Q4 2022 Mid-America Apartment Communities Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the M. A a first quarter and full year 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 recorded today February 22nd 2022.
I will now turn the call over to Andrew Schaffer, Senior Vice President Treasurer, and director of capital markets of M. A a for opening comments. Please go ahead.
Thank you Nikki and good morning, everyone. This is Andrew Schaffer, Treasurer, and director of capital markets for MAA members of the management team also participating on the call with me. This morning are Eric Bolton, Tim Argo Al Campbell, Rob Delpriore, Joe Frost, Yes, and Brad Hill 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 the forward looking statements section in yesterday's earnings release, and our 34 Act filings with the SEC, which describe risk factors that may impact future results. During this call. We will also discuss certain non-GAAP financial measures a presentation of the most directly.
Terrible GAAP financial measures as well as reconciliations of the difference between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data and our earnings release and supplement our currently available only for investors page of our website at Www Dot M. A C dot com a copy of our prepared comments and an audio recording of this call will also.
It will be available on our website later today. After some brief prepared comments the management team will be available to answer questions I will now turn the call over to Eric.
Thanks, Andrew and good morning, everyone MAA wrapped up calendar year 2022, with fourth quarter results for core <unk>.
We're ahead of expectations as higher fee income.
Along with continued growth in average rent per unit and strong occupancy more than offset pressure from higher real estate taxes.
Looking ahead to the coming year.
There's clearly some uncertainty surrounding the outlook for the employment markets the pace of inflation and the broader economy. In addition, while we do know that new supply deliveries in 2023 broadly will be higher than in 2022. We continue to believe that MAA is well positioned for the coming year as the leasing market returns.
To more normalized conditions.
Our expectations for the coming year are built on a lease over lease pricing environment of 3%. This performance assumption coupled with the earn in from 2020 to shrink growth should drive growth in effective rent per unit of around 7% over the coming year.
We will of course see conditions vary some by market and Submarket location, but we believe that our portfolio is in a uniquely solid position to weather expected moderation from the historically high rate growth of last year. This.
This view is really supported by three key variables.
First we continue to believe that our sunbelt footprint maintains an advantageous position for capturing demand given the stronger and more stable employment markets in the Sunbelt states.
We continued to see job growth positive migration trends affordable rent to income ratios and low resident turnover.
Secondly, it may as unique diversification across Sun belt region, including both large and high growth secondary markets provides exposure to a good range of employment sectors and works to help soften some of the pressures surrounding new supplier levels in a number of our larger markets in.
And thirdly with a rent price point average for our portfolio that appeals to a broad segment of the rental market and it is around 20% below the price point of the mostly high in new product being delivered.
We believe we will capture more stability and topline performance as leasing conditions normalize in 2023.
In the event that we do find ourselves later in the year headed towards a more severe contraction in the economy or a recession.
MAA has consistently demonstrated over the past 20 years, we expect to perform with a lower level of volatility than what generally is seen with more concentrated portfolios and towards those concentrated in large coastal markets.
The transaction market remains very quiet and we are likewise remaining patient with what opportunities we do see.
I expect it will be the second half of the year before pricing data becomes more readily available.
We do have plans to initiate development on four new projects in 2023 associated with sites that we already own or that are under our control.
These projects will of course, not actually start delivering unions for another couple of years.
In conclusion, I want to give a big thank you to our MAA associates for their tremendous service and record performance in 2022.
We have the company well positioned for the next cycle is a number of new tech initiatives will positively impact performance over the coming years, our external growth pipeline continues to expand in the balance sheet provides a good strong foundation for supporting our current portfolio of operations as well as active pursuit of new growth.
Changes.
That's all I have in the way of prepared comments and now I'll turn the call over to Tim.
Thank you Eric and good morning, everyone same store performance for the quarter was once again strong and ahead of our expectations, while pricing performance moderated during the fourth quarter from the record growth. We had achieved September year to date blended lease over lease pricing was up five 7%.
As a result effective rent growth or the growth on all in place leases for the fourth quarter was 14, 9% versus the prior year and 2.8% sequentially from the prior quarter full year 2022 blended lease over lease pricing was 13, 9% helping to drive full year effective rent growth of 14, 6%.
Alongside this alongside the strong pricing performance average daily occupancy remained steady at 95, 6% for the fourth quarter and 95, 7% for the full year 2022 and.
In line with normal seasonality, our January new lease rate negative, 0.3% improved from December as new lease rate of negative <unk>, 9% and other than 2022 represents a higher new lease rate than any year since we have been tracking the data.
Combined with renewal pricing of eight 6% January blended lease over lease pricing was four 2% and average daily occupancy was 95, 7%.
With new lease pricing moderating as expected renewal pricing, which flag new lease pricing for much of 2022 is providing a catalyst for the strong January pricing and is expected to be strong for the next few months before moderating to a more typical range we.
We are achieving growth rates on sign renewals of around 8% to 9% for the first quarter.
We do expect new supply in several of our markets to remain elevated in 2023, putting some pressure on rent growth, but the various demand indicators remain strong and we expect our portfolio to continue to benefit from population household and job growth.
Eric mentioned should we see a more dramatic downturn in the economy from here, we expect our market diversification and price point will help mitigate some of the impact to performance.
During the quarter, we continued our various product upgrade initiatives. This includes our interior unit redevelopment program, our installation of smart home technology, and our broader amenity base property repositioning program for the full year 2022, we completed more than 6500 interior unit upgrades and installed over 24000 smart.
Home packages as of December 31, 2022, the total number of smart units is over 71000, and we expect to finish out the remainder of the portfolio in 2023.
For our repositioning program leases have been fully or partially repriced at the first 11 properties in the program and the results have exceeded our expectations with yields on cost averaging approximately 17%.
We have another four projects that will began repricing this quarter and five additional projects currently under construction.
Those are all my prepared comments I will now turn the call over to Brad.
Thank you Tim and good morning.
Despite execution challenges in the transaction market our team successfully completed our disposition plan for 2022 by closing our last two dispositions in the fourth quarter.
Our total disposition proceeds for the year were approximately $325 million, representing a stabilized NOI yield of four 3% and an investment IRR of 17, 7% for assets with an average age of 25 years old.
