When Conor Wagner, an analyst with Newport Beach, Calif.–based Green Street Advisors, first heard that Memphis, Tenn.–based REIT MAA corralled longtime Sun Belt rival Post Properties in an all-stock transaction, he was surprised.
“I was surprised it happened now,” Wagner says. “As much as it made sense to us, we didn’t perceive Post as being a willing seller.”
But MAA’s offer for the Atlanta-based REIT proved too good to pass up. “We think [Post] recognized it was going to be a challenge for them to make a go of it in the public markets, given their size. It seemed very unlikely they were ever going to get the cost of capital that would allow them to grow. In a lot of ways, it seemed the portfolio always made sense in someone else’s hands, just for the G&A costs alone. In a certain sense, there was an air of inevitability about Post ceasing to exist as a stand-alone public company,” Wagner says.
The value for Post shareholders is obvious. MAA, on the other hand, has to prove to its shareholders that it can justify the premium paid. “They’re doing a .71 exchange ratio [0.71 shares of MAA for each share of Post] in this deal,” Wagner says. “Last week, Post shares were trading 0.6 and you could have sold a share of MAA and bought more Post. In order to make up for that premium, they have to operate the portfolio better.”
Making the Deal Work
The good news: MAA’s management expertise. The REIT is known as a strong operator, and it completed a large integration effort when it bought Colonial Properties Trust in 2013.
“Fitch is comfortable with the integration risk, given MAA’s demonstrated experience integrating Colonial Properties Trust and deriving operational improvements,” Fitch Ratings said in a note released after the deal was announced. “A modest detraction from the transaction is that operating results may be more volatile relative to MAA’s prior strategy, which had fewer infill locations and did not have a material development strategy.”
MAA took some criticism for the Colonial integration from analysts, but the company anticipates Post will be easier. Wagner agrees. “They’re on the same revenue management software, so that will help, and what they learned with Colonial will help as well,” Wagner says. “The Colonial acquisition doubled the size of the company. Hopefully, they’re better prepared this time, having gone through the experience.”
The deal also gives MAA a larger stake in markets like Atlanta and Dallas. “MAA does get an increased presence in urban and primary locations,” says Philip Martin, vice president of market research at Waterton. “And they do get that development arm.”
Traditionally, MAA has built new projects on an opportunistic basis, mainly focusing on acquisitions. “Having a development platform will be a big shift for MAA,” Wagner says. “They took on some of the developments from Colonial, but they have mainly been buying recently developed assets and properties in lease-up. This will definitely be a shift for them.”
Stronger Balance Sheet
In many transactions, the buyer must lever up to make a deal. But MAA’s all-stock purchase of Post actually has the opposite effect on its balance sheet.
After the sale is finalized, MAA’s debt-to-market cap will fall from 30% to 27% (Post was at 20%). Already, Fitch, which upgraded its issuer default ratings (IDRs) of MAA to BBB+ from BBB, and Standard and Poor’s, which put MAA on a “Positive Watch,” have given the deal favorable ratings. “The all-stock acquisition of lower-levered Post Properties announced today will further strengthen MAA’s balance sheet to levels that Fitch believes will provide sufficient cushion to maintain a stronger credit profile through the cycle,” Fitch said in its note on the day of the sale.
Fitch estimates the deal will reduce MAA’s leverage by approximately 0.3x, all else being equal.
“The improvement in their credit profile will probably lower their unsecured debt costs, as well,” Green Street’s Wagner says. “The company estimates that the spread they pay over the 10-year will decrease by 30 to 40 basis points. From the balance sheet perspective and from improving the quality of the portfolio and having a shared G&A load, we think it’s very favorable. But there are risks with taking a development pipeline, and the synergies and NOI upside still have to be achieved.”
Fitch also likes the deal.
“The Post acquisition is a logical strategic transaction that improves MAA’s portfolio quality and should result in scale benefits from deeper market penetration,” Fitch said in the note. “The combined company’s increased size should also improve its public debt and equity markets access, resulting in lower capital costs.”