Mid-America Apartment Communities Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 18 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the MAA First Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, the company will conduct a question and answer session. As a reminder, this conference call is being recorded today, April 27, 2023. I will now turn the call over to Andrew Schafer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments.

Operator

Please go ahead.

Speaker 1

Thank you, Corliss, and good morning, everyone. This is Andrew Schafer, Treasurer and Director of Capital Markets for MAA. Members of the management team also participating on the call with me this morning are Eric Bolton, Tim Argo, Al Campbell, Rob DelFrore, Joe Fracchia and Brad Hill. Before we begin with our prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward looking statements. Actual results may differ materially from our projections.

Speaker 1

We encourage you to refer to the forward looking statements section in yesterday's earnings release and our 34 Act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non GAAP financial A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non GAAP and comparable GAAP measures at www.maac.com. A copy of our prepared comments and an audio recording of this call will also be available on our website later today. After some brief prepared comments, the management team will be available to answer questions. I will now turn the call over to Eric.

Speaker 2

Thanks, Andrew, and good morning. As Detailed in our earnings release, Q1 results were ahead of expectations as solid demand for apartment housing continues across our portfolio, Consistent with the trends that we've seen for the past couple of years, solid employment conditions, positive net migration trends The high cost of single family ownership are supporting continued demand for apartment housing across our portfolio. And while new supply deliveries are expected to run higher over the next few quarters, we continue to see net positive absorption across our portfolio. We believe that MAA's more affordable price point coupled with a unique diversification strategy including both large and secondary markets Further supported by an active redevelopment program will help mitigate some of the pressure from higher new supply in several of our markets. As outlined in our earnings release, our team is capturing steady progress and strong results from our various redevelopment and unit interior upgrade programs.

Speaker 2

We are on target to complete over 5,000 additional unit interior upgrades this year in addition to completing installation of new smart home We're also making great progress with our more extensive property repositioning projects with the projects completed to date Capturing NOI yields in the high teens on the incremental capital investment. These projects coupled with a number of new technology initiatives should provide additional performance upside from our existing portfolio. Our new development and lease up pipeline Projects have achieved rents that are close to 11% ahead of pro form a. We did not close on any acquisitions or dispositions during the quarter, We continue to believe that transaction activity will pick up over the summer and have kept our assumptions for the year in place. The portfolio is well positioned for the important summer leasing season.

Speaker 2

Total occupancy exposure at the end of the quarter, which is a combination of current vacancy plus notices to move out is consistent with where we stood at the same point last year. In addition, leasing traffic remains solid with on-site visits in comparison to the number of exposed units that we have It's actually running slightly ahead of prior year. A number of new leasing tools that we implemented over the course of last year should continue to support Stronger execution and our teams are well prepared for the upcoming summer leasing season. I want to thank our associates for their hard work over the last few months to position us for continued solid performance over the balance of the year. That's all I have in the way of prepared comments.

Speaker 2

And I'll now turn the call over to Tim.

Speaker 3

Thanks, Eric, and good morning, everyone. Same store growth for the quarter was ahead of our expectations with stable occupancy, low resident turnover And rent performance slightly ahead of what we expected. Blended lease over lease pricing of 3.9% reflects the normal seasonality pattern that we expected. And while we did return to a more typical seasonal pattern in Q1, it is worth noting that the blended lease over lease pricing captured It was higher than our typical Q1 performance. As discussed last quarter, we expected new lease pricing to show typical seasonality and that the renewal pricing, which New lease pricing for much of 2022 would provide a catalyst to 1st quarter pricing performance.

Speaker 3

This played out as expected with new lease pricing down slightly at negative 0.5% and renewal pricing increasing positive 8.6%. Alongside the strong pricing performance, average daily occupancy remained steady at 95.5% for the Q1, contributing to overall same store revenue growth of 11%. The various demand factors we monitor were strong in the Q1 and continue that way into April. 60 day exposure, which represents all current vacant units plus those units Notices to vacate over the next 60 days at the end of Q1 was largely consistent with prior year at 7.7% versus 7.9% In the Q1 of last year. Furthermore, in the Q1, lead volume was higher than last year and quarterly resident turnover was down Effective in April is 4.1 percent with new lease pricing beginning to accelerate up 110 basis points from March at plus 0.2% and renewal pricing remaining strong at 7.9%.

Speaker 3

We expect renewal pricing to moderate some Against tougher comps as we move into the late spring summer, but simultaneously expect some seasonal acceleration in new lease over lease rates. We expect new supply in several of our markets to remain elevated in 2023 putting some pressure on rent growth. But As mentioned, the various demand indicators remain strong and we expect our portfolio to continue to benefit from population growth, New household formations and steady job growth. In addition, we expect resident turnover to remain low as single family affordability challenges MAA's unique market diversification and portfolio strategy coupled with a more affordable price point as compared The new product being delivered also helps lessen some of the pressure surrounding higher new supply deliveries. During the quarter, we continued our various product upgrade initiatives.

Speaker 3

This includes our interior unit redevelopment program, our installation of smart home technology and our broader amenity based property repositioning program. For the Q1 of 2023, we completed over 1300 interior unit upgrades and installed over 18,000 smart home packages. We now have about 90,000 units with smart home technology and we expect to finish out the remainder of the portfolio in 2023. For our repositioning program, leases have been fully or partially repriced at the first 13 properties in the program and the results have exceeded our expectations yields on cost in the upper teens. We have another 7 projects that will begin repricing in the 2nd and 3rd quarters and are evaluating an additional group of properties to Those are all in my prepared comments.

Speaker 3

So I'll now turn the call over to Brad.

