Mid America Apartment Communities Inc. Q1 FY2023 Earnings Call

Good morning ladies and gentlemen and welcome to the MAA First Quarter 2023 Earnings Conference Call. As a reminder this conference call is being recorded today April 27th, 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, Phyllis 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, 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 1934 Act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the For Investors page of our website at www.maac.com. A copy of our prepared comments and an audio recording of this call will also be available on our website later today. After some brief prepared comments, the management team will be available to answer questions. I will now turn the call over to Eric.

Thanks Andrew and good morning. As detailed in our earnings release, first quarter results were ahead of expectations as solid demand for apartment housing continues across our portfolio. Consistent with the trends that we've seen for the past couple of years, solid employment conditions, positive net migration trends, and the high cost of single-family ownership are supporting continued demand for apartment housing across our portfolio. And while new supply deliveries are expected to run higher over the next few quarters, we continue to see net positive absorption across our portfolio. We believe that MAA's more affordable price point coupled with the unique diversification strategy including both large and secondary markets further supported by an active redevelopment program will help mitigate some of the pressure from higher new supply in several of our markets. As outlined in our earnings release our team is capturing steady progress and strong results from our various redevelopment and unit interior upgrade programs. We are on target to complete over 5,000 additional unit interior upgrades this year in addition to completing the installation of new smart home technology for the entire portfolio. We're also making great progress with our more extensive property repositioning projects with the projects completed to-date capturing NOI yields in the high teens on incremental capital investment. These projects, coupled with a number of new technology initiatives, should provide additional performance upside from our existing portfolio. Our new development and lease-up pipeline is performing well and we remain on track to start four new development projects later this year. Our various lease-up projects have achieved rents that are close to 11% ahead of pro forma. We did not close on any acquisitions or dispositions during the quarter, but continue to believe that transaction activity will pick up over the summer and have kept our assumptions for the year in place. The portfolio is well-positioned for the important summer leasing season. Total occupancy exposure at the end of the quarter which is a combination of current vacancy plus notices to move out is consistent with where we stood at the same point last year. In addition leasing traffic remains solid with on-site visits in comparison to the number of exposed units that we have is actually running slightly ahead of the prior year. A number of new leasing tools that we implemented over the course of last year should continue to support stronger execution and our teams are well prepared for the upcoming summer leasing season. I want to thank our associates for their hard work over the last few months to position us for continued solid performance over the balance of the year. That's all I have in the way of prepared comments and I'll now turn the call over to Tim.

Thanks, Eric and good morning, everyone. Same-store growth for the quarter was ahead of our expectations with stable occupancy, low resident turnover and rent performance slightly ahead of what we expected. Blended lease-over-lease pricing of 3.9% reflects the normal seasonality pattern that we expected. And while we did return to a more typical seasonal pattern in Q1, it is worth noting that the blended lease-over-lease pricing captured was higher than our typical Q1 performance. As discussed last quarter, we expected new lease pricing to show typical seasonality and that the renewal pricing which lagged new lease pricing for much of 2022 would provide a catalyst to first quarter pricing performance. This played out as expected with new lease pricing down slightly at negative 0.5%, and renewal pricing increasing positive 8.6%. Alongside the strong pricing performance average daily occupancy remained steady at 95.5% for the first quarter contributing to overall same-store revenue growth of 11%. The various demand factors we monitor were strong in the first quarter and continued that way into April. 60-day exposure which represents all current vacant units plus those units with notices to vacate over the next 60 days at the end of Q1 was largely consistent with prior year at 7.7% versus 7.9% in the first quarter of last year. Furthermore in the first quarter, lead volume was higher than last year and quarterly resident turnover was down driving the 12-month rolling turnover rate down 30 basis points from 2022. April to-date trends remain consistent as exposure remains in line with the prior year and occupancy has remained steady at 95.5%. Blended lease-over-lease pricing effective in April is 4.1% with new lease pricing beginning to accelerate up 110 basis points from March at plus 0.2% and renewal pricing remaining strong at 7.9%. We expect renewal pricing to moderate some against tougher comps as we move into the late spring and summer, but simultaneously expect some seasonal acceleration in new lease-over-lease rates. We expect new supply in several of our markets to remain elevated in 2023 putting some pressure on rent growth. But as mentioned the various demand indicators remain strong and we expect our portfolio to continue to benefit from population growth, new household formations and steady job growth. In addition, we expect resident turnover to remain low as single-family affordability challenges support fewer move-outs. MAA's unique market diversification of portfolio strategy coupled with a more affordable price point as compared to the new product being delivered also helps lessen some of the pressures surrounding higher new supply deliveries. 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 first quarter of 2023, we completed over 1,300 interior unit upgrades and installed over 18,000 smart home packages. We now have about 90,000 units with smart home technology 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 13 properties in the program and the results have exceeded our expectations with yields on cost in the upper teens. We have another seven projects that will begin repricing in the second and third quarters and are evaluating an additional group of properties to potentially begin construction later in 2023. Those are all of my prepared comments. I'll now turn the call over to Brad.

