Mid-America Apartment Communities Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2022

Key Takeaways

  • MAA reported robust leasing conditions in Q2 with 11% growth in traffic, a 7% jump in lease applications, 99.5% rent collection rate, and sustained rent growth under a 22% rent-to-income ratio.
  • The company raised full-year core FFO guidance to a midpoint of $8.25 per share (up 17.5%), and boosted same-store NOI growth expectations to 15% (170 bps margin expansion) after Q2 FFO beat by $0.05.
  • Inflationary pressures on operating expenses—led by repair & maintenance and real estate taxes—drove a hike in full-year expense growth guidance to 6.5%–7.5%.
  • MAA is expanding its development pipeline with $740 million under construction, land secured for 2,600+ units across eight sites (including Orlando and Denver starts in 2023), and a strategic adjacent-property acquisition in Tampa to unlock on-site synergies.
  • The balance sheet was strengthened with a Fitch upgrade to A-, an upsized $1.25 billion undrawn credit facility, 100% fixed-rate debt at a 3.97× leverage ratio, and an average debt maturity of 8.2 years.
AI Generated. May Contain Errors.
Earnings Conference Call
Mid-America Apartment Communities Q2 2022
00:00 / 00:00

There are 19 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the MAA Second Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, the company will conduct a question and answer session. As a reminder, this conference call is being recorded today, July 28, 2022. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments.

Speaker 1

Thank you, Gretchen, 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 Eric Bolton, Tim Argo, Al Campbell, Rob 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 supplemental financial data. Our earnings release and supplement are currently available on the For Investors page of our website at www dotmaac.com. A copy of our prepared comments and an audio recording of this call will also be available on our website later today.

Speaker 1

After some brief prepared comments, the management team will be available to answer questions. I will now turn the call over to Eric.

Speaker 2

Thanks, Andrew, and good morning. Leasing conditions remain strong across our Sunbelt portfolio. Job growth, positive migration trends And the higher cost of single family home ownership continue to fuel strong demand. Roughly halfway through the busy leasing We do not see any indication that demand is slowing. Leasing traffic or leads were up 11% in the 2nd quarter as compared to prior year, Generating a 7% jump in lease applications.

Speaker 2

New move ins during the quarter from households migrating into our Sunbelt footprint increased slightly from last year and drove 15% of our new move ins. Further supporting the strength of the leasing market and the prospects for continued rent growth. It's worth noting that the rent to income ratio of the new leases executed in the second Quarter was 22% and remains in a very affordable range. Collections also remained strong with 99.5% The rent build in the 2nd quarter collected, which is actually up slightly from 99.4% collected in the preceding Q1. Al will touch on this and while we see no near term indications that leasing conditions are poised to change And we expect the strong occupancy and rent growth trends to continue.

Speaker 2

We do anticipate that we'll see some year over year moderation And rent growth over the back half of the year as the prior year performance comparisons become more difficult, but current rent levels continue to hold up well and are increasingly fueling solid revenue momentum for the start of the next calendar year. Pressure on operating expenses We expect these pressures will likely persist over the balance of the year with some relief beginning in 2023 As we begin to harvest increasing benefits from our new tech and margin expansion initiatives, on balance, given the strong top line performance, Our NOI margin continues to expand and as noted in our earnings release, we once again increased our expectations for growth in same store Net operating income for the year. We are seeing increasing opportunity within the transaction market and are very pleased with our Tampa property acquisition completed earlier this month. This new property acquisition is actually located directly adjacent to one of our existing properties, Providing an opportunity to consolidate on-site operations to drive a very attractive investment return. Our new development pipeline continues to expand As we continue to find attractive opportunities to drive value and yields well above our overall cost of capital, Our pipeline of existing construction projects remains on budget and our lease up projects are outperforming our pro formas.

Speaker 2

We remain very encouraged by the current leasing conditions and the early momentum in key variables that will define calendar year 2023's initial performance. There are, of course, growing concerns surrounding the broader economy and concerns surrounding a potential recession. Our Sunbelt portfolio could better weather an economic slowdown as compared to other regions. MAA's balance sheet and coverage ratios are very strong and better than at any point in our company's history. We continue to introduce new technology and changes to our operating practices that will drive more efficiency and higher margins over the next couple of years.

Speaker 2

MAA has an established performance record of responding well to down cycles Our outlook remains positive and current leasing conditions are very strong. That's all I have in the way of prepared comments and I'll now turn the call over to Brad.

Speaker 3

Thank you, Eric, and good morning, everyone. Transaction activity in the 2nd quarter slowed meaningfully from the first quarter of the year as the increase in interest rates coupled with a higher degree of economic uncertainty have combined to send buyers with contract in the Q2. For the properties that did close, generally they closed with stronger institutional quality investors at cap rates that were 40 basis points higher than where deals traded in the Q1. As uncertainty in the market has risen, our ability to move quickly and close all Cash has led to a significant increase in inbound calls to our transaction team. As Eric mentioned, in July, we successfully acquired a newly constructed Property in the Tampa MSA.

