Mid-America Apartment Communities Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

Key Takeaways

  • MAA achieved blended rent growth of 3.8% in Q2, with new lease pricing up 100 basis points sequentially and renewal rates up 6.8%, while occupancy remained steady at 95.5%.
  • Despite elevated new supply deliveries, strong demand and positive migration continue to support performance, particularly in mid‐tier markets which are outperforming larger metros.
  • The transaction market remains muted, with cap rates near 4.9%, leading MAA to lower its 2023 acquisition forecast to $200 million and dispositions to $100 million, maintaining a patient balance sheet strategy.
  • MAA delivered 249 units across new developments (Novel Daybreak and West Midtown) and is advancing a $735 million project pipeline, while repositioning, smart home and amenity upgrades yield returns in the upper teens.
  • Leadership raised full‐year core FFO guidance to $9.14 per share, increased rent growth outlook, lowered occupancy guidance, factored in a Texas property tax rollback, and ended Q2 with record low leverage (3.4×) and $1.4 billion of liquidity.
AI Generated. May Contain Errors.
Earnings Conference Call
Mid-America Apartment Communities Q2 2023
00:00 / 00:00

There are 18 speakers on the call.

Operator

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

Speaker 1

Thank you, Aaron, and good morning, everyone. This is Andrew Schafer, Treasurer and Director of Capital Markets for MAA. Members of the management team also 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 measures. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non GAAP and Comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the For Investors page of our website 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, everyone. Leasing conditions across the MAA portfolio continue to reflect our steady employment markets, strong positive migration trends and continued low resident turnover. As a result, we are seeing good demand for apartment housing and are absorbing the new supply deliveries while supporting solid rent growth. In line with normal seasonal patterns, new lease pricing improved in the 2nd quarter and the spread between new lease pricing and renewal pricing narrowed. Rents for new move in residents jumped 100 points higher on a sequential basis as compared to the preceding Q1.

Speaker 2

Renewal lease pricing in the 2nd quarter remained strong growing by 6 0.8%, driving overall blended pricing performance in Q2 to 3.8%, which is ahead of the original projections we had for the year. Occupancy remains steady with average physical occupancy in the second quarter at 95.5%, which is consistent with the preceding Q1, this despite a higher number of lease expirations during the 2nd quarter. While we are working through a higher level of new supply deliveries across our markets for the next few quarters, with the demand trends holding up as they are, we expect to continue to drive top line results that will exceed our long term historical averages As has been the case in prior cycles of higher supply, we see the demand supply dynamic holding up slightly better in our mid tier markets And this component of our strategy continues to bring support to overall portfolio performance during this part of the cycle. As inflation pressures ease a bit and some of the efficiencies we expect to capture from new tech initiatives increasingly make an impact. As Al will cover in his comments, we do now also expect to see some relief on property taxes coming out of Texas, which further supports our ability to reduce our outlook for expense growth over the back half of the year.

Speaker 2

The transaction market remains quiet. We continue to underwrite a few deals, but the limited number of properties coming to market combined with strong investor interest continues to low cap rates and strong pricing. We continue to expect that more compelling opportunities will emerge later this year and into 2024 and believe it's important to remain patient with our balance sheet capacity. Our new lease up, new development and redevelopment pipelines will all continue to make all continue to make solid progress and will provide attractive incremental additional earnings over the next few years. I did want to take a moment and express my deep appreciation to our on-site property teams for all their hard work and great service to our residents during these busy summer months.

Speaker 2

And with that, I'll now turn the call over to Brad.

Speaker 3

Thank you, Eric, and good morning, everyone. As we've seen each quarter over the past year or so, 2nd quarter transaction activity remains muted versus normal levels. Volatility and uncertainty in the debt market continue to cause the majority of sellers to postpone their sale process, leading to a drop in poor sell inventory on the market. For high quality well located properties in our region of the country, continues to be strong investor demand causing cap rates to adjust slower than interest rate movements alone would indicate. Having said that, we have seen average buyer cap rates move up to 4.9% in the 2nd quarter from 4.7% in the 1st quarter with most cap rates ranging between 4.75% and 5.25%.

Speaker 3

We continue to believe we're likely to see more compelling but with no potential acquisitions under contract at the moment, we've lowered our acquisition forecast for the year to $200,000,000 at the midpoint. Our acquisition team remains active in the market and Al and his team have our balance sheet in great shape and ready to quickly support any transaction opportunity should it materialize. Due to the lower funds needed for expected acquisitions, we've also lowered our disposition forecast for the year to $100,000,000 At the midpoint, our properties in their initial lease up continue to outperform our original expectations producing higher NOIs and higher earnings and creating additional long term value for the company. These properties are navigating the increased supply pressure well and on average have in place rents 22% above our original expectations. For the 4 properties that are either leasing or will start leasing In the Q3, this rent outperformance, which is partially offset by higher taxes and insurance, is estimated to produce an average NOI yield of 7.2%, which is significantly higher than our original expectations for these properties.

Speaker 3

Early leasing is going well at Novel Daybreak in Salt Lake City and Novel West Midtown in Atlanta and we expect to start leasing at Novel Val Vista in Phoenix in the Q3. During the Q2, we also reached stabilization at MAA LOSO in Charlotte. Despite permitting and approval processes that are taking a bit longer than we anticipated, pre development work continues to progress on a number of projects. We expect 3 projects will be ready to start construction in the back half of twenty twenty three if we see sufficient adjustments to construction costs and rents to support our NOI yield expectations. These projects include 2 in house developments, 1 in Orlando and 1 in Denver and 1 pre purchase joint venture development in Charlotte.

