Q1 2022 Mid-America Apartment Communities Inc Earnings Call
Okay did in Raleigh, Tampa and Denver.
We're excited with the strong start to the year leasing conditions clearly remained very favorable we have a number of initiatives underway with new technologies and redevelopment that will further fuel margin expansion and higher earnings growth from our existing portfolio.
And expanding new development pipeline will add will also fuel additional <unk> growth over the next two to three years and the balance sheet is in a strong position to support our growth plans.
MAA strategy has consistently demonstrated more resilient performance during weaker parts of the economic cycle.
But as a consequence of the many enhancements we've made over the past few years to the portfolio mix to the operating platform to the balance sheet and to our external growth capabilities. We're excited to now also see maa's ability to post strong relative performance during recovery and the up parts of the market cycle.
In closing I'd like to extend my appreciation to our team of MAA associates for their continued hard work and consistently strong performance.
That's all I have in the way of prepared comments and I'll now turn the call over to Brad.
Thank you, Eric and good morning, everyone.
During the first quarter, we continued to make progress toward growing our new development pipeline we.
We finished the first quarter with $444 million under construction and $740 million combined under construction and in lease up at an average expected stabilized NOI yield of five 9%.
The size of our total pipeline is up from $700 million at the end of 2021 during the first quarter. We started construction on a 352 unit project in Denver called MAA Park Central.
This is the first phase of a three phase 1000 unit project on land, we purchased in late 2020.
Pre development work at our three owned sites in Raleigh, Tampa, and Denver is progressing and subject to receiving acceptable construction costs, we expect to start construction on these projects this year.
Additionally, we continue pre development work on several in house and pre purchase developments that we hope to start over the next 18 months in Atlanta, Charlotte, Denver, Orlando, Phoenix, and Salt Lake City.
This pool of future development opportunities includes an entitled site in Denver that we purchased in the first quarter of this year.
The timing of planned construction starts can change as we work through the local approval and the construction bidding processes, but at this time, we expect to start construction on 600 800 units in 2022 and end the year with a pipeline of under construction projects between eight and $900 million and a pipeline of total projects both under <unk>.
Instructions and in lease up over $1 billion.
Our operating performance a communities in their initial lease up is strong and we're achieving rents substantially above our pro forma expectations reflective of the strong leasing demand in our markets. We reached stabilization at our MAA Midtown Phoenix community two quarters earlier than our original expectation, while also achieving stabilized effective.
Rents more than seven 5% above our original pro forma expectations.
Our construction management team continues to actively manage all our practice and has done a tremendous job keeping labor and material cost increases from having an impact on our overall budgets.
Material shortages and shipping delays are prevalent in the market today and in many instances necessitate us, placing orders and making deposits much earlier in the process and we had to in the past to procure materials as well as our place in the delivery queue.
Spite these challenges we delivered our last units at both MAA West Glenn and MAA Park point on time during the first quarter.
Our 2022 disposition plan is underway with two properties in the Fort worth market currently under contract with an expected closing date later in the second quarter buyer interest was strong for these 30 year old properties with one by our winning the opportunity to purchase both.
We plan to sell two additional properties later in the year.
Our transaction team also remains engaged in the transaction market and we're actively evaluating several acquisition opportunities and we continue to believe that as we get later in the year more compelling opportunities for acquiring stabilized and lease up properties are likely to materialize.
All I have in the way of prepared comments, so with that I'll turn it over to Tom. Thank you, Brian and good morning, everyone performance for the quarter was once again robust and we're off to a good start in 2022, we saw strong pricing performance across the portfolio during the first quarter blended lease over lease pricing achieved during the quarter was up 16, 8%.
As a result, all in place rents are effective rent growth increased 12, 4% on a year over year basis, and two 6% from the prior quarter average effective rent growth is our primary revenue driver and with the current blended pricing momentum we expect it to continue to strengthen in addition.
<unk> average daily occupancy for the quarter was a strong 95, 9%.
The strong demand environment continues to create new opportunities for our product upgrade initiatives. This includes our interior unit redevelopment program as well as installation of our smart home technology package that includes mobile control of lights, thermostat and security as well as leak detection.
At quarter end, we have completed 1098 interior unit upgrades and installed 11018 smart home packages in 2022, we plan to complete over 6000 interior unit upgrades and approximately 23000 smart home packages by the end of the year, we expect our total number of smart units.
To approach 71000.
For our repositioning program, we're in the final stages of <unk>.
Pricing leases at the first of eight properties in the program that are now complaint and results have exceeded our expectations of another eight projects that are underway this year.
Strong leasing activity continues into April lease over lease pricing on new move in leases for April is currently 16, 5% ahead of the rent on the prior lease renewal lease pricing in April is running 16, 7% ahead of the prior lease and as a result blended lease pricing for the portfolio.
As a 16, 6% thus far in April .
Average daily occupancy for the month of April is currently strong at 95, 7% in exposure, which is all banking units plus notices through a 60 day period is just eight 5%. Both numbers are in line with our expectations and support our ability to continue to prioritize rent growth added into the busy.
Summer season.
Our teams are well prepared and looking forward to the busier summer season, I'm grateful for their time and commitment to serving all of our stakeholders al.
Okay. Thank you Tom and good morning, everyone reporting core <unk> per share of $1 97 was <unk> <unk> above the midpoint of our guidance for the quarter and virtually all of the outperformance came from revenue growth as rental pricing occupancy and collections all combined to produce 150 basis points of outperformance to our revenue expectation for the quarter.
Tom outlined pricing trends continue to be strong through the first quarter and into April as both new leases and renewals coming affected during the quarter and solid double digit growth over the prior lease.
