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

Good afternoon, everyone, and welcome to Bank of America's Global Real Estate Conference. I'm Josh Dennerlein, and I cover the residential REITs at BofA. I'm pleased to have with us MAA's President and CIO, Brad Hill; and CFO, Clay Holder; as well as SVP, Treasurer and Director of Capital Markets, Andrew Schaeffer. With that, I'll pass it over to Brad, but I love making these interactive, so I'll ping the field for questions as I go, but I have plenty as well. With that, Brad, I'll pass it over to you.

Yes. Well, thanks, Josh. First of all, if you don't have a package, Andrew can bring one to you. Just let us know if you need something. And agree, would love to make this as interactive as we can here. So for those of you that aren't familiar with MAA and our story, I'll give a brief introduction of who we are, kind of some of the focus areas, and then we can get into questions that you guys have. So MAA is an S&P 500 multifamily-focused REIT. We just celebrated this year, our 30th year anniversary as a public company. So it's a big year for us. Our strategy is pretty simple. And our strategy is really to deliver high-quality earnings, a high-quality recurring earnings stream over the full cycle. And our goal there is really to support a steady but growing dividend. And we believe the best way for us to do that is to deliver superior compounded TSR over a long period of time. And if you look at Slide 4 that we have in our package. Really, what you'll see is whether you're looking at a 5-year period, 10-year period, 15, 20, you can see that relative performance and that outperformance that I just described. That's our goal. And importantly, when you look at that, we're one of the only REITs, of a handful of REITs -- public REITs that have never suspended or reduced our dividend. And that's a key component of our strategy as we look forward, protecting our ability to pay a dividend. And I think we've really accomplished this through what we would say is our unique and differentiated focus and strategy of focusing on demand. A lot of folks get hung up on the Sunbelt region of the country, these high-growth markets that we're located in, and they really focus on supply. And for us, the biggest factor in terms of generating that long-term TSR performance is really by focusing on demand. It's not the supply levels. And so we really focus our capital deployment strategy on the region of the country that is likely to see the highest demand factors over a long period of time. And so if you turn to Slide 7, you can see a little bit about where we're focused, where we focus our capital. So if you go up toward the Northeast, we go up through D.C. We're throughout the Carolinas as you go down the East Coast. We go as far south as South Florida. And then we go west through Texas, Georgia, Kansas City. We're also in a number of markets in Texas, then you go as far west as Las Vegas, Nevada, including inside of Las Vegas, we're in Phoenix, we're in Denver as well, which those may or may not be considered Sunbelt markets, but definitely high-growth markets nevertheless. So demand is our main focus. And if you look at demand in the Sunbelt region over the last few years and this year, demand continues to be strong. Absorption in our region of the country has outperformed and probably held up better than what a lot of folks would have thought given the amount of supply that we've seen in our region of the country. We did put out a release showing our results third quarter quarter-to-date. Our blended leases are flat quarter-to-date. Our renewals continue to hold in there pretty strong at 4% and our new lease rates continue to feel the pressure of that new supply in the market. But importantly, our occupancy is holding up. And if you look broadly at our market, pointing to the demand factors and the demand levels that I just mentioned, as a market, absorptions are high, and we're hanging in there from an occupancy standpoint. We're not building -- digging a hole that we have to dig out of from an occupancy standpoint, which leads us to believe that the recovery in '25, late '25, '26 and '27 should be pretty compelling. The other thing I would just draw your attention to is the bottom of Slide 7. So in addition to focusing on really the high-demand region of the country, we're further differentiated from a number of our peers just by the number of markets that we're focused in, the diversification that we have by market, by submarket. We're in more states than any of our peers. And then we look to further diversify within those markets by product type. You'll also see in there, we have multiple product types, high-rise, mid-rise, garden properties. We're also diversified by price point. And we believe this gives us exposure to a broad segment of the rental market, which positions us very well in times like this, where we're facing competition. And finally, we also further diversify by including exposure to some mid-tier markets. Just on the chart there on Page 7, you'll see us focus capital not only in larger markets like in Atlanta, Dallas, which are some of our largest markets, at Tampa. But you'll also see us allocate capital to mid-tier markets at Charleston, Greenville, Savannah, Jacksonville, markets like that. We think that's a very important part of our strategy and really helps provide less volatility in our earnings stream. But the knock on the Sunbelt has always been the amount of supply that can come into the market. And it's really over the long term, it really just hasn't been an issue for us. The demand generally has always held in there and helped us weather the storm of supply periodically. What we always say is we want to have a product and be located in a market where somebody wants our product. The problem is when you have a product that nobody wants. And so the demand-induced downcycle is much more problematic for folks than a supply-induced downcycle. And so again, our strategy is to outperform in the full cycle. And if you compare where we are today, we're in a supply-driven down part of the cycle for us. Our forecast for this year is that our NOI would decline by 1.3%. And that's in a supply environment, the highest it's been in 50 years. If you contrast that with some of the down cycles that we've seen historically, you go back to 2002, 2009, '10, 2020, where we saw a demand downcycle. You'll see our peer returns were off between 5% and 6%. Their NOI performance was down 5% to 6%. So that starts to give you a little bit of a comparison of how we've constructed our portfolio, how we -- our strategy helps us focus on the highest demand region in the results and how we're able to get to the TSR results that I just mentioned. A couple of other points I'll make, and then we can go into questions. Going forward, a major focus for us as an organization is on driving incremental earnings growth. And we're focused on doing that through our existing portfolio. We have a number of margin expansion opportunities that we have done over the last few years and some that we continue to do and continue to implement. We're also focused on customer service with our residents, certainly recognizing that the most profitable lease that we can write as an organization is our renewal lease. And so the higher customer service that we're able to provide our residents, the more likely they're going to stay with us. So we're highly focused on that. Continued focus on redevelopment and repositioning. Certainly, the supply that's coming into the market continues to support our ability to do that. And then the last point I'll make is just on the balance sheet. Our balance sheet continues to be well positioned with leverage, very low, lots of capacity for us to be able to execute. So we're also looking to grow earnings incrementally is through external growth. We're really leaning into development at the moment. We have about $1 billion under construction today. We've really worked to grow that pipeline over the last couple of years and plan to continue to have it at that level. Acquisitions is a focus of ours as well. This year, our forecast is about $400 million in acquisitions. We are well on our way to hit those, and we're able to achieve stabilized NOI yields approaching 6%. I didn't mention this. I'll just mention this real quick, but on developments, anything we're starting today, the yields that we're able to achieve on those is about a 6.5%. So very accretive use of capital, really gearing up the portfolio to be able to drive that incremental earnings growth, especially as we get into '26, '27, where these new deliveries will deliver at a time where the supply pipeline will be much less than it is today.

