Q3 2024 Mid-America Apartment Communities Inc Earnings Call
Good morning and welcome to Mid-America apartment communities or MAA's third quarter, 2024 earnings conference call.
During management's prepared comments, all participants will be in a list and only mode. Afterwards, the company will conduct a question and answer session. In the interest of time, the company has requested a two question limit.
This conference call is being recorded today Thursday, October 31, 2024.
I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer, and Director of Capital Markets of MAA for opening comments.
Thank you, Julianne, and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team participating on the call this morning are Eric Bolton, Brad Hill, Tim Argo, Clay Holder, and Rob DelPriore.
Before we begin with 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 statement section in yesterday's earnings release and our 34-act filings with the SEC, which describe risk factors that may impact future results.
A copy of our prepared comments and an audio recording of this call will also 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. Third quarter results for Core FFO were ahead of our expectations, as same-store NOI came in better than our forecast.
Based on our analysis, we believe that peak deliveries of new supply that is impacting our submarkets and properties occurred this past third quarter.
Despite this record high supply pressure in Q3, we were able to capture solid performance in occupancy, record low resident turnover, strong collections, and better than expected performance with operating expenses, which all contributed to the third quarter NOI results.
In addition, as Tim will detail in his comments, we are beginning to see early trends with new lease pricing that support our position that the worst of the pressures on pricing from new supply are likely behind us.
As we have been discussing for the past year or so, we are now poised to see moderating trends in the amount of new supply deliveries that are impacting our portfolio as we head into 2025.
We expect to see normal seasonal leasing patterns for the next couple of quarters and remain convinced that the spring leasing season will usher in
The start of a recovery cycle with more favorable leasing conditions, as demand and absorption trends across our markets remain strong and the volume of new supply deliveries steadily declines.
With strengthening leasing conditions, significant redevelopment opportunity in our existing portfolio, and meaningful efficiency gains from various new technology initiatives,
We are excited about the upside outlook from our existing asset base. This momentum, coupled with the significant expansion of our external growth pipeline from our in-house new development projects, our pre-purchase joint venture program, and our recent new property acquisitions,
all combine for what we believe is a positive outlook for meaningful value growth.
Before turning the call over to Brad, I'd like to send my appreciation out to our MAA associates for their tremendous work and great results over this very busy third quarter. Now I'll turn the call over to Brad.
Thank you, Eric, and good morning, everyone.
MAA's long-term strategy of focusing on high growth markets and diversifying within those markets uniquely positions our portfolio to benefit from the continued strong demand in our footprint.
As an attractive, more affordable alternative to much of the higher-priced new multifamily supply being delivered, as well as the available single-family housing options, our residents are choosing to stay with us longer.
with only 11.5% of our move-outs occurring due to residents buying a home.
Our customer service is reflected in our Google scores which continues to lead the sector, supports our strong renewals and record low turnover rate.
With our 60-day exposure, which represents all current vacancies, and notices over the next 60 days, 30 bases points better than last year, and new deliveries poised to decline.
Our communities are well positioned for the seasonally slower months and for what we believe will be a stronger leasing environment in the spring and summer of 2025.
Throughout this year we've continued to make progress using our balance sheet capacity to support future earnings growth. In the third quarter we added two new projects to our under construction development pipeline.
Bringing our total under construction developments to eight projects, representing 2,762 units at a cost of approximately $978 million. A record level of development for MAA.
In addition to the previously disclosed 239-unit Charlotte project, where we provided financing to take out the equity partner on an under-construction community, we also closed and started construction on a 306-unit community in Richmond, Virginia in the third quarter.
The Richmond Project was a fully entitled, shovel-ready development that we took over from a developer who was unable to obtain financing. The Charlotte Project should deliver first units in the third quarter of 2025, and we expect the Richmond Project to deliver first units in first quarter of 2027.
We expect to start construction on one more project during the fourth quarter, bringing our total development starts for the year.
to five at a cost of $508 million, exceeding our original guidance for the year. We expect these projects to deliver an average expected stabilized NOI yield of 6.3 percent.
With our development pipeline approaching $1 billion, our focus turns to maintaining our pipeline at this level going forward. Pre-development work continues on a number of projects in our pipeline, which now includes 10 projects.
representing future growth of over 2,800 units at an expected cost of $1.1 billion. We have seen some construction cost declines in a few markets and remain hopeful that as the total under-construction pipeline
Again, our markets continues its steep decline, we could see further improvement in construction costs and schedules as well as we get into 2025, supporting our ability to start construction on additional opportunities at compelling yields.
In the transaction market, volume remains relatively low, with cap rates trending down into the high 4% range. Our team continues to find select but compelling acquisition opportunities at pricing better than market cap rates, generally in lease-up and often on an off-market basis.
In the third quarter, we closed on a 310-unit suburban property in Orlando for approximately $84 million, approximately 10% below replacement costs. This newly constructed property is nearly stabilized at just under 90% occupancy.
Subsequent to quarter end we closed on a 386 unit mid-rise property in the Knox Henderson area of Dallas at pricing 15% below current replacement costs. This property just wrapped up construction and is in its initial lease up.
This brings our total acquisition volume for the year to just over $270 million at an average stabilized NOI yield of 5.9%. Our team is actively evaluating other acquisition opportunities and we are hopeful we'll close another compelling acquisition before year-end.
Subsequent to quarter end, we sold a 216-unit property in Charlotte, North Carolina for $39 million, and we have an additional property in Richmond, Virginia under contract to sell with an expected closing during the fourth quarter. We have two more properties in Columbia, South Carolina.
on the market with a likely closing in early 2025.
Before I turn the call over to Tim, I want to echo Eric's comments to our Associates. Thank you for your hard work and dedication during this busy third quarter. With that, I'll turn it over to Tim.
Tim: Thanks Brad and good morning everyone. As noted by both Eric and Brad, various demand metrics we track remain strong, partially mitigating the impact of new supply deliveries that we believe peaked in the third quarter.
