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Mid-America Apartment Communities, Inc. (NYSE: COUNTRY) is a REIT and S&P 500 component that focuses on multifamily apartment communities in the Sunbelt regions of the United States. Over its 28-year history, it has built a portfolio of more than 100,000 apartment units and has recently capitalized on favorable migratory trends in its markets. In March 2021, for example, 11.1% of all removals in MAA markets were from non-MAA states. This figure has risen to 14.6% in the current period and is expected to continue to increase in future periods.
The affordability limitations of single-family ownership also force many apartment communities, which have lower barriers to entry for people, but few steps for accessibility, with rental growth at some of the highest levels. high, especially in the Sunbelt region. Despite the rapid rise in rents, the region is expected to continue to grow in population due to its attractive economic and regulatory environment. These trends are a few headwinds for MAA, which has a unique position in this market.
For income-focused investors, MAA is firmly committed to the payment of dividends, with a solid track record that includes continued growth and no suspensions or reductions since the IPO. Currently, the annual payment is $ 5.00 per share, which is a return of approximately 3% on the current price.
MAA offers potential investors the guarantee of continued dividend growth, supported in part by a leading balance sheet in the sector with + $ 1 billion in total liquidity. Strong leasing activity in the Sunbelt region provides more support for continued rental growth. While there are concerns about the broader macroeconomic environment, MAA is led by a management team with an average of 20 years of executive tenure. This puts them in a strong position to navigate difficult conditions. At its minimum, MAA is a safe addition to any long-term income-oriented portfolio.
Earnings review and other events that can be reported
In the most recent quarter ended March 31, 2022, MAA recorded total rental income of $ 476 million, up 12% from the same period last year and slightly better than expected. I expected. The increase in revenue far outweighed the increase in operating expenses, which were exacerbated by inflationary pressures on staff and the cost of materials. The good performance of the top line resulted in a net income that increased by almost 140% over the previous year and reported an FFO / share that exceeded both analysts’ expectations and the midpoint of the guidance. provided for the quarter.
Q1FY22 Investor Supplement: Summary of Total Income Q1FY22 Investor Supplement – Breakdown of total operating expenses
Several factors contributed to revenue growth during the quarter, including accelerating migration trends in Sunbelt markets and widespread restrictions on accessibility to single-family property, which is forcing a growing number of individuals in single-family homes. apartments.
In terms of migratory trends, nearly 14% of MAA’s new leases during the quarter came from relocations to the Sunbelt. This is an increase of 190 basis points over last year. In addition, turnover remained low, with a decrease in removals of around 6%. These tailwinds allow MAA to pick up strong rental growth, with store rentals themselves 12.4% and combined leases 16.8%.
Strong leasing activity continued until the date of publication of earnings in April, with lease prices on lease in new leases increased by 16.5% and renewal lease prices they increased by 16.7% over the previous year.
The good performance during the quarter supported the improvement in expectations for the rest of the year. For example, the full year interval for the basic FFO was adjusted to reflect an average of $ 8.08 per share, an increase of $ 0.16 per share, 13% more than the previous year. In addition, management now expects revenue growth from the stores themselves to be at an average of 11% versus 9% as initially stated. Despite higher spending growth expectations, the NOI is still expected to be higher due to strong price trends.
Q1FY22 Investor Supplement – 2022 Updated Guidance
The Basics
As of March 31, 2022, MAA had total assets of + $ 11.2 million, consisting primarily of net real estate assets of $ 10.9 million and a total liability of $ 5.1 million. Combined with the available capacity of its revolving line of credit, MAA had a total cash and cash equivalents of + $ 1 billion.
At the end of the period, net debt to EBITDA was at an all-time low of 4.27x, which is significantly better than the industry average of 5.56x, which includes partners such as AvalonBay Communities, Inc. (AVB) and Equity Residential. (EQR), among others. . In addition, virtually all of its debt is at a fixed rate and scales in 8.4 years. With limited short-term maturities and significant liquidity, MAA faces minimal risk of redemption.
