Q3 2021 Mid-America Apartment Communities Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the MAA third quarter Torchy 'twenty One 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 October 'twenty eight 2021.
I will now turn the call over to Tim Argo Senior Vice President of finance of MAA for opening comments.
Thank you Mallory and good morning, everyone. This is Tim Argo Senior Vice President of Finance for MAA with me are Eric Bolton, Our CEO Al Campbell, our CFO, Rob Delpriore, Our general Counsel, Tom Grimes, our CFO and Bryan Hill, our head of transactions before we begin with our prepared comments. This morning, I want to point out.
But it is 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 statements section in yesterday's earnings release, and our 34 Act filings with the SEC, which describe risk factors that may impact future results. These reports along with a copy of today's 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 web.
Site Www Dot Mac Dot com I'll now turn the call over to Eric.
Thanks, Tim and we appreciate everyone joining us this morning.
Our third quarter results were well ahead of expectations growing demand across our sunbelt markets continues to drive strong rent growth and high occupancy steady.
Steady job growth favorable migration trends wage growth and escalating pricing of single family housing.
Are all driving strong performance for apartment real apartment rents across our portfolio.
We're carrying significant pricing momentum into calendar year 'twenty two.
Resident turnover remains low collections remains strong occupancy is high and rent to income ratios remain very affordable.
This all suggest to us that we have good capacity in the market for the pricing trends that we are currently capturing.
As we think about next year, we believe leasing conditions across our markets will remain favorable.
Our Sun belt markets continue to capture good job growth driving positive migration trends.
New move ins year to date from households, relocating to our sunbelt markets constitute 14% of our new leases as compared to just over 10% in the same timeframe of 2020.
How are pricing trends associated with single family housing or further supporting strong demand for apartment housing.
In the third quarter move outs, among our resident base to buy a home were down 12% as compared to prior year and move outs to rent a home were down 38%.
We continue to keep an eye on pressure surrounding supply.
Chain challenges and inflation trends.
Year to date, our biggest pressure on operating expenses is building repairs and maintenance costs, which were up just over 6%.
<unk> associated with both materials and labor, we expect year over year increases in repair and maintenance expenses will likely hold in the 6% range through the end of the year.
Our current development pipeline remains on budget for both development cost and timing for unit deliveries, we're working into our planning and pro forma is more cost and unit delivery contingencies as we expect the supply chain challenges to be with us through next year.
But again at this point our current pre development pipeline remains fully on track and we expect to start several additional new projects in 2022.
In summary, our markets continue to capture strong demand driving robust rent growth that will carry into 2022.
It may as uniquely diversified approach across the Sunbelt region supported by a very strong balance sheet has the company well positioned to take advantage of the outlook for continued strong leasing fundamentals in our markets.
We continue to build strength in our technology platform and their operating capabilities.
Our redevelopment program and several repositioning projects will drive higher earnings opportunity from our existing portfolio.
We expect to capture meaningful expansion of our operating margins over the next couple of years.
In addition, our external growth pipeline continues to expand and will deliver meaningful value accretion over the coming years.
<unk> is well positioned heading into 2022, and we're excited about the prospects for continued outperformance in the coming year.
I'd like to thank the MAA team for the tremendous progress this year and the very positive results.
Turn the call over to Tom Thank.
Thank you Eric and good morning, everyone. We saw strong pricing performance across the portfolio during the third quarter blended lease over lease pricing achieved during the quarter was up 15% as a result, all in place rents or effective rent growth on a year over year basis grew six 3%. This is nearly five times.
The 1.3% growth in the first quarter.
Average effective rent growth is our primary revenue driver and what's the current blended pricing momentum we expect it to continue to strengthen through the remainder of the year. In addition average daily occupancy for the quarter was a strong 96, 4%.
As outlined in the release, we saw steady progress from our product upgrade initiatives. This includes our interior unit redevelopment program as well as the installation of our smart home technology package that includes mobile control lights thermostats security as well as the leak detection for the full year 2021, we expect to complete.
Over 6000 interior unit upgrades and install 22000 smart home packages.
This will bring our total number of smart units up to 47000 units.
We're in the final stages of completing the repositioning work on our first eight full reposition properties and have another eight that are underway this year.
Leasing activity for October has been strong new lease over lease pricing month to date for October is running close to 20% ahead of the rent on the prior lease renewal lease pricing in October is running 13% ahead of the prior lease as a result blended pricing for the portfolio is up.
Approximately 16% so far for October <unk>.
[laughter] daily occupancy for the month is currently 95, nine which is 30 basis points better than October of last year exposure, which is all vacant units plus notices through a 60 day period is just 6.8%. This is 10 basis points better than prior year. This supports our ability to continue to prioritize.
Rent growth, we are well positioned as we move into the fourth quarter and 22.
I'd like to Echo Eric's comments and thank our teams as well they've shown tremendous of that apt ability and resilience over the last year I'm proud of them and excited about their progress in 2021.
Brian.
Thanks, Tom and good morning, everyone.
The already robust investor demand for multifamily properties and our footprint has strengthened.
Transaction volume is at a record high as investors are looking to buy into the strong rent growth outlook in our sunbelt markets.
Strong leasing fundamentals, coupled with robust investor demand continues to push pricing growth, putting further downward pressure on cap rates.
While the main focus of our capital deployment effort is currently owned development through our in House development and our pre purchase program with third party developers, we remain active in the transaction market and are actively evaluating a number of acquisition opportunities for.
For the moment, New development provides a more attractive investment basis higher stabilized NOI yield and higher long term returns to capital. We believe that as we move further into the recovery part of the cycle, we will likely find more compelling opportunities for acquiring stabilized and lease up properties.
Our pre purchase and development pipeline that includes both under construction and in lease up projects stands at 2999 units with a total cost of $710 million.
