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

For the third panel in the row in this room. I'm excited to have MAA with us. As always, we'll have -- I'll pass it off to the management team for a brief overview of the company, give them some highlights, and we'll open it up for Q&A. I have questions, but I love when you guys jump in, and I think Trent might have a question behind me. So with that, I'll pass it over to Al, the Vice President and CFO, Al Campbell.

All right. Thank you appreciate that, Josh. So Al Campbell, CFO, MAA. We've got the whole team, you see from the name tags here. Brad Hill, Chief Investment Officer; Andrew Schaeffer, Head of Capital Markets. So we're going to tag team this today. I want to start with maybe just a few -- I'll review comments about the company, maybe talk about who we are a little bit, many of you -- some people who don't know the story that deeply, who we are, how we think about the business, talk about current trends, obviously, where we are today with the business and let these guys talk a little bit more about our positioning for the future. I mean, I think it's the most important part about what we expect for the future. So I'll start with, I think, to understand MAA and how we think about the business, it really, it starts with the foundation, if you would, our strategy, which has always been to build a steady, growing, high-quality earnings stream. It's really set to compete very well in that part of the cycle to have a portfolio or a diversification of your cash flows, that is gives you a little protection in the down part of the cycle. But through the full cycle, the highest earnings growth and maybe on a risk-adjusted basis is certainly the highest. And so that's certainly a track record. I'll point you to, if you have the presentation, I'll point you to Page 3. I would say that we certainly have a track record of that over the last 20-some-odd years of business. If you look at the bottom part there, I think that dividend growth shows that, certainly shows that discipline that consistent growth that earnings turns into dividend, which is compound earnings for our shareholders. And so I think if you look to the top right of that, that's manifested in shareholder return. In almost any year, you look at 1 year, 3 10, 20, so we're certainly proud of that performance. And I think it's been good as part of the discipline and proven strategy. So I think that's a good place to be, but it's more about, obviously, what does it mean for the future. Where are we positioned today for growth for the next 10 years? And so I think like we're positioned very well. It's going to be several components of our strategy, we'll talk about this morning -- this afternoon, excuse me, that are important to understand what we think, I think, starts with the region of the country. I think we feel very good about the region we're in. We've been in this business for -- and we know it very well, been it for many years. It's really a demand-driven region. Job growth is strong. You're seeing in-migration that's strong today, and you're seeing, obviously, single-family pricing is challenging and more so with interest rate environment today. So I think all of these things are a part of that demand that we're feeling today. We've always had long-term demand. I think our job growth -- organic job growth is really higher than national average typically, but these other 2 components are helpful right now. I think another part of our business that's maybe unique, and is certainly helpful to our performance is the diversification that we have. If you look at our portfolio in the Sunbelt, we have a large number of markets comparatively. We're in over 30 markets. But I think more important really than the markets, I mean, certainly very important, but in addition to that, is our positioning within those markets. So I think we've got product that is in the urban area, in the inner loop, we would say, in the outskirts of most every one of the markets we're in. So when we're in a market, we really had diversification in that market as well. And so -- and I think you'd see -- and you can see on Page 6, some of the stuff I'm talking about is highlighted. But we also have diversified in terms of product type and pricing point. And I think the diversification of our portfolio across all of these factors, if you would, really is an important part of understanding who we are and how we will -- not only how we perform the past, I think, how we're positioned in the future to even do more. So I think, certainly, in looking at our growth, you can expect our internal growth platform. We feel like it's going to be a strong part of our growth. If you understand our company, we see ourselves as a hands-on operator and sort of, I would say, the heartbeat of the company. We certainly develop really nice assets and do great things. But I think that the long-term heartbeat of the company has really been operations, intense, we feel like we can really perform well with the assets in our hands. We feel like that over the last many years, we've really built a strong scale in our business. We've done a couple of mergers over the last several years. One was really to double in size, another one layer was really, I think, really transformed our business in many ways to give us different products, also gave us development on our business. That's very important. So it's been -- our operating performance has really grown with us if we've grown, I would say. We certainly have scale across our portfolio. We've got 300 communities, about 100,000 units. And about 200 of our communities are within 5 miles of each other, providing good scale, good efficiencies that are good today, but [indiscernible] and we'll talk about in a moment, if we have time about, it's more in the future as well, because that scale, that proximity gives you ability as technology. We continue to invest in technology to continue to have impact on our business as we move forward. We have a really proven redevelopment program. I'll point to Page 19 and 20. I'm moving fairly quickly, but some highlights here. It's a program that really we have -- and a lot of our assets are good quality assets in good locations, but they've gotten a little older. We can bring this