60-day exposure is better than at any point over the last five years. The seasonal deceleration of new lease pricing is less than the prior year and pre-COVID periods.
and absorption remains strong. However, price and growth, particularly on new leases, continues to be impacted by elevated new supply deliveries but, as noted, showed less seasonal deceleration than we typically see this time of the year.
For the third quarter, new lease pricing on a lease-over-lease basis was minus 5.4 percent, just a 30 basis point decline from the second quarter compared to a 270 basis point decline over the same period last year. In fact, 10 of our top 15 highest concentration markets
showed new lease-over-lease growth acceleration from the second to third quarter. Renewal rates for the quarter stayed strong, growing four-fifths.
We have several e-spaces.
These two components resulted in lease over lease pricing on a blended basis of minus 0.2 percent, also a 30 basis point decline from the second quarter and compared to a 220 basis point decline over the same period last year.
Average physical occupancy was 95.7%, up 20 basis points from the second quarter, demonstrating the strong absorption in our markets.
Tim: Collections continued to outperform expectations with net delinquency representing just 0.4% of billed rents. All these factors drove the resulting same-store revenue that was in line with the third quarter of 2023.
Tim: along with the demand metrics noted.
Our unique market diversification strategy that Brad mentioned continues to benefit overall portfolio results. As we have mentioned previously, several of our mid-tier markets are holding up better in this higher supply environment. Savannah, Richmond, Charleston, Greenville, and our Fredericksburg and our other northern Virginia properties are all outperforming the broader portfolio from a blended lease-over-lease pricing standpoint.
Particularly in a down cycle, our portfolio balance between large and mid-tier markets helps strengthen overall portfolio performance.
Also, as has been the case all year, Austin, Atlanta, and Jacksonville are markets that continue to be more negatively impacted by the absolute level of supply being delivered into those markets, with Austin being the toughest challenge of all the markets.
We continue to execute on our various redevelopment and repositioning initiatives where it makes sense in this elevated supply environment.
with the expectation of starting to reaccelerate next year.
For the third quarter of 2024, we completed over 1,700 interior unit upgrades, achieving rent increases of $108 above non-upgraded units. We are encouraged by the strength of this program in this competitive environment, demonstrated by the fact that these units lease quicker, on average, than a non-renovated unit when adjusted for the additional turn time.
For our repositioning program, we have two active projects that are in the repricing phase, with NLI yields approaching 10%. We have an additional six projects underway with a plan to complete construction and begin repricing in the spring of 2025 in what we believe will be an improving leasing environment.
Thank you. Bye.
As we wrap up October, we are seeing normal seasonal moderation, but are encouraged by demand that should continue to keep the sequential seasonal pricing deceleration better than historical trends.
Our 60-day exposure of 6.3% should serve to keep occupancy stable and allow for more pricing power than last year, as we also start to lap new lease pricing that weakened significantly during the fourth quarter of last year.
Absorption remains strong in our markets, with the third quarter representing the first time since the first quarter of 2022 that units absorbed exceeded units delivered. Therefore, there is not a significant backlog of inventory needing to be absorbed.
Tim: Accordingly, October New Lease Pricing is within 10 basis points of September New Lease Pricing, demonstrating this demand in our expectation of less seasonal moderation in the fourth quarter than we normally experience.
Furthermore, lease over lease rates on accepted renewals for November and December are in the poor and a quarter range.
And we will only reprice approximately 16% of our leases in the fourth quarter, which minimizes the impact of this moderation on the portfolio.
Tim: As we have discussed over the last few quarters, new supply deliveries continue to be a headwind in many of our markets.
However, we still believe the near-term outlook is in line with what we have discussed the last few quarters. That is, we expect this new supply will begin to moderate and that we have likely already seen the maximum impact of new lease over lease pricing growth.
and that the supply-demand balance continues to improve from here, subject to normal seasonality. At a portfolio level, construction starts in our footprint peaked in mid-2022, and we have seen historically that the maximum pressure on leasing is typically about two years after construction starts.
That's all I have in the way of prepared comments. I'll now turn the call over to Clay.
Thank you, Tim, and good morning, everyone.
We reported core FFO for the quarter of $2.21 per share, which was $0.05 per share above the midpoint of our third quarter guidance. Just under $0.03 of the favorability was related to favorable same-store expenses, with an additional $0.02 driven by a combination of favorable overhead costs, interest expense, and non-operating income.
Our same-store revenue results for the quarter were relatively in line with expectations.
Speaker Change: As Tim mentioned, same-store revenues benefited from strong occupancy during the quarter. Our same-store expense performance, particularly real estate taxes, was favorable compared to our guidance for the quarter.
We received property valuations for our quarter portfolio, which were lower than our expectations.
Repairs and maintenance costs continue to show moderation, growing at 2% compared to third quarter last year.
During the quarter, we funded nearly $167 million of development costs of the current $978 million pipeline, leaving an expected $368 million to be funded on this pipeline over the next two to three years.
We also invested approximately $13 million of capital through our redevelopment and repositioning programs during the quarter, which we expect to produce solid returns and continue to enhance the quality of our portfolio.
Our balance sheet remained solid. We ended the quarter with just over $800 million in combined cash and borrowing capacity under our revolving credit facility, providing significant opportunity to fund future investments.
Our leverage remains low with net debt to EBITDA at 3.9 times, and at quarter end our outstanding debt was approximately 90% fixed with an average maturity of 7 years at an effective rate of 3.8%.
Finally, we are reaffirming the midpoint of our Sink Store NOI and Core FFO guidance for the year, while revising other areas of our detailed guidance that we've previously provided.
Given our operating results achieved through the third quarter, we are slightly adjusting the midpoint of effective rent growth guidance by 15 basis points to 0.35% and revising total same store revenue guidance for the year to 0.5% at the midpoint.
Speaker Change: With property valuations for our Florida portfolio now known, we have more insight into our overall real estate tax expense for 2024, and are lowering the midpoint of our guidance to 2%. This results in the lowering of our property operating expense growth projections for the year to 3.75% at the midpoint.
Speaker Change: The changes to our property operating expense projections, combined with our updated same store revenue expectations, results in reaffirming our original midpoint expectations for same store NOI at minus 1.3%.
