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

All right. Last session of the day. Best one -- saved the best for last. I'm Eric Wolfe. Welcome to Citi's 2024 Global Property CEO Conference. I'm very excited to have Eric Bolton of MAA with us here today. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com, enter the code GPC24 to submit any questions if you do not want to raise your hand. Eric, I'll turn it over to you to introduce your team, company, give some opening remarks, and then we'll go into Q&A.

Okay. Thank you, Eric. Well, as he mentioned, I'm Eric Bolton, Chairman and CEO of MAA. To my left here is Brad Hill, our President and Chief Investment Officer. To his left is Clay Holder, our Chief Financial Officer. To my right is Tim Argo, who heads up our Asset Management and Strategic Planning and Analysis; and then Andrew Schaeffer, who heads up by our Treasury and Capital Markets and Investor Relations operation.

Great.

And opening comments?

Opening comments, we've been asking top reasons to buy your stock. So -- but whatever you want to share before that as well is fine.

Well, in terms of why buy the stock and why buy it now, I think there are really 4 things I would point to. One is that, we think that the demand for our product across our markets is poised to not only remain healthy but poised to continue to grow over the next 3 to 5 years. The secret is out on the Sunbelt, and we like to think of the Sunbelt as America's expansion region filled with a lot of expansion markets, and we have an entire portfolio focused on this expansion area for the country. In terms of new supply, which obviously is a question that is on everyone's mind, we continue to believe based on the starts that we track across our markets and submarkets, some of which we touched on Page 11 in our presentation that we will see deliveries peak later this year, somewhere around kind of middle part of the year to third quarter is when we think that deliveries start to peak. And then once you get past that, and you get into '25 and beyond, supply deliveries really begin to trail off pretty meaningfully. And against that demand backdrop, we think that post this year, the next several years, start to look pretty exciting. The third thing I would point to is just the strong balance sheet position that we have and the capacity we have on the balance sheet to take advantage of what we see as an increasing market opportunity to deploy the capital to find some distress and some opportunity with all the supply coming to the market that is delivering in the market. As transaction activity, we think, will pick up later this year. And we think that we're in a great position to take advantage of that. And then the fourth thing I would just point to is, frankly, just the long tenure and track record that we have as a company. This is a management team that's been focused on these Sunbelt markets for many, many years. I have been with the company for 30 years. Brad's here, have been with the company for 14. Clay's new guy on the block at 7 years. Tim, 22 years and Andrew 16 years. So this is a team that has seasoned, been through a lot of cycles, and we know how to operate within these markets quite well.

Great. We already have some audience questions. I'll get into those in a second. It's good to see the late crowd still engaged. Over time, you've had a great track record with guidance, and I'm sure you saw the survey that we did a little while ago where I think people like 83% of people thought that you'd probably see negative rental rate growth, and you're expecting to see positive rental rate growth this year, at least in terms of blended spreads. So maybe you can just start by whether what you're seeing during this early part of the year, and I know it's still early, is consistent with your guidance and anything that you think investors are missing in terms of fundamentals today?