Speaker 3

This 196 unit property is adjacent to an existing MAA property and will be fully integrated into our existing property, creating operational efficiencies and margin expansion opportunities that we will fully harvest over the next few years. Our under construction and in lease up pipeline remains at $740,000,000 While we had no construction starts in the Q2, we did purchase a land parcel for a planned 2023 start of a 300 unit development in Orlando. Also subsequent to quarter end, we purchased a 500 unit development site in the Denver MSA that we also expect to start construction on in 2023. These land purchases bring our total land owned land sites for development to 8 sites with entitlements for We previously expected to start construction on our sites in Raleigh, Tampa and Denver this year, We've pushed the start of our Denver project to 2023. Predevelopment work on our Raleigh and Tampa projects are progressing and subject to receiving acceptable construction costs and the appropriate building permits, we still expect to start construction on these projects this year.

Speaker 3

We continue pre development work on several additional in house and The timing of planned construction starts can change as we work through the local approval and the construction bidding processes. But at this time, we expect to start construction on approximately 12 50 units this year and we expect to end the year with a pipeline of under Construction projects over $700,000,000 and a pipeline of projects both under construction and in lease up between $925,000,000 $975,000,000 Our construction management team continues to actively manage all our projects and has done a tremendous job Working with our contractors to keep the inflationary pressures surrounding labor and material costs from causing a meaningful increase to our overall job costs. To avoid the cost escalation that is so prevalent in the market today, we are making commitments to purchase materials much earlier in the process than we've had to in the past. Nevertheless, delivery delays, material shortages and securing building permits remain our biggest challenges. In our supplemental, we did push back by 1 quarter our expected delivery dates on Novel Val Vista in Phoenix and Central Park in Denver.

Speaker 3

Operating performance at communities and their initial lease up continues to strengthen. Traffic and leads remain elevated, leading to rents well ahead of our pro form a stabilization date by 1 quarter to Q3 of 'twenty two. As mentioned in our release, we successfully sold our 2 disposition properties in the Fort Worth market $167,000,000 We have 2 more planned disposition properties in the market that we hope to close late this year. 1 is in suburban Maryland and one is in the Austin That's all I have in the way of prepared comments. So with that, I'll turn it over to Tom.

Speaker 4

Thank you, Brad. Good morning, everyone. Same store performance for the quarter was once again robust and our busy summer season is going well. We saw strong Pricing performance across the portfolio during the Q2, blended lease over lease pricing achieved during the quarter was up 17.2%. As a result, all in place rents or effective rent growth increased by 14.3% on a year over year basis and 4% from the prior quarter.

Speaker 4

Average effective rent growth is our primary revenue driver and with the current blended pricing momentum, we The strong demand environment continues to create new opportunities for our product upgrade initiatives. This includes our interior unit redevelopment program as well as installation of our smart home technology package that includes mobile control of lights, thermostat and security, as well as leak detection. During the quarter, we completed 1844 interior unit upgrades and installed 9,438 smart home packages. In 2022, we plan to complete over 6,000 interior unit upgrades and approximately 23,000 smart home packages. By the end of the year, we expect our total number of smart units to approach 70,000.

Speaker 4

For our repositioning program, we're in the final stages of repricing leases at the first eight properties in the program And we are that are now complete and the results have exceeded our expectations. We have another 8 projects that are underway this year. Strong leasing activity continues for July. Same store lease over lease pricing on new move ins As of July 25, it's 17.9 percent ahead of the rent of the prior lease. Renewal lease pricing in July is running 15.4% of the prior lease and as a result blended lease pricing for the portfolio is up approximately 16.6% thus far in July.

Speaker 4

Same store physical occupancy as of July 25 was 95.9. Exposure, which is all vacant units Plus notices through a 60 day period is just 7.4%. Both numbers are

Speaker 5

in line with our expectations.

Speaker 4

Our teams have performed well during our busy summer season and have the portfolio well positioned for the slower fall and winter seasons. I'm grateful for their time and commitment to serving all our stakeholders. I'll now turn the call over to Al.

Speaker 6

Thank you, Tom, and good morning, everyone. Reported core FFO per share of $2.02 was $0.05 above midpoint of our guidance for the quarter. The outperformance virtually all came from property revenues, a stronger than projected rental pricing trends continued through the quarter, which produced a strong 17.2% increase in Blended lease pricing for the quarter, even as more challenging prior comparisons began to grow late in the quarter. We do continue to expect a growing impact from prior year comps As we move to the back half of the year as well as return of a more normal seasonal pattern during the Q4, which we'll discuss just a bit more with guidance in a moment. Same store operating expenses for the quarter were slightly higher than projected as we saw some inflationary pressures and repair and maintenance costs as well as revised real estate tax expenses for the year as more valuation information came in during the quarter.