program that's been very prudent for us now to kitchen, bath, spend a limited amount of capital, but get really strong returns. And we get 9% to 10% rent growth above market rent growth, which is a very strong cash-on-cash return. And we've now done this program for many years. It's a key part. I'd say it adds 40 to 50 basis points of revenue growth on a typical year to our portfolio is a very important part of what we do. And then finally, as we mentioned, the technology investments are really -- you're probably hearing a lot of the multifamily companies talk about this. I'll just say that really a very good point in the industry with technology almost at a tipping point, I would say, where years ago, technology was -- many things that were cool in the industry, you'd say. But today, I think we're at a point where some of these products are really -- they're very effective, and over the next couple of years, you're going to begin to see true margin enhancements in many of the portfolios of larger companies, and we'd certainly expect to be a part of that. And as we -- over the next couple of years, you'll see more of that from our company. And so obviously, the internal growth we're proud of, and we expect to do well, external growth over the next several years is going to be a big part of our story. I'll let Brad touch on it in a moment. And then also our balance sheet strength. I'll just say, we have really put a lot of time over the last 10 years of our company or so, strengthening our balance sheet. I'll let Andrew talk about the components of that and how we think about it. I'll just say that we're stronger than we've ever been there. As we look at the future, we have great access to capital at low cost. We're A- rated now by 2 of the agencies. We're hopeful that we'll get the final rating soon. Andrew will talk about that in a moment, I'm sure. But that's a low-cost, flexible capital and a significant access to that capital. So I would just say that, we certainly -- as we're looking at an environment where things are volatile and we look into next year, whatever may happen from that, we're certainly positioned as a company, both from the operating side of the business, but certainly from the balance sheet side of the business to not only to maintain our safety, but actually things you get a little more volatile to be able to take some opportunities from that. We have the capacity to do that. So I hope you heard me say in all that, in all of our areas of our business. We feel we're prepared for the future, our portfolio, our platform, external, internal growth and those things. And then so lastly, in Page 13, and I'll turn it to these guys, is I just want to touch on where we are today in terms of our pricing trends. It's been very strong over the last several quarters, as you know. On Page 13, you'll see there that really through last year, we had -- it was really -- 2021 was a tale of 2 halves, if you would. First half of the year, we saw blended -- I'd point to blended pricing, which is about halfway down that page, which is the average of new and renewal leases that goes into our portfolio. In that timeframe, we put 6% -- just over 6% rents in the first half, which is strong relative to history, but the second half was really where we saw the acceleration, I'm talking about 15% rent growth over the second half of last year, moved into this year. Those trends continued. Saw 17% you see there for the first half of this year. And I think what I'd point to is July and August, I mean, I think, what you're seeing there is still very strong. We're beginning to see -- we are beginning to see what we expected, hesitate the word, use the word moderation. But what our plan business expectation or forecast this year is built on is pricing trends that through this year moderate some in the back half of the year because of prior year comps. As you can see, that 15.4% that we're running into kind of hitting that steep hill now, you can see that. And we would say we do expect to see a little bit of, I'd call it, normal seasonal trends in the fourth quarter. I mean, last year, you see that 15.4%. If you broke that out in the 2 quarters of the last years, it actually accelerated in the fourth quarter. I don't think at this point, what we're seeing in the cycle. It's not a 15% into perpetuity business. So I think what we're seeing is strong trends. But what we're saying over the back half of this year is what we talked about in our guidance is average pricing of about 8%, which is showing some of the prior year comps and some of the seasonal trends in the fourth quarter. So we're certainly hopeful that we outperformed that, but that's what our expectation is, and it's prudent to expect that given where we are today. And so -- and the last thing I'll leave it with is given that pricing, I think that we've done this year through August, I mean, we've built a pretty strong foundation for next year at this point. I mean, I think most of the multifamily companies are certainly I'm sure saying that to you. I think the way that people look at it different ways. So I'll just tell you that I think the best way we look at it, I think that kind of gives some rule of thumb, but we talk about we're carrying into next year. We like to think of it as it's -- what average pricing you put in your portfolio this year, blended pricing, a rule of thumb would be, you're going to carry about half because our leases are [ year on ] average. You're going to carry about 1/2 of that into next year, and you're going to earn the other half next year. And that's a rule of thumb, but we found it to be pretty good trend. So I would say our forecast is built on the pricing we've seen today, roll through the end of the year that I've talked about now to be 12%, 12.5%. Half of that, 6% and some change that we're carrying into next year. And then whatever we get blended pricing next year, half of that assessment would be on top of that. So it's certainly a lot of -- a lot to see over the next -- end of this quarter, in the fourth quarter, but that kind of gives you how we're thinking about the business and how we frame up the business in terms of our growth prospects. So hopefully, that was helpful. And then I'll turn it over to Brad to talk about external revenue.

