Mid America Apartment Communities Inc. Q3 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the MAA Third Quarter 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, the company will conduct a question-and-answer session. As a reminder, this conference call is being recorded today, October 27th, 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, Riesa, 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 audio recording of this call will 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. MAA posted solid results for the third quarter as strong demand for apartment housing across our portfolio drove a 16% increase in leasing traffic volume as compared to last year's third quarter. Higher leasing traffic supported continued solid occupancy and rent growth as was detailed in our earnings release. While as expected, we are seeing a return to more normal seasonal leasing patterns with slower leasing velocity typical during the coming holiday season, it's clear that leasing conditions have held up stronger than expected over the back half of this year, and we are carrying solid momentum into calendar year 2023. We will have more details to share about our expectations for next year when we provide earnings guidance for 2023 as part of our fourth quarter earnings release. But absent a severe recession taking place with resulting weakness in the employment markets, we expect the demand for apartment housing across our portfolio to continue to be strong. At this point, we've not seen any evidence of weakness in the drivers of demand for apartment housing as it applies to our Sunbelt portfolio. Of the leases written in the third quarter, 15% of our new residents were relocating to the Sunbelt from coastal markets. This is comparable to the trends we saw last year. It's also worth noting that the move-outs we had in the third quarter, only 5% were moving out of the Sunbelt. This is also consistent with last year's trends. As noted earlier, leasing traffic is high and resident turnover or move-outs remain well below long-term trends. And importantly, we are seeing no signs of stress in terms of affordability with rent-to-income ratios on the leases completed in Q3 remaining consistent with Q3 of last year in the 22% range and resident payment practices remaining very strong with over 99% of bills rent being collected. As detailed in the earnings release, we are nearing full completion on several of our new development projects, and we have recently started construction on a new property located in Tampa, Florida. In addition, we expect to start construction during the fourth quarter on a new property located in Research Triangle Park in Raleigh, North Carolina. During the third quarter, we also closed on two acquisitions where we had initiated negotiations and due diligence earlier in the year. The transaction market has become increasingly choppy as rising interest rates and economic uncertainty have presented more challenges. And as a result, seller activity has slowed. We are actively monitoring conditions, but are not currently under contract with any additional acquisitions. Before turning the call over to Tim to recap more details associated with our property operations, I did want to acknowledge the retirement announcement we made last week concerning the planned retirement of Tom Grimes, who has been with our company for the past 28 years. Tom has played a large part in supporting MAA's long and established record of strong performance and steady growth. I'm grateful for Tom's contributions to our company, and we all wish him well. As outlined in last week's release, we have a strong team of leaders at our company with extensive experience, expertise, and a record of strong performance. We are well-positioned for continued progress as we move forward into 2023. That's all I have in the way of prepared comments, and I will now turn the call over to Tim.

Thank you, Eric, and good morning, everyone. Same-store performance for the quarter was once again strong and ahead of our expectations. We saw broad-based strength and pricing performance across the portfolio. During the third quarter, blended lease-over-lease pricing achieved up 13.9%. As a result, effective rent growth or the growth on all in-place leases for the third quarter was 16.7% versus the prior year and 5.6% sequentially from the prior quarter. Based on our forecast for in-place rents at the end of 2022, we expect our earned in or baked-in rent growth for 2023 to be in the 6% range before considering any new rent growth that may occur in 2023. Alongside the robust pricing performance, average daily occupancy for the quarter remained strong at 95.8%. We have continued to achieve pricing better than our previous expectations in the early part of the fourth quarter with blended lease-over-lease pricing for October to date at a very seasonally strong 8.3%. Average physical occupancy for October to date is in line with expectations at 95.7%. Additionally, on average, we are achieving growth rates on signed renewals of around 10% for the fourth quarter. Despite projections that supply will likely remain elevated in 2023, at similar levels to 2022, various demand indicators remain strong, and we expect our region of the country to continue to benefit from population, household, and job growth. During the quarter, we continued our various product upgrade initiatives. This includes our interior unit redevelopment program and our installation of smart home technology that includes mobile control of lights, thermostat, and door locks, as well as leak detection monitoring. In addition, our broader amenity-based and more extensive property repositioning program continues to make great progress. The value to residents provided by these programs can be particularly impactful when new supply is being delivered into the market. On average, we are seeing new development being delivered in our markets with monthly rents that are $350 or about 22% higher than the average rent of our current portfolio, which helps drive the value opportunity associated with our repositioning programs. For the third quarter, we completed 2,305 interior unit upgrades and installed 652 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, leases have been repriced 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 currently in various stages of construction and unit repricing. Those are all in my prepared comments. I'll now turn the call over to Brad.

