Mid America Apartment Communities Inc. Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the MAA Second Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded today, July 28, 2022. 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, Gretchen, and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team also participating on the call with me this morning are Eric Bolton, Tim Argo, Al Campbell, Rob DelPriore, Joe Fracchia, Tom Grimes and Brad Hill. Before we begin with our 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 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 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. Leasing conditions remained strong across our Sunbelt portfolio. Job growth, positive migration trends and the higher cost of single-family home ownership continue to fuel strong demand. Roughly halfway through the busy leasing season, we do not see any indication that demand is slowing. Leasing traffic or leads were up 11% in the second quarter as compared to the prior year, generating a 7% jump in lease applications. New move-ins during the quarter from households migrating into our Sunbelt footprint increased slightly from last year and drove 15% of our new move-ins. Further supporting the strength of the leasing market and the prospects for continued rent growth, it's worth noting that the rent-to-income ratio of the new leases executed in the second quarter was 22%, and it remains in a very affordable range. Collections also remained strong with 99.5% of the rent billed in the second quarter collected, which is actually up slightly from 99.4% collected in the preceding first quarter. Al will touch on this. While we see no near-term indications that leasing conditions are poised to change, we expect the strong occupancy and rent growth trends to continue. We do anticipate that we'll see some year-over-year moderation in rent growth over the back half of the year as the prior year performance comparisons become more difficult. But current rent levels continue to hold up well and are increasingly fueling solid revenue momentum for the start of the next calendar year. Pressure on operating expenses from the competitive labor market, inflationary and supply chain pressures, and real estate taxes continued in the second quarter. We expect these pressures will likely persist over the balance of the year, with some relief beginning in 2023 as we begin to harvest increasing benefits from our new tech and margin expansion initiatives. On balance, given the strong top line performance, our NOI margin continues to expand. As noted in our earnings release, we once again increased our expectations for growth in same-store net operating income for the year. We are seeing increasing opportunity within the transaction market and are very pleased with our Tampa property acquisition completed earlier this month. This new property acquisition is actually located directly adjacent to one of our existing properties, providing an opportunity to consolidate on-site operations to drive a very attractive investment return. Our new development pipeline continues to expand as we continue to find attractive opportunities to drive value and yields well above our overall cost of capital. Our pipeline of existing construction projects remains on budget, and our lease-up projects are outperforming our pro formas. We remain very encouraged by the current leasing conditions and the early momentum in key variables that will define calendar year 2023's initial performance. There are, of course, growing concerns surrounding the broader economy and concerns surrounding a potential recession. Should we find ourselves facing a weaker economic backdrop later this year or in 2023, we believe that MAA is very well positioned for such an environment. First, we believe that the well-diversified and more affordable nature of our markets will continue to enable our Sunbelt portfolio to better weather an economic slowdown as compared to other regions. MAA's balance sheet and coverage ratios are very strong and better than at any point in our company's history. We continue to introduce new technology and changes to our operating practices that will drive more efficiency and higher margins over the next couple of years. MAA has had an established performance record of responding well to down cycles, and I'm confident that we will again demonstrate that resilience, should we find ourselves in such an environment. Meanwhile, our outlook remains positive, and current leasing conditions are very strong. That's all I have in the way of prepared comments, and I'll now turn the call over to Brad.

Thank you, Eric, and good morning, everyone. Transaction activity in the second quarter slowed meaningfully from the first quarter of the year as the increase in interest rates coupled with a higher degree of economic uncertainty have combined to push buyers with shorter investment time horizons as well as buyers using higher leverage to the sidelines. Unlike previous quarters, we saw a number of properties fall out of contract in the second quarter. For the properties that did close, generally, they closed with stronger institutional quality investors at cap rates that were 40 basis points higher than where deals traded in the first quarter. As the uncertainty in the market has risen, our ability to move quickly and close all cash has led to a significant increase in inbound calls to our transaction team. As Eric mentioned, in July, we successfully acquired a newly constructed property in the Tampa MSA. This 196-unit property is adjacent to an existing MAA property and will be fully integrated into our existing property, creating operational efficiencies and margin expansion opportunities that we will fully harvest over the next few years. Our under construction and in lease-up pipeline remains at $740 million. While we had no construction starts in the second quarter, we did purchase a land parcel for a planned 2023 start of a 300-unit development in Orlando. Also, subsequent to quarter end, we purchased a 500-unit development site in the Denver MSA that we also expect to start construction on in 2023. These land purchases bring our owned land sites for development to eight sites with entitlements for approximately 2,677 units. We previously expected to start construction on our sites in Raleigh, Tampa and Denver this year, but we've pushed the start of our Denver project to 2023. Predevelopment work on our Raleigh and Tampa projects are progressing, and subject to receiving acceptable construction costs and the appropriate building permits, we still expect to start construction on these projects this year. We continue predevelopment work on several additional in-house and prepurchase developments located in Atlanta, Charlotte, Denver, Orlando and Salt Lake City that we hope to start over the next 18 months. The timing of planned construction starts can change as we work through the local approval and the construction bidding processes, but at this time, we expect to start construction on approximately 1,250 units this year, and we expect to end the year with a pipeline of under-construction projects over $700 million and a pipeline of projects both under construction and in lease-up between $925 million and $975 million. Our construction management team continues to actively manage all our projects and has done a tremendous job working with our contractors to keep the inflationary pressures surrounding labor and material costs from causing a meaningful increase to our overall job cost. To avoid the cost escalations that are so prevalent in the market today, we are making commitments to purchase materials much earlier in the process than we've had to in the past. Nevertheless, delivery delays, material shortages, and securing building permits remain our biggest challenges. In our supplemental, we did push back by one quarter our expected delivery dates on Novel Val Vista in Phoenix and Central Park in Denver. Operating performance at communities in their initial lease-up continues to strengthen; traffic and leads remain elevated, leading to rents well ahead of our pro forma expectations at all of our lease-up communities. Due to the strong leasing performance achieved by our property team at MAA Westland, we moved up our expected stabilization date by one quarter to third quarter of 2022. As mentioned in our release, we successfully sold our two disposition properties in the Fort Worth market for $167 million. We have two more planned disposition properties in the market that we hope to close late this year. One is in Suburban Maryland, and one is in the Austin market. That's all I have in the way of prepared comments. So with that, I'll turn it over to Tom.

