Mid-America Apartment Communities, Inc.

Please stand by. Your program is about to begin. Good morning, ladies and gentlemen, and welcome to the MAA fourth quarter and full year 2021 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 3, 2022. And I will now turn the call over to Andrew Schaffer, Senior Vice President, Treasurer, and Director of Capital Markets of MAA for opening comments. Please go ahead.

Thank you, Chris, and good morning, everyone. This is Andrew Schaefer, 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 Del Prore, Joe Fracchia, Tom Grimes, 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 comparable GAAP financial measures, as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the For Investors page of our website at www.mac.com. A copy of our prepared comments and 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, everyone. MAA wrapped up calendar year 2021 with strong momentum in rent growth, driving fourth quarter results that were ahead of expectations. The demand for apartment housing across our markets continues to grow. Comparing the pricing achieved on all the leases that went into effect during the fourth quarter on a lease-over-lease basis, rents jumped 16% as compared to the rents on expiring leases. This is 100 basis points ahead of the performance in the preceding third quarter. We're clearly carrying good momentum for continued strong rent growth in the coming year. As outlined in our earnings guidance for 2022, we plan to take further advantage of the strong leasing environment and drive additional rent growth through unit interior upgrades and more extensive full repositioning projects at several communities. Additionally, we continue a steady rollout of a number of new technology initiatives aimed at further expanding our operating margins. We are just beginning to harvest some of the benefits of our new tech initiatives with 30 leasing positions eliminated through attrition in 2021 and another 50 leasing positions targeted to be eliminated by the end of this year. Our new development and lease up portfolios continue to make solid progress with leasing velocity and rents running ahead of our pro forma expectations. As Brad will outline in his comments, we have several additional new projects that we are expected to start in 2022. The balance sheet remains in a very strong position, and during the fourth quarter, Standard & Poor's moved their credit rating outlook on MAA to a positive status. Given the strong earnings performance and robust pricing being captured on property dispositions, we expect to see the balance sheet metrics improve further in 2022. Our initial earnings guidance for 2022 outlines in more detail our expectations for continued strong performance from our existing portfolio, the expansion of our new development pipeline, and our commitment to maintain a strong balance sheet. Following a 9% growth in core FFO per share in calendar year 2021, we're forecasting a 13% growth in core FFO in 2022 at the midpoint of our guidance range. Our team of MAA associates had a terrific year of performance in 2021, and I very much appreciate their service to our residents and support to each other. And that's all I have in the way of prepared comments, and I'll turn the call over to Tom to update on property operations. Tom.

Thank you, Eric, and good morning, everyone. Performance for the quarter was once again robust, and those trends carried into 2022. We saw strong pricing performance across the portfolio during the fourth quarter. Blended lease-over-lease pricing achieved during the quarter was up 16%. As a result, all in-place rents, or effective rent growth, increased 10.1% on a year-over-year basis. Average effective rent growth is our primary revenue driver, and with current blended pricing momentum, we expect it to continue to strengthen. In addition, average daily occupancy for the quarter was a strong 96%. As outlined in the release, we saw steady progress from our product upgrade initiatives. This includes our interior unit redevelopment program as well as installation of our smart home technology package that includes mobile control of lights, thermostat and security as well as leak detection. For the full year 2021, we completed 6,360 interior unit upgrades and installed 23,579 smart home packages. This brings the total number of smart units to 48,000. In 2022, we plan to complete a similar level of interior unit upgrades and smart home packages. For our repositioning programs, we're in the final stages of completing work on our first eight properties in the program and have another eight that are underway this year. The strong leasing activity continued into 2022. Lease over lease pricing on new move-in leases for January was 15.4% ahead of the rent on the prior lease. Renewal lease pricing for January was running 17.1% ahead of the prior lease. As a result, blended lease pricing for the portfolio was up approximately 16.3% in January. Average daily occupancy for the month of January is currently 95.9%, which is 50 basis points better than January of last year. Exposure, which is all vacant units plus notices through a 60-day period, is just 7.4%. This is 60 basis points better than prior year. This supports our ability to continue to prioritize rent growth. We're well positioned as we move into 2022. I'm grateful for our team's continued resilience and strong performance. I'm excited to see what they accomplish in 2022. I'll now turn the call over to Brad.

