MAA - NYSE

Good morning, and welcome to Mid-America Apartment Communities or MAA's Second Quarter 2024 Earnings Conference Call. During management's prepared remarks, 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, August 1, 2024. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening remarks.

Thank you, Julianne, 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. Rob 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.

Thanks, Andrew, and good morning. Core FFO results for the second quarter were ahead of expectations as the strong demand for apartment housing across our markets is steadily absorbing the new supply being delivered. This strong demand continues to support steady occupancy performance from our portfolio as well as blended lease-over-lease pricing that has consistently increased since Q4 of last year. These positive trends are continuing into July. MAA's strategy has long focused on positioning our portfolio to capture higher full cycle demand to drive superior long-term value growth. To best mitigate the occasional periods of supply pressure, we have a unique portfolio diversification strategy involving both large and mid-tier markets. Further by appealing to a broad segment of the rental market with a more affordable price point, as evidenced by our strong rent income ratios and sector leading low delinquency performance, we believe, we are able to drive higher demand and absorption across our portfolio. We continue to believe that new supply deliveries across our markets are currently peaking and we expect to see the volume of new deliveries decline over the back half of this year with 2025 ushering in a multi-year period where the growing demand for apartment housing will exceed the level of new competing supply. As detailed in yesterday's earnings release, we continue to find compelling opportunities to deploy capital in new acquisitions and development that will, we believe, deliver meaningful earnings accretion over the next few years. Our balance sheet remains strong and well-positioned to deliver on this future value pipeline that we are building. We believe that with the combination of the evolving market conditions poised to decline with the level of new supply delivering across our markets, the redevelopment and repositioning opportunities available to harvest within our existing portfolio, and the new growth pipeline that we're building through in-house development, our pre-purchase program with third-party developers, and the acquisition of newly constructed properties, MAA is positioned for meaningful growth and value over the next few years. Before turning the call over to Brad, Tim, and Clay for more details, I'd like to send my thanks and appreciation to our MAA associates for their dedication and tremendous service to our residents. MAA is capturing record levels of resident retention, high resident satisfaction ratings, and strong lease renewal performance, thanks in large part to your hard work. I'll now turn the call over to Brad.

Thank you, Eric, and good morning, everyone. We continue to see solid demand in our markets supported by strong household formation and positive wage and job growth, leading to continued blended pricing momentum in July with stable occupancy. MAA's long-term strategy positions our portfolio as an attractive lower cost alternative to the higher priced new multi-family supply being delivered, as well as the available single-family housing options within our markets. Our renewal accept rates are at a record high and our Google scores continue to lead the sector, evidence of the value our residents find in living with MAA. With the backdoor controlled, we're very focused on the front door and encouraged by the improving traffic trends. Our property tours are higher than this time last year and our conversion of leads into leases is also up. With increased traffic, strong conversion, stable occupancy and lower exposure, our properties are well-positioned as we enter the back half of the year. As indicated in our release, we have made progress using our balance sheet capacity to support future earnings growth. In addition to the two second quarter construction starts that bring our under construction pipeline at the end of the second quarter to 2,617 units at a cost of $866 million. In July, we provided financing to take out the equity partner on a 239 unit under construction development in the SouthPark area of Charlotte. The project suffered an early delay that put the project's investment horizon outside of the equities fund horizon. Our previous relationship with the developer and the equity partner provided us the unique opportunity to invest in an under construction project with no entitlement risk and a materially shortened construction schedule with first units scheduled to deliver in second quarter of 2025. The second quarter development starts -- the two second quarter development starts were expected to deliver first units in mid-2026 and all three projects are expected to deliver average initial stabilized NOI yields around 6.4%, similar to what we are achieving on our current developments that are leasing. While new lease rates are facing slightly more pressure at the moment, rents achieved at our developments are well above our original expectations, driving higher than originally projected NOIs that should deliver stabilized NOI yields that exceed our original expectations by approximately 70 basis points. Pre-development work continues on a number of projects in our pipeline, which has increased to 11 projects, representing additional growth of over 3,100 units. We maintain optionality on when we start these projects, but we expect to start construction on one to two more projects later this year, bringing our development starts for the year to four to five at or slightly above our original guidance for the year and leading to a slight increase in our development spend for the year at $350 million. Construction costs have yet to decline broadly. But we are hopeful that as the current under construction pipeline winds down, we could see more improvement in construction costs and schedules as we progress through the year, supporting our ability to start construction on additional opportunities at compelling yields. In the transaction market, volume remains low with cap rates generally in the low 5% range, with a number of transactions occurring well below 5%. Our team continues to find select but compelling acquisition opportunities generally in lease-up and on an aftermarket base -- on an off-market basis. In the second quarter, we closed on a 306 unit suburban property in Raleigh for approximately $81 million, which is 15% to 20% below replacement costs. This newly constructed property is currently in its initial lease-up and finished the quarter at 62% occupied. We have two additional acquisition opportunities in due diligence and upon successfully concluding our inspections we expect the closings to occur over the next few months. The three acquisitions are expected to deliver stabilized NOI yields on average just under 6%. Based on the activity our team is seeing in the market, we believe, our forecasted acquisition volume of $400 million is achievable. We have two dispositions in the market, one in Charlotte and one in Richmond that we hope to execute on by the end of the year, but we are early in the process. 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 your hard work and dedication that you show on a daily basis to our prospects, residents, and fellow associates. With that, I'll turn the call over to Tim.

