Mid-America Apartment Communities Q1 2022 Earnings Call Transcript

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Provided by Quartr
April 28, 2022

Key Takeaways

  • Strong Rent Growth: Same-store rents rose 12.4% year-over-year in Q1, while new leases were priced 16.8% above expiring leases, fueling momentum into the summer leasing season.
  • Raised Full-Year Guidance: Core FFO guidance increased to $7.92–$8.24 per share (15% growth at midpoint) on the back of a 200 bps lift in projected effective rent growth to 12%.
  • Robust Development Pipeline: $444 million under construction and $740 million combined under construction and lease-up at a 5.9% expected stabilized NOI yield, with five projects already leasing above underwriting rents.
  • Expense Pressures: Inflation and supply-chain challenges drove higher personnel and maintenance costs, although robust revenue growth keeps same-store NOI on track for a 13.5% gain.
  • Balance Sheet Strength: Net debt/EBITDA at a record low 4.27×, $1 billion of liquidity, all-fixed debt laddered over 8.4 years, and Moody’s affirmed Baa1 rating with a positive outlook.
AI Generated. May Contain Errors.
Earnings Conference Call
Mid-America Apartment Communities Q1 2022
00:00 / 00:00

There are 19 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to today's MMA First Quarter 2022 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, April 28, 2022. I will now turn the call over to Andrew Schafer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments.

Speaker 1

Thank you, Ashley, and good morning, everyone. This is Andrew Schafer, Treasurer and Director of Capital Markets for MAA. Members of the management team also participating on the call with me this morning are Eric Bolton, Tim Argo, Al Campbell, Rod Del Priore, Joe Fracchia, Tom Grimes 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 at www.maac.com. A copy of our prepared comments and audio recording of this call will also be available on our website later After some brief prepared comments, the management team will be available to answer questions.

Speaker 1

I will now turn the call over to Eric.

Speaker 2

Thanks, Andrew, and we appreciate everyone joining us this morning. EMEA continues to capture robust leasing conditions across our portfolio And we are carrying strong momentum in rent growth into the summer leasing season. Leasing traffic remains high, the solid job growth, accelerating migration Trends to our Sunbelt markets and the higher pricing hurdles for single family ownership continue to fuel strong demand for apartment housing. Almost 14% of the new leases we wrote in the Q1 came from move ins relocating to the Sunbelt. This is an increase of 190 basis points from the first Quarter of last year.

Speaker 2

Resident turnover continues to remain low with move outs further declining by close to 6% as compared to Q1 of last year. These trends continue to support our ability to capture strong rent growth. The rents in place at quarter end within the same store were on average 12.4% higher on a comparable basis to the prior year. And encouragingly, The new leases that went into effect in the Q1 were 16.8% higher than the expiring leases. Pricing momentum remains strong heading into the important summer leasing period.

Speaker 2

Our largest pressures on property operating expenses were with personnel costs and repair and maintenance expenses as the tight labor market, inflationary pressures and supply chain issues make an impact. But with the strong top line performance, we continue to see strong NOI growth and as detailed in our earnings release, we have increased Our performance expectations for the full year. Our new development pipeline continues to perform very well with 5 of the projects Now actively leasing and capturing rents that are higher than assumed in our projections. As detailed in the earnings release, we have 3 other developments under In addition to the development detailed in the earnings release, we are Also expecting to break ground on another 3 projects later this year located in Raleigh, Tampa and Denver. We're excited with the strong start to the year.

Speaker 2

Leasing conditions clearly remain very favorable. We have a number of initiatives underway with new technologies and redevelopment that will further fuel margin expansion and higher earnings growth from our existing portfolio and expanding new development pipeline will also fuel additional FFO growth over the next 2 to 3 years and the balance sheet is in a strong position to support our growth plans. MAA's strategy has consistently demonstrated more resilient performance during weaker parts of the economic cycle. But as a consequence of the many enhancements we've made over the past few years to the portfolio mix, to the operating platform, to the balance sheet and to our external growth capabilities, we're excited to now also see MAA's ability to post strong relative performance during recovery and the up parts of the market cycle. In closing, I'd like to extend my appreciation to our team of MAA Associates for their continued hard work And consistently strong performance.

Speaker 2

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

Speaker 3

Thank you, Eric, and

Speaker 4

good morning, everyone. During the Q1, we continued to make progress toward growing our new development pipeline. We finished the Q1 with $444,000,000 under construction and $740,000,000 combined under construction and in lease up at an average expected stabilized NOI yield of 5.9%. The size of our total pipeline is up from $700,000,000 at the end of 2021. During the Q1, we started construction on a 3 52 unit project in Denver called MAA Park Central.

Speaker 4

This is the first phase of a 3 phase 1,000 unit project on land we purchased in late 2020. Predevelopment work at our 3 owned sites in Raleigh, Tampa and Denver is progressing and subject to receiving acceptable construction costs, We expect to start construction on these projects this year. Additionally, we continue pre development work on several in house and pre purchase developments that we hope to start over the next 18 months in Atlanta, Charlotte, Denver, Orlando, Phoenix and Salt Lake City. This pool of Future development opportunities includes an entitled site in Denver that we purchased in the Q1 of this year. The timing of planned construction starts Can change as we work through the local approval and the construction bidding processes, but at this time we expect to start construction on 1600 to 1800 units in And in the year with a pipeline of under construction projects between $800,000,000 $900,000,000 and a pipeline of total projects both under construction and end lease up over $1,000,000,000 Our operating performance at communities and their initial lease up is strong and we're achieving rent substantially above our pro form a expectations.

Speaker 4

Reflective of the strong leasing demand in our markets, We reached stabilization at our MAA Midtown Phoenix community 2 quarters earlier than our original expectation, while also achieving stabilized Our construction management team continues to actively manage All our projects and has done a tremendous job keeping labor and material cost increases from having an impact on our overall budgets. Material shortages and shipping delays are prevalent in the market today and in many instances necessitate us placing orders and making deposits much earlier in the process than we had to in the past to secure materials as well as our place in the delivery queue. Despite these challenges, we delivered our last Units at both MAA WestGlen and MAA Park Point on time during the Q1. Our 2022 disposition plan is underway with 2 in the Fort Worth market currently under contract with an expected closing date later in the Q2. Buyer interest was strong for these 30 year old properties with 1 buyer winning the opportunity to purchase both.

