Q2 2022 Mid-America Apartment Communities Inc Earnings Call
Please standby your program is about to begin if he need audio assistance during todays program.
Yeah.
[music] Brad.
Good morning, ladies and gentlemen, and welcome to the MAA second quarter 2022 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 <unk>.
Recorded today July 28, 2022, I will now turn the call over to Andrew Schaffer, Senior Vice President Treasurer, and director of capital markets of MAA for opening comments.
Thanks, and good morning, everyone.
<unk> Treasurer and director of capital markets for any members of the management team also participating on the call with me. This morning are Eric Bolton embargo Al Campbell, Rob Delpriore, Joe fracture, Tom Grimes and Brad.
Before we begin with our prepared comments. This morning, I want to point out that as part of this discussion company management will be making forward looking statements actual results may differ materially from our projections. We encourage you to refer to their 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.
During this call. We will also discuss certain non-GAAP financial measures the presentation I'm going to 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.
Our earnings release and supplement are currently available on the for investors page of our website at Www Dot Jim AC Dot com.
Our prepared comments and an audio recording of this call will also be available on our website. Later today. After some brief prepared comments management will be available to answer your questions I will now turn the call over to Eric.
Thanks, Andrew and good morning leasing conditions remain strong across our sunbelt portfolio job growth positive migration trends, there's a higher cost of single family Homeownership continues to fuel strong demand.
Halfway through the busy leasing season, we do not see any indication that demand is slowing.
Leasing traffic or leads were up 11% in the second quarter as compared to prior year generating a 7% jump in lease applications.
New move ins during the quarter from households, migrating into our sunbelt footprint increased slightly from last year and drove 15% of our new move ins.
Further supporting the strength of the leasing market and the prospects for continued rent growth, it's worth noting that the rent to income ratio of the new leases executed in the second quarter was 22%. It remains at a very affordable range collections also remained strong with 99.5.
5% of the rent billed in the second quarter collected which is actually up slightly from 99, 4% collected in the preceding first quarter.
We'll touch on.
I'll touch on there so while we see no near term indications that leasing conditions are poised to change and we expect a strong occupancy and rent growth trends to continue we do anticipate that we will see some year over year moderation in rent growth over the back half of the year as the prior year performance comparisons become more difficult.
But current rent levels continue to hold up well and are increasingly feeling solid revenue momentum for the start of the next calendar year.
Pressure on operating expenses from the competitive labor market inflationary and supply chain pressures and real estate taxes continued in the second quarter. We expect these pressures will likely persist over the balance of the year with some relief beginning in 2023, as we begin to harvest increasing benefits from our new tech and margin expansion.
<unk> initiatives on balance given the strong top line performance, our NOI margin continues to expand and as noted in our earnings release, we once again increased our expectations for growth in same store net operating income for the year.
We are seeing increasing opportunity within the transaction market and are very pleased with our Tampa property acquisition completed earlier. This month. This new property acquisition is actually located directly adjacent to one of our existing properties, providing an opportunity to consolidate onsite operations to drive a very attractive investment return.
Our new development pipeline continues to expand as we continue to find attractive opportunities to drive value and yields well above our overall cost of capital our pipeline of existing construction projects remains on budget and a lease up projects are outperforming our pro form us.
We remain very encouraged by the current leasing conditions in the early momentum in key variables that will define calendar year 2020 Three's initial performance.
There are of course growing concern surrounding the broader economy and concerns surrounding a potential recession.
Should we find ourselves facing a weaker economic backdrop later this year or in 2023, we believe that MAA is very well positioned for such an environment.
First we believe that the well diversified and more affordable nature of our markets will continue to enable our sunbelt portfolio to better weather, an economic slowdown as compared to other regions maa's balance sheet and coverage ratios are very strong and better than at any point in our company's history.
We continue to introduce new technology and changes to our operating practices that will drive more efficiency and higher margins over the next couple of years.
EMEA has an established performance record of responding well to down cycles, and I'm confident that we will again demonstrate that resilient should we find ourselves in such an environment.
Meanwhile, our outlook remains positive and current leasing conditions are very strong.
All I have in my prepared comments and I'll now turn the call over to Brad.
Thank you, Eric and good morning, everyone.
Transaction activity in the second quarter slowed meaningfully from the first quarter of the year as the increase in interest rates.
Coupled with a higher degree of economic uncertainty have combined to send buyers with shorter investment time horizons as well as buyers using higher leverage to the sidelines.
Unlike previous quarters, we saw a number of properties fall out of contract in the second quarter for.
For the properties that did close generally they closed with stronger institutional quality investors at cap rates that were 40 basis points higher.
Then where deals traded in the first quarter.
Is there uncertainty in the market has risen our ability to move quickly and close all cash has led to a significant increase.
In inbound calls to our transaction team.
As Eric mentioned in July we successfully acquired a newly constructed property in the Tampa MSA.
This 196 unit property is adjacent to an existing MAA property and will be fully integrated into our existing property created creating operational efficiencies and margin expansion opportunities and we will fully harvest over the next few years.
Our under construction and in lease up pipeline remains at $740 million, while we had no construction starts in the second quarter, we did purchase a land parcel for our planned 2023 start of a 300 unit development in Orlando also subsequent to quarter end, we purchased a 500 unit development site in the Denver MSA that.
We also expect to start construction on in 2023.
These land purchases, bringing our total land owned land sites for development to eight sites with entitlements for approximately 2000 and 677 units. We previously expected to start construction on our sites in Raleigh, Tampa and Denver This year and we've pushed the start of our Denver project to 2023 pre development work on.
Our Raleigh, and Tampa projects are progressing and subject to receiving acceptable construction costs and the appropriate building permits we still expect to start construction on these projects this year.