In 2023, we will continue the discipline of steadily recycling capital out of older higher Capex properties with the intent to redeploy the capital into newer lower capex higher rent growth properties to drive higher long term earnings growth within our portfolio.
While transaction volume continues to be muted, we believe it's likely that the transaction market will provide more opportunities towards the back half of the year.
Currently the number of marketed properties is down substantially from 2022 with the majority of sellers waiting until at least the spring leasing season before reevaluating their plans sale timing in the face of this lower volume we have seen some upward pressure on cap rates.
With the degree of the movement varying based on property characteristics embedded rent growth as well as market and Submarket location. However, until closed transactions materially increase transparency around cap rates will be difficult when marketed deal volume does increase we expect by our financial strength and speed of execution.
To be attractive key differentiators, and our balance sheet strength and capacity will support our ability to transact despite a more difficult credit environment.
On our new developments our team has done a tremendous job working through the challenges of elevated construction costs and permitting delays leading to steady growth in our development pipeline. During 2022, we started construction on 1253 units at a cost of $468 million a record level of starts for MAA.
During the fourth quarter, we started construction on two projects that have been in pre development for some time. These two projects will begin delivering units in two years and should finish construction in three years lining up well with what we believe is likely to be a strong leasing environment.
While the timing of planned construction starts can change as we work through the local approval and construction bidding processes.
We expect to start for new developments during the back half of 2023. This includes two in house developments, one located in Orlando and one in Denver and to pre purchase joint venture developments, one located in Charlotte and the other a phase II to our west Midtown development in Atlanta.
Our construction management team continues to do a tremendous job actively managing our projects and working with our contractors.
To keep the inflationary and supply chain pressures from causing a meaningful increase to our overall development costs or our schedules.
Despite these headwinds the team delivered three projects on time in 2022 and under budget by approximately $4 $5 million during the fourth quarter construction wrapped up an MAA Windmill Hill, and we reached stabilization at MAA Robinson.
Leasing demand at our new properties remains high and the competition from other new supply has to date not had a significant impact on our lease up performance with rents being achieved well ahead of pro forma that's all I have in the way of prepared comments, so with that I'll turn the call over to al.
Okay. Thank you Brad and good morning, everyone.
Reported <unk> per share of $2 32 for the quarter was five cents above the midpoint of our guidance and contributed to core <unk> for the full year of $8 50 per share representing a 21% increase over the prior year St.
Same store rental pricing and occupancy levels were in line with expectations for the quarter, while higher fee and reimbursement revenues combined with strong lease up in commercial revenues.
Thanks to produce about two thirds of this earnings out performance for the quarter.
This favorability was partially offset by real estate tax expenses as final millage rates came in higher than expected during the quarter for several markets primarily in Texas.
Our real estate tax estimates were based on strong valuations supported by the very strong revenue trends over the last year offset by expected millage rate rollbacks as counties managed overall tax needs and rollbacks occurred but were less than expected in Texas, particularly in Dallas and Austin.
<unk> guidance for our initial guidance excuse me for 'twenty, three which we'll discuss more in a moment anticipate some continued pressure in this area given its backward looking nature.
Alrighty modest balance sheet remains very strong as we ended the year with historically low leverage debt to EBITDA reached $3 seven one times with 95, 5% of our debt fixed at an average interest rate of three 4% and with $1 3 billion in available capacity to support growth and manage our debt maturities late in 2023.
Also at the end of January we settled our outstanding forward equity contracts, providing an additional 204 million of capacity at an attractive cost of capital.
Currently expect to fund our near term term acquisition development and refinancing needs with short term debt capacity. Following the financing markets to continue to strive to stabilize before locking in long term financing.
Finally, we did provide initial earnings guidance for 2023 with our release, which is detailed in the supplemental information package.
So F O for the year is projected to be 88 to 928 per share or nine away at the midpoint, which represents a six 8% increase over the prior year.
The foundation for the <unk> 'twenty for the projected 2023 performance sustained store revenue growth.
Produced by historically high rental pricing earn in of about five 5% combined with a more normalized blended rental pricing performance of 3% for the year as well as a continued strong occupancy rate remaining between $95 six and 96% for the year.
Based on this effective rent growth for the years objected to be a solid 7% at the midpoint of our range with total same store revenue is expected to grow 6.25% slightly diluted from the other revenue items, primarily reimbursement and fee income, which grow at a more modest pace.
Same store operating expenses are projected to grow at 6.15% at the midpoint for the year with real estate taxes and insurance producing the most significant growth pressure.
Combined these two items alone are expected to grow just over 7% for 2023 with the remaining controllable operating items expected to grow around five 5%.
These expense pressures were offset by the continued strong revenue growth with NOI for the year projected to grow six 3% at the midpoint.
We're also expecting continued external growth both through acquisitions and development opportunities during the year with combined 700 million full year planned investment this growth will be partially funded by asset sales, providing around 300 million million of expected proceeds.
We expect to fund the remaining capital needs for the year from internal cash flow and short term variable rate borrowings as we anticipate the financing markets to continue stabilizing over the next over the next year eventually providing better opportunities to lock in long term debt rates. This desk, there's some slight pressure on cargo <unk> performance, given how short term rates, but is expected to be rewarded with low.
Our long term financing costs when markets stabilize further.
That's all that we have in the way of prepared comments. So Nicky will now turn the call back to you for any questions.
Thank you we will now open the call up for questions. If you would like to ask a question. Please press. The Star then one on your Touchtone phone.
We'd like to withdraw your question you May press the pound key.
We'll take our first question from Nick <unk> with Scotiabank. Please go ahead.
Thanks, Good morning, everyone. So I just wanted to start with the guidance on same store revenue. So if youre right sort of right around 6%.
The mid point thank.
Thank you guys had a earning that was close to that number coming into the year. So you have occupancy being roughly flat in the guidance. So just just trying to understand kind of what might be the offsite ads to and you are assuming some market rent growth as well. So just trying to understand kind of the buildup there.
We're missing as to why.
The revenue growth guidance wouldn't be a little bit higher.
Based on the earning you've cited.
