Blackstone’s Big Move Sparks REIT Rally: Mid-America Or Camden Properties, Who Wins?

This article was written by Leo Nelissen.

On December 31, we published an article titled “10 REITs To Buy In 2024.”

One of the stocks we highlighted was the Apartment Income REIT Corp. (AIRC).

This is one of the largest landlords in the United States, as it owns 75 multifamily communities that cover more than 26 thousand units in 10 states and Washington, D.C.

What makes this REIT so special is its focus on higher-income renters, who bring a lot of safety and stability to the table.

“Apartment Income REIT is selective in the tenants they lease to and look for high-quality tenants to fill their apartment homes. As of 3Q-23, AIRC’s tenants had an average income of $241,000 and an average FICO score of approximately 725. AIRC refers to these tenants as ‘renters by choice.’”

We also noted its attractive 5% dividend yield and the fact that it traded at just 16.1x AFFO (adjusted funds from operations) back then, well below its normalized AFFO multiple of 23.5x.

Guess what?

Blackstone (BX) just bought the company – causing the entire apartment segment to rally!

The asset manager is buying AIRC for roughly $10 billion, which caused the stock price to rally 23%.

This comes after the giant bought Tricon Residential for $3.5 billion in January.

According to Bloomberg, apartment REITs are now the best-performing group in the REIT space. After Monday’s gain, the entire sector is up roughly 1% year-to-date.

This deal is quite interesting, as we wrote a Blackstone-focused article on March 29 titled “Follow The Money (Blackstone): 3 Strong Buy REITs.”

In that article, we highlighted the company’s intention to buy underappreciated assets in a market that is becoming increasingly attractive for investors with the necessary cash reserves:

“Competition to buy discounted assets hasn’t been great so far, he said, adding that there will be a strong need for new capital as financial institutions begin realizing losses from loans that were made when borrowing costs were much lower. While Gray sees a wave of buying opportunities as some banks and even insurance funds may have to sell at discounts, the scale won’t be as bad as it was during the financial crisis, he said.” – Bloomberg.

Although the Apartment Income REIT isn’t a distressed company, Blackstone is clearly buying quality below a fair price as well.

This brings us to two of the biggest components of the apartment REIT space. Two stocks that both have an iREIT® Buy rating.

These stocks are Mid-America Apartment Communities, Inc. (MAA) and Camden Property Trust (CPT).

In light of Blackstone’s big move, we’ll compare the two, explain what makes them so special, and where we would put our money if we could buy just one.

Two Apartment Gems – One Winner

With a market cap of $16 billion, Mid-America Apartment Communities is larger than $11 billion Camden Property Trust and Blackstone’s $10 billion deal for the Apartment Income REIT.

Founded 30 years ago, MAA owns more than 100,000 apartment units. 63% of these assets come with a garden. 38% are A/A+ assets in mostly large markets.

What sets MAA apart is that it has Sunbelt exposure without owning buildings in California, a market many readers want to avoid for political reasons.

As we can see above, the company’s biggest markets are in Georgia, Texas, Florida, North Carolina, and Tennessee, which are some of the hottest destinations for people moving to more affordable Sunbelt markets.

Camden Property Trust has similar exposure.

The company owns more than 58,000 apartment units in Sunbelt states, including California, where it generates roughly 8.4% of its net operating income. 38% of its assets are low-rise Class A apartments, mainly located in suburban markets.

Its biggest markets are similar to Mid-America Apartments.

Both REITs have an occupancy rate of roughly 95%.

Furthermore, what’s interesting is that both have very similar tenant profiles.

The median MAA resident is a 34-year-old single (80%) with a rent/income ratio of 22% and an average income of $85,620.

Bear in mind that the average rent/income ratio in the United States is 30%.

The median age of a Camden resident is 31 years old, with an average household income of $122 thousand. 50% of apartments have just one resident.

The average rent/income ratio is 19%.

Generally speaking, it’s advised that landlords maintain an average rent/income ratio of 30%. The average ratio in the U.S. is currently this high, as aggressive rent growth and low affordability of the housing market force people to rent.

