Mid-America Apartment Communities Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 13 speakers on the call.

Operator

and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team participating on the call this morning with prepared comments are Eric Bolton, Brad Hill, Tim Argo and Clay Holter. Al Campbell, Rob Del Priore and Joe Procio are also participating and available for questions as well. Before we begin with prepared comments this morning, I want point out that as part of this discussion, company management will be making forward looking statements.

Operator

Actual results may differ materially from our projections. 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 at www.maac.com.

Operator

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 1

Thanks, Andrew, and good morning. Core FFO results for the Q4 were ahead of our expectations. Higher non same store NOI performance and lower interest expense drove the outperformance. As expected during the Q4, A combination of higher new supply and a seasonal slowdown in leasing traffic increasingly weighed on new resident lease pricing during the quarter. Encouragingly, we did see some of this pressure moderate in January with blended pricing improving 130 basis points from the 4th quarter performance, led by improvement in new lease pricing.

Speaker 1

Stable employment conditions, continued positive migration trends, A higher propensity of new households to rent apartments and continued low resident turnover are all combining to support steady demand for apartment housing. We continue to believe that late this year, new lease pricing performance will improve and we will begin to capture recovery in that component of our revenue performance. In addition, with the pressure surrounding higher new supply deliveries likely to moderate later this year, We continue to believe the conditions are coming together for overall pricing recovery to begin late this year and into 2025. As you may have seen last week, MAA crossed a significant milestone marking the 30 year anniversary since our IPO. Over the past 30 years, MAA has delivered an annual compounded investment return to shareholders of 12.6%, with about half of that return comprised of the cash dividends paid.

Speaker 1

Through numerous new supply cycles and various stresses associated with the broader economy, MAA has never suspended or reduced our quarterly dividend over the past 30 years, which of course is a key component of delivering superior long term investment returns to REIT shareholders. Today, I'm more positive about our outlook than I was this time last year. Today, as compared to a year ago, we have more clarity about the outlook for interest rates with downward movement likely later in the year. Worries associated with material economic slowdown or recession are dissipating. Inflation pressures on operating expenses are declining.

Speaker 1

The demand for apartment housing and absorption remains steady. And with clearly declining permits and new construction starts, We have increasing visibility that competing new supply is poised to moderate. With a 30 year track record of focus on high growth markets, Before turning the call over to Brad, I do want to take a moment to just say a big thank you to Al Campbell, who will be officially retiring effective March 31. Al has been with our team for the past 26 years and has served as our Chief Financial Officer for the past 14 years. Al has been instrumental in the growth of our company, transitioning us to the investment grade debt capital markets and has built a strong finance, accounting, tax and internal audit platform for MAA.

Speaker 1

Al leads our company and finance operation in strong hands with Clay and his team. And we're all grateful for Al's service and tremendous accomplishments. So thank you, Al, for all you've done for MAA. And with that, I'll now turn the call over to Brad. Thank you, Eric, and good morning, everyone.

Speaker 1

As mentioned in our earnings release, we successfully closed on 2 compelling acquisitions during the Q4 at pricing 15% below current replacement costs. Both properties fit the profile of the type of properties we expect to continue to emerge throughout 2024. Properties in their initial lease up, with sellers focused on certainty of execution with a need to transact prior to a definitive deadline. Our relationships with the Sellers and our ability to move quickly and execute on the transactions utilizing the available capacity on our line of credit Without a financing contingency, we're key components of MAA being chosen as the buyer for these properties. MA Central Avenue, a 323 Unit Mid Rise Property in the Midtown area of Phoenix and MA Optimist Park, a 52 Unit Mid Rise Property in the Optimus Park area of Charlotte are expected to deliver initial stabilized NOI yields of 5.5% and 5.9%, respectively.

Speaker 1

We expect both properties to achieve further yield and margin expansion as a result of adopting MAA's more sophisticated revenue management, marketing and lead generation practices as well as our technology platform. Additionally, we expect to achieve operational synergies by combining certain functions with other area MAA properties as part of our new property potting initiative. Due to continued interest rate volatility and tight credit conditions, transaction volume remains tepid, down 50% year over year and 16% from the 3rd quarter's pace. We continue to believe that transaction volumes will pick up later in 2024, providing visibility into cap rates and market values. For deals we tracked in the 4th quarter, we saw cap rates move up by roughly 35 basis points from the 3rd quarter.

Speaker 1

Our transaction team is very active in evaluating additional acquisition opportunities across our footprint with our balance sheet in great position to be able to take advantage of more compelling opportunities as they continue to materialize later this year. Our forecast for the year includes $400,000,000 new acquisitions likely in lease up and therefore dilutive until stabilization is reached. Despite pressure from elevated new supply, Our 2 stabilized new developments as well as our development projects currently leasing continue to deliver good performance, producing higher NOIs and earnings than forecasted in our original pro formas, creating additional long term value. New lease rates are facing more pressure at the moment, but these properties have captured asking rents on average approximately 20% above our original expectations. Our 4 developments that are currently leasing are estimated to produce an average stabilized NOI yield of 6.5%.

Speaker 1

We continue to advance pre development work on several projects, but due to permitting and approval delays as well as an expectation that construction costs are likely to come down, We have pushed the 3 projects that we plan to start in 2023 into 2024. We now expect to start between 3 to 4 projects this year, with 2 starts in the first half of the year and 2 starts late in the year. Encouragingly, we have seen some recent success in getting our costs down on new projects that we're currently repricing. As we have seen a meaningful decline in construction starts in our region, We're hopeful to see continued decline in construction costs as we progress through the year. Our team has done a tremendous job building out our future development pipeline, Today, we own or control 13 well located sites, representing a growth opportunity of nearly 3,700 units.

Speaker 1

We have optionality on when we start these projects, allowing us to remain patient and disciplined. Any project we start this year will deliver 1st units in 2026, aligning with a likely stronger leasing environment supported by significantly lower supply. Our development team continues to evaluate land sites as well as additional pre purchase development opportunities. In this constrained liquidity environment, it's possible we could add additional development opportunities to our future pipeline. The team has our portfolio in good position.

Speaker 1

Our broad diversification provides support during times of higher supply with a number of our mid tier markets outperforming. As we ramp up activities in 2024, we're excited about the coming year. Beyond the new external growth opportunities just covered And as Tim will outline further, we continue to see solid demand and steady absorption of the new supply delivering across our markets and remain convinced that pricing trends will begin to improve late this year and into 2025. In addition, we continue to make progress on several new initiatives aimed at further enhancing our leasing platform to further position us to outperform local market leasing metrics during the supply cycle. Before I turn the call over to Tim, to all of our associates at the properties and our corporate and regional offices, I want to say thank you for coming to work every day focused on improving our business, serving our residents and exceeding the expectations of those that depend on us.

Speaker 1

With that, I'll turn the call over to Tim.

