Starwood Waypoint Residential Trust; market cap (as of 26/09/2015): $953.73m
Colony American Homes; market cap (as of 26/09/2015): N.A.

Introduction

On September 21 Starwood Waypoint Residential Trust (NYSE: SWAY) and Colony American Homes (CAH), two of the largest U.S. single-family home landlords, agreed on the merger in an all-stock deal that would create a real estate mogul with $7.7bn in assets in the young house-rental industry.

 

About Starwood Waypoint Residential Trust

Starwood Waypoint Residential Trust, based in Oakland, California, is a real estate investment trust (REIT) formed primarily to acquire, renovate, lease and manage residential assets throughout the United States. The Company operates in two segments: SFRs (single-family residential properties) and NPLs (nonperforming loans). As of June 30, 2015, it owned approximately 12,500 single-family homes in eight U.S. states. The firm is part of Barry Sternlicht’s Starwood Capital Group, a $44bn real estate investment firm.

 

About Colony American Homes

Colony American Homes, based in Scottsdale, Arizona, is the leading provider of high-quality single-family rental homes across the United States. As of June 30, 2015, it owned and managed approximately 19,000 homes. The company is affiliated with billionaire Tom Barrack’s Colony Capital Inc., whose assets range from distressed mortgages to the famous Michael Jackson’s Neverland estate.

 

The Deal

Under the agreement, Starwood Waypoint Residential Trust would buy its rival Colony American Homes in an all-stock deal that values Colony American Homes at $1.5bn. In fact, Starwood Waypoint Residential Trust will issue 64,869,583 shares in exchange for all shares of the Colony American Homes. Upon the completion of the deal the shares will be distributed based on net asset values of the companies. Mainly, Colony American Homes’ shareholders will be allocated 59% of the newly formed entity, while Starwood Waypoint’s shareholders will receive approximately 41% of the company’s shares. The Starwood Waypoint’s CEO, Doug Brien, will become the new CEO of the combined business. The deal is expected to close in the first quarter of 2016.

 

The Rationale

There are several reasons that justify this transaction. Firstly, Starwood Waypoint and Colony will gain ground on Blackstone Group LP, with its roughly 50,000 houses, and American Homes 4 Rent, the biggest publicly traded home-rental real estate investment trust, with more than 37,000 properties. This way the new company, which will have more than 30,000 homes in its portfolio, will take advantage of the increasing demand for rental properties since tight mortgage standards are holding back home purchases. Secondly, the cost savings are estimated to be at about $40m to $50m and greater scale benefits are expected in places like Florida, where it will have about 10,000 homes. According to Thomas Barrack Jr., the executive chairman of Colony Capital Inc., this merger demonstrates the power of scale and consolidation and really crystallizes the long-term durability of the single-family rental industry.

 

The Rental Property Market

Since the financial crisis, home ownership rates have decreased as non-appealing down payment and credit requirements have pushed the “would-be’’ borrowers out of the buying market. In fact, the homeownership rate fell to 63.4% in the second quarter, its lowest rate since 1967 while before the financial crisis the rate stood at 68.2%.

As a result, the surge in the pool of renters has sent rents upward and since then institutional investors have been acquiring thousands of houses in search of good bargains. However, the purchasing of properties for single-family residential players has not been as big of a problem as attracting good-quality renters and maintaining homes.

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REIT Buyout Mode On 

According to Green Street Advisors LLC, real estate investment trusts (REITs) are trading at an almost 15% discount to what investors would pay for buildings individually. Real estate shares have been hit because of investors’ concern that once the interest rates increase, the property values will deteriorate and it will be more expensive for REITs to raise money. Instead the prices in the U.S. property market have substantially recovered from the financial crisis. As long as property prices are following an upward trend and shares of REITs continue to be traded at a discount to the former, the likelihood of REIT buyouts will increase.

 

Financial Advisors

Moelis&Company and the law firm Sidley Austin advised Starwood Waypoint while Colony American Homes was advised by Morgan Stanley and the law firms Skadden, Arps, Slate, Meagher&Flom and Clifford Chance.

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