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

Welcome to Citi's 2026 Global Property CEO Conference. I'm Nick Joseph here with Eric Wolfe with Citi Research. We're pleased to have with us MAA and CEO, Brad Hill. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit any questions. Brad, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reason investors should buy your stock today, and then we'll get into Q&A. Just hit the red button there.

Are we live now? Okay. Good. Thank you. So I'm Brad Hill, President and Chief Executive Officer. To my left, I have Clay Holder, our CFO. And to my right, I have Tim Argo, who's our Chief Strategy Officer. And to his right, we have Andrew Schaffer, who's our Head of IR and Investor Relations. So I appreciate the opportunity to be here today. Just a quick intro on MAA, and then I'll get into some specifics about why I think now is a good time to be investing in MAA stock. So MAA is a multifamily exclusive multifamily REIT, where we focus in the Sunbelt predominant region of the U.S. We're in other high-growth markets as well outside of the Sunbelt, but predominantly, we are in the Sunbelt of the U.S. We have an over 30-year history of investing and carrying on activities in that region of the country specifically. We are a well-diversified multifamily REIT. We focus in both large and mid-tier markets and diversification is a key component of our operating strategy and our investment strategy. So key reasons why I think now is a good time for investors to be investing in MAA. Number one is it's a great value. Certainly, if you have access to the package that's in front of you, I'd call your attention to Slide 6 and 7 of that deck. By investing in our stock today, investors get access to a portfolio that has consistently delivered strong core FFO and TSR performance as indicated there on that slide at lower volatility than what we've seen by others in the space. You get a portfolio with the largest exposure to the high-demand, high-growth region of the country, as I mentioned a moment ago, and one of the best operating platforms that we continue to invest in to continue to strengthen and to improve margins in terms of our performance. And all of that today at one of the lowest multiples, higher -- highest cap rates that we've seen in quite a long time. And then with that, we're also delivering a strong current income for investors through a very strong dividend yield that's well supported by an A- rated balance sheet. But not only are you getting great value, you're also getting growth prospects. If you look at Slides 9 and 12, we lay that out a little bit where if you look at our region of the country, we're seeing the largest reduction in new supply across the country. And if you look at the demand dynamics, whether it's job growth, population growth, household formation, wage growth, all of those demand fundamentals continue to be significantly stronger than what we're seeing in other regions of the country. And so those 2 dynamics really come together to support what we believe will be strong growth prospects for our existing portfolio. And then the final point is the other investments that we're making to not only drive growth out of our existing platform, but to make accretive investments. You look at our redevelopment, our repositioning, where we continue to invest in our existing assets to help them compete better with the new supply that's coming into the market where we're able to get close to 20% cash-on-cash returns, new development that we continue to invest in as well through driving accretive returns and then tech investments, as I was mentioned a moment ago, to drive margin expansion opportunities. So those are the reasons that we think investing in MAA now is a good path for investors.

Great. On the call, you mentioned that you expect to see a pretty significant year-over-year change in your rental rate growth this year. So I think it's -- if you look at sort of 2025 versus 2026, you're expecting that to go up, call it, 130 basis points or so. I guess maybe can you just talk about sort of what you've seen thus far? I know it's early, but just sort of what you've seen thus far through January and February, what the sort of forward indicators are telling you about the early strength of the peak leasing season and why you have confidence that you're going to be able to achieve that target?

Yes, I'll touch on that. And I would say, so far, pretty much in line with expectations as we sit here in early March with January and February results. I mean the way we think about it, as you said, kind of 1% to 1.5% is the expectation for blended pricing for 2026. And our expectation would be relatively normal seasonality on the new lease side, where we start to see some momentum from now into late July or so and then start to see it trend down a little bit with normal seasonality. But I would expect the latter part of the year for that moderation to be a little bit less than what we typically see as we continue to see supply -- the impact of supply continue to moderate, expect steady demand as well. And then on the renewal side, where we expect pretty consistent 5-plus type renewal lease-over-lease rates. We've now sent out through May, and we're seeing that hold up pretty well. So we feel good about what that means not only for the year, but what that means for demand expectations, what that means for new lease pricing. we're starting to see the momentum. We saw a little bit of a slowdown in late January with winter storm firm, particularly in our portfolio with a lot of our markets impacted at some level by that. But then we saw that demand kind of pick right back up 10 days or so after that. So kind of back to normal there. But when you think about the supply drops, 30% fewer deliveries in 2026 than last year, continuing to get further away from that peak of 2024 in terms of units in lease-up in our markets and then the expectation of some of the demand fundamentals Brad mentioned, that's what gives us confidence in kind of as we sit here today and where we see the rest of the year.

