It’s good to have friends with connections. Back in the early ’90s, Eric Bolton had a great job as CFO of Trammell Crow Asset Management in Dallas, but he was a Memphis guy at heart. Fortunately, he had an in at Memphis-based Mid-America Apartment Communities (MAA). One of his friends at Trammell Crow Co., Andy Cates, happened to be the son of MAA’s president and CEO, George Cates. At the time, in February 1994, Cates was in the throes of an IPO as a REIT and had an opening for a CFO. His son encouraged him to meet with Bolton. “George flew to Dallas to tour some possible property acquisitions and he agreed to meet with me,” Bolton says. “We met in a conference room at Love Field [Airport] for the first time. It was a positive meeting, and I think it was clear we shared a lot of the same values. He invited me to Memphis to meet some of the other folks at the company.”
By the time Bolton arrived in Memphis for the second interview, Cates was down to Bolton and Simon Wadsworth, a longtime friend of Cates’ and temporary CFO at the time (who retired in 2010). Bolton didn’t get the job, but he impressed Cates with his technical skill set, experience, and personal traits, like integrity, energy, forthrightness, belief in the worth of individuals, and belief in teamwork, according to Cates.
Cates, the founder of Cates Co. (which bought Mid-America in 1994), eventually had another job in mind for the young CPA—chief operating officer (COO). After initially coming to Mid-America in 1994 as vice president of development, Bolton became COO in 1996. When Cates retired in 2001, Bolton took the CEO title.
“I talked again to Eric not long after we’d had a brief, cordial conversation ending the CFO opportunity, this time inviting him to come aboard in a line position in operations and development, rather than the staff position we’d talked about shortly before,” Cates says. “I suggested even that early that, while it would be competitive, this position would put him on the direct succession track for my job. As the years passed, he rose steadily through that formal process and emerged relatively quickly as The Candidate to run MAA.”
Over the past decade, Bolton has put his own mark on the company, by retooling Mid-America’s investment portfolio, balance sheet and operating practices, and even its name and logo. (The company is now known simply as MAA.) But Bolton has held steadfast with one belief—MAA has clung to the company’s Southeastern markets, a strategy that has served the firm well: In the past 10 years, MAA has outperformed all other REITs in same-store growth, except for Palo Alto, Calif.–based Essex Property Trust. In 2011, MAA produced 5.5 percent revenue growth while the apartment REIT sector as a whole was at 5 percent. In addition, MAA has scored better than all its peers over the past 10 years in a metric produced by Newport Beach, Calif.–based consulting and research firm Green Street Advisors called current value net income (CVNI). The CVNI tracks changes in net asset value plus dividends.
MAA’s strategy doesn’t come without risk. Unlike its peers in the coastal markets, which are buffered by high home prices, limited land supply, and long entitlement processes, MAA is susceptible to oversupply and resident migration to for-sale housing. In the past couple of years, however, the gap between owning and renting has narrowed most in the coastal markets favored by institutional-grade investors, locations where MAA is absent (see “The Shrinking Rent vs. Own Cost Gap,” below). That seeming advantage, along with the homeownership rate plummeting, has put MAA in a position to capitalize. But when a housing recovery happens (and there have been slight hints of optimism recently), to weather the storm MAA will need to rely on the systems and team that Bolton has built over the past decade.
Ask any REIT CEO about his strategy and he’ll methodically explain what sets his firm apart and how it can execute that strategy better than other operators. But even in the controlled REIT world, Bolton stands apart. While he may not be a quote machine, like a Tom Toomey or a Sam Zell, it turns out the accountant is a pretty good salesperson.
“He’s one of the more traveled CEOs I know of in terms of coming out and meeting face-to-face with investors,” says Richard C. Anderson, a senior research analyst on New York–based financial services provider BMO Capital Markets’ REIT research team. “He and his team are on the road quite a bit to tell the story and to literally knock on doors and kiss babies to get the word out on MAA.”
Bolton must possess that level of energy to counter perceptions about his company. “MAA dances where other people don’t want to dance,” Anderson says. “They’re in the commodity markets of the Southeast and take what I would call a fairly contrarian approach to the multifamily business. These are markets that a lot of MAA’s peers don’t want to be in.”
With the investment world seemingly fixated on high-barrier markets and shiny Class A high-rises, Bolton has to work a little harder to tell his story. “Often, the investment and capital markets are very focused on New York, Boston, San Francisco, or the bi-coastal and perceived high-barrier markets, sometimes largely because that’s simply what they’re accustomed to or familiar with, and they underestimate the ability to create long-term rent and value growth in other markets and regions,” Bolton says.