Speaker 3

We've pushed back the start of the Phase 2 to our West Midtown pre purchase development in Atlanta to 2024 due to the approval process taking longer than anticipated. The team continues to work through the increased pre purchase development opportunities that had been presented to us and we're hopeful we will be able to add currently unidentified development opportunities to our pipeline. Any project we start over the next 12 to 18 months would likely deliver in 2026 2027 and should be well positioned to capitalize on what we believe is likely to be a much stronger leasing environment, reflecting the significant slowdown in new starts over the balance of 2023 2024. Our construction management team remains focused on completing and delivering our 6 under construction projects And they're doing a tremendous job managing these projects and working with our contractors to minimize the impact of inflationary and supply chain pressures as well as labor constraints on our development costs and schedules. During the quarter, the team successfully completed and accepted delivery of a combined 249 units, a novel Daybreak in Salt Lake City and novel West Midtown in Atlanta.

Speaker 3

That's all I have in the way of prepared comments. So with that, I'll turn the call over to Tim.

Speaker 4

Thanks, Brad, and good morning, everyone. Same store revenue growth for the quarter was essentially in line with our expectations with stable occupancy, low resident turnover and better blended rent performance than what we previously projected. Despite increasing supply pressure in some of our markets, Blended lease over lease pricing of 3.8% comprised of new lease growth of 0.5% and renewal growth of 6.8% was better than our forecasted expectations. While occupancy was slightly below our expected range for the quarter, the resulting higher blended lease growth performance is a favorable trade off providing a greater future compounding growth effect. As discussed last quarter, we expected new lease pricing to show typical seasonality That is to accelerate from the Q1 and renewal pricing, which lag new lease pricing for much of 2022 to moderate some but still provide the catalyst strong second quarter pricing performance.

Speaker 4

As Eric mentioned, this played out as expected with new lease pricing accelerating 100 basis points as compared to the Q1 and renewal pricing remaining strong. Alongside the pricing performance, average daily occupancy remained consistent with the 1st quarter at 95.5%, contributing to overall same store revenue growth of 8.1%. The various demand factors we monitor remained in the Q2 with 60 day exposure, which represents all current vacant units plus those units with notice to vacate over the next 60 days, largely consistent with prior year at 8.5% versus 8.4% in the Q2 of last year. Furthermore, Quarterly resident turnover was down almost 2% from the prior year. Move ins from markets outside of our footprint ticked up slightly from Q1 to 13% and rent to income ticked down slightly from Q1 to 22%.

Speaker 4

The employment market remains relatively strong also, particularly in the Sunbelt markets. While lead volume trails the record demand scenarios we saw in 2021 2022, it is up from 2018 2019, The last year is where we experienced a more normal demand curve. Our prospect engagement platform that combines AI, marketing automation and scheduled human engagement has enabled us to engage with prospects more effectively. July to date pricing remains ahead of our original expectations with blended pricing of 3.2%. This is comprised of new lease pricing of 0.3% and renewal pricing of 5.5%.

Speaker 4

New lease pricing is relatively consistent with the 0.5% for quarter and within 5 basis points of June new lease pricing. As expected, renewal pricing is moderating to a more normal range as leases are beginning to expire that were signed in the period last year when renewal rents had caught up to new lease rents. Physical occupancy is currently 95.6% with average daily occupancy for July month to date of 95.3%. The current July occupancy and July exposure, which is even with the prior year at 7.5% puts us in a good position for the remainder of the quarter. A key part of our portfolio strategy is to maintain a broad diversity of markets, submarkets, asset types and price points.

Speaker 4

As we compete with elevated supply deliveries, particularly in some of our larger markets, many of our mid tier markets are performing well and leading the portfolio and pricing performance in the Q2 and into July. Savannah, Charleston, Richmond, Kansas City, Greenville and Raleigh are all outperforming the overall portfolio. We expect that this market diversification combined with continued strong demand fundamentals will help mitigate the impact of new supply that we expect to be elevated over the next several quarters. Regarding redevelopment, we continued our various product upgrade initiatives in the Q2. This includes our interior unit redevelopment program, of smart home technology and our broader amenity based property repositioning program.

Speaker 4

For the Q2 of 2023, We completed nearly 1900 interior unit upgrades and installed nearly 2,300 smart home packages. We are nearing on the Smart Home initiative and now have over 92,000 units with this 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 15 properties in the program and the results have exceeded our expectations with yields on costs in the upper teens. We have another 5 projects that will begin repricing in the 3rd quarter and are evaluating an additional group of properties to potentially begin construction later in 2023. That's all I have in the way for prepared comments.

Speaker 4

Now I'll turn the call over to Al. Okay.

Speaker 5

Thank you, Tim, and good morning, everyone. Reported core FFO for the quarter of $2.28 per share was $0.02 per share above the midpoint of our quarterly guidance. The outperformance was primarily driven by favorable interest in overhead costs during the quarter and a large portion of the overhead cost favorability is timing related the cost now expected to be incurred in the back half of the year. Overall, same store operating performance for the quarter was essentially in line with expectations. As Tim mentioned, blended lease pricing continues to outperform original expectations for the year and build stronger than expected longer term revenue, but was primarily offset in the 2nd quarter by average occupancy slightly below forecast.

