MAA - NYSE

Good morning, ladies and gentlemen, and welcome to the MAA Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, July 31, 2025. [Operator Instructions] I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments.

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 are Brad Hill, Tim Argo, Clay Holder and Rob DelPriore. 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 data. 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 able to answer questions. I will now turn the call over to Brad.

Thanks, Andrew, and good morning, everyone. As detailed in our release, second quarter core FFO results were ahead of our expectations with the sequential improvement in new renewal and blended lease-over-lease rates all exceeding the prior year's sequential improvement. While the economic uncertainty has caused the pace of recovery in pricing power to slow across the country, the recovery in our portfolio is underway. And as the economic uncertainty stabilizes and deliveries continue to decline, the recovery should accelerate. Demand remains resilient with absorption across our markets, reaching the highest level in over 25 years. Encouragingly, absorption has now outpaced new deliveries for 4 consecutive quarters, with the gap between the trailing 12-month absorption and new deliveries in our markets approaching the level lasting during COVID. The downward trend in new deliveries is helping market conditions to firm up with market-level occupancies, improving in many of our markets, and we are seeing pockets of decreasing concessions, a combination that should lead to improved pricing power. With a stable employment sector and strong wage growth, our residents are financially healthy, leading to continued good collections and improving rent-to-income ratios. Our diversified portfolio, focus on high-growth markets and operating scale continue to position MAA best to capitalize on these favorable trends to a greater degree as the demand/supply balance moves more in our favor. The resilience of our platform is evident. In the midst of still elevated supply, we have maintained stable occupancy, achieved higher renewal rates and increased our retention, the result of our team's focus on customer service and operational consistency. On the external growth front, because of our access to capital, we continue to find select compelling development opportunities. We remain committed to the disciplined expansion of our development pipeline, and we are making progress towards that goal. In the second quarter, we started construction on a 336-unit suburban project in Charleston, South Carolina, which is expected to deliver a stabilized NOI yield of 6.1%, bringing our active pipeline to 2,648 units at nearly $1 billion. We own or control 12 additional sites with approvals of nearly 3,300 more units. Amid record pressure from competitive lease-ups in our markets, we remain patient in our approach to leasing up our new communities and are prioritizing rents and long-term value creation, allowing us to achieve our expected lease-up rents and deliver stabilized NOI yields that continue to trend above our original expectations. Our development projects are well positioned to benefit from the declining new starts and the tightening supply backdrop. The acquisition market remains relatively quiet. Transaction volumes are still muted as bid-ask spreads persist and capital remains cautious given elevated interest rates. That said, we are evaluating several opportunities. We have a stabilized suburban acquisition with a small Phase 2 development component in the Kansas City market under contract, and we expect it to close upon the completion of our due diligence review during the third quarter. Our strong balance sheet and liquidity position will allow us to be opportunistic should more attractive acquisition opportunities become available in the second half of the year. With a 30-year track record of navigating economic cycles, we remain confident in our ability to execute through this transition period and that our focus on high demand and high-growth markets will continue to lead to higher earnings and lower volatility over the full cycle. Our markets continue to benefit from higher job growth, wage growth, household formation and demographic tailwinds than the national average. We're encouraged by the building blocks that are in place and the growing momentum heading into the back half of the year and remain confident in our ability to deliver compounding revenue and earnings performance as the recovery continues to accelerate. To all our associates across our properties and in our corporate and regional offices, thank you for your continued dedication and focus during this pivotal leasing season. With that, I'll turn the call over to Tim.

Thank you, Brad, and good morning, everyone. For the second quarter, we saw a steady progression in new lease over lease rates from what was achieved in the first quarter. Though, as Brad mentioned, broad economic uncertainty did slow the pace of new lease pricing recovery that we saw through April and caused May and June new lease pricing to be a bit below our expectations. The uncertainty showed up twofold with prospects being more selective in making decisions and operators continuing to lean toward occupancy despite broadly improving market level occupancies. However, renewal lease performance represented by the high level of renewal acceptance and the rates achieved continue to outperform expectations. As a result, we saw lease-over-lease pricing improvement from the first to second quarter that exceeded 2024 for new leases and renewals, which manifested into stronger sequential blended pricing growth as compared to the prior year. Blended pricing for the quarter was 0.5%, which represented a 100 basis point improvement from the first quarter. Along with the stronger pricing trend, we had stable average physical occupancy of 95.4% and another quarter of strong collections with net delinquency representing just 0.3% of billed rents. Our strongest performing markets continue to be consistent with what we have seen in the last few quarters, led by many of our mid-tier markets. Our Virginia markets remain strong and other mid-tier markets such as Kansas City, Charleston and Greenville, all demonstrated strong pricing power. Of our larger markets, Tampa continued to show pricing recovery and Houston was steady as well. We also continue to see a slow but steady recovery in Atlanta, which had our largest year-over-year improvement in both blended pricing and occupancy of any of our higher concentration markets. Austin continues to face record supply pressure, resulting in weaker new lease pricing, Phoenix and Nashville are 2 other markets facing significant pricing pressure. We have seen the uncertainty and higher leasing pressure particularly impact the leasing velocity in our lease-up portfolio. And in turn, we pushed the stabilization dates by one quarter for 3 of our lease-up properties, West Midtown, Vale and Val Vista. However, across our lease-ups, we've achieved rents to date, 2.5% ahead of pro forma. We had 1 property, MAA Boggy Creek, reached stabilization in the quarter, and our 6 remaining lease-up properties ended the quarter with a combined occupancy of 80.7%. Despite supply concerns, we continue to execute various targeted redevelopment and repositioning initiatives in the second quarter, and we expect to accelerate these programs over the remainder of 2025 and into 2026. Through the second quarter of 2025 year-to-date, we completed 2,678 interior unit upgrades, achieving rent increases of $95 above non-upgraded units and a cash-on-cash return in excess of 19%. This was an acceleration above volume and rent growth achieved from the first quarter. Despite this more competitive supply environment, these units leased on average 9.5 days faster that non- renovated units when adjusted for the additional turn time. We still expect to renovate approximately 6,000 units in 2025 with more expected in 2026. For our repositioning program, we began repricing in the second quarter at 5 of our 6 recent repositioning projects with the last slated to begin repricing in August. Early results are encouraging with NOI yields in the low teens based on current pricing. We have identified several additional projects to start later this year with anticipated repricing in time for the prime 2026 leasing season. Work also continues on 23 retrofits for community-wide WiFi with go-live dates planned through the remainder of 2025. With July closeout in process, we continue to see seasonal pricing and occupancy trends that are aligned with our guidance. July pricing is trending better than the second quarter and our current occupancy at the end of July is 95.7%. Our 60-day exposure for July is 7.1%, 10 basis points lower than this time last year and keeps us in a position for stable occupancy to allow for pricing power, assuming demand fundamentals remain intact. Brad noted the exceptionally strong absorption with absorption in our markets exceeding new supply for the fourth straight quarter or said another way, the fourth straight quarter with fewer available units for lease in our markets than the prior quarter. Strength in our renewals continues with the percentage of our residents accepting renewal offers exceeding last year's record level and lease-over- lease growth rates on renewals accepted for July, August and September in the 4.5% range. Strong absorption, declining deliveries and high retention rates underlie our optimism for an expected continuously improving lease environment over the next several quarters. That's all I have in the way of prepared comments. Now I'll turn the call over to Clay.