Thanks, Al. And I'll call your attention first to Slide 17. So as Al mentioned, one of the things that we wanted to do to really strengthen our story and strengthen our plans going forward is really to focus on external growth. And for the last couple of years, we've really been positioning our platform to be able to add significant external growth no matter what part of the cycle that we're in. And so we've really been positioning for that. It started with our merger with Post Properties. A number of years ago, a number of things positive came out of that merger, and one of which was a development platform. And so we have been working for the last couple of years really to continue to build that development platform so that we could continue to add properties and assets to our platform really in any part of the cycle. And so we've really been focused for the last few years on building that. We have elected to kind of sit out of the transaction market given how aggressive cap rates have been the last few years, really with a focus on building that development pipeline. And so there are really 3 ways that we look to grow externally. One is through development with our in-house capabilities, our in-house team and platform. The second is through what we call our prepurchase platform, which is where we partner with developers. They generally have entitlements on a site, and we bring the capital to the asset. What we want in that situation is a clear path to 100% ownership at stabilization, where we can again add that asset to our balance sheet. Again, just expands our opportunity set on the development side where we can continue to get good assets to bring into our portfolio. And the third, of course, is through acquisitions. And at different points in the cycle, each one will have different weightings, and we'll lean into different avenues of external growth at different parts of the cycle. But as Slide 17 shows where we stand today, we've got 9 projects today that are in our development pipeline. Five of those are under construction, 4 are in lease-up. And those total about $740 million, which is a pretty significant increase to where we've been historically. As we sit here today, we do have 2 more projects that we do expect to start construction on later this year, and we do expect to end the year at about $900 million to $950 million under construction and in lease-up. And our team has really done a tremendous job building out that pipeline and that platform. And today, we have 8 owned sites with about 2,700 units approved. We have 3 more sites that we have under contract through our development team. We own them and control them 100% that are approved for another 1,000 units. And then we have 2 sites that we control through JVs, through our prepurchase platform, where we have access to another 500 units in development. So we're really building a pipeline where -- that's 13 sites, 4,100 to 4,200 units that we control. And the good news about that pipeline is we absolutely control the timing of that. We have the optionality to put those off and to delay those projects if for some reason we need to or we have the opportunity to push those through. We have entitlements in place on all of those projects. So really, our team has done a tremendous job building that platform for external growth. And certainly, as we get into a market like we are today, where it's a little bit more volatile transaction. Transactions are starting to get repriced. You're starting to see some cap rate movements. Our ability to execute on an all-cash basis is very favorable for us. And certainly, as buyers have difficulty lining up financing, we're able to take advantage of the market that we're giving and perhaps lean into acquisitions more than we have in the last few years. So I would expect us to continue to be active in that area and hopefully execute on a deal or 2. And so the growth aspect that we have from an external standpoint is different than it has been in the past, and I would say that's a differentiator from where we have been historically and can continue to add value to our story going forward. And so I'll let Andrew talk about the balance sheet and how we'll look to fund these.

