Multifamily property is a popular way to participate in commercial real estate. Housing is and always will be essential, and apartment complexes can take advantage of several benefits, like economies of scale, making them an attractive asset class. Mid-American Apartment Communities (NYSE: MAA) and Equity Residential (NYSE: EQR) are two popular residential real estate investment trusts (REITs) that specialize in the development, acquisition, and management of high-end apartment buildings across the United States. At first glance, they may seem like comparable companies, but let’s take a deeper look at how they compare and which company is the better buy right now.
Similar business model with a few differences
Mid-American Apartment Communities and Equity Residential both own, operate, and manage higher-end apartment communities using fairly comparable business models, but with a few differences.
Mid-American Apartment Communities owns 102,105 apartment units in 16 states across the Southeast, Southwest, and Mid-Atlantic regions (often referred to as the rust belt), including markets like Jacksonville, Orlando, Atlanta, Nashville, Houston, Memphis, and Washington, D.C., among many others. Equity Residential owns 78,410 apartment units in 9 core markets across the United States, Boston, Orange County California, New York, Washington, D.C., Seattle, San Francisco, San Diego, Los Angeles, and Denver.
Both companies focus a large part of their efforts on the redevelopment of existing properties, including new acquisitions and legacy properties already established in their portfolio. Rather than sell older buildings, effort and money are put into keeping them up to date and competitive in the marketplace. With that being said, new development is a part of both companies’ business models; it’s just not the core of their business. Equity Residential currently has five projects under development for a total of $274 million, and Mid-American Apartment Communities has six new development projects underway, totaling $460 million.
The type of apartments each company owns differs slightly as well. Mid-American Apartment Communities owns a mixture of Class A and Class B garden apartments, mid-rise apartments, and high-rise apartments, while Equity Residential primarily owns Class A mid-rise and high-rise apartments.
The other big difference between the two is that Equity Residential operates as an UPREIT, meaning they can offer certain tax advantages and benefits to existing multifamily property owners when they sell. This, among other creative financing strategies, allows them to grow their portfolio in competitive markets.
Q2 of 2020 was tough on REITs a whole. The initial Coronavirus outbreak shook the market, plummeting stock and REIT values. Continued concern over the ability for tenants to pay rent has kept prices down for both companies. Mid-American Apartment Communities has fared better than Equity Residential, which is currently trading below its March low, a 41% decrease from its February high. Mid-American Apartment Communities share values also took a hit but have recovered slightly from their March low, down roughly 23% for February highs.
When it comes to actual performance in Q2 2020, Mid-American Apartment Communities definitely outshined Equity Residential with an increase of $13.1 million in revenues when compared to the Q2 2019. MAA’s rent collection for August 2020 month’s end was 98.6% and has risen steadily since its June low of 97.1%. Occupancy also remains strong for the Company at 95.7%. Equity Residential hasn’t provided an interim update, but as of quarter end, June 30, 2020 revenues were down 0.9% and earnings per share were down 15.7%. Rental collections averaged 97% for Q2 and occupancy was at 95%.
Mid-American Apartment Communities recently increased its dividend to $1.0625 for Q3 2020, which still maintains a conservative payout ratio of 66%. Their overall debt to earnings ratio is 5.3x, which is within a normal range for an equity REIT, and they have just over $19 million in cash or cash equivalents.
Equity Residential has maintained its current dividend payout of $0.6025 for the coming quarter, which falls well within a safe payout ratio of 70%. Debt to EBITDA was 4.82x, which is relatively low for a REIT and puts them in a very safe position in addition to their $187 million of available cash or cash equivalents.
Which is the better buy?
Honestly, both companies are worthy buys. They have strong portfolios, room for growth, high demand, a secure tenant base, and have clearly performed well this past quarter despite economic challenges. But if I had to pick, I’d say go for Equity Residential. Its super-low share prices have pushed returns to 4.7%, which isn’t far above Mid-American Apartment Communities’ 3.7% return. But its slightly lower debt ratios and increased liquidity provide extra safety in the current climate. With that being said, I’d like to see an interim update to ensure the company has been able to maintain its occupancy rates, lease rates, and rental collections in line with Q2 results, but I still feel it’s a strong buy at the current price.