Mid-America Apartment Communities, Inc.

Good morning, ladies and gentlemen, and welcome to the MAA second 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, July 27, 2023. I will now turn the call over to Andrew Schaefer, Senior Vice President, Treasurer, and Director of Capital Markets of MAA for opening comments.

Thank you, Aaron, 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 DelPriori, 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 reconciliations of the differences between non-GAAP and comparable GAAP measures, can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the For Investors page of our website at www.mac.com. A copy of our prepared comments and 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, everyone. Leasing conditions across the MAA portfolio continue to reflect our steady employment markets, strong positive migration trends, and continued low resident turnover. As a result, we are seeing good demand for apartment housing and are absorbing the new supply deliveries while supporting solid rent growth. In line with normal seasonal patterns, new lease pricing improved in the second quarter and the spread between new lease pricing and renewal pricing narrowed. Rents for new move-in residents jumped 100 basis points higher on a sequential basis as compared to the preceding first quarter. Renewal lease pricing in the second quarter remained strong, growing by 6.8%, driving overall blended pricing performance in Q2 to 3.8%, which is ahead of the original projections we had for the year. Occupancy remains steady, with average physical occupancy in the second quarter at 95.5%, which is consistent with the preceding first quarter, this despite a higher number of lease expirations during the second quarter. While we are working through a higher level of new supply deliveries across our markets for the next few quarters, with the demand trends holding up as they are, we expect to continue to drive top-line results that will exceed our long-term historical averages. As has been the case in prior cycles of higher supply, we see the demand-supply dynamic holding up slightly better in our mid-tier markets, and this component of our strategy continues to bring support to overall portfolio performance during this part of the cycle. As described in our first quarter report, We do expect to see moderation in year-over-year growth in operating expenses as inflation pressures ease a bit, and some of the efficiencies we expect to capture from new tech initiatives increasingly make an impact. As Al will cover in his comments, we do now also expect to see some relief on property taxes coming out of Texas, which further supports our ability to reduce our outlook for expense growth over the back half of the year. The transaction market remains quiet. We continue to underwrite a few deals, but the limited number of properties coming to market combined with strong investor interest continues to support low cap rates and strong pricing. We continue to expect that more compelling opportunities will emerge later this year and into 2024 and believe it's important to remain patient with our balance sheet capacity. Our new lease up, new development, and redevelopment pipelines will all continue to make solid progress and will provide attractive incremental additional earnings over the next few years. I did want to take a moment and express my deep appreciation to our onsite property teams for all their hard work and great service to our residents during these busy summer months. And with that, I'll now turn the call over to Brad.

Thank you, Eric, and good morning, everyone. As we've seen each quarter over the past year or so, second quarter transaction activity remains muted versus normal levels. Volatility and uncertainty in the debt market continue to cause the majority of sellers to postpone their sale processes, leading to a drop in poor sale inventory on the market. For high-quality, well-located properties in our region of the country, there continues to be strong investor demand, causing cap rates to adjust slower than interest rate movements alone would indicate. Having said that, we have seen average buyer cap rates move up to 4.9% in the second quarter from 4.7% in the first quarter, with most cap rates ranging between 4.75% and 5.25%. We continue to believe we're likely to see more compelling acquisition opportunities later this year and into next, so we remain patient as we wait for the market to continue to adjust. We are actively reviewing a number of acquisition opportunities, but with no potential acquisitions under contract at the moment, we've lowered our acquisition forecast for the year to $200 million at the midpoint. Our acquisition team remains active in the market, and Al and his team have our balance sheet in great shape and ready to quickly support any transaction opportunity should it materialize. Due to the lower funds needed for expected acquisitions, we've also lowered our disposition forecast for the year to $100 million at the midpoint. Our properties in their initial lease-up continue to outperform our original expectations, producing higher NOIs and higher earnings and creating additional long-term value for the company. These properties are navigating the increased supply pressure well, and on average have captured in-place rents 22% above our original expectations. For the four properties that are either leasing or will start leasing in the third quarter, this rent outperformance, which is partially offset by higher taxes and insurance, is estimated to produce an average stabilized NOI yield of 7.2%, which is significantly higher than our original expectations for these properties. Early leasing is going well at Novel Daybreak in Salt Lake City and Novel West Midtown in Atlanta, and we expect to start leasing at Novel Val Vista in Phoenix in the third quarter. During the second quarter, we also reached stabilization at MAA LOSO in Charlotte. Despite permitting and approval processes that are taking a bit longer than we anticipated, pre-development work continues to progress on a number of projects. We expect three projects will be ready to start construction in the back half of 2023 if we see sufficient adjustments to construction costs and rents to support our NOI yield expectations. These projects include two in-house developments, one in Orlando and one in Denver, and one pre-purchase joint venture development in Charlotte. We've pushed back the start of the phase two to our West Midtown pre-purchase development in Atlanta to 2024 due to the approval process taking longer than anticipated. The team continues to work through the increased pre-purchase development opportunities that have been presented to us, and we're hopeful we will be able to add additional currently unidentified development opportunities to our pipeline. 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, reflecting the significant slowdown in new starts expected 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 the impact of inflationary and supply chain pressures, as well as labor constraints on our development costs and schedules. During the quarter, the team successfully completed and accepted delivery of the combined 249 units and novel daybreak in Salt Lake City and novel West Midtown in Atlanta. That's all I have in the way of prepared comments, so with that, I'll turn the call over to Tim.