While the size of our development pipeline will fluctuate due to the timing differences of starts and completions. We continue to make good progress towards growing the pipeline. Our in house development team has multiple sites either owned or under contract that we expect to start construction on in 2022.
We have three sites in Denver, one of which is a three phase site, a two phase site in Raleigh, and a site in Tampa.
Additionally, we are negotiating on pre purchase projects in Charlotte and Salt Lake City that we hope to start next year as well.
Despite inflationary pressures on materials and labor, we expect stabilized NOI yields on our new projects to remain in the five five to 575 range.
The strong leasing demand, we're seeing across our portfolio is also evident in our lease up properties, where we're seeing rents and velocity well above our pro forma book.
Because of the strong demand we've moved up the expected stabilization date of our sand Lake property in Orlando by two quarters with an expected stabilization date of third quarter 'twenty to <unk>.
All of our under construction projects remain on budget and on schedule with yield expectations at or above our original projections. These projects have fixed cost construction contract. So they remain on budget and we are seeing increased material shortages due to strong demand and shipping delays.
Our construction management team has done a great job navigating these challenges and minimizing the impact to our schedules. However, we expect the supply chain disruptions could add 60 days or so to any new starts next year.
We've made great progress on our remaining dispositions for the year, which includes two properties in Savannah, and one in Charlotte the buyers or through their due diligence processes with hard earnest money deposits. So the closings should wrap up fairly soon.
Pricing on these 31 year old assets is very strong generating a levered investment IRR.
30%.
That's all I have in the way of prepared comments, so I'll turn it over to al Okay. Thank you Brad.
The continued very strong pricing trends and high occupancy through the third quarter produce revenue performance well above our prior expectations core <unk> was <unk> 10 per share above the midpoint of our guidance range with the outperformance essentially all coming from revenue blended lease pricing for the third quarter was 5% higher than projections supported by the average physical occupancy about 50 basis points above.
Projections and as we expected operating expense growth for the quarter moderated given some favorable prior year comparisons, but he is projected return to the full year range during the fourth quarter.
As you saw in the release this third quarter performance produced a significant increase to both our core <unk> and same store guidance for the full year, we increased projected <unk> for the year to $6 94 per share, which is <unk> 19 per share above our prior midpoint and now represents seven 9% growth over the prior year. The increase was driven by our revised same store revenue growth projection for the full year.
Or a five 1% at the midpoint.
Which is based on continued strong pricing trends through the fourth quarter with some late seasonal moderation expected and we're assuming blended lease pricing averaging somewhere around 10% for the full quarter.
We left our operating expense expectation for the year unchanged at four in a quarter to four and three quarters percent growth, which produces revised same store NOI growth with year five 5% at the midpoint.
We do expect some growing pressure from operating expenses as we move into 2022 with personnel costs repair and maintenance costs and real estate taxes, which combine to make up over two thirds of operating expenses all expected to begin showing some inflationary increases during 2022.
Our balance sheet remains in great shape, we completed several important financing transactions during the third quarter, which further enhanced our strength, we issued a combined 600 million in public bonds during the quarter, our barbell deal pairing five year and 30 year notes, which had very good pricing for both blended to a two 1% effective rate, which supports our view that our current ratings are conservative.
Yeah.
These transactions also fixed over 99% of our debt and extended our average debt maturities to almost nine years, providing important protection from a rising interest rate environment.
We also executed an 18 month forward equity transaction, which provides around 210 million of future funding for our growing development pipeline and based on current projection. This takes care of our equity needs for the next couple of years.
That's all we have in the way of prepared comments. So Mallory will now turn the call back over to you for questions.
We will now open the call up for questions. If you would like to ask a question. Please press Star then one on your Touchtone phone.
I would like to withdraw your question you may push the power.
Looks like we will take our first question from Rich Anderson.
From S M D C.
Your line is open.
Rich you there.
I'm, sorry, I was on mute thanks.
So you know obviously it goes without saying unbelievable performance to this point.
What what concerns you, though I mean to me this economy and this setup with wage growth and everything happening in a positive direction on top of the supply chain issues.
Suggests at least a risk of.
If there is a new firm and a fed chairman name that we could see.
Him or her showing.
To to combat whats going on and perhaps increase interest rates in the short and I'm curious if you're if you're worried about that we got the GDP print for the third quarter of just 2%.
Do you see these as the main kind of factors.
In terms of the risks going forward because obviously this type of growth can't happen forever.
Well.
Richie I mean.
I think you've certainly hitting on some of the bigger variables that could change that would change the dynamic that we're operating within.
I do think that.
We believe that if we do find ourselves in a rising rate environment.
First this business that we're in the apartment business offers I think some degree of <unk>.
Hedge against rising pricing and rising cost in general as as we have the ability to sort of reprice, our service and our product are pretty pretty quickly.
Al and named who have done a terrific job with the balance sheet, we've got the.
All the metrics that are very very strong position and I think in a position to withstand.
Pressures that we may see a various sorts in the in the capital markets.
So I think that you know and then you know I think some of the supply chain issues that we've been referencing will continues to be with us for some time eventually that get fixed but I think it's going to be awhile and happening probably a couple of years or so.
That may.
Either eagle create some issues for us, but I think it will also potentially cause some delays in deliveries of some of the competing supply that may be coming into the market. So.
There's a it's hard to sort of underwrite things right now there's an obviously, there's just a whole lot of noise.
Noise coming out of a.
Out of Washington D. C. These days and discussion surrounding changes and tax policies and what degree that may or may not affect the economy and capital and how capital chooses to an alley.
The allocate and invest so I think there are a lot of worry beads out there in that regard and from our perspective.
We've long believed that the right thing for us to do is just simply Orient our capital towards.