Speaker 5

Also as expected, we began to see moderation in same store operating expense growth during the 2nd quarter With the growth of personnel, repair and maintenance and real estate expenses tax expenses, excuse me, which combined represent 70% of total operating costs, all reflecting moderation from the prior quarter. We expect moderation for these items to continue through the remainder of the year, particularly for real estate taxes, which we'll discuss More with guidance in just a moment. As mentioned in the release, our annual property and casualty insurance programs renewed on July 1st with combined premium increase of approximately 20%, which was in line with our prior guidance. During the quarter, we invested a total of $300,000 of capital through our redevelopment, repositioning and smart rent installation programs, producing strong returns and adding to the quality of our portfolio. We also funded just over $51,000,000 of development costs during the quarter toward the completion of the current $735,000,000 pipeline, leaving $344,000,000 remaining to be funded.

Speaker 5

As Brad mentioned, we also expect to start several new deals over the next 12 to 18 months, likely expanding our development pipeline to be closer to $1,000,000,000 which our balance sheet remains well positioned to support. We ended the quarter with $1,400,000,000 in combined cash and borrowing capacity under our revolving credit facility, providing significant safety and future opportunity. Our leverage remains historically low, the debt to EBITDA at 3.4 times and our debt is currently 100% fixed for an average of 7.5 years at a record low 3.4%. We do have $350,000,000 of debt maturing in the 4th quarter, but our current plan is to remain patient and allow interest rates and financing markets to continue stabilizing over the next few quarters before refinancing with long term debt. And finally, given 2nd quarter's earnings performance and the expectations for the remainder of the year, we are revising our core FFO and several other areas of our guidance previously provided.

Speaker 5

With the blended pricing outperformance achieved through the Q2, we are increasing the midpoint of our effective rent growth guidance to 7.25%, a 25 basis points increase. This is offset by a decrease in our physical occupancy guidance, which is now projected to average 95.5% for the full year, a 30 basis points decrease. Now this trade off supports slightly higher rental earning going forward, our total revenue growth guidance for this year remains unchanged at the midpoint of 6.25%. In early July, the Texas state legislature passed a tax overhaul which significantly rolled back property tax rates across the state to effectively redistribute a budget surplus. Given aggressive property valuations, we had previously anticipated rate rollbacks in Texas, But we have now added a specific reduction for this legislation, which lowers our overall same store real estate tax growth rate for the year by 50 basis points to 5.75% at the midpoint and that's $0.02 per share to core FFO for the year.

Speaker 5

There's still limited information regarding exactly how individual Counties and municipalities will push this change through, but our guidance now includes our early estimate of this overall impact, which is expected to be ongoing. In summary, we are increasing our core FFO projections for the full year to a midpoint of $9.14 per share, which is an increase of $0.03 per share. This increase is primarily comprised of a carry through of $0.01 per share from the 2nd quarter performance, outperformance as well as the $0.02 per share addition related to legislation. As Brad mentioned, we also revised our transaction volume expectations for the current year to reflect current market conditions. So that's all we have in the way of prepared comments.

Speaker 5

So Aaron, we will now turn the call back to you for any questions.

Operator

We'll now open the call up for questions. And we will take our first question from Eric Wolf with Citi. Your line is open.

Speaker 6

Good morning. Apologies if I missed this in your remarks, but could you just tell us the blended rent growth that you're expecting sort of for the full year now if that's been revised upward and then what that would in the back half of the year as well?

Speaker 5

Yes, Eric, this is Al. We had started the year, if you remember, with 3% for the full year, but the outperformance we've seen through the first half, that's increased that. So I think for the full year, we didn't put that in our guidance, but you do the math on this, about 3.5% for this year. And that means Largely sticking to the 3% for most of the back half that we started in July as Tim talked about stronger than that. So you're probably averaging 3.2%, 3.1%, 3.2% for the back half in that projection now.

Speaker 5

Yes, that makes sense. And then, Now.

Speaker 6

Yes, that makes sense. And then you mentioned that new lease rates did come up as you expect In the Q2, as you would expect seasonally, but there's still a pretty wide gap between new lease and renewal rate growth. Just trying to understand what your sort of expectation would be for new lease growth in the back half of the year. And then thinking through whether that's actually a good sort of proxy for market rent growth, should the 2 kind of be around the same?

Speaker 4

Hey Eric, this is Tim. With new lease growth, we did as you said, we saw it accelerate some as we expected. It didn't accelerate quite as much as what we would see in a normal environment. I do think there's a little bit of supply pressure impact in that. Having said that, I don't really expect it to decelerate as much as it normally might would in Q3.

Speaker 4

It's typically kind of around this time that you start seeing New lease pricing moderate a little bit as demand starts to moderate. So I don't expect the volatility, if you will, to be quite It's large on the new lease side. On the renewal side, we talked about it from the beginning of the year. There was a sort of unusual scenario last year where for the 1st, call it, 7, 8 months of 2022 new lease pricing outpaced renewal pricing quite a bit. So we knew we had opportunity kind of mark to market those that were on the renewal rates as the 1st part of last year.

Speaker 4

So We've kind of reached a point where we're lapping those and starting to reprice those. That's where you've seen the renewal pricing moderate a little bit. But We still expect it to be quite a bit stronger than the new lease rates, which is typical and really just kind of returning to a normal seasonality scenario.

Speaker 6

Yes. All right. Thank you.

Operator

And we will go next To Jamie Feldman with Wells Fargo. Your line is open.