Speaker 2

Thank you, Brad, and good morning, everyone. Same store NOI growth for the quarter was right in line with our expectations with slightly lower operating expenses, offsetting slightly lower blended lease over lease pricing growth. Expanding on Eric's earlier comment on new lease pricing, Developers looking to gain occupancy ahead of the holiday season and

Speaker 3

the end of

Speaker 2

the year did put further pressure on new lease pricing, particularly in November December. However, because traffic tends to decline in the Q4, again, particularly in November December, we intentionally repriced only 16% of our leases in 4th quarter and only about 9% in November December. This resulted in blended lease over lease pricing of -1.6 percent for the quarter, comprised of new lease rates declining 7% and renewal rates increasing 4.8%. Average physical occupancy was 95.5% and collections remained strong with delinquency representing less than 0.5 percent of bill grants. These key components drove the resulting revenue growth of 2.1%.

Speaker 2

From a market perspective in the Q4, many of our mid tier metros performed well. Being invested in a broad number of markets, submarkets, asset types and price points is a key part of our strategy to capture growth throughout the cycle. Savannah, Richmond, Charleston and Greenville are examples of markets that led the portfolio in lease over lease pricing performance. The Washington D. C.

Speaker 2

Metro area, Houston and to a lesser extent, Dallas Fort Worth were larger that held up well. Austin and Jacksonville are 2 markets that continue to be more negatively impacted by the level of supply being delivered into those markets. Touching on some other highlights during the quarter, we continued our various product upgrade and redevelopment initiatives in the 4th quarter. For the quarter, we completed nearly 1400 interior unit upgrades, bringing our full year total to just under 6,900 units. We completed over 21,000 smart home upgrades in 2023 and now have over 93,000 units with this technology, and we expect to complete the remaining few properties in 2024.

Speaker 2

For our repositioning program, we have 5 active projects are in the repricing phase with expected yields in the 8% range. We have targeted an additional 6 projects to begin in 2024 with a plan to complete construction and begin repricing in 2025. Now looking forward to 2024, we're encouraged by the relative pricing trends we are seeing thus As noted by Eric, blended pricing in January was 130 basis points better than the 4th quarter. This is comprised of new lease pricing of negative 0.2 percent, an 80 basis point improvement from the 4th quarter and notably 150 basis point improvement from December and renewal pricing of 5.1%, an improvement of 30 basis points from the 4th quarter, while maintaining stable occupancy of 95.4%. Similarly, renewal increases achieved thus far in February March averaged around 5%.

Speaker 2

As noted, new supply being delivered to be a headwind in many of our markets. While we do expect this new supply will continue to pressure pricing for much of 2024, We believe we have likely already seen the maximum impact to new lease pricing and that the outlook is better for late 2024 and into 2025. It varies by market, but on average, new construction starts in our portfolio footprint peaked in the Q2 of 2022. Based on typical delivery time lines, this suggests peak delivery is likely in the middle of this year with some positive impact of pricing power soon thereafter. While increasing supply is impactful, the strength of demand is more indicative of pricing power in a particular market.

Speaker 2

Job growth is expected to moderate in 2024 as compared to 2023, but growth is still expected to be strongest in the Sunbelt markets. Job growth combined with continued in migration accelerates the key demand factor of household formation. Separately, the cost gap between owning and renting gapped out considerably in the back half of twenty twenty three, even before considering the impact of higher mortgage rates. Move outs to buy a home dropped 20% in the 4th quarter on a year over year basis,

Speaker 4

And we

Speaker 2

expect the continued low number of move outs due to homebuyings to contribute to low turnover overall in 2024. That's all I have in the way of prepared comments. Now I'll turn the call over to Clay. Edwards:] Thank you, Tim,

Speaker 3

and good morning, everyone. Reported core FFO for the quarter of $2.32 per share was $0.03 per share above the midpoint of our quarterly guidance and contributed to core FFO for the full year of $9.17 per share, representing an approximate 8% increase over the prior year. The outperformance for the quarter was primarily driven by favorable interest and the performance of our recent acquisitions and lease ups during the quarter. Overall, same store operating performance for the quarter was essentially in line with expectation. Same store revenues were slightly below our expectations for the quarter as effective rent growth was impacted by lower new lease pricing that Tim mentioned.

Speaker 3

Same store operating expenses were slightly favorable to our 4th quarter guidance, primarily from lower than expected personnel costs and property taxes. During the quarter, we invested a total of $20,700,000 of capital through our redevelopment, repositioning and smart vent installation programs, producing solid returns and adding to the quality of our portfolio. We also funded $48,000,000 of development costs during the quarter toward the completion of the current $647,000,000 pipeline, leaving nearly $256,000,000 remaining to be funded on this pipeline over the next 2 years. As Brad mentioned, we also expect to start 3 to 4 projects over the course of 2024, which would keep our development pipeline at a level consistent with where we ended 2023, in which our balance sheet remains well positioned to support. We ended the year with nearly $792,000,000 in combined cash and borrowing capacity under our revolving credit facility, providing significant opportunity to fund potential investment opportunities.

Speaker 3

Our leverage remains low with debt to EBITDA at 3.6 times. And at year end, our outstanding debt was approximately 90% fixed with an average of 6.8 years at an effective rate of 3.6%. Shortly after year end, we issued $350,000,000 of 10 year public bonds at an effective rate of 5.1 percent using the proceeds to pay down our outstanding commercial paper. Finally, we did provide initial earnings guidance for 2024 with our release, which is detailed in the supplemental information package. Core FFO for the year is projected to be $8.68 to $9.08 or $8.88 at the midpoint.

Speaker 3

The projected 2024 same store revenue growth midpoint of 0.9% results from rental pricing earn in of 0.5% combined with blended rental pricing expectation of 1% for the year. We expect blended rental pricing is to be comprised of lower new lease pricing impacted by elevated supply levels and renewal pricing in line with historical levels. Effective rent growth for the year is projected to be approximately 0.9% At the midpoint of our range, we expect occupancy to average between 95.4% 96% for the year and other revenue items, primarily reimbursement and fee income, to grow in line with effective rent. Same store operating expenses are projected to grow at a midpoint of 4 point to grow almost 6% for 2024, with the remaining controllable operating items expected to grow just over 4%. These expense projections combined with the revenue growth of 0.9 percent results in projected decline in same store NOI of 1.3% at the midpoint.

Speaker 3

We have a recently completed development community and lease up along with an additional 3 development communities actively leasing. As these four communities are not fully leased up and stabilized and given the interest carry associated with these projects, we anticipate our development pipeline being diluted to core FFO about $0.05 in 2024 and turning accretive to core FFO upon later stabilization. We are expecting continued external growth in 2024, both through acquisitions and development opportunities. We anticipate a range of $350,000,000 to $450,000,000 in acquisitions, all likely to be in lease up and not yet stabilized, and a range of $250,000,000 to $350,000,000 in development investments for the year. This growth will be partially funded by asset sales, which we expect dispositions of approximately $100,000,000 with the remainder to be funded by debt financing and internal cash flow.

Speaker 3

This external growth is expected to be slightly dilutive to core FFO in 2024 and then again turning accretive to core FFO after stabilizing. We project total overhead expenses, a combination of property management expenses and G and A expenses, to be $132,500,000 at the midpoint, a 4.9% increase over 2023 results. We expect to refinance $400,000,000 in bonds maturing in June 2024. These bonds currently have a rate of 4%, and we forecast to refinance north of 5%. This The refinance coupled with the recently completed refinancing activities mentioned previously will result in $0.04 of dilution to core FFO as compared to prior year.

