Q3 2020 Mid-America Apartment Communities Inc Earnings Call

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[noise] morning, ladies and gentlemen, and welcome to <unk> third quarter 2020 earnings Conference call.

Presentation, all participants will be in listen only mode. After where she company will conduct the question and answer session. As a reminder, this conference is being recorded today October 29, 2020, I will now turn the conference over to Tim Argo Senior Vice President Finance for NIH.

Thank you Ashley and good morning, everyone. This is Tim Argo Senior Vice President of Finance and I agree with me are Eric Bolton, Our CEO Al Campbell, our CFO, Rob Delpriore, our general counsel.

As our CMO and Brad Hill, Executive Vice President and head of transactions before.

Before we begin with our prepared comments. This morning, I want to point out that as part of the discussion company management will be making forward looking statements actual results may differ materially from our projections. We encourage you to refer to the forward looking statement section in yesterday's earnings release, and our 34 Act spot Act filings with the FCC.

Which describe risk factors that may impact future results.

These reports along with a copy of todays prepared comments and an audio copy of this morning's call will be available on our website. During this call. We will also discuss certain non-GAAP financial measures a presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable.

GAAP measures can be found in our earnings release and supplemental financial data, which are available on the for investors page of our website at www Dot M&A Si Dot Com I will now turn the call over to Eric.

Thanks, Tim and appreciate everyone joining us this morning.

Results for the third quarter were ahead of our expectations cash collections on rich rich build in the third quarter were strong.

In October trends are the same.

While we still have a long way to go and capturing full economic recovery. We are encouraged by the early signs of improvement evident in our third quarter results.

Leasing traffic was well ahead of prior year on a lease over lease basis, new move in rent pricing meaningfully improved as compared to the second quarter. Overall net effective rents were 1.8% higher than Q3 of last year and average daily occupancy remains strong at 95.

0.6%.

As a result, we captured positive sequential revenue growth in each of our markets as compared to the second quarter.

Demand is strong across our footprint and growing.

While we expect new supply levels to remain elevated for the next few quarters forecast for new deliveries and the trends for permits for new construction suggest moderation and deliveries beginning in the back half of next year and significantly declining into 2022.

We continue to make progress on our new development pipeline with construction and scheduled deliveries on track to our pro Formas.

Where we are underway with initial leasing both our leasing trajectory and rents are in line with our expectations.

We are in active Predevelopment work on several other new development projects that we hope to start next year.

We believe it may be a strategy with a focus on the sunbelt region uniquely diversified across both large and mid tier markets and serving a broad segment of the rental market as a company well positioned to continue to work through the challenges presented by the current economic slowdown.

As the economy begins to recover post Covis, we believe our markets will continue to outperform capturing employment trends and a demand for housing that will be well above national averages.

It may is well positioned for a coming recovery cycle.

Two our team, but they may associates. Thank you for your tremendous work and commitment to our mission over the busy summer leasing season.

You have again exceeded expectations and as a result have us well positioned as we head into next year.

With that I will turn the call over to Tom Thank.

Thank you, Eric and good morning, everyone.

Recovery, we saw beginning in May and June continued across the portfolio through our busy season leasing volume for the quarter was up 11%. This allowed us to improve average daily occupancy from 95.4% in the second quarter to 95.6% in the third quarter. In addition in addition, this time.

Anthony in occupancy by 20 basis points, we were also able to drive new lease pricing improvement effective new lease pricing during the quarter improved 140 basis points from the second quarter to the third all.

All in place rents on a year over year basis were up 1.8% and turnover for the quarter was down 2.7% versus last year.

These improvements were supported by an increase in lead generating marketing spending we're pleased with resulting improvements in occupancy and new lease pricing mentioned earlier.

We saw steady interest in our product upgrade initiatives during the second quarter, we restarted our interior unit redevelopment program as well as the installation of our smart home technology package that includes mobile control lights, thermostat and securities Wells leak detection year to date, we have installed 22000 smart home packages and complete.

You did 3300 interior unit upgrades.

As noted in the supplemental document collections during the quarter were strong we have worked diligently to identify and support those who need help because of COVID-19. The number of those seeking assistance is dropped with each month and April we had 5600 residents on the release plans. The number of participants decreased over time in this just.

470 for the October rental assistance plan. This represents a loss 10.5% of our 100000 units.

October collections are running slightly ahead of the good results. We saw in the third quarter as of October 26, Weve collected 98.6% of rent build for October. This is a 20 basis point improvement from what we saw on average for July August and September, but the same day of the month, including deferred payments for Covance.

Teen effective resonant payment plans referenced in the COVID-19 disclosure we've accounted for 98.8% of October billed rent.

Leasing volume for October is on track to exceed last year effective new lease pricing for October to date is negative 2%, a 30 basis point improvement from the third quarter effective blended lease over lease pricing for October month to date is 1.3% a 50 basis point improvement on the.

Third quarter.

Our high percentage of our current residents are choosing to stay with us and our resident renewal and retention trends are positive October November and December lease over lease renewal rates signed at this time are in the 4.5% to 5.5% range.