Thank you, Tim, and good morning, everyone. We reported core FFO for the quarter of $2.15 per diluted share, which was $0.02 per share ahead of the midpoint of our second quarter guidance. The favorability to our guidance driven by $0.025 related to favorable overhead expenses, $0.01 of favorable interest expense and other nonoperating income and $0.005 from our same-store NOI performance, partially offset by unfavorable non-same-store NOI of $0.02, which was mostly driven by the impact of elevated supply pressure on the lease-up portfolio. Our same-store revenue results for the quarter were in line with our expectations as revenues benefited from strong collections during the quarter. Our same-store expense performance was better than expected, primarily driven by real estate tax expense. We now have more information relating to our real estate expense for the year as municipalities have started providing 2025 property valuations, which I'll discuss more with our revised guidance in a moment. During the quarter, we funded approximately $92 million in development costs for the current $943 million pipeline, leaving an expected $326 million to be funded on our current pipeline over the next 2 to 3 years. Our balance sheet remains well positioned to support future growth opportunities with $1 billion in combined cash and borrowing capacity under our revolving credit facility, and our low debt net to -- debt-to-EBITDA at 4x. At quarter end, our outstanding debt was approximately 94% fixed with an average maturity of 6.7 years at an effective rate of 3.8%. We have an upcoming $400 million bond maturity in November that we plan to refinance later this year. Finally, we are reaffirming the midpoint 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 in the second quarter, we are making slight adjustments to our guidance associated with same-store rent growth. We are lowering the midpoint of effective rent growth guidance to negative 0.25% while maintaining average fiscal occupancy guidance at 95.6% for the year. Total same-store revenue guidance for the year is revised to 0.1%, which also reflects continued strong rent collection performance over the back half of the year. We are lowering our same-store property and operating expense growth projections for the year to 2.25% at the midpoint. We have better insight into our real estate tax expense for 2025 and have lowered the midpoint of our guidance to 0.25%. The lower guidance is primarily due to favorable property valuations in certain jurisdictions as compared to our original expectations. Also, we recently renewed our property and casualty insurance program on July 1 and achieved an overall premium decrease on our property and casualty lines. We now expect our interest expense for the full year to increase by 1.3% as compared to last year. The changes to our property operating expense projections, combined with our updated same-store revenue expectations, resulted in us reaffirming our original expectation for same-store NOI at negative 1.15%. In addition to updating our same-store operating projections, we are revising our 2025 guidance to reflect favorable trends in overhead expenses, along with adjusting our acquisition and disposition volume for the year given the current transaction market. The impact of these adjustments, combined with our continued focus on pricing in our lease-up portfolio resulted in us maintaining the midpoint of our full year core FFO guidance at $8.77 per share by narrowing the range to $8.65 to $8.89 per share. 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.

[Operator Instructions] Our first question comes from the line of Austin Wurschmidt with KeyBanc.

Tim, you mentioned that July trends are trending better than the second quarter. I was hoping you could expand a little bit on that comment and whether that's new lease rate growth that's driving improvement and exceeding what you've seen in recent months or if it's more of a function of the renewal strength and stronger retention you highlighted?

Yes. I mean it's a little bit of both. I mentioned the renewal trends in the prepared comments. We're continuing to see in that 4.5% range, through the -- really through the end -- through the rest of the third quarter and continuing to see the acceptance rates be a little bit higher than what we saw before. So that's certainly playing a part of it. But we are seeing new lease rates so far trend better than what we saw in Q2 and actually the best new lease rate on a lease-over-lease basis we've had so far this year. So that's what gives us some confidence in what we're expecting to continue to see an improving environment as we get to the last part of the year.

That's really helpful. And I guess how much of the changes to your 2025 lease rate growth assumption reflect kind of what's happened in the first half of the year versus how much was a function of changing sort of the second half projection and then just that trajectory of fundamentals from here?

