Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA, welcomed listeners to the MAA Second Quarter 2023 Earnings Conference Call. He was joined by other members of the management team and warned listeners of forward-looking statements and non-GAAP financial measures. After some brief prepared comments, the management team will be available to answer questions. Eric Bolton then began the call.

In the second quarter, leasing conditions across the MAA portfolio reflected strong demand for apartment housing, resulting in good rent growth and steady occupancy. New lease pricing improved and renewal pricing grew by 6.8%, driving overall blended pricing performance to 3.8%. Despite the higher number of lease expirations during the quarter, occupancy remained steady at 95.5%, indicating that demand is holding up better in mid-tier markets. Operating expenses are expected to moderate due to easing inflation pressures and tech initiatives.

The transaction market in Texas remains quiet, with limited properties coming to market and strong investor interest leading to low cap rates and strong pricing. Eric expressed appreciation for the on-site property teams for their hard work and great service. Brad mentioned that high-quality, well-located properties in their region of the country are in high demand, leading to cap rates adjusting slower than interest rate movements alone would indicate. They expect to see more acquisition opportunities later this year and into next, so they are remaining patient.

The company is actively reviewing acquisition opportunities, but has lowered its acquisition forecast for the year to $200 million at the midpoint and its disposition forecast to $100 million at the midpoint. Properties in their initial lease up are outperforming expectations, producing higher NOIs and higher earnings. Early leasing is going well at two properties, and three projects are expected to start construction in the back half of 2023.

Brad reported that the Phase 2 development in West Midtown Atlanta has been pushed back to 2024 due to the approval process taking longer than anticipated. The team is working on prepurchase development opportunities and additional unidentified projects are expected to be added to the pipeline. The construction management team is focusing on completing and delivering 6 under-construction projects and successfully accepted delivery of 249 units in Salt Lake City and Atlanta. Tim reported that same-store revenue growth was in line with expectations and blended lease-over-lease pricing was better than expected with 0.5% new lease growth and 6.8% renewal growth. Occupancy was slightly below expectations but the higher blended lease growth provides a greater future compounding growth effect.

In the second quarter, new lease pricing increased by 100 basis points and renewal pricing remained strong. Average daily occupancy and same-store revenue were both up, and various demand factors, such as 60-day exposure, resident turnover, and move-ins from outside markets, remained consistent with the prior year. Lead volume was up from 2018 and 2019, and the prospect engagement platform enabled more effective engagement with prospects. July pricing is ahead of expectations, with new lease pricing at 0.3% and renewal pricing at 5.5%.

Renewal pricing is moderating and occupancy is high, with mid-tier markets leading performance. The portfolio strategy of diversification and strong demand fundamentals will help mitigate the impact of new supply. Interior unit upgrades and Smart Home technology have been installed in the second quarter of 2023, with 92,000 units having Smart Home technology. Repositioning program yields have exceeded expectations with yields on cost in the upper teens.

Tim reported that core FFO was above the midpoint of quarterly guidance, driven by favorable interest and overhead costs. Same-store operating performance was in line with expectations, with blended lease pricing outperforming original expectations and occupancy slightly below forecast. Operating expense growth moderated in the second quarter, and the annual property and casualty insurance program renewed on July 1 with a 20% premium increase. The company invested $26.3 million of capital during the quarter for redevelopment, repositioning, and smart reinstallation programs.

In the second quarter, the company funded over $51 million of development costs for the current $735 million pipeline and is expecting to start several new deals over the next 12-18 months, expanding the pipeline to nearly $1 billion. The company has $1.4 billion in cash and borrowing capacity and a historically low debt-to-EBITDA ratio of 3.4x. Though the company is waiting to refinance its $350 million debt until financing markets stabilize, it has increased its effective rent growth guidance to 7.4% and decreased its physical occupancy guidance to 95.5%. This trade-off supports slightly higher rental earnings, however the total revenue growth guidance remains unchanged at the midpoint of 6.25%. Additionally, the Texas state legislature recently passed a tax overhaul that significantly rolled back property tax rates.

In response to aggressive property valuations, the company has added a specific reduction to their real estate tax growth rate, which lowers it to 5.5%. This change is expected to increase their core FFO projections for the full year to a midpoint of $9.14 per share, with a carry-through of $0.01 per share from the second quarter performance, and a $0.02 per share addition related to the Texas legislation. The company has also revised their transaction volume expectations for the current year to reflect current market conditions. The expected rental growth for the full year is 3.5%.

Tim Argo and Eric Wolfe are discussing lease rates in the second quarter. Argo explains that new lease growth did not accelerate as much as expected due to supply pressure, but he does not expect it to decelerate as much as it normally would in Q3. Renewal pricing is moderating due to the unusual scenario of new lease pricing outpacing renewal pricing for the first part of the year. Argo expects renewal pricing to remain much higher than new lease rates, which is typical and returning to a normal seasonality scenario.

Tim Argo discusses how B assets have been outperforming A assets by 40 to 50 basis points in terms of new leases and renewals. He then goes on to explain that job growth, lead volume, leads per exposed unit, and renewal acceptance rates are all indicators of demand which have been strong enough to mitigate supply risks.