Markets, where we believe the demand for what we do is likely to be the most stable and the strongest over a full peer over a full cycle over.
Over the years have heard me often times make reference to the notion.
That we're trying to be the best full cycle performer, we can be and and I think it starts frankly with protecting the downside in protecting against risk and for that reason that's why we focused the way we do on the sunbelt and half for 27 years and then it's also frankly, why we choose to allocate capital the way we do.
Across the region with a real bad towards both a healthy combination of larger markets as well as secondary markets and with an affordable price point, we think it all just combined to create a higher degree of appeal for our product and and thereby you know sort of sort of.
Drive more stability and the ability to weather down cycles better.
I am excited about the opportunities that are coming in terms of the emerging recovery cycle and we've got.
Some exciting things happening with development, we've got ample capacity and strengthen the balance sheet to cover risk surrounding that we've got some pretty exciting things we're doing with redevelopment.
Which are going to drive revenue growth opportunities off of our existing asset base and then we've got some exciting things we're doing with technology.
Thank God it could continue to create performance advantages for us in the markets, where we do business. So I.
I feel like that we're probably as well positioned as we could be for you know whatever the future holds and.
Time will tell.
That's great Eric and just a quick one maybe for Tom.
Everything going up in price, including apartment rents.
Have you seen any indication that people are starting to at least consider doubling up to save some money has there been any more of that happening in your portfolio to this point.
No rich.
The sort of popularity.
His stayed sort of the same with ones and twos being most popular and the efficiency is still the least only 4% exposure to those in there you know mid teens on rent growth and they're above 95% occupied so we're there, but I mean, we.
Really we see people staying put.
Our renewal conversations, though at higher rates than they've ever been are easier because everybody sees the noise in the market and the price of single family homes and those kind of things. So there has not been a retrenchment and then on as far as affordability goes we continue to stay in the same area, where where we've been in.
And that 21, 22% range. So our sense is salaries are adjusting and.
Folks are continuing as is.
Okay, great I'll yield the floor. Thanks.
Thanks Rich.
Yeah.
We will go to.
Now, Brad Heffern with RBC capital markets.
Your line is open yeah, hi, everyone.
Hey, good morning.
Good morning.
Good morning, just based on the October Stat that you gave it doesn't really seem like there is any seasonality hitting those numbers yet, but then you talked about that 14% averaging out to more like 10% over the whole first fourth quarter. So are you seeing preliminary signs of seasonality and my interpreting that correctly.
I think Brad this is al I'll hit that at those comments as my comments I think what we have put into our expectations. As continued strong trends I mean October was a little ahead of the quarter as you mentioned and so we're seeing that October maybe into November, but we do believe there's going to be some seasonal call at holiday moderation, even as we get into the last month of the quarter, we put that in the fourth.
Cash and so that kind of brings us to that 10% average, but I will say this it also the fourth quarter is the lowest number of leases that we redo for any other quarter and so so even if it's a little higher a little bit low it really won't have that big of a impact on their performance and so we felt like that was that was the right range.
<unk> put in.
Okay got it.
And then I appreciate the comments just now on rent income that it hasn't really moved around that much can you just talk about I guess, what's the underlying driver for that is that it just seems surprising if you have no.
New lease up 20% in some of these blended numbers up 15 like it doesn't seem like you know the underlying wages would've kept pace with that.
Yes.
Tim has more detailed data on this but roughly from 19 to 20 inch moved probably 150 200 basis points, but it has not moved material and it's still incredibly affordable so.
It is it is a shift or a chair you know what we're what we're seeing is the people coming in the front door or more qualified so it may not be the right. You know it may not be salaries that are coming up but the people that we are attracting are easily available able to pay for the rent.
Yes ill add one comment.
If we go back to the Q3 and 19 two years ago.
It's gone up about 17%, so while rents have increased quite a bit or it comes out as well we're not seeing.
It's different in terms of the type of revenue, where they were similar sectors a lot of professional services.
A lot of health care, but we are seeing a little more single slightly younger actually.
Move from call it 75% singles about 82% singles, but overall incomes are generally keeping pace with rent growth.
Okay. Thank you.
We will take our next question from Nick Joseph from Citi. Your line is open.
Thank you maybe just following up on the seasonality.
What's the loss to lease for the total portfolio today.
Nick This is Tim ill answer that.
A couple of different ways.
All of those leases that went into effect.
In September a new new leases and renewals and compare that to our September ERU or all in place leases in September its about 11% or so if you look at it that way and obviously.
Changes daily assay question December probably a little bit different answer, but the other thing I'll add.
Do we think about it is.
How is that earned in are baked in and get a claim in 2022. So if you look at our 10% blended lease over lease guidance that we gave for the full year 2021.
With most leases on average 12 months or so we would expect about half of that.
Next year, so that earned in are baked in rent growth of about 5% right now heading into 'twenty.
Thank you that's very helpful. And then you had made a comment about the supply chain disruption for the impact how does that impact your market supply expectations for 2022.
Well, it's kind of hard to do.
Give you any real specifics on that Nick but I would generally tell you that as this supply chain issue continues to prolong in terms of the of an impact.
I've got to believe that it's going to create some construction delays for some of the projects underway I mean, we just we.
We were we were anxious about the delivery of some some hardy playing siting at one of our projects in Austin that we currently have under construction and we were really reaching a deadline.
The last two to three weeks, where we were going to have to make a decision to either.
Hold out and wait and create a delay or make a change to a different type of siding just because we couldnt get the order and then at the last minute. It did come in thankfully and so everything is still on schedule there, but I you know, we're hearing more and more.
Discussion about material delays and challenges and of course, it's been that way for some time over the course of the past year with appliances other things, but we're hearing it more broad spread and more.
Including more more items than ever and I, just I think that as we get into next year. If it continues at the.
