The operator welcomes participants to MAA's Second Quarter 2024 Earnings Conference Call and explains the format of the call. Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets, introduces the management team and reminds listeners that forward-looking statements will be made. He also mentions the availability of non-GAAP financial measures and directs listeners to the company's website for more information. The management team will then give prepared comments and answer questions.

Eric Bolton, CEO of MAA, discusses the company's strong second quarter performance, driven by high demand for apartment housing and steady occupancy rates. The company's portfolio diversification strategy and focus on appealing to a broad rental market has helped mitigate supply pressure. Bolton also mentions that new supply deliveries are expected to decline in the second half of the year, and the company is actively seeking opportunities for acquisitions and development to drive future earnings growth.

The company believes that its strong position in the market, combined with upcoming redevelopment and growth opportunities, will lead to significant growth and value in the next few years. The company also thanks its associates for their hard work and notes strong demand and performance in their markets. The company is focused on increasing traffic and converting leads into leases, and is optimistic about the future.

The company has utilized their balance sheet capacity to support future earnings growth and has made progress in this area. They have started two construction projects in the second quarter and have a pipeline of 2,617 units at a cost of $866 million. In addition, they provided financing for a project in Charlotte and have a total of 11 projects in their pipeline. They expect to start construction on one to two more projects later this year, leading to a slight increase in their development spend for the year.

The company is hopeful that construction costs will decline as the current under construction pipeline winds down. They have closed on a property in Raleigh at a lower cost and are currently in the process of acquiring two more properties. They also have two dispositions in the market. The company's forecasted acquisition volume of $400 million is achievable. The speaker thanks all the associates for their hard work and dedication. The call is then turned over to Tim.

The demand for rental properties in the company's markets remains strong, with lease-over-lease rates improving for new move-in and renewal residents. This is despite the impact of new supply deliveries on pricing growth. The company's unique market diversification strategy has helped mitigate the effects of new supply in some markets, with mid-tier metros performing better than larger markets. However, markets like Austin, Atlanta, and Jacksonville continue to be negatively impacted by high levels of new supply. The company has slowed down some of its upgrade and redevelopment projects in response to the elevated supply environment, but plans to resume these initiatives next year.

In the second quarter of 2024, the company completed 1,700 interior unit upgrades, resulting in a rent increase of 8% above non-upgraded units. They have three active repositioning projects and plan to begin construction on six more in the third quarter. July occupancy is stable at 95.5% and current occupancy is 95.8%, setting the company up for more pricing power. Blended pricing for July is up 0.3% from previous quarters and new lease pricing has improved since March. The company expects a positive year-over-year change in asking rents for August, the first time since February 2023. New supply remains a headwind, but the company believes the supply/demand balance will continue to improve subject to normal seasonality.

The company reported that new construction starts peaked in mid-2022 and leasing pressure is typically highest two years after construction. Demand remains strong with high absorption rates and wage growth. Resident turnover is expected to remain low as fewer residents are moving out to buy homes. Core FFO for the quarter was $2.22 per share, with favorable same-store expenses and storm costs partially offsetting each other. Same-store revenues were in line with expectations, and expenses in repairs and maintenance, real estate taxes, and personnel costs were lower than expected.

The company has a better understanding of their real estate tax expenses for 2024 and has funded $80 million of development costs for their pipeline. They expect their pipeline to grow to $1 billion and have a strong balance sheet to support it. They have invested $12 million in redevelopment and have low leverage with a majority of their debt fixed. The company has issued new bonds and plans to be in the market again before their next bond maturity in 2025. They are reaffirming their same-store NOI and core FFO guidance for the year while revising other areas of their detailed guidance.

The company is making slight adjustments to their guidance for the year based on their operating results achieved through the second quarter. They are lowering their mid-point guidance for effective rent growth and occupancy, as well as revising their same-store revenue and property operating expense projections. They have also updated their guidance for G&A and interest expense, and increased their development spend. Despite these adjustments, they are maintaining their mid-point core FFO guidance for the full year. The call is now open for questions.