Thank you, Tim and good morning, everyone. While operating fundamentals across our platform have remained consistent as Tim just outlined transaction volume remains muted due to a lack of for-sale inventory on the market. For high-quality well-located properties bidding is strong and available capital is aggressively competing in order to win the bid and put capital to work. This strong relative investor demand coupled with often favorable in-place financing continues to support stronger-than-expected cap rates on closed transactions. Having said that, we believe the need to sell increases as the year progresses and it's likely that more compelling acquisition opportunities will materialize later in the year. Therefore, we have maintained our acquisition forecast for the year, but have pushed the timing back a couple of months. Our acquisition team remains active in the market and Al and his team have our balance sheet in great shape and ready to support our transaction needs. The properties managed by our lease-up team continue to outperform our original expectations generating higher earnings and creating additional long-term value. To-date our new lease-up properties' performance does not appear to be impacted by increased supply pressures. As Eric mentioned, these properties have achieved rents nearly 11% above our original expectations. During the first quarter, we began pre-leasing at our Novel Daybreak community in Salt Lake City, and early leasing demand is extremely strong with the property currently 11.5% pre-leased at rents well ahead of our expectations. Predevelopment work continues to progress on a number of projects, four of which should start construction in the back half of 2023: 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. During the first quarter we purchased a Phase 2 land site to our Packing District project in Orlando, Florida, bringing our future development projects owned or under construction to 12, representing over 3,300 units. Over the past few months, we have seen an increase in inbound pre-purchase development opportunities due to a substantial decline in the availability of both debt and equity capital for new developments. We remain disciplined and selective in our review process but we are hopeful these calls will lead to additional currently unidentified development opportunities. Any project we start over the next 12 to 18 months would likely deliver in 2026 or 2027 and should be well positioned to capitalize on what we believe is likely to be a much stronger leasing environment reflective of the significant slowdown in new starts that we expect to continue to see over the balance of 2023 and 2024. Our construction management team remains focused on completing and delivering our six under construction projects and are doing a tremendous job managing these projects and working with our contractors to minimize inflationary and supply chain pressures on our development costs and our schedules. We have two projects that we'll be delivering units during the second quarter, Novel Daybreak in Salt Lake City, which delivered six units late in the first quarter and Novel West Midtown in Atlanta. That's all I have in the way of prepared comments. And with that I'll turn it over to Al.

Thank you, Brad and good morning, everyone. Reported core FFO per share of $2.28 for the quarter was $0.06 above the midpoint of our quarterly guidance. About half of this favorability was related to the timing of certain expenses, which are now expected to be incurred over the remainder of the year, primarily related to real estate taxes. Operating fundamentals overall were slightly favorable to expectations for the quarter producing about $0.01 per share of favorability. And the remaining outperformance is related to overhead and net interest costs for the quarter. Our balance sheet remains in great shape, providing both protection from market volatility and capacity for strong future growth. We received an upgrade from Moody's during the quarter bringing our investment-grade rating to the A3 or A- level with all three agencies. We expect the favorable ratings to have a growing positive impact on our cost of capital as we work through future debt maturities. During the quarter, we also closed on the settlement of our forward equity agreement providing approximately $204 million net proceeds towards funding our development and other capital needs. We funded $38 million of redevelopment, repositioning and smart home installation costs during the quarter producing solid yields. We also funded just over $65 million of development costs during the quarter toward the projected $300 million for the full year. As Brad mentioned, we expect to start several new deals later this year and early next year, likely expanding our development pipeline to over $1 billion, for which our balance sheet is – remains well positioned to support. We ended the quarter with record low leverage, our debt to EBITDA of 3.5 times with over $1.4 billion of combined cash and available capacity under our credit facility with 100% of our debt fixed against rising interest rates for an average of 7.7 years and with minimal near-term debt maturities. And finally in order to reflect the first quarter earnings performance, we are increasing our core FFO guidance for the full year to a midpoint of $9.11 per share, which is a $0.03 per share increase. We're also slightly narrowing the full year range to $8.93 and $9.29 per share. Given that the majority of the Q1 same-store outperformance was timing related and the bulk of the leasing season is ahead of us, we are maintaining our same-store guidance ranges as well as all of the key ranges for the year. So that's all we have in the way of prepared comments. So Phyllis, we will now turn the call back over to you for questions.