Trends that we're currently seeing I got to believe that that supply coming into the market next year is going to be a little bit below current expectations.
Thank you very much.
Our next question will be from chimney with fur from Goldman Sachs.
Your line is open. Thank you. Good morning. This is Jonathan <unk> from Goldman Sachs and congratulations on a really strong quarter.
Could you perhaps talk about you know you said that you think that you know given your balance sheet.
You could get aggressive on development could you, perhaps give us some color on you know where do you think development can go for you in this part of the cycle as we think about <unk> as a percentage of enterprise value.
Well this is Erik and one thing I will say, we do not intend to get I wouldn't use the word aggressive.
We intend to be very not yes, I mean, we will see some growth take place with our development pipeline currently including our lease up where we're sitting on about $700 million of total funding. We funded a good portion of that at this point and.
And as Brad alluded to we've got several projects that are getting teed up that we would likely pulled the trigger on in 2022 I wouldnt be surprised to see the overall aggregate. If you will amount of development to get to 1 billion, maybe a little bit over $1 billion, but recognize that the actual funding out.
Legations in a given calendar year for that kind of pipeline is going to be approaching 400 million or something of that nature is something that we're very very comfortable in dealing with but in terms of enterprise value if we get to.
$1 billion on a 28 billion or so sort of enterprise value balance sheet, we think that that's still very comfortable and.
And something that we're very comfortable executing on.
Got it that's great color and then you briefly talked about service caffrey seeing further downward pressure.
Earlier in the call I mean can you give a little can you can you talk a little bit more like that.
What are you seeing how much compression RV talking about and what's that doing to your.
Yield expectations.
Yes. This is Brad I can give you a little bit of color to that if we go back to call. It first quarter of this year.
Cap rates on new deals in the market that we were underwriting and looking at cap rates were about a four.
Second quarter they were at call. It 375 this quarter.
That's down to about a three and a quarter and these are these are really trailing three three month cap rate. So these are trailing cap rates that we're looking at so you can see in the last quarter we've seen.
Probably a 50 basis points or so further compression of cap rates versus what we saw in the second quarter. So we continue to see a significant amount of capital looking at our markets looking for.
You have to deploy for reasons I mentioned in my comments. So we don't see any reason on the horizon right now that that is going to go.
To stop in fact, we are we are hearing more and more stories from our brokers, who we're talking to that.
Cap rates are in the mid to upper twos and some of the markets depending on what the growth looks like so again.
Mentioned last quarter I think from here it feels like cap rates, probably come down a little bit more but we have certainly seen as we as we get later in the year and as often is the case we have seen.
Bid sheets lighten up a little bit some of that is because we've had a historical amount of volume. This year. So folks maybe have met their allocation or maybe there is just a little bit of deal fatigue as we get later in the year, but nevertheless, the pricing that the winning bidder is willing to pay us continues to be aggressive.
<unk>.
Driving those cap rates down.
That's fantastic insight. Thank you so much for all this color and congratulations once again.
Thanks.
We'll take our next question from Austin, where Smith from Keybanc. Your line is open.
Hi, everybody and good morning, so al you'd mentioned that the 10% blended lease pricing in <unk> was baked into the guidance, despite kind of where you're tracking at this point through October I'm curious did you assume any additional moderation in occupancy or does it do you expect to kind of hold within that high 95.
Range through the balance of the year.
We bet, we put our guidance.
<unk> seen a update.
And we expect the average for the year about 96 or so.
Download, but from where we have been but as Tom mentioned October occupancy was down just a little bit nothing is still in the high 90 fives, we expect something in the high 95, something like that.
But I think as we mentioned the pricing growth that's the average for the whole quarter.
Taking account the last part of the quarter, which may be some seasonality even call. It like we said even holiday traffic really slows down during that period, but as you mentioned it really shouldn't have that big impact from a quarter not as much other quarters, because there's just very few leases that are signed.
Understood that's helpful.
And then just switching over to development a couple.
Couple of questions. Eric you mentioned $1 billion, you've talked about it previously I mean do you think that you can scale up to that level to two 1 billion or a little bit north of 1 billion by next year and then secondly, you guys have talked about you know the projects and lease up being a drag this year, but even less of a drag next year.
Drag still nonetheless, but with the rent growth that your markets have achieved relative to what you underwrote could that be a tailwind at this point into next year.
Well.
In reference to your first question, Yeah, we're very comfortable with.
Our ability to execute.
With the development operation that gets the pipeline two 1 billion a little over 1 billion and recognize that we're doing it in two different ways. We've got an in house platform, where we've got our in house development and in House construction oversight now we do not actually act as a general contractor ourself, we always.
Contract out with third party general contractor, so we're not actually building it ourselves, but we are overseeing the construction.
And then in addition to the in house execution that we've got a what we referred to as a pre purchase program, where essentially we're joint venturing with third party developers and they really do the construction and in a lot of the development work and we just oversee what theyre doing so yeah, I mean with it with the staffing that we have today, we feel very confident.
Our ability to execute at that kind of volume given the ways that we're doing that.
And then I'm sorry, the second part of your question was what.
It was just on on sort of the the earnings contribution from earlier in the year, you had talked about it being a pretty significant drag this year.
More modest drag next year, but still a drag and I was just curious with the rent growth that your markets have achieved relative but what I presume you underwrote.
Much more conservative I'm wondering if that's now a tailwind at this point.
Hey, Alison this is Tim I mean, I think the key there is we've got three deal.
How many pipelines that are.
Moves that will complete here in the fourth quarter and so it's still even even though we're certainly getting rents as good if not better than we originally pro forma theres still going to be the bulk next year pretty low occupancy. It takes some time to lease.