I would say, effectively, the -- what occurred in Q2 was the biggest impact. There's obviously a lot of leases that expire in Q2, and we intentionally obviously move them towards the strongest part of the leasing season. But we revised the total lease-over-lease guidance by roughly 100 basis points. We were somewhere around 1.5% in our prior guidance, roughly around 0.5%. So it's a little bit of a combination of both, but what we saw in the second quarter was the biggest part of the adjustment.

Our next question comes from the line of Cooper Clark with Wells Fargo.

I just wanted to follow up on Austin's question. I'm curious kind of what the expectation for new lease rate growth is in the current embedded guidance? And what gives you confidence in the updated range given continued volatility from the lease-up inventory?

Yes. I mean we're somewhere in the negative 4% range, give or take, for the back half of the year on the new lease side that's driving the pricing guidance. And then as we mentioned, continue to see renewals play a larger part of the combination and continue to see the real rates be strong. I mean, what gives us the confidence is a few things. One, the renewal strength we're seeing. We've got good visibility into September for that and starting to get October as well. Current occupancy where we stand right now, as I mentioned, is 95.7%, expect that to trend through August at a similar rate. Our exposure is at a better spot than it was this time last year. And then just a macro level on some of the uncertainty we're seeing consumer sentiment take back up, chances of a recession are lower than they were before. So I think there's less uncertainty in the market as well that helps from a consumer and operator sentiment standpoint. And then the absorption that Brian and I both mentioned in the prepared comments, continues to be really strong. In fact, there's -- if you look at no absorption we've had over the last 4 quarters, it was about 85,000 fewer units in our markets available to lease than there was 12 months ago with the absorption. And I expect that to continue to grow, be well over $100,000 as we move through the back part of the year. And then the last point I would make is just from a comp standpoint, the last 2 years in Q3, our cumulative new lease rates were down about 8%. And in Q4, cumulative new lease rates were down about 15%. So there's an easier comp component to it as well.

Cooper, real quick. This is Brad. I agree with everything Tim said. The one thing that I would add to that, that gives us confidence as we head into the back half of the year is, in second quarter, we continue to be in a high level of supply situation that continues to decline, yet if you look at our performance in the second quarter, clearly, we saw blended lease pricing turned positive. We saw a pretty good improvement in blended lease pricing second quarter versus first quarter. But if you look at the rate of improvement this year versus what we saw last year, we've seen an acceleration in the midst of an environment where we saw increased uncertainty, and we saw still high levels of supply. So all of that really comes together to give us confidence that the back half of the year should progress in line with what our current expectations are.

Okay. That's super helpful. And then switching to the capital allocation with the Charleston development start and the Kansas City acquisition noted earlier. Is it fair to say your incremental dollar will continue to be away from more of the mature Sunbelt markets and into your Midwest and small-format Sunbelt markets like your Charleston's or Savannah's. And then any comments on cap rate or expected yield from the Kansas City acquisition you can share would be great.

Yes, sure. I mean I wouldn't read anything into where our incremental dollar is going away from the Sunbelt. I mean that is not our focus at all. We certainly believe in the merits of investing our capital in the highest demand region of the country. If you look over time, performance in earnings growth, dividends performance is most highly correlated with the strength of demand, which we think correlates highly with the Sunbelt markets in the U.S. So we'll continue to invest our capital in those markets. You will see us continue to invest capital, both in our large markets as well as our mid-tier markets, which Charleston and I'd say Kansas City are both more of our mid-tier markets. So you'll see us continue to invest capital in that manner. As I mentioned in my opening comments, the Charleston development is a 6.1% yield. So the developments that we've executed over the last 12 months or so have been in that 6% to 6.5% range. We're still seeing select opportunities in that range that you can expect us to continue to execute on as we continue to build out that development pipeline. On the acquisition side, the Kansas City acquisition, there's 2 phases there. One is a stabilized acquisition. That's probably in the high 5s from an NOI yield perspective. We have a Phase 2 -- small Phase 2 development to go along with that, which combined will expand the total development yield to about a 6.3% or so on the entire development.

Our next question comes from the line of Eric Wolfe with Citi.

It's actually [ Nick Carr ] on for Eric this morning. So I guess the first one I have is just on Atlanta. Obviously, minus 40 bps same- store revenue growth quarter-over-quarter. I guess I would have thought that would have been a bit better on a sequential basis given we talked about some improvement there last quarter. So I guess if you could just kind of walk through what's -- what you're seeing on the ground there, that would be helpful.

Yes. I mean we're continuing to see some positive momentum out of Atlanta. I mean it was coming from a pretty low spot with -- if you think back to early '24, there were occupancy and pricing concerns there. So it's -- and the revenue growth is trailing looking. So it will take some time for it to really start to show up. I mean it's still at a level below, I would say, the average of our portfolio. But when you think about the improvement from last year, it's one of the best. In fact, as I mentioned, when you combine our improvement in blended lease-over-release in Atlanta compared to last year, in our improvement in occupancy, the combination of those 2 is better than what we saw in any of our other large markets. And then the delinquency continues to not be an issue. It's down to almost the portfolio average. And then we've started to see concessions come down a little bit, particularly Midtown Atlanta has been a spot where we've seen huge concessions still there, but they've come down a little bit. We've seen it down a little bit in Northwest Atlanta as well. So it will take some time to really show up on the revenue side, but we're encouraged with where it's trending.

Right. Got it. And then I apologize if I missed it, but did you give like a specific blended lease expectation for the back half of the year? And if you didn't, could you inform us on that?

