Mid-America Apartment Communities, Inc.

Good morning, ladies and gentlemen, and welcome to the MAA first quarter 2023 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, April 27, 2023. 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, Corliss, 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 DelFrori, Joe Fracchia, 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 reconciliation so 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. As detailed in our earnings release, first quarter results were ahead of expectations as solid demand for apartment housing continues across our portfolio. Consistent with the trends that we've seen for the past couple of years, solid employment conditions, positive net migration trends, and the high cost of single family ownership are supporting continued demand for apartment housing across our portfolio. And while new supply deliveries are expected to run higher over the next few quarters, we continue to see net positive absorption across our portfolio. We believe that MAA's more affordable price point, coupled with a unique diversification strategy, including both large and secondary markets, further supported by an active redevelopment program, will help mitigate some of the pressure from higher new supply in several of our markets. As outlined in our earnings release, our team is capturing steady progress and strong results from our various redevelopment and unit interior upgrade programs. We are on target to complete over 5,000 additional unit interior upgrades this year, in addition to completing installation of new smart home technology for the entire portfolio. We're also making great progress with our more extensive property repositioning projects, with the projects completed to date capturing NOI yields in the high teens on the incremental capital investment. These projects, coupled with a number of new technology initiatives, should provide additional performance upside from our existing portfolio. Our new development and lease-up pipeline is performing well, and we remain on track to start four new development projects later this year. Our various lease-up projects have achieved rents that are close to 11% ahead of pro forma. We did not close on any acquisitions or dispositions during the quarter, but continue to believe that transaction activity will pick up over the summer and have kept our assumptions for the year in place. The portfolio is well positioned for the important summer leasing season. Total occupancy exposure at the end of the quarter, which is a combination of current vacancy plus notices to move out, is consistent with where we stood at the same point last year. In addition, leasing traffic remains solid with onsite visits in comparison to the number of exposed units that we have is actually running slightly ahead of prior year. A number of new leasing tools that we implemented over the course of last year should continue to support stronger execution and our teams are well prepared for the upcoming summer leasing season. I want to thank our associates for their hard work over the last few months to position us for continued solid performance over the balance of the year. That's all I have in the way of prepared comments, and we'll now turn the call over to Tim.

Thanks, Eric, and good morning, everyone. Same store growth for the quarter was ahead of our expectations with stable occupancy, low resident turnover, and rent performance slightly ahead of what we expected. Blended lease-over-lease pricing of 3.9% reflects the normal seasonality pattern that we expected. And while we did return to a more typical seasonal pattern in Q1, it is worth noting that the blended lease-over-lease pricing captured was higher than our typical Q1 performance. As discussed last quarter, we expected new lease pricing to show typical seasonality and that the renewal pricing, which lagged new lease pricing for much of 2022, would provide a catalyst to first quarter pricing performance. This played out as expected with new lease pricing down slightly at negative 0.5% and renewal pricing increasing positive 8.6%. Alongside the strong pricing performance, average daily occupancy remained steady at 95.5% for the first quarter, contributing to overall same-store revenue growth of 11%. The various demand factors we monitor were strong in the first quarter and continue that way into April. 60-day exposure, which represents all current vacant units plus those units with notices to vacate over the next 60 days, at the end of Q1 was largely consistent with prior year at 7.7% versus 7.9% in the first quarter of last year. Furthermore, in the first quarter, lead volume was higher than last year and quarterly resident turnover was down, driving the 12-month rolling turnover rate down 30 basis points from 2022. April to date, trends remain consistent as exposure remains in line with the prior year and occupancy has remained steady at 95.5%. Blended lease-over-lease pricing effective in April is 4.1%, with new lease pricing beginning to accelerate up 110 basis points from March at plus 0.2%, and renewal pricing remaining strong at 7.9%. We expect renewal pricing to moderate some against tougher comps as we move into the late spring and summer, but simultaneously expect some seasonal acceleration in new lease-over-lease rates. We expect new supply in several of our markets to remain elevated in 2023, putting some pressure on rent growth, but as mentioned, the various demand indicators remain strong, and we expect our portfolio to continue to benefit from population growth, new household formations, and steady job growth. In addition, we expect resident turnover to remain low as single-family affordability challenges support fewer move-outs. MAA's unique market diversification and portfolio strategy, coupled with a more affordable price point as compared to the new product being delivered, also helps lessen some of the pressures surrounding higher new supply deliveries. During the quarter, we continued our various product upgrade initiatives. This includes our interior unit redevelopment program, our installation of smart home technology, and our broader amenity-based property repositioning program. For the first quarter of 2023, We completed over 1,300 interior unit upgrades and installed over 18,000 smart home packages. We now have about 90,000 units with smart home technology, and we expect to finish out the remainder of the portfolio in 2023. For our repositioning program, leases have been fully or partially repriced at the first 13 properties in the program, and the results have exceeded our expectations with yields on costs in the upper teens. We have another seven projects that will begin repricing in the second and third quarters and are evaluating an additional group of properties to potentially begin construction later in 2023. Those are all of my prepared comments, so I'll now turn the call over to Brad.

