Mid-America Apartment Communities, Inc. (MAA) Earnings Call Transcript & Summary

Great. Thank you. Welcome to Citi's [Technical Difficulty]. I'm Nick Joseph with Citi Research. We're pleased to have with us Mid-America Apartment's CEO, Eric Bolton. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. [Technical Difficulty] screen, and they will direct to me and I will do my best to ask. Eric, I'll turn it over to you to introduce your company and the team and any opening remarks.

Thank you, Nick. [Technical Difficulty] joining us this morning. Hopefully, you can see on the screen here, Al Campbell, our CFO; Tim Argo, our Director of Finance; and Andrew Schaeffer, our Treasurer. And for those that you may not have seen it, we did [Technical Difficulty] used to be the case. And that these southeast markets, Sunbelt continue to show solid recovery, and we are getting rental trends that are very encouraging, better than what we saw in last year and certainly better -- even better than what we saw in January. So we are early in the year, heading into the all-important season. And as these Sunbelt markets continue to open up and add back jobs, we are optimistic with the trends and what it holds for us. So with that, Nick, let me turn it back to you.

Well, if an investor were to chose only 1 real estate stock to own, what are the 3 reasons why they should invest in MAA.

Well, I would start with our Sunbelt markets to look at our stock. We have very big markets. We're in more different types of markets, both large and more secondary markets than other companies that focus on the Sunbelt. And we think it brings a very [Technical Difficulty] profile [Technical Difficulty] to weather downturns better than most. And also I think weather the pressures around the supply pressure within those [Technical Difficulty] our footprint and our strategy that we've had in 27 years of the company. I think the Sunbelt strategy is working better than it ever has [Technical Difficulty] the opportunity or great upside opportunity [Technical Difficulty] market is coming to the market an entire rent level, which creates a good spread between our current rents and the new rents that are being [Technical Difficulty] supply. And it creates an ability for us to redevelop and position the [Technical Difficulty] still have a lot of opportunity in regard to the harvest. And I think over the next 2 to 3 years, organic earnings growth coming out of existing asset base will compensate that. [Technical Difficulty] higher leverage buyers. [Technical Difficulty] right now, we've got another 2 or 3 projects, which will probably get started later this year. [Technical Difficulty] 6 versus market cap rate right now close to 4. So there will be a lot of value creation that we think we're going to deliver out of that story over the next 2 or 3 years above all it rather suggests to me that we've got a lot of opportunity coming into this recovery part of the cycle. And I like where we're positioned.

Great. Why don't we start with that operating update, as you mentioned, there's an investor presentation with a lot of good slides. But it looks like blended rent growth is kind of trending as you would expect, occupancy is stable. As we look to how 2021 will play out, do you think it's a normal leasing cycle? Or is there still some disruption across your markets from COVID? And how should we expect it to trend from here?

Yes, I think it's going to be certainly a lot more normal this year than prior year last year. And I think it's largely going to be a more normal year for us at a very sort of high level. We are going into the spring with strong occupancy, low exposure. We're right where we want to be, which is in a position to push pricing and start to recover some of the pricing trends that we backed off on last year. So I'm optimistic that the spring and summer leasing season, yes, will be pretty robust for us. We are starting to see a lot of these southeast markets starting to continue to open up, bringing back a lot more service employment jobs. And we think that all things suggest to us that the leasing trends over the spring and summer will be solid, which will begin to then have an impact on overall revenue results late this year and 2022 as we start to built that pricing momentum into the portfolio.

Are you seeing concessions in any of your markets on stabilized properties?

Not a lot. I mean, I think there are -- could be some pockets in some of the more urban locations in Dallas, in Atlanta, where you're seeing some of the new product that's trying to lease up offering concessions, but it's really isolated in nature. And we may see a property that is facing near-term competitor that's leasing up with some conditions, and we're responding as we need to. But it's a pretty -- it's a pretty limited situation, and we don't see a widespread use of that going on. Tim, is there anything you would add to that from -- lease concessions are down from last year, for sure.

Yes. I mean I think it's -- at a portfolio level, it's running somewhere around 1% of rents, which is within a 20 basis point spread really of where it's been for the last several years, certainly some pockets where it's higher, but -- and then a lot of areas where it's none, but pretty minimal overall.

What are you seeing in terms of traffic and demand trends, and then also on the turnover side and the risk of maybe people moving out to purchase homes?