Thank you, Tim, and good morning, everyone. Despite the challenges in the transaction market, the team continues to make good progress in executing our disposition plan for the year. In addition to the two Fort Worth properties we sold in the second quarter, we closed on the sale of a 396-unit community in Maryland earlier this month. We have one more disposition property located in the Austin market that we expect to close in the fourth quarter. Total expected proceeds for all four dispositions remain at the midpoint of our guidance of $325 million with an NOI yield of 4.3%, generating a total expected IRR for these 25-year-old assets of 17.8%. The slowdown in transaction volume that started in the second quarter continued in the third quarter as dislocation in the capital markets increased over the quarter. Most buyers remain on the sidelines, and with only a limited number of properties coming to market, price discovery will take some time. However, as we've seen in previous cycles, when deals begin to come to market, the evaluation of counter-party risks will drive decisions, with buyer financial strength and speed of execution being attractive key differentiators. During the third quarter, we were able to opportunistically use those strengths to close on two compelling newly constructed properties for a total of $213 million, generating an initial stabilized NOI yield of 4.7%, which we expect to increase further through our operating platform capabilities. These investments not only provide a higher immediate NOI yield than what we are selling, but also give us more scale and higher demand in higher growth markets, where we expect to generate higher organic growth over the long term, especially on an after-CapEx basis. Due to their locations near other MAA communities, both investments also provide additional margin expansion opportunities that we will fully harvest over the next few years. We continue to make progress in building out our development pipeline, while our under-construction pipeline remained at $444 million at the end of the third quarter. Earlier this month, we started construction on a $197 million, 495-unit project in Tampa, bringing our total active under-construction projects today to $641 million, representing 2,254 units. Predevelopment work is nearly complete on our Raleigh project, and we expect to start construction this quarter. With the scheduled completion of our Windmill Hill property in Austin during the fourth quarter, we expect to end 2022 with approximately 2,310 units under construction at a total cost of $723 million. Also during the third quarter, we purchased a land parcel for a potential late 2023 start of a 500-unit development in the Denver, MSA. We now own seven and control five development sites with total entitlements in place for approximately 3,700 units. As we've indicated in previous quarters, the timing of planned construction starts can change as we work through local approvals and the construction bidding processes, but we are hopeful we can start a number of these projects over the next 18 months. Having said that, our balance sheet strength gives us the option to be patient with our construction timing, if it's warranted. Our disciplined approach to asset allocation, including site selection and land valuation, will continue to be an integral part of our capital deployment decision process. Our construction management team continues to do a tremendous job actively managing our projects and working with our contractors to keep the inflationary pressure surrounding labor and material costs from causing a meaningful increase to our overall development costs or our schedules. To help mitigate some of the potential cost escalation and schedule expansion that is prevalent in the market today, we are working with our contractors to make commitments to purchase materials much earlier in the process. Today, our biggest challenges involve securing labor, obtaining cabinets and electrical components, and securing building permits. Our team has been able to work around these issues on the majority of our projects to stay on schedule. In line with the performance of our overall portfolio, operating performance at our development communities in their initial lease-up is strong, with results at each community well ahead of our pro forma expectations. Demand remains strong and the competition from other new supply is not impacting our lease-up performance. During the third quarter, our Jefferson Sand Lake Community in Orlando reached stabilization, and due predominantly to the strong rent performance, we expect our stabilized NOI yield to be between 7.8% and 8%, exceeding our original expectation by over 25%. That's all I have in the way of prepared comments, so I'll turn it over to Al.

