Home ren­tal giants to merge

Union of In­vi­ta­tion Homes and Star­wood Way­point will cre­ate largest single-fam­ily ren­tal owner in U.S.

Los Angeles Times - - BUSINESS - By An­drew Khouri an­drew.khouri @la­times.com Twit­ter: @khourian­drew

Union of In­vi­ta­tion Homes and Star­wood Way­point will cre­ate a firm with a com­bined 82,000 U.S. homes.

Two of the na­tion’s largest own­ers of single-fam­ily ren­tal houses an­nounced Thurs­day they are merg­ing, cre­at­ing a be­he­moth ren­tal com­pany with a ma­jor pres­ence in South­ern Cal­i­for­nia.

The deal be­tween In­vi­ta­tion Homes and Star­wood Way­point Homes comes as home prices have risen across the coun­try and re­flects the dif­fi­culty that such gi­ant ren­tal firms face in grow­ing. Gone is the del­uge of cheap fore­clo­sures that pro­pelled their rapid ex­pan­sion early this decade, prompt­ing a wave of in­dus­try con­sol­i­da­tion.

The union is the high­est­pro­file and largest merger yet, cre­at­ing a com­pany with an in­dus­try-lead­ing 82,000 homes na­tion­wide. Star­wood Way­point, based in Scottsdale, Ariz., it­self was a prod­uct of a merger last year, when Colony Amer­i­can Homes com­bined with Star­wood Way­point Res­i­den­tial Trust.

Amer­i­can Homes 4 Rent of Agoura Hills also merged in 2016 with Amer­i­can Res­i­den­tial Prop­er­ties, also of Scottsdale. Amer­i­can Homes was the largest owner of single-fam­ily rentals with 48,400 homes as of the close of the sec­ond quar­ter, slightly more than Dal­las-based In­vi­ta­tion Homes, ac­cord­ing to Green Street Ad­vi­sors, a New­port Beach re­search firm.

As home prices have risen, the com­pa­nies have sig­nif­i­cantly slowed their pur­chases, es­pe­cially in high­cost mar­kets such as Cal­i­for­nia, which was an early cen­ter of their buy­ing sprees.

Ac­cord­ing to CoreLogic, the me­dian price in South­ern Cal­i­for­nia was $500,000 in June, up 67% from 2012 — the year pri­vate eq­uity gi­ant Black­stone Group launched In­vi­ta­tion Homes.

“They can’t ac­quire in scale like they could,” said John Pawlowski, an an­a­lyst with Green Street Ad­vi­sors.

The push to grow also has been driven by a de­sire to con­cen­trate prop­er­ties in cer­tain mar­kets so that home man­age­ment and main­te­nance can be done more ef­fi­ciently, ac­cord­ing to a re­port last year from Keefe, Bruyette & Woods Inc.

Pawlowski said that by adding more homes, the com­pa­nies can ne­go­ti­ate bet­ter deals with re­pair ser­vice providers, Home De­pot and other ven­dors. And con­cen­trat­ing houses in cer­tain mar­kets makes it far eas­ier to over­see mul­ti­ple prop­er­ties with fewer on-the­ground man­agers.

Pawlowski said man­ag­ing 82,000 homes five years ago would have been ex­tremely dif­fi­cult, but on­line man­age­ment sys­tems have im­proved to the ex­tent that a deal be­tween In­vi­ta­tion Homes and Star­wood Way­point makes sense.

“This merger cre­ates the lead­ing single-fam­ily ren­tal com­pany in the United States, which will be uniquely po­si­tioned to de­liver ex­cep­tional ser­vice to res­i­dents, while also im­prov­ing oper­at­ing ef­fi­ciency,” said Fred Tuomi, chief ex­ec­u­tive of Star­wood Way­point, who will lead the new firm un­der the In­vi­ta­tion Homes name.

The deal gives the new firm a con­cen­tra­tion of houses in Florida and the West, in­clud­ing more than 12,700 in Cal­i­for­nia. Still, the com­pany’s na­tional port­fo­lio would be just a sliver of the nearly 16 mil­lion sin­gle­fam­ily homes for rent in the United States.

His­tor­i­cally, the sin­gle­fam­ily ren­tal in­dus­try has been the do­main of mo­mand-pop land­lords. But in the wake of the sub­prime mort­gage cri­sis, large Wall Street firms such as Black­stone rushed into the mar­ket to ac­quire homes at rock­bot­tom prices.

