Mid-America Apartment Communities: Market Level Returns With A Higher Dividend
Summary
- Mid-America Apartment Communities (MAA) is a high-quality residential REIT with a strong presence in growing Sunbelt markets, making it an attractive investment option.
- MAA has maintained high occupancy rates and experienced rent increases, with management expecting continued growth in 2023, including a 6.25% revenue growth and a matching NOI growth.
- The company has a solid balance sheet, low leverage, and a reliable dividend with a history of growth, making it a good pick for income-oriented investors.
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It’s been a while since I wrote an article on a residential REIT. In my previous articles, I’ve tried to articulate my stance towards legacy vs sunbelt markets, concluding that I don’t see either as significantly positioned. While legacy markets will see lower demand, this will be counter-balanced by lower supply. Sunbelt markets on the other hand, will see some of the highest levels of supply ever, but this will be offset by an influx of people and jobs. For my detailed outlook on the Sunbelt, check out my article on BSR REIT (OTCPK:BSRTF). Today I want to cover Mid-America Apartment Communities (NYSE:MAA) which is a high-quality REIT, regarded by many as the safest one to invest into right now.
Why do so many investors like it? It’s quite simple. Its geographical presence is heavily focused on growing markets in the Sunbelt, with their largest markets being Atlanta (13%), Dallas (10%), and Tampa (7%). This could also be considered the biggest risk as the supply is really high and demand might slow down in the future but I personally don't see it as a threat since the demand seems to be keeping up so far. The REIT owns high quality buildings as 92% of the portfolio is classified as A- or better. This corresponds with the fact that they tend to focus on higher income individuals with average rents amongst the highest of any residential REITs.
MAA
Last year, as well as at the start of 2023, has been great for MAA as they managed to retain high occupancy of 95.5% and their rents increased by 13.5% fueled by inflation. Management is expecting these positive trends to continue in all of 2023, forecasting 6.25% revenue growth on the whole portfolio and a matching NOI growth. Occupancy is expected to tick up slightly to 95.8% at midpoint. That’s a really positive outlook at a time when the share price, as we’ll see shortly, is very low. The point I want to make clear is that MAA has grown their cash-flows by double digits last year, and is on its way to continue growing, though at a slower pace, also this year. Per share, 2023 FFO is expected at $9.11 at midpoint which would represent a 7% YoY growth.
MAA
And the thing is, that this growth is actually quite visible with a great balance sheet. MAA is one of just eight REITs that are A- rated or better. Also 100% of their debt is fixed and although the company has about 8% of total debt ($350-400 Million) maturing each year, the increase in interest expense is going to be quite gradual. The REIT is also amongst the least leverage with a net debt to EBITDA of 3.5x, compared to the average of peers (AVB, CPT, EQR, ESS, and UDR) of 4.9x.
On top of this, the company pays a reliable dividend which has a long history of growth. The yield currently stands at 3.7%. And sure, I know that’s below treasury yields, but in my opinion investing in MAA at this time is strictly better than treasuries. This is because of capital appreciation and long-term inflation protection which treasuries simply don’t have. Moreover, if one invests in 2-year treasuries, what happens in two years when he needs to re-allocate his money? It could very well happen, that rates have dropped by them and asset prices have moved significantly higher, leaving the investor with a bitter taste. So once again, the yield is lowish, but it’s likely to continue to grow and very unlikely to get cut, given the history and a low payout ratio of just 61%.
MAA
With everything I’ve shown you, you shouldn’t expect MAA to be cheap. Sure enough, it trades at 17x FFO which is in line with the historical average and on par with AVB which holds properties of similar quality in less popular legacy markets. Though I don’t think you can count on the market re-rating the stock to 20x anytime soon, with strong underlying revenue growth of 7% this year and 4-5% beyond that, you should easily make 8-10% per year, compounded for a very long time. That’s in line with the S&P 500 returns, but double the dividend and arguably a similar risk profile so it might be a good pick for some income oriented investors. That’s why I rate MAA as a BUY here.
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