Colonial investors will receive 0.36 newly issued shares of Memphis, Tennessee-based Mid-America for each share of Colonial they own, the companies said in a statement today. Based on Mid-America’s closing share price of $67.97 on May 31, that indicates a price of $24.47, about 11 percent more than Birmingham, Alabama-based Colonial’s last close.
The deal would create a real estate investment trust with about 85,000 rental units primarily in the U.S. south. Shares of multifamily companies, after almost tripling since March 2009 as apartment vacancies fell to the lowest in a decade, are now lagging behind other commercial-property types on prospects growth will slow. The merger may boost landlords’ stocks as investors speculate that other deals might be coming, said Rod Petrik, a REIT analyst at Stifel Nicolaus & Co. in Baltimore.
“What’s moving this sector is sentiment, so certainly the thought of M&A activity can change sentiment,” he said in a telephone interview.
A Bloomberg index of 16 multifamily REITs rose 1.6 percent in the past 12 months, compared with an 18 percent gain for the entire REIT sector. Office properties, the second-worst performer after apartments, rose 14 percent in the same time period.
Colonial Properties shares (CLP:US) climbed 5.7 percent to $23.37 today, the most since November 2011. Mid-America, which has a market value of about $2.79 billion, fell 3.1 percent to $65.89.
The nation’s apartment-vacancy rate was 4.3 percent in the first quarter, the lowest in more than a decade, according to Reis Inc. (REIS:US) Demand for rental homes has been rising among Americans who can’t qualify for a mortgage or don’t want to own property after the worst housing crash since the Great Depression.
Mid-America shareholders will own about 56 percent of the combined company’s equity, with Colonial owners holding the rest. Mid-America Chief Executive Officer H. Eric Bolton Jr. will be chairman and CEO, while Mid-America’s chief financial officer and chief operating officer will also assume those roles at the combined company.
“The scale of the combined company will support accelerated growth,” Bolton said in the statement. The merger will “drive higher margins as a result of synergies and advantages generated.”
The joint company will own 285 properties, with its largest markets including Dallas/Fort Worth and Austin, Texas; Atlanta; Raleigh, North Carolina; and Jacksonville, Florida. Colnial’s average monthly rent in communities open at least a year is $982, about the same as Mid-America’s, Petrik said in a note today.
The deal was unanimously approved by both boards and will result in gross savings of about $25 million a year once the companies are fully merged. The agreement is subject to approval of shareholders of both companies, and is expected to be completed in the third quarter.
The combined company would be the biggest by number of units after Chicago-based Equity Residential (EQR:US), which is also the largest apartment REIT by market value, at $20.6 billion. AvalonBay Communities Inc. (AVB:US), based in Arlington, Virginia, is the second-biggest by market value, at $17.5 billion.
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