Speaker 6

Irvine's guidance for the year reflects these expense Pressures, but these are more than offset by growing revenues as reflected by our revised NOI guidance. Our balance sheet is stronger than ever As reflected by the upgrade to an A- credit rating by Fitch during the quarter, we continue to have discussions with the other agencies and are confident the strength will eventually be reflected in our other ratings as well. Just after the end of the quarter, we completed renewal of our unsecured credit facility, which is our primary tool for liquidity and short term funding of development, debt maturities and short term operating needs. As part of the renewal, we increased the facility size $1,250,000,000 from $1,000,000,000 and captured improvements in pricing and terms despite the growing volatility of the financing markets. At the end of the quarter, we had no outstanding borrowings under our credit facility and our leverage was historically low, but debt to EBITDA had a low 3.97 times.

Speaker 6

And 100% of our debt had fixed interest rates with an average maturity of 8.2 years, providing protection in a rising interest rate environment. And finally, given the 2nd quarter performance and expectations for the remainder of the year, we are increasing both our core FFO and same store guidance for the full year. We increased our full year range for core FFO by $0.17 per share or 2% at the midpoint to a range of $8.13 to $8.37 per share or $8.25 This now represents a 17.5% growth over the prior year. This increase is essentially all the results of higher revenue growth, Strong pricing tends continued through the Q2 as we mentioned. We're now projecting 125 basis points increase in our effective rent growth expectation for the year to 13.25 percent at the midpoint.

Speaker 6

Our revenue projection for the year continues to be built on strong pricing performance and stable occupancy for the year Some growing impact from prior year comps for the second half and normal seasonal trends during the Q4 as we mentioned. We expect blended lease pricing to be approximately For the second half of the year, which for context is on top of a record high 15% growth in blended pricing captured in the back half of last year.

Speaker 4

So I

Speaker 6

think this reflects our expectation for As mentioned, we also increased the expected growth rate for same store operating expenses for the full year by 100 basis points at the midpoint of our range, Now 6.5% to 7.5% for the full year, primarily reflecting pressure in repair and maintenance costs as well as real estate taxes. Property valuations received during the quarter mainly in Texas reflected aggressive assessments and we do expect these valuation increases Partially offset by millage rate rollbacks finalized late in the year, but we increased our expectation for taxes by 100 basis points for the full year to reflect the net impact. The overall impact of these changes is an increase to our expectations for same store NOI growth for the year to a midpoint of 15%, up from the 13.5% provided at the end of the Q1. And this represents 170 basis point expansion in our margin in from the prior year. So other changes to guidance of note were $50,000,000 reduction in our expected development spending for the year, reflecting Really revised timing of funding as well as a $25,000,000 redemption in our disposition proceeds as we finalize the sale of the 2 remaining properties in Maryland and Austin.

Speaker 6

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

Operator

We will now open the call up for questions. Our first question comes from Nicholas Joseph from Citi.

Speaker 7

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

Speaker 4

Yes, Nick, I'll jump in there. I mean, I think looking at a few different fronts, The collections improved to 99.5% from 99.4%, which is encouraging. Our unit types were not seeing a Flight to efficiencies and our efficiency 1s, 2s and 3s are performing consistently. Our Headcount units has moved from 1.7 heads to mid-1.6s on that. So it really seems to be moving steadily.

Speaker 4

I mean we are pushing rates and we do see a And move outs to rent increase, but again we're moving those folks back in at 22%. So it's pretty steady as it goes, Nick.

Speaker 7

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

Speaker 8

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

Speaker 7

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

Speaker 8

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

Speaker 7

Thank you.

Operator

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

Speaker 9

Thank you. Eric, you transformed the portfolio from more of a class fee focus to a more diversified Thanks, Wayne. Should we get an update on what percentage of your portfolio is Class A versus Class B? And what part of these will perform better

Speaker 4

John, you're really fragmented. And I think First question was, what's the balance between A and B assets?

Speaker 2

Go ahead.

Speaker 8

Yes. Between A and B, it's roughly fifty-fifty. There's some nuances between what we would call A plus A and B and B plus, but I would call it about fifty-fifty or so.

Speaker 10

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

Speaker 2

Well, John, this is Eric. I think that broadly speaking across our markets and our footprint, I mean, we see that our Product is pretty affordable. That rent to income ratio that we see between the As and Bs is pretty consistent across the portfolio. Our collections performance is still consistent across the portfolio. So, I think that trying to I think that the Bs will maybe do a little bit better than the As in a downturn just because it's a slightly more affordable product.

Speaker 2

But Honestly, I don't think there's going to be a huge difference if we find ourselves in a downturn of some I think it becomes more a question about markets that you're in and employment base, employment diversification. And certainly, I do think That a slightly more affordable product probably holds up a little bit better, but across our Sunbelt markets, we think that The whole region will just do a little bit better in a downturn as it has historically always in prior downturns.

