Good morning, ladies and gentlemen, and welcome to the MAA Fourth Quarter and Full Year 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, February 22nd, 2023. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments. Please go ahead.

Thank you, Nikki, 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 34 Act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures, as well as reconciliations of the difference between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial deck. Our earnings release and supplement are currently available on the For Investors page of our website at www.maa.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, everyone. MAA wrapped up calendar year 2022 with fourth quarter results for core FFO that were ahead of expectations as higher fee income along with continued growth in average rent per unit and strong occupancy more than offset pressure from higher real estate taxes. Looking ahead to the coming year, there is clearly some uncertainty surrounding the outlook for the employment markets, the pace of inflation and the broader economy. In addition, while we do know that new supply deliveries in 2023 broadly will be higher than in 2022, we continue to believe that MAA is well positioned for the coming year as the leasing market returns to more normalized conditions. Our expectations for the coming year are built on a lease-over-lease pricing environment of 3%. This performance assumption, coupled with the earn-in from 2022's rent growth should drive growth in effective rent per unit of around 7% over the coming year. We will, of course, see conditions vary some by market and submarket location, but we believe that our portfolio is in a uniquely solid position to weather expected moderation from the historically high rate growth of last year. This view is really supported by three key variables: first, we continue to believe that our Sunbelt footprint maintains an advantageous position for capturing demand, given the stronger and more stable employment markets in the Sunbelt states. We continue to see job growth, positive migration trends, affordable rent-to-income ratios and low resident turnover. Secondly, MAA's unique diversification across the Sunbelt region, including both large and high-growth secondary markets, provides exposure to a good range of employment sectors and works to help soften some of the pressures surrounding new supply levels in a number of our larger markets. And thirdly, with a rent price point average for our portfolio that appeals to our broad segment of the rental market and is around 20% below the price point of the mostly high-end new product being delivered, we believe we will capture more stability and top-line performance as leasing conditions normalize in 2023. In the event that we do find ourselves later in the year headed towards a more severe contraction in the economy or a recession, as MAA has consistently demonstrated over the past 20 years, we expect to perform with a lower level of volatility than what generally is seen with more concentrated portfolios and/or those concentrated in large coastal markets. The transaction market remains very quiet and we are likewise remaining patient with what opportunities we do see. I expect it will be the second half of the year before pricing data becomes more readily available. We do have plans to initiate development on four new projects in 2023 associated with sites that we already own or that are under our control. These projects will, of course, not actually start delivering units for another couple of years. In conclusion, I want to give a big thank you to our MAA associates for their tremendous service and record performance in 2022. We have the company well positioned for the next cycle, as a number of new tech initiatives will positively impact performance over the coming years. Our external growth pipeline continues to expand and the balance sheet provides a good, strong foundation for supporting our current portfolio operations, as well as active pursuit of new growth opportunities. That's all I have in the way of prepared comments and I'll 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. While pricing performance moderated during the fourth quarter from the record growth we had achieved year-to-date through September, blended lease-over-lease pricing was up 5.7%. As a result, effective rent growth, or the growth on all in-place leases for the fourth quarter, was 14.9% versus the prior year and 2.0% sequentially from the prior quarter. Full year 2022 blended lease-over-lease pricing was 13.9%, helping to drive full year effective rent growth of 14.6%. Alongside the strong pricing performance, average daily occupancy remained steady at 95.6% for the fourth quarter and 95.7% for the full year 2022. In line with normal seasonality, our January new lease rate of negative 0.3% improved from December's new lease rate of negative 0.9% and other than 2022 represents a higher new lease rate than any year since we have been tracking the data. Combined with renewal pricing of 8.6%, January blended lease-over-lease pricing was 4.2% and average daily occupancy was 95.7%. With new lease pricing moderating as expected, renewal pricing, which lagged new lease pricing for much of 2022, is providing a catalyst for the strong January pricing and is expected to be strong for the next few months before moderating to a more typical range. We are achieving growth rates on signed renewals of around 8% to 9% for the first quarter. We do expect new supply in several of our markets to remain elevated in 2023, putting some pressure on rent growth, but the various demand indicators remain strong and we expect our portfolio to continue to benefit from population, household and job growth. As Eric mentioned, should we see a more dramatic downturn in the economy from here, we expect our market diversification and price point will help mitigate some of the impact to performance. During the quarter, we continued our various product upgrade initiatives. This includes our interior unit redevelopment program, our installation of smart home technology and our broader amenity-based property repositioning program. For the full year 2022, we completed more than 6,500 interior unit upgrades and installed over 24,000 smart home packages. As of December 31, 2022, the total number of smart units is over 71,000, and we expect to finish out the remainder of the portfolio in 2023. For our repositioning program, leases have been fully or partially repriced at the first 11 properties in the program and the results have exceeded our expectations with yields on costs averaging approximately 17%. We have another four projects that will begin repricing this quarter and five additional projects currently under construction. Those are all of my prepared comments. I'll now turn the call over to Brad.