In addition to the positive leasing trends occupancy has also strengthened occupancy has improved from a low point of 95.1% in may to 95.7% today average daily occupancy for the month is 95.6, which is even with October of last year.

60 day exposure, which is all vacant units plus notices through a 60 day period is drop from a high of 9.2% and may 6.8% in October this low level of exposure also matches. The same time last year and has us well position for the slower winter leasing season.

I'd like to Echo Erics comments and thank our teams as well they served and care for our residents and our associates well and have grappled with the constantly changing implications over 19. We've also worked diligently to adapt to new business conditions and drive our recovery proud of them and grateful for their efforts incur.

Term Brent.

Thanks, Tom and good morning, everyone.

Third quarter transaction volume picked up from second quarter, but still remains down significantly year over year, and we expect the volume to continue to be slow into next year.

Because of the desirability of our markets, we continue to see robust buyer demand for existing assets within our footprint.

This strong demand coupled with very attractive debt rates has further compressed cap rates and in some cases is resulting in pricing above pre cobot levels, despite lower and our lives.

We continue to expect our best buying opportunities on existing assets to be owned properties in their initial lease up where we believe pressure is likely to continue to build through the winter.

With that said, we have only seen a few lease up opportunities come up and pricing trends are mixed all cash buyers and strong sponsors with established agency relationships remain the most aggressive bidders while leveraged buyers are having more difficulty obtaining financing on pre stabilized properties.

We do expect cap rates within our footprint to remain at historical lows.

And perhaps continue to trend lower likely making acquisitions, a smaller contributor to our external growth for some time.

As I mentioned last quarter, we expect our in house development at our pre purchase platforms to be significant contributors to our external growth going forward and.

And anticipate starting construction on a number of these projects later this year and into next.

While cap rates on acquisitions have compressed yield.

Yields on developments remain attractive rents and occupancy are holding up at our markets and despite cost pressure in a couple of line items, especially lumber developments continue to underwrite to a positive spread to cap rates on stabilized properties.

As shown in our supplemental we have six development projects that are underway and all remain on budget and on time, despite working through some minor supply chain issues.

Subsequent to quarter end, we started construction on the land parcel in the northern suburb of Boston that we purchased back in January.

This 350 unit project should begin leasing in the first half of 2022, when we expect leasing conditions to be significantly stronger than they are today.

While early report showed 2021 deliveries in line with this year's levels data in permitting and construction starts to show a material decline since March and point to a drop in future deliveries beginning late next year and into 2022.

Lining up well with the expected delivery of any new development, we start that's.

Thats all I have in the way of prepared comments, so with that I'll turn it over to al.

Thank you Brad and good morning, everyone. We reported core FFO of $1.57 per share for the quarter, which was slightly better than our internal expectations as operating performance corporate overhead costs and interest costs were all better than expected for the quarter.

As mentioned earlier stable occupancy strong builds in effective rents and continued strong collection supported third quarter performance, while improving pricing trends physician portfolio well for the fourth quarter.

As Tom mentioned Nicolet I'm seasoning, we have established a reserve for bad debts at quarter end sufficient to fully cover uncollected rent from residents not working with this on payment plans as well as for a large portion of the remaining deferral program payments look collections experience for those have been very good today.

As discussed in our release last quarter, we expected some pressure in property operating expenses over the back half of the year.

The majority of the increase for the third quarter was related to growth in real estate taxes insurance and marketing costs as well as impact on utilities costs from the double play book.

Both Internet program, all discussed last quarter, a couple of unusual items affecting the quarter were an unexpected increase in Austin tax rates related to a recent approval by the city to bring forward funding for a light rail system, which was approved during the quarter and actually goes before voters next week.

That's all we have no way of prepared comments, so actually we will now turn the call them to you for questions.

But.

Okay.

If you would like to ask a question. Please press sorry, then one on your Touchtone phone you may withdraw your question at any time by pressing the pound key once again that is star and one.

And we'll take our first question from John Kim with BMO capital mortgage. Please go ahead.

Thanks. Good morning, all you just mentioned that there are some uncertainties remaining.

You know basically.

How'd, you to refrain from providing guidance for the Euro can you just elaborate on what type of furniture. These are just like.

Yes, John I appreciate that question I think as we look at whether there's continuation certain government programs the reset potential rise and Covid cases in our region. The timing of reopening plans that continue in our region reminders of these things and so all these things continue to bring risks and as I mentioned I mean, we are very encouraged with trans but just given that it was.

One quarter remaining in the year, we felt a credit to refrain from putting that out right now we hope to be in and feel like will be in position to some exchanged ability an overall marketplace in <unk>.

Environment to put all guidance out for 2021.

And with your cost of capital coming down and become at that time.

With your recent decorate that one seven.

How does this change it Alex Howard how you underwrite investments.

I don't know the changes I made.

Could you underwrite in a similar manner I think what it does is certainly provides the potential for very strong yields and okay gaps and spread capture on some of these new development deals that Brad whether there.