Thank you, Brad, and good morning, everyone. Same-store performance for the quarter was once again robust, and our busy summer season is going well. We saw strong pricing performance across the portfolio during the second quarter. Blended lease-over-lease pricing achieved during the quarter was up 17.2%. As a result, all in-place rents or effective rent growth increased by 14.3% on a year-over-year basis and 4% from the prior quarter. Average effective rent growth is our primary revenue driver, and with the current blended pricing momentum, we expect it to continue to strengthen. In addition, average daily occupancy for the quarter was a strong 95.7. The strong demand environment continues to create new opportunities for our product upgrade initiatives. This includes our interior unit redevelopment program as well as installation of our smart home technology package that includes mobile control of lights, thermostat and security as well as leak detection. During the quarter, we completed 1,844 interior unit upgrades and installed 9,438 smart home packages. In 2022, we plan to complete over 6,000 interior unit upgrades and approximately 23,000 smart home packages. By the end of the year, we expect our total number of smart units to approach 70,000. For our repositioning program, we're in the final stages of repricing leases at the first eight properties in the program that are now complete, and the results have exceeded our expectations. We have another eight projects that are underway this year. Strong leasing activity continues for July. Same-store lease-over-lease pricing on new move-ins as of July 25 is 17.9% ahead of the rent of the prior lease. Renewal lease pricing in July is running 15.4% of the prior lease and as a result, blended lease pricing for the portfolio is up approximately 16.6% thus far in July. Same-store physical occupancy as of July 25 was 95.9. Exposure, which is all vacant units plus notices through a 60-day period, is just 7.4%. Both numbers are in line with our expectations. Our teams have performed well during our busy summer season and have the portfolio well-positioned for the slower fall and winter seasons. I'm grateful for their time and commitment to serving all our stakeholders. I'll now turn the call over to Al.

Thank you, Tom, and good morning, everyone. Reported core FFO per share of $2.02 was $0.05 above the midpoint of our guidance for the quarter. The outperformance virtually all came from property revenues and stronger than projected rental pricing trends continued through the quarter, which produced a strong 17.2% increase in blended lease pricing for the quarter even as more challenging prior year comparisons began to grow late in the quarter. We do continue to expect a growing impact from prior comps as we move through the back half of the year as well as a return of a more normal seasonal pattern during the fourth quarter, which we'll discuss just a bit more guidance in a moment. Same-store operating expenses for the quarter were slightly higher than projected as we saw some inflationary pressures and repair maintenance costs as well as revised expectations for real estate tax expenses for the year as more valuation information came in during the quarter. Our revised guidance for the year reflects these expense pressures, but these are more than offset by growing revenues as reflected by our revised NOI guidance. Our balance sheet is stronger than ever as reflected by the upgrade to an A- credit rating by Fitch during the quarter. We continue to have discussions with the other agencies and are confident the strength will eventually be reflected in our other ratings as well. Just after the end of the quarter, we completed a renewal of our unsecured credit facility, which is our primary tool for liquidity and short-term funding of development, debt maturities and short-term operating needs. As part of the renewal, we increased the facility size to $1.25 billion from $1 billion and captured improvements in pricing and terms despite the growing volatility of the financing markets. At the end of the quarter, we had no outstanding borrowings under our credit facility, and our leverage was historically low with debt to EBITDA at a low 3.97x and 100% of our debt had fixed interest rates with an average maturity of 8.2 years, providing potential in a rising interest rate environment. And finally, given the second quarter performance and expectations for the remainder of the year, we are increasing both our core FFO and same-store guidance for the full year. We increased our full year range for core FFO by $0.17 per share or 2% at the midpoint to a range of $8.13 to $8.37 per share or $8.25 at the midpoint. This now represents a 17.5% growth over the prior year. This increase is essentially all the result of higher revenue growth, strong pricing momentum continued through the second quarter. As we mentioned, we're now projecting a 125 basis points increase in our effective rent growth expectation for the year to 13.25% at the midpoint. Our revenue projection for the year continues to be built on strong pricing performance and stable occupancy for the year with some growing impact from prior year comps for the second half and normal seasonal trends during the fourth quarter, as we mentioned. We expect blended lease pricing to be approximately 8% for the second half of the year, which for context is on top of a record high 15% growth in blended pricing captured in the back half of last year. So I think this reflects our expectation for continued strong demand in our markets. As mentioned, we also increased the expected growth rate for same-store operating expenses for the full year by 100 basis points at the midpoint of our range, now 6.5% to 7.5% for the full year, primarily reflecting the pressure in repair and maintenance costs as well as real estate taxes. Property valuations received during the quarter, mainly in Texas, reflected aggressive assessments, and we do expect these valuation increases to be partially offset by millage rate rollbacks finalized late in the year, but we increased our expectation for taxes by 100 basis points for the full year to reflect the net impact. The overall impact of these changes is an increase to our expectations for same-store NOI growth for the year to a midpoint of 15%, up from the 13.5% provided at the end of the first quarter. And this represents a 170 basis point expansion in our margin in 2022 from the prior year. So other changes to guidance of note were a $50 million reduction in our expected development spending for the year, reflecting really revised timing of funding as well as a $25 million reduction in our gross disposition proceeds as we finalized the sale of the two remaining properties in Maryland and Austin. So that's all that we have in the way of prepared comments. So Gretchen, we'll now turn the call back over to you for any questions.