Thanks, Brad. As you can see on Page 24 and 25 of the presentation, the balance sheet is in a very strong position. And as Al mentioned, the strongest in company history. We have well-laddered maturities. You can see that on the bottom of Page 25 with no significant maturities until Q4 of 2023. On the credit metrics on the top of 25, some of the best would be multifamily sector, with leverage debt to total assets of 29.4%, coverage and net debt to adjusted EBITDA of 3.97x and weighted average maturity over 8 years, 100% fixed. At the end of July, we amended and expanded our credit facility, increased the size from $1 billion to $1.25 billion with an accordion to $2 billion. We have plenty of capacity for the growth, Brad just mentioned, and 100% available as of 6/30. Also, we priced an equity forward last August for 1.1 million shares and expect to settle that in Q1 of 2023 with proceeds of approximately $200 million. Finally, on the rating agencies front. Right now, there are 7 REITs that are rated A- or above, we want to be the eighth. Fitch upgraded MAA to A- in May, S&P upgraded MAA to A- in August and Moody's right now is at BBB+ with a positive outlook. They put a positive outlook on in February, and we're pushing hard to get them over the line. I think we'll turn it over to Q&A now.

Awesome. Thanks, guys, for the opening remarks there. Al, you mentioned that 8% in the back half of the year, can you kind of clarify those remarks and put a little more color around that?

Yes, absolutely. So what we project for the rest of the full year for the rest of the year, I would say, is we saw the pricing strength through the first half of the year. We expected and we put out our guidance with our second quarter to -- as we moved into the back half of the year, as we ran into the very strong steep comps you see there in July through December 21 on Page 13 of 15%, but actually, if you look at it [ portal to portal ] escalated in the fourth quarter. So as we hit that, we expected to see the percentage growth rates moderate. I would say the pricing on a dollar -- on actual dollar level is still moving forward, probably at a rate that's higher than long-term norms, but hitting those. That steep comps is going to hit that percentage. And then as we move into the fourth quarter, we just -- we did not -- last year, if you look at those numbers, we sort of powered through the majority of seasonal trends. But in the business, certainly, as you -- in the first quarter and the fourth quarter where the leasing traffic is lower. Fourth quarter, particularly, as you get into the holiday seasons. So your traffic is lower. And so we would expect to feel some of the typical seasonal trends in the fourth quarter. This year, we think it is appropriate to dive that into our forecast, and we're beginning to see that, first, as you can see in July and August, we're beginning to see the first part of that now, certainly have a lot to play out as we finish September quarter as you move into the fourth quarter. And just a little color as I would say that 8% is built on renewals and new leases is important. I think what you would see in our business is renewals continuing to be strong. As we move to the year, probably not that 15% level, but the math we based on call it low double digit. And then with new leases, being the most competitive point of your pricing as you move in the fourth quarter. In a normal year, this is least over lease not year-over-year. On a normal year, you might see new lease pricing in the fourth quarter go 0 to negative. And so we're not dialing that in. That's not what we expect. But we would say something flat to mid-single is probably appropriate, call it, a mid- to low single-digit number for that, funding that together. That gives you 8% for the back half of the year. So that's how we think about it. Hope that's helpful.

Yes. I appreciate that color. Maybe could you just go over kind of market demand and supply across your markets? I think supplies [indiscernible] in Sunbelt.