Speaker 3

That is all that we have in the way of prepared comments. So Carrie, we will now turn the call back to you for questions.

Speaker 5

Thank you. And we will take our first question from the line of Josh Dunderline with

Speaker 2

My first question would just be on the same store revenue growth outlook. Can you provide us maybe more details on what will get you to the high and low end of guidance? I guess I'm really curious about, what you would assume for the blended rate growth at the high and low end? This is Tim. So I think as far as the high end and the low end, I think We feel pretty comfortable with the renewal rates and they've been steady for the last few months.

Speaker 2

What we're seeing, as I noted, the next few months has been in that 5% range. I think that the new lease rates are what could certainly determine whether we get more to the high end and low end, which is going to be a function of the demand side. We expect to see steady job growth, steady demand in migration, all those factors. So that's a little bit better. I think it obviously pushes new lease rates Higher and then the opposite is true.

Speaker 2

But if you think about our full year guide, it's built on New lease rates for the year, and this will be seasonal, starting a little bit lower in Q1, accelerating to Q2 and Q3 and then declining a little late Q4, but we're in the negative 3%, 3.25% range on new lease for the year and expectations of the 4.5% to 5% range on renewals, which blends out to the 1% blended is what we're assuming for the full year.

Speaker 4

Okay. I appreciate that. And then for

Speaker 2

the drag that you're assuming on the $400,000,000 of acquisitions, is there a way to quantify that?

Speaker 3

Yes, I think you can Josh, I think you could think through what we're projecting, new rates to come in this next year and the timing of those acquisitions. From a standpoint of just the timing of it, we're assuming that those start in the second quarter and then play out over the remainder of the year. And we think about it maybe in the range of, call it, 4 acquisitions at roughly $100,000,000 each. And I think they'll look similar to what these other two acquisitions that we just completed in 2023 as far as how they will lease up and how they'll the drag that we'll see on earnings over 2024.

Speaker 1

And Josh, this is Brad. Just to add to that, our assumption on the acquisitions is that Obviously, they're as Clay mentioned, they're very similar to the ones we purchased last year. They're in lease up. We're assuming about a 4.5% NOI yield contribution at the time of closing, given that those are in lease up and given the comments that Clay made about where Our current commercial paper is and where our cost of debt is, you can kind of

Speaker 2

do the math on what the dilution there is.

Speaker 5

And we'll take our next question from the line of Austin Wurschmidt with KeyBanc. Please go ahead.

Speaker 6

Great. Thanks. Good morning, everyone. Eric, We remain confident that new lease pricing is going to improve through this year, but it really sounds like peak delivery don't hit it until around midyear. And we've really yet to see, I guess, leasing volume pick up.

Speaker 6

So with kind of that expectation of the improvement in new lease rates for the year, do you think that Lease rates get better in the back half of this year versus last year on sort of a lease weighted basis. I know things deteriorated late in the year, but more interested in sort that period of July through October?

Speaker 1

Well, I'll Answer your question, and Tim, you can jump in here. But broadly speaking, yes, we do think that as you get into the summer We've always traditionally seen leasing traffic pickup. And as commented in our prepared comments, I mean, we just see No evidence of demand really deteriorating. And we do think that normal seasonal patterns will continue to play out. So as we think about supply delivery, and we see it as pretty elevated at this point.

Speaker 1

And I mean, does it go up Another 10%? I don't think so. I think that kind of we're in the sort of the peak of the storm from a supply perspective, I feel like right now in a weak demand quarter. And we think that supply now, it stays high, certainly in Q1 and Q2 And probably even early Q3, it's hard to peg it by month. But we do think that there is a lot of reasons believe that supply starts to peter out or starts to moderate a little bit as you get into particularly into Q4.

Speaker 1

So we do think that the pressure surrounding supply that will persist will be met with even stronger leasing traffic and demand patterns as we get into the summer as a function of normal seasonal patterns. And therefore, it does lead us to believe that new lease pricing performs better in Q2 and Q3. And as Tim alluded to, we expect, again, normal seasonal patterns that begins to moderate a little bit in Q4. And the other thing that I would just point out, of course, is that we began to see early effects of supply pressure really in 2023 and particularly in the latter part of 2023. So in some ways, you could also suggest that the prior year comparisons in terms of new lease over lease performance starts to get a little bit easier, if you will, in the back half of twenty twenty four.

Speaker 1

So collectively, that's what leads us to The consensus of where we think things are headed. I mean, Tim, what would you add to that?

Speaker 2

Yes. I'll add on what Eric was saying. If you go back to last I mean, we our new lease pricing went slightly negative starting in July and then kind of progressively got more so throughout the year. So There is a comp component that plays into this as well. So I do think to answer one of your questions, Austin, that new lease pricing does look better in the end of 2024 as compared to the end of 2023 with those comps, with supply getting a little bit better.

Speaker 2

No, I think the improvement won't be as clear to see because it is a lower demand of the year when you get into the November December, but I think trends will be positive and really start to play out in 2025.

Speaker 6

What do you guys think the lease rate growth could turn positive? And then just a second question is, I'm just curious how what underlying assumptions in same store revenue guidance change the most relative to what you published in November of last year? Thanks. [SPEAKER J. PATRICK O'SHAUGHNESSY:] Patrick

Speaker 4

Gallagher, Jr.:]

Speaker 2

I think likely new lease pricing Probably doesn't get positive until 2025. I think it will get close to flat probably in the middle of this year in the highest demand part of the year, but even in a normal year or a good year, we typically see new lease pricing as negative in the back part of the year. So I think likely it's early 2025 as we see the supply pressure Start to moderate more. So I think that's probably the most likely scenario for new lease pricing. As far as what changed, I mean, it was Really the earn in, which is based on what we saw in November December, as I mentioned in my comments, English pricing really moderated quite a bit, In November December, which the way we calculate our earn in is just basically saying, all the places all the leases that were in place at the end of December 31, if they all priced at 0 for the rest of the year, what would our rent growth be?

Speaker 2

And that's so the earn is more in the 0.5 range, A little bit lower than that range we talked about at NAREIT, but really driven by the new lease pricing in November December and the pressure we saw from The developers and get looking for occupancy and that sort of thing.

Operator

Okay. Thanks everybody.

Speaker 5

And we'll take our next question from the line of John Kim with BMO Capital. Please go ahead.

Speaker 4

Thank you. Good morning. I wanted to follow-up on that comment you just made on the earn in that basically half of what you expected in November. I realize the blended rates probably seem to be lower than expected. But you also mentioned, Tim, in your prepared remarks that the leasing volume was very light quarter is only 16% of leases overall.

Speaker 4

I'm just trying to understand that impact of the 4th quarter leases and why earning it come down so much in just a month?

Speaker 2

Yes. I mean, it's based exactly on that. I mean, I think the other component that played into is we did We saw turnover for the year down, but November December, we had a little bit higher weighting on new lease pricing as compared to renewals. So More new leases in November December than renewals, which obviously with the new lease pricing was a bigger impact on the blended. Now we've seen that shift more so to what we think will happen throughout the course of 2024, which is where we're waiting.