We continue to expect stable occupancy and strong rent growth through this year and with some impact from prior year comps and returned to more normal.
Seasonal patterns during the fourth quarter leasing season, which did not occur last year.
Overall same store operating expenses were in line with expectations for the quarter, but we do expect continued inflationary pressure over the remainder of the year and particularly in personnel and maintenance costs, which I'll discuss just a bit more in a moment.
Our balance sheet remains in great shape, providing both protection from market volatility and capacity for strong future growth.
We funded approximately $40 million to $43 million of development costs during the quarter project at $250 million funding for the full year.
As Brad mentioned earlier, we expect to start several new deals this year and early next year likely spawn expanding our total construction pipeline to between $800 million to $1 billion by year end, which remains well within our risk tolerance limits.
We ended the quarter with low leverage our debt to EBITDA at a record low for $2 seven times with virtually all of our debt fixed and well ladder over an average of $8 four years over $1 billion of combined cash and borrowing capacity remaining under our line of credit.
So during the quarter Moody's affirmed our debt rating of <unk>, one and revise their outlook from stable to positive, bringing all three rating agencies now to a positive outlook.
Certainly reflects the strength of our balance sheet and the potential for upgraded ratings over the next several quarters.
And finally, given the first quarter performance and expectations for the remainder of the year. We are updating both our core <unk> and same store guidance for the full year, we increased our full year range for <unk> by <unk> 16 per share at the midpoint to $792 24 per share at the midpoint.
This represents a 15% growth over the prior year.
This increase is essentially all produced by higher revenue growth expectations as projected continued strong pricing trends produced a 200 basis points increase in our effective rent growth.
Our expectation for the year to 12% at the midpoint compared to 10% in our prior guidance and five 2% from the prior year performance.
Mentioned, our revenue projection for the full year is built on continued solid pricing performance and stable occupancy for the year with some impact from prior year comps of the second half and normal seasonal trends during the fourth quarter.
The trends with our property operating expenses remain largely in line with our original projections with some increased pressure expected from both from personnel and maintenance costs, a strong labor market robust development environment and continued supply chain issues are expected to continue to pressure our maintenance service salaries and materials costs, we increased our guidance for total operating expenses for this.
50 basis points at the midpoint to 6%, reflecting the continued pressure. However important to note. This increase was more than offset by the revenue growth trends, which produced a revised same store NOI expectation of 13, 5% for the full year, which is.
Thanks points above our prior guidance.
The forecast for our largest property operating expense line on our real estate taxes remains 4% to 5%.
I'll add also as a result of the continued labor market inflation assumed higher performance based incentives given strong projected performance. We've also raised the midpoint of our total overhead assumptions for the full year and the only other change to our guidance was an increase in the dollar value of our disposition volume, which was increased $25 million to a midpoint of $350 million, reflecting higher pricing expectation.
On the assets being sold.
That's all we have in the way of prepared comments. So actually we 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 the star and one on your Touchtone telephone if you would like to withdraw your question you May press the pound key.
We will now take our first question from Neil Malkin from capital one. Please go ahead.
Thank you.
Everyone. Good morning, another great quarter.
First question, just kind of want to touch on <unk>.
In migration trends, and obviously thats been something thats been talked about for.
Particularly.
Covid started but I was wondering if you can give an update on <unk>.
How those trends are going on either property or market level are you seeing those that inflow kind of remains that need is.
Is it increasing.
From the last couple of quarters in terms of people coming in from out of state.
And then the second part would be hired those people from out of state also bringing with them.
Higher average incomes compared to.
I guess you want to call it in state moving.
Yes, Neil this is Tom ill just give you the broad trend for first quarter start 2019.
Move outs from outside of the footprint, we're not one in 'twenty. There were 10, one in 21, there were 12 in this quarter. There were 14, so accelerating across the board and then.
We see.
Places like Phoenix, or now, 22%, Tampa 18, Nashville, 29, 15% Charleston.
Yes, we see so those trends are continuing and they are coming in at higher salaries as well.
Yes. Thanks.
Makes sense and then maybe wanted to touch on.
On the acquisition side, you guys have been kind of shying away from that just given.
Low low cap rates.
Yes.
Interest rates going up I'm just curious.
Your comment about acquisition.
Potentially pursuing some of those in the back half of the year what are some of the trends.
That gives you confidence.
You might have some success there.
Elevated deliveries is at higher interest rates, maybe reducing competition any any kind of color on.
The opportunities you see and why you have some more confidence versus prior quarters.
Yes, Neal this is Brad I would say first of all we have.
Continued to remain active in the acquisition space for the.
The last few quarters.
Certainly pricing has been very frothy in that area and so it's really hindered our ability to execute in that area.
So over the last couple of quarters that we do think that opportunities will increase as we get later into the through the cycle and into this year and generally what we ended up seeing is.
If something changes and something changes too.
To drive the market, a little bit closer to us, where we where our execution capabilities are a little bit more valued and I think what we're seeing right now is that play out a bit where our ability to execute.
The speed.
Where we're able to come in and close on an acquisition within really 30 days, our ability to close all cash.
Certainly becomes more valuable to some of the folks in the market and certainly we're seeing that at this point, we thought that.
That would likely be the case this year and I think just given some of the geopolitical things that are going on the interest rate movements as you referenced or are playing out where we do believe that we'll be able to execute in that arena. This year.
Does that have anything to do with.
Potentially cap rates backing up at all or do you expect cap rates to be flat to even compress further.
No.
