Mid-America Apartment Communities, Inc.

fourth quarter and full year 2024 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, February 6, 2025. I will now turn the call over to Andrew Schaefer. Senior Vice President, Treasurer, and Director of Capital Markets of MMA for opening comments. Thank you, Ian, and good morning, everyone.

This is Andrew Schaefer, Treasurer and Director of Capital Markets for MAA. Members of the management team participating on the call this morning are Eric Bolton, Brad Hill, Tim Argo, Clay Holder, and Rob DelFerrari.

Before we begin with prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our 34-act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures 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 reported in our earnings release, MAA finished calendar year 2024 in line with our expectations and is in a great position for the recovery cycle for apartment leasing that should be increasingly evident over the course of this year. While we are still working through the impact of record high levels of new supply delivered over the past year, We are encouraged with some of the early recovery trends that we are capturing with lease over lease pricing performance. While it would take some time for the recovery momentum to build, it seems clear that the tide is starting to turn, and we look forward to a productive spring and summer leasing season when the improving trends will have a more obvious compounding impact on overall portfolio results late this year and into 2026. Before turning the call over to Brad, I did want to take just a few minutes this morning and tell you why I'm excited and confident about the prospects for MAA's earnings outlook over the emerging recovery cycle. It starts with my confidence in our leadership team. As we disclosed in December, effective April 1st, we plan to execute on the next step in our CEO succession planning program, and Brad will assume the role of president and CEO I'll remain active in supporting Brad and our board as executive chairman. Brad and his executive leadership team have an average tenure of 16 years with our company. I know this leadership team well, and I have a lot of confidence in them. Brad and his team have a deep understanding of our strategy and our approach to executing on that strategy, which has delivered sector leading long-term results for shareholder capital. Beyond my confidence in our leadership team, While our markets have more recently been challenged with a 50-year high record of new supply deliveries, there is increasing evidence that the worst of the pressure from this new supply is poised to materially moderate, especially as we get into the summer leasing season. As we have discussed, we historically have seen the actual delivery and leasing pressure from competing new development peak at roughly two years after the start of construction. Based on our analysis, the volume of new construction started in calendar year 2023 or two years ago dropped 39% from the peak of starts during the extraordinary low interest rate environment in calendar year 2022. And then starts sequentially dropped another 50% in calendar year 2024. So this is expected to result in a significant decline in actual unit deliveries starting this year and then to 2026 and 2027. Given where we are currently with interest rates and construction costs, we continue to see challenges in the market's ability to meaningfully restart and increase in new projects. Taken together, we believe these conditions will manifest in a sharp drop in new supply delivery starting this year and continuing for several years. In addition to this supply dynamic and the impact on leasing conditions, We believe that our portfolio is uniquely well positioned to capture the benefits from job growth, population growth, and high single-family housing costs. This continues to drive a resulting growth in the demand for apartment housing across our markets that will outpace national trends over the long haul. This strong positioning for the demand side of the equation, coupled with the material drop in new supply this year and beyond, we believe will have a significant impact on market rent growth across the portfolio for the next few years. Furthermore, I'm excited about the various new tech initiatives we have underway aimed at driving enhanced services for our residents and more efficiencies within our operating platform. Several new initiatives that we have more recently implemented Coupled with new projects that will launch over the coming year, we expect we'll further increase operating margin and accelerate earnings over the next few years. And finally, our external growth pipeline is stronger and larger than at any time in our company history. We have several new projects slated to deliver over the emerging recovery cycle with other new sites already lined up. And importantly, the balance sheet is strong and well positioned to continue to support this growth. So, in summary, the experience and proven capabilities of our leadership team, our orientation towards the strongest growth in housing demand markets in the country, the strength of our operating platform with growing efficiencies, and the more robust external growth pipeline we have in place that is supported by a sector-leading strong balance sheet all combined to drive much enthusiasm and confidence in my outlook for MAA over the next few years. As this will serve as my last earnings call prior to the transition of the CEO role, I'd like to extend my appreciation and thanks to our shareholders and to the analyst community for your trust in our company and our team. It's truly been