Thanks, Brad, and good morning, everyone. As previously referenced, demand in our markets continue to be strong as evidenced by steadily improving lease-over-lease rates on new move-in residents and stable lease-over-lease rates on renewal residents. Pricing growth does continue to be impacted by elevated new supply deliveries, but showed improvement over the first quarter as traffic patterns increased. These factors contributed to new lease pricing on a lease-over-lease basis of minus 5.1%, with renewal rates for the quarter staying strong, growing 4.6% on a lease-over-lease basis. These two components resulted in lease-over-lease pricing on a blended basis that was an improvement of 70 basis points from the first quarter. Average physical occupancy was 95.5%, up 20 basis points from the first quarter and collections continue to outperform expectations with net delinquency representing just 0.3% of billed rents. All these factors drove the resulting same-store revenue growth of 0.7%. Our unique market diversification strategy that Eric mentioned continues to benefit overall portfolio results. While some of our larger markets are being more heavily impacted by new supply deliveries, many of our mid-tier metros remain steady. Similar to last quarter, Savannah, Richmond, Charleston and Greenville are all outperforming the broader portfolio from a blended lease-over-lease pricing standpoint. Our portfolio balance between large and mid-tier markets and diversification of submarkets within the market help strengthen performance through the cycle. Austin, Atlanta and Jacksonville are markets that continue to be more negatively impacted by the absolute level of supply being delivered into those markets. While we have slowed some of our various product upgrade and redevelopment initiatives, in this elevated supply environment, we do continue to execute where it makes sense with the expectation of reaccelerating next year. For the second quarter of 2024, we completed nearly 1,700 interior unit upgrades; achieving rent increases more than 8% above non-upgraded units. For our repositioning program, we have three active projects that are in the repricing phase. We will begin construction on an additional six projects in the third quarter with a plan to complete construction and begin repricing in 2025 in what we believe will be an improving leasing environment. With July now wrapped up, we're encouraged by the early third quarter trends. Average physical occupancy for the month of July of 95.5% is in line with second quarter and current occupancy is 95.8%. This stability in occupancy combined with the lower 60-day exposure that Brad noted sets us up for more pricing power for the remainder of the summer as we also start to lap weaker new lease pricing that became evident beginning in August of last year. Accordingly, July, blended pricing of positive 0.3% is up from the first and second quarters and the month of June. And new lease pricing has improved each month since March. Furthermore, the year-over-year change in asking rents for August is expected to be positive for the first time since February of 2023, 18 months ago. As we have discussed over the last few quarters, new supply being delivered continues to be a headwind in many of our markets, and it is resulting in prospects shopping longer and being more selective. However, we still believe the long-term outlook is similar to what we discussed last quarter. That is, we expect this new supply will continue to pressure pricing for much of 2024, but we believe we have likely already seen the maximum impact to new lease-over-lease pricing growth and that the supply/demand balance continues to improve from here subject to normal seasonality. It varies by market, but on average, new construction starts in our portfolio footprint peaked in mid-2022 and we have seen historically that the maximum pressure on leasing is typically about two years after construction start. While supply remains elevated, the strength of demand is evident as well. Absorption in the second quarter in our markets was the highest of any quarter since the third quarter of 2021. Wage growth remained strong with our rent to income ratio in the second quarter dropping a bit to 21%, the lowest level in three years. Additionally, we saw resident turnover continued to decline in the second quarter, and we expect it to remain low with fewer residents moving out to buy a home. The 12.4% of move-outs in the second quarter that were due to resident buying a home was the lowest ever for MAA, slightly lower than what we saw in the first quarter. That's all I have in the way of prepared comments. I'll now turn the call over to Clay.

Thank you, Tim, and good morning, everyone. We reported core FFO for the quarter of $2.22 per share, which was $0.03 per share above the mid-point of our second quarter guidance. Just under $0.02 of the favorability was related to favorable same-store expenses and $0.015 was driven by a combination of favorable overhead cost, interest expense, and non-operating income partially offset by about $0.01 in storm cost. Our same-store revenue results for the quarter were essentially in line with expectations. As Tim mentioned, we saw sequential quarter-over-quarter improvement in both blended pricing and occupancy while same-store revenues again benefited from strong rent collections. Our same-store expense performance, particularly in repairs and maintenance, real estate taxes and personnel costs was favorable compared to our expectations for the quarter. Repair and maintenance costs continue to show moderation growing at 1.8% compared to second quarter last year. At this point in the year, we have better visibility into our real estate tax expense for 2024, which we will discuss more with our revised guidance in a moment. During the quarter, we funded nearly $80 million of development cost of the current expected $866 million pipeline, leaving an expected $328 million to be funded on this pipeline over the next two years. Considering the Charlotte opportunity and the additional development starts that Brad mentioned and adjusting for those properties we will complete over the remainder of 2024, we expect our development pipeline to grow to just under $1 billion, which our balance sheet is well-positioned to support. During the quarter, we invested approximately $12 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 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 3.7x. And at quarter end, our outstanding debt was approximately 93% fixed with an average maturity of 7.4 years at an effective rate of 3.8%. During May, we issued $400 million of seven-year public bonds at an effective rate just below 5.4%, using the proceeds to effectively pay off a $400 million bond maturity in June that had an effective rate of 4%. While our next scheduled bond maturity isn't until the fourth quarter of 2025, we expect to be in the market prior to that date to support ongoing investment opportunities. Finally, we are reaffirming the mid-point of our same-store NOI and core FFO guidance for the year while revising other areas of our detailed guidance that we've previously provided. Given our operating results achieved through the second quarter, we are making slight adjustments to our guidance associated with rent growth and occupancy. We are lowering the mid-point of effective rent growth guidance by 35 basis points to 0.5% and average physical occupancy guidance by 20 basis points to 95.5% for the year. Total same-store revenue guidance for the year was revised to 0.65%, which also reflects stronger expected rent collection performance over the back half of the year. We are lowering our property operating expense growth projections for the year to 4.25% at the mid-point. As previously mentioned we have better insight into our real estate tax expense for 2024 and have lowered the mid-point of our guidance to 4%. The lower guidance is primarily due to favorable Texas property valuations as compared to our original expectations. Also, we renewed our property and casualty insurance program on July 1 and have achieved a combined premium decrease of around 1%. The changes to our property operating expense projections, combined with our updated same-store revenue expectations, results and reaffirming our original expectation for same-store NOI at negative 1.3%. In addition to updating our same-store operating projections, we were revising our 2024 guidance to reflect favorable trends in G&A and interest expense. As Brad previously mentioned, we also increased the mid-point of our development spend to $350 million. The impact of these adjustments, combined with the $0.03 of expected storm costs associated with Hurricane Beryl in the third quarter, resulted in us maintaining the mid-point of our full year core FFO guidance at $8.88 per share on narrowing the range of $8.74 to $9.02 per share. That is all that we have in the way of prepared comments. So Julianne, we will now turn the call back to you for questions.