The rush of in­vestors was cred­ited with help­ing home prices re­cover in some mar­kets.

Derek Oie, a lo­cal real es­tate agent who has worked with In­vi­ta­tion Homes and Star­wood Way­point, said when the com­pa­nies started buy­ing homes in the In­land Empire neigh­bor­hoods he spe­cial­izes in, there were still heaps of fore­clo­sures and short sales.

“The mar­ket needed these guys to come in,” he said. “There still wasn’t enough buy­ers in the mar­ket­place. It prob­a­bly would have taken 10 years to clear out [the dis­tressed homes]. They cleared it out in 2 ½ to 3 years.”

In ad­di­tion to Cal­i­for­nia be­ing an epi­cen­ter of early pur­chases, the in­dus­try has other ties to the state. Amer­i­can Homes 4 Rent was founded by bil­lion­aire B. Wayne Hughes, who decades ago started Glen­dale’s Pub­lic Stor­age Inc.

L.A. bil­lion­aire Thomas J. Bar­rack Jr.’s pri­vate eq­uity firm launched Colony Amer­i­can Homes in 2012. Ear­lier this year, Bar­rack — a close friend of Pres­i­dent Trump — cashed out of Colony Star­wood Homes, which changed its name to Star­wood Way­point Homes fol­low­ing his de­par­ture.

At the be­gin­ning, there was de­bate whether the com­pa­nies were in the busi­ness for the long haul or if they would quickly un­load their homes as soon as prices rose.

In­creas­ingly, it’s be­com­ing clear they are here to stay. Ear­lier this year, In­vi­ta­tion Homes went pub­lic, join­ing Amer­i­can Homes 4 Rent and Star­wood Way­point on the pub­lic mar­kets. And Fan­nie Mae, the gov­ern­ment-con­trolled mort­gage gi­ant, agreed to back a $1-bil­lion loan to In­vi­ta­tion Homes.

“The ques­tion was is this a trade or is this a busi­ness,” said Kevin Dwyer, an an­a­lyst with Morn­ingstar. “This is a busi­ness…. I would be very sur­prised if they all went away.”

The com­pa­nies have ben­e­fited from a shift to­ward rent­ing fol­low­ing the fi­nan­cial cri­sis. De­spite a re­cent uptick in home­own­er­ship, the na­tion’s own­er­ship rate stood at 63.7% last quar­ter, down from a high of 69.1% at the be­gin­ning of 2005. And in many pricey metropoli­tan mar­kets, such as Los An­ge­les, would-be buy­ers are in­creas­ingly be­ing priced out.

But as the com­pa­nies profit, they have faced re­oc­cur­ring ques­tions over whether they could prop­erly main­tain tens of thousands of homes spread out across the coun­try. In June, Re­veal, an out­fit of the Cen­ter for In­ves­tiga­tive Re­port­ing, pub­lished a story that de­tailed what it said were prob­lems with main­te­nance at Star­wood Way­point houses.

In re­sponse, the com­pany said it re­ceived high sat­is­fac­tion marks from cus­tomers in a re­cent sur­vey and plays “an im­por­tant role in pro­vid­ing high-qual­ity and af­ford­able ren­tal hous­ing for thousands of Amer­i­cans.”

Dwyer of Morn­ingstar said that the com­pa­nies take com­plaints over main­te­nance se­ri­ously and that his re­search doesn’t in­di­cate wide­spread ne­glect.

“We cer­tainly don’t see that in a sys­tem­atic way,” he said.

The deal an­nounced Thurs­day is a 100% stock swap be­tween In­vi­ta­tion Homes and Star­wood Way­point. Af­ter clos­ing, ex­pected by the end of the year, In­vi­ta­tion Homes share­hold­ers will own 59% of the firm, with Star­wood Way­point share­hold­ers con­trol­ling the re­main­der.

The new com­pany would be val­ued at $11.3 bil­lion based on Thurs­day’s clos­ing stock prices.

In­vi­ta­tion Homes saw its shares rise 3.9% to $21.81. Shares of Star­wood Way­point rose 5.2% to $35.35.

Mel Melcon Los An­ge­les Times

A SINGLE-FAM­ILY REN­TAL house owned by In­vi­ta­tion Homes is seen in Canoga Park in 2013. The com­pany’s merger with Star­wood Way­point Homes is the high­est-profile and largest yet in the in­dus­try, cre­at­ing a com­pany that will own 82,000 homes na­tion­wide.

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