Thank you, Tim, and good morning, everyone. While operating fundamentals across our platform have remained consistent, as Tim just outlined, transaction volume remains muted due to a lack of for-sale inventory on the market. For high quality, well located properties, bidding is strong and available capital is aggressively competing in order to win the bid and put capital to work. This strong relative investor demand coupled with often favorable in place financing continues to support stronger than expected cap rates on closed transactions. Having said that, we believe the need to sell increases as the year progresses and it's likely that more compelling acquisition opportunities will materialize later in the year. Therefore, we have maintained our acquisition forecast for the year, but have pushed the timing back a couple of months. Our acquisition team remains active in the market, and Al and his team have our balance sheet in great shape and ready to support our transaction needs. The properties managed by our lease-up team continue to outperform our original expectations, generating higher earnings and creating additional long-term value. To date, our new lease-up property's performance does not appear to be impacted by increased supply pressures. As Eric mentioned, these properties have achieved rents nearly 11% above our original expectations. During the first quarter, we began pre-leasing at our novel daybreak community in Salt Lake City. An early leasing demand is extremely strong with the property currently 11.5% pre-leased at rents well ahead of our expectations. Pre-development work continues to progress on a number of projects, four of which should start construction the back half of 2023. two in-house developments one located in orlando and one in denver and two pre-purchased joint venture developments one located in charlotte and the other phase two to our west midtown development in atlanta during the first quarter we purchased a phase two land site to our packing district project in orlando florida bringing our future development projects owned or under construction to 12 representing over 3 300 units over the past few months We have seen an increase in inbound pre-purchase development opportunities due to a substantial decline in the availability of both debt and equity capital for new developments. We remain disciplined and selective in our review process, but we are hopeful these calls will lead to additional currently unidentified development opportunities. Any project we start over the next 12 to 18 months would likely deliver in 2026 or 2027 and should be well positioned to capitalize on what we believe is likely to be a much stronger leasing environment, reflective of the significant slowdown and new starts that we expect to continue to see over the balance of 2023 and 2024. Our construction management team remains focused on completing and delivering our six under construction projects, and they're doing a tremendous job managing these projects and working with our contractors to minimize inflationary and supply chain pressures on our development costs and our schedules. We have two projects that will be delivering units during the second quarter. Novel Daybreak in Salt Lake City, which delivered six units late in the first quarter, and Novel West Midtown in Atlanta. That's all I have in the way of prepared comments, so with that, I'll turn it over to Al.

Thank you, Brad, and good morning, everyone. Reporting core FFO per share of $2.28 for the quarter was $0.06 above the midpoint of our quarterly guidance. About half of this favorability was related to the timing of certain expenses, which are now expected to be incurred over the remainder of the year, primarily related to real estate taxes. Operating fundamentals overall were slightly favorable to expectations for the quarter, producing about a penny per share of favorability, and the remaining outperformances related to overhead and net interest costs for the quarter. Our balance sheet remains in great shape, providing both protection for market volatility and capacity for strong future growth. We received an upgrade from Moody's during the quarter, bringing our investment grade rating to the A3 or A- level with all three agencies. We expect the favorable ratings to have a growing positive impact on our cost of capital as we work through future debt maturities. During the quarter, we also closed on the settlement of our forward equity agreement, providing approximately $204 million net proceeds toward funding our development and other capital needs. We funded $38 million of redevelopment, repositioning, and smart rent installation costs during the quarter, producing solid yields. We also funded just over $65 million of development costs during the quarter toward the projected $300 million for the full year. As Brad mentioned, we expect to start several new deals later this year and early next year, likely expanding our development pipeline to over a billion dollars, for which our balance sheet remains well positioned to support. We ended the quarter with record low leverage, our debt to EBITDA up 3.5 times, with over $1.4 billion of combined cash in available capacity under our credit facility, with 100% of our debt fixed against rising interest rates for an average of 7.7 years, and with minimal near-term debt maturities. And finally, in order to reflect the first quarter earnings performance, we are increasing our core FFO guidance for the full year to a midpoint of $9.11 per share, which is a $0.03 per share increase. We're also slightly narrowing the full year range to $8.93 to $9.29 per share. Given that the majority of the Q1 same-store outperformance was timing-related and the bulk of the leasing season is ahead of us, we are maintaining our same-store guidance ranges as well as all other key ranges for the year. So that's all we have in the way of prepared comments, so Corliss, we will now turn the call back over to you for questions. Corliss, we'll now turn the call back over to you for questions.

Absolutely. We will now open the call for questions. If you would like to ask a question, please press star then one on your touch tone phone. If you would like to withdraw your question, you may press the pound key. We will pause a moment to allow questions to queue. And we will take our first question from Kim John with BMO Capital Markets. Your line is open.

I'll take it. Thank you. Eric and Tim both mentioned in your prepared remarks that the more affordable price point is one of the reasons why you have such strong demand. I'm wondering if there's any noticeable difference between your A and B product as far as demand and performance.

Yeah, John, this is Tim. I mean, we are seeing a little bit of a diversion, not significant. I would say in Q1, our, what you might call our B, more B assets were about 70 basis points or so higher on blended pricing versus the more A. And so I think, you know, part of it's some of the price point and certainly to the extent we've seen some supply pressure, more of it's coming in typically in the more urban or A-style types of assets.

Okay. My second question is on the premiums that you're getting on renewals versus the new leases signed. I think it was 900 basis points in the first quarter, a little bit lower than 800 basis points in the second quarter so far. It still seems like a record amount as far as that premium you're getting, and I'm wondering when you think it goes back to the norm and what level do you think is fair premium on renewals?