Speaker 7

Great. Thank you for taking my call. I appreciate your comments on mid Your markets outperforming the entire portfolio. Can you talk more about A versus B and how those are performing within your market?

Speaker 4

Yes, this is Tim. The Bs are still outperforming a little bit. I would call it kind of a 40 to 50 basis point gap between How we would define As versus Bs and that's pretty consistent on the new lease side and the renewal side. So I think It's part of the portfolio structures that we expect those markets to that can be more of the B assets Form well and some of the supply or in most markets the supply coming in hasn't been quite as impactful on some of the more B assets. They've typically been much higher price, more urban style assets and a much higher rent than particularly some of the B assets.

Speaker 7

Okay. Thank you. And then in the press release, you talked about Demand kind of maybe even better than your initial expectations and mitigating some of the supply risk. Can you give more color or maybe put some numbers around that? Maybe I don't know if you've looked at in different detail, but like what percentage of truckloads you need mitigate that supply to rates, just more color on what gave you confidence in making that statement and what you're seeing?

Speaker 4

Yes. So there's a few things that we typically look at as a leading indicator of demand. You obviously have job growth at a macro level, which continues to be Pretty strong and certainly stronger in a lot of the Sunbelt markets. And then more granular, we look at exposure, lead volume, what we call lead per exposed unit, which is really a combination of those two metrics and then also looking at what our renewal accept rates are. So On lead volume and leads for exposed, it's not at the level it was in 2022, which was record demand.

Speaker 4

But As I've noted in the comments, if you go back to kind of the 2018, 2019 timeframe when we saw more normal, if you will, demand scenario. We have our lead volume leads for exposed is quite a bit higher than those times. So That's encouraging. And then our renewal accept rates remain strong and higher to that period as well. We have 60% accept rate for July, 58% for August and 43% for September, which is at or above where we would expect or we would like to see it.

Speaker 4

And then on a couple of other metrics, Sprint to income continues to stay consistent, stay low, actually dropped a little bit from what it was in Q1. Turnover remains low with reasons People moving out to buy houses way down. So all of those various factors, while not quite at the level we've seen with the record performance last year still healthy and stronger than a typical year, if you will.

Speaker 2

And Jamie, this is Eric. I'll add to What Tim just said, which covers a lot of reasons why we see the demand staying healthy. The other thing is just the continued positive migration trends. 13% of leases we wrote in Q2 were for people moving into the Sunbelt for the first time and that compares to 15%, 16% during the peak of COVID. So While it's moderated, it's moderated just a little bit and it's still well above where it was before COVID started.

Speaker 2

So These positive migration trends are still there. Any thought of some kind of reversal after COVID was over? I think we've just spelled that fear at this point. So there's just a multitude of factors that sort of go into it and we're pleased with where we see demand continuing to hold up.

Speaker 8

Okay. That's very helpful color.

Speaker 7

And then finally for me, your comments about expenses moderating into the back half of the year, Certainly encouraging. As you think about 2024 and the key line items, do

Speaker 8

you have a sense like do

Speaker 7

you think all of them will be down in terms of your expense growth rate?

Speaker 5

I think as you talk about, I mean, too early to really get too refined on 2024, but certainly we would expect some continued moderation just Some of the inflationary pressures begin to wane. The 3 main areas, obviously, the personnel, repair, maintenance and taxes. Taxes, I would say being the biggest, certainly, it's going to follow the moderations of the top line. So it's a backward looking thing. So you would think that's 24 looking back to 2023, which is a good year, but a more moderate year than it was in 2022 that you should see some moderation there.

Speaker 5

So probably in those 3 to make up 70% of our expenses, you'll see some moderation at some level. Can you ballpark it? Hard to ballpark at this point. I don't think it would be probably yet a long term rate, but somewhere between where we are today and that.

Speaker 7

Okay. All right, great. Thank you.

Operator

And we will move Next to Austin Wurschmidt with KeyBanc Capital Markets. Your line is now open.

Speaker 9

Great. Thanks. Good morning, everybody. I'm just curious if you're finding that you're having to trade off some of that new lead growth to drive traffic or sustain occupancy since the 95.5% level. It seemed like July occupancy dip from what you were tracking.

Speaker 9

And I'm just wondering, trying to think through as sort of seasonal demand slows and picks up, does that concern you as you move to the latter part of the year and heading into 2024?

Speaker 4

Hey, Austin, this is Tim. On the occupancy front, we've kind of we've been hanging in that 95.5% range for really all of the first half of the year, which we've been comfortable with as we mentioned with pricing a little bit better than we thought. So we're willing to make that trade off with the compounding growth we can get for rents. As we moved into July, I can see moderated a little bit. There is some unique circumstances in Atlanta that we can talk about that's driving that down a little bit.

Speaker 4

Kind of pull Atlanta out of that number, we'd be right back at 95.5% on occupancy, which we're comfortable being in that range. It hasn't moved the needle, I don't think, on the newly traded a little bit. I mean, there is some supply pressure that we've talked about. But Outside of that, I don't think there's anything specifically tied to occupancy necessarily.

Speaker 2

And Austin, I'll also add a couple of points on that. The The thing to keep in mind is we have a pretty extensive sort of redevelopment and some of the new technology initiatives that we're particularly smart home initiative that is that we're particularly smart home initiative that continues to fuel the opportunity for Positioning the portfolio at a higher rent level, particularly as it compares to some of the new supply coming into the market. One of the benefits of new supply coming into the market, particularly when it's coming into the market on average 20% higher than the rents that we're charging. It creates a more compelling value play for our portfolio to the rental market. And so that's working to give us some momentum on the rent growth that we might otherwise not have both of those things.