Thank you. We'll now open the call for questions. [Operator Instructions]. Our first question comes from Eric Wolfe from Citi. Please go ahead. Your line is open.

Hey, thanks. I was hoping you could discuss your seasonality assumptions and what you're expecting for the fourth quarter this year versus what you saw last year.

Eric, can you repeat that a little -- I lost you a little bit there at the beginning.

Sure. I was hoping you could discuss your seasonality assumptions and what you expect for the fourth quarter this year.

Okay. Got you. Yes, I mean, I think from a seasonality standpoint, we've seen it play out kind of like we thought so far where we continue to see some acceleration through about this time of the year. And then I think as we get later into the fall and winter, we'll see that normal seasonality. Now having said that, and I alluded to it a little bit in my opening comments. We're in a really good spot right now with our current occupancy. We're in a good spot with exposure lower than what it was this time last year. And so we feel like with what we're seeing particularly, I mentioned to the asking rents for August are a little bit higher than what they were this time 12 months ago. It's the first time we've seen that 18 months. So I'd see that all to say, I think the normal seasonality, could extend out a little bit longer. July is typically when it peaks in a normal seasonality. We think that could extend for a month or six weeks or two months and then start to moderate as we get into the back half of the year. But the adjustments we made to the pricing guidance was really just on new lease pricing, and most of that was -- would occurred in the second quarter. We made a couple of minor tweaks to Q3 and Q4, but essentially held our expectations for what we saw for that. So net-net, it was really about a 100 basis point decrease in our new lease pricing assumption renewals holding steady, and that seasonality is standing out a little bit more than it typically would.

Thanks. That's helpful. And then it looks like your guidance includes some uplift from other revenues. Could you just talk about what the opportunity looks like there and whether that contribution could potentially increase as we go into 2025.

Yes. I mean I think it's not a huge piece. I mean, it's growing a little bit more than rents currently with where our occupancy is there's fee income, application fee, that sort of thing. So it's providing a little bit, nothing out of the ordinary, I think, in a normal environment, it would be somewhat in line with rents. I mean, we do have some opportunities over the long-term with Wi-Fi -- ubiquitous Wi-Fi that we're testing this year. And I think over the next several years that will be a big opportunity for us, but nothing material necessarily in the short-term.

Great. Thank you.

Our next question comes from Nick Yulico from Scotiabank. Please go ahead. Your line is open.

Thank you. I just wanted to see, I think, I don't know if you gave this, apologies. But is there a way to get just sort of the blended lease pricing that is assumed to the back half of the year? I know you said you adjusted in the full year; I just want to make sure we're clear on that.

Yes. So for blended for the back half of the year, we're on average were I would say this, for full year new lease we're somewhere in the 4.25% range, which is about 100 basis points lower than what it was in our original guidance. And we're still in that mid-4 to 5 range on renewals. And so somewhere in the 0.5% to 1% blended in the back half of the year is how that plays out.

Okay. Great. Thanks. And then just second question is, you talked about some of the markets where you're seeing more impact from supply, Austin, Atlanta, Jacksonville. As you look at some of the supply deliveries or what's happening with competitive concessions in those markets. I mean do you have any sort of visibility right now when you think some of those markets would be not as much of a drag on overall new lease pricing? Thanks.

Yes. I mean, I think all those markets are in somewhat of a similar timeline, saw similar peak and starts and deliveries that frankly, pretty consistent across the portfolio where we saw start peak in mid-2022 and kind of seeing the peak of it right now. So market like Austin still going to be elevated next year, not going to be quite as much supply as we had this year. Job growth is really strong. So I mean, I think for all three of those, in particular, I would expect 2025 to look better than what it does in 2024. It's not going to flip to be in our lead markets, but I think it will be more in line with the portfolio and be less of a drag in 2025 for sure.

And just a quick follow-up on that. I mean, is there anything you're seeing just on the ground right now that would point to some of that concessionary impact already easing? Or is it still a wait and see?

Well, we haven't seen it get worse. We saw concessions pick up quite a bit in the back part of 2023 and then come back down, I would say, at early 2024 and then pretty steady throughout 2024. Somewhere -- broadly somewhere between half a month and a month is pretty consistent across markets. There are some pockets with more lease-ups, Downtown Austin probably closer to two months. Midtown Atlanta probably our worst concessionary environment right now, sometimes pushing three months where there's lease-ups, but not really any heavier than it was the last couple of quarters. And I think we're in a much more stable environment, both in terms of interest rates and when the supply picture is going to start to look better. So I don't see that necessarily getting any worse from here.