We continue pre development work on several additional in house and pre purchase developments located in Atlanta, Charlotte, Denver, Orlando and Salt Lake City that we hope to start over the next 18 months.
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 approximately 250 units. This year and we expect to end the year with a pipeline of under construction projects over $700 million and a pipeline of projects both.
Under construction and in lease up between $925 million and $975 million.
Our construction management team continues to actively manage all our projects and has done a tremendous job well.
Working with our contractors to keep the inflationary pressures surrounding labor and material costs, and causing a meaningful increase to our overall job cost to avoid the cost escalation that are so prevalent in our market today, we are making commitments to purchase materials much earlier in the process and we've had to in the past.
Nevertheless, nevertheless delivery delays material shortages and securing building permits remain our biggest challenges in our supplemental we did push back by one quarter or expected delivery dates on novel Val Vista in Phoenix and Central Park in Denver.
Operating performance at communities in their initial lease up continues to strengthen traffic and leads remain elevated leading to rents well ahead of our pro forma expectations at all of our lease up communities due to the strong leasing performance achieved by our property team at MAA West Glenn We moved up our expected stabilization date by one quarter to third quarter of 'twenty two.
As mentioned in our release, we successfully sold our two disposition properties in the Fort worth market for $167 million. We have two more planned disposition properties in the market that we hope to close late this year. One is in the in suburban Maryland, and one is in the Austin market.
All I have in the way of prepared comments and with that I'll turn it over to Tom. Thank.
Thank you Brad and good morning, everyone same store performance for the quarter was once again robust in our busy summer season is going well, we saw strong pricing performance across the portfolio during the second quarter blended lease over lease pricing achieved during the quarter was up 17, 2% as a result, all in place rents are in.
Fact of rent growth increased by 14, 3% on a year over year basis, and 4% 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 average daily occupancy for the quarter was a strong 95.7.
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 like thermostats security swells leak detection during the quarter, we completed 1800.
44 interior unit upgrades and installed 9438 smart home packages in.
In 2022, we plan to complete over 6000 interior unit upgrades and approximately 23000 of smart home packages by the end of the year. We expect our total number of smart units to approach 70000.
For our repositioning program, we're in the final stages of repricing leases at the first eight properties in the program.
That are now complete and the results have exceeded our expectations. We have another eight projects that are underway this year.
Strong leasing activity continues for July .
Same store and lease over lease pricing on new move ins as of July 25th is 17.9% ahead of the rent of the prior lease renewal lease pricing in July is running 15, 4% of the prior lease and as a result blended lease pricing for the portfolio is approximately 16.6, thus far in July .
Same store physical occupancy as of July 25th was $95 nine exposure, which is all vacant units plus notices through a 60 day period is just seven 4% those numbers are in line with our expectations. Our teams have performed well during our busy summer season and have the port.
Folio well positioned for the slower fall and winter seasons, I'm grateful for their time and commitment to serving all our stakeholders I will now turn the call over to al.
Thank you Tom and good morning, everyone reported core <unk> per share of $2.02 was five cents above midpoint of our guidance for the quarter outperformance.
The outperformance virtually all came from property revenues stronger than projected rental pricing trends continued through the quarter, which produced a strong 17, 2% increasing leno blended lease pricing for the quarter, even as more challenging prior year comparisons began to grow late in the quarter.
Continue to expect a growing impact on prior year comps as we move through the back half of the year as well as a return of a more normal seasonal pattern during the fourth core, which we'll discuss just a bit more guidance in a moment.
Same store operating expenses for the quarter was slightly higher than projected as we saw some inflationary pressures and repair maintenance costs as well as revised expectations for real estate tax expenses for the year is more valuation information came in during the quarter.
Our revised guidance for the year reflects these expense pressures, but these were more than offset by growing revenues as reflected by our revised <unk> guidance.
Balance sheet is stronger than ever as reflected by the upgrades on a modest credit rating by Fitch during the quarter. We continued to have discussions with the other agencies and are confident the strength will eventually be reflected in our other ratings as well.
Just after the end of the quarter, we completed a renewal of our unsecured credit facility, which is our primary tool for liquidity and short term funding of development that maturities and short term operating needs as part of the renewal we increased the facility size to one a quarter billion from 1 billion in cash improvements in pricing and terms despite the growing volatility in the financing markets.
At the end of the quarter, we had no outstanding borrowings under our credit facility and our leverage was historically low with debt to EBITDA at a low 3.97 times and 100% of our debt had fixed interest rates with an average maturity of 8.2 years, providing protection in a rising interest rate environment.
And finally, given the second quarter performance and expectations for the remainder of the year, we are increasing both our core <unk> and same store guidance for the full year, we increased our full year range for quarter fell by 17 cents per share or two 2% at the midpoint to a range of 813 to 837 per share hit 25 at the midpoint.
Represents a 17, 5% growth over the prior year.
This increase is essentially all a result of higher revenue growth strong pricing turns continue for the second quarter as we mentioned on Apple checking 125 basis points increase in our effective rent growth expectation for the year to 13 of core percent at the midpoint our.
Our revenue projection for the year continues to be built on strong pricing performance and stable occupancy for the year some growing impact from prior year comps for the second half of normal seasonal trends during the fourth quarter as we mentioned.
We expect blended lease pricing to be approximately 8% for the second half of the year, which for context is on top of the record high 15% growth in blended pricing captured in the back half of last year.
This reflects our expectation of a continued strong demand in our markets.
As mentioned, we also increased the expected growth rate for same store operating expenses for the full year by 100 basis points at the midpoint of our range now six 5% to seven 5% for the full year.
