Why Mid-America Apartment Is A Superior REIT (NYSE:MAA)

Summary

Mid-America Apartment Communities is a residential REIT giant with a market cap of around $18 billion, focused on the mid-American market and managing 276 same-store communities with close to 100,000 units.
MAA has a healthy balance sheet with an A-range rating from all three major rating agencies, a debt capitalization rate of 19%, and close to $2 billion in available liquidity.
The company has consistently outperformed its peers with a dividend yield of 3.7%, 117 consecutive quarters of dividend payments, and an average annual dividend growth rate of 8.1% over the past five years.

Geschäftsmann Hand hält goldene Trophäe mit Stern auf blauem Hintergrund. Geschäftliche Herausforderung, Belohnung, Wettbewerbskonzept. 3D-Rendering — okies3D/iStock via Getty Images

Introduction

It's time to talk about Mid-America Apartment Communities (NYSE:MAA), a REIT I have never discussed before. In this case, I went with a very positive title, which I believe is fully warranted as the company behind the MAA ticker is superior. Not only has the stock consistently outperformed its peers, it has done so with subdued volatility and a business model that protects investors against recessions and related mayhem in the real estate market.

In this article, I will walk you through my thoughts and numbers and explain why real estate income-seeking investors might benefit from taking a closer look at this residential REIT gem.

So, let's get to it!

What's MAA?

With a market cap of roughly $18 billion, MAA is the fourth-largest residential REIT in the United States. The company has been public for 29 years, it's a member of the S&P 500, it has an average executive tenure of 20 years, and more than 100 thousand apartment units managed by roughly 2,400 associates.

As its name already gives away, the company is focused on the mid-American market, where it manages 276 same-store communities with close to 100,000 units. Most of its assets are inner loop and suburban apartments in great locations. More than 60% of its assets come with a garden. Only 4% of its assets are high-rise apartments.

The company's primary markets consist of Atlanta, Georgia; Dallas, Texas; Tampa and Orlando, Florida; and Austin, Texas, where it enjoys a significant market presence.

Also, its top ten markets all benefit from the current migration from northern to southern states.

Furthermore, the company's tenants come with a number of benefits. This includes a high median salary, a relatively low median age, and diversified employment.

Looking at the numbers below, we see that the median tenant is single, 35 years old, makes $84K per year, and spends roughly a fifth of their income on rent.

In other words, the company caters to people who need affordable, high-quality housing. This allows the company to benefit from the anti-cyclical characteristics of its markets. It is far less dependent on the health of the economy than industrial, retail, or hotel/leisure REITs.

Furthermore, the company maintains an extremely healthy balance sheet.

The company is just one of eight REITs with an A- rating or higher. In this case, the company has an A-range rating from all three major rating agencies with a stable outlook.

It has a debt (+ preferred) capitalization rate of 19% and close to $2 billion in available liquidity. Furthermore, every penny of its debt has a fixed rate, which helps the company to withstand the pressure of rising rates.

Adding to that, the company has a net debt ratio of just 3.50x, which is one of the healthiest numbers in the REIT space I've seen in a long time. It also has a weighted average maturity of 7.7 years and a weighted average interest rate of just 3.4%.

Also, less than 18% of its debt is maturing before 2025.

The best thing is that this portfolio comes with satisfying dividends and outperformance.

Dividends & Outperformance

MAA currently pays a $1.40 per share per quarter dividend. This translates to a yield of 3.7%. The yield on the Vanguard Real Estate Index Fund (VNQ) is 4.3%.

While 3.7% may be underwhelming to some, there are good reasons to buy this 3.7% yield instead of the average yield of 4.3% - or slow-growth companies with even higher yields.

MAA has paid a quarterly dividend for 117 consecutive quarters.
The company has never cut its dividend.
MAA has grown its dividend by 6.9% per year over the past ten years.
Over the past five years, the average annual dividend growth rate was 8.1%.
On December 13, 2022, the board approved a 12% dividend hike.
Using 2023E numbers, the company has a healthy payout ratio of 61%.

Furthermore, the company has consistently outperformed its peers. Since 2005, the company has returned 11.7% per year. The aforementioned VNQ ETF has returned 6.3% per year. The S&P 500 has returned 9.0%.

The best news is that this outperformance came with a standard deviation of 22.7%. This is just 40 basis points above the standard deviation of the VNQ ETF.