We're really early interest rates have moved 100 basis points in the last 60 days and so what I would say on cap rates is for well located well executed.
Properties.
Really no movement in cap rates in fact in the first quarter on the deals that we looked at.
Cap rates actually went down.
Now that the full quarter.
Likely not the case in March and April were where there have been some folks that.
High Levered buyers that have have paused for the moment, but I would say that instead of getting 10 bids invest in final youre getting for in the deals that are well located well executed are still getting done. So so I wouldn't say, it's a result of cap rates changing it.
It's really a result of folks looking to certainty of execution.
More so than maximizing price and I would say that where we are right now is big.
Bids have been blowing through the top end of broker guidance now they're getting the top end of their guidance and deals are still getting done especially for the.
The asset types that we're selling and then the asset types that we're looking to buy.
Yes.
Great. Thank you guys great quarter, thanks for the color.
Thanks Neil.
We will now take our next question is from Brad Heffern from RBC capital markets. Please go ahead.
Hi, everyone can you walk through where rent to income ratios are currently and any any changes.
Yes, Brian this is Tim.
If you look at our entire portfolio right now rent to income is about 23%.
Captures everybody Thats in a unit right now.
Got up a little bit over the last couple of years, but still remains fairly fairly low and feel like there's still plenty of room to move in terms of our performance.
Performance.
Okay.
And can you talk about where renewal offers are being sent out currently.
Sure Brad.
April .
I think I mentioned is currently running 16, seven mace and the 17 range in June and 16, right now, but James a little early.
Peripheral understanding so they've continued to be very robust.
Okay. Thank you.
We will now take our next question from Austin, where Schmidt from Keybanc. Please go ahead.
Great and good morning, everyone. So I was just trying to understand I mean, we saw new leases now.
Trending a little bit below renewals in the first quarter end.
A slight bit I guess in April .
And you've seen average daily occupancy.
Just now start to tick down here more recently, so I'm just trying to understand if this is a trend that you think you can.
Can persist for some time.
Or if there's been.
Just now to the point, where you are receiving some pushback on the renewal pricing and that may ultimately lead to.
I need to I guess break and bring those down as.
As we as we move through the year.
Yes.
I'll turn the call them kind of the first part of that.
I wouldn't see anything that I would characterize as a slowdown.
It is very steady or a few weeks into April are wrapping up April mid sixteens and I'll tell you, we've certainly gotten some pushback on renewal increases.
Those folks that are leaving for price, we're replacing with someone paying 27% higher so.
What we see on this is good except to rates for renewals. Both in terms of the number of people that are renewing.
The increase we are seeing exposure low.
Occupancy continues to run.
But we're very comfortable running in our demand metrics on leads per exposed units are as high as they've been so.
Short term, we feel pretty darn good about where pricing is in Austin. This is Eric I'll also add that obviously, we're just now getting into the peak leasing season, and where demand tends to pick up in leasing traffic really tends to pick up. So I think the fact that we're carrying the renewal rates that we are in the new.
Lease rates that we are through the last six months of the fall and winter.
Heading into now the more robust part of the year.
Feeling pretty good about the trends that we're seeing.
No. That's helpful. I guess, just trying to understand I guess, the opportunity costs or turnover cost.
Associated if youre back filling at a lower rent increase on average across the portfolio.
Yes.
Just a bit.
So I think important recognize we're back filling if you will but someone paying 27% and total turnover is down 6%.
We're not increasing turnover at this point and we're repricing at a higher rate on those folks.
That did choose to leave for price.
Understood.
Helpful color and so what is market rent growth across the portfolio today and could you give the current loss to lease.
Yes, Allison this is Tim I'll hit the hit the loss lease part.
If you look at the blended rents for call. It March compared to our March <unk> that would imply about 8% loss to lease you've got about six to $800 was our effective rents in March versus 14 84. If you look at just the new lease prices, where our absolute new lease prices are still running.
A little bit higher than renewals actually about 10% based on that number.
And then as far as market rent growth just curious where you are year to date and I guess, whether anything has changed.
As far as your projection across your markets for this year that led you to increase guidance 200 basis points.
This early in the year given.
We've received guidance just a couple of months ago.
Austin This is al I'll start with that and Tim and Tom can add some color I think what we saw was we had always expected going back to when we gave guidance with game here that we have strength in the first quarter and begin to move into a situation where we have.
Prior year comp strong prior year comps as well as the fourth quarter, some normal seasonal trends impact us that we didn't have last year that general trend is still in our expectation, albeit the first quarter was just much stronger than we had outlined I mean pricing came in at <unk>. You saw a 16, 8% for the quarter continued through April as Tom mentioned to be mid sixteens same some level. So.
I think that just weren't stronger and longer than we thought it would so it cause us to expect the same continued shape.
Shape of that curve for the year given the comps was based on but just moved it up 200 basis points and everything went up 200 basis points.
US and I'll add that as I alluded to it.
Tim or Tom mentioned as well I mean, our move ins from people moving from outside the sunbelt into our markets continues to grow but the other thing Thats changed frankly in the last 90, 120 days or so with the change happening on mortgage rates and interest rates the hurdles to home buying just continued to grow and I think that is.
Continuing to fuel some <unk>.
Level of demand for apartment housing as well that is running higher than we expected.
Sure and we do that.
If we do continue to have in the back half moving to a mid single digit kind of growth based on those prior year comps and that fourth quarter seasonally talked about which is which is still strong on a relative basis in terms of years past outside of the COVID-19 period would that still built into or that we think it prudent to do that.
Let's see what performance is.
Is that mid single digit blended lease rate growth or same store revenue. Okay got it. Thank you.
