Mid-America Apartment Communities, Inc. (NYSE:MAA) Q1 2024 Earnings Call Transcript

Mid-America Apartment Communities, Inc. (NYSE:MAA) Q1 2024 Earnings Call Transcript May 2, 2024

Mid-America Apartment Communities, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Mid-America Apartment Communities or MAA's First Quarter 2024 Earnings Conference Call. During management prepare comments all participants will be in a listen-only mode. Afterwards, the company will conduct a question-and-answer session. [Operator Instructions]. This conference call is being recorded today Thursday, May 2, 2024. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments.

Andrew Schaeffer : Thank you, Regina, and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team participating on the call this morning with prepared comments are Eric Bolton, Brad Hill, Tim Argo and Clay Holder. DelPriore and Joe Fracchia are also participating and available for questions as well. Before we begin with prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our 34 Act filings with the SEC, which describe risk factors that may impact future results.

During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial debt. Our earnings release and supplement are currently available on the for Investors page of our website at www.maac.com. A copy of our prepared comments and an audio recording of this call will also be available on our website later today. After some brief prepared comments, the management team will be available to answer questions. I will now turn the call over to Eric.

Eric Bolton: Thanks, Andrew, and performance trends in the first quarter were in line with our expectations, and we enter the summer leasing season well-positioned. Pricing trends for new resident move-ins continue to reflect the impact from new supply delivering in several of our markets. Our renewal pricing remained strong. Encouragingly, blended lease-over-lease pricing in the first quarter captured 100 basis points improvement as compared to the prior quarter, followed by April pricing that was ahead of the first quarter performance. While the bulk of the leasing year is still in front of us, we do like our early positioning as we head into the summer leasing season. We continue to believe that our high-growth markets are producing solid demand sufficient to absorb the new supply in a steady manner that will enable continued stable occupancy, strong renewal pricing, strong collections and overall revenue results that are aligned with the outlook that we provided in our prior guidance.

Our leasing traffic remains strong and record low resident turnover, favorable net migration trends and stable employment conditions across our diversified portfolio and markets continue to drive solid demand. While we expect leasing conditions will remain pressured by new supply deliveries through the year, our on-site teams actively supported by our asset management group are doing a terrific job. Superior Resident Services as reflected by our sector-leading Google ratings and record-high resident retention rates, along with several new technology capabilities introduced over the past couple of years are making a meaningful difference in this competitive environment. With new supply deliveries poised to begin tapering later this year, demand trends remaining stable and occupancy remaining strong, we remain optimistic that leasing conditions should recover quickly and begin improving in early 2025.

While the transaction market remains slow, we are seeing more acquisition opportunities for new lease-up projects, which Brad will touch on in his comments, and we remain comfortable with our transaction expectation for the year. I continue to be optimistic about our ability to work through the current supply cycle with in our high-growth markets ability to absorb new supply. With a 30-year performance record focused on these high-growth markets, we've operated through prior supply cycles. Today, we believe our diversified and higher-quality portfolio, our stronger operating platform our stronger balance sheet have us positioned to compete at an even higher level. We're excited about the outlook over the next few years. Our high-growth markets continue to offer attractive long-term appeal for employers, households and real estate investors.

We have a meaningful future growth on the horizon as new supply deliveries decline and leasing conditions strengthen. Several new technology initiatives will drive further efficiencies and higher operating margins from our existing portfolio and a pipeline of redevelopment opportunities will also drive higher rent growth from our existing properties. And finally, our external growth pipeline continues to expand, setting the stage for a meaningful additional NOI growth. I'd like to send my appreciation to our MAA team for a solid start to 2024. And with that, I'll turn the call over to Brad.

Brad Hill : Thank you, Eric, and good morning, everyone. In preparation for what we believe will be a stronger leasing environment in 2025 through at least 2028, we continue to make progress in putting our balance sheet capacity to work to deliver future earnings growth. Subsequent to quarter end, we started construction on a 302-unit prepurchase development in Charlotte, North Carolina, and we expect to start construction this quarter on a 345-unit project under our prepurchase development platform in the Phoenix, Arizona MSA. Both projects are expected to deliver first units by mid-2026, and deliver stabilized NOI yields in the mid-6% range. consistent with what we are achieving on our current developments that are leasing.