In other words, MAA has the same standard deviation as a well-diversified basket of real estate stocks. That's rare and a sign of high quality.

Also note that the company's outperformance has been very consistent, as shown in the table below.

With all of this in mind, let's take a closer look at recent developments.

New Developments & Valuation

By now, it shouldn't surprise anyone when I say that real estate has been under pressure. Especially commercial real estate is being hit hard. Fitch estimates that 35% of pooled securitized commercial mortgages coming due between April and December of this year may not be able to refinance, which shows how bad the situation could get in some areas.

In its first quarter, the company saw no signs of weakness. MAA reported core FFO per share of $2.28 for the quarter, exceeding the midpoint of its quarterly guidance by $0.06. This was driven by solid demand for apartment housing across its portfolio.

The company attributes this demand to favorable employment conditions, positive net migration trends, and the high cost of single-family ownership. Despite anticipated increases in new supply deliveries, MAA continues to experience net positive absorption.

MAA believes that its affordable price point and unique diversification strategy, encompassing both large and secondary markets, along with an active redevelopment program, will help mitigate the pressure from higher new supply in certain markets.

If anything, headwinds in the market are an opportunity for MAA. While transaction volumes in the real estate market remain muted due to a limited supply of properties for sale, MAA anticipates that more compelling acquisition opportunities will emerge later in the year as the need to sell increases.

The company's acquisition team remains active, and they maintain a well-positioned balance sheet to support future transaction needs, as we briefly discussed in this article.

Furthermore, MAA's lease-up properties continue to outperform expectations, generating higher earnings and long-term value. The company has pre-development work underway for several projects, with four new construction projects expected to commence in the latter half of 2023.

When it comes to redevelopment projects, the company is on track to complete over 5,000 additional unit interior upgrades in the current year, in addition to installing new smart home technology across its entire portfolio.

Property repositioning projects have also been successful, with completed projects achieving net operating income yields in the high teens on incremental capital investment. These initiatives, combined with new technology implementations, are expected to provide additional performance upside for MAA's existing portfolio.

Thanks to these developments, the company continues to benefit from strong lease renewal rates, which offset some weakness in same-store new lease numbers.

Furthermore, the company continues to enjoy high occupancy rates. In 1Q23, total occupancy was 95.5%.

Based on this context, the company's core FFO guidance for the full year was increased to a midpoint of $9.11 per share, reflecting strong performance and a positive outlook. This guidance implies 7.2% growth versus 2022.

This also suggests that MAA is trading at 16x FFO.

The median sector valuation is 12.4x forward FFO, which means that MAA is trading at a premium. I believe that this premium is fully warranted. However, MAA is not cheap. 16x FFO is slightly above the longer-term median. After the pandemic, the company's valuation went above 20x, boosted by strong rent growth.

The current consensus price target is $170, which is 13% above the current price. I agree with that.

However, the stock could fall to the $120 to $130 range if rates remain high and investors continue to sell real estate assets - especially if rent growth turns negative in MAA's core markets.

That said, a decline towards $120 would make MAA a highly attractive long-term investment, which is why I put this stock on my watchlist.

Takeaway

Mid-America Apartment Communities stands out as a superior residential REIT with a track record of consistent outperformance and a business model that provides stability in the real estate market.

With a focus on the mid-American market and a portfolio of well-located apartments, MAA caters to tenants seeking affordable, high-quality housing, making it less susceptible to economic downturns.

The company boasts a strong balance sheet, an impressive credit rating, and healthy dividends with a history of growth.

MAA's long-term outperformance, matched with a standard deviation comparable to a diversified basket of real estate stocks, demonstrates its high quality and reliability.

Recent developments, including positive demand and strong occupancy rates, further support MAA's positive outlook.

While the stock currently trades at a premium, a potential decline in price could present an attractive buying opportunity for long-term investors.

Overall, MAA deserves attention from income-seeking investors looking for stability and growth in the residential REIT sector.

This article was written by

Leo Nelissen

28.57K Followers

Leo Nelissen is an analyst focusing on major economic developments related to supply chains, infrastructure, and commodities. He is a contributing author for iREIT on Alpha.

As a member of the iREIT on Alpha team, Leo aims to provide insightful analysis and actionable investment ideas, with a particular emphasis on dividend growth opportunities. Learn More.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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