Primarily reflecting pressure and repair maintenance costs as real estate as well as real estate taxes cotton.
Public valuations received during the quarter, mainly in Texas reflected aggressive assessments and we do expect these valuation increase to be partially offset by millage rate rollbacks online late in the year, but.
But we increased our expectation for taxes by 100 basis points for the full year to reflect the net impact.
The overall impact of these changes is an increased our expectations for same store NOI growth for the year to a midpoint, 15% up from the 13, 5% provided.
First quarter.
And this represents a 170 70 basis point expansion in our margin in 2022 from the prior year.
Other changes to guidance from network $50 million reduction in our expected development spending for the year, reflecting revised timing of funding cost went up to $25 million reduction in our gross disposition proceeds as we finalized the sale of two remaining properties in Maryland and Austin that's.
That's all that we have in the way of prepared comments. So Gretchen will now turn the call back over to you for any questions.
We will now open the call up for questions if you'd like to ask a question. Please press star.
Star and one on you touched on.
If you'd like to withdraw your question you May press the pound key.
Our first question comes from Nicholas Joseph from Citi.
Okay.
Obviously rents have been moving up I appreciate the affordability stat that you provided for the new move ins for.
The existing portfolio obviously.
Requalify them op income, but are you seeing anything change in terms of move outs, because because rent is too high or any other kind of commentary on affordability of the existing portfolio. It would be helpful.
Yes.
I'll jump in there.
Yes.
Looking at a few different tracks, but collections improved to 95 from 94, which was encouraging.
Unit types, we're not seeing a flight to efficiencies in our efficiency ones twos and threes are profound mean consistently our head count units has moved from 1.7 heads to low.
Mid ones fixes on that.
So it really seems to be moving steadily I mean, we are pushing rates and we do see.
I'd pick up and move outs to rent increase but again, we're moving those folks back in at 22%.
Pretty steady as it goes.
Thanks, that's helpful. And then as you think about the pricing trends I guess year to date, but also your expectations for the back half of the year, what does that start to look at in terms of the earn in for next year in 2023.
Naples Tampa.
Hit that one so thinking about the earn out and the way, we typically think about that as our full year blended Liza released for this year.
All it somewhere around half of that we would expect to blend into 2023. So if you think about the forecast that we've laid out there in the 8% back half of the year blended lease over lease that comes out to about somewhere at 12, 12.5% blended lease over lease is what we're expecting for full year 2022, so call it somewhere about six person.
And as we sit here today.
Thanks for that how does that compare to kind of the history of earnings.
It's certainly the highest we've ever had I think you know going back to 2020. It was zero last year I think it was about 3% or so.
The highest we've seen.
Thank you.
Sure.
Our next question comes from John Kim from BMO capital markets.
Thank you Eric.
Eric transformed the portfolio.
Okay.
Goodbye.
Right.
Can we get an update on what percentage of your class.
Class eight.
Okay.
Okay.
Taking the question.
It's very importantly.
Jonathan John you're really fragmented and I think the first question was what's.
What's the balance between a and B assets. That's go ahead.
Yeah between A&D, it's roughly 50 50, I mean, there's there are some nuances between what we would call a plant a and b and B players I would call it about 50, 50%.
The second part, but what did you what do you think will perform better if we head into a recession.
Well.
John This is Eric I think that.
Broadly speaking across our markets in our footprint I mean, we see that our product is is pretty a four but that rent to income ratio that we see between the A's and b's is pretty consistent across the portfolio.
Collections performance is still consistent across the portfolio. So.
I think that trying to.
I think that the basal maybe get a little bit better than that as in a downturn just because it's a slightly more affordable product, but you know I am.
Honestly I don't think there's going to be a huge difference if we if we find ourselves.
In a in a downturn of some sort I think.
Thank you.
It becomes more a question about markets that you're in.
And employment base and plenty of diversification.
And certainly I do think that.
That are slightly more affordable product, probably holds up a little bit better but across our sunbelt markets. We think that broadly the whole regional just do a little bit better in a downturn as it has historically always in prior downturns.
Okay.
And my second question is on.
Fences.
Some inflationary pressure on expenses.
Higher than here and I realize some of that is.
But you made a similar type of investments in technology.
Okay.
Wondering if you can comment on the expense guidance going out this quarter.
John you are really broken there something about inflation and expense guidance. Thank you. Sir also real estate taxes were not having.
The increase okay got it yeah, I think a couple of things I'll start with Tom Please jump in here, but on the guidance on that John you were broken out, but I think youre asking that and it's two things primarily.
As with repair and maintenance up a bit and in real estate taxes, which is obviously almost 40% of our expenses. That's a real big driver of that in fact actually particularly we started the year with no information really got our best estimates of it and we saw valuations come in higher pretty aggressive as our company, particularly from Texas.
As we mentioned, we do expect rate rollbacks millage rate robots come in for a large part of that as it is.
Progressive but look at those late in the year. So it's hard to get a picture of that.
And we'll certainly continue to fight like we do every year and local performed they litigate over half of our Texas portfolio. So that's really attach pressure and Tommy might we get color on that.
That's a repair maintenance and taxes, both in the quarter and I would say in the guidance as well as once the back part of the year, probably tilting a little more toward taxes.
I appreciate it thank you.
Our next question comes from Brad Heffron from RBC capital markets.
Hey, good morning, everyone.
Was curious if you could talk about the plan for the 200 million in equity forwards that were sold last year I know they need to be settled by February of next year, but it doesn't really seem like there is an obvious need for the capital.
Especially with leverage below the target range and likely moving lower.
Yeah, I think that's a great question and we wish you get that right. We have the Ford outstanding too I think February of next year, we don't have immediate plans to draw on that but I think our expectations are between now and then to draw that to help fund the remaining development.