Thanks, Brad, and good morning, everyone. Same-store revenue growth for the quarter was essentially in line with our expectations with stable occupancy, low resident turnover, and better blended rent performance than what we previously projected. Despite increasing supply pressure in some of our markets, blended lease over lease pricing of 3.8%, comprised of new lease growth of 0.5% and renewal growth of 6.8%, was better than our forecasted expectations. While occupancy was slightly below our expected range for the quarter, the resulting higher blended lease growth performance is a favorable tradeoff, providing a greater future compounding growth effect. As discussed last quarter, we expected new lease pricing to show typical seasonality, that is, to accelerate from the first quarter, and renewal pricing, which lagged new lease pricing for much of 2022, to moderate some but still provide the catalyst to strong second quarter pricing performance. As Eric mentioned, this played out as expected with new lease pricing accelerating 100 basis points as compared to the first quarter and renewal pricing remaining strong. Alongside the pricing performance, average daily occupancy remained consistent with the first quarter at 95.5%, contributing to overall same-store revenue growth of 8.1%. The various demand factors we monitor remain strong in the second quarter with 60-day exposure, which represents all current vacant units plus those units with notice to vacate over the next 60 days, largely consistent with prior year at 8.5% versus 8.4% in the second quarter of last year. Furthermore, quarterly resident turnover was down almost 2% from the prior year. Move-ins from markets outside of our footprint ticked up slightly from Q1 to 13%, and rent-to-income ticked down slightly from Q1 to 22%. The employment market remains relatively strong also, particularly in the Sunbelt markets. While lead volume trailed the record demand scenarios we saw in 2021 and 2022, It is up from 2018 and 2019. The last year is where we experienced a more normal demand curve. Our prospect engagement platform that combines AI, marketing automation, and scheduled human engagement has enabled us to engage with prospects more effectively. July to date pricing remains ahead of our original expectations with blended pricing of 3.2%. This is comprised of new lease pricing of 0.3% and renewal pricing of 5.5%. New lease pricing is relatively consistent with the 0.5% for the second quarter and within five basis points of June new lease pricing. As expected, renewal pricing is moderating to a more normal range as leases are beginning to expire that were signed in the period last year when renewal rents had caught up to new lease rents. Physical occupancy is currently 95.6%, with average daily occupancy for July month-to-date of 95.3%. The current July occupancy and July exposure, which is even with the prior year, 7.5%, puts us in a good position for the remainder of the quarter. A key part of our portfolio strategy is to maintain a broad diversity of markets, submarkets, asset types, and price points. As we compete with elevated supply deliveries, particularly in some of our larger markets, many of our mid-tier markets are performing well and leading the portfolio in pricing performance, both in the second quarter and into July. Savannah, Charleston, Richmond, Kansas City, Greenville, and Raleigh are all outperforming the overall portfolio. We expect that this market diversification combined with continued strong demand fundamentals will help mitigate the impact of new supply that we expect to be elevated over the next several quarters. Regarding redevelopment, we continued our various product upgrade initiatives in the second quarter. This includes our interior unit redevelopment program, our installation of smart home technology, and our broader amenity-based property repositioning program. For the second quarter of 2023, we completed nearly 1,900 interior unit upgrades and installed nearly 2,300 smart home packages. We are nearing completion on the smart home initiative and now have over 92,000 units with this 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 15 properties in the program, and the results have exceeded our expectations with yields on costs in the upper teens. We have another five projects that will begin repricing in the third quarter and are evaluating an additional group of properties to potentially begin construction later in 2023. That's all I have in the way for parent comments. Now I'll turn the call over to Al.