Yeah, I mean, we talked about a little bit last quarter that we knew with kind of the unusual circumstances of last year where Newly's pricing was ahead of renewal pricing for the bulk of 2022, that that set us up with some good comps and some opportunity on the renewal side, particularly in the first quarter. you know, call it five, six months in 2023. And so that's definitely what we've seen. I think as we get a little further in, you'll see it moderate to more normal. I think, you know, probably get down to the 6% or so range over the next few months, but don't expect it to be too volatile. We still think renewals will outpace new leases, but get into a little bit more normalized range.

That's great, Tyler. Thank you.

And we'll take our next question from Austin Orschment with KeyBank Capital. Your line is open.

Hey, good morning, everybody. Yeah, Eric, you have highlighted, you know, that the price point, you know, does provide you some insulation as it relates to new supply. And certainly job growth has surprised to the upside, you know, earlier this year. If we start to see job growth slow, does that become more concerning as supply begins to ramp and does pricing power just become more challenging for you later this year and maybe into early 2024?

Well, Austin, certainly if we see the employment markets pull back in any material way, that will have an effect on demand at some level. I think that, you know, we've been through those periods before where the employment markets get much weaker, and there's no doubt that such a scenario does have an effect on demand. Having said that, You know, we're in, I think, a unique, you know, all these cycles have their own sort of unique elements to them. And in this particular cycle, what we see happening in the single-family market and the lack of single-family affordability is clearly working in our favor right now. And I would also suggest to you that in the event of a recession where there is weakness in the employment markets, What really helps us, at least on a relative basis, I think, is the fact that we are oriented in the Sun Belt. I think these Sun Belt markets have demonstrated historically an ability to weather downturn more so than some of the higher-density coastal markets that tend to be more dominated by financial services, insurance, and banking markets. The diversification that we have in our, there's one of the slides in our presentation deck that you can look at, the latest presentation deck, that really gives some insight on the diversification we have, not only in markets, but also in the employment sectors that we cater to that our residents need. work in. And I think that diversification coupled with the Sunbelt, some of the other things that are relating to single families, so forth. Well, I think a recession certainly creates concern for everybody in the apartment sector. I think that I'm confident as we have historically always done in downturns that will likely hold up better.

That's all very helpful. And then just for my follow-up, for projects that are in lease-up today, have you seen any slowdown in the pace of lease-up or absorption for those? And where are concessions today for assets in lease-up? Thank you.

Hey, Austin. This is Brad. We really haven't seen any impact negative impact associated with uh with supply pressures on our new lease ups and generally that's where you think we would see it first um you know we've got uh you know six or so projects that are in lease up right now uh concessions on those we typically model about a month free i'd say on three of those we're using some concession maybe up to a half a month free we're not using the full concessions that we underwrote and we're not seeing the need to just generally based on what we're seeing in the market. And I'd say our traffic continues to be really good on all of our lease-ups. The leases we're signing, the velocity is really, really good. So we're not seeing any early indications yet that that new supply is having an impact there.

Thanks, everybody.

And we'll take our next question from Chasni Lucva with Goldman Sachs. Your line is open.

Hi, good morning. Thank you for taking my question. You guys talked about in your prepared remarks that cap rates are still going strong for good quality product. Could you remind us where they are tracking at the moment? And then as you think about your own opportunity set down the line, as you think about distressed opportunities emanating from the current supply situation and lending markets, Where would cap rates need to be for you to be comfortable buying and, you know, getting in the market?

Yeah, this is Brad. I'll certainly jump on that. You know, we continue to see cap rates call it in the 4.7, 4.75 range for assets that fit that description, well-located, strong markets. You know, interestingly, in the first quarter, I mean, we only had seven data points. So, again, it's, you know, the volume's down, you know, call it 70% year over year. So we don't have a whole lot of data points. But interestingly, the band of those seven trades is pretty close together. which we haven't seen that historically. You know, I would say for us, you know, cap rates definitely need to be over five, five and a quarter, five and a half, something in that range. But I would say it's really going to depend on the asset, what the rent trajectory looks like. And, you know, we're also looking at, you know, the after cap X, you know, what it looks like in that nature as well. So that's pretty important to us. And I would say where opportunities might come for us are going to be properties that are early in their lease up. You know, that's where some of these developers tend to get a little bit more stress in terms In their underwriting and in their performance, as some of the supply in our markets begins to come online, some of these less experienced operators that are operating some of these new lease-ups could potentially struggle a bit to lease up those assets. And so I do think that's going to be an opportunity for us. And, in fact, that's really what our acquisition forecast is built on, is buying assets that are in their initial stage of lease-up.

That's very helpful. Thank you. And, you know, for my follow-up, as we think about new supply, you know, from a geographic standpoint, what are the markets where you're seeing most pressure, and how are you thinking about balancing occupancy versus pricing in those markets?

Hey, Shawn. Hey, this is Tim. You know, right now it's a Austin is probably the number one market in terms of where we're seeing supply. And Phoenix, to an extent, we're seeing a little bit. Honestly, some of the higher supply markets we're seeing, like Raleigh and Charlotte, Charleston or three of the markets where we're seeing a fair amount of supply have also been some of our best pricing markets so far this year. So as Eric kind of laid out earlier, we're not seeing a lot of pressure yet from supply. We're still getting the job growth in demand. pockets here and there, but, you know, right now as we did in Q1, we're happy to keep pushing on price where we can. Our occupancy is at a stable point, and, you know, there's a lot of things we monitor as kind of leading edge demand indicators, but still in a healthy balance right now.

Great. Thanks for taking my question.

We will go next. To Michael Goldsmith with UBS. Your line is open.