It now costs roughly $2,700 per month to service the median mortgage (at 6.8%). That’s up from less than $1,750 in 2021.

According to Redfin, 22% of its survey respondents (homeowners and renters) said they skip meals to fight affordability issues in the housing sector!

In other words, in this environment, both MAA and CPT have a fantastic tenant profile that protects them against severe affordability issues.

Speaking of protection, another issue facing the industry is rising delinquencies.

Because multifamily housing has seen strong demand tailwinds, a wave of investors entered this market after the pandemic.

They got cheap finance and accelerated construction, causing supply to pressure prices.

Despite multifamily enjoying anti-cyclical demand (we all need a place to live), it has become a tough place to be, as higher rates have started to pressure weaker landlords.

Believe it or not, Freddie Mac data shows that multifamily delinquency rates have hit the highest level since 2013.

It is highly likely that this number will rise further if the Fed is unable to cut rates due to sticky inflation. At that point, we expect giants like Blackstone to accelerate investments in this area, buying high-value properties well below their fair value.

Hence, the good news is that both MAA and CPT have fantastic balance sheets.

For starters, both companies have A-range credit ratings. This alone makes them special.

Moreover:

• Both have >80% fixed-rate debt, which protects them against the initial surge in rates.
• MAA has a weighted average interest rate of just 3.6%. That number is 4.2% for CPT.
• Both have a weighted average duration of debt of close to seven years, which buys a lot of time in this unfavorable environment.
• MAA has close to $800 million in available liquidity. That number is $1.2 billion for CPT.

Both companies have been around for decades, which means they have learned from the Great Financial Crisis and other challenging periods that maintaining a healthy balance sheet will, sooner or later, be a fantastic advantage.

Moreover, both companies are highly focused on capital recycling.

CPT, for example, has kept a healthy balance sheet and a young asset portfolio by consistently selling older assets and improving new assets.

Since 2011, it has bought $2.7 billion worth of new assets with an average age of just four years. During this period, it has spent $3.9 billion on developing assets with an average age of six years and sold assets worth $3.7 billion. Disposed assets had an average age of 24 years.

Financial stability also bodes well for the dividends of both companies.

MAA currently has an annualized dividend of $5.88. This translates to a yield of 4.4%.

According to FactSet data, MAA is expected to generate $7.96 in AFFO this year. This gives us a healthy payout ratio of 74%.

This dividend has been kept stable during the Great Financial Crisis, and it has a five-year CAGR of 8.8%.

CPT’s dividend history is a bit more volatile, as it includes a juicy special dividend in 2016 and a dividend cut in 2009.

Currently, CPT pays $1.03 in quarterly per-share dividends after hiking its payout by 3% on February 1.

This translates to a yield of 4.0% and a 71% payout ratio based on a 2024E AFFO result of $5.83.

The five-year dividend CAGR is 5.3%.

Company	Yield	Payout Ratio	5Y CAGR
MAA	4.4%	74%	8.8%
CPT	4.0%	71%	5.3%

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With that said, MAA seems to have an edge here.

However, CPT is catching up when it comes to stability in this environment.

• On a full-year basis, MAA expects a 1.3% net operating income contraction and just 0.9% effective rent growth. Expenses are expected to grow by 4.9%. In February, it saw 5.5% lower rents for new leases, which captures perfectly the pressure from new building supply. Lease renewals were up 5.2% due to favorable spreads.
• CPT expects flat net operating income in 2024, 1.2% net market rent growth, and 4.5% growth in expenses. In February, it saw a 6.8% rent growth for renewals and a 2.2% growth in new leases.

In other words, in this environment, CPT appears to be slightly better at managing rent growth and expenses.

I believe the company’s California exposure is a true blessing in this regard, as this market is better protected against supply risks. This is due to zoning decisions and geographic advantages, as major Californian markets are surrounded by the ocean and mountains.

That said, the difference is small, and analysts expect MAA to catch up again.

