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

Okay. I think it's right at 9:30. So we will go ahead and get started. I'm Eric Bolton, Chairman and CEO of MAA; to my immediate right here is Al Campbell, our Chief Financial Officer; to my immediate left is Brad Hill, our Chief Investment Officer; and on his left is Tim Argo, who runs our strategy analysis group. And I appreciate everyone joining us this morning. I'm going to give you just about a 5-minute overview of sort of what's going on with MAA at this point, and then we will open it up for your questions. Hopefully, everyone has a copy of our presentation. And we may have a few more left here. If you need one, just raise your hand. And it is on our website as well, if you prefer to get it that way. Just as a way of introduction for anyone who may not be familiar with our story, on Page 3 is just a quick overview of a little bit about who we are. Obviously, we're focused on the Sunbelt, 15 states across the Sunbelt plus D.C. Page 6 is a brief kind of overview of our footprint in terms of where we are located. But also gives you some perspective on what I feel like is a pretty unique way of diversifying across this Sunbelt region, both in terms of the submarkets that we are in, price point, as well as asset type. We've been public for 28 years now. I've been Chairman and CEO for 20 years -- 21 years as CEO. And our focus has long been oriented towards an objective of trying to be a full cycle performer. It's the way we refer to it, which is touched on Slide 5. We've historically always had a focus on the Sunbelt markets of the U.S. We take a little bit of a differentiated approach to it in that we are very diversified across the region, but we also are very intent on allocating capital to not only the large markets across the region, but also select high-growth secondary markets across the region as well; Nashville; Jacksonville, Florida; Raleigh, North Carolina; as well as, as I say, the big markets, Atlanta, Phoenix, Dallas, and so forth. And our approach has been pretty consistent for the 28 years that we've been public. Page 10 is an interesting chart that I draw your attention to. It gives you a little perspective on the rental market that we serve. We feel like we've got a fairly affluent renter that we cater to, both in terms of the locations that we have as well as the product that we provide. It's interesting to see how this demographic has shifted over the years. It's become increasingly single, increasingly female, and increasingly affluent. And we think that this continues to support our ability to drive strong growth and strong performance. You can see there where our average lease rent level is relative to income, and we continue to feel like we're in a very affordable range for the demographic that we're serving. Page 13 and 14 kind of give you a quick recap of sort of where we are in terms of performance. You can see we're updating our numbers here through the second quarter -- quarter-to-date through May, blended rent growth, blended meaning a combination of what we're getting on new moving customers as well as renewal lease pricing. Blended is just over 17%. That's on top of almost 11% that we captured all of last year. And unlike a lot of others in the sector, we actually hung in there pretty well during 2020 and 2021. So even with tougher comps, you'll find that our rent growth numbers are very aligned with what's happening across the sector today. Pages 14 and 15 give you a little update on some of the broader forecast updates in terms of FFO and so forth. Really, I want to talk to you a little bit about sort of the growth story that we feel like we have going forward. In many ways, I feel like the growth outlook that we have for the next 2 or 3 years is more robust than I've seen in my 28 years with the company. Not only do the leasing demands across our region continue to look very healthy, but we're also, as recapped on Pages 16 and 18, beyond the strong leasing fundamentals. We've got a growing and expanding new development pipeline. Some of the projects are recapped there for you on Pages 16 through 18. We'll be approaching just over $1 billion of active development by the end of this year or early next year, which we think will fuel some pretty accretive earnings growth over the next, really, 3 or 4 years. In addition to that, Pages 19 through 21, give you a little perspective of what we're doing relating to redevelopment and repositioning of existing properties across the portfolio. We've got a pretty extensive unit interior redevelopment initiative underway and have had it for some time now, continues to support above-market rent growth. In addition to that, we've got a more extensive sort of property repositioning initiative underway. We've got 6 projects that we finished last year. We've got another 8 underway this year that, again, we think are going to continue to support above-market rent growth for the next few years as we're really enhancing the product in a number of ways outlined in those pages there. And then finally, on Pages 22 and 23, a little perspective on what we're doing with new technology. We've got some pretty exciting projects underway that we think are going to continue to create some real opportunity for margin expansion over the next 2 or 3 years as we continue to roll out Smart Home technology across the portfolio. It's creating capabilities that we have to further fuel remote leasing as well as consolidating some of our maintenance operations across our portfolio and drive more efficiency through, frankly, just lower headcount requirements that we'll have over the next 2 or 3 years. We think that there will be some pretty significant margin expansion coming from that alone as well over the next 2 or 3 years. And then Pages 24 through 25, just to give you a little perspective on what's going on with the balance sheet and where we are. We're rated by all 3 rating agencies. Fitch actually just moved us to an A- rating a couple of weeks ago. And both Moody's and S&P have positive outlooks on the current ratings they have on our balance sheet at this point. We're optimistic that they will likewise be moving us into that A- rating, hopefully, in the next year or so. But the balance sheet is in tremendous shape, a lot of capacity on the balance sheet, strong coverage metrics and one of the strongest balance sheets in the apartment sector, frankly. And with that, I'll just point you back to Page 4, which is just kind of a recap of performance that we've been able to generate over the number of years. If you're not familiar with or didn't see it, we did just announce a dividend increase, a 15% dividend increase that we announced about 3 weeks ago. And what's important to recognize is even with that 15% dividend increase, our payout ratio, defined as dividend as a percent of AFFO, adjusted funds from operations, is still well below the sector average. So we really believe that the earnings growth that we've captured over the past year or so, the earnings growth outlook that we have supports that level of dividend increase. So we're very comfortable with it. Our story has historically -- if you're familiar with our story and have seen it over the years, our story has historically always hung in there, if you will, during downturns, and we've been a little bit more recession resistant than a lot of our peers over the past. And we think that we still have a lot of those characteristics, both as a function of the markets that we serve and the diversification we have across the region, coupled with the affordable nature of the product that we have. And we think that, that defensive characteristic is still there. But more importantly, we really believe that we've got now a much more robust growth story that goes with that as well. We've got, as I mentioned, the development initiative underway, new development that we think is going to really fuel some significant earnings growth over the next number of years. Coupled with the redevelopment and some of the technology initiatives, we think that the opportunity to drive more significant earnings growth off the existing asset base is going to be there for some time to come. So with that, that's just kind of a quick overview, and we would be happy to entertain any questions or jump into any detail on any of those topics I just mentioned, if you have any desire to do so, anything I can answer for you right now. With that, I mean, Brad, why don't you give a little bit more of an in-depth update on what we're doing with development, also our dispositions and talk about acquisitions.

