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

All right. Good afternoon, everyone. Welcome to Citi's 2025 Global Property CEO Conference. I'm Eric Wolfe with Citi Research, and we are pleased to have with us MAA and CEO, Eric Bolton. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. [Operator Instructions] Eric, we'll turn it over to you to introduce your company, your team, give some opening remarks, tell us the top reasons to buy your stock, and then we'll go into Q&A.

Okay. Well, thank you, Eric. My name is Eric Bolton, and I'm Chairman and CEO of MAA for another 3 weeks, and then I'm stepping down as CEO at the end of this month. And Brad Hill to my immediate right, will be -- who's our President, Chief Investment Officer; will be stepping into my role as CEO. I will remain Executive Chairman going forward. But by way of introduction, as I mentioned, Brad Hill is to my immediate right here. To his right is Clay Holder, our Chief Financial Officer. To my left is Tim Argo, who runs all of our strategy and heads up our asset management operations and a host of other activities. And then Andrew Schaeffer to his left, heads up our Capital Markets and Investor Relations group. Just by way of introduction, I think many -- I see a lot of familiar faces in the room. But just by way of introduction, MAA has been a publicly traded apartment-only REIT for the last 31 years, focused on high-growth markets, mostly throughout the Sunbelt region of the country. We've long believed that these markets offer demand dynamics that will support the ability to drive returns to capital that will be superior over a long period of time and outperform over a long period of time. We do battle supply pressures from time to time, and there are things we do to try to mitigate that pressure. But I -- as I talk about sort of what excites me about the future and why now is the time to jump into MAA, I'm going to let Brad mostly handle that. But I touched on this a bit in our earnings call we had a few weeks ago. But it really -- to me, it starts with, obviously, the supply pressure that we've had for some time that I think everyone knows, is clearly showing signs of beginning to really dissipate. And I think the outlook going forward is pretty strong, and we're pretty optimistic about that. But my confidence in moving forward beyond that really rest with this leadership team. As I mentioned, MAA has been publicly traded for 31 years. I've been there for 31 years. And we have a very experienced and long-tenured leadership team with our company. Brad has been with our company for 15 years, Clay for 8, Tim is the old guy at 23 years. And Andrew, it's 17 years. If you take the executive leadership team we have in our company, the average tenure is 17 years. So very stable, very experienced team. And I'm super excited to -- I have a ton of confidence in this group, and I'm very excited about the opportunities moving forward and what this team is going to be able to deliver. And with that, I'll turn it over to Brad to talk through some of the more specifics.

Well, thank you, Eric. And I think in addition to what Eric just mentioned in the leadership team, certainly, we've had a history of outperformance within our region of the country at lower volatility than what others have been able to do. But I think there are additional opportunities ahead for us that certainly excite us, and I think it should certainly excite shareholders as well. And I think that's really the opportunity to take advantage of the upcoming multiyear growth cycle that we see coming. There's really a few reasons why or that we would point to for that. As Eric just mentioned, certainly, the favorable demand/supply dynamics that we see playing out, certainly over the back half of this year as we continue to see supply ramp down. And then certainly, as we get into '26 and '27, which should continue to benefit our existing portfolio. And as Eric mentioned, we are predominantly focused on the Sunbelt region of the country. We are in high-growth markets, which encompasses that Sunbelt. So we have the highest exposure to the highest growth region of the country than anyone in our space. So -- and we've been exclusively focused on that area for the last 30 years. So we see a tremendous growth cycle coming as a result of those demand and supply dynamics that are improving. We also see growing earnings contribution coming from our external growth. We are at a record level in terms of external growth for us as a company. Last year, we invested close to $800 million on external growth. And if you look at our external growth pipeline, development pipeline that's under construction as well as our lease-up properties, we're at $1.6 billion, all of those, which should stabilize over the coming growth cycle that I just talked about, specifically as we see that new supply pipeline continue to come down, the earnings contribution from that should be pretty good. And then the third point would be growing earnings contribution from continued investment in our existing portfolio. We'll continue to invest in our interior unit renovation program, we'll continue to ramp that up, as well as our property repositioning/those are two areas of the business that continue to benefit from the new supply -- higher-priced supply that comes into the market and really supports our ability to do that. And then we'll also continue to invest in the portfolio through various technologies, AI, things of that nature that really help us give our services and provide our services to our residents and to do it in a very efficient way across our portfolio, which will continue to drive incremental NOI over the future. And then, of course, all of that is supported by one of the sector-leading balance sheets and the strength that we have there. So those are the reasons that we're excited, and we think that our investors should be excited for the stock as well.