In addition to updating our same-store operating projections, we are revising our 2024 guidance to reflect favorable trends in G&A and interest expense.
These adjustments, combined with the 2 to 3 cents of estimated impact of cleanup costs,
related to storms in the fourth quarter resulted in us maintaining the midpoint of our full year core FFO guidance at $8.88 per share while narrowing the range to $8.80 to $8.96 per share.
Including the fourth quarter, we estimate our 2024 results will include approximately $0.08 to $0.09 of total storm cleanup costs compared to $0.01 of costs included in our initial 2024 guidance.
That is all that we have in the way of prepared comments, so Julianne, we will now turn the call back to you for questions.
Thank you. We will now open the call for questions. If you would like to ask a question, please press star then 1 on your touchtone phone. If you would like to withdraw your question, you may press star 1 again.
Our first question comes from Jamie Feldman from Wells Fargo. Please go ahead, your line is open.
Great, thanks and good morning and thanks for taking the call.
Sorry, the question, I guess just to start, can you talk about your 4Q expectations for blended rent growth and occupancy? You may have run through them, but I think it went kind of quickly, I don't know that I got it all. But I guess just trying to figure out, you know, if you think about year-end occupancy, you sounded pretty positive on demand and on renewals. So just what are you thinking at year-end and how 4Q looks for occupancy and blends?
Thank you very much.
Speaker Change: Yeah, Jamie, this is Tim. Yeah, I think in terms of occupancy, pretty consistent with where we are right now. We're 95.4% currently. I think 95 to 4, 95.5% for Q4 is a range we're comfortable with, particularly with where we see exposure right now.
Deceleration than we typically do as we commented in the call.
As we think about 25, I mean is there still a lot of juice to get on the expense side that could help you, you know, with efficiencies or anything else? Or do you think you get back to more of a normalized growth rate?
Speaker Change: Yeah, the...
the growth that we've seen in real estate tax expenses of 2%, I believe that would be a little tough to repeat that level at next year. I would think that would get to more of a normalized growth rate, somewhere between 3-4%. But I believe that would be appropriate for real estate taxes. Insurance, we had the slight decrease in our
Speaker Change: premium review all this past July.
And so we'll get that for the first half of next year, and then we'll have to reprice in July of next year.
Hard to say at this point where that's going to ultimately end up. I don't think it gets back to the levels of increases that we saw over the past couple of years, but I also don't think it's going to be flat either. So somewhere in the 5-10% range, keeping in mind that insurance is just a small piece of our overall expense stat.
Speaker Change: And in regards to personnel costs, you know, I think that that continues to moderate a little bit as we get some of these inflationary impacts behind us.
similar things for repair and maintenance. We've talked about some of the moderation we've seen this past year in repair and maintenance. I don't know that we'll be back at that level in 2025, but I think it will also be more of a reasonable growth rate, something around 3 to 3.5%.
Speaker Change: Marketing expenses I think would be the other one to call out that continue to run a little high the first half of the year, but I would expect that to come back down as we cop some of these increases that we've seen this past year.
Okay, great. Yeah, that was super helpful. Thank you.
Speaker Change: Our next question comes from Josh Dennerlein from Bank of America. Please go ahead, your line is open.
Josh Dennerlein: Yeah, hey guys, thanks for the time. I'm just kind of curious, is there any way to kind of quantify like the impact of like the deliveries on that new lease rate growth? Like are there any good examples of markets where you didn't really have supply pressure and maybe just how the new lease rate growth trended in those markets?
for Supply Heavy Markets.
Yeah, I mean, there are a couple markets. Austin, as we've talked about all year, continues to be, you know, our most challenging market and we saw new lease rates in Austin.
pick up in a negative way quite a bit from Q2 to Q3. We saw a little bit in Raleigh, but I think the point as far as Q3 is concerned, it was pretty targeted to a couple of markets. I made the comment in the prepared comments that out of our 15 highest concentration markets, we actually saw 10 of those 15 new lease rates accelerate.
And so, actually, if you pull out, if you focus on just Austin.
and pull the new lease rates in Austin out of both the Q2 and Q3 numbers, we actually would have seen new lease rate from Q2 to Q3 accelerate about 10 basis points as opposed to a 30 basis point decline. So certainly Austin was a big driver. Atlanta continues to be a struggle, but obviously we feel really good about Austin long term. It's just working through a lot of supply, but it did have an outsized impact on what we saw with new lease rates.
Okay, interesting. And then in those higher supply markets, were those also skewing renewal rates down as well? Because do you have like a similar stash for renewal if you like strip out Austin?
for the High Supply Markets.
Yeah, I mean, it impacts renewals to some extent, so if you think about for the third quarter, renewals were, what, somewhere in the four?
4% range, 4.1%. Austin was 1.5% to give you some perspective on that. So it does tend to impact renewal rates a little bit, but we certainly see much stronger renewal spreads than we do even for some of those more challenging markets.
Speaker Change: Oh, no, appreciate the color. Thank you.
Thank you for watching. I'm Clay Holder. I'll see you next time.
Our next question comes from Nick Yulikow from Scotiabank. Please go ahead, your line is open.
Hey, good morning guys. It's Dan Otrkarek along with Nick. I wanted to clarify how you're thinking about this peaking of supply ultimately impacting market rent growth next year. I'm obviously not talking guidance, but there's obviously still a lot of units to absorb, so just curious how you'd see that relative change in supply impacting the seasonal curve in market rents in those higher supply markets.
Speaker Change: Thank you.
Yeah, I mean, as we've talked about, you know, supply definitely peaked sort of the mid to, you know, second, third quarter of 2022.
and that's pretty consistent across all our markets. You know, some of them lagged or were ahead of that, maybe a quarter or so, but pretty consistent. So, you know, as we talked about, we think about two years from start is when we see the maximum amount of pressure, which is kind of about right now and what we saw in Q3. And I think we'll see a little bit of moderating pressure in Q4. It won't necessarily show up with seasonal moderation and just less traffic, less leases expiring. So I think as we get into the spring and summer, you know, I would expect we'll see normal seasonality, just like we would any other period, but start to see some strength, particularly on the new lease side as demand picks up seasonally and as the impact of the moderating supply, which we think, you know, we think in general supply.
is probably down 20% or so in 2025 as compared to 2024. So, should start to see that strength as we get into the spring.