Speaker 7

Okay. And my second question is on

Speaker 9

expenses. You've seen some Inflationary pressure on expenses higher than your coastal peers, and I realize some of that is just real estate taxes. But you've made a similar type of investment So I'm wondering if you could comment on the expense guidance going up this quarter?

Speaker 4

John, you are really broken there. Something about inflation and expense guidance?

Speaker 6

I think you said also real estate taxes was part of that.

Speaker 8

The increase Got it. Yes.

Speaker 6

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

Speaker 6

They're pretty aggressive as they're coming in, particularly from Texas. As we mentioned, we do expect rate rollbacks, millage rate rollbacks to come in for large part of that as it progresses. But we get those late in the year, so it's hard to get a picture of that. And we'll certainly continue to fight like we do every year We'll formally litigate over half of our Texas portfolio. So that's really the tax pressure.

Speaker 6

And Tom, you might want to give color on if you have any, but that's repair maintenance and taxes Both in the quarter and I would say, in the guidance as well as for the back part of the year, probably tilted a little more toward taxes.

Speaker 10

Appreciate it. Thank you.

Operator

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

Speaker 11

Hey, good morning, everyone. I was curious if you could talk about the plan for the $200,000,000 in equity forwards that were sold last year. I know they need to be settled by February of next year, but it doesn't really seem like there's an obvious need for the capital, especially with leverage below the target range and likely moving lower.

Speaker 6

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

Speaker 11

Okay. And are you guys comfortable running at sort of like mid to high 3 times leverage? Or is there a desire to maybe ramp up development Some net acquisition activity, that fuel to get that leverage number back into the force.

Speaker 6

I'll give the leverage target and maybe Brad and Eric will talk about the other parts of the But we're a little below our range right now. I mean we've talked about the last couple of quarters, we always are working to add strength To the business in every area, so on our balance sheet, we're very strong right now. Our leverage is historically low. Debt to EBITDA, we touched 3.97 below. I think we would answer and I would say between 4% to 5% is probably preferred.

Speaker 6

4.5% certainly wouldn't want to get above 5% in our current credit rating. So We're where we need to be. We believe that's opportunity both as protection and opportunity. So as we move into this recession and some Opportunities come up for Brad and the team, we want to give them that flexibility to do that.

Speaker 3

Yes, Brad, this is Brad Hill. I think certainly we've About over the last few quarters the vision and the plan to grow our development pipeline and we're certainly on pace To do that as I laid out in my comments and what Al has done with the balance sheet and the really optionality that he has provided us To be able to do that is there. And I would say just on the acquisition side, certainly, we're keeping our eyes open in that area. And Like past disruptions in the market, we've been able to really take advantage of those within our footprint. We We have focused on the Sunbelt region of the country for the last 28 years.

Speaker 3

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

Speaker 11

Okay. Appreciate the comment.

Operator

Our next question comes from Austin Wurschmidt from KeyBanc Capital.

Speaker 12

Great. Thanks. So Eric, I'm just curious if you are concerned at all that if we do get Further, perhaps you've had a little bit of a pull forward in demand in recent years. And when you kind of marry that with the fact that the under construction pipeline in many Sunbelt markets So just curious kind of how you think about that, versus maybe the setup

Speaker 6

for the

Speaker 12

portfolio ahead of Any prior downturns?

Speaker 2

Well, Austin, our long term approach to this business and strategy has long been Based on a notion of trying to position for the full cycle, both the down part of the cycle and the up part of the cycle. And we have long believed that the way to do that is to focus on markets where we think that job growth, Population growth is likely to be the best over time over the full cycle, which has caused us to continue to retain our focus on the Sunbelt markets. In an effort to take further cyclicality out of our performance, the other thing We've intentionally done over the years is that we have purposely been very diversified across the region as well as differentiated capital allocation between large markets as well as some of the select secondary markets of the region as well. And as was touched on earlier, we tend to have a price point in our portfolio that appeals to the broadest segment of the rental market. We don't do the sort of the low end or the super high end.

Speaker 2

We average kind of right in the middle. So We're appealing, if you will, to the largest segment of the rental market. So all that to say that our strategy, we think, has continued to serve Very well for a long time. The migration trends that we've talked about over the last couple of years, of course, they were evident there prior to COVID and move ins from outside the Sunbelt into our footprint prior to COVID were running somewhere around 9% And now it's up to of our move ins, 9% of our move ins were coming from people moving into the Sunbelt. Now it's up to 15% Of our move ins are coming from people in Sunbelt.

Speaker 2

It's a long way of saying, while certainly there's been a trend of migration that has worked in our favor, It's not like it's been huge. It's not 50% of our move ins or something of that nature. It's gone from 9% to 15%. So I think that That particular variable of move ins, migration trends, if you will, while helpful hasn't been as significant as sometimes what I think the press and others tend to make it out as when you read what's going on nationally. Beyond that, I will just tell you that I think in a recessionary environment, we find ourselves in such a scenario, I think that the diversification of the employment base, the employers, the affordability of the region That we have in the Sunbelt, I think all continues to work in our favor.

