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Invitation Homes-Starwood Waypoint merger generates scale, savings, execs say

The combination of Invitation Homes Inc. and Starwood Waypoint Homes into a public single-family rental landlord with roughly 82,000 properties will generate $45 million to $50 million in cost savings in the coming months, company executives said.

The combined company, which would have a roughly $11 billion market capitalization based on current share prices, will retain Invitation Homes' name and headquarters, but executives at both companies called it a merger of equals. Starwood Waypoint CEO Fred Tuomi, who will continue in that role at the combined company, emphasized repeatedly that Starwood Waypoint and Invitation Homes are "nearly identical."

The similarities include geographical portfolio overlap: 83% of the combined company's properties are in markets where both Invitation Homes and Starwood Waypoint own houses. Those redundancies, and a larger company presence in top markets, will allow the combined Invitation Homes to save money on field operations, insurance, supplies from vendors and corporate staffing. Roughly 75% of the savings are expected to materialize within a year, and all of them within 18 months.

"Basically with this merger what we're able to do is pull forward our opportunities that we both saw independently in this space," Tuomi said. "It would have taken us a long time to achieve these types of densities, these types of concentrations in these high-growth markets."

Other benefits include a larger balance sheet, and therefore a cheaper cost of capital over time, executives said.

One unanswered question from the call is the role that Blackstone Group LP will play in a larger Invitation Homes, and for how long. The REIT began its corporate life as a Blackstone unit before going public in a February IPO, and a lockup agreement prevents Blackstone from selling its substantial holdings in the company. The agreement expired recently, but will be extended to expire 30 days after the merger closes, CFO Ernie Freedman said. Freedman said there are also breakup fees associated with the transaction, though he declined to detail them.

Citi analyst Michael Bilerman, in a question to Tuomi, said the potential for a Blackstone share sale after the lockup expires will create an "overhang" on the company's share price. Bilerman also asked why, in a transaction that in some ways represents a surrender of control by Starwood Waypoint leadership, the company did not secure a more favorable exchange ratio in the stock-for-stock deal.

"I recognize the strategic merits, and I recognize there are synergies, but it doesn't seem that you were able to get any sort of control premium or any premium at all, even though Invitation trades at a higher multiple," he said.

"You're correct to focus on the merits of this deal, which are the long-term growth potential that this gives both companies," Tuomi said, adding that the "unparalleled" combined platform represents the best path toward realizing both companies' growth prospects.

"This was not a takeover. This was not a sale process," he said. "This was two boards of savvy investors realizing this is the best thing for both portfolios, for both companies, for both sets of shareholders."

The largest public competitor to the combined REIT, American Homes 4 Rent, has a market capitalization of roughly $5.8 billion and owned roughly 48,000 houses as of the end of 2016.