Real estate has long served as a refuge for investors seeking some shelter from economic storms, since real estate can raise rents to counter the effects of inflation.
The housing market can be highly profitable, but also highly time-consuming, expensive, and even frustrating for those directly managing properties. That makes publicly traded real estate investment trusts (REITs) in this sector an attractive way to benefit from providing this essential service — a place to live. People can enjoy a low entry cost and a passive income stream without actively managing tenants and buildings.
A good one to start with would be Mid-America Apartment Communities (NYSE: MAA), one of the U.S.’s largest landlords. It has ownership interest in nearly 102,000 units in about 300 apartment communities across 16 states and the District of Columbia.
Atlanta is MAA’s largest market, accounting for about 13% of its same-store income, with other metros such as Dallas, Charlotte, Orlando, and Tampa not far behind. Note the concentration here: high-growth, low-unemployment areas across the Sunbelt. This trust knows its business well and has built an impressive record of investor payback over the years.
Indeed, when MAA paid its shareholders a dividend of $1.40 per share in January, that marked 116 straight quarters of payouts. That’s a 12% boost from the quarter before. Over those nearly 10 years, MAA has outperformed two key benchmarks, the Vanguard Real Estate ETF (NYSEMKT: VNQ) and the S&P 500 itself, as the chart below shows.
Continually checking the right boxes
MAA has continually checked the boxes for a safe, sound REIT investment. It has easily manageable debt and sufficient liquidity for further investment in a portfolio already stocked with properties and tenants producing reliable — ideally growing — cash flow, and a sustainable dividend payout ratio.
Funds from operations (FFO) is the standard measure of how a REIT generates and uses cash — including meeting its mandate to pay out at least 90% of its taxable income in dividends. In this regard, things look good.
For 2023, MAA is guiding core FFO to rise to $8.88 to $9.28 per share, a nice jump from the $8.50 per share reported for 2022. Same-store property revenue and earnings per share gains are also expected to be notably higher this year than last.
Meanwhile, a payout ratio that’s currently about 54% based on cash flow is quite low by REIT standards and points to the ability to readily support further dividend increases. MAA has already raised its dividend for 13 straight years and is currently yielding about 3.2% at a share price of about $174.
Now available at a reduced price
Concerns about rising interest rates affecting a REIT’s ability to fund expansion and for rental properties to continue raising their rent at the pandemic-fueled pace have helped suppress interest in this sector.
That yields a considerably price for a proven operator like MAA that has the credit rating, deeply experienced management, and target markets to finance planned acquisitions, developments, and redevelopments of its expansive portfolio.
MAA shares are currently down about 17% from this point a year ago, compared to about 7% for the S&P 500 and 13% for that Vanguard exchange-traded fund that holds a weighted mix of about 160 REITs.
Of course, that stock price a year ago was in record territory for the company, like for so many others, and its price/funds from operations (FFO) per share ratio is still nearly 19 times, about its average for the past 10 years but well above the 12 times for that key metric at this point five years ago.
Things could always change but steady is good, too
So, while investors have generally valued this stock favorably in recent years, and especially during the pandemic-driven surge in rents and demand in the markets that MAA serves, this could always change.
Rent increases could slow or stop, certainly, and those markets themselves could go from boom to, if not bust, at least to a bit of a fizzle that would be enough to take the steam out of earnings growth.
But overall, MAA has consistently proved a way to grow wealth for investors without the hassle of directly owning or managing property, and comes with the liquidity that comes with owning shares in a publicly held company. It has the balance sheet, portfolio, and management chops that can lend some credence to the notion that this steady performance can continue.
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Marc Rapport has positions in Mid-America Apartment Communities and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has positions in and recommends Mid-America Apartment Communities and Vanguard Specialized Funds-Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.