Speaker 2

We think Turnover remained down and be weighted a little more towards renewal. So while we have seen new lease pricing improve in January, The blended improved even more as we've seen more what we think will be the lower turnover component. So it's really just that. Like I said, we're that's comparing at the 1 was part of 1 was demand part of the year. We do expect blended to be positive in 2024.

Speaker 2

So I think that's Calculating loss, lease, earn in, whatever you want to call it the end of December, certainly the most pessimistic time to look at it, but it was that pricing that drove it.

Speaker 4

But when you calculate earnings, do you just take the blended lease change for your entire portfolio and just Not weighted by number of transactions, but just

Speaker 7

a cap of it basically?

Speaker 4

A Chuck Jones

Speaker 2

No, we just said When we talk about earn in, we're just saying, okay, if our total rents were $2,000,000,000 at the end of December And or if we take just December, whatever that number was for rent and apply that all the way through 2024 with the full year growth over 2023. And so where that ends up can affect that number a fair amount.

Speaker 4

Okay. My second question is on acquisition yield, which your last 2 were at 5.5% and 5.9%. How do you see that move towards the end of this year when you see more acquisition activity occur. And your recent bond rate is down at 5.1 How does that change your view on initial yields that are acceptable to you?

Speaker 1

John, this is Brad. I'll start off with that. Well, certainly, we were fortunate with the 2 acquisitions that we executed in the 4th quarter. And we felt like we got really good pricing on those for the reasons I mentioned really in my comments. But we haven't seen A lot of activity in that area.

Speaker 1

And so even in the Q1 here in January, we've seen A little bit of an uptick in terms of the deals coming out. We were at NMHC last week and certainly think that that volume picks up a little bit as we go through the year. But we haven't seen a lot of opportunities come in that way. Now we do think as we continue to get further End of the year, the pressure given where interest costs are for the developers, given the supply pressures that they're likely to feel that The urgency from some of these developers to execute on transactions will continue to increase and we're certainly hopeful that that yields additional opportunities. The other thing that we are watching, frankly, is some of the larger equity sponsors and what their exposure is to other sectors, whether that's retail or office.

Speaker 1

And some of them have big exposures to multifamily development. And some of them have liquidity needs, which necessitates that they execute transactions in some of the multifamily space. So we're having some discussions with folks like that. We're certainly hopeful that that will yield some opportunities. But I do think that The pricing expectations on the seller side is still a bit lower than where we think pricing needs to be.

Speaker 1

Pricing expectations are still low fives. So we still need to see some movement up in cap rates from where Those expectations are for the market to really pick up.

Speaker 4

So

Speaker 1

it's an area that we continue to work on, And we do think that there'll be more opportunities as we get through this year.

Speaker 7

Great. Thank you.

Speaker 5

And we'll take our next question from the line of Jamie Feldman with Wells Fargo. Please go ahead.

Speaker 7

Great. Thank you. Appreciate all the color on rents and how you think it can inflect more positive. But I guess just as like a case study, if you think about your weakest market, your deepest supply challenged market, then what do you think the pace of rents look like in that market for the kind of the quarterly improvement or is it still weak into 25? I think just looking for like the worst case scenario here so we can build on the better.

Speaker 4

[SPEAKER J. PATRICK GALLAGHER, JR.:] Patrick Gallagher,

Speaker 2

Jr.:] Well, I mean, I will say when we talked about Construction starts that peak somewhere around the middle of 2022, that is pretty consistent Across our markets, there are a few that were a little bit later than that, few that were a little bit earlier than that. So it is a relatively consistent supply wave in terms of the timing. Obviously, some markets are getting a lot more supply than others, which drives under or over performance. I mean, Austin is the market we talked about forever. That is our weakest one right now.

Speaker 2

I mean, it's just getting a ton of supply and it's very widespread throughout the market, whereas some other markets a little more targeted. So that's one that has probably been the worst new lease performance right now. So I mean, I think a market like that will continue to struggle through most of 2024, probably be 2025 before it starts to see A little bit of improvement, but I would say that again sort of the cadence of supply is relatively consistent across most of our markets.

Speaker 1

And just to add to what Tim is saying, while the cadence of supply is fairly Where you do see a lot of differences on occasion is the by market, some the percent of new supply coming to the market as a And then also you see, of course, market differences in terms of demand and demand drivers. And so in a market like Austin, where it's probably one of our, if not the most oversupplied market that we have or supply high relative to A percent of existing stock, it also happens to be one of the strongest job growth markets that we have. And probably as a consequence of that, we're seeing absorption rates, if you will, Probably running higher in Austin than we would in a market like Dallas or some of the others that are also getting a lot of supply, but maybe not quite the level Dallas, obviously, is getting a lot of job growth, but a market like Jacksonville, where you're not getting quite the level of job if you get in a market like Austin. So I think you have to be careful with trying to extrapolate one market to the whole portfolio In terms of performance expectations, because it will vary quite a bit.

Speaker 1

And that's obviously why we diversify the way we do. As Tim and Brad alluded to in their comments, this is why we also have a mid tier market component to our portfolio where we're seeing some of these mid markets holding up in a much more steady fashion than some of the others. So I think that the question about how quickly any given market snaps through the or snaps back through the supply pipeline, if you will, is going to largely be a function of The demand factors that we see in those markets and market like Austin, we think has huge potential long term for us and it snaps back pretty strong probably late this year and more likely into early 2025.

Speaker 7

Okay. That's helpful. Yes, I mean the question is coming from I think most of you and most of your peers are thinking that by the end of the year, a lot of these markets are much better. So that's what I'm trying to figure out. Like what so maybe if you guys pick the market, like what do you think is going to be the market that has the most pain for the longest period Combining both job growth projections and supply, just so we can at least keep our eyes on that to see that this is the worst case.

Speaker 1

Yes. I would put Austin in that group for sure.

Speaker 4

[SPEAKER J. PATRICK O'SHAUGHNESSY:]

Speaker 2

Patrick Gallagher:] Yes. I would agree with Boston. I mean, It's getting a lot of supply and frankly without the level of job growth it would be worse off than it is. So we're getting a ton of jobs, but that one's going to take some time to work

Speaker 7

Okay. All right. Great. That's helpful. And then thinking about the acquisition opportunities, I mean, you currently have very low leverage versus your peers.

Speaker 7

How high would you be willing to take that leverage, if you found the right opportunities? And then What do you view as your absolute buying power right

Speaker 3

now? Yes. I think just from a leverage standpoint, So we would be comfortable moving it up to 4.5 to close to 5. And of course, that would take a lot of time At the rate that we're looking at these coming through to get to that point, but we would be comfortable taking our leverage up to that point.

Speaker 7

Do you have a sense of total dollar amount?

Speaker 3

I think that gets to roughly $1,500,000,000

Speaker 7

Okay. All right. Thank you.

Speaker 5

We'll take our next question from the line Nick Yulico with Scotiabank. Please go ahead.

Speaker 8

Hey, good morning. It's Daniel Trocicco with Nick. Brad, you talked about the improving absorption in the back half of the year. Can you comment on what you're seeing on the demand side, job growth Migration that gives you this confidence, maybe the general economic outlook embedded in the guide? And maybe said another way, what household formation or job growth scenario gets you to the low end of guidance?

Speaker 8

Formation or job growth scenario gets you to the low end of guidance?

