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MAA/CPT -Quick sunbelt update

Eric J Bokota

Mid American and Camden both reported results last week.  For 4Q20/FY2020 MAA's results were a bit better as it has less exposure to the soft Houston market and no exposure to Los Angeles.  Similarly, MAA has a slightly better outlook for 2021.  MAA mgmt expects slightly positive NOI expected for 2021 as renewal rent hikes are now back to 5-6% though there is still some softness in new lease rates. CPT expects slightly negative NOI for 2021 as Houston and LA are both expected to continue to underperform most Sunbelt markets.  That said, I see better things for LA starting in 2H21.  Further, despite NOI softness, private market apartment values in LA have held up quite well.

MAA management expects supply to moderate as we move through 2021, given the amount of money chasing deals in the Sunbelt (cap rates in the mid 3s to low 4s), I expect we may see a pickup in development activity.  Of course, there a lag here so additional supply won't be felt for a couple of years at the earliest.  

For its part, MAA expects to take advantage of market strength and sell stabilized assets at high prices and redeploy the proceeds into development activities.  Expected yields on cost for development are about 6% and the company has recently begun projects in Phoenix and Austin.  

There is a strong bid for Class B value add (apartment classes explained here) apartments in the private market.  The cap rate spread between Class B 'value add' apartments and Class A apartments has narrowed considerably over the last couple of years. Camden plans to take advantage of the relative strength of the Class B pricing by selling Class B and rotating the proceeds into Class A assets.  This will reduce associated capital expenditures over the life of the asset.  Overall this makes sense to rotate into higher quality assets given the narrowed valuation differential.

Update (2/20) From NXRT conf call:

Source: Seeking Alpha transcripts

No changes to my NAV estimates.  Here is my initiation of CPT/MAA.