You will still be a drag that I do think we'll get to sort of that breakeven cost of capital yield a little bit quicker. So.
All in all not as much of a drag that would've been but still be somewhat of a drag this year.
Okay. That's helpful. Thanks, guys appreciate the time.
Okay.
We will take our next question from Alexander Goldfarb from Piper Sandler Your line is open.
Thank you Hey, good morning, good morning down there.
Question first two questions first.
You know.
As you guys planned 2022, and obviously, you're not giving guidance now, but you had 8% blended spreads in the second quarter, 15% now obviously on the sell side were all imagining where our numbers could go based on these trends, but internally as you guys sit there and underwrite next year, how do you reasonably under.
Next year, given that historically youre, probably looking at three four maybe 5% rent growth, whereas now your teams or I mean, presumably you guys could be 10% rent growth for next year.
These type of numbers in a loss to lease so how do you comfortably underwrite next year without us, saying, Hey, you're sandbagging or you guys, saying, Hey, we left our targets too low and our field team is going to clean up.
Well, we do it really really thoughtfully and carefully I'll say that I mean, we're in the middle of frankly are doing that right now for us It really starts with kind of a bottom up approach and.
We have a very robust budgeting process that we go through at a property specific level.
We look at all.
All the supply dynamics, we think about.
The baked in trends that we have.
And.
And then at a top level you know, we think we think about job growth, we think about sort of the variables that drive demand all of which we think are going to continue to be very positive into next year and then in addition to that we also have the variables surrounding what we're doing with both new technologies and various things that we think are going to.
Create some.
Some upside as well as what we're doing with both redevelopment and repositioning efforts. So there's a lot of variables that go into it and we underwrite them each of those.
And in very specific ways and in order to build up to what we what we think is a is the right expectation to establish so I think that you know as.
As Tim alluded to I mean, we're going to obviously be carrying in some great.
Baked in performance stronger than then.
I can remember it ever being.
And and I think that.
No.
We'll see where we get to it's I'm not really going to be able to give you a specific answer Alex how they used to.
Hey.
We try to go at it in a very detailed fashion and.
And I think when we wrap up our process, which will be done leading up to our board meeting we have in December we will it will be arrived at a pretty thoughtful manner I can assure you that.
Right, but it would seem like something upper single digits, 10% ish for rent growth next year is not unreasonable would that be correct Eric.
You know.
With the with the with the baked in that we're looking at coupled with some of the redevelopment.
In some of the market fundamentals.
I mean, those continue to stay as strong as they are.
I think what you're saying is not unreasonable but.
But we will have more to say on that later.
First question is on cap rates.
Obviously, we all know where cap rates have gone, but as far as the total IRR have IRR has changed so that people are paying low threes you have.
15% rent growth et cetera, so have irr's.
The held firm or have you seen irr's also compressing because the cap rate compression more than offsets any rent growth that people are baking in.
Well this is Brad.
It really depends on what's your.
Long term rent growth outlook is certainly putting in one year of.
15, 20% rent growth helps but you know what.
What does that look like in years two through.
10, I think that's really what's going to drive whether your IRR or coming down or staying flat I would say generally speaking the irr's are coming down.
But to what degree is going to depend on what you know.
What.
Degree you believe this outside outsized rent growth is going to continue certainly for a couple of years, but besides outside of that you've got folks that are dialing in substantial rehab components on assets to help drive those rates up.
So I'd say it just depends but my general comment would be that irr's are down to some degree.
Thank you.
We will take our next question from Amit suite, Sir from Baird. Your.
Your line is open.
Thanks, Good morning, following up on that conversation on returns I may have misheard you in the prepared remarks, but it does sound like your tone has changed a bit on pursuing stabilized acquisition.
If that's the case, what is giving you greater comfort today.
It mainly being driven by that kind of continued improvement in your cost of capital.
And then just Eric I think that I mean, obviously the cost of capital factors into it in a big way, but I think that as we just feel like we're getting later into the cycle.
Our supply and starts or has it picked up a bit this year and we will get it.
Two more deliveries potentially next year, coupled with probably some growing levels of distress here and they are surrounding supply deliveries and supply chain challenges that we've been hitting on it we're talking about.
I think that we are getting.
More optimistic that we're going to see some struggling lease up situations out there.
And we really believe that that is where we have the best opportunity to execute on an acquisition of a stabilized asset at a price point that we're comfortable executing with.
And so I just think the conditions are evolving to a point that you may see more distress.
With some of the stabilized assets, particularly lease up assets and we're optimistic that that that may yield an opportunity or two this next year.
And I'll add one thing to that you know we as we were getting to a point we are seeing select instances, where there is some aspect of a transaction that appeals to a seller other than the highest price whether it be.
Timing of year end close or something of that nature and as Eric said as we get into situations, where some supply chain causes some delays.
We are seeing folks using more prep equity mezzanine equity things of that nature. So their capital stack gets a little bit more expensive as those delays occur which could open up some opportunities for us to take advantage of a of an opportunity here or there.
Okay that makes sense and then you also mentioned Youre excited about your kind of next wave of capital initiatives can you talk about what those initiatives are after the smart implementation is complete.
Amanda will give you a kind of a quick update on what's going on.
This year, we expanded our call center solution, we deployed lead nurturing software, which is really just an automatic automatic automated prospect engagement.
That interacts with our prospects earlier in sort of extends the sales process, we upgraded our virtual touring we launched mobile maintenance and mobile inspections.
So to the next tools coming are improved self touring improved.
Improved multilocation sales support must simplify online leasing this.
This year, we were able to reduce.
30 positions.
Next year, we'd expect a head count reduction and we're doing this on natural turns.
Theres not a head count reduction cost with this of about another 50, but in short technology is just allowing us to shape and refine and change their resident journey. So that every step of it is easier for the resident which helps us capture them.