Speaker 1

Yes. Well, I'll start out. Tim can certainly jump in here. But A couple of points I'll make here on the demand side is definitely the traditional demand drivers that we see whether it's Job growth, population growth, migration trends, all of those are still very, very positive and steady within our region of the country. And those will continue to be significant drivers over the long term for us.

Speaker 1

But we also see another dynamic kind of at play here. And a big part of that has to do with the single family market and really

Speaker 9

has to do with

Speaker 1

the affordability in the availability that we see there. As Tim mentioned in his opening comments, we've seen a significant decline In the move outs to buy a home, that's down 20% year over year with us. And if you look at the cost of buying a home in our region of the country, it's up Significantly over the last couple of years, the monthly cost of homeownership is about 50% to 60% higher than the rents are within our region of the country. So that's a significant hurdle for most people. We've also seen the construction starts in the single family sector continue to decline.

Speaker 1

So the inventory level of available single continues to decline. And so we think that's pushing a segment of demand into multifamily. And it's also pushing folks to stay longer in multifamily. We've seen the average tenure of our residents up to almost 2 years now. So that's got a demand component to it as well.

Speaker 1

And then we've also seen some preference shift within the demographics that are Our rental demographics, honestly, and that is a preference to live alone. And so that also is extending the household formation numbers that we're seeing. And so all of that really combines to point to a point that Eric made in his comments, which is that apartment rental continues to make a higher make up a higher percentage of the occupied housing. And so as we look out and see demand in our region of the country, those traditional drivers continue to be important. But there's also this other component that is really adding to the demand component that we see in our region of the country.

Speaker 1

Tim, what would

Speaker 2

you add? Yes. I'll add a couple of points there. I mean, I think the job growth component and how much there is will be probably more likely the fact that determines, To your original question, kind of high end, low end, that sort of thing.

Speaker 8

I mean,

Speaker 2

I think we'd expect the in migration and all things Brad just noted to be there and that component of demand to be Pretty consistent with what we've seen the last couple of years. We've dialed in about 400,000 new jobs into our expectations for our markets for 2024. That's down certainly from 2023, but still net positive and still expect job growth highs in the Sunbelt markets. And encouragingly, if you look at the national job growth numbers for January added, I think, about 350,000 new jobs in January. You compare that back to 2023, the average is about 250,000 a month.

Speaker 2

So while we do expect job growth to be down some to 2023, the Early indications are that it's still holding up pretty well.

Speaker 8

That's great color. Thanks guys. Follow-up on development. You have 3 or 4 development start this year development starts. What markets are those in?

Speaker 8

And what are underwritten stabilized yields on those? And I guess along the same line, you talked about Austin being the weakest. You stabilized Windmill Hill in Austin in the 4th quarter. Can you give us a sense of how that asset leased up versus your expectations? And Obviously a little bit more suburban, but how do you expect that asset to perform within the Austin market this year given it's expected to be one of the weaker markets?

Speaker 1

Yes, Nick. This is Brad. A couple of comments. On the development side, yes, we do have 3 to 4 starts that we expect this year, 2 in the first half. One of those is in Charlotte.

Speaker 1

The other one is in the Phoenix, Chandler submarket of Phoenix. We've got 2 other ones that we're working on. One is a Phase 2 in Denver. The other one is a Phase 2 in Atlanta. And in terms of the yields we're seeing there, we are pushing those at the moment to we're re pricing all of those, Trying to get the construction costs down to really get to a yield, call it, mid-6s.

Speaker 1

That's really what our goal is. We have had some on the project in Charlotte, we've been able to get between 5% 6% reduction in the construction costs, which really helps support our ability to get that yield. So we feel really good about where we are with those developments. And then the 2 that are late in the year are Phase II projects. So we're hopeful that The yields there continue to increase as we get further construction costs out of those as well.

Speaker 1

And I'm sorry, the second part of your question, Nick?

Speaker 8

The Windmill Hill in Austin in Fort

Speaker 1

Yes, that asset performed extremely well for us. The average rents that we achieved on that asset were almost 24% higher than what we expected. From a yield perspective, significantly outperformed what we expected. And part of that was you mentioned it's a suburban asset In Austin, great execution on the property, had 2 adjacent lease ups going on at the same time as it, but we very patient in how we leased that asset up. We didn't have to offer concessions to meet the market, and really performed extremely well there.

Speaker 1

So I think Given the execution on the construction side as well as the leasing side, we did not have to compete quite as much head to head with some of the competition that was in that market and we've got pretty good results there.

Speaker 2

Thanks for the time.

Speaker 5

And we'll take our next question from Eric Wolf with Citi. Please go ahead.

Speaker 4

Thanks. So I understand your point on comps getting easier through the year, especially in the Q4. But if The largest amount of supply is delivering in the middle of this year. It takes like a year to lease up. I guess, why would rents start recovering Sort of later this year before the developments are fully leased, isn't there typically like a compounding effect to the supply?

Speaker 2

Well, I think one is the while we're talking about completer starts peaked in the middle of 2022, it's been pretty steady. So I think we've seen a relatively steady level of supply being delivered over the last several quarters. And then we have the steady level of demand as well. I mean, we have seen absorption keep up pretty well even though supply kind of compounded, as you said. Certainly, certain markets are a little bit different.

Speaker 2

But the other thing is middle of the year, obviously, is the strongest demand component. And so I think the timing of that with the timing of most of our traffic and most of the demand coming in is what we believe Helps keep it from we talked about we think new lease pricing is kind of bottomed, helps keep it from getting worse than where it is now, just that normal seasonality and all the different demand factors that we've talked about. And then you'll have a few months After the middle, after its peak where there's still pressure, but we typically see it start to drop a few months after those final deliveries, which is what gives us Some confidence in the back half of the year that we start to see some improvement.

Speaker 1

And as Tim mentioned, I mean, we also I mean, we assume that new lease pricing moderates in Q4 and that's also what's important to remember. That's also why we stagger our lease expirations the way we do such that we're re pricing a smaller percent of leases of the portfolio in that holiday period of November December. So I understand the point that you're making, But we feel like that we've accounted for that, both in terms of our new lease over lease pricing performance expectation, couple of seasonal patterns, if you will, but also just the way we manage lease expirations over the course of the year. So we think that we've got it dialed in appropriately. And we do think that as we get into, again, it varies by market so much.

Speaker 1

So it's hard to make Any real conclusive broad observations as it relates to the point that you're making, but we do think that there are certain markets for sure that we began to see the supply pressures meaningfully moderate in terms of new coming in late in the year And that begins to establish some early signs of recovery in that new lease pricing performance as we head into 2025.

Speaker 2

I think one more point I'll add just back to the kind of the middle of the year. I mean, we're still dialing in somewhere in the negative 0.5% range during that strongest period of 2024 for new lease pricing. So we certainly don't see it getting positive yet. But I think with the demand components that it will be a little bit better than what we're seeing right now.

Speaker 4

Thanks. And then just maybe a quick clarification on the earning. Does that include your sort of loss or gain to lease real time changes in market rents? Or is it based Surely off of the leases signed at one point in time. Just trying to understand if like real time moves in market rents ends up impacting That earnings such that it's always going to end up being lower at the year end?

Speaker 4

J.

