2023-05-01 08:25:00 ET
Summary
- Mid-America Apartment continues to demonstrate strong operating fundamentals and sticky tenant demand.
- It has a very strong balance sheet and pays a well-covered and growing dividend.
- It's fully capable of funding its development pipeline and long-term investors ought to take a look at the stock at current levels.
It pays to own durable REITs that pay a respectable and growing dividend, and which remain cheap relative to where they were trading a year ago. This may especially be the case when inflation is showing signs of easing, with the Treasury I Bond now yielding just 4.3% , making them less appealing compared to some dividend stocks.
This brings me to Mid-America Apartment ( MAA ), which as shown below, remains down by 25% over the past year. I last covered MAA back in March here , and the stock has produced a nice 4.3% total return since then, surpassing the 2.7% rise on the S&P 500 ( SPY ). In this article, I highlight MAA’s first quarter results and discuss why it remains a bargain for income and total returns, so let’s get started.
Why MAA?
Mid-America Apartment Communities is a member of the S&P 500 index and at present, owns 101,986 apartment units, including those currently in development, across 16 states and Washington D.C.
MAA has a long operating history, having been around for 29 years, and its strategy is to own and operate well-located apartments in secondary markets primarily across the Sunbelt, where it finds less competition for deals. This strategy appears to have worked out well for MAA as it’s produced the same return as that of the S&P 500 while paying a higher dividend yield, and produced a far higher return than the Vanguard Real Estate ETF ( VNQ ) over the past 10 years, as shown below.
Meanwhile, MAA continues to drive strong results, with first quarter FFO per share beating expectations by $0.03 to land at $2.28. This was driven by robust rise in same property revenues, which grew by 11% YoY, outpacing the 8.3% rise in operating expenses. This resulted in positive operating leverage, with same property NOI rising at a faster clip than revenue, at 12.5% YoY growth.
Key drivers behind MAA’s solid results include its affordable price points, combined with solid employment conditions and positive net migrations into its markets. Moreover, higher interest rates actually benefit MAA, as higher mortgage payments resulted in some buyers being priced out of single-family homes, resulting in stickier demand for MAA’s apartment communities.
This is reflected by occupancy remaining stable at 95.5% , which is down by just 40 basis points from 95.9% in the prior year period, and this is despite material rental increases with a blended lease spread of 16.8% on new and renewal leases during the first quarter.
Looking ahead, there’s good reasons to be optimistic around MAA as management recently raised its full year FFO per share guidance by $0.03 to $9.11 at the midpoint. Management also expects to expand its development pipeline to over $1 billion this year.
This is supported by a very strong balance sheet with an A- credit rating and a debt to EBITDA ratio of just 3.5x, sitting well under the 6.0x level most ratings agencies consider to be safe for REITs. MAA also has $1.4 billion of total liquidity, and 100% of its debt is fixed rate with an average maturity of 7.7 years.
Importantly for income investors, MAA pays a well protected 3.6% dividend yield. The dividend is well-covered by a 61% payout ratio, based on the aforementioned FFO/share guidance for 2023. MAA has also grown its dividend at an 8.1% 5-year CAGR and has 12 years of consecutive raises under its belt.
Lastly, MAA remains a good value at the current price of $153.80 with forward P/FFO of 16.8. This is considering its strong operating fundamentals and balance sheet, which supports meaningful development opportunities. Sell side analysts who follow the company have an average price target of $172 , which equates to a potential 15% total return over the next 12 months.
Investor Takeaway
Mid-America Apartment Communities has proven to be solid performer, with a long operating history and strong returns over the past decade. Its first quarter results demonstrate continued robust growth and management raised its FFO per share guidance for this year.
Meanwhile, MAA also pays an attractive dividend yield that is well-covered by FFO and has a long history of dividend increases. Finally, MAA remains attractively priced at current levels for long-term investors who prize meaningful income and growth backed by a strong real estate base.
For further details see:
Mid-America Apartment: Unlock Value In This REIT Gem