Well, I'll start and you guys can jump in. I mean I think that the short answer is there's nothing happening at this point that is out of line with what we are expecting. We continue to see demand drivers that are supportive of what we think is going to play out over the course of this year. We continue to see strong pricing performance on renewal transactions. We are now out into May on renewal transactions, and we are getting 5%, plus or minus rent growth on renewal transactions in line with what we were expecting. New lease pricing on a lease-over-lease basis continued to show improvement in February versus January, which was better than the fourth quarter. Typically, we see new lease pricing performance on a lease-over-lease basis, weakest in the winter months, and then it tends to get stronger in the summer -- spring and summer leasing season. As demand picks up, the gap in terms of lease-over-lease pricing performance tends to gap out the most in the winter and the gap closes a bit over the course of the year in the spring and summer. I mean our forecast for the year calls for new lease-over-lease pricing in kind of the negative 3% range for the year. We continue to feel that, that's achievable. Nothing at this point causes us to feel that, that's not going to be doable. We also continue to believe that renewal pricing will hold up in that 5% range over the course of the year tends to be much more steady and stable over the course of the year. So on the -- again, I think the wild card in all of this and the variable that really -- it's the most impactful. I mean we know what supply is going to be. The question is, is the demand going to hold up? And as we think about demand, we really think about it in terms of sort of 3 different important components. One is just what's happening with job growth and household formation trends, migration trends. All those things continue to hold up quite well and continue to be in line with what we were expecting. The other variable that is certainly creating some positive momentum right now is the propensity for our residents to move out and buy a home continues to be at record low levels. Turnover overall continues to be at record low levels. So those trends, we don't see are likely to alter over the course of the year. Single-family affordability is still challenged and that continues to obviously work in our favor. And then the third thing I would just point to that I think is a function of continued healthy demand for apartment housing across these markets just continues to be some of the underlying trends surrounding demographics and changes taking place in society. We continue to see more single-person household formation trends taking place. This is a household that is more likely than not to want to live in a community lifestyle with on-site amenities, on-site maintenance, structured parking, interior hallways, those kinds of aspects of living, I think, are going to continue to appeal to the single market -- single market household that continues to become an increasing part of household formation. We've seen, in our portfolio, over 80% of our resident profile is single, over half is female. And we think that, that's a demographic trend that's been building, continues to build and continues to drive more household formation towards multifamily.

Got you. So you effectively need less job growth to generate the same demand?

Correct.

And all these factors. Again, I know it's early in the year and sometimes there's always, you can say, "Hey, well, we just talked about this a couple of weeks ago, but when I think about this important period, right, from March, April, May, sort of the start of the peak leasing season, I think it's pretty informative of how the year is going to shape up. Is there anything that you can look at today sort of as a forward indicator? Just kind of get a sense of the strength of demand, whether it's the number of leads to your site, maybe it's conversion ratios, maybe it's you kind of look at your forward exposure in terms of occupancy just based on the number of leases that you signed today out, call it, 30, 60 days? Like is there anything that you're seeing today that can kind of inform what the peak leasing season is going to look like and what is it telling you so far?

I'm going to let our export handle that.

Yes. A couple of points I'll make there. I mean, I think, one, the strength of renewals. We've already sent out May renewals. So we have a pretty good indication through May of what renewals are doing, and they're holding up well in that 5% range. So I think that gives some level of confidence in where things are headed. And then where we sit right now, March is kind of where we really start to see demand and lease expirations start to pick up as well. And when we look at leasing volume, whether it's visits or traffic, our exposure has now flattened out. It tends to rise to January and February. It's now flattened out kind of to the point where we like it to be. And then we're seeing really in the back half of February and into now that leasing activity that lead volume, lead to lease, visits per lease, all those various metrics that we look at are kind of doing what we would expect. We expected more of a return to normal seasonality, which we haven't seen really since pre-COVID, and it's kind of doing that. As you can see, with new lease rates slowly starting to accelerate, renewals hanging right in there, leasing volume, traffic exposure, kind of doing what we thought. So it's early January and February are minimal leases and it really starts to pick up into March through July and get into July, it's about 14% of our leases expire then. So to your point, the next 4 months will tell the story that's trending better, worse or as thought. But so far kind of has it all.

Got you. And then you think as part of your guidance, you expect occupancy to trend up a little bit. I mean you would expect to see that in the next couple of months?

Yes. I mean, we always -- February is a weird month. We always see it dip down a little bit. If you can have that inflection point of expirations picking up and then demand starting to pick up. So we sort of plan and budget for that and saw that in February. And I think as we get in now into March and that demand starts to pick up, I think generally occupancy follows sort of with new lease pricing, not as volatile, obviously, as new lease pricing, but we would expect occupancy to sort of slowly trend up through the spring and into the mid-summer. And then trend back down in a narrow band, but some seasonality on that as well.