Speaker 2

And we think that today, we very much Retain our defensive characteristics that would be helpful to have should we find ourselves in a downturn.

Speaker 12

That's a thoughtful answer. Thank you for the response. And then just curious about sort of the acquisition opportunities. I mean, you were fairly upbeat when we spoke at Avery. You seem to still be fairly upbeat today and certainly have the balance sheet to fund if the opportunities emerge.

Speaker 12

But can you size up just What the pipeline looks like today or what you think you can really capitalize on? And then, what the negotiations are like for cap rates in your markets versus maybe where it was 6 to 12 months ago?

Speaker 3

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

Speaker 3

And so what we've seen there is about a 40 basis points change in the cap rates. And what we've also seen though as we look at the assets that traded in the second quarter, Every asset that traded went to high quality institutional capital. So we're seeing buyers certainly flock to High quality assets and we're also seeing sellers flock to high quality buyers. And that's where in the past when the markets have changed where we've Been able to find our opportunities through our execution capabilities and through just our 28 year history in the markets that we're in. So As we sit here today, we are getting more calls on acquisitions than we've ever received, Frankly, to look at assets that either are fell out of contract or they're just taking to a couple of folks that they know can close the assets.

Speaker 3

So we're getting a lot of look at assets. And then I think just from an underwriting perspective, the Fundamentals within our region of the country just continue to perform extremely well, which leads us to believe that From a performance standpoint, these assets, again, that are very high quality will continue to perform. And I do think that the assets that are coming to market that we're looking at Are likely to trade. You mentioned cap rates today versus a year ago. Well, cap rates today on what we are looking at are 3.7 percent, a year ago they were 3.8 percent.

Speaker 3

So we're still under kind of where we were a year ago. So Although there's been some recent movement, interest rates went up in the 2nd quarter, they're back down a bit. You can get a 10 year rate right now in the 4%, 4%, 5% range. So there appears to be on the assets that we are bidding against A floor at the moment on pricing for these high quality assets. There are bidders that are still stepping into the 3.75% to 4% cap rate range.

Speaker 3

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

Speaker 12

Thanks for the detail. That's all for me.

Operator

Our next question comes from Rich Anderson from SMBC.

Speaker 11

Thanks. Good morning.

Speaker 13

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

Speaker 8

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

Speaker 13

Okay. And then that's a lead into my second question. I think it was Tom that mentioned you're having move outs For rent increases, but you're replacing that with 18% new lease increases and that same 22% rent to income. But is the cadence of that event like a single moving out and roommates moving in. Is that sort of a dynamic that's going on?

Speaker 13

I'm not Suggesting that there's an advance going on in doubling up, but maybe at the margin that that's what's happening because people who are by Ourselves are starting to feel stretched?

Speaker 4

Rich, we're not seeing the doubling up in that. If we look at our headcount per unit, It's dropped each quarter since Q1 of 2020 really pre COVID. So we are not seeing signs of doubling up occurring. Okay.

Speaker 6

That's all I got. Thanks. Thanks, Rich.

Operator

Our next question comes from Rob Stevenson from Janney.

Speaker 5

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

Speaker 3

So in terms of the sites, As I mentioned in my comments, we have 8 that we currently own, 2,600 units, 2,700 units. That does not include Sites that we have under contract where we have not purchased, for example, the Raleigh site that we look to close later this year, That would be an additional site. Our JV sites that we have under contract with partners would be additional sites as well. So But in terms of what we own and control right now, there are 8 sites, 2,600 units, 2,700 units. The costs on those vary a bit.

Speaker 3

What I have in front of me is about, call it, dollars 3.50 to $3.60 a unit on those assets. Okay.

Speaker 5

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

Speaker 3

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

Speaker 3

But that is a permitting delay on the Denver deal.

Speaker 5

Okay. And then, Alan, Tom, when you look at the continued spend on the technology initiatives and Some of the stuff from an operating standpoint, what's really left for you at this point that's going to make any type of material Impact on margins or operating expenses going forward, that you already haven't started? How much more is there to come? Or are we at a point where you've done what you can for now and everything from here is incremental? When you look over the next couple of years in terms of operating margin spend, where's what's the drivers and What's the potential impact there for you guys?

Speaker 4

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

Speaker 8

Yes, Rob. I'll walk through and hit a couple key points I think that are important. So I would say we're in the very early innings in terms of Capturing efficiencies on the expense side, really going back to late 2019, early 2020, our initial focus really was on the With SmartRin and some of the revenue opportunities as you mentioned and what that could do for us on the revenue side. And then really as well, The key infrastructure that that puts into place as a result integrates with site plan that can help make our service staff and maintenance operations a little more efficient and then Also offers some opportunities for more seamless self touring options. So I think important to note today, these have been rolled out about 3 quarters of our units.

