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

Well, I show at 8:45. So we will get started. Thanks for being here this morning. My name is Eric Bolton. I'm the Chairman and CEO of Mid-America Apartments. To my left is Brad Hill, who is our President, Chief Investment Officer. To his left is Tim Argo, our Executive Vice President, Head of Strategic Planning and Analysis and Asset Management. And to my right is Clay Holder, our Executive Vice President and Chief Financial Officer. I'm going to just offer some introductory comments about our company. For those who may not be familiar with our story, Brad will give a quick update on some operating trends, and then Clay will give a quick update on our balance sheet and then we'll open up for whatever discussion or conversations that you guys want to have. Hopefully, everyone has got a copy of the presentation. Andrew, back -- in the back there, who is also on our team, our Treasurer and Head of Investor Relations, has those, if you don't have one. Just looking at the presentation quickly, by way of introduction on Page 3, we are a apartment-only focused apartment, apartment-only REIT focused on the Sunbelt region of the country. We've been public and focused on these markets in the apartment industry for 30 years. You see roughly the size of the company right around $20 billion market cap, a little over 100,000 apartments, very strong balance sheet, one of the few A rated balance sheets, A minus rated balance sheets in the apartment space. For 30 years, we've paid a steady growing dividend, have never reduced or suspended our dividend through all various phases of cycles over the last 30 years. Our strategy is really built around the -- as recapped quickly on Page 5 is really built around the idea of trying to drive the best full cycle performance we can for shareholder capital through all phases of the cycle. And our execution is really built around the idea that, first and foremost, it starts with being positioned with real estate properties where we believe that the demand side of the business is likely to be the strongest and steadiest over a full cycle and thus, our orientation towards the high-growth Sunbelt markets that we have. We've, over the years, have just continued to see more recently, really in the last 5 to 10 years, particularly have seen migration trends, job growth trends, the relative more affordable lifestyle that a lot of these markets offer just continue to bring more and more jobs and demand for apartment housing across these markets and continue to believe very much in being oriented with our capital in these high-growth markets as we are. Pages 13 and 15 really get into a bit more about the demand side of the business as we see it from the markets where we are invested. Obviously, the challenge that we occasionally will run into in these Sunbelt markets is supply, the barriers to new supply coming into the market are not quite as high as you might see in other regions of the country. And while we cannot eliminate supply pressure, there are things we can do to help mitigate that pressure. We talk a little bit about some of that. Our footprint is actually recapped on Page 7 in your presentation. You can see where we are. But broadly, from a diversification perspective, in terms of portfolio diversification, we focus our capital intentionally on both some of the larger markets across the region as well as some of the more mid-tier markets where we believe the supply dynamics play out a little bit differently. We are -- we offer a price point that appeals to a broad segment of the rental market, which provides some downside protection as well. The elsewhere in the presentation, you'll see on Pages 23 to 25, a number of initiatives we have underway involving new technologies, opportunities we think over the next few years to continue to drive higher operating margins from the existing asset base that we have and then -- also then quickly point you to, and Clay will touch more on this towards the back of the presentation, a bit about our balance sheet. We have a lot of capacity to put capital work right now and are continuing to start to see a few more opportunities to do so. And the final point I'll just make is we are, obviously, as I think most everyone in this room probably is aware of. We are working through a supply cycle at the moment that we continue to see play out much along the lines of what we expected, nothing really surprising occurring in that regard. And over the years, we have just come to appreciate that the pressures that we get from an operating perspective as a function of higher supply coming to the market, the pressure that, that creates in our experience is not nearly as great as a pressure as you can see from disruption on the demand side of the business. And thus, our orientation towards these markets, we think, drives the opportunity for really full cycle performance. And I think that's recapped a little bit. If you jump to the back of the presentation on Pages 28 and 29, what we're really laying out there, particularly on Page 28, is just sort of a recap of our performance relative to the other 5 big apartment REITs over a long period of time there. And you can see the variation that occurs in our story as a function of disruption on the demand side of the business which occurred in during the COVID years 2020, '21, then you begin to see the impact of supply coming into the market reacting to the very strong demand that we saw coming out of COVID. And you can see that performance disparity laid out there. And again, what we're trying to do is protect the downside more so than anything. And over time, again, drive performance that outperforms the sector over a full cycle. If you go all the way back to Slide 4, which just sort of recaps what we've done for shareholders over the last 30 years, we think that, obviously, the proof is in the results there. We continue to believe that we are positioned to see a very significant recovery begin to take place probably early next year. We think some of the pressures we're seeing from supply begin to mitigate late this year. And then for the next 3 or 4 years, we think the conditions are teeing up to be very strong. So we're very optimistic about where we sit today and look forward to really driving some pretty strong performance over the next few years. Brad, do you want to update a bit?

