The MAA Third Quarter 2023 Earnings Conference Call is about to begin and all participants will be in listen mode. The call will be recorded and the company will conduct a question-and-answer session. Andrew Schaeffer, Treasurer and Director of Capital Markets, will be leading the call with other members of the management team. Before starting, they remind participants that forward-looking statements will be made and refer to the earnings release and SEC filings for risk factors. Non-GAAP financial measures will also be discussed, with a presentation and reconciliations available on the company's website. The prepared comments and audio recording of the call will also be posted on the website. Eric Bolton, Senior Vice President, will begin with his prepared comments.

MAA's third quarter FFO performance exceeded expectations due to strong demand for their properties, low resident turnover, positive migration trends, and strong collections. However, there was a higher impact from new supply deliveries in some markets, leading to lower rent growth for new move-in residents. This is expected to improve in late 2022 and into 2025. MAA's market diversification, affordable rent structure, and experienced operating team position them to outperform their markets. The current supply cycle has also created more acquisition opportunities for MAA, as seller and developer pricing expectations have shifted due to challenging lease-up conditions and higher interest rates. The recent property acquisition after the quarter is an example of the opportunities MAA expects to see, particularly in newly developed properties that are still in the initial lease-up phase.

In the third quarter, there was an increase in for-sale marketing activity and cap rates have risen by 15 basis points. MAA recently closed a property in Phoenix, which fits their target opportunities. The property is in its initial lease-up and the seller was under pressure to close by a specific date. MAA's familiarity with the market, quick execution, and strong balance sheet helped them secure the purchase with an all-cash offer and no financing contingencies.

The company's pricing for their units is lower than replacement costs and is expected to generate a 5.5% NOI yield. They plan to capture more margin and yield expansion opportunities by adopting MAA's revenue management practices and seeking out new acquisitions. Despite pressure from supply, their new properties are performing well and producing higher NOI and earnings than expected. They are also advancing predevelopment work on several projects, but some may be delayed until 2024 due to permitting and approval delays. Construction costs have been slow to adjust, but there are signs that they will decrease in the future.

The company has seen a decline in new construction activity, as indicated by consultants, architects, and engineers. General contractors have more capacity to start new projects and there are five potential projects that could be ready for construction start by the end of 2024. The company owns or controls 13 sites for potential development and is continuously evaluating new opportunities. The construction management team is focused on completing and delivering current projects.

The company's same-store revenue growth for the quarter was in line with expectations, with higher occupancy offsetting lower new lease pricing. Supply pressure affected pricing in some markets, resulting in a 1.6% lease over lease pricing increase. Demand metrics, such as employment and migration trends, remained strong. However, the company did experience pressure from new supply, leading to lower new lease pricing in August and September. This was driven by higher concession usage by developers and the impact of a higher interest rate environment.

The third quarter typically sees a moderation in pricing compared to the second quarter, but this year there has been less moderation due to strong demand factors. October's blend and lease-over-lease pricing has remained steady, with physical occupancy at 95.6%. The Sunbelt markets have also seen increased absorption, helping to mitigate the impact of new supply. The company's diverse portfolio strategy has led to outperformance in mid-tier markets, such as Savannah, Charleston, and Raleigh, compared to larger metros with more new supply pressures. The company also continued its redevelopment initiatives in the third quarter.

During the third quarter of 2023, the company completed interior unit upgrades and implemented Smart Home technology in over 92,000 units. They also have five active projects for repositioning and are considering starting construction on more properties in 2023 or 2024. The reported core FFO for the quarter was higher than expected, driven by favorable interest and overhead costs. Same-store operating performance was in line with expectations, with slightly higher revenues due to increased occupancy. However, there was some moderation in same-store operating expenses, with higher personnel costs but lower real estate taxes. The company received updated information on property tax rates in Texas, but their projection for the full year remains unchanged.

In the third quarter, the company invested $19.7 million in redevelopment, repositioning, and smart rent installation programs, which have produced strong returns and improved the quality of their portfolio. They also funded $47 million in development costs and plan to start new projects in the next 12-18 months. The company has a low leverage ratio and $1.4 billion in cash and borrowing capacity to fund potential investment opportunities. They have updated and narrowed their guidance ranges for the year, with higher operating expenses expected to offset the favorability in core FFO related to overhead and interest costs.

The company is maintaining its core FFO projection for the full year, with a 7.5% growth over the prior year. The total revenue growth projection remains unchanged, but there is an increase in guidance for same-store operating expense growth due to continued pressure in labor costs. Real estate taxes are expected to continue moderating over the next couple of years, and the company has reduced its total overhead cost projection for the year. Disposition expectations have been removed due to current market conditions. The impact of merchant builders delivering into a higher supply higher rate environment has changed the company's lease-up strategy.