Speaker 4

Thank you, Tim, and good morning, everyone. While operating fundamentals across our platform have remained consistent as Tim just outlined, transaction volume remains muted due to a lack is aggressively competing in order to win the bid and put capital to work. This strong relative investor demand coupled with often favorable in place financing Continues to support stronger than expected cap rates on closed transactions. Having said that, we believe the need to sell increases We have maintained our acquisition forecast for the year, but have pushed the timing back a couple of months. Our acquisition team remains active in generating higher earnings and creating additional long term value.

Speaker 4

To date, our new lease up properties Performance does not appear to be impacted by increased supply pressures. As Eric mentioned, these properties have achieved rents nearly 11% above our original expectations. During the Q1, we began pre leasing at our Novel Daybreak community in Salt Lake City and early leasing demand is extremely strong with the property on a number of projects, 4 of which should start construction in the back half of twenty twenty three. 2 in house developments, 1 located in Orlando and 1 in Denver and 2 prepurchased joint venture developments, 1 located in Charlotte and the other a Phase 2 to our West Midtown development in Atlanta. During the Q1, we purchased the Phase 2 land site to our packing district project in Orlando, Florida, bringing our future development projects owned or under construction to 12 representing over 3,300 units.

Speaker 4

Over the past few months, we have seen an increase in inbound pre purchase development opportunities due to a We remain disciplined and selective in our review Processed, but we are hopeful these calls will lead to additional currently unidentified development opportunities. Any project we start over the 12 months to 18 months would likely deliver in 2026 or 2027 and should be well positioned to capitalize on what we believe is likely To be a much stronger leasing environment, reflective of the significant slowdown in new starts that we expect to continue to see over the balance of 2023 2024. Our construction management team remains focused on completing and delivering our 6 under construction projects And we're doing a tremendous job managing these projects and working with our contractors to minimize inflationary and supply chain pressures on our development costs and our schedules. We have 2 projects that will be delivering units during the Q2, Novel Daybreak in Salt Lake City, which delivered 6 units Late in the Q1 and Novel West Midtown in Atlanta. That's all I have in the way of prepared comments.

Speaker 4

So with that, I'll

Speaker 5

turn it over to Al. Thank you, Brad,

Speaker 4

and good morning, everyone. Reported core FFO per share

Speaker 5

of $2.28 for the quarter was $0.06 above the midpoint of our quarterly guidance. About half of this favorability was related to the timing of certain expenses, which are now expected to be incurred over the remainder of the year, primarily related to real estate taxes. Operating and fundamentals overall were slightly favorable to expectations for the quarter producing about a $0.01 per share of favorability and the remaining outperformance is related to overhead and net interest call. Our balance sheet remains in great shape, providing both protection for market volatility and capacity for strong future growth. We received an upgrade from Moody's during the quarter, bringing our investment grade rating to the A3 or A- level with all three agencies.

Speaker 5

We expect the favorable ratings to have a growing positive impact on our cost of capital as we work through future debt maturities. During the quarter, we close on the settlement of our Ford Equity agreement providing approximately $204,000,000 net proceeds toward funding our development and other capital needs. We funded $38,000,000 of redevelopment, repositioning and smart rent installation costs during the quarter producing solid yields. We also funded just over $65,000,000 in development costs during the quarter toward the projected $300,000,000 for the full year. As Brad mentioned, we expect to start several new deals later this year and early next year, likely expanding our development pipeline to over $1,000,000,000 which our balance sheet remains well positioned to support.

Speaker 5

We ended the quarter with record low leverage, our debt to EBITDA of 3.5 times With over $1,400,000,000 of combined cash and available capacity under our credit facility with 100% of our debt fixed against rising interest rates for an average of 7.7 years and with minimal near term debt maturities. And finally, in order to reflect the Q1 earnings performance, we are increasing our core FFO guidance for the full year To a midpoint of $9.11 per share, which is a $0.03 per share increase. We're also slightly narrowing the full year range to $8.93 to $9.29 per share. Given that the majority of the Q1 same store outperformance was timing related and the bulk of

Speaker 4

the leasing season is ahead of

Speaker 5

us, we are maintaining our same store guidance ranges as well as all other key ranges for the year. So that's all that we have in the way of prepared comments. So Cordless, we will now turn the call back over to you for questions. Of course, we'll now turn the call back over to you for questions.

Operator

Absolutely. We will now open the call for questions. We will take Our first question from Kim Jong with BMO Capital Markets. Your line is open.

Speaker 6

I'll take it. Thank you. Eric and Tim both mentioned in your prepared remarks that the more affordable price Point is one of the reasons why you have such strong demand. I'm wondering if there's any noticeable difference between your A and B Product as far as demand or performance?

Speaker 3

Yes, John, this is Tim. I mean we are seeing a little bit of a diversion, not I would say in Q1, our what you might call our B, more B assets were about 70 basis points or so higher on Blended pricing versus the more A. And so I think part of it's some of the price point and certainly to the extent we've seen some supply

Speaker 6

Okay. My second question is on the premiums that you're getting on renewals versus the new leases signed. I think it was 900 basis points in the Q1, a little bit lower than 800 basis points in the 2nd quarter so far. It still seems like a record amount as far as that premium you're getting. And I'm wondering when you think it goes back to the norm And what level do you think is fair premium on renewals?

Speaker 3

Yes. I mean, we talked about a little bit last Quarter that we knew with kind of the unusual circumstances of last year where new lease pricing was ahead of renewal pricing for the bulk of 2022 that sets up with some good comps and some opportunity on the renewal side, particularly in the first, call it 5, 6 months in 2023. And so That's definitely what we've seen. I think as we get a little further in, you'll see it moderate to more normal. I think probably get down to the 6% So range over the next few months, but don't expect it to be too volatile.

