Apartments are an extremely sensitive property type given the short-term leases that are the backbone of the industry. However, as the saying goes in the real estate sector, location, location, location. Which helps explain why Mid-America Apartments (MAA 0.21%) has been hitting on all cylinders since the pandemic. And why management thinks there's another good year ahead in 2022.
The right place at the right time
Fear was high when the coronavirus started spreading around the world in 2020. Given that the illness was well known to spread easily in group settings, people decided to move out of big cities. That was a massive hit to the financial results of apartment real estate investment trusts (REITs) that owned coastal and urban assets. Luckily for Mid-America Apartments that's not really its focus.
Mid-America Apartments' portfolio is filled with suburban and Sunbelt properties. The REIT ended 2019 with occupancy of 95.7%. And it ended 2020 with occupancy of 95.7%. In other words, the REIT didn't skip a beat. And it didn't have to resort to concessions to keep its apartments filled, with an average rent increase of 1.3% in 2020 despite the pandemic. The landlord was in the right place at the right time and, thus, was able to navigate a tumultuous year in stride.
Still going strong
The thing is, Mid-America Apartments was positioned so well not because it expected a global pandemic but because it was following a broader trend. More and more people have been moving to the Sunbelt and to less urban areas. The pandemic just sped up the pace of that shift a little. So the strength of the REIT's positioning played out again in 2021, with occupancy inching up to 96%. But, along with that came an average rent hike of around 10%! Although inflation was a headwind that restrained overall growth, fourth-quarter 2021 net operating income increased by a heady 12.1%. It's pretty clear that Mid-America Apartments is hitting on all cylinders right now.
And that's not expected to change. In fact, in the company's fourth-quarter 2021 earnings release management laid out some pretty positive numbers for 2022. At this point it is expecting core funds from operations (FFO) to come in somewhere between $7.74 and $8.10 per share, with a midpoint of $7.92. At the midpoint, that suggests core FFO growth of nearly 13%. That's huge growth for a REIT.
Backing that bottom-line number up, Mid-America Apartments is projecting property level rental growth of between 8% and 10% and net operating income growth of between 10% and 12%. The company hasn't forgotten about rising prices, either, noting that the above projections include operating costs rising between 5% and 6%. This is a very attractive story.
The problem here is that investors are aware of how well the REIT is doing. Since the start of 2020 the stock is up some 60% or so. That compares to around 20% for industry bellwether AvalonBay and roughly 20% for the average REIT, using the Vanguard Real Estate Index ETF as a proxy.
Also notable, Mid-America Apartments' dividend yield is a miserly 2%. That's near the lowest levels in the REIT's history. This is not a great option for investors who take a value approach to stock selection. And yet it is impossible to ignore how well the company is performing and how strong an outlook it has, according to management.
At this point, Mid-America Apartments seems most appropriate for investors in search of dividend growth. The annual payment has risen from $3.84 per share in 2019 to a current run rate of $4.35, with a hike each year (including one already in 2022). While this REIT won't be right for everyone, the attractive fundamentals might still entice long-term investors who want to position themselves with broader population trends. You'll pay up for that privilege, but if recent strength is any guide you'll likely be well rewarded with solid dividends.