Mid-America Apartment Communities: A Leader In The Real Estate Space

Summary

Housing affordability is sitting near post-recession lows, which is good news for the rental market.

MAA had a strong 2018, beating the S&P 500, as well as broad real estate sector funds.

Economic conditions, such as a dovish Fed and strong employment figures, provide positive tailwinds for real estate exposure.

MAA is expanding in territories that are seeing strong population growth, which should fuel demand for the rental units the company owns.

Main Thesis

The purpose of this article is to evaluate Mid-America Apartment Communities Inc (MAA) as an investment option at its current market price. MAA has been performing strongly, along with the broader Real Estate sector, and I see this strength continuing throughout 2019. While solid employment figures are positively impacting American’s desire to buy homes, a lack of new construction and affordable housing is keeping many buyers out of the market. While not necessarily a positive for the country, it is a positive for rental market demand. MAA is well-positioned to take advantage of this trend, as it owns rental properties in many growing areas, which should keep occupancy high. Furthermore, MAA rounded out 2018 on a high note, with its February earnings report displaying strong Q4 performance. Finally, MAA’s dividend story is attractive, with the annual payment increasing at a faster pace than the payout ratio.

Background

First, a little about MAA. The company is a "real estate investment trust that focuses on the acquisition, selective development, redevelopment and management of multifamily homes throughout the Southeast, Southwest and Mid-Atlantic regions of the United States". MAA has ownership interests in over 100,000 operating apartment homes in 17 states and Washington DC. Currently, the stock is trading at $104.38/share and is yielding 3.68% annually. I recommended MAA when I reviewed it for the first time back in December, as I began recommending individual stocks with attractive dividend yields to buy as we entered 2019. Since then, MAA has performed quite well, registering a positive return of about 4.5% in a relatively short period of time. Now that we have pushed further in to the new year, I believe a reassessment of MAA is warranted, to determine if it continues to make sense to hold going forward. I believe it does, as many of the same conditions that led me to recommend it late last year still exist now. Therefore, I remain confident in the story behind MAA, and I will explain why in detail below.

Housing Affordability – A Positive For Rentals

I want to begin the discussion with a look at the outlook for the rental market in general, which I view quite favorably, especially for the short-term. While the conditions are seemingly ripe for first-time home buyers, due to a strong labor market and rising wages, rental demand remains high. This is because there are other factors at play that are keeping first-time home purchases out of reach, even when buyers have the desire to buy. Notable among them is housing affordability, which is currently near post-recession lows, as illustrated in the graph below:

Source: Bloomberg

The affordability factor is especially relevant for single-family homes, particularly for first-time buyers. This index has been trending lower for a variety of factors, and chief among them is a slowdown in home construction. As demand has risen, building of entry level homes has not kept pace, and this has been pushing up the prices of houses for years, at levels above the rate of wage increases. Hence, we have seen the affordability metric tick downward.

To put this in perspective, consider the current level of new housing starts compared with the last few years. As it stands now, new construction is at its lowest level in about two years and, just as importantly, the trend is accelerating downward, as illustrated in the graph below:

Source: Bloomberg

My takeaway here is that while Americans may be wanting to purchase homes, the lack of new construction, coupled with rising prices of existing homes, is keeping many would-be buyers out of the market. Given that new construction ended 2018 on such a sour note, I do not see this trend reversing in the short-term. While I believe new construction will eventually rise to meet this pent up demand, it is clearly going to take time, and that bodes well for the rental market as a whole in 2019.

MAA Is Leading The Way

I now want to look at MAA specifically, to explain why I think it is a smart way to invest in future rental demand. To do so, I have compared MAA’s 1-year performance against the S&P 500 and a couple select ETFs which track the performance of the Real Estate sector. These include the iShares U.S. Real Estate ETF (IYR), the Schwab U.S. REIT ETF (SCHH), and the Vanguard Real Estate ETF (VNQ). The short-term performance of all these options is displayed below:

Source: CNBC

As you can see, all of these Real Estate-focused options bested the S&P 500 over a 1-year period, but MAA is the clear winner. Of course, this is simply past performance, as well as short-term, so there is no guarantee these results will continue. However, I wanted to point out the relative strength the company’s stock is seeing, and I will discuss the reasons why this could continue in the following paragraphs.