Yes, Nick I'll give you the components. So this is al I'll give you the components of it how we built it and maybe Tim can give a little color. If he would like on some of the covenants, but really it's built on the R&D you talked about based on where pricing was when we think about pricing in the ear. If you wanted to carry for that same level.
We're down what would it be built into our portfolio that's about five 5%.
That's the way, we think about it and on top of that.
You get about half of the current year expected blended pricing as we talked about we're expecting about 40%. So you add those two numbers together you get right at 7% rent growth.
Guidance that we put out now that is as we mentioned in the comments a little bit moderated from other income items and about 10% of our revenue stream is from re.
Reimbursements fees all of those things and they are expected to grow more modestly than that so that's what gets you to six in a quarter, but in terms of the earnings.
And the components, that's really what it is.
Okay. Thanks, that's helpful.
And then just second question is just to get a feel for what type of economic scenario baked into guidance you know what it is.
After landing with modest job losses at any any commentary from you guys on the economic outlook would be helpful. Thanks.
Well Nick this is Eric I mean broadly as Al mentioned I mean, we do expect that the overall.
<unk> growth for the market next year will be something around 3%, which I think is going to be.
Fueled by what we expect to be.
Continued relatively stable employment backdrop to.
What we're seeing today.
Not seeing any real evidence significant evidence building in any of our markets at this point.
Leading to.
Employment weakness or people, losing jobs, we're not having any kind of issues surrounding collections migration trends continue to be very positive.
And so as we think about.
The outlook for 'twenty, three I mean, we where we're at.
Definitely moderated from what it was 2022, but we're not seeing any any concerns at the moment that a severe contraction or any sort of a worse.
Ah materially worst decline in the in the employment markets where were to occur now if that does happen as soon as I alluded to in my comments.
We've been through recessions in the past and we think that if we find ourselves in a more severe economic contraction.
More broadly the employment markets start to really pull back.
We think that that's where the sort of defensive characteristics that we've built into our strategy really start to pay dividends for us and that's where our secondary markets come into play a lower price point of our product comes into play.
The broad diversification took more employment sectors that we have across the.
A large number of markets that we're in I'll provide some level of.
Of cushion if you will if we find ourselves in a more severe.
Downturn, so right now, we're not calling for that but but we think that it should happen.
We would probably whether that pressure better than a lot of others.
Thanks, Eric.
Yes.
We will take our next question from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning.
Hi.
First question is on <unk>.
Development and.
Your appetite for using capital you said that cap rates overall for stabilized product are still sort of in blocks.
Yes, the debt markets clearly better for apartments, but see MBS, which you guys don't user Fannie Freddie whatever yeah, that's still well I guess more see MBS remains sort of closed. So as you guys think about development do you think more about starting on your own account or do you see the potential that youre better off.
Buying from other people, who may run into financial difficulty where on a risk adjusted you're better off to pick from someone else rather than starting ground up from you guys.
Yes, Alex this is Brad I'll start off with that I would say, it's both we're looking at both opportunities both on our balance sheet and then working with partners as well I mean, what we havent seen broadly yet.
Our developers kind of spitting site spitting land sites.
We've seen it a little bit but its been sites that we're not really interested and we've not seen.
The well located.
<unk> that have gone under contract.
Kind of being let go we've not seen that yet so we will keep our eye on that for sure because I think that's where the opportunity presents itself for our on balance sheet developments, where we can pick up some of those land sites that other people drop I think what we are seeing short term.
Is exactly what you mentioned is the difficulties in the debt market.
<unk> kind of showing up through some of our development partners, maybe they can't get the debt financing for some of their developments going or equity partners backing out on deals we are seeing that short term.
We've got a team of folks this week that are out at an MHC.
We've already gotten a number of emails of projects.
JP development opportunities that are a follow up from that work.
They're shovel ready could start mid year.
So we will begin evaluating those.
Those are the ones that are going to be impacted by the debt market and just how tight that is right now, but the long story is what we'll look for opportunities in both of those areas.
Okay and the second question just going back to Nick's question on sort of state of the market and the appointment you know one of the common refrain is about the sunbelt as it always has a lot of supply, but the economic growth seems to be more than offset and you spoke about that relative to your ability to manage higher taxes higher insurance.
If you look at this year and based on what your property managers see among the resident base and employment stats within your markets do you see any light at.
Substantial risk that employment or economic job growth in your markets will not be able to.
Exceed the new supply coming on or as you sit here today, you're you're as you guys sit around the round heavier like <unk>.
There are a few more markets that were more concerned about now than we were back in let's say November .
Yes, when you guys were assessing how 2023 with luck.
Well al.
Alex It's Eric.
As we sit here today.
We continue to feel good about the demand side of the equation for us.
As I mentioned, we're not seeing any.
The lead volume and traffic that we're seeing is still.
Strong.
We're seeing we're not seeing any evidence of stress with our renters in terms of collections.
Or we're not seeing any evidence of.
People coming in and talking about losing their job because of.
And needing to get out of their lease we're not seeing any ruminating trends starting to pick up and so as we sit here and then also you look at the migration trends, we still saw a 12% of the leases that we did in in the fourth quarter were for people moving into the sunbelt from.
Outside the Sun belt.
No.
We are.
We're still not seeing any worries build on the demand side equation at this point moderating from what it was but it's still quite strong.
Thank you.
Is that coming yeah.
Yes.
All good on our end. Thank you okay. Thank you.
We will take our next question from Austin <unk> with Keybanc capital markets. Please go ahead.
Great. Thanks, guys I was just curious if you could share how I believe this 3% figure you provided on Liza releases, the blended lease rate growth assumption embedded in guidance and I'm. Just wondering if you could break down that between sort of the first half assumption.
And back half as you alluded to kind of renewables, maybe trending a little bit lower as the year progresses.
Hey, Alison as Sam Yes, you heard me mentioned in the comments that renewals right now are the catalysts for us in kind of carrying the strengths new lease pricing outpace renewals for the bulk of 2022. So we knew we kind of had some runway on the renewable side, that's carrying us through this.
Early part of 2023.
The 8% to 9% I talked about on renewals.
Probably carries through the first quarter call. It and then starts to moderate a little bit as you get into.