Bolton’s answer to critics is simple. His bet is that with garden apartments in small markets like Bowling Green and Florence, Ky.; Franklin, Tenn.; and Jackson, Miss., he can generate as big of a return as the other guys. “The idea that we’re going to go into New York City and that we can, on a recurring basis, do something magical for capital that other people can’t do is not realistic,” Bolton says. “On the other hand, we can go into select secondary markets like Little Rock, Ark., or submarkets in larger cities across the Sun Belt.”
That doesn’t mean Bolton hasn’t adjusted his allocations in his core markets. Ten years ago, 80 percent of MAA’s portfolio was invested in secondary markets. Under Bolton’s stewardship, only 40 percent of the company’s apartments are in such markets.
Bolton contends that in the Sun Belt markets, large employers like FedEx in Memphis and J.C. Penney and ExxonMobil in Dallas reside in the suburbs. Those sorts of job centers are what MAA follows. But some wonder if that may push the company too far out of city centers.
“If I have one issue with MAA—and this is really splitting hairs—it’s that some of their recent acquisitions have been a meaningful distance from downtowns, and hence a bit less convenient for residents. That may have helped them get better initial cap rates than their peers,” Anderson says. “Besides that, I think management is top-notch, and there is nothing in the day-to-day operations that I have an issue with.”
The Advantages of Being Big
By being the biggest player in a lot of these markets, MAA can bring a number of advantages to bear, including simple scale. In areas such as rehab, for instance, the firm has a big advantage (MAA was No. 8 on Multifamily Executive’s Top 25 Renovators list last year, with 1,760 units renovated in 2010). With its scale, the REIT can buy at cheaper prices than its competitors. And its ability to use more-sophisticated systems, like call centers, yield management, online search and reservations, and search engine optimization, allows the company to streamline the processes of scheduling sitework and projecting rents.
Though it is not a builder itself, MAA will deploy capital on a selective basis on new developments with builders. MAA’s biggest competitive advantage may lie in acquisitions. The company buys with a 10-year hold period. It then selectively prunes the underperforming properties from its portfolio. It’s past the point of having to sell to move out of markets that it wants to exit or pay out its dividend. Operating against private competitors in many markets, MAA can bring buying resources to the table that others can’t match. For instance, instead of cobbling together debt, it can buy off of its balance sheet, giving a seller more confidence that a deal will close.
“They have an investment capacity to do what they want to do [in their markets],” says Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based firm. “From a seller’s perspective, you know that MAA won’t retrade your deal.”
Bolton says the company’s financials will only grow over the next few years. In the past decade, under Bolton’s watch, the company has pulled its debt-to-gross-asset-value from 64 percent debt down to 46 percent. In the past, it was overly reliant on Fannie Mae and Freddie Mac for funding. Now, with the status of the two government-sponsored enterprises up in the air and a need for unsecured debt, MAA has gone to commercial banks and insurers. In 2011, it secured an investment-grade rating from Fitch Ratings. Next up are Moody’s and Standard & Poor’s. Bolton sees that as the last big balance sheet challenge.
“Our focus is to position the balance sheet to secure an investment-grade rating and further broaden the company’s ability to access capital on a favorable basis,” Bolton says. “We believe this has positive implications for long-term public-market pricing of the company.”
And with its systems and scale, MAA may also be able to more confidently predict a better cap rate than its private competitors, giving the firm yet another advantage. “If we have a lot more properties in a region, we can pro forma our efficiencies of operation,” says MAA’s executive vice president, Don Aldridge. “Where [MAA’s competitors] think they’re getting a five and a half cap and we think we’re getting a six cap, we’re pretty sure of our numbers.”
Moreover, MAA can close in 20 days if it likes a deal. “We can go in and move very quickly,” says Al Campbell, MAA’s CFO. “We can go in, see an asset, kick the tires, make an offer, and buy it.”
The Emergence of Competition
Perhaps most important for MAA is who isn’t in its nice Southern suburbs. “One of my biggest fears is to wake up one day and read in the paper that AvalonBay is building in Little Rock, Arkansas,” Bolton says. “All of a sudden, our huge competitive advantage is compromised.”
Alexandria, Va.–based REIT AvalonBay Communities may never build in Little Rock, but eventually there will be home builders, and maybe even other apartment companies, that will. “Development is the general risk for MAA,” Anderson says. “When development starts to pick up in earnest, there will potentially be a perception that MAA has greater exposure to supply growth than their peers.”
The financial gap between owning and renting isn’t that wide in MAA’s markets. Add to the equation that MAA owns apartments in desirable submarkets with good school systems, and it makes sense that the MAA renter may want to eventually own a home.
“The cost of owning [versus] renting presents a challenge to MAA and anyone who does business in the South,” Anderson says. “To the extent the housing market picks up, that would add an element of risk.”
Bolton doesn’t ignore this reality. “It’s always been more affordable to buy a home in the Southeastern markets,” he says. “The issue giving us a problem [during the housing boom] was the fact that our resident could easily secure the financing to buy a home with little or no downpayment.”