Speaker 3

We still think renewals We'll outpace new leases, but get into a little bit more normalized range.

Speaker 6

That's great color. Thank you.

Operator

And we'll take our next question from Austin Wurschmidt with KeyBanc Capital. Your line is open.

Speaker 7

Hey, good morning everybody. Yes, Eric, you have highlighted You know that the price point does provide you some insulation as it relates to new supply. And certainly, job growth has surprised to the Earlier this year, if we start to see job growth slow, does that become more concerning as supply begins to ramp? And does Pricing power, just become more challenging for you, later this year and maybe into early 2024?

Speaker 2

Well, Austin, certainly if we see the employment markets pull back in any material way That will have an effect on demand at some level. I think that we've been through those periods before Where the employment markets get much weaker and there's no doubt that such a scenario does Have an effect on demand. Having said that, we're in, I think a unique all these cycles have their own sort of unique Elements to them and in this particular cycle, the what we see happening in the single family market and And the lack of single family affordability is clearly working in our favor right now. And I would also suggest to you that in the event of a recession where there is weakness in the employment markets, What really helps us, at least on a relative basis, I think, is the fact that we are oriented in the Sunbelt. I think these Sunbelt markets Insurance and Banking, the diversification that we have in our there's one of the slides in our presentation deck You can look at the latest presentation deck that really gives some insight on the diversification we have not only in markets, but also in the employment Sectors that we cater to that our residents work in and I think that diversification coupled with the Sunbelt of the other things that are relating to single family and so forth, while I think a recession certainly creates concern For everybody in the apartment sector, I think that I'm confident as we have historically Always done in downturns that will likely hold up better.

Speaker 7

That's all very helpful. And then just for my follow-up, For projects that are in lease up today, have you kind of and maybe you've seen any slowdown in the pace Of lease up or absorption for those and where are concessions today

Speaker 3

for, yes, assets and lease up? Thank you.

Speaker 4

Hey Austin, this is Brad. We really haven't seen any impact, negative impact associated with supply Pressures on our new lease ups. And generally, that's where you think we would see it first. We've got 6 or so projects that are in lease up right now. Concessions on those, we typically model about a month free.

Speaker 4

I'd say on 3 of those, we're using some concession maybe To a half a month free, we're not using the full concessions that we underwrote and we're not seeing the need to just generally based What we're seeing in the market and I'd say our traffic continues to be really good on all of our lease ups. The leases we're signing, The velocity is really, really good. So we're not seeing any early indications yet that, that new supply is having an impact there.

Speaker 3

Thanks everybody.

Operator

And we'll take our next Question from Chutney Luthra with Goldman Sachs. Your line is open.

Speaker 8

Hi, good morning. Thank you for taking my question. You guys talked about in your prepared remarks that cap rates are still going strong for good quality product. Could you remind us where they are tracking at the moment? And then as you think about your own opportunity set down the line, as you think about distressed Opportunities emanating from the current supply situation in lending markets, where would Cap rates need to be for you to be comfortable buying and getting in the market.

Speaker 4

Yes, this is Brad. I'll certainly jump on that. We continue to see cap rates, call it, in the 4.7%, 4.75% range for assets that fit that description, well located, strong markets. Interestingly, in the Q1, I mean, we only had 7 data points. So again, it's the volume is down, call it 70% year over year.

Speaker 4

So We don't have a whole lot of data points, but interestingly the band of those 7 trades is pretty close together, so Which we haven't seen that historically. I would say for us, cap rates definitely need to be over 5, 5.25%, 5.5%, something in that range. But I would say it's really going to depend on the asset, what the rent trajectory looks like. And We're also looking at the after CapEx, what it looks like in that nature as well. So that's pretty important to us.

Speaker 4

And I would say where opportunities might come for us are going to be properties that are early in their lease up. That's where some of these developers tend to get a little bit more stress In their underwriting and in their performance, as some of the supply in our markets begins to come online, Some of these less experienced operators that are operating some of these new lease ups could potentially struggle a bit to lease up those assets. And so I do think that's It's going to be an opportunity for us. And in fact, that's really what our acquisition forecast is built on is buying assets that are in their Initial stage of lease up.

Speaker 8

That's very helpful. Thank you. And for my follow-up, as we think about new from a geographic standpoint, what are the markets where you're seeing most pressure? And How are you thinking about balancing occupancy versus pricing in those markets?

Speaker 3

Hey, Shawnee. This is Tim. Right now, I would say Austin is probably the number one market in terms of where we're seeing supply. And Phoenix to an extent we're seeing a little bit. Honestly some of the higher supply markets we're seeing like Raleigh and Charlotte, Charleston are 3 of the markets where we're seeing a fair amount of supply and have also been some of our best pricing markets so far this year.

Speaker 3

So As Eric kind of laid out earlier, we're not seeing a lot of pressure yet from supply. We're still getting the job growth in demand. There Pockets here and there, but right now as we did in Q1, we're happy to keep pushing on price where we can. Our occupancy is at A stable point and it's one of the things we monitor is kind of leading edge demand indicators, but still in a healthy balance right now.

Speaker 8

Great. Thanks for taking my question.

Operator

We will go next to Michael Goldsmith with UBS. Your line is open.

Speaker 9

Good morning. Thanks a lot for taking my question. Earlier you talked about the B product outperforming A product on a portfolio level. I was wondering if we can dive into Mark and Orchula just had to better understand some of the dynamics of what you're seeing in the A product And then also within that, can we talk about kind of like the larger markets that you're in versus the smaller markets? And if A versus B is performing differently in the large one versus the smaller ones?

Speaker 9

Thanks.