Great. So maybe, Eric, we'll start with you. I guess, any sort of parting words of wisdom as you've been talking to people over the last couple of days, anything you'd tell Brad about things that you would wish you had done over time, I don't know, go activist on Camden or buy certain portfolios or buy back more stock? Anything that for the next kind of 10 years, you tell them, "You should be more aggressive doing this or do this," things that you wish you had done over the last 10 years?

Well, that's an interesting question. No, I think that we just have long believed that our ability to drive total shareholder return was really oriented and anchored in a belief that you want to invest your capital where you think the demand for your product and your service is likely to be the best and the strongest and growing. And I get it that the Sunbelt markets have low barriers to entry and that supply concerns can pop up from time to time. And certainly, in my experience over the last 30 years, I've always felt that the capital markets had a tendency to become overconcerned about supply worries whenever talk of that began to pop up. And what I would suggest to you is that supply can certainly cause things to moderate for 6 or 8 quarters or so. But we've never seen supply really cause the train to get off the track and for us to get into any kind of trouble. We just came out of 2024 where there was a 50-year record high level of new supply that came into our markets. And if you would have told me 2 years ago, 3 years ago that we were going to be facing a 50-year high record level of new supply and that our performance would only feel pressured to the extent it did and what we reported on results, I would have never believed it. And what I think it shows is that there are things that we actively do and have done and will continue to do to help mitigate the pressures of supply. We can't eliminate the pressures of supply, but we can mitigate those pressures. But if nobody is there on the demand side, that's a problem. And so I would just tell you that I feel that the trends that started 20 years ago with the fixation and the migration towards the coastal markets, in my opinion, was really based on a belief that those low-cap rate markets really drove the capacity to drive value. And I've long believed that what really drives value is earnings. And you just need to keep growing earnings. And you just -- as a REIT, you just need to keep growing the dividend. And you want to be positioned to where demand is going to support that agenda. And that's the way we've always done it. Probably the only thing I would tell you going back and regretting, I mean, there have been some transactions that we walked away from, bigger and smaller transactions that looking back now, probably we could have executed on and would have been just fine. But I think that the things that we didn't do never really hurt us. And I think the discipline is what's really important. And so nothing I would change radically, but we like what we're doing.

Got it. And I guess out of curiosity, we don't have to spend a ton of time on it, but why did you walk away from some of those? So just leverage increase was too high or just something about...

Usually, it was an asset quality issue or pricing. Any time we've ever looked at doing anything strategically, it always just starts with an idea that, okay, does this strategic investment opportunity, does it somehow make us better? Does it make us stronger? Does it create diversification? Does it create market exposure? Does it create capabilities and advantages that we otherwise would have a hard time achieving on our own or that it would take a really long time to achieve? And if there is some strategic rationale for it that it can really be defended beyond just getting bigger, getting bigger is not a reason to do something. You do something because it makes you better. And so if there is an opportunity to get better, we would take a look at it. And then you got to overcome the second big hurdle, which is price. And you're not going to destroy a lot of value to do that. But I mean, in both the case of the 2 big mergers that we did with both Colonial and Post, they were dilutive for a year or 2. And so we were willing to bite the bullet, so to speak, because we believe so much in the value proposition longer term. But those two hurdles, does it make you better? And can you execute at a price that makes sense? And if you can't clear those two hurdles, then you don't do it.

Got it. And we're getting sort of near the end -- not the end of the conference we have tomorrow, but sort of the end of the discussion with the apartment REITs. And I think a lot of them, including at EQR's Investor Day last week, have been talking about how this environment reminds them a little bit of the great financial crisis in the sense that you look at the amount of supply being produced, it's come down meaningfully. Do you think that's an appropriate comparison? And when we -- if we look out over the next couple of years, do you think we could see that type of recovery in rent growth? Or is it just really just too early to be saying something like that?