Yes. Yes. Thanks, Eric. What I thought I'd do is just to give a quick update on our operating performance and then maybe talk a little bit about some of our growth initiatives. On the operating side, if you take a look at Slide 9, as we set out this year, we -- as we kind of laid out our expectations for the year, we certainly expected our renewals to really be pretty consistent in that 4.5%, 5% range throughout the full year. And as you can see, we're really right in line with that mid-[ 4.8 ], upper 5s -- sorry, upper 4s and low 5s. On our renewal rates, that's pretty steady. We expect that to be the case throughout the full year. And as we expected, as we got into the summer, spring and summer leasing season, we do expect renewal rates to hold steady. We expect new lease rates, which is the most competitive with the new supply we're seeing in our market. We do expect that to trend up and improve a bit as we get into this summer leasing season. And we are seeing that. If you look at our May performance that we just put out, it's about 140 basis points better than it was in April. So we're seeing the trends in line with our expectations for the year. We're about 150 basis points better than what we were in the first quarter. So all of the trends are tracking in line with our expectations at this point. And encouragingly, our occupancy is holding in there at 95.5%. So we're not having to give up occupancy in order to get the new lease rate performance that we're getting. So we feel really good about where we are. As Eric mentioned, our strategy is built on being located where the demand is, and we're seeing demand at our property levels, our traffic levels, our leads, things of that nature are above where they were in '18, '19. So we feel good about where we are at this point here in the second quarter. The next thing I wanted to do is really talk a little bit about some of our growth initiatives. If you look at Page 21, redevelopment, as Eric mentioned, one of the benefits of the supply coming into our region of the country is it does provide an opportunity for us to really focus on redevelopment of some of our units. It's a strategy that we have employed for years. And generally, the new supply that's coming into our markets is about $300 per unit on average, more expensive than our existing communities, which gives us the opportunity to go in to renovate our kitchen and our baths, to be able to drive additional rent growth above market rent growth and really compete a little bit closer with some of that new supply. So it does provide an opportunity for us. And as you can see on Slide 21, our plan for this year is about 5,000 units to 6,000 units in that program. We're able to generate 6.5%, 7.5% rent growth above market rent growth. So it continues to be one of our best uses of capital. And then on Slide 24, as Eric hit on just a little bit, while we're tasking our teams on site to really focus on performing for today and really capturing everything we can from a performance perspective today, we're always keeping an eye out to the future, improving our platform, investing in technology really to help us improve our customer service, drive efficiencies, increase our revenues and decrease expenses, and you'll see a number of initiatives that we have on that page there. Smart home technology is something that we've now rolled out to almost all of our units across the portfolio, which really helps drive efficiencies. It also has a revenue component to it as well. We're on the -- really the front end of some of these initiatives that we think will lead to efficiencies on-site over time, some of our centralization and specialization efforts. We're really in the early innings of that. But a lot of work really going on, on the -- continuing to invest in our platform to drive efficiencies over time, which will continue to help us improve margins. The other thing I would just mention is on the external growth front, if you look at Slides 18 to 20, that continues to be a focus of ours, investing our balance sheet capacity that Clay will talk about and really getting ahead of what Eric mentioned, we think, is going to be a really good operating environment in '26, '27 as the new supply continues to come down. We are investing in some new developments today. We have about $650 million under construction. Right now, we have started 2 new developments here in the second quarter, yield expectations of those in the mid-6s, which brings us to about $850 million under construction. We look to start another 1 to 2 deals later this year, which will continue to increase that and bring our under development pipeline to about $1 billion, which we think is where we want that on a run rate basis. So the team has done a great job really helping us get up to speed there. In all of these developments that we'll start this year will deliver in that '26, '27 time frame, which again, we think is a really good time to have new units coming online from a performance perspective to help us continue to drive incremental growth into the future. And then the other thing we're doing is continuing to focus on the acquisition market while the transaction market has been slower. We are finding opportunities there just over the last few quarters. We have purchased 3 deals, 2 in the fourth quarter of last year, one here in the second quarter. We continue to look at new opportunities in that area that are in their initial lease-up where it's harder for buyers to get financing lined up. We're able to come in during lease-up, which we're very comfortable managing properties that are in their lease up and we're able to get a higher yield and return out of that than what the market -- where market cap rates are. So we feel really good about our opportunities over the balance of this year to hit our forecast of $400 million in acquisitions. And then I'll turn it over to Clay, and he can tell you how we're going to pay for those.