In 2007, MAA saw 34 percent of its move-outs leave for home purchases. By the fourth quarter of 2011, that number had dropped to 17.4 percent. Bolton knows that figure won’t stay at 17.4 percent forever. But he doesn’t think he’ll be hemorrhaging residents as he did in the boom years, either. “Over the next five years, as we return to a state of normalcy in the single-family environment, I think the new normal won’t be what [it was] during 2005, 2006, and 2007,” he says.
While Bolton thinks the rental industry has an incredibly bright future as America rebalances its approach to housing, it’s fair to say, being positioned in the Southeast, Texas, and Phoenix, that MAA could be on the front lines of the next skirmishes between multifamily and single-family. For-sale housing often comes back earliest in those markets and submarkets exhibiting economic growth. Texas added 204,500 jobs in 2011, according to the Texas Workforce Commission. With the Commission reporting that the state saw only a 0.2 percent decline in home prices and a foreclosure rate of only one in 1,133 mortgages, the state seems primed for a single-family recovery. MAA has 11,124 units there.
“In our forecast [for 2012], we’re assuming a pretty big move in the loss of renters to purchase homes in Texas,” says Greg Willett, who heads the research and analysis team at Carrollton, Texas–based market research firm MPF Research. “This should really start showing up, first because the economy has been pretty healthy for a while and there’s not much of a premium to buy versus rent.”
That could present a challenge for MAA. So could overdevelopment.
Controlling the Message
Tom Grimes has been on the front lines of the renter-retention battle for a while. He started with MAA at the property level in 1994 and worked up from a manager’s job to area manager, regional manager, and corporate asset manager. In his time at MAA, he’s seen the for-sale market pull his renters away … and give them back. Now, in his new role as COO, resident retention continues to be part of Grimes’ responsibility. He thinks the company can continue to push rents, but he knows that will ultimately change.
“We’re preparing more for 2013, 2014, and 2015,” Grimes says. “We’ll be spending some time really revisiting the current customer service process and the bonding of the resident to us, and really preparing for a return to normal levels. [Move-outs to buy homes] will never go back to the crazy days [of the mid-2000s], but we need to get better at retention [nonetheless].”
To Grimes, retention starts with education. He wants to remind residents that MAA provides services, such as maintenance, that a homeowner would have to handle himself. In a rocky economy, flexibility, which may mean the ability to break a lease if a renter needs to move from Atlanta to Washington, is important as well. That’s a lot easier than selling a home. It may also entail educating residents about a particular maintenance service that MAA provides. The company surveys residents four times during their stay, comprising a move-in survey, a work survey on every work order, a midterm survey, and a move-out survey. The firm generates 162,000 requests and receives 15,000 completed surveys, which it uses to design its service programs. “[The survey results] set us up for that renewal conversation,” Grimes says. “We know where we stand with residents, and we hopefully solved their issues. That takes care of the service side, which I think is critical.”
Ultimately, there’s only so much Grimes can do when people have saved enough money for a downpayment, are confident in the market, can get financing, and decide it’s time to buy a home.
Andrew J. McCulloch, a managing director at Green Street Advisors, thinks the company’s decision to diversify its capital structure with unsecured debt can buffer it for rockier times come any move-outs. “You really can’t insulate yourself on the demand side,” he says. “People are going to start buying homes, or they’re not. But you can position your company’s capital structure to weather any potential storms. MAA has been fortifying its balance sheet and trying to make it more flexible by going after an unsecured rating. Their current leverage and debt-to-EBITDA levels suggest they are well-positioned should any downturn in demand materialize.”
Enjoying the Ride
Right now, like many apartment owners, Bolton thinks the financing market isn’t where it needs to be to pull renters out of his properties. With continuing issues in the mortgage market and lingering job concerns, plus the S&P/Case–Shiller index saying property values declined 3.7 percent in 20 cities from November 2010 to November 2011, that time could still be a little ways off.
Then there are simple consumer tendencies to consider. While talk of lifestyle shifts with Gen Y, the prime renter cohort, is probably overblown, there is evidence that this demographic group is waiting to marry and have kids later in life. That’s probably one of the reasons Bolton said during his firm’s recent fourth-quarter 2011 conference call that the multifamily sector looks “pretty darn good” for the next couple of years.
“We need to make sure we’re spending money correctly and driving rents and realizing the opportunity that’s in front of us,” Grimes says.
Analysts and those associated with MAA have no doubt the firm will have the operational might to capitalize on this opportunity. For Bolton, the process is quite an evolution from 18 years ago, when he first met Cates at Love Field. He didn’t know what the future held in that meeting—and no one really knows what will happen if for-sale housing improves or overdevelopment becomes a threat. But Bolton’s work over the past 10 years has a lot of people feeling optimistic about how MAA will perform even if uncertainty does arise.