Speaker 2

And then the so I would just tell you and the other thing that We track pretty actively by people leave us. And when you look at move outs that are occurring because people don't want to pay the rent increase, That's ticked down a little bit from where it was last year as a percent of our turnover, but it's still running higher than it has long term. And as Tim says, we're okay with that trade off for Slightly lower Oxy right now because that revenue growth associated with rents is really much more impactful in terms of compounding value over the long term. So, we sort of like where we are right now, continue with this sort of trying to manage that tension between pricing and occupancy where it is right now.

Speaker 9

Got it. No, that's helpful, Deepa. It sounds like some sense to occupancy and maybe even some of the frictional vacancy is like redevelopment was picking up a little bit from where you had originally expected. Yes. Second question, When you look across some of your larger markets, obviously new lease growth is modestly positive.

Speaker 9

But when you kind of look across the large markets where you're feeling some of the supply pressure more Are there any that are notable game to lease today that you'd kind of highlight that we should be a little bit more focused on Moving forward.

Speaker 4

Hey, Austin, it's Tim. When you say gain to lease, meaning where there's Threats for Yes, the most careful of the rates

Speaker 9

are noticeably above market rents.

Speaker 4

Yes. Not I wouldn't say anything significant. Even we do have some negative new lease rates on a couple of those larger markets, But none of them are getting too out of balance. I mean, they're kind of in that negative 1% high percent range. So it's not a huge variance of what we're seeing overall.

Speaker 4

So nothing significant that I would point out.

Speaker 9

But to those that are at that Kind of negative 1% -ish range.

Speaker 4

So you've got I would point out Austin is one that's been a little softer. Austin and Phoenix and we've talked about those two markets Here for a while are kind of the 2 that I would point out that have been our weaker performers and certainly have some supply impact. So great about them long term, obviously, have great demand fundamentals, but those have been 2 that probably lead the list in terms of our higher concentration markets.

Speaker 1

Very helpful. Thanks for the time.

Operator

All right. Thank you very much. We will go next to Brad Heffern with RBC Capital Markets. Your line is now open.

Speaker 3

Yes. Hi, everybody. For some

Speaker 10

of the markets that are

Speaker 4

Supply, I mean supply is somewhat widespread across several of the larger markets in particular. And then it's nuanced too by market obviously and depending on where our portfolio is relative to some others. I mean, Charlotte is a good example. It's getting a high level of supply similar to some of these other markets, but it's performed well. And It's just kind of where our portfolio is positioned versus where the supply is coming in.

Speaker 4

So generally, I'd say supply, again, going back to the demand side, if you Look at job growth across our markets compared to national averages, we're pretty consistently higher than the average across all those markets. So There's obviously nuances by market, but nothing notable outside of that.

Speaker 11

Okay, got it. And then

Speaker 10

on the balance sheet, You've been setting record low leverage numbers every quarter for a while now. What do you think the likelihood is that we'll see these sub-4x numbers stick around for the long term? I guess what are the circumstances where you would potentially take leverage back up to a more normal level?

Speaker 5

So Brad, this is Alan. We've talked For several quarters now. Certainly, we love the strength of our balance sheet, but our leverage is really below where we want it long term at this point. We've been patient to allow opportunities come to us. So in our credit rating at A minus 4.5 would be something you could be very confident.

Speaker 5

So we're a full turn below that right now. So Significant opportunity there, but willing to be patient to allow Brad to find the right investments.

Speaker 2

And we do think that as we get later in this year and particularly into 2024 that we are seeing early indications that would suggest that opportunities are going to start Pickup as Brad alluded to, we have seen cap rates move just a tad on a sequential basis quarter to quarter. And we're talking he and his team are talking to another a number of merchant builders right now about some J. D, so we continue to feel confident and comfortable that more opportunity is around the corner.

Speaker 12

Appreciate it.

Operator

And we will move next to Michael Goldsmith with UBS. Your line is open.

Speaker 13

Good morning. Thanks a lot for taking my question. In response to an earlier question in the Q and A, you talked about new lease not accelerating as Much as you expected, does that mean that new leases have the rent growth has peaked earlier in the season than it has in the past? And then the second part of that question talked about, you don't expect it to decelerate as quickly. Why is that?

Speaker 4

Well, one nuance there. The New Age pricing has done what we expected. It didn't decelerate or didn't accelerate less than we expected. It accelerated a little bit less than what we've seen in the last couple of years, but in line with if not slightly better than expectations. And so what we've seen is New lease pricing accelerate just not quite as much as it may do in a lower supplied environment.

Speaker 4

So I think at the same time, given all the fundamentals we're seeing and the various metrics we talked about earlier, Don't quite expect that new lease rate to drop off quite as much as it might normally for kind of the same reason it didn't accelerate as much. So That's kind of how we see it playing out, but really Ben, as it's not better than expected.

Speaker 13

And then as a follow-up, there's a lot of new supply coming in your markets, tenants or potential tenants have a lot of options to choose from, are you seeing a longer time for tenants to make a decision or Maybe like between your foot traffic to visit and the time between that and when they sign our conversion What are you seeing in the trends there? What are you seeing in the trends from that perspective?