Same store revenue growth will obviously it will continue.
The math is math it'll accelerate next quarter to stay high through the year.
Based on what we've done over last several quarters.
Okay. Thank you.
We will now take our next question from Nicholas Joseph from Citi. Please go ahead.
Thanks, Brian you talked about kind of the inflation in the supply chain challenges.
With development. So as you think about the third or later in the year, how much of construction cost move.
I'll be there on a year over year basis or from earlier in the cycle.
As you think of pricing those deals.
Yes.
Yes.
Nick This is Brad so yes.
Build into all of our projections, depending on when we expect.
Those projects to start some level of cost escalation.
And I would say that varies based on the market and I would say also that the.
Cost increase that we've seen varies based on market and I'll tell you.
Some markets right now are seeing cost increases that are pretty substantial but I'll also point out that the way that we approach our developments in the way we underwrite our development.
Pretty conservative.
As I mentioned, we do keep in our underwritings if.
If we're going to start a project later this year, we've got cost escalation built in our construction costs, but we're also not trending rents.
Until we get to that point and based on what we're seeing in our markets across the board.
There are significant level of rent increases occurring.
<unk>.
Now or when we put a project under contract and when we ultimately move to construction.
That we're not recognizing until we get to the point, where we start construction. So we're we're conservative in how we underwrite these and we do expect construction cost to continue to rise. When we started this year, we kind of expected a construction cost increase of call it 8% across the board.
I'd say that Thats, probably increase to 10 or 12% this year.
Thanks, that's helpful and Thats kind of my second question right. So if you think about obviously rents have moved up.
Meaningfully as well so when you blend that together how to kind of be underwritten on credit yields.
Look today for some of those projects versus when you initially contemplated.
Yes.
The projects that we have today that are under construction actively I think we're averaging about a $5 seven yield right now on our underwriting written rents on those that are under construction. We have construction costs that are locked in on projects that we are modeling going forward we continue.
To expect those yields to be in the call. It five in a quarter five and a half range.
So there is some some movement there, but when you compare that to still what we're seeing on the acquisition side.
The yields youre three to three and a half the spreads continue to be in that 150 to 200 basis points range and so we still continue to believe that.
Taking into account the risks associated with development and the cost and all those things that that 150 to 200 basis point spread is still a good place for us to be putting our capital.
Thank you.
Yes.
We will now take our next question from Luca from Scotiabank. Please go ahead hi.
Thanks, just going back to the guidance on the year, particularly on the 12% effective rent growth I mean, I know you talked a little bit about this but I'm honestly still a little bit confused I mean, if you did $12.
12% in the first quarter.
I really struggle to see how blended pricing would be below 10% mid single digits. As you said in the back half of the year and how you could still get to that 12% number for the year.
Any additional clarity on that would be helpful. Because it really feels like the blended pricing that's embedded in guidance on new and renewal leases is assumed to be pretty strong over the next couple of quarters.
And Nick this is al I'll get back in.
Try to address that and maybe Tim or Tom can look at it more but I think it comes down basically to the fact that it takes our average leases a year and so if you look at the trends in our pricing over the last several quarters go back to two to 'twenty. One has started the year blended pricing of $2 seven to eight eight to 15, 16% in the third and fourth quarter and then we put another 16 eight up in the first quarter.
This year. So I think what we are though we expect our blended pricing to be impacted by by the trends this year, but prior year comps and the seasonal trends, we talked about that strength that we've put in for the last several quarters going to play out for another few quarters and so.
If you think about our leases average year that map of play out. So I think there is what we would expect as.
You'll know that revenue given the leasing that we've done unless of course, we will continue to accelerate.
Continuing to generate in the next quarter to be pretty strong over the remainder of the year given those mid single digit new pricing and blended pricing.
Performance that we expect to put in the back half year. So that's how it works out basically you've got to take into context year lease and how that's building up and then winding down over time.
Thanks Al I guess, when you are saying, though that that blended pricing.
Getting down mid single digits is that a fourth quarter issue or is there any of that in the third quarter as well.
Now we will have to see.
See what happens Nick obviously, what we've projected is a strong second quarter, continuing because we started off and say we start off Tom talked about that's coming in in the third quarter, a good bit just because thats, where the really if you go back to last year, that's when pricing really accelerated cost and so as the prior year comp that's the quarter you feel it and in the fourth quarter has a low prior year comp plus that seasonal.
So it's a little bit lower so it's both of those the average together.
There's going to be in that mid single digit range for the second half and the other the other variable in all of this to keep in mind Nick is that.
We're talking about blended assumptions here, but of course, what you see actually play out can vary a bit different between renewal pricing versus new lease pricing and <unk>.
New lease pricing tends to be much more reflective.
So planned on supply demand dynamics going on in the market but.
Tim was alluding to earlier, we've got some some mark to market or.
Capture to still continue to recover with our renewal pricing and then if turnover stays low and we continue to execute at a higher level of renewal versus new lease pricing.
Change the outcome a bit so what al has laid out is sort of our best guess as to how things will play out over.
Over the back half of the year when you do consider the prior year comparisons are a little bit more challenging and we are assuming a return to more seasonal patterns next year.
Later, this year, which did not occur next year, but but that mix between renewal and new lease pricing performance can change a little bit and that can create some.
Some variation in terms of the Ultimate result, we get.
Okay I appreciate Eric now.
Okay.
We will now take our next question from John Kim from BMO capital markets. Please.
Please go ahead.
Good morning, a follow up on that line of questioning so youre able to push rent, 16% to 17% this quarter.