Well, I definitely think, as I mentioned in my comments, we are entering into a multiyear growth period that I think corresponds with the reduction of supply that we continue to see throughout our region of the country. Having said that, we certainly see that demand continues to be really strong. Demand in 2024, I think, surprised most folks to the upside. We have always seen strong demand within the Sunbelt region of the country. And I think what has happened over the last 5 years is that demand outlook is even stronger than it was even 5 years ago. The amount of job relocations that we've seen coming into our region of the country, the amount of onshoring some of the manufacturing jobs that generally relocate in some of these Sunbelt regions of the country, the regulatory environment in some of our markets continues to be very, very positive and very supportive of job growth, migration trends, all of those demand factors. So going forward, we definitely think that the demand component of our business in our region of the country should be pretty robust. I think the GFC was more of a supply issue, where supply really shut down. That is definitely a component of what we see going forward. But I think overlaying with that is a very strong demand dynamic that we think should produce very robust earnings growth opportunity for us in our region going forward.

And you mentioned that in your markets, they've generally been lower volatility over time. I remember thinking about the perception of MAA 10 years ago, maybe pre-COVID before you saw some extraordinary rent growth, was that through the cycles, you wouldn't be as big on the ups and you wouldn't be as big on the downs, you'd be more consistent through it. I don't know if that's necessarily the case this time, but maybe that's the first question. But if I look at some of those sort of secondary markets that have reduced volatility to the downside, do you think that they're going to have that same upswing over the next couple of years? So markets like Charleston, Savannah, these secondary markets, are they going to see the same swings up as, say, like in Austin, Nashville, Dallas and Atlanta?

Well, I definitely think that they'll show tremendous strength. Now whether they show the same magnitude of improvement, it's hard to say because they haven't seen -- to your point, they're more stable. So when things get a little bit more challenging, those generally hang in there a little bit better. So for example, on Austin, there's a deeper hole in Austin that we're going to be digging out of for the next year or so, but the demand there is tremendously strong. So my sense is that these secondary markets will not see the same type of supply growth that we've seen in some of these larger markets, but they're still going to be pretty robust, I think, in terms of their performance because you take -- you mentioned the Charleston, the job growth that we've seen in Charleston has been pretty good. If you look at Savannah with the port, if you look at some of these smaller markets that we're in, they continue to put up tremendous job numbers. So I think the secondary component of our portfolio will continue to hang in there quite well. I do think we'll see higher growth coming out of some of our larger markets. But overall, to your point, with the purpose of our investing in large markets, in these mid-tier markets combined, lowering the earnings volatility of our overall portfolio long term, that will continue to be our focus going forward.

Usually in an up cycle, the early part of the up cycle, what we found is that the mid-tier markets are not quite as strong as the bigger markets, largely because they don't -- they have a tougher prior year comparison, the mid-tier markets. So for the first year or so, you may see the mid-tier markets not be quite as strong as our larger markets simply because the prior-year comparisons for the mid-tier markets is a little bit more challenging. But in terms of overall demand drivers, whether it be a function of housing affordability issues, job growth, migration trends, population growth; those secondary markets and mid-tier markets are -- will be as strong as we think as the large-tier markets.

And I have your update here, just looking through it. I think people look at it and they say, "Okay, yes, renewals are pretty much in line with what you expected. I think maybe a little bit better. Occupancy is exactly what you said." Maybe help us understand on the new lease side, whether that's moving in line with your expectations? It's always hard for us to judge because we just take the commentary on the call that I think says negative 1.5% through the full year and then try to estimate how far you have to go to get there. Just maybe some commentary on whether the new lease is sort of matching your expectations, how confident you are that you're going to continue to see that recover such that the average through the year is much better than where it is today?

