I came up w/ a similar price/unit ($175K). Once you look at the combined FFO's and adjust for the share conversion (0.71 PPS=1 MAA) and then you calculate the merged Price/FFO; the current market price for MAA is over priced @ $95.00/share.
One could make an argument that the merged MAA is/could be fairly valued at $41.35/share based on their 5% revenue growth rate and 3.5% dividend.
If management increase their dividend so the yield is 5% and is well covered, perhaps you could justify a market price of $62.00/share (assume combined FFO/share @ $8.27) and 7.5X Price/FFO and 5% revenue growth rate.
I think we arrive at the same conclusion. However, I am still Bullish on all apartment REITs if priced correctly (Price/FFO <= Revenue growth rate) and the dividend is >=5%. You only get that w/ new projects (or remodels) that have a Cap rate >6% and rents can be increase and/or expenses decreased by 1%-2% per year. When you get too large (as measured by market cap) this is difficult to do especially in a rising interest rate environment.
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Q2 report for MAA
For the six months ended June 30, 2016, FFO was $241.9 million, or $3.04 per Share, compared to $219.3 million, or $2.76 per Share, for the six months ended June 30, 2015. Core FFO for the six months ended June 30, 2016 was $233.3 million, or $2.93 per Share, as compared to $213.2 million, or $2.68 per Share, for the six months ended June 30, 2015.
For MAA:
Assume $6.00 FFO/share for the year then Price/FFO is 15x w/ a 3.4% dividend. Revenue growth was 5% (YoY) so 15x FFO is still quite high. (Note: I want Price/FFO <= revenue growth rate w/ >= 5% dividend)
For PPS:
FFO for the six months ended June 30, 2016 was $85.8 million, or $1.60 per diluted share, compared to $78.9 million, or $1.44 per diluted share, for the six months ended June 30, 2015.
$1.60x2 = $3.20 Annual FFO/share estimate $66.18/$3.20 = 20x (very high for 1.8% revenue growth YoY)
It looks like two overvalued REITs combining assets (perhaps can reduce management SG&A expense) but future revenue growth is still limited. Upside revenue growth maybe 5%-8% if they remodel/upgrade units. Also if your 4.5% front end cap rate is correct, that's just too low to justify the current valuation.
I have been Buying small cap REITs that have 6%-7% cap rates on new projects and even some w/ 8%. Management is lean and mean, they are very selective on new projects and since they are small (<$500mln market cap), their $25mln-$50mln deals move the needle.
The combined EV of the MAA/PPS merger will be $15.1bln, so any new project they do will not move the needle that much and the company is limited on how much of the expenses they can cut and/or on raising rents. The total number of shares after merger would be 113.5mln, my estimate for their combined FFO $8.27/share.
Therefore, the Price/FFO ($95.00/$8.27)is currently priced at 11.48x. If they maintain current div @ 3.49%, that's still quite high w/ expected Revenue growth rate at 5% YoY.
If you assume Price/FFO is equal to their forward Revenue growth rate, then MAA may/could trade as low as $41.35/share but I would want <1.5x dividend coverage and a dividend >=5%.
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I would say that MAA may be worth looking at in 12-18 months at $50.00/share or lower. Will put on my watch list. Management has a lot of work ahead of them to substantiate their stock price of $95.00/share.
Good Investing
EKS |