an honor to serve the public capital markets over the past 30 years here at MAA. Our culture at MAA is grounded in a strong belief that our stewardship of MAA assets and shareholder capital is at all times focused on creating value for the benefit of our residents, our shareholders, our associates, and the communities where we operate. I'm proud of our associates at MAA. I appreciate their hard work and support, and I look forward to MAA delivering even higher value in the future for those that we serve. Turn it over to Brad now. Thank you, Eric, and good morning, everyone. As expected, during the fourth quarter, our focus on occupancy combined with higher news supply and the typical seasonal slowdown in leasing traffic weighed on new resident lease pricing during the quarter, but the seasonal decline in lease-over-lease rates was less than we've seen in previous years. Encouragingly, this pressure has continued to moderate in January, with blended pricing improving more from the fourth quarter's performance than in previous years. predominantly due to improvement in our new lease pricing. I share Eric's optimism for our growth prospects and momentum toward delivering strong long-term earnings. As Tim will discuss in more detail, we are seeing encouraging signs that indicate leasing conditions are poised to support improvement in blended lease rates and have a compounding impact on revenue performance throughout the year. Continued strong absorption, occupancy and exposure, Improved seasonal performance and an expected more meaningful reduction in supply pressure all contribute to a favorable outlook for our existing portfolio. Additionally, we're continuing to invest in several key areas that will significantly impact future earnings, including various technology initiatives that will support our centralization efforts and enhance efficiencies. In 2025, we will begin to more aggressively roll out property-wide Wi-Fi across our portfolio, we will ramp up the rollout over the next couple of years as a number of our properties transition off of our legacy bulk wi-fi program we also plan to increase our investments in the interior renovation and repositioning programs both of which benefit from the higher price new supply that has delivered into the market recently on the external growth front we're committed to maintaining an active development pipeline of around a billion dollars In 2024, we invested in a record five projects expected to deliver average NOI yields at stabilization of 6.3%, ending the year with seven projects under construction, representing over 2,300 units at a cost of approximately $850 million. We expect to start construction on another three to four projects in 2025. As the transaction market begins to open later this year, will continue to opportunistically deploy capital into acquisitions that are in their initial lease up. During the fourth quarter, we closed on a 386 unit property early in its initial lease up in the Dallas market. This property was 44% occupied at the end of the fourth quarter and is expected to stabilize in early 2026. This brings our total acquisitions in 2024 to three properties, which were on average 65% occupied at closing and projected to deliver NOI yields of 5.9% upon reaching stabilization in 2025 and 2026. During the fourth quarter, we sold two properties with an average age of 29 years, a 216-unit property in Charlotte, North Carolina, and a 272-unit property in Richmond, Virginia, delivering a combined investment period IRR of approximately 19%. We have two additional properties in Columbia, South Carolina under contract and expect those to close in the first quarter of 2025. We will continue our focus on strengthening our overall earnings quality by recycling capital out of some of our older higher CapEx properties and redeploying that capital into newer acquisitions with a higher earnings growth profile, particularly on an after CapEx basis. We expect to execute on the balance of our $325 million disposition plan late in the year. the end of the fourth quarter we had eight communities in lisa four acquisitions and four developments with an end of the year occupancy of 69.7 percent we expect the acquisitions to average noi yields at stabilization of 5.9 percent and the developments to average noi yields around 6.4 due to the high level of competition in many of our markets and our intent to hold firm On our rent pricing expectations, we pushed the expected stabilization dates back slightly on a few of our lease-up properties by one quarter. However, rents continue to exceed our pro forma expectations, and the stabilized NOI yields on our new developments and lease-up are significantly above our original expectations. Our existing portfolio is well positioned to benefit from the improving demand and supply trends, with our various growth initiatives providing additional earnings over the recovery cycle. To all of our associates at the properties and our corporate and regional offices, thank you for your commitment, hard work, and dedication that you show every day to our prospects, residents, and fellow associates. Before turning the call over to Tim, I do want to take a moment to say a few words in recognition of Eric ahead of his transition to the executive chairman role. Over his 30 years of service to MAA, with 23 years as our chief executive officer, Eric has been instrumental in so many ways to this company. His dedication to serving our various stakeholders is second to none. We are grateful for his vision and wisdom, his courage, and his discipline in leading this company to unmatched performance. His mentorship and counsel over