Yes. So we're somewhere around 0.8% or so for the back half of the year on a blended basis.

Our next question comes from the line of Nicholas Yulico with Scotiabank.

So I guess first question is as we think about the pricing, and I think your leasing, you said being a little bit slower than expected in the last couple of months. What is the driver of that? Is it -- I know we've all known about supply for a while, but it feels like there's also a general demand problem that's hitting multifamily. And I'm not sure as well for Sunbelt market if you're also facing the opposite of the benefit from in-migration if now you're facing out migration or just other issues in those markets from a demand standpoint. So can you just talk a little bit about what you're seeing on the ground?

Yes. Nick, this is Brad. I would start out by saying that we are certainly not seeing any problems whatsoever on the demand side. If you go back to what we saw going into the second quarter, we were seeing very significant and very strong new lease-over-lease improvement on a monthly basis. Even going into April, we saw new lease-over-lease rent growth in the 100, 150 basis point range, which was in line with kind of what our expectations were. We expected that to continue. As we got into May, we saw that market operators began to focus a little bit more on occupancy, which clearly had an impact in terms of the rate of the recovery that we expected. But there's no demand concerns whatsoever in our region of the country. In fact, if you look at the varying demand metrics that are out there, we monitor absorption. As I mentioned in my comments, we're seeing record absorption in our region of the country, the highest that we've seen in the last 25 years. And if you look at the gap between the trailing 12-month absorption and supply, we are approaching COVID levels in terms of the gap between excess supply. And really what that means is that absorption is significantly outpacing new deliveries. And the point that Tim made a moment ago, based on that excess absorption, we have 85,000 fewer units to lease in our market today than we had at this time last year. You couple that with the fact that supply continues to decline significantly from where we are today and demand continues to hold in there. That gap in the reduction of supply that's available to lease will quickly become 100,000 units, 120,000 units, and that will have a significant impact on the acceleration of performance in our region of the country. We're not seeing any slowdown on migration trends. So that's still a net positive of 6% or so. It's down from pre-COVID highs, but it's still in line with -- sorry, it's down from COVID highs, but in line with pre-COVID numbers. So we're not seeing any concerns whatsoever on the various demand metrics that we look at.

Okay. Just second question is, I know you gave some numbers about the back half of the year, new lease rate growth, and you talked about the prior couple of years, and it was down, I think, last year in the back half. I mean, at what point -- can you just explain to us at what point do your comps become easy? Because we're thought that if you were down substantially a year ago on new lease rate growth in the back half of the year, you would get some comp benefit this year, but it doesn't seem like that from what you talked about with new lease expectations.

Yes, Nick, this is Tim. We do think there is some comp benefit. I mean the biggest drivers are everything we've talked about from a demand standpoint, absorption and all that. But there is a piece of it that's easier comps, particularly, to your point, in the back part of the year and particularly in the fourth quarter, where we've seen it trail off quite a bit in the last 2 years. So if you look at just our new lease rents over the last couple of years, they're down cumulatively 8% in Q3 and 15% in Q4. And so we've obviously got much better supply/demand fundamentals now in a good shape, as I mentioned, with occupancy and exposure. So we do think that plays a component in our expectation for less seasonality than what we would typically see.

Our next question comes from the line of Adam Kramer with Morgan Stanley.

I think you guys have talked a little bit about sort of pace of recovery here. And so maybe sort of piggybacking on that, I wanted to ask about how absorptions that you're seeing today, how does that compare to maybe what your forecast would have been 3 months ago or 6 months ago, recognizing the sort of the pricing is what it is, but I think just to maybe underscore what's happening with demand. I would love to hear just about how absorptions are trending relative to your expectations?

Yes. This is Tim. I mean we expected absorption to continue to be strong. I mean, it's hard to pinpoint exactly what that -- what's dialed into the numbers, but we know to Brad's point a minute ago, the demand factors have continued to be strong, particularly in the Sunbelt and then we know supply deliveries each quarter have been dropping. So we expected a level of absorption. I mean there's a few markets, few spots where -- and we talked about with the lease-up portfolio where leasing velocity has slowed a bit, but it's more in pockets with a lot of supply. But I would say general -- in general, absorption has been really strong. We expected it to be really strong. I think it will be even stronger over the next couple of quarters.

Great. And maybe a similar question on deliveries. What is sort of the forecast, I guess, for 3Q and then 4Q for deliveries? How does that compare to maybe the first half of 2025? And whether that's national or in your markets, I think it would be helpful context.

Yes. I mean in our markets, if you compare last year to this year, we're expecting about a 25% or so drop in new supplies as compared to last year. We saw that occur a little bit in the first half, but it was probably down 10% or 15% in the first half of the year compared to what it's been trending. So I would expect it to accelerate a little bit from what we saw in the first part of the year.

Our next question comes from the line of Jana Galan with Bank of America.

It's great to see the renewals for the third quarter remain in the mid-4% range, but just kind of curious how long do you feel that they could stay in that range? And is it a function of wage growth? Or is it kind of the churn in the portfolio that it's not the same residents that received a similar increase last year?

Yes, this is Tim. I think it's some of that. I think those points you just made a play in a part of it. I think the service we provide plays a lot of it. We have mentioned this, I think, last quarter that we have the highest Google scores in the sector, and I think that customer service plays a part in it. And we do a very thoughtful analysis when we go out with our renewal offers on tiering it based on where people are relative to market. But we bidded this period for now going on about 8 quarters where new lease pricing has struggled, but we've continued to see renewal rates hold in this 4.5% range. So I think there's a lot of qualitative factors I just mentioned beyond the just straight numbers that help that. And even though turnover is down, we're still turning 40% or so of our portfolio each year. So there's a factor there that plays into it. But no reason to expect that we should see anything different going forward from what we've seen in the last 2 years.