Thank you, Tom, and good morning, everyone. 2021 was a record year for multifamily transactions, and the fourth quarter was no exception. We continue to see very strong asset pricing trends across our footprint, with an acceleration in pricing in the fourth quarter. Operational performance across our markets is strong, driving continued high investor demand. Bid sheets are deep, with winners surviving multiple best and final rounds and offering aggressive all-around deal terms. To date, we've seen no negative impact on asset values from expected rising interest rates, and we believe the tremendous amount of liquidity coupled with continued strong rent growth expectations will drive values higher. We remain active in the transaction market and are constantly evaluating several acquisition opportunities and believe that as we move further into the recovery part of the cycle, particularly in a rising rate environment, more compelling opportunities for acquiring stabilized and lease-up properties could materialize. New development continues to provide a more attractive investment basis, higher stabilized NOI yield, and higher long-term returns to capital as compared to acquisitions, so we will continue to focus on growing our development pipeline. Our pipeline ended 2021 at $460 million under construction and $242 million in lease-up. As we've indicated in the past, the size of our development pipeline will fluctuate due to the timing differences of starts and completions, but we remain focused on expanding our opportunity. Later in 2022, the growth in our pipeline will be more evident as we expect to end the year with $900 million to $1 billion under construction and $300 million in lease-up. Therefore, we expect our total under construction and in lease-up to grow from approximately $700 million at the end of 2021 to $1.2 billion to $1.3 billion by the end of 2022. This ramp up will include in-house developments at two owned sites in Denver, one of which is a three-phase site, an owned site in Tampa, and two controlled sites in Denver and Raleigh. On the pre-purchase side of our development operation, we are in pre-development on a Salt Lake City site that we hope to start in late 2022. Performance at communities in their initial lease up is going well. Absorption is stronger than we expected and rents on average are five to 13% above pro forma. Reflective of the strong absorption, we've moved up the expected stabilization date of our novel midtown community to first quarter 22. All of our under construction projects remain at or below our budgeted construction costs, but we continue to see increased and broad based material shortages and delivery delays. In addition, we've begun to see some level of labor shortages in the market. Our construction team has done a great job navigating these challenges and minimizing the impact to schedules and the economics of our projects, but this is an area we'll need to actively monitor throughout the year. We expect these challenges to add 60 days or so to any new starts this year, and we expect a 30-day delay at our Val Vista and West Glen projects. We've adjusted our construction schedules as noted in the supplemental to reflect the delay at these two properties. We had tremendous execution on our property dispositions in 2021, selling seven assets and achieving pricing well ahead of our expectations. Our fourth quarter dispositions were sold above our guidance range, generating a leveraged investment IRR of 26% for these 29-year-old assets. In 2022, we will continue our disciplined pruning of the portfolio and expect to sell another four properties over the coming year. That's all out of the way of prepared comments, so I'll turn it over to Al.

Thank you, Brad, and good morning, everyone. Core FFO performance of $1.90 per share for the fourth quarter was 7 cents per share above the midpoint of our guidance, producing core FFO of $7.01 per share for the full year, which, as Eric mentioned, is 9% above the prior year. The outperformance for the quarter is virtually all from revenue growth. As Tom outlined, strong pricing trends continued through the fourth quarter, showing no seasonal slowdown, which not only benefited the fourth quarter, but provided additional strength for 2022 expectations, which I'll talk about more in just a moment. In total, same-store operating expenses for the fourth quarter were essentially in line with our expectations, as some inflationary pressures impacted repair and maintenance costs. Real estate taxes were lower than expected due to favorable appeals and rate rollbacks finalized during the quarter. We expect some continued inflationary pressures in our operating expenses during 2022, but we expect the impact to be more than absorbed through the continued strong revenue growth for the year. We did provide initial earnings guidance for 2022 with the release, which is detailed in the supplemental package with the release. Core FFO for the full year is projected to be $7.92 per share at the midpoint of the range, which represents a 13% growth over the prior year. The overall backdrop for our projected 2022 performance is continued strong occupancy levels, remaining between 95.6% and 96% for the full year. providing a foundation supporting continued strong growth and effective rent per unit as the strong blended lease of lease rent rates continue to work through our portfolio. Effective rent growth is projected to be 10% for the year at the midpoint, which is nearly twice the total of effective rent growth posted for 2021. This result is based on continued strong blended lease rate growth through the first few quarters with some normal seasonal trends and challenging comparisons beginning to be felt late in the year. particularly during the fourth quarter. This produces projected total same-store revenue growth of 8% to 10% for the full year. As mentioned, we expect to see some inflationary pressures impacting our same-store operating expenses for the year, with personnel costs, repair and maintenance costs, real estate taxes and insurance costs all trending above long-term growth rates, producing 5% to 6% growth overall for 2022. However, this pressure is expected to be more than offset by the strong revenue trends producing an NOI growth expectation of 10% to 12% for the year. Our forecast also assumes an active transaction year with projected development funding of $200 to $300 million for the year and acquisitions of $75 to $125 million. We expect the majority of this to be funded by disposition proceeds of between $300 to $350 million. Our forecast anticipates a starting six new development projects during the year, a combination of in-house and pre-purchase deals, as outlined by Brad, which will increase our total pipeline and funding commitment as we enter 2023. We currently have no plans to raise additional equity during the year, as our forecast projects are leveraged to end the year slightly below the current level, with debt to EBIT ranging four to four and a half times. Also, virtually all of our debt is currently fixed, with maturities well-laddered over 8.7 years on average, providing some protection against rising interest rates. So that's all we have on the way for prepared comments, so Chris, we'll now turn the call back over to you for any questions.