Speaker 4

Not really anything much. It's probably taken a little bit longer for us to get an answer on the renewal side. But Ultimately, as I mentioned, our renewal accept rates are better than they were a couple of years ago in a similar environment and kind of where we expect to see them. Our conversion rates are in line with that period as well. So nothing notable Other than I mentioned the leads were are down a little bit from what we saw last year, but we would have expected that with the growth we saw last year.

Speaker 13

Thank you very much.

Operator

And we will go next to Alex Goldfarb with Piper

Speaker 12

So just trying to put a bow on the supply, it's obviously been a big topic. If I hear correctly from what you're saying, it sounds like it's really only Phoenix and Austin where it's really an issue. Atlanta has maybe is another market just given the occupancy dip that you talked about. But otherwise, the balance of your portfolio, it sounds like, Yes, there's supply, but it's not really competitive with you guys. You feel comfortable with the in migration, the economic growth, the job growth to be comfortable with your rents.

Speaker 12

So is that sort of the main takeaway that the supply is really limited to maybe 2 or 3 markets for you guys and that's it, all the other markets are fine? I just Sort of want to encapsulate this.

Speaker 4

Yes. I mean, Alston and Phoenix are the 2 that are the worst. I mean, I wouldn't say we only have 2 or 3 that are feeling any supply impact. I mean, I think it is impacting several of our markets at some level. But what we've always talked about is with the demand being there, Supply just sort of moderates things.

Speaker 4

It doesn't put it in a ditch. It says shocks on the demand side that really send rate growth negative for extended period of time and we're not seeing that. So I mean, I would like I said, I wouldn't say those are the only 2 we're feeling some Pressure, but those are the most notable. But otherwise, demand is doing a pretty good job of mitigating things.

Speaker 12

Okay. And then the second question is, your guidance for the Q2 is rather wide and I'm assuming you guys are pretty conservative group, but 2.18 on the low side, just low obviously. So should we expect a decline quarter to quarter or are there some oddball things that could come up that would drive like I'm just trying to think why would FFO go And maybe you'll say, hey, it's a one time item. There's some sort of tax impact or insurance or something like that, that we're going to see.

Speaker 5

Alex, this is Al. You see in the second and third quarter offense some things that are below same store NOI, whether it be overhead, Whether it be so just some items that are more that are not in your operating costs. And so second, third quarter, they tend to be chunky. What we're seeing is some of those costs we talked about that we outperformed in the 2nd quarter on G and A, but that would be timing related. Some of that's going to come back to us seeing some of that in the Q3, which affects that a little bit.

Speaker 5

So Nothing unusual. You see that second and third quarter be a little volatile, but the important point is just the projection for the year continued strength.

Speaker 7

Okay. Thank you.

Operator

And we will take our next question from Nick Yulico with Scotiabank.

Speaker 14

Tim, just going back to Atlanta, I know last quarter you talked about some weather issues affecting Was there anything else driving the occupancy being lower there this quarter?

Speaker 4

Yes. A couple of things going there. I mean Atlanta is variances a decent amount of supply. It's not quite as high as some of our other markets, but relative to what Atlanta typically gets, there is some supply pressure. But Couple of other things impacting that and you mentioned one of them.

Speaker 4

We had sort of late Q1, early Q2 over the course of 2 or 3 months. We had about 100 units come back online in Atlanta, which was a mixture of some units that were down to storm damage and then a fire at one of our properties. And so Pulling those back into the portfolio and needing to lease those up had some impact. And then secondly, which is hinders us a little bit in the short term, but is positive on the long term is Atlanta and the counties there have started to progress some on evictions and filings and doing court dates and kind of working through that whole process, which has been a real laggard in terms of our markets for working through that. So we actually year to date have seen about 140 more evicts and skips this time versus the same period last year.

Speaker 4

So good thing, as I said, long term and we are Seeing a little bit better payment progress there, but it kind of doubled down on some of the occupancy pressure there. Revenue and pricing is held in okay. It's a little bit below the market, but not a little bit below the portfolio, but not too bad. And overall, we obviously still feel good about it long term, but just running through a little bit of pressure right now.

Speaker 14

Okay, thanks. And then in terms of, if we think about new supply and concessions being offered Across markets, can you just give a feel for where concessions are more prevalent competing product and Where you're also offering concessions in the existing assets or in any of the development assets?

Speaker 4

Yes. So for our portfolio, concessions are running about cash concessions are about 0.5 percent of rents. It's ticked up a little bit, but not significantly. I mean, we do tend to net price with our pricing systems, so don't use a ton of concessions. But Broadly at a market level and what we're seeing some of the competitors, I would say you're at A month free is about where we're at in several of the larger markets.

Speaker 4

And for most, that is more Kind of in town, central areas of the markets, you might see a little bit more if there's a lease up in the area, but we're not seeing any more than a month and a half or so in any of our markets. Austin is one where it's a little unique in that. We're actually not seeing a lot of concessions in the Central Austin, but more in the suburbs where there's quite a bit of supply. That's one where concessions are a little more prevalent in the suburbs versus other markets where it's more urban and infill.

Speaker 3

Sorry, I just want to add to that real quick. You asked about our lease up properties. To Tim's point, we've got one in lease up in Austin. That one we're offering up to a month free, which is on select units by the way, not across the board. We've got couple of 100 units competing supply just in that same submarket.