If a comp period, where a year ago was 8%.
Third quarter of last year, you had 15% so.
On your renewals will be about 10% in the third quarter.
Market rates don't move.
Yes.
That sounds low to me for renewal.
I think renewals is kind of once withheld is where some of the opportunity is right now I mean, we're still we're still in a situation where our new lease pricing is call it 2% or so the absolute pricing is 2% or so higher than absolute pricing were getting on renewals. So that's that's.
Kind of where we are.
Call. It return to seasonality returned to normalcy as those renewals catching up and then likely surpassing the new leases. So I do think the renewals will continue to be strong for quite a while.
So Tim at least 10%.
I would say so.
Okay.
What's the likelihood you get an a minus credit rating. This year. It seems like your net debt to EBITDA will continue to improve.
On an LTM basis, and can you remind us what the <unk>.
With the.
On incremental cost of debt, if you get that rating.
Hey, John It's a great question I think.
Of course, the markets are a bit volatile right now both rates as well as spreads are gone up now because of some of the concerns about all the factors, but I think we certainly feel good about that deposit I would think thats I don't think we need to do anything else in terms of our balance sheet to make that happen I think what we've said is our long term debt to EBITDA range is probably four five to five we're below that now.
Al.
I would say we have capacity for growth for some of the things that Brian is talking about.
And so I think that we don't really need to do anything to let some time play out I think there maybe.
That would be there a little bit.
Hines on catching up on the strength of the business, but we feel very good about where they are today. So we'll see what happens over the next few quarters.
Hopefully something happens there we've already if you think about it you should get about a 25 to 30 basis points impact on your borrowing cost.
On average a 10 year financing.
<unk> gone from a b to an a rating on our deals that we've done our last couple of years quite frankly, we've captured about half of that John I think we've priced through triple B plus rating and kind of moved into almost touched a minus at times and so got close so we've captured about half of that I think we probably pick up about 15 basis points from here and a normal stable market and good thing is great.
Great work Andrea and the team has done we really don't have much financing to do it this year, but only a 125 million coming due so so we will be in the market very much both planned to be in the market as we've talked about but if.
If we are in.
And the writing columns, we expect another 15 basis points increase would have been able to do.
I appreciate it thank you.
We will now take our next question is from Alexander Goldfarb from Piper Sandler. Please go ahead.
Okay.
Good morning down there.
Two questions.
First on the on the asset pricing and the bidder pool I think earlier.
You said that.
Pricing through the top end it now pricing at the top end and there may be a fewer bidders coming for the buy deal does that mean that multifamily is losing its lustre or is there just a lot more supply out there or is the capital that was going to multifamily now going into other sectors.
Outside of let's say the classic industrial and multifamily that was all the rage capacity or.
This is Brad.
I certainly don't think folks are going away from multifamily and in fact, just given the strength of the fundamentals in the <unk>.
Broader trends in migration and job growth and things like that in our in our region of the country.
We're seeing as much capital today as we've ever seen in this space and then in our region of the country. So no it's not that at all.
What I think that is a couple of things one is the.
The highly levered buyers are.
We are sitting on the sidelines at the moment just trying to figure out.
What levers theyre going to pull to try to get back into the market.
Interest rates have moved so quickly for those folks that they're entering these deals at a negative leverage position the rent growth that's in place in our region of the country helps them overcome that.
So thats really what it is at the moment, it's not a reallocation of our capital it's not capital moving to other sectors or anything of that nature. At this point it is simply <unk>.
Folks on the sidelines at the time being.
As the first point the second point is that there has been a flood of projects deals come to market in March and April folks were trying to get ahead of some of the interest rate movements. So there has been a flood of deals that have come to market frankly, and so I think that part is dispersed the buyer pool a bit.
Mongst. These deals so thats the second component that I would say is limiting the buyer pool on individual deals but in times in terms of the entire market No I don't think capital has moved away from from this sector at all.
Okay and then the second question is on gas prices.
Are you seeing any impact on your resident there are some people who say.
Sunbelt has heavy dry and because of lower relatively customers. The coastal market gas prices are a bigger deal. The offset is most of your resident they've got their single lender, probably more concerned about their beer budget and their gas budget. So just curious.
Prices.
The impact on your renter on your renters or if it's really just I don't want to not issue, but sort of a non issue.
I'd say its a non issue is one of many factors going on and I think when.
Do you stack up sort of the different regions of the company or even a different of the country or even sub markets, we're seeing steady performance and pricing whether it's.
And our loop downtown walkable asset or a suburban asset with a drive so just just not not seeing much on that on the rental side of things and Alex.
<unk> seen wage growth take place that in pretty robust pace as well so a combination of.
What's happening on the on the employment side and wages I think is muted any negative impact on the rise in gas prices so far.
Okay. Thank you.
We will now take our next question from Hendel St. Jessie from Mizuho. Please go ahead.
Okay.
Good morning, Thank you.
A couple of follow ups here I guess I heard you earlier mentioned that some markets are seeing very substantial development cost increases I guess im curious which markets are those.
The cost increase in standing up more so.
Why why more than other markets.
Yes, I mean to that I can think of our Denver and Phoenix and really those are more because they are kind of islands on their own frankly in terms of the sub trade base and the GC base.
You consider Texas, where you've got.
Austin, Houston and Dallas.
San Antonio all of those markets contractors really go to all of those markets, but that's not the case when you get into a market like Denver and Phoenix, There more islands unto themselves. So your base of your.
Pool is a little bit more limited so you have a.
Different impact in those markets.
Got it got it okay.