Certainly. At this time, if you would like to ask a question, please press star and 1 on your touch-tone phone. You may withdraw yourself from the question queue at any time by pressing the pound key. And our first question comes from Nick Ulico from Scotiabank. Your line is open.

Hi. Good morning, everyone. In terms of the guidance, I was hoping you could maybe give a little bit more detail on the 10% effective rent growth at the midpoint. Your blended lease pricing has been trending higher than that in January fourth quarter. So just trying to understand, I know you talked about some slowing in the back half of the year, but just trying to understand how you're thinking about sort of future market rent growth on top of what you've already achieved so far.

Yeah, Nick, this is Al. I can give you some color on that. And as we talked about a little bit in the comments, it's really, I mean, it's based on a strong projection of revenue for sure, but carrying the significant strength of what you're seeing in the fourth quarter into the year and having pricing at beginning year, as we talked about, move to the back half of the year, being impacted by a couple of things, really just some normal seasonality. As we enter the back part of this year, particularly in the fourth quarter, You know, we thought we'd see some seasonality really powered through that. I mean, it just continued to accelerate in rent pricing. So our forecast is built on continued strong pricing, particularly in the first half of the year, beginning in the back half to feel a little bit of normal seasonality, and then hitting those tough comps that we saw from the fourth quarter. So I wouldn't say that we're projecting weakness at all. We're just projecting a couple things that come back to sort of normality in the back part of the year. I think that's, you know, we felt like that was a pretty forecast for the year.

Okay, that's helpful. I guess just on the renewal piece of that, maybe you can give us a feel for, again, I mean, you've been pushing renewals at well over 10%. So, I mean, at what point does that sort of slow down, you think, this year?

I'll give you the overall, and some of these other guys want to jump in here, but what I'll say is, first, the forecast, we build our forecast off of blended, first and foremost, because that's really, you know, that drives, obviously, the economic portion of the forecast. And so how it falls out from renewals to new leases, we're we don't focus specifically on for the forecast other than I would say the underlying belief expectation is that you'll see renewals be pretty steady through the year. That's where you'll see the strength continue or the market that we're seeing right now continue If we see the seasonality that we're talking about in new comps, you'll feel that more in the new lease pricing. So, you know, I hesitate to give too much detail there because really we're focused on blended. I think that's the most important number. But that's how we think about it, and we've laid it out in our forecast. You'll see that those two normalizing factors hit the new lease pricing of the year.

Okay, thanks. Just one last quick one is if you had any latest move-in data into your portfolio from stats from areas outside of the Sun Belt and any markets that that's more beneficial right now?

Yeah, I mean, that continues to be the trend. And we saw, you know, in 2019, it was 10%, then 11%, and now 14%. And the markets that we're seeing highest 25% of move-ins are in Phoenix, 22% in Tampa, 20% in Nashville, 19% in Charleston. Honestly, it's just a continuation of the trends you've been seeing and we've been talking about for the last year or so.

All right. Thanks, guys. Thanks, Nick.

And our next question comes from Brad Heffern from RBC Capital Markets. Your line is open.

Hey, good morning, everyone. First, could you give the current loss to lease number, and can you talk about how much of the revenue growth you're projecting for 22 comes from realization of that loss to lease versus how much of it comes from underlying market rent growth?

Yeah, Brad, this is Tim. So, you know, there's a couple ways to think about our loss to lease. But, you know, if you look at the leases we did in December, for example, the average price of the blended average price for December of all those leases was about $1,574. And you compare that to our December effective rent per unit, so all the leases in place in December was about $1,443. So if you do the math on that, it's roughly 9%. Now, recognizing December is only about 5% of the leases, so it takes some time to work through that and get through a full loss to lease. Alternatively, if you base it on our new leases that we did in December, it's a little bit higher, closer to 12% or so. But in terms of what's going to flow into December, 2022, it's really more of a function of all the blended lease-over-lease that we saw in 21. So 10.7 was our full-year blended lease-over-lease in 2021. Assuming the normal seasonality that Al talked about, we would expect, you know, half of that or so to flow into 2022. So you've got, you know, call it 5% to 6% of sort of earned-in rent growth sitting here on, you know, as of January 1.

Okay, got it. And then on the dispositions for this year, obviously the balance sheet's improving pretty rapidly. So I'm curious why have dispositions at all and why not fund the capital needs with debt.

Well, Brad, this is Eric. You know, we just think that it's really important to continue a discipline of cycling off the bottom, if you will, a little bit every year, specific properties that we think that either due to the age of the asset or submarket or neighborhood concerns that the outlook for the property is not likely to be as strong as the rest of the portfolio. And in an effort to sort of manage earnings performance and earnings stability over a full cycle, one of the ways that we feel like we accomplished that is by having a discipline to cycle off a little bit every year, some of the weakest outlook, some of the weaker properties from an outlook perspective. So, you know, we think that, you know, and certainly obviously we're getting great pricing today. So we just, you know, we sold seven properties in 2021. We'll sell four. is our plan at the moment in 2022. And we think that that effort is just part of our chemistry to continue to compound long-term earnings growth.

