2023-11-20 08:05:00 ET
Summary
- CPT and MAA are two popular apartment REITs.
- They share many similarities, but there are also some differences.
- We explain which we prefer and why.
Co-produced by Austin Rogers
Prior to the COVID-19 pandemic, coastal apartments dominated multifamily real estate investment trusts ("REITs") (VNQ). When you thought about multifamily REITs, you almost certainly thought about Class A mid-rise or high-rise apartment buildings in big, coastal cities like New York, Boston, San Francisco, or Los Angeles.
For example, maybe you would have thought about AvalonBay's (AVB) Avalon Midtown West building in Manhattan:
It makes sense. Before COVID-19, coastal gateway cities spent decades leading the country in job growth and economic dynamism. Many of the country's smartest, most talented, and most ambitious workers moved to these big cities and lived in apartments owned by the likes of AVB or Equity Residential (EQR) in order to go work in an office 5 days a week (or more).
Meanwhile, during the 2010s, population and job growth had been growing fast in many Sunbelt states like Texas, Florida, Georgia, North Carolina, and Arizona, but nowhere near fast enough to displace the dominance of coastal cities anytime soon.
COVID-19 changed that, triggering a massive reshuffling of the population across the country, primarily away from dense, high-cost coastal cities and toward lower-cost Sunbelt areas.
As a result, the valuation gap that used to exist between coastal and Sunbelt landlords has largely disappeared. To illustrate this, notice how the gap in market cap between the coastal REITs and the two largest Sunbelt apartment REITs, Mid-America Apartment Communities (MAA) and Camden Property Trust (CPT), has narrowed after COVID-19.
Now, in the post-COVID era, observers (most of all, investors) are wondering whether the COVID-era migration trends will reverse, or if the large wave of new apartment supply hitting the market will negate any benefit the Sunbelt landlords have enjoyed over the last several years.
These worries seem to be causing the pre-COVID valuation premium enjoyed by coastal multifamily REITs to return:
- AVB: 16.1x
- EQR: 14.7x
- MAA: 13.3x
- CPT: 12.8x
We think the preliminary evidence is showing that, for the most part, Sunbelt markets are absorbing this new supply fairly well, because population growth in these areas remains elevated due to in-migration.
There will be a near-term impact, but MAA attests that the new supply should be absorbed quickly, and rent growth should reaccelerate within a year from now. To quote MAA's CEO Eric Bolton from the Q3 2023 earnings conference call:
"The volume of new apartment starts has begun to decline, and we expect that leasing conditions will be supportive of higher rent growth in late 2024 as markets absorb the current development pipeline."
High interest rates have made it prohibitively expensive to obtain financing for new projects, which should make for a very favorable supply-demand environment in 2025 and beyond.
Tellingly, in spite of this wave of new supply beginning to hit the market, MAA's and CPT's occupancy rates have remained very high.
Moreover, it's worth noting that the primary competition for these new, mostly Class A apartments is not necessarily CPT and MAA's existing apartment stock but rather other new apartments . Developers typically try to get top dollar rent rates for their newly developed properties, which means that they will price their product well above the rents typically offered by the existing apartment stock.
Citing Eric Bolton again:
"One of the benefits of the supply coming to the market, particularly when it's coming into the market on average 20% higher than the rents that we're charging, it creates a more compelling value play for our portfolio to the rental market."
With that said, let's compare and contrast the two largest players in the Sunbelt apartment REIT space:
Apartment Portfolio Comparison
Both CPT and MAA have selectively positioned their portfolios in fast-growing, mostly Sunbelt markets. Both have a healthy mix of Class A & B and urban and suburban properties.
Both also have active in-house development arms that build new apartment communities in whichever markets management deems most opportunistic at the time. Likewise, both redevelop/refurbish a certain number of their existing apartment stock every year to keep it up to date with the latest styles and technologies.
While MAA has a larger portfolio consisting of over 100,000 units across 297 properties, CPT's portfolio is smaller at nearly 59,000 units across 172 properties.