Speaker 3

So I'd say that one's probably feeling the most pressure. But I will say that Average rents on that property are a couple $300 to $400 higher than what we expected and then the average concession usage there is significantly below What we expected most of our new lease ups we expect about a month free and we've been significantly below that

Speaker 5

on this asset. And then

Speaker 3

I would just say And all of our properties that are in lease up right now, we're below what we generally pro form a, which is a month free, just we're offering that on select units as needed. So it's not broad based use of concessions that we're seeing right now.

Speaker 14

Great. Thanks. If I could just follow-up on the investment activity and being more patient There, I know you gave some commentary on this, but is that more of a view that, hey, cap rates seem like they're too low to where you're Penciling, they should make sense. Or is it also just a view that, hey, at some point, we're not sure exactly where market rents are going in some areas there is supply coming, maybe there's an opportunity to wait. You mentioned talking to merchant developers and Just trying to kind of tie together, I guess, valuation versus a view on, hey, fundamentals are becoming a little bit uncertain because of supply.

Speaker 3

Right. Hi, Nick. This is Brad. I would say, it's really the belief that we think cap rates will tick up a bit from where they are right I mean the fundamentals generally are holding up pretty well within our region of the country and we're not seeing distress certainly in our region and What we believe right now with the limited amount of inventory that's on the market, the capital that's out there kind of piling up on each other on the assets that are coming to market. So that is driving down cap rates.

Speaker 3

We also continue to see a high proportion of the deals that do trade or 31 exchange as well as loan assumptions. So we just believe that as the elevated supply that's in our market over the last year or 2 years begins to come to market. Those assets need to trade, merchant developers need to sell. And as that product comes to market, it's likely to spread out the capital a bit and we're likely to see cap rates continue to move up a bit from where they are today. Today interest rates are 5.5%, 5.75%.

Speaker 3

And I think when you layer on to that just still good operating fundamentals, but The 5%, 6%, 7% rent growth that we've seen over the last year. I do think that that continues to point to a scenario where the negative leverage continues to decrease which supports increasing cap rates. So just for context, after the GFC 3 year period after that, we purchased 9,000 units over a 3 year period. And I don't know if this situation will be as fruitful as that was for us, but it certainly feels like Our region is really primarily driven by merchant developers and product needs to trade at some point. And we're starting to see cap rates move up a bit.

Speaker 3

So we're going to be patient and hold our capacity to what we think will be a better opportunity.

Speaker 14

Thanks. Appreciate it.

Operator

And we will move next to John Kim with BMO Capital Markets. Your line is open.

Speaker 8

Good morning. I wanted to ask about your same store revenue guidance. You narrowed the range, but you maintained a midpoint. But you started the year 5.5% turn in. So just to hit the top end of your same store revenue guidance of 7%, you only really needed to achieve 3% lease growth rates for the year.

Speaker 8

You've already exceeded that. I think you've been saying that lease growth rates have come in higher than expected. So I know that occupancy offsets this a little bit same with the fees, but your 6.25 midpoint seems very conservative Today, I just wanted your response on this.

Speaker 5

John, this is Al. I think important point there, we didn't cover we've talked about a bit in the past is that there is a little bit of dilution in that total revenue from the pricing line because there's other income components that are what about 10% of our revenue stream that aren't growing at that call it 7%. And so they're going 2% to 3% and so that dilutes it some. So that's probably the difference there. But in general, the math that you laid out was 5.5 carry in plus half of the pricing performance we've gotten this year, is we've talked about was 3% 3.5% blended pricing, half of that.

Speaker 5

That gives you pretty close to the effective rent growth expectation we have this year. And then those other income items dilute that just a bit.

Speaker 8

So is there a likelihood that you're going to achieve above the midpoint of your guidance?

Speaker 3

I'm just saying that the guidance is we think

Speaker 5

the guidance is accurate. There are things other than effective rents that are affecting that total There's items that are other income related that are growing call it 2% to 3% that bring that down. So if you're looking at total revenue, I think We brought it in just because we narrowed it, which we typically do, just because we have a little more information getting closer to the end of the year. That midpoint of 6.25 percent in total revenue, we still feel that's the right number.

Speaker 8

Okay. My second question is on the insurance premium that you got at 20%. I know that's in line with your guidance, but it still came in probably lower than many of us had expected. And I'm wondering if there was any change in the coverage that you had to get that premium, whether it's self insuring or reduced coverage or anything else?

Speaker 15

Yes, John, this is Rob. Yes, in part, the cost The property insurance premium is a big driver of it. It was up about 33% and that was offset by a much Smaller increase in our casualty lines, automobile workers' comp, general liability. So the balance 20%. We did have some changes on the retentions this year, about $1,000,000 on our per occurrence and a couple of $1,000,000 on our aggregate.

Speaker 15

Then we do have a separate freeze event deductible because of some of the events that were happening in the Southeast. But Overall, we feel like the retentions that we have are appropriate given the balance sheet strength we have and the spread of risk across the portfolio given the geographic disbursement. And then as we've done for several years, we did take A portion of the primary insurance. So we've got About $10,000,000 of self retention there that we feel very comfortable with an insurance product that caps our loss over 3 years at $15 or so 1,000,000 So feel like we're in really good shape there relative to the strength of the balance

Operator

And we will move next to John Pawlowski with Green Street. Your line is open.

Speaker 16

Thanks. Brad or Eric, I just had a follow-up question regarding The glimpses and signs of better acquisition opportunities you're starting to see, can you just give me a sense for Whether you're seeing notable signs and broad based signs of capitulation on pricing from merchant builders struggling with Higher debt service costs and their lease ups?