Yes, for sure. So as Eric mentioned, one of our focuses over the last couple of years has really been focused on growing our development pipeline. And at this time last year, our both under construction and in lease-up pipeline was about $600 million. Today, we're right around $740 million, $750 million in that pipeline. So significant growth has already occurred. Our team has been very active finding new opportunities for us. Where we sit today and the projects that we have both and the land that we have under contract and that we own and the projects we've already started this year, as Eric mentioned, we're on path to end this year with about $1 billion in that pipeline. Now we do certainly face some risks in that area with permitting processes taking a little bit longer than we expected. There's a big pipeline of projects in the Denver market specifically. The planners there are a little bit overwhelmed at the moment. So that's taking a little bit longer, but we're still very optimistic that we're on track for $1 billion by the end of this year. And then as we get into next year, we continue to have identified pipeline that we expect to grow from where we are today and expect to end next year in that, call it, $1.2 billion pipeline range. So significant progress has been made. We'll continue to work that. On the disposition side, we did sell 2 projects last week. Our plan for this year was to sell between $325 million to $375 million worth of projects. We sold 2 last week. No pricing impact was observed from the current interest rate environment that we have. We actually went to market during the time when interest rates shot up about 90 basis points, and we were still able to get the pricing that we expected out of those assets. We do have another project right now that's on the market in D.C. and one later this year that will come out in Austin, and we still feel pretty good about our projections for the year on the disposition side. There's still capital that's out there. Certainly, some of the froth has come out of the market with the interest rate run up. High leverage buyers are having a little bit more difficult time at the moment, but the deals that we continue to chase and continue to work on are still getting done. I would say that there is some pricing discount that is going on and the level of that discount really depends on the market it's located in and then just the quality of the asset. There's a bit of a flight to quality right now. And I would say that the high-levered buyers in the past have been more focused on value-add assets. So those have been more impacted. But certainly, the high-quality assets that we own and that we would be looking to acquire have not been impacted quite as much. As Eric talked about, we do have margin expansion opportunities in our portfolio. And as we look to roll those out in more in-depth across our portfolio and apply those to the acquisition market, we expect to see more opportunities on the acquisition side. At the moment, we do have 2 projects under contract that we're going through due diligence on at the moment. So there has been some opportunities that have come up as a result of some of the capital pulling back, and we'll continue to be active in that market and certainly hopeful that as we work through this year, we'll find additional opportunities.

