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Mid-American Apartment Communities, Inc. - Initiation Note

Mid-American Apartment Communities, Inc.

BUY (MAA, $66.44)

Making all the Right Moves to Gain Size and Efficiency. Shares Appear Undervalued. Uprading to BUY and an $80 Price Target.

September 23, 2014

John R. Benda

212.471.8127

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Investment Conclusion. We are upgrading our rating of Mid-America Apartment Communities, Inc. to BUY from NEUTRAL with an $80.00 price target. In 2013, MAA upped the stakes of the MF game when they completed a merger with then competitor Colonial Properties Trust, Inc. in October 2013, catapulting the merged entity itself to the position of the third largest MF REIT in the space by units. As we highlighted in our sector initiation, the market ascribes a premium for size as, among other, the general and administrative expense (“G&A”) leverage opportunities created in such a merger are accretive, and should drive funds from operations (“FFO”) higher forward. Despite MAA’s current size, the market has yet to ascribe MAA the premium it’s like-sized peers garner, creating an opportunistic entry point for investors. Despite continually posting amongst the highest FFO based ROE metrics, even besting its peer group’s 2001 – 2012 median by 200 bps coupled with a 60.6% payout ratio in its most recent quarter which translates to ample room to increase the dividend, MAA is undervalued at its current market price in our opinion. The $80.00 price target is based on our net-asset-value (“NAV”), Price/FFO (“P/FFO”), and dividend discount model (“DDM”) valuations and implies an annual total return of 24.9%, including the current 4.31% dividend yield.

MAASource: Capital IQ, Company reports, National Securities Corporation Estimates

Market Premium Ascribed to Players with >55,000 units, Except for MAA. For Apartment Investment and Management Company (AIV – NR, $32.45), AvalonBay Communities Inc (AVB – NR, $145.00), Camden Property Trust (CPT – NR, $68.68), Equity Residential (EQR – NR, $62.07) and Essex Property Trust Inc. (ESS – NR, $181.41) who cumulatively own 390,496 units or 78,099 on average, the group’s median 2014 P/FFO multiple and 2014 P/NAV multiple is 19.21x and 0.96x, respectively. This compares to the entire multifamily rental REIT universe’s 15.52x median P/FFO multiple and 0.98x P/NAV multiple. Since the merger, MAA now falls into that group, the >55,000 unit club, yet its P/FFO is only 13.16x, 31% below its peer median, 29% below its peer...


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