2023-05-09 07:00:00 ET
Summary
- Opportunities to buy blue chip REITs with double-digit (and even 25%+) discounts attached to them are historically rare.
- To us, the multifamily space offers a relatively safe harbor in the real estate sector.
- Right now, the multifamily REITs are offering a relatively unique combination of high quality ratings and wide margins of safety.
- This is the first of a two-part series covering our favorite picks in the space.
Right now, every single multi-family real estate investment trust, or REIT, that we track at iREIT has either a “Strong Buy,” a “Buy,” or a “Speculative Buy” rating attached to it.
This clearly speaks to my bullish outlook for this area of REITdom over the long-term.
These ratings are determined by margin of safety and quality scores.
For a company to have a “Strong Buy” rating attached to it at iREIT in today’s market environment, we need to be looking at a 25%+ margin of safety.
Also, to signify risk and protect investor capital, we’ve shifted our quality ratings and ensured that only the highest quality companies can receive “Buy” or “Strong Buy” ratings.
Therefore, lower quality names which are trading with attractive valuations receive the “Speculative” tag to ensure that investors - especially those who want to sleep well at night by investing only in blue chip stocks - clearly understand the risk across our coverage.
In general, opportunities to buy blue chip REITs with double digit (and even 25%+) discounts attached to them are historically rare.
However, during the bear market that REITs have experienced throughout the Fed’s hawkish cycle, we’ve noticed that many of our favorite companies have traded down to valuations that we haven’t seen in years (and in some cases, decades), representing long-term buying opportunities.
Now, to be clear, we’re not overly bullish on every part of the real estate sector.
There are certain areas of the market that we’re happy to avoid (I discussed this coming into the year in my 2023 REIT Roadmap).
But, we continue to like the multifamily space.
You see, people need a place to live and higher borrowing costs have made renting a better economic decision…and potentially the only one that cash-strapped consumers have…in many of the residential housing markets that we track.
Increasing demand has led to reliable rent increases and higher NOI amongst the companies with the highest quality developments and units to offer in high demand locales in recent years and although the economy is slowing this year, this trend continues to hold true.
To us, this makes the multifamily space a relatively safe harbor in the real estate sector. That’s especially the case when we’re talking about our highest rated companies in the space which are currently trading at historical cheap valuations.
Because of the unique combination of high quality ratings and wide margins of safety, the multifamily REITs are currently playing a large role in my iREIT index.
And with that being said, we wanted to take the time to provide earnings updates for some of our favorite stocks in the multifamily space and highlight the attractive opportunities that we see in this area of the market today.
Mid-America Apartment
Mid-America Apartment Communities, Inc. ( MAA ) is our highest rated multi-family REIT (and one of the highest-rated REITs in the iREIT coverage spectrum overall), and this graphic provided by the company in its most recent investor presentation makes it clear why that is…
The fact is, you’re going to have a very hard time finding a company that has provided investors with stronger adjusted funds from operations, or AFFO, and dividend growth over the last 10 years or so.
And, due to MAA’s savvy investments across the sunbelt, we believe that strong demographic shifts in the company’s favor are going to serve as catalysts for this growth for years (and likely decades) to come.
The company clearly showed this during its recent first quarter report; in a market where poor growth is becoming commonplace, MAA continued to provide investors with double digit y/y results.
With that being said, MAA sports a 99/100 iREIT IQ quality score, making this one of our favorite sleep well at night, or SWAN, investments in the market today.
During Q1, MAA continued to provide shareholders with solid y/y growth.
The company’s FFO increased from $2.06/share a year ago to $2.31/share today (representing 12.1% growth).
MAA’s core FFO was up as well; during the first quarter a year ago, Mid-America’s core FFO came in at $1.97/share, and today we’re looking at core FFO of $2.28 (representing 15.7% y/y growth).
Overall, for Q1, MAA’s same-store revenue was up 11% and its same-store NOI was up 12.5%.