Speaker 8

And for the full year 2022, there's about $16,000,000 or so of NOI embedded in And our NOI stream for 2022. And then by the end of 2023, as we roll out some more, we think there's probably 120 basis points of Margin enhancement from the rent increase is just strictly on the smart home. And then as we fully roll it out, I think it will get fully priced out By about mid-twenty 24, you're talking 140 basis points of margin expansion just related to this piece and $25,000,000 to $30,000,000 of sort of ongoing NOI stream related to that. So now the focus as we've gotten that into place is a little more on the And so I think now with our new CRM tool in process and live across the portfolio, we're focused on Some of the efficiencies we think we can get primarily through staffing and task efficiencies. Right now, the new CRM gives us A lot greater access and visibility into properties and prospects and we're focusing initially on some of the on-site office oversight roles through efficiencies from properties Within close proximity, so call it pods or however you want to label it, we think that's some of the near term benefits that come over the next year or so.

Speaker 8

And So when we think about potting, there's about 200 of our properties, call it, 70% of our portfolio that fit into 2 or more property pod type scenario, we think that will create somewhere $5,000,000 to $10,000,000 about 40 basis points of margin expansion As we get towards the end of 2023, just on that piece. And so then we start thinking about beyond the initial pilot scenarios we're working on. We're testing and we're working on and reworking processes related to self touring, virtual touring, AI technology as well as centralizing and automating some on-site activities. So we think that ultimately creates more efficiencies on the leasing side and other day to day tasks. With our portfolio size, just given the high degree of variability in our assets, mid rise, high rise, garden style, some variation, frankly, in the Consumer preferences across our markets, in many cases, there isn't just a one size fit all solution.

Speaker 8

So trying to be thoughtful of that and mindful of that. So Long way of answering your question that beyond the 180 basis points of margin expansion that I mentioned between the SmartRent and some of the initial We think there's a lot more opportunity to come over the next couple of years.

Speaker 5

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

Speaker 4

We're heading into it now. Into it now. And Al has the back half, front half split for us that I think is pretty telling. I'll let him share that.

Speaker 6

Yes. On blended, he's just got it handy. Yes. I mean, we certainly and going back to last year, the 3rd and 4th quarters, Rob, we talked about where When you're leasing the tip of the spear, it was 15% in the 3rd quarter and 16% blended pricing in the 4th quarter. So those comps are what we're running into and probably July to August is kind of that peak of that hill you're comparing to.

Speaker 6

So I hope that answers

Speaker 14

your question.

Speaker 2

I think it really is the 3rd quarter Will be the peak. And last year in Q4, we had a little fall off. We expect so it was not quite as High, if you will, in the Q4 last year versus Q3. So I think the Q3 will be our most challenging. But as noted earlier, I mean, the July Rents, which is obviously the 1st month of the quarter are pretty good.

Speaker 2

And but as Al outlined in his comments, we expect blended pricing

Speaker 9

for the back half of the

Speaker 2

year on in total to be For the back half of the year on in total to be 8%. That's on top of 15% that we got Last year over the back half of the year. And so but to answer your question specifically, Rob, I think it's really This month, next month, it'd probably be our toughest monthly comps.

Speaker 5

And then has anything changed since pre COVID in terms Of the amount of leases rolling in the 4th quarter, are you still at a fairly consistent level, so it's still a very fairly light Roll in the 4th or have you allowed more leases to roll then since it's been better of late?

Speaker 4

No. We've been quite disciplined on that Rob and that can get The trouble in the 4th quarter and our lease expirations remain on target with a drawdown in the 4th quarter.

Speaker 5

Okay. Thanks.

Operator

Our next question comes from Anthony Powell from Barclays.

Speaker 9

Hi, good morning. I guess question on some of your more tech and biotech focused markets like Austin and Raleigh. Have you

Speaker 14

seen any Decline in traffic in those markets or do you expect to see any weakness there given some of the job now since we've seen in those sectors?

Speaker 4

Yes. We have not on those two sites And a large part of it is because of the ongoing tech transition that's occurring. So just picking Austin, you've got Tesla opening its Gigafactory that's on and so hiring is up in that area. And then Raleigh, Apple's building a large campus there and bringing on jobs and those are just the headlines. But I think the Sunbelt still continues to benefit from the tech companies reallocating jobs across the country.

Speaker 4

So we're in pretty good shape in those two markets right now and rent increases are fabulous there.

Speaker 14

Thanks. And you talked a lot about how rent to income levels are consistent even as you raise rents, so it must be incomes are going up. Over the long run, does that raise the risk of Seeing more move out to homeownership as you have maybe a more affluent renter base that may seek that out over the long run?

Speaker 4

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

Speaker 2

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

Operator

Xander Goldfarb from Piper Sandler.