Speaker 4

We plan to sell 2 additional properties later in the year. Our transaction team also remains engaged in the transaction market and we're actively evaluating several acquisition opportunities And we continue to believe that as we get later in the year, more compelling opportunities for acquiring stabilized and lease up properties are likely to materialize. That's all I have in the way of prepared comments. So with that, I'll turn it

Speaker 5

over to Tom. Thank you, Brad, and good morning, everyone. Performance for the quarter was once again robust and we're off to a good We saw strong pricing performance across the portfolio during the Q1. Blended lease over lease pricing achieved during the quarter was up 16.8 percent as a result all in place rents or effective rent growth increased 12.4% on a year over year basis and 2.6% from the prior quarter. Average effective rent growth is our primary revenue driver And with the current blended pricing momentum, we expect it to continue to strengthen.

Speaker 5

In addition, average daily occupancy for the quarter was a strong 95.9%. The strong demand environment continues to create new opportunities for our product upgrade initiatives. This includes our interior unit redevelopment program as well as Installation of our smart home technology package that includes mobile control of lights, thermostat and security as well as leak detection. At quarter end, we have completed 10 98 interior unit upgrades and installed 11,018 smart home packages. In 2022, we plan to complete over 6,000 interior unit upgrades and approximately 23,000 smart home packages.

Speaker 5

By the end of the year, we expect our total number of smart units to approach 71,000. For our repositioning program, we're in the final stages of Pricing leases at the first of 8 properties in the program that are now complete, results have exceeded our expectations Another 8 projects that are underway this year. The strong leasing activity continues into April. Lease over lease pricing on new move in leases For April, it is currently 16.5% ahead of the rent on the prior lease. Renewal lease pricing in April is running 16.7% ahead of the prior lease and as a result, blended lease pricing for the portfolio is up 16.6% thus far in April.

Speaker 5

Average daily occupancy for the month of April is currently strong at 95.7% and exposure, which is all vacant units Plus notices through a 60 day period is just 8.5%. Both numbers are in line with our expectations and support our ability to continue to prioritize rent growth headed into the busy summer season. Our teams are well prepared and looking

Speaker 6

Okay. Thank you, Tom, and

Speaker 7

good morning, everyone. Reported core FFO per share of $1.97 was $0.06 above the midpoint of our guidance for the quarter And virtually all of the outperformance came from revenue growth as rental pricing, occupancy and collections all combined to produce 150 basis points of outperformance to our revenue As Tom outlined, pricing trends continue to be strong through the Q1 and into April as both new leases and renewals coming effective during the quarter We're in solid double digit growth over the prior lease. We continue to expect stable occupancy and strong rent growth through this year and with some impact from prior year comps And return to more normal seasonal patterns during the Q4 leasing season, which did not occur last year. Overall, same store operating expenses were in line with expectations for But we do expect continued inflationary pressure over the remainder of the year and particularly in personnel and maintenance costs, which I'll discuss just a bit more in a moment. Our balance sheet remains in great shape, providing both protection for market volatility and capacity for strong future growth.

Speaker 7

We funded approximately 43,000,000 Development costs during the quarter toward projected $250,000,000 funding

Speaker 3

for the full year.

Speaker 7

As Brad mentioned earlier, we expect to start several new deals this year early next year, likely expanding our total construction pipeline to between $800,000,000 to $1,000,000,000 by year end, which remains well within our risk tolerance limits. We ended the quarter with low leverage, our debt to EBITDA at a record low 4.27 times with virtually all of our debt fixed and well laddered over an average of 8.4 years And with $1,000,000,000 of combined cash and borrowing capacity remaining under our line of credit. Also during the quarter, Moody's affirmed our debt rating of BAA1 and revised their outlook from to positive bringing all 3 rating agencies now to a positive outlook. And this certainly reflects the strength of our balance sheet and the potential for upgraded ratings over the next several quarters. And finally, given the Q1 performance and expectations for the remainder of the year, we are updating both our core FFO and same store guidance for the full year.

Speaker 7

We increased our full year range for core FFO by $0.16 per share at the midpoint to $7.92 to $8.24 per share or 808 at the midpoint. This represents a 15% growth over the prior year. This increase is essentially all produced by higher revenue growth expectations As projected, continued strong pricing trends produced a 200 basis points increase in our effective rent growth expectation for the year to 12% at the midpoint compared to 10% in our prior guidance and 5.2% for the prior year performance. As mentioned, our revenue production for the full year is built on continued solid Pricing performance and stable occupancy for the year with some impact from prior year comps of the second half and normal seasonal trends during the Q4. The trends with our property operating expenses remain largely in line with our original projections with some increased pressure expected from both from personnel and maintenance costs, The strong labor market, robust development environment and continued supply chain issues are expected to continue to pressure our maintenance service Salaries and materials costs, we increased our guidance for total operating expenses for this by 50 basis points at the midpoint 6%, reflecting the continued pressure.

Speaker 7

However, it's important to note this increase is more than offset by the revenue growth trends, which produced Our revised same store NOI expectation of 13.5% for the full year, which is a significant percentage of 50 basis points above our prior guidance. The forecast for our largest property operating expense line on the real estate taxes remains at 4% to 5%. I'll add also as a result of the continued labor Market inflation assumed higher performance based incentives given stronger projected performance. We have also raised the midpoint of our total overhead assumptions for the full year. And the only other change to our guidance was an increase in the dollar value of our disposition volume, which was increased $25,000,000 to a midpoint of $350,000,000 reflecting higher pricing expectations on assets being sold.

Speaker 7

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

Operator

We will now take our first question from Neil Malkin from Capital One. Please go ahead.

Speaker 8

Thank you. Hey, everyone. Good morning. Another great quarter. First question, just kind of want to Touch on in migration trends and obviously that's been something that's been talked about for particularly since COVID started, but just wondering if you can give an update on how those trends are going on either property or market level.

Speaker 8

Are you seeing those that inflow kind of remain steady? Is it increasing from the last couple quarters in terms of people coming in from out of state. And then the second part would be, are those people from out of state also bringing with them higher average incomes compared to, I guess, you want to call it in state move ins?

