Mid-America Apartment Communities, Inc.

Good morning, ladies and gentlemen, and welcome to the MAA Second Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterward, the company will conduct a question and answer session. As a reminder, this conference call is being recorded today, July 28, 2022. I will now turn the call over to Andrew Schaffer, Senior Vice President, Treasurer, and Director of Capital Markets of MAA, for opening comments.

Thank you, Gretchen, 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 Prory, 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 statement 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.maac.com. 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. Leasing conditions remain strong across our Sunbelt portfolio. Job growth, positive migration trends, and the higher cost of single-family home ownership continue to fuel strong demand. Roughly halfway through the busy leasing season, we do not see any indication that demand is slowing. Leasing trafficker leads were up 11% in the second quarter as compared to prior year, generating a 7% jump in lease applications. New move-ins during the quarter from households migrating into our Sunbelt footprint increased slightly from last year and drove 15% of our new move-ins. Further supporting the strength of the leasing market and the prospects for continued rent growth, it's worth noting that the rent-to-income ratio of the new leases executed in the second quarter was 22%. It remains in a very affordable range. Collections also remain strong, with 99.5% of the rent billed in the second quarter collected, which is actually up slightly from 99.4% collected in the preceding first quarter. Al will touch on this, and while we see no near-term indications that leasing conditions are poised to change, and we expect the strong occupancy and rent growth trends to continue. We do anticipate that we will see some year-over-year moderation in rent growth over the back half of the year as the prior year performance comparisons become more difficult. But current rent levels continue to hold up well and are increasingly fueling solid revenue momentum for the start of the next calendar year. Pressure on operating expenses from the competitive labor market, inflationary and supply chain pressures, and real estate taxes continued in the second quarter. We expect these pressures will likely persist over the balance of the year with some relief beginning in 2023 as we begin to harvest increasing benefits from our new tech and margin expansion initiatives. On balance, given the strong top line performance, our NOI margin continues to expand And as noted in our earnings release, we once again increased our expectations for growth and same store net operating income for the year. We are seeing increasing opportunity within the transaction market and are very pleased with our Tampa property acquisition completed earlier this month. This new property acquisition is actually located directly adjacent to one of our existing properties, providing an opportunity to consolidate onsite operations to drive a very attractive investment return. Our new development pipeline continues to expand as we continue to find attractive opportunities to drive value and yields well above our overall cost of capital. Our pipeline of existing construction projects remains on budget, and our lease-up projects are outperforming our pro formas. We remain very encouraged by the current leasing conditions and the early momentum and key variables that will define calendar year 2023's initial performance. There are, of course, growing concerns surrounding the broader economy and concerns surrounding a potential recession. Should we find ourselves facing a weaker economic backdrop later this year or in 2023, we believe that MAA is very well positioned for such an environment. First, we believe that the well-diversified and more affordable nature of our markets will continue to enable our Sunbelt portfolio to better weather an economic slowdown as compared to other regions. MAA's balance sheet and coverage ratios are very strong and better than at any point in our company's history. We continue to introduce new technology and changes to our operating practices that will drive more efficiency and higher margins over the next couple of years. MAA has an established performance record of responding well to down cycles, and I'm confident that we will again demonstrate that resilience should we find ourselves in such an environment. Meanwhile, our outlook remains positive, and current leasing conditions are very strong. That's all I have in the way of prepared comments, and I'll now turn the call over to Brad.

Thank you, Eric, and good morning, everyone. Transaction activity in the second quarter slowed meaningfully from the first quarter of the year, as the increase in interest rates, coupled with a higher degree of economic uncertainty, have combined to send buyers with shorter investment time horizons as well as buyers using higher leverage to the sidelines. Unlike previous quarters, we saw a number of properties fall out of contract in the second quarter. For the properties that did close, generally they closed with stronger institutional quality investors at cap rates that were 40 basis points higher than where deals traded in the first quarter. As uncertainty in the market has risen, our ability to move quickly and close all cash has led to a significant increase in inbound calls to our transaction team. As Eric mentioned, in July we successfully acquired a newly constructed property in the Tampa MSA. This 196-unit property is adjacent to an existing MAA property and will be fully integrated into our existing property, creating operational efficiencies and margin expansion opportunities that we will fully harvest over the next few years. Our under-construction and in-leaseup pipeline remains at $740 million. While we had no construction starts in the second quarter, we did purchase a land parcel for a planned 2023 start of a 300-unit development in Orlando. Also subsequent to quarter end, we purchased a 500 unit development site in the Denver MSA that we also expect to start construction on in 2023. These land purchases bring our total owned land sites for development to eight sites with entitlements for approximately 2,677 units. We previously expected to start construction on our sites in Raleigh, Tampa, and Denver this year, but we've pushed the start of our Denver project to 2023. Pre-development work on our Raleigh and Tampa projects are progressing and subject to receiving acceptable construction costs and the appropriate building permits. We still expect to start construction on these projects this year. We continue pre-development work on several additional in-house and pre-purchase developments located in Atlanta, Charlotte, Denver, Orlando, and Salt Lake City that we hope to start over the next 18 months. The timing of planned construction starts can change as we work through the local approval and the construction bidding processes, but at this time, we expect to start construction on approximately 1,250 units this year, and we expect to end the year with a pipeline of under-construction projects over $700 million and a pipeline of projects both under-construction and in-lease-up between $925 million and $975 million. Okay. Our construction management team continues to actively manage all our projects and has done a tremendous job working with our contractors to keep the inflationary pressure surrounding labor and material costs from causing a meaningful increase to our overall job costs. To avoid the cost escalation that is so prevalent in the market today, we are making commitments to purchase materials much earlier in the process than we've had to in the past. Nevertheless, delivery delays, material shortages, and securing building permits remain our biggest challenges. In our supplemental, we did push back by one quarter our expected delivery dates on Naval Val Vista in Phoenix and Central Park in Denver. Operating performance at communities in their initial lease-up continues to strengthen. Traffic and leads remain elevated, leading to rents well ahead of our pro forma expectations at all of our lease-up communities. Due to the strong leasing performance achieved by our property team at MAA West Glen, we moved up our expected stabilization date by one quarter to third quarter of 22. As mentioned in our release, we successfully sold our two disposition properties in the Fort Worth market for $167 million. We have two more planned disposition properties in the market that we hope to close late this year. One is in suburban Maryland, and one is in the Austin market. That's all I have in the way of prepared comments, so with that, I'll turn it over to Tom.

