Mid-America Apartment Communities Q2 2022 Earnings Call Transcript

Participants

Corporate Executives

• Eric Bolton, Chairman, President & Chief Executive Officer
• Adrian Hill, Executive Vice President & Chief Investment Officer
• Thomas Grimes, Executive Vice President & Chief Operating Officer
• Albert Campbell, Executive Vice President & Chief Financial Officer
• Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer

Analysts

• Nicholas Joseph, Smith Barney Citigroup
• John Kim, BMO Capital Markets
• Bradley Heffern, RBC Capital Markets
• Austin Wurschmidt, KeyBanc Capital Markets
• Richard Anderson, SMBC Nikko Securities
• Robert Stevenson, Janney Montgomery Scott
• Anthony Powell, Barclays Bank
• Alexander Goldfarb, Piper Sandler & Co.
• Chandni Luthra, The Goldman Sachs Group, Inc.
• Omotayo Okusanya, Credit Suisse Group AG
• Unidentified Participant

Presentation

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

[Call starts abruptly]

Construction projects remains on budget, and our lease-up projects are outperforming our pro formas. We remain very encouraged by the current leasing conditions and the early momentum in key variables that will define calendar year 2023's initial performance. There are, of course, growing concerns surrounding the broader economy and concerns surrounding a potential recession. Should we find ourselves facing a weaker economic backdrop later this year or in 2023, we believe that MAA is very well positioned for such an environment. First, we believe that the well diversified and more affordable nature of our markets will continue to enable our Sunbelt portfolio to better weather an economic slowdown as compared to other regions.

MAA's balance sheet and coverage ratios are very strong and better than at any point in our company's history. We continue to introduce new technology and changes to our operating practices that will drive more efficiency and higher margins over the next couple of years. MAA has had an established performance record of responding well to down cycles, and I'm confident that we will again demonstrate that resilience, should we find ourselves in such an environment. Meanwhile, our outlook remains positive, and current leasing conditions are very strong.

That's all I have in the way of prepared comments, and I'll now turn the call over to Brad.

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

Thank you, Eric, and good morning, everyone. Transaction activity in the second quarter slowed meaningfully from the first quarter of the year as the increase in interest rates coupled with a higher degree of economic uncertainty have combined Ascend Buyers with shorter investment time horizons as well as buyers using higher leverage to the sidelines. Unlike previous quarters, we saw a number of properties fall out of contract in the second quarter.

For the properties that did close, generally, they closed with stronger institutional quality investors at cap rates that were 40 basis points higher than where deals traded in the first quarter. As the uncertainty in the market has risen, our ability to move quickly and close all cash has led to a significant increase in inbound calls to our transaction team.

As Eric mentioned, in July, we successfully acquired a newly constructed property in the Tampa MSA. This 196-unit property is adjacent to an existing MAA property and will be fully integrated into our existing property, creating operational efficiencies and margin expansion opportunities that we will fully harvest over the next few years.

Our under construction and in lease-up pipeline remains at $740 million. While we had no construction starts in the second quarter, we did purchase a land parcel for a planned 2023 start of a 300-unit development in Orlando. Also, subsequent to quarter end, we purchased a 500-unit development site in the Denver MSA that we also expect to start construction on in 2023. These land purchases bring our owned land sites for development to 8 sites with entitlements for approximately 2,677 units.

We previously expected to start construction on our sites in Raleigh, Tampa and Denver this year, but we've pushed the start of our Denver project to 2023. Predevelopment work on our Raleigh and Tampa projects are progressing and subject to receiving acceptable construction costs and the appropriate building permits, we still expect to start construction on these projects this year. We continue predevelopment work on several additional in-house and prepurchase developments located in Atlanta, Charlotte, Denver, Orlando and Salt Lake City that we hope to start over the next 18 months.

The timing of planned construction starts can change as we work through the local approval and the construction bidding processes but at this time, we expect to start construction on approximately 1,250 units this year, and we expect to end the year with a pipeline of under construction projects over $700 million and pipeline of projects both under construction and in lease-up between $925 million and $975 million. Our construction management team continues to actively manage all our projects and has done a tremendous job working with our contractors to keep the inflationary pressures surrounding labor and material costs from causing a meaningful increase to our overall job cost.

To avoid the cost escalation that is so prevalent in the market today, we are making commitments to purchase materials much earlier in the process than we've had to in the past. Nevertheless, delivery delays, material shortages and securing building permits remain our biggest challenges. In our supplemental, we did push back by 1 quarter, our expected delivery dates on Novel Val Vista in Phoenix and Central Park in Denver.

Operating performance at communities in their initial lease-up continues to strengthen, traffic and leads remain elevated, leading to rents well ahead of our pro forma expectations at all of our lease-up communities. Due to the strong leasing performance achieved by our property team at MAA Westland, we moved up our expected stabilization date by 1 quarter to third quarter of '22.

As mentioned in our release, we successfully sold our 2 disposition properties in the Fort Worth market for $167 million. We have 2 more planned disposition properties in the market that we hope to close late this year. One is in Suburban Maryland, and one is in the Austin market. That's all I have in the way of prepared comments.

So with that, I'll turn it over to Tom.

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

Thank you, Brad, and good morning, everyone. Same-store performance for the quarter was once again robust, and our busy summer season is going well. We saw strong pricing performance across the portfolio during the second quarter blended lease-over-lease pricing achieved during the quarter was up 17.2%. As a result, all in-place rents or effective rent growth increased by 14.3% on a year-over-year basis and 4% from the prior quarter.

Average effective rent growth is our primary revenue driver and with the current blended pricing momentum, we expect it to continue to strengthen. In addition, average daily occupancy for the quarter was strong [Phonetic]. The strong demand environment continues to create new opportunities for our product upgrade initiatives. This includes our interior unit redevelopment program as well as installation of our smart home technology package that includes mobile control of lights, thermostat and security as well as leak detection.