Thanks, Brad. I'm going to touch on some of the balance sheet highlights that are on Pages 26 and 27 of the slide deck. And as Eric mentioned, our balance sheet is in great shape. At the end of the first quarter, we had $1.1 billion in combined cash and borrowing capacity under our revolving credit facilities. So as Brad mentioned, this provides ample opportunity to be able to fund those future investments. Our leverage at the end of the quarter remained low, and it was 3.6x from a debt-to-EBITDA ratio perspective. Our outstanding debt was approximately 95% fixed with an average maturity of just over 7 years at an effective interest rate of 3.6%. Subsequent to the first quarter, we issued $400 million of public bonds at a rate of just under 5.4%, and those bonds mature in 2032. Those proceeds from that bond issuance will effectively be used to retire the maturity that we have coming due this month. And then once that -- once we pay off this maturity here in June, our next maturity isn't until November of 2025. With that, I'll turn it back over to Eric, and to wrap it up.

Well, thanks, Clay and Brad. I think at that point -- at this point, I think you hopefully got a kind of a good deal where we are. Just open it up for questions and happy to talk about whatever you guys want to...

This is a big picture question. But as an investor, I always wondered about the [ wrong ] things. And looking back 5 years ago, I didn't worry about COVID, Ukraine and all of that [ case ]. So as people in the industry focused on day to day, what do you think investors are worried about and they don't need to be worried about? And what are investors not worried about that they should be worried about?

That's a good question. What -- the 2 things that I think the capital markets have historically worried about as it relates to our story and worried about it in ways that were more than they should. Two things. One is the threat of new apartment supply coming into the market, and two is the more affordable single-family housing market that we tend to operate in. And over full cycle, over time, I can tell you neither of those 2 issues have ever really been a problem. We find that when supply delivers, we go through a cycle where demand is really strong. Supply is not keeping up with demand. Developers have access to capital, developers do what they do. And as they really start building and as long as they get capital, they keep building. And somewhere along the way, we realized that we've supplied the market more than it really needed for a period of time. And so what you're faced with typically in our experience is you go through 4 to 8 quarters of moderation in terms of our ability to push rents because there's just more supply in the market. And it really affects our -- primarily our pricing capabilities as it relates to new move in residence. Historically, we've always been able to capture fairly steady performance as it relates to renewal pricing. But in terms of new leases, that's where you tend to be more at risk for supply issues coming to the market. But I would just tell you that in our experience, you just sort of because of the things that we've done to try to protect ourselves against periodic periods of supply pressure through a very thoughtful diversification approach that we've taken with the portfolio and maintaining a price point of the portfolio that appeals to a broad segment of the rental market. We've always been able to work through those supply cycles without really seeing anything resembling a collapse. And we've been through multiple supply cycles. And I will take that modest pressure from time to time in an effort to stay positioned in front of a significant amount of growing demand. You want to talk about where you can really see a collapse in performance is when you have something nobody really wants to buy. Where demand dries up, that's where you run into real problems. And these Sunbelt markets tend to provide an ability to be better positioned over a full cycle from a demand perspective than other regions of the country. We've been through a number of recessionary periods in our history going all the way back to 2018, 2019 during the great financial crisis. We were one of the very few REITs that really did not see a significant amount of pressure on our performance. We didn't suspend. We didn't cut our dividend, didn't do any dilutive equity issuances. And we worked through those cycles better than most. So I would tell you that the worry that the market subscribes to supply, and it's always very headline grabbing and it's very definitive in nature, and you can see it coming. And so people just tend to overreact, I think, to supply pressure. The other thing I can tell you is while single-family housing is broadly more affordable as in our markets as compared to some of the coastal markets, single-family housing broadly has never, again, never really been a problem. Of course, we're in a period now where mortgage rates have jumped up to a point that housing cost, because the migration trends and the population growth trends in these Sunbelt markets have been so strong, we've seen a rapid rise in single-family housing cost across our markets. So it's actually -- and our turnover for people leaving us to go buy a house is at record low levels. We've never seen it this low before. And we don't really see that changing in a significant way anytime soon. But typically, when the single-family housing market is really booming, it's usually accompanied by also a pretty strong economy and that's creating jobs and other things that are driving demand for overall housing. So I would just to answer your question about what are the worries that sometimes the market has that are more so than they should be? I would point to those 2 things. I think in terms of, at least, what I worry about and the thing that is, I think, would be the most impactful from a negative perspective is really a deep recession in the country, some sort of major pullback in the broader economy, which really causes the demand for housing to start to slow or constrict in some form or fashion, that can really impact pretty significantly your top line. And -- but I would say and add that during, as I mentioned a moment ago, during a deep recession, when the job market really pulls back and the demand for housing really slows, historically, at least our markets have tended to weather those periods better than some of the coastal markets. And so as long as the demand is strong and demand is there, we can work through whatever challenges the market wants to throw our way. And I think that from my perspective, being positioned where demand is likely to be the best over time over a full economic cycle is the right approach to take, and that's our orientation to the Sunbelt. But that's what I worry about the most. Yes, sir.