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Speaker Change: That's great, thank you. And then can you just quantify what you're, what you'd expect the loss to lease and revenue earnings to be at the end of the year?
Speaker Change: Thank you very much.
Yeah, I think in terms of earn-in, you know, if you think about our blended lease-over-lease expectations for full year 2024, it's somewhere in that negative 3% range and, you know,
Half of that, if not a little more, carries over into 2025, which kind of drives the earn-in. So, you know, it's slightly negative, call it 20, 30 base points, somewhere in that range of where we sit right now in terms of earn-in.
Thank you.
Speaker Change: Thank you.
Our next question comes from Michael Goldsmith from UBS. Please go ahead, your line is open.
Speaker Change: Thank you. Thank you.
Good morning. Thanks a lot for taking my question. Absorption was clearly a positive in the quarter. Do you assume that
Michael Goldsmith: Absorption levels continue through the remainder of the year. Level of demand is baked into guidance and have you seen traffic or conversion levels move or change as we've moved into the slower leasing season? Thanks.
Speaker Change: Thank you. Bye. Bye.
Thank you very much.
I'm not sure I caught all of that, but I know you were asking about absorption initially. I mean, yeah, we don't see any reason for absorption to...
to go backwards. I mean, if you look at absorption so far this year, Q1 was a record high for any first quarter since we've been tracking it.
Q2 was the highest absorption since...
Speaker Change: early 2021. And Q3, as I mentioned, saw, you know, us actually absorb more units than were delivered for the first time since Q1 of 2022. So, we don't see anything on the demand side that's moderating. I mean, you think about job growth, household formation, population growth, you know, move outs to buy a home, we expect turnover to continue to stay low. So, I think demand will hold up strong. And as supply starts to moderate, which we think it will, I would expect absorption to be as good, if not better, as we look into 2025.
Speaker Change: Got it. And as a follow-up, and I'll try to streamline the questions better, but just, you know, how are concession levels trending for merchant developer lease-up properties? Are you offering any concession at stabilized properties? And maybe just, can you frame the price differential, if there is any, between the typical MAA property and the new developments?
Speaker Change: Thank you.
Yeah, I mean, broadly, concessions in Q3 were pretty consistent with Q2. I mean, it's pretty standard in a lot of markets that you're seeing, you know, on a stabilized...
in a stabilized submarket, half a month, two months, something like that. Now, we are seeing in lease-up areas a little more than that, and as the markets I've mentioned
Speaker Change: particularly Austin and Atlanta. You know, in Austin you're seeing up to three months when you think about Central Austin and Round Rock-Georgetown area, and then particularly in Midtown Atlanta seeing up to three months. So I would call out those two.
Speaker Change: kind of sub-market markets as the highest concessionary environment.
Speaker Change: but pretty consistent with what it's been in most of our other markets.
But we are still seeing, if we look at the new supply being delivered on aggregate, it's about, you know, anywhere from $250 to $300 higher price point than our average portfolio.
Thank you very much.
Our next question comes from Brad Heffern from RBC Capital Markets. Please go ahead, your line is open.
Right now, that's kind of where we're leaning into. When we look at our cost of equity versus our cost of debt, right now we're actually trading at probably a slight discount. So we're going to probably lean more into the debt side versus the equity side for the time being.
Things begin to change and you know we expect to get a little bit of more benefit there on the equity side at some point and you know we probably leaned a little bit more that direction when the time is right.
Okay, got it. And then I think I heard you say three percent gain to lease earlier in the call, correct me if I'm wrong, but I would think that that would weigh on new lease spreads in 2025. I'm just curious, big picture, when you think we might see those actually turn positive?
Thank you.
Speaker Change: We didn't
I didn't say 3%, I think our gain to lease right now, if you look at where October rents or October leases compared to in-place rents, it's about .7 gain to lease, which is not too unusual this time of year with seasonal, you know, pricing starts to decelerate some seasonally, so it's not a, you know, not a big number for us.
Right now, I think what we did talk about was just kind of the earn-in being slightly negative, headed into 2025, and then I would expect we see better new lease pricing in 2025 as compared to what we saw in 2024.
Okay, thank you.
Our next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead, your line is open.
Speaker Change: Thank you for watching. Please like, comment, and subscribe. See you soon.
Hey, good morning. Thank you. Two questions here. First, just based on, you know, your responses to a lot of the other analysts,
And then two, it sounds like your comments around
Speaker Change: you know, strengthening 25 and being in a better leasing position is predicated on the current run rate of absorption, meaning like you're, even though you expect absorption rates to improve.
Speaker Change: Your comments around expectations of leasing for 25 aren't predicated on improving absorptions based on the current trend.
Yeah, I would say your second point is right. I mean, we're, you know, we would expect to see...
consistent demands certainly consistent if not a little bit better absorption but you know where we where we think and would like to see that play out is more on rates and more new lease rates as opposed to you know trying to get occupancy to to 96 or 96 and a half or something like that we would prefer to focus on rates
Speaker Change: To your first point, I mean, I wouldn't say those are the only ones feeling supply pressure. Those are certainly feeling more supply pressure. I mean, most of our markets are getting more supply than what we would call a typical market.
But, you know, holding up a little better given where the supply is occurring relative to our markets and demand and all that, so We're certainly in a more elevated supply picture, but also in the Atlanta ones that stand out a little bit But I think those start to get better next year as do most of our other markets
You know, I think it's, Alex, this is Eric, I think it's important to just recap what Tim said.
earlier, is that, you know, of our 15 largest markets,
Ten of those actually saw
Speaker Change: new lease or release.
pricing improved in the third quarter as compared to the second quarter. And if you take just Austin out of the mix and just exclude Austin from our Q2 and Q3 performance trends on new lease pricing, our new lease pricing in Q3 would have been up 10 basis points from where it was in Q2. So Austin clearly is having an outsized impact on the portfolio right now.
