MAA - Changing Market Trends Present Headwinds And Tailwinds For Mid-America Apartment And AvalonBay

2023-04-13 12:35:44 ET

Summary

• Yardi Matrix has released a Multifamily rent report for March.
• Because real estate is at least in part all about Location, Location, Location, REITs might be faring better or worse depending on regional market exposure.
• We identify which REITs have the most exposure in the hottest and coldest MSAs.
• Bonus identification of an overvalued REIT and its sponsor.

On April 5th, Yardi Matrix published its March 2023 Multifamily National Report detailing rental rates and occupancy changes for major markets across the country. It seems that much of the sunbelt is losing steam while previously sleepy markets like Indianapolis and Kansas City are gaining momentum. As a precursor to the fast approaching 1Q earnings season, we used Portfolio Income Solutions' Property Directory to identify which REITs had the most exposure in the 5 hottest and 5 most tepid markets. As examples we examine how Mid-America Apartment Communities (MAA) and AvalonBay Communities ( AVB ) might each be affected by the changing trends.

The Report

Since we haven't heard much from the multifamily REITs since their 4Q reports in February, Yardi Matrix's new report might provide insight into what we might see when the companies release 1Q results later this month and into May. Year-Over-Year rent growth came in at +4.0% on average, nationally.

The major markets breakout looks like this:

REITs often focus on specific asset classes (luxury apartments vs. workforce housing), and their operating results will be strongly influenced by their capital structure, leverage ratios, and other company specific factors. The focus of this review is to isolate what is happening in specific markets and to identify which companies have the most exposure to those markets. We will look at the top 5 leaders and the bottom 5 laggards from the All-Asset Classes graphic above.

The Leaders

• Indianapolis

Indianapolis led the Matrix top 30 metro rankings with a Y-O-Y rent growth of 8.6%. Independence Realty Trust ( IRT ) is the only REIT with material exposure here. Last September we described IRT's presence in markets that other REITs hadn't yet identified as opportunistic. Maybe their choices are starting to pay off.

• Kansas City

At 1,100 apartment units, Mid-America Apartment Communities has more exposure in Kansas City than any other publicly traded real estate company. With a portfolio of more than 100,000 units, however, MAA's performance needle won't be moved by the strong 6.9% Y-O-Y rent growth in Kansas City alone.

• New York

Many companies have holdings in NYC, but with 14,880 apartments, Avalon Bay Communities has a nearly 32% market share of public company apartment holdings. New York is rebounding from the pandemic's exodus and, if the trend is sustained, the city's 6.9% Y-O-Y rent growth could materially contribute to AVB's results.

• Boston

With 5.8% Y-O-Y rent growth, Boston is enjoying a solid start for the year. With more than 9,500 apartments in the Boston MSA, Avalon Bay controls nearly a third of the public company owned units and this tacks on to the strong showing in New York.

• Chicago

Chicago apparently hasn't been a target market for US real estate companies. With public companies reporting ownership of only 7,173 apartments in the Chicago MSA, sister companies Morguard Corp. ( MRCBF ) and Morguard North American Residential REIT ( MNARF ) combine to control more than 53% of Chicago's 5.2% Y-O-Y rent growth, but they're Canadian, eh? Aimco (AIV), at 21% market share, has the highest US based ownership in the market.

The Laggards

• Phoenix

With 6,288 apartments in the Phoenix MSA, Blackstone Inc.'s ( BX ) flagship fund, Blackstone REIT controls more than a third of public company owned units in the market. Phoenix's -2.0% Y-O-Y rent decline is a reversal from prior periods and hits MAA, Camden Property Trust (CPT), and NexPoint Residential (NXRT), as well.

• Las Vegas

Blackstone REIT dominates the Las Vegas market with a more than 2/3s share of public company owned apartments. Las Vegas' -1.8% Y-O-Y rent decline is a complete turnaround of the double-digit growth Vegas enjoyed in the early post-COVID reopening.

• Austin

Migration has continued to follow Elon Musk and Tesla (TSLA) to the Silicon Valley of the south, but new supply has dampened rent growth and Austin could muster only 1.0% Y-O-Y rent growth. MAA controls more than 34 % of public company owned apartments, but BSR REIT's ( BSRTF ) 1,936 units represent an outsized portion of its portfolio. BSR will more acutely feel the slowing growth.