Good morning. Thanks a lot for taking my question. Earlier you talked about the B product outperforming A product on a portfolio level. You know, I was wondering if we could dive into a market or two or just kind of better understand some of the dynamics of what you're seeing in the A product versus the B product, and then also within that, can we talk about the larger markets that you're in versus the smaller markets, and if A versus B is performing differently in the large ones versus the smaller ones?

Yeah, it's fairly consistent, I would say. Atlanta is probably a good example where we have Quite a bit of diversification there. We've got several assets kind of in-town, mid-town, buckhead, and then a lot of assets outside the perimeter. And we're pretty consistently seeing the suburban assets perform better than those more urban assets. And that's playing out relatively consistent across some of the markets. We are seeing, you know, what you might call our secondary markets perform pretty well. I mentioned Charleston a moment ago. Savannah, Greenville, some of these more secondary markets are holding up very well and doing really well in terms of pricing. And that's part of the strategy. I mean, typically those markets aren't going to get quite as much of the supply as some of these larger markets, and that's playing out for us pretty well so far.

Thank you. And then my follow-up question is on the, you know, we talked about the job market and how the portfolio may react to that. I guess my question is more related to just the in-migration to the Sun Belt and what's that looking like versus pre-COVID levels? And are there any markets that you're seeing where it's stronger or weaker in migration?

Michael, this is Eric. I would tell you that the immigration that we're we saw in the first quarter uh with about 11 of the leases that we are writing a function of people moving into the sunbelt uh that's pretty consistent with where we were prior to covid uh you know it began to move up a bit during 2020 late 2020 and throughout most of 2021 and um and then it started moderating a little bit in 2022 but right now to you know as we sit here today roughly 11% or so of the move-ins that we are seeing are coming from people moving in from outside the Sun Belt. And that compares to 9% to 10% that we saw prior to COVID. Move outs from the Sunbelt of the turnover we have where people are leaving us and moving out of the Sunbelt. It's still only about 3 to 4% of the of the move outset that we're having our function people leaving the region. So, you know, on a net basis, we're pretty close to where we were prior to code and would expect that those trends will likely now continue at the current level going forward.

And when you say going forward, does that mean, you know, for the rest of 23, or is that kind of for the intermediate term?

I would say, you know, the rest of 23 into 24. I think that, you know, again, harking back to my earlier comments relating to the potential for moderation in the employment markets, you know, we've seen these trends in through these cycles that we've been through over the years where migration trends are more positive, if you will, in the Sunbelt region. And it's been that way for many, many years. through recessions and through expansions in the economy. That continues to be the case. And so I just continue to think that these markets and the portfolio strategy we have will serve us well long term. And I think the net positive migration trends that we see today will likely persist for the foreseeable future.

Thank you very much.

And we'll take our next question from Nick Uliko with Scotiabank. Your line is open.

Thank you. Good morning. I was hoping to get a little bit of a feel for how the new lease growth on signings is differing by market, just sort of an order of magnitude between better versus weaker markets, if you can give a little color on that.

Yeah, Nick, this is Tim. So if we think about where April is, you know, it's anywhere from call it negative 1, negative 2% for some of the lower markets up to 3, 4, 5% on some markets. And it moved positive in April, as we talked about. We're at 0.2%. And we saw a good acceleration from March to April. We kind of expect to see that typical seasonality and a little more acceleration as we move through the spring and summer. But that gives you a little bit of a order of magnitude.

That's helpful. Thanks. Do you mind also just maybe saying which markets are the better versus weaker in that range?

Yeah, I mean, as I mentioned before, Austin is one of the weaker ones. Austin and Phoenix are two that I would point out as a little bit on the weaker side. Orlando continues to be one of our strongest markets. And then I mentioned a moment ago as well, we're seeing some of our more secondary markets perform really well. Also, Charleston, Savannah, Richmond, Greenville, all holding up really well also.

Thanks. That's helpful. Just last question is on Atlanta. You know, if you look, the occupancy there is a bit lower than the rest of the portfolio. Can you just talk about what's, you know, going on there and I guess also unpacking? I think you were saying that, you know, that's a market where suburban is doing better than urban. And so I'm not sure if it's a, you know, if there's any sort of supply impact there that you're dealing with on occupancy or what's driving that. Thanks.

Sure. Yeah, Atlanta is a little bit of a unique situation. So, you know, back in February, we had some winter storms. It affected Texas and Georgia also, but we particularly saw some impact in Atlanta and Georgia. We had about 70 units in Atlanta that were down, that we took out of service due to the storms, and then brought them back up kind of in late February. So you had a pretty good chunk of units in Atlanta that we had to get leased up. So that was really the occupancy story there. We've seen it kind of bottomed out in March, but we have seen April occupancy pick up. So I think Atlanta will continue to improve and be a pretty solid market for us later in the year.

Appreciate it.

We will go next to Alan Peterson with . Your line is open.

Hey, everybody. Thanks for the time. Tim, I was just hoping you can shed some light on your planning for peak leasing and if you're anticipating in some of your weaker markets whether or not you're going to have to use concessions to maintain occupancy, you know, call out the Austins or the Phoenixes of the world.

Yeah, I mean, you know, there will be pockets. You know, we're not, we certainly haven't seen, don't expect to see it at any sort of portfolio-wide level. If we look at Q1, total concessions were about 25 basis points as a percent of rent. We are seeing a little more in Austin, you know, call it half a month, up to a month, and then there's areas where if there's leased-out properties, you may see a little bit more. Markets like Orlando, we're seeing no concessions, but we'll see it a little bit, but I don't think any more than half to a month, more than what we're kind of seeing right now. I don't really see it getting much different than what we see today.