Interesting. I guess it was about a year ago, we had met and did a similar roundtable, and I think things were kind of fine at that point. And then afterwards September, October, the demand -- things started to kind of roll over. I guess, one, in hindsight, like what happened that was missed? And then how do we get comfort that, that won't happen again this year?

Yes. Yes. I mean as we look at kind of the macroeconomic environment that we were in at this time last year, I would say it's completely different this year. Going into this time last year, the outlook for interest rates was much higher. Interest rate in the 10-year was close to 5% at this time last year. At that point, we were debating what level of job loss were we going to have? Were we going to have a recession or not at that point? Inflation was running extremely high at that point. And the supply wave was really ahead of us. It was really to come. And so there were a lot of pressure points at this point last year. As we sit here today, I would say all of those have been resolved to the positive. Interest rates clearly are down from where they were this time last year. Inflation is trending down considerably from where it was this time last year. The supply pipeline, we have clear indications that, that is trending down below long-term averages in terms of new starts. So there is definitely a benefit on the horizon. We're also seeing clear evidence that there is a market for these properties within our region of the country where things are still transacting in the call it, 4.75% to 5% cap rate range. So there's a market out there. So the mentality is a little bit different at this time this year than it was last year. Having said that, I think you'll still see seasonality in the fourth quarter as we always do. As we look at our results that we just put out, you compare June to August performance this year versus last year. Last year, June to August, our blended lease rates were down 220 basis points. This year, June to August, we were down 40 basis points. So what we're seeing in the market today is more typical seasonal downturn in terms of the new lease rates. That's where the pressure is generally seen. It's very consistent with pre-COVID seasonality trends and really nothing more than that, that we're seeing in the market at this point.

And maybe last year's kind of like slippage in new lease rate kind of presents an opportunity just on the base effects. Like how do we think about the base effects from what we -- what's been reported through August through like the balance of the year and how we should think about like the growth rates?

Yes. I think as you kind of think through the back half of the year, I mean, you're still going to see negative new lease pricing. And that's typical for just the overall seasonality curve. But I think as you think through -- as we get to some of these -- the back half of the year, especially the fourth quarter, you're going to get some easier comps as you're looking at with that. So I would expect it to still be negative, but I don't think it will be nearly as negative as what we saw last year in fourth quarter.