And helps revenues and it's more efficient.
On the expense side as well.
Thank you I appreciate the time.
Amanda.
We will take our next question from Rob Stevenson from Janney. Your line is open.
Hey, good morning, guys.
You guys give guidance one year at a time, but presumably have some internal numbers run out several years at a time it looks like given your guidance and what you did last year, you're going to average mid to high three same store revenue growth over the 'twenty 2021 period, when youre sitting back two years ago Halloween 2019.
Before Covid is this about where do you guys expect it to be in terms of portfolio rents and combined same store growth over the two year period or is there something here that some markets that have been disappointing where you thought that you'd be higher than this maybe a little lower than this how would you sort of characterize that versus your own internal sort of <unk>.
Getting over the 2021 period.
Yeah.
That's an interesting question.
I mean, we certainly.
In October 2019.
It did not foresee what happened over the last couple of years.
I would I would tell you that yeah, I think broadly speaking when you think about a long term sort of top line performance for our asset class.
We would we would put it at call it three and a half plus or minus.
Three 5% plus or minus over a long period of time.
And I think you know in a highly competitive business like ours, where pricing is part of the competition tool set I just think that that's a that's a that's a pretty reasonable.
Assumption to make and then our challenge as a management team is then to think about how do we take take volatility out of that performance stream I think that it, particularly as a REIT paying of hopefully a steady growing dividend is really important to think about that and that's why we have the strategy there.
We do in an effort to try to remove some of the volatility, but yet still be in a position to drive that kind of topline growth now we we do believe that that over time also with platform capabilities that we should deliver results topline results that would be.
If you will superior to a normal market trends both as a combination of just the balance sheet strength. We have the technology platform that continues to build out and add capabilities are very robust revenue management system and then the things that we're doing with with repositioning and redevelopment so.
To say that over the last two years.
At the end of the full two year cycle, we achieve revenue growth. It was kind of in line with where we thought we'd be in October 2019, I, that's probably not too far off there is little more volatile than we would have liked but we got through it just fine.
And any markets you know based on that that is sort of disappointed.
If I told you.
Where you'd be operationally back in October 2019.
Presumably you know supply markets oversupplied markets were weak or that there were some issues like the D CS or the Houston et cetera, but any markets that sort of stick out to you over the combined two year period that are still either abnormally strong relative to what you would've thought or weaker than where you would've thought.
I mean, the markets that have just been incredibly strong for us and continue to be our particularly Phoenix and Tampa I would point to.
Orlando had a dip there that we never would have expected in October of 2019, Orlando is a market that dipped more than we would have expected and that was a lot of impacts surrounding COVID-19 and the shutdown of the entertainment.
<unk> park businesses in that market and in Houston has been a bit of a laggard.
Well more so than we would have expected but.
I think that.
<unk> speaking.
Folio did what what we hoped it would do in some of our more secondary markets are markets like Greenville.
Greenville, and Charleston, and Savannah, Nashville, Jacksonville have continued to produce the kind of the more steady results that we count on during times of volatility and Atlanta has been.
It was a little weaker earlier last year, but its come back really strong so I wouldn't point to anything really surprising other than just those few that I've mentioned there.
Okay, and then lastly for me Al when you take a look at property taxes today any of your markets, where you basically got a bull's eye on your back given the increase in values. The trades in the market, where rents are going et cetera, or is there any markets, where you're really seeing material upward pressure even despite the.
Material upward pressure over call it the last almost decade.
I think I think all I'd say on that Rob as you know combination of growing top lines in great revenue growth and declining cap rates as Brad talked about has put pressure almost everywhere in our portfolio. There are areas that are more aggressive that we do expect more pressure, we've talked often about particularly Texas and Florida are.
Those two are the most aggressive programs and theyre, both combined a little over 50% of our tax liability. So we expect that to be the biggest area in 2022 to really get challenged and we will fight everything as we do.
And we'll see what happens and there is some some of them some.
Some factors that help us a bit in 2022 and that will have some areas that arent assessing I think Tennessee, North Carolina, and they're not and they're not reassessing. This year parts of Georgia portfolio, because we've appealed and we've completed those and there is kind of locked for a year or two when you would complete appeal. So there's some areas that are not going to see assessments, there that's going to be helpful, But Texas.
Florida is going to really challenge us and so we're preparing for that.
And with the growing top lines and premium cap rates you expect that you know we've talked about.
Mid mid to upper single digit kind of expectations in some of those markets and so that's what we'll have more to say about that as we in the year and put out guidance and it certainly as we move into next year, but that's where the pressure should come from okay. Thanks, guys I appreciate it.
We will take our next question from Anthony Powell from Barclays.
Line is open.
Hi, Good morning, just a question on the disposition disadvantaged Charlotte just a.
Maybe cap rates there.
I guess why selling those properties and what your disposition outlook in the next couple of years.
Yes. This is Brad.
First I'll just start with why those properties, but we go through a process every year, where we are.
There are obviously multiple departments here that we sit down with and kind of go through what we want to look to sell potentially for next year that involves.
Looking at properties that have some cash flow and capex needs that are.
Our above what we're looking for in our overall portfolio those generally trend to older properties, we've got somewhere.
Maybe there's some regulatory issues that that.
We're looking at that we evaluate we've got properties that are in markets, where the rent growth is not really what we want it to be.
So we go through that process every year really to identify the opportunities for us to to sell excuse me to sell for the following year. The other side of that as we're looking at what can we.
Handle in terms of dilution and then one of our what our cash flow needs for the year, our funding needs. So all of that kind of goes into our process and we're in the process of doing that now for next year. So we'll certainly have more to say about that with our release for next year, but in terms of what we're set.
<unk> this year the two in Savannah, the the one in Charlotte, we raised our guidance in terms of that pricing was.