Understood. And that's on your assets or other competing assets nearby?

More so on competing assets. I mean, we have some. As I mentioned, it's pretty minimal, and it kind of depends on the market. There's some markets where upfront concessions are more of a staying in that market, whereas others it's more of a net pricing scenario where you don't really see upfront concessions. So it kind of depends, but similar whether it's our properties or the market in general.

Appreciate that. And Brad, just one follow-up on your prepared remarks about debt and equity capital starting to dry up. Across the buckets of capital out there, where are some of your private peers the most concerned about when sourcing new financing today? What are some of the, whether it be the banks or the life insurance companies, what buckets of capital right now are the ones that are seeing the most impact there?

Yeah, I mean, most of our partners use bank financing for their developments. And so I'd say that's the biggest concern at this point. And, you know, given the last few weeks and just the restriction there in capital with banks, it's more acute than it has been first quarter. You know, it was difficult. Equity was difficult. Debt was difficult. And I'd say the debt piece has gotten even more difficult for them. But generally, they're going to regional banks for their banking needs. And, you know, they generally have strong relationships with these banks, so they can get a deal or two done with the banks. But it's a lot more difficult. It takes a lot longer than what it has in the past. And so that's really restricting, you know, one of the other areas that's restricting new deals getting done. And I don't see that, you know, changing for the foreseeable future.

Appreciate that. Thanks for the time today, guys.

We'll go next to Rob Stevenson with Jamie. Your line is open.

Good morning, guys. Eric or Brad, you guys added a Lando land parcel this quarter, but overall, how aggressive are you going to be in adding additional land parcels for development at this point? And are you seeing any relief in terms of the costs of land. Some of the peers have spoken about more office sites and vacant movie theaters and that such being sold for apartment development allowing for better deals. Curious as to what you're seeing in terms of that.

Yeah, Rob, this is Brad. As I mentioned, we have 12 sites now that we either own or control. So we feel like we're in a good spot in terms of building out our pipeline going forward. And as Al mentioned, we think we're on pace for that billion, billion two or so in terms of projects going. And we like where we're located. The asset that we purchased last in Orlando is a phase two to a project that will start this year. So there was a strategic reason for that. It's really a covered land play. There's some leased buildings on it right now. I'd say going forward, we'll be a bit more cautious on land. I would say we'll continue to look for sites that have been dropped by other developers. We'll look to get time. A couple of the sites we have now, as I mentioned, we control them. We do not own them. So that's our preference to have time on the deals. And I'd say we're on the... early stages or it appears that we're in the early stages of land repricing a bit in some areas we've seen a 10 percent price reduction on some of the projects that that some of the our partners are coming to us with sites for they've been able to negotiate some additional time and some cost reduction so I think we're on the early stages of that at this point

Okay, that's helpful. And then Tim or Al, where is bad debt or delinquency today, and how does that compare to the historical periods pre-COVID and recent comparable periods?

Yeah, Rob, this is Tim. So if we look at Q1, for example, all the rents that we built in Q1, we collected 99.4% of that, so 60 base points of bad debt, which is consistent right in line with where we were last year. If you factor in prior month collections and any collection agency, it goes down to about 50 basis points, so really remains pretty minimal.

And is there any markets in particular that you're seeing any material higher amounts in?

Atlanta is probably the one I would point out where it's just still kind of the court system and everything going on there. It's taken a little longer to move through the process. So it's our highest one right now, probably closer to around 1% or so. But that's really the only market where we're seeing that. Okay.

Thanks, guys. Appreciate the time.

And we will go next. Let's see. Hello. With Credit Suisse.

Hello, can you hear me?

Yes.

Yes, hi, everyone. I'm hoping you can help me understand the increasing guidance a little bit better. Again, you kind of talked about in one cue you had some effects kind of tailwind that could potentially become headwinds going forward, so you're not changing things to NOI. But to try to really understand what that sliding piece is, number one. And then number two, it sounds like based on spring leasing season, you could reassess guidance again.

Yes, that's a good question. As we talked about a little bit, the first quarter, obviously, we outperformed six cents according to our midpoint, and about half of that was timing, as I mentioned. It's really some expenses, some favorability we had in the first quarter. The bulk of that was real estate taxes that we still think our four-year guidance number is correct, so we'll fill that over the year. The $0.03 increase in core FFO was the other items coming through. I would say a third of that, a one penny, was really operating forms. As Tim mentioned, we were favorable, particularly in pricing. It was, you know, for the first quarter, what we expect, I think we, if you remember our guidance or our discussion at SIN Guidance was that Our pricing expectation for the full year was 3%, and the first quarter was 3.9%, so that's a little bit of favorability. But given that we have the bulk of the leasing season ahead of us, a lot of work to be done, we just felt like our ranges and our guidance are still where they need to be there. And the other part of the favorability of FFO that flowed through were things below NOI overhead interest in those things. So, really, the same story was good that we were, I would call it favorable, slightly favorable to on point with what we expected, and we'll wait to see what happens over the next couple of quarters.

Gotcha. Okay, that's helpful. And then you were talking about kind of new spread for the quarter. Again, that was kind of negative. Just kind of curious thoughts there, whether it really is a supply issue, whether there's a bit more of a demand issue, and how would you kind of think about that kind of especially going into like your core spring leasing season?