Thank you, Brad. Good morning, everyone. Same store performance for the quarter was once again robust and our busy summer season is going well. We saw strong pricing performance across the portfolio during the second quarter. Blended lease over lease pricing achieved during the quarter was up 17.2%. As a result, all in place rents or effective rent growth increased by 14.3% on a year over year basis and 4% from the prior quarter. Average effective rent growth is our primary revenue driver, and with the current blended pricing momentum, we expect it to continue to strengthen. In addition, average daily occupancy for the quarter was a strong 95.7. The strong demand environment continues to create new opportunities for our product upgrade initiatives. This includes our interior unit redevelopment program, as well as installation of our smart home technology package that includes mobile control of lights, thermostat security, as well as leak detection. During the quarter, we completed 1,844 interior unit upgrades and installed 9,438 smart home packages. In 2022, we plan to complete over 6,000 interior unit upgrades and approximately 23,000 smart home packages. By the end of the year, we expect our total number of smart units to approach 70,000. For our repositioning program, we're in the final stages of repricing leases at the first eight properties in the program that are now complete, and the results have exceeded our expectations. We have another eight projects that are underway this year. Strong leasing activity continues for July. The same store lease over lease pricing on new move-ins as of July 25th is 17.9% ahead of the rent of the prior lease. Renewal lease pricing in July is running 15.4% of the prior lease. And as a result, blended lease pricing for the portfolio is up approximately 16.6 thus far in July. Same store physical occupancy as of July 25th was 95.9. Exposure, which is all vacant units plus notices through a 60-day period, is just 7.4%. Both numbers are in line with our expectations. Our teams have performed well during our busy summer season and have the portfolio well positioned for the slower fall and winter seasons. I'm grateful for their time and commitment to serving all our stakeholders. I'll now turn the call over to Al.

Okay, thank you, Tom, and good morning, everyone. Reported core FFO per share of $2.02 was 5 cents above midpoint of our guidance for the quarter. The outperformance virtually all came from property revenues, as stronger than projected rental pricing trends continued through the quarter, which produced a strong 17.2% increase in blended lease pricing for the quarter, even as more challenging prior comparisons began to grow late in the quarter. We do continue to expect a growing impact from prior comps as we move through the back half of the year, as well as a return of a more normal seasonal pattern during the fourth quarter, which we'll discuss just a bit more with guidance in a moment. Same-store operating expenses for the quarter were slightly higher than projected, as we saw some inflationary pressures and repair maintenance costs, as well as revised expectations for real estate tax expenses for the year, as more valuation information came in during the quarter. Our revised guidance for the year reflects these expense pressures, but these are more than offset by growing revenues, as reflected by our revised NOI guidance. Our balance sheet is stronger than ever, as reflected by the upgrade to an A-minus credit rating by Fitch during the quarter. We continue to have discussions with the other agencies and are confident this strength will eventually be reflected in our other ratings as well. Just after the end of the quarter, we completed renewal of our unsecured credit silty, which is our primary tool for liquidity and short-term funding of development, debt maturities, and short-term operating needs. As part of the renewal, we increased the facility size to one and a quarter billion from a billion and captured improvements in pricing and terms despite the growing volatility of the financing market. At the end of the quarter, we had no outstanding borrowings under our credit facility, and our leverage was historically low, with debt to EBITDA at a low 3.97 times. And 100% of our debt had fixed interest rates with an average maturity of 8.2 years, providing protection in a rising interest rate environment. And finally, given the second quarter performance and expectations for the remainder of the year, we are increasing both our core FFO and same-store guidance for the full year. We increased our four-year range for core FFO by 17 cents per share, or 2% at the midpoint, to a range of 813 to 837 per share, or 825 at the midpoint. This now represents a 17.5% growth over the prior year. This increase is essentially all the results of higher revenue growth. Strong pricing tends to continue through the second quarter, as we mentioned. We're now projecting 125 basis points increase in our effective rent growth expectation for the year to 13.25% at the midpoint. Our revenue projection for the year continues to be built on strong pricing performance and stable occupancy for the year, with some growing impact from prior year comps for the second half and normal seasonal trends during the fourth quarter, as we mentioned. We expect blended lease pricing to be approximately 8% for the second half of the year, which for context is on top of a record high 15% growth in blended pricing captured in the back half of last year. So I think this reflects our expectation for continued strong demand in our markets. As mentioned, we also increased the expected growth rate for same-store operating expenses for the full year by 100 basis points at the mid-portable range, now 6.5% to 7.5% for the full year, primarily reflecting pressure in repair and maintenance costs as well as real estate taxes. Property valuations received during the quarter, mainly in Texas, reflected aggressive assessments, and we do expect these valuation increases to be partially offset by millage rate rollbacks finalized late in the year, but we increased our expectation for taxes by 100 basis points for the full year to reflect the net impact. The overall impact of these changes is an increase to our expectations for same-store NOI growth for the year to a midpoint of 15%, up from the 13.5% provided at the end of the first quarter. And this represents 170 basis point expansion in our margin in 2022 from the prior year. So other changes to guidance of note were a $50 million reduction in our expected development spending for the year, reflecting really revised timing of funding, as well as a $25 million reduction in our first disposition proceeds as we finalize the sale of the two remaining properties in Maryland and Austin. So that's all that we have in the way of prepared comments. So Gretchen, we'll now turn the call back over to you for any questions.