Quite a bit higher than what we expected frankly, the way we look at our pricing on these assets is we're looking at.
A yield our trailing 12 month NOI yield than what we're getting on the proceeds there and from that basis, we're getting about a four 2% yield on those and just for cap rate comparison purposes.
So you can compare cross markets, that's about a call it a three and a quarter to three and a half market cap rate.
So very good pricing that we were able to achieve and just as a reminder, those are 31 year old assets that we're selling in those markets and so very very strong pricing that we're seeing.
Got it thanks good quarter.
Okay.
We will take our next question from Alice Alex Comer from Zelman and associates.
Your line is open.
Thank you I wanted to double click on the struggling lease up acquisition targets you mentioned earlier.
Given just the robust revenue growth, you're getting it's hard to imagine that lease ups would be struggling I'm curious, what's what's driving that in your opinion is it the cost side is it on.
And knowledgeable outsiders marketing in the market, what's driving the opportunity.
Well just to confirm I mean, our lease ups are actually not struggling our lease ups are running well ahead of expectations in terms of our pro forma and are both and leasing velocity and rents that we're getting what I was making reference to was.
Out in the market if you will.
As we get later into the cycle I think that there are some other development projects that are out there that may start to run into some challenges surrounding supply chain delivery issues late.
Late deliveries.
And I was.
Suggesting that some of that may come into play with other third party developers that are out there that may then drive some purchasing opportunities for us as we get into next year, but.
Our lease ups are actually doing very well and better than we expected. So just.
That's what I was referencing when I talk about struggling lease ups not hours on talking about some others as we get later into next year right right, Yeah, I was referring to the potential.
<unk> for acquiring those not your own.
Okay.
For clarifying and.
Just looking at the.
Where the demand is coming from you mentioned the out of state relocations or are doing well and moving out to single family is down.
What about the shifts between.
Renters within the market are you noticing a trend where.
They may they may be.
The apartment renters going a little more suburban.
Or any other trends there.
No.
The trend has continued on urban versus suburban.
Back in 'twenty, and 'twenty, one or 'twenty 'twenty.
It sort of peaked the pricing gap there was 260 basis points as suburban I would say, it's safe to say was favored in urban was affected a little bit more by supply that's narrowed to 60 basis points and both are excellent now so you know what.
We're seeing and we saw that with a b assets that the Delta is just closed.
And the strength is across the board now so.
A b an urban suburban assets are within the norm of our blended rent growth of you know.
For the quarter for 15 plus percent growth some who.
That delta is.
Closed.
Got it thank you very much thank.
Thank you.
We will take our next question from John Pawlowski from Green Street.
Your line is open.
Great. Thanks, so much Brad just one clarifying question the cap rates you referenced for Charlotte Savannah.
For two on trailing 12 months.
Was it the seller or the buyer kind of market cap rate that you were referring to in the low threes. Once you adjust for taxes and insurance is that accurate.
Yes, that's correct.
Okay.
And then al you mentioned growing personnel pressure you expect over the coming years.
Just give us a bit more detail or are we talking closer to 5% or 15% just order of magnitude. What you expect in terms of personnel cost pressures.
I would refer to three three primary areas that I talked about John and all of them. The three largest expense categories, you have or close to it I would say I would look at personnel as well as repair maintenance and taxes. All of those combined are probably two thirds of our expenses mentioned those non personnel.
And I'll, let Tom give you details this is challenging today to keep our workforce.
Keep it all positions, we need and it's very competitive and you might have more details on exactly what that will be next year. We havent really we go into the details now to look at property by property market by market. The challenges. We're seeing so we'll have more to say about that when we put our fourth quarter out but.
And all of those categories that you are looking at call. It a mid mid single digit kind of number likely for 2020 to somewhere around plus or minus something for all three of those.
John This is Eric I mean, the thing I would tell you is that.
What we're obviously working to do to combat some of the pressures on labor cost with among.
Among our own workforce as we are continuing to introduce more technologies that are frankly, allowing us the opportunities to eliminate positions. We eliminated 30 leasing positions. This year, we'll probably be looking at eliminating close to 50 next year.
Through attrition and and I think that that.
There are various things that we're doing like that in an effort to sort of.
React to not only opportunities surrounding new technology, that's coming into.
Becoming available, but but in an effort to sort of push back some of the some of the pressure surrounding whats happening in the labor markets broadly speaking, where we probably today experienced the most pressure from a labor cost perspective is on contract labor, where we are are forced to go out and hire a third party.
The vendors with third party contractors to come in and do certain activities that that's where we've seen more of their pressure from a labor perspective, but we believe that.
Through various programs that we have.
With it within our company from an HR perspective, coupled with the efforts that we've got underway with new technologies and the ability to get more efficient with our head count levels that will probably keep the labor cost itself I'm going to I'm going to put it in probably a 4% to 5% range.
Would be I would think comfortable to be able to deliver on that kind of performance.
Okay great.
The details thanks guys.
We will take our next question from John Kim from BMO capital markets. Your line is open.
Thank you.
Historically, <unk> been able to push renewals higher than new lease rate just given the kaufmann convenient for revenue from our brand.
When do you think that environment returns.
John.
Right now.
Where as you mentioned were probably $300 a hand on renewals of where we would historically be so that opportunity is still to be captured.
And I would.
His long right now new lease rates are moving at such a pace. It is where we are behind the mark on renewals. It is honestly pretty difficult to predict when that gap closes.
But we're encouraged by the trajectory.
Behind the mark meaning that the new lease pricing for new moving customers was $300 more than what we're charging on a renewal renewal lease end.
And frankly as long as long as the as the the demand level stays as high as it is.
