Investors who bought into the single-family rental securitizations from Invitation Homes and Starwood Waypoint Homes stand to gain from the recently announced merger of the two SFR giants, but the deal is not without some inherent risk, Moody’s Investors Service said in a new report.
Last week, Invitation Homes and Starwood Waypoint announced plans to merge in a deal that would create the nation’s largest single-family rental landlord.
Invitation Homes was already the nation’s largest single-family landlord due to its nearly 50,000 rental homes, slightly exceeding the approximately 49,000 homes owned by American Homes 4 Rent.
But the merger with Starwood Waypoint, which boasts a portfolio of roughly 32,000 of rental homes, would bring the combined company’s portfolio to 82,000, far exceeding American Homes 4 Rent’s portfolio.
According to Moody’s report, the size of the combined portfolio of Invitation Homes and Starwood Waypoint, which is formerly known as Colony Starwood Homes, has financial benefits for SFR securitization investors.
“The merger would be credit positive for each company’s SFR securitizations because the combined company would benefit from improved economies of scale and potentially better access to financing, thus improving its ability to pay down the loans backing SFR securitizations,” Moody’s writes in its report.
One of the benefits of the deal, Moody’s notes, is the markets where Invitation Homes’ and Starwood Waypoint’s portfolio’s overlap, which could lead to reduced operating expenses.
“The two companies have similar portfolios of homes with significant overlap in several markets and have nearly identical average monthly rents,” Moody’s notes. “Additionally, the companies said that nearly 70% of the combined entity’s revenue would come from the Western U.S. and Florida.”
But the concentration of the combined company’s portfolio is also a risk, Moody’s states.
“High regional concentration as a result of the merger is a risk. If the combined company were to default, the special servicers to the securitized transactions would have to sell or work out a larger number of properties in more concentrated regions than would be the case for either company separately,” Moody’s writes.
But Moody’s notes that the concentration risk is “partially mitigated” by the significant equity built up in the properties since the various securitizations closed.