Our first question comes from Nicholas Joseph from Citi.

Obviously, rents have been moving up, but appreciate the affordability stats that you provided for the new move-ins. But for the existing portfolio, obviously, you don't kind of requalify them off of income. But are you seeing anything change in terms of move-outs because rent is too high? Or any other kind of commentary on the affordability of the existing portfolio would be helpful.

Yes. Nick, I'll jump in there. I mean I think looking at a few different fronts, but collections improved to 99.5 from 99.4, which is encouraging. Our unit types, we're not seeing a flight to efficiencies, and our efficiency 1s, 2s and 3s are performing consistently. Our headcount units have moved from 1.7 heads to on that. So it really seems to be moving steadily. I mean we are pushing rates, and we do see a tick-up in move-outs due to rent increase. But again, we're moving those folks back in at 22%. So it's pretty steady as it goes, Nick.

That's helpful. And then as you think about the pricing trends, I guess, year-to-date, but also your expectations in the back half of the year. What does that start to look at in terms of the earn-in for next year in 2023?

Yes, Nick, this is Tim. I'll hit that one. So thinking about the earn-in. The way we typically think about that is our full year blended lease-over-lease for this year, call it, somewhere around half of that, we would expect to blend into 2023. So if you think about the forecast that we laid out there in the 8% back half of the year, blended lease-over-lease that comes out to about somewhere 12%, 12.5% blended lease-over-lease is what we're expecting for full year 2022. So call it, somewhere about 6% earn-in as we sit here today.

And how does that compare to kind of the history of earnings?

It's certainly the highest we've ever had. I think going back to 2020, it was 0 last year, I think it was about 3% or so, so certainly the highest we've seen.

Our next question comes from John Kim from BMO Capital Markets.

Eric, you transformed the portfolio for more of a classic focus to a more diversified price point. Should we give an update on what percentage of your portfolio Class A versus Class B? And what part you were able to perform better in consumer recession?

John, you're really fragmented. And I think the first question was what's the balance between A and B assets as we look on that?

Yes. Between A and B, it's roughly 50-50. I mean there are some nuances between what we would call A plus A and B and B plus I would talk about 50-50 or so.

And the second part was what do you think will perform better if we head into recession?

Well, John, this is Eric. I think that broadly speaking, across our markets and our footprint, I mean, we see that our product is pretty for that rent-to-income ratio that we see between the As and Bs is pretty consistent across the portfolio. Our collections performance is still consistent across the portfolio. So I think that trying to think that the Bs will maybe do a little bit better than As in a downturn just because it's a slightly more affordable product. But honestly, I don't think there's going to be a huge difference if we find ourselves in a downturn of some sort. I think it becomes more a question about markets that you're in and employment base, employment diversification. And certainly, I do think that a slightly more affordable product probably holds up a little bit better. But across our Sunbelt markets, we think that broadly, the whole region will just do a little bit better in a downturn, as it has historically always in prior downturns.

Okay. And my second question is on expenses. You've seen some inflationary pressure expenses higher than your coastal peers. And I realize some of that is just real estate taxes. But you made a similar type of investment in technology as you and had. So I'm wondering if you could comment on the expense guidance going up this quarter.

John, you were really broken there something about inflation and expense guidance.

