The real estate sector is full of opportunities for dividend investors, and to be fair, many pay significantly higher dividends than Mid-America Apartment Communities' (MAA -0.14%) 3.4% yield. However, this apartment REIT could be a great option for investors who want safe, growing dividend income, as well as the potential for market-beating returns over long time periods.
About Mid-America Apartment Communities
Mid-America Apartment Communities acquires, develops, redevelops, and manages apartment communities in the Sunbelt region of the United States, with a particularly high concentration in the Southeast.
As of the end of 2016, the company owns or is in the process of developing more than 101,000 apartment homes. Its top three markets are Atlanta, Dallas, and Charlotte. The company's target markets have higher-than-average job growth, and the apartment properties are at price points that appeal to a large portion of the market.
Mid-America Apartments is the largest apartment REIT focused on the Sunbelt region, which gives it several competitive advantages over peers. For one thing, the company's size allows it to run more efficiently than peers. It also has more financial flexibility, especially with its investment-grade (BBB+/Baa2) balance sheet, which allows it the ability to pursue new opportunities as they come up.
The growing U.S. rental market
Over the past 13 years, the U.S. homeownership rate has been steadily declining, thanks to the younger generations staying out of the housing market. These days, people tend to change jobs more often, and home prices are prohibitively expensive to many millennials. As a result, the U.S. homeownership rate is at a generational low, and the rental vacancy rate is the lowest it's been since the early 1990s.
Growth opportunities
One of my favorite things about Mid-America Apartment Communities is that it has tremendous potential for growth and value creation, especially over the next few years.
For starters, the company recently acquired Post Properties, another Sunbelt apartment community owner and operator, and this should produce lots of opportunities to create synergies, streamline the companies' development pipeline, and more. In all, Mid-America Apartment Communities believes that the merger, which was finalized in December 2016, will result in a total net value creation of $684 million.
I'm also a big fan of REITs that develop properties from the ground up. This way the company has the potential to create instant value for shareholders, as well as own newer, more marketable real estate assets than competitors.
Think of it this way: Let's say that the average apartment property produces a 7% return, so you can buy a $1 million property and generate $70,000 in annual income. If you can build the same property for $800,000, now your $70,000 in income translates to an 8.8% return -- plus you have an asset worth $200,000 more than you paid to build it.
As of this writing, Mid-America Apartment Communities has a $562 million development pipeline that the company estimates will result in $75 million to $80 million in value creation for shareholders. And with the nation's trend toward renting that I discussed earlier, there should be no shortage of further development opportunities in the years ahead.
In addition, the company has identified more than 15,000 units from its existing properties that are excellent candidates for redevelopment, in addition to about 13,000 from the PPS merger. This basically means renovating older apartment units, adding features like modern kitchen appliances, and will cost the company between $5,000 and $5,500 per unit. Once renovated, these units generate rental income that's 9% to 10% higher than before.
Consistent dividends with room to grow
Mid-America Apartment Communities has a rather impressive track record when it comes to delivering returns and growing income for shareholders.
Since 2006, the company has increased its adjusted funds from operations (AFFO) at an annualized rate of 6.6%, which has allowed it to raise its dividend steadily, from $2.38 to $3.48, over that time period. The company has paid 92 consecutive quarterly dividends, and while it doesn't have a flawless record of raising its payment every year, it hasn't cut it either. In fact, Mid-America Apartment Communities is one of just three apartment REITs that didn't have to cut its dividend during the 2008-2009 housing crisis.
In addition, although the dividend has increased considerably, it represents a lower percentage of the company's income. A 66.7% payout ratio is quite low for a REIT, and implies that there is plenty of room for future dividend increases. From a safety perspective, it also means that if times get tough and earnings fall a little, the company should still be able to maintain its payout.
Over the past 20 years, Mid-America Apartment Communities has delivered average total returns of 13.1% per year, handily beating the S&P 500, as well as its apartment REIT peers.
Valuation
Mid-America Apartment Communities is projecting FFO in the range of $5.72 to $5.92 per share for 2017. Based on the midpoint of this range, the stock trades for a P/FFO multiple of 17.5. This isn't the cheapest REIT in the market, but the growth potential more than justifies this valuation.
And as you can see, this valuation is on the lower end of its peer group. For comparison, here are the P/FFO multiples for a couple of other leading apartment REITs:
Company |
Recent Share Price |
2017 FFO Guidance |
P/FFO |
---|---|---|---|
Mid-America Apartment Communities |
$101.56 |
$5.72-$5.92 |
17.5 |
Equity Residential |
$64.40 |
$3.01-$3.11 |
21.0 |
Essex Property Trust |
$235.06 |
$11.46-$11.86 |
20.2 |
The Foolish bottom line
While there is no way to predict future investment results, with a growing market and multiple streams of value creation, there's no reason to believe that Mid-America Apartment Communities' fantastic history of strong performance is in jeopardy.