June through the rest of the year I would expect it to be a little more normal with sort of what you typically see from M&A, which is kind of in that 6% to 7% range and then on the new lease side, where we're sitting slightly negative right now I think that will slowly accelerating through the spring and summer and go modestly positive and then <unk>.
And back down towards the end of the year, so kind of higher renewals in the first part first half of the year moderating a little bit new lease new lease rates growing slightly through the year and then moderating just with seasonality as we typically would see in Q4 and that you kind of blend that altogether and get to the.
Our forecast that we have from blended lease over lease.
On the new lease rate side, I guess, what specifically I mean, it seems like that's fairly low relative to what you've achieved historically pre pandemic period, and with 3% market rent growth.
You would think that you kind of surpassed that 3% into the peak leasing season before it moderates in the back half of the year. So.
I guess I'm trying to understand that.
That kind of cautious new lease rate growth assumption.
In your guidance and then could you also just share.
What would get you to the low end of the guidance range because of that.
Like a pretty.
Pretty draconian scenario to.
Be able to achieve.
The lower end.
I'll give you that sort of the forecast how it's laid out quarter by quarter, Tim can give a little more specifics on it it is fairly consistent around that 3% for the year with obviously a little higher in the second two quarters of years, Tim mentioned as as we get more traffic in our renewals hold stronger and new lease pricing becomes most robust, it's really going to come down a new law.
<unk> pricing is debatable.
Through the year, but the band is fairly tied around 3% and our expectation just give me the blend of overall overall demand and so.
Following up on the new lease rate.
Again absent last year.
<unk> record highs new lease rates kind of November December early part of the first quarter typically are negative. So it's not unusual kind of the new lease rates that we're seeing right now and then.
Start to accelerate as we get into the spring and summer, but in terms of getting to the low end I think it's kind of back to <unk> comments on the economy, if we see.
A further deceleration in demand or something.
<unk>.
Economic front.
Drive pricing, obviously, lower and that's how you get towards the lower end of guidance, and then offset a little bit better economic backdrop would post pricing higher and get us more to the higher end of revenue guidance. Thanks, Sean came it will it would given it's coming the impact will come through pricing it would be manifest probably in the latter part of the year as new leases Lindsay.
Got it that's helpful. Thanks, everybody.
We'll take our next question from Nick Joseph with Citi. Please go ahead.
Thanks.
Eric in your comments in the south.
You talked about the strong balance sheet and that being in position to capture growth opportunities. It sounds like you think.
May emerge.
From your comments on the call it sounds like maybe that's more of a second half 'twenty three comments.
What do you think theres opportunities could come from that's more acquisitions.
Land.
Nick I would tell you that.
My belief is that we've been through this in the past, where we tend to find the best opportunity is.
Is in projects that are in lease up fairly newly constructed there are more likely than not have already finished the construction.
May be at that 50%, 60% occupancy level in their initial lease up they've been leasing for probably the better part of a year or.
So theres still they're now getting to a point, where they're starting to run into lease explorations and related turnover, which just brings out much more pressure on the lease up effort itself and these as I say are not yet fully stabilized assets and thus they are more typical too difficult to finance.
From a typical leverage buyer and so that's where we're hopeful that we will find more emerging opportunity is in that kind of a scenario, we certainly seen that in the past.
One of the things I think it's important to point out I mean, our assumptions is built around.
For 2023, or our guidance is built around the assumption of a $400 million.
Acquisition volume now we are assuming that their initial yield on this $400 million acquisition is only 3% reflecting that non stabilized status of these investments. So while that is weighing on F. F O performers for the year, we think that it has great value propositions.
<unk> value opportunity going forward long term and so.
We give.
Given the supply that's coming into the market given the difficult financing environment, we find ourselves in and we think that that area of opportunity is going to emerge over the course of this year and that's what we've kind of dialed into our guidance for the year.
Thanks, that's very helpful. And then I guess, we've spent a lot of time on kind of.
Macro backdrop, and the blended rent growth assumption and everything that goes into revenue.
But if you think about from a market perspective in 'twenty three given your.
Okay.
Guidance, what does that imply for which markets are kind of the top performers, we can walk and talk about.
Yes.
I mean with the earn out and we talked about of our larger markets I expect just rent growth or revenue growth should be pretty solid for several of our markets due to that earn in but if you think about some of the stronger ones that we think will continue into 2023, I mean Orlando continues to be a really strong market for us it's been.
Then and strong now for a couple of years in terms of demand. It's our number one job growth market that we're expecting our 2023, it is getting a little bit of supply, but it is not necessarily situated.
Our portfolio is in Orlando.
Some markets in our portfolio that are getting the most supply only one of those is in Orlando. So the demand combined with the supplier there expect Atlanta to be strong and continue to have really strong blended pricing. Both in Q4 and January and then Dallas is another one I would point out that we think can can shows.
Some strength in 2023 it had its.
One of our lower supply markets, we would expect Theres a couple of Submarkets that ran particularly in north Dallas Frisco, Plano Allen that'll get some supply, but broadly Dallas isn't seen as much supply pressure and we've seen the pricing both in Q4 and January been a little bit higher than portfolio average. So those are those are a couple that we've kind of gone.
Our eye on from a from a strength standpoint, Austin is probably one that on the downside that we're keeping our eye on more than anything.
It's kind of got the extremes on supply and demand. It's one of the better indicators in terms of demand with job growth migration population all of that and it also has the absolute highest supply coming into the market of any of our portfolios are any of the markets in our portfolio.
Various submarkets that we're seeing supply four out of the top 20 are in Austin. So that's one we do expect to moderate though it does have pretty good earn in rate growth. So those are a couple that we're kind of keeping our eye on.
That's helpful. So it sounds like maybe the large still outperformed the secondary markets in 'twenty three or.
Maybe that spread narrowed a bit.
Yes, it probably narrows a bit just with.
Moderating rent growth, we typically see the secondary markets hold up a little more if we get into a softer economic environment, but I think broadly in terms of revenue growth again with our earn in I would expect that the large markets hold up pretty well.
Thank you very much.
Yes.
We'll take our next question from Anthony Powell with Barclays. Please go ahead.
Hi, Good morning, just a question on new lease spreads and pricing going into the spring.