One of the reasons that MAA is able to continue to grow its bottom line is because it continually upgrades and redevelops its assets; during Q1 , the company redeveloped 1,328 units and noted that these upgraded units produced rental rates that were roughly 8% higher than non-renovated spaces.
The company experienced 46% resident turnover during the quarter; however, overall demand for its units remains extremely high.
Not only was MAA able to increase its same-store NOI by raising rents, but the company ended Q1 with an overall occupancy ratio of 95.5%, showing that higher prices aren’t keeping renters away.
At the end of Q1 management noted that MAA had six communities under development which will bring on another 2,310 units online once they’re completed.
This is a growth catalyst on top of rent raises.
And with that being said, despite the rough macroeconomic headwinds that this REIT (and every REIT, for that matter) faces these days, MAA’s management provided investors with a bullish full-year outlook when it raised its guidance across the board.
Even with such strong growth/guidance in mind, MAA shares have suffered on a year-to-date and trailing twelve month basis.
During 2023 thus far shares are down by 3.84%.
During the past year, MAA shares have fallen by 21.5%.
This weakness has pushed Mid-America’s share price down into “Buy” territory, which is a relatively rare occurrence for this blue chip which tends to trade with a high valuation premium.
Currently, MAA’s share price of $149.45 represents a 12% margin of safety relative to our “Buy Below” threshold of $170.00/share.
Looking at the stock’s valuation, we see that today MAA shares trade with a 19.0x blended P/AFFO multiple.
This is essentially in-line with the stock’s long-term P/AFFO average; however, it represents a discount to MAA's 5 and 10-year average P/AFFO ratios of 19.2x and 20.9x, respectively.
Given that MAA’s future growth prospects are somewhat in-line with longer-term averages (during the last 15 years, MAA’s average AFFO growth rate is 6.8% and, looking forward, we expect to see mid-to-high single digit AFFO growth from MAA) we don’t believe that a discount relative to historical multiples is justified.
And, given MAA’s strong Q1 results/guidance, we’re happy to give this management team the benefit of the doubt and base our valuation of shares on forward cash flows.
Therefore, using a ~19x multiple on our forward looking FFO expectations, we arrive at our $170 “Buy Below” level.
Looking at forward FFO growth estimates, dividend expectations, and potential mean reversion back up towards that 19x threshold, we believe that MAA shares offer annualized total return CAGR potential in the 12% area over the coming years.
And in the meantime, investors get to sit back and relax as they collect this company’s 3.74% dividend yield.
We believe that MAA’s dividend is quite safe; the stock’s forward AFFO payout ratio is just 67.8%, MAA’s most recent dividend raise came in at 12%, and the stock’s 5-year dividend growth rate is 8.1%.
Camden Property Trust
While MAA is our top-dog in the apartment space, Camden Property Trust ( CPT ) shares are running close behind them with a 97/100 iREIT IQ quality rating (in other worlds, this is a wonderful company and a SWAN stock as well).
CPT offers investors exposure to the sunbelt; however, it is not a pure play there.
As you can see below, this company has assets in southern California and in the mid-Atlantic (via its large Washington, D.C. portfolio).
But, like the other stocks on this list, CPT has made it a priority to invest in markets where there is a supply/demand crunch. In other words, by focusing on supply constrained markets, CPT is able to use supply/demand to its benefit by raising rents.
The company makes this clear in the chart below, and if you are someone who reads the earnings conference call transcripts from both of the companies that we’ll be discussing today, you’ve probably noticed a trend…they’re all looking to develop portfolios of high quality assets in supply-constrained markets.
This is a trend that we like investing behind. Every Econ 101 class highlights the importance of scarcity and its impact on demand.
Well, when you combine that with the southern migration that we’re witnessing as millions flee from high cost urban areas along the coasts to more affordable (and business friendly) areas across the south, it shouldn’t be a surprise that companies like MAA and CPT are able to produce growth results which are above their peer and sector averages.