Well, traffic levels are high. I mean, they're as high as they were last year, if not higher. Leasing volume is strong as seen there. Our -- on Slide 8, our occupancy is running pretty consistent at around 95.5% to 96%. And that's a comfort -- that's a level of occupancy that we want to hold. We really believe that the demand is strong enough that we going -- as I say, going to the spring and summer with the ability to push rents pretty good. Turnover, I expect it to start to move up just a little bit. I don't think it's going to get way out of line, but there is a slide in the presentation in our materials there. I can't remember which page it is, but it does show a little pickup in turnover, but most of that's a function of a little bit of pickup and move out to buy a home. But it's still only about 23% of our turnover and I don't see it jumping significantly higher just as a consequence of what's happening with single-family home pricing in a lot of our markets, which has gotten pretty steep. And so I think that in the move-outs to rent a single-family home remains very modest. Probably the variable that has the potential to drive turnover up more than anything else is a recovery in the employment markets and people moving to, due to a change in their employment status, a new job, if you will. That change in employment status is a bigger factor in turnover for us than it is anything else, even more so than buying a home. So I think that we likely will see from these record levels, turnover start to pick up a little bit. But it may -- it's -- right now, we ended the fourth quarter around 46% on an annualized run rate. I don't know what the number could be, but it may be -- I could see it being closer to 48% or so by the end of the year as the economy really starts to recover.

Ryan, I'm getting some messages that the audio is choppy. I'm not seeing anything on my end, but just wanted to alert, you've gotten 3 comments. But everything -- it looks fine on my end, but I'm hearing that from some of the investors watching. But we'll continue on. In terms of the demographic trends, Eric, that you've seen, obviously, COVID today answer some of these people that have relocated during COVID, kind of creating a headwind going forward? Or do you think these trends continue to persist?

Well, a couple of things I'll say about that. First of all, I think that the notion of people leaving the gateway markets for the Sunbelt, I think that, that probably has been, in my opinion, potentially a little bit overstated. Certainly, it's been there to some degree. If you look at the move-ins that we had in the fourth quarter, roughly 12% of the move-ins that we had were for people moving in from outside of the Sunbelt into the Sunbelt. Now that 12% compares to about 10% the year before. So while the trends ticked up a little bit, it's not like it went from 10% to 50% or something of that nature. And I think a lot of people that left some of the more dense urban locations to some of these gateway markets generally stayed within the metro area, they just moved out to the suburbs or closer by. I think what's more likely to happen, though, is that a lot of the people that have moved out of some of these more expensive gateway locations that have relocated, I think a lot of them are sticky. I don't think a lot of them are going to go back. I think a lot of them are -- have established an ability to work remotely. A lot of them have established either new jobs or their jobs have moved with them and I think the propensity for remote working will be greater post pandemic than it was before COVID hit. So I think that -- I don't think there's going to be this great reversal because it wasn't a great trend to begin with. I think there was some trend and that maybe even a smaller percent of that, that will go back. I think where the gateway markets are more at risk is more as a consequence of less in [Technical Difficulty] historically been in place. And I think that the ability for young people or the tendency for young people recently out of college to relocate to some of these markets is going to be a little tougher than it has been because the jobs -- there's going to be more propensity for the jobs to be in the Sunbelt. So I still think that -- when I think about sort of the demand drivers and trends, I think the Sunbelt markets certainly got a lift from COVID. As you know, the trends were there before COVID, and COVID accelerated those trends. I don't think it's all going to reverse for sure, and a lot of it is sticky. And I feel like the Sunbelt markets are poised to continue to see much stronger demand relative to some of the gateway markets over the next 2 or 3 years.

How does that impact where you want to position the portfolio across the Sunbelt? In your opening comment, you mentioned kind of the benefits of diversification. You want to be more diversified? Are there some of these secondary and tertiary markets that may be net beneficiaries, where as an institutional investor, you can create more value?

Well, I mean, we're expanding our presence in Denver. We've got 2 properties there already. We're finishing up construction on another. We've got 2 other sites that we've got tied up. That we'll hopefully start either late this year or early next year. We are -- as we've mentioned before, we are tied up with the site. We hope to close on in April in Salt Lake City, which will be a new market for us. We've got some other sites there that we're looking at as well. I think that's a market that we'll continue to see good performance. But our broad footprint and broad orientation towards these high-growth markets across the Sunbelt up Mid-Atlantic to kind of the Carolina area and as Far West as Denver and Salt Lake, that's really kind of the footprint for us. I don't really plan to change that. We are continuing to look at some opportunities. And we've got 2 sites underway in Orlando. We've got another opportunity in Tampa, where we're working. We just started a new project in Austin. And we've got another site tied up in Raleigh. So all those kind of a lot of the same markets that we're in right now and just continue to build out our footprint in those markets.

