It’s a sign that Wall Street investors feel that the single-family rental market is not slowing down. Two of the nation’s biggest SFR landlords are merging to form one landlord goliath. The all stock deal is expected to be good for stockholders, but you may be wondering what effect the merger will have on smaller landlords, tenants, and the single-family rental market as a whole.
The deal was announced as a “merger of equals” on August 10th between Invitation Homes and Starwood Waypoint, which was formerly known as Colony Starwood. Invitation brings 50,000 SFRs to the table, while Starwood brings 35,000. The combined entity will have 82,000 single-family rentals in 17 markets, and will keep the name Invitation Homes.
Most of the rentals are in South Florida and Southern California. The Real Deal says the company has more than 9,000 homes near Miami, and 8,000 in the Los Angeles area. The Wall Street Journal names Atlanta as another market where the company has a large footprint.
It is large. The Real Deal says this new landlord is twice the size of its closest competitor, which is now the Texas-based American Homes 4 Rent. It wasn’t that long ago that the business of single-family rentals was limited to mom and pop landlords. The market niche was born out of the housing crisis.
Starwood chair Barry Sternlicht was quoted in The Real Deal as saying: “When we started out I think there were a lot of people who didn’t think it was a business. They thought it was a trade.” Now they are thinking it’s not just business, but BIG business.
Investors Will Benefit
Invitation Homes just went public in January and raised more than $1.5 billion dollars. It also received $1 billion in backing from Fannie Mae this last January, which the Real Deal says is “unprecedented” for the government-sponsored mortgage insurer.
Equity market capitalization of the new Invitation Homes is about $11 billion. The total enterprise value of the new company, which includes market capitalization plus debt and a few other calculations, is about $20 billion. The new company will continue trading under the Invitation Homes ticker: INVH, on the New York Stock Exchange.
In addition to the IPO, stockholders are expected to benefit from the merger. HousingWire says that “economies of scale” will help bring the operating expenses down, especially where there’s market overlap. The deal will also make it easier to get financing, and pay down securitization loans.
Effect on the Housing Market
The Wall Street Journal offered a positive view of the situation for other landlords. It called the merger a “clear sign” that investors feel that homeownership rates will remain low, and that more and more people will be renting. The paper says they feel that the demand for housing will continue to outpace the building of new homes. There are also many would-be buyers who are still struggling with a low credit rating, and a lack of savings for a down payment.
The U.S. housing market is also a lot bigger than this new bigger kid on the block. Despite the awesome size of the deal, the company represents only .1 percent of the 90 million homes in the U.S. and less than .5% of the 17.5 million single-family rentals.
As for homebuyers and renters, Urban.org weighed in on the deal with an article explaining why homebuyers and renters shouldn’t worry. The number one reason on the list is Invitation Homes only owns “a tiny sliver of the housing market”.
Number two on the list, Urban.org says that institutional investors have already done most of their “growing.” They scooped up a bounty of homes during the foreclosure crisis, but now that home prices have recovered to within 1.5% of their pre-crisis levels, the buying frenzy is over.
The third important point is that most prospective buyers are not looking for the kind of homes that investors like to buy. While the typical home buyer wants a turnkey property, investors are looking for fixer uppers. Because they usually have cash on hand, work crews ready to go, and the benefits of bulk pricing for materials, they can get the upgrades and repairs done quickly and cheaply.
Last but not least, Urban.org offered assurances to renters. It says that bigger landlords aren’t necessarily bad landlords. It says they will conduct their business as professionals with good practices for managing the properties, similar to multi-family landlords.
The Big Picture
Urban.org says that the deal underscores the idea that single-family rentals have become a permanent part of the U.S. landscape, and that policy-makers should take notice. It says that SFRs could become an important part of an affordable housing solution.
Although homeownership is still the best way to build wealth, Urban.org says “there is no ideal homeownership rate.” It says that many families will go through phases where they might alternately own and rent their primary homes. It says that people should not be pushed into homeownership until they are financially able to take on that responsibility.