We will now open the call for questions. Our first question will be from Kim John with BMO Capital Markets. Your line is open.

Thank you. Eric and Tim both mentioned in your prepared remarks that the more affordable price point is one of the reasons why you have such strong demand. And I'm wondering if there's any notable difference between your A and B product as far as demand or performance?

Yeah, John, this is Tim. We are observing a slight difference in Q1, where our B assets showed about 70 basis points higher blended pricing compared to our A assets. Part of this can be attributed to the price points, and we've noted that any supply pressures tend to affect the more urban or A style assets more.

Okay. My second question is on the premiums that you're getting on renewals versus the new leases signed. I think it was 900 basis points in the first quarter, a little bit lower than 800 basis points in the second quarter so far. It still seems like a record amount as far as that premium you're getting. And I'm wondering when you think it goes back to the norm. At what level do you think it's fair premium on renewals?

Yeah. I mean, we talked about a little bit last quarter that we knew with the unusual circumstances of last year where new lease pricing was ahead of renewal pricing for the bulk of 2022 that set us up with some good comps and some opportunity on the renewal side particularly in the first call it fix, six months in 2023. And so that's definitely what we've seen. I think as we get a little further in you'll see it moderate to more normal. I think it'd probably get down to the 6% or so range over the next few months, but don't expect it to be too volatile. We still think renewals will outpace new leases but get into a little bit more normalized range.

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

Hey, good morning everybody. Eric, you have highlighted that the price point does provide you some insulation as it relates to new supply. And certainly job growth has surprised to the upside earlier this year. If we start to see job growth slow, does that become more concerning as supply begins to ramp? And does pricing power just become more challenging for you later this year and maybe into early 2024?

Well, if we see a significant pullback in the employment markets, it will impact demand to some extent. We have experienced weaker employment periods before, and it's clear that such situations affect demand. However, this cycle has its unique aspects. Currently, the challenges in the single-family market and the lack of affordability are working in our favor. In the event of a recession with employment market weaknesses, our positioning in the Sunbelt may provide some relative advantage. Historically, Sunbelt markets have shown a greater ability to endure downturns compared to higher density coastal markets, which are often influenced by industries like financial services, insurance, and banking. Our diversification in both market locations and the sectors our residents are employed in offers insight into our resilience. Although a recession raises concerns for everyone in the apartment sector, I believe that, as we have done in past downturns, we will likely perform better than others.

No. That's all very helpful. For my follow-up, regarding projects currently in lease-up, have you noticed any slowdown in the pace of lease-up or absorption for those? Also, what are the current concessions for assets in lease-up? Thank you.

Yeah. Hey. Austin, this is Brad. We really haven't seen any impact negative impact associated with supply pressures on our new lease-ups. And generally that's where you'd think we would see it first. We've got six or so projects that are in lease-up right now. Concessions on those we typically model about a month free. I'd say on three of those we're using some concession maybe up to 0.5 month free. We're not using the full concessions that we underwrote and we're not seeing the need to just generally, based on what we're seeing in the market. And I'd say our traffic continues to be really good on all of our lease-ups. The leases we're signing the velocity is really, really good. So we're not seeing any early indications yet, but that new supply is having an impact there.

And we'll take our next question from Chandni Luthra with Goldman Sachs. Your line is open.

Hi. Good morning. Thank you for taking my question. You guys talked about in your prepared remarks that cap rates are still going strong for good quality product. Could you remind us where they are tracking at the moment? And then, as you think about your own opportunity set down the line as you think about distressed opportunities emanating from the current supply situation and lending markets. Where would cap rates need to be for you to be comfortable buying and getting in the market?