Yes, hi, this is Tim. I mean, I think one thing to keep in mind, you know, the new lease rates that we saw in Q1 are really pretty typical if we go back through history. You know, you look outside of last year, the kind of lease rates we were seeing were pretty much in line or better, frankly, than most of the years we've been tracking it. So... It was pretty much as expected. I mean, March, new lease rates dropped a little bit, and it was really more a function of somewhat what I was talking about with Atlanta earlier, where we saw leasing activity drop for a couple weeks there in February with some of the storms, particularly in Texas and Georgia. That impacted occupancy a little bit in February, and then we were able to regain that occupancy in March, but it did come at the expense a little bit of some of the new lease pricing, but... as we talked about with April, where we saw newly spreads accelerate and move positive. So from where we sit right now, all the demand metrics look strong. Exposure is where we want it. Leads, traffic volume, all that is where we would expect. So I think we'll move into the rest of the spring and the summer strong leasing season and see some acceleration and see what we would typically expect out of a pretty strong supply-demand dynamic.

Sounds good. Thank you.

And we will go next to Hendel St. Joseph with Mizuho. And your line is open.

Hey, good morning. Thanks for taking my question. This is Barry Lou on for Hendel St. Joseph. My first question was on property taxes. I was just wondering how that was trending versus expectations and some relief in the back half.

Yeah, this is Al. I can give you some color on that. Right now, we expect that our estimates that we put out, our guidance for property taxes, we left that the same. We think that's a good range that we've got. We did have some favorability in the first quarter on property taxes, as I just mentioned a minute ago, but really that's related to the timing, some of the activity. You know, the appeals from prior year, they come in and the timing can be different year to year. We had some wins that we achieved in the first quarter on some of our prior year appeals that were good. We got them a little earlier than we thought. We still have a lot of fights both for prior year to go and a lot of information for this year to come in. So on balance, we have about 6.25% growth that we expected for this year. We still, at the midpoint of our guidance, we still think that is right. I would tell you that we still, in terms of current year, Don't have a lot of information yet. We feel like we have a good beat on values, but a lot of the information, the stubs from the municipalities come out probably mostly in the second quarter. So as we're talking next quarter, I should have 60 to 70% knowledge on that. And then the millage rates will come more in the third and even some in the fourth quarter. So we feel like our range is good. I would say that we've continued, the pressure's coming from Texas. Florida and Georgia, that's continuing to be the case, has been for several years. I would say that as we move forward into 2024, as they're looking backwards toward this more normalized year, hopefully we begin to see some moderation in that line.

Got it. Okay, thank you. And just looking at Texas in particular, so noticing a significant expense decline sequentially, so 11% for Fort Worth and I think 6% for Austin. Is some of that being driven by property tax relief, or what's kind of driving that? Thanks.

I think there's some property tax in that for sure, but I mean, Tim can answer as well. But I think overall, we expected the first quarter expenses for all categories together and the companies held to be pretty high in the first quarter. Really, for many of the groupings, because of the comparisons for last year, as we saw inflation kind of come into our business more in the second, third, or fourth quarter of last year, we expected our operating expenses to be high. Actually, they were 8.3% when we came out. It was favorable to our expectations. what we had said, as Tim mentioned. So what we would expect to see is some key items, personnel, repair and maintenance, begin to moderate as we move back into the second, third, or fourth quarter of the year, with really the outstanding points of continued pressure being taxes, insurance areas primarily. Does that answer the question?

Well, I was more looking at the sequential decline from 4-2. in Fort Worth versus one key in Fort Worth. Looks like there's some relief on the side.

Yeah, I think the sequential decline all those Texas markets think was pretty much real estate tax relief. Just the timing of accruals and settlements and all that, it can be pretty volatile from quarter to quarter, but normalizes over the course of the year.

Yeah, and that's where you're seeing some of those items, particularly in Texas, where we have the real estate tax prior appeals come in. That's some of that occurring. Got it.

And we will go next to Alexander Goldfarb with Piper Sandler. Your line is open.

Thank you. And morning down there. So two questions. First, just going back to the supply, just because it's a big topic that always comes up with the Sunbelt. You guys articulated a lot of how your portfolio is doing. Would you say it's more just your rent versus new supply, or would you say it's more just proximity, meaning that your properties end up less likely to be near where the new supply is, meaning that the new supply is in other parts of the market, and therefore, like where you cited, some supply-heavy markets where you guys actually did well. It's because just proximity, in general, your portfolio doesn't line up where a lot of the new product is being built. I'm just trying to understand.

Alex, this is Eric. I would say it's both of the points that you're making that are at play here. Where we do see supply coming into a market more often than not, It is in some of the more urban-oriented submarkets. And when you look at our portfolio and the footprint we have and the diversification we have across a number of these markets, particularly big cities like Atlanta and Dallas, we have generally more exposure to the suburban markets versus the urban markets. So I think there is a supply proximity point that I would point to that you're mentioning that probably works in our favor to some degree. It's hard to, and it'll vary, of course, by market. And then the other thing that you pointed to, which I think is also at play here, is the price point that broadly we have for our portfolio. When you look at the average effective rent per unit of our portfolio and compare it to the average rent of the new product coming into the markets, we still are somewhere in the 25% plus or minus range below where new product is pricing and again it will vary a bit by market but that certainly provides some level of protection against the supply pressure and offers the renter market a great value play in renting from us versus something that may be down the street. uh that's newer but considerably more expensive and with some of the renovation work that we're doing frankly that's what creates the opportunity for us to do some of this renovation work and effectively offer the resident in the market what it feels like a brand new apartment on the interior, but still at a meaningful discount to what they would have to pay in rent for something brand new. So there are a multitude of factors at play, and it varies by market, but certainly we cannot absolutely eliminate new supply pressure, but after being in this region for 30 years, we've learned how to do some things to help at least mitigate the pressure a little bit here and there.

okay second question is on insurance uh certainly a hot topic especially in florida and texas with big premium jumps are you guys seeing opportunities where some of your uh some of your smaller players or maybe some of the merchant uh your recent new developments may have you know they may not have underwritten you know 50 type premium increases and therefore that could gin up some buying opportunities. Do you think that you would see that potentially, you know, people having to sell because of insurance pressure?

