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Mid America Apartment Communities Inc (MAA), Equity Residential (EQR): Why Is This REIT Stronger After its Merger

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Mid America Apartment Communities Inc (NYSE:MAA) will acquire Colonial Properties Trust Inc (NYSE:CLP) and operate as a multifamily REIT. The equity market cap of the combined operations will be $5.1 billion with a total market cap of $8.6 billion. The merger was approved by both boards. Colonial Properties Trust Inc (NYSE:CLP) shares are worth 0.36 of a share of Mid America Apartment Communities Inc (NYSE:MAA) or a premium of 11% to its closing price on May 31, 2013. Following the deal announcement, shares of Mid America Colonial Properties Trust Inc (NYSE:MAA) declined by about 4.5% while shares of Colonial Properties Trust Inc (NYSE:CLP) are up about 4%. Since June 5, the share prices have moved in tandem.

Mid America Apartment Communities Inc (NYSE:MAA)

The entity will have 85,000 units located on 285 properties located in the Southeast but largely in Atlanta, Houston and Orlando. The combined company will be the second largest owner of multifamily units in the US. Management believes the combined company will “support accelerated growth and deployment of capital across our high-growth Sunbelt markets.” It also expects that higher margins will result from operating synergies generated from the merger.

The dividends of the new company would increase the dividends from $2.64 in CY12 to $2.78 in CY13, with FFO of $4.57 and $4.87 per share in those respective years.

Industry Trends

The industry is going through a growth phase and grew by 11% in the five years prior to 2005. The downturn in 2007 led to a decline in the percent of households that owned their homes. Almost 70% of households owned their home at the end of 2004. This has declined to around 65% currently. Renting gained share versus owning and many cities saw apartment occupancy rates climb with some cities going into a deficit. This helped rents climb in many locations.

All this said, new home construction and the economy are slowly rebounding. The shift is moving slowly back towards ownership versus renting. Lending standards will likely remain tighter than during the 2004-2007 time frame, which should lead to a normalized level of home ownership below prior peaks.

New construction has slowed for multifamily units in recent years. This should help support rents at a high level. In addition, demographic and population trends in Mid America Apartment Communities Inc (NYSE:MAA)’s core Southeast market are positive for the multifamily market. The consensus opinion from industry analysts is that apartment supply will remain tight for the foreseeable future.

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