The speaker explains that the impact of lower rental rates will likely be felt for a longer period of time. However, they do not expect further deceleration and see strong renewal rates for the next few quarters. They also mention that there is not a significant difference in performance between Class A and Class B properties at a portfolio level, but there may be more pressure on B+ and A- assets in markets with more supply. This could potentially create opportunities in the long term.

Eric Bolton, the CEO of MAA, discusses the current state of the rental market. He notes that while new developments are stabilizing at higher rents, there is still pressure in smaller markets with a lot of supply. Last quarter, he had expected lease rate growth to remain strong, but the third quarter saw more aggressive practices from merchant developers that impacted their product in larger markets. The company is still seeing a healthy spread between new product with concessions and the average rent in their portfolio. The CEO also mentions the rapid ramp-up of junior treasuries during the third quarter.

The speaker discusses how developers, specifically merchant builders, are facing a competitive leasing landscape due to a prolonged high interest rate environment. This has led them to be more aggressive in getting properties leased before the holiday season. The speaker believes that this trend will likely continue for the next couple of quarters, but overall demand remains stable and may even improve in the coming months.

Eric Bolton, the CEO of Mid-America Apartment Communities, believes that the strong demand for apartments in Sunbelt markets will help mitigate the impact of increased supply in the coming year. He expects positive market rent growth next year, assuming the economy remains stable and demand remains strong. The company's strategy of diversifying across the region also helps to offset supply pressures. Bolton predicts that supply levels will start to moderate in the second half of next year, leading to positive market rent growth for new leases.

The company has been experiencing solid performance on their renewal practices and expects it to continue to be a tailwind for them in the coming year. They do not anticipate new lease rates to get much worse and expect them to remain in the current range for a few months, with a potential acceleration in the spring due to higher traffic volumes. They also expect their renewal rates to hold up and the turnover rate to remain low, providing a blend for their lease rates.

Eric Bolton and Tim Argo discuss the seasonal pattern of new lease pricing and renewal pricing, with a typical gap of 500-600 basis points in Q2 and Q3. They also mention that historically, Q4 and Q1 have seen a wider gap of 900 basis points, which then narrows in the spring and summer. They do not expect this pattern to change based on current supply dynamics. In response to a question about potential acquisition activity, they mention the recent Phoenix acquisition at $317,000 per unit and a 5.5% yield. They explain that they consider metrics such as price per unit, AFFO accretion, and NAV accretion when evaluating deals, and also take into account their cost of capital and the required spread on their cost of capital.

Eric Bolton discusses the company's priority of stabilizing yield and comparing it to their current cost of capital. He mentions a recent deal in Phoenix and how they were able to bring a new asset onto the balance sheet at their cost of capital with potential for operating upside. He also mentions plans to drive down operating costs and expects the yield to increase by 100-200 basis points.

Tim Argo, speaking on behalf of the company, discusses the rental trends for October, stating that the blended rent is around zero, with new leases at negative 5.3 and renewals at 4.4. He also addresses the below average revenue growth in Atlanta, attributing it to a combination of supply pressure, lower pricing, and unique circumstances such as winter storms and fraud concerns. He notes that occupancy is slowly improving and the fraud cases are being addressed by the courts.

The speaker discusses the impact of short-term occupancy on revenue quality and ability to pay. They mention in-house training that has helped reduce fraud and delinquency in the Atlanta market. They also mention that they may continue to cycle some capital out of Atlanta, but they still like the market long-term. The speaker is then asked about their loss to lease, but it is not provided.

Tim Argo, responding to a question from Nick Yulico, discusses the impact of current pricing on the company's earnings for the next year. He estimates that 1 to 1.25 of earnings will come from current pricing, and there will be a negative impact of 1 on loss lease. Brad Hill also adds that the recent acquisition has a 5.5% initial stable yield, which includes concessions for a month to six weeks on new leases. He also mentions that as the property stabilizes, there will be a strengthening in the yield and a decrease in the use of concessions. John Kim then asks about the impact of rising interest rates on leasing demand and landlord behavior, and Tim responds that demand has been strong and occupancy has increased in the third quarter. However, the new lease growth rates of minus 4% in September and minus 5.3% in October may be influenced by the current interest rate environment.

Eric Bolton, CEO of a real estate company, believes that the current environment for merchant-built properties is not what was expected when construction began two years ago. As a result, these properties are rushing to get stabilized before the holiday season and are facing challenges with refinancing and interest rates. This has led to more competitive pricing practices in order to attract new residents. Bolton believes that once the supply picture improves, the situation will improve as well. The company's turnover rate has also declined.

The speaker, Tim Argo, responds to a question about the company's low turnover rate and how it plans to maintain it despite new supply coming online. He explains that move-outs due to buying a house and job changes are the main reasons for turnover, and those are expected to remain low. The CEO, Eric Bolton, adds that move-outs due to rent increases have also decreased. The company is not planning to make any changes to its renewal strategy. The speaker also mentions that the competition from new supply has been surprising, but they are confident in the company's future prospects. Al Campbell, who is retiring, also thanks the company and expresses excitement for its future.