Okay. Thank you.

And our next question comes from Neil Melkin from Capital One. Your line is open.

Good morning, guys. Nice job on another Stellar quarter. You know, can you guys please give an update on what you're sending out for renewals in February and March?

Neil, renewals are in the mid-teens, you know, ranging from sort of 15% to 17% on where they've gone out. Okay, great.

I know that you mentioned a little bit in the prepared remarks about how potentially rising interest rates may yield some acquisition opportunities. You've been pretty outspoken about focusing your capital on development just given the historically low cap rate environment. Do you expect that... you know, in some of your markets, rising rates will eliminate, you know, some incremental marginal buyers who, you know, use a lot of leveraged, you know, floating rate to finance the property and can pay, you know, essentially uneconomic rates. Is that something that you think will actually come to fruition? Is it more of a market-specific thing? Is it, you know, can you just kind of comment on, you know, that outlook as the year progresses and rates, you know, at least in the short part of the curve go higher?

Yeah, Neil, this is Brad, and I'll answer that. You know, I would say, you know, we expect as we get later in this year and as some of these interest rates do start to increase a little bit, that on the margin we could see some of the buyer interest in some of the markets that we're looking at could come down a little bit. I'd say there's so much capital that's out there in the market right now that I think that's really on the margin. I don't see anything indicative on the horizon or from the buyers and brokers that we're talking to to indicate that some level of interest rate rise would drive a big fall off in pricing. We're not really seeing that. We've certainly seen a run up in pricing Here in the fourth quarter and also in the first quarter, cap rates are really stable, but the underlying underwriting is very aggressive, so we continue to see price increasing. But I think as the operations start to normalize a little bit more, I do think that The run up in pricing that we've seen, the run up in rent growth that we've seen is already priced in. So I think to see another large increase in asset pricing from here. on the acquisitions is not likely to come. So I think from a seller's perspective, kind of the benefit that they're going to get is already baked in at this point. And so from the sellers and brokers we're talking to, certainly price is the most important characteristic or function right now in a transaction. I do think as we get later in the year, that starts to shift a little bit more to some level of of strength that we have of execution, all cash closing speed, those type things become a little bit more valuable as we get later in the year in our markets.

Yeah, that's super helpful. If I could just quick one. I've heard some rumblings about, you know, some Sunbelt apartment owners looking at potentially single family rental portfolios or assets, you know, kind of in their backyard just to sort of tap into that strength and continue to follow the renter through their life cycle. Can you just comment on that?

Well, Neil, this is Eric. We get asked this a lot. I think that for us at the moment, we continue to find ample opportunity, we think, to deploy capital and achieve some growth at very attractive yields through the development and pre-purchase programs that Brad has detailed. And as we sit here today, the notion of consciously going out and really deploying capital in single-family rental is not something that really we're focused on doing. Just don't see, frankly, a real need to do that. As you mentioned, that segment of the residential market continues to attract just enormous amounts of capital. And anything in that area, much like in the apartment sector, is going to be very expensive to execute on today. And so, you know, we continue to believe that the renter pool, if you will, for our product is still quite significant, growing significantly, quite deep, particularly at our affordable price point. So we think that better for us to stick to our focus that we have on multifamily, and that's certainly what our plans are at the moment.

Makes a lot of sense. Thanks, guys. Great quarter. Thanks. Thanks, Sam.

And our next question comes from Nick Joseph from Citi. Your line is open.

Hey, this is Michael Griffin on for Nick. Wanted to circle back on the effective rent growth question posed initially. So I'm just curious, how do you get both to the low end and the high end of that expected guidance range?

I think it would come down to, Mike, this is Al, and Tim can jump in here as well. I mean, it's going to come into what happens with those leasing trends from here as you move into the year. What we've got dialed in is, as we talked about, two kind of normalizing factors happen in the back part of the year. You know, we start seeing some normal season outlets come in, and we bump into those comps. I think the low end would be, you know, it would be bumping to that worse than we have projected right now, obviously, where you see, I would say, new lease pricing gets challenged earlier in the year. That is the most aggressive point of that negotiation or the most challenging part of that negotiation. I mean, rules will be stable, but it will be those new leases. Right now, as Tom mentioned, they're going out well. If we saw that happen earlier, it would likely push toward that low end. On the other side of that, if we saw that environment we're seeing right now, we saw it was in January, we saw 16.3%. you know, blended pricing. When we saw that go for a couple of more months or a few more months, I mean, I think we would be talking about the top end of that. So that's really how we think about it. You know, we put the forecast based on, you know, recent projection that we would see some of those factors happen. It's certainly reasonable, and so we'll monitor that as we move forward.