Is there anything from an organizational standpoint, obviously, some of those markets are Sunbelt. But as you think about Denver and Salt Lake City, it is more geographic expansion. How scalable is the operating platform? What you need to add as you diversify?

Yes. I think that probably by the end of this year, we'll be at a point where we will need to add a regional office in Denver, would be my guess. Right now, we're sort of serving that out of Phoenix. And our Regional Vice President based in Phoenix is covering that market for us. But I think with what's coming online in Denver and Salt Lake, we will probably establish -- and when I talk about regional office, I'm talking about maybe 1 or 2 people. So it's not like it's a big add, frankly. From a corporate level perspective, this is all very scalable for sure. And so minimal, minimal overhead implications with the growth that we're talking about.

You've been focused on operating enhancements and technology, similar to a lot of your public peers. Ultimately, what's the margin expansion opportunity from these, I guess, near and medium term?

Tim, you want to take that?

Yes. I mean, I think near term, we've talked about some leasing positions with the enhancements we're doing on the leasing side. There's probably 25 to 30 leasing positions that over the next year or 2, we think we can eliminate. And then ultimately -- I think it's ultimately a rent driver and a revenue driver as we get the entire leasing from sort of A to Z, more automated and more customized for a given resident. So I think, ultimately, there's probably 100, 150 basis point margin opportunity as we get over the next 2, 3, 4 years, that will slowly build, start slow, and I think will get bigger as we get into the next couple of years and really get that automated leasing environment in place across the portfolio.

What innings are we in, in terms of prop tech that really impacts the operating platform?

I think we're in the very early innings, call it, inning 2 or 3.

So a lot to come?

Yes. Yes, a lot to come.

Great. What's the best capital allocation decision to make today?

Yes. I would tell you, it's the redevelopment, repositioning that we're doing of our existing asset base, followed closely by the investment that we're making in some of this prop-tech initiatives that we're just discussing. The ability to drive a little bit more margin and rate growth opportunity of our existing asset base given the scale of our asset base is pretty impactful. And then after that, I would tell you, development is still something that we feel that we're able to create a lot of value. If you look at our ability with the $600 million pipeline we've got underway right now to deliver stabilized yields north -- right at 6% compared against a market value of kind of a 4 cap or so, a lot of value creation, $300 million or so value -- or a total value creation of about $800 million on a net basis, $200 million, $300 million. So that becomes pretty compelling as well. Right now, going out and making one-off acquisitions is very difficult. And we, as you know, don't have any dialed in this year for that.

And recognizing it is difficult for those. But when you think about the operating platform that you have relative to a different buyer, when you are able to actually acquire an asset, what sort of uplift do you see on NOI from an acquisition?

It can be quite significant. I think that more often than not, the ability to leverage our scale from operating expenses is pretty significant. And the numbers would be 100, 200 basis point margin I'd tell you, but where I have found, based on the experience that we've been through with both Colonial and more recently with Post, where I find the mower compelling opportunities on the revenue side with revenue management practices that we use, coupled with the redevelopment experience and expertise that we have. So I'm hopeful that the acquisition market starts to come our way. I think you're going to have to see a change in the interest rate environment for that really to happen. But it will happen someday. And I think the value creation from that could be quite significant because of the platform, as you mentioned.

So is it just cost of capital and private buyers using much higher leverage or underwriting something different on a forward growth perspective than you are?

I think it's both. I think it's both. I just think private equity is probably more aggressive on the operating side, particularly with rents, then probably they should be. But more than anything, overwhelmingly, it's really the ability to bring in 75% to 80% low-cost debt and put on the asset that really drives the metrics for them more so than anything.

You mentioned the attractive nature of redevelopment. And then actually, the new supply is helpful with creating opportunities. Where is the price point on average of that new supply relative to kind of where it gets interesting to redevelop existing communities?

No, we look [Technical Difficulty] that before, Tim, help me with that. But pricing on average was, what, 20%, 30% higher or something like that?

Yes, it's 25%, 30%, I'd say, on average, particularly in the urban locations where a lot of the new supply is being built. And obviously, is where we're doing a lot of our redevelopment, take advantage of that. So if we raise it 10% on average, you still have a 15%, 20%, 25% gap from where that new property is coming in. So it still creates a really good value play.

And how do you think about kind of the cadence of redevelopment, and how much you're comfortable with doing each year and what the kind of the forward pipeline is on that redevelopment spend?