Okay, thank you, Tim, and good morning, everyone. Reported core FFO for the quarter, 228 per share, was two cents per share above the midpoint of our quarterly guidance. The outperformance was primarily driven by favorable interest and overhead costs during the quarter. A large portion of the overhead cost favorability is timing related, with the cost now expected to be incurred in the back half of the year. Overall, same-store operating performance for the quarter was essentially in line with expectations. As Tim mentioned, blended lease pricing continues to outperform original expectations for the year and builds stronger than expected longer-term revenue, but was primarily offset in the second quarter by average occupancy slightly below forecast. Also as expected, we began to see moderation in same-store operating expense growth during the second quarter, with the growth of personnel, repair and maintenance, and real estate expenses, tax expenses, excuse me, which combined represent 70% of total operating costs, all reflecting moderation from the prior quarter. We expect moderation for these items to continue through the remainder of the year, particularly for real estate taxes, which we'll discuss more with guidance in just a moment. As mentioned in the release, our annual property and casualty insurance programs renewed on July 1st with a combined premium increase of approximately 20%, which was in line with our prior guidance. During the quarter, we invested a total of $26.3 million of capital through our redevelopment, repositioning, and smart re-installation programs, producing strong returns and adding to the quality of our portfolio. We also funded just over $51 million of development costs during the quarter toward the completion of the current $735 million pipeline, leaving $344 million remaining to be funded. As Brad mentioned, we also expect to start several new deals over the next 12 to 18 months, likely expanding our development pipeline to be closer to $1 billion, which our balance sheet remains well positioned to support. We ended the quarter with $1.4 billion in combined cash and borrowing capacity under our revolving credit facility, providing significant safety and future opportunity. Our leverage remains historically low, the debt to EBITDA at 3.4 times, and our debt is currently 100% fixed for an average of seven and a half years at a record low 3.4%. We do have $350 million of debt maturing in the fourth quarter, but our current plan is to remain patient and allow interest rates and financing markets to continue stabilizing over the next few quarters before refinancing with long-term debt. And finally, given the second quarter's earnings performance and the expectations for the remainder of the year, we are revising our core FFO and several other areas of our guidance previously provided. With the blended pricing outperformance achieved through the second quarter, we are increasing the midpoint of our effective rent growth guidance to 7.25%, a 25 basis points increase. And this is offset by a decrease in our physical occupancy guidance, which is now projected to average 95.5 for the full year, a 30 basis points decrease. Though this tradeoff supports slightly higher rental earning going forward, our total revenue growth guidance for this year remains unchanged at the midpoint of 6.25%. In early July, the Texas state legislature passed a tax overhaul which significantly rollback property tax rates across the state to effectively redistribute a budget surplus. Given aggressive property valuations, we had previously anticipated rate rollbacks in Texas, but we have now added a specific reduction for this legislation, which lowers our overall same-store real estate tax growth rate per year by 50 basis points to 5.75% at the midpoint and adds $0.02 per share to core FFO for the year. There's still limited information regarding exactly how individual counties and municipalities will push this change through, but our guidance now includes our early estimate of this overall impact, which is expected to be ongoing. In summary, we are increasing our core FFO projections for the full year to a midpoint of $9.14 per share, which is an increase of $0.03 per share. This increase is primarily comprised of a carry-through of $0.01 per share from the second quarter outperformance, as well as the $0.02 per share addition related to the Texas legislation. As Brad mentioned, we also revised our transaction volume expectations for the current year to reflect current market conditions. So that's all that we have in the way of prepared comments. So Aaron, we will now turn the call back to you for any questions.

We'll now open the call up for questions. If you would like to ask a question, please press star then one on your touchtone phone. If you draw your question, you may press the pound key. And we will take our first question from Eric Wolf with Citi. Your line is open.

Hey, good morning. Apologies if I missed your remarks, but could you just tell us the blended rent growth that you're expecting sort of for the full year now, if that's been revised upward, and then what that would be in the back half of the year as well?

Yeah, Eric, this is Al. We had a start of the year, if you remember, with 3% for the full year, but the outperformance we've seen through the first half, that's increased that. So I think for the full year, we didn't put that in our guidance, but if you do the math on that, it's about 3.5% for this year. And that means largely sticking to the 3% for most of the back half, though we started in July, you know, as Tim talked about, stronger than that. So you're probably averaging, you know, 3.2, 3.1, 3.2 for the back half in that projection now.

Yeah, that makes sense. And then... You mentioned that new lease rates did come up, as you expected, in the second quarter, as you would expect seasonally. But there's still a pretty wide gap between new lease and renewal rate growth. So I was just trying to understand, you know, what your sort of expectation would be for new lease growth the back half the year, and then thinking through whether that's actually a good sort of proxy for market rent growth, should the two kind of be around the same.

Hey, Eric, this is Tim. You know, with new leach growth, we did, as you said, we saw it accelerate some as we expected. It didn't accelerate quite as much as what we would see in a normal environment. I do think there's a little bit of supply pressure impact in that. Having said that, I don't really expect it to. decelerate as much as it normally might would in Q3. It's typically kind of around this time that you start seeing new lease pricing moderate a little bit as demand starts to moderate. So I don't expect the volatility, if you will, to be quite as large on the new lease side. On the renewal side, you know, we talked about it from the beginning of the year. There was a sort of unusual scenario last year where for the first, call it, seven, eight months of 2022, new lease pricing outpaced renewal pricing quite a bit. So we knew we had some opportunity to kind of mark to market those that were on the renewal rates as the first part of last year. So We've kind of reached a point where we're lapping those and starting to reprice those. That's where you've seen the renewal pricing moderate a little bit, but we still expect it to be quite a bit stronger than the new lease rates, which is typical, and really just kind of returning to a normal seasonality scenario.

All right. Thank you.

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

Great. Thank you for taking my call. I appreciate your comments on mid-tier markets outperforming the entire portfolio. Can you talk more about A versus B and how those are performing within your market?

Yeah, this is Tim. The Bs are still outperforming a little bit. I would call it kind of a 40 to 50 basis point gap between how we would define A's versus B's, and that's pretty consistent on the newly side and the renewal side. So I think it's You know, it's part of the portfolio structures that we expect those markets that can have more of the B assets perform well. And some of the supply, or in most markets, the supply coming in hasn't been quite as impactful on some of the more B assets. They've typically been much higher price, more urban-style assets, and at a much higher rent than particularly some of the B assets.