Thank you, Brad, and good morning everyone. Reported core FFO per share of $2.19 was $0.12 above the midpoint of our guidance for the quarter. About $0.75 or $0.9 of the outperformance came from revenues. Stronger than expected rental pricing trends continued into the quarter, producing 14.6% same-store revenue growth, which was over 200 basis points above our expectation. Remaining core FFO per share outperformance primarily came from overhead and other non-operating items during the quarter, which were slightly favorable to expectations. Same-store operating expense growth for the third quarter was impacted by continued inflationary pressures as well as a challenging prior year comparison. If you recall, operating expenses grew only 1.5% during the third quarter of last year. Real estate taxes made up the biggest portion of the variance from our expectations for the third quarter this year. We received a significant amount of information during the quarter, particularly in Florida, reflecting some pressure in both values and millage rates as compared to our expectations. We will continue to aggressively challenge values where we can, but we now expect our real estate tax expense to be at the higher end of our previous range. Revised guidance for the year discussed more in a moment reflects these expense pressures, but they continue to be more than offset by the strong revenue performance. Our balance sheet remains stronger than ever, providing both protection and opportunity as we move through this volatile market environment. In August, we received an upgrade from S&P to an A- credit rating. We're now rated A- by both S&P and Fitch and continue to have positive discussions with Moody's, which we believe will eventually lead to an upgrade. We also completed the early renewal of our unsecured credit facility at very attractive pricing levels during the quarter, increasing the facility from $1 billion to $1.25 billion despite a challenging financing market. In addition, we expanded the size of our commercial paper program from $500 million to $625 million to reflect the increase in our credit facility. These two programs provide significant low-cost and flexible capital development programs and our future capital needs. At the end of the quarter, we had over $1.2 billion of combined cash and borrowing capacity available. Our leverage remains historically low, with a net debt adjusted EBITDA rate of only 3.97 times. Our debt balances also have significant protection from rising interest rates, as over 97% of our debt is fixed at an average interest rate of 3.4% and with an average maturity of eight years. Finally, given the third quarter outperformance 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 $0.20 per share at the midpoint to a range of $8.37 and $8.53 per share or $8.45 at the midpoint, which now represents a 21% growth over the prior year. This increase is primarily a result of higher revenue growth, as the strong pricing trends continued into the third quarter with the projected impact of prior year comparisons and seasonal trends coming later than originally projected. We now expect same-store revenue growth for the year to be 13.5% at the midpoint, primarily driven by a 125 basis points increase in our effective rent growth expectation for the year over our previous guidance. Our revenue projection for the year continues to be built on strong pricing performance and stable occupancy, with growing impact from prior year comps and normal seasonal trends during the fourth quarter. We're now seeing the beginning of this impact, albeit a few months later than originally projected. We expect average blended lease pricing to be in the 7% to 8% range for the fourth quarter, which for context is on top of a record high 16% growth captured in the fourth quarter of last year. We also narrowed the expected range for same-store operating expenses for the full year, effectively increasing the midpoint by 25 basis points from last year's guidance, primarily reflecting the pressure from real estate taxes that I mentioned earlier. The overall impact of these changes is an increase to our same-store NOI growth guidance for the year by 200 basis points to a midpoint of 17%. So, that's all we have in the way of prepared comments, Riesa. We'll now turn the call back over to you for questions.

We will now open the call for questions. And we'll take our first question from Nick Joseph with Citi. Your line is open.

Thanks. Just given your experience recently in the transaction market, particularly on the sales, but as you look to acquire maybe if there's interesting opportunities and kind of the positives you mentioned in terms of being a certainty as a buyer. How are you thinking cap rates have trended? And then how are you changing your underwriting standards for any future potential opportunities?

Yes. Hey Nick, this is Brad. I'd say we've certainly seen cap rates come up here in the third quarter as we've seen interest rates really rise very quickly. Now interest rates are regularly over 6%. We don't have a whole lot of data points frankly in the third quarter. In the second quarter, we commented we saw cap rates in the 3.7% range. For what we did see close in the third quarter, call it, 4.5% is really where we saw cap rates. But again, not a whole lot of trades there. And I would say that what we've seen for what has traded is there's been some characteristic about the property that has allowed the buyer really to take advantage frequently of previous debt rates through loan assumptions, while taking advantage of the rent profile today. So, I would say that what has traded so far, in my opinion, is not reflective of where the market is going. Most of what we're hearing today is new assets that are being priced. BOVs are going out today 5% or more in terms of the cap rate. So, I would expect to see cap rates rise from where they are today. Where they shake out, that's hard to say. But given where interest rates are, over 6%, given that we are starting to see seasonality come back into play, which we did last year. The appetite for a significant level of negative leverage from a buyer's perspective, I think that appetite is dissipating a bit. So, my sense is that we'll continue to see cap rates rise a bit next year. But I think it will be mid-next year before we really start to see some transactions come to market and transactions to clear. So, I think it's going to take some time to really get visibility into what that looks like.

