REIT M & A Activity: Independence Realty Trust (IRT) Announced Acquisition of TradeStreet Residential (TSRE) - Part 1
On May 11th, 2015 Independence Realty Trust (IRT) announced a merger agreement to acquire TradeStreet Residential (TSRE). According to IRT's official release, its acquisition of TSRE would, "creat[e] a leading, regional market focused, multifamily REIT". We combined the two companies using the data found in our Q12015 IRT and Q12015 TSRE data products. Our data provides the exact locations of each property owned by IRT or TSRE respectively at the time of the announced merger. We then conducted GIS analysis to understand the geography of the merger and also enriched the data with important demographics for zip codes where each REIT owns a property to determine if the merger creates a significant change to the demographic makeup of IRT's portfolio. Following this methodology we should be able to answer questions like:
- What does the geography of IRT's portfolio look like before and after the acquisition (Part 1)?
- Does IRT's acquisition of TSRE's properties add locations to IRT's overall portfolio that provide more favorable demographics and improve the demographic profile of IRT (Part 2)?
Geography of the IRT Acquisition of TSRE:
A quick look at the map above shows the IRT's acquisition of TSRE will expand or deepen its exposure to several states, mainly in the Deep South. Through its acquisition of TSRE, IRT will now have exposure to South Carolina, Florida and Alabama. With the addition of TSRE's communities, IRT will own properties in 18 states.
Moreover the acquisition of TSRE increases IRT's exposure to North Carolina by almost a multiple of 5, IRT's presence Georgia increases almost 3 times and similarly in Texas and Tennessee. At the MSA level, the acquisition would put IRT into 25 unique MSAs, up from 16. Currently, IRT and TSRE both maintain properties in Atlanta, GA, Memphis, TN and Raleigh, NC MSAs. In Q12015, TSRE maintained properties in 12 MSAs, IRT's owns properties in only three MSAs where a TSRE also wons and operates a community. In other words, even in states where TSRE and IRT overlap, the overlap does not continue down to the MSA level. Essentially, providing a level of geographic diversity at a more local level. IRT can essentially expand in a regional focused manner (increasing presence in the Deep South) while also claiming a degree of geographic diversity at the MSA level of geography.
One can debate whether diversification or concentration of real estate assets is a better strategy, but in reality a REIT can maintain a degree of both. Regional focus, paired with MSA diversification. However, the analysis should not stop at the MSA level, as there could be hidden inefficiencies in the geographic distribution of communities at the most local level. To identify inefficiencies we can dig deeper below the MSA level by determining the average distance amongst IRT owned, TSRE owned and the combined REIT's properties within each MSA where either or both of the REITs maintain a community. The infographic below tells us that the IRT's acquisition actually spreads its portfolio apart at the local level. Though diversification is desired at more macro levels, high performing REITs like Essex Properties (ESS) seek geographic clustering of assets within a five mile radius. IRT before the merger maintained the under 5 miles threshold, but the acquisition expands the distance amongst properties.
The cause for the increased distance amongst IRT properties at the local level is fairly clear when we look at the data on a map. Below is a map of the Memphis MSA depicting the locations of IRT and TSRE communities located within the MSA. IRT's properties (grey) are located are about 5 miles apart, while TSRE's properties (orange) are seperated by about 7 miles. Though acquisiion of TSRE's properties will deepen IRT presence in Memphis, it will also stretch it out. The lack of concentration in Memphis is something less desired and is a trend across many of the MSAs that will make up the combined company.
- IRT's announced acquisition of TSRE makes the REIT "much more southern", despite its ownership of properties in the Southwest, Mountain West, Midwest and Mid-Atlantic.
- TSRE provides IRT exposure to new markets in the Deep South and a deepening presence in three markets where it already maintains properties. TSRE provides IRT the ability to claim both enhanced regional focus and more localized diversity (at the MSA level of geography).
- Despite the fact the combined company provides both regional focus and MSA diversity, the acquisition of TSRE stretches IRT out at the property level. The lack of clustering amongst its properties at the property level is a less desirable characteristic and will be carried over into the combined company.
Stay tuned for PART 2- How IRT's acquisition of TSRE effects the demographics of IRT's portfolio....