For this year and as we go into next year. So we certainly don't need to take our leverage lower but it is a part of our funding over the longer term that we think is important.
Okay and.
Are you guys comfortable running at you know sort of like mid to high three times leverage or is there a desire to maybe ramp up development or do some net acquisition activity.
That fuel to get that leverage number back into the force.
The leverage target and maybe maybe that brand and Eric will talk about other parts of that strategy, but.
Or a little below our range right now I mean, we've talked about for the last couple of course, we know where we always are working to add strength to the business in every areas on our balance sheet now we're very strong right now our leverage is historically low debt dividend. We touched a free 97 is below I think we would answer and I would say between four to five is probably for you.
We certainly wouldn't want get them above five now current rent credit rating, so well below any debate, we believe there's opportunity both its protection and opportunity. So as we move into this recession as opportunities come up for Brad and the team, we won't give them that flexibility to do that.
Yeah, Brian This is Brad Hill, I think certainly we've talked about over the last few quarters.
The vision and the plan to grow our development pipeline and we're certainly on pace to do that as I laid out in my comments.
What <unk> done with the balance sheet.
Really the Optionality that he has provided us with to be able to do that is.
Is there and I would say just on the acquisition side certainly.
We're keeping our eyes open in that area and.
Like past disruptions in the market, we've been able to really take advantage of those within.
Our footprint.
Have focused on the Sunbelt region of the country for the last 28 years. So we know that region of the country. We certainly have executed both on a transaction side and then operating side for the last 28 years there through all parts of the cycle. So what else do on the balance sheet puts us in a great position to be able to execute on.
Some opportunities which are likely to manifest themselves during this time.
Okay I appreciate the comment.
Our next question comes from Austin, <unk> from Keybanc capital.
Great. Thanks, So Eric I'm, just curious if you are concerned at all that.
If we can get sort of an economic slowdown if the migration trends that you've referenced now for a couple of years begin to soften further yeah, perhaps you've had a little bit of a pull forward in demand in recent years and when you kind of marry that with the fact that the under construction pipeline in many sunbelt markets as is off Joe So just curious.
<unk> kind of how you think about that.
Versus maybe the setup for the portfolio and ahead of any prior downturns.
Our Austin.
Our long term approach to this business and strategy has long been based on a notion of trying to position for the full cycle. Both the down part of the cycle and they are part of the cycle.
And we have long believed that the way to do that is to focus on markets, where we think that job growth population growth.
<unk> is likely to be the best over over over time over the full cycle, which has caused us to continue to retain our focus on a sun belt markets in an effort to take further cyclicality out of our pro form that's the other thing that we've intentionally done over the years is that we have.
Purposely been very diversified across the region.
As well as differentiated cap allocation between large markets as well as some of the select secondary markets or the other.
The region as well.
And in and as was touched on earlier, we tend to have a price point in our portfolio that appeals to the broadest segment of the rental market. We don't do the sort of the low end or the Super high end, we averaged kind of right in the middle. So we're appealing if you will to the largest setting and other than a market. So all that to say.
<unk>.
That our strategy. We think has continued to serve us very well for for a long time.
The migration trends that we've talked about over the last couple of years of course, they were evident there prior to Covid and move ins from outside the sunbelt into our foot career prior to Covid, we're running somewhere around 9% and now it's up to all of our move is 9% of our move ins were coming from people moving into the Sunbelt now is.
Up to 15% of our movements are coming from people, who are sunbelt, so long way of saying, while certainly there's been a trend of migration that has worked in our favor. It's not like it's been huge it's not 50% of our move ins or something of that nature. It's gone from 9% to 15%. So I think that you know.
That particular.
Variable of move ins.
Migration trends, if you will while helpful hasn't been as significant as sometimes what I think the press and others tend to make it out as when you when you read what's going on nationally.
Beyond that I will just tell you that I think in a in a recessionary environment. If we find ourselves in such a such a scenario I think that the diversification of the employment base the employers the affordability of the region.
We have in the Sunbelt I think all continues to work in our favor and we think that today, we very much retain our defensive characteristics that would be helpful to have should we find ourselves in a in a downturn.
That's a thoughtful answer thank you for the response and then just curious about sort of the acquisition opportunities. I mean, you were fairly upbeat when we spoke in heat rate you seem to still be fairly upbeat today and certainly have the balance sheet.
Fund if the opportunities emerge, but Kenny can you size up just what the pipeline looks like today or what you think you can.
Really capitalize on and then.
What the negotiations are like for cap rates in your markets versus maybe where it was six to 12 months ago.
Yeah Austin this is Brad.
In terms of cap rates as I mentioned in my comments, there's definitely been a movement.
And the last two to three months.
But that that movement is very.
Different based on the asset quality of the asset location and just to keep in mind.
Really the assets that we're looking at is just a segment of the assets that are out there I mean, we're looking at well located assets brand new assets.
High quality assets and so what we've seen there is about a 40 basis points change in the cap rates in.
What we've also seen though as we look at the assets that traded.
In the second quarter every asset that traded went to a high quality institutional capital.
So we're seeing buyer certainly flocked to.
High quality assets, and we're also seeing sellers flock to high quality quality buyers.
And that's where in the past when the markets have changed where we've been able to find our opportunities through our execution capabilities and through.
Just the our 28 year history and the market's there we're in so.
As we sit here today, we are getting.
More calls on acquisitions than we've ever received frankly to look at assets that either are felt.
Fell out of contract or they're just taking two a couple of folks that they know and close the asset. So we're getting a lot of look at assets.
And then I think just from a.