During the quarter, we completed 1,844 interior unit upgrades and installed 9,438 smart home packages. In 2022, we plan to complete over 6,000 interior unit upgrades and approximately 23,000 smart home packages. By the end of the year, we expect our total number of smart units to approach 70,000. For our repositioning program, we're in the final stages of repricing leases at the first 8 properties in the program that are now complete, and the results have exceeded our expectations. We have another 8 projects that are underway this year.

Strong leasing activity continues for July. Same-store lease-over-lease pricing on new move-ins as of July 25, is 17.9% ahead of the rent of the prior lease. Renewal lease pricing in July is running 15.4% of the prior lease and as a result, blended lease pricing for the portfolio is up approximately 16.6% thus far in July. Same-store physical occupancy as of July 25 was 95.9. Exposure, which is all vacant units plus notices through a 60-day period, is just 7.4%. Both numbers are in line with our expectations. Our teams have performed well during our busy summer season and have the portfolio well positioned for the slower fall and winter seasons. I'm grateful for their time and commitment to serving all our stakeholders.

I'll now turn the call over to Al.

[Albert Campbell, Executive Vice President & Chief Financial Officer at Mid-America Apartment Communities]

Thank you, Tom, and good morning, everyone. Reported core FFO per share of $2.02 was $0.05 above the midpoint of our guidance for the quarter. The outperformance virtually all came from property revenues and stronger than projected rental pricing trends continued through the quarter, which produced a strong 17.2% increase in blended lease pricing for the quarter even as more challenging prior year comparisons began to grow late in the quarter.

We do continue to expect a growing impact from prior comps as we move through the back half of the year as well as a return of a more normal seasonal pattern during the fourth quarter, which we'll discuss just a bit more [indecipherable] guidance in a moment. Same-store operating expenses for the quarter were slightly higher than projected as we saw some inflationary pressures and repair maintenance costs as well as revised expectations for real estate tax expenses for the year as more valuation information came in during the quarter.

Our revised guidance for the year reflects these expense pressures, but these are more than offset by growing revenues as reflected by our revised NOI guidance. Our balance sheet is stronger than ever as reflected by the upgrade to an A- credit rating by Fitch during the quarter. We continue to have discussions with the other agencies and are confident the strength will eventually be reflected in our other ratings as well.

Just after the end of the quarter, we completed a renewal of our unsecured credit facility, which is our primary tool for liquidity and short-term funding of development, debt maturities and short-term operating needs. As part of the renewal, we increased the facility size to $1.25 billion from $1 billion and capture improvements in pricing and terms despite the growing volatility of the financing markets.

At the end of the quarter, we had no outstanding borrowings under our credit facility, and our leverage was historically low with debt to EBITDA at a low 3.97x and 100% of our debt had fixed interest rates with an average maturity of 8.2 years, providing potential in a rising interest rate environment. And finally, given the second quarter performance and expectations for the remainder of the year, we are increasing both our core FFO and same-store guidance for the full year.

We increased our full year range for core FFO by $0.17 per share or 2% at the midpoint to a range of $8.13 to $8.37 per share or $8.25 at the midpoint. This now represents a 17.5% growth over the prior year. This increase is essentially all the result of higher revenue growth, strong price intends continued through the second quarter, as we mentioned, we're now projecting a 125 basis points increase in our effective rent growth expectation for the year to 13.25% at the midpoint.

Our revenue projection for the year continues to be built on strong pricing performance and stable occupancy for the year with some growing impact from prior year comps for the second half and normal seasonal trends during the fourth quarter, as we mentioned. We expect blended lease pricing to be approximately 8% for the second half of the year, which for context is on top of a record high 15% growth in blended pricing captured in the back half of last year.

So I think this reflects our expectation for continued strong demand in our markets. As mentioned, we also increased the expected growth rate for same-store operating expenses for the full year by 100 basis points at the midpoint of our range, now 6.5% to 7.5% for the full year, primarily reflecting the pressure in repair and maintenance costs as well as real estate taxes.

Property valuations received during the quarter, mainly in Texas, reflected aggressive assessments, and we do expect these valuation increases to be partially offset by millage rate rollbacks finalized late in the year, but we increased our expectation for taxes by 100 basis points for the full year to reflect the net impact. The overall impact of these changes is an increase to our expectations for same-store NOI growth for the year to a midpoint of 15%, up from the 13.5% provided at the end of the first quarter.

And this represents a 170 basis point expansion in our margin in 2022 from the prior year. So other changes to guidance of note were a $50 million reduction in our expected development spending for the year, reflecting really revised timing of funding as well as a $25 million reduction in our gross disposition proceeds as we finalized the sale of the 2 remaining properties in Maryland in Austin.

So that's all that we have in the way of prepared comments. So Gretchen, we'll now turn the call back over to you for any questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Nicholas Joseph from Citi.

[Nicholas Joseph, Analyst at Smith Barney Citigroup]

Obviously, rents have been moving up, but appreciate the affordability stats that you provided for the new move-ins. But for the existing portfolio, obviously, you don't kind of requalify them off of income. But are you seeing anything change in terms of move-outs because rent is too high? Or any other kind of commentary on affordability of the existing portfolio would be helpful.

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

Yes. Nick, I'll jump in there. I mean I think looking at a few different fronts, but collections improved to 99.5 from 99.4, which is encouraging. Our unit types, we're not seeing a flight to efficiencies and our efficiency 1s, 2s and 3s are performing consistently. Our headcount units has moved from 1.7 heads to mid-16s [Phonetic] on that. So it really seems to be moving steadily. I mean we are pushing rates, and we do see a tick-up in move-outs to rent increase. But again, we're moving those folks back in at 22%. So it's pretty steady as it goes, Nick.

