Eric Bolton
Credit: Eric Bolton Eric Bolton

A lot of apartment REITs have been active over the past few months. Few have been as aggressive as Memphis-based Mid-America Apartment Communities. In August and September, the company announced five acquisitions. Mid-America CEO Eric Bolton took some time to chat with Multifamily Executive senior editor Les Shaver about how the acquisitions market has loosened, how he may use development to add to his pipeline, and the perception of his company. MFE: How are you feeling about your performance so far this year?
BOLTON: We're very happy with the way things are playing out this year. Generally, performance is trending inline with what we expected and based on the increased guidance we gave earlier this year. We saw the improvement coming early this year, which lead us to increase expectations after the first quarter. Occupancy is very strong, and rent levels are showing very nice recovery. We're feeling pretty bullish about things.

MFE: What spawned all of your transactional activity?
BOLTON: We clearly have seen the transaction environment change in the last 90 days or so. I think we all thought last year was going to be a great buying opportunity, and it never really materialized. Early this year, it still wasn't very vibrant. Really in the second quarter, we saw things picking up, and I think it's a variety of factors that are really causing transactions to come to market in a more active way.

Cap rates have continued to come down. I think sellers are seeing that and are becoming increasingly motivated to bring product to market. If they have any plans to sell or dispose [of assets] in the next year or two, now is good time, given where cap rates are. There are a lot of concerns about the economy and the capital markets, and I just think that people see a window of opportunity to bring product to market. Secondly, the financing environment remains very attractive for apartments. That's creating awareness by sellers and buyers to be active in the market.

MFE: Have operational improvements played into this at all?
We are also are continuing to see evidence that the operating environment for the apartment business is continuing to get healthier. That has provided buyers the ability to be a little more definitive and optimistic in how they think about making their projections. The net result is that sellers and buyers are coming together in a more active way. I think to the extent that there's still distress on lease-up deals or banks are having loans on their books that are under some level of distress, I think they're more motivated than a year ago or six months ago to go ahead and monetize their loan or investment and bring deals to market.

MFE: You have been rumored to be interested in the Flournoy portfolio. Is there any thing you can talk about with that?
BOLTON: Obviously, we know the company very well, think very highly of them personally, and we think very highly of their product. I think we certainly have been involved in what they're going through and looking at opportunities. We recently bought one of their properties, just south of Nashville. So we're obviously in conversations with them. If we can find a way to put some of our capital to work in a way that makes sense for us and pricing that makes sense for them, hopefully we'll find a way to do something together moving forward.

MFE: How much can Mid-America grow through this year and this cycle?
BOLTON: As we released our second-quarter earnings, we updated our guidance for the year for acquisitions. At the moment, our guidance is built around completing $200 million of acquisitions of wholly owned investments for Mid-America's balance sheet. We've also assumed $150 million of acquisitions for our joint venture Fund II. It's a total of $350 million of acquisitions for the calendar year 2010. As we sit here today, we've closed $215 million so far. The $350 [million] still looks to be a pretty good number and we're hopeful we can accomplish that.

MFE: There's been some talk of working with merchant builders on development. How would that work?
BOLTON: It's something we're considering. I think that we continue to believe that the right thing for us strategically is to remain primarily an acquirer of existing properties. That continues to be our priority for how we deploy capital. Having said that, there is clearly some distress in the marketplace for developers and development companies. Their ability to access capital is pretty constrained at the moment. We've had conversations with some developers about possibly having some sort an arrangement wherein we have a pre-committed takeout when they do a development. In other words, we would guarantee that at some level of occupancy or at some period of time after completion, we could buy the asset from them. In some cases, it may be that we simply fund the development from the beginning and handle the lease-up ourselves.

MFE: What is Mid-America's development background?
Whatever development we have done historically has been very limited. Whatever new development we might do in the future would remain a limited aspect of how we intend to grow the portfolio. We're looking for some sort of value-add aspect to any development that we would be involved with. We're going to bring value because of our access of capital or because of our ability to handle the lease-up, or generally some our ability to take pressure off of the developer and capture that value for our shareholders. For the developer, they are put into a position where they can keep their business moving, and they can keep their development staff busy. If there's a way for us to bring new product into the portfolio that meets our investment hurdles and strategy, while providing a developer an opportunity to keep their platform moving forward, it may be a win/win situation. It's all about looking for ways to create new value within the current environment and use our platform in a way that makes sense for our shareholders.

MFE: Have you thought about where you want to be coming out of this tremendous window of opportunity?
BOLTON: We don't have a particular size or targeted new growth metric that we are striving for. We've always stayed away from trying to establish such targets and avoid putting pressure on underwriting or capital deployment decision-making. At the moment, we're approaching $2 billion in equity cap or almost $4 billion in total cap. That's a pretty good size. I do think that we have an opportunity to continue to leverage the operating platform and the public platform that has been built and drive more efficiency from the platform. However, I'm reluctant to ever define a specific size or mandate a definitive growth objective as I believe it can create subtle pressures to strive for growth that may not be the right long-term action for shareholders' capital.

MFE: Are you thinking about ways to rebrand Mid America?
We continue to be very comfortable with the strategy and the focus that we have. We have no plans to change who we are or the focus that has defined our brand. One of the things that we struggle with sometimes is the label Mid-America. When some hear that name, they think we're in the middle of wheat fields in Kansas or Nebraska. That's not who we are. Likely, you're just going see us increasingly refer to ourselves as MAA and just use the ticker as more of a label to who we are and continue to hammer at the fact that we have a dynamic and unique mix of Sunbelt markets that we believe put the company in a great position for superior long-term performance.

MFE: You think that will help with Wall Street?
BOLTON: I think most of the institutional capital market participants know who we are and where we are located. In my opinion, however, there continues to a bias towards the strategies that are focused on the high-barrier, bicoastal markets. I think that bias has existed for a long time and may be there forever. But at the end of the day, what really drives us is challenging ourselves with the question of are we positioned to best create a return for our capital over the long-term. Our strategy is built around the concept that we believe we can create returns on investment, in both secondary and large markets in the high-growth Sunbelt, that over time are every bit as attractive as the returns to capital that you can create in New York, Boston, or San Francisco.

We just go about it differently. We buy and exit at different price points, and we grow revenues at different levels.  But, in the end, we are creating a return to capital that is consistent or better than strategies focused on more highly sought after and very competitive high-barrier markets.  I'd also argue that the returns we create are generally less volatile and with lower risks than what you often see in some of those other markets. That's what really drives us. We're not going to change who we are. I do think the markets needs to recognize that, while there is clearly a defensive and less volatile profile to our performance, our strategy and markets also offer meaningful upside opportunity and sometimes the market doesn't appreciate that as much as perhaps as they should.