• Atlanta

It seems everyone is moving to Atlanta. Builders noticed, produced abundant new supply, and kept Atlanta's rent growth in check at just 1.1% Y-O-Y. Almost every multifamily REIT owns apartments in Atlanta, but MAA's 11, 114 units give it a 1/3 market share of public company owned apartments.

• Sacramento

We had previously observed that Kennedy Wilson ( KW ) was the only publicly traded real estate company that owned apartments in the then white-hot Boise market. KW is again marching to a different drummer as the only public company investing in multifamily in Sacramento. Sacramento grew rents just 1.5% Y-O-Y and is forecast to grow just 1.8% for the balance of 2023.

Location, Location, Location - A Nationwide Consideration

A lot of skill, nuance, and know-how go into the successful management of a real estate company, but if we isolate geographic compositions of portfolios, we might be able to draw conclusions as to how they will perform going forward. As an example, we will compare the portfolios of two of the larger multifamily REITs: Mid-America Apartment Communities and AvalonBay Communities.

MAA is diversified over many markets but could accurately be described as concentrated in the South and Sunbelt. They have no exposure in California, New York, or Massachusetts. The tables above show that they do have material exposure to the lagging markets of Phoenix, Austin, and Atlanta.

AVB's portfolio has a completely different geographic exposure concentrated in just 5 regions. The tables above don't list AVB's presence in any of the 5 lagging markets. The tables do show AvalonBay does have a dominant presence in the freshly rent growing markets of New York and Boston.

Looking Back to Look Forward

A little more than a year ago, every investor wanted to attach to the growth/inflation-hedge opportunity of multifamily real estate. In particular, they wanted to capture the double-digit rent growth of the Sunbelt. As we described, AVB and MAA have property portfolios that don't geographically intersect on a Venn diagram. The table below, however, describes that a year ago they traded at remarkably similar valuations as measured by P/FFO multiples.

Moving to today, they still trade as similar multiples to forward consensus FFO estimates, but at significantly lower share prices.

All else being equal (which of course it is not), our previous observations about geography might make investment in one REIT more appealing than the other. MAA is exposed to previously overheated markets that now face the headwinds of heavy new supply. AVB is solidly positioned in markets that lagged during the pandemic but are now showing signs of life.

All else being equal, we would observe that both REITs, and the multifamily sector as a whole, are now more realistically valued. If the market rent growth trends sustain, we would be neutral on MAA and leaning toward a buy on AVB.

All else being equal, we would observe that BREIT and its sponsor Blackstone are significantly overvalued.

Bonus Insight

BREIT is a publicly registered, but not-exchange-traded REIT. Blackstone offers a limited liquidity option to unitholders based on its internally calculated Net Asset Valuation of BREIT. Dane Bowler previously detailed the gaping flaws of this "liquidity" and the merits of his analysis has been repeatedly proven in the oversubscribed, under-redeemed redemption program every month at BREIT.

BX contends that their properties have appreciated as same store NOI has been growing. Same store NOI has been growing at each of the multifamily REITs listed above, but that didn't stop the 25% decline in their share prices.

Though its holdings are not exclusively multifamily, BREIT has dominant positions in the apartment rent declining markets of Phoenix and Las Vegas. BX's claims of asset appreciation are wearing thin. As such BX's ability to raise new AUM is greatly diminished in this higher interest rate, bank crisis, flight-to-safety investment environment. Without new assets under management, BX's shares have nowhere to go but down in our view. We rate BX a sell.

Conclusions

1. Multifamily REIT FFO multiples were overinflated at the start of 2022 and beaten down share prices might now more accurately reflect reasonable valuations at 16x FFO.
2. Post work-from-anywhere migration and heavy new supply, the sunbelt's torrid rent growth has cooled for MAA and coastal markets may perform better in the near term for AVB.
3. BREIT's flawed valuation/"liquidity" posture will preclude raising additional capital. Absent new BREIT capital infusions, BX's AUM and valuation has likely peaked.

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