I think he mentioned something about real estate taxes.

increase on the expense guidance

I think a couple of things, and I'll start with this, Tom, and please jump in here. But on the guidance on that, and John, you were broken up, but I think you're asking that. And it's two things primarily, which up a bit. And then real estate taxes, which is obviously almost 40% of our expenses, that's a real big driver of that. And for that picture, particularly, we started the year with no information really, put out our best estimates of it. And we saw the valuations come in higher. They're pretty aggressive as they're coming in, particularly from Texas. As we mentioned, we do expect rate rollbacks or millage rate rollbacks come in for a large part of that as it progresses. But we get those late in the year, so it's hard to get a picture of that. And we'll certainly continue to fight like we do every year and we'll formally litigate over half of our Texas portfolio. So that's really the tax pressure. And Tom, you might want to give color on if you have any, but that's out, repair maintenance and taxes both in the quarter and I would say in the guidance as well as one for the back part of the year, probably tilting a little more toward taxes.

Our next question comes from Brad Heffern from RBC Capital Markets.

I was curious if you could talk about the plan for the $200 million in equity forwards that were sold last year. I know they need to be settled by February of next year, but it doesn't really seem like there's an obvious need for the capital, especially with leverage below the target range and likely moving lower?

Yes, I think that's a great question. I mean you hit that right, we have the forwards outstanding to, I think, February of next year. We don't have immediate plans to draw on that, but I think our expectations are between now and then to draw that to help fund the remaining development expectations for this year and as we go into next year. So we certainly don't need to take our leverage lower, but it is a part of our funding over the longer term that we think is important.

Okay. And are you guys comfortable running at sort of like mid- to high 3x leverage or is there a desire to maybe ramp up development or do some net acquisition activity that fuel to get that leverage number back into the 4s?

I will provide the leverage target and maybe let Brad and Eric discuss other parts of the strategy, but currently we are slightly below our range. We have been emphasizing for the last few quarters that we are actively working to strengthen the business in every area. Our balance sheet is very strong right now. Our leverage is historically low, with the debt to EBITDA ratio touching 3.97%. This is below our preferred range, which we consider to be between 4% to 5%. We wouldn't want to exceed 5% given our current credit ratings, so we are below where we aim to be. We see this as an opportunity, both for protection and to seize upcoming opportunities. As we enter this recession and as opportunities arise for Brad and the team, we intend to grant them the flexibility to act.

Brad, this is Brad Hill. I think certainly, we've talked about over the last few quarters, the vision and the plan to grow our development pipeline, and we're certainly on pace to do that as I laid out in my comments. What Al has done with the balance sheet and the really optionality that he has provided us with to be able to do that is there. And I would say just on the acquisition side, certainly, we're keeping our eyes open in that area. And like past disruptions in the market, we've been able to really take advantage of those within our footprint. We have focused on the Sunbelt region of the country for the last 28 years. So we know that region of the country. We certainly have executed both on a transaction side and then operating side for the last 28 years there through all parts of the cycle. So what Al is doing with the balance sheet puts us in a great position to be able to execute on some opportunities, which are likely to manifest themselves during this time.

Our next question comes from Austin Wurschmidt from KeyBanc Capital.

So Eric, I'm just curious if you are concerned at all that if we do get sort of an economic slowdown if the migration trends that you've referenced for a couple of years begin to soften further, perhaps you've had a little bit of a pull forward in demand in recent years. And when you kind of marry that with the fact that the under-construction pipeline in many Sunbelt markets is up. So just curious kind of how you think about that versus maybe the setup for the portfolio ahead of any prior downturns?

Our long-term strategy has always focused on preparing for both downturns and upswings in the market. We believe that the best approach is to concentrate on areas with strong job and population growth over time, which is why we maintain our focus on Sunbelt markets to reduce fluctuations in our performance. Over the years, we have also diversified across different regions and strategically allocated capital between larger markets and select secondary ones. Our portfolio targets a price point that appeals to the widest segment of the rental market, avoiding both the low-end and luxury tiers. This approach has proven effective for us over a long period. Migration trends, which we have discussed in recent years, were noticeable even before COVID, with around 9% of our move-ins coming from outside the Sunbelt. This has now increased to 15%. While this trend is beneficial for us, it's important to note that it hasn't been overwhelming; the change is from 9% to 15%, not a drastic shift like 50%. Therefore, while migration trends have helped us, they may not have as significant an impact as some might suggest based on national discussions. In the event of an economic downturn, our diverse employment base and the affordability of the Sunbelt region should continue to work in our favor. We believe that our portfolio has the characteristics that would provide resilience during a downturn.

That's a thoughtful answer. And then just curious about sort of the acquisition opportunities. I mean you were fairly upbeat when we spoke in REIT. You seem to still be fairly upbeat today and certainly have the balance sheet to fund if the opportunities emerge. But can you size up just what the pipeline looks like today or what you think you can really capitalize on? And then what the negotiations are like for cap rates in your markets versus maybe where it was 6 to 12 months ago?

