2023-07-05 09:31:44 ET
Summary
- Mid-America Apartment has had a rough time since the late 2021 market peak.
- The fundamentals though are sound and the company has continued to execute soundly.
- We go over what went wrong and where we would buy this.
Mid-America Apartment Communities, Inc. ( MAA ) is the owner, manager and developer of multi-family apartment communities in the United States. These are primarily located in the southeast, southwest and mid Atlantic regions of the country.
While the above graphic notes the same store communities and units statistics, this REIT's portfolio comprised a total of 101,717 units as at the end of Q1-2023 , which includes 3,004 units under development. Excluding the units under development, this REIT had a 95.5% occupancy level at the end of Q1. MAA operates via a partnership of which is it the sole general partner, owning over 97% interest in the entity.
MAA boasts of a stellar dividend record, that in their own words was "never suspended or reduced".
The REIT has an impressive long term record, through good times and bad.
The recent drop from the highs has certainly drawn the value seekers to it and general consensus is bullish.
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We examine the setup and see if this is a fit for our portfolio.
Q1-2023
The latest quarterly results for MAA show the continuing trend of passing on rental hikes alongside prudent expense control. Same property Net operating income (NOI) was up 12.4% year over year and total NOI was up 12.9%.
These are huge growth numbers. Now, MAA is hardly alone in this trend as most REITs are still feeling the tailwind from tight apartment markets. Here are the numbers for AvalonBay ( AVB ) shown as one comparative for the identical Q1-2023. Same property NOI was up 10.7% for them as well.
Getting back to MAA, their average effective rent per unit was up to $1,662 ($1,664 if you include the lease up communities).
This is one of the best data pieces to go back and take a long-term look. You often here that real estate is a hedge against inflation and here is where you find evidence of that "hedge". Average effective rent 4 years back was just $1,223 ($1,228 including lease up and development communities).
That is a pretty substantial increase over 4 years. More importantly for MAA shareholders, the company has been able to translate that into very solid funds from operations ((FFO)) per share. In Q1-2023, year over year, core FFO increased 15.7%.
Again, using our longer term comparative, here is where our numbers were for Q1-2019.
For the quarter ended March 31, 2019, FFO was $186.4 million, or $1.58 per diluted common share.
Source: Q1-2019 Supplemental
MAA has shown an ability to consistently develop and upgrade properties to make the most of the market conditions. Q1-2023 was no different and the company continued to execute across all areas.
Outlook
Investors have complained that REITs are getting unnecessarily punished and we can see what they mean when we see MAA's performance since the market peak. We have used a January 1, 2022 start date here.
Obviously, MAA has been strongly growing in this timeframe and investors have been disgruntled by the price action. From our perspective, this is par for the course. As we have said before, " Pay Silly Multiples, Win Silly Returns ". What part about that late 2021/early 2022 peak in price to cash flow per share looked sustainable to you?
Right? If you jumped in to pay 30X multiples you got poor returns despite amazing growth. After the fall, we have now corrected the excesses. There are still two things that will impact your returns from here on out that you need to be aware of.
The first is that excesses in one direction, create excesses in the other. That is about as ironclad law of finance that you can find. So expect at some point to get a price to cash flow or price to FFO multiple as low as you saw in late 2013/early 2014. This is even more likely today considering that interest rates have never been remotely this high in the past decade. We show this by using a spread between MAA's dividend yield and the 10 Year Treasury yield. Y-charts has a new bug which shows this metric as a bit "jumpy" as evidenced by the up and down movements each month. But the ranges are accurate and by this metric, MAA is still more expensive than at any other time in the last decade.
The second problem is the amount of supply coming on the market. This is a very solid number.
The number above is not adjusted for population size or for the existing size of the apartment market. If you adjust it, it becomes less intimidating.
Nonetheless, it is more supply than what we have seen in a long time, and it will temper rent growth, especially if we get a recession.
Verdict
It is rare when we examine a REIT and find everything looking as good as we did with MAA. Most REITs tend to get caught in their own hype when things are going good, but that is not the case with MAA. The company has focused on risk-management and it shows in their credit ratings (one of the 8 REITs with a A- or above).
Their debt to EBITDA at 3.5X is unheard of elsewhere.
AVB was at 4.6X in Q1-2023. Most REITs that we follow are well over the 6.0X mark. So if you want something that is likely to give the least beta in a market meltdown, MAA is likely to be that bet. Sure, from the peak there have been other REITs that better than MAA, but that has everything to do with the silly multiples everyone was paying for this REIT. Here on, MAA should be an outperformer. MAA gets a 4 on our potential pain scale rating.
We would consider a Buy under $140.00 per share.
Mid-America Apartment Communities, Inc. PFD SER I ( MAA.PI )
Investors tend to gravitate towards senior securities in times of market turbulence and sometimes that can be a good choice. MAA.PI is a preferred offering from this excellent REIT that has a hefty coupon of 8.5%. Unfortunately, thanks to its call date in October 2026 and its hefty premium over par, you are unlikely make a lot of dough here. The current yield is high, but the yield to maturity is just under 5.14%.
We would avoid this security unless we can get it under $53.00 per share in the near future.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
Mid-America Apartment: Quality Player, Close To A Buy Point