How sustainable you have gone from 11% to today 9% and 9.5% [Technical Difficulty] new leases but how sustainable is that 9%-10% [indiscernible] assuming but these guys are for how long?

Yes. Well, certainly, the gap today at 1,000 basis points is probably a little bit wider than normal. In the fourth quarter of last year, it's about 1,100 basis points. So we have been a little bit wider than normal. I would say in the first quarter, fourth quarter, it's common for that to be 900 or so basis points. In the second and third, you're going to be 600 or so basis points. So we're a little wider than that at the moment. What we're watching there is the move-outs, move-out reasons, folks that don't -- moving out because they don't want to pay the rental increase. And what we've seen in that metric is it's actually trending down. It's not going up. So folks leaving us today because they don't want to pay the rental increases about 8%, 8.5% or so. So it's still very, very manageable. The other thing I'd say is the actual dollar amount between a new lease and a renewal is about $130. So what we're asking those residents to do is to come -- is to pay a renewal that's $130 more than a new lease. So on a 12-month basis, that's $2,000 or so. That's -- for most of them, it's too much of a hassle to move over that. The other piece of that, I would say is that we're very intentional in how we're focusing on customer service for our residents. As I mentioned in my comments, if we're able to go in and take care of that resident, both from our leasing staff in the office as well as our maintenance folks, if we're able to hit our maintenance metrics in terms of the maintenance request that we are fulfilling in 24 hours and 72 hours and meet the needs of those residents, their satisfaction will be really high, increasing our likelihood of retaining a renewal. Google scores is something we really focus on. We have the highest Google score rating of anyone in the space. And we think that, that also helps our ability to be able to retain these residents and continue to get strong renewals. So we'll monitor that percent to move out because they don't want to pay the rent increase. And if we see that start to move, then we can adjust our tactics, but it's actually moving the other way at this point.

Other questions from the field?

[indiscernible] affordable rents, but is there some offset to that people kind of move to buy home?

Yes. I mean I think on the margin, you probably could see a little bit of movement there, move out today to buy a home is 12.5% or so of our folks. So it's pretty small. It's obviously been trending down. I think the important thing to note is that the average cost of a home in our region of the country has increased 55% to 60% over the last 5 years. So take interest rates off the table for a moment. That rent-to-own gap is still substantial without considering interest rates. And then I think when you start looking at interest rates in order for the existing inventory to really become available, I think interest rates have to come down quite a bit. The majority of interest rates that are out there today are below 4%. So for folks to put their house on the market and move, it generally has to be some event occurring in their life and I think other than that, interest rates need to come down quite a bit. The other thing that could drive that up is that the homebuilders could increase their inventory and their construction. We're not seeing that at this point. But if that picked up like it did pre-GFC, we performed quite well because that normally creates jobs within the market, which is a positive for us. So we don't see anything on the near-term horizon that makes us believe that the single-family piece, even if interest rates come down, really changes that affordability trade-off very much. It might move on the margin.

[Technical Difficulty] percent in 2021 [indiscernible]

2021, it's probably closer to 20%. It was 14.5% last year. And back in 2021, it's probably -- pre-COVID, it was probably closer to 20%.

The other piece I would say on interest rates, to the extent that folks have some type of variable rate debt, whether it's student loans, car loans, credit cards, that's actually going to be a benefit for the residents in their spending ability. So I think there's some benefit on that side that would show up as well.

Brad, you mentioned margin expansions and kind of what you're commenting on ties into a question I've been asking like every company I've had and a big focus of mine is just on platforms like rates are permanent capital vehicles, there's ability to kind of invest for the long term. It sounds like you have some platform initiatives and you want to drive the margin growth. Like could you walk us through those and where you see that going from here?

Yes. I think if you look at Slide 25, we've got a number of the things that we are focused on, have focused on, continue to focus on. If you look at those various technologies, smart home technology, clearly it is something that we've leaned into our entire portfolio, close to 103,000 units today. We basically have Smart Home technology rolled out. And that is really an enabler for other things that we can do on our properties, whether it's self-touring, whether it's on the maintenance side, drive some efficiencies in that way. We have done a number of initiatives on the sheet today. And today, we have in our run rate, about $50 million worth of NOI improvements with some of these initiatives that we've already deployed. Going forward, I think near term, over the next few years, at least, one of our main focuses will be on property-wide WiFi. We're pretty early in that at this point. We're testing that at a few properties. That's something that the industry is really going towards. A lot of benefits of that for us to be able to provide coverage across our full property and the benefits that provides to our residents. That's something that we're really early on. That will be a multiyear rollout of that. But as you see there, that could ultimately be an opportunity of $30 million or more. Centralization, we're early in that. We have a number of functions that we have centralized, whether it's our collections or whether it's some of our renewal practices. We've got some centralization that has occurred there. We are testing centralized lease administration really with the goal of taking some of the transaction-related activities off of the properties to free them up really to focus on customer satisfaction and customer service. So we're working through some pilots in those areas at this point. So I think the centralization piece will be another area that will be an opportunity for us that we're really early in on at the moment.