When do you see your major markets where we're located stabilizing? And we saw this abnormal rent growth over the last 2 years or so and now we're starting to stabilize and you're saying that some of those [indiscernible] feeling overwhelmed and new project is being oversupplied. Where do you see that maybe the market demand or maybe some pressure [indiscernible]?

Yes. Well, my comment specifically was Denver, and there's a unique situation going on in Denver. They had some code changes there. So a lot of folks are trying to get their plans in ahead of time before some code changes take effect and impact some of the density requirements and things of that nature that they have. So that was kind of an artificial surge in supply there. I think our broad view is that within our markets that supply is going to stay elevated from the numbers that we're looking at. Tim's got some numbers on that for the next couple of years, but the demand side of the equation continues to remain very robust in our markets. We continue to see good job growth. We continue to see many employers move to the Sunbelt region of the country and continues to drive job growth and migration trends in our area continue to be good. So we don't see anything on the horizon right now that causes us anything to be concerned about from a demand perspective, and then supply continues to be what it has been over the last couple of years.

And I might add one point on the supply. We're actually seeing -- if you think about probably Austin, Orlando, Tampa to a little bit are ones that we're seeing more supply right now. They're actually 3 of our highest rent growth markets in the portfolio well above the average, which is at 17%. So right now, it's really about the demand. The demand is outpacing supply. So not any real concerns either in the short term or the long term.

Tim, why don't you take a minute and talk a little bit about some of the things that we're doing with some of our new initiatives and margin expansion opportunities?

Yes, I can do that. So I may start with kind of 2022, what we're seeing on the margin side. We're expecting somewhere between 150, 160 basis point margin enhancement over what we had last year. And I think important to note, our margins currently are actually above where they were at pre-COVID. So even with the shutdowns and the pause we saw during COVID, we're actually at higher margins than we were pre-2020 or so. And so right now, 150 basis points what we're expecting this year. It's a combination of some of the technology things that you've heard mentioned and then some of the redevelopment that we're doing right now. So I think with the interior unit, we're kind of doing 6,000 to 7,000 units per year. We think we have about 50 basis points of margin opportunity related to that, both with some carryover of what we did last year plus the units that we're doing this year. The Smart Home initiative that you heard Eric talk about earlier. Right now, we're getting it -- we're seeing it on the revenue side, where once we install it, we charge $25 per month of additional rent for the Smart Home with the capabilities it has that's creating 40 basis points or so of margin on the revenue side. But what that really does is set us up in the future as well for some opportunities on the expense side, as it enables self-touring and some opportunities on the staffing side, we think, in the leasing model. We've got a few other things on the expense side right now with some of the -- we did a park in any one home, some automated call systems, some AI chatbot technology that we put in. So we're seeing some efficiencies on the office side this year, probably 10 basis points of margin or so there. But where we really see the opportunity is we just finished rolling out our new CRM, which has kind of gone from a property-centric model to a prospect centric. So whether prospect goes into one of our assets in Austin and then goes to another, we already have all the information, so we can sort of lead, nurture and track them across different properties. And what that will ultimately enable us to do is centralize from the office staff. We're able to serve those residents from one property and we can sell them on the property therein. We can give them opportunities for other properties that we may have in the market that has something that may suit them better than what they have at that property. So we think over the next 2 to 3 years, probably 70 basis points of margin opportunity associated with that. And that's strictly sort of on the office or leasing side. We're also looking at some things on the maintenance side, that the site plan, technology and some other centralization, as we utilize the CRM, will create some additional opportunity there that we're just kind of starting to research right now.