And we get the tailwind from the migration trends and what's happening is single family housing and so on and so forth, we think that that probably fuels and ability to continue to command a higher price. If you will from a from a new move in customer on a new lease so.
When that changes and we go back to a scenario where renewal pricing is exceeding on an absolute dollar amount exceeding what we're charging in new customers hard to forecast, but we don't see it happening anytime.
In the next year or so.
And on that rent growth I don't know if you still look at your portfolio at all.
Versus legacy MAA.
Is there any difference between rent growth in class eight and class B just given.
New supply hitting the market and affordability concerns there was John I mean on a b assets back in the fourth quarter of 2020, GAAP was 310 basis points and it's close to about 70 basis points now with both very strong at 14, seven and 15 four so.
It is.
It's really more a market differentiation on performance than an asset class urban suburban at this point it has been very strong consistently.
Class a getting the higher rent growth in class eight.
Class.
A is 14 seven class B is 15, four it's really where you see.
Pressure on class a is not so much a market function as much as more of a supply issue whenever you see new supply coming into market more often than not it is going to have a price point.
Associated with the new construction there in a location frankly oftentimes that is going to be a more direct competitor to our existing a class.
Product a class portfolio. So to some degree the performance Delta is more a function of supply coming to the market in which part of our portfolio and price point of our portfolio is more likely to impact.
Alright.
Developers of new projects or the offering concessions.
It varies in some locations they do in Sunday down it's hard to give you a oh.
<unk> spread I would tell you that the the the presence of concessions in the market generally does not exist today versus a year ago.
And so broadly concessions are are you don't really see that much of the market anywhere at this point.
That's great. Thank you.
Thanks, Sean.
Well take our next question from Nick <unk> from Scotiabank. Your line is open.
Thanks Al I just wanted to go back to the expense topic for next year I mean, it sounds like.
Should we think about expense growth starting at 5% as a reasonable number you know higher than this year overall.
Yes that was really good.
It's a good question and that's really the kind of the point I was I was trying to get across earlier that those three when you take those three largest areas. We talked about that's no with two thirds of expenses and you've got that middle mid single digits.
Kind of number that that's that's certainly reasonable and we'll have more to say about that as we move as we give our guidance, but that is going to be those three are going to be big drivers for next year's and the pressure that we see on expenses.
Okay. Thank you and then my second question is just on.
Rental pricing and how we should think about this because.
In the third quarter right you had blended pricing was up 16%.
Im sorry that was October 16% I think it was 15% for the third quarter. When we look at some of the industry data a year ago rents in your markets were kind of not.
They were only impacted Arab there was sort of slightly down year over year or may be flattish and so it really feels like what's happening here in this quarter or right. Now is you have this comparison period, where the numbers are very high because a year ago. There was no rent growth and so you are almost getting like two years of rent growth.
In one quarter or in October right now and so as we just kind of think about where rents could be trending going forward. Realizing there is yeah. You. Eventually you hit some comp issues next year in the second quarter third quarter, because you had very strong.
<unk> this year.
For markets, but really the way is it the right way for us to think about blended pricing right now is something like half of what the number is so maybe really 7% to 8% on an annual basis not because it's not it's very hard to see how that continues at 15%, but is there a reasonable thing to think that you know really on an annual basis, it's sort of.
Half of that right now.
Well.
Nicholas Eric it's kind of hard to them.
Answer that specifically the thing let me break it down this way and explain to you now.
The the renewal pricing performance.
<unk> is driven by a different set of factors our renewal pricing.
As was alluded to earlier one of the earlier questions as has a lot more influence surrounding.
The ability for us to be a little bit more aggressive there because people really just want to avoid the hassle of moving.
Obviously supply demand dynamics factor into what we can do on renewal pricing to some degree as well, but also you know are they happy are we've done a good job of keeping them serviced and responsive to their needs and so on and so forth. So I think that what we find is that renewal pricing.
Which is call it roughly half or so of the blended performance is it tends to be a lot more stable and tends to be a lot steadier. If you will over the course of over the course of the year.
And I would tell you that it back to what Thomas was mentioning a moment ago. When you look at the absolute rent amount that is being charged for new moving customers versus the absolute rent amount being charged for renewal customers. There is room to continue to push pretty hard on the renewal pricing without.
Eclipsing are going above the new lease pricing. So we think that the outlook and the trajectory for our renewal pricing is likely to remain fairly stable.
Stable and growing and positive.
More or less consistent with what we're seeing now and don't really see why that would that would materially weaken.
New lease pricing for new customers coming in tends to be a much more volatile number and not only do you have market dynamics that come into play there, but you've also got seasonal factors that work into the equation, a little bit and and so I think that as we think about.
What's driving rent growth this year.
And particularly as it relates to new lease pricing new customers moving in there is some of the Covid unbundling. If you will that's going on that as you point out will start to taper off if you will at some point, but the other variables surrounding job growth migration trends the inability for people to go out.
And and buy homes at pricing that has gotten above what they can afford and so forth. Those variables are likely to continue for some time as we see and certainly to the overall migration trends and demand for apartment housing across our reaching as continue.
Continue to be very robust, so I think that.
New lease pricing is probably inflated a little bit right now as a consequence of sort of coming out of Covid.
And so to some degree if you wanted to think about moderation, taking places we get sort of past the COVID-19 influence altogether. It probably does show up a little bit more so in new lease pricing.
And to put a number to that right now is kind of hard because we don't know which of those variables is is is necessarily.
The most impact I would tell you probably as job growth and migration trends and what's happening in single family housing more so than any sort of COVID-19 unbundling effect that's going on.
Okay, Great I appreciate it thanks, Eric.
We have no further questions I will return the call over to MAA for closing remarks.
No closing remarks, we appreciate everyone joining us and obviously follow up with any questions. You may have thank you.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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Yeah.
Yeah.