Mid-America Apartment Communities (MAA -0.10%) and Essex Property Trust (ESS -0.13%) have a lot in common. They're leading apartment owners and both have long records of providing a nice flow of dividend income since becoming publicly traded real estate investment trusts (REITs).
They also have share prices battered by market malaise in general and by concerns about slowing rent growth after they increased so much during the pandemic. Both stocks seem to be saying "buy me" at the moment. Let's find out which one is more convincing.
Accomplished dividend payers that continue on that roll
For starters, this chart shows how much their share prices have fallen in the past year compared to the benchmark S&P 500.
REITs compete for investor attention primarily as income stocks, and both MAA, as it brands itself, and Essex have distinguished themselves. MAA just raised its dividend by 12%, marking 13 straight years of increases, and now yields 3.6% at a share price of about $155. A payout ratio of about 61% based on cash flow indicates the sustainability of its dividend.
Essex currently trades for about $216 and yields 4%. It has an admirable record of 29 straight years of raising dividends, including 4% annually for the past three years. Currently paying $2.20 a share a quarter, Essex has a similar payout ratio of 63% based on cash flow. So both of these are reliable income stocks.
Sunbelt vs. SoCal, Silicon Valley, and Seattle
Now, let's look at some differences. The biggest one is their markets. MAA has a portfolio of about 101,000 units in 296 communities in 16 states, primarily in high-growth metros across the Southeast and Texas. Atlanta accounts for nearly 13% of its same-store net operating income, followed in order by Dallas at nearly 10%. Other major markets for this REIT include Tampa and Orlando in Florida and Charlotte, North Carolina.
Essex has 253 apartment communities with about 62,000 units concentrated in Southern California and in and around San Francisco, along with the Seattle market. These are areas strongly dependent on tech jobs, and mounting job losses of late in those sectors have helped drive down this REIT's share price more than MAA's, it would appear.
In a November presentation, Essex offered arguments that suggest those fears might be overblown. It detailed how job growth and unemployment in its markets are still better than national averages.
And it pointed to such developments as Alphabet's (GOOG -1.60%) (GOOGL -1.61%) Google breaking ground for a San Jose, California, campus that could generate some 25,000 new jobs in the next 10 years in an area where Essex has numerous apartment communities. Plus, despite slowing hikes in home prices, Essex says it is still 2.3 times more expensive to buy than to rent in its markets.
Growing FFO and dividends, but one more than the other
Both companies have been regularly increasing funds from operations (FFO) as well as dividends. Both sell for nearly identical price-to-FFO ratios of about 15, which is reasonable for such REITs. However, as the chart below shows, MAA has been growing FFO (a key metric for REITs) and dividends much faster over the past decade.
Looking back or forward, the nod goes to MAA
So, which of these two solid stocks is screaming "buy me" louder? My choice is MAA. Although it has less ground to make up to get back to its 52-week high, that's not necessarily the target.
Share growth is nice, but portfolio growth is, too, and MAA has a $1 billion development pipeline backed by an A-minus investment-grade rating from S&P. Its ratio of net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) is a modest 3.97. And it has more than doubled Essex in total return during the past decade.
Analysts give MAA a consensus target price of $182.85, an upside of almost 18%. Essex gets a consensus target of $254.85 and an upside of 18% as well. Indeed, Essex is no slouch and it, too, appears oversold.
In fact, I went into this analysis thinking I might replace MAA with Essex as the residential REIT among the collection of REITs in my retirement portfolio. Instead, I think MAA -- with its more diverse footprint and development pipeline -- is a more compelling buy at this point, and I plan to add more shares.