Okay, thank you. And then, you know, in that press release, you talked about demand kind of maybe even better than your initial expectations and mitigating some of the supply risks. Can you give more color or maybe put some numbers around that? You know, maybe, I don't know if you've looked into some detail, but like what percentage of job growth do you need to mitigate that supply risk? Or just more color on, you know, what gave you confidence in making that statement and what you're seeing?

Yeah, so there's a few things that we typically look at as a leading indicator of demand. You obviously have job growth at a macro level, which continues to be. pretty strong and and certainly stronger in a lot of the sunbelt markets and then more granular we look at exposure lead volume what we call lead per exposed unit which is really a combination of those those two metrics and then also looking at what our renewal accept rates are so on lead volume and leads for expose it's it's not at the level it was in 22 which was record demand but As I've noted in the comments, you go back to kind of the 2018-2019 timeframe when we saw more normal, if you will, demand scenario. We have our lead volume, leads per exposed, is quite a bit higher than those times. So that's encouraging. Then our renewal accept rates remain strong and higher to that period as well. We have 60% accept rate for July, 58% for August, and 43% for September, which is a at or above where we would expect or we would like to see it. And then, you know, a couple other metrics, rent to income continues to stay consistent, stay low, actually dropped a little bit from what it was in Q1. Turnover remains low, reasons people moving out to buy houses way down. So, you know, all of those various factors, while not quite at the level we've seen with the record performance last year,

still healthy and and stronger than a typical year if you will and jamie and this is eric i'll add to what tim just said which covers a lot of reasons why we see the demand staying healthy the other thing is just the continued positive migration trends you know 13 of leases that we wrote in q2 were for people moving into the sunbelt for the first time And, you know, that compares to 15%, 16% during the peak of COVID. So while it's moderated, it's moderated just a little bit. And it's still well above where it was before COVID started. So these positive migration trends are still there. Any thought of some kind of reversal after COVID was over, you know, I think we've dispelled that fear at this point. So There's just a multitude of factors that sort of go into it, and, you know, we're pleased with where we see demand continuing to hold up.

Okay, that's a very helpful color. And then finally for me, you know, your comments about expenses moderating into the back half of the year, certainly encouraging. As you think about 24 and the key line items, do you have a sense, like, do you think all of them will be down in terms of your expense growth rates?

I think as you talk about, I mean, too early to really get to a refined on 24, but certainly we would expect some continued moderation, just some of the inflationary pressures begin to wane. The three main areas, obviously the personnel repair, maintenance, and taxes. Taxes, I would say, being the biggest, certainly it's going to follow the moderations of the top line, so it's a backward-looking thing. So you would naturally think that that's 24 looking back to 23, which is a good year. but a more moderate year than it was in 22 that you should see some moderation there. So probably in those three that make up 70% of our expenses, you'll see some moderation at some level. Can you ballpark it? Hard to ballpark at this point. I don't think it would be probably yet a long-term rate, but somewhere between where we are today and that.

Okay. All right, great. Thank you.

And we will move next to Austin Warschmidt with KeyBank Capital Markets. Your line is now open.

Good morning, everybody. I'm just curious if you're finding that you're having to trade off some of that new lead growth to drive traffic or sustain occupancy at the 95.5% level. It seemed like July occupancy dipped from what you were tracking, and I'm just wondering, trying to think through as sort of seasonal demand slows and supply picks up, does that concern as you move to the latter part of the year and heading into 24?

Hey, Austin, this is Tim. On the occupancy front, we've been hanging in that 95.5% range for really all of the first half of the year, which we've been comfortable with, as we mentioned, with pricing being a little bit better than we thought. So we're willing to make that trade-off with the compounding growth we can get from rents. As we moved into July, I can see moderated a little bit. There is some unique circumstances in Atlanta that we can talk about that's driving that down a little bit. If you kind of pull Atlanta out of that number, we'd be right back at 95.5% on occupancy, which we're comfortable being in that range. So, you know, it hasn't... It hasn't moved the needle, I don't think, on the new lease rate a little bit. I mean, there is some supply pressure that we've talked about, but outside of that, I don't think there's anything specifically tied to occupancy necessarily.

And Austin, I'll also add a couple of points on that. The thing to keep in mind is we have a pretty extensive sort of redevelopment and some of the new technology initiatives that we're particularly smart home initiative that continues to fuel the opportunity for positioning the portfolio at a higher rent level, particularly as it compares to some of the new supply coming into the market. One of the benefits of new supply coming into the market particularly when it's coming into the market on average 20% higher than the rents that we're charging, it creates a more compelling value play for our portfolio to the rental market. And so that's working to give us some momentum on the rent growth that we might otherwise not have, both of those things. And then, you know, the, so, you know, I would just tell you, and the other thing that I would tell you is, you know, we track pretty actively why people leave us. And when you look at move outs that are occurring because people don't want to pay the rent increase, That's ticked down a little bit from where it was last year as a percent of our turnover, but it's still, you know, running higher than it has long term. And as Tim says, you know, we're okay with that tradeoff for a slightly lower oxy right now because, you know, that revenue growth associated with rents is really significant. much more impactful in terms of compounding value over the long term. So, you know, we sort of like where we are right now. We'll continue with this sort of trying to manage that tension between pricing and occupancy where it is right now.