That's very helpful. And then maybe just tying that environment to the new starts and any plans for starts. How do you think about kind of underwriting or starting the project today, given maybe the uncertainty of where the acquisition cap rate and trying to price a net risk premium on development?

Yes, I mean I'll back up and just start with, we have purposefully sat out of the acquisition market over the last couple of years. The last deal we purchased was in 2019 because the spreads between development yield and acquisition cap rates had gotten really large in the last few years. So, we have purposefully focused our capital on development. Where we sit today with cap rates of 4.5%, perhaps moving up to 5%, I think you're going to get back to a more normal 100, 125, 150 basis point spread between cap rates and development yields. So, I think there'll need to be some movement going forward. And all of that is really dependent upon the quality of the development that you have, where it's located, and what the rent trajectory looks like on that asset. But clearly, I think for starts going into next year on the development side, I think you're likely to see a drop off in construction starts. Developers, we obviously are active in the JV market, partnering with developers. We are certainly hearing that equity partners on deals are backing out. Some of the pipeline I think is shrinking as you go forward from here because those yields do need to go up a bit. So, we're hopeful at this point that some of that starts to manifest itself through construction costs. But as you know, just like land costs, it's a little sticky. It takes time for that to manifest itself down into the cost, but we are certainly hopeful that yields expand a bit on the development pipeline.

Good morning everyone. It was a great quarter, congrats. Eric, it's good to talk with you. In the last couple of quarters, you've mentioned that due to favorable demand trends, you expect rent growth and same-store top line trends to remain significantly above trend for the foreseeable future. Can you comment on whether you still believe that's true? Also, has the uncertain macro environment in the U.S. and global economy affected that outlook in the near term? Thanks.

Thanks, Neil. As we look ahead to 2023, I remain optimistic about our ability to achieve top-line performance that exceeds our long-term averages. Based on our current position and the rent trajectories we've observed over recent months, we anticipate a 6% earn-in for next year. Additionally, we expect to see positive rent growth beyond that. Considering the drivers of demand related to employment, the challenges of single-family affordability, and the ongoing positive migration trends in our markets, we foresee positive rent growth next year. Although there are discussions about a potential recession, the prevailing view suggests that if it does occur, it will likely not be severe or prolonged. We also believe it won't significantly impact the labor market. While the future is uncertain, we remain optimistic about next year's outlook. We are taking steps to prepare for any potential downturns, such as pushing for rent growth, and our strong balance sheet allows us to capitalize on opportunities that may arise in a recessionary environment. Currently, we do not see any significant signs indicating a pullback in the demand trends we are experiencing.

Well, Neil, this is Tim. We discussed the 6% earned-in that we anticipate for next year. If you consider the question you're probably asking about where our rents stand today in September compared to our existing rents, it's approximately 3.5% from where we are now.

Okay. The last question I have is for Brad. Considering the elevated supply and delivery situation over the next year, along with the challenging permanent financing environment regarding loan-to-value ratios, terms, and so forth, and also anticipating rising cap rates, could you provide some insight into your capital allocation priorities or strategy for 2023, especially in light of your current share price? Thank you.