[Nicholas Joseph, Analyst at Smith Barney Citigroup]

That's helpful. And then as you think about the pricing trends, I guess, year-to-date, but also your expectations in the back half of the year. What does that start to look at in terms of the earn-in for next year in 2023?

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

Yes, Nick, this is Tim. I'll hit that one. So thinking about the earn-in. The way we typically think about that is our full year blended lease-over-lease for this year, call it, somewhere around half of that, we would expect to blend into 2023. So If you think about the forecast that we laid out there in the 8% back half of the year, blended lease-over-lease that comes out to about somewhere 12%, 12.5% blended lease-over-lease is what we're expecting for full year 2022. So call it, somewhere about 6% earn-in as we sit here today.

[Nicholas Joseph, Analyst at Smith Barney Citigroup]

And how does that compare to kind of the history of earnings?

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

It's certainly the highest we've ever had. I think going back to 2020, it was 0 last year, I think it was about 3% or so, so certainly the highest we've seen.

[Operator]

Our next question comes from John Kim from BMO Capital Markets.

[John Kim, Analyst at BMO Capital Markets]

Eric, you transformed the portfolio for more of a classic focus to a more diversified price point. Should we give an update on what percentage of your portfolio Class A versus Class B? And what part you were able to perform better in consumer recession?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

John, you're really fragmented. And I think the first question was what's the balance between A and B assets as we look on that?

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

Yes. Between A and B, it's roughly 50-50. I mean there are some nuances between what we would call A plus A and B and B plus I would talk about 50-50 or so.

[John Kim, Analyst at BMO Capital Markets]

And the second part was what do you think will perform better if we head into recession?

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

Well, John, this is Eric. I think that broadly speaking, across our markets and our footprint, I mean, we see that our product is pretty for but that rent-to-income ratio that we see between the As and Bs is pretty consistent across the portfolio. Our collections performance is still consistent across the portfolio.

So I think that trying to think that the Bs will maybe do a little bit better than As in a downturn just because it's a slightly more affordable product. But honestly, I don't think there's going to be a huge difference if we find ourselves in a downturn of some sort, I think it becomes more a question about markets that you're in.

And employment base, employment diversification. And certainly, I do think that a slightly more affordable product probably holds up a little bit better. But across our Sunbelt markets, we think that broadly, the whole region will just do a little bit better in a downturn as it has historically always in prior downturns.

[John Kim, Analyst at BMO Capital Markets]

Okay. And my second question is on expenses. You've seen some inflationary pressure expenses higher than your coastal peers. And I realize some of that is just real state taxes. But you made a similar type of investment in technology as you [indecipherable]. So I'm wondering if you could comment on the expense guidance going up this quarter.

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

John, you were really broken there something about inflation and expense guidance.

[Albert Campbell, Executive Vice President & Chief Financial Officer at Mid-America Apartment Communities]

I think he said also in real estate taxes...

[John Kim, Analyst at BMO Capital Markets]

[Indecipherable] increase on the expense guidance...

[Albert Campbell, Executive Vice President & Chief Financial Officer at Mid-America Apartment Communities]

I think a couple of things, and I'll start with this, Tom, and please jump in here. But on the guidance on that, and John, you were broken up, but I think you're asking that. And it's 2 things primarily, which [indecipherable]. And then real estate taxes, which is obviously almost 40% of our expenses, that's a real big driver of that. And for that picture, particularly, we started the year with no information really, put out our best estimates of it. And we saw the valuations come in higher.

They're pretty aggressive as they're coming in particularly from Texas. As we mentioned, we do expect rate rollbacks or millage rate rollbacks come in for a large part of that as it progresses. But we get those late in the year, so it's hard to get a picture of that. And we'll certainly continue to fight like we do every year and we'll formally litigate over half of our Texas portfolio. So that's really the tax pressure. And Tom, you might want to give color on if you have any, but that's out, repair maintenance and taxes both in the quarter and I would say in the guidance as well as one for the back part of the year, probably tilting a little more toward taxes.

[Operator]

Our next question comes from Brad Heffern from RBC Capital Markets.

[Bradley Heffern, Analyst at RBC Capital Markets]

I was curious if you could talk about the plan for the $200 million in equity forwards that were sold last year, I know they need to be settled by February of next year, but it doesn't really seem like there's an obvious need for the capital, especially with leverage below the target range and likely moving lower?

[Albert Campbell, Executive Vice President & Chief Financial Officer at Mid-America Apartment Communities]

Yes, I think that's a great question. I mean you hit that right, we have the Ford outstanding to, I think, February of next year. We don't have immediate plans to draw on that, but I think our expectations are between now and then to draw that to help fund the remaining development expectations for this year and as we go into next year. So we certainly don't need to take our leverage lower, but it is a part of our funding over the longer term that we think is important.

[Bradley Heffern, Analyst at RBC Capital Markets]

Okay. And are you guys' comfortable running at sort of like mid- to high 3x leverage or is there a desire to maybe ramp up development or do some net acquisition activity that fuel to get that leverage number back into the 4s?

[Albert Campbell, Executive Vice President & Chief Financial Officer at Mid-America Apartment Communities]

I'll give the leverage target and maybe add Brad and Eric will talk on the other parts of the strategy, but we're a little below our range right now. I mean, we've talked about for the last couple of quarters, we always are working to add strength to the business in every area. So on our balance sheet, we're very strong right now.

Our leverage is historically low debt to EBITDA may touched 3.97%. That's below. I think we would -- Andrew and I would say between 4% to 5% is probably preferred. 4.5%, you certainly wouldn't want to get above 5% in our current credit ratings. So we're below where we need to be. We believe that's opportunity, both as protection and opportunities. So as we move into this recession and some opportunities come up for Brad and the team, we want to give them that flexibility to do that.