We will now open the call up for questions. If you would like to ask a question, please press star and 1 on your touch tone phone. If you would like to withdraw your question, you may press the pound key. Our first question comes from Nicholas Joseph from Citi.

Thanks. Obviously, rents have been moving up. I appreciate the affordability stats that you provided for the new move-ins. But for the existing portfolio, obviously, you don't re-qualify them off of income. But are you seeing anything change in terms of move-outs because rent is too high or any other kind of commentary on affordability of the existing portfolio would be helpful?

Yeah, Nick, I'll jump in there. I mean, I think looking at a few different fronts, but collections improved to 99.5 from 99.4, which is encouraging. Our unit types, we're not seeing a flight to efficiencies, and our efficiency 1s, 2s, and 3s are increasing. performing consistently. Our headcount units has moved from 1.7 heads to mid one sixes on that. So it really seems to be moving steadily. I mean, we are pushing rates and we do see, you know, a tick up and move outs to rent increase. But again, we're moving those folks back in at 22%. So it's pretty steady as it goes, Nick.

Thanks. That's helpful. And then as you think about the pricing trends, I guess, year to date, but also your expectations for the back half of the year, what does that start to look at in terms of the earn-in for next year in 2023? Yeah, Nick, this is Tim.

I'll hit that one. So thinking about the earn-in, the way we typically think about that is our full-year blended lease and release for this year call it somewhere around half of that we would expect to blend into 2023. So if you think about the forecast that we laid out there in the 8% back half of the year blended lease over lease, that comes out to about somewhere 12, 12.5% blended lease over lease is what we're expecting for full year 2022. So call it somewhere about 6% earn in as we sit here today.

Thanks. And how does that compare to kind of the history of earn in?

It's certainly the highest we've ever had. I think, you know, going back to 2020, it was zero. Last year, I think it was about 3% or so, so certainly the highest we've seen. Thank you.

Our next question comes from John Kim from BMO Capital Market.

Thank you. Eric, you transformed the portfolio from more of a classic focus to a more diversified price point. Can we get an update on what percentage of your portfolio is Class A versus Class B? And what percentage will perform better in the recession?

John, you're really fragmented. And I think the first question was, what's the balance between A and B assets? Go ahead.

Yeah, between A and B, it's roughly 50-50. I mean, there's some nuances between what we would call A plus A and B and B plus, but I would call it about 50-50 or so.

My second part was, what do you think will perform better if we head into a recession?

Well, you know, John, this is Eric. I think that... Broadly speaking, across our markets and our footprint, I mean, you know, we see that our product is pretty affordable. That rent-to-income ratio that we see between the A's and B's is pretty consistent across the portfolio. Our collections performance is still consistent across the portfolio. So I think that, you know, trying to, you know, think that the B's will maybe do a little bit better than the A's in a downturn just because it's a slightly more affordable product. But You know, honestly, I don't think there's going to be a huge difference if we find ourselves in a downturn of some sort. I think that, you know, it becomes more a question about markets that you're in and, you know, employment base and employment diversification. And, you know, certainly I do think that – that a slightly more affordable product probably holds up a little bit better. But across our Sunbelt markets, we think that, you know, broadly, the whole region will just do a little bit better in a downturn, as it has historically always in prior downturns.

Okay. And my second question is on expenses. You've seen some inflationary pressure on expenses higher than your coastal tier, and I realize some of that is real estate taxes. But you've made a similar type of investment in technology as your colleagues and peers have had. So I'm wondering if you can comment on the expense guidance going up this quarter.

John, you were really broken there. Something about inflation and expense guidance. I think he said also real estate taxes part of that.

I think a couple of things, and I'll start with this, Tom, and please jump in here. But on the guidance on that, John, you were broken up, but I think you were asking that. And it's the two things primarily, which pair maintenance up a bit, and then real estate taxes, which is obviously almost 40% of our expenses. That's a real big driver of that. And for that particularly, we started the year with no information really, put out our best estimates of it, and we saw the valuations come in higher. They're pretty aggressive as they're coming in, particularly from Texas. As we mentioned, we do expect rate rollbacks or middle-year rate rollbacks to come in for a large part of that as it progresses. But we get those late in the year, so it's hard to get a picture of that. and we'll certainly continue to fight like we do every year, and we'll formally litigate over half of our Texas portfolio. So that's really the tax pressure, and, Tom, you might want to give a color on if you have any, but that's repair maintenance and taxes both in the quarter and, I would say, in the guidance as well as the back part of the year, probably tilting a little more toward taxes.

I appreciate it. Thank you.

Our next question comes from Brad Herfin from RBC Capital Market.

Hey, good morning, everyone. I was curious if you could talk about the plan for the $200 million in equity forwards that were sold last year. I know they need to be settled by February of next year, but it doesn't really seem like there's an obvious need for the capital, especially with leverage below the target range and likely moving lower.

Yeah, I think that's a great question. I mean, you hit that right. We have the forward outstanding until, I think, February of next year. We don't have immediate plans to draw on that, but I think our expectations are between now and then to draw that to help fund the remaining development expectations for this year and as we go into next year. So we certainly don't need to take our leverage lower, but it is a part of our funding over the longer term that we think is important.