Can you talk about development costs and what they look like today or what they look like pre-COVID and with the trend as far as those costs are concerned?

Yes. Brad, do you want to...

Yes. I mean, versus pre-COVID, I mean, they're up substantially. I don't know if I could give you an exact number, but they're up substantially. I would say the trend over the last year or so has certainly not been broad reduction in costs. It's been more stabilization. We've seen depends on the market, but construction costs generally are hanging in there. We're not seeing large increases at this point. We are seeing from contractors better coverage. Certainly, as the contractors look out and look at their book and they thought they had 10 projects for the year and now they have 2. We are seeing them certainly have better coverage from the subcontractors. So performance should be better going forward. My hope is that as we continue to work through the reduction in supply later this year that we're able to see some level of cost reduction, whether it's in profit margins for some of the subcontractors. You probably aren't going to see a reduction in some of the materials and things of that nature. But profit margins, some of the labor cost could -- you could see a little bit of reduction there. But we're not expecting to see a significant reduction in construction costs at this point, but are certainly hopeful that we get some later this year. I mean, the way we've positioned our development pipeline at this point, we own 10 sites at the moment, about 2,800 units that are really ready to go if we're able to get some reduction in construction costs or some improvement in the operating metrics that help us hit our return requirements. So we're certainly in the market every day, pricing new projects and seeing where the construction market is. But it's stable, but we're not seeing a broad reduction at the moment.

How much of a move in cost coming down would you need to see to be able to move forward?

I'd say in the 5% to 7% range is what we would need to see across the board to make a lot of these projects more feasible.

One thing I'll add about sort of the current environment for delivering construction projects and getting those projects built out that's different today than it was 2 years ago, 3 years ago, is that we're seeing a tendency for projects much more so today to stay on schedule, starting 2 or 3 years ago when the development pipelines or the construction projects really started going and all these starts really started -- picked up in a big way. We were seeing real pressures from local code enforcement permitting delays. The staffs were just understaffed relative to the demand to get out there and approve projects and inspect projects as they were being built. We're creating a lot of delays in construction. Coupled with 2 or 3 years ago, we were still fighting through a lot of supply chain issues and other delays in delivery. So you are seeing routinely a lot of projects that were slated to start delivering 1 quarter slip, 1 or 2 or 3 quarters in some cases. We're not seeing that at this point, which is partly what gives us a lot of confidence that as we look at the starts peaked 2 years ago and based on our experience, the max pressure that comes from new units coming into the market is about 2 years after the starts occurred. So that really coincides with, we think right now, we are in the time frame where the supply pressure is being the most felt. And as we get later into this year, it starts to dissipate a bit. And I think that given the fact that over the last 4 to 6 quarters, as this supply has been coming into the market, the absorption has actually been pretty strong. And as a consequence of the absorption remaining strong as it is, the market is absorbing a supply at a pace that I think was surprising most people. And it's not like we're digging a big hole that we got to dig out of occupancy are holding in the 95.5% range. Rent growth is not as good as it was 2 years ago, but it's hanging in there just fine such that when you start to turn the supply [ spigot ] off, which we think is happening later this year and into next year, the opportunity for recovery, we think is really going to be pretty quick and pretty strong. Yes, sir.

Yes. Just on that point, I just turnover, housing turnover that [ some what ] like mortgage rates 7%. Is there any worry that maybe absorption has been so high because there's some shadow demand, housing demand that is going to apartments now because those just can't get home?