Speaker 2

Rice:] Yes. Well, for the earnings, like I said, it's basically just saying All the leases that were in place at the end of 2023, so call it all the December leases, if those just held steady for all 24 that's earned in. I mean, lost the lease, how we think about that. If you look at all of the leases That went effective in January compared to our in place. It's about a negative 1% loss lease looking at it that way.

Speaker 2

But we are dialing in, as we said, positive 1% blended, for the course of 2024.

Speaker 4

Okay. Thank you.

Speaker 5

And we'll take our next question from the line of Rich Anderson with Wedbush. Please go ahead.

Speaker 9

Thanks. Good morning, everyone. So what do you make of this January effect that's happening? Like you guys have Seeing this sort of recovery in January, some of your peers, many of your peers have seen the same thing. It's still freaking cold outside.

Speaker 9

Why do you think January is recovering the way it is for you and others at this point?

Speaker 1

Two reasons. 1, you don't have the holidays In January, I think nobody likes to move during Christmas or Thanksgiving. I think the holiday effect is real. And I think it weighs on people's interest in moving. Secondly, I think that There are and we have seen some evidence to suggest that some developers were facing kind of a calendar year end Pressure point.

Speaker 1

And I think that we as we started to see in the early part of Q4 as we're approaching year end, Developer lease up practices were getting increasingly aggressive as we're headed towards the holidays and I think a calendar year end. And so I just think that developer practices got A little bit more aggressive in the holidays and approaching the year end. And I think that to some degree, there was some moderation on that. And certainly, absent the holidays, even though it is cold and so forth, I think people's The capacity to deal with the hassle of moving just improves a little bit better once you get past the holidays and therefore traffic picked up.

Speaker 9

Do you think this holiday factor moderates in February when it's still sort of seasonally slow period of time, sort of the January hiccup and then you kind of get back to Normal course sequential business, is that fair? Yes, I

Speaker 1

think that's okay.

Speaker 2

Pretty small.

Speaker 9

Okay. And then second question is, someone asked about how much you'd lever up and Appreciate that color. And I know you're sort of waiting for transaction market to be sort of more attractive to you to execute with still low cap rates. But you have this sort of development acute that was still low cap rates. But you have this sort of development opportunity sitting, I don't remember what the number was, but you got a lot that you can do right now.

Speaker 9

Why wouldn't you if you're going to deliver into 2026, which is likely to be a very good year to deliver, why not really accelerate development right now and have that be a part of the a bigger part of the external growth story. You seem to be slowing it down more than speeding it up at So just curious on that. Thanks.

Speaker 1

Yes. Hey, Rich, this is Brad. Well, you're right. We do have a pretty big pipeline of projects that are ready that we could And really it's just a matter of working the costs on those projects right now. I mean, As I mentioned, we are seeing early signs of costs coming down on the project in Charlotte, call it 5% to 6 We do think we'll continue to see costs come down as we get later into this year.

Speaker 1

So while we do expect to start 3 or 4 projects this year, we have another 4 to 5 that are approved, where plans are nearly ready and if cost came in, we could certainly pull the trigger on So we have the optionality to be able to do that. But we think it's prudent to be sure that the costs are in line. We do also agree with you that these line up very, very well from a delivery perspective into 2020 The other area where we are seeing opportunity that I think could yield itself more immediately is in our pre purchase So we are talking with developers on a number of opportunities where the projects are approved, entitled, plans are In some instances, GMPs are already in place. But given some of the other liquidity constraints out there that I was talking about earlier and pressures in other sectors, the equity or even the debt has pulled out of the project. So we are evaluating projects in that way.

Speaker 1

And so if we can find well located opportunities with good partners that meet our return requirements, we'll definitely lean into that area a little bit more.

Speaker 9

Okay, great. Thanks very much.

Speaker 5

And we'll take our next question from the line of Alexander Goldfarb with Piper Sandler. Please go ahead.

Speaker 10

Hey, good morning. Good morning down there. So two questions, and apologies about the clock in the background. The first one is, can you just talk a little bit about renewals? I think you said You expect them to be sort of 5%, but new rents down 3%, so an 8% spread.

Speaker 10

Can you just walk us through why that That seems a rather widespread, but in your comments you said that's sort of consistent with historic. So maybe you could just talk about that and why residents would accept an 8% spread versus new residents.

Speaker 2

Yes. This is Tim, Alex. I mean, the gap is a little bit wider than historical. If we look at January, for example, it's about 1100 basis point gap for the month. But you look at last year at this time, it was about 900.

Speaker 2

And even if you look at over the last several years, really as long as we've been tracking it, Q1 runs about an 800 basis point gap. And even as you get into the spring and summer, there's typically always a gap where we see renewal pricing Outperforming new lease pricing. But I mean, I think there's a few reasons for that, frankly. It's one, there is a real cost, but the hassle cost and financial cost to moving. There is the customer service component.

Speaker 2

When we have someone that's lived with us and knows kind of what to Expect and knows what kind of service they're going to get. If you look at our Google Star ratings, we averaged 4.4 Google Star rating in 20 3%, which is highest in the sector. 80% of our ratings were 5 star and that is a component that plays out and it manifests itself in this way with our renewal pricing. And then we just we do dedicate a lot of time and resources to this renewal process, Within our corporate office and on the on-site team, there's a lot of thought. There's a lot of factors considered.

Speaker 2

There's a lot of There's a level of buy in that we get from our teams that get them comfortable with the rates we're sending out at. And again, that manifests itself well. It will narrow and as we see new lease pricing, we expect to accelerate as we get into the spring and summer, that gap will narrow. But Yes. And as I've made in the prepared comments, you look at February, March and even April, we're averaging right around that 5%.

Speaker 2

So I think that can hang in there, particularly as new lease rates start to accelerate around that same time frame.

Speaker 10

Okay. And then the second question is, On the supply front, it only seems like a handful of your markets have supply issues, but pressure on new rents seems to be broad crushed. And yet, Sunbelt still has good economy, good jobs, good in migration. So how do you like we understand weakness in new rents in markets that have a lot of supply. But how do we interpret rent softness sort of portfolio wide, especially in the markets that aren't beset by supply?

Speaker 10

And clearly your price point seems to be affordable for the community. So just want to understand the non supply markets, Why there's rent pressure there as well?

Speaker 2

Well, we are seeing pretty good strength. And as I've commented in some of the mid tier markets, You think about Greenville and Savannah and Richmond and Charleston and those markets, we are seeing pretty good relative performance. Now, I mean, the Supply is it obviously varies by market and we're seeing it a lot more in some of the larger markets. And I think frankly we're seeing it in some of our higher concentration markets. If you Think about Austin and Charlotte and Dallas, some of our higher concentration markets is where there's more supply, which is Not surprising.

Speaker 2

Those are good markets to be in. Those are good long term demand markets. So that's not really a surprise. I think there's some of that market concentration factor that's weighing into it where those obviously have an outsized impact on what you see at the portfolio level overall. But If you look at 2023, for example, across all of our markets, deliveries were about 4% between 4% and 4.5% inventory across the portfolio.

Speaker 2

So while it varies pretty widely by market, we did see Pretty good. Historical average is probably 3 to 3.5. So even for some of the ones that weren't getting ton of supply, they were still higher than average.