I'll add one point, Michael. I think, you know, overall we've assumed, you know, economic backdrop of pretty good job growth and supply levels moderating a little bit. So, you know, to Al's point, if If we had a shock on the job side or economic shock one way or the other, that would be something that might drive the pricing down and push us towards the lower end.

I'll add one more factor, too, that Tim and I have talked about. One thing we did in the forecast also, and we've done this in the past, is we left ourselves room if you look at the projection for average occupancy. We left 30 basis points below the average of this year, thinking that we wanted to continue pushing on that price and have a little foot on the gas. So we have that support, but that's how we think about it.

Gotcha. I appreciate the color on that for sure. And then just turning to the development side, you know, you anticipate $200 million to $300 million spend this year building the pipeline to $1 billion plus by the end of that year. Where do you see that sort of in the near to medium term, and how much more could you see that grow in the coming years?

Well, Michael, this is Brad. I'll certainly talk a little bit about the near term here this year. You know, we have pretty good visibility. In terms of our starts this year, this is a focus that we've had for the last couple of years, really focusing on building out our development capability, our development platform, and we have good visibility on the six projects that we've indicated this year and expect to start those between $650 to $750 million here by the end of this year. We've got two owned sites in Denver that we should start here in the first half of the year. We've got an owned site in Tampa that we will also start first part of this year. We have a site under contract in Raleigh that should start this year. We've got another site in Denver that we're working on that should start late this year. And then on top of that, those are all in-house projects, so we have good visibility on those. We're also working on our JV platform. We're in pre-development on a site right now in Salt Lake City that should start by the end of this year. And then in addition to those, we've got other JV projects that we're working on And one of the nice things about those is the lead time a lot of times is less than our in-house development, so sometimes those can start within the year. So we're hopeful that we can continue to build out that even more than where we are today. But those are the starts that we have this year. Again, good visibility on that and good momentum really in building that platform and the capabilities there.

Michael, this is Eric. Just to add to what Brad is saying, I think that with six new starts this year and the funding associated with that, I would suggest to you that that's probably what we're attempting to do is build a process and seek opportunities either through pre-purchase or land sites that we can acquire. I would view that as Our goal is to sort of have a steady state level of funding that approximates kind of the funding that you're seeing taking place this year. It would mean, depending on the pace of construction and the pace of lease up, that our overall aggregate, you know, sort of pipeline, if you will, is going to be hovering around a billion dollars. And we have said for some time that from an enterprise perspective, we're comfortable carrying up to about 5% of our enterprise value in a development pipeline, which at today's valuation would suggest that we're comfortable somewhere around $1.3, $1.4 billion. So I would tell you that we would expect going forward that you're going to see the pipeline sort of stay around $1 billion, and annual funding needs are going to be approximating $300 million or so.

Great. Well, I really appreciate the color. Thanks for the time and look forward to seeing you all in Florida next month.

Thank you. Thank you.

And our next question comes from John Kim from BMO Capital Markets. Your line is open.

Thank you. I wanted to ask about your optimism on acquisitions this year and how pricing is getting better. How dynamic are cap rates due to not only interest rate movements but the NOI growth that's being achieved? So, if NOI growth is 15% to 20%, are we going to see a similar amount of increase in cap rates this year?

Well, John, this is Brad. I mean, you know, based on the numbers that we're seeing, I mean, it looks to us like forward cap rates are pretty constant. They're hovering around that low 3% range right now. But what we're seeing is, as you mentioned, the rent growth and the underlying NOI growth that's being underwritten right now is in that It can be 15%, 20% depending on the market, which is really driving the value growth at the moment. So I think cap rates are going to be pretty steady where they are right now. I think the question is just what are folks going to underwrite on the NOI growth perspective. And that's very aggressive from where we sit today. And certainly based on the amount of liquidity that's in the market from some of the folks that we're talking to in the markets, some believe that cap rates go down from where we are today. I don't know if that's true or not, but certainly values appear to be increasing at a pretty rapid pace right now based on the underlying fundamentals.

and and john this is uh eric again you know the thing i would tell you about why i think there is reason to believe that there may be better buying opportunities ahead is that it when we see been through these cycles before and typically what happens is that as you get later into the recovery cycle uh what you begin to see are sellers or developers uh capital is looking for you know, a little bit more certainty for close. Particularly you see this happen towards the end of the year where contracts that had been, or properties that had been previously under contract fall out and they have a year in closing mandates and therefore going to contract with someone like us who they know can be an all-cash buyer, not subject to any kind of financing risk, and just a very good track record of closing. Those attributes become more important as you get later into the cycle. I think that given what's happening with NOI growth, we don't really see the market changing from a pricing perspective so much. And for all the reasons Brad said, cap rates we think are going to continue to hold very, very strong. because even with the prospect of some slight rise in interest rates, the NOI growth rate is more than compensating for that. So it's going to cause, I think, values to hold up quite strong. But the early indication that you see that as you get later in the cycle, the early trends that sometimes happen is certainty of close becomes a more important characteristic. And when we get into that kind of point, get to that point, that's where we think that we may have a little bit more success.

