Recently, Colonial Properties Trust Inc (NYSE:CLP) has received a buyout offer from Mid America Apartment Communities Inc (NYSE:MAA) to acquire the trust for around $2.2 billion. To complete the deal, Mid-America will issue new shares for Colonial’s shareholders, and each Colonial Properties Trust Inc (NYSE:CLP) shares would be equivalent to 0.36 newly issued Mid America Apartment Communities Inc (NYSE:MAA)’s share. For the past four years, Colonial has advanced significantly, from only $3 per share in the beginning of 2009 to more than $23.40 per share. Does Colonial Properties Trust Inc (NYSE:CLP) have a fair deal? Should investors be bullish about Mid America Apartment Communities Inc (NYSE:MAA) after this deal? Let’s find out.
Mid-America and Colonial’s business snapshot
Mid America Apartment Communities Inc (NYSE:MAA), founded in 1994, is the apartment communities REIT focusing on the Sunbelt region in the U.S, owning around 160 properties with 47,809 apartment units. It also possessed more than 33% interest in the owner of two properties with 626 units and four other properties with more than 1,150 units. Most of its net operating income (NOI), $132.7 million, or 44.7% of the total 2012 NOI, was generated from the Large Market Same Store segment, while the Second Market Same Store and the Non-Same Store and Other segment contributed $112.9 million and $51.5 million, respectively, in NOI.
Colonial Properties Trust Inc (NYSE:CLP) is also a REIT operating multifamily apartment communities in the same region that Mid America Apartment Communities Inc (NYSE:MAA) is focusing on. It owns around 114 multifamily apartment communities and 11 commercial properties. The majority of its NOI, $220 million, or 84% of the total 2012 NOI, derived from the multifamily segment, while the commercial segment generated only $41.6 million in NOI.
A deal with great synergies
With the exchange ratio of 0.36x Mid-America per Colonial Properties Trust Inc (NYSE:CLP) share, Mid America Apartment Communities Inc (NYSE:MAA) shareholders will own 56.2% and Colonial shareholders will own 43.8% of the combined company. The combined company will operate around 84,772 units in 285 communities with the very high occupancy of 96%. According to Mid-America, the combined company will be the second biggest multifamily REIT by units with a total market capitalization of more than $8.6 billion. It has more units than AvalonBay Communities Inc (NYSE:AVB). After this acquisition AvalonBay will rank third, operating more than 73,470 units.
As the two companies have the huge overlap in its asset footprint and technology to drive performance, the combined company would have a lot of scale efficiencies and synergies via integration of the two businesses. It was estimated that there would be around $25 million in run-rate annual synergies. The new company will have debt/LTM EBITDA of around 6.7, with the LTM fixed charge coverage ratio of only 3.4, lower than the old Mid-America of 4.3.
Eric Bolton, CEO of Mid-America felt excited about the merger. He commented
The scale of the combined company will support accelerated growth and deployment of capital across our high-growth Sunbelt markets driving superior value creation opportunity for our shareholders.
He also expected that the ability to serve residents across the region would be enhanced with higher margins via potential synergies. Colonial Properties Trust Inc (NYSE:CLP) expected to generate around $1.34 to $1.40 in diluted FFO (Funds from Operations) per share. Thus, with the valuation of $2.2 billion, it would value Colonial at around 17.50 times its forward FFO.
AvalonBay Communities Inc (NYSE:AVB) has a much higher valuation on the market. For the full year 2013, AvalonBay Communities Inc (NYSE:AVB) expected to generate around $6.29 in FFO per share. Including non-routine items including the recent Archstone Acquisition costs, interest hedge, the company estimated to have $4.98 to $5.28 in FFO per share for the full year. AvalonBay Communities Inc (NYSE:AVB) is trading at around $134.50 per share, with the total market cap of around $17.40 billion. The market values AvalonBay Communities Inc (NYSE:AVB) at a much higher valuation than Colonial Communities, at around 27 times its forward FFO. At the current trading price, AvalonBay Communities Inc (NYSE:AVB) offers shareholders dividend with a yield of 3.2% while Mid-America pays a higher yield to shareholders, at 4.2%.
My Foolish take
The acquisition of Colonial Communities is quite a great fit for Mid-America to expand and strengthen its footprint in the Sunbelt area, giving the combined company a significant economies of scale as being the second largest multifamily REIT and the great synergies. With the juicy dividend yield, investors might consider investing in Mid-America for income in a long run.
Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Great Synergy in This Multi-Family REIT Merger originally appeared on Fool.com is written by Anh HOANG.
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