Speaker 3

Yes, John, this is Brad. Yes, I would say we're not seeing capitulation At this point, I think what we're seeing is selectively developers are looking to take some risk off the table on select assets When it makes sense for them to do so. I mean, just for context in the Q1, we track think 7 deals that we had data points on, we're up to call it 14 in the second quarter, but I would also say the majority of those are not necessarily merchant developed assets. So again, not a lot of data points there. We've seen a few, but not broad based.

Speaker 3

I do think that that is what we continue to monitor because as we get Later into this year to my comments earlier, I think the merchant developer profile and need to transact increases. But we haven't seen that Really open up broadly at the moment.

Speaker 2

And John, I would tell you, as

Speaker 3

you get later in the year

Speaker 2

and you get into the Slower leasing season sort of during the holidays in Q1 of next year, a lot of these lease ups are going to see more pressure. Just leasing traffic is not as robust during that time of the year. And so we do think that we're heading into an environment where More likely than not, pressure will build for some of the lease up projects that are happening out there And that may trigger some opportunity.

Speaker 16

Okay. Makes sense. Final question for me, Tim, you talked about the mid tier markets outperforming over the coming quarters. Can you just give us a sense, a rough range of The blended rent spreads you expect in your mid tier markets over the second half of this year versus the More supply lead in larger metros?

Speaker 4

Yes. I mean, it obviously varies by market. There are Some doing much better than others. But I would say, and then depending on which markets you define is mid tier versus not. You're probably somewhere in a 100 basis points to 150 basis point Blended spread.

Speaker 4

So year to date, we're seeing several that are in that 4.5% to 5% range compared to our upper 3s overall portfolio. So I do think 100 to 200 basis point spread is

Operator

move next to Rob Stevenson with Shannon. Your line is open.

Speaker 17

Good morning, guys. I know you collect a lot of data on your residents. Do you have the data on the percentage of Residents with student loans outstanding and what do you think the resumption of payments is going to have impact wise on the ability to pass through future rent increases in 2024?

Speaker 4

Yes, Rob, this is Tim. We talked about that a little bit. We do not have insight into that. We outsource sort of our credit check and income verification. So we don't have insight into that certainly At any broad level and actually as part of income qualification and rent to income checks, You're not allowed to use student debt as part of that.

Speaker 4

So really don't have much insight into that to be honest.

Speaker 17

Okay. And then, Al, how are you reading Texas in terms of this property taxes going forward? Is this just a one time distribution of the surplus? Or are you expecting to see fundamental changes there in lower levels of property taxes in Texas going forward?

Speaker 5

Now Rob, we would read this as at some level it should be an ongoing benefit.

Speaker 3

I mean, what we've seen over

Speaker 5

the last several years is Texas because of the strength of the state has had really high valuations come out, property valuations. And we've seen millage rate rollbacks, some more than others in different municipalities because of that, because there is some limitation at the revenue level and budgetary level on taxes they can do. So We have projected a rate rollback. Now this because of the overall budget surplus goes well beyond that. And so they basically recognizing that the call recognizing that the state is doing very well, that valuations overall are very strong.

Speaker 5

So they're permanently reducing that rate if you would by legislation. Now the other side of that is in the future, if the economy of Texas is different, they can undo it. But this to be a permanent ongoing impact. That's pretty significant. I mean it caps out to be something like $0.20 per $100 of value for your property values and that's pretty

Speaker 17

And any other markets where you're seeing property taxes trending above or below your expectations from earlier this year?

Speaker 5

Not really. I think the one outstanding to really get the final information on other than Texas is Florida. It's the one that comes in late and so we need to see the millage rates there. We've got the values. We need to see the millage rates coming in.

Speaker 5

That's pretty significant. But other than that, Getting a pretty clear picture at this point. We're about 70% of the knowledge at this point, I would say, Rob.

Speaker 17

All right. Thanks, guys. Appreciate the time.

Operator

And our next question comes from Anthony Powell with Barclays. Your line is open.

Speaker 11

Hi, good morning. Just wanted to walk through maybe the medium term outlook for lease spreads. It sounds like you expect new lease spreads to be in the 0% to 1% range for the next couple of quarters. Does it mean that renewals go to 0% to 1% maybe early next year as well? Or can it remain above new for a while?

Speaker 11

Yes.

Speaker 4

I think I would expect renewals to remain above new and that's not unusual. I mean, What we saw last year renewals rates were quite a bit higher than renewals is more the exception than the norm. And so with renewals, you've got Obviously, somebody that has lived with you and hopefully you provided good resident service and have an asset that they enjoy living in and so there's some friction costs to move and all that. So typically, we would see renewals pretty consistently above new leases. I don't expect it to get down to the new lease level.

Speaker 11

And can you remind us what's your peak level of supply delivery on a quarterly basis? Is it first half of next year? And just When do you think supply starts to come down in your market?

Speaker 4

Yes. I mean, it's difficult to nail down to a quarter, but I think our belief right now is kind of peaking early 2024 and then starting to trend down and then really set up for a good position as we get into 2025 in terms of lower deliveries.

Speaker 11

Okay. Thank you.

Operator

We have no further questions. I'll turn the call to MAA for closing remarks.

Speaker 2

We appreciate everyone joining us this morning and obviously follow-up with any other questions that you may have. And that's all we have this

Powered by Quartr