And you mentioned demand is steady thus far. I guess what do you mean by demand? I guess how are you defining demand internally? What do you guys talk about when you have your weekly or daily meetings about like how demand is trending? What are the indicators? And what are they doing on a year-over-year basis?

Yes. I mean, lead volume is what we look at a lot, and it's essentially traffic coming through the door, coming on our website, coming in through various marketing sources and then looking at that as a percentage or as a per exposed unit, if you will. So we look a lot at exposure, which is our current vacancy plus units that are on notice to move out over the next 60 days. So our leads for exposed or actual exposure are significantly better than they were this time last year. The closing ratio. So ultimately, we're looking to take a lead, turn that lead into a visit, turn that visit into an application and then ultimately into an approved lease. So that closing ratio of lead to gross lease, we've seen that pick up over the last few weeks. So that's more a near-term demand scenario than we look at renewals. As we said, we have that information starting to get into May as well. So exposure, lead volume, those are more of the near-term things that we're looking at that look pretty positive right now.

And can you maybe just talk about that specifically the lease exposure and tell people exactly sort of what that means? And I guess, what is the implication of the fact? I think you said it was significantly better than at this time last year. So when you see your lease exposure come down to a certain level, is that when you get a bit more aggressive on new lease rates? Like what is the sort of implication of seeing your lease exposure getting better?

Yes. So if you think about exposure, and we have tolerances throughout the year, we would tolerate, if you will, a little more exposure in the summer because you have more people coming in the front door. So it ranges anywhere, I'd say, from 6% to 8% throughout the year. And that's -- like I said, that's your current vacancy and then that's notices that people that have let us know that they plan to move out. Right now, we're somewhere in around a 7% range, which is 30, 40 basis points better than where we were this time last year. And so it does play into our pricing occupancy mix, but it's still target. It's going to be a submarket. It's going to be a property even to a unit type level. We look at those exposure metrics all the way down to a unit type level. So there could be certain unit types. We're pushing pricing a little more even on the same property. So it's going to be macro factors certainly play into it, but a lot of these micro factors impact our decision-making as well.

And you talked about lease-ups earlier. I think if you look back at the last sort of 2 years, one of the things that's been the most difficult to judge is sort of this changing demand patterns that we've had and then how that impacts the lease-up of supply that is already delivered. We have the statistics on sort of what's delivering this year. I think you've sort of framed what you expect this year and next year. But can you maybe just help us understand what's happening real time in your markets in terms of leasing up that sort of excess inventory that delivered, call it, over the last year or so, sort of where that is in the process and sort of what the likelihood it is that we're going to see some pricing power when we get into the peak leasing season.

Yes. I mean if we look at in our markets, this market level occupancy stabilized plus units in lease-up. The overall average occupancy is about 200 basis points higher than it was kind of at the trough, if you will. And then we look at the number of -- we take a look at number of units in lease-up. And so how we define that is just all of the units for being delivered in lease-up, but in our markets, it's down about 120,000 units today from what it was at the peak, and we've continued to see positive net absorption. There's still some concessions out in the market. I mean the average about month, a quarter or so is kind of what we're seeing broadly. Some of the lease-up submarkets are still in that 2, 2.5-month range in targeted areas. But that creates some of the opportunity as well. When those concessions burn off creates significant opportunity to grow leases. 1 month represents 8% rent growth right there. So when we look at just market level occupancies, absorption, where we were relative to the peak and combine that with the demand factors, that's kind of what drives our expectations.

And I guess, again, early in the year, but are you seeing any sort of markets sort of standing out? Anything can change sort of on a month-to-month basis? It seems like Atlanta maybe is finding its footing a little bit, maybe Dallas. Can you just talk about the markets where you think you might see that pricing power the earliest versus those that you expect might take some time?

