Good morning, everyone, and welcome to the MAA Second Quarter 2023 Earnings Conference Call. This conference call is being recorded today, July 27, 2023. I will now hand the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for his opening remarks.

Thank you, Aaron, 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 '34 Act filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the 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, everyone. Leasing conditions across the MAA portfolio continued to reflect our steady employment markets, strong positive migration trends, and continued low resident turnover. As a result, we are seeing good demand for apartment housing and are absorbing the new supply deliveries while supporting solid rent growth. In line with normal seasonal patterns, new lease pricing improved in the second quarter, and the spread between new lease pricing and renewal pricing narrowed. Rents for new move-in residents jumped 100 basis points higher on a sequential basis as compared to the preceding first quarter. Renewal lease pricing in the second quarter remained strong, growing by 6.8%, driving overall blended pricing performance in Q2 to 3.8%, which is ahead of the original projections we had for the year. Occupancy remains steady with average physical occupancy in the second quarter at 95.5%, which is consistent with the preceding first quarter despite a higher number of lease expirations during the second quarter. While we are working through a higher level of new supply deliveries across our markets for the next few quarters, with the demand trends holding up as they are, we expect to continue to drive top-line results that will exceed our long-term historical averages. As has been the case in prior cycles of higher supply, we see the demand-supply dynamic holding up slightly better in our mid-tier markets, and this component of our strategy continues to bring support to overall portfolio performance during this part of the cycle. As described in our first-quarter report, we do expect to see moderation in year-over-year growth in operating expenses as inflation pressures ease a bit, and some of the efficiencies we expect to capture from new tech initiatives increasingly make an impact. As Al will cover in his comments, we also expect to see some relief on property taxes coming out of Texas, which further supports our ability to reduce our outlook for expense growth over the back half of the year. The transaction market remains quiet. We continue to underwrite a few deals, but the limited number of properties coming to market combined with strong investor interest continues to support low cap rates and strong pricing. We continue to expect that more compelling opportunities will emerge later this year and into 2024 and believe it's important to remain patient with our balance sheet capacity. Our new lease-up, new development, and redevelopment pipelines will all continue to make solid progress and will provide attractive incremental additional earnings over the next few years. I did want to take a moment and express my deep appreciation to our on-site property teams for all their hard work and great service to our residents during these busy summer months. And with that, I'll now turn the call over to Brad.

Thank you, Eric, and good morning, everyone. As we've seen each quarter over the past year or so, second-quarter transaction activity remains muted versus normal levels. Volatility and uncertainty in the debt market continued to cause the majority of sellers to postpone their sales processes, leading to a drop in sale inventory on the market. For high-quality, well-located properties in our region of the country, there continues to be strong investor demand, causing cap rates to adjust slower than interest rate movements alone would indicate. Having said that, we have seen an average buyer cap rate move up to 4.9% in the second quarter from 4.7% in the first quarter, with most cap rates ranging between 4.75% and 5.25%. We continue to believe we're likely to see more compelling acquisition opportunities later this year and into next, so we remain patient as we wait for the market to continue to adjust. We are actively reviewing a number of acquisition opportunities, but with no potential acquisitions under contract at the moment. We've lowered our acquisition forecast for the year to $200 million at the midpoint. Our acquisition team remains active in the market, and our balance sheet is in great shape, ready to quickly support any transaction opportunity should it materialize. Due to the lower funds needed for expected acquisitions, we've also lowered our disposition forecast for the year to $100 million at the midpoint. Our properties in their initial lease-up continue to outperform our original expectations, producing higher NOIs and higher earnings and creating additional long-term value for the company. These properties are navigating the increased supply pressure well and on average have captured in-place rents 22% above our original expectations. For the four properties that are either leasing or will start leasing in the third quarter, this rental performance, which is partially offset by higher taxes and insurance, is estimated to produce an average stabilized NOI yield of 7.2%, significantly higher than our original expectations for these properties. Early leasing is going well at Novel Daybreak in Salt Lake City and Novel West Midtown in Atlanta, and we expect to start leasing at Novel Val Vista in Phoenix in the third quarter. During the second quarter, we also reached stabilization at MAA LoSo in Charlotte. Despite permitting and approval processes that are taking a bit longer than anticipated, predevelopment work continues to progress on a number of projects. We expect three projects will be ready to start construction in the back half of 2023 if we see sufficient adjustments to construction costs and rents to support our NOI yield expectations. These projects include two in-house developments, one in Orlando and one in Denver, and one pre-purchased joint venture development in Charlotte. We've pushed back the start of the Phase 2 of our West Midtown pre-purchased development in Atlanta to 2024 due to the approval process taking longer than anticipated. The team continues to work through the increased pre-purchase development opportunities that have been presented to us, and we're hopeful we will be able to add additional currently unidentified development opportunities to our pipeline. 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, reflecting the significant slowdown in new starts expected over the balance of 2023 and 2024. Our construction management team remains focused on completing and delivering our six under-construction projects, and we're managing these projects tremendously while working with our contractors to minimize the impact of inflationary and supply chain pressures as well as labor constraints on our development costs and schedules. During the quarter, the team successfully completed and accepted delivery of a combined 249 units at Novel Daybreak in Salt Lake City and Novel West Midtown in Atlanta. That's all I have in the way of prepared comments, so with that, I'll turn the call over to Tim.