And I guess, have you guys quantified like the potential total margin expansion that these initiatives could add to them?

I think the number that we have said previously is somewhere in the 200 to 300 basis points margin expansion opportunity with all of these combined. Obviously, some of those are already implemented at this point. Some of them are fully in the run rate. Some are not at this point. So we'll continue to incrementally improve that over the next few years.

Okay. Any questions from the field? Maybe just -- you didn't mention, I think you're leaning into development today. Why do you think that's like the right external growth avenue in this environment?

Yes. Well, in this environment, it's where we're finding more opportunities at the moment. So we have grown our development pipeline, as I mentioned, to $1 billion. We've been focusing on that growth for some period of time, recognizing that given our scale, external growth needs to be a significant portion of our growth story going forward. And it's really hard to move the needle without some broad initiative like that to do it just through acquisitions. Acquisitions for us is a bit spottier. It's lumpy. You can't plan it quite as well from a capital allocation perspective and it's really more dependent on market dynamics. Certainly, the development is also dependent on market dynamics, but to some degree, we can control our own destiny with that a bit. Acquisitions, we would love to do more in that market. We've had some success in the acquisition market. But our strategy really is to find acquisitions that where we're able to use some type of strength that we have to generate excess value. So for us, we're able to go out and execute on these acquisitions, call it, $400 million this year. We're executing those in a high 5%, 6% NOI yield range. Today, if we were to go out and issue unsecured bond financing, we'd be, call it, 4.7%, 4.8%. That's a pretty good value proposition for us to be able to do. Problem is we can't do $1 billion, $2 billion of that, but we also don't need to. That's a good incremental earnings opportunity for us. We're not reallocating capital from specific markets to other markets. We like where we're located. We like our portfolio breakdown between our markets. So we just feel right now, development from a risk-adjusted perspective at 6.5%, delivering into a market in '26, '27 where the supply environment is going to be significantly less than it is today, feels really good use of capital at this point.

Brad how would you think about the [indiscernible] IRR [Technical Difficulty] IRR [indiscernible]

Yes. It depends on the project, but we're generally somewhere on a levered IRR basis, generally how we look at it, we're in the 9% to 10% range on our developments.

[Technical Difficulty] Unlevered [indiscernible]

It's only about 100 basis points less than that.

How are you underwriting the risk around -- like if these projects are delivering '26, '27, how are you underwriting like the risk that like the current supply could like impact market rents?

Yes. I mean we're -- well, one, we very conservatively underwrite any development deal. If you look at our current pipeline that is delivering today in this environment where there is excess supply, we're significantly outperforming our original expectations. The projects that are delivering today, they're outperforming on rents by 15 to 20 basis points. So our yields that we underwrote were around a 5.7%. We're delivering 6.5% even today. So from a conservative standpoint, we underwrite everything very conservatively. So I think that helps protect us a little bit in terms of if the market supply in '26, '27 were to surprise to the upside a bit. I think the other part of that is we're betting on demand. If you look at our region of the country, the demand dynamics continue to be very positive. And as you look out into '25, '26, '27, we think the demand dynamics in our region of the country, if you look at the pro-business environment, you look at the corporate relocations, you look at the manufacturing jobs, which a lot of those facilities are just under construction now, so the real job growth hasn't started yet. We think the long-term demand aspects in our region of the country are likely to be higher going forward than they were historically, which I think also supports the notion of delivering more product into that environment.

[indiscernible]puts a strike through in terms of regulation?

Yes. I don't know if it puts a strike through, but it definitely puts a lower probability of regulation. 90% of our NOI comes out of states that has a state prohibition against local rent control. So it makes it a lot less likely.

Any other questions from the field? Maybe turning to Clay.

[indiscernible]90% of [ universe ] is in states that have[Technical Difficulty] against direct control.

It is in the state constitutions. Correct.