Speaker 3

Okay. That's helpful. Thank you.

Speaker 5

We'll take our next question from the line of Michael Goldsmith with UBS.

Speaker 4

Good morning. Thanks a lot for taking my question. My first question is on the expenses. Can you kind of walk through where which line items you're seeing particular pressure and how you Envision expense trending through the year?

Speaker 3

Yes. Just a couple of things around Expenses, I'll point to is, 1, our uncontrollable expenses are really what's driving some of that expense growth. Whenever You kind of break that down. Real estate taxes are projected to grow at roughly 4.8% for the year. I think you saw that in our guidance.

Speaker 3

And then you have insurance. That's growing at roughly 16%, 15%, 16% for the year. So that continues to be a bit of a headwind for us as we go into 2024 and for all the same reasons that we've seen in previous years, just as the market is trying to catch up there.

Speaker 1

And when you get into some of our controllable

Speaker 3

expenses, really the biggest driver there is probably repair and maintenance, while the other items around expenses are pretty much right there at that overall growth rate of 4.1% or actually slightly lower than that.

Speaker 2

And I'll add just a couple of points there on the controllable. I mean, we do expect that if you look back to 2023 That all of those controllable line items will moderate in 2024 as compared to 2023 pretty significantly and you can See that in the guide that we have. I think marketing is the one that's a little bit variable, may not we had pretty reasonable marketing costs in 2023. And certainly in the environment we're in, that's something we want to make sure we're careful about and make sure we're properly spending there. So that may be the one where you don't see

Speaker 4

And my follow-up is on, concessions. How have concessions and competing lease up properties trended? And are you offering any concessions at your stabilized property?

Speaker 2

I mean, concessions for us, it's stabilized. It's pretty minimal. I think across we're about 0.5% or so of rents and concessions. And With the way we price, there's a lot of net pricing. We don't do a ton of concessions.

Speaker 2

We do see it more in some of the lease ups that we're competing against. I would say in general concessions in the market and what we're competing is went up a little bit in Q4, probably where we saw The biggest chains, some of our Carolina markets, Charlotte, Raleigh were ones that we saw concessions pick up a little bit. But Still in terms of lease up in areas of development, the concession practices is still pretty strong, kind of that 1 month to 2 months range. Thank you very much.

Speaker 5

And we'll take our next question from Haendel Stajjus with Mizuho Securities. Please go ahead.

Speaker 4

Hey there. Going back to your comments on your 5% renewal rate, I guess I'm curious if that 5% renewal pricing does hold, but market rate growth is just 1%. Are you creating a gain for leases? And how do you feel about that going into next year in line of either outlook

Speaker 2

You cut out there a little bit, Haendel. You said a gain release. Is that what you that what you were saying?

Speaker 3

Sorry about that. Yes, I was

Speaker 4

saying that if the 5% renewal rate forecast that your that you just did does hold And market rate growth is just 1%. Are you creating a gain for lease? And then how would that impact your outlook for next year when you're expecting market rates to recover or you rent a rate in your portfolio to recover?

Speaker 2

Yes. I mean, like I said, the gap is a little wider right now, but I expect it to come in. We haven't seen any signs, like I said, going all the way out to April, we're still kind of in that 5% range. Obviously, depends on the mix and who's renewing his new lease. We typically our average stay is somewhere in the 20 month range, some money leases and then they do one renewal and typically moving out.

Speaker 2

So all those You're not renewing on top of renewing on top of renewing where that gap continues to get larger and larger. But as I said, we've always seen a gap there and little bit wider right now, but I expect it to narrow as we get into the spring, but no concerns with where we sit here right now? And I'll just add Haendel that

Speaker 1

I mean over time to the extent that obviously we the new lease pricing pressure we're Right now is obviously largely a function of supply coming into the market. As that begins to moderate late this year into 2025, In the event that we do see renewal pricing need to moderate a little bit more next year, call it, percent of 5% we're in the 3% or 4% range. We also though expect new lease pricing to start to show some improvement next year such that We probably continue to get the blended performance that we need and that we're after. So it's a give and take back and forth. We've always We've seen new lease pricing in that kind of 4% to 5% range.

Speaker 1

I don't recall it ever really materially getting a lot lower than that. Maybe it was a year back years ago where it got to 3%. But generally, when that's happening, and certainly, we think that will be the scenario this time, By that point, renewal or new lease pricing has started to show some improvements such that the overall blended performance continues to hang in there pretty well.

Speaker 4

I appreciate that, Eric. I guess I'm just thinking ahead and thinking of potentially that renewal rates would need to drop next year. How much CBD unless market rate growth does improve and increase maybe into the mid to single upper single digit rate growth?

Speaker 1

Yes.

Speaker 4

Okay. One more. I appreciate the color you guys gave on the Durban Block revenue, but could you give us some color on what you're assuming for bad debt, ancillary and for turnover?

Speaker 3

Haendel, on bad debt, the way that we're thinking about that is it will remain consistent with where it's run here recently. I mean, we'd probably run around that 0.5 percentage point range. Turnover staying low, at least for our guidance, so it's staying low, around that 45% range. And then what was the last one that you asked about?

Speaker 2

The income.

Speaker 9

The insulative.

Speaker 2

Yes, the insularity income,

Speaker 3

it would grow in line. We're assuming it It'll grow pretty much in line with our overall effective rent growth, so right around that 1% level.

Speaker 4

Got it. Got it. Okay. And then one last one. I think it was last quarter, there's a lot of chatter around A versus B, rental pricing and the impact that the new supply was having on that dynamic.

Speaker 4

Curious if there's any updated perspective, anything that you've seen in this past quarter or any updated views on the performance of A versus Bs in your portfolio is or has changed over the last quarter or so? Yes.

Speaker 2

I mean, we've probably seen a gap a little bit. I mean, our RVs, whether you would call it these or even if you want to Think about suburban versus urban. Suburban is outperforming urban, kind of the CBD in the inner loop. If you think about suburban, we're probably about 80 basis points better in Q4 and January on a blended lease over lease basis from what we're seeing on Secondary. A versus B, in the way we think about our portfolio, it's about 55% A, 45% B, A little bit tighter there, probably about a 30 basis point gap with the beads doing a little bit better.

Speaker 2

I can see pretty consistent for both. But I would say the biggest notable thing there is certainly suburban assets are outperforming and There's a little bit of less supply in those areas as well.

Speaker 5

And we'll take our next question from the line of Brad Heffern with RBC Capital Markets. Please go ahead.

Speaker 11

Hey, Vivek, thanks. First, I just wanted to say congratulations to Al. Hope you enjoy your retirement. On your lease ups, you talk about how those are going in terms of pace? Obviously, you're outperforming on the rent side, but I'm just curious if they're taking longer than normal just given the supply backdrop.

Speaker 1

Yes. Hey, this is Brad. Those are pretty much in line with our expectations. Certainly, there's been a slowdown in the velocity in line with our overall portfolio kind of over the holidays and the winter months. But there's nothing material in terms of difference there versus what we expected.

Speaker 1

Our Daybreak asset It's leasing up a little bit slower and has been. But in general, all of our assets and that's the one in Salt Lake City. But in general, all of our assets are leasing up pretty much in line with our expectations in terms of velocity, given the slowdown here over the winter season.

