The purpose of this article is to evaluate Mid-America Apartment Communities Inc. (MAA) as an investment option. MAA is a stock I had owned for a while, and I am now tempted to come back in at the current price. While real estate is down in 2020, MAA has clearly better returns than the sector as a whole. While the MAA is lagging behind the S&P 500, I continue to see the exposure positively, as the broad indices are highly concentrated at the top. MAA offers a way to diversify and also access a stable income stream. Furthermore, the company's financial result for the second quarter shows that it has handled the Covid-1
First a little about MAA. The company is a "real estate investment group that focuses on the acquisition, selective development, redevelopment and management of multi-family homes throughout the Southeast, Southwest and Mid-Atlantic in the United States." MAA has ownership interests in over 100,000 condominiums in 17 states and Washington, DC. The stock is currently trading at $ 113.01 / share, yielding 3.48% annually. This is a stock I have recommended on several occasions, including earlier this year. Unfortunately, while MAA initially held up better than the wider market when sales started in February, this trend did not last. The stock got a big hit, and has been slow to recover from the S&P 500 since my last review, as shown below:
Source: Seeking Alpha
Despite this weak short-term performance, I continue to like the story behind MAA, and it has been a good long-term hold for me. Having given it a fresh look, I think it is still justified to have a bullish rating, and I will explain why below.
Real estate lags behind, but MAA beats the sector
To begin, I will briefly touch on the elephant in the room, which is Real Estate & # 39 ;s poor performance. As a result, it may seem counterintuitive to recommend buying a REIT at this point. For controversial investors, they can of course look at the sale of real estate as an opportunity, which is a fair assessment. However, the challenges facing commercial real estate, such as continued government lock-in orders, rising e-commerce trends and a shift towards external work environments, will not reverse in the short term. Thus, the pain the sector is experiencing can certainly continue, which is especially true if the volatility in the market picks up. The sector is not immune to broad macroeconomic concerns, so investors need to think carefully about any new positions at this point, whether it is real estate or not.
That said, there is some support for assessing the MAA within this space. , based on past performance. While the MAA has had a tough year, it has actually outperformed the broader sector, measured by the 1-year return of the MAA against iShares US Real Estate ETF (IYR), Schwab US REIT ETF (SCHH) and Vanguard Real Estate ETF (VNQ), which shown below:
As you can see, while all options have underperformed the S&P 500, the MAA has managed to exclude sector ETFs, especially SCHH. What is perhaps more comforting is that this performance divergence is even greater when we consider a longer time horizon, for example five years, as shown below:
My takeaway here is to illustrate to investors why I like selective positions, such as MAA, across the broader real estate sector. The long-term performance is clear, and I will discuss in more detail the attributes that are in place to help this trend. However, investors should also recognize the graph showing that Real Estate as a whole, including the MAA, has failed to keep up with the S&P 500. Looking forward to the end of the year and into 2021, I do not expect Real Estate, MAA or otherwise to beat the wider market significantly. I say this to meet expectations going forward. I think MAA is a solid company with an attractive dividend and a history of leading its sector. But investors should go into this to play to diversify the portfolio and earn income, not to "beat" the market.
Q2 The results were quite strong
I will now dig into the MAA's recent economy, with Q2 results coming in late July. Since I have covered MAA, the company has had strong earnings reports, and Q2 2020 does not deviate from this trend. In fact, the results actually surprised me to the upside, as I had expected that the Covid-19 pressure would weigh on the company. While headwinds from the virus will undoubtedly push coatings and rent increases, the company has so far managed to get through the crisis with strong numbers.
To illustrate, I collected some important calculations from the earnings release for Q2 and compared them to Q2 2019, shown in the chart below:
|Metric (thousands)||Q2 2020||Q2 2019||YEAR INCREASE|
|Rental / property income||$ 413,026||$ 407,390||1.4%|
|Property expenses||$ 284,661||$ 278,086||2.4%|
|Net Income (Available to Ordinary Shareholders)||$ 77,728||$ 64,141||21.2%|
|Total Same Store Revenue||$ 389,894||$ 381,762||2.1%  Funds from Operations (FFO)||$ 188,867||$ 180,848||4.4%|
|Metric|| 19659021] Same store occupancy||95.4%|
|Same store average Efficient rent (increase)||2.1%|
Source: Seeking Alpha
The biggest takeaway here is that the numbers were quite strong, as we consider the macro environment the company operates in. With many people without work and struggling to make ends meet to meet, the rental collections look quite strong for MAA, which is a very good sign. Net income and FFO are both up for the company, and the occupancy is almost identical to where it was during my last review. Overall, this tells me that the company is well managed, and the tenants still have to pay the rent on time despite the financial challenges. Unless we see a significant change in the months ahead, I expect the 3rd quarter will provide more of the same, and point to the opposition to this company.