Speaker 3

Yes. It's fairly consistent, I would say. Atlanta is probably a good example where we have quite a bit of diversification there. We've got Several assets kind of in town, midtown, Buckhead and then a lot of assets outside the perimeter and we're pretty consistently seeing the Suburban assets performed better than those more urban assets and that's playing out relatively consistent across some of the markets. We are seeing what you might call our secondary markets performed pretty well.

Speaker 3

I mentioned Charleston a moment ago, Savannah, Greenville, some of these more secondary markets are holding up very well and doing really well in terms of pricing. And that's part of the strategy. I mean typically those markets aren't going to get quite as much of the supply as some of these larger markets And that's playing out for us pretty well so far.

Speaker 9

Thank you. And then my follow-up question is just based on the We talked about the job markets and how the portfolio may react to that. I guess my question is more related to Just like the in migration to the Sun Belt and what's that looking like versus pre COVID levels and are there any markets that you're seeing Stronger or weaker in migration?

Speaker 2

Michael, this is Eric. I would tell you that the in migration That we saw in the Q1 with about 11% of the leases that we are writing A function of people moving into the Sunbelt, that's pretty consistent with where we were prior to COVID. It began to move up a bit during 2020, late 2020 and throughout most of 2021 And it started moderating a little bit in 2022. But right now, as we sit here today, Roughly 11% or so of the move ins that we are seeing are coming from people moving in from outside the Sunbelt and Compares to 9% to 10% that we saw prior to COVID move outs From the Sunbelt, the turnover we have where people are leaving us and moving out of the Sunbelt, it's still only about 3% to 4% of the move outs that we're having are a function of people leaving the region. On a net basis, we're pretty close to where we were prior to COVID and would expect that those trends will Now continue at the current level going forward.

Speaker 9

And when you say going forward, does that mean for the rest of 'twenty three or is that kind of

Speaker 2

I would say rest of 2023 into 2024. I think that Again, harking back to my earlier comments relating to the potential for moderation in the employment markets, We've seen these trends through these cycles that we've been through over the years Where migration trends are more positive, if you will, in the Sunbelt region and it's been that way for many, many years Through recessions and through expansions in the economy that continues to be the case. And so I just Continue to think that these markets and the portfolio strategy we have will serve us well long term. And I think the net positive migration trends that we see today will likely persist for the foreseeable future.

Speaker 9

Thank you very much.

Operator

And we'll take our next question from Nick Yulico with Scotiabank. Your line is open.

Speaker 10

Thank you. Good morning. I was hoping to get a little bit of a feel for how the new lease growth on Signings is differing by market, just sort of an order of magnitude between better versus weaker markets, if you can give a little color on that.

Speaker 3

Yes, Nick, it's Tim. So if we think about where April is, It's anywhere from call it negative 1%, negative 2% for some of the lower markets Up to 3%, 4%, 5% on some markets and it moved positive in April. As we talked about, we're At 0.2%, we saw a good acceleration from March to April and we kind of expect to see that typical Seasonality and a little more acceleration as we move through the spring and summer, but that gives you a little bit of a quarter of magnitude.

Speaker 10

That's helpful. Thanks. Do you mind also just maybe saying which markets are the better versus weaker in that range?

Speaker 3

Yes. I mean, as I mentioned before, Austin, Austin is one of the weaker ones. Austin and Phoenix are 2 that I would point out as a little bit on the weaker side. Orlando continues to be one of our strongest markets. And then mentioned a moment ago as well, we're seeing some of our more secondary markets perform really well Also, Charleston, Savannah, Richmond, Greenville, all holding up really well also.

Speaker 10

Thanks. That's helpful. Just last question is on Atlanta. If you look the occupancy there is a bit lower than The rest of the portfolio, can you just talk about what's going on there and I guess also unpacking? I think you were saying that That's a market where suburban is doing better than urban.

Speaker 10

And so I'm not sure if it's a there's any sort of supply impact there that you're dealing with On occupancy or what's driving that? Thanks.

Speaker 3

Sure. Yes. Atlanta is a little bit of a unique situation. Back in February, we had some winter storms that affected Texas and Georgia also, but we particularly saw some impact in Atlanta and Georgia. We had about 70 units in Atlanta that were down that we took out of service due to the storms and then brought them back up kind of in late February, so you had a pretty good chunky units in Atlanta that we had to get leased up.

Speaker 3

So that was really the occupancy We've seen it kind of bottomed out in March, but we have seen April occupancy pick up. So I think Atlanta will continue to improve and be a pretty solid market for us later in the year.

Speaker 11

Appreciate it.

Operator

We will go next to Alan Peterson with GreenTree. Your line is open.

Speaker 12

Hey, everybody. Thanks for the time. Tim, I was just hoping you can shed some light on your planning for peak leasing and if you're anticipating in some of your weaker markets whether or not you're going We use concessions to maintain occupancy, call out the Austin's or the Phoenix's of the world.

Speaker 3

Yes. I mean, there will be pockets. We're not we certainly haven't seen or expect See it at any sort of portfolio wide level, if we look at Q1, total concessions were about 25 basis points as a percent of rent. We are seeing a little more in Austin, call it half a month up to a month and then there's areas where If there's lease on properties, you may see a little bit more. Markets like Orlando, we're seeing no concessions, But we'll see it a little bit, but I don't think any more than half to a month more than what we're kind of And right now, I don't really see it getting much different than what we see today.

Speaker 12

Understood. And that's on your assets or other competing assets nearby?

Speaker 3

More so on competing assets. I mean, we have some, as I mentioned, there's it's pretty minimal and it kind of depends on the market. There are some markets where Yes. Upfront concessions are more of a saying in that market whereas others it's more of a net pricing scenario where you don't really see Upfront concession. So it kind of depends, but similar whether it's our properties or the market in general.