Got you. And you mentioned on the earnings call that you dedicated a lot of time and resources to the renewal process. Can you maybe just talk about how that process has changed sort of over time and how it works within the company? I mean, obviously, we just see the numbers. But it sounds like there's quite a bit of a process for you to go to. And it sounds like you've tried to refine that process to get the ultimate -- the better outcome from it?

Yes. I mean I think it's a combination of, one selling our on-site teams and our associates on the renewal pricing that we want to offer and then in turn, selling obviously, the residents on that. So we have a revenue group that spends all their time thinking about pricing and thinking about the stuff, and we have a revenue analyst assigned to each division. Every month, they're having calls with the property managers, all the renewals that are going out, they're looking at a tiered selection of where do you stand? Where does that resident stand relative to market? If they were to lease a similar unit, similar lease term, what would that look like? How far above, below are they to market, and we tier it based on that. And recognizing sort of in the background that there's friction costs. There's real cost, there's hard cost, soft cost of moving. And then we -- so we get our on-site teams comfortable with where it is and all the reasons why we're suggesting the offer that we put out. And then it's getting with the residents, helping them understand. Hopefully, they've had a good resin experience. If you look at our Google score ratings, one of the highest in the sector. It was 4.5% last year, 80% of our Google reviews last year were 5-star. Certainly a resident satisfaction component. They feel good about living there and know the costs involved. And then we sell them on, too, particularly what's probably changed a little bit in a higher supply environment. You've obviously got competitors that are offering concessions and getting closer to what our rents are and helping them understand. You've got obviously the cost to move. You've got application fees, all those other fees. But once that new developer gets you in the door, once they get leased up, they're going to have to get rid of those concessions pretty quick or their economics aren't going to work. So realize that if you got a month free, 2-month free, you're going to be looking at minimum 10%, 15% increase once you renew that lease a year from now. So it's really just educating our team and then educating the associates as well.

Got you. And i think a key part of the guidance is the 5% renewal or 4.5% to 5%. Is there anything that would cause you to pull back from that level? Is it just a higher percentage of people not accepting what would cause you to sort of dial that 4.5% to 5% down into the 3s or whatever level?

I think one of the things that we really track is how much turnover are we creating because people don't want to pay the rent increase. And I will tell you that today, the amount of turnover that we're incurring due to rent increase is about half of what it was last year. So if we were to see turnover picking up in a material fashion due to rent increases that we were asking for, that would more often than not cause us to want to rethink that push a little bit and back off a little bit because we're creating more vacancy than we would like.

And is that 4.5% to 5% pretty consistent across markets? I mean I think the answer is going to be, yes, but it's sort of amazing to me that you can be in a market where you have a negative 9% new lease and then you have 5% renewal and then it can be another market that has 2% new lease and 5% renewal. So yes, I mean, the question is, effectively, is it pretty similar across markets? And if so, why?

Well, it is fairly similar, but I think it's important to put some context on this a bit. When you look at lease-over-lease pricing for new move-in residents and you look at lease over lease pricing for renewal residents and the percentage changes as you're talking about and the gap in that percentage right now, it's around 1,000 basis points in terms of the lease-over-lease pricing change. Recognize that's only $150. So the actual dollar amount is not as great as you might think it is just when you look at those performance -- those percentages, also recognize that, that gap closes as you get into the peak leasing season. And what we typically see is the lease-over-lease pricing performance on new leases start to increase, and that gap between new lease and renewal lease-over-lease pricing trends start to close a bit. And why don't you add a little bit about the tenure and all that.

Yes. And I think important to remember, too, I mean, while turnover is down historically and the lowest we've ever been, we're still turning, call it, 40%, 45% of our residents every year. So our average resident stay right now is about 22 months. So they're, typically, they're coming in, they're signing a 12-month lease and renewing once and moving out. So we have a little bit of buffer there where every 2 to 2.5 years, we've turned over our entire portfolio. So you're not in a situation -- a very few situations where it's 5% on 5% on 5% where it's getting so far out of market. So the turnover sort of balances that a bit.