Presentation to the investor June 2022 – Summary of debt maturities
MAA also fulfills all its debt agreements well. The company, for example, has a fixed load ratio of 6.4x versus a requirement of 1.5x. This is also better than the industry average of 5.71x. The high level of coverage ensures that the company can continue to meet its debt service obligations before maturity with ease.
Q1FY22 Investor Supplement – Summary of Debt Agreements
The support for MAA’s solid balance sheet is its average daily occupancy of 95.7%, with limited exposure to vacancies and delinquents. The strength of the lease, as well as favorable migratory trends in the Sunbelt region, support continued rental growth, which has been exceeding expectations.
A constant ability to generate positive operating cash flows allows the company to invest in new developments and return excess cash to shareholders in the form of dividend payments. In the current quarter, for example, MAA reported $ 179.6 million in total operating cash flows and $ +125.4 million in total dividend payments. With 1.4x operational coverage, the payment was adequately covered, as evidenced by the 60% AFFO payment ratio, which indicates a high degree of security.
For income investors, the current payment is yielding around 3% after having recently increased by 15%. The increase marks a continued growth trend, which is unlikely to be affected by broader macroeconomic concerns, given the company’s current financial situation.
Risks to consider
In the full year ended December 31, 2021, 40.5% of MAA’s portfolio was in its top five markets. In addition, due to its global operating concentration in certain regions of the U.S., MAA faces a higher risk of geographic exposure. Should local operating markets experience recessionary pressures or other negative economic effects, the company could incur reductions in rental and occupancy rates, as well as increased property turnover and deterioration.
MAA is also subject to concentration risks from being exposed to only one asset class, the multi-family sector. While a substantial investment in these properties has certain advantages, such as a higher degree of specialization, any fall in the sector or negative event related to the asset class would have important ramifications for the company.
The MAA could also be adversely affected by the adverse evolution of the national economy as a whole. An increase in the supply of multi-family rental and other rental markets, for example, would affect the company’s ability to rent its apartment communities at favorable prices. In addition, job losses combined with declining household wealth could lead to delinquency and / or declining employment. While rent control is not an immediate threat to the MAA market, the issue may gain momentum among politicians, especially during election years.
Because many of the company’s apartment communities are close to coastal areas, the properties are at increased risk for adverse weather events, such as hurricanes and other tropical storms. Aside from property damage, increasing frequency or more severe weather events could adversely affect the demand for MAA properties. In addition, the company may not be able to recover property damage in a timely or costly manner through insurance claims. In addition, changes in federal, state, and local laws and regulations in response to these events could result in increased compliance costs for the business.
Conclusion
MAA is a multifamily REIT that has a unique position to capitalize on long-term favorable housing trends in the Sunbelt region of the United States. it reflects on its strength. quarterly earnings results. Favorable population estimates in the region give confidence that the trend is likely to continue in future periods.
Despite a long history of success, MAA has fallen by almost 30% in the previous year, which is much worse than the 20% drop suffered by the broader index. The company also performs lower than its AVB and EQR related partners. Although the current valuation of 20x FFO forward seems high, the shares appear to be undervalued based on the CAGR of their dividend, which is about 4.5% for five years. With an estimated capital cost of 7%, the shares would be 20% undervalued when using a standard dividend growth model.
While investors are cautious in the current environment, MAA is well positioned to exceed expectations in future periods. Management is actively focusing on further strengthening its balance sheet, which is already among the best in the industry, with a positive outlook from the top three credit bureaus. In addition, MAA also benefits from above-average rent growth which will be more sticky during periods of recession. Lack of interest in rent control in the Sunbelt region are other competitive advantages of operation.
In a bear market, the timing of the fund will be a challenge for any investor. However, the onset of incremental positions in a quality REIT such as MAA is likely to ultimately reward long-term potential investors with a material appreciation of the stock price and continued dividend growth.