Should You Hold Mid-America Apartment (MAA) in Your Portfolio?
Mid-America Apartment MAA is poised to benefit from its well-diversified Sun Belt-focused portfolio. The prospects of its redevelopment program and progress in technology measures are also likely to aid margin expansion. A solid balance sheet bodes well for the company’s long-term growth despite a high interest rate environment and elevated supply in certain markets.
What’s Aiding MAA?
MAA’s portfolio is set to gain from healthy operating fundamentals. The pandemic accelerated employment shifts and a population inflow into the company’s markets as renters sought more business-friendly, low-taxed and low-density cities. These favorable long-term secular dynamic trends are increasing the desirability of its markets.
The high pricing of single-family ownership units amid a high interest rate environment continues to drive demand for rental apartments. Due to these positives, MAA is expected to continue maintaining a high level of occupancy in the upcoming period.
Our projection for average physical occupancy in 2023 is 95.6%. For 2024 and 2025, the average physical occupancy is expected to remain elevated at 95.7% and 95.8%, respectively. Our projections for top-line growth point to an increase of 6.3% year over year in the current year.
MAA continues to implement its three internal investment programs — interior redevelopment, property repositioning projects and Smart Home installations. These programs will help the company capture the upside potential in rent growth, generate accretive returns and boost earnings from its existing asset base.
Along with the healthy operating fundamentals of the Sunbelt markets and a robust development pipeline, the prospects of its redevelopment program and progress in technology measures are likely to drive margin expansion. We expect a year-over-year increase of 6% in the company’s same-store net operating income (“NOI”) in 2023. For 2024 and 2025, the metric is projected to witness growth of 7.3% and 7.4%, respectively.
MAA enjoys a solid balance sheet with low leverage and ample availability under its revolving credit facility. As of Sep 30, 2023, MAA had a strong balance sheet with $1.4 billion in combined cash and capacity available under its unsecured revolving credit facility and a historically low Net Debt/Adjusted EBITDAre ratio of 3.4. In the third quarter of 2023, it generated 95.8% unencumbered NOI, providing the scope for tapping additional secured debt capital if required. Hence, the company is well-positioned to bank on growth opportunities.
Moreover, solid dividend payouts are arguably the biggest enticements for real estate investment trust (“REIT”) shareholders and MAA remains committed to the same. In the last five years, MAA has increased its dividend six times and its five-year annualized dividend growth rate is 8.74%. Moreover, it has a lower dividend payout compared with the industry. Backed by healthy operating fundamentals, we expect the company’s core funds from operations (“FFO”) to increase 8.5% year over year in the current year. Hence, with these factors in place, we expect its dividend distribution to be sustainable in the upcoming period.
What’s Hurting MAA?
However, the struggle to lure renters will persist as supply volumes are expected to remain elevated in some markets. This phenomenon is expected to put some pressure on rent growth in the upcoming period. Stiff competition in the residential real estate market with various housing alternatives like manufactured housing, condominiums and the new and existing home markets is concerning. This affects the company’s power to raise rent or increase occupancy and leads to aggressive pricing for acquisitions.
Although the company’s robust development and redevelopment pipeline is encouraging for long-term growth, supply-chain constraints and inflationary pressure could lead to cost overruns and lease-up concerns. This is likely to weigh on the company’s profitability.
Elevated rates imply a high borrowing cost for the company, affecting its ability to purchase or develop real estate. Moreover, the dividend payout might seem less attractive than yields on fixed-income and money market accounts due to high interest rates.
Shares of this Zacks #3 (Hold) company have gained 5.7% in the past month, underperforming the industry’s growth of 8.2%.
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Stocks to Consider
Some better-ranked stocks from the REIT sector are UMH Properties, Inc. UMH and Centerspace CSR, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for UMH Properties’ 2023 FFO per share has increased by a penny over the past month to 84 cents.
The Zacks Consensus Estimate for Centerspace’s current-year FFO per share has moved 4.5% northward in the past two months to $4.66.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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