Yes, Austin, this is Brad. In terms of cap rates, as I mentioned in my comments, there's definitely been a movement in the last two to three months. But that movement is very different based on the asset quality, the asset location. And just to keep in mind, really the assets that we're looking at is just a segment of the assets that are out there. I mean we're looking at well-located assets, brand-new assets, high-quality assets. And so what we've seen there is about a 40 basis points change in the cap rates. And what we've also seen, though, is we look at the assets that traded in the second quarter, every asset that traded went to high-quality institutional capital. So we're seeing buyers certainly flock to high-quality assets, and we're also seeing sellers flock to high-quality buyers. And that's where, in the past, when the markets have changed, where we've been able to find our opportunities through our execution capabilities and through just our 28-year history in the markets that we're in. So as we sit here today, we are getting more calls on acquisitions than we've ever received, frankly, to look at assets that either fell out of contract or they're just taking to a couple of folks that they know can close the assets. So we're getting a lot of look at assets. And then I think just from an underwriting perspective, the deals within our region of the country just continue to perform extremely well, which leads us to believe that from a performance standpoint, these assets, again, that are very high quality will continue to perform. I do think that the assets that are coming to market that we're looking at are likely to trade. You mentioned cap rates today versus a year ago. Well, cap rates today on what we're looking at are 3.7. A year ago, they were 3.8. So we're still under kind of where we were a year ago. So although there's been some recent movement, interest rates went up in the second quarter, they're back down a bit. You can get a 10-year rate right now in the 3%, 4%, 5% range. So there appears to be on the assets that we are bidding against a floor at the moment on pricing for these high-quality assets. There are bidders that are still stepping into the 3%, 7%, 5% to 4% cap rate range. So there appears to be a bid certainly for those types of assets. You get outside of that for assets that aren't as well located, have a significant value add. The price differential can be a little bit different, but that's not what we're talking about. So our execution capabilities. Our ability to put our platform value in place on these assets like we're doing with the Tampa asset I think will yield us selectively an opportunity or two that we can execute on.

Our next question comes from Rich Anderson from SMBC.

And just suggestion maybe do the question Q&A alphabetically next time. So the first question is the 22% rent to income. What's the range of that, assuming that there's that assumes though, kind of a 1.5 person per unit type of income? So what's the range of that 22%?

Yes, Rich, this is Tim. It's a pretty narrow band. I'm going through all of our markets right now. The highest is 24%, the lowest is 19%. So pretty narrow band, most of them in that 22% range.

Okay. To follow up with my second question, Tom mentioned that you're experiencing move-outs due to rent increases, but you're compensating for that with 18% increases on new leases and a consistent 22% rent to income ratio. Can you describe the dynamics of this situation, like whether a single occupant is moving out and roommates are moving in? I'm not implying that there's a trend of doubling up, but it seems possible that it's happening at the margins as individuals living alone might be feeling financially strained.

Rich, we're not seeing the doubling up. If we look at our headcount per unit, it's dropped each quarter since Q1 of 2020, really pre-COVID. So we are not seeing signs of doubling up occurring.

Our next question comes from Rob Stevenson from Janney.

Brad, with the land parcels that you've bought, how many projects do you now control land for future development on? And what's the ballpark expected cost to develop out those parcels?

We currently own eight sites with 2,600 to 2,700 units. This count does not include sites under contract that we haven't purchased yet, such as the Raleigh site we plan to close on later this year, which will add to our total. We also have joint venture sites under contract with our partners that will count as additional sites. As it stands, we own and control eight sites, totaling 2,600 to 2,700 units. The costs on these assets vary somewhat, but I have a rough estimate of the unit costs in front of me.

Okay. That's helpful. And then what caused you guys to push the Denver development start out?

Yes. That is really a permitting issue, and that's really what changed some of the funding requirements or needs from development that Al mentioned. Even the Tampa and the Raleigh project that we're working on, really the approval process is taking a lot longer than what we anticipated on all of those projects. So they're generally all getting delayed. What we're finding is these municipalities are really kind of kicking the can down the road and reviewing things at this point, and it's taking a lot longer than we expected, but that is a permitting delay on the Denver deal.

Okay. Al and Tom, considering the ongoing investment in technology initiatives and various operational aspects, what remains that could significantly affect margins or operating expenses in the future that hasn't already been implemented? How much more is on the horizon, or have you reached a point where you’ve done all you can for now and everything from this point forward is incremental? In the next couple of years, when assessing operating margin spending, what are the key drivers and potential impacts for you?

We've made a lot of progress on our revenue and a ton more to come, and Tim's got a great outline that he'll walk you through on that.