This is Brad. We are currently observing cap rates in the 4.7 to 4.75 range for well-located assets in strong markets. In the first quarter, we had only seven data points, indicating a 70% decrease in volume compared to last year, so our data is limited. However, the cap rates from these seven transactions are relatively close to each other, which is atypical based on historical trends. For us, cap rates really need to exceed 5, 5.25, or 5.5, but this will vary depending on the specific asset and its rent trajectory. It's also essential to consider what the situation looks like after capital expenditures. We believe opportunities may arise from properties that are just beginning their lease-up phase, as developers in this stage may experience more challenges with their underwriting and performance. With new supply entering our markets, less experienced operators handling these lease-ups could face difficulties in leasing those assets. I think this presents a potential opportunity for us, and our acquisition strategy is primarily focused on targeting assets in the early stages of lease-up.

That's very helpful. Thank you. And for my follow-up, as we think about new supply from a geographic standpoint, what are the markets where you're seeing most pressure? And how are you thinking about balancing occupancy versus pricing in those markets?

Hi Chandni, this is Tim. Right now, Austin is probably the number one market in terms of where we're seeing supply. And Phoenix to an extent we're seeing a little bit. Honestly, some of the higher supply markets we're seeing like, Raleigh and Charlotte, Charleston are three of the markets where we're seeing a fair amount of supply have also been some of our best pricing markets so far this year. So as Eric kind of laid out earlier, we're not seeing a lot of pressure yet from supply. We're still getting the job growth and demand. There's, pockets here and there. But right now as we did in Q1, we're happy to keep pushing on price where we can. Our occupancy is at a stable point. And there's, a lot of things we monitor as kind of leading-edge demand indicators but still in a healthy balance right now.

We will go next over to Michael Goldsmith with UBS. Your line is open.

Good morning. Thanks a lot for taking the question. Earlier you talked about the B product outperforming A product on a portfolio level. I was wondering if we can dive into a market or two to just kind of better understand some of the dynamics of what you're seeing in the A product versus the B product? And then, also, within that, can we talk about kind of the larger markets that you're in versus the smaller markets? And if A versus B is performing differently in the large ones versus the smaller ones? Thanks.

Yes. It's fairly consistent, I would say. Atlanta is probably a good example where we have quite a bit of diversification there. We've got several assets kind of in town, Midtown, Buckhead and then a lot of assets outside the perimeter and we're pretty consistently seeing the suburban assets perform better than those more urban assets. And that's playing out relatively consistent across some of the markets. We are seeing, what you might call, our secondary markets perform pretty well. I mentioned Charleston a moment ago. Savannah, Greenville some of these more secondary markets are holding up very well and doing really well in terms of pricing. And that's part of the strategy. I mean, typically those markets aren't going to get quite as much of the supply as some of these larger markets and that's playing out for us pretty well so far.

Got you. My follow-up question is about the job market and how the portfolio may respond to it. I'm particularly interested in the in-migration to the Sunbelt. How does that compare to pre-COVID levels? Are there any specific markets where you're observing stronger or weaker in-migrations?

Michael, this is Eric. I want to note that in the first quarter we observed about 11% of our leases being written as a result of people moving to the Sunbelt, which aligns with the trends we saw before COVID. This percentage increased slightly during late 2020 and most of 2021, but began to taper off in 2022. Currently, approximately 11% of the move-ins we are experiencing come from outside the Sunbelt, which is comparable to the 9% to 10% we recorded prior to COVID. The percentage of move-outs from the Sunbelt, where residents are leaving the region, remains low at about 3% to 4%. Therefore, on a net basis, our situation is similar to pre-COVID levels, and we anticipate these trends to persist at the current rate moving forward.

And when you say going forward, does that mean for the rest of 2023, or is that kind of for the intermediate term?

I would say the rest of 2023 into 2024. I think that, again, harking back to my earlier comments relating to the potential for moderation in the employment markets, we've seen these trends through these cycles that we've been through over the years, where migration trends are more positive, if you will, in the Sunbelt region. And it's been that way for many, many years, through recessions and through expansions in the economy. That continues to be the case. And so, I just continue to think that these markets and the portfolio strategy we have will serve us well long term. And I think the net positive migration trends that we see today will likely persist for the foreseeable future.

And we'll take our next question from Nick Yulico with Scotiabank. Your line is open.

Thank you. Good morning. I was hoping to get a little bit of a feel for how the new lease growth on signings is differing by market. Just sort of an order of magnitude between better versus weaker markets, if you can give a little color on that.