Right. You're not building some big gain to lease because if somebody -- they turn over and then -- In terms of market performance, again, I know early, but are you seeing any gap between sort of the supply-impacted markets submarkets versus those that are not? Is that spread getting wider? Are you seeing more impact from supply? Or maybe conversely, I think late last year, you saw developers behaving not irrationally, behaving rationally. But with interest rates moving up, going into the end of the year, weak demand period, increasing concessions, maybe those concessions are actually lighting up. So it's just a long-winded way of asking, are you seeing the sort of gap between supply-impacted markets and non-supply-impacted markets get wider or narrower?

I would say to your point on the concession, I think a little bit narrower now. I do think the developers, there's a little more clarity into when supply starts to drop. I think there's a little more clarity in what the macroeconomic environment is and what interest rates are going to do. So I do think some of the hysteria, if you will, on the developers that we saw toward the end of 2023 has moderated some as they get a little more comfort in where things are headed. But still in terms of the impact, it's submarket by submarket, market by market. I mean, a market like Austin where you're getting supply throughout the market. That is one of our worst performing markets, and it's feeling that impact on supply. Other markets where you're seeing it -- we're still seeing on balance more of the supply in most markets happening in more of the urban infill and CNR or suburban or more B Assets perform a little better. That's broadly what we're seeing. But again, you take a market like Charleston, it's getting a ton of supply as well, but it's not occurring where our portfolio is there and also one of our best performing markets. Certainly, market by market, I do think it's moderated a little bit from where it was Q4, the impact, I mean, and would expect as demand starts to pick up, we see it gets better, obviously, as well.

I'd say, I don't know, make what you'd say, but I think Eric, I told you, MAA is probably the most asked about company over the last 2 months in terms of when we're on the road marketing. And I think what everyone is trying to figure out and you get asked probably 1,000 times is just when there's going to be a recovery? I would say the clients, I'd say, on average, probably expect it to be in the back half of 2025, maybe even 2026, just given the time it takes to lease up these pipelines. It sounds like you think it's going to be earlier. Maybe just help people understand why it's not going to be as late as they think. Why is it going to turn around later this year? Why is it going to turn around early next year? Or maybe when you say turnaround, that's just bottoming, and we're just saying the same thing in a different way, but try to help people understand when it's going to turn around and the magnitude of the recovery?

Well, I think that, again, as I was talking about earlier, I think when we track the starts, new construction starts in our markets, in our submarkets to really get engaged on future delivery pressures, new supply coming into the market. And based on the information you see in our presentation deck, we saw new construction starts really pick up meaningfully in 2022. and then begin to trail off a bit late in '22 into 2023, which translates into deliveries sort of peaking throughout the course of 2024, kind of 18- to 24-month delivery -- construction and delivery window. So we do think that the delivery of units into the market -- new delivery of units in the market starts to peak out in, call it, third quarter of this year based on the construction activities that we see and we track. We think that the leading indicator of recovering fundamentals, the sort of the tip of the spear from a revenue perspective is always new lease-over-lease pricing, new customers coming in off the street, they are shopping all the various alternatives that they have to choose from. And the challenge that we will have is that we think that the supply delivery peaks, call it, in the third quarter, but that's also the start of the traditionally slower leasing season as well. So I mean, I think we will feel things looking a bit better as we get late this year as the delivery starts to moderate a bit. We -- in our new lease pricing, we think that it may not be incredibly obvious that the trends are happening other than the fact that we will, of course, be comparing against the back half of 2023. So the comps get a bit easier in that regard. So I think that more likely than not, it will take the spring of 2025 before we begin to really see new lease pricing performance really start to be clearly evident that the recovery is underway. Again, we continue to believe that renewal price will hold fairly steady through that process or through that time frame. So I think that we think it begins to set up for, in our estimation, likely a performance year in 2025 that's better than 2024 based on those supply-demand dynamics. And I think that we also understand and believe, given the strong demand that we continue to see and the migration trends, the single family or the household formation trends and all the things I've talked about driving demand that the absorption of the remaining supply, the tail end of supply that's being delivered gets absorbed fairly quickly. So we think the recovery is a more steeper curve perhaps than what people -- some people may believe is likely to occur given the continued strong healthy demand. And then as you get into '26 and '27, it looks really strong. So I think that these expansion markets continue to -- well, expansion markets as it relates to the United States. These are high-growth markets. These high-growth markets tend to get over supply pressures pretty darn quickly and snap back pretty quickly. Take Austin, for example, Austin is one of our most oversupplied markets right now. It's also our strongest job growth market. So you start to choke off the supply, the recovery is quick, and so I think it begins to set up for a pretty meaningful recovery in a pretty fast trajectory. And I think that the other thing that is going to continue to sort of work, I think, somewhat in our favor, is that we think that the transaction market starts to get more visibility later this year. I think that there is a lot of investor capital appetite for multifamily real estate in the Sunbelt. And we think that, that increasing visibility on asset pricing and cap rates is going to work in our favor in terms of public pricing. So I guess my point would be don't be late.