Okay. And are you guys comfortable running it, you know, sort of like mid to high three times leverage, or is there, you know, a desire to maybe ramp up development or do some net acquisition activity that's that fuel to get that leverage number back into the force?

I'll give the leverage target, and maybe Brad and Eric will talk about the other parts of the strategy. But, you know, we're a little below our range right now. I mean, we've talked about, you know, the last couple of quarters, you know, we always are working to add strength to the business in every area. So on our balance sheet, We're very strong right now. Our leverage is historically low. Debt to EBITDA, we touched 397. That's below. I think Andrew and I would say between four to five is probably preferred. Certainly wouldn't want to get above five in our current credit rating. So we're below where we need to be. We believe that's opportunity, both as protection and opportunity. So as we move into this recession and some opportunities come up for Brad and the team, we want to give them that flexibility to do that.

Brad, this is Brad Hill. I think certainly we've talked about over the last few quarters the vision and the plan to grow our development pipeline, and we're certainly on pace to do that as I laid out in my comments. What Al's done with the balance sheet and really the optionality that he has provided us with to be able to do that is there. And I would say just on the acquisition side, certainly, you know, we're keeping our eyes open in that area. And like past disruptions in the market, we've been able to really take advantage of those within months. Our footprint, we have focused on the Sunbelt region of the country for the last 28 years, so we know that region of the country. We certainly have executed both on a transaction side and an operating side for the last 28 years there through all parts of the cycle. So what Al's doing with the balance sheet puts us in a great position to be able to execute on some opportunities which are likely to manifest themselves during this time.

Okay, appreciate the comment.

Our next question comes from Austin Werschmitt from KeyBank Capital.

Great, thanks. So, Eric, you know, I'm just curious if you are concerned at all that, you know, if we do get sort of an economic slowdown, if the migration trends that you've referenced now for a couple years begin to soften further, you know, perhaps you've had a little bit of a pull forward in demand in recent years. And when you kind of marry that with the fact that the under-construction pipeline in many Sunbelt markets is up. So just curious kind of how you think about that versus maybe the setup for the portfolio ahead of any prior downturns.

Well, Austin, you know, our long-term approach to this business and strategy has long been based on a notion of trying to position for the full cycle, both the down part of the cycle and the up part of the cycle. And we have long believed that the way to do that is to focus on markets where we think that job growth, population growth is likely to be the best over time, over the full cycle, which has caused us to continue to retain our focus on these Sunbelt markets. In an effort to take further cyclicality out of our performance, the other thing that we've intentionally done over the years is that we have purposely been very diversified across the region, as well as differentiated capital allocation between large markets, as well as some of the select secondary markets of the region as well. And as was touched on earlier, we tend to have a price point in our portfolio that appeals to the broadest segment of the rental market. We don't do sort of the low end or the super high end. We average kind of right in the middle. We're appealing, if you will, to the largest segment of the rental market. So all that to say, you know, that our strategy, we think, has continued to serve us very well for a long time. You know, the migration trends that we've talked about over the last couple of years, of course, they were evident there prior to COVID. And move-ins from outside the Sun Belt into our footprint prior to COVID were running somewhere around 9%. And now it's up to our move-ins. Nine percent of our move-ins were coming from people moving into the Sun Belt. Now it's up to 15 percent of our move-ins are coming from people in the Sun Belt. So a long way of saying, while certainly there's been a trend of migration that has worked in our favor, it's not like it's been huge. It's not 50% of our move-ins or something of that nature. It's gone from 9% to 15%. So I think that that particular variable of move-ins, migration trends, if you will, while helpful, hasn't been as significant as sometimes what I think the press and others tend to make it out as when you read what's going on nationally. Beyond that, I will just tell you that I think in a recessionary environment, if we find ourselves in such a scenario, I think that the diversification of the employment base, the employers, the affordability of the region that we have in the Sun Belt, I think all continues to work in our favor. And we think that today we very much retain our defensive characteristics that would be helpful to have should we find ourselves in a downturn.

That's a thoughtful answer. Thank you for the response. And then just curious about sort of the acquisition opportunities. I mean, you were fairly upbeat when we spoke at A-REIT. You seem to still be fairly upbeat today and certainly have the balance sheet to fund if the opportunities emerge. But can you size up just what the pipeline looks like today or what you think you can really capitalize on? And then what the negotiations are like for tap rates today? in your markets versus maybe where it was six to 12 months ago?

Yeah, Allison, this is Brad. You know, in terms of cap rates, as I mentioned in my comments, there's definitely been a movement in the last two to three months. But that, you know, that movement is very different based on the asset quality, the asset location. And just to keep in mind, Really, the assets that we're looking at is just a segment of the assets that are out there. I mean, we're looking at well-located assets, brand-new assets, high-quality assets. And so what we've seen there is about a 40 basis points change in the cap rates. What we've also seen though, as we look at the assets that traded in the second quarter, every asset that traded went to high quality institutional capital. So we're seeing buyers certainly flock to high-quality assets, and we're also seeing sellers flock to high-quality buyers. And that's where in the past when the markets have changed where we've been able to find our opportunities through our execution capabilities and through just our 28-year history in the markets that we're in. So as we sit here today, we are getting more calls on acquisitions than we've ever received, frankly, to look at assets that either fell out of contract or they're just taking to a couple of folks that they know can close the assets. So we're getting a lot of look at assets. And then I think just from an underwriting perspective, the fundamentals within our region of the country just continue to perform extremely well, which leads us to believe that from a performance standpoint, these assets, again, that are very high quality will continue to perform. And I do think that the assets that are coming to market that we're looking at are likely to trade. You mentioned cap rates today versus a year ago. Well, cap rates today on what we're looking at are a 3.7. A year ago, they were 3.8. So we're still under kind of where we were a year ago. So although there's been some recent movement, interest rates went up in the second quarter, they're back down a bit. You can get a 10-year rate right now 4, 3, 4, 5% range. So there appears to be on the assets that we are bidding against a floor at the moment on pricing for these high quality assets. There are bidders that are still stepping into the 3, 7, 5 to 4 cap rate range. So there appears to be a bid certainly for those type assets. You get outside of that for Assets that aren't as well located have a significant value add. The price differential can be a little bit different, but that's not what we're talking about. So our execution capabilities, our ability to put our platform value in place on these assets like we're doing with the Tampa asset, I think will yield us selectively an opportunity or two that we can execute on.

