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

Okay. I think, yes, we got a green light here. So we will kick it off here. On my way of introduction. My name is Eric Bolton. I'm the Chairman and CEO of MAA and I have Brad Hill to my right here, who's our Chief Investment Officer; Tim Argo, who heads up our asset management strategy planning process; and then Al Campbell on the end there, is our Chief Financial Officer. I think for several of you in the room, I recognize. But for those of you who may not be familiar with who MAA is, I'll just take now 60 seconds here and introduce you. We are apartment-only REIT focused on the high-growth markets, mostly positioned across the Sunbelt states. We feel like we have a pretty unique portfolio, diversification with exposure to both large as well as mid-tier markets across these high-growth markets of the country. Our focus really is to create value through opportunistic acquisitions, through new development, both in-house and through partnerships with third-party developers and through operations using scale and technology to drive operating margins from our portfolio. Our strategy for almost now 30 years as a public company has centered on driving performance in such a way to sort of try to take volatility out of operating performance and results over time to really match up with our performance objectives as a REIT platform for shareholder capital. If you look in the presentation, hopefully, everyone got one. If not, Andrew may have some others. But if you look on Page 3 in the presentation, our returns to shareholders have performed quite well relative to the sector with compounding returns to shareholders at close to 14% now annually for almost 20 years now. I did want to take by way of just sort of addressing a topic that I think for most people's mind when they're looking at our stories. I'll take a minute and just talk about supply. And new supply coming into the Sunbelt markets. I refer you to Page 11 in the presentation where we touch on it a little bit there. But this is obviously not a new phenomenon for our company and the history that we've had for 30 years in these markets. And we've always approached it with an understanding that we cannot eliminate periodic periods of supply where you see demand/supply come into a relationship where we don't have quite the advantage that we've had for the last couple of years as an example. And while we can't eliminate supply pressure, we feel like there are things that we can do and do, do to help mitigate that pressure and take some of the volatility and performance pressures that you often see sometimes. And we've developed this approach over the last 30 years. It really starts first with a very thoughtful and active level of diversification across the Sunbelt markets with an intentional focus on both large as well as very extensive submarket diversification in some of the larger markets and then also with a focus on mid-tier markets. We have found over the years that as we have really captured the level of diversification that we have that, that first and foremost, helps with some of the periodic periods that you go through over time where supply comes into the market. Secondarily, I would point to the fact that when you look at the average rent in our portfolio, on average, we have a more affordable price point for rent across the portfolio on average where our current rents are about 20% -- more than 20% below the new product, new supply coming into the market. And that enables us to appeal to a broader segment of the rental market and to, again, help to offset and mitigate some of the pressures that you see as some of the new supply coming into the market and is always at a significantly higher price point than where we are at. And then thirdly, I would just tell you that the operating platform can make a huge difference in terms of any company's ability, any property's ability to weather supply pressure from time to time, whether it is the practices that we use surrounding how we capture leasing traffic, how we work that leasing traffic to convert it to new leases. And then resultingly, how our revenue management program really actively works to manage the tension between occupancy and rent growth. And just over the years, we feel like that we've really developed the capabilities through our operating platform and our scale advantages to really, again, help work to mitigate some of the supply pressure that you see from time to time. The thing that we have always focused on in our company and I think the thing that really matters over time, of course, is the demand side of the curve. And it's interesting to note, as you'll see there in the presentation, some of those strongest or highest supplied markets that we've had historically have also been some of the strongest rent growth markets that we've had. And it just is another sort of support for the fact that it really is the demand side of the equation that we orient our capital towards and more sensitive to, and really believe that over time, that's what drives the capacity we have as a portfolio to weather cycles with lower levels of volatility and lower earnings performance pressure that you might otherwise think would be there during periods of supply. So with that, we've got some other prepared comments that we can offer you in the way of updates, but I do want to be respectful. We've only got about 30 minutes. So respectful if anybody has got any questions, we're happy to jump right into addressing anything that anyone has in particular on their mind. But if not, we'll give you a little bit more of an operating update next. All right. Tim, why don't you go ahead to do that?