Yes, I'll walk through and hit a couple of key points, I think, that are important. So I would say we're in the very early innings in terms of capturing efficiencies on the expense side, really going back to late 2019, early 2020. Our initial focus really was on the opportunities with and some of the revenue opportunities, as you mentioned, and what that could do for us on the revenue side. And then really as well, the key infrastructure that puts into place as a result integrates with site plan that can help make our service staff and maintenance operations a little more efficient, and then also offer some opportunities from more seamless self-touring options. So I think it's important to note today that these have been rolled out about 3/4 of our units. And for the full year 2022, there's about $16 million or so of NOI embedded in our NOI stream for 2022. And then by the end of 2023, as we roll out some more, we think there's probably 120 basis points of margin enhancement from the rent increases just strictly on the Smart Home. And then as we fully roll it out, I think it will get fully priced out, probably by about mid-2024, you're talking 140 basis points of margin expansion just related to this piece and $25 million to $30 million of ongoing NOI stream related to that. So now the focus, as we've got that into place is a little more on the expense side. And so I think now with our new CRM tool in process and live across the portfolio, we're focused on some of the efficiencies we think we can get primarily through staffing and task efficiencies. Right now, the new CRM gives us a lot greater access and visibility into properties and prospects, and we're focused on initially on some of the on-site office oversight roles to efficiencies from properties within close proximity, so call it, pods or however you want to label it. We think that some of the near-term benefits that come over the next year or so. So when we think about adding, there's about 200 of our properties, call it, 70% of our portfolio that fit into two or more property pilot-type scenario. We think that will create somewhere $5 million to $10 million, about 40 basis points of margin expansion as we get towards the end of 2023 just on that piece. And so then we started thinking about beyond the initial pilot scenarios we're working on. We're testing and we're working on and reworking processes related to self-touring, virtual touring, AI technology as well as centralizing and automating some on-site activity. So we think that ultimately creates more efficiencies on the leasing side and other day-to-day tasks. And with our portfolio size, just given the high degree of variability in our assets, mid-rise, high-rise, garden style, some variation, frankly, in the consumer preferences across our markets. In many cases, there isn't just a one-size-fit-all solution. So trying to be thoughtful of that and mindful of that. So a long way of answering your question that beyond the 180 basis points of margin expansion that I mentioned between the Smart Rent and some of the initial podding. We think there's a lot more opportunity to come over the next couple of years.

Okay. And then last 1 for me. Tom, when are you hitting your most difficult month of year-over-year comps in terms of the blended lease growth?

We're heading into it now. We are headed into it now. Al had the back half, front half split force that I think is pretty telling. I'll let him share that on blended piece. He's just got it handy.

Yes, certainly, if we look back to last year, Rob mentioned that in the third quarter, the leasing at the forefront was 15%, and it blended to 16% in the fourth quarter. Those are the comparisons we are facing now, and July to August seemed to be the peak period to compare against. I hope that answers your question.

I believe the third quarter will be the peak. Last year, we noticed a dip in the fourth quarter compared to the third quarter. Therefore, I anticipate that the third quarter will present our greatest challenge. However, as previously mentioned, the rents for July, which is the first month of the quarter, look promising. As Al pointed out, we expect blended pricing for the second half of the year to be 8%, in addition to the 15% we achieved during the latter half of last year. Specifically to your question, Rob, I think this month and next month will likely present our toughest monthly comparisons.

Has there been any change since pre-COVID regarding the number of leases coming up in the fourth quarter? Is the volume still relatively low for this period, or have you allowed more leases to come up now that conditions have improved?

We've been quite disciplined on that, Rob, and that can get you into trouble in the fourth quarter, and our lease expirations remain on target with a drawdown in the fourth quarter.

Our next question comes from Anthony Powell from Barclays.

Question on some of your more tech and biotech focused markets like Austin and Raleigh. Have you seen any decline in traffic in those markets? Or do you expect to see any weakness there given some of the job losses we've seen in those sectors?

Yes. We have not seen any decline in those two areas, particularly due to the ongoing tech transition. In Austin, for instance, Tesla has opened its Gigafactory, which has increased hiring in that area. Additionally, Apple is constructing a large campus in Raleigh, leading to job creation there. These are just the notable developments. Overall, the Sunbelt continues to thrive as tech companies redistribute jobs across the country. We are currently in a strong position in those two markets, and rent increases are impressive there.

And you talked a lot about how rent-to-income levels are consistent even as you raise rents so much, the incomes are going up. Over the long run, does that raise the risk of more move-outs to home ownership as you have maybe a more affluent renter base that may opt that out over the long run?

No. The key point to consider is that homeownership rates have been increasing at a faster pace than our rents. Currently, with higher incomes being reported, we haven't observed a lower percentage of move-outs to home buying compared to where we are now.

And I'll also add that what's been interesting to watch play out as well over the last two or three years is how the demographic of our renter profile has continued to evolve, continues to become increasingly single, continues to become increasingly female. And frankly, it's a demographic that wants the lifestyle that we're offering our communities as opposed to a single-family lifestyle. So we do not see any early concerns developing that should we find ourselves in a very affordable single-family housing market that we're at any sort of material risk from what we normally are in terms of move-outs associated with home buying.

Our next question comes from Alexander Goldfarb from Piper Sandler.

I want to revisit the question regarding the Sunbelt. I recognize the difference between the 9% and 15% move-ins from outside the Sunbelt. However, I'm curious about your overall perspective on the Sunbelt markets you operate in. Are you suggesting that inbound migration has less of an impact on your total Sunbelt operations? Or do you find that your portfolio attracts a larger share of residents from the Sunbelt, despite the overall markets benefiting significantly from inbound migration? I'm trying to understand if MAA's experience with inbound migration reflects the market trends or is more about your specific positioning within those markets.