On the development pipeline overall, you mentioned getting to about $1 billion by year end that you're still within your I think your comfort threshold I guess I'm curious how much larger could you be willing to grow that pipeline to especially as it was back then.
The rising rates.
And the supply.
Bob protective chemical.
Yes.
Alright.
We talked about in the past that we talked about 45% of our balance sheet kind of being the tolerance limit we're well below that now so we can go.
<unk> being forward be no problem for us given the start certainly where we're thinking about the marketplace and how things shape up on our balance sheet as our leverage is very low as we've talked about now.
Are we look at it we're below our sort of our leverage thresholds right now with plenty of capacity.
And so we have plenty of runway to continue funding.
And our market is changing so that's how we think about it.
Okay Fair enough and then one more if you wouldn't mind sharing some updated color on DC and Houston to get softer market I guess, I'm curious, how those marketing bearing growth expectations coming into the year and is there any incremental optimism maybe plus a little as you kind of think about those markets.
Yeah.
No.
D C is now.
10 five.
Blended rent for April .
Houston is.
Non six so if we were three years ago I would be telling you how well they were doing.
<unk> are improving they have improved over time, they probably moved from them and for US. It's just that that still puts them at the lower end of our portfolio's growth rate. So.
Improving modestly I would say.
Thanks Richard.
Scott.
Yes.
We will now take our next question from Anthony Powell from Barclays. Please go ahead.
Hi, good morning, So your rental growth in lease spreads have been higher in our single family for the past few quarters, which is good but in a lot of cases now some of your monthly rents.
Our our conversion with single family so.
See that as a risk as single family inventory increases and could that be maybe a potential headwind.
Maybe larger I guess homes available at.
Alright, Thats, what youre offering.
No I mean, there's just no no threat at all in fact roundhouse is I mean.
Down 117 move outs and is now just three 2% of our.
Reason for move out so it's a total non factor.
Home buying as you would expect is down.
Close to 23% now just 18% of our move out so.
Yes.
Yes.
The affordability of those areas seems to be driving people to stay.
And Thats, a big part of our production on turnover.
Add one point to that that even.
With the rate increases we've been seeing our new lease rates are up about 30% over the last few years, but single family home prices in our markets almost 40% over that same period, so relative affordability.
Affordability is actually got lower single family than it was a couple of years ago.
I'm, sorry, I was referring to single family rents I guess I was looking at one of their large large rental peers and looking at a market like Atlanta, Tampa and things like the actual monthly rents.
Tomorrow.
And to be clear move outs to rent increase is now down to three 2% of our move outs is it a 100 basis points lower so not a factor there.
Anthony It is also important.
Recognize this is Tom is alluding to.
Sure.
Competition that we may have from people choosing to rent a home versus renting an apartment I mean, it's just it's a non factor for us and I think it really is a non factor because people are making a choice for renting housing based on our lifestyle need and given the demographic that we're serving and the demographic the dip.
<unk> our resident profile. These are not people that are choosing our want our desire the single family lifestyle. They want the apartment lifestyle. So we just we just do not and never have really seen it as being a problem comparison.
Got it that's clear and just one more I guess one of the multifamily Peter's yesterday said that they were seeing.
Older tenure tenants in certain markets like Tampa move out as pricing increases are you seeing the same thing and does that kind of factor into how you price and that renewals in any given market.
And doesn't affect how we price on renewals and our average length of stay has stayed consistent at about 20 months. So we're not seeing a real material change.
On that point and we're so.
Consistent with our renewal increases.
The renewal people that have renewed theyre not generally about behind its more of the new move ins that are getting that higher increase.
Got it thank you.
We will now take our next question from Rob Stevenson from Janney. Please go ahead.
Hey, good morning, guys.
Average same store rents $14 69, a month, where monthly fees per unit today and what type of growth rates are you passing through with fees I assume it's not anywhere near the rental rate growth levels of mid teens.
No no it is not.
It is those run from 101 hundred $50, a month and they run or in the 3% to 4% range.
Okay are you seeing lower application fees, given the lower turnover.
Sorry say that again are.
Are you seeing any decrease in application fees, given the higher occupancy in the lower turnover there just less units available in your portfolio and so therefore, youre getting lower application fees that are pushing down fees, a little bit in aggregate across the portfolio.
No.
Not materially and fees are actually.
Up a little bit as we've gotten back to more normalized operating conditions on things like audit fees and term fees.
Okay and then some of your peers have been talking about for it in into 2023, so rental rates continue at current levels at the current trajectory through the prime leasing season, how much is baked in same store growth is are going to be locked in for 2023, as we exit 2022, I think the peers a bit.
About 3% to 4% and their portfolios for 2023, even if rents didn't increase from here. How are you guys thinking about that sort of where these leases are going to set you up for 2023 as a base.
Rob This is Tim ill answer that it certainly in terms of the guidance that we have for the rest of the year. The way we kind of look at it is that the blended lease over lease that we expect to get some full year roughly half of that should should pretty much carry into the next year. So I think I guess, a little more than that I would call it somewhere around 5% now.
Based on our guidance.
Pricing holds up better than we think and certainly that will impact that number as well.
The day that goes by helps us in 'twenty, two but also sets us up for 'twenty three as well.
Okay, and then one quick one how much of your redevelopment is being done by internal MAA staff. These days versus contracted third party.
On the interior innovated as primarily a contractor base that's coming in.
And doing the countertops in cabinetry.
Flooring and those items, we do a little bit of the pain in house, but it's primarily a contract process and always has been.
Is that an impediment at this point of getting that labor are you guys still getting as much done as you want to at this point is not an impediment at all much like Brad has outlined in his comments by construction, we've seen some rate increase there.