[Technical Difficulty]

No, I would say Austin takes the cake in terms of the supply pressure and being more impacted there. The other markets that are high supply that are being more impacted are Jacksonville, Florida. That one sets apart. Generally, our mid-tier markets are performing better because they don't have quite the supply pressure. Jacksonville, obviously, is an exception to that. Phoenix is seeing higher supply pressure as well. I would say the positive with both Phoenix and Austin is that the job machines there are pretty robust. So I think once the supply spicket kind of cuts off in those markets, which it has. It's come down, but it did it later than other markets. So we're going to have higher supply for a little bit longer in those markets. I think the job market there will overtake the supply. Again, we're not building a hole in occupancy. Even in those markets, we continue to hold up pretty well from an occupancy standpoint. So I think the recovery could be pretty significant and rapid if the job market continues to hold up in those markets.

Maybe turning to Clay. Brad, you just said you have to fund $1 billion of development. I guess, how are you thinking about it from your seat? And I think you have one of the lowest levered balance sheets out there, just like when do you start to lean into that?

Yes. So today, we're sitting at a 3.7x leverage. We've stated that we would like to go up to 4.5 to 5x. So the math on that turns out to be about $1.5 billion. So that's probably where the first amount of that capital is coming from is from the debt markets. We probably want to maintain somewhere right around there. We could go up higher a bit, but the main focus there is we want to maintain our A- credit rating. And so we're very focused on protecting that and making sure we don't do anything that we would upset that rating.

Okay. You just have a couple of small refinancings. Yes.

So we've got -- we had 2 this year, earlier this year, and we've got another refinancing in November of next year. It will be at about a 4.2% effective rate that we'll be refinancing. But between now and then, I'd expect us to be back in the market again and looking to issue some debt to fund some of this growth opportunity that Brad has been talking about and that we'll look to continue to do from both an acquisition and development standpoint.

Any other questions in the field?

[indiscernible]interest rates fall. Is there -- have you ask the tenants and use their ways to the visibility on their retentions.[indiscernible]

Yes. I think that would be tough. Generally, what we found is the decision to move out to buy a home is driven by a change in some event in your life, either you get married, you have kids or something of that nature. So normally, it's a life decision that drives that, not necessarily just that homes are more affordable. The other thing I'd mention is in our demographics, 80% of our profile -- of our resident profile are single. And that generally doesn't lend itself to singles just going out and buying a home because they become a little bit more affordable. Again, generally, it's correlated more toward getting married or some type of life event like that, which would be pretty hard to forecast and ask our residents. So it's not really something that we've done.

Other questions? Maybe we didn't touch on just the redevelopment strategy and some of the value-add work you're doing. Like is that something you can accelerate into 2025? Or how are you thinking about kind of the pace of that program?

Yes. As we -- that's a program that we've been focused on intently over the years, and it's one of our most value-add uses of capital is going in there and redeveloping that unit, putting in new countertops, new appliances, faucets and those sorts of things. It's been very beneficial for us because we can go in and raise the rent on that unit. We've -- given the supply pressure that we've seen this year, we've slowed that program down a bit, not a whole lot, but a bit -- but as we look forward into 2025 and beyond, we think that we can continue to lean into that particular program, especially as all this new supply is delivered, begins to be absorbed, that will allow us to be able to go in and better compete with some of that supply, that kind of shorten that gap between our unit price versus this new supply price that would be coming into our markets.

And really, we have 2 programs that we're focused on there. That's our redevelopment program that Clay just talked about. We go in and renovate a kitchen and bath. We'll increase that a little bit next year. And that's one of the benefits of the supply coming into our market. Generally, the new competitive supply is $300-plus more per unit per month on average than what our existing rents are. So that provides us a little bit of that opportunity to be able to go in and renovate our units and compete, really change our comp set and really drive additional growth there. The other piece to -- other than our redevelopment is our repositioning. That's where we go in and we completely renovate the amenity area, renovate the clubhouse and we're able to again increase our rents associated with that component too and really drive toward a higher comp set again related to that. We'll have 6 or 8 properties that we do every year under that program as well. So both of those together will be an ongoing focus of ours to continue to grow those earnings associated with our existing portfolio.

Awesome. So we're basically at time, but we have 3 rapid fire questions, we've been asking every company the multiple choice. So not too hard. The first one is, do you expect real estate transactions to increase once the Fed starts to cut? Yes or no?

Yes.

If yes, when do you expect them to pick up? A, 4Q '24; B, first half '25; or C, second half '25?

First half '25.

How would you characterize demand for space today? A, improving; B, steady; C, weakening?

Steady.

Last year, the majority of companies at our conference stated they expected to ramp up spending on AI initiatives in 2024. How would you characterize your plans over the next year? A, higher; b, flat; c, lower?

Higher.

Awesome. Thank you guys.