Yes. I mean you called out 2 for sure, Dallas and Atlanta, and we have a slide in there that talks about some of our market expectations and ones that are trending up, and those are 2. And the way we've sort of looked at that is what has pricing power been in the last 5, 6 months in those markets relative to where it was a year ago. And Atlanta and Dallas are 2 that when you combine pricing and occupancy gains are significantly better than they were this time last year. Austin and Phoenix are ones that you asked about more laggard markets. Those would be ones that are probably later '26 into '27 recovery. Now they are doing better on a relative basis than they were this time last year, but that's coming off some pretty anemic numbers. So we're seeing a little bit of momentum, but don't expect those to outperform. I think some of our mid-tier markets we talked about are Richmond, Greenville, Charleston, we would to continue to have pretty good performance out of those. Houston is a larger market that's holding up well. We expect good things. And then on the flip side, probably Raleigh and Charlotte are 2 that we're keeping an eye on, on the trending down. They've gotten a lot of supply over the last 2 years have held up pretty well, but it's starting to impact there. Raleigh, I would almost put in a little bit of an Austin light where it's got some of the best demand fundamentals of any of our markets, but just gotten a ton of supply. And so those are a couple that probably fall on the longer end of recovery as well.

And when you see your renewals are going out at over 5%, I guess, can you tell us what the take rate has been on that? And then when we think about sort of the variability in that across markets, is that just very consistent like if you take a weaker market, is it also 5%? Or is it like you're getting 1% in a weaker market and 8% in some of the stronger ones that just averages 5%?

I mean it varies a bit. It's not quite as extreme as that. I mean a tougher market, we're probably in the 1% to 2% range and then the stronger markets more in the 6% to 7% range. But we're -- as far as retention, we're seeing pretty similar retention to what we had last year. Last year was a record low turnover close to 40%, 41%. We're seeing something similar so far. So not really -- certainly not seeing any degradation in the retention rates and the speed in which people are making decisions is pretty consistent. We're not really seeing that. get delayed. So all positive on that front.

And I guess one of the more common questions I get, I think you have people that are bullish on the stock, you have people that are bearish, always a healthy balance. But those that are bearish sometimes bring up this idea that you're renewing tenants at a rate that is higher than market. And I think there's this sort of fear that as you move forward that, that sort of premium, if you will, kind of just comes down to 0, comes down to market and it's an inhibitor even as market rent growth presumably grows. I mean, can you talk about -- I assume you don't agree with that, so just tell people why you don't agree with that, sort of why you think the sort of renewal premium, if you will, is sustainable?

Yes, I can start, and Tim can jump in. I mean I think it's obviously a question we get a lot. If you look back at our historical renewal performance, I mean, we've been in the 4% to 5% range for years. And normally, what you see is the renewal to new spread gaps out in the first quarter and the fourth quarter. So it's always a little bit wider in those quarters, and it narrows as we get into the summer. I think today, we're probably at the widest range that we've been in quite some time. But that spread today is only $180. So it's not like folks that are renewing are paying $200, $300, $400 more than what the new leases are paying. And then we continue to monitor the reason that folks are moving out. And the reason for moving out because they don't want to pay the rent increase continues to decline. It's down 10% in the fourth quarter year-over-year. So that continues to decline for us. And so what I think you would generally see for renewals to really pick up, the single-family home market has to get a little bit stronger than where it is today. And I think if you look back at the historical performance that we've had when the single-family market is doing well and folks are moving out to buy homes, the economy is doing well. And certainly, in that instance where we would expect that to occur, we would expect new lease rates to be -- and the gap certainly to be a lot smaller. So we certainly don't see a risk of the gain-to-lease scenario that folks keep talking about. I mean, in fact, we're seeing our retention continue to increase. We focus a lot on customer service. And the reason why folks are renting with us, the #1 reason is because they don't want to pay -- they don't want to maintenance requirements by living in a home. And so we focus a lot on the service side of things that we're doing. So we're not seeing anything to indicate to us that there's pushback on the renewal side. In fact, our renewals this year so far are 75 basis points or so better than they were last year, and the move-outs continue to decline. So... Anything you'd add to that, Tim?