Underwriting perspective, you know the fundamentals within our region of the country just continue to perform extremely well, which leads us to believe that.
From a performance standpoint. These assets again that are very high quality will continue to perform and I do think that the assets that are coming to market that we're looking at are likely to trade.
You mentioned cap rates today versus a year ago, while cap rates today on what we're looking at are a $3 seven a year ago. They were three eight so we're still under kind of where we were a year ago. So the.
Although there's been some recent movement interest rates went up in the second quarter. They are back down a bit you can get a 10 year rate right now for 345% range.
So there appears to be on the assets that we are bidding against.
A floor at the moment on pricing for these high quality assets. There are bidders that are still stepping ended into the.
375 to four cap rate range. So there appears to be a bid.
Certainly for those type asset you get outside of that for.
Assets that arent as well located have a significant value add the price differential can be a little bit different but that's not what we're talking about I'm, sorry execution capabilities, our ability to put our platform value in place on these assets like we're doing with the Tampa asset I think will yield us.
Selectively an opportunity or two that we can execute on.
Thanks for the detail that's all for me.
Our next question comes from Rich Anderson from SM BC.
Thanks, Good morning, just a suggestion maybe do the questions Q&A alphabetically next time.
Yes.
The first question is the 22% rent to income.
What's the what's the range of that assuming that there is.
That assumed though kind of a one and a half.
Per per unit type of income.
What's the range of that 22.
Yeah Rich this is Tim.
Pretty narrow band I'm going through all of our all of our markets right now the highest is 24 the lowest as 19, so pretty narrow band and then suddenly that 22% range. Okay. And then lead into my second question I think it was Tom.
Dom that mentioned Youre, having move out for rent increases that you're replacing that with 18% new lease increases and that same 22%.
Income but.
Is the cadence of that of that even like a single occupant moving out and roommates moving in is that sort of the dynamic that's going on I'm, not I'm, not suggesting that theres a advance going on in doubling up but maybe at the margin.
That's what's happening because.
Who are by themselves are starting to feel stretched.
Rich, we're not we're not seeing the doubling up in that if I look at our head count per unit, it's dropped each quarter since Q1 of 'twenty really pre COVID-19. So we are we're not seeing any signs of doubling up recurring.
Okay. That's all I got thanks.
Thanks Roger.
Our next question comes from Rob Stevenson from Janney.
Yes.
Hi, Good morning, guys, Brad with the land parcels that you bought how many projects do you know control land for future development on it what's the ballpark expected cost to develop out those parcels.
So the in terms of the sites as I mentioned in my comments, we have aid that we currently own 26 2700 units that does not include.
Sites that we have under contract where we have not purchased for example, the Raleigh site that we look to close later this year.
That that would be an additional site our JV sites that we have under contract with partners would be additional sites as well so but in terms of what we own and control right. Now there are eight sites 'twenty six 'twenty 700 units the costs on those.
Three a bit.
What I have in front of me is about call. It $3 50 to $3 60 a unit.
All of those.
On those assets.
Okay. That's helpful. And then what caused you guys to push the Denver development start out.
Yes.
That is really a permitting issue and that's really what changed some of the funding requirements or needs from development that al mentioned.
Even the Tampa and the.
Our Raleigh project that we're working on really the approval process is taking a lot longer than what we anticipated on all of those projects. So they are generally all getting delayed what we're finding is these municipalities are.
Really kind of kicking the can down the road and reviewing things at this point and it's taking a lot longer than we expected, but that is a permitting delay on the Denver deal.
Okay, and then Alan Tom.
You look at the continued spend on the technology initiatives and some of the stuff from a operating standpoint, what's really left for you at this point, that's going to make any type of material impact on margins or operating expenses going forward.
Got you.
Already haven't started and how much more is there to come or are we at a point, where you've done what you can for now and everything from here is incremental.
When you look over the next couple of years in terms of operating.
<unk> spend.
Where's, what's the drivers and what's the potential impact there for you.
We've made a lot of progress on our revenue on a ton more to comment Kevin has got a great outlines and he'll walk you through on that.
<unk> had.
I had a couple key points I think that are important.
I would say we're in the very early innings in terms of capturing efficiencies on the expense side really going back.
By 2019 early 2020, our initial focus really was on the opportunities with smart ran in some of the revenue opportunities as you mentioned.
And what that could do for us on the revenue side, and then really as well the key infrastructure that that puts into place as a result, and integrates with site plan that can help make our service staff and maintenance operations, a little more efficient and then also offer some opportunities for more seamless self touring option. So.
I think important to note today.
<unk> been rolled out about three quarters of our units and for the full year 2022, there was about $16 million or so of NOI embedded in our and our and our NOI stream for 2022, and then by the end of 'twenty 'twenty three as we rollout more we think there's probably 120 basis points of margin enhancement from the rent increases.
Just strictly on this on the smart home and then as we fully roll it out I think it will get fully priced out I'll buy by about mid 2024, Youre talking 140 basis points of margin expansion just related to those fees.
$25 million to $30 million of sort of ongoing NOI stream related to that so.
Now the focus as we've done that in the places a little more on the expense side and so I think now with our with our new CRM tool and process alive across the portfolio. We're focused on some of the efficiencies. We think we can get it primarily through staffing and task efficiencies right now the new CRM gives us a lot greater.
Access and visibility into properties and prospects and we're focusing initially on some of the onsite office oversight roles do efficiencies from properties with within close proximity to I'll call. It pods or however, you want to label it.
We think that some of the near term benefits to come over the next year or so.
So when we think about audience was about 200 of our 200 of our properties call. It 70% of our portfolio that fit into two or more property pilot type scenario.