Thanks, Brad, and good morning, everyone. Same-store revenue growth for the quarter was essentially in line with our expectations with stable occupancy, low resident turnover, and better blended rent performance than what we previously projected. Despite increasing supply pressure in some of our markets, blended lease-over-lease pricing of 3.8%, comprised of new lease growth of 0.5% and renewal growth of 6.8%, was better than our forecasted expectations. While occupancy was slightly below our expected range for the quarter, the resulting higher blended lease growth performance is a favorable trade-off providing a greater future compounding growth effect. As discussed last quarter, we expected new lease pricing to show a typical seasonality that is to accelerate from the first quarter, and renewal pricing, which lagged new lease pricing for much of 2022, to moderate some, but still provide the catalyst to strong second-quarter pricing performance. As Eric mentioned, this played out as expected with new lease pricing accelerating 100 basis points as compared to the first quarter and renewal pricing remaining strong. Alongside the pricing performance, average daily occupancy remained consistent with the first quarter at 95.5%, contributing to overall same-store revenue growth of 8.1%. The various demand factors we monitor remained strong in the second quarter with 60-day exposure, which represents all current vacant units plus those units that would notice to vacate over the next 60 days, largely consistent with the prior year at 8.5% versus 8.4% in the second quarter of last year. Furthermore, quarterly resident turnover was down almost 2% from the prior year. Move-ins from markets outside of our footprint ticked up slightly from Q1 to 13%, and rent-to-income ticked down slightly from Q1 to 22%. The employment market remains relatively strong, particularly in the Sunbelt markets. While lead volume trailed the record demand scenarios we saw in 2021 and 2022, it is up from 2018 and 2019, and last year when we experienced a more normal demand curve. Our prospect engagement platform that combines AI, marketing automation, and scheduled human engagement has enabled us to engage with prospects more effectively. July to date, pricing remains ahead of our original expectations with blended pricing of 3.2%. This is comprised of new lease pricing of 0.3% and renewal pricing of 5.5%. The new lease pricing is relatively consistent with the 0.5% for the second quarter and within 5 basis points of June new lease pricing. As expected, renewal pricing is moderating to a more normal range as leases are beginning to expire that were signed in the period last year when renewal rents had caught up to new lease rents. Physical occupancy is currently at 95.6%, with average daily occupancy for July month to date at 95.3%. The current July occupancy and July exposure, which is even with the prior year, at 7.5%, puts us in a good position for the remainder of the quarter. A key part of our portfolio strategy is to maintain a broad diversity of markets, submarkets, asset types, and price points. As we compete with elevated supply deliveries, particularly in some of our larger markets, many of our mid-tier markets are performing well and leading the portfolio in pricing performance, both in the second quarter and into July. Savannah, Charleston, Richmond, Kansas City, Greenville, and Raleigh are all outperforming the overall portfolio. We expect that this market diversification, combined with continued strong demand fundamentals, will help mitigate the impact of new supply that we expect to be elevated over the next several quarters. Regarding redevelopment, we continued our various product upgrade initiatives in the second quarter. This includes our interior unit redevelopment program, our installation of Smart Home technology, and our broader amenity-based property repositioning program. For the second quarter of 2023, we completed nearly 1,900 interior unit upgrades and installed nearly 2,300 Smart Home packages. We are nearing completion on the Smart Home initiative and now have over 92,000 units with this 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 15 properties in the program, and the results have exceeded our expectations with yields on cost in the upper teens. We have another five projects that will begin repricing in the third quarter and are evaluating an additional group of properties to potentially begin construction later in 2023. That's all I have in the way of prepared comments. Now I'll turn the call over to Al.