No, that's helpful, Dave. It sounds like some of this is to occupancy and maybe even some of the frictional vacancy is like redevelopment was picking up a little bit from where you had originally expected. The second question is, When you look across some of your larger markets, obviously new lease growth is modestly positive, but when you kind of look across the large markets where you're feeling some of the supply pressure more acutely, are there any that are at a notable gain to lease today that you'd kind of highlight that, you know, we should be a little bit more focused on moving forward?

Hey, Austin. It's Tim. When you say gain to lease, meaning where there's threats to get worse.

You know, not...

I wouldn't say anything significant. We do have some negative new lease rates on a couple of those larger markets, but none of them are getting too out of balance. I mean, they're kind of in that negative one type percent range, so it's not a huge, huge variance to what we're seeing overall. So nothing significant that I would point out.

Which are those that are at that kind of negative one percentage range?

So you've got, you know, I would point out Austin's one that's been a little softer. Austin and Phoenix, and we've talked about those two markets here for a while, are kind of the two that I would point out that have been our weaker performers and certainly have some supply impact. I feel great about them long-term. Obviously, they have great demand fundamentals, but those have been two that, you know, probably lead the list in terms of our higher concentration markets.

Very helpful. Thanks for that.

All right. Thank you very much. We will go next to Brad Heffern with RBC Capital Markets. Your line is now open.

Yeah. Hey, everybody. For some of the markets that are lagging their normal seasonal trends, like, you know, you obviously just mentioned Austin and Phoenix, but some of the other ones as well, do you think that that's entirely due to elevated supply, or are there any other factors that you would call out that might be driving that?

No, I think it's primarily supply. I mean, supply is somewhat widespread across several of the larger markets in particular. And then it's nuanced, too, by market, obviously, and depending on where our portfolio is relative to some others. I mean, Charlotte's a good example. It's getting... high level of supply similar to some of these other markets, but it's performed well. And, you know, it's just kind of where our portfolio is positioned versus where the supply is coming in. So generally, I'd say it's supply, you know, again, going back to the demand side. If you look at job growth across our markets compared to national averages, you know, we're pretty consistently higher than the average across all those markets. So there's obviously nuances by market, but nothing notable outside of that.

Okay, got it. And then on the balance sheet, obviously you've been setting record low leverage numbers every quarter for a while now. What do you think the likelihood is that we'll see these sub-4X numbers stick around for the long term? Or I guess what are the circumstances where you would potentially take leverage back up to a more normal level?

So, Brad, this is Alan. We've talked about for, I think, several quarters now. Certainly, we love the strength of our balance sheet, but our leverage is really below where we want it long term at this point. We've been patient to allow opportunities to come to us. So, you know, in our credit rating at A minus, four and a half would be something you could be very confident. So, we're a full turn below that right now. So, significant opportunity there, but willing to be patient to allow Brad to find the right investments.

And we do think that as we get later in this year, and particularly into 2024, that we are seeing early indications that would suggest that opportunities are going to start to pick up. As Brad alluded to, we have seen cap rates move just a tad on a sequential basis, quarter to quarter. And, you know, we're talking, he and his team are talking to another, a number of merchant builders right now about some opportunities. So we continue to feel confident and comfortable that more opportunity is around the corner.

Appreciate it.

And we will move next to Michael Goldsmith with UBS. Your line is open.

Good morning. Thank you all for taking my question. In response to an earlier question in the Q&A, you talked about new lease not accelerating as much as you expected. Does that mean that new leases have – the rent growth has peaked earlier in the season than it has in the past? And then the second part of that question talked about you don't expect it to decelerate as quickly. Why is that?

Well, one nuance there, the newest pricing has done what we expected. It didn't decelerate or it didn't accelerate less than we expected. It accelerated a little bit less than what we've seen the last couple of years, but in line with, if not slightly better than expectations. And so what we've seen is, you know, new lease pricing accelerate, just not quite as much as it may do in a, in a, in a lower supplied environment. So I think at the same time, given all the fundamentals we're seeing and the various metrics we talked about earlier, don't quite expect that new lease rate to drop off quite as much as it might normally for kind of the same reason it didn't accelerate as much. So that's kind of how we see it playing out, but really been as if not better than expected.

And then as a follow-up, you know, there's a lot of new supply coming in your markets. Potential tenants have a lot of options to choose from. Are you seeing a longer time for tenants to make a decision or – You know, maybe like between your foot traffic to visit and the time between that and when they sign or conversion rates being low. What are you seeing in the trends there? Yeah, what are you seeing in the trends from that perspective?

Not really anything much. It's probably taken a little bit longer for us to get an answer on the renewal side. But, you know, ultimately, as I mentioned, our renewal accept rates are better than they were a couple years ago in a similar environment and kind of where we expect to see them. Our conversion rates are in line with that period as well. So, you know, nothing notable yet. Other than, you know, I mentioned the leads are down a little bit from what we saw last year, but, you know, we would have expected that with the growth we saw last year.