<unk> somewhere $5 million to $10 million about 40 basis points of margin expansion as we get towards the end of 2023, just on that piece and so then we start thinking about beyond the initial pilot scenarios. We're working on we're testing and we're working on and reworking processes related to self touring virtual tours.
<unk> AI technology, as well as centralizing and automating some on site activities. So we think that ultimately creates more efficiencies on the leasing side. Another day to day tasks with our portfolio size given the high degree of variability in our asset mid rise high rise garden style. Some variation frankly in the.
Consumer preferences across our markets in many cases, there isn't just a one size fit all solution, so trying to be thoughtful that mindful of that.
Long long way of answering your question.
180 basis points of margin expansion that I mentioned between the.
The smart brand and some of the initial hiring we think there's a lot more opportunity to come over the next couple of years Okay.
Okay, and then last one for me Tom why don't you hitting your most difficult month of year over year comps in terms of the blended lease growth.
We're heading into it now we're heading into it now.
How has the back half on half.
The split for us that I think is pretty telling all of it I'm sure that blended he's just got and Andy Kaufman, we certainly keep going back to last year, the third and fourth quarters right. We talked about were there when you're leasing that at the tip of spear was 15% in the third quarter and 16% blended pricing in the fourth quarter. So so those costs are what we're running into probably Joe.
August is Canada.
Peak of that.
That healed compared to some.
First question I think it I think is really into the third quarter will be it will be the peak and last year in the fourth quarter, we had a little fall off.
We expect.
So it was not.
Not quite as high if you will in the fourth quarter last year versus third quarter. So I think the third quarter will be our most challenging but as noted earlier I mean, the July rents, which is obviously the first month of the quarter are pretty good and but as al outlined in his comments, we expect blended pricing for the <unk>.
Half of the year on a total to be a percent.
That's on top of 15% that we got last year over the back half of the year end.
But to answer your question, specifically, Rob I think it's really this month next month.
Our our toughest monthly comps.
And then has anything changed since pre COVID-19 in terms of the amount of leases rolling in the fourth quarter or are you still at a fairly consistent level. So it's still a very fairly light roll in the fourth or have you allowed more leases to roll then since it's been better.
Of late.
<unk> been quite disciplined on that Rob.
And that can get you into trouble in the fourth quarter in a row lease explorations remain on target with a draw down in the fourth quarter.
Thanks.
Our next question comes from Anthony Powell from Barclays.
Hi, Good morning, I guess a question on some of your more tech and biotech focused markets like Austin and Raleigh have you seen any any decline in traffic in those markets or do you expect to see any weakness there given some of the job now since we've seen in those sectors.
We have not.
On those two sides, particularly.
A large part of it is because of the ongoing transition that's occurring so.
Just thinking Austin, you've got Tesla opening its giga factory, that's on an so hirings up in that area and in Raleigh.
Apple's transfer.
Building, a large campus, there and bringing on jobs and those are just the headlines.
I think the sundial still continues to benefit from.
The tech companies reallocating jobs across the country.
So we're in pretty good shape in those two markets right now.
Rate increases are fabulous there.
Yes.
I think that and you've talked a lot about how rent to income levels are consistent even as you raise rents. So there must be an comes from the line up.
Over the long run does that raise the risk of seeing them.
Move outs to homeownership.
More affluent renter base that may stick that out over the long run.
Yes.
The thing to keep in mind is there what's gone on with homeownership rates over time and that that has grown at a faster rate than our rents.
And at this point with the higher incomes coming in I'm not sure we've seen move outs to home buying at a lower point.
The percentage that they are right now.
I'll also add that what's been interesting to watch it play out as well over the last two or three years is how the demographic of our renter profile has continued to evolve.
Continues to become increasingly single continues to become increasingly female and frankly, it's a demographic that once the lifestyle that we're offering our communities as opposed to a single family lifestyle. So we do not we do not see any early.
<unk> is developing that should we find ourselves in a very affordable single family housing market that we're in any sort of material risk.
From what we normally are in terms of move outs associated with Homebuy.
Thank you.
Our next question comes from Alexander Goldfarb from Piper Sandler.
Hey, good morning, good morning down there.
I just.
Just wanted to go back to.
To the question on the standout recreate.
The 9% versus 15% move in from outside from about now, but if you think about I guess the question is when you think about your total Sun belt are you seeing that in your in the Sunbelt markets that you guys operate inbound migration is not as big of an impact overall for you are seeing in Europe .
Portfolio, you guys tend to pull a lot more sunbelt based rather than while the overall market that you operate in tend to benefit a lot from inbound migration I'm trying to differentiate whether.
MAA is experienced with inbound migration is representative of the market or more how you guys are positioned within your markets.
Yeah.
Good question.
Honestly I don't know the answer to that I mean, obviously, the the 9% to 15% metrics that you were talking about in sort of the move in traffic that we're seeing from outside the sunbelt into our markets as it's only based on what we are actually seeing at our properties.
And so it may be that.
When you look at other sort of broader market statistics that are published and reported on.
They may in fact be.
If you will some higher level of migration trend that has been occurring.
And then the 15% that were alluding to that we saw in the second quarter.
But I think that you know.
And obviously a lot of the migration.
What's happening.
Out of the coastal markets into the sunbelt.
I think theres been a lot reported on that a lot of these people that are moving are fairly affluent households.
And more likely than not I would tell you that I think that a lot of the households that are relocating given that affluent are probably going into single family homes and to some degree as we see single family home pricing in markets like Atlanta, Nashville going through the roof. It is it is people coming from the outside the sunbelt.
Homeowners outside the sunbelt coming into the sunbelt and wanting to be homeowners in the Sun belt. So there probably is some level of differentiation there, but the point that I was trying to make earlier, which has certain thank you you touched on is that.
