Mid-America Apartment Communities, Inc. — 2024 Q1

Just want to hit a little bit on the operating side of the business. And I was hoping you could provide some detail on sort of the operating playbook in the next couple of months and how you're thinking about pushing on lease rate growth and occupancy. And has the breakdown between new and renewal lease rate growth that you embedded in guidance changed at all at this point?

Austin this is Tim. Yes, I'll give you a little bit of an overview. I mean I think we're -- as I mentioned in my comments, with where we are in exposure, where we are with occupancy we feel like we're in a good place there. So we'll continue as we get into that, certainly, busier part of the season now, the push on new lease rent growth where we can and balance a little bit depending on property by property.

That's helpful. And then the March data implies there was a pocket of softness, which I think you alluded to a little bit in your prepared remarks, comparing the March versus April. I mean anything from a comp issue or a 60-day exposure perspective that caused you to pull back in March to just position the portfolio better heading into April and May? Just looking for some additional detail there.

Yes. I mean there was a little bit more of a push towards occupancy, I would say, in late February and early March is based again looking at it on a targeted basis where exposure was. And that's late February or early March time frame is always the time of the year where you start to see lease expirations pick up and you're kind of waiting on that demand to pick up as it as it has and it starts to do in March.

To the first question, yes, we have seen traffic pick up leads, lead volume, and we look at it kind of going back to the exposure factor. We look at leads for exposed unit, and that's as good as what it was. We've kind of talked about we haven't seen a normal year since probably 2018, 2019. So we're sort of exceeding those levels when you think about traffic volume and leads for exposed and all the things that we look at internally for demand.

Brad, this is Brad. Yes, I think relative to that comment, it's a realization that the high level of supply that we are seeing today is partly a result of cheap financing that's been available over the last couple of years and just realizing that in general, those times are behind us. And so getting back to a more normal supply environment going forward into the future.

This is Stephen Chen on for Josh. Just a quick question on the concession usage. Wondering whether you can kind of comment on that, like across your markets. Where you see the biggest concession and where you see maybe the improvements?

Yes. This is Tim. I mean at a high level, concession usage is pretty similar to what we saw in Q4. We haven't seen it get materially worse or better. For us as a portfolio was about 0.5% of rents last quarter. It's about 0.4% of rents this quarter. At a market level, it obviously varies a little bit. I would say, again, not a lot of movement from last quarter.

And then on a different subject on the development yield, sorry if I missed that, but can you comment on like what's the yield you're underwriting for the new starts? And maybe also some comments on the construction costs you're seeing right now?

This is Brad. Yes, I would comment that the yields that we're expecting on our new starts for this year are in the mid-6% range, which is consistent with what we're delivering today on our existing development portfolio. So that is a pretty good spread from where current cap rates are, call it, low 5s as I mentioned in my comments. So we're still in that call it, 150 basis points spread or so range with current cap rates, which feels really good to us.

I mean I don't think it needs to necessarily stay at higher levels than what we expected. I think it needs to be at levels that we've seen pretty consistently now for a while. I mean the demand has been there in our markets for a while. Job growth in migration continues. The number of move-outs that we're seeing outside of our -- to outside of our footprint has declined. So that net in migration is pretty consistent with where it's been.

Yes. I mean we're -- this time of the year, there's always a fairly wide spread when you're looking at new leases first renewals. It's gapped out a little bit from where it typically is, but not hugely different, and I expect those spreads to narrow a little bit as we get into the spring and summer.

And Michael, this is Eric. Just to add on to what Tim is saying. I think another thing to keep in mind is when you look at that negative 6% on new lease pricing versus 5% of renewal in terms of a lease-over-lease comparison, that implies, I think, in some people's mind a bigger dollar difference than what's at play really.

When you say, are you talking about blended spreads or new lease, you talking about blended?

Yes. I mean I don't think it's quite to the level you said on new leases. I mean, a couple of things to keep in mind that we sort of alluded to is one, the Q2 and Q3 will represent about 60%, 65% of all the leases. So -- which is also the strongest period. So that will weigh heavier into the full year blended. And then along with that, we tend to see the renewal portion of that mix tick up even more in Q2 and Q3 as well.