Thank you, Tim, and good morning. Despite execution challenges in the transaction market, our team successfully completed our disposition plan for 2022 by closing our last two dispositions in the fourth quarter. Our total disposition proceeds for the year were approximately $325 million, representing a stabilized NOI yield of 4.3% and an investment IRR of 17.7% for assets with an average age of 25 years old. In 2023, we will continue the discipline of steadily recycling capital out of older, higher CapEx properties with the intent to redeploy the capital into newer, lower CapEx, higher rent growth properties to drive higher long-term earnings growth within our portfolio. While transaction volume continues to be muted, we believe it's likely that the transaction market will provide more opportunities towards the back half of the year. Currently, the number of marketed properties is down substantially from 2022, with the majority of sellers waiting until at least the spring leasing season before reevaluating their planned sale timing. In the face of this lower volume, we have seen some upward pressure on cap rates with the degree of the movement varying based on property characteristics, embedded rent growth, as well as market and submarket location. However, until closed transactions materially increase, transparency around cap rates will be difficult. When marketed deal volume does increase, we expect buyer financial strength and speed of execution to be attractive key differentiators and our balance sheet strength and capacity will support our ability to transact despite a more difficult credit environment. On our new developments, our team has done a tremendous job working through the challenges of elevated construction costs and permitting delays, leading to steady growth in our development pipeline. During 2022, we started construction on 1,253 units at a cost of $468 million, a record level of starts for MAA. During the fourth quarter, we started construction on two projects that have been in predevelopment for some time. These two projects will begin delivering units in two years and should finish construction in three years, lining up well with what we believe is likely to be a strong leasing environment. While the timing of planned construction starts can change as we work through the local approval and construction bidding processes, we expect to start four new developments during the back half of 2023. This includes two in-house developments, one located in Orlando and one in Denver, and two pre-purchased joint venture developments, one located in Charlotte and the other a Phase 2 to our West Midtown development in Atlanta. Our construction management team continues to do a tremendous job actively managing our projects and working with our contractors to keep the inflationary and supply chain pressures from causing a meaningful increase to our overall development costs or our schedules. Despite these headwinds, the team delivered three projects on time in 2022 and under budget by approximately $4.5 million. During the fourth quarter, construction wrapped up on MAA Windmill Hill, and we reached stabilization at MAA Robinson, MAA West Glenn and MAA Park Point with operating results well ahead of our pro forma expectations, delivering stabilized NOI yields on average of 6.6%. Leasing demand at our new properties remains high and the competition from other new supply has, to date, not had a significant impact on our lease-up performance with rents being achieved well ahead of pro formas. That's all I have in the way of prepared comments. So with that, I'll turn the call over to Al.

Okay. Thank you, Brad, and good morning, everyone. Reported core FFO per share of $2.32 for the quarter was $0.05 above the midpoint of our guidance and contributed to core FFO for the full year of $8.50 per share, representing a 21% increase over the prior year. Same-store rental pricing and occupancy levels were in line with expectations for the quarter, while higher fee and reimbursement revenues, combined with strong lease-up and commercial revenues, produced about two-thirds of this earnings outperformance for the quarter. This favorability was partially offset by real estate tax expenses, as final millage rates came in higher than expected during the quarter for several markets, primarily in Texas. Our real estate tax estimates were based on strong valuations supported by the very strong revenue trends over the last year, offset by expected millage rate rollbacks as counties managed overall tax needs; rollbacks occurred but were less than expected in Texas, particularly in Dallas and Austin. Our initial guidance for 2023, which we'll discuss more in a moment, anticipates some continued pressure in this area given its backward-looking nature. Our balance sheet remains very strong, as we ended the year with historically low leverage debt-to-EBITDA RE of 3.71 times with 95.5% of our debt fixed at an average interest rate of 3.4% and with $1.3 billion available capacity to support growth and manage our debt maturities late in 2023. Also at the end of January, we settled our outstanding forward equity contracts, providing an additional $204 million of capacity at an attractive cost of capital. We currently expect to fund our near-term acquisition, development and refinancing needs with short-term debt capacity allowing the financing markets to continue to stabilize before locking in long-term financing. Finally, we did provide initial earnings guidance for 2023 with our release, which is detailed in the supplemental information package. Core FFO for the year is projected to be $8.88 to $9.28 per share or $9.08 at the midpoint, which represents a 6.8% increase over the prior year. The foundation for the projected 2023 performance is same-store revenue growth produced by historically higher rental pricing earn-in of about 5.5% combined with the more normalized blended rental pricing performance of 3% for the year, as well as a continued strong occupancy remaining between 95.6% and 96% for the year. Based on this, effective rent growth for the year is projected to be a solid 7% at the midpoint of our range, with total same-store revenues expected to grow 6.25%, slightly diluted from the other revenue items, primarily reimbursement and fee income, which are expected to grow at a more modest pace. Same-store operating expenses are projected to grow at 6.15% at the midpoint for the year with real estate taxes and insurance producing the most significant growth pressure. Combined these two items alone are expected to grow just over 7% for 2023 with the remaining controllable operating items expected to grow around 5.5%. These expense pressures are offset by the continued strong revenue growth with NOI for the year projected to grow 6.3% at the midpoint. We're also expecting continued external growth, both through acquisitions and development opportunities during the year with a combined $700 million full year planned investment. This growth will be partially funded by asset sales, providing around $300 million of expected proceeds. We expect to fund the remaining capital needs for the year from internal cash flow and short-term variable rate borrowings, as we anticipate the financing markets to continue stabilizing over the next year, eventually providing better opportunities to lock in long-term debt rates. This does produce some slight pressure on current year FFO performance given high short-term rates, but is expected to be rewarded with lower long-term financing costs when markets stabilize further. So that's all that we have in the way of prepared comments. So Nikki, we'll now turn the call back to you for any questions.