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

Brad, this is Brad Hill. I think certainly, we've talked about over the last few quarters, the vision and the plan to grow our development pipeline, and we're certainly on pace to do that as I laid out in my comments and what Al has done with the balance sheet and the really optionality that he has provided us with to be able to do that is there.

And I would say just on the acquisition side, certainly, we're keeping our eyes open in that area. And like past disruptions in the market, we've been able to really take advantage of those within our footprint, we have focused on the Sunbelt region of the country for the last 28 years. So we know that region of the country.

We certainly have executed both on a transaction side and then operating side for the last 28 years there do all parts of the cycle. So what Al is doing with the balance sheet puts us in a great position to be able to execute on some opportunities, which are likely to manifest themselves during this time.

[Operator]

Our next question comes from Austin Wurschmidt from KeyBanc Capital.

[Austin Wurschmidt, Analyst at KeyBanc Capital Markets]

So Eric, I'm just curious if you are concerned at all that if we do get sort of an economic slowdown if the migration trends that you've referenced for a couple of years, begin to soften further, perhaps you've had a little bit of a pull forward in demand in recent years. And when you kind of marry that with the fact that the under-construction pipeline in many Sunbelt markets is up. So just curious kind of how you think about that versus maybe the setup for the portfolio and ahead of any prior downturns?

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

Well, Austin, our long-term approach to this business and strategy has long been based on a notion of trying to position for the full cycle, both the down part of the cycle and the up part of the cycle. And we have long believed that the way to do that is to focus on markets where we think that job growth, population growth is likely to be the best over time, over the full cycle, which has caused us to continue to retain our focus on these Sunbelt markets.

In an effort to take further cyclicality out of our performance. The other thing that we've intentionally done over the years is that we have purposely been very diversified across the region as well as differentiated capital allocation between large markets as well as some of the select secondary markets of the region as well. And as was touched on earlier, we tend to have a price point in our portfolio that appeals to the broadest segment of the rental market.

We don't do the sort of the low end or the super high end. We averaged kind of right in the middle. So we're appealing, if you will, to the largest segment of the rental market. So all that to say that our strategy, we think, has continued to serve us very well for a long time. The migration trends that we've talked about over the last couple of years, of course, they were evident there prior to COVID and move-ins from outside the Sunbelt into our footprint prior to COVID, we're running somewhere around 9%.

And now it's up to -- of our move-ins, 9% of our move-ins were coming from people moving into the Sunbelt. Now it's up to 15% of our move-ins are coming from people to Sunbelt. So a long way of saying, while certainly there's been a trend of migration that has worked in our favor. It's not like it's been huge. It's not 50% of our move-ins or something of that nature. It's gone from 9% to 15%.

So I think that particular variable of move-ins migration trends, if you will, helpful hasn't been as significant as sometimes what I think depressed and others to make it out as when you read what's going on nationally. Beyond that, I will just tell you that I think in a recessionary environment, if we find ourselves in such a scenario, I think that the diversification of the employment base, the employers, the affordability of the region that we have in the Sunbelt, I think all continues to work in our favor. And we think that today, we very much retain our defensive characteristics that would be helpful to have should we find ourselves in a downturn.

[Austin Wurschmidt, Analyst at KeyBanc Capital Markets]

That's a thoughtful answer. And then just curious about sort of the acquisition opportunities. I mean you were fairly upbeat when we spoke in REIT. You seem to still be fairly upbeat today and certainly have the balance sheet to fund if the opportunities emerge. But can you size up just what the pipeline looks like today or what you think you can really capitalize on? And then what the negotiations are like for cap rates in your markets versus maybe where it was 6 to 12 months ago?

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

Yes. Austin, this is Brad. In terms of cap rates, as I mentioned in my comments, there's definitely been a movement in the last 2 to 3 months. But that movement is very different based on the asset quality, the asset location. And just to keep in mind, really the assets that we're looking at is just a segment of the assets that are out there. I mean we're looking at well-located assets, brand-new assets, high-quality assets.

And so what we've seen there is about a 40 basis points change in the cap rates. And what we've also seen, though, is we look at the assets that traded in the second quarter, every asset that traded went to a high-quality institutional capital. So we're seeing buyers certainly flock to high-quality assets, and we're also seeing sellers flock to high-quality buyers.

And that's where, in the past, when the markets have changed, where we've been able to find our opportunities through our execution capabilities and through just our 28-year history in the markets that we're in. So as we sit here today, we are getting more calls on acquisitions than we've ever received, frankly, to look at assets that either are fell out of contract or they're just taking to a couple of folks that they know can close the assets. So we're getting a lot of look at assets.

And then I think just from an underwriting perspective, the deals within our region of the country just continue to perform extremely well, which leads us to believe that from a performance standpoint, these assets, again, that are very high quality will continue to perform. And I do think that the assets that are coming to market that we're looking at are likely to trade. You mentioned cap rates today versus a year ago.

Well, cap rates today on what we're looking at are a 3.7. A year ago, they were 3.8. So we're still under kind of where we were a year ago. So although there's been some recent movement, interest rates went up in the second quarter, they're back down a bit. You can get a 10-year rate right now in the 3%, 4%, 5% range. So there appears to be on the assets that we are bidding against a floor at the moment on pricing for these high-quality assets. There are bidders that are still stepping in into the to 3%, 7%, 5% to 4% cap rate range. So there appears to be a bid certainly for those type of assets.

You get outside of that for assets that aren't as well located, have a significant value add. The price differential can be a little bit different, but that's not what we're talking about. So our execution capabilities. Our ability to put our platform value in place on these assets like we're doing with the Tampa asset I think will yield us selectively an opportunity or 2 that we can execute on.

[Operator]

Our next question comes from Rich Anderson from SMBC.