The notion that we are.
At least within our portfolio that we have been some.
Somehow.
Way outside captured a significant outsized benefit two relocations from outside the Sunbelt I think I think that that that's been.
It's probably a bit overstated.
For us it's only it's still only 15% of our move ins and as compared to nine as I said earlier and so we're still seeing a significant amount of the leases that we are executing on.
And the vast majority are from people just moving around within the Sunbelt If you will.
Okay and then the second question is on the market disruption that you guys got purely on the corn and many of my peers are at about it.
The cap rates you said.
<unk> 40 bps buyer or sellers want more of the better sponsors.
Be clear is it really fallout from Levered buyers stepping away in fact that when you look year over year fabric really arent things here with that rocket come up off the market or are you suggesting that.
Beyond that like more deals are unwinding simply regardless of whether it's the levered buyer not simply because of the macro interest rate.
Pick your favorite.
Today, I'm, just trying to understand whether you're specifically talking to levered buyers pulling back and the fallout or if this is a broader fallout in the market.
Taxes.
Yeah. This is Brad.
One thing I would say is that there's not a there's not a ton of transaction data at this point. So I think frankly, there's not a lot on the market right now and I think as we get into the third quarter, which will certainly start to see more data points, but from what we're seeing today it appears that the.
Majority of the fallout to use your term.
Is is related to the higher levered buyers pulling back and buyers with shorter term time horizons are pulling out of the market and those are impacting a certain type of asset class. They are not as impactful on the stuff that we are looking at.
We certainly hear in the market.
Rates are off.
50 to 75 to 100 basis point, so we're not seeing that at this point out clearly certain assets that are.
Not well located.
Or have some type of inherent issue with them you could certainly see that but we're not seeing that at this point and based on the fact that every deal that we saw that closed in the second quarter was with institutional quality capital tells us that there's still a demand.
By institutional capital for well located assets and the cap rates have moved a bit but they have not moved tremendously.
And they're still down from from where we were second quarter of last year.
Okay. Thank you.
Our next question comes from Jamie <unk> with Goldman Sachs.
Hi, Good morning, and thank you for taking my question, So with day to day inflation on commodities food complex gas prices could you talk about what you are seeing any impact on your residents has the discussion and negotiation in 11 of negotiation gone up.
On <unk> just given.
Pressure.
On day to day expenses for some of your Dennis perhaps.
Hey, Charlie.
Tom.
The level of negotiation if you will in terms of the feedback that we get from residents began to go up last year as renewal increases went up last year.
We negotiate a well less than a percentage point on our renewal offers in fact, it's like 20 basis points that has not changed over time.
And.
The renewal except the rate has continued as it has.
Sure.
Historically high and the turnover staying flat so.
I mean, we get questions about it but we have not needed to adjust our renewal rates and.
So very little push.
Because I mean pushback in that area.
When they get out in the market and they look at what our new lease rate is which is still $100 higher than our average renewal rate.
They kind of see where they're priced fairly.
It makes up the rate and move on.
Is it the Tam I'll pick a point worth noting if you look at some of our B assets are little bit lower price point assets, we actually have seen pricing performance do a little bit better in the last couple of quarters in those assets arguably those would be the ones that might feel a little more pressure than what you just haven't seen it from a pricing standpoint.
Got it thank you and if I could get a quick follow up please.
In terms of the development pipeline.
Had been inflationary environment supply chain permitting delays that you talked about impacted.
If you could give us.
Mathematical color around that please.
Yeah.
I would say that just municipal delays and those type things is not having much of an impact at this point on our overall yields.
Certainly in the last six months, we have seen.
A tremendous increase in cost escalation very acute the last six months I would say, but we are starting to see early signs of that cost escalation pressure alleviate a bit certainly some of the commodity prices are down lumbers down just given that the single family.
Instruction is off a bit so.
From where we sit today it looks like going forward that the kind of cost escalation that we're seeing.
We will start to mitigate itself I don't think Costco backwards, but I think the rate of increase will substantially slower it looks like it will substantially slow and then you couple that with what we're seeing on the rent side and our yields are actually holding up pretty well from those delays that I just talked about.
Okay. Thank you.
We'll take our next question from Tayo Okusanya from credit Suisse.
Okay.
Good morning, most of my questions have been answered, but just a quick one I mean, you did mention earlier on that the resident base is increasingly turning single are increasingly turning female.
I'm just curious how that is impacting how are you.
Buildings that designs going forward, whether its unit mix.
And what implications that could have pud development costs.
Going forward and also if you could kind of fluid and ESG considerations as part of that answer.
And from from a development aspect.
Frankly, we haven't changed a whole lot relative to for that I mean other than.
Our amenities to take into account pets has increased substantially so I'd say that would be one thing that certainly has changed and then just broadly I think the desire for.
Meeting spaces and common area spaces, where.
Where folks whether it no matter what demographic it is where folks can gather in and just being community with the other folks at the complex has certainly grown and we're spending a lot of time on that but other than I would say the areas that we've had to spend more.
<unk> attention and paid more design attention to their haven't hasnt really been a whole lot of change associated with the demographic changes.
What I would say over a longer period of time longer horizon.
I think that what has changed about the product in general and it wasn't a change.
In response to this demographic shift, but I think the demographic shift that you alluded to is finding it attractive and that is structured parking.
Interior hallways I think it's also been one of the reasons why our smart home and smart rent technology has been so embraced.
It just it provides a.
A certain degree of.
Of <unk>.
Privacy.
I think people really appreciate and.