Well, I mean, certainly, the move-outs that we are having, as I mentioned a moment ago, the move-outs that are occurring due to people leaving us to go buy a house are at record low levels. And I think that were we to see mortgage rates start to fall in a meaningful way and the market adjust in some fashion such that home buying became increasingly more affordable. It probably does translate into some higher level of resident turnover that begins to occur. We will probably someday trend back to something more normal in terms of that. But what I would tell you is that if the single-family housing market does begin to really take off and people are being much more active in buying homes. That's usually accompanied by a pretty good economy, and people are feeling confident in their employment. The job market is good. The job market is -- wages are growing. And all those things also drive demand for apartment housing as well. So we've been through cycles. I mean, the only time -- I will tell you the only time that single-family housing ever really created some meaningful pressure for us was the 2 years or so leading up to the great financial crisis when you really didn't have to have any meaningful credit history to get a mortgage. 2016, no, before that, 2008, 2009, it was -- we were having single-family developers come into our apartment communities at night and put hangers on the door saying, "We'll pay to move you, no down payment, no job history, whatever, you can buy a house." And that was probably the most -- the only time we ever really saw pressure from single-family housing. So I think that at some point, turnover will become -- will pick up again. But the other thing I would also mention to you is the demographic shift that's occurring broader across society and also as it applies to our portfolio is worth making note of. And I think the demographic shift that is occurring is driving at least based on what we see driving a lower level of demand in the future, I think, for single-family housing. When you look at the demographics, and we have a slide there in our presentation, over 80% of our residents are single. Majority are female. And largely, this is a demographic that is not as prone to want a single-family commitment, the single-family housing, they want the on-site amenities, the on-site fitness, the on-site maintenance, the structured parking deck, the ability to get out and park their car in parking deck, get on the elevator and go to their apartment. All those lifestyle options really cater to the clientele that we are increasingly serving. And so I think to some degree, a lot of the decline in move-outs to single-family housing are really associated with some of these shifts in society. I'll also quickly add, when you look at the amount of turnover that we have or people leaving us to go rent a single-family house, it's very, very minimal. It's about 4% of our total turnover are people leaving us to go rent a house, and it's just never been a problem. Yes, sir.

Can you talk about the transactions market? If you're seeing an uptick, would you characterize it as modest or significant? And also just comment on cap rates [indiscernible]?

Yes. I mean we have seen an uptick in kind of marketed deals coming out in the second quarter. And I think we would expect as the interest rate volatility is lower that, that would pick up a bit as we get into the late second quarter and third quarter. Transaction volume in general continues to be depressed, but we're seeing that pick up a little bit. I think in terms of cap rates, what we saw really in the first quarter and continue to see our cap rates for well-located properties in our market. High-quality properties are in, call it, low 5s on average. So continues to be a lot of demand from capital for properties in our region in the country, again, for the well-located assets. There's plenty of bids on those. The bid sheets are often 4, 5, 6 deep in the best and final round. So there's a lot of interest at those cap rates within our markets.

We got time for one more question, yes.

Given that your stock trades and the cap rate that's higher than what you see in the private market, why not buy stock supposed to engage in acquiring the [ property ]?

Well, the way we look at share repurchase as compared to an alternative investment along the lines of what Brad is talking about, it really for us is a process of considering which option is going to offer the best after-CapEx yield on the incremental capital that we deploy. And then the second thing I would say is that as a REIT that is really in business to drive returns to shareholder capital through compounding earnings growth and compounding dividend growth, we have to think about the residual cash flow after CapEx and the best opportunity to deploy that capital over a long period of time to create that compounding value growth proposition, a long time being 10 years or generally longer than that. Today, when you look at sort of where we're being priced, the opportunity to invest in our existing real estate portfolio through share repurchase as compared to one of these other alternatives that Brad is talking about, all brand-new properties. When you look at the yield of those 2 alternatives on an after-CapEx basis, while the initial yield opportunity associated with investing in our existing real estate portfolio is more attractive, those lines cross at about year 4 right now. And then the performance beyond that is much stronger with -- on an after-CapEx basis with the newer product that we're looking at. Now that's not to say, I mean, there is a price point where investing in your existing real estate portfolio, your existing earnings stream is more compelling over a long time. I hope we don't see that kind of stock price, but it is possible to get there. And so -- but as we sit here today, it's not compelling enough versus the alternative that we have. We appreciate your time. Thank you.