Thanks for the detail. That's all for me.

Our next question comes from Rich Anderson from SMBC.

Thanks. Good morning. And just a suggestion, maybe do the question Q&A alphabetically next time. So the first question is the 22% rent to income. What's the range of that, assuming that there's, you know, that assumes kind of a one and a half person per unit type of income? But what's the range of that 22?

Yeah, Rich, this is Tim. It's a pretty narrow band. I'm going through all of our markets right now. The highest is 24. The lowest is 19. So pretty narrow band, most of them in that 22% range.

Okay. And then to lead into my second question, I think it was Tom that mentioned you're having move-outs for rent increases, but you're replacing that with 18% new rents. lease increases and that same 22% rent to income. But is the cadence of that event like a single occupant moving out and roommates moving in? Is that sort of a dynamic that's going on? I'm not suggesting that there's an advance going on in doubling up, but maybe at the margin... that that's what's happening because people who are by themselves are starting to feel stretched?

Rich, we're not seeing the doubling up. If we look at our head count per unit, it's dropped each quarter since Q1 of 20, really pre-COVID. So we're not seeing signs of doubling up occurring.

Okay, that's all I got. Thanks.

Thanks, Rich.

Our next question comes from Rob Stevenson from Janney.

Good morning, guys. Brad, with the land parcels that you've bought, how many projects do you now control land for future development on? And what's the ballpark expected cost to develop out those parcels?

So in terms of the sites, as I mentioned in my comments, we have eight that we currently own, 2,600, 2,700 units. That does not include land sites that we have under contract where we have not purchased. For example, the Raleigh site that we look to close later this year. That would be an additional site. Our JV sites that we have under contract with partners would be additional sites as well. But in terms of what we own and control right now, there are eight sites, 26, 2700 units. The costs on those vary a bit. What I have in front of me is about, call it 350 to 360 a unit on those assets.

Okay, that's helpful. And then what caused you guys to push the Denver development start out?

Yeah, that is really a permitting issue, and that's really what changed some of the funding requirements or needs from development that Al mentioned. Even the Tampa and the Raleigh project that we're working on, really the approval process is taking a lot longer than what we anticipated on all of those projects. So they're generally all getting delayed. What we're finding is these municipalities are – really kind of kicking the can down the road and reviewing things at this point. And it's taking a lot longer than we expected, but that is a permitting delay on the Denver deal.

Okay. And then, Alan, Tom, when you look at the continued spend on the technology initiatives and some of the stuff from an operating standpoint, what's really left for you at this point that's going to make any type of material impact on margins or operating expenses going forward that you already haven't started? I mean, how much more is there to come, or are we at a point where you've done what you can for now and everything from here is incremental? You know, when you look over the next couple of years in terms of operating margin spend, what's the drivers and what's the potential impact there for you guys?

Yeah, we've made a lot of progress on our revenue and a ton more to come, and Tim's got a great outline that he'll walk you through on that.

Yeah, right. I'll walk through and hit a couple – key points, I think, that are important. So I would say we're in the very early innings in terms of capturing efficiencies on the expense side. You know, really going back to late 2019, early 2020, our initial focus really was on the opportunities with SmartRent and some of the revenue opportunities, as you mentioned. and and what that could do for us on the revenue side and then really as well the key infrastructure that that puts into place as a result you know it integrates with site plan that can help make our service staff and maintenance operations a little more efficient and then also offers some opportunities for more seamless self-touring options so I think important to note today these have been rolled out about three quarters of our units and for the full year 2022 there's about $16 million or so of NOI embedded in our NOI stream for 2022. And then by the end of 2023, as we roll out some more, we think there's probably 120 basis points of margin enhancement from the rent increases just strictly on this smart home. And then as we fully roll it out, I think it will get fully priced out probably by about mid-2024. You're talking 140 basis points of margin expansion Just related to this piece and 25 to 30 million of sort of ongoing in a live stream related to that. So now, you know, the focus as we've gotten that into place is a little more on the expense side. And so I think now with our new CRM tool in process and live across the portfolio, we're focused on some of the efficiencies we think we can get primarily through staffing and task efficiencies. Right now, the new CRM gives us a lot greater access and visibility into properties and prospects, and we're focusing initially on some of the on-site office oversight roles, do efficiencies from properties within close proximity, so call it pods or however you want to label it. we think that's some of the the near-term benefits that come over the next year or so and so we when we think about potting there's about 200 200 of our properties call it 70 of our portfolio that fit into a two or more property pod type scenario and we think that'll create somewhere five to ten million dollars about 40 basis points of margin expansion as we get towards the end of 2023 just on that piece And so then we start thinking about beyond the initial pod scenarios we're working on. We're testing and we're working on and reworking processes related to self-touring, virtual touring, AI technology, as well as centralizing and automating some onsite activities. So we think that ultimately creates more efficiencies on the leasing side and other day-to-day tasks. And with our portfolio size, just given the high degree of variability in our assets, mid-rise high-rise garden style some variation frankly in the consumer preferences across our markets in many cases there isn't just a one-size-fits-all solution so trying to be thoughtful that mindful that so long long way of answering your question that you know beyond the 180 basis points of margin expansion that I mentioned between the the smart rent and the in some of the initial potting we think there's a lot more opportunity to come over the next couple of years

Okay. And then last one for me, Tom, when are you hitting your most difficult month of year of your comps in terms of the blended lease growth?