We feel great about that market long term, but certainly in 2024, you know, it's weighing on the performance of the portfolio as a whole, given just the absolute level of supply that came into that one market.
Okay, the second question just revolves around the hurricane.
Speaker Change: obviously some big storms.
As you guys assess your portfolio, because it's incredible, the REITs never really seem to have any major damage.
Speaker Change: Is it a matter of either one, you guys really only buy properties or invest in properties that are away from rivers or are away from shorelines or elevated?
or is it some of the steps you're taking, or why is it that...
You know, we see some devastation, but then when the REITs report, like you guys, the damage is minimum. Just trying to understand if that's active management on your part as far as how you select the properties and where geographically you're keeping, or if there's something else at work.
Thanks, Rob. I think it's really a combination of factors. I think part of it is the selection of the sites and what we're building, but ultimately it's the ongoing repair and maintenance that we're spending on the properties, making sure that the roofs are relatively new, they're intact, and the preparation we do before the storms come in really assists with minimizing our damage so that it really is only cleanup that we're stuck with and kind of some landscaping and other smaller things. Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Our next question comes from Handel St. Just from Mizuho. Please go ahead, your line is open.
Speaker Change: Thank you.
Hey guys, thanks for taking the question. Can you talk a bit about the transaction market and the opportunities coming across your desk?
More sellers willing to engage with cap rates down to 5 and even sub 5 as you noted.
So, as you guys look at the opportunities...
Speaker Change: coming across your desk. What are the key items or non-negotiables you're seeking? Is it newer assets with operational upside, as you talked about previously? And then maybe some color on the compelling, I think there's a word used, opportunities that you're looking at here, potentially closing by year end. Is that a comment on the size, value creation, IRR potential, what's so compelling? Some color would be appreciated, thanks.
Speaker Change: Thank you. Bye. Bye.
Hey Hendel, this is Brad. I mean generally relative to the compelling comment, you know, that really is similar to what we're investing in today and if you look at the
Stabilized NOI yields of the three acquisitions we've had this year at 5.9 percent relative to where current market cap rates are.
You know those are pretty compelling returns I would say really what we're focused on and where we're finding our opportunities are on
properties that are generally brand-new most times they are just finishing up their initial lease up or excuse me just finishing up construction and just entering in their initial lease up you know it's assets that are
It's tougher for other folks to get financed, but given our ability to close all cash, we have some competitive advantage versus others in the market. There's also opportunities for us to put our operating platform on these assets to drive additional returns that many other folks can't do.
Oftentimes, we're looking for properties that are in a proximity to current assets that we have where we're able to apply those properties and really generate additional returns. So those are kind of the competitive... Excuse me.
that we're looking for where we're able to generate additional returns. And then the last point I would just make is generally...
Speaker Change: A lot of what we're doing is off-market. We have extensive relationships in this region of the country, exclusively operating for 30 years. About 80% of the $2 billion that we've purchased over the last 10 years have been...
with merchant developers, so we have extensive relationships that we're able to lean on that allow us the opportunity to execute at returns that often exceed what the market rates are.
Speaker Change: Got it. Appreciate that.
Speaker Change: Just going back to development pipeline for a moment, now up to over a billion, I think you mentioned.
and with a sizable opportunity beyond that with the shadow pipeline. I guess I'm curious how large.
Could that...
development pipeline grow to in the near term? How aggressive could you be given the...
compelling opportunity you see into 26.
and then maybe some color on which projects are most likely to be started next and how you're thinking about underwriting the rent growth in those markets the next couple of years. Thanks.
Yeah, if I forget something in that question, please let me know, but yeah, I mean, in terms of the size of the development pipeline, you know, we've commented for...
A couple of years now, really, a desire to build that pipeline.
To a billion, billion two
total size. Today we're just under a billion, so we've got a little bit of room, you know, to grow that a little bit. That would equate to about three to four starts a year.
in over a three-year period, which is really the timeline it takes for most of these projects that gets us to our billion, billion two. So that's really, we're very comfortable given the size of our balance sheet of really maintaining our pipeline at that level. And clearly, given what we think are going to be strong operating fundamentals in 26, 27, this is a great time for us to be.
ramping up that development pipeline to that billion, billion two level. In terms of how we're underwriting these projects, very conservatively, you know the developments that we have delivering today on average even in this
high-supplied Environment we're exceeding our underwritings on average by about 50 basis points. So we underwrite very conservatively Very little trending in rents for the first few years and typically you get to year three year four You start trending a little bit more. We're trending our expenses the entire whole period So that's generally how we underwrite our deals, but but on a very conservative basis
Speaker Change: Thank you.
Okay, thanks. I appreciate that.
Speaker Change: Our next question comes from Buck Horn from Raymond James. Please go ahead, your line is open.
Hey, thanks, good morning. I just wanted to follow up on that. Just in thinking about the Richmond asset in terms of the start there,
you know, as you're rebuilding the development pipeline, thinking about new or your large markets versus mid-tier markets, would you expect to kind of restock and maybe look at more development opportunities in those mid-tier markets? And I'm kind of wondering what the
differential and yields might be to do a development in a larger market versus a mid-tier market right now.
Speaker Change: I'll see you next time. Bye.
Hey Buck, this is Brad. Yeah, I mean, we definitely believe in our strategy of allocating capital between both large markets and these mid-tier markets. So we are very much committed to continuing to growing our presence and allocating capital both through acquisitions and development in some of these mid-tier markets. And, you know, really it's been a function of just where the opportunities have come. So we haven't seen as many opportunities given the lower level of supply in some of these mid-tier markets, but we are seeing some of those opportunities now.
Speaker Change: We acquired the Raleigh project earlier this year, the development here in Richmond. So you'll see us continue to have a focus in those mid-tier markets. I would say from a stabilized yield perspective, there's maybe 10, 20 basis points difference in today's rate. So Richmond's close to 6.5, and some of the other projects are maybe 6.25 or 6.3. So there's not a big swing in terms of some of the yields for these projects, but really that is going to manifest itself maybe a little bit on IRRs. Where we're getting higher IRRs on the projects in these secondary markets is the exit cap rates, maybe a little bit higher.
a little bit different, but that's really the only difference in terms of the underwriting of these projects.