Yes, I'll take that one. Yes, so far, in line with expectations, whether you're looking at new lease renewal occupancy kind of where we expected. Obviously, we've -- we're only about 3.5 weeks since we did earnings in January and February, are a small number of leases. We'll do more leases in July than we do in January and February combined. So it's a smaller sample size. But so far, doing exactly what we thought. What we have talked about on the new lease side is we would expect sort of a normal seasonal curve. And when I say normal seasonal curve, meaning if you go back to probably 2018 or before is the last time we've had sort of normal seasonality, but we typically see new lease rates kind of accelerate from January through about July, then start to moderate a little bit as you get into the fall and winter. So we would expect that this year, probably with a little bit steeper on the upside. So kind of from that April to July time frame, we're anticipating a little bit steeper acceleration on the new lease side, and it's for the reasons we've talked about. You have strong demand in place, but weakening supply or moderating supply. We think the impact from -- or the pressure from supply is going to continue to moderate as we get into the middle and the end of '25 and then certainly into 2026. And then we combine that with the fact where occupancy and exposure are right now, our occupancy is about 25 basis points or so better right now than it was this time last year. Our exposure is 60 basis points or so better. So that sets us up good from an occupancy standpoint to really push on that price. But normal seasonality with a little bit steeper curve is how I would summarize it.

Got it. I guess what are the leading indicators that you all look at for your business to sort of judge how things are going to trend, say, 1, 2 months out? What are the things you're looking at, foot traffic, conversion, maybe anecdotally conversations with tenants and feedback from property managers? What are those signals telling you about sort of the early part of the peak leasing season?

Yes. I mean it's a lot of all of those things. There's certainly some qualitative more anecdotal things that we look at. But from a forward-looking metrics, exposure is one that we certainly look at. That's our 60-day forward look at where occupancy is trending. And then also on the renewals and accept rates and negotiation and time to accept some of those things we look at, we've already sent out renewals through May. And we're at or above our renewal accept rates for last year, which were really high, and we're getting, as we've shown in the packet, still in that 4.5% range, and we're continuing to get that through about May. So if we start to see moderation in that or we start to see more negotiations, we track what we call lost opportunity, where is how much of our team needing to negotiate to get those leases signed, that stayed in line. And then from a more macro standpoint, we're looking at if we're seeing any early terms or skips or things like that would indicate any stress. And none of that's occurring. Turnover continues to be low. Exposure, as I mentioned, is really good and renewal accept rate is really good. So no, nothing trending -- shining any blinking red lights for us right now.

Got it. And so I guess you mentioned the exposure. I guess that's calculated based on, I guess, where your occupancy is today and sort of how many people have renewed, right, going in the future versus what would be expected. Is that generally how...

Yes. So we tend to -- we require a 60-day notice for people if they're going to renew. And so it's a 60-day forward look. It's all of our current vacant units plus ones we have received notice that they're going to vacate. So it's -- if we didn't do any more new leases, that's where our occupancy would be trending.

Right. Okay. And then if that exposure gets too high, then presumably new leases adjust downward a little bit to...

Right. But we're also willing to tolerate -- we'll tolerate lower exposure and push a little more on -- or lean a little more on occupancy in the winter time when there's less traffic. And then we're willing to let that exposure go up, frankly, as you get into the spring and summer because we know there's the higher traffic patterns, more people looking to move. So it's seasonal in terms of the rails. But yes, it's always a good sort of leading indicator for us.

Got you. And that exposure today would suggest that things are relatively healthy and trending as you'd [ expand ]?

Yes. I mean it's lower -- certainly lower than last year and lower than it's been this time of the year in the past several years.

I guess I heard from some peers that turnover is continuing to run low. Granted, it's early in the year, January and February, not the biggest turnover months, but still, nonetheless, encouraging. I guess what -- do you think this sort of lower turnover environment is here for a while? I mean, to some extent, obviously, it's just a product of the housing market. But is there anything that you could see changing that this year? And then as we go into next year, I mean, could we actually see turnover even get a little bit lower just because you're losing all those options on the supply side, that outlet of new supply that people can go to? Just trying to understand your expectations around turnover in the short and long term.