Speaker 12

Appreciate that. And Brad, just one follow-up on your prepared remarks about debt and equity capital starting to dry up. Across the buckets of

Speaker 3

capital out there,

Speaker 6

where are some

Speaker 12

of your private peers the most out there. Where are some of your private peers the most concerned about when sourcing new financing today? What are some of the whether it be the banks or the life What buckets of capital right now are the ones that are seeing the most impact there?

Speaker 4

Yes. I mean most of our partners use bank Financing for their developments. And so I'd say that's the biggest concern at this point. And given the last Few weeks and just the restriction there in capital with banks. It's more acute than it has been.

Speaker 4

Q1, it was difficult.

Speaker 2

Equity was difficult, debt was difficult and

Speaker 4

I'd say the debt piece has gotten even more difficult for them. But generally they're going to regional banks for their banking needs and They generally have strong relationships with these banks, so they can get a deal or 2 done with the banks, but it's a lot more difficult, Takes a lot longer than what it has in the past. And so that's really restricting. One of the other Areas that's restricting new deals getting done and I don't see that changing for the foreseeable future.

Speaker 12

Appreciate that. Thanks for the time today guys.

Operator

We'll go next to Rob Stevenson with Janney. Your line is open.

Speaker 13

Good morning, guys. Eric or Brad, you guys added Orlando land parcel this quarter. But Overall, how aggressively are you going to be in adding additional land parcels for development at this point? And are you seeing any relief In terms of the costs of land, some of the peers have spoken about more office sites and vacant movie theaters and that such Being sold for apartment development allowing for better deals, curious as to what you're seeing in terms of that?

Speaker 4

Yes, Rob. This is Brad. As I mentioned, we have 12 sites now that we either own or control. So we feel like we're in a good spot in terms of building out Our pipeline going forward, and as Al mentioned, we think we're on pace for that $1,000,000,000 $1,200,000,000 or so in terms of projects going and we like where we're located. The asset that we purchased in Orlando is a Phase 2 to a project that will This year, so there was a strategic reason for that.

Speaker 4

It's really a covered land play. There's some leased buildings on it right now. So, I'd say going forward, We'll be a bit more cautious on land. I would say we'll continue to look for sites that have been dropped by other developers. We'll look to get time.

Speaker 4

A couple of the sites we have now, as I mentioned, are we control them. We do not own them. So that's our Preference to have time on the deals. And I'd say we're on the early stages or It appears that we're in the early stages of land repricing a bit in some areas. We've seen a 10% price reduction on Some of the projects that some of the our partners are coming to us with sites for, they've been able to negotiate some additional time and some cost reduction.

Speaker 4

So I We're on the early stages of that at this point.

Speaker 13

Okay. That's helpful. And then Tim or Al, Where is bad debt or delinquency today? And how does that compare to the historical periods pre COVID and recent comparable periods?

Speaker 3

Yes, Ross, this is Tim. So if we look at Q1, for example, all the rents that we build in Q1, we collected 99.4 So 60 basis points of bad debt, which is consistent right in line with where we were last year. If you factor in prior month collections and any collection agency, it goes down about 50 basis points. So really Remains pretty minimal.

Speaker 13

And is there any markets in particular that you're seeing, any material Higher amounts in?

Speaker 3

Atlanta is probably the one I would point out where it's just still kind of the court system and everything going on there. It's Taking a little longer to move through the process. So it's our highest one right now, probably closer to around 1% or so. But that's really the only market where we're

Operator

And we will go next to Omitayo Augustin. Let's see.

Speaker 14

Hello.

Operator

With Credit Suisse.

Speaker 14

Hello. Can you hear me?

Speaker 2

Yes.

Speaker 14

Yes. Hi, everyone.

Speaker 9

I'm hoping you can

Speaker 14

help me understand the You think guidance a little bit better? Again, you kind of talked about in 1Q, you had some OpEx kind of tailwinds that could potentially become headwinds going forward. So you're not changing same store NOI. But so trying to really understand what that slide in case is, number 1. And then number 2, it sounds like based on spring leasing fees and you could reassess guidance again.

Speaker 5

Yes. That's a good question. As we talked about a little bit, the Q1 obviously we outperformed $0.06 according to our Midpoint. And about half of that was timing, as I mentioned. It's really some expenses, some favorable that we had in the Q1.

Speaker 5

The bulk of that was real estate taxes That we still think our full year guidance number is correct, so we'll fill that over the year. So the $0.03 increase in core FFO was The other items coming through, I would say a third of that, a $0.01 was really operating forms. As Tim mentioned, we were favorable, particularly in pricing. It was For the Q1, we expect I think we if you remember our guidance or our discussion in the same guidance was that our pricing expectation for the full year was 3% in this quarter, Q1 was 3.9, so that's a little bit of favorability. But given that we have the bulk of the leasing season ahead of us, a lot of work to be done, we just felt like our ranges and our guidance So where they need to be there and the other part of the favorability of FFO that flow through were things below NOI, overhead, interest and those things.

Speaker 5

So Really the same store was good that we are I would call it favorable, slightly favorable to on point with what we expected and we'll wait to see what happens over the next couple of quarters.

Speaker 14

Got you. Okay, that's helpful.

Speaker 9

And then

Speaker 8

can you just

Speaker 14

talk about kind of new lease spreads for the quarter? Again, that was kind of it was negative. Just kind of curious the thoughts there, whether It really is a supply issue, whether there's a bit more of a demand issue, and how would you kind of think about That kind of especially going into like your post spring leasing season?