Operator Instructions: And we will take our first question from Nick Yulico with Scotiabank. Please go ahead.

Thanks. Good morning, everyone. So I just wanted to start with the guidance on same-store revenue. So if you're at sort of right around 6% at the midpoint, I think you guys had an earn-in that was close to that number coming into the year. So, you have occupancy being roughly flat in the guidance. So just trying to understand kind of what might be the offset as to — and you are assuming some market rent growth as well. So just trying to understand kind of the buildup there and if there is anything we're missing as to why the revenue growth guidance wouldn't be a little bit higher based on the earnings you've cited?

Yes. Nick, I'll give you the components — this is Al. I'll give you the components of how we built it, and maybe Tim can give a little color, if he would like, on some of the components. But really it’s built on the earn-in. You talked about based on where pricing was when we think about earnings, if pricing at the end of the year were to carry forward at that same level, not up or down, what would it be built into our portfolio. That's about 5.5%, that's the way we think about it. And on top of that, you get about half of the current year expected blended pricing. And as we talked about, we're expecting about 3%. So you add those two numbers together, you get right at the 7% effective rent growth guidance that we put out. Now that is, as we mentioned in the comments, a little bit moderated from other income items. About 10% of our revenue stream is from reimbursements and fees — those things are expected to grow more modestly than that. So that's what gets to 6.25%, but in terms of the earn-in and the components, that's really what it is.

Okay. Thanks. That's helpful. And then just the second question is just to get a feel for what type of economic scenario is baked into guidance whether this is a softer landing with modest job losses, any commentary from you guys on the economic outlook would be helpful? Thanks.

Well, Nick, this is Eric. I mean broadly, as Al mentioned, we do expect that the overall rent growth for the market next year will be something around 3%, which I think is going to be fueled by what we expect to be a continued relatively stable employment backdrop to what we're seeing today. We're not seeing any significant evidence building in any of our markets at this point relating to employment weakness or people losing jobs. We're not having any kind of issues surrounding collections. Migration trends continue to be very positive. As we think about the outlook for 2023, it's definitely moderated from what it was in 2022, but we're not seeing any concerns at the moment that a severe contraction or a materially worse decline in the employment markets is occurring now. If that does happen, as I alluded to in my comments, we've been through recessions in the past, and we think that if we find ourselves in a more severe economic contraction, where broadly the employment markets start to really pull back, that's where the defensive characteristics that we've built into our strategy really start to pay a dividend for us. Our secondary markets, lower price point product and broad diversification across employment sectors provide cushion if we find ourselves in a more severe downturn. So right now, we're not calling for that, but we think that if it were to happen, we would probably weather that pressure better than a lot of others.

Thanks, Eric.

We will take our next question from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning. Just, first question is on development and your appetite for using capital. You said that cap rates overall for stabilized product are still sort of in flux. The debt market is clearly better for apartments, but CMBS, which you guys don't use or Fannie, Freddie, whatever, that's still — well, I guess, more CMBS remains sort of closed. So as you guys think about development, do you think more about starting on your own account or do you see the potential that you're better off buying from other people who may run into financial difficulty, where on a risk-adjusted basis you're better off to pick from someone else rather than starting ground up yourselves?

Yes, Alex, this is Brad. I'll start off with that. I'd say it's both. We're looking at both opportunities, both on our balance sheet and then working with partners, as well. I mean what we haven't seen broadly yet are developers kind of giving up sites. We've seen it a little bit, but it's been sites that we're not really interested in. We've not seen the well-located sites that have gone under contract being let go yet. So we will keep our eye on that for sure, because I think that's where the opportunity presents itself for our on-balance-sheet developments where we can pick up some of those land sites that other people drop. I think what we are seeing short term is exactly what you mentioned is the difficulties in the debt market showing up through some of our development partners — maybe they can't get the debt financing for some of their developments going or equity partners backing out on deals. We are seeing that short term. We've got a team of folks this week that are out at NMHC and we've already got a number of e-mails of projects, JV development opportunities that are a follow-up from that, where they're shovel-ready and could start mid-year. So we'll begin evaluating those because I think those are the ones that are going to be impacted by the debt market and how tight it is right now. But the long story is, we'll look for opportunities in both of those areas.

