Is Mid-America Apartment (MAA) an Apt Portfolio Pick Right Now?
Mid-America Apartment MAA is poised to benefit from its well-diversified Sun Belt-focused portfolio. Also, the prospects of its redevelopment program and progress in technology measures are 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.
MAA’s portfolio is set to gain from healthy operating fundamentals. The pandemic has accelerated employment shifts and a population inflow into the company’s markets as renters seek more business-friendly, low-taxed and low-density cities. These favorable longer-term secular dynamic trends are increasing the desirability of its markets.
Also, the high pricing of single-family ownership units in a high-interest-rate environment continues to drive the demand for rental apartments. Amid 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 95.5%. For 2024 and 2025, the average physical occupancy is expected to remain elevated at 95.6% and 95.7%, 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. The 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 Sun Belt markets and a robust development pipeline, MAA’s redevelopment program and technology implementation are likely to drive margin expansion. We expect same-store net operating income (NOI) to grow 6.6% in 2023 and 7.9% in 2024.
MAA enjoys a solid balance sheet, with low leverage and ample availability under its revolving credit facility. As of Jun 30, 2023, MAA had a strong balance sheet with $1.4 billion in combined cash and capacity available under its unsecured revolving credit facility.
Also, MAA had a historically low Net Debt/Adjusted EBITDAre ratio of 3.41. It generated 95.1% unencumbered NOI in the second quarter of 2023, providing the scope for tapping additional secured debt capital if required.
Moreover, solid dividend payouts are arguably the biggest enticements for REIT shareholders, and MAA remains committed to that. In the last five years, MAA has increased its dividend six times, and its five-year annualized dividend growth rate is 7.91%. Moreover, it has a lower dividend payout compared with the industry. Further, backed by healthy operating fundamentals, we expect core funds from operations (FFO) to increase 8.7% in 2023. Hence, we expect its dividend distribution to be sustainable in the upcoming period.
Although shares of MAA have declined 5.9% in the past six months against the industry’s increase of 3.4%, analysts seem bullish regarding MAA’s FFO growth prospects. The Zacks Consensus Estimate for the company's 2023 FFO per share has been revised two cents downward over the past month. The company currently carries a Zacks Rank #3 (Hold). Any hiccups in the share price are likely to provide a good entry point.
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However, the struggle to lure renters will persist as supply volumes are expected to remain elevated in some of its markets. This is expected to put some pressure on rent growth in the upcoming periods. Furthermore, 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 MAA’s power to raise the 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 MAA’s profitability.
Also, elevated rates imply a high borrowing cost for the company, which will affect its ability to purchase or develop real estate. Moreover, the dividend payout might become less attractive than the yields on fixed-income and money-market accounts due to high interest rates.
Stocks to Consider
Some better-ranked stocks from the residential REIT sector are AvalonBay Communities AVB, American Homes 4 Rent AMH and Centerspace CSR. While Centerspace sports a Zacks Rank #1 (Strong Buy), AvalonBay Communities and American Homes 4 Rent each have a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for AvalonBay Communities’ 2023 FFO per share has increased three cents upward over the past month to $10.56.
The Zacks Consensus Estimate for American Homes 4 Rent’s 2023 FFO per share has moved marginally northward in the past month to $1.65.
The Zacks Consensus Estimate for Centerspace’s current-year FFO per share has moved 8.1% northward in the past two months to $4.65.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report
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