Yes. Well, I'll certainly talk about the external piece of that. As we sit here today, as I mentioned in my comments, we have really spent a lot of time developing our ability to deploy capital externally, both through acquisitions and development. And we are in a really good spot for that. We control, as I mentioned, 3,700 units, both owned and sites that we just have under contract. So, in the land basis of those, as I mentioned, we've been very disciplined in picking sites, and we've lost out on sites because one, the location wasn't the best location in a market and ones that are likely to stress more if things get a little bit shaky in the economy or the land price was too high. So, we feel really good about where we stand today in that regard. And so we have optionality on those projects given the size of our balance sheet. It's not a problem for us to continue to work those sites to get to a point where we're ready to pull permits. And if the financing environment is such that it doesn't make sense for us to pull on those or our capital is better used in the acquisition market, we'll certainly lean into that. Just for perspective, in the acquisition side of things, after the last recession for a three-year period, from 2010 to 2012, we executed on almost 10,000 units, single transactions, 9,500 units. And if we were able that similar type environment plays out over the next year, two years, three years, that's 10,000 units, and at today's pricing even at a discount, that's $3 billion to $4 billion. And so that's what we're really preparing for is for an environment where we're able to execute on opportunities. It may or may not be that size of opportunities. But to your point, the amount of construction that started in 2020, 2021 in our region of the country was significant. And as you mentioned, the cost to refinance that, the cost to extend loans; banks are not going to be willing to do that. They want to clear these loans off their books at this point. So I think you will see a number of these merchant developers will need to transact. And I also think the basis of these developments that went under construction in 2020, 2021 still have profit in them. So, I do think a market will be made on these assets, and there will be an opportunity for us to step in and execute in that area.

Good morning. Regarding Nick Joseph's question on underwriting, you mentioned a 17% levered IRR on the transactions this quarter. I'm interested in knowing the unlevered IRR as well. More importantly, over the past decade, the Sunbelt has greatly benefited from cap rate compression. However, as you noted, there is an expectation for cap rates to rise. How do you foresee IRRs changing and how are you underwriting them for the next five years, considering the last decade has been driven by significant advantages from both cap rate compression and rent growth? First, could you provide the unlevered IRRs on the deals sold this quarter? Secondly, how will you approach underwriting new deals in the absence of the compression tailwind?

I'll start with that, and Eric can jump in if he needs to. The unlevered IRR on what we expect to sell this year is just under 13%. So still a really good IRR generated on those assets, which I'll also mention is our 25-year-old assets to generate those IRRs. In terms of cap rate compression, yes, we've benefited from that over the last few years. And that will not obviously be the case going forward. But I think that indicates a healthy environment where we get back to the point where location of assets really matters, and that will drive the value of an asset. And I think that benefits us long term because I think we've got some of the best located assets in the best markets in our region of the country. And I think that differentiation between cap rates based on location and markets will absolutely benefit us as we go forward from here.

And Alex, this is Eric. I want to add to what Brad mentioned about cap rates in our market and across the region. Cap rates are influenced by two main factors: interest rates and the reconfiguration of asset pricing. Additionally, they are affected by the demand-supply dynamic for investment capital in apartment real estate. When there are many buyers competing for a limited number of sale opportunities, it tends to put downward pressure on cap rates. In the region where we operate, we continue to see strong demand dynamics that contribute to job growth, population growth, and household formation trends. These conditions were evident before COVID and remained strong during the pandemic. As a result, I believe that cap rates may not increase as much in several of our markets as one might expect. In fact, I think they may rise less than in other regions due to the positive rent growth prospects and demand dynamics we are observing. Regarding your question about IRR, we typically do not focus heavily on that. Most of our modeling is based on a 10-year outlook, and predicting an appropriate cap rate for the future is uncertain. Our main aim is to compare the opportunity to deploy capital and achieve a stabilized yield that complements the yield from our existing asset base while considering after-CapEx figures to evaluate our ability to grow the dividend. Currently, we see development as a sensible opportunity. We will proceed with caution, keeping our development pipeline at around 3% of our enterprise value to ensure it remains manageable. We also have considerable capital available, ready to invest should acquisition opportunities arise significantly, and we have shown in the past the value that can come from this strategy.

Eric, that's helpful. So, the second question plays into that. A lot of market talk about concern about supply in the Sunbelt. It seems that over time, the Sunbelt has handily handled supply, maybe with the exception of Houston, for example. So maybe you could just talk a little bit more about some of the supply that you're seeing in the market. Do you see it just sort of dispersed across your markets? Do you see it more concentrated in certain submarkets? And are there any areas where you could see yourself maybe next summer going, yes, this market or that market, we have felt a supply impact?