And Nick, this is Eric. Just to follow on what Tim is saying, last -- late last year in the fourth quarter, there was a lot of uncertainty out there surrounding the demand side of the business and the overall economy and the job market and the supply delivery is really starting to make an impact. And I think that, that's what prompted a lot of pretty aggressive concessionary practices in the marketplace late last year. But as the year has continued to unfold, I think we've all been pleasantly surprised with the very strong demand that we continue to see taking place. Stability is more evident than I think people initially feared it was possible, and as a consequence of the strong demand that we're seeing and clear visibility that new supply deliveries are poised to start declining. I think the market is starting to feel a little bit more comfortable with the practices I have and the lease-up programs I have in place.

Thanks, Eric, Tim. Appreciate it.

Our next question comes from Josh Dennerlein from Bank of America. Please go ahead. Your line is open.

Yes. Good morning, guys. Just wanted to touch based on the insurance renewal looked pretty favorable versus maybe what you were forecasting before. Just kind of any changes to maybe what you're covering or just any kind of color on how you got that pretty decent renewal.

Yes, hi, Josh, this is Rob. I guess kind of framing it up, if you look at the last three years of insurance renewals in the aggregate, our costs have gone up about 50%. And we've had some good positive claims here. We've got long relationships -- positive relationships with our insurers. So I think given the claims history and where this wound up, we wound up with the same coverage levels that we had last year. And we just -- we caught a break with a kind of stabilizing insurance market and favorable claims history.

Okay. All right. Great. And then on the real estate taxes, are there -- is there any more variability across the rest of the year? Or you kind of locked in at this point for the back half on real estate taxes? And then just how should we think about like maybe the cadence from here? I think some of the states have like different assessment times. So just trying to think through like maybe some kind of lag on a go-forward basis?

Hey Josh, this is Clay. Yes, I think we have pretty good visibility across the portfolio at this point with the exception of Florida. And that's the one -- that's the one state that typically lags the rest. I think keep in mind now that Florida has a cap on their valuations. And so we have a pretty good idea of where they'll ultimately end up. We just don't have the final valuation onto at this point. The other missing piece is around the millage rates. And that's fairly across the Board. But we, again, kind of same story with Florida property valuations. We have pretty good visibility as to what we think that those will be as we wrap up the rest of this year.

All right. Thanks, guys.

Our next question comes from Michael Goldsmith from UBS. Please go ahead. Your line is open.

Good morning. Thanks a lot for taking my question. It sounds like the adjustments to the guidance reflects the pressure in the first half and the original assumptions for the second half remain relatively unchanged. So what gives you confidence in that just given seasonal slowing trends and also elevated supply? Thanks.

Yes, this is Tim. And I mentioned a couple on that. I think, one, we're at a really good spot from an occupancy exposure standpoint. As we said here this time last year, we were a little bit more of a hole in terms of occupancy and exposure. We're in a better spot this year. And I think, frankly, a couple of things that I didn't mention in the prior question is about mid-July of last year is when new lease rates really started to drop off, they hit sort of a cliff there in mid-July and continue that way through December. So that frankly creates an easier comp scenario for us as well. So now as we sit here at the beginning of August, we're starting to lap some of those comparisons. And then I think as we've said, too, we do expect the impact from supply to start to moderate a little bit in the back part of the year. I mean it won't manifest itself too much with seasonality. But we were in a period of increasing supply this time last year, while we think we're in a little bit of a period of decreasing price from supply this year. So I think where we are with occupancy exposure the comps, the supply situation, and the continued demand turnover being low, more of our mixes and renewals, which continues to be our strongest point for pricing. Rent to income continuing to be solid. So don't see any change on the demand scenario either other than some of the normal seasonality that we'll see later this year.

Thanks for that. And my follow-up question is on the renewals. How are they trending at an ask versus take rate basis? Thanks.

Yes. So we were at 4% in June. We're actually 4% -- or in July, sorry, the next couple of months, August, September, where we expect to be in the 4% to 4.5% range with actually September being more towards the higher end of that range. So we're seeing -- and on top of that, our renewal accept rates are higher than they were last year, really higher than they've been in the last few years. So continue to see strength there and expect that to hold up pretty well through the rest of the year.

Thank you very much. Good luck in the back half.

Thanks.

Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.

Great. Thank you. I just want to talk some more about the development opportunities. I appreciate your comments of ramping up to $1 billion of potential spend. I think a lot of people are excited about all the major pullback in starts and what 2026, 2027 could look like in your markets. Can you talk more about how much more you think you could ramp up? Is the land already on your balance sheet? Would you need to go out and buy it? And just kind of how large and how would you fund as you throttle up the development pipeline?

Yes. Jamie, this is Brad. As we've said in the past, we would feel comfortable given our balance sheet strength and size really ramping up our development pipeline to about 4% to 5% of our enterprise value, which would take our pipeline to call it, $1 billion to $1.2 billion, and that's really what we've been working with over the last few years. We -- this time in 2022, our pipeline was about $450 million. And today, we've almost doubled that. So we feel really good about the trajectory that we're on. We do have -- as I mentioned in my comments, we've got a sufficient pipeline of owned and controlled sites on our balance sheet. We've got about 11 projects now that that we currently control. A number of those would be ready to start very quickly if construction costs come down or rents improve sufficiently enough to drive the returns up to where we think they need to be. So we've got a good pipeline ahead of us. We're in a really good spot. And Clay, I'll let you handle the other part of that question.