With regard to this growth, let’s take a look at CPT’s recent Q1 results …
Like MAA, CPT’s occupancy ratio remained quite high at 95.3%.
This was down a bit from Q1 of 2022 where occupancy was 97.0%; however, it was essentially in-line with the prior quarter’s 95.8% rate.
Not only did CPT maintain its occupancy, but it was able to grow its bottom line (once again, due to strong demand and increased rental rates).
During Q1, CPT’s core FFO came in at $1.66, which was 12.2% higher than the $1.48/share result that the company posted a year ago.
Looking at core AFFO, we see similar growth with a $1.50 result this year, which was 11.1% higher than the $1.35/share that CPT posted in Q1 of 2022.
CPT’s same-store property revenue and NOI posted solid y/y growth as well; these two metrics were up by 8.0% and 8.1%, respectively.
During Q1 CPT saw similar turnover to MAA at 44%.
This was in-line with historical averages here and, as we see above, CPT was able to release these properties at higher rates, leading to that double digit AFFO growth.
Also, like MAA, CPT also raised its full-year growth guidance.
CPT’s original same-store revenue guidance was 5.1% and now management has bumped that estimate up to 5.65 at the midpoint.
However, CPT is also calling for higher expenses on the year, so it is maintaining its full-year same-store NOI growth target at 5%.
So, while CPT doesn’t have quite the same growth outlook as MAA right now, we’re still looking at mid-single digit same-store net operating income prospects here, which should support ongoing investment activity and implies a safe (and growing) dividend.
As you can see below, these positive 2023 expectations should continue CPT’s long-term growth trends with regard to its rising profits and dividends.
The upward trajectory at play here is why CPT remains one of our highest rated REITs and after its recent share price weakness, one of the better deals that we see in the market today.
On a year-to-date basis, CPT shares are down by 1.72%.
That means that they’ve underperformed the broader market by a wide margin (on a year-to-date basis the S&P 500 is up by approximately 6.2%).
And things get worse during the trailing twelve month period where CPT shares are down by 28.8%.
This nearly 30% sell-off has created a fantastic buying opportunity in our estimation. Right now, Camden Property Trust receives a “Buy” rating at iREIT due to its $108.78/share price, representing an 18% discount to our “Buy Below” threshold of 132.50/share.
CPT shares are trading with an 18.6x blended P/AFFO ratio attached to them, and looking at the chart below you’ll notice that this ~17.5x-18.5x level has served as strong support for the company since 2010.
Over the last 5, 10, and 15-year periods, CPT’s average P/AFFO multiples have been 23.6x, 21.7x,and 20.4x, respectively.
Therefore, either way you slice it, today’s ~18.5x level represents a nice discount.
Looking forward, assuming CPT continues to meet growth expectations and pay its safe dividend, if shares were to rise back up to the 20x level, investors buying today could expect to generate total annualized returns of nearly 11.5% over the next several years.
In a volatile market, the opportunity to collect a relatively safe (CPT’s forward AFFO payout ratio is just 66.8%) and growing 3.66% dividend (CPT’s most recent dividend increase was 6.4% and its 5-year dividend growth rate is 4.8%) with double digit upside potential is an attractive one to us.
Conclusion
At the end of the day, these are the types of investments that allow me to sleep well at night, which is why I am bullish on both Mid-America Apartments and Camden Property Trust in today’s market environment.
They’re both A-rated companies (both stocks carry a Standard and Poor’s credit rating of A-), they are both on 13-year annual dividend increase streaks, and after their recent selloffs, they’re both offering abnormally high dividends yields (relative to historical averages).
If these two stocks seem attractive to you then stay tuned; we’re currently working on the second part of this multifamily earnings recap which is going to highlight two more of our favorite stocks in the space, one of which is a Dividend Aristocrat that currently sports a “Strong Buy” rating.
For further details see:
2 Apartment REITs That I'm Buying With Both Hands