That's very colored. Thank you. I also wanted to follow up on your same store revenue guidance. which was 9% at the midpoint. Tim mentioned the earnings you're getting from rent signed last year. But the last couple quarters, you had it at 15% and 16%, and this quarter's trending at 16% as well. So what gets you to the 9% revenue? Is there any other offsetting factors that would offset the very high rent growth that's already been achieved?

I'll start with that and then pitch it to Tim. I think a couple of things. One, you're looking at revenue. So what we're talking about is effective rent growth is going to be 10%, which is a little higher. And that's going to be based on largely what we talked about starting off that 16% level, which is great to see, and expecting as we move late into the year to see those two normalizing factors happen, occur a little bit. So it's normal seasonal pressure, heating those comps. And so that's the proxy part. in terms of effective rent down to that nine, you've got some other areas, other income items, though they're growing, they're not going to grow at 10%. So that kind of gets you to the nine there. And so that's how we're thinking about that factor. So I'll let Tim do anything. What color you think about it?

No, I think the fees and the dialing in a little bit lower occupancy is what gets you from the effective rent growth to the revenue growth. And then back, you know, on the pricing, it's, again, sort of back to, Alex's point about seasonality, you know, typically we would see Q2 is kind of the highest price point for blended pricing, Q3 down a little bit, and Q4 down from there with seasonality. And that's really what's driving it is sort of we expect that return to, to normal seasonality, but starting off certainly at a higher point than we would in a, quote, normal year.

Yeah, don't forget, also mentioned earlier, we're also giving ourselves 30 basis points. We're sort of eating 30 basis points of occupancy that's in that total revenue to give ourselves the room to continue pushing price as well. So I think all those factors impact it.

All right, thank you. Looking forward to seeing you somewhere.

And our next question comes from Rich Anderson from SMBC. Your line is open.

Hey, thanks. Good morning, everyone. So you said a few times the kind of main variable to guidance or among the main variables is what happens with new lease growth. You know, a rule of thumb in my mind about strength of a market in multifamily is when new lease growth exceeds renewal, and that's been happening. That's obviously likely to shift this year. Do you have an idea of how low new lease growth could go embedded in your blended number of 10%? And the reason why I ask is I feel like if you've done almost 20% new lease growth in the fourth quarter, could it be possible that you could get close to zero new lease growth by the end of this year, back half of this year?

No. The short answer to that, Rich, is no. We think that when you look at sort of the supply-demand dynamics and just overall strength of the market, and you're right, new lease pricing is kind of the tip of the spear, if you will. We don't see any scenario suggesting that we see that kind of 0% growth. I think that particularly in the Sunbelt markets where we continue to see demand drivers, job growth, household formation trends, population trends, migration trends, such that the demand side of the equation we think in 2022 is likely to be as strong if not stronger than what we saw in 2021. And then following on what Tim mentioned as well, supply levels and deliveries in 2022 are actually down slightly from 2021. So, you know, while clearly there was some, you know, COVID recovery kind of in unique circumstances taking place in 2021 that helped there a little bit, when you just look at the key fundamentals that drive absorption and our ability to push rents, in 2022, we see no reason at the moment to believe that there's going to be any material deterioration in fundamentals. As Al mentioned, the only thing that we're really thinking about is that we know that we've got some tougher prior year comps and it's hard to put a number on that, but it's there. And we'll have to wrestle with that topic a bit later in the year. And then we do think that contrary to 2021, there probably will be some seasonality that will come back into 2022. And as you get particularly in the fourth quarter and the holiday season, you know, leasing volumes tend to, or traffic, it tends to moderate a little bit. So we didn't see that in 2021. We may not see it in 2022, but we're assuming we will. And as to where that actually gets to from a new lease pricing perspective, we will see. As Al mentioned, we really budget and forecast and manage our business based on blended performance, but we certainly see new lease pricing remaining positive in 2022.

Yeah, I recognize zero is an extreme, you know, range. But nonetheless, it got the answer I was looking for. So second question, you know, you had a great year last year. You're looking to have another great year this year, but perhaps a mirror image of last year where it's great in the first half and slows down in the second half. Considering that cadence, I mean, you know, we should be starting to condition people that this type of growth, double-digit blended growth, is not a forever circumstance. Is that the right way to think of it? You know, you're not, I'm not looking for 23 guidance, obviously, but, I mean, we're, this is, this is setting up for, you know, CPI plus return to growth type of thing in 2023 and beyond. Would you, would you agree with that assessment?