Broadly speaking, the supply picture indicates that 2023 deliveries will be quite similar to those in 2022. An analysis weighted by Net Operating Income shows a slight decrease in 2023 compared to 2022. We do not anticipate a significant increase in supply deliveries next year, keeping in mind the challenges we face with construction labor, materials, and permitting processes that are part of predevelopment. Therefore, we believe that overall supply will not see a major increase in 2023 compared to 2022. Additionally, regarding your point, I have been hearing concerns about new supply for 28 years, and it has never been a major issue. While it can cause some fluctuations within the portfolio based on varying markets and submarkets, we have always managed to navigate through it. Our strategy includes efforts to mitigate supply pressures when they arise, which is why we are diversified across both secondary and large markets. Our portfolio has a generally affordable price point, with new products entering the market at rents 25% to 30% higher than ours, giving us room to manage pressures. This situation also presents significant redevelopment opportunities. Therefore, as we head into 2023, we remain confident about the supply levels.

Thank you.

Great. Thanks and good morning everyone. Eric, you and the team have referenced being open to a large transaction I think probably over a year now and have been historically. And I'm just curious what you think the benefits of additional scale are to the company at this point? And what really would you be trying to achieve strategically from a portfolio allocation standpoint through a potentially larger deal?

Well, it's hard to put a number on or quantify what additional financial benefits may come from scale. We feel like frankly, at the point we are at the moment that we're fairly efficient in what we're able to do. Certainly, put more assets against this existing platform, there's going to be at the margin, some additional opportunity that comes from that, but it's not something that we're candidly actively trying to initiate, if you will, right now. For us, our focus really is the opportunity to drive increasing scale in a very disciplined fashion through the development effort that we have and through emerging opportunities for one-off acquisitions that we've done a lot of over the years. And we think that with our development pipeline headed towards $700 million of active construction with emerging opportunities surrounding acquisitions that we think are likely to pick up more so next year, it puts us in a position to put together fairly meaningful levels of external growth that we think we can capture just through those processes that we have without the need to go out and do something more strategic in nature. We're always open to those ideas and we'll continue to monitor it, but it's not something that we feel compelling need to do in any way right now.

Austin, this is Tim. The market rent growth we've seen to date is about 7% or so, when you strip out the baked-in and everything else. It's hard to say that we expect rent growth next year to be at the level that we've seen this year, which certainly has been between this year and 2021 then record levels. But as Eric laid out a little bit ago, we don't see in the near term, anything changing too much from the demand standpoint, supply kind of is what it is, like we talked about. So, we think we're still in a period where we can see some better than average, if you will, but likely not to the extent we've seen the last 12 months or so.

Thank you. Good morning everyone. I wanted to revisit the 15% of move-ins or relocations from the coast. It’s interesting that some might not expect the numbers to still be strong compared to a year ago. I'm curious if you have any insights about whether specific markets within your portfolio are performing better. Additionally, can you share what you've learned about the coastal regions where people are relocating? Also, do you have any information on the job profiles of those who are moving?

Yes, we're at 15% for Q3 for move-ins from non-MAA states. This rate has been stable, fluctuating between 14% and 16% since early 2021. The majority of these relocations are coming from New York and California, which is expected given their size. Key markets benefitting from this trend include Dallas, Tampa, Nashville, Charleston, Phoenix, and Savannah, and this pattern has remained consistent. The quality of residents, in terms of income levels, has also been strong. Our rent-to-income ratio has held steady at around 22% for the past couple of years. We are experiencing an influx of professionals from sectors like finance and tech into our markets. It's hard to say. We haven't seen any big significant changes that we've noticed at the property level. It's a little bit hard to tell, but I think there's certainly some, but not probably not quite to the level we saw like a year or so ago. Yes, we believe we will be on the higher side, with Austin and Charlotte being among the top performers. Austin presents an interesting case as it has experienced high supply for a few consecutive years, and we expect this trend to continue. However, it also leads in job growth, migration, household formation, and population. Therefore, as long as demand remains steady, we do not anticipate that the current supply will significantly affect the market. Dallas, on the other hand, has seen relatively low supply but has strengthened notably in recent months. We believe Dallas has great potential for strong performance. The remaining markets are fairly evenly distributed, but we will be watching Charlotte and Austin a bit more closely.