Apartments Seeing Fewest Number of Distressed Sales
My next point looks at the broader commercial real estate sector, and how it has gone in 2020. It goes without saying that this is a difficult market environment, as many commercial properties are struggling with defaulted tenants, store closures, government lock orders and reluctant consumers. Not surprisingly, hotel and retail REITs have been hit particularly hard, with office space also reducing demand. The end result of this environment right now has been an increase in distressed sales. Although manageable, the trend showing some deterioration in the hotel, office and retail sectors is clear.
To illustrate, consider the graph below, which shows the number of distressed sales per subsector, and put the figure in perspective by share of sales volume:
Source: Real Capital Analytics
The most important takeaway for me here is to highlight how resilient apartment owners have performed during a unique crisis. Although the total figures do not indicate that any of the sub-sectors cannot recover, the apartment sector stands out with the least number of distressed sales, the lowest volume in dollars and the smallest share of the sales volume affected by the distressed sales within its sub-sector.
Finally, I see this positively on MAA. The stock has been a long-term winner, and is well positioned in one of the best sub-sectors within Real Estate to maintain profitability in a difficult time. The graphic above tells me that I want to stay away from retail and hotel REITs for now, but also tells me that apartment REIT is an affordable way to build real estate exposure without taking too much risk. This is a win-win for MAA.
The labor market poses a challenge
Of course, there are many inherent risks to buying into MAA right now. Despite the recent retreat in the market, equities are still hitting fairly high levels, which also applies to MAA. Yes, short-term charts look weak, but a long-term look shows us that stocks, whether in real estate or otherwise, are still a bit expensive. This exposes investors to a lot of inconvenience risk, especially if the Covid-19 crisis lingers longer than expected. At this point, it is difficult to find true value. So while the MAA may look reasonable compared to the S&P 500, I want to emphasize that it is certainly not "cheap."
With this in mind, one of the biggest risks I see for MAA's profitability at the moment is the weak labor market. As I'm sure readers are aware, millions of Americans have lost their jobs in response to the virus, and many of these job losses are permanent. Furthermore, despite the partial reopening of many states, unemployment rates remain high, as shown below:
It should be clear what a weak labor market can have for renting apartments. When Americans lose their jobs and income, paying rent and rent can be a challenge. While the country has recovered some of the lost jobs, we are not out of the woods yet. Furthermore, Congress originally adopted stimulus measures designed to bear some of the financial burden imposed on households as a result of Covid-19. The stimulation programs probably rejected some forced admissions and expulsions, but further stimulus measures are in the air at this time. This means that we can see the rental market come under pressure in the coming months, if further labor gains come to a standstill.
Although I would not completely reduce this risk, I want to emphasize why I like MAA especially when considering REITs on apartments. This is because the company is primarily focused on the southwest and southeast, which are fast-growing regions with many young professionals. While millions of jobs have been lost, they have primarily been in service and areas with blue collars, which has reduced the impact on professionals, as shown below:
Source: Bureau of Labor Statistics
The graphics above highlight some of the hardest hit and least hit areas. While leisure, hospitality and mining / accommodation received major cuts, areas of business and professional services, as well as the authorities, have seen less impact.
My takeaway is that this shows us how uneven the pandemic has been. While workers in many sectors are losing jobs and feeling financially distressed, other areas have been much less affected. This means that the apartment REITs, such as MAA, which caters more to professional classes, should see fewer obligations and / or evictions. To understand why, consider the MAA's Top Markets, shown below:
Source: Seeking Alpha
These are areas filled with professional workers, and Washington, DC, is known for its large public workforce (federal employment has been largely unaffected so far). Finally, this explains the elasticity of MAA's earnings report for the second quarter, and gives me confidence in the share going forward.
MAA was one of my best investment calls in 2019, but 2020 again has a lot to be desired. Despite poor short-term performance, I am still bullish on the long-term history. The company owns rental apartments in the fastest regions in the country, and caters to professionals who were some of the least likely to lose their jobs during this crisis. This can be evidenced by the elastic Q2 earnings report, as well as the even occupancy. With a stable return of 3.5% and a share price that is well on top, I see better days ahead for MAA. Therefore, I am looking to build a position in this stock and I recommend investors to pay some attention to it at this time.
Information: I / we have no positions in any of the mentioned shares, but can start a long position. in MAA for the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for that (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.