What caused you to get a bit more I guess confident.
Right more as you get to the peak leasing season would it be just general improvement in economic sentiment.
Job growth with Fannie Mae to be where it is the market continuing to do.
Well just curious how you change your approach to pricing and spring if things get a bit better.
I mean generally it's going to be it will be that if the.
The economy and the demand and we look at lead volume when you look at the exposure when you look at rent to income and various things there that drives some of our decisions on.
We're always sort of balancing how much we want to push price versus occupancy so.
So theres nothing Theres no blinking Red lights, right now that would suggest that we see any sort of downturn.
We're kind of monitoring all of those various metrics right now and everything looks about which you would typically think during this time of the year during the during the winter. So it'll really be as we get into spring and summer as demand picks up in traffic pick up and we can pick up that will be really the determining factor on.
Where in 2023 heads in terms of demand.
Alright, thanks, and turnover seemed pretty pretty consistent and any changes in how our how certain residents responded to lease renewals price increases and any trends there you wanted to call out.
Sure.
No I mean, the turnover was remains pretty low historically speaking it was up a little bit in Q4, but the reasons for turn have been pretty consistent we've actually seen.
<unk>.
Move outs to rent increase decline a little bit but it still is.
Job transfer and buy a house or still the two biggest factors, but those are certainly been down from what we've seen in the past, but no no notable trends one way or the other.
Alright, thank you.
We'll move next with Jack Luther with Goldman Sachs. Please go ahead.
Hi, Good morning, and thank you for taking my question could you spend some time talking about the expense outlook for 2020.
Guidance does talk about property taxes in there, but perhaps you could spend some time on other elements and then you know what are the markets, where do you see more tax pressures.
Uh huh.
There's others. Thank you.
Hi, This is al I'll start with that and then maybe Tim can give some color on some of the I think that the way to think about that as you go into 2023 is.
We're continuing to see general inflationary pressures a bit in our expenses, but really taxes and insurance are the drivers of the main pressure and as I mentioned in my comments those together are over 7% and so that's really in taxes or 35% of all operating expenses. So its very meaningful.
And then the other expenses together are about five 5% I think we're beginning to see some moderation in your personnel repair and maintenance and those things and I think youll see that manifest and Tim can talk about components of it but as we move more into the back of the year Youll see a little more of that manifest in those line items, but taxes and insurance. There is a pressure point, what can take us higher lower too.
Our guidance on the overall, which is primarily going to taxes and insurance would be you know we don't have a lot of information yet on either one of those taxes. When you go into the year notoriously you don't have a lot youre going off.
Have a good idea of what you think valuations will be based on cap rate markets, but you are totally guessing on millage rates and that has been very volatile in the last year or so is as municipalities deal with their budget issues. So so we think we and we've got a few fights leftover from last year I mean, we've got some things that we were going to fight hard and we continue to have Texas, we will formally mitigate half of our properties this year and we.
Last year in some of those have not yet finished and so there are things like that that can make you go higher or lower we feel like we've got our best estimate in there right now and that's the appropriate thing to do in.
So overall, we'll see some moderation in the controllable expenses expense pressure driven by insurance and taxes.
Yes, Sean and ill add to that all.
Al mentioned about 40% of our expenses are taxes and insurance.
Call it around 7% and then the other 60% around five 5% so to speak.
And in terms of absolute year over year growth I'm, just sort of rank them I would say insurance probably the highest.
R&M, probably the second highest in real estate taxes.
Hitting on R&M, and it's really driven by inflationary pressures not so much that we expect to get really any worse in 2023 that kind of carryover earn if you will on some of the inflationary increases that we saw in 2022 same HVAC up 16% in plumbing up 18% appliances up.
70%. So that's that's expected to drive the pressure on on the R&M side, though we still remain on a per unit basis lower lower than the sector average.
Thank personnel moderates from what we saw in 2022.
Some opportunity there, but and then the other the other smaller line items are fairly manageable. So it's really on the on the controllable. If you will side. It's R&M, we think is driving the.
The bulk of the increase.
Thank you for all that detail.
For my follow up question I, just wanted to clarify are you trying to understand how you're thinking about bad debt in 2023, what's embedded.
In your guidance if there is anything and you know how does that compare to where it is 2022 and then as you've obviously talked about supply being higher in 2023. How are you thinking about concessions are you seeing more concessions in your markets in your properties.
Any thoughts around that would be very helpful. Thank you.
I'll start with the bad debt I mean, I think in terms of we have in our guidance collection practices have come pretty much back to normal not 100%, maybe but very close I would say rami has something to say about that but so collections are very good what we've dialed in as close to historic normal I'll call. It 40 to 50 basis points delinquency, which is which is very low.
And we have almost no collections coming from any government programs we have.
Out of our uncollected from history as it continues to decline. So we're in very good position, there and so that our forecast for the year reflects that and so moderating a normalizing transit we're putting our forecast really has collections about where they typically are in a normal environment.
Yes, one I'll add on the concession point, we're not seeing any significant increase in concessions at this point.
Was <unk>, 3% of rents overall in Q4, which is in line with what we saw in Q3, we are to the extent, we're seeing them, it's still largely across the portfolio more on some of the urban or downtown Submarkets, which has seen more of the supply.
Staying less less concession usage on the more suburban assets, but generally no big change from what we've seen in the last couple of quarters.
Thank you for that.
We will take our next question from Hendi <unk> with Mizuho. Please go ahead.
Yes.
Hey, good morning out there.
Two questions for me on the external growth front.
I was at NASA multi housing too.
<unk> heard that Theres a ton of buyers.
Still demand.
Got a shortage of sellers and product.
So I guess I'm curious.
You would see an advantage of not selling more assets now.
The premium.
And perhaps be willing to sell a bit earlier in the year to capitalize on.
Even if it doesn't mean they put the dilution as you wait to redeploy somewhat favorable.
Acquisition market for Nebraska.
Yes. This is.
Brad I'll take that.
As we entered this year our disposition plan is really big.
A big component of that is as you mentioned is the ability to redeploy that capital.
It's a big part of what we're looking to do and so we're not generally looking to time the market.
We do a very.
In depth review of our disposition plans in the third and fourth quarter.
