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Does Mid-America/Colonial Deal Signal Onset of Renewed Apartment M&A?

Proposed Merger Shows Apartment Market Momentum Spreading Inland from Coasts Into Booming Southeast Metros
June 5, 2013
Announced on the eve of this week's NAREIT conference in Chicago, the merger between Colonial Properties Trust (NYSE: CLP) and Mid-America Apartment Communities Inc. (NYSE: MAA) will almost certainly be the subject of hallway and cocktail chatter among the REIT set.

And why not? The combination of Birmingham, AL-based Colonial and Memphis, TN-based Mid-America is huge news for the multifamily sector on several levels. The merger would create the second-largest U.S. multifamily REIT with over 85,000 units in 285 properties, ranking behind only Equity Residential (NYSE: EQR).

The transaction, which values Colonial shares at nearly $2.2 billion and would create a company with a total market capitalization of $8.6 billion, also demonstrates that the institutional investor appetite for all-things apartment-related has infiltrated the Sun Belt, where investors hope to reap the benefits of above-average employment and population growth.

The expanded presence of the new MAA in the Sunbelt market "is big news for the sub-sector," said Cantor Fitzgerald REIT analyst David Toti. "Our initial reaction is that the deal makes sense given significant regional portfolio overlap that should lead to operational efficiencies."

Finally, the deal has re-invigorated discussions over whether a new era of consolidation and perhaps even private-takeout activity has arrived in the multifamily sector. Reports of slowing rent growth, near-peak valuations and rising supply at a time that the single-family home market is recovering have all weighed on multifamily stock performance of late.

"We believe that the merger announcement could be a positive catalyst for the [multifamily REITs], especially if investors speculate on prospects of additional public-to-public mergers in the apartment space," Toti added.

Analysts have cited Post Properties Inc. (NYSE: PPS), with its presence in Washington, D.C., Atlanta and other core markets, along with BRE and HME, as potential public-public consolidation or private-equity targets.

“Given the efficiencies of merging companies with complementary platforms and the growing importance of CEO succession planning, we believe M&A should increase," Alexander Goldfarb, analyst with Sandler O'Neill, said in an investor note. "We think M&A in most sectors of REITland makes sense," particularly in apartments, student housing, retail and industrial, he added.

The all-stock MAA/CPT deal, valued at $2.2 billion, is expected to close in the third quarter. The combined company would operate under the Mid-America name and ticker and retain its Memphis headquarters. MAA’s current management team will manage the newly combined REIT, with Eric Bolton serving as chairman and CEO and Colonial CEO Thomas H. Lowder becoming a director on the combined board.

As of March 31, 2013, Mid-America owned or had an ownership interest in 49,591 completed apartment units, while Colonial owned or managed 35,181 units, primarily in the southeast.

Colonial, which also owns or manages 2 million square feet of commercial space, has streamlined and bulked up its multifamily portfolio, increasing concentration of apartments from 90% to 95% over the last couple of years. MAA has focused exclusively on apartments since it was founded in 1977 as the Cates Co., going public in January 1994.

The two companies have overlapping portfolios in such growth markets as Atlanta, Austin, Dallas, Raleigh, Tampa, Savannah and Phoenix. Ranked by net operating income (NOI), the top 10 markets for the new MAA would be Dallas/Ft. Worth, Atlanta, Austin, Raleigh-Durham, NC; Charlotte, SC; Nashville, Jacksonville, Tampa, Orlando and Houston, according to Cantor's Toti.

Multiple market observers noted that the combination "makes sense” given the attractive deal pricing, and the portfolio fit and operating synergies between the companies.

The merger has potential upside given the positive fundamentals and strong job markets across the Sunbelt region, noted Citi REIT analyst Michael Bilerman.

"The portfolio’s Sunbelt market concentration should produce above-average revenue growth over the next three to five years as a disproportionate amount of jobs are being created in these markets," Bilerman said.

Certainly, there are risks to the strategy, and supply shock leads most analysts' lists. In recent quarters, developers have moved beyond the hot Texas markets to declare "game on" in other high-population growth metros in the southeast, including Atlanta, Orlando and Nashville.

"In 2009, development activity was concentrated on the coasts. In 2013, the entire middle portion of the country is now filled in, including the Midwest and Southwest," noted Erica Champion, senior real estate economist with CoStar's Property and Portfolio Research (PPR), during CoStar's recent Multifamily Review and Outlook.
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