the years to so many in the industry and especially to MA's executive leadership team and to me exemplify the tremendous leader that he is. Eric, for all you've given to our company and to the industry, we thank you. With that, I'll turn the call over to Tim. Thanks, Brad, and good morning, everyone. As noted by Brad, in the fourth quarter, we prioritize achieving portfolio-level occupancy that positions us well for the improving supply-demand dynamic in 2025. We particularly focused on the higher exposure markets, which came at the expense of slightly weaker new lease pricing performance, but achieved the occupancy goals for which we were striving. The moderation in new lease pricing showed less seasonal deceleration than we saw in 2023, and less than we typically see from the third to fourth quarter. As a result of this strategy, new lease pricing on a lease-over-lease basis for the fourth quarter was down 8%. The 260 basis point decline from the third quarter but favorably comparable to a 470 base point decline over the same period in 2023. Renewal rates for the quarter stayed strong, growing 4.2% on a lease-over-lease basis, which was a 10 basis point increase sequentially over the third quarter. The resulting lease-over-lease pricing on a blended basis was down 2%, which represented 140 basis point improvement in sequential moderation as compared to the same period in 2023. Average physical occupancy was 95.6%, up 10 basis points from the third quarter. And collections continued to outperform expectations, with net delinquency representing just 0.3% of billed rents. All these factors drove the resulting same-store revenue down 0.2% for the quarter and up 0.5% for the full year of 2024. As was true for most of 2024, several of our mid-tier markets continued to hold up better than the broader portfolio in the fourth quarter from a blended lease and release pricing standpoint. Richmond, Norfolk, Charleston, Greenville, and our Fredericksburg and other northern Virginia properties all stood out. Tampa and Orlando are two larger markets that started to show some relative pricing recoveries. Also, as was true for most of 2024, Austin, Atlanta, and Jacksonville are markets that continue to be more negatively impacted by the absolute level of supply being delivered into those markets, with Austin continuing to be the toughest challenge of all the markets. We continued our various redevelopment and repositioning initiatives in the fourth quarter, and as Brad mentioned earlier, we expect to accelerate these programs over the course of 2025 and into 2026. For the fourth quarter of 2024, we completed 1,130 interior unit upgrades, bringing our year-to-date total to 5,665 units, achieving rent increases of $106 above non-upgraded units. Despite this more competitive supply environment, these units lease about 10 days quicker on average than a non-renovated unit when adjusted for the additional turn time. We expect to renovate closer to 6,000 units in 2025 with an even larger increase expected in 2026. For our repositioning program, we have two active projects that are most of the way through the repricing phase with NOI yields approaching 10%. We have an additional six projects underway with a plan to complete construction between April and June and begin repricing in what we believe will be a strengthening leasing environment. We are also now live on the four property-wide Wi-Fi retrofit projects we began in 2024 and expect to begin an additional 23 projects in 2025. With January wrapped up, we are seeing encouraging trends that are aligned with our outlook for 2025. New lease and blended pricing in January improved as compared to both December and the full fourth quarter with stable occupancy of 95.6%. Our 60-day exposure at the end of January was 7%. 70 basis points lower than this time last year and should serve to keep occupancy stable through the remainder of the quarter and allow for more pricing power as seasonal demand starts to increase. The 95.6% January average daily physical occupancy was 25 basis points higher than January of 2024. As Brad noted, absorption remains strong in our markets, with the fourth quarter representing the second consecutive quarter that units absorbed exceeded units delivered. The excess absorption as compared to new supply in the fourth quarter was the largest gap since the third quarter of 2021. With new lease pricing improving, though remaining a challenge, we are also encouraged by the lease or release rates achieved on excessive renewals through April with average increases in the 4.25% range. Improving new lease rates should help support continued strong renewal performance into the busier spring and summer leasing seasons. New supply deliveries continue to be a headwind in many of our markets, but the trends support expected improvement throughout 2025, laying the groundwork for an even stronger 2026. Following on Eric's comments, with construction starts peaking in mid to late 2022 in most of our markets, we believe we have passed the maximum pricing pressure period that tends to come two years or so after the peak of construction. The slowly moderating supply pressure, increasing spring and summer leasing traffic, and our current occupancy exposure portfolio position have us excited about the recovery to come. That's all the way I have for prepared comments. We'll now turn the call over to Clay. Thank you, Tim, and good morning, everyone. We reported core FFO for the quarter of $2.23 per share, which was in line with our fourth quarter guidance. It contributed a core FFO for the full year of $8.88 per share, in line with our original guidance for the year.