Speaker 3

Yes, Tayo, this is Tim. I mean, I think one thing to keep in mind, the new lease rates that we saw in Q1 are really pretty typical if we go back through history. You look Outside of last year, the kind of the lease rates we're seeing were pretty much in line or better frankly than Most of the years we've been tracking it. So it was pretty much as expected. I mean March at least rates dropped a little bit and it was Really more function of similar to what I was talking about with Atlanta earlier where we saw leasing activity drop for a couple of weeks there in February with some of the storms, particularly in In Georgia, that impacted occupancy a little bit in February and then we were able to regain that occupancy in March, but it did come I'm at the expense a little bit of some of the new lease pricing, but as we talked about with April, we saw new lease spreads accelerate and move positive.

Speaker 3

From where we sit right now, all the demand metrics look strong, exposure is where we want it, leads, traffic volume, all that is where we would expect. So I think we'll move into the rest of the spring and the summer, strong leasing season and see some acceleration and And see what we would typically expect out of a pretty strong supply demand dynamic.

Speaker 14

Sounds good. Thank you.

Operator

And we will go next to Hindal St. Juste with Mizuho. And your line is open.

Speaker 11

Hey, good morning. Thanks for taking my questions. This is Barry Liu on for Haendel St. Trust. My first question is on property taxes.

Speaker 11

I was wondering how that was trending versus

Speaker 5

Yes, this is Al. I can give you some color on that. So right now, we expect that our estimates that we put out our guidance for property taxes, do we left that the same? We think we still have a Good range that we've got. We did have some favorability in the Q1 on property taxes, as I just mentioned a minute ago, but really that's related to the timing of some of the activity.

Speaker 5

We had some The appeals from prior year, they come in and the timing can

Speaker 3

be different year to year.

Speaker 5

We had some wins that we achieved in the Q1 on some of our prior year appeals that were good. We got them a little early than We still have a lot of fights both for prior year to go and all of a lot of information for this year to come in. So on balance, we have about 6.25% Growth that we expected for this year, we still at the midpoint of our guidance, we still think that is right. I would tell you that we still in terms of current year, Don't have a lot of information yet. We feel like we have a good deal on values, but a lot of the information that the stubs from the municipalities come out, probably mostly in the 2nd quarter.

Speaker 5

So as we're talking next quarter, I should have 60% to 70% knowledge on that. And then the millage rates will come more in the 3rd And even some in the Q4. So we feel like our range is good. I would say that we've continued the pressure is coming from Texas, Florida and Georgia, that's continuing to be the case, has been for several years. I would say that as we move forward into 2024, as they're looking backwards toward this more normalized year, Hopefully, we begin to see some moderation in that line.

Speaker 11

Got it. Okay. Thank you. And just looking at Texas, in particular, So noticing a significant expense decline sequentially, so 11% for Fort Worth and I think 6% for Austin. Some of that being driven by property tax relief or what's kind of driving that?

Speaker 11

Thanks.

Speaker 5

I think there's some property tax in that For sure, but I mean Tim can answer this well. But I think overall, we expected the Q1 expenses for all categories together and the company is held to be pretty high in the Q1. Really, For many of the groupings because of the comparisons for last year as we saw inflation kind of come into our business more in the second, third or fourth quarter last year, We expected our property our operating expenses to be high. Actually they were 8.3% when we came out was favorable to our expectations what we had said as Tim mentioned. So What we would expect to see is some key items personnel, repair and maintenance begin to moderate as we move back into the second, third

Speaker 3

or fourth quarter of the

Speaker 5

year, It's really the outstanding points of continued pressure being taxes, insurance areas primarily. Does that answer the question?

Speaker 9

So, well, I was more looking

Speaker 11

at like the sequential decline from 4Q in Fort Worth versus 1Q in Looks like there's some relief on the tax side.

Speaker 3

The decline in Yes. I think the sequential decline, all those Texas markets, I think, was pretty much real estate tax related. Just the timing of accruals and settlements and all that, it can be pretty volatile from quarter to quarter, but Normalizes over the course of the year.

Speaker 5

Yes. And that's where you're seeing some of those items, particularly in Texas where we have the real estate tax Prior appeals come in, that's some of that occurring.

Speaker 6

Got it. Thank you.

Operator

And we will go next to Alexander Goldfarb with Piper Sandler. Your line is open.

Speaker 15

Thank you and good morning down there. So two questions. First, just going back to the supply just because it's a big topic that always comes up with the Sunbelt. You guys articulated a lot of how your portfolio is doing. Would you say it's more just your rent versus new supply?

Speaker 15

Or would you say it's more just proximity, meaning that Your properties are less end up less likely to be near where the new supply is, meaning that the new supply is in other The market and therefore like where you cited some supply heavy markets where you guys actually did well, it's because just proximity In general, your portfolio doesn't line up where a lot of the new products are being built. I'm just trying to understand.

Speaker 2

Alex, this is Eric. I would say it's both of the points that you're making that are at play here. Where we do see Supply coming into a market more often than not, it is in Some of the more urban oriented submarkets and when you look at our portfolio and the footprint we have and the diversification we We have across a number of these markets, particularly big cities like Atlanta and Dallas. We have Generally more exposure to the suburban markets versus the urban markets. So I think there is a supply proximity point That I would point to that you're mentioning that probably works in our favor to some degree.

Speaker 2

It's hard to it will vary of course by market. And then the other thing that you pointed to, which I think is also at play here is the price Point that broadly we have our portfolio. When you look at the average effective rent per unit of our portfolio and compare it to the average rent Of the new product coming into the markets, we still are somewhere in the 25% plus or minus range below where new product is pricing. And again, it will vary a bit by market, but that certainly provides Some level of protection against the supply pressure And offers the rental market a great value play in renting from us versus something that may be down the street That's newer, but considerably more expensive. And with some of the renovation work that we're doing, frankly, that's what creates the opportunity for us to do some of this renovation work And effectively offer the resident in the market, what it feels like a brand new apartment on the interior, But still at a meaningful discount to what they would have to pay in rent for something brand new.