Speaker 5

Yes, Nehal, this is Tom. And just to give you Broad trend for Q1 starting in 2019, move outs from outside the footprint were 9.1. In 20, they were 10.1. In 2021, there were 12% and this quarter, there were 14%. So accelerating across the board.

Speaker 5

And then we see places like Phoenix So now 22%, Tampa 18%, Nashville 29%, 15% Charleston. And yes, we see so those trends are continuing and they're coming in at higher salaries as well.

Speaker 8

Yes. Thanks. Makes sense. And then maybe I wanted to touch on the acquisition side. You guys have been kind of shying away from that just given low cap rates.

Speaker 8

And now with interest rates going up, I'm just curious about your comment about acquisitions, potentially pursuing some of those in the back half of the year. What are some of the trends That gives you confidence that you might have some success there? Is it just elevated deliveries? Is it Higher interest rates maybe reducing competition. Any kind of color on the opportunities you see and Why you have some more confidence versus the prior course?

Speaker 4

Yes, Neal, this is Brad. I'd say, first of all, we've We've continued to remain active in the acquisition space for the last few quarters. Certainly pricing has been very frothy in that area and so it's really hindered our ability to execute in that area and we've Several last couple of quarters that we do think that opportunities will increase as we get later into the cycle and into this year. And generally, what we end up seeing If something changes and something changes to drive the market a little bit closer to us where we where our And I think what we're seeing right now is that play out a bit where our ability to execute Via speed, where we're able to come in and close on an acquisition within really 30 days. Our ability to close all cash Certainly becomes more valuable to some of the folks in the market and certainly we're seeing that At this point, we thought that that would likely be the case this year.

Speaker 4

And I think just given some of the geopolitical things that are going on, the Straight movements as you referenced are playing out where we do believe that we'll be able to execute in that arena this year.

Speaker 8

Does that have anything to do with potentially cap rates backing up at all? Or do you expect cap rates to be flat to even compress further?

Speaker 4

It's hard we're really early. Interest rates have moved 100 basis points in the last 60 days. And so What I would say on cap rates is for well located, well executed properties, there's really No movement in cap rates. In fact, in the Q1 on the deals that we looked at, cap rates actually went down. Now that's the full quarter.

Speaker 4

That's likely not the case in March April Where there have been some folks that high levered buyers that have paused for the moment, but I would say that instead of getting 10 bids Invest and finally, you're getting 4 in the deals that are well located, well executed, rates changing. It's really a result of folks looking to certainty of execution, more so than maximizing price. And I would say that Where we are right now is bids have been blowing through the top end of broker guidance. Now they're getting the top end of their guidance. And deals are still getting done, especially for the asset types that we're selling and then the asset types that we're looking to buy.

Speaker 8

Great. Thank you, guys. Great quarter. Thanks for the color.

Speaker 2

Thanks, Neil.

Operator

We will now take our next question from Brad Heffern from RBC Capital Markets. Please go ahead.

Speaker 1

Hey, everyone. Can you walk through where rent to income ratios are currently and any changes?

Speaker 6

Yes, Brad, this is Tim. If you look at our entire portfolio right now, rent income is about 23%. That captures everybody that's in a unit right now. So it's gone up a little bit over the last couple of years, but still remains Fairly low and feel like there's still plenty of room to move in terms of our rent performance.

Speaker 1

Okay. And can you talk about where renewal offers are being sent out currently?

Speaker 5

Sure, Brad. April's, I think I mentioned is currently running 16.7. Mays in the 17 range and June Right now, but June is a little early for full understanding. So they continue to be very robust.

Speaker 3

Okay. Thank you.

Operator

We will now take our next question from Austin Wurschmidt from KeyBanc. Please go ahead.

Speaker 8

Great and good morning everyone.

Speaker 9

So I was just trying to understand, I mean, we saw new leases now You're trending a little bit below renewals in the Q1 and a slight bit, I guess, in April. And you've seen average daily occupancy Just now start to tick down here more recently. So I'm just trying to understand if this is a trend that you think you can that can persist for some time Or if there's been just now to the point where you're receiving some pushback on the renewal pricing and that may ultimately lead to a need to, I guess, bring those down as we

Speaker 8

move through the year?

Speaker 5

Yes. I'll tackle the kind of the first part of that. And I wouldn't see anything that I would characterize as a slowdown. It is very steady. We're a few weeks into April.

Speaker 5

We're wrapping up April at mid-16s. And I'll tell you we've certainly gotten some pushback on renewal increases, but those folks that are leaving for price we're replacing with Someone paying 27% higher. So, what we see on this is good acceptor rates For renewals both in terms of the number of people that are renewing and the increase, We are seeing exposure below and occupancy continues to run-in a level that we're very comfortable Running in our demand metrics on leads per exposed units are as high as they've been. So Short term, we feel pretty darn good about where pricing is.

Speaker 2

And Austin, this is Eric. I'll also add Obviously, we're just now getting into the peak leasing season and where demand tends to pick up and leasing traffic really tends to pick up. So, I think the fact that we're carrying the sort of renewal rates that we are and the new lease rates that we are through the last 6 months of the fall and winter Heading into now the more robust part of the year, I'm feeling pretty good about the trends that we're seeing.

Speaker 9

That's helpful. I guess just trying to understand, I guess, the opportunity cost or turnover cost associated if you're backfilling at a lower rent increase on average Across the portfolio.

Speaker 5

Yes. And so I think it's important to recognize we're backfilling, if you will, But someone paying 27% high and total turnover is down 6%. So we're not increasing turnover at this And we're re pricing at a high rate on those folks that did choose to leave for price.

Speaker 9

And so what is market rent growth across the portfolio today and could you give the current loss to lease?

Speaker 6

Yes. Austin, this is Tim. I'll hit the loss Lease parts, if you look at the blended rents for call it March compared to our March ERU, it would imply about 8% loss to lease. You've got about $1600 was our effective rents in March versus ERU of 14.84 If you look at just the new lease prices where our absolute new lease prices are still running a little bit higher than renewals, it's actually about 10%

Speaker 9

And then as far as market rent growth, just curious where you are year to date. And I guess whether Anything has changed, as far as your projection across your markets for this year that led you to Increased guidance 200 basis points this early in the year given we received guidance just a couple of months ago.

