Solid Demand Boosts Mid-America Apartment Despite Supply Woes

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 likely to drive margin expansion. A healthy balance sheet will support its growth endeavors despite an elevated supply of rental units and a high interest rate environment.

What's Aiding MAA?

Sunbelt-Focused Portfolio: MAA's portfolio is set to gain from healthy operating fundamentals. The pandemic accelerated employment shifts and 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 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.

Moreover, per a September Update from MAA, both new lease pricing and occupancy for the quarter through Aug. 31 improved from the second quarter of 2024 despite supply pressures.

Image Source: Mid-America Apartment Communities, Inc.

Our projection for average physical occupancy in 2024 is 95.6%. For 2025 and 2026, the average physical occupancy is expected to remain elevated at 95.9% and 96%, respectively. While we anticipate a 1.7% increase in total revenues, the metric will rise 2.9% and 6.1% year over year in 2025 and 2026, respectively.

Redevelopment & Technology Initiatives: MAA continues to implement its three internal investment programs — interior redevelopment, property repositioning projects and Smart Home installations. These programs are likely to help the company capture the upside potential in rent growth, generate accretive returns and boost earnings from its existing asset base.

In the first half of 2024, MAA redeveloped 2,796 apartment homes. As of June 30, 2024, the total number of units with Smart Home technology reached more than 94,000 across its apartment community portfolio since the initiative's beginning in the first quarter of 2019. The company expects to complete the remaining few properties in 2024.

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.

Balance Sheet Strength: MAA enjoys a solid balance sheet, with low leverage and ample availability under its revolving credit facility. As of June 30, 2024, MAA had a strong balance sheet with $1.0 billion of combined cash and available capacity under its unsecured revolving credit facility. It also has a low net debt/adjusted EBITDAre ratio of 3.7.

In the second quarter of 2024, it generated 95.9% unencumbered net operating income (NOI), providing the scope for tapping additional secured debt capital if required. Hence, the company is well-positioned to bank on growth scopes.

In addition, its trailing 12-month return on equity is 8.25% compared with the industry's average of 3.17%. This reflects that the company is more efficient in using shareholders' funds than its peers.

Attractive Dividend: 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 seven times, and its five-year annualized dividend growth rate is 9.98%. Moreover, it has a lower dividend payout compared with the industry. Further, backed by healthy operating fundamentals, we expect its dividend distribution to be sustainable in the upcoming period.

Over the past three months, shares of this Zacks Rank #3 (Hold) company have risen 17%, outperforming the industry's growth of 13.9%.

Image Source: Zacks Investment Research

What's Hurting MAA?

Elevated Supply: The struggle to lure renters will persist as supply volumes are expected to remain elevated in many Sunbelt markets. This phenomenon is expected to put pressure on rent growth in the upcoming period. Furthermore, 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 as well as leads to aggressive pricing for acquisitions.

High Interest Expenses: A high interest rate environment is a concern for MAA. Elevated rates imply a high borrowing cost for the company, which will affect its ability to purchase or develop real estate. The company has a substantial debt burden, and its total debt as of June 30, 2024 was $4.7 billion. For 2024, our estimate indicates a 17.6% year-over-year increase in the company's interest expenses.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and Essex Property Trust, Inc. ESS, each carrying a Zacks Rank #2 (Buy) at present.

The Zacks Consensus Estimate for Cousins Properties' current-year FFO per share has been raised marginally over the past two months to $2.66.

The Zacks Consensus Estimate for Essex Property Trust's current-year FFO per share has moved northward marginally over the past month to $15.53.

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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