The properties it secured in its deal with Colonial helped MAA expand its critical mass of apartments in key Sun Belt markets, including Charlotte (top, far left), Atlanta (middle, far left), Orlando (top, far right), and Raleigh (middle, far right).

Twenty years ago, two of the apartment industry’s newest REITs began throwing their weight around the Sun Belt.

In February 1994, Mid-America Apartment Communities (MAA) went public with a portfolio of 24 developments, or nearly 6,000 units, spread across cities such as Memphis and Chattanooga, Tenn., and Jackson, Miss. But that portfolio would quickly prove to be just a drop in the bucket.

Emboldened by its IPO, MAA went on a frenzied acquisition tear, aggressively expanding into second-tier Sun Belt markets like Little Rock, Ark.; Louisville, Ky.; and Jacksonville, Fla. By the time it acquired Omaha, Neb.–based America First REIT, in June 1995, MAA had a portfolio that suddenly numbered more than 15,000 units.

Not too shabby for just 16 months of work.

Colonial Properties Trust had a five-month head start on Mid-America, having gone public in September 1993. The firm began trading on the stock exchange (NYSE symbol CLP) with a portfolio of just 16 apartment communities spread throughout Alabama, Florida, and Georgia.

As with MAA, the capital infusion Colonial received through its IPO would jump-start an aggressive expansion. The firm went on a shopping spree in 1994 that saw it more than double its apartment holdings throughout the Sun Belt, to 10,873 units, becoming the largest owner in Alabama in the process.

Twenty years ago, shares of Colonial Properties Trust were trading for $23.25. That same day, on March 1, 1994, the price of one share of Mid-America Apartment Communities hit a high of $23.25.

But while these neighborly REITs began life with similar footprints and trajectories, they took very different paths in the years ahead. And today, one owns the other, combining to form a ­powerhouse portfolio of more than 85,000 units, making MAA the industry’s second-largest REIT, eclipsed only by Equity Residential.

“In my opinion, the whole is going to be more valuable than the parts,” says Rich Anderson, research analyst at Chicago-based BMO Capital.

Tightening the Sun Belt
As you’d expect, the Sun Belt’s two largest apartment owners—and their CEOs, Eric Bolton and Thomas Lowder—had a healthy respect for each other, and a lot in common.

“Tom Lowder and I have known each other for years, and we’ve enjoyed a number of conversations discussing apartment leasing conditions and general trends in the marketplace,” says Bolton, MAA’s chairman as well as CEO.

But they also had very different recipes for success. And a REIT analyst looking at each company back in 1994 could be forgiven for thinking Colonial, not MAA, would emerge the victor.

A diversified portfolio is usually a smart hedge, a way to mitigate risk from overexposure to any one asset class. And as each company matured into the turn of the century, Colonial was by far the more diversified, with office and retail portfolios to complement its apartment volume.

Colonial also had more-diverse multifamily activities—it fell in love with the bigger yields achieved on the development front and aggressively moved into new construction. Colonial built 1,144 units in 2006 and another 1,615 in 2007, landing on multifamily ­executive’s Top 50 Builders list each year.

In contrast, MAA had a deliberate, focused approach as a pure-play multifamily owner. Instead of looking to other asset classes, or moving into new development, MAA grew by acquisition and focused on operational excellence. It was a less sexy, but more stable, strategy.

But in the end, ­Colonial’s diversity proved to be a ­liability, as did its ill-advised foray into townhome and condo ­development. Analysts viewed the company’s diversity as indecision: Colonial never figured out what it wanted to be.

When the Great Recession hit, Colonial’s office and retail portfolios, and its pipeline of new development deals, dragged its balance sheet down. The firm had a growing mountain of debt—in the depths of the recession, Colonial was one of the most, if not the most, highly leveraged REITs in the industry.

In a nutshell: Colonial built condos in the run-up to the recession, while MAA sold properties for astronomical prices to condo converters. And as the fortunes of these two REITs came into focus post-­recession, it was widely expected that Colonial would be sold. And who better to acquire the company than its biggest competitor?

“It wasn’t a surprise as far as them getting together,” says ­Alexander Goldfarb, managing director of equity research at New York–based Sandler O’Neill & Partners. “These are two companies that share very similar markets. And, so, there was very obvious crossover in terms of executive and operating synergies.”

In late 2012, officials at MAA and Colonial formally began discussing the possibility of a merger.

“As we explored the strategic rationale and fit, it was obvious we had reached a point where each platform brought certain strengths and benefits that would enable something good for both sides,” Bolton says. “We felt that a combination would create a company with enhanced capabilities to attract capital and generate higher efficiencies, capable of driving higher returns to investment capital.”

The Iron’s Hot
The markets that MAA focuses on also happen to be some of the fastest-growing markets in the nation—in terms of both population and new apartment construction activity.

Over the past two years, many developers have targeted metros like San Antonio and Austin, Texas, and Nashville, Tenn., for growth, with each of those metros adding more than 3.3 percent to its existing inventory this year. Austin alone will see 12,915 new apartments in 2014, an inventory growth rate of 6.7 percent, tops in the nation.

“The risk in the Sun Belt is that you have the propensity for high-level supply growth through construction,” Anderson says. “That’s bad for any existing ­portfolio.”

But the best way to counter oversupply is to become more efficient, something this deal accomplishes for MAA. By expanding its critical mass of apartments in key Sun Belt markets, MAA will realize greater economies of scale just as the upturn matures into a high-water mark for new construction activity.

“I think this is all indicative of the fact that we’re getting into the sixth/seventh inning,” Anderson says. “It’s an opportune time to combine assets.”

Consolidation Traction
Colonial’s presence in larger metros, and its focus on newer, higher-class assets, was certainly attractive to MAA, as was bringing Colonial’s development expertise in-house. The $2.17 billion merger was a natural, and to hear Bolton tell it, the two companies were practically interchangeable.

“We truly looked at it more as a merger. The fact that I’m running the company as opposed to Tom is ­really a function of our respective ages and sort of where we are in our careers in the cycle,” says Bolton. “He was ready to retire and I wasn’t.”

That’s a gracious take on the fates of the two entities, one that no REIT analyst seemed to share with Bolton. But given the massive consolidation trend over the past year, evidenced by the Archstone and BRE deals, this isn’t the last major merger the industry will be seeing, according to analysts.

“A theme that has been playing out in the apartment REIT space in the last year and a half is the belief that bigger is better,” says Dave Bragg, managing director at Newport Beach, Calif.–based Green Street Advisors.

As the upturn matures, major owners are focusing less on opportunistic properties and more on opportunistic enterprises.

“We’re in the part of the cycle where major owners of properties and investors are using more creative ways to extract value,” says Dan Fasulo, managing director of New York–based market research firm Real Capital Analytics (RCA). “It’s not two or three years ago, where prices are depressed and there are distressed properties … that game is over. Given where we were at the peak, and how far we are from that, we’re in the early innings of the M&A cycle for commercial real estate.”

The growing availability of debt and equity will only help this merger-and-acquisition trend increase this year, he adds.

In many ways, this wave of mega-deals is a measure of distance from the Great Recession, a sign of healthier times that offers a sense of closure to the industry.

“Most of the time, you really have to be confident of the future to make the numbers work,” Fasulo says. “It’s a shot of confidence for the sector.”