Yes, I'll jump in on that and others can as well. So we'll start on Slide 9, talking a little bit about supply. As part of our budgeting process that we go through in the fourth quarter, we'll do a very deep dive on the supply outlook for our markets and not only our markets, but for our individual assets where we really dial in supply expectations in the proximity to all of our assets to determine if we're seeing more NOI at risk of supply or less by property. So that's kind of ongoing and feeds into kind of our budgeting process. But I'd say 2 things. One, on supply, we certainly don't see a scenario where supply drops significantly from where it is today next year because the pipeline is in process right now. The Sunbelt region of the country supply is always elevated. Given the fundamentals that we see in the market right now, we see no reason to think that there's a significant pullback that affects next year. But at the same time, the capacity of the system is pretty full. We're seeing delays in permitting processes. We're seeing delays, obviously, in the construction process as well. So GCs are very busy, and it's hard to get GCs even to price your jobs at the moment. So it's hard to see a scenario where the supply picture picks up materially from where it is today. And then you mentioned on the demand side, we continue to see job growth in our region of the country that's very, very strong. At the top right of Slide 9, we've got the jobs to completion numbers continues to be very, very healthy. We think anything in the 4x range is probably equilibrium. That actually number could possibly come down from where it is as you have more work-from-home moving to our region of the country where that doesn't actually hit the job growth numbers. So we still feel really good about the supply-demand dynamics within our region of the country. The end migration continues to be very, very strong. And again, the job growth numbers that we're seeing in our region continues to support what we're doing and what we're seeing -- the fundamentals that we're seeing.

I'm going to add just real quick, and then to the demand side of that, I mean, and Brad talked about that. We're really seeing 3 pieces of that right now. I mean, certainly, the organic job growth. We talked about this above normal. I mean, our region has historically been above master averages. We're certainly seeing that, expecting that. But we're seeing that in migration on that Page 8, as you pointed to. It is -- I would say this -- in our region has been -- in migration is strong. It's not a huge wave that has come in that has just driven demand. It's a significant component of demand. And there's certainly no -- so it is impactful, but it's not the driver. There are other drivers there as well, the organic growth. And we're certainly not seeing signs of that reversing anything going back at this point. And then you have, obviously, the single-family housing market today, the pricing there, the challenges there. I mean, more and more of our renters today are renters by choice. But that single-family housing environment is causing you to stay a bit longer. And so those 3 components are our big part of our demand, I mentioned that today.

And then on the external growth front, I thought the redevelopment program is pretty unique for you guys. Can you maybe just hit kind of on your returns and how big the program is?

Yes. That's on page -- help me what slide number. So okay, Slide #19, I would say, probably 19, maybe 20. So that's a program we've been doing for many years. We've really had a chance now to dial it in and it is where we're doing 6,000 to 7,000 units a year. We're spending limited amounts of capital, call it, $6,000 to $7,000 per unit, kitchens, baths. I mean, it's taking a unit that is -- a property that's well located in good shape, but just adding it and taking it to just a different level. Oftentimes, it's helpful when there's a development near, a new development that comes into the marketplace. We can come in and do this program, offer really strong comparable good product, that's the value tokens, a value underneath the development pricing at the[ half ]. So it's been a great program for us. I would say one of the best uses of our capital, for sure. In terms of returns we're getting 9% to 10%, or 8% to 10%, we we've gotten closer to 9%, 10% over the last several years, rent growth on that. That's over the market, typical market rent. So maybe you can do the math on that, that's cash-on-cash, 20 plus. So it's been a very -- we've now done it for many years, dialed in, we've got room in our portfolio to continue that inventory, you can see on Page 20. I think to some extent, we underwrite this very conservatively. And so there's really no kick out value at the end so that we could do it every 10 years if we needed to on a property come back and do that. And our returns are working and are very strong. So the reason we don't go faster on this is because it might change the economics, but it is one of the best programs and the best capital uses that we have.

Any questions from the field at this point?

Maybe on your even your actual full development program. Could you kind of just go over your strategy and your funding needs to finish this program that you have fully laid out?