Right. Maybe two quick follow-ups to that since, and we'll start talking about the acquisition of external growth in a second. I want to get into that. But I want to make sure I get the audience questions answered, too. Like when you're thinking about your supply projection, are you factoring in development delays into your estimates? And then the second part of the question is, is there a concern just from like a same-store revenue perspective for 2025 that you have this negative new lease pricing through the year. So will that create like an earn-in headwind for 2025?

Certainly, we think the earn-in for 2025 will be less than it has been in the past. But again, we think that the recovery from that is pretty steep and pretty strong. And answer your question, yes, I mean, we routinely we're seeing some delays in delivery of units back a couple of years ago, even as late as last year as a function of supply chain issues, as a function of a very, very tight labor market and particularly construction trade labor was difficult to come by. But we are seeing from the contractors that we talk to and developers that we do business with, that those issues are now passed, and we think that the ability for developers to sort of deliver on schedule is better now than it was 1 year or 2 years ago. And so we don't see a lot of cause to believe that a significant amount of this supply that's scheduled to deliver this year is likely to slip into 2025.

So I guess moving to capital allocation. Your acquisition volume looks higher this year, at least based on initial guidance. But I think what people are trying to understand is you have this great balance sheet. What would cause you to really use up the capacity of that balance sheet on acquisitions or other investment opportunities? What type of returns do you see? Maybe put a specific number around it, like what would cause you to buy over $1 billion of assets or do something very material that uses your balance sheet capacity?

Brad, do you want to?

Yes. I mean, in terms of acquisitions, we did execute on two acquisitions in the fourth quarter of last year, and those are really indicative of the opportunities that we really see us being able to use our balance sheet for. And those are assets where there's some ability that we have, obviously, to execute all cash that even in this market, some folks don't have an option to do. We executed both of those in kind of the high 5% NOI yield basis. But at the same time, there's some characteristics about our platform, characteristics about our ability to layer on our technology, layer on our revenue management practices. And then additionally, we've got some opportunity to expand margins on those assets as we pod those in the future. They're both located adjacent to other properties that we have. So really, what we're looking for are opportunities like that, call it in the high 5% range in terms of yields. Really, the inhibitor to us right now for that is just deal flow. There's not a lot of those coming to market at the moment. We certainly believe that as we get further into this year, those opportunities will continue to materialize. And certainly, we're working on a few of those at the moment. I think another area of opportunity for us continues to be in development. We expect to start 3 to 4 developments this year. We had a couple planned for last year that we pushed into this year because we -- given the cost of capital moves we felt that we were -- we would work to get the construction cost down to get those returns at a better place. We've got 2 that will start this year, they're call -- it in the mid- 6s. First half of this year in terms of NOI yields. We've got another 1 or 2 that we hope to start in the back half of this year. And another area where we're really seeing some opportunities to deploy capital is also through our development prepurchase, where we are partnering with other developers. We're seeing opportunities where a developer -- merchant developer in our region of the country has a property. They've purchased property. They have plans complete in many instances and their equity is backed out. In some of those instances, the equity partners are either really heavy in development right now. So they're kind of pausing their exposure to more development or they have exposure to other sectors, office, things of that nature and they're pulling out. So we are evaluating some opportunities in that area as well. Again, those are very little entitlement risks with those. But the key component of those is where construction costs are and where ultimate returns are. So we do see some opportunities emerging in that area as well.