No, I think that's right. I mean -- and the other point is we still are at 40%, 41% turnover. So we still have people turning and our average stay is about 22 months or so. So there's not a lot of scenarios where you keep stacking renewal on top of renewals where it continues to gap out significantly. So there's a little bit of a natural governor with that low turn rate, but still that turn rate is still there.

And I think the other fear, and you just talked about it a second ago, is that you've had this great retention, very low turnover. It seems like quite a bit of it is associated with affordability gap on the for-sale side, just the fact that it costs considerably more to purchase something today than to rent. I think the fear is that, that sort of retention goes down as President Trump and sort of housing policies get initiated. Is there anything that you can see based on what he's announced thus far or what's in the pipeline? I know you have -- keep on top of what's going on in the regulatory side. Like is there anything that you see that you think is going to change that dynamic? Is there any risk out there where you say, I really hope we don't see this legislation because that's really going to ignite housing demand.

Well, certainly, there's been a lot of proposals that have put out, and I think there is a lot of focus on affordability and single-family affordability is a big part of that. And I do think the thing that we have to strive to start is we've got to have more supply of single-family and multifamily. That's what's going to ultimately solve the issue that we have. And to date, there's been 3 or 4 proposals that have been kind of floated out there. I haven't seen anything in any of the proposals to date that really stimulate supply. And that's really what we need. To date, we've not seen anything that would indicate to us that there's going to be a material change in the turnover numbers associated with the single-family side. The drop in move-outs for single-family is something that has been going on for 10 years now. It started 10 years ago where our turnover was about 50% and a big portion of that at the time was moving out to buy a home, and that's down significantly. So that's a trend that started 10 years ago. It's not a COVID-related phenomenon. It's something that's been there. So I think it's a secular trend as well. We're seeing folks move out or pardon me, get married later, have kids later. And normally, the #1 driver of folks moving out is because of a change in their family dynamics. And so as we see those things occur later in life, then we would expect to see retention continue to hold in there. The other thing is if you look at some of the new supply on single-family that's come to the market, a lot of times, it's located further out than where we're located. And so we're just not seeing our renter dynamic looking to own a home. We lose just a few percentage of our residents every year to that, certainly only 3% to rent a home. So we're not seeing a big portion of our dynamic of our demographic looking to go out and to own or to rent a home. So the ideas that have been floated so far, we don't see those having a material impact in the near term.

And have your demographics changed? You mentioned this is something that's a process that started 10 years ago. I mean if you think about your average customer today versus what that customer was like 10 years ago, is that different? And then maybe also layer on top of that sort of how you think about affordability of your products or where rent to income is today versus history? And as the cycle hopefully turns, right, as supply comes down, demand stays steady, you get rent increases, the ability of that tenant to absorb further price increases, rent increases.

Yes. I mean the first one I'll hit there is your affordability piece. I mean if you look at the rent to income in our portfolio today is at 20% 2 or 3 years ago, it was up to 23%. So certainly, we have a highly affordable product. That's part of the reason why we focus on the region that we focus on and the product that we focus on is because of that affordability piece. In terms of the demographic shifts that we've seen, I mean, I think our residents have gotten maybe a year or 2 older. We're a little bit more female than what we have been historically. I think 80% of our residents today are single. So we've seen some demographic shifts associated with that. Certainly, a lot of dog owners in our communities today. But I think all of that has shifted to the renter for longer scenario that we're seeing. I think we've seen a slight uptick over the last couple of years in terms of the residents per unit has gone up just slightly, but no material shifts in that regard. But the demographics that we see are strong. They're certainly financially stable, able to afford the product that we've seen. And I think you got to keep in mind, too, in our region of the country over the last year, we've seen tremendous wage growth, over 5% wage growth, which is really helping support the affordability of our product.

You mentioned that supply is ultimately the solution on both sides, whether it's for sale or multifamily. I mean one thing that we've heard at least so far from certain people is that construction costs seem to be coming down. There seem to be some savings. Can you maybe talk about what kind of savings you're seeing on your side? How much construction costs are coming down? And if that ultimately is going to result in seeing more supply starts this year? I know rents probably need to rise a little bit more, but is the construction cost coming down enough to get more supply coming in like a year or 2?