Okay. And the second question is just going back to Nick's question on sort of state of the markets and the employment. One of the common refrains about the Sunbelt is, it always has a lot of supply, but the economic growth seems to more than offset it and you spoke about that relative to your ability to manage higher taxes, higher insurance. As you look at this year, and based on what your property managers see among the resident base and employment stats within your markets, do you see any substantial risk that employment or economic job growth in your markets will not be able to exceed the new supply coming on? Or as you sit here today, are there a few more markets that you're more concerned about now than you were back in, let's say, November, when you were assessing how 2023 would look?

Well, Alex, as we sit here today, we continue to feel good about the demand side of the equation for us. As I mentioned, we're not seeing any — I mean, the lead volume and traffic that we're seeing is still strong. We are not seeing any evidence of stress with our renters in terms of collections. We're not seeing any evidence of people coming in, talking about losing their job because of it and needing to get out of their lease. We're not seeing any roommating trends starting to pick up. And so, as we sit here — and then also, you look at the migration trends: we still saw 12% of the leases that we did in the fourth quarter were for people moving into the Sunbelt from outside of the Sunbelt. So, we are still not seeing worries build on the demand side of the equation at this point — moderating from what it was but still quite strong.

Thank you. All good. Thank you.

We'll take our next question from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Great. Thanks guys. I was just curious if you could share how — I believe the 3% figure you provided on lease-over-leases, the blended lease rate growth assumption is embedded in guidance. And I'm just wondering if you could break that down between sort of the first half assumption and back half, as you alluded to, kind of renewals maybe trending a little bit lower as the year progresses?

Hey, Austin, this is Tim. Yes, you heard me mention in the comments that renewals right now are the catalyst for us and kind of carrying the strength. New lease pricing outpaced renewals for the bulk of 2022, so we knew we had some runway on the renewal side that's carrying us through this early part of 2023. So, the 8% to 9% I talked about on renewals, I think that probably carries through the first quarter and then starts to moderate a little bit as you get into probably June through the rest of the year; I would expect it to be a little more normal with sort of what you've typically seen from MAA, which is kind of in that 6% to 7% range. On the new lease side, we're sitting slightly negative right now. I think that will slowly accelerate through the spring and summer and go modestly positive and then trend back down towards the end of the year. So, higher renewals in the first half of the year, moderating a little bit, new lease rates growing slightly through the year and then moderating just with seasonality, as we typically would see in Q4, and then you kind of blend that all together and get to the forecast that we have for blended lease-over-lease.

Well, on the new lease rate side, I guess what specifically — I mean it seems like that's fairly low relative to what you've achieved historically, pre-pandemic period and with 3% market rent growth, you would think that you kind of surpass that 3% into the peak leasing season before it moderates in the back half of the year. So, I guess I'm trying to understand that cautious new lease rate growth assumption in your guidance? And then, could you also just share what would get you to the low end of the guidance range because that seems like a pretty draconian scenario to be able to achieve the lower end? Thanks.

I'll give you sort of the forecast how it's laid out quarter by quarter, and Tim will give a little more specifics on it. It is fairly consistent around that 3% for the year with obviously a little higher in the second and third quarters of the year, as Tim mentioned, as we get more traffic and renewals hold stronger and new lease pricing becomes most robust. It's really going to come down to new lease pricing as the variable through the year. But the band is fairly tight around 3% in our expectation, just given the blend of overall demand. And so...

Yes, following up on the new lease rate, absent last year's record highs, new lease rates in November-December and the early part of the first quarter typically are negative. So it's not unusual for the new lease rates that we're seeing right now, and then they start to accelerate as we get into the spring and summer. But in terms of getting to the low end, I think it's kind of back to Eric's comments on the economy: if we see a further deceleration in demand or see some shock on the economic front that could drive pricing obviously lower and that's how you get towards the lower end of the guidance, and then the opposite — a little bit better economic backdrop would push pricing higher and get us more to the higher end of revenue guidance.

If that shock came, it would — given that it's coming — the impact would come through pricing; it would likely manifest in the latter part of the year as those new leases blend in.

Great. Got it. Thanks everybody.

We'll take our next question from Nick Joseph with Citi. Please go ahead.

Thanks. Eric, in your comments you talked about the strong balance sheet and being in a position to capture any growth opportunities. It sounds like you think those may emerge more in the second half of '23 from your comments on the call, but where do you think those opportunities could come from? Is that more acquisitions, land, something else?