Yeah, this is Brad. You know, I definitely think that that is something to keep an eye on. You know, I do think that the market down there right now is extremely tough. And depending on where you are in Tampa or South Florida, those insurance premiums are increasing substantially for new products. So I would say for newly developed properties in those areas, Tampa, Orlando, not as much, but Jacksonville, it's something for us to keep an eye on because I do think that the insurance premiums are going to be a lot higher than the developer underwrote than they expected. And I do think there's going to be some impact to the sales proceeds as a part of that. And so I think as you get Some of the supply pressures coupled with that and some of the leasing pressures, those are areas that we'll keep an eye on. And then obviously we have the benefit with our broader portfolio in insurance pricing, but that definitely is a platform benefit for us.

Okay, thank you.

We will go next. to Wes Gulliday with Baird. Your line is open.

Hey, good morning, everyone. Just a quick question on capital allocation. You know, your stock's yielding low six to maybe mid six implied cap. So how do you view a potential buyback versus starting new development at this part of the cycle?

Well, Wes, this is Eric. I would tell you right now, we believe that What really is important to have is a lot of strength and capacity on the balance sheet. Obviously, we're in a very turbulent environment at the moment. Capital markets are very turbulent. There's still obviously some level of risk in the broader economy. And so we really believe that the thing to do right now is to protect capacity and and keep the balance sheet in a strong position, not only for defensive reasons, but as Brad has alluded to, we do think as we get later in the year that we may see some improving opportunities on the acquisition front. We have, as Brad alluded to, we have four projects that we may start. We're scheduled to start later this year. These are projects that we'll deliver in 2026 into 2027. So I think that that level of development is something that we feel very comfortable with. These would be, of course, we're still Fine tuning a lot of the numbers and pricing is not yet locked in, but we are seeing some early indication of some relief on some of the pricing metrics. And of course, by the time we get to 26 and 27, we think the leasing environment is likely to be pretty strong. given the supply pullback that we expect to start to see happening late in 24 and 25. So we would anticipate that these will be some very attractive investments that we could potentially start later this year and would reconcile very nicely to even where our current cost of capital is. So, you know, we certainly understand the metrics and the math and all this and pay close attention to it. We don't think we're going to ramp up a lot more than that at this point in the cycle, but we feel pretty good about the four opportunities that we're looking at at the moment.

Okay, and then maybe if we can go to that topic of distress, I mean, a lot of the private owners Right now, do you feel that they may be upside down and the banks are just extending and pretending right now? Or do they have significant equity? This may be the capital infusion.

Yeah, I mean, I don't think that we are seeing any distress in the market right now. I mean, the projects, just like our portfolio, the operating fundamentals are very strong. So even on some of these lease-ups, when they underwrote them in 2021 or so, the leasing fundamentals are going to be a lot stronger than what they expected. And even the joint venture projects that we started in 2021, cap rates were we're in the five, five and a half range on the valuation. I mean, that's kind of where we are. So I would say that the developers have been somewhat disciplined in their underwriting the last couple of years, and the operating fundamentals are outperforming. So they won't get the pricing that they could have gotten a year and a half ago, but they There's still profit in a lot of these projects, so we're not seeing that yet. Where I think the distress could come are projects that closed a year, year and a half ago, and they did some type of financing cap or something that's coming due, and it's going to require a reset or a pay down in order to get that loan right-sized and the debt service coverage right-sized. Those are going to be the ones, I think, that are going to have a little bit of trouble.

Great. Thanks, everyone.

And we will go next to Eric Wolf with Citi. Your line is open.

Thank you. Yeah, just to follow up to your answer there a moment ago, you know, you mentioned your balance sheet is just in incredible shape. I don't think I can remember, you know, seeing a partner company at sort of, you know, mid three times leverage down to probably low three times later this year. So my question is really sort of what would it take, what type of opportunity would you need to see before you'd be willing to take your leverage back up to a more normal, you know, sort of five times amount? And I guess if a portfolio came across that was like in, say, the 5.5% to 6% range, would that be interesting enough to allow you to take your leverage back up?

Eric, I'll start now. You can jump in. We do anticipate that over the course of the next year or two that we will see leverage probably edge back up just a little bit. Believing that we will, if nothing else, you know, we've got some development funding that we'll do. And of course, the funding that we're doing on our redevelopment work and repositioning work is super very, very creative. And so we will begin to. see leverage move a little bit back up. But having said that, we just think right now, given the uncertainty in the broader capital markets landscape and what we imagine to be likely an opportunity for more distressed asset buying, that capacity right now is a good thing to have. And so we're going to We're going to hold on to that. I do think that obviously if we did see some larger opportunity come across that we felt made sense for us strategically and felt like we could do something in closer to five and a half to six range from a cap rate perspective, that probably would certainly get our attention. Obviously, it depends on a lot of different other variables. But we like where the balance sheet is right now, given the broader landscape that we have with the capital markets and the transaction market. And so we're going to be very cautious in how we put that capacity to work. We've got some known needs that I've just mentioned that are very attractive investments, and we'll continue to move forward with those. We don't have any, certainly need to go attracting additional capital right now, and as Al alluded to, the debt gap. portfolio is in terrific position and a lot of duration and it's all 100% fixed. So, you know, we're going to sit tight with what we have at the moment, largely.