Thank you. Good morning. I wanted to understand this dynamic. You had the strongest lease-over-lease growth rates this quarter among your peers, when you ended the quarter with the lowest loss to lease and that same dynamic has continued sort of like this quarter, low loss to lease, highest rent growth. I'm just wondering if there's a unique way that you calculate loss to lease or maybe there's a timing difference. And if the loss to lease today, it's roughly 3%, is that roughly where your lease growth will be going forward?

So, the loss to lease of 3.5%, the way that is calculated is basically just looking at the rents we did in September that went into effect in September as compared to all in-place rents right now, and that's 3.5%. And so we typically see that number. That's calculated in that way. It's going to be the highest in the summer when rents are strongest and seasonality is the strongest. It will come down a little bit as you get into the fall and likely into the winter, assuming you're seeing that normal seasonality. So, in my opinion, that number is pretty volatile. I mean it's going to move around. And that's why one of the points we're making is with where we expect December to be in all of our in-place rents, that will be there in December, if you just carry that through to 2023 and assume we don't get any more rent growth, you get to 6%. So to me, that's why we focus on that 6%.

Hey John, this is Rob. Yes, I think if it gets on the ballot, I think it's okay. The one court that's actually looked at the ordinance itself effectively said that they consider that violates state law. So even if it passes, ultimately, I don't think that it will be upheld as an effective ordinance. And then if you look at it for us, we've got nine properties in Orange County, seven in same-store, and it's about 4.4% of our third quarter same-store NOI. And we went back and looked at it as it were in place in 2022, and it would really only have an 18 basis point impact on same-store revenue and about a 17 basis point impact on total revenue. So overall, not that material to us as we think about it. So, we think it probably doesn't pass, and we think it's not material to us overall anyway. And also that was in some of the highest growth rate rent increases that we've had over this period in Orange County compared to, until recently, a relatively low CPI.

We incurred about $1.6 million in expenses during the third quarter. Fortunately, our portfolio experienced minimal impact from this situation. While we will have some additional costs related to cleanup, water intrusion, and roofing, the total expense of $1.6 million, which is reflected in our operating expenses outside of same-store, has been disclosed in the press release. We anticipate some more capital items, but collectively, the costs will be quite significant. We consider ourselves very fortunate.

Just one point there, Rob, to is just our current resident receivable balance is about September 30 is about $5 million compared to $5.3 million at June 30. So kind of as Al said, I mean, trending down in the right direction.

All right. And are you seeing any uptick in the last 30, 60 days in either bad debt or delinquencies in the portfolio?

Our leverage remains historically low. We have a net debt adjusted EBITDA rate of only 3.97 times. Our debt balances also have significant protection from rising interest rates, as over 97% of our debt is fixed at an average interest rate of 3.4% and with an average maturity of eight years. Finally, given the third quarter outperformance 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 $0.20 per share at the midpoint to a range of $8.37 and $8.53 per share or $8.45 at the midpoint, which now represents a 21% growth over the prior year. Thank you.

And we will take our next question today from Austin Wurschmidt with KeyBanc Capital. Your line is open.

Great. Thanks and good morning everyone. Eric, you and the team have referenced being open to a large transaction I think probably over a year now and have been historically. And I'm just curious what you think the benefits of additional scale are to the company at this point? And what really would you be trying to achieve strategically from a portfolio allocation standpoint through a potentially larger deal?

Well, it's hard to put a number on or quantify what additional financial benefits may come from scale. We feel like frankly, at the point we are at the moment that we're fairly efficient in what we're able to do. Certainly, put more assets against this existing platform, there's going to be at the margin, some additional opportunity that comes from that, but it's not something that we're candidly actively trying to initiate, if you will, right now.

Yes. This is Brad. I'll address the part of that, which is the current lease-up dynamics in the market. We're certainly not seeing pressure and struggles from the development community in terms of the lease-up performance of assets that are in lease-up.

No closing remarks. We appreciate everybody hanging with us this morning, and we look forward to seeing a lot of you over the next few weeks with upcoming conferences. Thanks a lot.

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