And then maybe just following up on the turnover. Do you expect that in the second half to be similar to '24 or even lower kind of given what's going on with interest rates?

I think so far with what we've seen in Q3 and renewal accept rates that we continue to be a little bit lower than where we were in '24. So I would expect that into Q3. Q4 is always a little bit higher turnover quarter. But again, no reason. We don't see any reason to expect that's going to change. There's not a -- people aren't leaving us to buy houses, the rent increase, turnover due to rent increase is down. So we don't see any larger factors that would suggest that, that number would creep back up in the fourth quarter.

Our next question comes from the line of Michael Goldsmith with UBS Financial.

How has the competitive pricing environment across operators in your markets trended? Are other operators pushing occupancy? And if so, how much occupancy improvement do you think they would need in order to be comfortable to return to pushing rate again?

Yes. I mean I do think we have seen operators push more towards occupancy broadly, and I think that was a factor that played into Q2, where even though we saw in our markets, occupancy increase from Q1 to Q2 broadly 40 or 50 basis points. So I think there is still some hesitancy on the operator front to push pricing perhaps when they could have a little more. And we've been pushing pricing where we think we can or where we should. But I mean, with where we sit today, we're at 95.7%, as I mentioned, we'll continue to have a targeted approach where we're -- where we have exposure and current vacancy in a good position, we'll push price. And where we don't, we'll push occupancy. But I think broadly with where the macro environment is and where consumer sentiment is and improving fundamentals, it will become more of a rate pushing environment, particularly as we get into 2026.

Got it. And I recognize it's a small market for you, but Northern Virginia had a material slowdown in same-store revenue growth in the quarter relative to the first quarter. So can you discuss what trends you're seeing in that market in particular?

Yes. I mean we've seen it slowdown a little bit. I mean, obviously, that market has been strong for going on 6, 7 quarters now. So I think a little bit is just coming into tougher comps. We did see similar to what we saw more broadly, just a little more choosy on the prospect side and then particularly in our Pentagon area asset. We've seen renewal accept rate go down a little bit just with some of the uncertainty on people taking the buyouts and that sort of thing. So I don't think there's anything necessarily unique to that market, different than others. I think it's more just naturally slowed a little bit as it's had a really strong 6 or 7 quarters.

Our next question comes from the line of Alexander Goldfarb for with Piper Sandler.

Two questions. First, just big picture because everyone is asking about new rents, and you guys talk about improving fundamentals, improving demand, 85,000 fewer units this year than last. And yet new rents are still down and things are still lethargic. How much of it do you think is just pure rent fatigue over the past few years that new prospects even if they're relocating within the market or just sort of fed up with the rent increases, and therefore, as they're looking, they're just being much more cautious about what they're going to pay versus someone who's renewing has already made the decision that they're just staying there. So how much of it do you think is that dynamic versus other factors?

Alex, this is Brad. There's nothing that we see that indicates that there's a level of rent fatigue in the market that's causing the rate of recovery to be less than what we expected. I mean, in fact, if you look at the wage growth in our region of the country, it continues to be strongly positive. Our rent-to-income ratios are actually down this quarter versus prior quarters. So we're seeing improvements in that -- in those levels. And we do continue to get the 4% to 5% renewal increases. So from our perspective and from what we see in the market, the consumer confidence readings that we get that really decreased corresponding with some of the uncertainty that came into the market after Liberation Day. All of that plays into, I think, the psychology of the operators in the market, really getting a bit nervous to performance and what performance looked like and really focusing, as Tim mentioned, on occupancy. To us, everything that we're seeing seems to indicate that, that's the issue that we're facing right now, not rent fatigue or a demand issue or anything on that side of the equation. The demand continues to be very, very strong.

Okay. Second question is, you mentioned that deliveries are taking a little bit longer. In general, I think you guys said some years and I think broader market is, do you have a sense for how much of this year's supply will slip into next year? Just trying to understand the peak supply is last year and this year, trying to understand how much are we going to have to contend with spill over in '26?

Yes. This is Tim. I don't think it's material. I mean if we look at quarterly supply that's been delivered, I mean it has dropped off pretty good over the last 2 quarters, and I expect it will drop out even more in Q3 and Q4. So I mean, there's certainly some of that, but I think more of the leasing velocity slowdown that we've seen is for the reasons we've been talking about, which is just some of the uncertainty that we saw in Q2 and less units taken longer to be delivered.

Our next question comes from the line of Steve Sakwa with Evercore ISI.

Could you guys talk about maybe some of the changes that you've made on your underwriting for the developments, either on the revenue side, the cost side, time to lease up? And what maybe changes or cost changes are you seeing on the construction cost side?

Yes, Steve, this is Brad. We haven't honestly made a whole lot of changes in terms of our underwriting. Our development underwriting is pretty conservative. If you look at the yields that we're achieving on our development deals, they're 20% to 30% higher than what we originally underwrote. So we feel pretty good about our underwriting process in our ability to achieve the returns that we have in our development. Yes, the properties that we have in lease up today, we are prioritizing achieving the rents that we expected versus pulling forward some maybe performance from '26 into 2025 by lowering prices to get occupancy, and that has some implications for this year. But our long-term value creation opportunity is still intact with all of our developments. So we still feel really good about our approach to development on the cost side. Honestly, we're not seeing -- your costs are pretty flat at the moment. We're not seeing really any increase associated with tariffs or immigration or anything like that at the moment. Certainly something that will continue to keep an eye on the labor market and things of that nature. But feel really good about our development opportunities that we are under construction on right now as well as the -- a few others that we're pursuing at the moment.