Eric asks Tim about the company's seasonality assumptions and expectations for the fourth quarter. Tim explains that they are seeing a normal seasonality pattern so far, but due to current occupancy and lower exposure, they may see a longer peak season and moderate later in the year. The company made some adjustments to pricing guidance for new leases in the second quarter, but renewals are expected to remain steady. Overall, there was a 100 basis point decrease in new lease pricing assumption.

The speaker discusses the impact of other revenues on the company's guidance, mentioning a potential increase in 2025. They also mention that the blended lease pricing for the back half of the year is around 0.5% to 1%. They then discuss the markets where they are seeing more impact from supply, such as Austin, Atlanta, and Jacksonville, and mention potential competitive concessions in those areas.

Tim Argo, the speaker, is responding to a question about the impact of certain markets on new lease pricing. He states that all three markets (Austin, Nashville, and Charlotte) have similar timelines for peak starts and deliveries, with a peak expected in mid-2022. He predicts that these markets will continue to be elevated next year but will improve in 2025. He also mentions that concessions have picked up in the back part of 2023 but have since stabilized and are currently between half a month to a month. He does not expect the concessionary environment to worsen and notes that interest rates and the supply picture are more stable. Eric Bolton adds that Midtown Atlanta is currently experiencing the worst concessionary environment.

The speaker is discussing the demand and supply in the business market. They mention that there was uncertainty in the fourth quarter of last year, but demand has been strong and supply deliveries are expected to decrease. They also mention that insurance renewals have been favorable due to positive relationships with insurers and a stabilizing insurance market.

The speaker is confident in the company's guidance for the second half of the year, despite pressure in the first half and seasonal trends and elevated supply. This is due to a better occupancy and exposure position compared to last year.

In mid-July of last year, new lease rates dropped off significantly and continued to decline through December. This creates an easier comparison for the company. As of August, the company is starting to lap those comparisons. They also expect the impact from supply to moderate in the back half of the year. Renewals are trending well, with a 4-4.5% renewal rate expected for August and September. Renewal accept rates are higher than they have been in the past few years. The company expects this trend to continue through the rest of the year.

Jamie Feldman asks about development opportunities and how much the company can ramp up its spending. Brad Hill responds that they are comfortable ramping up to $1 billion to $1.2 billion and currently have 11 projects on their balance sheet. Clay Holder adds that they would fund this through additional debt, potentially increasing their leverage to 4.5x or 5x, which is over $1 billion.

The speaker discusses the potential for funding opportunities in a declining interest rate environment and the impact of potential decreases in construction costs. They also mention the potential for maintaining historically low turnover rates and renewal pricing power despite pent-up demand for homeownership.

The speakers discuss the potential impact of declining interest rates on resident turnover in single-family home rentals. They note that lower rates may lead to an increase in turnover, but it would require a significant decrease in rates to have a significant effect. They also mention that the current median house payment is much higher than the average rent, so it would take time for the turnover to return to previous levels.

During a conference call, Richard Anderson from Wedbush asked the operator about the impact of new leases on the company's revenue guidance. The operator, Tim Argo, explained that while the second quarter had lower-than-expected new lease rates, the company is optimistic about the back half of the year. The decrease in new lease rates was due to people shopping longer and being more selective in the current market. However, the seasonality of new lease rates is expected to extend into 2025. When asked about the cadence of 2025, Argo stated that it is difficult to predict, but the company is prepared to hit the ground running with the upcoming supply.

Tim Argo, in response to a question about the growth story for the company, explains that there will still be some supply pressure next year, but it will start to ease in the spring and summer, leading to an improvement in blended lease-over-lease rates. However, this will take about 12 months to fully reflect in the company's revenue growth. He expects to see positive asking rents in August and for this trend to continue into early to mid next year, with new lease rates likely turning positive as well.

The speaker discusses the current state of the market, noting that the gap between asking rents and new lease rates is closing. They predict that this trend will continue into the spring and early summer. They also mention that the portfolio is currently at a 2% loss to lease compared to in-place rents. In response to a question, they explain that absorption is at its highest since the third quarter of 2021, driven by factors such as strong job growth in their markets.

