Investors looking for solid, long-term stocks have to consider not only what stocks to buy, but also when to buy them. For example, many quality real estate investment trusts (REITs) purchased at the beginning of 2022 have not fared well since then, challenged by rising interest rates.
Those same REITs, having lost a good chunk of their previous values, should be assessed with a forward view, rather than looking in the rearview mirror of the last 20 months.
Take a look at one stalwart REIT with a long history of success that has not performed well throughout 2022-2023, although it now could be at a level that would make for a formidable investment into the future.
Mid-America Apartment Communities Inc. MAA is a self-administered residential REIT that specializes in purchasing and leasing apartment complexes. It owns just under 102,000 units in 300 communities across 16 states and Washington, D.C. Most of Mid-America Apartment Communities' properties are in the Southeast, Southwest and Mid-Atlantic states.
Mid-America Apartment Communities is a member of the S&P 500 and has been a public company for 28 years. The Atlanta and Dallas areas comprise over 22% of its same-store net operating income.
Recent operating results were positive. On July 26, Mid-America Apartment Communities reported second-quarter funds from operations (FFO) of $2.28 per share, beating estimates for $2.25 per share and providing a 12.87% increase over FFO of $2.02 per share in the second quarter of 2022. Revenue of $535.15 million was slightly above the estimate of $533.57 million and was an 8.1% increase over revenue of $495.04 million in the second quarter of 2022.
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Mid-America Apartment Communities recently announced a 12% quarterly dividend increase from $1.25 to $1.40 per share. This followed last summer's dividend hike from $1.088 to $1.25 and shows the ongoing strength of the FFO, along with management's faith in its future. The annual dividend of $5.60 per share now yields 4.09%.
Despite these positives, Mid-America has been underperforming in 2023, with a total return year-to-date of negative 9.34%. However, its five-year total return is 52.76% and the 10-year total return is 179.46%.
Analysts have been somewhat neutral to positive on Mid-America. On Sept. 5, Bank of America Securities analyst Joshua Dennerlein initiated coverage on Mid-America Apartment with a Neutral rating and announced a price target of $158, about 21% above its recent closing price of $136.70. On Sept. 12, Wells Fargo analyst James Feldman maintained Mid-America Apartment with an Equal-Weight rating but lowered the price target from $156.50 to $148.50.
Another positive for Mid-America was a recent insider stock purchase. On Aug. 7, Director William Reid Sanders purchased 3,000 shares of Mid-America Apartment Communities stock with an average price of $146.84, for a total purchase of $440,513. Insiders don't generally buy shares of company stock unless they believe the price will eventually move higher.
But Wall Street seems to believe that apartment rents have peaked, and there is recent evidence that the large rent hikes of 2022 may have come to an end. Another concern is that 460,000 new apartment units, already under construction, will be completed by the end of 2023, leading some to conclude that supply will begin to outstrip demand.
But in mid-August, the national average for a 30-year fixed mortgage rose to 7.48%, the highest level in the U.S. since November 2000. Rates have since backed down to 7.13%, but 30-year loan applications have declined and are now at 28-year lows. With mortgage rates remaining high and home inventories still low, many tenants will be forced to continue renting, and the demand should continue to keep rental prices strong.
In addition, a recent survey found that 18% of millennials and 12% of Generation Z in large cities said they will never buy a home because prices are too high, and they can't afford the downpayment and/or monthly payments.
While that sort of sentiment could change as young people age, get married and land better jobs, it still suggests that the American dream of owning a home may not be as pervasive as it was in previous decades.
It’s also unlikely that tenants renting in Mid-America's apartment units would move into newly constructed apartments that, because of high materials and labor costs, are likely to charge higher rents than older buildings.
With mortgage rates remaining high, demand for mortgages declining and less interest in owning than there once was, there is every reason to believe in the continued success of residential REITs. With Mid-America Apartment Communities now 37% off its high of $219.57 in January 2022, it could be a good opportunity to pick up shares for the long term. And it's comforting for investors to know that they will be buying shares approximately $10 below the price recently paid by company Director Sanders.
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