Okay. And then second, just maybe on real estate taxes. Maybe just broadly, kind of what are you seeing from the various municipalities? And I know that number is down about 2.5% through the first 6 months. But is that more of just a one-off thing this year, or do you think that's maybe something that could be more of a tailwind on the expense side for the next couple of years?

Yes, Steve, this is Clay. Yes, I do think it could be a bit of a tailwind as we move forward or maybe said it a little differently, maybe not as much of a headwind as it had been in years past. When you think about the environment that at least that we're in our markets and with the negative same-store NOI growth the past couple of years, that should continue to carry through over the next cycle or 2 depending on when some of these municipalities revalue, some revalue, once a year, some revalue once every 4 years. So that will be a little dependent on each respective municipalities timing. But I do think that we can see some potential help there in future years as these -- as they look back to these periods of declining NOI growth. We can take that and we also factor in the cap rates that are out there. Those seem to be relatively stable. We talk about new developments being in mid- to upper 4s, but I think overall, cap rates in general on the average are relatively stable over the past couple of years. So it will probably lean a little bit more towards operating income results.

Our next question comes from the line of Rich Hightower with Barclays.

I think I want to sort of follow up and combine a couple of prior questions, but just to dig a little deeper on this peak delivery phenomenon. So there's obviously a kind of a longer tail when it comes to lease-up after properties delivered, and you have talked a little bit about sort of slower leasing velocity that's impacting your numbers. So when does that dynamic do you think peak? And then how does that flow through to when -- again, to sort of echo other people on this call, to when new lease pricing would improve and really start to reflect that dynamic tailing off, if that makes sense?

Yes. I mean we saw deliveries in our markets peak around Q2, Q3 of last year, and we've seen it slowly trend down from there. Now it's still obviously at an elevated level in terms of comparing to what historically a normal year may be. So obviously, still seeing the pressure from that. But going back to the absorption point, each quarter, that's gotten greater absorption, we see the excess units that are out there drop significantly. So I think the challenge for the rest of this year is you also have sort of the normal seasonality and you have less traffic generally looking for apartments in the back part of the year. So it won't show up quite as much as it probably otherwise would if it were the peak leasing season, but I think you'll really start to see that momentum as you get into the spring of next year.

Okay. That's very helpful. And then just on the transaction environment, you did mention, I think, in the prepared comments that there remains a fairly wide bid-ask spread, at least in certain pockets. Anecdotally, you would kind of see that lenders are maybe starting to get a little more aggressive with troubled borrowers or troubled assets from the COVID era. So -- I mean, is that -- does that reflect anything you're seeing? Does that create opportunity? Or is that just more sort of headlines that don't really apply to this situation?

Yes, this is Brad. I mean, I would say, in our markets, we're not really seeing distress in the market. Honestly, we're not seeing that manifest itself in the way of good buying opportunities. In fact, the cap rates for deals that traded in the second quarter that we tracked were down from first quarter. They were about a 4.7% in second quarter. So cap rate -- there's not a lot of transactions. I think they were only maybe 10 or 12 that we track, which is very low. So not a lot of transactions. We're not seeing a lot of distress in the market at this point. We'll continue to certainly keep our eyes on that, but nothing at the moment in that area.

Our next question comes from the line of Bradley Heffern with RBC Capital Markets.

Previously, you expected positive new lease spreads in the third quarter. Obviously, you aren't guiding to that at this point. But I'm curious, when do you think you will see those spreads turn positive?

I mean it's difficult to say, but I do think '26 looks a lot better for all the reasons we've talked about. So I think as you get into the spring and summer of next year is most likely the time.

Okay. Got it. And then do you have a loss lease or gain to lease figure that you can get?

Yes. So if you look at the way we think about loss lease, if you look at all the leases we did in July compared to all of our in-place leases, there's about a 2% loss to lease, but it's always the largest this time of the year. July is kind of the peak of the year typically. So that number tends to gap out a little bit this time of the year, even in a tougher supply-demand year, and then I would expect it to trend back down a little bit as we get to the back part of the year.

Our next question comes from the line of Haendel St. Juste with Mizuho.

So a couple of questions here. First one, I guess, I'm curious how long do you think this low supply narrative for Sunbelt plays out? Looks like that the low supply window is now being pushed out to 2028. I think a couple of months ago, we're talking about 2027. So can you talk about how difficult it is perhaps for private developers to get equity, debt capital, and how much either rents have to grow or how much their capital costs have to come down for the private side of the business to be able to hit the hurdles and maybe get the development engine starting again?

Haendel, this is Brad. Yes, I mean as part of our development platform, we partner with a lot of merchant developers to build through our prepurchase program. So we're looking at 30 to 40 equity packages a quarter. And on average, we might find one that really hits our return thresholds above a 6% NOI yield with realistic underwriting. Most of those are falling in the mid to low 5% range on realistic underwriting. So those are going to need -- the returns are going to have to improve 10% to 20% or so to make those feasible. So that's a combination of construction cost reduction, rent growth improvement in order to make those numbers work on a more broad basis. But I think really the biggest -- the next biggest challenge right now is the availability of capital. Equity capital is very challenged to get in development deals today. So we certainly don't see that on the horizon picking up. If you look at the development pipeline and the new starts that we're seeing, they are significantly below the last 12 months below historical averages, and we certainly have seen that trend down every single quarter for the last year or so in our region of the country, and we do think that, that continues for the next few quarters to years at this point. The availability of capital is a big challenge at the moment.