Speaker 7

Austin, this is Sal. I'll start with that and Tim and Tom can ask some color if they want. I think what we saw was we had always expected Going back to when we gave guidance to begin to hear that we would have strength in the Q1 and begin to move into a situation where we have prior year comps, So on prior comps as well as the Q4, some normal seasonal trends impact us that we didn't have last year. That general trend is still Our expectation, albeit the Q1 was just much stronger than we had outlined. I mean pricing came in at 16%, you saw 16.8% for the quarter, Continued through April, as Tom mentioned, to be mid-16s at same similar levels.

Speaker 7

So I think that just went stronger and longer than we thought it would. So it caused us to expect the same continued shape of that curve for the year given the comps was based on, but just moved it up 200 basis points

Speaker 2

Austin, I'll add that, as I alluded to, and Tim or Tom mentioned as well, I mean, our Move ins from people moving from outside the Sunbelt into our markets continues to grow. But the other thing that's changed Frankly, in the last 90, 120 days or so is with the change happening on mortgage rates and interest rates, the hurdles for home buying just continue to grow. And I think that is continuing to fuel some level of demand for apartment housing as well that is running higher than we expected.

Speaker 6

Sure. And

Speaker 7

we do I just want to we do continue to have in the back half moving to a mid single digit kind of growth based on those prior year comps and that 4th quarter Seasonally talked about which is still strong on a relative basis in terms of years past outside of the COVID period. But that's still built into our

Speaker 3

that we think it proves to

Speaker 7

do that. And we'll just have to see what performance is.

Speaker 9

Is that mid single digit blended lease rate growth or same store revenue growth? Okay, Got it. Thank you. Yes.

Speaker 7

Same store revenue growth will obviously will continue. The math is math. It will accelerate next quarter and stay high through the year Just based on what we've done over the last several quarters.

Speaker 1

Okay. Thank you.

Operator

We will now take our next question from Nicholas Joseph from Citi. Please go ahead.

Speaker 3

Thanks. Right. You talked about

Operator

kind of the inflation and supply chain challenges with development. So as

Speaker 3

you think about the starts for later in the year, how much of Construction costs move, I don't know, either on a year over year basis or from earlier in the cycle, just as you think of pricing those deals?

Speaker 4

Yes. Nick, this is Brad. So yes, we build into all of our projections depending on when we Expect those projects to start some level of cost escalation. And I would say that varies based on the market. And I would say Also that the cost increase that we've seen varies based on market.

Speaker 4

And I'll tell you, Some markets right now are seeing cost increases that are pretty substantial, but I'll also point out that the way that we approach our And the way we underwrite our developments is pretty conservative. As I mentioned, we do keep in our underwritings, if we're going to start a Later this year, we've got cost escalation built in our construction costs, but we're also not trending rents until we And based on what we're seeing in our markets across the board, there's significant level of rent increases occurring between Now or when we put a project under contract and when we ultimately move to construction that we're not recognizing Until we get to the point where we start construction. So we're conservative in how we underwrite these and we do expect construction costs to continue to RISE, when we started this year, we kind of expected a construction cost increase of call it 8% across the board. And I would say that that's probably increased to 10% or 12% this year.

Operator

Thanks. That's helpful. And that's kind of my second question, right? So if

Speaker 3

you think about obviously Rents have moved up pretty meaningfully as well. So when you blend that together, how does kind of the underwritten, untrended yields Look today for some of those projects versus when you initially contemplated them.

Speaker 4

Yes. I mean, the projects that we have today that Our under construction actively, I think we're averaging about a 5.7 yield right now on our underwritten rents. And On those that are under construction, we have construction costs that are locked in. On projects that we are modeling going forward, We continue to expect those yields to be in the call it 5.25%, 5.5% range. So there is some movement There, but when you compare that to still what we're seeing on the acquisition side, where the yields are 3 to 3.5, the spreads continue to To be in that 150 basis points to 200 basis points range.

Speaker 4

And so we still continue to believe that taking into account The risk associated with development and the cost and all those things that that 150 basis points to 200 basis points spread is still a good place for us to be putting our capital.

Operator

Thank you. We will now take our next question from Nick Yuluca from Scotiabank. Please go

Speaker 10

ahead. Hi, thanks. Just going back to the guidance on the year, particularly on the 12% effective rent growth, I mean, I know you Talked a little bit about this,

Speaker 7

but I'm honestly still a little bit confused.

Speaker 10

I mean, if you did 12% over 12% in the Q1, I really struggle to see how blended pricing would be below 10%, mid single digits, as you said, in the back half of the year And how you could still get to that 12% number for the year? I mean, just any additional clarity on that would be Helpful, because it really feels like the blended pricing that's embedded in guidance on new and renewal leases is assumed to be Pretty strong over the next couple of quarters.

Speaker 7

And Nick, this is Al. I can try to address that and maybe Tim and Tom can look at I think it comes down basically to the fact that it takes average leases a year. And so if you look at the trends in our pricing over the last several quarters, Go back to 2021, at the start of the year, lending pricing at 2.7% and went to 8.2%, 15%, 16% in the 3rd and 4th Then we put another 16 to 8 up in the Q1 this year. So I think what we're though we expect our blended pricing To be impacted by the trends this year, both prior year comps and the seasonal trends we talked about, that That we've been put in for the last several quarters got to play out for another few quarters. And so I think if you think about our leases and average year that math will play out.

Speaker 7

So I think there's what we would expect is You'll dial that in. Revenue, given the leasing that we've done in the last several quarters, will continue to accelerate. It should continue to accelerate in the next quarter, it'd be pretty Over the remainder of the year, given those mid single digit new pricing and blended pricing performance that we expect to put in the back half of the year. So That's how it works out. Basically, you guys take into context year lease and how that's building up and then winding down over time.

Speaker 10

Okay. Yes. Thanks, Al. I guess when you're saying though that That blended pricing getting down mid single digits, is that a 4th quarter issue or is there any of that in the 3rd quarter as well?