Yes. I mean our base case for this year is that turnover stays pretty consistent with where it was last year, which was, I think last year was record lows, so continuing those low levels. If we think about the, let's call it, the three highest reasons for people to move out, it's a job change, it's move out to buy a house and then at some parts of the cycle, move out, just I don't want to pay the rent increase. So we've seen that third one drop as rents have moderated, and we've certainly seen the buy houses drop with where mortgage rates are and home prices are. Don't expect that to change materially in the near term. And then the job transfer is the highest one, and that remains pretty consistent. And that will -- typically, if we're in a pretty healthy economy, that one will be -- will stay somewhat elevated. But I think the home buying could move up a little bit just if and when interest rates go down, but I don't think we'd get back to the levels that we were seeing, call it, 8 to 10 years ago, where I think there's been a shift certainly in our in the resident profile that we have. We're 80% single and a relatively affluent, where they could buy a house if they wanted to, but they like the flexibility, they like the maintenance, they like the amenities that we offer. So I think there's a paradigm shift in terms of the resident we have and how people think about homeownership that, that one doesn't get -- that was -- it's 12% of our move-outs right now. It was in the high teens previously. So a long way of saying, I think it can move up a couple of hundred basis points maybe over the next 2 or 3 years, but I don't think it goes back to the levels we were seeing before that.

Got it. And then there was a discussion, I think, last week with EQR. One thing that surprised me was that 42% of their tenants, I think, are sort of as they would qualify like middle-aged to seniors, I was surprised that they were sort of that old on average. I was just curious for your portfolio sort of how the demographics break out by however -- whatever age group you want to define them because obviously, that has sort of different implications in terms of the risk around homeownership. If people are -- so 42% of people are there and are already older, they've presumably chosen to be renters. It's a choice, not a force thing. So I was just curious, what your demographics look like? And any implications we can take from that?

I mean I think our median age, I believe, is about 38 years old right now. It's trended a little bit older over the last couple of years, but we're still heavily -- what would be, I guess, Gen Z and millennial would make up the biggest bulk of our residents. And we haven't seen that shift a lot. I mean our Florida market is a little bit higher, average age as would be expected. But our -- to the point earlier, when you think about 80% single, we're a little bit -- shade a little more towards female. So I think overall, just the demographic we serve that has been pretty consistent now, unlikely to want to move into a single-family home.

Got it. And I think in my conversations with investors, the biggest pushback I always get if I ever say that I'm positive on apartments and specifically Sunbelt, they might -- they would say, "Well, like supply is going to come ruin the party at some point. And if you look at it, it's going to be like 2026 is going to be good, 2027 is going to be good, but then supply is just going to come back and kind of equalize things." I guess, what do you say to that? Why won't the sort of same thing happen this time or maybe the growth rate over the next couple of years is so good that it kind of drives you above trend? But why won't supply ruin the party this time?

Well, what I would say to that is we've never worried about supply. I mean, as Eric said in his opening comments, supply can come in and can cause performance to moderate a bit for a few quarters. But generally, we're not overly worried about the impact of supply. And in fact, if you look at the chart on Slide 5 that we have and if you look at our overall performance versus the REIT sector, we've outperformed over a long period of time in terms of NOI performance at lower volatility. So to Eric's original point, demand has the bigger impact on performance long term. And so if you go back and look at the impact of the demand shocks on the system have in terms of performance, if you look at 2000, the GFC or COVID, what you'll see is a demand shock in the system has a much bigger impact on NOI performance than a supply shock. To Eric's point earlier, we're at 50-year level high of supply and our revenue increased 50 basis points last year. So you compare that with performance in those periods of time that I talked about with supply shocks, what you'll see is NOI performance for the sector and for our peers was over 5%; it decreased -- NOI decreased by over 5%. So I think what we are focused on is the demand side of the equation because long term, that's what's going to generate that compounded earnings growth that we talked about that will support the dividend performance that we've talked about. And I think our performance over time shows that.

MAA is probably one of the most supply-exposed Strategies in the sector. Arguably, it probably is one of the more supply exposed strategies in the sector. And it's also generated the highest TSR, total share return, over a long period of time in the sector. So supply is not a problem. You just got to manage through it. You got -- there are things you can do to help mitigate it. You can't eliminate it, but you can mitigate it. And you can outperform over a longer period of time as long as you get -- as long as you actively work to mitigate it.

And we had an investor question. As many private real estate funds are moving towards build-for-rent, and we have heard from some impact to the public SFRs, I guess what percentage of deliveries in your market are sort of BTR? Is this having any impact on you? And then I guess maybe to add on to that is that, is this a product type that you're looking increasingly more at to invest in?