We're heading into it now. We are headed into it now. Al had the back half, front half split for us that I think is pretty telling. I'll let him share that on blended. He's just got it handy.

Going back to last year, the third and fourth quarters we talked about were when you're leasing the tip of the spear was 15% in the third quarter and 16% blended pricing in the fourth quarter. So those costs are what we're running into, and probably July to August is kind of that peak of that hill that you're comparing to. So I hope that answers the question.

I think it really is the third quarter will be the peak. And last year in the fourth quarter, we had a little fall off. We expect – so it was not quite as high, if you will, in the fourth quarter last year versus the third quarter. So I think the third quarter will be – Our most challenging, but as noted earlier, the July rents, which is obviously the first month of the quarter, are pretty good. But as Al outlined in his comments, we expect blended pricing for the back half of the year in total to be 8%. That's on top of 15% that we got last year over the back half of the year. And so, but to answer your question specifically, Rob, I think it's really this month, next month, it'll probably be our toughest monthly comps.

And then has anything changed since pre-COVID in terms of the amount of leases rolling in the fourth quarter? Are you still at a fairly consistent level? So it's still a fairly light roll in the fourth? Or have you allowed more leases to roll then since it's been better of late?

We've been quite disciplined on that, Rob. And that can get you into trouble in the fourth quarter. And our lease expirations remain on target with a drawdown in the fourth quarter.

Okay. Thanks.

Our next question comes from Anthony Powell from Berkeley.

Hi, good morning. It's a question on some of your more tech and biotech-focused markets like Austin and Raleigh. Have you seen any decline in traffic in those markets, or do you expect to see any weakness there given some of the job analysis we've seen in those sectors?

Yeah, we have not on those two sites, particularly, and a large part of it is because of the ongoing tech transition that's occurring. So, you know, just picking Austin, you've got Tesla opening its Gigafactory. That's on, and so hiring's up in that area, and then Raleigh. Apple's, you know, building a large campus there and bringing on jobs. And those are just the headlines. But I think the Sunbelt still continues to benefit from, you know, the tech companies reallocating jobs across the country. So we're in pretty good shape in those two markets right now. And rent increases are fabulous there.

And you talked a lot about how rent-to-income levels are consistent even as you raise rent, so it must mean incomes are going up. Over the long run, does that raise the risk of seeing more move-outs to homeownership as you have maybe a more affluent renter base that may seek that out over the long run?

No, you know, the thing to keep in mind is that what's going on with home ownership rates over time, and that has grown at a faster rate than our rents have. And at this point, you know, with the higher incomes coming in, I'm not sure we've seen move outs to home buying at a lower point than the percentage that they are right now.

And I'll also add that what's been interesting to watch play out as well over the last two or three years is how the demographic of our renter profile has continued to evolve uh continues to become increasingly single continues to become increasingly female and uh frankly it's a demographic that wants the lifestyle that we're offering our communities as opposed to a single family lifestyle So we do not see any early, you know, concerns developing that, you know, should we find ourselves in a very affordable single-family housing market that we're at any sort of material risk from, you know, what we normally are in terms of move-outs associated with home buying.

Thank you.

Our next question comes from Alexander Goldfob from Paper Sandler.

Hey, uh, good morning. Morning down there. Uh, just wanted to go back to, uh, to the question on the Sunbelt and appreciate, uh, the, uh, 9% versus 15% move in, uh, from outside the Sunbelt now. But if you think about, I guess the question is when you think about your total Sunbelt, are you saying that in your, in the Sunbelt markets that you guys operate, the inbound migration is not as big of an impact overall? Or you're saying in your portfolio, you guys tend to pull a lot more Sunbelt-based residents while the overall markets that you operate in tend to benefit a lot from inbound migration. I'm trying to differentiate whether, you know, MAA's experience with inbound migration is representative of the market or more how you guys are positioned within your markets.

You know, Alex, that's a good question. Honestly, I don't know the answer to that. I mean, obviously, the 9% to 15% metrics that you were talking about and sort of the move-in traffic that we're seeing from outside the Sunbelt into our markets, it's only based on what we are actually seeing at our properties. And so it may be that when you look at, you know, other sort of broader market statistics that are published and reported on, you know, it may in fact be, if you will, some higher level of migration trend that has been occurring recently. than the 15% that we're alluding to that we saw in the second quarter. But I think that, you know, and obviously a lot of the migration that's happening out of the coastal markets into the Sun Belt, I think there's been a lot reported on that a lot of these people that are moving are fairly affluent households. And more likely than not, I would tell you that I think that a lot of the households that are relocating, given that affluence, are probably going into single-family homes. And to some degree, as we see single-family home pricing in markets like Atlanta and Nashville going through the roof, it is people coming from outside the Sun Belt, homeowners outside the Sun Belt coming into the Sun Belt and wanting to be homeowners in the Sun Belt. There probably is some level of differentiation there, but the point that I was trying to make earlier, which I certainly think you touched on, is that the notion that we are, at least within our portfolio, that we've been somehow way outside, you know, captured a significant outside benefit to relocations from outside the Sun Belt. I think that that's been, you know, it's probably a bit overstated, you know, for us. It's still only 15% of our move-ins, and as compared to nine, as I said earlier, and And so we're still seeing a significant amount of the leases that we're executing on, and the vast majority are from people just, you know, moving around within the sundown, if you will.