Yeah. Nick it's Tim. So if we think about where April is, it's anywhere from call it negative 1%, negative 2% for some of the lower markets, up to 3%, 4%, 5% on some markets. And it moved positive in April. As we talked about we're at 0.2% and we saw a good acceleration from March to April. We kind of expect to see that typical seasonality and a little more acceleration as we move through the spring and summer, but that gives you a little bit of an order of magnitude.

That's helpful. Thanks. Do you mind also just maybe saying which markets are the better versus weaker in that range?

Yeah. I mean, as I mentioned before, Austin is one of the weaker ones. Austin and Phoenix are two that I would point out as a little bit on the weaker side. Orlando continues to be one of our strongest markets. And then I mentioned a moment ago as well we're seeing some of our more secondary markets perform really well. Also Charleston, Savannah, Richmond, Greenville all holding up really well also. Sure. Yeah, Atlanta is a little bit of a unique situation. So back in February, we had some winter storms. It affected Texas and Georgia also, but we particularly saw some impact in Atlanta and Georgia. We had about 70 units in Atlanta that were down that we took out of service through the storm and then brought them back up kind of in late February. So you had a pretty good chunky units in Atlanta that we had to get leased up. So that was really the occupancy story there. We've seen it kind of bottomed out in March, but we have seen April occupancy pick up. So I think Atlanta will continue to improve and be a pretty solid market for us later in the year.

And we will go next to Alan Peterson with Green Street. Your line is open.

Hi, everybody. Thanks for the time. Tim, I was just hoping you can shed some light on your planning for peak leasing. And if you're anticipating in some of your weaker markets whether or not you're going to have to use concessions to maintain occupancy call out the Austins or the Phoenixes of the world.

Yes, there will be some variations, but we don't expect this to be a widespread issue across our portfolio. In the first quarter, total concessions were about 25 basis points relative to rent. We are observing a bit more activity in Austin, ranging from half a month to a month, while other areas, like Orlando, are not experiencing any concessions. We might see a slight increase, but I don't anticipate it exceeding half a month more than what we are currently experiencing. I don't expect much change from today's situation.

Yes, Rob, this is Brad. As I mentioned, we currently have 12 sites that we either own or control, which positions us well for expanding our pipeline. As Al noted, we expect to reach around $1 billion to $1.2 billion in projects, and we are pleased with our locations. The asset we acquired in Orlando is part of a Phase two of a project we plan to initiate this year, which was a strategic decision since it serves as a covered land play, with some leased buildings in place. Moving forward, I would say we will be more cautious regarding land acquisition. We will continue to seek out sites that other developers have passed on and look to secure more time on these deals. Some of the sites we currently have are ones we control but do not own. Our preference is to have more time on these transactions. It appears we are in the early stages of land repricing in certain areas, with some projects showing about a 10% price reduction. Our partners have been successful in negotiating additional time and cost reductions for some sites. So, I think we are just beginning to experience this trend.

Yes Rob, this is Tim. So if we look at Q1, for example, all the rents that we billed in Q1, we collected 99.4% of that, so 60 basis points of bad debt which is consistent right in line with where we were last year.

And is there any markets in particular that you're seeing any material higher amounts in?

Atlanta is probably the one I would point out, where it's just still kind of the court system and everything going on there. It's taken a little longer to move through the process. So it's our highest one right now, probably closer to around 1% or so. But that's really the only market where we're seeing that.

Yes, Tayo, that's a good question. In the first quarter, we exceeded our midpoint by $0.06, and about half of that resulted from timing. This includes some favorable expenses we experienced in the first quarter, primarily involving real estate taxes. We believe our full-year guidance remains accurate, and we will address that over the year. The initial $0.03 increase in core FFO was due to other factors, with about a third of that, or $0.01, stemming from operational forms.

Sure. That's helpful. Could you discuss the new lease spreads for the quarter? They were negative, and I would like to know if you think this is primarily a supply issue, a demand issue, or a combination of both, especially as we approach the core spring leasing season.