[Richard Anderson, Analyst at SMBC Nikko Securities]

And just suggestion maybe do the question Q&A alphabetically next time. So the first question is the 22% rent to income. What's the range of that, assuming that there's that assumes though, kind of a 1.5 person per unit type of income? So what's the range of that 22%?

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

Yes, Rich, this is Tim. It's a pretty narrow band. I'm going through all of our markets right now. The highest is 24%, the lowest is 19%. So pretty narrowband, most of them in that 22% range.

[Richard Anderson, Analyst at SMBC Nikko Securities]

Okay. And then that to lead into my second question. You -- I think it was Tom that mentioned you're having move-outs for rent increases, but you're replacing that with 18% new lease increases and that same 22% rent to income. But is the cadence of that event like a single occupant moving out and roommates moving in. Is that sort of a dynamic that's going on? I'm not suggesting that there's an advance going on in doubling up, but maybe at the margin that, that's what's happening because people who are by themselves are starting to feel stretched?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

Rich, we're not seeing the doubling up. And that if we look at our head count per unit, it's dropped each quarter since Q1 of '20 really pre-COVID. So we are not seeing signs of doubling up occurring.

[Operator]

Our next question comes from Rob Stevenson from Janney.

[Robert Stevenson, Analyst at Janney Montgomery Scott]

Brad, with the land parcels that you've bought, how many projects do you now control land for future development on? And what's the ballpark expected cost to develop out those parcels?

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

So in terms of the sites, as I mentioned in my comments, we have 8 that we currently own 2,600, 2,700 units. That does not include sites that we have under contract where we have not purchased, for example, the Raleigh site that we look to close later this year that would be an additional site. Our JV sites that we have under contract with partners would be additional sites as well. So -- but in terms of what we own and control right now, there are 8 sites, 2,600, 2,700 units. The costs on those vary a bit. What I have in front of me is about, call it, 350 to 360 [Phonetic] a unit on those assets.

[Robert Stevenson, Analyst at Janney Montgomery Scott]

Okay. That's helpful. And then what caused you guys to push the Denver development start out?

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

Yes. That is really a permitting issue, and that's really what changed some of the funding requirements or needs from development that Al mentioned. Even the Tampa and the Raleigh project that we're working on, really the approval process is taking a lot longer than what we anticipated on all of those projects. So they're generally all getting delayed. What we're finding is these municipalities are really kind of kicking the cane down the road and reviewing things at this point, and it's taking a lot longer than we expected, but that is a permitting delay on the Denver deal.

[Robert Stevenson, Analyst at Janney Montgomery Scott]

Okay. And then, Al and Tom, when you look at the continued spend on the technology initiatives and some of the stuff from an operating standpoint, what's really left for you at this point that's going to make any type of material impact on margins or operating expenses going forward that you already haven't started?

And how much more is there to come? Or are we at a point where you've done what you can for now and everything from here is incremental. When you look over the next couple of years in terms of operating margin spend, where is -- what's the drivers and what's the potential impact there for you guys?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

We've made a lot of progress on our revenue and a ton more to come, and Tim's got a great outline that he'll walk you through on that.

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

Yes, I'll walk through and hit a couple of key points, I think, that are important. So I would say, we're in the very early innings in terms of capturing efficiencies on the expense side, really going back to late 2019, early 2020, our initial focus really was on the opportunities with Smart Rent [Phonetic] and some of the revenue opportunities, as you mentioned, and what that could do for us on the revenue side. And then really as well, the key infrastructure that, that puts into place as a result, it integrates with site plan that can help make our service staff and maintenance operations a little more efficient.

And then also offer some opportunities from more seamless self-touring options. So I think important to note today, these have been rolled out about 3/4 of our units. And for the full year 2022, there's about $16 million or so of NOI embedded in our NOI stream for 2022. And then by the end of 2023, as we roll out some more, we think there's probably 120 basis points of margin enhancement from the rent increases just strictly on the Smart Home.

And then as we fully roll it out, I think it will get fully priced out, probably by about mid-2024, you're talking 140 basis points of margin expansion just related to this piece and $25 million to $30 million of sort of ongoing NOI stream related to that. So now the focus, as we've got that into place is a little more on the expense side. And so I think now with our new CRM tool in process and live across the portfolio, we're focused on some of the efficiencies we think we can get primarily through staffing and task efficiencies.

Right now, the new CRM gives us a lot greater access and visibility into properties and prospects, and we're focused on initially on some of the on-site office oversight roles to efficiencies from properties within close proximity, so call it pods or however you want to label it. We think that some of the near-term benefits that come over the next year or so.

So when we think about adding, there's about 200 of our properties, call it, 70% of our portfolio that fit into 2 or more property pilot-type scenario. We think that will create somewhere $5 million to $10 million, about 40 basis points of margin expansion as we get towards the end of 2023 just on that piece.

And so then we started thinking about beyond the initial pilot scenarios we're working on. We're testing and we're working on and reworking processes related to self-touring, virtual touring, AI technology as well as centralizing and automating some on-site activity. So we think that ultimately creates more efficiencies on the leasing side and other day-to-day tasks.

And with our portfolio size, just given the high degree of variability in our assets, mid-rise, high-rise, garden style, some variation, frankly, in the consumer preferences across our markets. In many cases, there isn't just a one-size-fit-all solution. So trying to be thoughtful of that and mindful of that. So a long way of answering your question that beyond the 180 basis points of margin expansion that I mentioned between the Smart Rent [Phonetic] and some of the initial podding. We think there's a lot more opportunity to come over the next couple of years.

[Robert Stevenson, Analyst at Janney Montgomery Scott]

Okay. And then last 1 for me. Tom, when are you hitting your most difficult month of year-over-year comps in terms of the blended lease growth?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

We're heading into it now. We are headed into it now. And Al had the back half, front half split force that I think is pretty telling. I'll let him share that on blended piece. He's just got it handy.