Yes. I would say that at a high level, the markets that have been strong, continue to be strong, and I would expect to remain strong. And then I'm thinking about D.C. and Houston and then some of the mid-tier markets like Charleston and Richmond and Savannah and Greenville to some extent.

It's Daniel Tricarico for Nick. Maybe for Brad, can you expand on the confidence in the acquisition opportunity that you highlighted in your prepared remarks? And also, what is the initial and stabilized yield on the Raleigh lease-up deal?

Yes. So the Raleigh lease-up deal is a 6% NOI yield is what we're expecting out of that. And I'm sorry, I missed the very first part of your question.

Just a general commentary you had in the prepared remarks on the confidence in the acquisition opportunity set.

Yes. I mean I think if you look at where we sit today, as we've said over the last few quarters, the transaction market has been quiet for a couple of years, but the supply is up. So we just feel like the need to transact continues to build while we're not seeing transactions I think the difficulty has been the volatility on interest rates has really slowed the market down from transactions occurring.

And then just going back to the revenue outlook, the job growth numbers you talked about an initial guidance obviously seem pretty conservative now 4 months into the year, but no change to the revenue components in guidance. How should we be interpreting that?

I think really just interpreting to the fact that we have the heavier leasing season ahead of us. Like I said, the first quarter leasing is about 19% of our leases. So we'll do 50% over the next 4 months. That's really when driving -- it's just seeing how it plays out over the next few months, but certainly encourage where the demand side is.

This is Brad, and I'll start, Tim can add to it. We do have a little bit of insight in that just via a couple of avenues. One, the comp properties all of our properties. We monitor specifically how our comps are performing. And then also, as I mentioned earlier, we just have relationships with all the developers in the market.

Yes. And I'll add to that. I mean, we do track properties in our markets that are in lease-up and how quickly they're leasing up and that sort of thing. And right now that would suggest any concerns from that point. I mean, certainly, as we get later in this year and you get to the fourth quarter, things can change quickly based on what they're doing, but we're not seeing it right now, but that is part of why we certainly dial in, particularly on the new lease side that we think it will moderate back down as you get into the fourth quarter.

Yes. I mean it's pretty consistent, to be honest, where again, we kind of look back to when construction starts and do a lot of looks at different markets of how long it takes to that peak pressure to hit. But -- and most of them are in sort of that Q2 time frame. I would say Atlanta is probably one, that's maybe a little bit behind that curve. Charlotte is one that's probably a little bit behind that curve. And then I would think of a market like Phoenix and we're landing in Tampa probably a little bit ahead of that curve. But at a high level, most are within that range and certainly within a quarter, give or take, of that same range.

Haendel, this is Clay. Right now, we're seeing anywhere between 5.6% and 5.7% as we look to that maturity.

Yes, for the next couple of months, and we're just wrapping up July now, but for the next couple of months, we're in the 4.6%, 4.7%, 4.8% range.

Adam, this is Brad. Certainly, we have been building development as a capability and a tool for us to lean into over the last couple of years. And as I mentioned in my comments, we have a pipeline of projects that we could start and really deliver value over the next couple of years. Really what's preventing us from doing that more broadly, has just been hitting the returns that we need on our developments.

Adam, this is Eric. Just to add on to what Brad is saying. We spend a lot of time thinking about just how much development risk that we want to put on the platform. And one of the things that we centered around is the idea that we'd like to keep our exposure in forward funding obligations, if you will, no more than around sort of 5% of enterprise values, which based on sort of where pricing is today for us, that would put it at around $1 billion.

John, this is Brad. I don't think that these cap rates are representative of below-market debt. I mean I don't think there's many loan assumptions that are in these numbers that I'm quoting. And some of these are reflective of very recent transactions as of a few days ago, where we've gotten the cap rate information.

Well, we're not. If you look at the Raleigh acquisition, for example, that's representative and the two acquisitions that we had in the fourth quarter of last year. That's representative of where we're willing to transact, which from a yield perspective, has been in the high 5s and then the Raleigh transaction was a 6% yield.