In the second quarter, migration levels for MAA ticked up to 12%, which is similar to the levels seen 12 months ago. This is due to factors such as wage growth, population growth, and household formation. The strong absorption rate has been able to keep up with new supply, which is why the demand is not expected to worsen. Renewal rates for the year are expected to be between 4% and 5%, with July being on the lower end of that range. However, August and September are showing improvement and the gap between new lease rates and renewals is narrowing, which should help boost renewals in the fourth quarter.

The speaker from Mizuho asks about the current market cap rates and how they have changed over the past year. He also asks if sellers are now more willing to engage in conversations about selling assets and if the cap rates are expected to decrease further. The speaker also inquires about how the company is underwriting deals and the IRRs for assets acquired in the second quarter. The company's representative responds by stating that cap rates have been consistent at around 5% and are expected to stay in that range. He also mentions that there is optimism for future growth and that most acquisitions are delivering a levered IRR of 8%, which is higher than their cost of capital.

The acquisitions that the company has made and those that are under contract have a high yield of 5-6%, above their current cost of capital. The rent to income in the portfolio has dropped in Q2, with lower turnover due to rental moderation and residents buying houses. Concessions usage in the portfolio is minimal, with some pockets having slightly higher usage. Overall, it has been consistent throughout 2024.

The speaker, Rob DelPriore, addresses a question about the company's approach to insurance costs. He explains that their retentions are mostly the same as last year, with the exception of a $250,000 increase in general liability. The next question is about bad debt and the speaker, Tim Argo, responds by stating that the company's resident credit profile is mostly back to pre-pandemic levels, with only a slight increase in delinquency. Atlanta is the only market that has seen more pressure, but practices have been put in place to catch fraud and it is not a major issue for the company.

The speaker confirms that normal bad debt is 30 to 40 bps but currently it is 15 above that. The delinquency rate before COVID was around 0.3% and in the new environment it is estimated to be between 0.4-0.5%. Despite changes in same-store assumptions and occupancy rates, FFO mid-point remained the same, with focus on revenue and operating expenses. Real estate taxes and insurance renewal offset the changes in revenue guidance.

The company's repair and maintenance costs have been trending positively, which could offset the impact of the recent hurricane. Other factors such as favorable G&A costs and interest expense are also helping to balance out the impact of the hurricane. The key driver of FFO is NOI, which is expected to improve in the future despite record levels of new supply in the market. The company expects new lease pricing to hold steady and renewal pricing to remain strong, while operating expenses may decrease due to new technology and moderating inflation. Ultimately, same-store NOI is the main factor that drives FFO.

The speaker believes that the NOI performance will show improvement in the next few years. There was a 50 basis point difference between the leases signed and commenced in July. The company plans to allocate capital to both acquisitions and development, but may prioritize acquisitions due to the immediate earnings associated with them.

The speaker discusses the company's slower pace in the acquisition market due to their successful returns and their focus on development opportunities. They also mention potential rent control laws proposed by President Biden and their belief that they will not gain much traction at the federal level. They also address the question of potential rent control laws at the state level.

Clay Holder, speaking on behalf of the company, stated that they do not expect a significant acceleration in growth of any expense line items next year. Property taxes are expected to continue running at a 3-4% range, with a current guidance of 4%. Insurance costs will see a slight decrease in the first half of next year, but negotiations for the following year may not result in another decrease. Personnel costs, repair and maintenance, and marketing costs are expected to continue at a normal rate with some moderation seen in the past year.

The speaker discusses expectations for growth in lease rates and occupancy in Atlanta, stating that they expect improvement in the future but it may take longer than other markets. They also mention current renewal rates for August and September and compare them to last year, as well as tracking average incomes of residents.

In the second quarter, the average income for MAA was around $91,000, which has increased from $75,000 at the beginning of 2020. This increase has followed the trend of rent growth. The rent income ratio has remained consistent at 20-23% for the past few years, with the highest being 24% and the lowest being 19%. MAA's management is open to answering any further questions.

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