You know, Rich, you know, It's hard to say. I think if you look at 23 and beyond, probably the biggest challenge we have is just we're dealing with prior year comparisons at a level that we've never dealt with before. But again, fundamentally, when you think about the drivers of demand, for housing broadly. There's been all kind of studies. I'm sure you've seen a lot of the research done suggesting that broadly in the U.S., we have undersupplied housing in the U.S. by a significant amount for the last five to 10 years. And so you take a region like these Sunbelt markets where the migration trends, the population grant trends, and the job growth trends are such that they're outpacing other regions of the country. The demand is strong. Single-family home pricing is escalating at levels beyond anything that we've seen. Developers are having trouble, whether it be single-family, multifamily, securing the materials and the labor they need to address the demand that's there. you know, it starts to define, you know, a pretty robust environment for the foreseeable future. You know, call it the next three or four years. And particularly, again, as it relates to these Sunbelt markets. So, you know, it's hard to say exactly what we get to in 23 and 24. But, you know, reverting back to, you know, 3.5% to 3% rent growth, I don't see that for a while.

Okay, great. Well, hope to see you in Tokyo someday soon.

Thanks, Rich.

And our next question comes from Austin Werschmidt from KeyBank. Your line is open.

Hey, good morning, everybody. So you guys talked earlier about the loss to lease being in that high single, low double-digit range, and you guys are achieving well above that today on the new and renewal lease rates. So is that increase, I guess, above above and beyond the loss to lease just reflect kind of what you're expecting for market rent growth this year? Or are you guys kind of leading the market and could end up above market by the time we get to year end?

Awesome, Tim. I think the pricing we're seeing right now is a combination, obviously, of the strength, but also some of the comps going back to 12 months ago. We really saw pricing start to take off last year. around April, May, and then continue to accelerate from there. And so, you know, we have this first three or four months where, if you want to say there's some easier comps, those are in place combined with the strength we saw towards the back half of last year. So I think that's kind of what's driving it now. And then we'll, to Rich's point earlier, we'll see sort of a mirror reflection of that as we get into the back half of the year and get into some of those tougher comps.

Yep, that makes sense. So what are you projecting for market rent growth across the portfolio this year?

Well, I'll tell you what's built in our – we talked about earlier also. We really have blended lease pricing built in our overall. And, you know, for the full year, the average is going to be somewhere probably around 8% that we have built in at this point. And like we talked about, we'll look at that as we move forward. And we've talked about what it's built on. It's built on as we move to the back part, seeing some normal seasonal trends and bumping those comps that Tim talked about.

And then just last one, I was curious what the rent to income ratio is today, and maybe more importantly, what that figure looks like, you know, on some of the new move-in leases over the last, you know, several months.

Yeah, we've tracked that on a new move-in basis, and right now it's right up against a little under 24%, which is in line what it is in the third quarter. It's moved up slightly over the last few quarters. It's been running in the 21%, 22% before. But we're seeing, you know, frankly, great revenue or great salary increases in the folks that are coming in. They're doing well and at 24% quite comfortable compared to the 30% or 35% you hear that economists say begins to put stress on the household. So a lot of room to run there.

Got it. Great. Thank you.

And our next question comes from Alexander Goldfarb from Piper Sanders. Your line is open.

Oh, great. Good morning down there. And certainly you guys are popular. A lot of people want to take you to different places. So a few questions here. One, first a clarification. On the year-over-year comps, is there any free rent that you're comping over? So like the 16% numbers that you cited, is that enhanced in any way by burn-off of free rent a year ago, or this is absolute rent growth?

I mean, it's absolute effective rent growth. I mean, concessions were a little bit higher this time last year, but we're talking, you know, 10 to 20 basis points of difference. So it's really no impact at all on concessions.

Okay. And then, Eric, as far as the seasonality, I mean, your markets never really had the shutdown that the coast had. So it's not like there's a big reopening. That said, several articles have highlighted the job recovery back to near pre-pandemic levels. What do you think is causing the aberration in terms of basically seasonality no longer being the case last year and potentially this year? Because, again, it's not like all these markets suddenly reopen and people are surging back. So what do you think is really driving this?

You know, Alex, I think that – The fact that we did not have a seasonal slowdown in 2021, I think I would just attribute to... just the continued very strong demand drivers for housing across the Sun Belt, whether it's job growth, it's migration trends, it's people looking to come to a more affordable region of the country. Whatever the motivations and drivers are, I think that those trends were there in 2021 and more than offset whatever slowdown typically occurs when people get to the holiday timeframe and are just less reluctant to think about moving. I think that, you know, we just had such strong, strong pull to these markets for all the reasons I mentioned that in 21, we overcame that normal seasonal mindset. In 2022, I think we don't know. I, you know, we think that that it's prudent to think about some kind of a normal seasonal slowdown. Certainly, when you look at how we stagger our lease expirations from a portfolio management perspective, we tend to stagger more of our lease expirations in the summer and spring. we intentionally uh stagger fewer expirations in the winter months believing that the traffic levels will be a little uh moderate um or a moderate down from what you see in the spring and the summer so that's the way we sort of set up the the forecast and the way we we manage our our lease expirations from a portfolio perspective We may be surprised again in 2022. And, you know, all the factors that are at play today may continue to hold up, you know, or will hold up to some degree, I'm sure. I think that, you know, we may be surprised at the upside again in 2022. But right now, we just believe that, you know, a normal season slowdown in the holiday fourth quarter of next year is a prudent thing to count on.

