BofA Elevates Mid-America Apartment to 'Buy'
Bank of America (BofA) analysts have recently upgraded Mid-America Apartment Communities, Inc. (MAA) from "Underperform" to "Buy". They have also increased the price target from $144 to $189. This upgrade reflects MAA's undervaluation, especially after a significant portfolio trade in the Sunbelt region.
Sunbelt Assets Prompt Revaluation
The revaluation was triggered by a deal on August 7, where Equity Residential (EQR) purchased a $964 million apartment portfolio from Blackstone at an implied capitalization rate of about 5%. In contrast, MAA's current rate stands at 6.0%. The capitalization rate, or cap rate, is an indicator of return on investment in real estate, calculated by dividing annual rental income by the purchase price. A higher cap rate suggests undervaluation.
BofA revised their model to a 5.1% cap rate for MAA, down from 6.3%. This adjustment supports the substantial increase in their price target to $189, marking one of Wall Street's highest targets.
Valuation and Risk Assessment
While there are fundamental risks, such as potential market rent growth challenges in the Sunbelt through 2025, analysts believe MAA's current evaluation offers a significant margin of safety. Investors are focusing on 2026, when the outlook is expected to be more balanced.
The recent EQR/BX portfolio trade supports this forward-looking view, making it easier to overlook short-term risks. The difference between current and implied cap rates strengthens the bullish perspective on MAA.
Attractive Valuation and Low Expectations
Analysts at BofA have noted that current market expectations for MAA have hit a low. This means the challenges in the Sunbelt region, such as demand and supply imbalances, are already priced in. If the latter half of 2024 avoids a significant decline in rents, there is potential for upwards revisions to earnings estimates, enhancing the stock's appeal.