Yes. Jamie, I'll add on to that as far as where we think that, that funding would come from, I mean, where we would look to first is to fund that through additional debt, given our leverage at the 3.7x. And so we would look to move that up at least to the 4.5x or maybe 5x. And that's a significant number. That's almost over $1 billion. So we've got plenty of opportunity there of how we would go about funding that. Especially in an environment where rates will -- we expect would continue to decline over the next year or so.

Okay. And then just a quick follow-up on that. So you mentioned if construction costs decline, I mean where do you -- what line items are you watching the most to see if they pull back, where would that be the most helpful.

Certainly, we don't need a lot of decrease in construction cost because the other piece of the puzzle, I think, that we're likely to see a little bit of improvement on is on the schedules side of things, which has extended a bit over the last few years just given the amount of product that's in the pipeline. So we don't need construction costs to come down a whole lot to make some of these projects feasible or to get the economics more in line. But -- and we have seen that. The project that we started in Charlotte in the second quarter, we saw construction costs come down a few million dollars. So we don't need it to come down a lot. I think where you're likely to see that is some of the margins for some of the contractors out there. We've seen those margins -- profit margins increased substantially over the last couple of years. I think framing and lumber and things of that nature are down right now. So I'm not sure you'll get a whole lot of that, but I think it's going to come from some of the margins.

Okay. And then also, as we think about your historically low turnover, do you expect to maintain that kind of retention and renewal pricing power in a potentially lower interest rate environment despite some of the pent-up demand for homeownership. We're just trying to understand some of the key drivers that could pull that number back. And I don't know if it's in your surveys that you get when people move out or just your own tens of cycles. Is it -- is there a certain mortgage rate, we think will make a difference? Or just how are you guys thinking about it over the next year or so, if rates continue to decline or do decline?

Yes. I mean, we certainly track the reason for move out as part -- when somebody does move out and track those reasons where they're trending. And certainly, the decrease and move out to my home has been helpful to overall turnover decreasing. So I mean, I do think it will tick back up if and when rates start to drop. I mean, it's still it probably needs to be a fairly material drop. If you think about single-family home prices even ignoring the level of interest rates. Those have continued to go up even as rents have started to moderate. And so with current interest rates, somebody buying a house is going to be -- their average payment is going to be about 40% to 50% higher than our average rent. So to fill that gap, it would take quite a decrease in interest rates. So I do expect at some point, turnover pick up a little bit, but usually when that happens, if interest rates are dropping, people buy in homes that typically speaks to a pretty strong economy as well. So we typically see that hold up okay as rents start to move as a part of that. So I don't think it would be as big of a -- I don't think it would be a one-for-one trade-off. It would have some benefits on the revenue side as well.

And Jamie, this is Eric. I'll add to what Tim said. Right now, the median house principal interest payment in our markets is about 40% higher on average than our average rent. So there is a pretty significant modification or moderation in the purchase of single-family housing that's going to have to take place before I think we get back to the level of turnover that we saw going back four or five years ago, I think that we've been in a steady decline of resident turnover for quite a few years. And I think it will likewise take a few years to get back to perhaps where we were some years ago.

Okay. Great. Thanks for your thoughts.

Our next question comes from Richard Anderson from Wedbush. Please go ahead. Your line is open.

Thanks. Good morning. So if you can help me sort of marry a few things here. It sounded very optimistic looking out beyond the near-term supply maximum impact to new lease is behind you, as you said, and August is looking good, yet you lowered your new lease rate guidance. I'm just curious, is this kind of like final hurdle to clear type of thing or the beatable situation in the back half of this year? I'm just curious if you can sort of bring those two pieces together for me?

Yes. I'll comment just on the new lease rate piece. I mean, it was -- the biggest modification, if you will was the Q2 new lease rates being a little bit lower than what we had initially dialed in. And as I commented just people shopping a little longer, being a little more selective in this elevated environment, we tweaked new lease rate -- the cadence of new lease rates a little bit in the back half of the year, but I do think, as I said, that seasonality extends out a little more. So really, the impact to our -- to the revenue guidance and the new lease pricing was primarily what occurred in Q2, then you obviously had that carried over in the back half of the year, whereas as good or better new lease rates in the back half don't impact quite as much as the current year but certainly play into 2025.

Okay. Great. And then the second question is, when you think about kind of looking into 2025, just in your experience and history in dealing with pockets of supply that have happened in your careers many times you're accustomed to this. How does the cadence of 2025 kind of look when you think about what you know is coming to be delivered and then the tail of that as it leases up does 2025 sort of hit the ground running? Or is it sort of a slow evolution and you don't really get back to a real growth story of significance until a year into the year, if that makes sense.

Yes, it does. I mean, I think the seasonality will be pretty typical and there will still be supply pressure next year. It's going to be less in, but it's not nothing. It's still going to be there. So I think what you'll see play out as -- particularly as we get into the spring and summer, that we'll start to see the new lease rates accelerate. We'll see that blended lease-over-lease improve, but that's going to obviously take 12 months kind of feed through all the leases. So what I would expect is to start to see some pricing power on blended lease-over-lease in spring, summer 2025 and then really not hugely play out in terms of revenue growth until you get late 2025 into 2026. And I think it really sets up for a good earn-in into 2026 and then even less supply pressure there where you really start to see that revenue growth pick up late 2025 and into 2026.

Okay. Great. Thanks for the color. Appreciate it.

Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead. Your line is open.