Camden's Portfolio:
Mid-America's Portfolio:
Other than differences in the weighting of various Sunbelt markets, the primary difference between the two REITs' portfolios is that CPT has a meaningful presence in Southern California (10.4% of NOI) and the Washington DC Metro area (12.6% of NOI), while MAA has no presence in California and minimal presence in Northern Virginia (3.8% of gross real estate asset value).
Thus, while both REITs are overwhelmingly concentrated in Sunbelt states, MAA is the more pure-play Sunbelt multifamily REIT.
Though it is a very small portion of its portfolio right now, it's worth mentioning that CPT also has two single-family rental neighborhoods currently under development in Texas, which will give it incrementally more diversification.
Largely as a result of sharing similar investment strategies, both REITs have virtually identical occupancy ratios at around 95-96%:
Occupancy | Camden | Mid-America |
Q3 2023 | 95.7% | 95.6% |
As you can see, then, CPT and MAA have more similarities than differences, but the differences do exist.
Balance Sheet Comparison
The similarities continue when comparing the two REITs' balance sheets.
Both have A-/A3 credit ratings with stable outlooks. Both have similar debt-to-capitalization ratios. Both have fairly even debt maturity schedules over the next decade.
But there are a few differences to point out.
Mid-America's Balance Sheet:
Camden's Balance Sheet:
We will point out a few of the differences:
- While 100% of MAA's debt is fixed-rate, only ~82% of CPT's debt is fixed-rate.
- Compared to MAA's weighted average interest rate of 3.4%, CPT's is a bit higher at 4.1%.
- MAA's weighted average debt maturity of 7.5 years is a bit higher than CPT's 6 years.
- MAA's debt to EBITDA of 3.4x is lower than CPT's 4.3x, although both are obviously low enough to award them with A- credit ratings.
- CPT has slightly more debt maturing in the next few years, but MAA has more debt maturing in 2026-2027.
Performance Divergence
Over the last 1, 3, 5, and 10-year periods, MAA has outperformed CPT on a total return basis.
This is somewhat surprising, given the many similarities between CPT and MAA.
It's also surprising given that both REITs have grown their respective FFO per share numbers about equally over the last 10 years:
FFO Per Share | Camden | Mid-America |
2012 | $3.62 | $4.57 |
2022 | $6.59 | $8.42 |
10-Year Growth | 82% | 84% |
So why did CPT underperform MAA over that time period?
It comes down almost entirely to starting valuation. We can see this visually by looking at a chart of price to operating cash flow. At the beginning of 2012, CPT was valued significantly higher than MAA, but by 2014 their valuations had come more into alignment.
In 2012, MAA's average price to FFO was 14.3x, while CPT's stood at 18.2x.
Today, MAA's average P/FFO is 13.2x (after being much higher than that in 2021 and 2022), while CPT's P/FFO has fallen to 12.8x.
Of course, both REITs' share prices are higher today than in 2012 because of rising FFO per share, but the point is that MAA's total return outperformance over CPT over the last decade is due almost entirely to its smaller multiple compression compared to CPT's.
Today, however, both REITs have very similar valuations. As such, going forward, we would expect their returns to be very similar -- much more so than the last decade.
Bottom Line
CPT and MAA are two of the biggest and best-run Sunbelt multifamily REITs. Investors are likely to do well in either one (or both) of them, in our view.
On the portfolio side, CPT's exposure to California and Washington DC (compared to MAA's nearly pure-play Sunbelt exposure) may either be a good thing or a bad thing depending on your perspective. For those particularly bullish on the Sunbelt, MAA's portfolio is slightly preferable. But for those with a more balanced view of Sunbelt and coastal market growth prospects, CPT's portfolio is slightly preferable.
On the balance sheet side, MAA's lower leverage, longer average maturity, 100% fixed-rate debt metrics make it a slightly more attractive pick than CPT right now. But it's worth keeping in mind that the equal credit ratings of A-/A3 make clear that MAA's balance sheet advantage over CPT isn't massive.
At the end of the day, though, we think these two REITs will perform very similarly in the future because of their substantially similar portfolios and valuations.
For further details see:
Better REIT Buy: Camden Property Trust Or Mid-America Apartment Communities