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PPS Deal Sends MAA Apartment REIT Deep into High-Rent Urban Core

Combined Company Enhances Southeast Strength

By Dave Sorter | Thursday, August 18, 2016

Mid-America Apartments’ (MAA) announced $3.88 billion purchase of Post Properties (PPS) not only further consolidates the publicly traded apartment REIT field, but it also creates a new volume leader with a more diversified portfolio.

MAA, which will be the surviving entity if the purchase closes as expected in the fourth quarter of 2016, will add PPS’ approximately 60 properties with a combined 24,000 units to create an entity with 314 properties and 105,000 units.

The deal would significantly increase MAA’s presence in urban core submarkets with upper-tier price points. Some 42% of PPS’ communities are located in the center city, according to Axiometrics research, compared to MAA’s 3.3%. That shows in the July 2016 average effective rent level for the two REITs: $1,549 for Post vs. $1,091 for Mid-America.

On one hand, MAA is diversifying its portfolio to include higher prices and more locations, according to an Axiometrics analysis. On the other, many of PPS’ properties are close to concentrated apartment construction zones, which means more competition. That’s the primary reason that MAA’s July 2016 annual effective rent growth of 4.0% was stronger than PPS’ 1.1%.

Despite that seemingly low figure, PPS is doing well, given some of the submarkets it is in.

The following chart depicts the Post urban core submarkets with the number of units being added to the Mid-America portfolio.

Though many urban core submarkets, such as Montrose/River Oaks, Oaklawn and Downtown Charlotte, recorded negative effective rent growth in July, Mid-America CEO Eric Bolton told “Multifamily Executive” that his company is looking to the long term.

“We’re not doing this transaction with an eye toward how do we optimize performance next year or the year after,” Bolton told the magazine. “This is a strategic combination that we think creates a stronger value proposition for the next 10 years.”

As with everything else real estate, future portfolio performance will depend on the cyclical nature of supply and demand. Job growth is strong in most of the markets in which MAA is acquiring properties, except for Houston, which creates demand. On the other hand, some market and submarkets involved in the deal are receiving supply in excess of the demand.

Part of the strength will come from solidifying its hold on several southeastern apartment markets. If the transaction closes, MAA will double its presence in Atlanta and Tampa-St. Petersburg and significantly add to its total in Orlando and Charlotte.

As the chart below shows, the purchase of Post will make Mid-America much more of a factor in the Washington, DC area, which can also include the one PPS property in the Maryland suburban Silver Spring metro. MAA is also spreading its footprint in Dallas, Austin, Houston and Raleigh.

Meanwhile, a weighted average (by units) of the two companies’ performance metrics for July 2016 shows that the new MAA would outperform both the overall national levels and the total REIT levels of rent growth and occupancy.

Financially, shareholders of both companies should benefit from the deal. Post stockholders will receive a 17% premium as each share of their stock will convert into 0.71 shares of Mid-America stock, according to an article in “The Wall Street Journal.” Meanwhile, the company expects to find about $20 million in efficiencies within one year of closing as duplicate processes are consolidated, which should enhance stock prices, as should the increasing stronghold in major markets, Axiometrics economists said.

Should the deal close, the roster of publicly traded apartment REITs will further consolidate. MAA began the consolidation trend in 2013, when it acquired Colonial Property Trust (CLP), followed by Essex Property Trust’s (ESS) purchase of BRE Properties (BRE) the following year. Then, in 2015, Associated Estates Realty (AEC) was bought out by Brookfield Asset Management and Home Properties (HME) was sold to Lone Star Funds.

The MAA-PPS transaction is another example of the changing apartment market. It probably won’t be the last.

Dave Sorter

Dave Sorter

Journalist

Dave Sorter is an award-winning journalist who spent 30 years as a newspaper reporter and editor before joining Axiometrics. He oversees all Axio blogs and newsletters and serves as senior editor of all Axio publications.

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