That's a good question. Honestly, I'm not sure of the answer. The metrics you mentioned, from 9% to 15%, and the move-in traffic we're observing from outside the Sunbelt into our markets are based solely on what we see at our properties. It's possible that broader market statistics show a higher level of migration than the 15% we referenced in the second quarter. There's been a lot of discussion about migration from coastal markets into the Sunbelt, and many of those relocating are affluent households. Given this affluence, it's likely that these households are moving into single-family homes. We're witnessing sharp increases in single-family home pricing in places like Atlanta and Nashville, driven by homeowners from outside the Sunbelt wanting to buy property here. There may be a difference in experiences, but I believe the idea that our portfolio has greatly benefited from relocations into the Sunbelt is somewhat exaggerated. For us, only 15% of our move-ins come from outside the Sunbelt compared to the 9% I mentioned earlier. The majority of leases we are executing are from individuals relocating within the Sunbelt.

Okay. And then the second question. On the market disruption that you guys discussed early on the call, and many of my peers have asked about on the cap rates, you said up 40 bps buyers or sellers want more, the better sponsors. Just to be clear, this is really fall out from levered buyers stepping away and such that when you look year-over-year, cap rates really aren't changed. So as that process come up off the market? Or are you suggesting that it's beyond that, like more deals are unwinding simply regardless of whether it's a levered buyer or not simply because of the macro interest rate, pick your favorite of the day. I'm just trying to understand whether you're specifically talking to levered buyers pulling back in the fallout or if this is a broader fallout in the market on transactions?

Yes, this is Brad. One thing I would say is that there's not a ton of transaction data at this point. So I think, frankly, there's not a lot on the market right now. And I think as we get into the third quarter, we'll certainly start to see more data points. But what we're seeing today, it appears that the majority of the fallout to use your term is related to the higher levered buyers pulling back and buyers with shorter-term time horizons pulling out of the market. And those are impacting a certain type of asset class. They're not as impactful on the stuff that we are looking at. We certainly hear in the market that cap rates are off 75 to 100 basis points. So we're not seeing that at this point out. Clearly, certain assets that are not well located or have some type of inherent issue with them, you could certainly see that. But we're not seeing that at this point. And based on the fact that every deal that we saw that closed in the second quarter was with institutional quality capital tells us that there's still a demand by institutional capital for well-located assets and the cap rates have moved a bit, but they have not moved tremendously. And they're still down from where we were in the second quarter of last year.

Our next question comes from Chandni Luthra of Goldman Sachs.

So with day-to-day inflation on commodities, food complex, gas prices. Could you talk about what you are seeing, if any impact on your residents? Has the discussion in negotiation level of negotiation gone up on renewals, just given more pressure on day-to-day expenses for some of your tenants perhaps?

Chandni, it's Tom. The level of negotiation regarding feedback from residents started to increase last year as renewal increases also rose. We negotiated slightly less than a percentage point on our renewal offers, specifically around 20 basis points. This has remained consistent over time, and the renewal acceptance rate has remained historically high while turnover has stayed flat. We do receive questions about it, but we have not found it necessary to adjust our renewal rates, resulting in very little pushback in this area. When residents go into the market and see our new lease rates, which are still $100 higher than our average renewal rates, they recognize that they are priced fairly, accept the rates, and move on.

And Chandni, it is Tim. I think a point worth noting, if you look at some of our B assets or little bit lower price point assets. We actually have seen pricing performance do a little bit better in the last couple of quarters on those assets. So arguably, those would be the ones that might feel a little more pressure and we just haven't seen it from a pricing standpoint?

Yes. I would say that just municipal delays and those type things is not having much of an impact at this point on our overall yields. Certainly, in the last six months, we have seen a tremendous increase in cost escalation, very acute the last six months, I'd say. But we are starting to see early signs of that cost escalation alleviate a bit. Certainly, some of the commodity prices are down, lumber is down just given that the single-family construction is off a bit. So from where we sit today, it looks like going forward that the cost escalation that we are seeing will start to mitigate itself. I don't think costs go backwards, but I think the rate of increase will substantially slow. And then you couple that with we're seeing on the rent side, and our yields are actually holding up pretty well from those delays that I just talked about.

We'll take our next question from Tayo Okusanya from Credit Suisse.

Most of my questions have been answered. But just a quick one. I mean you did mention earlier on that the resident base is increasingly turning single, increasingly turning female. I'm just curious how that is impacting how buildings are designed going forward, whether it's unit mix and kind of what implications that could have for development costs going forward? And also, if you could kind of throw in any ESG considerations as part of that answer.

From a development perspective, we haven't made significant changes in this area. One notable adjustment has been the increased focus on amenities for pets. Additionally, there is a growing demand for meeting spaces in common areas where residents, regardless of their demographics, can come together and build a sense of community. We are dedicating substantial effort to this aspect. Beyond the enhanced design for pet areas, there hasn't been much change related to shifts in the demographic landscape.