[Albert Campbell, Executive Vice President & Chief Financial Officer at Mid-America Apartment Communities]

Yes, I mean we certainly -- in going back to last year, the third and fourth quarters Rob has talked about where the -- when you're leasing the tip of the spear was 15% in the third quarter and 16% blended pricing in the fourth quarter. So those comps are what we're running into and probably July to August is kind of that peak of that heal comparing to. So I hope that answers the question.

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

I think it really is the third quarter will be the peak. And last year, in the fourth quarter, we had a little fall off. We expect -- so it was not quite as high, if you will, in the fourth quarter last year versus third quarter. So I think the third quarter will be are most challenging. But as noted earlier, I mean the July rents, which is obviously the first month of the quarter are pretty good. But as Al outlined in his comments, we expect blended pricing for the back half of the year in total to be 8% that's on top of 15% that we got last year over the back half of the year. And so -- but to answer your question specifically, Rob, I think it's really this month, next month, it'll probably be our toughest monthly comps.

[Robert Stevenson, Analyst at Janney Montgomery Scott]

And then has anything changed since pre-COVID in terms of the amount of leases rolling in the fourth quarter? Are you still at a fairly consistent level -- so it's still a fairly light role in the fourth? Or have you allowed more leases to roll then since it's been better of late?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

We've been quite disciplined on that, Rob, and that can get you into trouble in the fourth quarter, and our lease expirations remain on target with a drawdown in the fourth quarter.

[Operator]

Our next question comes from Anthony Powell from Barclays.

[Anthony Powell, Analyst at Barclays Bank]

Question on some of your more tech and biotech focused markets like Austin and Raleigh. Have you seen any decline in traffic in those markets? Or do you expect to see any weakness there given some of the job now since we've seen in those sectors?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

Yes. We have not on those 2 sides, particularly. And a large part of it is because of the ongoing tech transition that's occurring. So -- and just picking Austin, you've got Tesla opening its Gigafactory that's on. And so hiring is up in that area. And then Raleigh, Apple's building a large campus there and bringing on jobs. And those are just the headlines. But I think the Sunbelt still continues to benefit from the tech companies reallocating jobs across the country. So we're in pretty good shape in those 2 markets right now. And rent increases are fabulous there.

[Anthony Powell, Analyst at Barclays Bank]

And you talked a lot about how rent to income levels are consistent even as you raise rents so much, the incomes are going up. Over the long run, does that raise the risk of more move-outs to home ownership as you have maybe a more affluent renter base that may speak that out over the long run?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

No. You would -- the thing to keep in mind is that what's going on with the homeownership rates over time, and that has grown at a faster rate than our rents have. And at this point, with the higher incomes coming in, I'm not sure we've seen move-outs to home buying at a lower point than the percentage that they are right now.

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

And I'll also add that what's been interesting to watch play out as well over the last 2 or 3 years is how the demographic of our renter profile has continued to evolve, continues to become increasingly single, continues to become increasingly female. And frankly, it's a demographic that wants the lifestyle that we're offering our communities as opposed to a single-family lifestyle. So we do not see any early concerns developing that should we find ourselves in a very affordable single-family housing market that we're at any sort of material risk from what we normally are in terms of move-outs associated with home buying.

[Operator]

Our next question comes from Alexander Goldfarb from Piper Sandler.

[Alexander Goldfarb, Analyst at Piper Sandler & Co.]

Just wanted to go back to the question on the Sunbelt. I appreciate the 9% versus 15% move-ins from outside to Sunbelt now. But if you think about -- I guess the question is, when you think about your total Sunbelt, are you saying that in your -- in the Sunbelt markets that you guys operate, the inbound migration is not as big of an impact overall?

Or you're seeing in your portfolio, you guys tend to pull a lot more Sunbelt based residents while the overall markets that you operate in tend to benefit a lot from inbound migration? I'm trying to differentiate whether MAA's experience with inbound migration is representative of the market or more how you guys are positioned within your markets?

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

Alex, that's a good question. Honestly, I don't know the answer to that. I mean, obviously, the 9% to 15% metrics that you were talking about and sort of the move in traffic that we're seeing from outside the Sunbelt into our markets, it's only based on what we are actually seeing at our properties. And so it may be that when you look at other sort of broader market statistics that are published and reported on, it may in fact be, if you will, some higher level of migration trend that has been occurring than the 15% that we're alluding to that we saw in the second quarter.

But I think that -- and obviously, a lot of the migration that's happening out of the coastal markets into the Sunbelt. I think there's been a lot reported on that. A lot of these people that are moving are fairly affluent households. And more likely than not, I would tell you that I think that a lot of the households that are relocating given that affluence are probably going into single-family homes.

And to some degree, as we see single-family home pricing in markets like Atlanta and Nashville going through the roof, it is people coming from outside the Sunbelt homeowners outside the Sunbelt coming into the Sunbelt and wanting to be homeowners in the Sunbelt. So there probably is some level of differentiation there.

But the point that I was trying to make earlier, which I certainly think you touched on is that the notion that we are, at least, within our portfolio that we've been somehow way outside -- captured a significant outsized benefit to relocations from the outside of Sunbelt. I think that, that's been a bit overstated. For us, it's only -- it's still only 15% of our move-ins. And as compared to 9%, as I said earlier. And so we're still seeing a significant amount of the leases that we're executing on and the vast majority are from people just moving around within the Sunbelt, if you will.

[Alexander Goldfarb, Analyst at Piper Sandler & Co.]

Okay. And then the second question. On the market disruption that you guys discussed early on the call, and many of my peers have asked about on the cap rates, you said up 40 bps buyers or sellers want more, the better sponsors. Just to be clear, this is really fall out from levered buyers stepping away and such that when you look year-over-year, cap rates really aren't changed.