That's helpful. And maybe one more, you mentioned a few times here your desire to acquire assets, talk about the broader market, but also talked about your lower leverage here. So I guess I'm curious how much you'd be willing to lean into that, which obviously carries a lower cost? And how much buying power that could allow you to perhaps do more deals. So maybe how much you can lean into debt to fund deals before you kind of get to leverage levels that -- or maybe bump up against some leverage levels?

Haendel, this is Clay. Yes, so we're sitting at 4x levered as we -- here at the end of the quarter. We'd be happy to take that up to 4.5x to 5x. So that would be additional, call it, $1 billion, maybe a little bit north of $1 billion. So we've got plenty of room there on the balance sheet to really begin to lean into these opportunities that are coming up, whether there are more acquisitions or on the development front.

Our next question comes from the line of John Kim with BMO Capital Markets.

I had a question on seasonality, and how you think that compares versus prior years? I know you mentioned that the July lease pricing is favorable versus the second quarter. But I was wondering if you could discuss how that compares versus June.

Yes. I mean it's trending better than June as well. I mean, on an absolute basis, July looks to be our best new lease pricing month of the year. And so as mentioned on the seasonality, we're certainly dialing in less seasonality in the back part of the year for all the reasons we mentioned that we still expect that Q4 would be lower on a blended basis than what Q3 is.

Okay. And then you mentioned Atlanta being one of your best markets in terms of blended pricing and occupancy. I was wondering if you were surprised on the news that net migration turned slightly negative for the first time in the market? And if that -- if you had seen that in your portfolio and if that changes how you allocate capital to the market?

Well, one point of clarification on Atlanta, we saw the most improvement from last year on pricing. It's not -- it's still lagging the portfolio. So there's still a lot of room to run on Atlanta, but we're encouraged by the trends. But broadly no, not concerned about the migration trends at all. I mean, as Brad mentioned earlier, we're right at where we are at pre-COVID levels, which is having 10%, 11%, 12% of our move-ins come from outside of our footprint, and only 4% to 5% of our move-outs leaving our footprint. It's still a net 5%, 6%, 7% in migration trend, and that's remained very steady over the last several quarters.

Our next question comes from the line of Rob Stevenson with Janney.

Tim, you talked about Austin, Phoenix and Nashville as weak given supply. Are you seeing any positive signs in those markets? Or they have enough tough 6 to 9 months ahead of them?

Well, I mean, often, not seeing a lot of positive trends there. I mean, it trended a little bit down in the back part of Q2 in terms of new lease pricing, and it just continues to get -- while supply is on an absolute basis is down a little bit this year compared to last, it's still really high in that market. Now I will say for -- well, one for Austin, the demand fundamentals remain one of our top 1, 2 to 3 markets in terms of all the migration, household formation, job growth. So it will turn around once it gets the supply mix. And one other point I'll make on Austin is that, it's actually our lowest rent-to-income ratio market that we have right now. So really healthy resident base there. I think once the supply pressure wanes, I think that market is poised to do really well. On Nashville, we have seen concessions come down a little bit in the downtown area. I mean it's really -- downtown and around that area of Nashville that's been the hardest hit. We're seeing a little bit better performance out in the suburbs. So I think that's a market that could turn around a little quicker. And then Phoenix, probably somewhere in the middle. It's still a struggle with a lot of supply, particularly focused in certain submarkets. But the job engine and all the things that are going on there, I expect that probably turns around. So not to rank it, I'd say probably Nashville, Phoenix, Austin in terms of the time of which turns around a little bit quicker.

Okay. That's helpful. And then, Brad, beyond Kansas City, can you talk about which of the 12 owned and controlled development sites are both ready to start and make sense from a return and supply demand perspective over the next sort of 6 to 12 months for you guys?

Yes. I mean over the next 6 to 12 months, we should have a pretty healthy start level. I mean we've got a Phase 2 site in Raleigh that we're currently working on. It's out to price at the moment. We've got a site -- actually 2 sites in D.C. that we're working on right now that are still pretty compelling from a return and a long-term value perspective. We have a couple of sites -- or a site in Orlando with a couple of phases to it that we're working on pricing. So of the 12 sites that we currently have and the Kansas City deal has the Phase 2 site, which will start in the next, call it, 6 months or so. But of all of the sites that we have control or owned I think it's important to note that they are all approved. We are just waiting for market fundamentals to turn a little bit more in our favor to support our disciplined growth of that pipeline and a return that we think makes sense for us. So over -- I'd say, over the next 6 to 12 months, we will have 4 to 5 starts in that development pipeline.

Our next question comes from the line of Michael Lewis with Truist Securities.

I have just one kind of bigger picture, longer-term question. We've obviously had this big wave of new supply, and I saw now there's a bill in the U.S. Senate to try to make adding housing easier across the country. But I read an article that said many southern markets are subtly starting to look a lot more like California and coastal markets in terms of not in my backyard when it comes to adding new supply. So in other words, maybe every American feels nimby. It just didn't show up in the South because sprawl was still possible and maybe that's starting to get exhausted. So my question is, are you seeing any changes in any of your markets in terms of local community starting to push back on new supply or raise barriers, so that may be the next supply wave whenever it comes, will be more limited. And does that -- I know you guys are very much focused on demand. But are there kind of lessons learned in the last 2 years in terms of an eye on supply and the way you pick your markets as well?