Speaker Change: That's great, really helpful. Second question, with these new mandates coming out for return to office, I know it's maybe not as big in Sunbelt markets, but
Have you seen any...
Speaker Change: changes or shifts recently in terms of traffic releasing patterns in urban locations versus suburban locations that might be affected by certain return to office policies.
Hey, Buck. This is Tim. Nothing that we've seen, you know, at a material level. I mean, we did see, you know, we talk about performance between A and B assets and urban and suburban. We did see that.
Speaker Change: narrow a little bit. Were the urban properties performing a little bit better? I'm not sure that's necessarily related to anything return to office, but we did see a little bit of performance there. But no, broadly speaking, not seeing a lot of shifts in any of the metrics that we track.
Got it. Thanks, guys. Appreciate it. Good luck.
Our next question comes from Eric Wolfe from Citi. Please go ahead, your line is open.
Eric Wolfe: Hey, thanks. As you get ready to give guidance next year, I guess, what will you be looking at over the next couple months to determine your view on market rent growth or blended spreads for next year? You know, I think you said new leases might be down like 7 or 8 percent in November and December. Does that even weigh into your view? Does it not really matter? Just wondering what we should be looking at.
to kind of understand what market rent growth should be like next year.
Thank you so much.
Speaker Change: Thank you very much.
Yeah, this is Tim. I mean, I think new lease pricing is the key metric that we're looking at in terms of, you know, it's not going to, what happens in the rest of this quarter is not going to be impactful necessarily to 2024, but it does have some impact to some extent on earn-in and where we start the year. You know, occupancy we think will be relatively stable, and so, you know, it's going to, and we think renewals will continue to be stable. They've been in that 4% to 5% range all throughout this year, so we don't expect to see that change necessarily. So it's, it'll come down to the new lease rates and sort of where those
Speaker Change: how those play out and then you know we'll have more to say as we as we
Get into Q4 earnings release, but certainly sitting here today compared to where we were 12 months ago feel a lot better both in terms, you know, just macroeconomic variables, you know, recession risk is down. There's a little more certainty there. You know, we know supplies is starting to moderate.
And so feel pretty good that it sets up for a little bit better year. I mean, it's still going to be elevated supply. And, you know, even in a, quote, normal environment, new lease rates in Q1 and Q4 are typically negative, so we don't expect that necessarily to change, but we do expect to see a little more.
Speaker Change: Positive momentum in terms of new lease pricing when we get into Q2 and Q3.
The other thing that I'll add to that quickly on top of Tim's comment is that don't forget what Tim mentioned in that we intentionally only have about 16% of our leases expiring in the fourth quarter.
consider that roughly, you know, a good percentage of those are going to renew as a renewal transaction versus a new lease transaction. So the overall impact on earn-in from new lease performance between now and the end of the year is not as significant as you might think it is given the low percentage of leases set to expire and the split between renewal and new lease pricing that will take place.
yep that's helpful and then I guess are there any other items that we should be thinking about when it comes to your revenue growth potential next year I know I sometimes ask about this other income but I think you've been studying the Wi-Fi cable program so was curious if that might pick up next year if that's maybe an opportunity you know more for like 2026
Speaker Change: in 2026 and 2027.
Thank you for joining us. We look forward to seeing you again soon here on Let's Talk, the show that was co-hosted by the New York Times. I'm your host, Michael Moller. Thanks for joining us. Have a great day. We'll see you next time. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.
yeah I mean that you called out one that that can start to have an impact me we're
testing or retrofitting four properties this year that are just now starting to go live that have that property-wide ubiquitous Wi-Fi, if you will. And, you know, so if you think about those four properties by themselves,
Speaker Change: Once it's fully rolled out and kind of flows through the portfolio is close to a million dollars. So you can start to extrapolate the opportunities that we have there. We expect to expand that pretty significantly next year, initially looking at maybe 20 to 25 properties that we do in 2025. So that on the revenue side, that would be one that I call out, you know, we're wrapping up the smart rent installations at the last few properties now, there'll be a little bit of tailwind from that in 2025. But you know, other than rent growth and stable occupancy, I think the
The Wi-Fi starts to slowly have a bit of an impact.
Speaker Change: Thank you.
Speaker Change: Thank you. Bye.
Speaker Change: Our next question comes from John Kim from BMO Capital Markets. Please go ahead, your line is open.
Thank you. As far as hurricane and storm related costs, you don't exclude or add back those costs to get to your core FFO, which I think is a really standout policy versus maybe some of your peers.
but going forward will you be including a larger assumed expense in your guidance as you look to 2025 and how do you think about exposure in some of these markets like like Tampa?
Thank you. Thank you.
Yeah, John. Hey, this is Clay.
Yeah, so I think whenever you kind of look at what the cost that we had, that we were projecting for the full year this year, it's going to be somewhere around $10 million, you know, $9, $10 million, call it.
Speaker Change: When you look back over the course of the past 7 years, 6-7 years, we haven't had anything of this magnitude.
that we've had to deal with. And, you know, it's been spread across each quarter of this year. It hasn't been just one quarter or one storm. It's been multiple storms impacting us throughout the year. So, you know, I think as we look towards next year, you know, that's not something we've traditionally done in the past as far as including some storm costs in our guidance. Now, we did include one penny in our guidance this past year, in 2024, because we knew about that storm. It impacted us before we released earnings back in February.
and then released our 2024 guide to February.
So we reflected that, but that's the only cost that we reflected in our guidance. But as we look forward to next year, I think that you would expect to see something in there. It will not be at the levels that we experienced this year, just because history hasn't shown that that's the norm. But I would expect it will include something in our guidance to account for that.
Thank you. Bye.
And does it make you think differently about some of your Florida exposure? I know you just purchased something in Orlando, but as far as Tampa or maybe some other markets where...
insurance costs could be pretty significant.
Speaker Change: Thank you for watching.