So as that process come up off the market? Or are you suggesting that it's beyond that, like more deals are unwinding simply regardless of whether it's a levered buyer or not simply because of the macro interest rate, pick your favorite post of the day. I'm just trying to understand whether you're specifically talking to levered buyers pulling back in the fallout or if this is a broader fallout in the market on transactions?

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

Yes, this is Brad. One thing I would say is that there's not a ton of transaction data at this point. So I think, frankly, there's not a lot on the market right now. And I think as we get into the third quarter, we'll certainly start to see more data points. But what we're seeing today, it appears that the majority of the fallout to use your term is related to the higher levered buyers pulling back and buyers with shorter-term time horizons pulling out of the market. And those are impacting a certain type of asset class. They're not as impactful the stuff that we are looking at.

We certainly hear in the market that cap rates are off 75 to 100 basis points. So we're not seeing that at this point out. Clearly, certain assets that are not well located or have some type of inherent issue with them. You could certainly see that. But we're not seeing that at this point. And based on the fact that every deal that we saw that closed in the second quarter was with institutional quality capital tells us that there's still a demand by institutional capital for well-located assets and the cap rates have moved a bit, but they have not moved tremendously. And they're still down from where we were second quarter of last year.

[Operator]

Our next question comes from Chandni Luthra of Goldman Sachs.

[Chandni Luthra, Analyst at The Goldman Sachs Group]

So with day-to-day inflation on commodities, food complex, gas prices. Could you talk about what you are seeing, if any impact on your residence? Has the discussion in negotiation level of negotiation gone up on renewables, just given more pressure on day-to-day expenses for some of your tenants perhaps?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

Chandni, it's Tom. And the level of negotiation, if you will, in terms of the feedback that we get from residents began to go up last year as renewal increases went up last year. We negotiated well less than a percentage point on our renewal offers. In fact, it's like 20 basis points. That has not changed over time. And the renewal accept rate has continued as it has pretty historically high and turnover staying flat.

So we're getting -- we get questions about it, but we have not needed to adjust our renewal rates. And so very little push -- I mean, excuse me, pushback in that area. But when they get out in the market and they look at what our new lease rate is, which is still $100 higher than our average renewal rate. They kind of see that they're priced fairly and accept the rate and move on.

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

And Chandni, it is Tim. I think a point worth noting, if you look at some of our B assets or little bit lower price point assets. We actually have seen pricing performance do a little bit better in the last couple of quarters on those assets. So arguably, those would be the ones that might feel a little more pressure and we just haven't seen it from a pricing standpoint?

[Chandni Luthra, Analyst at The Goldman Sachs Group]

Got it. And if I could get a quick follow-up, please. In terms of the development pipeline, how has the inflationary environment, supply chain, permitting delays that you talked about impacted yields, if you could give us some mathematical color around that, please?

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

Yes. I would say that just municipal delays and those type things is not having much of an impact at this point on our overall yields. Certainly, in the last 6 months, we have seen a tremendous increase in cost escalation very acute the last 6 months, I'd say. But we are starting to see early signs of that cost escalation alleviate a bit. Certainly, some of the commodity prices are down, lumber is down just given that the single-family construction is off a bit. So from where we sit today, it looks like going forward that the cost escalation that we are seeing will start to mitigate itself.

I don't think cost go backwards, but I think the rate of increase will substantially slower. It looks like it will substantially slow. And then you couple that with we're seeing on the rent side and our yields are actually holding up pretty well from those delays that I just talked about.

[Operator]

We'll take our next question from Tayo Okusanya from Credit Suisse.

[Omotayo Okusanya, Analyst at Credit Suisse Group]

Most of my questions have been answered. But just a quick one. I mean you did mention earlier on that the resident base is increasingly turning single, increasingly turning female. I'm just curious how that is impacting how buildings are designed going forward, whether it's unit mix and kind of what implications that could have for development costs going forward? And also, if you could kind of throw in any ESG considerations as part of that answer.

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

From a development aspect, frankly, we haven't changed a whole lot relative to that. I mean, other than our amenities to take into account pets has increased substantially. So I'd say that would be one thing that certainly has changed. And then just broadly, I think the desire for meeting spaces in common area spaces where folks -- whether -- no matter what demographic it is, where folks can gather and just be in community with the other folks of the complex has certainly grown, and we're spending a lot of time on that. But other than, I would say, the pet areas that we've had to spend more design attention and paid more design attention to, there hasn't really been a whole lot of change associated with the demographic change there.

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

Tayo, and what I would say, over a longer period of time, longer horizon, I think that what has changed about the product in general, and it was a change in response to this demographic shift, but I think the demographic shift that you alluded to is finding it attractive and that is structured parking, interior hallways, I think it's also been 1 of the reasons why our Smart Home and Smart Rent [Phonetic] technology has been so embraced.

It just -- it provides a certain degree of privacy that I think people really appreciate. And get out of the weather elements a little bit more with the interior hallways and the structured parking deck. So I think those things have continued to really find great receptivity this demographic shift that we've mentioned, and I think it will continue to do so going forward.

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

Tayo, this is Tim. To hit on your ESG point. Our ESG group works closely with our development group and we've kind of historically built at least a broad standard in terms of green building certification. We're evaluating that and along the ones we've done recently for silver, even golds and -- so we're definitely thinking about in our underwriting, kind of considering what makes sense, but from a resident perspective and from our perspective as well.

[Operator]

Our next question comes from Nick Yulico from Scotiabank.

[Unidentified Participant, at Mid-America Apartment Communities]

It's Daniel Spark [Phonetic] on for Nick. Most of my questions have been answered a lot of great detail. Just a quick 1 for me, and I apologize if you answered this, but what is the assumed split between new renewal embedded in the new guide? Is there an expectation for like a divergence through the end of the year in '23?