Yes. I mean I think we -- as part of our development platform, we look at a lot of equity packages for new developments that are out in the market. We probably underwrite write 50 or so projects a year. And predominantly, all of the projects are still not financially feasible. They're generally showing yields in the mid-5% range. So we need to see a substantial improvement. And as you just mentioned, the rents as well as construction costs coming down, somewhere in the probably 12% to 15% range combined between those 2 before you really see most of these deals start making sense. What we're seeing today is probably a 5% reduction on the construction cost. We're generally seeing a couple of percent on the front end. And then where the other savings is materializing generally is in the buyout. So after you go under contract, the contractor goes out to buy out the contract from the subcontractor. So you're not generally seeing all of that on the front end. Some of that materializes during the project. But we need to see still a substantial combined reduction of either rent increases or construction costs coming down before we see a majority of the projects that are out there today begin to pencil. And I do think it's important to keep in mind, what we're seeing more of, though, is developers unable to find equity for projects. We're also seeing developers not willing to spend predevelopment dollars to get projects going at this point in the cycle. And it still takes 1 year to 1.5 years from when you start pursuing a project before you're able to get permits and ready to start construction in the Sunbelt. So I do continue to believe that there is going to be a material window of where the supply numbers are well below long-term averages before the pipeline again continues to pick up. And I think it's also important to remember that the peak supply that we saw delivering in 2023 and '24, that is directly correlated with the interest rates that we saw that were effectively 0 2 years before that. So I don't think we go back to a situation where we have the supply levels that were 6% of inventory in our markets. I mean if you look at long-term averages are around 3%. Today, the trailing 12-month starts are somewhere in the 1.8% to 1.9% range. So we're well below that and have been for the last 3 years. So I could see a situation where the supply over the next 1.5 years, 2 years starts to tick up a little bit or new starts start to tick up, but it takes time for that to start manifesting itself into deliveries.

And sorry, did you just say that starts as a percentage of inventory is kind of like around sub 2%, like 1.8%. Just trying to think through like 2 years from now, like what's the level of sort of inventory we'll be seeing?

Yes, it's the 1.8%. I think we have a slide in our deck that forecasts out for the next couple of years based on third-party data that we have in our region, again, the long-term averages are 3-ish, 3 to slightly above that. And the projections we have for the next couple of years are in the 1.8%, 1.9% range.

Any questions on sort of -- from the audience before I switch to capital allocation. just jump in. I guess keeping with development, you've had a growing but relatively consistent development pipeline. I think for the last 2 years, you sort of said the earnings contribution from the development pipeline is coming. I think you said on the call that you're going to see this contribution next year. Can you just talk about sort of what gives you confidence in that?

Yes. I mean I think number one is when we underwrite developments, we're pretty conservative in how we look at those developments. And if you look at what we've done historically -- well, let me back up. So today, what we're underwriting, yields are in the 6% to 6.5% range. So still very strong yield contributions from -- stabilized yield contributions from these developments. And if you go back and look at what we've developed over the last 5 or 10 years, on average, our developments have delivered stabilized NOI yields 90 basis points higher than what our expectations are. They've delivered costs that were 3% below and rents on average have been 8% above what our expectations are. So we are very conservative in how we underwrite projects. What we're seeing today, though, is the new deliveries that are delivering into the market right now are leasing up slower, just given all the supply that's in the market. And we've also seen increased concession usage. Most developments you underwrite a month free. We're seeing 2 months free or so on those developments. So the concession usage is taking longer to burn off. And so what we've said is the full earnings contribution from the developments that are delivering today is pushed off about a year. The good news is the recurring rents that we're seeing on those projects every month are still above pro forma. But again, concessions are higher, but we are burning those off. If you look at our renewals on lease-ups, we're getting low double-digit rent growth or lease-over-lease rent growth on renewals. So we're burning the concessions off. So again, we believe in the long-term earnings contribution from our development pipeline and from those deals. It's just taking a little bit longer to get there than what we originally anticipated.

And then on the buybacks, some of your peers have been quite a bit more aggressive in repurchasing stock. Can you just talk about why you haven't done the same? And obviously, we've seen one of your closer peers selling a large portfolio to potentially fund some buybacks. And maybe just talk about your strategy around buybacks versus dispositions and sort of why you haven't been quite as aggressive as some of your peers?