We slowed it down a little bit in 2020 just with COVID and took a pause there for a quarter or so. So we only did, I think, 4,500 or so. Our normal cadence, probably 6,000 to 7,000 units. That's kind of what we're targeting for 2021. And I think we probably have 15,000, give or take, sort of in our pipeline right now, but that continues to grow. Even as we redevelop more units, that pipeline still continues to expand, is probably to get older and neighborhoods emerge and opportunities come about with new supply. So expect that pipeline to carry on for quite a while.

And when you think about -- you mentioned legacy post properties, particularly with this opportunity. Is that based off of geographies or is that still just kind of legacy opportunity from the acquisition?

Yes, it's a combination of both, but I would tell you that the majority of the opportunity is a function of the great locations of those Post assets enjoy. These are more often than not inner loop, more -- a little bit more -- leaned a little bit more urban in nature than a lot of the legacy portfolio that we had. And that's where a lot of the new supply delivery has occurred over the last year or so. It is still happening in a lot of these markets. And so that's what really creates the opportunity for us more than anything. That portfolio is just the locations themselves. Now I would also say Post had not executed very much on redevelopment. Their approach was different than our approach, and they tended to want to make a more extensive renovation and spend a lot more money per unit than what we typically execute on. And therefore, they did not see the scale of opportunity, but we take a more modest investment per unit and really try to find that sweet spot of how much we're spending to do the repositioning versus how much upside we think we can capture and it really broadened the field of opportunity more so than what Post had envisioned. And so it's a combination of both factors.

You've talked about getting the development pipeline, I think, up to 4% to 5% of EV. I think you're around 3% today. Are you finding a lot of good new opportunities or is it still very well bid and more of a challenge in terms of land and keep your opportunities intact?

It's still -- it's challenging, Nick. Land costs continue to move up. Construction materials, particularly lumber continues to be a challenge. I think in a lot of ways, I feel like that the -- in aggregate, the pipeline, the construction pipeline broadly is pretty full right now. Whether there is lumber, materials, labor, focusing on trying to build single-family homes or whether they're trying to build multifamily homes or trying to [indiscernible], this feel like that the pipeline is pretty much at capacity right now and pricing reflects that. And so it's not as hard in that area as it is with buying stabilized acquisitions. But it's pretty darn competitive, and we're having to look pretty hard. And the [indiscernible] repurpose some existing land sites. I mean, the opportunity we're building currently in Denver is we tore down an old Home Depot. The opportunity we're doing in Orlando, we worked a deal with the adjacent church to take parking and provide them some parking. So you're having to get a little bit more creative today than perhaps ever before, and it's still pretty competitive.

And what are you seeing on the presale opportunities, just partnering with developers that maybe already have that development opportunity, but maybe to help on the capital side?

Yes. And we are definitely finding opportunities there. We're working on opportunity at the moment in Atlanta with a developer that we know quite well that was set up to go and had it all teed up and their equity partner backed out at the last minute, late last year. And so we engage in conversations with them, and hopefully, we'll get that deal done. But yes, I think merchant builders are finding things tough just for all the reasons I've been through. And the ability for us to come in and work an arrangement where we come in and provide the cap and let them build it. In some cases, we lease it up, some cases they lease it up. There are a lot of merchant builders that are pretty poor in that markets that are -- love that opportunity. And so I think that's an area that we will continue to execute on. And I expect we'll add a couple more deals this year on a prepurchase basis like that.

What are your thoughts on I guess moving into single-family rentals? You're obviously seeing more and more of a focus within your markets of institutional capital coming in. Would MAA ever just be a residential REIT with different verticals beyond just apartments?

It's something we've kicked around a little bit. It's something that we continue to monitor. I think that we have -- in some of the sites that we've been looking at, there has been, in some cases, the permitting or zoning has tossed into the idea of having a -- whether it's townhomes or some other sort of single-family structure to it that we have indicated a willingness to do. But I will tell you that for the moment, we really believe like -- believe that we can capture the growth that we're after by focusing on our traditional multifamily product. And so the priority for us now is to continue to execute on that. But we certainly remain open to the idea, and I wouldn't be surprised to see some of these projects for us over the next 2 or 3 years to have some mix in there of a component to it that has some single-family element to it. It will be kind of the same area, same location, just more horizontal rental, single-family rental or horizontal multifamily as opposed to vertical, but it's something we continue to take a look at.

What are your top 3 priorities to improve your ESG score over the next year?

Tim, do you want to take that?