Yes. So the presentation that we filed that Eric referenced on Page 13, we did include an operating update, really just some updated pricing and occupancy on what's happened since we released Q1 earnings as [of] April and May, pricing and occupancy info in there. And so I think at a high level, generally, it's doing exactly what we expected. We thought that new lease pricing in particular, would return to what we call a normal seasonality where you see it weakest in the first part of the year and then accelerate through the spring and summer as you get more traffic and more volume and then likely start to moderate again. As you get into the fall and to Q4 in the winter and that's exactly what we've seen and accelerated pretty significantly from Q1 to April and then even more so from April to May. And then on the renewal side, where we thought we particularly added opportunity there kind of based on what happened last year. So going back to 2022. New leases really outperformed or outpaced renewals for much of 2022 kind of all the way through August or so, which is a little bit abnormal, typically, those track each other a little bit closer. So we thought really with kind of marking those renewals to market, we had some opportunity, particularly in the first part of 2023 on the renewal and that's played out as well. We're well over 8% in Q1, close to 8% in April and then around 6.5% in May. And so I think we have a few more months of sort of outsized capability there and then likely normalize to what for us has really been in a 5% to 6% range on the renewals. So overall, playing out as expected, a little -- probably slightly better than we thought coming into this year. And then on the -- hit on a few of the markets, we kind of laid out at the beginning of the year that on the weaker side, we thought Phoenix and Austin would be a little bit weaker. They've been really strong markets for us the last 2 or 3 years and a little weaker now with some supply pressure, but -- and probably a little bit of rental fatigue as well. And that's played out with those kind of being some of our trailing markets. And then on the strong side, Charlotte was one where it's getting a lot of supply throughout the market. We had our eye on that one and thought that could be weaker but it's actually held up really well and showing some strength in one of our stronger markets so far this year. And then the Carolinas, in particular, holding up really well in some of our secondary markets. Raleigh is doing well, Charleston, Greenville, Savannah, all those secondary markets over in the Carolinas and the East Coast home up well. And then what's been encouraging also is that through COVID and really post COVID, the strength we saw there, D.C. and Houston had kind of been laggards for us and those that have really started to show some strong performance as well. So encouraged by what we're seeing in D.C. and Houston. So that gives a kind of a market overview and operations update and happy to answer any questions related to that or we can move on to some other topics.

More than the supply cycle really in your market over the past couple of years where you moving into [ considering strong ] growth at the same time that supply kind of shutdown during COVID. It seems like you might be moving back to a more normalised type of environment, which historically may have been tougher somehow because of the supply side of the equation. What do you guys [indiscernible] or trying to kind of set yourself on to manage for this kind of next part of the cycle [indiscernible]?

