• by Thom Forbes  @tforbes, August 11, 2017

Two of the largest home-rental companies in the U.S., both having risen from the ruins of the foreclosure crisis of 2008, are merging to create an $11-billion shared household. Billed as a “merger of equals,” Blackstone-owned Invitation Homes’ stockholders will hold about 59% of the combined company's stock; Starwood Waypoint Homes’ stockholders will own the rest. 

The combined entity will have 82,000 homes and an average of 4,800 homes per market, with 70% of its revenue coming from the Western U.S. and Florida. Invitation is based in Dallas, Tex.; Starwood Waypoint in Scottsdale, Ariz. It will operate under the name Invitation Homes, according to the release announcing the deal yesterday, and be based in Dallas with a “presence” in Scottsdale.

Invitation Homes chairman Bryce Blair will be chairman of the new entity; Starwood Waypoint’s Fred Tuomi will be CEO.

“Both firms’ founders saw an opportunity in the wake of the financial crisis to consolidate the disparate U.S. housing market and to prove that owning and managing a portfolio of single-family homes could be a lucrative business. Houses had historically been rented out by small-time landlords, rather than large corporations,” report Javier Espinoza, Kara Scannell and James Fontanella-Khan for Financial Times.

“Barry Sternlicht’s Starwood Waypoint merged with Colony American Homes, backed by real estate mogul Tom Barrack, a close friend to President Donald Trump, in 2015. Mr. Barrack sold his stake in the combined company in June. Blackstone floated Invitation Homes earlier this year,” they continue.

“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 [Calif.] research firm,” reports Andrew Khouri for the Los Angeles Times.

“As home prices have risen, the companies have significantly slowed their purchases, especially in high-cost markets such as California, which was an early center of their buying sprees,” Khouri points out.

“The all-stock deal comes at a time when homeownership rates are still at near historic lows and incomes are not growing as quickly as home prices, making it tough for first-time home buyers to save for a down payment,” observe Reuters’ Arunima Banerjee and Ankit Ajmera. “However, demand for both rental and new homes continues to be supported by an improving U.S. economy and healthy job growth.”

Other macro-economic factors are at play, too.

“Their near-term wager is that home-building will continue to lag behind demand and that bad credit, a lack of savings and tight lending will keep many people renting. Long-term, they are wagering that homeownership will no longer be an essential component of the American dream and that more people will choose to rent,” Ryan Dezember writes for the Wall Street Journal.

“On the eve of the crisis, the rate of homeownership — the percentage of households that own a home — hovered around 69%. Today, it is 63.7%, according to the United States Census Bureau. And last year, the number of new renters again outpaced the number of new homeowners, according to Harvard University’s Joint Center for Housing Studies,” reports Matthew Goldstein for the New York Times.

But the game isn’t as lucrative for the players as it has been. 

“For the past year or so, many institutional investors have had to compete with potential homeowners shopping for foreclosed homes posted for sale on multiple listing services,” Goldstein points out, eating into the double-digit returns investors expect to see.

The key to continued success is the anticipated growth in the markets where Invitation has its presence, it points out repeatedly in its release.

“The markets that we’re in are characterized with high population growth, high household formation growth and, most importantly, job growth,” says CEO-to-be Tuomi, the WSJ’s Dezember reports. “These are markets that people are moving to for opportunity versus moving from.”

News being what it is of late, however, they may want to place some side bets on the “frozen deserts of Iceland,” which are reportedly one of nine “ideal” locations for surviving nuclear conflagration.