2023-09-12 02:15:37 ET
Summary
- Mid-America Apartment Communities is a defensive REIT with a diverse tenant base and a portfolio primarily located in the high-growth Sunbelt region.
- The company has a conservative approach, with a history of stable dividend payments and solid dividend hikes in recent years.
- MAA is positioned to deliver superior returns compared to the broader REIT market due to its fortress balance sheet and resilient operations.
Mid-America Apartment Communities ( MAA ) is a pure-play U.S. apartment REIT and is one of the few REITs included in the S&P 500. As of June 30, 2023, MAA had over 101,000 apartment homes in its portfolio spread across 16 states and the District of Columbia. The apartments are primarily located across the high growth Sunbelt region that together explain the lion's share of MAA's total exposure.
Most of the apartment buildings are of a high quality, where 92% of all buildings are classified as B+ or higher.
The existing tenant base is also greatly diversified with no major exposures towards a particular segment of economy.
All in all, MAA can be considered a rather defensive REIT with an exposure towards specific REIT sector, which enjoys secular tailwinds and if properly managed can deliver stable and predictable returns going forward.
Typically, apartment REITs have the optionality to grow organically via directing part of the total CapEx spend towards improving or redeveloping the existing asset stock. Acquisitions, which are based on higher cap rates than the cost of capital also play an important role, but usually are more procyclical depending on the prevailing spread (cap rates - WACC) and company's ability to attract sound financing.
We can see that in MAA's case the net acquisitions for 2023 are projected to land at $400 million, which accounts for roughly 2.5% of the total market cap. This is conservative.
The chart above reflecting MAA's dividend history is a clear testament of the Company's conservatism and stability, which have supported 117 consecutive dividend payments with some growth component attach almost each year.
At the same time, MAA has managed to register more solid dividend hikes in the past two years by capitalizing on the prevailing sector-specific tailwinds (i.e., favourable supply and demand dynamics, which put an upward pressure on the rent levels) and its fortress balance sheet.
In my humble opinion, MAA is positioned to deliver superior returns relative to the broader REIT market over the foreseeable future, where there is an increased probability of distress and 'higher-for-longer' interest rate scenario.
It is a combination of two factors, which differentiate MAA from its peers and equips the Company to benefit from the volatility in the real estate market.
#1 Fortress balance sheet
MAA has one of the strongest balance sheets in the entire REIT space and is only one of eight publicly traded REITs, which carry an upper investment grade credit rating.
Compared to 15 direct peers operating in the REIT "Apartments" segment, MAA has the second strongest balance sheet in terms of debt to EBITDA and debt ratio. On an absolute basis a net debt to EBTIDAre of 3.5x is considered very safe providing ample debt capacity to fund accretive transactions and / or redevelopment activities.
An additional major aspect in the context of MAA's debt capacity and financing structure, which has to be factored in is the relatively extended debt maturity profile in conjunction with 100% fixed rate financing.
This means that MAA is protected from materially higher financing costs imposing a significant and concentrated effect on the FFO generation. Instead , provided that MAA does not assume incremental external financing in a major fashion, only ~9% of the total debt is set to reprice towards market level interest rates on an annual basis. Given MAA's ability to deliver a positive like-for-like growth in NOI and fund new projects through internal cash generation, these gradual effects from higher interest rates should be easily offset with improved cash flows.
Lastly, MAA possesses a great degree of flexibility to cover notable investments or obtain an optimal financing source to refinance the maturing borrowing. As of Q2, 2023, MAA had over $1.25 billion available under the existing credit facility, which is more than enough to refinance all of the incoming debt maturities until 2026.
#2 Resilient operations
As elaborated above, the sector in which MAA operates is robust and with favourable growth prospects. Historically, MAA has managed to capitalize on these dynamics by registering relatively stronger FFO growth results compared to the peers.
In fact, MAA has avoided negative rate of change movement in its annual FFO during 2020 and 2021, while the sector, on average, suffered from higher vacancy rates and temporarily reduced rents due to the COVID-19 shock.
MAA
A major driver of the resilient performance has been both internal and external growth opportunities funded by primarily internal cash generation.
On average MAA retains 40% of the generated FFO. This allows the Management to cover CapEx and / or accretive M&A deals without a heavy reliance on external leverage. In the context of prevailing financing costs, this strategy clearly bears fruit allowing MAA to act opportunistically, while there is an increasing pressure for more indebted competitors to optimize their balance sheets via (among other) divestitures.
The bottom line
In my opinion, MAA is great real estate investment for investors, who seek stability and protection amid the looming recessionary risks and potential consequences from higher-for-longer scenario in the real estate market.
Currently, MAA yields 4%, which is not that attractive, but considering the growth potential and the resiliency of underlying business operations, the investment case looks attractive.
The investment case of MAA should play out when the market becomes more depressed causing the property cap rates to go up materially. Under such conditions, MAA should be able to utilize its balance sheet capacity and internal cash generation to accommodate profitable deals in a sizeable fashion.
For further details see:
Mid-America Apartment Communities: 4% Yielder Positioned For A Solid Performance