Well, the question really is the point that the -- we are returning to a more -- question about a more normal environment in the Sunbelt markets having lower barriers to new entry, so supply questions coming back up in a more normal fashion. And what are we doing to prepare for the current cycle. A couple of points I'll make. First and foremost, recognize that we do expect to see supply levels elevated from where they were the last couple of years, really through the balance of this year and through most of next year. So we're not talking about a long period of time. We're talking about in the next 1.5 years or so. Everything that we see in the way of start data and the conversations that we are having with developers and these are national builders that are building 30,000 to 50,000 units a year. Everybody is pulling way back. And we haven't seen it manifest itself yet in the start data but we're absolutely convinced that that's coming. And that by the time we get to 2024 and 2025, we will see starts and delivery, if you will, dramatically drop and feel pretty confident about that. So we're talking 5 quarters or so where we think that the demand/supply dynamic is not as favorable as it has been for the last couple of years. Having said that, the other thing that I'll mention is that, as I said somewhat in my opening comments, supply is not a new phenomenon. I mean, we've dealt with it for 30 years. And these markets have always been viewed as more exposed to supply pressure. But as I've mentioned, we've never worried about that. There are things that we can do and have done, and I'll talk more about that in terms of how we help mitigate that pressure. But the thing that will cause a company to get in trouble, I think that will cause a shareholder performance and earnings performance to take a severe tumble is demand. If demand isn't there, you got a problem. And if supply is there, then you got competition, you've got to deal with it. But if demand is not there, it's a problem. And we've long believed that these Sunbelt markets provide that stabilizing influence on demand more so than what you see in other regions of the country. And particularly, you want to start to think about a broader-based recession or a real slowdown in the U.S. economy. Historically, MAA has always outperformed during down periods. And to my point earlier about the Sunbelt markets being more at risk for supply, all I can point to is on Page 3 of your presentation slides. Through 5 years, 10 years, 15 years, 20 years and beyond, nobody has done a better job of creating returns for shareholder capital than this strategy. So we're not worried about supply. Now there are things that we do to help mitigate that the active diversification that we have across both large and mid-tier markets, I think, provides -- we have a very unique level of diversification. We're in more markets than anybody else in the Sunbelt and that provides some mitigating pressure. When you start to look at some of the bigger markets that we're in, like Atlanta and Dallas and Phoenix, we have a very proactive level of diversification in submarkets. To give you an example, in a market like Raleigh, North Carolina, that's seeing a fair amount of new supply coming into the market based on our analysis, only about 1/3 of our properties are even exposed, really exposed to that new supply. We touched a little bit in the presentation there. We touched a little bit about another example of markets like Nashville that's getting a lot of supply. And you can see some of the reference there to the level of exposure we really have to that supply. So I think that -- and then the point I mentioned earlier about the price point, I think that, that gives us some level of -- one of the things that I think is important in order to sort of take earnings volatility out of performance over a long period of time is you just want to be sure that you're priced and you're positioned to appeal to a broad segment of the rental market. And we think that our more affordable price point gives us that capability. So we're affordable, if you will, to a broader segment of the rental market. And again, that provides some level of stabilizing performance or stabilizing influence, particularly as you get into a down cycle recession, if you will. And then finally, what we are doing. We are like a number of our peers, we continue to bring new technologies to bear on what we're doing from an operating perspective, the things that we now have in the way of tools and capabilities to attract leasing traffic in a more active and aggressive manner, the way we have using AI and some of the other technologies we've introduced to sort of get through a lot of that traffic and understand which of this traffic is really likely to turn into a viable lease and direct our leasing staff to really focus on that traffic that has the highest propensity to turn into a lease. And the capabilities to then work that prospect in a more active manner using chat and bots and other sorts of technology affords us the ability, we think, particularly in a more competitive environment and particularly when you're talking about competing against some of the new supply coming into the market that is often merchant builders who don't have the operating capabilities and the sophistication that we do. It just -- it creates some advantages that we feel like help us in a more competitive environment and we're able to convert lease -- capture traffic, convert leases, convert them to residents in a more active way. And of course, as we get more traffic and convert more leases, it has an impact on our revenue management system and yield management system. And has not only capabilities in terms of lowering vacancy loss, but it also continues to keep our pricing fairly firm. So how we position to deal with a more competitive environment really gets down to the tools and capabilities that you have to go out and secure leasing traffic and convert traffic to leases more actively, more aggressively, more effectively than what your competition is able to do. And we feel like we've got that capability and certainly, we've demonstrated that over the years. During other periods of time, we get supply-demand dynamics that are more competitive. But again, I think that the thing that we've always seen and been through is, we have supply issues or supply concerns come up, they pop up. They're there for a few quarters. And generally, because of the demand side of our business, job growth, population growth, migration trends, all the things that drive housing demand in the Sunbelt markets, sort of work through the absorption of that supply and you've got 4 to 6 quarters, 7 quarters of sort of intense competition and then you sort of get back to an environment that's more advantageous from a rent growth perspective. And -- but we've always -- the challenge that we have is I think with when we get into these cycles is the market sometimes gets very nervous about supply pressure and worried about the supply issue because it's a very easy variable to underwrite. We know it's coming. We see it. It's being built as we speak. It's easy to sort of wrap your head around that. What's hard to underwrite sometimes is demand because it's a function of a lot of variables. It's a function of job growth. It's a function of migration trends. It's a function of your outlook on the broader economy. And it's a harder variable to underwrite but I can just tell you that over the years, these states and these cities continue to capture population growth, continue to capture job growth, continue to capture demand for housing that outpaces other regions of the country. And at the end of the day, I'm going to bet on demand, and we'll deal with supply when it happens.