Okay. And then the second question is, on the market disruption that you guys discussed early on the call, and many of my peers have asked about on the cap rates, you said up 45, you know, buyers or sellers want more of the better sponsors. Just to be clear, This is really fallout from levered buyers stepping away and such that when you look year over year, cap rates really aren't changed. It was that profit come up off the market. Or are you suggesting that it's beyond that, like more deals are unwinding simply regardless of whether it's a levered buyer or not, simply because of the macro interest rate, pick your favorite poison of the day. I'm just trying to understand whether you're specifically talking to levered buyers, pulling back in the fallout or if this is a broader fallout in the market on transactions?

Yeah, this is Brad. You know, one thing I would say is that there's not a ton of transaction data at this point. So I think, you know, frankly, there's not a lot on the market right now. And I think as we get into the third quarter, we'll certainly start to see more data points. But from what we're seeing today, it appears that the majority of the fallout, to use your term, is related to the higher levered buyers pulling back and buyers with shorter term time horizons pulling out of the market. And those are impacting a certain type of asset class. They're not as impactful on the stuff that we are looking at. We certainly hear in the market that cap rates are off 75 to 100 basis points. We're not seeing that at this point. Now, clearly, certain assets that are not well located or have some type of inherent issue with them, you could certainly see that, but we're not seeing that at this point. And based on the fact that every deal that we saw that closed in the second quarter was with institutional quality capital, tells us that there's still a demand by institutional capital for well-located assets, and the cap rates have moved a bit, but they have not moved tremendously. And they're still down from where we were second quarter of last year.

Okay, thank you.

Our next question comes from Chani Luthra of Goldman Sachs.

Hi, good morning, and thank you for taking my question. So with day-to-day inflation on commodities, food complex, you know, gas prices, could you talk about what you are seeing, if any, impact on your residents? Has the discussion in negotiation, you know, level of negotiation gone up on renewables just given, you know, more pressure of on day-to-day expenses for some of your tenants, perhaps?

Hey, Chandra. It's Tom. And the level of negotiation, if you will, in terms of the feedback that we get from residents began to go up last year as renewal increases went up last year. We negotiate well less than a percentage point on our renewal offers. In fact, it's like 20 basis points. That has not changed over time. And the renewal accept rate has continued as it has pretty historically high and turnover staying flat. So we get questions about it, but we have not needed to adjust our renewal rates. So very little push, I mean, excuse me, pushback in that area. But when they get out in the market and they look at what our new lease rate is, which is still $100 higher than our average renewal rate, they kind of see where they're priced fairly and accept the rate and move on.

Sean, this is, Tim, I think a point worth noting. If you look at some of our B assets or little bit lower price point assets. We actually have seen pricing performance do a little bit better in the last couple quarters in those assets. Arguably, those would be the ones that might feel a little more pressure, and we just haven't seen it from a pricing standpoint.

Karit, thank you, and if I could get a quick follow-up, please. In terms of the development pipeline, how has the inflationary environment, supply chain, permitting delays that you talked about, impacted yields, if you could give us some mathematical color of that, please.

Yeah, you know, I would say that just municipal delays and those type things is not having much of an impact at this point on our overall yields. Certainly in the last six months, we have seen a tremendous increase in cost escalation, very acute the last six months, I'd say. But we are starting to see early signs of that cost escalation. pressure alleviate a bit. Certainly some of the commodity prices are down, lumber's down, just given that the single-family construction is off a bit. So from where we sit today, it looks like going forward that the cost escalation that we are seeing will start to mitigate itself. I don't think costs go backwards, but I think the rate of increase will substantially slow, or it looks like it will substantially slow, and then you couple that with what we're seeing on the rent side, and our yields are actually holding up pretty well from those delays that I just talked about.

Okay, thank you. We'll take our next question from from Credit Suite.

Good morning. Most of my questions have been answered, but just a quick one. You did mention earlier on that the resident base is increasingly turning single, increasingly turning female. I'm just curious how that is impacting how buildings are designed going forward, whether it's unit mix,

know and kind of what implications that could have for development costs uh going forward and also if you can kind of throw in any esc considerations as part of that answer if from from a development aspect you know frankly we haven't changed a whole lot um relative to to that i mean other than um you know our amenities uh to take into account pets uh has increased substantially so i'd say that would be One thing that certainly has changed, and then just broadly, I think the desire for, you know, meeting spaces and common area spaces where folks, whether, you know, no matter what demographic it is, where folks can gather and just, you know, be in community with the other folks of the complex is certainly grown, and we're spending a lot of time on that. But, you know, other than I would say the pet areas that we've had to spend more design attention and paid more design attention to, there hasn't really been a whole lot of change associated with the demographic change there.

Tyler, you know, and what I would say over a longer period, period of time, longer horizon, I think that what has changed about the product in general, and it wasn't changed in response to this demographic shift, but I think the demographic shift that you alluded to is finding it attractive, and that is structured parking, you know, interior hallways. I think it's also been one of the reasons why our smart home and smart rent technology has been so embraced. It just, it provides a certain degree of privacy that I think people really appreciate and get out of the weather elements a little bit more with the interior hallways and the structured parking decks. So I think those things have continued to really find great receptivity to this demographic shift that we've mentioned, and I think it will continue to do so going forward.