This is Tim, John. I don't think there's anything especially different in the resident. We look at all the sort of the resident demographics are pretty consistent with what they've been the last couple of years. But certainly, it's much more difficult to buy a house. And if you look at our markets in particular, given where interest rates are now, it's about 70% more expensive household than it is our average rent.

Sure, Jamie. This is Clay. Just speaking to the first quarter and what we saw there. The biggest -- the slight unfavorable we had there that we called out in the comments, was really around some onetime property costs around some storm damages that we had at a number of properties, nothing significant, but it was a bit of -- a bit outside of what we were dialing in for the quarter.

I'd say that's fair. I mean, again, real estate taxes will get the majority of the valuation around that. In late second quarter, early third quarter, we'll probably have a little bit more to say about that in the second quarter call. Same for insurance expense as well. And again, the other expenses pretty much in line with what we've dialed in.

Jamie, this is Brad. I think as we look at where we want to deploy capital, broadly speaking, the high-growth regions of where we're located is what we're targeting. And that's going to be both our larger markets as well as some of our mid-tier markets that you mentioned. I mean in Tim's prepared comments, he noted some of the mid-tier markets that are performing quite well right now.

Yes, it's going to be different based on each market. But I would say, in general, '24 is going to be flattish. But you also have to remember that on our deals that we're underwriting on an acquisition, the leases are predominantly new leases, which is different than our existing portfolio, but we're generally bringing all new leases into the portfolio.

Two questions. The first is jobs have definitely been stronger than everyone collectively as imagined. And my question is, were you guys just overly conservative in job expectations? Or have the jobs truly been like much better than anyone would have expected? Just trying to understand the difference, what's going on because clearly, it's allowing you guys and others to handle the supply much better than was originally believed to be the case.

Well, we use a number of different sources to compile our view of what the demand horizon and the job growth is going to be. Obviously, a year or so ago, there was more nervousness surrounding the prospects of a more material slowdown in the economy. We have seen some moderation in '24 as compared to certainly '23 and '22, but broadly speaking, we've long believed that these Sun Belt markets had underpinnings associated with them surrounding employer stability and job growth and new jobs coming such that we felt pretty good about the job growth or about the employment markets broadly holding up.

Okay. And then the second question is transaction market really tough. But in fairness, it's -- I mean, the transaction market almost, I guess, you'd have to go back to the RTC days for it to be sort of lucrative. And over the past decade or so since the credit crisis, we've never seen assets dumped onto the market.

Yes. This is Brad. I think there's really two components of that. I would say, number one, we have seen a number of loans, specifically in 2023. The last number I saw was 85% of the loans that were coming due, we're pushed. We're extended in 2023.

And Alex, this is Eric. I'll add on to what Brad is saying. A couple of other things that I think I would point to as well, when you try to contrast and compare the buying environment, the buying opportunity that we thought was going to be forthcoming, contrast that to historical cycles in the past, like coming out of the great financial recession in 2008, 2009, that 2-year period following that fall off. We bought 9,000 apartments in 2 years.

This is Tim. I mean, probably not necessarily anything differently on a market-by-market basis, but we've actually updated our website back toward the end of February, which is intended to drive more traffic organically and through to our site as opposed to using some IOSs, which can be quite a bit more expensive. We're getting more involved in some social media things and that type of thing. But it's really just trying to drive people and traffic towards our website and really be able to experience what's there and have a better feel for the community in the neighborhood, and we have everything you want to look at there with floor plans and unit types and all that sort of thing.

Yes. I mean there's the one highlight that we talked about is something that we think will not only drive down marketing costs but increased demand and the traffic coming in that way. There's a smart home initiative that we've been talking about that we're wrapping up this year. I mean I think over the next 2, 3, 4 years, the biggest initiative in terms of what it can do for margin is continuing sort of our ubiquitous or full property WiFi.

We appreciate everyone joining us this morning, and feel free to reach out for other questions and see most of you at NAREIT I'm sure. Thank you.