And then just finally, quick question on development yields. Obviously, there's cost pressure, there's timing delays, but you have really strong rent growth. So in your model, and I realize that every pro forma always pencils, but in your model, do you anticipate rent growth outpacing the timing delays in materials and labor, or do you think that the costs will outrun or that they're even, in which case yields are unchanged?

Yeah, Alex, this is Brad. You know, we are underwriting a little bit of downward pressure on our development yields, the, excuse me, the developments that we have in our pipeline. Right now that we've started, those are kind of locked in at I call it a 5-9 yield with, frankly, upward movement in that yield when we update with current rents that we're seeing that are outpacing what our original expectations are. So the things that are on the book will certainly outperform what we expect. We do expect those yields to come down, you know, maybe to 5.25, 5.5. But I'll remind you that the way we underwrite our developments, We're very conservative. We're underwriting at today's rents with very little trending. So if we have a development that we're working on today that starts in 2023, we do not trend those rents for this year. And depending on what third-party provider you're looking at, we're expecting rent growth this year of 10% to 15%. So if we were to underwrite our developments with those trending, I think we'll be fine and match the yields that we're seeing today. But we're not banking on that when we go into a development. We're underwriting with rents today and are just conservative in our underwriting and our expectations.

Thank you. Thanks, Alex.

And our next question comes from Chandni Luthra from Goldman Sachs. Your line is open.

Hi, good morning, everyone. This is Chandni Luthra, Goldman Sachs. Thank you for taking my question. So you guys talked about supply levels and deliveries in 2022 actually down slightly from 2021. So looking out to 2023 and kind of, you know, thinking about sort of this pause or rather delays from 2022, plus all this surge capital that we have been seeing into your markets. I mean, what gives you comfort that there isn't an oversupply situation developing in your backyard as we look out beyond this year? And as a follow-up of that, how do you think about your offering being competitive in such an event?

Well, we don't believe that there is an oversupply risk building at the moment. We think that as you do start to look at 2023, and particularly in 2024, based on permitting data and new start data that we see, it suggests to us that supply levels may pick up or will pick up in late 2023 into 2024 from what's currently happening. That's a pickup in supply. What really matters is how does that supply level compare to the demand that is there and resulting absorption that you get. And with the strong demand trends that we expect to continue across these Sunbelt markets, I would characterize what we anticipate happening as a consequence of supply is perhaps the potential for some moderation in rent growth to begin to show up in late 23 into 2024 as a consequence of supply levels. But the extent of that moderation, if at all, is really going to come down to what's happening on the demand side of the equation. And what we see happening in Sunbelt markets is continued very strong demand. Coupled with that is what's happening on the single-family side, both single-family rental and for sale, where the demand there continues to and the supply there continues to be limited. And so broadly speaking, we just think that it sets up for a very strong demand outlook for apartment housing for the next two or three years. And even with some supply levels picking up a little bit in late 23 or 24, you know, I think it suggests to us that at worst we're looking at a slight moderation, if you will, from today's performance trends on rent growth. But we don't at this point see any reason to underwrite any kind of long-term expectation for even reverting back to long-term historical trends. We think we'll be above that for some time.

And this is Brad. I'll add another point to that. On the construction side, we're seeing schedules certainly elongated. We're seeing labor struggles in the market. So getting projects finished is taking longer. So just the overall system is pretty much at capacity. So it's really hard to see a major uptick in the supply side as we go forward from here.

All right. And our next question comes from Rob Stevenson from Jani. You're open.

Good morning, guys. Quick question on same-store numbers. You guys are forecasting 8% to 10% same-store revenue growth. What is the band by market? Is that like 5% at the low end and 15% at the high end? Where is that band, and what markets are you seeing at the top, and which markets are you expecting to be at the bottom of that among your major ones? Hello?

And I do apologize. Speakers, can you hear us? If you can hear us, we are unable to hear you. And I do apologize, participants, for the technical difficulties. We will try and get the speakers reconnected. Just one moment. And I do apologize, everyone. It looks like the speaker's lost power. They are reconnecting just momentarily. All right, everyone, we got the speakers reconnected. They're going to let us know what happened. Go ahead.

Sorry, this is Eric Bolton here. We're actually having an ice and snowstorm here in Memphis, believe it or not, and one of the buildings lost power, and so the generator came back on, but the line got disconnected. So all's well, but we did lose power. I'm going to suggest that we just go ahead and wrap up the earnings call at this point. I think there were three more questions out there, and we just ask that you guys reach out to us directly. Feel free to call either myself or Al or Andrew, and we'll be happy to answer your questions. But we appreciate everyone joining us this morning, and sorry for the loss of power here, but all's good on our side. So thank you very much.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.