Okay. Thank you, Tim, and good morning, everyone. Reported core FFO for the quarter was $2.28 per share, which was $0.02 per share above the midpoint of our quarterly guidance. The outperformance was primarily driven by favorable interest in overhead costs during the quarter, and a large portion of the overhead cost favorability is timing-related with the costs now expected to be incurred in the back half of the year. Overall, same-store operating performance for the quarter was essentially in line with expectations. As Tim mentioned, blended lease pricing continues to outperform original expectations for the year and build stronger-than-expected longer-term revenue but was primarily offset in the second quarter by average occupancy slightly below forecast. Also, as expected, we began to see moderation in same-store operating expense growth during the second quarter with the growth of personnel, repair and maintenance, and real estate tax expenses, which combined represent 70% of total operating costs, all reflecting moderation from the prior quarter. We expect moderation for these items to continue through the remainder of the year, particularly for real estate taxes, which we'll discuss more with guidance in just a moment. As mentioned in the release, our annual property and casualty insurance programs renewed on July 1, with a combined premium increase of approximately 20%, which is in line with our prior guidance. During the quarter, we invested a total of $26.3 million of capital through our redevelopment, repositioning, and smart reinstallation programs, producing strong returns and adding to the quality of our portfolio. We also funded just over $51 million of development costs during the quarter toward the completion of the current $735 million pipeline, leaving $344 million remaining to be funded. As Brad mentioned, we also expect to start several new deals over the next 12 to 18 months, likely expanding our development pipeline to be closer to $1 billion, which our balance sheet remains well positioned to support. We ended the quarter with $1.4 billion in combined cash and borrowing capacity under our revolving credit facility, providing significant safety and future opportunity. Our leverage remains historically low, with a debt-to-EBITDA ratio of 3.4x, and our debt is currently 100% fixed for an average of 7.5 years at a record low 3.4%. We do have $350 million of debt maturing in the fourth quarter, but our current plan is to remain patient and allow interest rates and financing markets to continue stabilizing over the next few quarters before refinancing with long-term debt. And finally, given the second quarter's earnings performance and expectations for the remainder of the year, we are revising our core FFO and several other areas of our guidance previously provided. With the blended pricing outperformance achieved through the second quarter, we are increasing the midpoint of our effective rent growth guidance to 7.4%, a 25 basis point increase. This is offset by a decrease in our physical occupancy guidance, which is now projected to average 95.5% for the full year, a 30 basis point decrease. Though this trade-off supports slightly higher rental earnings going forward, our total revenue growth guidance for this year remains unchanged at the midpoint of 6.25%. In early July, the Texas state legislature passed the tax overhaul which significantly rolled back property tax rates across the state to effectively redistribute a budget surplus. Given aggressive property valuations, we had previously anticipated rate rollbacks in Texas, where we have now added a specific reduction for this legislation, which lowers our overall same-store real estate tax growth rate for the year by 50 basis points to 5.5% at the midpoint, which translates to $0.02 per share to core FFO for the year. There's still limited information regarding exactly how individual counties and municipalities will push this change through, but our guidance now includes our early estimate of this overall impact, which is expected to be ongoing. In summary, we are increasing our core FFO projections for the full year to a midpoint of $9.14 per share, which is an increase of $0.03 per share. This increase is primarily comprised of a carry-through of $0.01 per share from the second quarter performance outperformance, as well as the $0.02 per share addition related to the Texas legislation. As Brad mentioned, we also revised our transaction volume expectations for the current year to reflect current market conditions. So that's all we have in the way of prepared comments. So Aaron, we will now turn the call back to you for any questions.