Get out of the weather elements, a little bit more with the interior hallways and a structured parking deck. So I think that I think those things have continued to really find great receptivity to this demographic shift that we had mentioned and I think it will continue to do so going forward Im tired of town to hit on your ESG point and our.
<unk> group works closely with our development group.
Kind of historically built in at least a bronze standard in terms of Green building certification, we're evaluating that and a lot of the ones, we've done recently or silver even Goldman.
We're definitely thinking about in our underwriting kind of considering what what makes sense both from a resident perspective.
And from our perspective as well.
Thank you.
Our next question comes from Nick <unk> from Scotiabank.
Thanks, <unk> good morning.
Devin answered.
Great detail just two quick ones for me and I apologize.
Answered this but what.
What are the assumed split between renewal embedded in that <unk> got it is there an expectation for a like a divergence at the end of the year in 'twenty three.
This is al just some color on that I mean, certainly as we talked about.
You mentioned, 8% over the back half of the year, then it's a little bit lower expectation for the fourth quarter, because that's when the seasonality that we talked about with the kind of again.
Because of the holiday season. So in general what is built on is renewals continue to be the strongest I'll say in double digits, probably lower double digits likely in that range.
With new leasing, which tends to feel the most pressure are probably both comps as well as certainly seasonality being in single digit a mid single digit range and that's one of the estimate for the back half of the year that you can run.
Alright.
Great and then what are the main drivers of the components of the Opex guidance increase I know you mentioned real estate taxes of roughly 4% to 5%. So just wondering what increase in the rest of that sticks out in the center of that.
And in general is too.
The increase for the quarter is too compelling primarily repair and maintenance as well as taxes, we talked about taxes and so on so I'll talk about the environment is really is more just costs of materials.
H that costs, because it's such a hot summer as well as the summer months are our highest turnover by design as we have more of our units.
We push most of our filing in the summer months, because that's when the demand is there so.
That pressure is being felt their bed in and we're not seeing that unexpected despite significantly on the back half you are at this point some of things Tim mentioned will help us going forward, but really its repair maintenance and taxes were the reasons for that change.
Thank you.
Our next question comes from Alan Peterson from Green Street.
Hey, thanks, everybody.
Thanks for the time, Brad I was just wondering if you could share pricing expectations for the incremental dispositions that you're guiding to 30 year end and then on top of that you. If you could touch on that just a little.
Al.
Assets that you're marketing or considering marketing that would be great.
Yeah, So I think I mentioned it in.
My initial comments the two that we look to bring out or have on the market right now one is in suburban Maryland.
And then one.
Is in Austin and these are <unk>.
On average 25 year old assets that we look to bring out so.
In terms of pricing expectations on those for the entire set for.
For the year, we expect to achieve a call. It a four to a four and a half yield on those assets and the way we look at that as a as an NOI yield and one of the things that is having an impact on.
On our yields there.
Specifically the asset in suburban Maryland, that's an asset that has had.
<unk> had some challenges in a number of ways one specific to the asset. It has a right of first refusal that the county, there has where they can step in and buy the asset they have the right to match any offer that you get normally that's not.
Big deal, but they.
They did recently.
Take advantage of our ROE for they had on a another asset nearby they have not done that in years. So obviously the buyer pool is we're well aware of that so they are more reluctant to spend a lot of time on an asset going through due diligence because what they have to do is go under contract on the asset and continue to perform their due diligence, but at any <unk>.
Tom during that period, the county can ROE for the product.
So we're seeing a little bit of an impact associated with that we also have on that asset some regulatory issues, which recently rolled back but it has impacted their performance renewal cap increases and things of that nature. So that is impacting the pricing of that asset which is driving our overall returns a little bit off on those.
<unk> from what we would normally expect.
Got you I appreciate the color there.
Are you noticing any pick up in concessions in any of your more heavily supply markets that other operators might be using to drive up demand.
Concessions are really not that heavily used and where we see them.
Is really only in the pockets where.
They're not really being used to drive excess demand on a stabilized asset, but you see them use from time to time on new lease ups.
We're not having to compete much with those at this point just because our demand levels.
David.
Concessions are less than four tenths of a percent of our net.
Central right now.
Perfect I appreciate the time guys.
Thank you.
And our last question comes from Barry Lu from Mizuho Group.
Hi, Thanks for the time.
On the line for handoff to a job.
My first question was on the expense side could.
Could you I think you mentioned a 180 bps of margin expansion from knowledgeable sits in your platform how much of vaccination coming from expense versus top line revenue growth.
Specific point about about 40, or so of that is related expense and the rest is revenue and then that's.
All we've identified for now or we think there are some further opportunity on the expense side in the next couple of years.
Got it. Thank you. Thank you and also are you concerned about turnover at all and how.
How much more you're willing to push the price of the pathway might be loss to lease.
And also do you know what the Walker.
Turnover at 45% on a 12 month rolling basis.
It was it was very good at low sort of the lowest I've seen in my career and.
And we feel very good.
The opportunity for pricing going forward and still believe now is the time to push rate purchase volumes.
We will see a seasonal slowdown in tougher comps, but <unk>.
Demand is good and our priorities are growing rents.
Yes.
Thanks, you measure what your losses.
Yes, the last layer. So if you if you look at our June blended rents compared to where our whole portfolio says, it's about 8% or so if you. If you look at just new leases, it's about 11%, but we would typically expect that to be the highest right now.
The peak season, but that's where it stands right now.
Got it thanks, congrats on a smartphone.
Okay.
We have no further questions I will return the call to MAA for closing remarks.
Well, we appreciate everyone being on the call are hanging in there with us and obviously feel free to reach out back to us at any point. If you have any other questions you'd like to ask well. Thank you very much.
This concludes today's program. Thank you for your participation you may disconnect at any time.
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