The year to really identify what we're going to sell for the year.
And.
We generally don't factor in.
The what we think are going to be.
Market dynamics in terms of just Mac maximizing value, we want to do that but broadly speaking what we're trying to do is really build a long term earnings profile within the company that really supports our ability to pay a growing dividend over time and so we think that's better done on a consistent basis.
Where we are in a position to be able to sell assets.
<unk> our proceeds to the best we can and then redeploy that capital into external growth opportunities. So what we have in our forecast right. Now is a sale of one asset earlier in the year and the reason for that is we're targeting a strong primary market.
That's in Charlotte, where we think we can kind.
Kind of maximize the proceeds given the.
The fact that there arent a lot of sellers out there right now in that specific market.
And then we'll come out with our other assets later in the year, when we think that that markets will be a little bit.
Settle down a little bit spreads there'll be a little bit less volatile than where they are right now and frankly, where buyers can get a little bit more visibility on values. We think that that's the best direction for us in terms of our dispositions and our external growth plan.
That's very helpful. Appreciate the color there.
A follow up on maybe.
But let's start with growth related.
We've seen a lot of mid and high four cap rate favorably.
But hearing the bid ask spread remains fairly wide 10.
Some folks are curious.
What you're hearing or seeing on the bid ask spread and how this plays out what you think the market, leaving right.
Or what you'd be willing to pay to get deals done yet right.
Yes, it's hard to say I mean theres just.
As we looked at the market in the fourth quarter honestly in terms of the assets that we would be interested in buying.
And track there was really only seven so in the universe of US normally tracking 40 deals in a quarter to only have seven transact.
As a very very small universe, and we have seen cap rates move up I would say in the third quarter around a four and a half on the projects that we looked at in the fourth quarter. They were $4 75, we've but theres a spread obviously and it really depends on where the assets are located we saw one in the fourth quarter that traded call. It for.
Five in a quarter, but generally when youre getting into that cap rate range right. Now we found that the quality of the asset or the location is not ideal and it's not generally a location that we're interested in so for assets. We're interested in and they are still in the $4 75 range.
To your earlier point I think part of the driver there is that there's just not a lot on the market and I think as more volume begins to come to market, which we think will happen late second quarter and third quarter later this year even.
As more properties come to market at those cap rates likely expand a bit I mean.
Fact is interest rates are up substantially today the debt rates are five five and a half.
And that's got to push cap rates up at some point negative leverage.
It's not something that we can maintain in perpetuity.
But until you have.
A significant volume of assets coming to market.
There's still going to be a number of aggressive buyers out there that are bidding hard assets that are really setting a lower cap rate range and then I would also say that.
Majority of what selling right now continues to be loan assumptions and so that kind of masks what true cap rates are out in the market and we just need volume to really help us see that.
That's really helpful to you appreciate that if I could squeeze in one more I don't think I heard it but did you guys see Eric and you said what your turnover assumption is for full year 'twenty three.
Okay.
Yes.
For now we're expecting it to be pretty similar I think some of the reasons that drove turnover this year, probably moderate a little bit and maybe some of the other reasons that go up a little bit.
In general we're expecting similar to turn it over to what we saw in 2022.
Thank you.
We will take our next question from Rich Anderson with NBC. Please go ahead.
Good morning.
So my first question.
Is on.
The <unk>.
Expected deceleration of rent growth obviously in 2023, no. One is surprised by that but I'm wondering if you can sort of get into some more of the nitty gritty detail of where you're landing how much of it is proactive on your part how much of is it reactive are you sensing fatigue from invert from customers.
Are you noticing.
You can see moving around or turnover I think you mentioned, Tim I think you mentioned turnover uptick in the fourth quarter are there any things that you are reacting to that's causing you to pinpoint where you're headed for same store growth revenue growth in 2023 or are you just sort of sort of protecting the downside given some.
The uncertainty in the macro environment.
Being more proactive approach.
Well rich this is Eric let me try to answer that.
I think that.
Are they at the ground level I would say that we're not really.
Seeing anything at this point that causes us to believe that.
We're looking at.
A much weaker demand environment over the coming year, I mean as I.
Such done earlier I mean, we're still seeing no evidence of distressed with our renter base. Our rent income ratios remained very stable relative to where they have been collections performance has been very strong we're not seeing any behavioral changes with remaining things of that nature.
Not.
And the trends too.
Migrate.
Migration trends continued to be quite positive move outs too.
Non MAA markets are move outs out of the sunbelt continues to be quite low.
So I think more than anything for us we're just.
Trying to keep an eye on the broader economy, and the broader employment markets and any any evidence that.
The employers are really starting to <unk>.
Get aggressive at Downscaling in downsizing.
Their staffing and we've not seen that yet but that would be obviously.
Pause for concern, but but at a macro level move outs to home buying continues to be quite low and there is no evidence mounting that that's starting to change.
And move outs due to.
The not the people not wanting to pay their rent increase they were asking for is still is our third biggest reason, but we're still having people come in after them when they do move out willing to pay more than what we were asking the renewing resident to pay so that's.
That to me is a fairly strong.
Indicator that the market is still holding up quite well.
And so I think we're just we're moderating off of incredible highs and that's what's happened here, but in terms of any significant.
Pull back in demand, we're just not seeing that at this point, Okay fair enough.
Second question is.
Just closing the loop on the supply conversation.
What always happens developers chasing 2022 growth by delivering product in 2024.
Always is.
Smart strategy, but.
Yes.
My question is do you feel like given the environment and interest rates and everything else do you feel like sort.
The private developer model is on Shakier ground than normal this time around and perhaps even more of an opportunity for you to step in at some point down the road or is it sort of a typical environment differ.
Different obviously variables, but typical opportunity for you a year or two down the road.
Hey, Rich this is Brad.
Definitely think in terms of new starts there on much shakier drought ground. The privates are for sure in terms of getting financing.
I would say that for anything that is in.
Lease up right now.
There is not a distress in that market currently so so.
Theres not a lot of forced selling at the moment now theyre still equity and capital folks they want to cycle out of as I mentioned earlier our region is.
Predominantly controlled are developed by merchant developers and Theyre really.