Hi, this is Tim to hit on your ESG point. Our ESG group works closely with our development group and it was kind of historically built to at least a bronze standard in terms of green building certification. We're evaluating that and a lot of the ones we've done recently are silver, even gold. So we're definitely thinking about in our underwriting kind of considering what makes sense both from a resident perspective and from our perspective as well.

Thank you.

Our next question comes from Nick Euglio from Scotiabank.

Good morning. I apologize if you can't answer this, but what is the assumed split between renewal and vetted in the new guide? Is there an expectation for like a divergence to the end of the year and it's 23?

This is Alex from Color on that. I mean, certainly as we talked about, as Eric mentioned, 8% over the back half of the year. There's a little bit lower expectation for the fourth quarter because that's when the seasonality that we talked about would kind of begin because of the holiday season. But in general, what we've built on is renewals continue to be the strongest, I would say, in double digits, probably lower double digits likely in that range, with new leasing, which tends to feel the most pressure of probably both comps as well as certainly seasonality. being in single-digit, probably mid-single-digit range, and that's sort of the estimate for the back half of the year that you can roll in.

Great. And then what are the main drivers or the components of the OPEX guidance increase? I know you've mentioned real estate taxes are roughly 4% to 5%, so just wondering what's increasing the rest of that 6.5% to 7% amount?

In general, it's two, from the increase for the quarters, two components primarily, really repair maintenance as well as taxes. We talked about taxes, and so, you know, so we'll talk, but repair maintenance really is more just, you know, costs of materials, HVAC costs because it's been a hot summer, as well as, you know, this is the month of our highest turnover by design as we have more of our units, you know, we push most of our turnover in the summer months because that's when the demand is there, so... So that pressure is being felt there a bit, and we're not seeing that, you know, don't expect that to dissipate significantly over the back half of the year at this point. Some of the things Tim mentioned will help us going forward, but really it's repair and maintenance and taxes were the reasons for that change.

Thank you.

Our next question comes from Alan Peterson from Green Street.

Hey, thanks for the time. Brad, I was just wondering if you could share pricing expectations for the incremental dispositions that you're guiding to through year end. And then on top of that, too, if you could touch on the digital location of those assets that you're marketing and considering marketing, that would be great.

Yeah, so I think I mentioned it in my initial comments, the two that we look to bring out or have on the market right now, one is in suburban Maryland, and then one is in Austin. And these are, you know, 20, on average, 25-year-old assets that we look to bring out. So in terms of pricing expectations on those, you know, for the entire set for the year, we expect to achieve a call it a four to a four and a half yield on those assets. And the way we look at that is an NOI yield. And one of the things that is having an impact on our yields there is specifically the asset in suburban Maryland. That's an asset that has, had some challenges in a number of ways. One, specific to the asset, it has a right of first refusal that the county there has where they can step in and buy the asset. They have the right to match any offer that you get. Normally, that's not a big deal, but They did recently take advantage of a ROFR they had on another asset nearby. They have not done that in years, so obviously the buyer pool is well aware of that, so they're more reluctant to spend a lot of time on an asset going through due diligence, because what they have to do is go under contract on the asset and continue to perform their due diligence, but at any time during that period, the county can ROFR the product. So we're seeing a little bit of an impact associated with that. We also have on that asset some regulatory issues, which recently rolled back, but it has impacted the performance. Renewal cap increases and things of that nature. So that is impacting the pricing of that asset, which is driving our overall returns a little bit off on those dispositions from what we would normally expect.

Roger, appreciate the color there. And Tom, are you noticing any pickups and concessions in any of your more heavily supplied markets that other operators might be using to drive up demand?

No, concessions have really not been heavily used, and where we see them is really only in the pockets where, you know, they're not really being used to drive excess demand on a stabilized asset, but you see them used from time to time on new lease-ups. But we're not having to compete much with those at this point, just because our demand level is good, and, you know, concessions are less than four-tenths of a percent of our Perfect.

Appreciate the time, guys.

You bet. Thank you.

Our last question comes from Barry Lou from Muzoho Group.

Hi. Thanks for the time. I'm on the line for handouts and address. My first question was on the expense side. I think you mentioned 180 bits of margin expansion from technology investments in your platform. Do you know how much of that expansion is coming from expense versus top line revenue growth?

Yeah, for that specific 180, about 40 or so of that is related to expense and the rest is revenue. And then that's just what we've identified for now. We think there's some further opportunity on the expense side in the next couple of years.

Got it. Thank you, thank you. And also, are you concerned about turnover at all? And how much more are you willing to push pricing to capture more of your lost police? And also, do you know what the lost police means?

Turnover at 45% on a 12-month rolling basis is very good, sort of the lowest I've seen in my career. And we feel very good about the opportunity for pricing going forward and still believe now is the time to push rate versus volume. So we'll see a seasonal slowdown and tougher comps. But demand is good, and our priority is for growing rents.

Thanks. I'm sorry, did you mention what your lost lease was?

Yeah, on the lost lease, if you look at our June blended rents compared to where our whole portfolio sits, it's about 8% or so. If you look at just new leases, it's about 11%, but we would typically expect that to be the highest right now. This is sort of the peak season, but that's where it stands right now.

Got it. Thanks. Congratulations. Thank you.

We have no further questions. I will return the call to MAA for closing remarks.

Well, we appreciate everyone being on the call and hanging there with us. And obviously, feel free to reach out back to us at any point if you have any other questions you'd like to ask. So thank you very much.

This concludes today's program. Thank you for your participation. You may disconnect at any time.