Strong Financial Performance in 2018

Continuing the discussion on why MAA is a good choice to play the apartment trend, I want to turn to its 2018 financial performance, which was favorable when compared to the prior year, displaying some positive momentum going forward. To illustrate, I reviewed MAA’s recent 10-K filing and consolidated some of the most relevant metrics in the chart below:

Metric (thousands) 2017 2018 YOY Increase Funds From Operations (FFO) $699,561 $712,690 1.9% Dividends and Distributions Paid $409,948 $434,928 6.1% Total Net Operating Income (NOI) $952,256 $976,758 2.6% Metric YOY % Increase Same Store Average Effective Rent 1.9% Overall Rent Growth 2.5% Property Operating Expenses 2.0%

Source: Seeking Alpha

As you can see, the numbers for 2018 are pretty solid. MAA saw FFO gains for the year, and total NOI grew at an even faster clip. This was propelled by an increase in rent growth at a rate that was higher than the growth for operating expenses, which is clearly a positive. My takeaway here is that MAA is performing well, and its share price gains are roundly justified. Given the strength we saw in 2018, I feel 2019 will see similar performance, especially since the company is positioning for growth in the right places, which I will discuss in the following paragraph.

Building in Growth Areas

Another important point on MAA has to do with its portfolio, specifically, where the company currently operates and is planning expansion. While MAA is a national company it operates primarily in the Southeast and Southwest, as the chart below illustrates:

Source: MAA Presentation

This is a primary reason why I gravitate towards MAA: because the company is heavily exposed to the faster growing areas of the United States. In fact, according to the U.S. Census Bureau, the South and the West have been leading the way since 2010, seeing strong population gains while other areas are averaging smaller gains, or even declines, as illustrated below:

Source: U.S. Census Bureau

So what does this mean for MAA? It means the company has been well-positioned to take advantage of the migration trends the country has experienced over the past decade. Perhaps even more importantly, however, is that MAA is currently undergoing development in areas that continue to grow, which is vital. At the end of 2018, MAA had active development underway in Raleigh, Denver, and Dallas, with active lease-ups underway in Denver, Charleston, and Atlanta, as illustrated below:

Source: MAA Presentation

As you can see, the company is getting quite aggressive in the Southeast, and has made a considerable investment in Denver. While it may seem risky to be so heavily concentrated in a few geographical areas, I believe this growth strategy has merit. According to recent data compiled by WalletHub on the fastest growing cities in America, Denver ranks #5 in terms of large cities experiencing the fastest growth. In addition, Raleigh, Dallas, and Atlanta also crack the top 20, coming in at #15, 17, and 10, respectively. While Charleston is not as high on the list, it does rank as the #28 fastest-growing among midsize cities.

My overall take on this is that MAA is well-positioned to take advantage of continuing migration trends in the U.S. and is currently investing in areas with some of the fastest growth. This should keep rental demand high in these areas and help MAA fill up these new units quickly. To gauge this going forward, investors will want to carefully monitor the occupancy rate of the active lease-ups, currently sitting at 62%, to see just how well the company is doing at filling those buildings. Watching how this metric grows (or does not grow) will be key to determining if MAA has indeed made the right investment decisions. For now, I am quite optimistic.

Dividend Is Attractive

A final point on MAA has to do with the current dividend. As interest rates remain low, I continue to search for above-average dividend payers, and the relatively higher yielding Real Estate sector remains one of my preferred ways to play this. With a yield above 3.5%, MAA fits the bill there, especially since the stock has been performing so well in the short-term. While it is true that 3.68% is not "high", it does beat what is currently being paid by many dividend funds. Furthermore, and perhaps even more importantly, the dividend appears safe going forward. This is because while MAA has been increasing its dividend year over year, its payout ratio has been increasing at a smaller percentage amount, as illustrated in the graph below:

Source: MAA Presentation

This is an encouraging trend, and helps give me confidence the income stream will remain high, and probably continue to increase, going forward. For example, in 2018, MAA increased its dividend by over 6%, but its payout ratio only climbed 2.5%. Similarly, MAA’s dividend rose by over 4% in 2019, based on company declarations, and its payout ratio is set to rise by only 1.5%. This illustrates good cash management and a commitment by management to return excess cash to shareholders. As a "dividend seeker", this is definitely what I want to see.

Bottom line

The rental economy continues to perform strongly, as Americans grapple with housing affordability. Despite wanting to buy, rising home prices and lack of new construction is keeping the price to own out of reach for many, especially at the bottom end of the spectrum. While this is not a rosy story, it does have positive implications for those wanting to invest in other areas of the Real Estate sector, namely the rental market. MAA is a stock poised to take advantage of this trend, as lack of affordability among first-time home buyers should keep rental demand high. Furthermore, MAA is capitalizing on growing populations in large U.S. cities, such as Denver, Atlanta, and other major cities in Texas and the Southeast. Recent earnings figures show the company is handling this growth well, and new development in high growth areas should continue this performance in 2019, and beyond. Therefore, I remain bullish on MAA, and encourage investors to give this investment option a serious look.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MAA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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