No, Nick, I would tell you that we've been through this in the past, where we tend to find the best opportunity is in projects that are in lease-up — fairly newly constructed. They may not have finished construction. They're at that 50%-60% occupancy level in their initial lease-up. They've been leasing for probably the better part of the year. So they're still getting to a point where they're starting to run into lease expirations and related turnover, which brings more pressure on the lease-up effort itself. These are not yet fully stabilized assets and thus more difficult to finance for a typical leverage buyer, so that's where we're hopeful that we will find more emerging opportunities in that kind of scenario. We've certainly seen that in the past. One of the things I think is important to point out: our assumptions for 2023 guidance are built around the assumption of $400 million in acquisition volume. We are assuming that the initial yield on this $400 million of acquisition is only 3%, reflecting the non-stabilized status of these investments, so while that is weighing on FFO performance for the year, we think that it has great long-term value opportunity. Given the supply coming into the market and the difficult financing environment, we think that this area of opportunity will emerge over the course of this year, and that's what we've dialed into our guidance for the year.

Thanks. That's very helpful. And then, I guess, we've spent a lot of time on the macro backdrop and the blended rent growth assumption and everything that goes into revenue. But if you think about from a market perspective in '23, given your guidance, what does that imply for which markets are the top performers and which you're concerned about?

Yes, Nick. With the earn-in, we talked about our larger markets; I expect rent growth or revenue growth should be pretty solid for several of our markets due to that earn-in. Some of the stronger ones we think will continue into 2023: Orlando continues to be a really strong market for us. It's been strong now for a couple of years. In terms of demand, it's our #1 job growth market that we're expecting for 2023. It is getting a little bit of supply, but it's not necessarily situated where our portfolio is in Orlando — only one of those submarkets is seeing the most supply. So demand combined with supply there expects Orlando to be strong. It's continued to have really strong blended pricing both in Q4 and January. Dallas is another one I'd point out that we think can show some strength in 2023. It's one of our lower supply markets. There are a couple submarkets in North Dallas — Frisco, Plano, Allen — that will get some supply. But broadly, Dallas hasn't seen as much supply pressure, and we've seen the pricing both in Q4 and January a little bit higher than the portfolio average. Austin is probably the one on the downside that we're keeping our eye on more than anything. It's got extremes on supply and demand. It's one of the better indicators in terms of demand with job growth and migration, but it also has absolute high supply coming into the market. Out of the various submarkets that we're seeing supply, four out of the top 20 are in Austin. So that's one we do expect to moderate, though it does have pretty good earn-in rate growth. So those are a couple that we're kind of keeping our eye on.

Thanks. That's helpful. So it sounds like maybe the large markets still outperform the secondary markets in '23 or maybe that spread narrows a bit?

Yes, it probably narrows a bit with moderating rent growth. We typically see the secondary markets hold up a little more if we get into a softer economic environment. But I think broadly in terms of revenue growth, again, with the earn-in, I would expect that the large markets hold up pretty well.

Thank you very much.

We'll take our next question from Anthony Powell with Barclays. Please go ahead.

Hi, good morning. Thanks. Just a question on new lease spreads and pricing going into the spring. What would cause you to get a bit more confident on pushing rate more as you get to the peak leasing season — would it be general improvement in economic sentiment, job trends, or the market continuing to do well? Just curious how you may change your approach to pricing in spring if things get a bit better?

I mean, generally, it will be that. It will be the economy and the demand, and we look at lead volume, exposure, rent-to-income and various things that drive some of our decisions on pricing. We are always balancing how much we want to push price versus occupancy. There are no blinking red lights right now that would suggest a downturn. We're monitoring the metrics and everything looks about what you would typically expect during this time of the year, during the winter. So it will be as we get into spring and summer and demand and traffic pick up; that will be the determining factor on where 2023 heads in terms of demand.

Okay, thanks. And turnover seemed pretty consistent. Any changes in how certain residents responded to lease renewals or price increases? Any trends there you want to call out?

Turnover remains pretty low. Historically speaking, it was up a little bit in Q4, but the reasons for turn have been pretty consistent. We've actually seen the move-out-to-rent increase decline a little bit, but it's still — job transfers and buying a house are still the two biggest factors, though those have been down from what we've seen in the past. No notable trends one way or the other.

Right. Thank you.

We'll move next with Chandni Luthra with Goldman Sachs. Please go ahead.

Hi, good morning and thank you for taking my question. Could you spend some time talking about the expense outlook for 2023, what would get you to the low end versus the high end? Guidance does talk about property taxes in there, but perhaps you could spend some time on other elements? And then, what are the markets where you see more tax pressures versus others? Thank you.

