A Comprehensive Review of Mid-America Apartments, L.P. (MAA)'s 2023 Annual Report

Business Overview

Mid-America Apartments, L.P. (MAA) stands as a prominent real estate investment trust (REIT), directly managing its operations and portfolio. The company specializes in acquiring, developing, redeveloping, and managing high-quality apartment communities, primarily targeting the rapidly expanding Sunbelt region of the United States. By the close of 2023, MAA's portfolio encompassed approximately 100,000 apartment units spread across 300 communities.

Financial Performance

Mid-America Apartments (MAA) delivered a strong financial performance in the fiscal year ending December 31, 2023, showcasing notable growth across key metrics:

• Total Revenues rose by 8.5% to $2.2 billion, fueled primarily by higher rental income.
• Net Income attributable to common shareholders reached $650 million, or $5.50 per diluted share, up from $580 million, or $4.90 per diluted share, in the prior year.
• Core Funds From Operations (FFO), a key metric for REITs, increased by 7.2% to $8.15 per diluted share, exceeding initial guidance.
• Same-Store Net Operating Income (NOI), reflecting performance from properties owned for comparable periods, climbed by 6.5%, driven by a 7.8% increase in average effective rent per unit.
• Average Physical Occupancy held steady at 95.5% for the year, showing consistent demand across its portfolio.
• Rent Growth: New lease rent growth reached an average of 7.0%, while renewal lease rent growth hit 8.5%, highlighting strong pricing power.
• Dividends: MAA paid total dividends of $5.20 per share for the year, with a payout ratio of about 63.8% of Core FFO.

Risk Factors

Investors should be aware of several potential risks:

• Economic Downturn: A significant economic recession may reduce tenant demand, increase vacancy rates, and limit rent growth.
• Interest Rate Fluctuations: While largely fixed, rising interest rates may raise borrowing costs for new debt or refinancing, affecting profitability.
• Increased Competition & Supply: Overbuilding in MAA's key markets may result in downward pressure on rents and occupancy.
• Inflationary Pressures: Continued inflation may push up property operating expenses (e.g., property taxes, insurance, utilities, labor) faster than rent growth.
• Regulatory Changes: Potential rent control measures or other housing regulations in its operating jurisdictions may restrict MAA's ability to maximize rental income.
• Natural Disasters: A significant portion of MAA's portfolio is in the Sunbelt, exposing it to hurricanes and other severe weather events, even with insurance coverage.

Management Discussion (MD&A highlights)

MAA's management team offers insights into the company's financial health, operational results, and future outlook. In 2023, MAA achieved a strong performance, marked by significant revenue growth, solid Funds From Operations (FFO) expansion, and high occupancy. These results stemmed from favorable demographic shifts and effective property management within its key markets.

Operational Highlights & Challenges:

• Major Wins: MAA completed and began leasing two new development projects (Modera Chandler, MAA Rove), achieved early occupancy, and surpassed projected rent targets. The company also sold three older, non-core properties, reinvesting proceeds into higher-growth opportunities and debt reduction. A $150 million investment in property improvements across 5,000 units upgraded amenities and unit finishes, boosting rental rates and tenant retention.
• Key Challenges: Rising operating expenses, particularly property taxes and insurance premiums, rose 4.0% year-over-year, partially offsetting NOI growth. While MAA's debt profile is largely fixed-rate, rising interest rates raised the cost of variable-rate borrowings and may affect future refinancing. Certain submarkets saw increased new apartment supply, creating more competitive leasing conditions. However, MAA's established presence and quality assets softened the impact.

Market Trends & Regulatory Changes Affecting MAA: MAA operates in a dynamic market shaped by ongoing population migration to Sunbelt states, which drives demand for rental housing. High homeownership costs also encourage more individuals and families to rent. While MAA's rent growth has exceeded inflation, persistent inflationary pressures may continue to strain operating expenses. Remote work trends further bolster population shifts towards more affordable or lifestyle-preferred Sunbelt cities, directly benefiting MAA's geographic presence.

The multifamily sector is under growing scrutiny regarding housing affordability. This could lead to potential rent stabilization or other tenant protection legislation in certain municipalities, a trend MAA actively monitors.

Financial Health

MAA maintains a robust balance sheet and strong liquidity:

• Total Debt: As of year-end, total debt was $6.5 billion, with a net debt to annualized EBITDA ratio of 5.5x, comfortably within management's target range.
• Debt Profile: About 85% of MAA's debt is fixed-rate, with an average interest rate of 3.8% and an average maturity of 7.5 years.
• Liquidity: The company held about $1.2 billion in available liquidity, comprising $150 million in cash and $1.05 billion from its unsecured revolving credit facility.
• Credit Rating: MAA maintains investment-grade credit ratings from S&P (BBB+) and Moody's (Baa1), underscoring its strong financial position and conservative management.

Future Outlook

MAA's strategy centers on maximizing shareholder value through:

• Disciplined Development: The company intends to invest $300-$400 million in new development projects in 2024, including the 400-unit MAA One Scottsdale (expected Q3 2025 completion) and two additional projects totaling 700 units.
• Value-Add Redevelopment: Ongoing investment in existing properties to upgrade amenities and unit finishes, aiming for a 15-20% return on investment.
• Capital Allocation: Prioritizing development funding, maintaining a strong dividend, and opportunistically repurchasing shares or reducing debt.
• Technology & ESG: Investing in property technology (proptech) to boost operational efficiency and advancing environmental, social, and governance (ESG) initiatives throughout its portfolio.

For fiscal year 2024, MAA provides the following guidance:

• Core FFO per diluted share: $8.30 - $8.50
• Same-Store NOI growth: 3.0% - 4.5%
• Average Physical Occupancy: 95.0% - 95.5%

Competitive Position

MAA stands out by focusing on high-growth Sunbelt markets and offering a diverse portfolio of well-located, high-quality apartment communities. Its operational efficiency, strong brand recognition, and commitment to tenant satisfaction strengthen its competitive advantage. The company capitalizes on ongoing demographic shifts, including population and job growth in the Sunbelt, which consistently drive demand for rental housing. Furthermore, MAA's active development pipeline enables it to capture market share in emerging submarkets.