Can you talk about cost pressures on the property insurance side, particularly in Florida and [indiscernible]?

Yes, I can. The question is, what's going on with insurance and property insurance, in particular. Tim, do you want to do that?

Yes. So, to highlight our program renews July 1. We run from July 1 to June 30. So we'll know for sure here in about a month of exactly what that's going to be. But what we dialed into our forecast right now is a 20% increase which, I think, relative to some other numbers a year is probably not bad. It sounds high but I think a lot others are seeing much higher. And I think it's a function of a couple of things. One, we have a very large portfolio, broad, diversified that has some CAT exposure in Florida and has some of the non-CAT areas as well. And then we've really been working to do some things over the last 3 or 4 years to continue to match our program with our balance sheet strength and capacity. And for some of the lower level or some of the more recurring things that happen, the small fires or other claims kind of really take that on our balance sheet and be willing to self-insure that and really just use insurance for the more catastrophic kind of active guide sorts of things. So that is helpful for us to the portfolio and the things that we've done with the program. And then really going back 20 years, we've been going to all the different markets to look for insurance. So we've been talking to London. We've talked to Bermuda. We've talked to U.S. and tried to kind of have our insurance [ 1/3, 1/3, 1/3 ] from those various markets. So that -- having that capacity helps. And we were actually in London a couple of weeks ago talking to those guys and if we had not been doing that, it would be difficult to bring a portfolio to them that has -- we have a fair amount of [Florida] exposure to be able to get anything done. They're seeing pressure on their reinsurance markets and higher costs. And so their capacity is dwindling and they're focusing on the guys that they've been dealing with for a long time and not really focusing on new entrants. So the fact that we've done that for years is going to help us in terms of those premium increases in rates, and that's kind of why we have the budget that we have for it.

Yes, sir, back -- in the back.

Sure. On Slide 14, your real estate tax expectations [indiscernible]

Question is about Texas, our real estate taxes and particularly about [Texas]...

And particularly the windfall related to what's going on the legislature in Texas right now. It does not at this point. What I'll say is our [indiscernible] taxes, as you can see on Page 14, the guidance, we have about a 6.25% growth rate expected this year in taxes. 70% of our taxes do come from Texas and Florida and Georgia. Texas is 40% of that alone. So that's your focus on the point that we're focused on for sure. They're very aggressive. So our guidance this year is based on expecting aggressive valuations from Texas. They come out with the stub notices that we don't yet know we're arguing them now as we argue everything in Texas, don't yet know. And about a month, we'll know what that is. We're not seeing anything that makes us believe that our guidance is -- we feel good about where we are today on that. So what it's built on is aggressive valuations and [ millage ] rate's coming back a little bit naturally to get to that number. And together, we're still expecting probably a 10% to 11% growth in [ Texas, ] we have a pretty aggressive number in there. It does not consider that. And so I think we're encouraged to see that, depending on I mean that's good to say the state has excess corporate revenues and they're going to distribute that back to in some ways, focused on the schools, the school program funding and so they're probably talking about getting rid of the [indiscernible] effect where the most prosperous areas, to fund, pay more to fund some of the other areas and we tend to be in those first categories. So depending on where they fall out on that, we don't have anything now depending on how they spread that. Something is going to come back, probably something to us, but the ratio that we don't know yet. So we feel good about our range right now overall. [ Taxes ] has been a big piece of that. If there is a positive side for that, that could come out, it could be. If this falls more, more even spread of that, we could have a little bit of [favorability] in that for the year. So we don't -- we haven't got that down at this point though.