Yes. Thanks, everybody. And piggyback a little bit off the last question there, Tim, and circling back to Tim's comments on asking rents turning positive in August. I guess with comps easing from here, what's sort of your expectation for the trend in asking rents through this year and into 2025 and maybe seasonality aside later this year, when do you expect positive asking rents to translate into positive new lease rate growth?

Yes. I mean I think similar probably gets into early mid next year. I mean, we have seen if you want to use kind of our new lease rates as a proxy for market rents. We have seen with where July new lease rents were about 4% or so higher than we were at the beginning of the year. So it's certainly closing that gap. And I don't -- it will moderate some in the winter time with the seasonality. But I would think probably it's going to be kind of spring, early summer that we start to see that manifest itself into positive new lease rates would be my guess.

And then I guess with this move in asking rents, where does that put the portfolio today from a loss or gain to lease perspective?

If you look -- so if you look, be clear on how I'm defining this, if you look at all the leases we did in July, it's about 2% higher, so 2% loss to lease compared to our in-place rents. Certainly, we're sitting at kind of the peak demand, if you will, or the peak pricing and a typical seasonality. So I think that edges back down a little bit later in the year, but it's about 2% right now.

That's helpful. Thanks for the time.

Our next question comes from John Kim from BMO Capital Markets. Please go ahead. Your line is open.

Thank you. Tim, in your prepared remarks, you mentioned absorption is the highest it's been since the third quarter of 2021. And I'm wondering what's driving this. A few years ago, we did have the strong net migration trends to your markets, but that seems to have softened a bit. So I just wanted to know what do you think is driving demand right now?

Yes. I mean I think it's a little bit a lot of factors. I mean we have -- job growth has been a little bit stronger. We still have certainly stronger job growth in our markets than the broader nationally. And even within migration, we saw it tick back up a little bit at 12% of our move-ins were from out of our footprint in Q2 into MAA, which is ticked up a little bit and back to where it was about 12 months ago, continue to see wage growth and population growth, household formation and then just the turnover being quite a bit lower, obviously, as well helps in that absorption as there's less existing units, if you will, to be absorbed that that spreads out into those new units coming online. So the absorption has been strong now for several quarters. It's keeping up, if you will, with the new supply, which is why we don't think it gets worse. But I think all those factors that I mentioned are combining to help drive that demand.

Okay. And I wanted to clarify your views on renewal rates. So you had 4.5% to 5% in the first half of the year. That's what you're expecting in the second half of the year. I think that's the answer you gave to Nick Yulico. But July opined to 4%. So I'm wondering why this month was relatively lower than what you're expecting. And are you basically expecting this to ramp up in the fourth quarter?

Well, I mean, we have 4% to 5% is kind of our full year expectation. We are on the higher end of that in the first half of the year. I think, probably a little bit lower end of that in the back half of the year. But we are seeing, I think, August probably is a little better than July and September is trending a little bit better than August. So I do think as we get into the back part of the year, I mean, our renewals have always held up pretty strong. And with new lease rates increasing that that gap between the two has started to narrow a bit. So I think, again, with the easier comps, I think that will tend to help renewals as well. But -- so I think you start to trend a little bit more towards that 4.5% as you get right at the back quarter in late Q4.

Got it. Thank you.

Our next question comes from Haendel St. Juste from Mizuho. Please go ahead. Your line is open.

Hey guys, thanks for taking my questions. So first one, I guess, is on the transaction market cap rates. Seemed like early this year, cap rates were closer to 6%. Now we're getting into the low 5%. Interest rates coming down a bit more I wouldn't necessarily call it confidence or clarity, but a better feeling of how fundamentals could be trending in the Sunbelt over the next 6, 12 months. I'm curious. Are sellers now more willing to engage in not only conversations about selling assets? Do you expect the cap rate to be lower from here? And then some color on how you're underwriting IRRs for the assets you bought in the second quarter. Thanks.

Yes, Haendel, this is Brad. I think, certainly, the cap rates that we're seeing in the market are kind of in that 5% range, which, frankly, has been consistent for the last couple of quarters. I think we saw cap rates tick up a little bit in the fourth quarter of last year, and that's since come down around that 5% mark. So given where the expectations are with interest rates and some of the market not being quite as uncertain as it was last year. I mean I would expect cap rates to kind of stay in that range going forward. There is a lot of optimism as we've talked about in 2026/2027 fundamentals. And so that's certainly being reflected a bit in the transaction market. Interest rates today are, call it, in that 5.5%, 5.75% range. So there is a little bit of negative leverage that folks are willing to accept when there's growth on the horizon. So that's kind of where we're seeing cap rates today. In terms of where we're underwriting deals and the IRRs that we're looking at. So based on our kind of long-term cost of capital, our levered IRR hurdles, call it, 8%. Most of our acquisitions are delivering substantially more than that. North of that, just to remind you, we're not buying at 5 caps. The acquisitions that we've executed on and the ones that we have under contract today or in the NOI yields high 5%, close to 6% range. So we're not active at a 5 cap at the moment. But given where our cost of capital is we're achieving yields and IRRs substantially above our current cost of capital.

Got it. Got it. Very helpful. You mentioned in your comments earlier that the rent to income in the portfolios around, I think you said 21%, the lowest in three years. I was curious if you're sensing any rent fatigue, any change in the move-outs due to rents you're seeing in the portfolio? And then can you add some color on concessions usage in the portfolio today, how that compares to last quarter or last year? Thanks.