Yeah. Tayo this is Tim. I mean I think one thing to keep in mind the new lease rates that we saw in Q1 are really pretty typical, if we go back through history. If you look outside of last year the kind of the lease rates we were seeing were pretty much in line or better frankly than most of the years we've been tracking it. So it was pretty much as expected. I mean March new lease rates dropped a little bit and it was really more function of similar to what I was talking about with Atlanta earlier where we saw leasing activity drop for a couple of weeks there in February with some of the stores, particularly in Texas and Georgia that impacted occupancy a little bit in February. And then we were able to regain that occupancy in March but it did come at the expense a little bit of some of the new lease pricing but as we talked about with April where we saw new lease spreads accelerate and move positive.

Thank you.

And we will go next to Haendel St. Juste with Mizuho. Your line is open.

This is Barry Luo on for Haendel St. Juste. My first question was on property taxes. I was just wondering how that was trending versus expectations since Cato's release in the back half?

Yes, this is Al. I can give you some color on that. So right now, we expect that our estimates that we put out in our guidance for property taxes we left that the same. We think we still have a good range that we've got. We did have some favorability in the first quarter on property taxes, as I just mentioned a minute ago but really that's related to the timing of some of the activity.

Got it. Thank you.

And we will go next to Alexander Goldfarb with Piper Sandler. Your line is open.

Thank you. Good morning. I have two questions. First, regarding supply, which is a significant topic for the Sunbelt. You have mentioned how your portfolio is performing. Would you say the issue is more about your rent compared to new supply, or is it more about location, meaning that your properties are less likely to be near the new developments?

Hi, Alex, this is Eric. I would say, it's both of the points that you're making that are at play here. Where we do see supply coming into a market more often than not it is in some of the more urban-oriented submarkets. And when you look at our portfolio, and the footprint we have and the diversification we have, across a number of these markets particularly the big cities like Atlanta and Dallas, we have generally more exposure to the suburban markets versus the urban markets. So, I think there is a supply proximity point, that I would point to that you're mentioning that probably works in our favor to some degree.

Okay. The second question is about insurance, which is certainly a hot topic, especially in Florida and Texas with significant premium increases. Are you noticing opportunities where some of the smaller players or maybe some of the recently developed merchants may not have adjusted for these substantial premium hikes? Do you think that we might see people needing to sell due to pressure from insurance costs?

This is Brad. I definitely think that that is something to keep an eye on. I do think the market down there right now is extremely tough. And depending on where you are in Tampa or South Florida, those insurance premiums are increasing substantially for new product. So I would say, for newly developed properties in those areas Tampa, Orlando not as much, but Jacksonville, it's something for us to keep an eye on, because I do think that the insurance premiums are going to be a lot higher than the developer underwrote than they expected.

Okay. Thank you.

We will go next to Wes Golladay with Baird. Your line is open.

Hey, good morning everyone. Just had a quick question on capital allocation. I know your stock's yielding low six to maybe mid-6 implied cap. So how do you view a potential buyback versus starting new developments at this part of the cycle?

Well, Wes, this is Eric. I would tell you right now, we believe that what really is important to have is a lot of strength in capacity on the balance sheet. Obviously, we're in a very turbulent environment at the moment. Capital markets are very turbulent. There's still obviously some level of risk in the broader economy. And so we really believe that the thing to do right now is to protect capacity and keep the balance sheet in a strong position not only for defensive reasons. But as Brad has alluded to, we do think as we get later in the year that we may see some improving opportunities on the acquisition front.

Okay. And then maybe if we can go to that topic of distress. I mean, a lot of the private owners right now do you feel that they may be upside down and the banks are just extending the opportunity right now, or do they have significant equity just need maybe a capital infusion?

Yes. I mean, I don't think that we are seeing any distress in the market right now. I mean the projects just like our portfolio the operating fundamentals are very strong. So even on some of these lease-ups when they underwrote them in 2021 or so the leasing fundamentals are going to be a lot stronger than what they expected.

I wanted to follow up on your earlier response. You noted that your balance sheet is in excellent shape. I can't recall seeing an apartment company with mid-three times leverage potentially dropping to low three times later this year. So my question is, what kind of opportunity would you need to encounter before you would consider increasing your leverage to a more typical level of around five times?

Well, I will start and Al can jump in. We do anticipate that over the next year or two, leverage may edge back up slightly, as we have some development funding planned. Additionally, the funding for our redevelopment and repositioning initiatives is very accretive.

I'll just quickly add that Eric made a very good point. Our long-term target is closer to 4.5 times to 5 times on the EBITDA coverage.

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

Well no additional comments to add. So we appreciate everyone joining us and I look forward to seeing everyone at NAREIT. Thank you.

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