Speaker 6

We'll have to see

Speaker 7

what happens, Nick. Obviously, what we've projected is a strong second quarter continuing to talk. We started off and Sue, we started off Tom talked about. That's coming in on the Q3 a good bit just because that's where the really if you go back to last year, that's when pricing really accelerated through the call. And so it's the prior year comp, that's the quarter you feel it.

Speaker 7

And then the Q4 has a little prior year comp plus that season, I said it's a little bit lower. So it's both of those, the average together, is going to be in that mid single digit range

Speaker 2

And the other variable in all this to keep in mind, Nick, is that we're talking about blended assumptions here. But of course, what you see actually play out can vary a bit different between renewal pricing versus new lease pricing. And New lease pricing tends to be much more reflective of supply demand dynamics going on in the market. But we've as Tim was alluding to earlier, we've got some mark to market or capture Sure. To still continue to recover with our renewal pricing and then if turnover stays low and we continue to execute a higher level of renewal Versus new lease pricing, it can change the outcome a bit.

Speaker 2

So what Al has laid out is sort of our best Guess as to how things will play out over the back half of the year when you do consider the prior year comparisons a little bit more challenging and we are Assuming a return to more seasonal patterns next year or later this year, which did not occur next year. But that mix Between renewal and new lease pricing performance can change a little bit and that can create some variation in terms of the ultimate result we get.

Speaker 10

Okay. Yes, appreciate it, Eric and Al.

Operator

We will now take our next question from John Kim from BMO Capital Markets. Please go ahead.

Speaker 3

Good morning. I'll just follow-up on that line of questioning. So you're able to push rents 16% to 17% this quarter off a comp period where a year ago is 8%. 3rd quarter of last year, you had 15%. So shouldn't your renewals be about 10% in the Q3 if market rents don't move?

Speaker 2

Yes. That sounds low to me for renewal.

Speaker 6

I mean, I think renewals is kind of what's What's held is where some of the opportunity is right now. I mean, we're still in a situation where our new lease pricing Just call it 2% or so, the absolute pricing is 2% or so higher than the absolute pricing we're getting on renewals. So That's kind of where we if you want to call it return to seasonality, return to normalcy, those renewals catching up and then likely surpassing the new leases. So I do think Renewals will continue to be strong for quite a while.

Speaker 3

So at least 10%?

Speaker 2

I would say so.

Speaker 3

Okay. Al, what's likely that you get And A minus credit rating this year, it seems like your net debt to EBITDA will continue to improve on an LCM basis. And can you remind us what the impact would be On incremental cost of debt, if you get that reading?

Speaker 7

Hey, John. It's a great question. I think in a of course, the markets are a bit volatile right now, both Rates as well as spreads have gone up now because some of the concerns about all the factors. But I think we certainly feel good about that deposit outlook. I think that's I don't think we need to do anything else in terms of balance sheet to make that happen.

Speaker 7

I think what we would say is our long term debt to EBITDA range is probably 4.5 to 5 and we're below that now. I would say we have capacity for growth for some of the things that Brad is talking about. And so I think that we don't really need to do anything to let some time play out. I think there may be Our backlog would be they're a little bit behind on catching up with the strength of the business, but we feel very good about where they are today. So we'll see what happens over the next few quarters, But hopefully something happens there.

Speaker 7

We've already if you think about it, you should get about a 25 to 30 basis points impact on your Borrowing costs, say on average, but 10 year financing over time from going from a B to an A rating. Our deals that we've done over the last couple of years, quite frankly, we've captured about half of that, John. I think we've priced through a BBB plus rating and kind of moved into almost touched A- at times and sort of got close. So we've captured about half of that. I think we'd probably pick up another 15 basis points from here in a normal stable market.

Speaker 7

The good thing is,

Speaker 6

great work Andrew and the

Speaker 7

team has done. We really don't have much And this year, we only have $125,000,000 coming due. So we won't be in the market very much. I don't plan to be in the market as we talked about. But if we are And the rate income, we expect another 15 basis points increase what we would have been able to do.

Speaker 3

Appreciate it. Thank you.

Operator

We will now take our next question from Alexander Goldfarb from Piper Sandler. Please go ahead.

Speaker 11

Hey, good morning down there. Two questions. First, on the asset pricing And the bidder pull, I think earlier to some of the questions you said that instead of pricing through the top end, it's now pricing at the top end and there Yes, maybe a fewer bidders coming forth to buy deals. Does that mean that multifamily is losing its luster or Is there just a lot more supply out there or is the capital that was going to multifamily now going to other sectors Yes, outside of, yes, let's say the classic industrial and multifamily that was all the rage in past few years.

Speaker 4

This is Brad. No, I certainly don't think folks are going away from multifamily. And in fact, Just given the strength of the fundamentals and the broader trends and migration and job growth and things like that in our region of the country, We're seeing as much capital today as we've ever seen in this space and then in our region of the country. So no, It's not that at all. What I think that is a couple of things.

Speaker 4

One is the highly levered buyers Are sitting on the sidelines at the moment, just trying to figure out what levers they're going to pull to try to get back into the market. Interest rates have moved so quickly for those folks that they're entering these deals at a negative Leverage position, the rent growth that's in place in our region of the country helps them overcome that. So that's really what it is at the moment. It's not a reallocation of a capital. It's not capital moving to other sectors or anything of that nature at this point.

Speaker 4

It is simply Folks on the sideline at the time being is the first point. The second point is that there has been a flood of Projects, deals come to market in March April. Folks were trying to get ahead of some of the interest rate movements. So there has been a flood of deals that have come to market frankly. And so I think that part has dispersed the buyer pool a bit Amongst these deals, so that's the second component that I would say is limiting the buyer pool on individual deals.

Speaker 4

But in terms of the entire market, No, I don't think capital has moved away from this sector at all.

Speaker 11

Okay. And then the second question is on gas prices. Are you seeing any impact on your residents? There are some people who say, because the Sunbelt is heavy drive and because of lower relative 1st, the coastal market, gas prices are a bigger deal. The offset is most of your residents, I'm guessing, are single and are probably more concerned about their beer budgets and their gas So just curious if gas prices have any impact on your renters or if it's really just I don't want to say non issue, but sort of a non issue.