Thank you very much.

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

Hey, morning down there. So just trying to put a bow on the supply, it's obviously been a big topic. If I hear correctly from what you're saying, it sounds like it's really only Phoenix and Austin where it's really an issue. Atlanta maybe is another market, just given the occupancy dip that you talked about. But otherwise, the balance of your portfolio, it sounds like Yeah, there's supply, but it's not really competitive with you guys. You feel comfortable with the in-migration, the economic growth, the job growth to be comfortable with your rents. So is that sort of the main takeaway that the supply is really limited to maybe two or three markets for you guys and that's it? All the other markets are fine? I just sort of want to encapsulate this.

Yeah, I mean, also an advantage for the two that are the worst. I mean, I wouldn't say we only have two or three that are feeling any supply impact. I mean, I think it is impacting several of our markets at some level. But what we've always talked about is with the demand being there, supply just sort of moderates things. It doesn't put it in a ditch. It's those shocks on the demand side that really send rent growth negative for an extended period of time, and we're not seeing that. So, I mean, like I said, I wouldn't say those are the only two we're feeling some supply pressure, but those are the most notable. But otherwise, demand is doing a pretty good job of mitigating things.

Okay. And then the second question is, your guidance for the second quarter is rather wide, and I'm assuming you guys are a pretty conservative group, but 218 on the low side, you know, just low, obviously. So should we expect, you know, a decline here? quarter to quarter, or are there some oddball things that could come up that would drive? Like, I'm just trying to think, why would FFO go down, you know, and maybe you'll say, hey, it's a one-time item. There's some sort of tax impact or insurance or something like that that we're going to see.

Alex, this is Al. You see in the second and third quarter offense some things that are below same-store NOI, whether it be overhead, whether it be just some items that are not in your operating costs. Second and third quarter, they tend to be chunky. What we're seeing is some of those costs we talked about that we outperformed in the second quarter on GNA, that that would be timing related. Some of that's going to come back to us, seeing some of that in the third quarter, which affects that a little bit. So nothing unusual. You see that second and third quarter be a little volatile, but the important point is just a projection for the year, continued strength.

Okay, thank you.

And we will take our next question from Nick Ulico with Scotiabank. Your line is open.

Thanks. Good morning, Tim. Just going back to Atlanta, I know last quarter you talked about some weather issues affecting occupancy. Was there anything else driving the occupancy being lower there this quarter?

Yeah, a couple things going there. I mean, Atlanta is experiencing a decent amount of supply. It's not quite as high as some of our other markets, but Relative to what Atlanta typically gets, there is some supply pressure. But a couple other things impacting that, and you mentioned one of them. We had sort of late first quarter, early second quarter. Over the course of two or three months, we had about 100 units come back online in Atlanta, which was a mixture of some units that were down to storm damage and then a fire at one of our properties. And so pulling those back into the portfolio and needing to lease those up had some impact. And then secondly, which hinders us a little bit in the short term but is positive on the long term, is Atlanta and the counties there have started to progress some on evictions and filings and doing court dates and kind of working through that whole process, which has been a real laggard in terms of our markets for working through that. So we actually year-to-date have seen about 140 more evicts and skips this time versus the same period last year. So good thing, as I said, long-term, and we are seeing a little bit better payment progress there, but it kind of doubled down on some of the occupancy pressure there. Revenue and pricing is held in okay. It's a little bit below the market, but not, or a little bit below the portfolio, but not too bad. And And, you know, overall, we obviously still feel good about it long term, but just running through a little bit of pressure right now.

Okay, thanks. And then in terms of, you know, if we think about new supply and concessions being offered, you know, across markets, can you just give a feel for where, you know, concessions are more prevalent, you know, competing product and, you know, where you're also offering concessions in the existing assets or in any of the development assets?

Yeah, so for our portfolio, concessions are running about, cash concessions are about half a percent of rents. It's ticked up a little bit, but not significantly. I mean, we do tend to net price with our pricing systems, so don't use a ton of concessions. But broadly, you know, at a market level and what we're seeing, some of the competitors... I would say, you know, you're at a month free is about where we're at in several of the larger markets. And for most, that is more kind of in-town, central areas of the markets. You might see a little bit more if there's a lease up in the area, but we're not seeing any more that a month and a half or so in any of our markets. Austin's one where it's a little unique in that we're actually not seeing a lot of concessions kind of in the central Austin, but more in the suburbs where there's quite a bit of supply. That's one where concessions are a little more prevalent in the suburbs versus other markets where it's more urban and infill.