Well, the one, you know, that's, you know, the insurance cost in Florida gets a lot of publicity. Of course, one thing you have to consider is just our overall portfolio and that we're able to defer a little bit of that risk, you know, across, you know, across all of our markets, not just in the Florida market. So, you know, we're still committed to Florida. Yes, there's some higher costs related to insurance there, but just given our size and portfolio, our platform that we have across the portfolio, we can still take advantage of some opportunities there.
Speaker Change: And just to clarify, you do exclude these costs from same-store expense, but do you keep those affected properties in the same-store pool?
and our earnings, we don't want it to impact the comparability of the same portfolio.
Thank you for watching. And I'll see you next time.
Speaker Change: All right.
Speaker Change: Great, thank you.
Speaker Change: Our next question comes from Julian Bleuet from Goldman Sachs. Please go ahead, your line is open.
Thank you. Thank you. Thank you.
Yeah, thank you. I just want to make sure I heard a couple numbers correctly so the earn-in going into next year about negative 30 basis points
and then gain to lease currently around negative 70 basis points. And then with, my real sort of question here is, with new lease spreads down 7% in October, do you still think we can get to sort of positive new lease spreads by spring, early summer? Just seems like quite the ramp to get there.
To answer your first question, you have those numbers correct. That is what we stated. As far as new lease rates, we'll...
Speaker Change: We'll talk more about this, obviously, in our next quarter earnings. You know, it's difficult to say right now exactly where it will get to. We're kind of going through our budgeting planning process now. You know, I think one point to make is…
through this year, our best new lease pricing was about negative 4%, negative 4.2, something like that in July.
Speaker Change: We certainly expect to exceed that. And to reiterate a point I made earlier, you know, even in normal supply and demand environments, Q1, Q4, typically negative new lease pricing anyway. So it's really Q2 and Q3 where you start to see it go positive. So more to come on that, but we certainly believe all the factors.
supply and demand point to much better new lease performance in 2025 than 2024. And of course the prior year comparisons factor into this as well.
That's right.
Yeah, thank you. Yeah, on those sort of comparisons, it does feel like the comparisons get a lot easier year over year in November and December, given just the new lease deceleration and concessions we saw last year. So if the worst of supply pressure is behind us and October held steady versus September, why wouldn't that sort of new lease spread begin to improve sequentially into November and December?
Speaker Change: Thank you.
Speaker Change: Well, you know, we'll see. And it might. You know, we certainly don't expect it to get much worse. For all the reasons we've laid out, including those easier comps. You know, it's always... New Leafs is certainly the tip of the spear and can change on a dime. But we feel comfortable it's going to stay in this range, if not start to improve a little bit. But, you know, the other point is just there's...
Not much leases, as we mentioned, you know, 16% and frankly, not a lot of traffic, particularly when you get into mid-November on through December, just with holidays, just not a lot of people searching. So, you know, it's not going to have a material impact one way or the other, but, you know, it could it.
We can see it sort of hanging in where it is right now.
Speaker Change: Okay, great. Thank you.
Speaker Change: Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead, your line is open.
Hey, great. Thanks for the time. I just wanted to ask about kind of the portfolio opportunity out there.
I think you talked a little bit about kind of the one-off acquisition opportunities and clearly seeing you guys be a little bit more acquisitive there, but are you seeing any change in terms of kind of sellers of portfolios out there? We've seen some large portfolios trade recently. Is that something that maybe you guys can take advantage of, or is the pricing there not kind of what you're looking for?
Hey Adam, this is Brad. I mean generally what we see on portfolios is a lot of times the quality of the assets are not what we're looking for.
There's some type of bad with the good, so to speak. In some of the portfolios that we've seen recently, I mean, frankly, part of that has been pricing.
Speaker Change: Some of the pricing on those assets were more aggressive than what we believed was
appropriate or where we want to invest our capital. I mean, if you look at the...
the three one-off acquisitions that we transacted on, you know, close to a six on an NOI yield basis for brand-new assets, so from an after-CAPEX basis, it's pretty appealing, especially considered to where some of these portfolios are trading, and then if you take into account the age and after-CAPEX nature of those, we just feel like, you know, what we've been able to do so far has been a very good strategy for us. Now, if there's a portfolio out there
We think it has some type of strategic nature to it that makes us stronger in some way. We would absolutely take a look at that. And if it's accretive to earnings, we would be interested in looking at something like that.
Thank you. Thank you. Thank you.
Great. And then just as a quick follow-up here, just remind us where kind of the pre-COVID bad debt.
level or rule of thumb is and then kind of where you are today relative to that and you know your view as to kind of getting back to that pre-COVID number is that something that can happen in 2025 or is that you know still multiple years away?
Speaker Change: I mean, we're honestly we're just about there. I mean, I think, you know, pre-COVID.
It was anywhere from 30 to 40 basis points of net delinquency.
Right now we're at about 40 basis points, so at most there's 5 to 10 basis points of difference in terms of where we were pre-COVID. We certainly didn't deteriorate near as much as some other markets, and we've just about gotten back to where we were pre-COVID.
It's really helpful. Thanks for the time.
Our next question comes from Michael Lewis from Truist Securities. Please go ahead, your line is open.
Michael Lewis: Thank you. So, Eric, in the press release last night, in your remarks, you said we're confident we will enter a new multi-year cycle with demand outpacing supply.
Speaker Change: One of the points of pushback I sometimes get is, you know, with cost pressures easing and short-term interest rates coming down,
Speaker Change: and developers who have capital like you, you know, already starting projects, that maybe this cycle will be short, right? That maybe what ends up happening is your same-star growth in 2025 is...
similar or a little bit better than 24, and maybe 26 is a good year. And then by the time you get to 27, you have, you know, your next wave of delivery. So, you know, maybe there's historical precedent or kind of, you know, what do you think about the reason why?
Sunbelt supply won't just rise up to meet the demand more quickly than in the past.
Well, I think, you know, to put it in context, what's important to recall or remember is that the deliveries this year
Speaker Change: This is not a normal supply cycle. The deliveries this year is a 50-year high.
