On Monday morning, MAA became the nation’s largest owner in a blockbuster $3.88 billion transaction to acquire Post Properties.
The acquisition propels MAA to the top of the REIT mountain, outpacing the rest of the pack by a substantial amount. The deal—which added 24,162 units across 61 communities—brings MAA’s portfolio up to 105,000 units, compared to AvalonBay’s 84,000-plus units. Equity Residential had been the largest REIT until 23,000 units to Starwood in a deal that closed earlier this year.
A day after announcing the mega-merger, Eric Bolton, MAA’s CEO, sat down with MFE to discuss the deal, which was consummated in the dog days of summer, when many CEOs would be on vacation. “I actually had intended to go on vacation too,” he laughed, “but it didn’t quite work out that way.”
When Bolton first joined the company 22 years ago, it had just 19 properties; today it has 317. But being the biggest REIT by unit count was never MAA’s intention, Bolton said. The opportunity to acquire Post was just too good to pass up.
“What jazzes me more than anything is the opportunity to take the best of two organizations and create something even more special. The size is almost like a byproduct of it,” he says. “I want to make sure we use that size to our advantage in every way we should. But it’s just a number—I’m more interested in the process.”
Notably, Post’s portfolio skews more toward Class A and urban, with an average rent per unit of $1,483, compared to MAA’s $1,031. And Post was a more active developer, with a pipeline of more than 2,900 units currently under construction, compared to MAA’s 628 units.
Some may question why MAA would take on more properties in supply-rich urban markets—not to mention Post’s big development pipeline—this late in the cycle. But Bolton takes a much longer-term view of value creation.
“We’re not doing this transaction with an eye toward how do we optimize performance next year or the year after,” he says. “This is a strategic combination that we think creates a stronger value proposition for the next 10 years.”
The merger doesn’t suddenly turn MAA into a development-heavy shop. All told, the new MAA now has $576 million in its current pipeline, or between 3% and 4% of its total market capitalization, a manageable number, Bolton says.
“We’re bringing in a very talented development team that we think broadens and strengthens our tool chest in terms of how we’re able to grow externally and importantly recycle capital,” he says. “But I don’t think this merger really changes who we are; we’re still going to be very active in the acquisitions market.”
The deal guarantees MAA will have the biggest institutional presence across the Sun Belt—but it also brings new markets into the fold, including two of the nation’s most dynamic metros, Washington, D.C., and Denver. The deal also upped MAA’s concentration in Atlanta and Dallas by a significant amount.
“We get stronger financially as a consequence of doing this, but we also get a portfolio of properties that are some of the best quality assets in the Southeast,” he says. “And while we have a lot of overlap, they share a different submarket, a different price point of the rental market, so we think as a consequence of combining the two that we further diversify our earnings stream.”
The acquisition raised MAA’s total market capitalization from $11.6 billion to $16.6 billion, fourth-highest among REITs.
Lessons Learned
In June 2013, MAA acquired Sun Belt rival Colonial Properties Trust, adding more than 35,000 units in the process. While the integration of Colonial was a colossal undertaking, Bolton feels the integration of Post’s properties and staff will make for a smoother transition.
“I learned a lot from the Colonial integration. It was surprising how two organizations focused on fundamentally the same business and markets were basically running the business in such different ways,” he says. “So one thing I learned is to go into these things believing you’ve got something to learn, and you need to hear what others have to say because what you’re doing may not be the best way.”
Case in point—the two firms used different property management software systems, and MAA ended up going with Colonial’s provider. But that created the second lesson learned—when you’re changing something as fundamental as property management software, you can’t always hit fast-forward.
The Colonial transaction closed in October, and MAA wanted to have the software integration done before the spring leasing season of 2014. “And we elected to force change to occur and adopted a completely new software platform in a very short amount of time,” he says. ”So we pushed through too much change in too short amount of time. If I had to do that again I would probably pace it at a little slower level.”
That’s one problem Bolton doesn’t have to worry about with the Post acquisition—the two companies share the same revenue management, property management and financial reporting software systems, making for a smoother transition.
Teamwork
In terms of how the deal materialized, Bolton was restricted from saying too much before the proxy statement is formally filed, which will take a few weeks. But as competitors, Bolton and Post’s CEO David Stockton have had a very healthy respect for one another’s work. And MAA’s rising stock price, and lower cost of capital, gave it the dry powder to execute such a massive deal.
“I’ve known Dave for years, I’ve admired what they’ve done,” Bolton says. “We at MAA have been fortunate to see our share price do reasonably well over the past year and a half or so and the opportunity to take the strengths that we created and use our currency as reflected in our share price to build something stronger and create something better going forward was there. So we jumped on it.”
Bolton credited Al Campbell, MAA’s CFO, as well as its general counsel Rob DelPriore and director of finance Tim Argo as instrumental to getting the deal done.
“The three of them have been putting in the hours and they were under the tent early on, helping me do all the analysis as we worked through negotiations.”
Both MAA and Post’s boards of directors unanimously approved the deal. MAA’s board will grow by three to 13, with Bolton remaining as CEO and Chariman of the Board and the three new directors appointed by Post. The deal is expected to close in the fourth quarter.