Here are the expected per-share AFFO growth rates through 2026 (from FactSet):

Year	CPT	MAA
2024	-2%	-3%
2025	3%	3%
2026	6%	9%
Average	2.3%	3.8%

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So, what does this mean for the stock’s valuations?

Valuations & Historical Performance

• Since 2012, MAA has enjoyed an average P/AFFO ratio of 18.9x. It currently trades at a blended P/AFFO ratio of 16.3x. A return to its normalized valuation by incorporation of its dividend could pave the way for 13% annual returns through 2026.

Please note that the numbers above are purely theoretical. It will likely require lower rates and subdued inflation to unlock a higher valuation.

However, it’s all relative, which is why we can compare MAA to CPT.

• Since 2012, CPT has enjoyed a higher multiple than MAA (21.2x AFFO). It currently trades at 17.3x AFFO. A return to 21.2x AFFO by incorporation of its dividend could result in 14% annual returns – slightly better than MAA’s return forecast.

Here’s the summary table:

Company	P/AFFO	Normalized P/AFFO	2024E-2026E AFFO Growth	Discount To Fair Price
MAA	16.3x	18.9x	3.8%	26%
CPT	17.3x	21.2%	2.3%	31%

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With that said, let’s take a look at the chart that shows the ratio between the CPT and MAA total returns (stock price + dividend).

Since the early 2000s, MAA has been a steady outperformer. During the Great Financial Crisis, this outperformance accelerated, as the CPT/MAA ratio dropped even faster during this period.

The good news for CPT investors is that momentum has faded over the past few years. In fact, if you had bought both stocks in early 2016, you would have fairly equal returns.

Now, it appears that CPT is gaining momentum.

Over the past 12 months, CPT has been flat (excluding its dividend). MAA has fallen by 11% (excluding dividends) during this period.

It is highly likely that CPT will continue to outperform in the quarters ahead.

Their balance sheets are almost equally strong, and their dividends are fairly similar.

The most significant difference is expected rent growth, which gives CPT an advantage.

In this environment, investors look for very specific tailwinds. Currently, that’s rent growth, which shows how well a landlord can withstand supply headwinds.

That said, on a multi-year basis, it is difficult to tell which stock will outperform. If MAA can maintain higher dividend growth with the potential benefits of fading supply risks, it could quickly regain the lead.

Regardless of which stock you own, you’ll likely be fine, as both are fantastic long-term REIT investments trading below their fair value.

Takeaway

Blackstone’s acquisition of Apartment Income REIT has sparked a surge in the apartment REIT segment, highlighting the potential in this market – especially as weaker players may be forced to sell.

Amidst this momentum, Mid-America Apartment Communities and Camden Property Trust have emerged as compelling investment options.

While MAA boasts a larger market cap and favorable geographic exposure (from a demand point-of-view), CPT shows resilience in managing rent growth and expenses, particularly in California.

Meanwhile, both companies offer stable dividends and strong balance sheets, positioning them as attractive long-term investments trading below their fair value.

	MAA	CPT
Market Cap	Larger ($16 billion)	Smaller ($11 billion)
Geographic Focus	Sunbelt Markets (ex-California)	Sunbelt Markets (including California)
Median Resident Age	34 years old	31 years old
Average Rent-to-Income Ratio	22%	19%
A-Range Credit Rating	Yes	Yes
Fixed-Rate Debt	>80%	>80%
Weighted Average Interest Rate	3.60%	4.20%
Weighted Average Debt Duration	7 years	7 years
Annualized Dividend	$5.88	$4.12
Dividend Yield	4.4%	4.0%
Payout Ratio	74%	71%
5-Year Dividend CAGR	8.80%	5.30%
Expected 2024E-2026E AFFO Growth	3.80%	2.30%
P/AFFO	16.3x	17.3x
Discount to Fair Price	26%	31%
Recent Performance (12M)	Down 11%	Flat
Advantage	Potentially higher dividend growth, favorable geographic exposure	Better rent growth management, California exposure

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Data Duel

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