With the addition of these two projects, our active development pipeline represents 2,617 units at a total cost of approximately $866 million. With continued interest rate volatility and tight credit conditions, transaction volume remains low. But we have seen cap rates firm up a bit from fourth quarter with market cap rates on deals we track that closed in the first quarter, averaging approximately 5.1%, 30 basis points lower than the previous quarter. Despite the low transaction volume, our team continues to find compelling select acquisition opportunities. We currently have an off-market 306-unit suburban property in Raleigh [ph] under contract to acquire for approximately $81 million that we expect to close this month. This newly constructed property is currently in its initial lease-up at 49% occupancy and is expected to stabilize in mid- to late 2025.

At this point, we believe our forecasted acquisition volume of $400 million is achievable. Despite the increased pressure from new supply, our four developments that are actively leasing three of which are under construction and one that has completed and is in lease-up continue to deliver good performance. While new lease rates are facing slightly more pressure at the moment with concessions on select units, up from four weeks to six weeks, we continue to achieve rents on average approximately 18% above our original expectations, driving higher than originally projected NOI and earnings and creating additional long-term shareholder value. For these four projects, we expect to achieve an average stabilized NOI yield of 6.5%, exceeding our original expectations by 70 basis points.

We continue to make progress on the predevelopment work for a number of projects. In addition to the two 2nd quarter development starts I mentioned a moment ago, we expect to start construction on one to two more projects later this year. While we have not seen a broad reduction in construction costs, encouragingly, we have achieved some level of reduction on our recent pricing supporting our ability to start construction on these projects. We have seen better subcontractor bid participation, which we expect to lead to better execution with stronger subs throughout the construction process for our new starts. We are hopeful that the significant drop in construction starts that we've seen in our region will lead to more substantial construction cost declines.

As we progress through the year, allowing us to start construction on additional opportunities in our development pipeline, which today consists of 10 well-located sites that we either own or control, representing additional growth of nearly 2,800 units. We maintain optionality on when we start these projects, allowing us to remain patient and disciplined in our execution timing. Any project we start this year will deliver first units in 2026 and 2027 and aligning with what is likely to be a strong leasing environment, supported by significantly lower supply. Our development team continues to evaluate land sites as well as additional prepurchase development opportunities. In this liquidity-constrained environment, it's possible we could add additional in-house and prepurchase development opportunities to our current and future pipeline.

While we continue to pursue numerous external growth opportunities, our existing portfolio remains in a good position heading into the busier leasing season. Our broad diversification provides support during times of higher supply with a number of our mid-tier markets currently outperforming. As Tim will outline further, despite the high level of new supply, we continue to see solid demand and absorption, leading to improved current occupancy with future exposure better than this time last year. Our collections are strong and near pre-covid levels at 99.6% of billed rents. Our resident base is stable with more residents choosing to live with us longer, supported by our focus on customer service, coupled with high single-family housing costs.

Before I turn the call over to Tim to all of our associates at the properties in our corporate and regional offices. I want to say thank you for all you do to improve our business and serve our residents and those around you while exceeding expectations of those that depend on us. With that, I'll turn the call over to Tim.

Tim Argo : Thanks, Brad, and good morning, everyone. As Eric mentioned, new lease pricing in the first quarter continued to be impacted by elevated new supply deliveries in several of our markets. This, combined with typically slower traffic patterns that are evident this time of the year attributed to new lease pricing on a lease-over-lease basis of negative 6.2%. Renewal rates for the quarter stayed strong, growing 5%. Because traffic tends to be relatively low as compared to the second and third quarters, we intentionally repriced less than 20% of our leases in the first quarter. The new lease-to-renewal pricing resulted in blended lease-over-lease pricing of negative 0.6% for the quarter, an improvement of 100 basis points from the fourth quarter.

Average physical occupancy was 95.3%, and collections outperformed expectations with net delinquency representing less than 0.4% of build rents. All these factors drove the resulting revenue growth of 1.4%. From a market perspective, in the first quarter, larger markets such as the Washington, D.C. metro area and Houston continue to hold up well and Nashville showed improvement. Many of our mid-tier metros also continue to be steady with Savannah, Richmond, Charleston and Greenville, all outperforming the broader portfolio from a blended lease-over-lease pricing standpoint. Our diversification between larger and mid-tier markets helps balance performance through the cycle. The improving performance of a market like Nashville, which is getting a lot of new supply, demonstrates the benefit of submarket diversification along with the market diversification.