In house development or pre purchase and so that's why we talked about the remaining capacity we have and also we talked about in the past John that we have a potential in our balance sheet to investors, you'll three quarters of a million dollars before really impacting our our leverage levels. So I think we would say that and I'll talk about in the comments. This morning, we do expect over the next couple of quarters on a.

Element pipeline to grow because that's where the opportunity isn't as you point out those six yields that we're putting in place compared to that one seven.

Funding cost is very attractive.

Great. Thank you.

Okay next question for next Tuesday for City. Please go ahead.

Thanks.

It's obviously been a very different operating year, thus far so I'm wondering how you're speaking about seasonality versus the normal pattern and how that impacts your operating strategy over the next few months.

Occupancy or right.

Yes, it's Tom.

I think what we.

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Enjoy thus far frankly is pricing that has been unseasonable as you mentioned normally.

Fact of new lease pricing peaks late July thus far it's peaked late August or excuse me late October study trends as it goes.

Expect as we move into the fourth quarter that we would see.

Seasonal fall off and sort of demand as we usually do and that new lease pricing will drop.

Modestly and it will be able to hold onto our in the range of our current level of occupancy that said, what I think will continue to grow.

Which are arena renewal rates that were effective in the third quarter or just 3.8, I think we'll see renewal rates continue to improve as we move through the fourth quarter, that's not something that's usual that seasonal.

And it will see those in the four and a half to five and a half range for the fourth quarter.

Okay and can I, just maybe specifically on D C.

Relative to the rest of their portfolio. So what are you seeing on the ground there.

Any confession.

I'm, sorry, Nick I missed which market you were asking about.

You can D C and a greater yes.

Yes, absolutely yes.

C as.

A little bit different honestly occupancy there is strong at 96 or the pricing has been weak and as we go around the horn, we're seeing concession levels in D.

D C proper at two month on stabilized Pentagon City Crystal City about two months Tysons corner, two months, Alexandria, pretty similar, Maryland, and Northern Virginia are a little bit stronger, but both seen a month free in those markets. So do you see as one where were stable on occupancy pricing.

Pricing gross remains elusive at the moment.

Thank you.

Oh, we'll take our next question.

<unk>. Please with Keybanc. Please go ahead.

Thanks, everybody just curious referenced permitting levels in a declining fundamentals have been relatively stable and and.

Supply is expected to fall off I guess why do you think there hasn't been a pickup and construction activity at this point.

Anything on the supply chain challenges, they think you referenced or difficulty getting financing.

And then just curious if there's any offsetting items from the pressure on lumber prices that Brad reference and where you think kind of construction costs are those pre covid levels.

And this is Brad.

I think certainly in terms of construction costs we've seen.

Strong rise and lumber, but it's been pretty volatile we've seen a strong runups since covid.

We have seen some relief there.

In the last 30 days or so, but it's still a pretty big unknown in terms of our construction cost and.

We're really not seeing any other line items at the moment.

Are providing relief or offsetting some of that it's just not happening.

At the moment in terms of.

Seeing R.

Not saying construction tick based on the permitting day that we're seeing.

I think it's I think financing is certainly a big part of that when we started out of Covid.

Equity was a little nervous and so.

Second quarter was tough equity folks backed out of a number of development deals that's kind of since come back and now I think the difficulty is more.

On the construction site.

Getting a construction loans, that's very very difficult are folks at the moment and and I think that's giving us some additional opportunities on our free purchase platform just based on the way we've structured that.

But I think fundamentally.

Our markets continue to underwrite well for new development, you've got the certainly the construction cost pressure a bit but we see <unk>.

Some mitigating circumstances, they're being.

Lower supply that we're talking about it late 2021 and into 2022 that the permitting data showing so we feel good about.

Anything that we are developing today and put in a show up on the ground on today, but I think the financing environment for folks for a number of folks out there is a little bit more difficult.

How robust is that pipeline of pretty purchase opportunities has there been any change in pricing. There and then do you think is the transaction market general loose ends up that maybe that spurs.

Little more activity in the construction market.

Perhaps I mean in terms of the what we're seeing on the preferred chest side I mean again, we're evaluating a lot of deals.

As equity backed out in the second quarter, we had a lot come forward.

And then as I said, we've got.

Our ability to provide the debt on our pre purchase platform is kind of a differentiator for us and for folks that.

A lot of the established developers that we're doing business with they have the capacity and the ability to go out and get that.

But.

We just provide a better option for them. So so we're seeing a lot of opportunities. There. We've got two that we hope to start in the coming quarters, and then others that are coming in daily for us to evaluate so.

We are optimistic that that platform continues to perform and to provide opportunities for us in Austin. This is Erica I'll add to what Brad, saying that we've got pre purchase opportunities or pre pre development opportunities I'll say that we're working including both in the house and on the pre purchase platform.

That Brad mentioned, we're working opportunities that we have tied up in Tampa Raleigh Denver.

Phoenix, We're also.