Speaker 5

I'd say it's a non issue. It's one of many factors going on. And I think when you stack up So the different regions of the company or even the different of the country or even our submarkets, we're seeing steady performance in pricing, Whether it's an interloop downtown walkable asset or a suburban asset with a drive. So Just not seeing much on that on the renter side of things.

Speaker 2

And Alex, we're also seeing wage growth take place at a pretty robust pace as well. So A combination of what's happening on the employment side and wages, I think has muted any negative impact on the rise in

Operator

We will now take our next question from Hindal St. Juste from Mizuho. Please go ahead.

Speaker 3

Hey, good morning. Thank you. A couple of follow ups here. I guess, I heard you earlier mentioned that some markets are seeing very substantial development cost increases. I guess, I'm curious which markets Are those cost increases standing up more so and why more than other markets?

Speaker 3

Thanks.

Speaker 4

Yes, I mean 2 that I can think of are Denver and Phoenix and really those are more because they're kind of islands On their own, frankly, in terms of the sub trade base and the GC base, you've considered Texas where you've got Austin, Houston, Dallas, San Antonio, all those markets, contractors really go to all those markets, but that's not the case When you get into a market like Denver and Phoenix, they're more islands onto themselves. So your base of Your pool is a little bit more limited, so you have a different impact in those markets.

Speaker 6

Got it. Got it.

Speaker 3

Okay. On the development pipeline overall, you mentioned getting to about $1,000,000,000 by year end that you're still within your I think your comfort threshold. I guess I'm curious how much larger Could you be willing to go that pipeline too, especially if you now factor in the rising rates And

Speaker 12

the supply increasing supply projected to come across the Sunbelt over the next year or 2. Thanks.

Speaker 7

We talked about in the past Haendel that we talked about

Speaker 6

4% to 5% of our

Speaker 7

balance sheet kind of being the tolerance limit. We're well below that now. So we could go $1,000,000,000 to $1,400,000,000 would be no problem for us given the surplus. Certainly we're thinking about the marketplace and how things shape up. But our balance sheet is Our leverage is very low as we talked about.

Speaker 7

However you look at it, we're below our sort of our leverage thresholds right now with plenty of capacity. And so we have plenty of runway to continue funding in a market that's changing. So that's how we think

Speaker 3

Okay, fair enough. And then one more, if you wouldn't mind just sharing some updated color on DC and Houston, 2 of your softer markets. Guess I'm curious how does market fairing versus expectations coming into the year? And is there any incremental optimism, maybe pessimism as you kind

Speaker 6

Hey, Hamill.

Speaker 5

Yes, D. C. Is now 10.5 on Blended rent for April and Houston is 9.6. So if we were 3 years ago, I would be telling you how well they were doing, but those are improving. They've improved over time.

Speaker 5

They probably moved from the mid-4s. It's just that that still puts them at the lower end of our portfolio's growth rate. So they're improving modestly, I would say.

Operator

We will now take our next question from Anthony Powell from Barclays. Please go ahead.

Speaker 13

Hi, good morning. So your rental growth and lease spreads have been higher than single family for the past few quarters, which is good. But in a lot of cases, now some of your monthly rents Converging with single family. So do you see that as a risk as single family inventory increases? And could that be maybe a potential just headwind Have you had maybe larger, I guess, homes available at both single rents what you're offering?

Speaker 5

No. I mean, it's just no threat at all. In fact, rent The house is down 117 move outs and is now just 3.2% Of our reason for move out, so it's a total non factor. And home buying as you would expect is Close to 23%. It's now just 18% of our move out.

Speaker 5

So The affordability in those areas seems to be driving people to stay, and that's a big part of our production and turnover.

Speaker 6

I might add one point to that that even with the rent increases we've been seeing, our new lease rates are up about 30% over the last 2 years, but Single family home prices in our markets is up almost 40% over that same period. So relative affordability has actually gotten lower For single family than it was a couple of years ago.

Speaker 13

Sorry, I was referring to single family rents, I guess. I was looking at one of the large rental peers And looking at a market like Atlanta or Tampa, it seems like the actual monthly rents in some of these markets Yes.

Speaker 5

And to be clear, move outs to rent increase is now down to 3.2 percent of our move outs is at 100 basis points lower, so non factor there.

Speaker 2

I think that Anthony, it's also important to recognize, as Tom is alluding to, competition that we may have From people choosing to rent a home versus rent an apartment. I mean, it's just it's a non factor for us. And I think it really is a non factor because people are making a choice For renting housing based on lifestyle need and given the demographic that we're serving and the demographic that defines our resident profile, These are not people that are choosing or want or desire the single family lifestyle. They want the apartment lifestyle. So, we just do not and never have really seen it as being a problem comparison.

Speaker 13

Got it. It's clear. And just one more, I guess, one of the multifamily peers yesterday said that they're seeing, I guess, older tenured Tenants in certain markets like Tampa move out as pricing increases. Are you seeing the same thing? And does that kind of factor into how you price in the renewals in any of the market?

Speaker 5

It doesn't affect how we price on renewals and our average length of stay has stayed consistent at about 20 months. So we're not seeing a real Material change on that point and we're so consistent with our renewal increases The renewal people that have renewed, they're not generally that behind. It's more the new move ins that are getting that Our increase.

Speaker 13

Got it. Thank you.

Operator

We will now take our next question from Rob Stevenson from Janney. Please go ahead.

Speaker 14

Good morning, guys. Average same store rents $14.69 a month. Where are monthly fees per unit today? And what type of growth rates are you passing through with fees? I assume it's not anywhere near the rental rate growth levels of mid teens?

Speaker 5

So we do I mean, no, it is not. And that is those run from $100 $150 a month and they run More in the 3% to 4% range.

Speaker 14

Are you seeing lower application fees given the lower turnover?

Speaker 5

Sorry, say that again, Rob.

Speaker 14

Are you seeing any decrease in application fees given the higher occupancy and the lower turnover? Is there just less units available in your portfolio and so therefore You're getting lower application fees that are pushing down fees a little bit in aggregate across the portfolio?

Speaker 5

Not materially and fees are actually Up a little bit as we've gotten back to more normalized operating conditions on things like late fees and term fees.