Austin and Jacksonville are two markets that continue to be more negatively impacted by the absolute level of supply being delivered into those markets. Touching on some other highlights during the quarter. We continued our various product upgrade and redevelopment initiatives. For the first quarter of 2024, we completed nearly 1,100 interior unit upgrades. Given the number of units and lease-up across our portfolio currently, we expect to renovate fewer units in 2024 than we would in a typical year, but would expect to reaccelerate the program in 2025. We have now completed over 94,000 smart home upgrades since the inception of the program, and we expect to complete the remaining few properties this year. For our repositioning program, we have four active projects that are in the repricing phase, and we have targeted an additional six projects to begin later in 2024 with a plan to complete construction and begin repricing in 2025.

Regarding April metrics, we are encouraged by the accelerating trends from both the first quarter and March in both pricing and occupancy. April blended pricing is negative 0.4%, a 20-basis point improvement from the first quarter and a 70-basis point improvement from March. This is comprised of new lease pricing of negative 6.1%, a 10-basis point improvement from the first quarter and notably a 70-basis point improvement from March. And renewal pricing of 5.1%, slightly ahead of the first quarter and an improvement of 50 basis points from March. Average physical occupancy for April was 95.5%, also up from both the first quarter and March. And as Brad noted, 60-day exposure also remained lower than this time last year at 8.5% versus the prior year of 8.8%.

As we've discussed, new supply being delivered continues to be a headwind in many of our markets, but we still believe the outlook is similar to what we discussed last quarter. While we do expect this new supply will continue to pressure pricing for much of 2024, with demand and leasing traffic expected to increase in the spring and summer, we believe we have likely already seen the maximum impact to new lease pricing and that the outlook is better for late 2024 and into 2025. It varies by market, but on average, new construction starts in our portfolio footprint peaked in early to mid-2022. And we've seen historically that the maximum pressure on leasing is typically about two years after construction store. While supply remains elevated, the strength of demand is evident as well.

Absorption in the first quarter in our markets was the highest for any first quarter in the last 2 decades and the highest of any quarter since the third quarter of 2021. Job growth is still expected to moderate some in 2024 as compared to 2023, but has recently been revised upwards and growth still expected to be strongest in the Sunbelt region in the country. Job growth combined with continued in-migration accelerate the key demand factor of household formation. Additionally, we saw a resident turnover continued to decline in the first quarter, and we expect it to remain low with fewer residents moving out to buy a home. In fact, the 12.9% of move-outs in the first quarter that were due to a resident buying a home with the lowest ever for MAA.

That's all I have in the way of prepared comments. I'll turn the call over to Clay.

Clay Holder: Thank you, Tim, and good morning, everyone. We reported core FFO for the quarter of $2.22 per share, which was $0.02 per share above the midpoint of our first quarter guidance. About half of the favorability was related to the timing of real estate taxes, while the remaining outperformance is related to the collective timing of overhead cost, interest expense and nonoperating income. Our same-store operating performance for the quarter was essentially in line with expectations. Same-store revenues were slightly ahead of our expectations for the quarter, driven by strong rent collections. Excluding the favorable timing of real estate tax expenses, Same-store operating expenses were slightly higher than our first quarter guidance, primarily due to onetime property costs.

During the quarter, we funded approximately $44 million of development cost of the current expected $647 million pipeline, leaving nearly $202 million to be funded on this pipeline over the next two years. Although we expect to complete three projects in the second half of 2024 with the additional starts that Brad mentioned earlier, we expect to continue to grow our development pipeline over the remainder of the year, which our balance sheet is well positioned to support. During the quarter, we invested a total of $9.4 million of capital through our redevelopment, repositioning and smart rent installation programs, which we expect to produce solid returns and continue to enhance the quality of our portfolio. Our balance sheet remains in great shape.

We ended the quarter with nearly $1.1 billion in combined cash and borrowing capacity under our revolving credit facility, providing significant opportunity to fund future investments. Our leverage remains low with net debt-to-EBITDA at 3.6 times. And at quarter end, our outstanding debt was approximately 95% fixed with an average maturity of 7.2 years at an effective rate of 3.6%. During January, we issued $350 million of 10-year public bonds at an effective rate of 5.1%, using the proceeds to pay down our outstanding commercial paper. We have an upcoming $400 million maturity in June that has an effective rate of 4%. Following this maturity, the next scheduled bond maturity is in the fourth quarter of 2025. Finally, with the bulk of leasing season ahead of us, we are reaffirming the midpoint of our core FFO guidance for the year while slightly tightening the full-year range to $8.70 to $9.06 per share.

We are also maintaining our same store as well as other key guidance ranges for the year. That is all that we have in the way of prepared comments. So, Regina, we will now turn the call back to you for questions.

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