As more apartments are delivered across the country, many REITs see an opportunity to buy new properties at what could be a discount to replacement costs.

For executives at Memphis-based REIT MAA, Central Avenue is the type of opportunity that should emerge over the next year. The company bought the 323-unit, mid-rise property from a developer under stress in October. The Phoenix Business Journal reported that Toll Brothers was the seller.

“The property is in its initial lease-up and the seller was under some pressure to close on the sale by a specific date,” MAA Chief Investment Officer Brad Hill said on the REIT’s recent third-quarter earnings call.

MAA secured the property for $102 million, or $317,000 per unit, which is “substantially below current replacement costs,” according to Hill. The property should provide an initial stabilized NOI yield of 5.5%.

“We think over the next couple of years that we'll see that yield meaningfully go up from there,” CEO Eric Bolton said on the call. 

Bolton thinks MAA can squeeze 100 to 200 basis points in additional efficiencies out of MAA Central Avenue once it's absorbed into the REIT’s platform.

“With the property nearing stabilization, we expect over the following year or so to capture further margin and yield expansion opportunities as a result of adopting MAA's more sophisticated revenue management practices and technology platform, coupled with our future ability to achieve operational synergies with another MAA property that is only half a mile away,” Hill said.

More opportunities coming

Phoenix represents a relatively small percentage of MAA’s portfolio. At the end of the third quarter, the firm owned 2,968 units in the city at an average rent of $1,756 and occupancy of 95.4%. Its total gross assets in the market were $481.8 million, comprising 3.2% of its overall portfolio.

Bolton sees more opportunities to buy for MAA in high-supply markets like Phoenix. “I think that we're going to continue to see more of those opportunities emerge over the coming year,” he said.

When those lease-up assets do shake loose, REITs that are sitting on cash have a competitive advantage when many other buyers depend on debt or assuming loans.

“Our familiarity with the market, speed of execution and balance sheet strength that supports an ability to close all cash with no financing contingencies were all aspects of our offer that were very important to the sellers,” Hill said.

Hill said MAA also has a balance sheet that puts it in a position to be aggressive when more deals come to market.

“Our transaction team is very active in evaluating other acquisition opportunities across our footprint,” Hill said. 

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