All right. Yes, sir?

So [indiscernible] presentations had [indiscernible] gateway market [indiscernible]. Has that trend [indiscernible]?

Yes. In fact, if you look at Slide 8 in the presentation, we actually saw the trend in the first quarter of this year, migration trend has actually accelerated from what we saw in 2021 and in 2020. We had more leases executed in the first quarter of this year from people relocating into the Sunbelt from those coastal markets than we've ever had. And I think it -- we don't see any indication to suggest that -- of course, those trends were there to some degree prior to COVID. we were continuing to see job growth and resulting migration trends and population shifts occurring before COVID. COVID, of course, changed a lot of things. And one of those things, whether it be remote work or just flexibility in that area, coupled with, I think, just continued job growth and more jobs being brought to the Sunbelt markets, the household formation trends continue to accelerate certainly based on what we've been seeing. So we continue to very much like the Sunbelt orientation that we have. Yes, sir?

Are you changing any underwriting assumptions at all in your models with respect to potential macro cost to operate in terms of inflation and finally the discount rates that you [indiscernible]?

Well, we are, at this point, introducing a little bit more contingency in our planning from a construction cost perspective. We are finding more pressure -- we act as our own developer in many cases. In some cases, we're doing joint ventures with private developers. But where we are operating as our own developer, we never act as our own general contractor. We always hire third-party general contractors to do the actual construction work. And what we're finding there is a little bit more pushback from the GCs, unwilling to take on cost escalation risk to the extent that they were a year or so ago. So we've been introducing a little bit more contingency in our modeling surrounding that as well for cost as well as a little bit more contingency from a timing perspective on the construction period. We're finding that sometimes these projects take a little bit longer to get completed. But in terms of the cost escalation, we've got, obviously, like everybody else, we're facing inflation pressures, labor cost pressures, and we're dialing that into our assumptions, but we're also dialing into our assumptions some of the benefits, some of the things that Tim was just mentioning regarding some of the new technologies that we are introducing, opportunities that we have, we think, to continue to expand actually our operating margins over the next several years despite what we're seeing with some of the inflationary pressures this year. And then our cost of capital is what it is. I mean, the financing that we've got in place might get out to update a little bit on the balance sheet here. But we really are looking at -- as we model these development opportunities, it's really for us, frankly as it is with any capital deployment decision we make, it's all about what kind of stabilized NOI yield that we think we can get off these investments. We're really not looking at things from an IRR perspective. It's all about trying to build recurring cash flow to support a growing dividend, which is effectively what a REIT is supposed to do, I think. So that's really where our focus is on that. And you might talk Al just a little bit about the balance sheet and cost of capital.

Absolutely. I'll just say one of the questions I'm sure we will get this week and has been coming up a bit is what are you doing in your business given potential change in the environment. And I would just say many of the things that Eric has been talking about this morning across our business, we've been doing for a very long time. The balance sheet is one of those things. But really, it starts with being in the right region, having a high-quality diversified portfolio in that region, if there's cash flow. And then you come to your balance sheet, your strength that both is to protect you if things change. And I would say, if it's as strong as our balance sheet, provides opportunity to continue doing the things that Brad is talking about. So our balance sheet is in incredible shape. The leverage is lower than it's been historically. We have 100% of our debt fixed as we're going into a rising rate environment. So we fixed an average of less than 3.5%. Average maturity is 8.5 years. We've got $1 billion on our credit facility supported by a very high-quality group of banks. So we're in a great position, I would say, and we just recently got the upgrade to A- from Fitch, as Eric mentioned. And that certainly reflects the strength of that balance sheet. So it kind of gives you credibility to what I'm saying. But I would say, we expect the other 2 to at some point follow more dependent on a lot of what we're doing, and I think right now, we're there. It's going to be more on the backdrop -- the economic backdrop, how quickly, and how things go there. So into that is we're in great position across the business, but in terms of the balance sheet, not only to protect the business, but that'll go the other way if things do change with someone with the ability to really take advantage of that with a lot of capital, the low cost and produce more growth in the future.