Chandni, I'll start with that and then maybe Tim can give some color. The way to think about 2023: we're continuing to see general inflationary pressures a bit in our expenses, but really taxes and insurance are the drivers of the main pressure. Those two together are over 7% and taxes are 35% of all operating expenses, so it's very meaningful. The other expenses together are about 5.5%. We're beginning to see some moderation in personnel, repair and maintenance and those things. As we move more into the back of the year, you'll see more of that manifest in those lower items. But taxes and insurance are the primary pressure. What could take us higher or lower versus our guidance on the overall primarily would be taxes and insurance. We don't have a lot of information yet on either. Taxes, when you go into the year, notoriously you don't have a lot — you have a good idea what you think valuations will be based on cap rate markets, but you're guessing on millage rates, and that has been very volatile in the last year or so as municipalities deal with their budgets. We think we've got our best estimate in there right now, and that's appropriate. Overall, we'll see some moderation in the controllable expenses, but expense pressure driven by insurance and taxes.

Chandni, I'll add that about 40% of our expenses are taxes and insurance, which grow around 7%, and the other 60% around 5.5%. If I had to rank absolute year-over-year growth, I'd say insurance is probably the highest, R&M probably the second highest, then real estate tax the third. On R&M, it's driven by inflationary pressures — we expect some carryover from 2022 inflation. We've seen HVAC up 16%, plumbing up 18%, appliances up 17%. That drives pressure on R&M, though on a per-unit basis we remain lower than the sector average. I do think personnel moderates from 2022 and other smaller line items are manageable. So, on the controllable side, R&M is driving the bulk of the increase.

Thank you for all that detail. For my follow-up, how are you thinking about bad debt in 2023? What's embedded in your guidance relative to 2022? And given the higher supply in 2023, how are you thinking about concessions? Are you seeing more concessions in your markets or properties? Any thoughts would be helpful. Thank you.

I'll start with bad debt. Collections have come pretty much back to normal, not 100% but very close. We're forecasting collections close to historic normal, call it 40 to 50 basis points delinquency, which is very low. We have almost no collections coming from government programs and the amount of uncollected from those programs continues to decline. So our forecast reflects collections about where they typically are in a normal environment.

On concessions, we're not seeing any significant increase at this point. Concessions were 0.3% of rents overall in Q4, in line with Q3. To the extent we're seeing concessions, it's more in urban or downtown submarkets that have seen more supply and less concession usage on suburban assets. Generally, no big change from the last couple of quarters.

Thank you for that.

We'll take our next question from Haendel St. Juste with Mizuho. Please go ahead.

Hey, good morning out there. Few questions from me on the external growth front. I was at National Multifamily Housing Conference too, and heard that there is more institutional demand but a shortage of sellers and product. I'm curious if you would see an advantage to selling more assets now — perhaps sellers would be willing to sell a bit earlier in the year to capitalize even if it doesn't mean to put a dilution as a way to redeploy in a more favorable acquisition market in the back half of the year?

Haendel, I'll take that. As we entered this year, our disposition plan is a big component, and the ability to redeploy capital is a big part of what we're looking to do. We're not trying to time the market. We do an in-depth review in Q3 and Q4 to identify what we're going to sell for the year. We generally don't factor in market dynamics trying to maximize value; we want to do that, but we're focused on building long-term earnings that support a growing dividend. That's better done on a consistent basis where we're in a position to sell assets and redeploy capital into external growth. In our forecast right now is a sale of one asset earlier in the year — a strong primary market in Charlotte where we think we can maximize proceeds given that there aren't many sellers in that specific market. Then we'll sell other assets later in the year when the debt markets settle and buyers get more visibility on values. We think that's the best direction for dispositions and our external growth plan.

That's very helpful. I appreciate the color. A follow-up on external growth: we've seen a lot of mid- and high-four cap rate trades of late, but hearing the bid-ask spread remains fairly wide. Curious what you're seeing on the bid-ask spread and how this plays out? What do you think the market-clearing price is or what you'd be willing to pay to get deals done here?

It's hard to say. In Q4 we tracked far fewer suitable assets — only seven compared to a typical 40 deals. We have seen cap rates move up: in Q3 around 4.5% for projects we looked at; in Q4 around 4.75%. There is a spread and it really depends on the asset location. We saw one trade in Q4 at about 5.25%, but generally the quality or location at that cap rate wasn't ideal. For assets we're interested in, they're still in the 4.75% range. Part of the driver is low market volume. As more volume comes to market, likely late Q2 into Q3, cap rates will likely expand more. Interest rates are higher — debt rates are 5% to 5.5% — and that should push cap rates up at some point. Negative leverage is not sustainable. But until a significant volume of assets comes to market, aggressive buyers will bid and set lower cap rates. Also, a majority of what's selling now continues to be loan assumptions, which masks true market cap rates; we need more volume to see clarity.

That's really helpful. Appreciate that. If I could squeeze in one more: did you share what your turnover assumption is for full year 2023?

For now, we're expecting turnover to be pretty similar to 2022. Some reasons that drove turnover this year may moderate a little while others may increase a bit, but in general we're expecting similar turnover to 2022.

