Mid-America Apartment: You Get Value, Growth, And Dividend Growth (NYSE:MAA)

The ‘higher for longer’ expectations for interest rates have caused the market to re-rate many income-producing stocks. This is reflected in the share price downturn in sectors ranging from consumer staples to real estate.

This brings me to Mid-America Apartment Communities (NYSE:MAA), which I last covered here back in May with a ‘Buy’ rating, noting its strong operating fundamentals and sticky renter demand.

The stock has continued its downward trajectory, falling by 14.4% since my last piece, driven by market concerns around higher interest rates. As shown below, MAA now sits at the low end of its 52-week range. In this article, I provide an update and discuss why MAA is a solid choice at present for income and value, so let’s dive in!

Why MAA?

Mid-America Apartment is an S&P 500 company and is one of the largest multifamily REITs on the market today. Unlike larger peers with focus on Tier 1 gateway cities, MAA’s investment strategy is focused around secondary markets with high population growth located in 16 U.S. states in the Southeast, Southwest, and Mid-Atlantic regions, otherwise known as the Sunbelt, comprising 102K apartment units.

MAA’s focus on second tier markets results in higher cap rates due to lower competition. This combined with demand growth has resulted in above average returns over the past 5 and 10 years. This is reflected by MAA’s 185% total return over the past 10 years, far surpassing that of the Vanguard Real Estate ETF (VNQ) and peers AvalonBay Communities (AVB), Equity Residential (EQR) and Essex Property Trust (ESS), as shown below.

Inflation and interest rates have sent jitters down the market, and this has impacted REITs, among other asset classes. The recent September inflation report showed that CPI increased 0.4% on the month and 3.7% from a year ago, above respective forecasts for 0.3% and 3.6%. This didn’t help income-producing stocks and REITs, including MAA traded down on the news.

However, apartment REITs are generally where an investor wants to be in an inflationary environment. That’s because unlike net lease REITs with capped rent escalators, apartment leases reset every year, enabling MAA to adjust its rent for inflation. This is reflected by MAA’s strong same-store portfolio NOI growth of 7.2% and average effective rent per unit growth of 9.3% YoY, all while maintaining a healthy occupancy rate of 95.5% during the second quarter.

Growth is expected to remain strong due to demand drivers in place. As shown below, MAA’s markets have seen above average migration, particularly in Nashville, Tampa, and Phoenix, where percentage of total move-ins from non-MAA states has been in the high-teens.

While interest rates have investors concerned about refinancing risk for REITs, it’s worth noting that REITs are inherently more efficient than a traditional business due to a smaller labor component, thereby giving them a buffer. MAA is no different as it carries a 59% TTM operating margin (with depreciation add back), which sits above the 40% operating margin that’s traditionally considered to be good for a standard business.

MAA is also backed by a strong balance sheet with one of the best debt metrics in the REIT industry, and it’s just one of a handful of REITs with an A- credit rating from S&P. This is supported by MAA’s remarkably low net debt to adjusted EBITDAre ratio of 3.4x with 100% fixed rate debt, and it doesn’t plan to issue any debt this year. MAA also has $1.4 billion of total liquidity, giving it plenty of capacity to go on the offensive at a time when public and highly leveraged private REITs are pulling back on investment.

MAA recently completed the redevelopment of over 1,800 apartment homes in the last reported quarter, capturing average rental rate growth of 8% above non-renovated units. It also completed a development community that’s expected to stabilize by the end of the year, and has 6 communities under development representing 2,310 units, which would increase MAA’s total units by 2%.

Meanwhile, MAA currently pays a 4.3% dividend yield, which is well-protected by a 61% payout ratio. While investors today can buy U.S. Treasury bonds in the 4.5% range, MAA’s dividend offers something that bonds don’t, which is growth. This includes a 5-year dividend CAGR of 8.7% and 13 years of consecutive dividend growth.

Risks to MAA include the potential for a hard landing in the economy due to higher interest rates, as this could pressure occupancy levels and rent growth. Moreover, while MAA does have well-laddered debt maturities, a higher-for-longer interest rate environment would lead to interest expense creeping up, which could negate some benefits from rent growth.

All in all, I see many of these factors as already having been baked into the current share price of $131.72 with a forward P/FFO of 14.3, sitting below its normal P/FFO of 17.6 over the past 10 years. Granted, some discount is warranted due to higher interest rates and inflation, but MAA has proven its ability to price rents above the rate of inflation.

Performing an NPV analysis, I arrive at a fair value of $178. This takes into account the forward FFO/share estimate of $9.23 for this year, a modest 5% annual growth rate, and a 2.5% discount rate, which is conservative considering that it sits higher than the 2% long-term inflation rate set by the Federal Reserve.

Lastly, MAA also trades at a meaningful discount to its peers despite its strong operating fundamentals. This is reflected by its EV/EBITDA of 15.99, sitting below that of peers AVB, EQR, and ESS, as shown below.

Investor Takeaway

To sum it up, MAA has been unfairly punished due to higher interest rates, despite its strong track record of delivering above average returns and a fortress balance sheet. Its ability to adjust rent for inflation is a key factor that makes it attractive in this environment, and with continued demand drivers in place and growth catalysts on the horizon, I see MAA as a solid long-term investment at its current price and dividend yield for value and income investors alike.