[Albert Campbell, Executive Vice President & Chief Financial Officer at Mid-America Apartment Communities]

This is Al. Just some color on that. I mean, certainly, as we talked about, as Eric mentioned, 8% over the back half of the year, there is a little bit lower expectation for the fourth quarter because that's 1 of the seasonality that we talked about would kind of begin because of the holiday season. So -- but in general, what we've built on is renewals continue to be the strongest I would say, in double digits, probably lower double digits, likely in that range with new leasing, which tends to feel the most pressure of probably both comps as well as certainly seasonality being in single digit by mid-single-digit range, and that's sort of the estimate for the back half of the year that you can roll in.

[Unidentified Participant, at Mid-America Apartment Communities]

Great. And then what are the main drivers of the components of the opex guidance increase? I know you mentioned real estate taxes are roughly 4% to 5%. So just wondering what's increasing the rest of that 6.5% to 7.5%?

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

In general, it's -- for the increase for the quarter two components, primarily really repair and maintenance as well as taxes. We talked about taxes. And so -- and so I'll talk about repair and maintenance really is more just cost of materials, HVAC costs because it's been a hot summer as well as this is a month of our highest turnover by design as we have more of our units, we pushed most of our turnover in the summer months because that's when the demand is there.

So that pressure is being built there a bit, and we're not seeing that -- I don't expect that to dissipate significantly or the back half of the year at this point. Some of the things Tim mentioned will help us going forward. But really repair and maintenance and taxes were the reasons for that change.

[Operator]

Our next question comes from Alan Peterson [Phonetic] from Green Street.

[Unidentified Participant, at Mid-America Apartment Communities]

Brad, I was just wondering if you could share pricing expectations for the incremental dispositions that you're guiding to through year-end? And then on top of that, too, if you could touch on the just of those assets that you're marketing and considering marketing that would be great.

[Adrian Hill, Executive Vice President & Chief Investment Officer at Mid-America Apartment Communities]

Yes. So I think I mentioned it in my initial comments. The 2 that we look to bring out or have on the market right now. One is in suburban Maryland, and then one is in Austin, and these are 20 -- on average, 25-year-old assets that we look to bring out. So in terms of pricing expectations on those, for the entire set -- for the year, we expect to achieve a, call it, a 4% to 4.5% yield on those assets.

And the way we look at that is an NOI yield and 1 of the things that is having an impact on our yields there is specifically the asset in Suburban Maryland. That's an asset that has had some challenges in a number of ways. One, specific to the asset, it has a right of first refusal that the county there has where they can step in and buy the asset, they have the right to match any offer that you get.

Normally, that's not a big deal, but they did recently take advantage of a ROFR [Phonetic] they had on another asset nearby. They have not done that in years. So obviously, the buyer pool is well aware of that. So they're more reluctant to spend a lot of time on an asset going through due diligence because what they have to do is go under contract on the asset and continue to their due diligence, but at any time during that period, the county can roll for the product.

So we're seeing a little bit of an impact associated with that. We also have on that asset some regulatory issues, which recently rolled back, but it has impacted the performance renewal cap increases and things of that nature. So that is impacting the pricing of that asset, which is driving our overall returns a little bit off on those dispositions from what we would normally expect.

[Unidentified Participant, at Mid-America Apartment Communities]

I appreciate the color there. And Tom, are you noticing any pickup in concessions in any of your more heavily supply markets that other operators might be using to drive up demand?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

No. The concessions have really not been heavily used and where we see them is really only in the pockets where they're not really being used to drive excess demand on a stabilized asset, but you see them use from time-to-time on new lease-ups. But we're not having to compete much with those at this point just because our demand level is good, and concessions are less than 0.4% of our net potential right now.

[Operator]

And our last question comes from [indecipherable].

[Unidentified Participant, at Mid-America Apartment Communities]

I was -- my first question was on the expense side. Could you -- I think you mentioned 180 bps of margin expansion from technology investments in your platform. Do you know how much of that expansion is coming from expense versus top line revenue growth?

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

Yes. For the specific 180, about 40 or so of that is related to expense and the rest is revenue. And then that's just what all we've identified for now, or we think there's some further opportunity on the expense side in the next couple of years.

[Unidentified Participant, at Mid-America Apartment Communities]

Got it. And also, are you concerned about turnover at all? And how much more are you willing to push pricing the capital more of your loss to lease? And also, do you know what the loss we see?

[Thomas Grimes, Executive Vice President & Chief Operating Officer at Mid-America Apartment Communities]

Turnover at 45% on a 12-month rolling basis is very good and low, sort of the lowest I've seen in my career, and we feel very good about the opportunity for pricing going forward and still believe now is the time to push rate versus volume. So we'll see a seasonal slowdown and tougher comps, but demand is good and our priority is for growing rents.

[Unidentified Participant, at Mid-America Apartment Communities]

And sorry, you mention what your loss lease was?

[Tim Argo, Executive Vice President, Chief Strategy & Analysis Officer at Mid-America Apartment Communities]

Yes. On the loss lease, if you look at our June blended rents compared to where our whole portfolio sits, it's about 8% or so. If you look at just new leases, it's about 11%, but we would typically expect that to be the highest right now. This is sort of the peak season, but that's where it stands right now.

[Operator]

We have no further questions. I will return the call to MAA for closing remarks.

[Eric Bolton, Chairman, President & Chief Executive Officer at Mid-America Apartment Communities]

Well, we appreciate everyone being on the call and hanging there with us. And obviously, feel free to reach out back to us at any point if you have any other questions you'd like to ask. So thank you very much.

[Operator]

[Operator Closing Remarks]