Sorry, I just wanted to add to that real quick. You asked about our lease-up properties. To Tim's point, we've got one in lease-up in Austin. That one we're offering up to a month free, which is on select units, by the way, not across the board. We've got a couple of hundred units competing supply just in that same sub-market. So I'd say that one's probably feeling the most pressure, but I will say that Average rents on that property are three to $400 higher than what we expected. And then the average concession usage there is significantly below what we expected most of our new lease ups we expect about a month free and we've been significantly below that on this asset and i would just say in all of our properties that are in lease up right now we're below what we generally pro forma which is a month free uh just we're offering that on select units as needed so it's not broad-based use of concessions that we're seeing right now great thanks if i just just follow up on the um you know the investment activity and being more patient

there. I know you gave some commentary on this, but is that more of a view that, hey, cap rates seem like they're too low to where you're penciling, they should make sense? Or is it also just a view that, hey, at some point, we're not sure exactly where market rents are going in some areas. There is supply coming maybe there's an opportunity to wait. You mentioned talking to merchant developers and just trying to kind of tie together, I guess, valuation versus a view on, hey, fundamentals are becoming a little bit uncertain because of supply.

Right. Nick, this is Brad. I would say it's really the belief that we think cap rates will tick up a bit from where they are right now. I mean, the fundamentals generally are holding up pretty well within our region of the country, and we're not seeing distress certainly in our region, and especially in these lease-up properties. We've seen cap rates tick up over the last year, year and a half, and really what we believe right now with the limited amount of inventory that's on the market, the capital that's out there kind of piling up on each other on the assets that are coming to market. That is driving down cap rates. We also continue to see a high proportion of the deals that do trade are 1031 exchange as well as loan assumptions. So we just believe that as the elevated supply that's occurred in our market over the last year, two years, begins to come to market. You know, those assets need to trade. Merchant developers need to sell. And as that product comes to market, it's likely to spread out the capital a bit. And we're likely to see cap rates continue to move up a bit from where they are today. Today, interest rates are 5.5, 5.75. You know, and I think when you layer onto that, just still good operating fundamentals, but not the 5, 6, 7% rent growth that we've seen over the last year. I do think that that continues to point to a scenario where the negative leverage continues to decrease, which supports increasing cap rates. So just for context, after the GFC three-year period after that, we purchased 9,000 units over a three-year period. And I don't know if this situation will be as fruitful as that was for us, but it certainly feels like our region is really primarily driven by merchant developers and product needs to trade at some point, and we're starting to see cap rates move up a bit. So we're going to be patient and hold our capacity to what we think will be a better opportunity.

Thanks. Appreciate it.

And we will move next to John Kim with BMO Capital Markets. Good morning.

I wanted to ask about your same-store revenue guidance. You narrowed the range, but you've maintain the midpoint. But you started the year with 5.5% earning. So just to hit the top end of your same-store revenue guidance of 7%, you only really needed to achieve 3% least growth rates for the year. You've already exceeded that. I think you've been saying that least growth rates are coming higher than expected. So I know that occupancy offsets this a little bit, same with the fees, but your 6.25% midpoint seems very conservative today. I just wanted your response on this.

John, this is Al. I think the important point there, we didn't cover today, we've talked about it a bit in the past, is that there is a little bit of dilution in that total revenue from the pricing line because there's other income components that are what, about 10% of our revenue stream that aren't growing at that call of 7%. And so they're going, you know, 2% to 3%. And so that dilutes it some. So that's probably the difference there. But in general, the math that you laid out with the 5.5 carry-in plus half of the pricing performance we've gotten this year, which is, you know, we've talked about was 3%, 3.5% blended pricing, half of that. That gets you pretty close to the effective rent growth expectation we have this year. And then those other income items dilute that just a bit.

So is there a likelihood that you're going to achieve above the midpoint of the guidance?

I'm just saying that the guidance is, we think the guidance is accurate. There are things other than effective rents that are affecting that total revenue, John. There's items that are other income related that are growing, call it 2% to 3%, that bring that down. So if you're looking at total revenue, I think we brought it in just because we narrowed it, which we typically do, just because we have a little more information getting closer to the end of the year. But that midpoint of $6.25 in total revenue, we still feel that's the right number.

Okay. My second question is on the insurance premium that you got at 20%. I know that's in line with your guidance, but it still came in probably lower than many of us had expected. And I'm wondering if there was any change in the coverage that you had to get that premium, whether it's self-insuring or reduced coverage or anything else.

Yeah, John, this is Rob. In part, the property insurance premium is a big driver of it. It was up about 33%, and that was offset by a much smaller increase in our casualty lines, automobile workers' comp, general liability. So the balance result, as you said, was about 20%. We did have some changes on the retentions this year, about a million dollars on our per occurrence and a couple million dollars on our aggregate. then we do have a separate freeze event deductible because of some of the events that were happening in the southeast. But overall, we feel like the retentions that we have are appropriate given the balance sheet strength we have and the spread of risk across the portfolio given the geographic disbursement. And then as we've done for several years, we did take a portion – of the primary insurance. So we've got about $10 million of self-retention there that we feel very comfortable with with an insurance product that caps our loss over three years at $15 or so million. So I feel like we're in really good shape there relative to the strength of the balance sheet.

Great. Thank you.

Thanks, John. And we will move next to John Pelosky with Green Street. Your line is open.

Thanks. Brad or Eric, I just had a follow-up question regarding the glimpses and signs of better acquisition opportunities you're starting to see. Can you just give me a sense for whether you're seeing notable signs and broad-based signs of capitulation on pricing from merchant builders struggling with higher debt service costs and their lease-ups?