Eric Bolton, CEO of a real estate company, discusses the competition from new supply in the market and the surprising aggressiveness of some developers to expedite their lease-up process. He attributes this behavior to the recent increase in interest rates, which has prompted a sense of urgency among developers to get their projects stabilized and leased as soon as possible. Despite the high supply levels, demand remains strong and Bolton expects this trend to continue. He also notes that peak deliveries are still expected to occur in 2024.

Eric Bolton and Brad Hill discuss the potential for increased competition in the real estate market in 2024 due to new properties coming online and rising interest rates. However, they do not believe there will be a significant change in the supply and demand dynamics and attribute any urgency from developers to potential calendar year-end pressures. They also note that developers are incentivized to lease up and sell quickly to improve their IRRs.

Clay Holder, speaking on behalf of the company, expects a moderation in operating expenses and property taxes in the upcoming year. He also mentions that high sales values and valuations may impact real estate taxes, but the speed at which this will happen is uncertain.

The speaker discusses the decline in new lease rates in October and mentions that Austin is the worst market with high negative single-digit rates. They also mention that Tampa stands out as the highest. The speaker believes that there will be a few weak quarters ahead but things are expected to improve in the back half of 2024 due to strong demand factors such as employment markets, low turnover, and solid collections performance.

The speaker discusses the potential moderation of current market behavior in the coming quarters due to the completion of stressed lease-ups and seasonal patterns. They also mention the impact of rising labor costs, particularly with third-party vendors, in strong economic markets.

Eric Bolton discusses the current state of demand and rent growth in the real estate market. He acknowledges that while demand is strong, there is also a lot of supply in the pipeline, which is creating a spread between rent growth and labor costs. However, he believes that this spread will likely moderate in the future as the construction workforce becomes more available. He also mentions that demand is the driving force in the market, and it is currently strong compared to previous years.

The speakers discuss the demand and supply trends in the Sunbelt markets over the past five to ten years. They mention that historically, demand has outpaced supply in these markets, but currently there is an elevated supply. However, they believe that demand will continue to outpace supply in the long term. They also mention that the migration numbers in these markets are higher than before COVID and the move to home buying is strong. In terms of Atlanta, they mention ongoing efforts to recapture units due to fraud issues.

The speaker discusses the slow response of counties in Atlanta to COVID and their recent increase in action. They also mention that they have been working to prevent fraudulent activity. The speaker then addresses the company's acquisition strategy and the potential for sizable activity in the future.

The speaker believes that multifamily real estate is still viewed as an attractive asset class and there is a healthy appreciation for Sunbelt markets. They predict that the transaction market will become more competitive, but they hope to take advantage of the opportunities that arise. They also mention that in the current higher rate environment, private equity players may not be as aggressive as before. The speaker also mentions that their company has a lot of capacity on their balance sheet and they are eager to put it to work, but they will remain disciplined. In terms of growth numbers, the pendulum tends to swing too wide and there may be a surprise on the downside.

The speaker discusses the forecast for the first half of 2024, stating that they have dialed in a forecast of zero for Q4 and expect Q1 to be similar. They believe that blended numbers could move slightly up or down, but there will be some normal seasonality in the spring. They also mention that cap rates increased by 15 basis points in the third quarter and could potentially expand further given the current interest rates and public market.

Brad Hill, responding to a question about the future of cap rates, predicts that there will be pressure on cap rates due to the availability of capital for well-located properties in good markets. However, the extent of this pressure will depend on liquidity and property fundamentals. When asked about turnover and renewal rent growth, Tim Argo notes that tenants are aware of the highly competitive market, but this is not a new phenomenon.

The speaker discusses the company's approach to capital allocation and mentions that they believe the best value creation comes from investing in opportunities such as the recent Phoenix acquisition. They plan to remain patient and wait for even more compelling opportunities in the market.

The company is controlling the timing of development opportunities and expects to see moderation in construction costs. They are being patient and looking for external growth opportunities in the next couple of years. They have not found any compelling assets to add to their balance sheet due to aggressive buying and lower quality assets. The questioner asks about the cause of higher fraud in certain markets, and the speaker mentions potential factors such as demographic shifts and technology.

The speakers discuss mitigation strategies for preventing fraudulent activities in the court system. They mention the lax actions of courts post-COVID, which creates opportunities for bad actors. To combat this, they have experts on their team who are skilled at detecting and preventing fraud. They also mention the use of new technology and modifications in their approval processes to improve detection. They note that fraudulent activities seem to be isolated and improving in Atlanta, where they have a large presence.

The operator ends the call and hands it over to MAA for closing remarks. Andrew Schaeffer thanks everyone for joining and mentions the upcoming NAREIT event. The operator then concludes the call and allows participants to disconnect.

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