Yes. I mean, definitely. And -- this is Brad, by the way. In certain markets, of ours, there is a strong pushback against multifamily. In fact, the city here where our office is located in Germantown, they've had a moratorium on new multifamily developments. And you see that in a lot of the municipalities of where we're located. Charleston in Mount Pleasant had a moratorium for a while against multifamily development. So there is a lot of pushback against multifamily and a lot of uphill battles and discussions that have to occur. And I think sometimes there's a misnomer that in the Sunbelt it takes you 6 months to start building a project. And the reality is it still takes a year to 2 years from when you identify a project and to be able to put a shovel in the ground. We had a project in Raleigh, I think it took us 5 years from when we started working on it to get that project under construction. So I do think there are constraints in terms of these suburban Sunbelt markets that really restrict a significant ramp-up in the supply wave that will impact future supply.

Our next question comes from the line of Linda Tsai with Jefferies.

Just one for me. I think you mentioned 85,000 fewer units over the last 4 quarters in your markets and said it would increase to 100,000 to 125,000 fewer points -- fewer units at some point. Was the time frame for this the second half of this year or the first half of next year?

Yes. So the point we're making is on the absorption front where we've obviously had more units being absorbed in the last 4 quarters and what's supplied. And so that's about 85,000 through Q2. Yes, I would expect this -- later this year, it gets beyond 100,000. I mean, we saw that number go from 45,000 to 85,000 just in Q2. So I think when you combine just the number of units being delivered, continuing to drop with no really changes in demand. I think you get to that number later this year.

Our next question comes from the line of Alex Kim with

I just wanted to ask about something that's been asked tangentially by others, but I just wanted to frame it a little differently. Just what, if at all, has surprised you about the supply environment so far this year that has materially impacted pricing power?

I don't know that the supply environment in and of itself has been much of a surprise. I mean there's been a few delays here and there. I think it's more some of the leasing velocity and some of the uncertainty that popped up in Q2 has been -- was certainly more of a surprise relative to our expectations. And I think particularly on the operator side where, again, the point I was making earlier that occupancies were accelerating from Q1 to Q2, but didn't really see a lot of pricing power. I don't think the nervousness both on the operator side and the prospects side or what was driving that? I think it's less of a change in the supply expectations that we had.

Okay. Yes, that's helpful. And then just a quick one. Just could you talk through what your expectations are for the operating environment in the out years when some of your more recent starts will deliver?

Yes. Alex, this is Brad. I'll give you a little sense of that. I mean as we've talked about, certainly, our development pipeline is pretty well positioned to deliver on what we think is going to be a very low supply environment. And just for context, kind of the long-term average supply in our market is probably in that 3% to 3.5% range. If you look at the trailing 12-month starts in our region of the country, it's about 1.7%. And for the comment I made earlier, continues to trend down every quarter. So that really speaks to a pretty good operating environment that we have over the next few years. And I think for context, there's a couple of different periods that you can certainly look at. As I mentioned in my earlier comments, if you go back and you look at the T12 gap between demand and supply, where demand is exceeding supply to get to the level that we're at today, you have to go back to the COVID period of '22 and '23. And certainly, during that period of time, average NOIs were pretty high in the low double-digit range. Alternatively, if you just look at the start -- or excuse me, the delivery numbers that are expected in 2026, you really have to go back to the GFC period after GFC period, call it, '11 and '12 to match those supply levels. And of course, we had 4 to 5 years of performance at that point where NOIs were in the 5% to 6% range. So -- and that occurred for, as I mentioned, 4 to 5 years. So we'll see where we go from here. But I think based on the points that we made earlier, we believe that certainly acceleration in 2026 based on diminishing supply, less uncertainty in the market, certainly are good building blocks for recovery from where we are right now.

Our next question comes from the line of Ann Chan with Green Street.

Just following up on the earlier question from Steve, on the cost side of development economics. Just quickly shifting to the revenue side. Could you walk us through the key assumptions behind your yield targets? Like what kind of rent growth and leasing velocity assumptions are you using to support the mid-single-digit yields that you've mentioned, I think 6% development yields you mentioned recently. And have you made any recent changes to those underwriting assumptions to account for maybe slower lease-up periods or other market trends you're serving?

No, we really haven't -- as I mentioned there, we really haven't made any changes to our assumptions. The 6.1% yield for the Charleston development based on the market comps that we look at, we do a very deep dive in terms of what truly comps that our traffic -- we will compete for traffic for. And if you look at that, the difference between our stabilized rents and today's market comps in that market is less than 5%. So when we deliver that project in 3 years, we're expecting rents to increase from today's rates less than 5%. And we believe that's pretty conservative given that the market expects cumulative rent growth over the next 3 years to be over 11%. So we feel good about how we underwrite our developments. We're pretty conservative, as I mentioned earlier, with -- our current development is trending toward a yield that's about 30 basis points higher than what we originally expected. So no major changes in how we look at development. Yes, our lease-up velocity is a little bit less right now. But certainly, when these developments are delivering over the next 2 to 3 years, the operating environment is expected to be quite a bit different than it is right now. So we've not sped up lease-up to take that into account. It's in line with what our kind of historical underwriting standards are.

Our final question will come from the line of Mason Guell with Baird.

Just one for me. I appreciate all the development lease-up commentary, but can you provide an update specifically on how your 2 acquisition lease-ups are performing? And are there any changes to those initial yield expectations?

Yes, this is Tim. No real change to the yield assumptions on those. I mean, as we talked about with some of the others, the leasing velocity was a little bit behind, but we're doing okay on the rent. So I think broadly, once those are fully stabilized, the yield expectations are intact.

And we have no further questions. I will return the call to MAA for any closing comments.

No further comments from us. If you got any questions, don't hesitate to reach out. Thank you, everybody.