You touched on the going-in yields. How does that compare to replacement cost? I mean, are you basically buying at replacement cost for those? Or is there kind of some level of distress right now or at least you can try to take advantage and get kind of a per pound, maybe better than what you'd be building today?

So the 2 that we closed in the fourth quarter were about 15% or so below current replacement costs. So we felt good about those on a per pound basis. And certainly, as we look at other acquisitions this year, and we haven't seen across the board construction cost reduction, we would expect to see some significant level of cost below replacement cost on those.

And we have an audience question says, how is the market underwriting lease-up vacancy in merchant develop assets right now? Which I think means if you if the buyers are going to come in and look at a development that's under water where the developer is struggling to lease it up, how much time are they assuming that it's going to take to get to like a stabilized yield? And how long would you assume it would take if you were to buy a similar property? Especially in a market that might be challenged by supply?

Well, it really depends that for example, the asset that we bought in Phoenix in the fourth quarter. I mean what we saw in that was the lease expiration matrix was really not ideal. And really what that was is indicative to us that the developer was really speeding up the lease up, trying to get heads and beds. The good news about that is the credit quality was still really good. They're still doing their full credit, criminal background checks, things of that nature, incomes were really good. But what, the result of that was we had 20% lease expirations in the first quarter or early in January. So we had to work through that. So it's really asset specific. It also depends on what month of the year you close. Obviously, if you close in the winter months, your lease-up is going to be slower for a few months and then pick up in the summertime. But, that's going to be a very varying answer. But generally, you're looking for, call it, 15 to 20 leases per month in terms of occupancy, just kind of on a normal basis.

Maybe last question before we jump into rapid fire. You have all your peers now trying to jump into the Sunbelt. I mean you probably could have predicted this 5 years ago, but...

Secret's out on the Sunday.

Secret is out. Would you say don't be late. But, I guess the question is, do you think just given your history in the Sunbelt that you have an advantage there in terms of either capital allocation or operations, understanding how those markets work? Is there any sort of competitive advantage just from having a history of operating in a certain market?

Yes, we have an advantage. I think that there, whether it's the advantage of scale across the region and in these markets and the ability to leverage that scale into pricing efficiency as it relates to how we procure various services -- landscaping services to contract labor that we need to bring in from time to time. There is long-standing relationships we've had operating with various vendors, long-standing relationships we've had operating and partnering with developers across this region. So not only do we think there are advantages that we have with the platform being as focused as it has in this region for 30 years in terms of operating dynamics but also in terms of deal flow, and external growth opportunities. So yes, I mean, we absolutely believe that we're, by far, the largest owner-operator of apartments across the Sunbelt. We're in more markets across the Sunbelt. And I think that the extensive sort of footprint that we've established and relationships that we've long had certainly does create both operating and deal flow advantages that we think will serve us well.

Rapid fire. Same-store NOI growth for the apartment sector overall next year in '25?

I put it 3%.

Will there be more fewer in the same number of public companies a year from now? For apartments?

Fewer.

And then what's the best real estate decision today?

From a long-term value creation perspective development.

Thank you very much.

Thank you.