Yes, sir?

Can you talk about cap rates in your [indiscernible]?

Yes. Yes, I'll answer that. Question was about cap rates in our markets. Yes, I would say that there's been a little bit of a change. As I mentioned, some of the froth has come out of the markets. Most of our markets, we've seen for well-located assets, there's only been about a 2% to 3% price impact right now based on some of the high-levered buyers pulling out of the market. So for well-located high-quality assets, you're seeing a change of about 2% to 3% in terms of pricing. Certainly, for assets that are more in the value add, maybe it's not the best location, that price discount could be a little bit bigger. It could be in the 10% range for some of those assets. Also, if there's a good story for management upside, those also are trading at a bigger price discount because banks aren't as willing to lend on assets where -- they're basically bedding along with the management company and the developer or the acquirer to turn around an asset. So those have been impacted a little bit more. But I would say cap rates are still within a tight band across our region of the country, and it's really still too early to tell broadly what cap rates are doing. I would say they're impacted, but it's not a significant impact at this point. The transaction volume is down at the moment. So we don't have a ton of visibility and a ton of closed transactions really to point to at this moment. But there are deals that are still getting done. I mean, we continue to participate in the transaction market and there are assets that we get a call from a broker on because they think the bidding is going to be light, and certainly, our all-cash capability, quick-close is very valuable in this market. And we get a call on those assets. And there are times where somebody -- it just takes one buyer. Somebody still steps up at the end of the day and pays really good pricing for the asset. So more to figure out on cap rates here in the next couple of months. But we have heard there's a number of high-levered buyers that are sitting out right now just trying to figure out how things are shaking out. But there are also assets that are going under contract with levered buyers. So that segment of the market is going to figure things out and get back in the business. The fundamentals in our region of the country continue to remain very, very strong. So I certainly don't see there being a lack of capital to get these projects done and to acquire assets, so...

Yes, sir.

[indiscernible].

The last part of your question, I didn't hear all that.

Hedging for cybersecurity or increasing your insurance and that sort of thing.

Yes. The answer is yes, we are. Our Chief Technology Officer's right here. And we have done a significant number of things to tighten our defenses in that area over the last couple of years. And we have also increased our protection through insurance coverage to guard against that risk a bit as well. But yes, it's never evolving, ever-changing enterprise risk that we face as a company like all companies in this area. And as we continue to introduce new technologies into our operation, being mindful of the cyber risk that comes with that is something that we spend a lot of energy and focus on to ensure that we are doing all we need to do to protect the company as part of that increasing line of technology. The other thing I wanted to just touch on briefly with a minute or so we have left is, obviously, we're in a little bit of an interesting time. There certainly seems to be growing discussions and talk of a looming recession of some sort, and the extent and when is something that always comes up. I will tell you, again, as a company that's been focused in this region, in these markets for 28 years, we have long believed in our objective of trying to be a strong full economic cycle performer for our shareholder capital that, frankly, it really starts with being protected in the downside. And we feel like that a combination of the price point that we have in our portfolio, the unique diversification we have across the Sunbelt in both large and secondary markets, coupled with the balance sheet, stronger than we've ever had in 28 years, puts us in a more, if you will, defensive posture, I think, and able to withstand pressure more so than we've ever had in the past. So regardless of sort of what the next 2 years hold, we think that we've got the company in a very strong position to withstand any economic shock that may come. Coupled with that, what we're also very excited about is if we continue to see the job growth and the strong demand trends taking place across these markets in this region, which I think we will, we really believe that we've got the company in a strong position to drive not only earnings growth from the existing asset base, but the external growth story is also improving, whether that be through development or through acquisitions. We're now getting back into the acquisition market in a more aggressive way. We've actually consciously made a decision to sit out for the last couple of years just believing pricing had gotten pretty difficult to justify, putting a lot of money out in that way. But we are seeing now developers coming to us and sellers coming to us in a more proactive fashion. We think it's time to wade back into that environment. And we've got, as Brad mentioned, a couple of opportunities that we've got teed up, and we think there'll be more coming. I think we're out of time. If you've got any follow-up questions, reach out to us at any point, but we appreciate you being here. Thank you.