Speaker 14

Okay. And then some of your peers have been talking about earn in into 2023. So Rental rates continue at current levels at the current trajectory through the prime leasing season. How much is baked in same store growth is there going to be locked Then for 2023 as we exit 2022, I think the peers have been talking about 3% to 4% in their portfolios for 2023, even if rents didn't increase from here, how are you guys thinking about that, the sort of where these leases are going to set you up for 2023 as a base?

Speaker 6

Rob, this is Tim. I'll answer that certainly in terms of the guidance that we have for the rest of the year. The way we kind of look at it is that The blend of lease over lease that we expect to get for the full year, roughly half of that should pretty much carry into the next year. So I I guess a little more than that. I would call it somewhere around 5% now based on our guidance.

Speaker 6

If pricing holds up better than we think, then certainly that will impact that number as well. So every day that goes by helps us That will impact that number as well. So every day that goes by helps us in 2022, but also sets us up for 2023 as well.

Speaker 14

Okay. And then one quick one. How much of your redevelopment is being done by internal MAA staff these days versus contracted third parties?

Speaker 5

On the interior renovated, it's primarily a contractor base that's coming in and doing the countertops and cabinetry And flooring and those items, we do a little bit of the paying in house, but it's primarily a contract process and always has been.

Speaker 14

Is that an impediment at this point of getting that labor? Or are you guys still getting as much done as you Want to at this point.

Speaker 5

It's not an impediment at all, much like Brad has outlined in his comments about construction. We've seen some rate increase there, But the price opportunity that we're seeing from the markets is better. And then of course new supplies come into our markets and that's given us Additional opportunity to grow it to a higher price point. So, there's I would say there's some expense there, but it's not affecting the economics

Operator

And we do have a follow-up question from Haendel St. Juste from Mizuho. Please go ahead.

Speaker 3

Hey, there. One more development question. 1 of your apartment peers entered the SFR Development business this past quarter doing a cash product I think in Houston. I guess I'm curious, one, if you have any plans to do so, anything in the pipeline that perhaps contemplates an SFR development? And what's your thoughts overall on maybe adding that to your that type of product to your pipeline?

Speaker 3

Thanks.

Speaker 2

Haendel, this is Eric. The short answer is no. It's not something that we plan to Jump on, we have spent a fair amount of time looking at it. We have studied it a good bit over the last couple of years and have We concluded that frankly we can capture margin expansion and from the portfolio And earnings upside, we think from the existing from our operations just through continue to focus on the multi product that we have and certainly the some of the things that we're doing With new technology and so forth, which is a lot of it, obviously, is being used in the single family space as well. But when you apply it to Our more condensed, if you will, apartment communities where you've got 250 units often with Shared structure and much more efficient from a CapEx perspective.

Speaker 2

We just ultimately believe And have concluded after studying a lot that we're better off to just stick to our knitting and stay focused on the apartment product. And certainly, as we continue to look at ramping up our external growth, we've got plenty of investment opportunity And plenty of growth opportunity we think by focusing again on what we really know, which is multifamily. So Again, answer is no. We're content to focus as we are.

Speaker 3

Thanks for the color, Eric.

Operator

We will now take our next question from Chandni Luthra from Goldman Sachs. Please go ahead.

Speaker 15

Thank you for taking my question. What are you hearing these days on the subject of rent control? We've seen Increasing dialogue here, we've seen Grant marches in Atlanta and kind of with elections Coming around later this year, basically, how are you thinking about managing this dynamic? Do you see heightened risk Going into 2023, if 2022 was basically, let's say, done at this point, From anything material transpiring from a head control standpoint.

Speaker 16

Hey, Jenny, it's Rob. I'll start and then maybe turn it over to Jim and Al, but so across our markets, 13 of our states that represent about 90% of our NOI Actually have in place state laws that prohibit rent control at a local level. So with that starting as a backdrop It's very difficult to get rent control imposed across our portfolio. So we have a group that is active in monitoring these along with the various And trade industries that we're part of, so don't really anticipate any significant impact from rent control across any of our markets.

Speaker 2

No. I'll add to what Rob is saying is what Tim alluded to earlier with rent to income in our portfolio now running around 20 3% is still a very affordable level of rent relative to income that we are at right now. And most economists will tell you once you get to 30% or better or higher that you start to run into a problem. So A combination of just the environment we find ourselves in, the issues and the fact that a lot of our states we operate really prohibit it. We just and the affordable nature of our product and relative to income, we're just not seeing any real Evidence that we're at risk of any sort of meaningful efforts towards rent control or regulations to try to Keep that in check.

Speaker 15

Got it. And a quick follow-up. So earlier on one of the questions you talked about 20 20 So, Ian, kind of where you are from capturing that loss to lease standpoint, you expect basically that going into 2023, You're looking at a 5% pricing for now. So big picture, thinking about where you guys were pre pandemic, When do you think the market gets back to that 3.5%, 4%

Speaker 2

I don't know. I think that it's going to vary A bit by region of the country and by market. From where we sit here today and I think about The fundamentals that are driving demand for housing in the Sunbelt largely as a function of the job growth that we are seeing And increasing embracing by employers of Some level of remote working and I think that's going to be with us for many years to come. I just it's I see the demand side of the equation for our business as continuing to be quite strong in our markets For some time. And then I'll overlay on that the pressures that Brad's been alluding to surrounding And the ability to secure development sites, which is very, very difficult.

Speaker 2

I think that Effectively, in many ways, we are at kind of full capacity at the moment in terms of the ability for Developers and construction companies to deliver supply. So, I think I mean, our biggest challenge frankly is just The prior year comparisons, it's and of course that will we have that this year and then going into next It'll be more steady. But I think that as I think about a return to normal From a rent growth perspective, as you're framing it up, it's hard to see that happening over the next 2 or 3 years. I think we're in a very Unique window right now where I think the only thing that could change that, the only thing that could really weaken that is if we do in fact See the country slip into some form of a recession and job growth begins to significantly low and we go into a real downturn in the economy, which of course will affect everyone. But Of course, MAA has shown the ability to weather those downturns better than most.

Speaker 2

And again, I think a lot of that comes back to It's in the way that we are uniquely diversified across the Sunbelt and the more affordable nature of our product. So, I think that My answer is fundamentally that I think the conditions are likely to remain pretty bullish for quite some time. And the only thing we can really materially weaken that would be a significant downturn in the economy, a recession, if you will. And even in that scenario, on a relative or comparative basis, I like our story in that kind of scenario.