Speaker 2

So there are multitude of factors at play and it varies by market. But certainly, We cannot absolutely eliminate new supply pressure, but there after being in this region for 30 years, we've learned how to do some Thanks to help at least mitigate the pressure a little bit here and

Speaker 15

there. Okay. Second question is on insurance, certainly a hot topic, especially in Florida and Texas with big premium jumps. Are you guys seeing opportunities where some of your smaller players or maybe some of the merchant Yes, recent new developments may have they may not have underwritten 50% type premium increases and therefore That could gin up some buying opportunities. Do you think that you would see that potentially, people having to sell because of insurance pressure?

Speaker 4

This is Brad. I definitely think that that is something to keep an eye on. I do think the market down there right now is extremely tough And depending on where you are in Tampa or South Florida, those insurance premiums are increasing substantially for New products. So I would say for newly developed properties in those areas, Tampa, Orlando, not as much, but Jacksonville, It's something for us to keep an eye on because I do think that the insurance premiums are going to be a lot higher than the developed or underwrote than they expected, and I do think there's going to be some impact To the sales proceeds as a part of that. And so I think as you get some of the supply pressures coupled with that and some of the leasing pressures, those are areas That we'll keep an eye on.

Speaker 4

And then obviously, we have the benefit with our broader portfolio in insurance pricing. That definitely It's a platform benefit for us.

Speaker 15

Okay. Thank you.

Operator

We will go next to Wes Golladay with Baird. Your line is open.

Speaker 16

Hey, good morning, everyone. Just a quick question on capital allocation. You know your stock is yielding low 6 to maybe mid 6 implied cap. So how do you view a potential buyback versus starting new development this part of the

Speaker 2

cycle? Well, Wes, this is Eric. I would tell you right now, we believe that What really is important to have is a lot of strength and capacity on the balance sheet. Obviously, we're in a Very turbulent environment at the moment. Capital markets are very turbulent.

Speaker 2

There's still obviously some level of risk And so we really believe that the thing to do right now is to protect capacity And keep the balance sheet in a strong position, not only for defensive reasons, but as Brad has alluded to, we do think as we get later in the year that we may See some improving opportunities on the acquisition front. We have As Brad alluded to, we have 4 projects that we may start, we're scheduled to start later this year. These are projects That is something that we feel very comfortable with. These would be of course, it's we're still Fine tuning a lot of the numbers and pricing is not yet locked in, but we are seeing some Early indication of some relief on some of the pricing metrics. And of course, by the time we get to 2026 and 2027, we think the leasing Environment is likely to be pretty strong given the supply pullback that we expect to start to see happening late in 2024 2025.

Speaker 2

So We would anticipate that these will be some very attractive investments that we could potentially start later this year and would reconcile Nicely to even where our current cost of capital is. So, we certainly understand the metrics and the math and all this and pay Close attention to it. We don't think we're going to ramp up a lot more than that at this point in the cycle, but we feel pretty good about the 4 opportunities that we're looking at the moment.

Speaker 16

Okay. And then maybe if we can go to that topic of distress. I mean, a lot of the private owners right now, do you feel that they may be upside And the banks are just extending their pretending right now or do they have significant equity just maybe the capital infusion?

Speaker 4

Yes. I mean, I don't think that we are seeing any distress in the market right now. I mean, the projects, just like Our portfolio, the operating fundamentals are very strong. So even on some of these lease ups when they underwrote them in 2021 or so, The leasing fundamentals are going to be a lot stronger than what they expected. And even the joint venture projects that we started in 2021, cap rates We're in the 5, 5.5 range on the valuation.

Speaker 4

I mean, that's kind of where we are. So I would say that The developers have been somewhat disciplined in their underwriting the last couple of years and the operating fundamentals are outperforming. So They won't get the pricing that they could have gotten a year and a half ago, but there's still profit in a lot of these projects. So we're not seeing that yet. Where I think the distress could come are projects that closed a year, year and a half ago and they did some type of financing Cap or something that's coming due and it's going to require a reset of or a pay down in order to get that loan rightsized and the debt Service coverage, rightsize, those are going to be the ones I think that are going to have a little bit of trouble.

Speaker 12

Great. Thanks, everyone.

Operator

And we will go next to Eric Wolf with Citi. Your line is open.

Speaker 17

Thank you. Yes, just to follow-up to your answer there a moment ago, You mentioned your balance sheet is just in incredible shape. I don't think I've can remember seeing partner companies sort of mid-three times leverage Probably a little 3 times later this year. So my question is really sort of what would it take, what type of opportunity would you need to see before you'd be willing to take your leverage back up to More normal sort of 5 times amount. And I guess if a portfolio came across that was like in say the 5.5% to

Speaker 2

Eric, this is I'll start and Al, you can jump in. But we do anticipate that over the course of The next year or 2 that we will see leverage probably edge back up just a little bit, believing that we will, if nothing else, we've got some We've got some development funding that we'll do. And of course, the funding that we're doing on our redevelopment work and repositioning work is super, very, very accretive. And so we will begin to see leverage move A little bit back up. But having said that, we just think right now, given the uncertainty in the broader capital markets Landscape and what we imagine to be likely an opportunity for more distressed asset buying that capacity Right now is a good thing to have.

Speaker 2

And so we're going to hold on to that. And I do think that, obviously, if we did See some larger opportunity come across that we felt made sense for us strategically and Felt like we could do something in closer to 5.5% to 6% range from a cap rate perspective. That probably would certainly Get our attention and obviously depends on a lot of different other variables. But we like where the balance sheet is right Now given the broader landscape that we have with the capital markets and the transaction market, And so we're going to be very cautious in how we put that capacity to work. We've got some known needs that I've just You mentioned that are very attractive investments and we'll continue to move forward with those.