Speaker Change: 50-year high, and so do I think that by 2027, 2028, and 2029 that we could see supply levels pick up from where they will likely be in 2025 and 2026? It is certainly possible. You have to start to think about financing costs and construction costs, and will things pencil out by that point in a way that is super compelling for developers? But I think that the idea that we are going to, any time in the next 10 years, repeat this 50-year high cycle I think is not reasonable in my opinion.
So I think that, and of course, we've long believed that ultimately what really drives performance
and the ability to drive value for shareholder capital over a long period of time is really the demand side of the business. We go through these periodic cycles where supply picks up, but because of some of the things Brad mentioned in terms of how we've diversified across both mid-tier and large-tier markets, we think we can weather these supply cycles okay.
And, you know, if you'd have told me.
Two years ago, three years ago, we were headed to a 50-year high delivery of new supply and that our NOI was only going to go down by 1.3 percent.
Speaker Change: I'd take that all day long. If that's as bad as it gets in a 50-year period, that's okay. Next year will be better. Twenty-six will be even better. I think twenty-seven and twenty-eight will be even better. Now, is it possible that, again, supply picks up in twenty-eight and twenty-nine? Probably so, but I don't see us going back to another 50-year high.
Speaker Change: Yeah, Michael, this is Brad. The only point I would add is if you look at the starts that occurred in first, second, third quarter of...
Brad Hill: 2022, excuse me, there's a very high correlation with that associated with where interest rates were. Historic low interest rates.
Speaker Change: You know, I think interest rates could come down a little bit from where they are today, but they certainly, we don't think, go back to that level that really spurred this kind of excessive 50-year high supply levels that Eric was talking about.
Okay, great. And I'm going to structure my second question kind of the same way, right? I'm going to read a brief excerpt from Cushman and Wakefield's 3Q National Apartment Report and then ask you a question. So they said, demand for apartment units is booming again, resurgent international migration trends in recent years alongside a stout labor market continue to power some of the best multifamily demand on record.
Speaker Change: So...
Speaker Change: Is this a major key variable, like in 2025, is this going to be a key demand variable potentially where, you know, me and the rest of the analysts on the call are writing research reports about this? Or do you think it's, you know, is that wildly overstating the importance of how that trends?
I think the influence that immigration has on...
apartment performance is a function of two things. It's a function of, you know, the markets, obviously, and I would argue that a number of the coastal gateway markets are going to be more influenced by immigration trends than a lot of our sunbelt markets. Secondly, I would tell you that the price point of your product is going to also be impacted somewhat or is a variable that can be influenced by immigration trends. And, you know, we think that a lower price point portfolio is more likely than not to be more at risk from fluctuation with, you know,
growing or declining levels of immigration. We think that we are, you know, not exposed in that way. Over 80% of our portfolio is single. You know, majority are female. We're serving a resident profile with average incomes of over 80, 85,000 a year. I mean, this is not a demographic that we're serving largely in our portfolio that's going to be influenced or impacted one way or the other by changing immigration trends.
Speaker Change: Thank you. Bye.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Alex Kim from Zellman. Please go ahead, your line is open.
Hey, good morning. Thanks for taking my question. I wanted to ask about occupancy trends, same for occupancy rows.
and I know it stands at 95.4 in October, but could you talk through some of the drivers of the 3Q increase? And with Glenhead rent growth inflecting negatively during the quarter, I mean, when does incremental occupancy become less valuable than rent growth Q revenue strategy?
Speaker Change: I mean, I think as far as the increase in occupancy from Q2 to Q3 is a function of the absorption we talked about and the, you know, getting more units absorbed than were delivered. And we certainly saw that play out in our portfolio and the majority of our markets all saw that sequential gain. You know, our
And we balance pricing and occupancy at a market, sub-market, property level. I think we're comfortable where we are right now with occupancy at the 95.4.
Speaker Change: primarily because of what we see with exposure that we talked about. We're at a record low exposure, something we haven't seen ever at 6.3, which what that does is you know kind of stabilizes where we think occupancy will be over the next 60 days or so and allows us where we can to push on pricing. So you know exposure is what we look at a little more than occupancy and it's in that range you know we're certainly comfortable on this 95.
Speaker Change: 495.5 range and being able to push a little bit on pricing where we can.
Got it. Thanks. And then just a quick follow-up here. This is now the second quarter.
community that was already in lease-up, you talk through just kind of what you're seeing, what you like about that strategy, and if it's something that you'll continue employing moving forward.
You kind of broke up in your question, can you repeat that last question?
Speaker Change: Yeah, sorry, just asking about your recent activity in buying properties in lease-up. Just curious about that strategy and if it's something you'll continue.
Speaker Change: Yeah, absolutely. Our acquisition strategy has been focused on brand new properties in their initial lease up for the last few years. Again, we just think that there's an opportunity for us to execute in that area, given that it's harder to line up financing when a property is not stabilized, and our ability to execute all cash is a benefit for us that we're able to really execute, driving higher returns, higher NOI yields than what we could get on a fully marketed project that's stabilized. So yeah, we'll continue to focus in that area.
Got it. Thanks for the time.
Our last question today will come from Anne Chan from Green Street. Please go ahead, your line is open.
Speaker Change: Thank you.
Well certainly the market that we talked a lot about that's struggling right now, Austin is one that, you know, as we think about longer term is one that we're really high on. I mean, you know, we, in terms of broader trends, we look at migration, we look at household formation, we look at population growth, and obviously look at job growth. And Austin is, you know, near the top of the list and all those, so that would be one. Raleigh's another one that we feel strong about. Orlando is one that
You know, it's had some some struggle with supply, but it's it's got some really strong demand metrics So, you know most of our footprint, you know We would be happy to continue to acquire and those are two or three markets that I would point out It's having some really strong forward-looking demand trends
Got it. Thank you for your time.
Speaker Change: Thanks.
We have no further questions. I will return the call to MAA for closing remarks.
Okay, no further comments from the company. I appreciate you joining us this morning and we look forward to seeing many of you out at NAWI. Thank you.
Speaker Change: This concludes today's program. Thank you for your participation. You may now disconnect.