Mid-America Apartment: Good News For 2026, But 2025 Likely Gets Rough

seekingalpha09-28 00:10

Mid-America Apartments maintained its FFO and AFFO guidance for 2024 despite some increasing headwinds.Sunbelt states face rent drops and oversupply issues, while Midwest markets show stronger rent ...

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(NYSE:MAA). While we have covered the stock 4 times in the last 15 months, it has never appealed enough to move out of the yellow and into the green. Seeking Alpha This is not just us exercising caution as usual. It is also not the idea that \"REITs are bad\". In fact, we have had multiple buy ratings on REITs in 2024 (see here, here, here, and here). But in this case for MAA, we never saw the case for a great alpha. In some ways, this was a correct call. The REIT has been flat since our first article. In other ways, it was incorrect. There was a big rally from our last article, and we were not part of the upmove. We go over the Q2-2024 results and tell you why we are actually thinking that this one goes lower from here. Q2-2024 MAA's Q2-2024 was about in line with core funds from operations (FFO) coming in at $2.22 per share. As can be seen below, both Q1-2024 and Q2-2024 showed a year-over-year decline. Mid-America Apartment Q2-2024 While the declines were marginal, we will note that came to fruition despite rising rents. The culprit was the strong expense increases which dwarfed rent growth. One notable thing here is that both (rents and expenses) cooled further in Q2-2024 vs. Q1-2024. That pushed net operating income (NOI) firmly into negative territory. Mid-America Apartment Q2-2024 On the bright side, occupancy held up fairly well, considering the big supply deluge in the Sunbelt states. Mid-America Apartment Q2-2024 MAA narrowed its guidance range for the full year. You can see the difference between the revised numbers and the previous one. There was no change to the midpoint of the FFO and Adjusted FFO (AFFO) and that is what investors mainly cared about. What was interesting to us was that the same property revenue growth (midpoint) moved marginally lower, but the expense growth expectations were also lower. This is what kept NOI expectations the same as before. Mid-America Apartment Q2-2024 Overall, it was a steady quarter for one of the best REIT teams in the business. Outlook We really built and built hard in the Sun Belt. Despite a rather strong job market until this point and tailwinds from interstate migration, rents are dropping. CRE Daily There is a lag here between the market rents and the MAA portfolio rents, and we are likely to see some more drops in the quarters ahead. This will happen as the supply fest is not over.  Rents soared nationally in 2021 and 2022, but suburban rental homes and Sunbelt apartments saw some of the highest price increases as population growth increased demand in those areas. New developments quickly followed. Buildings containing some 610,000 apartment units are expected to complete construction this year, more than in any year since the 1980s, CoStar said. The supply surge has caused values and rents to sag in many markets.  Source: WSJ That number is not adjusted for population, so one has to keep in mind that 610,000 in the 1980s is very different from 610,000 in 2024. The good news is that we are about to hit peak supply. \"Our view is all the new construction is going to finish in the next few months, and nothing new is going to come online for the next two or three years,\" Sharp said. Source: WSJ. He is not wrong. Supply will definitely decline. But the statement above is an exaggeration. WSJ One reason we favored and bought a ton of Canadian apartment REITs in June of this year was that the supply side is very weak up north. Even if you wanted to stay within the US, there are areas that are doing quite nicely. Unlike the Sun Belt declines, the Midwest saw the fastest rent increases, reflecting its slower pace of new construction compared to the Sun Belt and its status as the most affordable region. Minneapolis recorded the largest increase at 10.3%, followed by Cincinnati (9.9%), Chicago (9.1%), New York (8.9%), Washington, D.C. (8.6%), Indianapolis (8%), Virginia Beach, VA (7.7%), Houston (6.7%), Boston (5.7%), and Detroit (4.9%). Source: CRE Daily. Overall rents have now begun a climb and will likely continue to increase at a moderate pace. Redfin Verdict In all of that, one has to ask whether the price is right to own MAA. At 20X AFFO it does not look expensive. Of course, it does not look expensive as the bulk of the last 10 years was still a ZIRP (zero interest rate policy) state. TIKR We think what you pay comes down to your outlook on rates. Since we believe long-term rates (not the ones the Federal Reserve sets) are woefully underpriced for recession and budget deficit supply, we would not venture to hit more than 14-15X for this. We will add here that there are some big revision risks to the downside for at least 2025 estimates. Those in our view, are likely to move below the 2024 numbers. So at this multiple MAA is firmly in a Sell zone for us. Mid-America Apartment Communities, Inc. PFD SER I (NYSE:MAA.PR.I) The preferred shares are a great investment to look at… if you want to lose all belief in efficient markets. There are few guarantees in the world, but one that you can take to the luxury apartment that MAA rents and sleep on it, is that MAA.PR.I will be for the real losers. Seeking Alpha Ok, technically they still make 0.037% by the time it is guaranteed to be called in October 2026. DQYDJ But that is a ridiculously bad number to be locking in. It is like you are trying to make ZIRP happen for yourself. Investment grade corporate credit offers several opportunities for a 5% plus yield on a two-year horizon. We generally trade around fixed income rather than getting married to securities, but our bond ladder currently yields over 6% despite some big appreciation. So MAA.PR.I get a strong sell from us, for the sheer lunacy of holding a 0.037% YTM.  Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. 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