Speaker 2

We don't have any certainly need to go attracting additional capital Right now, as Al alluded to, the debt portfolio is in terrific position, a lot of Duration and it's all 100% fixed. So we're going to sit tight with what we have at the moment largely.

Speaker 5

I'll just add just quickly that, that's a very good point you make that really our target long term target is closer to 4.5 times to 5 times on the EBITDA coverage. I mean, We're providing opportunity right now, as Eric mentioned, and hopefully they will find those, expect to be able to find those and long term our target is in line with what you mentioned.

Speaker 17

Thanks for that. And then just unrelated guidance question, you did 3.9 in terms of blended Spread up 1st quarter, it sounds like you expect to accelerate through the balance of the peak leasing season. So my question is really just how did it get down to that 3% blend that's in your guidance? Is there just a steep drop off later this year Or just some conservative baked in there.

Speaker 5

I'll just start with it and Tim can give some more details on it. Zach, what I would say primarily is One, we need to see the bulk of the leasing season happen as it comes. So we're providing our team to see that and get more information. We're encouraged certainly by what we saw in the Q1. And I think secondly the biggest point would be we do expect to see that seasonality in the most acute if you would in

Speaker 3

the Q4. That's typically when it is in a normal year.

Speaker 5

That's sort of what we're expecting. So we could see that new lease pricing be a little more negative in that Q4 because the holiday season and demand just really shuts down in that period, so that's what we provided for in our forecast I think at this point.

Speaker 3

Yes, Eric, this is Tim. I mean I think it will kind of boil down to New lease pricing that we see over the late spring and summer will be the ballgame in terms of whether it ends up a little better than we thought or a little worse. Yes. Obviously, the bulk of the lease is happening during that period and they carry for several months throughout the year. So they have Certainly an outsized impact.

Speaker 3

So if those new lease rates accelerate more, then it probably is a little better than we thought. If they accelerate not quite as much, Probably a little less, because I think renewals are going to be relatively consistent through the rest of the year.

Speaker 17

Got it. Thanks for your time.

Operator

We will go next to Jamie Feldman with Wells Fargo. Your line is open.

Speaker 6

Great. Thank you and good morning. I want to go back to your comment about 11% of leases written in the Q1 were new people moving into Sunbelt. Can you provide more color on that data point across the different markets? And I guess I'm thinking more about maybe some of the larger MSAs versus the smaller MSAs?

Speaker 3

Yes, this is Tim. So 11% overall and probably markets you would expect in terms of Phoenix is our top market. You have about 18% of move ins out of market going into Phoenix. Tampa was another big one at 15%. Charlotte was 13%, Charleston and We're pretty high in there as well.

Speaker 3

And so those are the biggest drivers and that's been pretty consistent throughout the last Several quarters of the ones that are benefiting the most.

Speaker 6

Interesting. And then I guess similarly, if you think about the layup I guess those are also the markets where you've seen the most growth in tech jobs or jobs that might be most at risk. Can you talk at all about How layoff activity might be impacting the different types of MSAs and even that statistic specifically? Just trying to think through the next 12 months or so.

Speaker 3

Yes. I mean, we haven't seen a ton of impact yet. I mean, I think certainly the technology sector Just getting a lot of publicity and a lot of there's layoffs announced there, but I do think a lot of the other sectors are still in the net hiring position. Austin is one particularly in North Austin where we've seen a little bit of impact from that, some of the tech jobs up in North Austin. But at the same time, You've got Tesla still planning to expand over the next couple of years there.

Speaker 3

You've got Oracle moving their headquarters there. So certainly long term and also It's a job machine and we feel really good about that. Outside of that, we haven't seen a lot. Phoenix A little bit, but again, we've got properties there with a huge semiconductor plant coming in right near one of our properties. There's a little bit of short term pressure over the next few quarters, but long term feel really good about all of those markets.

Speaker 6

Okay. Thank you. And then I know you talked about insurance and taxes on the expense side. Just as we think about your guidance for the year, any other variables Line items on the expense side that maybe you don't feel quite as confident or maybe there could be some changes there. I know you got your insurance coming up in July, The renewal?

Speaker 5

Those are the 2 big items. I mean, I think the expense the key components of expenses for the year are personnel repair and maintenance, taxes and insurance. I think we The first two, we expect to moderate as the year progresses as we talked about in taxes and insurance, remaining the biggest items that have the most unknown At this point, so that's the ones we're keeping our eye on at this point.

Speaker 6

Okay. All right. Great. Thank you.

Operator

Question from Linda Tsai with Jefferies.

Speaker 16

Hi. Maybe just as a short follow-up to that last Question, in terms of rationale for move outs, job transfers and buying a new home, has the balance of these regions shifted since 4Q and any regional trends you'd highlight?

Speaker 3

I mean it's Pretty consistent. 1, we've seen move outs to buy a house has dropped dramatically as you would expect with what interest rates have done. We've seen our move outs due to rent increase drop quite a bit as well. The biggest reason for move outs, which As always, consistently our largest reason for move out is just a change in the job and job transfers and that's up a little bit. But it's As we've talked to people out on-site, it's more just moving for another job as opposed to any significant job losses.

Speaker 3

Yes. Turnover overall is down a little bit, but it's the some of the key reasons that we've talked about before and Pretty consistent across markets no matter larger markets or secondary markets.

Operator

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

Speaker 2

No additional comments to add. So we appreciate everyone joining us and look forward to seeing everyone at NAREIT. Thank you.

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Earnings Conference Call
Mid-America Apartment Communities Q1 2023
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