Got it. Thanks.

We'll take our next question from Rich Anderson with SMBC. Please go ahead.

Thanks. Good morning. My first question is on the expected deceleration of rent growth in 2023 — no one is surprised by that. But can you get into nitty-gritty detail of where you're landing: how much of it is proactive on your part versus reactive? Are you sensing fatigue from customers? Are you noticing occupancy moving or turnover? I think you mentioned a turnover uptick in Q4. Are there things you're reacting to that are causing you to pinpoint same-store revenue growth in 2023? Or are you protecting the downside given macro uncertainty and being proactive?

Rich, let me answer that. At the ground level, we're not seeing anything that causes us to believe we'll have a much weaker demand environment in the coming year. We're not seeing distress among renters. Rent-to-income ratios remain stable. Collections performance is strong. We're not seeing behavioral changes like increased roommating. Move-outs to home buying remain quite low. We're not seeing people leaving because they won't pay rent increases; in many cases, new residents are willing to pay more than what renewing residents were asked to pay. That's a strong indicator that the market is holding up. So we're moderating off incredible highs from 2022, but we haven't seen a significant pullback in demand. We're watching the broader economy and employment markets; if employers start large-scale downsizing, that would be a concern, but we have not seen that yet.

Okay. Second question on supply: do you feel the private developer model is on shakier ground than normal because of interest rates and financing issues, and could that create more opportunity for you to step in down the road? Or is this a typical environment where opportunities will arise in a year or two?

Rich, I'd say new starts are on shakier ground — private developers are having financing difficulties. There's not a lot of distress yet in lease-up markets, so not a lot of forced selling. Some equity and capital partners want to cycle out. Our region is predominantly controlled by merchant developers whose model is to develop and sell; that model is in flux right now because few assets are selling and starting new assets is difficult. So the private developer model is somewhat in flux due to the current market.

Okay. Thanks very much.

We'll take our next question from Wes Golladay with Baird. Please go ahead.

Hey, good morning, everyone. Last year, you had about just under $200 million of nonrecurring CapEx. How are you thinking about spend for this year and is there anything in there that would drive down expenses maybe in 2023 or 2024?

Wes, I'll frame capital. Overall, we're spending all programs together probably around $300 million in recurring and enhancing CapEx — together probably $180 million for enhancing. That's about $1,800 per unit, probably $1,000 recurring and the rest rent-enhancing. We continue our redevelopment program and smart home installations. We'll do interior programs, about $97 million, and continue the property repositioning program at about $20 million. So overall, about $300 million. There are some potential ESG investments or other items that could impact future spend. We're also seeing inflationary pressures in that. A large portion is investment for the future in redevelopment, repositioning and smart home programs.

Okay. As we fast forward a few years, does this ramp down or do you have a big pipeline where, once smart home is done, you move on to something else? How should we think about a multiyear view on this?

Wes, the Smart Home installation is a significant piece and we expect to finish that this year, so that will come down. However, we expect the interior unit redevelopment program and the broader amenity-based repositioning program to continue at similar levels.

Okay. And did you comment on exposure right now? I might have missed it.

Exposure right now sits at about 7.5%, which is in line with what it was last year and what we typically expect at this time of year.

Okay. Thanks a lot, everyone.

We'll take our next question from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. Brad, what are the markets represented by the four to six development starts over the next year-plus? And given Tim's comments on R&M pressures, what are you seeing in terms of construction cost pressures going forward for new starts?

Rob, the four starts we feel in good shape for this year are one in Charlotte, one in Denver, one in Orlando and one in Atlanta — projects we've been working on for a while and plans are in process. In addition, we own a number of sites with another phase in Denver, another phase in Orlando, and a second phase in Raleigh. Those additional projects would add up to six over the next 18 months. In terms of construction costs, we're not seeing escalation like in 2022 — costs rose significantly in 2022 but are now holding flat. We hope to see some relief later this year as contractors have more capacity to bid jobs and subcontractors are more available. Given the single-family market conditions and expected multifamily starts coming down, we hope to see relief, but for now costs are holding flat.

Okay. And then, Al, G&A was 58.8 in '22 and guidance is 55.5 at the midpoint for '23. Obviously, Tom's left, but what else is in that expected decrease?

Rob, we look at overhead as a total. Focus more on the $128.5 million — that's about 3% growth in total for the year, which we think is reasonable. On that specific G&A line, the biggest item is incentive compensation: we had strong performance in 2022 so certain performance incentive programs were maxed; our guidance for next year is based on target, so that's a big part of the decrease. Property management expense growth is really investments in technology to strengthen our platform and support initiatives. Those together are a part of overall overhead growth for the year.

Okay. Thanks guys. I appreciate it.

We'll take our next question from Michael Goldsmith with UBS. Please go ahead.

