Two of the largest single-family landlords, Starwood Waypoint Residential Trust and Colony American Homes, are merging into company with over 30,000 homes and an aggregate value of $7.7 billion.
Starwood shareholders will own approximately 41% of the combined company, and Colony American will own the rest.
It’s an indication that the economics of the industry are changing as home prices start to recover. Over the past several years, a number of players have raised large amounts of capital to acquire portfolios of single-family homes and rented them to people unable to meet tough mortgage lending standards. These firms are now grappling with ways to run these portfolios more efficiently.
“We believe this merger demonstrates the power of scale and consolidation and really crystallizes the long-term durability of the single-family rental industry,” Thomas Barrack Jr., executive chairman of Colony Capital Inc., said in a press release. “The opportunity in front of us is immense.”
The two companies expect their combination will result in annualized cost synergies of $40 million - $50 million.
Barrack and Barry Sternlicht, chief executive and chairman of Starwood, will serve as non-executive co-chairmen of the new company’s board of trustees. Fred Tuomi, president and chief operating officer of Colony, will serve as CEO, while Doug Brien, chief executive of Starwood, will serve as president and COO.
Both Starwood and Colony American have tapped the securitization market to refinance their portfolios of rental properties; Starwood has done a single deal, in December 2014; Colony American's most recent deal was in May of 2015.
It’s a very unusual merger,” Sternlicht said on a conference call. “The sector was suffering from investor neglect, [our] share price do not reflect earnings power or the value of homes. There’s no doubt that home prices are appreciating off of book value form 2011 or 2012, but none of these companies are trade close to fair value.”
Sternlicht described the portfolios of both companies as “very targeted.” Together, they have almost 10,000 homes in Florida. “We are very bullish on Florida long term. There are no taxes, which is increasingly important.” The other big concentrations are in Texas and California.
In other markets, like Illinois and North Carolina, that are “sub scale,” the combined company will either “either invest and grow, or likely divest.”
SWAY was advised by Moelis & Co. and Sidley Austin LLP. CAH was advised by Morgan Stanley, Skadden, Arps, Slate, Meagher & Flom and Clifford Chance.
The transaction is expected to close in the first quarter 2016.