Speaker 15

Great. Thank you so much.

Operator

We will now take our next question from Rich Anderson from SMBC. Please go ahead.

Speaker 17

Thanks. Good morning. So speaking of recession, so the GDP Print, for the Q1, surprising, down 1.4%. How do you speak about some of the protection that MAA has offered in the past about tougher economic climates. But I mean, is there a reason to be thinking out a couple of years or a year about All the good things are happening today and being careful not to have sort of a hangover when this is all said and done because I'd argue that this is not a forever thing and Karma is a you know what.

Speaker 17

So how do you manage this in light of the broader economic environment and the changes that are going on? Thanks.

Speaker 2

Well, Rich, it's a good question. And frankly, it's something we've been spending a fair amount of time thinking about, because I do agree with you that, I mean, one thing we know The economy is cyclical and our business is cyclical. And I think that while it's hard for me to sit here today and see Any reason to get particularly definitive about a downturn. There's a lot of uncertainty out there and there's changes afoot. But as we think about how do we position the company and prepare for an eventual downturn, there really There's always been 4 things that we have really focused our energy and efforts on.

Speaker 2

One is just the portfolio strategy itself and ensuring That we are focused in markets that we think can weather downturns better than other regions and other markets in the country. We think that the price point that we have in the portfolio relative to others is an advantage to us, should we find ourselves in that kind of And as you know, we are a bit uniquely diversified also across the Sunbelt and that we have exposure to a number of secondary markets as well as the larger markets as well. And that balance and that diversification across the region unique Our story, I think really is one of the things that we're going to continue to hold on to and to protect as we think about cycling capital and growing the company. The other thing that I would we focus on of course is the balance sheet and the capacity we have in the balance sheet and even though it's a long time, Rich, I mean, our balance sheet has never been this strong. We've never had this much capacity.

Speaker 2

So, we think we've got that positioned about as well as we can. The other thing is We continue to monitor very carefully about how much forward funding obligation we're creating for ourselves through new development. And as Al alluded We feel like that no more than 4% to 5% is kind of where we want to be. Right now, we're well below that and continue to and certainly intend to stay there. So, while we've We're still in a very comfortable position such that if the capital markets Close for some reason, we feel very confident that we can continue to complete all the obligations that we've created.

Speaker 2

And then the final thing I'll point to, If you were to tell me a year from now that we for sure we're going to recession, what would you be doing from an operational perspective? I would say we're doing exactly that. This is the time to be pushing for rent. When you get into a recession, the thing that will cause revenues to hold up better than they otherwise would Is that you've got baked in performance in your revenues through the rent growth that you've been capturing over the prior year or so. So, we think that this is for a host of reasons It's a good time to continue to be prioritizing rent growth over occupancy.

Speaker 2

And if you want to think about a recession, for sure, that's what we should be doing, which is Obviously, what we are doing now.

Speaker 17

Okay. And then second question for me is about an hour ago, you talked about 14% of your leasing came from someplace else into the Sunbelt. But your urban peers are also Claiming in migration too these days. So everyone's got in migration. It's a party.

Speaker 17

It's a migration party. And Mike, my question to you is that the 14% of leasing only tells half the story because what about the people that Did not renew and are leaving your portfolio, where are they going? And so I wonder if you know, perhaps the net is a positive inbound To the Sunbelt, I'm not going to argue that, but I wonder if there is the back door is opening up a little bit as people Perhaps are looking to the urban world and saying maybe I can get myself a deal someplace else or get a big paying job or whatever the case may be. Is that something you monitor the back door and where people are going, not where people are coming from? Yes,

Speaker 5

Rich, we do. And Move outs who moved outside the Sunbelt area were just 4.3%, Last day, Aryan, that's down from 4.5 last year. And it's not big enough that I've spent much time trying to figure out where they're going. So, and that is pretty big in our favor.

Speaker 17

Impressive that you know that number. I appreciate that. Thanks very much.

Speaker 5

Thank you.

Operator

We will now take our next question from Teo Okusanya from Credit Suisse. Please go ahead.

Speaker 18

Yes. Good morning, everyone. My question is more around innovation and technology. Hoping you could talk a little bit more around what you're doing in that area and ultimately what kind of margin expansion you expect From these initiatives that make you comfortable that they're all positive MPD products projects?

Speaker 5

Yes. Sure, Tayo. And I'll Take the first part and kick it over to Tim to cover the margin expansion. But we've currently what has either occurred or is in process is we've Exped Expanded Our Call Center Solution. We've implemented lead nurturing software which is automated prospect engagement technology It interacts with our prospects earlier.

Speaker 5

It allows us to automate follow ups. We've upgraded virtual touring. We've added prospect centric CRM, we've added mobile maintenance and mobile inspections. These changes just so far It's allowed us to restructure 30 positions in the office staff in 2021. It's benefiting us in 2022.

Speaker 5

We're also getting better clarity on billing and Higher resident satisfaction as a result of the inspection process. And then underway right now is improved self touring, Improved multi location sales support, simplified online leasing and we expect another 30 to 50 headcount reduction in 2022 It will benefit 'twenty three and then Tim can talk about a little bit about the margin expansion. Yes. So on the

Speaker 6

timing on the margin at least for 2022, we're expecting our total margin to go up somewhere between 150 basis points and 175 basis points. Obviously, a lot of Different factors playing into that, but a lot of the components Tom mentioned are included there. And so smart home is 1 for sure the installations we're doing there that we can see On the top line, that's probably contributing 40 basis points or so this year to the margin. And then some of The efficiencies on the headcount side, the call center and automated chatter are contributing a piece of that as well. I think some of the foundational things we're doing now with The CRM is currently getting rolled out and some of the other things that Tom mentioned will have more of an impact as we get into 2023 and we'll To find out more definitively as we move out to the next few months.

Speaker 6

Great. Thank you.

Speaker 12

Thank you.

Operator

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

Speaker 2

Okay. Well, we appreciate everyone hanging with us today. And if you have any follow-up questions, obviously, just feel free to reach out

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