Speaker 10

Hey, good morning. Good morning down there. Just wanted to go back To the question on the Sunbelt, appreciate the 9% versus 15% move ins from outside the Sunbelt now. But if you think about I guess the question is, when you think about your total Sunbelt, are you saying that in your in the Sunbelt markets that you guys operate, The inbound migration is not as big of an impact overall. What you're saying in your portfolio, you guys tend to pull a lot more Sunbelt based residents, while the overall markets that you operate in tend to benefit a lot from inbound migration, I'm trying to Differentiate whether MAA's experience with inbound migration is representative of the market or more How you guys are positioned within your markets?

Speaker 2

Alex, that's a good question. Honestly, I don't know the answer to that. I mean, The 9% to 15% metrics that you were talking about and sort of the move in traffic We're seeing from outside the Sunbelt into our markets is it's only based on what we are actually seeing at our properties. And so it may be that when you look at other sort of broader market Statistics that are published and reported on, there may in fact be, if you will, Some higher level of migration trend that has been occurring than the 15% that we're alluding to that we saw in the second Quarter. But I think that and obviously a lot of the migration that's happening Out of the coastal markets into the Sunbelt, I think there's been a lot reported on that a lot of these people that are moving are fairly Fluent households and more likely than not, I would tell you that I think that a lot of the households that are relocating Given that affluence are probably going into single family homes and to some degree as we see single family home pricing In markets like Atlanta and Nashville going through the roof, it is people coming from outside the Sunbelt, homeowners The Sunbelt coming into the Sunbelt and wanting to be homeowners in the Sunbelt.

Speaker 2

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

Speaker 10

Okay. And then the second question is, on the market disruption that you guys discussed early on in the call and many of my peers have asked About on the cap rates, you said up just 40 bps, buyers or sellers want more of the better sponsors. Just to be Clear. This is really fallout from levered buyers stepping away and such that when you look year over year, cap rates really aren't Changed it was that froth has come up off the market or are you suggesting that it's beyond that like More deals are unwinding simply regardless of whether it's a levered buyer or not simply because of the macro interest rate You know, pick your favorite poison of the day. I'm just trying to understand whether it's are you specifically talking to lever buyers pulling back in the fallout or This is a broader fallout in the market on transactions.

Speaker 3

Yes, this is Brad. One thing I would say is that There's not a

Speaker 8

ton of transaction data at this point.

Speaker 3

So I think, frankly, there's not a lot on the market right now. And I think as we get into the Q3, we'll certainly start to see more data points. But from what we're seeing today, it appears that the Majority of the fallout, to use your term, is related to the higher levered buyers pulling back and buyers with Shorter term time horizons pulling out of the market. And those are impacting a certain type of asset class. They're not as impact On the stuff that we are looking at, we certainly hear in the market that cap rates are off 75 to 100 basis points.

Speaker 3

So we're not seeing that at this point. Now clearly, certain assets that are Not well located or have some type of inherent issue with them, you could certainly see that, but we're not seeing that at this point. And based on the fact that every deal that we saw that closed in the second quarter was with institutional quality capital tells us There's still a demand by institutional capital for well located assets and the cap rates Have moved a bit, but they have not moved tremendously. And they're still down from where we were Q2 of last year.

Speaker 11

Okay. Thank you.

Operator

Our next question comes from Chani Luthra of Goldman Sachs.

Speaker 15

Hi, good morning and thank you for taking my questions. So with day to day inflation on commodities, Could you talk about what you're seeing if any impact on your residents? Has the discussion in negotiation level of negotiation gone up on renewals just given more pressure on day to day expenses for some of your tenants perhaps?

Speaker 4

Hey, Chaudhry. It's Tom. And the level of negotiation, if you will, in terms of the feedback that we get from residents Began to go up last year as renewal increases went up last year. We negotiate well less than a percentage point On our renewal offers, in fact, it's like 20 basis points. That has not changed over time.

Speaker 4

And the renewal accept rate Has continued as it has pretty historically high and turnover staying flat. So We're getting we get questions about it, but we have not needed to adjust our renewal rates. And So very little push I mean, excuse me, pushback in that area. But when they get out in the market and they look at what our new lease rate is, which is So $100 higher than our average renewal rate. They kind of see where they're priced fairly and

Speaker 8

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

Speaker 15

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

Speaker 3

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

Speaker 3

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

Operator

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

Speaker 16

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

Speaker 3

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

Speaker 2

demographic What I would say over a longer period of time, longer horizon, I think that what has Changed about the product in general and it wasn't changed in response to this demographic shift, but I think the demographic shift that You alluded to us finding it attractive and that is structured parking, interior hallways. I think it's also been One of the reasons why our smart home and smart rent technology has been so embraced, it just it provides A certain degree of privacy that I think people really appreciate and Get out of the weather elements a little bit more with the interior hallways and the structured parking deck. So I think that I think those things have Continue to really find great receptivity to this demographic shift that we've mentioned and I think it will continue to do so going forward.

