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Is it Appropriate to Hold Mid-America Apartment Stock Now?

Zacks Equity Research
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Everest Re (RE) Rewards Shareholders With 8% Dividend Hike

Everest Re (RE) instills investors' confidence in the stock with a dividend increase of 8%.

Mid-America Apartment Communities MAA — commonly referred as MAA — has fortified its portfolio through exclusive focus on high-growth regions of Southeast, Southwest and Mid-Atlantic. Favorable migration trends, supported by growth of prime age groups who prefer rentals, are consistently spurring demand and household formation. However, with a significant chuck of the company’s portfolio situated in a few markets, this apartment real estate investment trust (REIT) will likely be impacted by any unfavorable developments in the economic or political conditions in these areas.   

This Sunbelt-focused company has achieved widespread diversification in terms of markets, submarkets, product types and price points. Further, it is also venturing into retail space with 29 of its multifamily assets having notable retail presence. This provides a sustainable earning stream and also shields the company from economic downturn in any particular market, choppiness in any product-type or assets belonging to specific price points.

During the recently-reported quarter, its funds from operations (FFO) per share of $1.55 surpassed the Zacks Consensus Estimate of $1.48. The company’s same-store portfolio also delivered a decent performance. Same-store net operating income (NOI) increased 1.7% year over year to $224.2 million, while revenues inched up 1.5% as a result of an increase in average effective unit of 1.7%.

MAA also revised its guidance for 2018 FFO per share and expects it in the range of $5.96-$6.16 — up from the previous projection of $5.85-$6.15. This, along with the favorable trend in estimate revisions of 2018 FFO per share, indicates an impressive outlook for the company. In fact, the Zacks Consensus Estimate for 2018 FFO per share has been revised marginally upward in a week’s time to $6.04.

In fact, shares of this Zacks Rank #3 (Hold) company have gained 20.6% outperforming its industry’s rally of 18.7% over the past six months.

Also, its enhanced investment-grade balance sheet positions MAA for future opportunities. The company has ample funds with around $920.1 million of combined cash and capacity available under its unsecured revolving credit facility. During the second quarter, it issued 10-year unsecured notes worth $400 million to reduce debt balance. Such disciplined capital management will likely govern growth and enable MAA to increase investments in new developments.

Nevertheless, MAA does have its share of concerns. Particularly, elevated supply of new units in a number of the company’s markets remains a primary headwind. In fact, the Dallas, Austin and submarkets, where the company owns Post Properties assets, witnessed higher supply in the second quarter. Notably, new supply in high priced-point and urban locations hinders leasing activity. Consequently, in order to increase lease-up and retain tenants, the company is compelled to offer concessions.

Moreover, there is stiff competition in the residential real estate market with various housing alternatives like single-family housing, manufactured housing, condominiums and the new and existing home markets. This adversely impacts landlords’ capability to demand more rents and results in lesser absorption.

Lastly, rising interest rates poses a challenge for MAA. This is because rising rates imply higher borrowing cost for the company, which would affect its ability to purchase or develop real estate and lower dividend payouts as well. Also, the dividend payout might become less attractive compared to the yields on fixed income and money market accounts.

Key Picks

Better ranked stocks from the REIT space include NorthStar Realty Europe Corp. NRE, Outfront Media OUT and PS Business Parks, Inc. PSB. NorthStar Realty and Outfront Media sport a Zacks Rank of 1 (Strong Buy), while PS Business Parks carries a Zacks rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NorthStar Realty’s Zacks Consensus Estimate for 2018 FFO per share has been revised 5.5% upward over the past 30 days. Its shares have returned 33.1% in the past six months.

Outfront Media’s FFO per share estimates for 2018 remined unchanged at $2.06 in 60 days’ time. Its shares have depreciated 10.2% in the past six months.

PS Business Parks’ FFO per share estimates for the current year moved up marginally in the past 30 days to $6.39. Its shares have rallied 19.3% over the past six months.

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Mid-America Apartment Communities, Inc. (MAA) : Free Stock Analysis Report
PS Business Parks, Inc. (PSB) : Free Stock Analysis Report
OUTFRONT Media Inc. (OUT) : Free Stock Analysis Report
NorthStar Realty Europe Corp. (NRE) : Free Stock Analysis Report
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