Yes. I mean we did see rent income drop in Q2, and that's based on all the residents that moved in, in Q2. And we track move-in -- our move-ins or move-outs due to rent increase is certainly down significantly. So I think that and the move-outs to buy a house are the two components that are driving the lower turnover as rental started to moderate. But on the concession question, pretty consistent for us as a portfolio, it's very minimal; somewhere in the 0.5% to 1% of overall rent is our concession practice. But as I alluded to a little bit earlier, I'd say, broadly, kind of half a month to month is pretty typical in most markets. There are a few pockets where you might see two where there's some lease-up scenarios, and I mentioned Midtown Atlanta is probably our worst we might see two to three kind of uptown South and Charlotte, kind of in that two-month range in downtown Austin in that two-month range. Those are the three pockets I would say; we're seeing a little bit higher concession usage. But overall, pretty consistent with what we've seen in the last -- all throughout 2024 I would say.

Got it. Got it. And one last one, I appreciate the commentary on the insurance costs coming in the commentary in the marketplace. So I'm curious if there's anything that perhaps you're doing any differently in your approach if you're perhaps self-insuring a bit more? Thanks.

Hey Haendel, it's Rob again. Yes, our retentions are all the same as they were last year, one exception. We did have to increase our retention by $250,000 on our general liability to kind of our slip and fall protection there, just kind of got some pressure from the insurance companies to do that. But the rest of everything stayed the same in terms of what we're doing on retentions.

Great. Thanks, guys, and best of luck.

Our next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead. Your line is open.

Hey, good morning, down there. Two questions. The first is bad debt. Can you just talk a bit about your resident credit profile now versus pre-pandemic? Are you back to where you were pre-pandemic? And if there are any markets in particular that are still elevated and thoughts on why any elevated markets are remain as such?

Yes. We're mostly back to pre-pandemic level. I mean I think we're probably on average over the long-term, 10 to 15 bps higher in terms of delinquency than where we consistently were pre-COVID but you're talking about 0.3 to 0.4 maybe up to 0.5% of rent. So it's still very low for us and not much of an issue. Atlanta is the market has been talked about a lot that has had more pressure. We actually saw that drop to about 0.5% of rents in Q2 down from about 1.3% where it was a year ago. So I think the practices we've put in place to try to sort of catch that fraud before they come in the front door, and it's starting to play out and help us there. So outside of that, not a lot of pressure across portfolio, and it continues to be mostly a non-issue for us.

Okay. And just confirming what you said. You said normal bad debt is 30 to 40 bps and currently, you're 15 above that. I just want to make sure I heard that right.

Well, I would say, our delinquency in Q2, I think was around 0.3% or 0.4%. There's a little bit of seasonality too. I would say pre-COVID, longer-term, delinquency was somewhere in the 0.3 range. I would guess, long-term in this new environment is probably between 0.4, 0.5 roughly.

Okay. And then second question is a lot of discussion on the call about the changes in your same-store assumptions changes in rent profile and occupancy. And yet big picture is your FFO mid-point stayed the same and that's despite $0.03 hurricane charge in the third quarter. So I mean it sounds like there's a lot of focus on same-store, but ultimately to earnings, it's almost a non-issue. So what's the best way you gave a lot of stats on rents, on revenue, occupancy, et cetera? But ultimately, it matters what you guys deliver on the bottom line. So what's really the key focus or the key driver of the FFO versus all these puts and takes?

Yes. Alex, just a couple of points that I would make. I mean, obviously, the revenue plays into that. And so as we kind of dial those in and adjusted for that first half performance and what it's going to look like in the back half of the year, and then achieving what we were looking forward for the back half of the year. Those will all play into that from a revenue standpoint. We feel good about all that. That feels very achievable and for all the reasons that Tim previously mentioned, we feel like that's in a good spot. And you kind of get down into the operating expense section, we talked about the real estate taxes and the insurance renewal. Those are really kind of -- those two things are really offsetting the changes that we have adjusted for and the revenue guidance. And so if you look back at kind of where we've been running and trending in personal costs, repair and maintenance costs started with the first half of the year, there is potential upside there. We've -- but we'll see how that plays out. But those two things can really talking to each other and offsetting one another, then it just gets down into below the line there. And then there's been some favorable G&A costs, interest expense, and some other items that's really offsetting that $0.03 that we noted for the hurricane during the third quarter.

Yes. And overall --

Alex, this is Eric. Just to add to what Clay is saying. I mean, what really drives FFO performance long-term is NOI. And as you point out, I mean, a lot of gives and takes and lot of details that we dig into and the market most part trying to understand sort of what's driving that NOI. But for me, sort of the key takeaway is that in the midst of clearly what sort of record levels of new supply coming into our market. And we kind of feel like we're in the worst of the storm right now. We think that we're seeing sort of bottoming out occurring as it relates to sort of what's happening with new lease pricing. And we think that, particularly as you get into next year, we think that new lease price is going to hang in there. Next year, we think it starts to really take off. It will take a while for it to really build into revenues and ultimately into NOI just because of seasonal factors. But when you look at what's happening with new lease pricing and recognizing we're kind of the worst of the storm now, renewal pricing is hanging in there, and we do think that we are likely going to see continued relief on the overall operating expense side of the business as a function of some of the new technology we continue to introduce as well as inflationary pressures beginning to moderate. So ultimately, what really drives FFO is NOI, same-store NOI. And we think that when you look at the variables that make up that NOI performance, we think that it's poised to really show some recovery over the next few years.

Thank you.

Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead. Your line is open.

Great. Thanks. I want to ask about the delta between the commenced and the signed leases in July?

Say that again, the delta between what?

Yes. Just between the leases that were signed in July and the leases that were commenced or effective in July, what you reported?