Speaker 11

Okay, got it. And maybe I missed it, but can you give your expectation for market rent growth underlying the guide. Obviously, you gave the blend assumption, but just looking specifically for the market piece.

Speaker 2

So our blended, as we talked about, is about 1%. And really no, we expect market rent, if you will, to be pretty consistent from with where it is right now.

Speaker 11

Sorry, consistent as in flat or consistent as in similar to the 1% number?

Speaker 2

Yes, flat. 1% is what we're expecting in terms of our blended growth.

Speaker 11

Okay. Thank you.

Speaker 5

And we'll ask our next question comes from the line of Adam Kramer with Morgan Stanley. Please go ahead.

Speaker 12

Hey guys, thanks for the question. I just wanted to I think we talked a little bit about capital allocation and opportunities with acquisitions or developments. Maybe a similar question, again, recognizing where the balance sheet leverage is. But just wondering about the opportunity Or maybe the appetite for share buybacks here, if that's something you'd consider? And maybe kind of what it would take for that to be under greater consideration?

Speaker 1

Well, I mean, as you point out, I mean, we do think that attractive acquisition opportunities are going to start Merging later this year into 2025 as the merchant builders continue to struggle with their lease up more likely than not below what they underwrote. And so we believe for the moment that at current pricing that the longer term yield performance that we can pickup on acquiring these lease up properties provides a more attractive long term investment return, especially on the after CapEx basis As compared to investing in our existing portfolio earnings stream, we also see it providing a better ability to continue investing in our new tech initiatives that we think offer the opportunity for meaningful margin expansion over the entire portfolio over the next few years, creating significant amounts of value. And then As you know, I mean, as a REIT, we've long oriented our thinking around the idea that the best way for us to reward shareholders over a long period of time is through the dividend and through earnings growth. And we think that Continuing to find ways to put capital to work that supports those first two agenda items I just mentioned and supporting our ability to continue to push dividend growth through all phases of the cycle over Time is the best way to reward REIT Capital.

Speaker 1

But having said all that, I mean, we obviously continue to monitor the public pricing of our existing portfolio in the company and obviously interested in continuing to maintain a strong balance sheet. I mean, if we continue to see Dislocation or even more dislocation in terms of public versus private pricing of the real estate, I mean, we do have a buyback program in place, authorization in place. We've done it before. And we wouldn't hesitate to do it again if conditions warranted it. But for right now, given the outlook and the opportunity we think we have in front of us, We think better to sort of hold on to our powder and we think the long term value proposition is likely better with the focus that we have.

Speaker 12

Great. Thanks. And you mentioned some of the tech investments and kind of the opportunities that they are. Maybe just The 1 or 2 there that you're most excited about, you're kind of able to share with the public?

Speaker 1

Yes, I mean, this is Brad. You've definitely heard of these in the past. But I'd say number 1 is our continued investment in our CRM platform. We rolled this out a couple of quarters back, but we continue to update and refine that platform, which really allows better management of our prospects and our leasing process. And this is also really an enabler to a number of other things that we're working on our centralization, our specialization, our potting, All of those things have kind of our CRM platform at the center of those.

Speaker 1

We continue to focus on our potting of properties. We've got 27 potted properties today. And we'll continue to look to expand that when opportunities present themselves. We're also investing right now in updating our website. We're hopeful that we'll be able to roll this out later this month.

Speaker 1

And really our goal there is to be able to drive more leasing traffic through our website, which is the most cost effective way for us to do that. We get a large portion of our traffic now through our website and we're looking to continue to improve that. We're also really working to optimize Our mobile our website for mobile use, which will support our online leasing and our self touring. The last one that I'll mention We're rolling out right now property wide Wi Fi on select properties this year. We're also adding this on some of our new developments.

Speaker 1

And this is really an opportunity for our residents to have really seamless Wi Fi across our property, whether it's in the unit, common areas, amenities, and really provides a better opportunity and service for our residents. And that has a really big revenue component to it as well that we're testing at the moment.

Speaker 12

Great. Thanks for the time.

Speaker 5

And we'll take our last question from the line of Jamie Feldman with Wells Fargo. Please go ahead.

Speaker 7

Thanks for taking the follow-up. I'm sorry to But you had mentioned an expectation you think rental decline, you've decent amount of exposure to floating rate debt. Can you talk about your what's in your guidance in terms of rates this year? And then as of the year end, you had $500,000,000 on the Commercial paper facility, do you expect to keep that in place all year? Do you think you paid that down or is that already paid down?

Speaker 3

Jamie, we paid that down in the 1st week of January with the bond issuance that we completed. And that effective rate on that issuance was Right up, just north of 5%. Our place to the place we look to next for the next dollar is our commercial paper program. And right now, it's at roughly 5.5%. And so we'll keep an eye on that.

Speaker 3

And as rates are expected to decrease over the back half over the year, We expect that number

Speaker 8

to maybe come down a bit.

Speaker 7

What's your assumption in your guidance for where rates go?

Speaker 3

Yes. We've got it dropping down 25 basis points through halfway through the year and then another 25 basis points on the very back end of

Speaker 7

Okay. So you're down 75 basis points by year end?

Speaker 2

No, just 50.

Speaker 7

Just 50. Okay.

Speaker 3

25.25 at the end of the year.

Speaker 7

Okay. And then you had mentioned a $0.05 drag from developments that are not stabilized yet. Is there any variability to that? Is any of that being capitalized?

Speaker 3

Yes, there is.

Speaker 7

It shouldn't be so much of a hit to earnings?

Speaker 3

Yes, there is some capitalization there. And if you look at our capital interest capitalized year over year, slight increase, but pretty steady. But what really comes into play there is just the timing of the developments. In 2023, we delivered and leased up 2 developments in 2024. We're going to be delivering and leasing up 4 developments.

Speaker 3

And so you've got a bit of a play there that's creating some headwind. And then just in general, just the overall the rate at which we're capping that interest comes into play. You're looking at an effective rate, roughly 3.5% that we're capping and that we're borrowing at a higher rate today than what we've capped at previously.

Speaker 7

Okay. So I guess like even if you have an aggressive lease up or lease up better than expectations, do you think that $0.05 is still locked in? Or there's a way that could go away? It

Speaker 3

would have to be pretty meaningful change in how that would lease up to really move the needle on the 5

Speaker 7

Okay. And then finally, just a clarification. I think you had mentioned 0.85% is your And then you answered the last question with 1%. I know we're splitting hairs here, but is 0.85% still the right number? Or is it 1%?

Speaker 3

Yes. So our blended number is 1%. So that's the blended pricing we've got built into our revenue guidance. But our overall effective rent growth is the 0.85%. So that 25% includes the earn in that we've got for from 2023 plus the 1% of the blended that we're looking at for 20

Speaker 7

Okay. All right. Thanks for taking the question.

Speaker 5

We have no further questions at this time. I will return the call to M. A. Abe for closing remarks.

Speaker 1

All right. Thanks, everybody, for joining us this morning. And we'll,

Speaker 5

This concludes today's program.

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Earnings Conference Call
Mid-America Apartment Communities Q4 2023
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