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Is Mid-America Apartment Communities a Good Fit for a Retirement Portfolio?

Jul 19, 2020 by Matthew DiLallo

Real estate is often a great investment for retirees because it generates passive income they can use to supplement other retirement income sources. One of the easiest ways for a retiree to add real estate to their investment portfolio is by purchasing shares of a real estate investment trust (REIT).

Among the many options is Mid-America Apartment Communities (NYSE: MAA) , a residential REIT with an ownership interest in more than 100,000 apartment units across 16 states. Here's a look at whether it fits the bill for what most investors want in their retirement portfolio.

What makes a good retirement stock?

Most people with their eye on retirement want to hold lower-risk investments that generate steady income. That's why real estate can be a great option since it can accomplish both goals.

However, not all real estate investments, like REITs, are ideal retirement options since some are riskier than others, which puts their income streams in danger. Because of that, retirement-focused investors need to have a critical eye when considering a REIT. Ideal traits to look for:

  1. A high-quality portfolio of in-demand real estate. Quality and location matter in real estate since those properties command higher rents. Likewise, real estate experiencing growing tenant demand (i.e., residential and industrial) is more favorable to properties focused on industries facing headwinds (e.g., retail). REITs focused on the right real estate sectors and markets should be able to consistently grow their income and dividends.
  2. Strong financials. Ideally, a REIT will have an investment-grade balance sheet backed by low leverage metrics (such as a sub-6.0 times debt-to-EBITDA ratio) and a conservative dividend payout ratio (less than 80% of its FFO). These factors should put its dividend on solid ground while giving it the flexibility to expand.

With those traits in mind, here's how Mid-America stacks up.

Mid-America vs. the ideal retirement stock

Mid-America Apartment Communities, as the name suggests, owns multifamily buildings across America's mid-section, largely focused on the Sunbelt region. Atlanta is its top market, at 13.1% of its net operating income (NOI). Dallas, Charlotte, Austin, and Washington, D.C., round out the top five markets, showing the geographic diversification of its portfolio. Most of those markets have strong employment bases, which support steady rental growth. The company has helped drive some of that rental growth by renovating units with kitchen, flooring, and fixture upgrades, which keeps its properties in high demand.

Mid-America Apartment Communities also has a strong financial profile. The residential REIT has a solid investment-grade balance sheet backed by a 4.71 times debt-to-EBITDAre ratio (that also includes gains or losses on asset sales and any asset impairment charges), which is below the peer-group average of 5.11 times. On top of that, the REIT has a reasonably conservative dividend payout ratio of less than 70% of its initial AFFO estimate for 2020. That financial profile provides Mid-America with plenty of cushion, which has come in handy this year since the nonpayment of rent and recurring fees was slightly above the historical average in April and May due to the impact COVID-19 had on some tenants. Because of that, its dividend -- which it has now paid for 105 consecutive quarters -- is on solid ground.

The company's strong financial profile provides it with the flexibility to invest in redevelopment projects at its existing properties, develop new ones, and make acquisitions. It currently has 12,000 units in the pipeline that it can renovate in the coming years and $490 million of development projects underway. That pipeline should enable the company to continue growing its rental income and 3.6%-yielding dividend, which it has done in each of the last 10 years.

Verdict: Mid-America Apartment Communities is a good fit for a retirement portfolio

Mid-America has all the traits a retirement-focused investor would like to see. It has a high-quality portfolio of income-generating apartments in growing Sunbelt markets. On top of that, it has a top-notch financial profile, which puts its dividend on solid ground and provides it with the flexibility to keep growing. Because of that, it's a great way to generate truly passive income since investors in this REIT won't face any of the hassles of being a landlord.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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