Speaker 8

Tayo, this is Tim. To hit on your ESG point, our ESG group works closely with our development group and We've kind of historically built to at least a bronze standard in terms of green building certification. We're evaluating that and a lot of the ones we've Recently or silver, even gold. And so we're definitely thinking about in our underwriting kind of considering what makes sense both

Operator

Our next question comes from Nick Yucalillo from Scotiabank.

Speaker 10

Hi, it's Daniel Serraka on for Nick. Morning. Most of my questions haven't answered. A lot of great detail. Just a quick one for me and I apologize if you answered this, but what is the assumed split We know that in the new guidance there an expectation for like a divergence to the end of the year in 'twenty three?

Speaker 6

This is Al. I'll give some color on that. I mean, certainly as we talked about, as Eric mentioned 8% over the back half of the year, there is a little bit lower expectation Q4 because that's when the seasonality that we talked about would kind of begin, because of the holiday season. So, but in general, what was built on is renewals We continue to be the strongest, I would say in double digits, probably lower double digits, likely in that range. With new leasing, which tends to feel The most pressure of probably both comps as well as certainly seasonality being in single digit, probably mid single digit range and that's sort of the For the back half of the year, you can roll in.

Speaker 10

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

Speaker 6

And in general, it's 2 from the increase for the quarter is 2 components primarily, repair and maintenance as well as taxes. We talked about taxes. And So I'll talk about prepared remarks really is more just costs of materials, HVAC costs Because it's been a hot summer as well as this is the month of our highest turnover by design as we have more of our units. We push most of our turnover in the Summer months because that's when the demand is there. So that pressure is being felt there a bit and we're not seeing that.

Speaker 6

Don't expect that to dissipate significantly over the back half of the year at this point. Of the things Tim mentioned will help us going forward, but really it's repair and maintenance and taxes, were the reasons for that change.

Speaker 9

Thank you.

Operator

Our next question comes from Allen Petersen from Green Street.

Speaker 9

Hey, thanks for

Speaker 17

the time. Brent, I was just wondering if you could share pricing expectations for the incremental dispositions that you're guiding to through year end. And then on top

Speaker 14

of that too, if you

Speaker 17

could touch on the dislocation of those assets that you're marketing and considering marketing would be great.

Speaker 3

Yes. So I think I mentioned it in my initial comments, the 2 that we look To bring out or have on the market right now, one is in suburban Maryland and then one is in Austin. And these are 20 on average 25 year old assets that we look to bring out. So in terms of pricing expectations on those, for the entire set For the year, we expect to achieve, call it, a 4% to 4.5% yield on those assets and the way we look at that is an NOI yield. And one of the things that is having an impact on our yields there is specifically the asset in suburban That's an asset that has had some challenges in a number of ways.

Speaker 3

1, specific to the asset, it has a Right of first refusal that the county there has where they can step in and buy the asset. They have the right to match any offer that you get. Normally, that's not A big deal, but they did recently take advantage of a ROFR they had on Another asset nearby. They have not done that in years. So obviously, the buyer pool is well aware of that.

Speaker 3

So they're More reluctant to spend a lot of time on an asset going through due diligence because what they have to do is go under contract on the asset and continue to perform their due But at any time during that period, the county can roll for the product. So we're seeing a little bit of an impact associated with that. We also have on that asset Some regulatory issues which recently rolled back, but it has impacted the performance, renewal cap increases and things of that nature. So that is Impacting the pricing of that asset, which is driving our overall returns a little bit off on those dispositions from what we would normally expect.

Speaker 17

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

Speaker 4

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

Speaker 17

Perfect. Appreciate the time guys.

Speaker 4

You bet. Thank you.

Operator

And our last question comes from Barry Lu from Mizuho

Speaker 9

group. Hi,

Speaker 18

thanks for the time. I'm on the line for handouts and adjust. My first question was on the expense side. Could you I think you mentioned 180 bps of margin expansion from Technology investments in your platform, do you know how much of that expansion is coming from expense versus top line revenue growth?

Speaker 8

Yes. For that specific $180,000,000 about $40,000,000 or so of that is related expense and the rest is revenue. And then That's just what we've identified for now where we think there's some further opportunity on the expense side in the next couple of years.

Speaker 9

Got it. Thank you.

Speaker 18

Thank you. And also are you concerned about turnover at all? And how much more are you willing to push Price will capture more of your loss, please. And also know what the loss ratio is.

Speaker 4

Turnover at 45% on a 12 month rolling basis It is very good and low, sort of the lowest I've seen in my career, and we feel very good about The opportunity for pricing going forward and still believe now is the time to push rate versus volume.

Speaker 8

We'll see

Speaker 4

a seasonal slowdown and tougher comps, but demand is good and our priority is for growing rents.

Speaker 17

Thanks. And sorry, did you

Speaker 18

mention what your loss lease was?

Speaker 8

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

Operator

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

Speaker 2

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

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