Tim and Eric both discussed reasons why demand is staying healthy, such as strong renewal rates, consistent rent-to-income, low turnover, and positive migration trends. They also mentioned that expenses are expected to moderate in the back half of the year, and that they anticipate all of the key line items to be down in terms of expense growth rate in 2024.

Al Campbell and Tim Argo discussed the potential for moderation in expenses such as personal repair, maintenance and taxes in 2024. Al Campbell was unable to provide a ballpark estimate, but Tim Argo mentioned that they have been able to balance occupancy at 95.5% with pricing being better than expected, and that occupancy had moderated a bit in July.

Eric Bolton explains that Atlanta's unique circumstances have caused occupancy to drop slightly, but the company is still comfortable with the 95.5% occupancy rate. He also mentions that the extensive redevelopment and technology initiatives, such as the smart home initiative, are helping to position the portfolio at a higher rent level. Additionally, the new supply coming into the market is creating a more compelling value play for the portfolio to the rental market. Move-outs due to rent increases have dropped from last year, but are still higher than normal, however the company is willing to make the trade-off for the revenue growth associated with rents.

Tim Argo and Austin Wurschmidt are discussing the tension between pricing and occupancy in the market. Argo states that there are no markets that are significantly above market rents, but mentions Phoenix and another market as being weaker performers due to supply impact.

Brad Heffern and Tim Argo discuss the lagging of certain markets due to elevated supply. They both agree that it is not primarily due to supply, but rather due to nuances by market, such as job growth. Al Campbell then discusses the strength of the balance sheet and that they are willing to be patient to find the right investments.

Eric Bolton and Brad have seen cap rates move slightly quarter-to-quarter and are talking to merchant builders about potential opportunities. Tim Argo explains that new lease pricing has accelerated, just not as much as it would in a lower supplied environment, and they don't expect it to drop off as much as it normally would. He also notes that tenants have a lot of options to choose from and are taking longer to make decisions.

Tim Argo states that while there is supply impacting several of their markets, it is not enough to cause a major dip in their rental rates. He notes that Phoenix and Austin are the two markets feeling the most supply impacts, while Atlanta is also experiencing a dip in occupancy. He emphasizes that the in-migration, economic growth, and job growth in the other markets should be enough to keep their rental rates stable.

In Atlanta, there are several factors that are contributing to a lower occupancy rate, including weather issues and a decent amount of supply. G&A costs were outperformed in the second quarter, but some of that will come back in the third quarter, resulting in some volatility. However, the projection for the year is still for continued strength.

Atlanta has had an influx of 100 units coming back online due to storm damage and a fire, along with an increase in evictions and filings, leading to occupancy pressure. Despite this, revenue and pricing have held up relatively well with cash concessions at 0.5% of rents.

Tim mentioned that in most markets, a month free is the most common concession offered. Austin is unique in that concessions are more prevalent in the suburbs than in the central area. Brad Hill added that their lease-up property in Austin is offering up to a month free on select units and the average rents are higher than expected, while the average concession usage is lower than expected. Nick Yulico followed up by asking about investment activity and being more patient.

Brad Hill believes that cap rates will increase due to the limited inventory on the market, capital piling up on assets, and the elevated supply in the market. This is supported by the decrease in negative leverage and the fact that rent growth is not as high as it has been in the past. Interest rates are currently at 5.5-5.75%.

Al Campbell explains that the midpoint of the same-store revenue guidance of 6.25% is conservative due to dilution from other income components that are not growing. This dilution is offset by the 5.5% carry in plus half of the 3.5% blended pricing performance.

Al Campbell and Rob DelPriore explain that their guidance for total revenue is accurate, with other income-related items like insurance premiums affecting it. The insurance premiums were up 33%, but were offset by smaller increases in other areas, resulting in a 20% increase overall. They also made changes to their retentions, adding a freeze event deductible due to events in the Southeast, which they feel is appropriate for their balance sheet strength and spread of risk.

Brad Hill and Eric Bolton of the company discussed their self-retention of $10 million with an insurance product that caps their losses at $15 million. They have seen a few acquisition opportunities from merchant builders, but not enough to suggest broad-based capitulation. They are monitoring the situation as they expect merchant developers to need to transact more as the year progresses, especially during the slower leasing season of the holidays and Q1.

Tim Argo and John Pawlowski discussed the expected rent spread in mid-tier markets over the second half of the year. Tim suggested that the spread would be between 100 and 150 basis points, with some markets doing better than others. Rob Stevenson then asked about the percentage of residents with student loans outstanding and the potential impact of their payment resumption on rent increases in 2024, to which Tim replied that they do not have insight into that due to outsourcing their credit check and income verification. Finally, Al was asked about Texas' property taxes going forward, to which he replied that it was a one-time distribution of the surplus.

Al Campbell discusses the Texas property tax rate, which has been permanently reduced due to a budget surplus. He mentions that the rate reduction is significant, capping out at $0.20 per $100 of value. He then moves on to discuss the outlook for lease spreads in the medium-term.

Tim Argo and Anthony Powell discussed the expected lease spreads for the next couple of quarters, with Argo expecting renewals to remain above new leases. Eric Bolton then concluded the call, thanking participants for joining and encouraging them to follow up with any further questions. Additionally, Argo estimated that the peak level of supply delivery will be in early 2024, with deliveries starting to trend down in 2025.

This summary was generated with AI and may contain some inaccuracies.