I'll just add just quickly that it's a very good point you make that really our target, long-term target, is closer to four and a half to five times on the EBITDA coverage. I mean, we're providing opportunity right now, as Eric mentioned, and hopefully be able to find those, expect to be able to find those, and long-term our target is in line with what you mentioned.

Thanks for that. And then just on a related guidance question, you did 3.9 in terms of blended spread first quarter. Sounds like you expect to accelerate through the balance of the peak leasing season. So my question is really just how did it get down to that 3% blend that's in your guidance? Is there just a steep drop-off later this year or just some conservative dates in there?

I'll just start with it, and Tim can give some more details on it. Zach, what I would say primarily is, one, that we need to see the bulk of the leasing season happen as it comes. So we're providing our opportunity to see that and get more information. We're encouraged, certainly, by what we saw in the first quarter. And I think, secondly, the biggest point would be we do expect to see that seasonality the most acute if you would in the fourth quarter that's typically when it is in a normal year that's sort of what we're expecting so we could see that new lease pricing uh be a little more negative in that fourth quarter because you know the holiday season and demand just really shuts down in that period so that's what we provided for in our forecast i think at this point yeah eric this is tim i mean i think it'll kind of boil down to new lease pricing that we see

over the late spring and summer will be the ball game in terms of whether it ends up a little better than we thought or a little worse. You have, obviously, the bulk of the leases happening during that period, and they carry for several months throughout the year, so they have certainly an outsized impact. So if those new lease rates accelerate more, then it probably is a little better than we thought if they accelerate not quite as much. probably a little less because renewals are going to be relatively consistent through the rest of the year.

Got it. Thanks for your time.

We will go next to Jamie Feldman with Wells Fargo. Your line is open.

Great. Thank you and good morning. I want to go back to your comment about 11% of leases written in the first quarter were new people moving into Sunbelt. Can you provide more color on that data point across the different markets? And I guess I'm thinking more about maybe some of the larger MSAs versus the smaller MSAs.

Yeah, this is Tim. So 11% overall and, you know, probably markets you would expect in terms of in-migration. Phoenix is our top market. You have about 18% of move-ins out of market going into Phoenix. Tampa was another big one at 15%. Charlotte was 13%. Charleston and Savannah were pretty high in there as well. And so those are the biggest drivers, and that's been pretty consistent throughout the last several quarters as the ones that are benefiting the most.

Interesting. And then I guess similarly, if you think about the layoff activity, I guess those are also the markets where you've seen the most growth in tech jobs or jobs that might be most at risk. Can you talk at all about, you know, how layoff activity might be impacting, you know, the different types of MSAs and even that statistic specifically? Just trying to kind of think through the next 12 months or so.

Yeah, I mean, we haven't seen a ton of impact yet. I mean, I think certainly the technology sector is getting a lot of publicity and there's layoffs announced there, but I do think, you know, a lot of the other sectors are still in the net hiring position. You know, Austin's one, particularly in North Austin, where we've seen a little bit of impact from that, some of the tech jobs up in North Austin. But at the same time, you've got Tesla still planning to expand over the next couple years there. You've got Oracle moving their headquarters there. So, you know, certainly long-term at Austin, you know, it's a job machine. We feel really good about that. Outside of that, we haven't seen a lot. Phoenix. It's had a little bit, but again, we've got properties there with a huge semiconductor plant coming in right near one of our properties. So there's a little bit of short-term pressure over the next few quarters, but long-term, I feel really good about all of those markets.

Okay, thank you. And then I know you talked about insurance and taxes on the expense side. Just as we think about your guidance for the year, any other variables or line items on the expense side that maybe you don't feel quite as confident? Or maybe there could be some changes there. I know you've got your insurance coming up in July, your renewal.

Those are the two big items. I think the key components of expenses for the year are personnel repair, maintenance, taxes, and insurance. I think the first two we expect to moderate as the year progresses, as we talked about, and taxes and insurance remaining the biggest items that have the most unknown at this point. So that's the ones we're keeping our eye on at this point.

Okay. All right. Great. Thank you.

And we will take our next question from Linda Tsai with Jefferies.

Hi. This is a short follow-up to that last question. In terms of rationale for move-out job transfers and buying a new home, has the balance of these regions shifted since 4Q and any regional trends you'd highlight?

I mean, it's pretty consistent. One, we've seen move outs to buy a house has dropped dramatically as you would expect with what interest rates have done. We've seen our move-outs due to rent increase drop quite a bit as well. You know, the biggest reason for move-outs, which is always consistently our largest reason for move-out, is just a change in the job and job transfers, and that's up a little bit. But, you know, as we've talked to people out on site, it's more just people moving for another job as opposed to any significant job losses. So, you know, turnover overall is down a little bit. but it's some of the key reasons that we've talked about before and pretty consistent across markets, no matter, you know, larger markets or secondary markets.

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

Well, no additional comments to add, so we appreciate everyone joining us, and I look forward to seeing everyone at Navy.