Yes. I'll let these guys talk about the funding needs. But our strategy there certainly is to add high-quality assets to our balance sheet that's accretive to our current earnings is really what we're trying to do. And you look at the returns that we have listed on Slide 17, our active lease-ups. These are projects that have recently finished construction. They're actively leasing up at the moment. I mean, the yields there at 6.2% are very good historically. And what I would say about that is that those are based on pro forma rents. We're beating those by 10% to 15% on average across the board in all of our lease-ups. The top chart there are projects that are still under construction. We are leasing on one of those assets, the MAA Windmill Hill. Again, rents are 10% to 15% above our expectations there. So those are going extremely well. All of our assets that are under construction, we have GMP, gross maximum price contracts in place with our contractors. So where the construction costs are locked in. So we're not we're not at risk for construction cost increases. Obviously, we may change some scope of some things that increase cost, but there's no construction cost risk in those assets that we're going through. And I'll let you guys go over funding.

Yes, I'll start, and then maybe you jump in on that. I think how I think you'd look at it is through the full cycle, and we're looking to be active and we'll put out somewhere between $500 million and $600 million of capital paid for by maybe $300 million, $350 million of dispositions $100 million, $150 million of free cash flow at this point. So it's pretty self-funding this point. Now that's sort of the -- so it would kind of sustain itself. But obviously, we have capacity on our balance sheet, and Andrew can talk about it, Brad, to his team come and say we've got a more significant opportunity. Certainly, we can expand to absorb that, but that's ongoing stream.

And it's on Page 17, just to clarify on the earnings release, of the $444 million, $230 million has been spent to date as of 6/30, $213 million is expected to be funded, and I already mentioned the equity for $200 million in the first quarter. And then we've got the credit facility of $1.25 billion. So plenty of capacity.

Typical forecast, our typical plan would be to, call it, $400 million of development spend a year, a couple of hundred million of acquisitions and opportunistic basis that can go up or down based on opportunities.

And then it looks like, I just happen to flip the page to 18, it looks like there might be some additional opportunities in a couple of your markets. I guess, how are you guys thinking about this pipeline growing or expanding over the next 18 months?

Yes. I do think, as I started out, we are building a pipeline that we can replicate on a recurring basis. So we do have, as I mentioned, control of a number of land sites. We expect to start 2 assets, the 2 assets that are shown on Slide 18. Later this year, 1 in Tampa, 1 in Raleigh. That's almost 1,000 units or just over right at 1,000 units, actually, that we expect to start later this year. Obviously, with our pipeline, what we're keeping an eye on is construction costs and in the yields. We have seen yields come down on average to about a 5.5% on our developments. We still believe that based on our underwriting, conservative underwriting, where there's very minimal trending going on. And then the contingencies that we use to cover us for potential cost increases, we still feel very good about the returns that those are delivering. Obviously, as we go into 2023, we've got a number of these land sites, and we'll continue to evaluate the cost market as we get closer to construction on those. But the other thing that we do not do on our developments is from the time -- actually, we do not trend from when we buy the land until construction starts. There's no trending in that process. So we're very conservative in our underwriting, really because we want to be in a position where we can beat our expectations in terms of what we're delivering on our yields. And I think today, we've done a great job of doing that.

Have there been a lot of transactions in your markets? Just trying to get a sense of what the cap rates, how they've trended.

Yes. We saw a number of transactions in the second quarter. We saw cap rates in the second quarter up 40, 50 basis points from first quarter. I would say, since the second quarter, we have not seen a lot of transactions. Those are the ones really that are important to see where cap rates are trending since the interest rate movements really started occurring. There's really not been a lot that has occurred. There's certainly a lot of talk that deals have come out after Labor Day. We still haven't seen a whole lot come to market at this point. I suspect the recent interest rate volatility may push that off a little bit longer. So price discovery on some of these assets, I think, is going to take a little bit of time.

It's what it seems like. At one point, you mentioned tech initiatives and potential margin expansion opportunities. Can you kind of walk us through what you guys are working on in your portfolio and opportunities out there?

