Mid-America Apartment Communities (MAA) carries our highest Strong Buy investment ranking; we see an enhanced buying opportunity with the stock's 25% share price correction from its 52-week high, suggests analyst Kenneth Leon in CFRA Research's flagship newsletter, The Outlook.
Mid-America is a residential real estate investment trust mostly operating in Sun Belt states where market conditions are outpacing other U.S. regions.
These markets feature the following: 1) strong economic growth leading to household formation and job growth, which in turn should support higher demand for apartments; and 2) an attractive quality of life, which may lead to higher demand and retention for MAA’s apartments and allow the trust to readily increase rents.
We think residential REITS are defensive to potential recession and have pricing power to raise rents. We also think rental rates will trend in the high single digits Y/Y in most markets, with coastal markets and high demand Sun Belt markets experiencing double-digit rate increases for new leases.
Top of mind is the housing shortage and affordability for home ownership that makes multifamily rental properties attractive, in our view. For MAA, we are seeing demand for rental units today exceed pre-pandemic levels, given the U.S. housing shortage and affordability with record average home selling prices.
As of June 30, 2022, MAA had 101,229 apartment units across 16 states and the Washington D.C. metro area. We also think MAA directly benefits in Sun Belt markets, driven by job growth, in-migration, and a lower cost of living than the more expensive coastal, urban markets hurt by Covid-19. We see rental revenue of $2.0 billion in 2022 and $2.1 billion in 2023, following $1.8 billion in 2021.
Our $210 target price is based on forward P/FFO of 25.6x versus 22.0x average for residential REITs. Our FFO estimates are $8.20 in 2022 and $8.85 in 2023 compared to consensus at $8.25 and $9.09 for the same respective periods.
Our Strong Buy is based on residential rental fundamentals in Sun Belt markets not deteriorating in terms of rental rates, absorption and vacancies, and cash NOI growth. We think residential REITS are defensive in a potential recession due to pricing power. Risks to our view are high unemployment, high inflation impact on tenants’ living costs, and higher new supply of rental properties.