Their model is built on developing an asset and selling it taking the profit moving onto the next deal and renting and repeating.
I'd say that that's a little bit in flux right now.
With nothing selling and the inability to start new assets. So I would say the private developer is a little bit more in flux right now because of because of those reasons.
Okay. Thanks very much.
We'll take our next question from Wes Golladay with Baird. Please go ahead.
Hey, Yeah, good morning, everyone.
Last year, you had about just under $200 million of nonrecurring Capex. How are you thinking about the spend for this year and is there anything in there that will drive down expenses, maybe in 2023 or 2024.
Wes This is al I'll start and frame the capital.
Overall, we're spending.
All programs together, probably around $300 million in recurring revenue enhancing together.
Probably $180 million and so that's where <unk> thousand 800 Bucks a unit probably 1000 recurring a little more.
And the rest being revenue enhancing we continue our programs unit redevelopment program, which includes our smart grant.
So we'll do those interior programs, it's Margaret again, Thats, another $97 million and we'll continue our property repositioning program with Tim talks about taking properties and increasing their revenue potential another 20 minutes or so so overall, it's about a $300 million I mean, certainly theres some Tim concern, but there's certainly some things in the revenue has something we think whether it be some ESG investments some thing.
Like that that will have some potential for the future. We're also seeing some inflationary pressures in that as well.
And then a large portion of that is just investment for the future.
Those programs repositioning program unit redevelopment of smart rent. So that's kind of how we think about that.
Okay, and then I guess as we maybe fast forward for the next few years does this ever start to ramp down or do you have a big pipeline of when smart rents. Then you just move on to something else or how should we think about a multi year view on this.
Yes.
I mean in total I think it comes down a little bit.
The smart grid installations is a fairly significant piece of that we expect to finish that that.
That capital project. This year, I think youll see that come down, but I would expect post on the unit interior redevelopment program and the broader sort of amenity base property repositioning programs that we expect to continue those at similar levels.
Okay, and then did you comment on the exposure.
Right now.
<unk>.
Exposure right now set at about seven 5%, which is in line with what it what it was last year and kind of what we would typically expect this time of year.
Okay. Thanks, a lot everyone.
Yes.
We'll take our next question from Rob Stevenson with Janney. Please go ahead.
Hey, good morning, guys.
What are the markets represented by the four to six development starts over the next year, plus and given Tim's comments on R&M pressures. What are you seeing in terms of construction cost pressures going forward for new starts.
Yeah, Rob so for the four starts that we feel we're in good shape on for this year, we've got one.
Charlotte, We've got one in Denver.
Got one in Orlando and one in Atlanta dosing.
Those in my prepared comments. So those are projects, we've been working on for a while and plans are in process on those so we feel pretty good about those in addition to.
Those projects we own.
A number of sites.
We've got some in Denver, another phase in Orlando.
Second phase in the Raleigh market, so a number of those projects.
That would add up to that six over the next 18 months or so but but for this year. The four are the ones that I mentioned in my comments in terms of construction cost.
What we're seeing right now is that costs are not escalating like they were in 2022, we saw a significant increase in construction costs throughout the year.
At this point, we're not seeing that at the moment, it's certainly our hope that as we get further into this year the times, where our developments will be starting second or third third and fourth quarter that perhaps we get some relief there. The first signs of that are that were getting calls from contractor, saying they didn't think they had capacity.
<unk> to bid our job originally but now they do we're hearing that from subcontractors as well so.
Given where the single family market is.
And.
The fact that we expect new supply starts to.
To come down on multifamily, we hope to see some relief on the construction side, but for now it's just holding flat.
Okay.
And then al G&A was 58 eight.
In 'twenty, two and the guidance is 55, 5% at the midpoint for 23, obviously Tom's left but what else is in that expected decrease.
Well, let me start with Rob as we've talked about we really look at overhead as a total and so I would focus more on the 128, 5% and then Thats a little over 3% growth in total for the year, which we think is yours, but on that specific G&A line. The biggest item areas. We had very strong performance in 2020 twos, you've got certain programs.
Performance incentive programs that are at Max and then we set our guidance for next year is based on what's already a target. So that's a big big part of that.
And then on the property management expense line the growth in that that you see.
Is really investments primarily in technology, both to strengthen our platform and to support initiatives that were going on so.
Answered both of those I think that's both together for a part of the overall overhead growth of the euro.
Okay. Thanks, guys I appreciate it.
Okay.
We will take our next question from Michael Goldsmith with UBS. Please go ahead.
Good morning, Thanks, a lot for taking my question, what's the expected expense growth cadence through the year is that is that relatively flat or is that accelerating or within that.
Yes.
You Havent mid year renewal of our insurance, but easier compares in the back half how does that reconcile and then on real estate.
Taxes.
On the guidance.
6.25% right that would be lower than six 5% last year.
Trying to understand the shape of our.
And then the expenses through the year and also.
Right right.
The state taxes would be.
Perhaps slightly down this year okay.
I'll try to answer them. This is al I think what's the cadence for expenses you should see the most pressure in probably Q1, and that's because you've got continuation of sort of the inflationary levels that we saw in third and fourth quarter carrying sequentially over and comparing to Q1 last year with a lot of inflationary pressure wasn't yet built in and so sort of highest point would probably.
Q1, and it will moderate down in Q2, and three to more to more level more of that mid mid mid single digit range. So that's the main thing in taxes, the six in a quarter I think.
Yeah.
We are last year, what we saw in 2022 was.
Looking back to the strong year, we saw millage rates come in that we thought would roll back more than they did.
Surprised a little bit in the fourth quarter as we talked about.
So that was that we ended the year a little higher than we expected in 2022 and I think as you move in 2023. So we don't expect significant reprise in key areas. Our we got a pretty we have a pretty good beat on what's revaluing. This year, it's primarily Texas and part of Atlanta parts of Georgia, There's primarily Atlanta.
And so given given what's revaluing and our expectations for meals rates and.
We have a few of our cases from 2022 that there were litigating that are spilling over into 2023, and so we've got an estimate of what we think we'll win on that we may be wrong, but we've got an estimate on that included and that's all of that together gets us that six and a quarter range and in a lot of unknown in that right now as we talked about but.
