Eric Bolton takes pride in being picky. When it comes to buying new apartment properties and expanding Mid-America Apartment Communities, Inc.’s portfolio, the chairman and CEO gets involved in every deal.

“The acquisition environment is very tough, and our due diligence process kicks out a lot of potential properties,” Bolton said. “We would like to grow faster, but we only put money out if it makes sense.”

In 2006, the Memphis, Tenn.-based real estate investment trust (REIT) completed close to $200 million in apartment acquisitions, buying seven properties—just five percent of the 130 communities that went through the due diligence and underwriting process.

As part of the due diligence process, Mid-America puts all acquisitions through the “Byrne Test.” Named after Jack Byrne, a former member of the REIT’s board, the test measures an acquisition’s impact on net operating income (NOI). “We expect all acquisitions to contribute positively to earnings by the third year,” Bolton said.

For example, in September 2006, Mid-America made its first buy in Phoenix, purchasing two properties totaling 480 units for $62 million. The REIT plans to operate the two properties, Talus Ranch and Sansol, as one community called Talus Ranch at Sonoran Foothills.

At closing, the properties were 50 percent occupied, and Mid-America anticipated that the acquisition would cause a modest dilution in funds from operations (FFO). However, the REIT expects the acquisitions will begin to be accretive by the third quarter of 2007 and will eventually provide a stabilized annualized NOI yield of 6.4 percent.

“We’re very focused on adding new properties and cycling out of old ones,” said Bolton, who has been CEO for five years. “We’re definitely more acquisition driven than development driven.”

Searching for quality

Under Bolton’s leadership, Mid-America has found ways around the competitive acquisition environment. “We have relationships with merchant builders who develop very nice Class A properties and are willing to sell them to us,” he said. “By being patient and tuned in, we can find quality acquisitions.”

Failed condo conversions have also provided fertile ground for acquisitions, according to Bolton. He noted that Mid-America closed on several deals in 2006 with down-on-their-luck condo converters.

This year, Mid-America expects to buy $150 million to $200 million worth of apartments in Sunbelt markets, Bolton said, an acquisition volume that is consistent with the amount the REIT has invested annually over the past three years.

Today, the company, which was founded in 1977 and went public as a REIT in 1994, owns more than 40,000 apartment units in 14 states. Although many apartment REITs are focused on high barriers-to-entry coastal markets, Mid-America likes the growing markets in the Sunbelt.

Bolton acknowledged that most people think Sunbelt markets are risky because they have few barriers to entry. But he said that demand for apartments is not only higher in cities like Houston and Phoenix, but more consistent than demand in Boston and San Francisco. “In the Sunbelt cities there’s more consistent growth in the population, and demand tends to take care of itself,” he pointed out. “Coastal cities have more volatility in demand, and demand is a factor that can’t be controlled.”

Roughly 30 percent of Mid-America’s portfolio is located in large-tier markets such as Atlanta, Dallas, and Tampa, Fla., while 38 percent of its portfolio calls mid-tier markets such as Austin, Texas, Jacksonville, Fla., and Nashville home. The remaining 32 percent is situated in small-tier markets such as Charleston, S.C., and Savannah, Ga.

“We invest in three tiers of Sunbelt markets so we can diversify and capture steady growth,” Bolton said. “With that strategy, we can drive pretty good performance without a lot of volatility.”

Record performance

Since its initial public offering, Mid-America has outperformed the apartment REIT industry, posting a return of 18.6 percent compared to the industry’s median return of 16.6 percent, according to Mid-America.

Last year was a record-breaking year for Mid-America, which employs about 13,000 people.

“We continue to set new records for NOI and FFO,” Bolton said, pointing out that the REIT’s same-store NOI increased 8.9 percent in the third quarter of 2006 compared to the prior year—the best third quarter performance the company has ever achieved. In addition, the REIT posted a 9.3 percent increase in FFO during the third quarter of 2006 compared to the same period in 2005, reaching $21.97 million, or 82 cents per share.

As of the third quarter of 2006, Mid-America’s portfolio was 95.9 percent occupied and effective rents had increased 5 percent from a year earlier. Moreover, concessions had dropped from 4.4 percent of net potential rent to 3.1 percent, and the average rent per unit increased by 3.6 percent.

Bolton noted that Mid-America’s properties in large-tier markets—particularly Dallas and Atlanta—have seen increased occupancies, enabling the REIT to reduce concessions and prepare for more robust rent growth in 2007.

Expanding, improving

Mid-America also is looking forward to launching several expansion and renovation projects in 2007, Bolton said. "Most of our development opportunities involve completing second phases of properties that we bought recently," he explained.

This year, the REIT will invest more than $55 million to add units to three existing apartment properties. Specifically, the company is spending $24 million to add 200 units to Brier Creek in Raleigh, N.C., $20 million to add 216 units to Copper Ridge in suburban Dallas, and another $12 million to add 124 units to St. Augustine in Jacksonville, Fla.

In addition to the new construction, Mid-America spends roughly $5.5 million rehabbing older apartment complexes. In 2006, the REIT refurbished roughly 1,100 apartments in 23 communities, spending an average of $5,000 per unit. On average, the renovation efforts result in an unleveraged return of 13 percent and a 16.8 percent increase in revenues.

For example, the company recently completed renovations on Hunters Ridge, a 336-unit complex in Jacksonville, Fla.

Built in 1987, the complex received new appliances, countertops, plumbing and lighting fixtures, and ceiling fans. Two-tone paint and laminated wood plank flooring was also part of the renovation. The update resulted in rental increases of 17 percent.

This year, Mid-America plans to renovate 1,500 to 3,000 units at $3,800 per home. This value-added development, along with strong internal operations and smart acquisitions, sets the stage for another great year, Bolton said.