Tayo, and what I would say, over a longer period of time, longer horizon, I think that what has changed about the product in general, and it was a change in response to this demographic shift, but I think the demographic shift that you alluded to is finding it attractive and that is structured parking, interior hallways, I think it's also been one of the reasons why our Smart Home and technology has been so embraced. It just provides a certain degree of privacy that I think people really appreciate. And get out of the weather elements a little bit more with the interior hallways and the structured parking deck. So I think those things have continued to really find great receptivity this demographic shift that we've mentioned, and I think it will continue to do so going forward.

Tayo, this is Tim. Addressing your ESG point, our ESG group collaborates closely with our development team, and we have established a broad standard for green building certification. We are currently evaluating our recent projects that have achieved silver and even gold certifications. We are definitely considering what makes sense in our underwriting from both the resident's perspective and our own.

Our next question comes from Nick Yulico from Scotiabank.

It's on for Nick. Most of my questions have been answered a lot of great detail. Just a quick 1 for me, and I apologize if you answered this, but what is the assumed split between new renewal embedded in the new guide? Is there an expectation for like a divergence through the end of the year in '23?

This is Al. I want to provide some insights on that. As we previously discussed and as Eric pointed out, we are looking at an 8% growth rate for the second half of the year. However, we do have slightly lower expectations for the fourth quarter due to the seasonal trends associated with the holiday season. Overall, we are seeing the strongest performance in renewals, which are expected to be in the lower double digits. New leasing, on the other hand, is under more pressure from both comparables and seasonality, and we anticipate that to be in the single to mid-single digit range. That summarizes our outlook for the latter half of the year.

Great. And then what are the main drivers of the components of the OpEx guidance increase? I know you mentioned real estate taxes are roughly 4% to 5%. So just wondering what's increasing the rest of that 6.5% to 7.5%?

In general, the increase for the quarter is due to two main components: repair and maintenance as well as taxes. We have discussed taxes, so I will focus on repair and maintenance, which mainly involves rising costs of materials and HVAC expenses due to the hot summer. Additionally, this month marks our highest turnover period by design, as we schedule most of our unit turnover during the summer months when demand is highest. Consequently, we are experiencing some pressure in this area, and I do not anticipate a significant decrease in this trend for the latter half of the year. Some of the strategies mentioned by Tim will support us moving forward, but the primary factors for the change were repair and maintenance costs and taxes.

Our next question comes from from Green Street.

Brad, I was just wondering if you could share pricing expectations for the incremental dispositions that you're guiding to through year-end? And then on top of that too, if you could touch on the just of those assets that you're marketing and considering marketing that would be great.

Yes, I believe I mentioned this earlier. We currently have two assets that we are looking to market. One is located in suburban Maryland, and the other in Austin. These assets are, on average, about 25 years old. For the entire year, we anticipate achieving a yield of approximately 4% to 4.5% on these assets, based on their net operating income. However, the asset in suburban Maryland has been facing some challenges that are affecting our yields. Specifically, this location has a right of first refusal held by the county, allowing them to match any offer we receive. Although this isn't usually a significant issue, the county recently exercised this right on a nearby asset, making buyers more hesitant to invest time in due diligence. They would need to go under contract and continue their due diligence while the county can step in at any moment. This situation has an impact on buyer interest. Additionally, this asset has encountered some regulatory issues that, although recently resolved, have affected its performance and renewal cap increases. These factors are influencing the pricing and overall returns from these dispositions, making them lower than what we would typically expect.

I appreciate the color there. And Tom, are you noticing any pickup in concessions in any of your more heavily supply markets that other operators might be using to drive up demand?

No. The concessions have really not been heavily used. And where we see them is really only in the pockets where they're not really being used to drive excess demand on a stabilized asset, but you see them used from time to time on new lease-ups. But we're not having to compete much with those at this point just because our demand level is good, and concessions are less than 0.4% of our net potential right now.

And our last question comes from Barry Lu from Green Street.

My first question is about the expense side. You mentioned a margin expansion of 180 basis points from technology investments in your platform. Can you clarify how much of that expansion is attributed to expenses compared to growth in top line revenue?

Yes. For the specific 180, about 40 or so of that is related to expense and the rest is revenue. And then that's just what all we've identified for now, or we think there's some further opportunity on the expense side in the next couple of years.

Got it. And also, are you concerned about turnover at all? And how much more are you willing to push pricing the capital more of your loss to lease? And also, do you know what the loss we see?

Turnover at 45% on a 12-month rolling basis is very good and low, sort of the lowest I've seen in my career, and we feel very good about the opportunity for pricing going forward and still believe now is the time to push rate versus volume. So we'll see a seasonal slowdown and tougher comps, but demand is good, and our priority is for growing rents.

Yes. On the loss lease, if you look at our June blended rents compared to where our whole portfolio sits, it's about 8% or so. If you look at just new leases, it's about 11%, but we would typically expect that to be the highest right now. This is sort of the peak season, but that's where it stands right now.

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

Well, we appreciate everyone being on the call and hanging there with us. And obviously, feel free to reach out back to us at any point if you have any other questions you'd like to ask. So thank you very much.

This concludes today's program. Thank you for your participation. You may disconnect at any time.