We think where we stand that's a very good estimate.
Got it and speaking with you all.
NOI growth has been strong the property values haven't had the same magnitude of increase due to the rising cap rate. So does that mean.
More opportunity for successful Appeals maybe.
24 and beyond.
Yes.
Yes, I think I think what we'd say is 23 as of year, just that theyre still looking back at very strong revenues kind of backward looking game looking to beginning of this year still looking at strong revenues for 2022 and pretty stable cap rate environment has changed but it is still fairly stable. So that's driving it I do think your point I think is a very good point as we move into 2024.
Looking back at a more normalized year, we would expect some moderation in taxes, primarily in Texas, Georgia, and Florida, we're seeing that most pressure because there is going to be driven by normalized topline to your points. We would we would agree with that comment.
Thank you very much good luck in 'twenty one.
Thank you.
We'll take our next question from John Pawlowski with Green Street. Please go ahead.
Okay. Thanks for keeping the call going al maybe just a few quick follow ups on the property tax conversation can you just give me a rough sense what percentage of the portfolio that you already have a high degree of visibility for the increases this year.
Oh Man had said what we have a high degree.
Our visibility is pretty low other than we have a good beat on what we think the values are obviously, we believe we know given the current cap rate environment, what they are and Jeremy 70% to 75% of our tax exposure is from Texas, Florida, Georgia.
So it's really going to come down to the millage rates has kind of turned down to what are the municipalities need what are they what are they going to we expect to have continued strong valuations I'm, probably millage rates rolling back again.
That all ends up it's hard to have precise visibility. This point I mean, I think we have consultants to help us we have a lot of market knowledge. So it's based on our estimates based on Texas.
Georgia, and Florida, the key drivers of our expense and Thats.
I wish we had more at this point, but I do think that our experience our history in the markets. Our consultants gives a pretty good understanding at this point as good as we can have until second quarter. John will have more third quarter, we will have not perfect, but very good knowledge I would say.
Okay I understand there is there is a range around the holiday.
But just curious what do you think a reasonable worst case scenario is for property taxes. This year.
That's kind of why we put a little higher.
I'm sorry, yes, that's good.
Good question and that's why we put a little bit higher range wider range on that John you saw that we put 7% at the top end of our I think that's what we would say I mean, we're at six in a quarter.
Yes.
It could go you could have some things go either way.
We're hopeful that we have some strong fights in these areas, but I think seven.
Would be several things going against us that we didn't expect.
Eight 910 zero zero probability of cities don't molar millage rate.
Eight nine or 10, I mean, given what's revaluing and given the shape of where things are I think $8 19, as probably low probability, but I do think you know zero to low end low probably is the best. This houses have were looking back again to a very strong 2022, and I'll use that to put a cap rate on.
And so I think it's hard to see much reduction expectation this year, but as we mentioned John as we move into 2024, it will be hard to not be able to argue that some of those so we would expect what moderation that we've seen to begin in 2024.
Okay. Thank you.
Yeah.
We'll take our next question from Tayo Okusanya with Credit Suisse. Please go ahead.
Hi, yes, good morning, everyone, thanks for giving that.
Keeping the call going.
Broader general question about the regulatory backdrop again I apologize. If this has been asked but again just a lot of talk in several municipalities around additional rent control even at the federal level you have the white house, putting out guideline.
Your overall thoughts on this particular actually have any impact in the short medium or long term, but if you kind of think maybe a lot of suggestions or just things that may not impact you at all because it's all about just reading out.
Bad players in the industry.
Hi, Tayo.
Rob.
Shot at answering that I think really like if you start at the federal level and the White house blueprint that they put out a couple of weeks ago.
It really does seem to focus a lot on.
More on the affordable housing component of it and really almost using the agencies as part of the leverage there as we look at our the states in which we operate and the municipalities. There is some <unk>.
Rent control pressure or proposals that come up from time to time, but really don't ever see them gain any traction so from a kind of a short medium term, we don't really see anything as we as we're tracking legislation across the board that gives us any significant concern and still view it as really.
Affordable housing is the end goal, it's more of a supply driven.
The pressure that it needs to.
Be added to the system, rather than focusing on rent control, which ultimately is is a negative four.
The owners and the residents.
Great. Thank you.
We'll move next with Jamie Feldman Wells Fargo. Please go ahead.
Great. Thank you.
Just to follow up on <unk> question, I mean do you in any way include.
Handicapped any kind of rent control risks in your guidance are you ran outlook.
We have not.
Okay.
And then I appreciate all the color on so far and kind of markets. It sounds like things are still going pretty well, but I guess, if you focus specifically on like Austin Nashville, Raleigh. Some of these big Tech growth markets in recent years, and probably had more lapsed and others can you provide any kind of anecdotal evidence that anything changing there.
Whether it's different types of people back filling vacancies or move outs or anything like that.
That those kind of markets versus the rest of the portfolio would be helpful. Thank you.
Hey, Jamie.
I think the one as you point out are right in our Austin, Nashville, Raleigh, or the ones where we.
We would add more tech exposure than some of the others, but as of now we haven't seen it I mean, we're keeping an eye on what it exactly means in terms of which staff are going to be impacted by some of the announcements that have already been made but to date, we haven't seen any impact from that.
Trends are different in those markets other than sort of the broader again, we talked about Austin with the broader supply and demand concerns, but we haven't seen anything yet, but those are the ones, we would be keeping an eye on for sure.
Okay are you seeing slower demand from those types of employees.
People in those industries.
Not really I mean.
A lot of these markets arent quite.
Silicon Valley in terms of the types of unemployment that we have.
It's a little more call it.
Mid level or if you want to say more a little more blue collar type tech but.
We've not seen it yet like I said, its something were keeping an eye on and that that could be what drives more of the downside risk on our on our forecast for 2023, but nothing nothing reportable so far.
Okay alright, thank you.
We have no further questions I will return the call to <unk>.
For closing remarks.
Okay.
Appreciate everyone joining us this morning, if you have any other thoughts or questions follow up.
Reach out at any point so thank you for joining us.
This concludes today's program. Thank you for your participation you may disconnect at any time.
Okay.
Yes.
Yeah.
Yes.
Yeah.
Yeah.