Yes, I'll take that. So we have -- we've been putting a lot of time and effort toward this area over the last couple of years, and we did put a little bit of enhanced information in our slide deck that we put out on Friday. But so to pick 3 ways, I would say, one, just focus on making further progress towards our energy reduction goals. We've got about 20-or-so LED retrofit projects that we're planning for 2021, so about $4 million to $5 million of capital spend that will help us to continue to reduce energy usage and roll out our smart home installations as well. Number two, I would say, just more enhanced disclosures in our -- we put out our first corporate sustainability report late in 2020, some enhanced disclosures there. For example, compliance with the SASB standards, GRI Standards, you'll see us continue to build that out. And then thirdly, I would say, just continue to increase our number of Green certified and ENERGY STAR certified properties through both new developments that we're building now, but also getting certifications on some of the existing properties we have in our portfolio.

Eric, if you think about the Board and adding new members, what [Technical Difficulty] are you looking for it?

Probably more oriented towards new technologies, tech, consumer services, and digital marketing, some of those skill sets is what we've been talking more recently about, along with the increasing -- continue to add more and more diversity.

We have our 4 rapid-fire questions to end the session. When we are sitting physically together in Florida a year from today, what will be the 1 thing that will surprise people the most about MAA over the prior 12 months?

That despite having tougher prior year comps, MAA was still able to deliver outsized performance in '21 versus this sector.

What do you think your corporate travel budget will be in 2022 as a rough percentage of what you spent in 2019.

Probably about 80%. Virtual meetings are with us, to some degree, forever.

You're right. What will same-store NOI growth be for the apartment sector overall, so the sector, not MAA in 2022?

I'd put it at 3% to 3.5%.

And finally, what will the 10-year treasury yield be a year from today? Today, it's at about 1.5%?

Al, do you want to take that?

I would say there's a lot of -- yes, I will. I would say there's a lot of growth in there -- steepening in the curve already in, probably 25, maybe 50 basis points where it is today higher than it is today.

Great. Well, thank you all for your time. Really appreciate it. And I hope the rest of the conference goes well.

Thank you, Nick. Appreciate it. Thank you.

Sorry. And Eric, you just paste it at the front?

Okay.

Do you know where the audio issues were? Or...

Okay.

Why don't I -- Eric, why don't I just ask -- I'll read the script and just ask that first question, the 3 reasons.

Okay. Okay. Yes, I'm happy to say it again. I think the 3 reasons that someone should be...

Eric, hold one second -- hold on, one second. Let me start from the top.

Okay.

Because I think they have to paste it in the disclosure as well.

Okay, okay, okay.

Ryan, can I go right now? Welcome to Citi's 2021 Virtual Global Property CEO Conference. I'm Nick Joseph with Citi Research, and we're pleased to have with us MAA and CEO, Eric Bolton. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those joining us here today to ask management any questions, simply take them into the question box on the screen, and they will come directly to me, and I will do my best to ask them during the session. Eric, I'll turn it over to you to introduce your company and any members of the management team that are with you today, may answer the following question. Coming out of the pandemic, if an investor were to choose only 1 real estate stock to own, what are the 3 reasons why they should invest in MAA.

Okay. Well, thank you, Nick. And with me today on the screen, hopefully, for you can see there is Al Campbell, our CFO; Tim Argo, our Director of Finance; and Andrew Schaeffer, our Treasurer. And in terms of 3 reasons why someone should invest in our stock today. I would start with the fact that we think that our Sunbelt markets, our Sunbelt strategy, our Sunbelt orientation that we've had for 27 years is probably working better today than it ever has in our 27-year history. And I think we'll continue to work quite well. Job growth, migration trends, population growth, demand for housing, including multifamily housing continues to be very robust across this region of the country. I think employers continue to find these markets very attractive for a range of reasons. And so we think that the opportunity for our story focused on this region, with great upside opportunity over the next 2 or 3 years as well as continued downside protection uniquely positions MAA as an attractive play. Second, I would tell you that the upside that we have from our existing asset base as we continue to execute on redevelopment, repositioning introducing new technology initiatives into our operating platform, continue to create, we think, a very compelling opportunity for margin expansion, revenue growth off of our existing asset base and should drive some fairly compelling same-store organic earnings growth off the existing asset base. And then thirdly, I would point to our expanding external growth opportunity. Our scale, our platform now is supporting about a $600 million development pipeline. We'll see that scale up a little bit more over the next year or so. These are all developments that we think we're going to deliver stabilized yields at 6% or so as compared to market cap rates in the low 4 range, high 3 range right now for these quality assets in these markets. So very compelling value creation that we think we will deliver over the next 2 or 3 years from external growth as well.

Great. Thank you. Awesome. All right. Well, thank you all again. Hope the conference goes well, and we'll speak soon.