The price opportunity.
We are seeing from the markets is better and then of course, new supply has come into our markets and that's given us additional opportunity to grow it to a higher price point so.
I would say there is some expense there, but its not affecting the economics are so honest now okay. Thanks, guys you bet.
Thanks, Rob.
Yes.
And we do have a follow up question from Hendon Justy from Mizuho. Please go ahead.
Hey, there one more development question.
One of your apartment peers.
Entered the desktop our development business.
Quarter doing attached product I think in Houston, I guess I am curious one if you have any any.
Any plans to do anything in the pipeline that perhaps contemplates and thats the part of development and whats your thoughts overall on maybe adding that to your.
That type of product to your pipeline.
And also Eric.
Short answer is no.
It's not something that we plan to <unk>.
<unk>, we have spent a fair amount of time looking at it.
Have studied it.
Good bid over the last couple of years and have ultimately concluded that frankly, we can capture margin expansion and from the portfolio.
Earnings upside, we think from the existing from our operation just through continued to focus on the multifamily product that we have.
And certainly the.
The.
Some of the things that we're doing.
With new technology, and so forth, which is a lot of it obviously is being used in the single family space as well, but when you apply it to.
Our.
More condensed if you will apartment communities, where you've got 250 units often.
Shared shared structure and much more efficient from a from a capex perspective, we just ultimately believe and have concluded after studying a lot that we're better off to just stick to our knitting and stay focused on the on the apartment product.
And certainly as we continue to look at ramping up our external growth, we've got plenty of investment opportunity and plenty of growth opportunity, we think by focusing again on what we really know which is multifamily so.
Answer is now we.
We're continuing to focus.
As we are.
Thanks, Eric.
We will now take our next question from Kenny Luca from Goldman Sachs. Please go ahead.
Thank you for taking my question.
What are you hearing D C on the FERC.
Lynn.
Control.
<unk>.
Increasing dialogue here, we've seen great market John .
And as you know.
The election.
Let me go down later this year.
How are you thinking about managing this dynamic do you see heightened risk going into 2023 2022 with basically.
Let's say done at this point.
Some might be.
Biting.
Hey, Jacob.
It's Rob I'll start and maybe turn it over to Tim it out but.
So across our markets 13 of our states that represent about 90% of our NOI.
Actually have in place state laws that prohibit rent control at a local level. So so with that starting as a backdrop to it.
Sure.
It's very difficult to get rent control imposed across our portfolio. So we have.
Group.
<unk> is active in monitoring these along with the various apartment associations and trade industries that were part of <unk>.
Not really anticipate any significant impact from rent control across any of our markets I'll add to what Rob is saying is what Tim alluded to earlier with rent to income in our portfolio now running around 23% is still a very affordable level of rent relative to income that we are at.
Right now and most economists will tell you once you get to 30% or better or higher that you start to run into a problem. So a combination of just the environment, we find ourselves and the issues and the fact that.
A lot of our states, we operate really prohibited we just in the affordable nature of our product and relative to income. We just we're just not seeing any real.
Evidence that were at risk of any sort of meaningful efforts towards towards rent control or regulations to try to.
Keep that in check.
And a quick follow up earlier.
One of the questions you talked about week to week.
This way you are.
From capturing that loss to lease standpoint, you expect basically that going into 2023 indicators precedent pricing for now.
Big picture.
About.
When you guys.
Wendy.
The market gets back to that three and a half.
Thanks Ben.
Yes.
I don't know I think that.
It's going to vary.
A bit by region of the country and by market from where we sit here today and I think about the fundamentals that are driving demand for housing in the sunbelt.
Largely as a function of the job growth that we're seeing and.
<unk> increasing.
Embracing by employers of some.
Some level of remote working and I think that's going to be with us for many years to come.
<unk>.
I see the demand side of the equation for our business as continuing to be quite strong in our markets for some time and then overlay on that the pressures that brad's been alluding to surrounding construction costs and development and the ability to secure.
Sure.
Development sites, which is very very difficult I think that.
Effectively in many ways, we are at kind of full capacity at the moment in terms of the ability for <unk>.
Developers and construction companies to deliver supply so I think I mean, our biggest challenge.
Challenge frankly is just the.
Prior year comparisons.
It's where we've been.
And of course that will.
We have that this year and then going into next year, it'll be more steady, but I think that as I think about.
A return to normal from a rent growth perspective, as you're framing it up.
Hard to see that happening.
Over the next two or three years I think we're in a very.
A unique window right now where.
I think the only thing that could change that the only thing that could really weak and that is if we do in fact see the country's slip into some form of a recession.
And job growth begins to significantly slow and we go into a real downturn in the economy, which of course will affect everyone. But historically of course MAA has shown the ability to weather those downturn better than most and again I think a lot of that comes back to the markets and the way.
We are uniquely diversified across the sunbelt and more affordable nature of our product so I think that that.
I think.
The answer is.
Fundamentally that I think the conditions are likely to remain pretty bullish for quite some time.
And the only thing that can really materially weaken that would be.
A significant downturn in the economy, a recession, if you will.
And even in that scenario on a relative or comparative basis.
Like our story and that kind of scenario.
Great. Thank you so much.
Yeah.
We will now take our next question from Rich Anderson from F. N. B C. Please go ahead.
Good morning.
So speaking of recession, so the GDP.
For the first quarter surprising down one 4%.
How do you you speak about sort of the protection that MAA is offered in the past about.
Tougher economic climates, but is there reason to be thinking.
Out a couple of years or year about.