Yeah, John, this is Brad. Yeah, I would say we're not seeing capitulation at this point. I think what we're seeing is selectively developers are looking to take some risk off the table on select assets when it makes sense for them to do so. I mean, you know, just for context, in the first quarter, you know, we tracked I think seven deals that we had data points on. You know, we're up to call it 14 in the quarter. second quarter, but I would also say the majority of those are not necessarily merchant developed assets. So again, not a lot of data points there. We've seen a few, but not broad-based. I do think that that is what we continue to monitor because as we get later into this year, to my comments earlier, I think the merchant developer profile and need to transact increases. But we haven't seen that really open up broadly at the moment.

And, John, I will tell you, as you get later in the year and you get into the slower leasing season, sort of during the holidays and Q1 of next year, a lot of these lease-ups are going to see more pressure again. just leasing traffic is not as robust during that time of the year. And so we do think that we're heading into an environment where more likely than not, pressure will build for some of the lease-up projects that are happening out there. And that may trigger some opportunity.

Okay, makes sense. Final question for me, Tim. You talked about the mid-tier markets outperforming over the coming quarters. Could you just give us a sense, a rough range of the blended rent spreads you expect in your mid-tier markets over the second half of this year versus the more supply-laden larger metros?

Yeah, I mean, it obviously varies by market. There are, you know, some doing much better than others. But I would say, and depending on which markets you define as mid-tier versus not, you know, you're probably – somewhere in a 100 to 150 basis point blended spread. So, you know, year to date, we're seeing several that are in that 4.5% to 5% range compared to our upper threes overall portfolio. So I do think, you know, 100 to 200 basis points spread is probably about right. Sounds great.

Thanks for the time.

And we will move next to Rob Stevenson with Channing. Your line is open.

Good morning, guys. I know you collect a lot of data on your residents. Do you have the data on the percentage of residents with student loans outstanding? And what do you think the resumption of payments is going to have impact wise on the ability to pass through future rent increases in 24?

Yeah, Rob, this is Tim. We talked about that a little bit. We do not have insight into that. We outsource sort of our credit check and income verification, so we don't have insight into that, certainly at any broad level. And actually, as part of income qualification and rent-to-income checks, you're not allowed to use student debt as part of that. So really don't have much insight into that, to be honest.

Okay. And then, Al, how are you reading Texas in terms of this property taxes going forward? Is this just a one-time distribution of the surplus, or are you expecting to see fundamental changes there and lower levels of property taxes in Texas going forward?

Now, Rob, we would read this as at some level it should be an ongoing benefit. I mean, what we've seen over the last several years is Texas, because of the strength of the state, has had really high valuations come out, property valuations. And we've seen millage rate rollbacks, you know, some more than others in different municipalities because of that, because there is some limitation there. you know, at the revenue level and budgetary level on taxes they can do. So we had projected a rate rollback. Now this, because of the overall budget surplus, goes well beyond that. And so they're basically recognizing that the coffers are full, recognizing that the state is doing very well, that valuations overall are very strong. So they're permanently reducing that rate, if you would, by legislation. Now, the other side of that is In the future, if the economy of Texas is different, they could undo it, but this should be a permanent, ongoing impact that's pretty significant. It caps out to be something like $0.20 per $100 of value for your property values, and that's pretty significant.

Any other markets where you're seeing property taxes trending above or below your expectations from earlier this year?

Not really. I think the one outstanding to really get the final information on, other than Texas, is Florida. It's the one that comes in late, and so we need to see the millage rates there. We've got the values. We need to see the millage rates coming there. That's pretty significant. But other than that, you know, getting a pretty clear picture at this point. We're about 70% of the knowledge at this point, I would say, Rob.

All right. Thanks, guys. Appreciate the time.

And our next question comes from Anthony Powell with Barclays. Your line is open.

Hi, good morning. Just wanted to walk through maybe the medium-term outlook for lease spreads. It sounds like you expect new lease spreads to be in the 0% to 1% range for the next couple quarters. Does that mean that renewals will go to 0% to 1% maybe early next year as well, or can it remain above new for a while?

Yeah, I think I would expect renewals to remain above new, and that's not unusual. I mean, what we saw last year, renew lease rates were quite a bit higher than renewals. is is more the exception than the norm and so you know with renewals you've got obviously somebody that has lived with you and hopefully you provided good good resident service and and have a an asset that they enjoy living in and so there's some friction costs to move and all that so typically we would see renewals uh pretty consistently above new leases so i don't i don't expect it to to get down to the new lease level

And can you remind us, what's your peak level of supply delivery on a quarterly basis? Is it first after next year? And just when do you think supply starts to come down in your market?

Yeah, I mean, it's difficult to nail down to a quarter, but I think our belief right now is kind of peaking early 2024 and then starting to trend down and then really set up for a good position as we get into 2025 in terms of lower deliveries.

Okay, thank you.

We have no further questions. We'll call the MAA for closing remarks.

Well, we appreciate everyone joining us this morning and obviously follow up with any other questions that you may have. And that's all we have this morning. So thank you for joining us.

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