I don't know the percent of supply in our markets that is the BTR product versus multifamily, but we're not seeing a big shift. Today, I think maybe 3% of our residents, our move-outs are because they go to rent a single-family home of some sort, and that's been pretty consistent. So we're not seeing any type of trend shift, whether we look at our demographic numbers or whether we look at the reasons folks are moving out, we're not really seeing that. That's certainly something that we'll keep an eye on if we continue to see that kind of stay constant. We think that the opportunity for us right now is focusing on what we do best, which is the multifamily product. And certainly, we have a lot of opportunities ahead of us to continue to grow in that sector, as we talked about earlier, with our investments today at $1.6 billion in that space of new growth. And if we see some type of trend that's changing in that way, we would look at that. We have 30-plus properties today that have a townhome component to it. If we found a situation where we had an apartment community with a significant townhome or for-rent component that was part of the multifamily, it's something that we would take a look at and consider. But at this point, we're not seeing anything from a demand or demographic perspective that's pushing us into that space right now.

Got it. Can you just talk about the sort of the sizing of the development pipeline around $1 billion? I can't remember exactly, but I feel like it's actually pretty close to what Post was doing with a much smaller asset base. So just curious, that lower amount as a percentage of the enterprise is driven by like sort of not wanting to scale it, you're not wanting to get too far on the risk curve or is there an opportunity to scale it in the years ahead as the economics of development get a little bit better?

Well, I think what we have said and tried to do is really limit our exposure in that area to 4% to 5% of enterprise value. And so that's really what we're -- based on the strength of our balance sheet, the size of our balance sheet, we feel really good about that level. And in terms of scaling, 2 years ago, we were at, call it, $400 million. And today, we're -- it ebbs and flows a bit, and we're at $850 million in terms of the active pipeline right now. So we'll continue to try to keep that around that 4% to 5% of enterprise value. It could be a bit lumpy. If we find opportunities come in and we do have a group of opportunities come in at one point in time, we'll certainly execute on those. If we had to scale that up a bit -- the 4% to 5% is $1 billion, $1.2 billion on our size. If we had to scale that up a bit because the opportunities are there from, call it, $1.2 billion to $1.3 billion or $4 billion, we could certainly do that. Based on our balance sheet strength right now, there's nothing prohibiting us from doing that. But we're going to really lean into the opportunities that the market is giving us. Last year, we started 5 projects because that's what the market gave us. It didn't give us acquisitions at pricing that made sense, but it did give us developments at returns and yields and basis that made sense for us. So we'll continue to be disciplined in how we deploy capital in that area.

And -- sorry, go ahead.

[indiscernible].

I mean there's -- I think on the margins, there's opportunity there. I mean we're -- 12% or 13%, as I said, of our move-outs are single-family homes. But the gap -- I mean, the gap between renting an apartment from us and buying a home is the widest probably it's ever. I mean it's 50% or more when you think about a mortgage payment because single-family homes have stayed steady, if not grown, while rents have moderated. So I think on the margin, there's something there where there's going to be some pricing power with -- and then the other point you think about is our rent income is only 21%, and that's pretty consistent across all of our markets. I think our low is 19%, our high is 24%. So that would suggest some room to run as well. So yes, I do think, particularly late '25, '26, '27, there's some -- whether you want to attribute it to affordability or just weakening supply, but there's an opportunity for some outsized rent growth.

[indiscernible]

Yes. I mean I wouldn't put it that just because I don't think -- for all the reasons we are saying, I don't think it's that directly related where it's just a binary, either going to buy a house or rent an apartment. I mean there's a segment of that, that is. But as we said, it's more of renters by choice, and that's the lifestyle they want.

All right. Rapid-fire questions. I think Eric or Brad -- Eric, I think you've been the most accurate over time, based on what I've looked at. So no pressure here. What will same-store NOI growth be for the apartment sector in 2026?

I'm going to turn it over to him.

Say that one more time.

What will same-store NOI growth be for the apartment sector in 2026?

4%.

Great. Will there be the same more or less apartment REITs at this time next year?

Less.

Great. Thank you.