All the good things are happening today and being careful not to have.
Sort of a hangover when this is all said and done because.
I would argue that this is not a forever thing.
<unk>.
Karma is that you know what so how do you how do you how do you manage this in light of the broader economic environment and the changes that are going on thanks.
Well rich it's a good question and frankly, it's something we've been spending a fair amount of time thinking about costs I do agree with you that I mean, one thing. We know is the economy is cyclical and our business is cyclical and and I think that while it's hard for me to sit here today and see any reason to get particularly.
Definitive about a downturn there is a lot of uncertainty out there and theres changes afoot, but as we think about how do we position the company and prepare for an eventual downturn. There really has always been for things that we have really focused our energy and efforts on one is just the portfolio strategy itself in <unk>.
During that we are focused in markets that we think can weather downturns better than other regions. Other markets in the country. We think that the price point that we have in the portfolio relative to others as an advantage.
To us should we find ourselves in that kind of situation and then as you know.
Or a bit uniquely diversified also across the sunbelt and that we have exposure to a number of secondary markets as well as the larger markets as well and that balance and that diversification across the region unique to our story I think really is one of the things that we're going to continue to hold on to and to protect as we think about cycling cap.
It'll in growing the company the other thing that we.
We focus on of course is the balance sheet and the capacity we have in the balance sheet and even though it's a long time rich I mean, our balance sheet has never been this strong we've never had this much capacity. So we think we've got that position about as well as we can.
Other thing is.
We continue to monitor very carefully about how much forward funding obligation, we are creating for ourselves through new development and as al alluded to we feel like that no more than 4% to 5% is kind of where we want to be right now, we're well below that and continued and certainly intend to stay there. So we while we've scaled up a fair amount.
We are still in a.
Very comfortable position such that if the capital markets.
Clothes for some reason we feel very confident we can continue to complete all the obligations that we've created and then the final thing I would point to if you were to tell me a year from now that we for sure we're going to recession, what would you be doing from an operational perspective I would say we are doing exactly that this is the time to be pushing for ramp when you get it.
To a recession the thing that will cause revenues to hold up better than they otherwise would is that you've got baked in performance in your revenues through the rent growth that you've been capturing over the prior year or so so we think that this is that for a host of reasons is a good time to continue to be prioritizing rent growth over occupancy.
And if you want to think about a recession for sure. That's what we should be doing which is obviously, what we are doing now okay.
Okay and then the second question for me is about.
About an hour ago, you talked about <unk>.
<unk> thousand 14% of your leasing came from someplace self into the sunbelt, but youre urban peers are also.
Claiming in migration to these days so everyones got in migration, It's a party.
Ration party and.
My question to you is the 14% of leasing only tells half the story because.
What about the people that did not renew and are leaving your portfolio where are they going and so I wonder if you know.
Perhaps the net is a positive inbound to the sunbelt I am not going to argue that but I wonder. If there is the back door is opening up a little bit as people, perhaps are looking to the urban world and saying, maybe I can get myself a deal someplace else or go to a big pay paying job or whatever the case may be.
Is that something you monitor the back door and where people are going not.
Where people are coming from.
Yes, rich we do.
Move outs, who moved outside the Sunbelt area, where just four 3%.
Last day area and Thats down from 45 last year and.
It's not big enough that I've spent much time trying to figure out where they're going so that is pretty big in our favor.
Impressive number I appreciate that thanks very much.
Thank you.
We will now take our next question is from Tayo Okusanya from Credit Suisse. Please go ahead.
Yes.
Good morning, everyone.
My question is more around.
<unk> and.
Knowledge.
If you could talk a little bit more around what.
We are doing in that area and ultimately what kind of margin.
So we would expect.
From the initiatives that make us comfortable with that.
Pardon.
Product project.
Yes sure.
Ill take the first part and kick it over to Tim to cover the margin expansion, but we have.
Currently what is either occurred or is in process as we.
Expanded our call center solution, we've implemented lead nurturing software, which is automated prospect engagement technology that interacts with our prospects earlier.
Allows us to automate follow ups, we've upgraded virtual touring we've added prospect centric CRM, we've added mobile maintenance and mobile inspections.
These changes just so far but allowed us to restructure 30 physicians in the office staff in 2020 , one that's benefiting us in 'twenty. Two we're also getting better clarity on building higher resident satisfaction as a result of the <unk>.
<unk> process and then under underway right now has improved self touring improved multilocation sales support simplified online leasing and we expect another 30 to 50 head count reduction in 'twenty two it will benefit 'twenty three and then Tim can talk about a little bit about the margin.
Expansion.
So on the panel on the margin at least for 2022, we're expecting our total margin to go up somewhere between 150, and 175 basis points, obviously, a lot of different factors playing into that but a lot of the components. Tom mentioned are included there.
Smart homes, one for sure the installations, we're doing there that we can see on the top line Thats probably contributing.
40 basis points or so this year.
Margin and then some of the efficiencies on the headcount side the call center and automated chatter are contributing a piece of that as well I think some of the foundational things we're doing now with the <unk>.
<unk> is currently getting rolled out and some of the other things that Tom mentioned and we'll have more of an impact as we get into 'twenty three and we will we'll define that more definitively as we move out through the next few months.
Thank you.
Thank you.
Sure.
We have no further questions I will now return the call.
<unk> for closing remarks.
Okay, well, we appreciate everyone hanging with us today and if you have any follow up questions. Obviously, just feel free to reach out to us at any point. So thanks for joining us this morning.
This concludes today's program. Thank you for your participation you may disconnect at anytime and have a wonderful day.
Okay.
Okay.