And we are hopeful that we began to see some moderation in what we've seen in pretty significant growth in real estate taxes over the last 2 or 3 years as cap rates have lowered and values have gone up. But we think -- and as you know, I mean, the taxing is a backwards-looking game. And so as values have started to adjust a little bit this year, we think that, that translates into hopefully some early stages of tax relief year-over-year growth. Next year would be our hope. Yes, sir.

I have a question. You had a pretty significant increase in the revenue. Do you see any pressure from local governments, pushback or some sort of [indiscernible] rent increases like some of your competitors that [indiscernible] in this area of the country [indiscernible] you in a different area. Do you see any pushback at all in rent increases?

Pushback from government authorities?

[indiscernible]

Yes, yes. Question is around just rent growth and increasing dialogue that you see in the press and other places about government and elected officials expressing concerns about rent growth. We have not had any particularly worrisome indications of yet. We saw a little question come up in Orlando last year and a little question come up in Austin. But in both cases, it didn't really go anywhere. Broadly, what I would tell you is that these Southeast states are -- tend to be much more landlord oriented in terms of sort of their discipline. In fact, if you look at it, 90% of the net income that we generate comes from states at the state level that prohibit rent control. The states are saying to the cities, you cannot put in rent control. Now what happens is like real estate in Florida, as an example, in Orlando, the local elected officials who got concerned about rent growth, we're able to get through their city council or the government -- local government an action that said, well, we have a housing crisis. And therefore, we want to impose some level of rent control. But the way that they were interpreting the state law, it would only be effective for one year and the voters had to approve it. And so I took it to the voters. The voters said, yes, we think that's a good idea. But then it got knocked down in court because they were violating the state law. And so it's a long way of saying that it's something we continue to watch. It's something we continue to monitor. But having said that, of course, now we're in a different environment than we were at this time last year and rent growth is clearly starting to moderate back to more normal [ lives ] kind of levels. And I think that will begin to dissipate some of the pressure that elected officials were probably feeling to deal with the topic. But suffice to say that just structurally, these states and the way the laws are written, tend to be much more tolerant of landlord rights and landlord actions generally within reason, of course. And I think we all understand that the demand has been really strong and we had limited amounts of supply and now we're going back to a more normal environment. And we think that some of the noise surrounding concerns, surrounding tenant rights and so forth, I think some of that noise is likely to begin to dissipate a little bit.

Okay. We have a minute and 44 seconds. So if you want to talk a minute about the transaction [market]?

I'll talk really fast. Yes. So I'll talk a little bit about external growth for us. The transaction market continues to remain slow at the moment. Volumes down about 70% in the first half of this year versus last year, and really, that's for a couple of reasons. One is, generally, the volatility around interest rates spiked early this year, late last year and that really put a stop on the transaction market. I think the interest rates have kind of settled, they're high. They're higher than what they have been but I think the volatility around that has really settled down. I think that gives buyers and sellers a little bit more comfort and conviction to move forward with the transaction. And then I think the other thing is just seasonality. When you started this year, we had been saying that normal seasonal patterns. We were expecting those to come back into the system. And I think others were seeing some of that as well. But since we hadn't seen seasonality for the last couple of years, folks were nervous about what that meant on the operating side. But now I think we're past that. And we're seeing early signs that transaction volume is likely to pick up the back part of this year. So we do have -- [ BOVs ] are increasing, the early signs that projects will come out later this year. And so we do expect the transaction market to open up a bit as we get later into this year. So we'll continue to monitor that. Obviously, the dislocation in the banking sector puts a big question mark on that and how people are going to finance those assets. And I think that benefits us in a couple of ways. Our balance sheet strength, our all cash capability to move forward is a benefit for us. And I think it also benefits us on our development, our prepurchase platform, where we partner with developers and bring all the capital to development. So that will be an area that we'll focus on as well. And then we continue to build out our overall development platform. On Slide 18, I think it is. We show 10 sites that we own and control. So our team has done a great job really building out that pipeline for future growth for us. So we're on a good path at the moment to capitalize on that on the years to come.

All right. Well, I think we've got a blinking red light here. So I guess we're done. But we'll be up here for a few minutes if anyone has any follow-up questions. So thank you for being here. Appreciate it.