Yes. Well, I think as we look at really all of our capital allocation options in front of us, really, what we're trying to do is deliver long-term TSR performance that leads the space. And certainly, we believe that the best way to deliver long-term TSR performance is through development, where we're able to consistently deliver yields, again, aside from the supply environment that we're in right now, we're able to deliver yields and NOI and NOI growth that exceeds what our existing portfolio delivers. And particularly, if you look at that on an after-CapEx basis, the growth rate that we're getting from development delivering into our portfolio is a lot higher than what our existing portfolio is. So that's point number one. Number two is we do think that we need to have a balanced approach. We need to be able to take advantage of short-term opportunities, but we also don't want to do that to the extent that it restricts us from carrying on investments in a way that we think will deliver that long-term TSR performance. And so we are balanced. You saw in our package there that we have purchased about $61 million worth of shares to date, and we will continue to be opportunistic in that way. But again, we believe that development is the way for us to be able to deliver TSR performance going forward that is certainly stronger than what the sector average is able to do.

I guess kind of a random question, but like where do you think like the bottom end of your portfolio would trade today? Like if you were to sell your dogs, the worst stuff that you have, I don't know what percentage that is of what you own, but where do you think that would trade on a cap rate basis?

That's hard to say. We don't own any dogs. But some of our assets that are in smaller markets where we just have a couple of assets that are a little bit older, they're probably in the, call it, a 6 cap range.

I guess the question is, I understand what you're saying about development and why it's better over the long term, but it's not necessarily like an either/or type of analysis, right? If you're able to do that plus maybe sell some of your worst assets at an accretive spread to where your actual stock is trading, it seems like you're improving the growth profile. You're getting rid of some of your lower quality assets. Again, it doesn't have to be either/or. So I guess that's really my question is why not approach it that way?

Yes. Well, believe me, we've analyzed it every different way. I think for us, broadly speaking, we do not have a lot of assets that we need to cycle out of. We like the broad diversification of our portfolio. We like where we're generally located. So we don't have a large portfolio of properties that we could sell and reallocate that capital. But what I would say on some of the examples that you just gave, I mean, I think you have to keep in mind, there are tax implications associated with this as well. And our portfolio on average, what we've sold over the last 5 years, the depreciated basis, which is creating certainly a tax gain for us is somewhere in the 80% to 90% range. So when you take that into account, the best opportunity for shareholders through that is if we sell that is then to 1031 that into new properties. which we wouldn't have a lot at that point left to buy shares back. So that's not the strategy that number one, we don't need to sell a whole lot of properties and to reallocate capital from one area of the country to another. So we're not -- that's just not a situation that we're in.

Brad, one thing we're focusing on all these sessions is just efficiencies internally from AI deployment. How is MAA thinking about finding those efficiencies? How are you deploying AI? And what's the mix of build versus buy or partner?

Yes. Well, we've been using AI now for a few years. Certainly, in lead management, AI is a key component of what we're doing in that area. We've also used internally have built some AI capabilities to help us with things like bill reading, bill payment, things of that nature, where we've got some AI readers to help in that regard. So we've been active in that space for quite some time. I'd say where we are right now in terms of build, buy, partner, generally, it's mostly we're partnering with AI providers just generally because the AI is mostly siloed today in whatever third-party software that we're using in our tech stack. We are looking at building our own kind of AI capability that sits on top of our data warehouse, where we're able to mine our own data through AI capabilities. So we're certainly very active in that space.

Do you think it will drive meaningful efficiencies either on the G&A side or operating margin? Where do you see the opportunity?

Yes. No, absolutely. I think the industry is probably on the front end of that. And I do think that's probably the next probably 2 to 3 years as the industry continues to specialize and centralize, which is certainly an area of the business that we're focused on. I think what you'll see is some efficiencies and scalability in the operating side of the business, which will drive G&A expense and property expense reductions as well.

Now we have a few more seconds here. So just rapid fire. Same-store NOI growth for the apartment sector overall next year in 2027?

1%.

And then will the apartment sector have more, fewer or the same number of companies a year from now?

Fewer.

You said 4%, right?

Did you say '26 or '27.

'27.

'27. I thought you said '26. '26, 1%; '27, I'm going to say 3%.

I was about to get concerned.

That's funny. I think I was like I think you said '27.

Thank you.

Thank you.