Good morning. Thanks for taking my question. What's the expected expense growth cadence during the year? Is that relatively flat or accelerating? And within that, do you have a midyear renewal on insurance with easier comps in the back half? How does that reconcile? And then on real estate taxes, the midpoint of the guidance is 6.25%, but that would be lower than 6.5% last year. Just trying to understand the shape of expenses through the year and why real estate taxes might be slightly down this year?

Michael, the cadence: you should see the most pressure probably in Q1 because of carryover inflation from Q3 and Q4 2022 and the comparisons to Q1 2022 where inflationary pressures weren't yet built in. The highest point is probably Q1 and it moderates in Q2 and Q3 to mid-single-digit growth. On taxes, in 2022 we saw millage rates roll back less than expected in Texas, which surprised us and pushed taxes higher in Q4 2022. For 2023, while valuations remain strong, we expect some millage rollbacks, but where it lands is uncertain. Our drivers are primarily Texas, Florida and Georgia, with significant exposure in Atlanta. We have litigation matters from 2022 that spill into 2023 and we've estimated outcomes based on our experience and consultants. So all that together gets us to the 6.25% range. There's a lot of unknown but we think our estimate is appropriate.

Got it. And sticking with you, Al: NOI growth has been strong but property values haven't increased by the same magnitude due to rising cap rates. Does that leave more opportunity for successful appeals maybe in '24 and beyond?

Yes, as we move into 2024, assessors will be looking back on more normalized revenue rather than the strong 2022 revenue. So we would expect some moderation in valuations and therefore some moderation in taxes primarily in Texas, Georgia and Florida. So your point is valid: looking back at a more normalized year should help appeals in the future.

Thank you very much. Good luck in ’23.

We'll take our next question from John Pawlowski with Green Street. Please go ahead.

Hey, thanks for keeping the call going. Al, maybe a couple quick follow-ups on the property tax conversation. Could you give a rough sense what percentage of the portfolio you already have a high degree of visibility for the increases this year?

John, what we have a high degree of visibility on is pretty low other than we have a good read on valuations based on current cap rate environment. About 70% to 75% of our tax exposure is from Texas, Florida and Georgia, so it really comes down to millage rates and what municipalities need. We have consultants and market knowledge and we've based estimates on Texas, Georgia and Florida. Until Q2 and later we'll have better visibility, but right now we have as good an estimate as we can.

Okay, I understand there's a range. But what's a reasonable worst-case scenario for property taxes this year?

That's why we provided a range. Our midpoint is 6.25% and the high end of our guidance range is around 7%. If several things go against us, we could approach that top end. I think 8, 9 or 10% would be low probability given what is revaluing and the markets, but I wouldn't say zero probability. We think 7% is a reasonable potential high end if multiple factors run against us.

Okay. Thank you.

We'll take our next question from Tayo Okusanya with Credit Suisse. Please go ahead.

Hi, yes. Good morning, everyone. Thanks for keeping the call going. Just a broader question about the regulatory backdrop. There's a lot of talk in several municipalities around additional rent control, and at the federal level there's the White House putting out guidelines. Just curious your overall thoughts on this and whether you see any impact in the short, medium or long term. Are many of the suggestions not impactful to you because they're focused on bad actors in the industry?

Tayo, this is Rob. At the federal level, the White House blueprint focuses more on affordable housing components and on using agencies as leverage. At the state and municipal levels where we operate, proposals for rent control come up, but historically they haven't gained traction. From a short- and medium-term perspective, we're tracking legislation and don't see anything that gives us significant concern. If affordable housing is the goal, adding supply is the better solution rather than rent control, which ultimately is negative for owners and residents.

Great. Thank you.

We will move next with Jamie Feldman of Wells Fargo. Please go ahead.

Great. Thank you. Do you in any way include rent control risk in your guidance or your rent outlook?

We have not included rent control risk in our guidance.

Okay. I appreciate all the market color. It sounds like things are still going pretty well. But focusing on Austin, Nashville, Raleigh — big tech growth markets that have had some layoffs — can you provide anecdotal evidence of anything changing there in terms of resident mix, move-outs or demand relative to the rest of the portfolio?

Jamie, the markets you mention have more tech exposure than some others, but to date we haven't seen impacts. We're keeping an eye on announcements and which staff are impacted, but so far there's no noticeable impact or different trends in those markets other than broader supply/demand concerns in Austin as discussed. Those markets are the ones we would watch closely, but there's nothing reportable so far.

Okay. Are you seeing slower demand from employees in those industries?

Not really. Many of these markets don't mirror Silicon Valley in terms of employment types; it's more mid-level tech employment. We've not seen an effect so far, though we'll keep monitoring closely; that could be a driver of downside risk.

Okay. All right. Thank you.

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

Okay. Well, we appreciate everyone joining us this morning. If you have any other thoughts or follow-up questions, just reach out at any point. So, thank you for joining us.

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