Absolutely. And I'll point you to Page 22 and 23, and Andrew [ talked on this ] as well. But I think we're working on right now. What you'll see is, I think, all the multifamily companies, I think, that large ones now are really working on what I call a resident life cycle from a lead to an app or I guess you can get go from a lead to a tour to an app to a lease to move-in and just through the life cycle, looking on really making that very effective, very fluid, very seamless and adding products to make that happen. I mean, it's somewhat automated today, but I think there's places along that line right now where you've got to take a customer and move them. And so I think all of us are working on making that very effective for the business in the future from your phone. You have minimal clicks, and you've done everything you want to do and you've got a lease. We're all working on that. And so we're working on that. Now a couple of components to that are sort of foundational. I think you'll continue over the next couple of year or 2 to continue to play out some of the other parts. First one is smart home technology, you see there on 22. That is where we're putting in -- putting mobile control of lighting, locks, thermostat and some leak detection there as well for us for expense control. So that's really important. I think going into this year, we had about -- and we're getting paid right now on that. We're getting about $25 -- it costs about $1,300, $1,350 per unit. We're getting $25 per unit revenue stream right now. So it's a strong return. It's adding to the revenue line right now. I do think over the long term, it's going to be a requirement for communities to really -- the residents are going to demand to require that. But we've got about half of our portfolio done with that going into the year. End of this year, we'll probably have 3 quarters, in another quarter, we'll do over the next year or so would expect. And then another one that's not quite out front, maybe not as sexy, but it's important for the long term is really a new CRM program that we put in technology. A customer management system, which our current system, our old system, we'll say, was sort of property-centric, where you come in a resident, you take their information and if they left and went somewhere else, they kind of start that process again. And so today's software is much different. It's much more resident-centric. And so they come to MAA community, we track them where they are. And it's important not only for customer service, but I think, over the long term, I think it's important for the efficiency of our properties, a staffing structure because you can see that community can -- this community could manage leasing for any community in our portfolio. And so used to, we would look for economies of scale if the properties were very near each other, like we bought one recently was right across the street from one we've got and we underwrite and harvest some efficiencies there. I think you could see a pretty strong pace for the near future where 5, 10, even further miles away, you can harvest efficiencies from some of these foundational systems that we're putting in. So we're certainly working on that, and there will be more. I think from those 2 products -- you want to talk about the margins on those 2 that we see?

Yes. So just on the margin improvement, our margin enhancement from just the smart home, looking at by 2024 getting to kind of 140 bps of margin enhancement. And then on the -- taking the smart home and the CRM and being able to kind of, I guess, what some of the peers have called kind of podding opportunities and kind of multi-site where one manager may manage 2 or 3 properties, we've got 200 of our 300 properties within 5 miles of each other. So you're looking at another 40 bps of savings there as well on the expense side.

I think we really feel like I'm sure many of our peers feel the same way that this is really a potential area of larger companies can really be able to differentiate of our business. You can see the staffing, the structured communities in the future could be a bit different than you are today. It could be very helpful in the near term.

Any questions from the field? If not, we're about out of time.

I mean, I think, there's certainly -- yes, I mean, I think certainly, there's a limit to that. You would, you want a couple of thousand units right next to each other. But if you've got Uptown Dallas, we've got a lot of assets that are really near each other, which allow for some efficiencies to be gained there. But certainly, in some extent, those efficiencies will start to be outweighed by potential risks associated with having too much together. But for the most part, I don't think that we have any of that of the 200 that we have there within 5 miles of each other, those are generally just a couple 2 to 3 assets within those ranges, with the exception of an uptown in Dallas.

With that, I think we're out of time, but we do like to ask management teams through rapid fire questions. We'll send you a report card afterwards. The first one is, which of the following is the greatest macro challenge facing U.S. public REITs today: one, risk of higher rates; two, risk of a recession; or three, the rise of private equity in nontraded [ regions ]?

Probably rates at this point, which would probably tie us to #2, but rates is what I would say.

Which of the following is the greatest sector-specific risk: Labor issues, supply or capital markets?

Labor.

Are you seeing any signs of weakening demand? Yes or no.

Not at this point.

Great.

I appreciate it.

Thank you.