There's about a 50 basis point delta. So I mean, obviously, with sign, you've got some that will go in effect into that month and some that will go effect later, could be ones that end up getting canceled. So we don't -- we frankly don't pay a ton of attention to sign, but that's what the delta is.

That's really helpful. Thank you. And then just as a follow-up, I wanted to ask about some of capital allocation from a high level, maybe a little bit of focus on this call on development and maybe the possibility of leaning a little bit more into that. So I guess, just kind of given kind of where acquisitions and cap rates are today and maybe that market showing some green shoots given the development opportunity that you talked about, how would you kind of stack rank those two and any other kind of capital allocation opportunities and priorities.

Yes, Adam, this is Brad. Well, I think our plan from a capital allocation perspective is to certainly continue to allocate both to acquisition and development. We would like to lean a little bit more into the acquisition area given just the immediacy of earnings associated with that. But honestly, given the returns that we've been able to achieve, where our yields are 6% and the market was substantially less than that, we've been a little bit slower in the acquisition market, I still feel good about our guidance for the year at $400 million development. Again, we've seen opportunities there that have really come up. We've got additional opportunities that we're looking at where developers -- third-party developers are not able to get their financing lined up. And so we're seeing additional opportunities come to us through that area. So I wouldn't be surprised if in the short-term we do find additional development opportunities versus acquisition. But from a long-term perspective, we like both of those avenues. And I think generally, they'll be pretty evenly split in terms of the acquisition in development on our spend on a yearly basis.

Great. Thanks for the time.

Our next question comes from Omotayo Okusanya from Deutsche Bank. Please go ahead. Your line is open.

Yes. Good morning. My question is more from a regulatory perspective. Again, you have President Biden up there kind of talking about implementing further rent control. We're going into an election cycle. Just curious what you think about that? And specifically, if you're also kind of hearing anything in any of your key states where you have exposure about potential rent control laws and kind of going into this current election cycle.

Hi Omotayo, it's Rob. I'll start off, I guess, with President Biden's 5% rent control proposal. And we do think that there's some election year politicking going on there. It does require an active Congress that in this year with the divided Congress. We don’t really see that -- that, that particular effort will gain a lot of traction at the federal level and then following-up on your state-level question. 13 of the states where we operate that represents about 90% of our NOI as a state-level prohibition on local rent control. So we're really not seeing any movement at the state level. And in most of the instances, it's blocked at the local level. So in terms of rent control, we're not that concerned about the impact of rent control on our markets.

Thank you.

Our next question comes from Ann Chan from Green Street. Please go ahead. Your line is open.

Hey, good morning. Quick question for me. Do you expect a reacceleration in growth of any expense line items heading into next year?

This is Clay. We kind of look at it next year, we think that, that property taxes, I'll start there since it's the biggest line item. But the property taxes will continue to run in this 3% to 4% range as we've adjusted our guidance is at 4% today. We think it can run probably in there for a period of time, especially given what we've seen and just for the property performance over these past couple of years given the high supply and seeing some of those income levels come down from those properties. Insurance, we saw -- we had our renewal this year, so we'll enjoy a little bit of that going into the first half of next year as well. And then it will be another negotiation at that point. And look, I wouldn't expect it to be necessarily another decrease by any stretch, but I also don't know that we would expect to see levels of what we saw in the couple of -- past couple of years of 15%, 20%. So I think it would be a much more reasonable growth with that level, assuming claims experience stays pretty effective with what they've been for us in the past. And then looking at personnel costs, repair and maintenance, marketing costs and those types of items, we think that those will continue to run at a pretty normal rate. We've seen some moderation in all those mix categories over the past year. And so we would think that those -- we would definitely would expect those to jump to a level of what they were going around 2021, 2022. So big more of the 3% to 4% growth range there.

Thanks. And second question, Tim, can you share what your expectations are for new lease growth in Atlanta for this year? And when you believe the markets will start seeing a stronger rate and occupancy trends?

Yes. I mean, Atlanta has been pretty -- new lease rates has been pretty consistently high-single-digits in the negative -- high negative single-digits in the negative 8% to 9% range. We've seen it improve a little bit the last couple of months, and we've seen a little bit of traction in occupancy in July for Atlanta. So I think it will follow a similar trend in terms of the slowly getting better and starting to show some signs as we get into 2025, but probably take a little while for that one to get back to positive, a little bit longer than some of the other markets we're looking at.

All right. Thank you.

Our last question will come from Linda Tsai from Jefferies. Please go ahead. Your line is open.

Yes. Hi, where are you sending out renewals for August? And what are you getting for those? And how does that compare to last year and historically?

So for both August, September, we're getting in the 4% to 4.5% range. We sent out around 4% and depending on who accepts and what lease term. That's how you can get a variance there. But -- so I think this time last year, it was somewhere around 4.5% to 5%, so we're a little bit shy of that, but expect to be in that 4% to 4.5% range for a period of time.

And then with rent to income dropping to 21%, do you track how much average incomes of your residents have increased over the past few years?

Yes, we do. It is -- so right now, in Q2, we're about $91,000 or so is the average income that was -- if I go back to beginning of -- kind of right at the beginning of COVID, beginning of 2020, it was about $75,000. So it has trended up quite a bit and generally followed rent growth pretty well because as we said, that rent income ratio has been between, call it, 20% and 23% for the last four or five years. So it's pretty consistent across the market. I think our highest is 24% our lowest is 19%. So it's pretty consistent across markets as well.

Thanks.

We have no further questions. I will turn the call to MAA for closing remarks.

Okay. No further comments and we appreciate everyone joining us reach out if you have any other questions you'd like to ask. Thanks very much.