We will take our first question from Eric Wolfe with Citi.

Apologies if I missed this in your remarks, but could you just tell us the blended rent growth you're expecting for the full year now? That's been revised upward, and then what that would be in the back half of the year as well?

Yes, Eric, this is Al. We had started the year, if you remember, with 3% for the full year, but the outperformance we've seen through the first half has increased that. So I think for the full year, we didn't put that in our guidance. But if you do the math on it, it's about 3.5% for this year. And that means largely sticking to the 3% for most of the back half, though we started in July, as Tim talked about stronger than that. So you're probably averaging 3.1%, 3.2% for the back half and that projection now.

Got it. Makes sense. And then you mentioned that new lease rates did come up as you expected in the second quarter, as you would expect seasonally, but there's still a pretty wide gap between new lease and renewal rate growth. So I was just trying to understand what your sort of expectation would be for new lease growth in the back half of the year? And then thinking through whether that is actually a good sort of proxy for market rent growth should the two kind of be around the same?

Eric, this is Tim. With new lease growth, we did, as you said, see it accelerate some as we expected. It didn't accelerate quite as much as what we would see in a normal environment. I do think there's a little bit of supply pressure impact on that. Having said that, I don't really expect it to decelerate as much as it normally might would in Q3. It's typically kind of around this time that you start seeing new lease pricing moderate a little bit as demand starts to moderate some. So I don't expect the volatility, if you will, to be quite as large on the new lease side. On the renewal side, we talked about it from the beginning of the year, there was an unusual scenario last year where for the first, call it, seven or eight months of 2022, new lease pricing outpaced renewal pricing quite a bit. So we knew we had some opportunity kind of mark-to-market those that were on the renewal rates as the first part of last year. So we've reached a point where we're lapping those and starting to reprice those. That's where you've seen the renewal pricing moderate a little bit, but we still expect it to be quite a bit stronger than new lease rates, which is typical and really just kind of returning to a normal seasonality scenario.

And we will go next to Jamie Feldman with Wells Fargo.

Great. I appreciate your comments on mid-tier markets outperforming the entire portfolio. Can you talk more about A versus B and how those are performing within your market?

Yes. This is Tim. The Bs are still outperforming a little bit. I would call it kind of a 40 to 50 basis point gap between what we would define As versus Bs, and that's pretty consistent on the new lease side and the renewal side. So I think it's as part of the portfolio structure that we expect those markets that can be more of the B assets to perform well and some of the supply or, in most markets, the supply coming in hasn't been quite as impactful on some of the more B assets. They've typically been much higher price, more urban-style assets and at a much higher rent than particularly some of the B assets.

Okay. And then in the press release, you talked about demand kind of maybe even better than your initial expectations and mitigating some of the supply risks. Can you give more color or maybe put some numbers around that? Maybe I don't know if you've looked in that detail, but like what percentage of job growth do you need to mitigate that supply risk? Just more color on what gives you confidence in making that statement and what you're seeing.

Yes. So there are a few things that we typically look at as a leading indicator of demand. You obviously have job growth at a macro level, which continues to be pretty strong and certainly stronger in a lot of the Sunbelt markets. Then, more granularly, we look at exposure, lead volume, what we call lead per exposed unit, which is really a combination of those two metrics and then also looking at what our renewal accept rates are. On lead volume and leads for exposed, it's not at the level it was in '22, which was record demand, but as I noted in the comments, you go back to kind of the 2018, 2019 time frame when we saw more normal, if you will, demand scenario, we have our lead volume leading per exposed is quite a bit higher than those times. So that's encouraging that our renewal accept rates remained strong and higher than that period as well. We have a 60% acceptance rate for July, 58% for August, and 43% for September, which is at or above where we would expect or we would like to see it. A couple of other metrics, rent-to-income continues to stay consistent, stay lower, actually dropped a little bit from what it was in Q1, turnover remains low, and reasons for people to move out to buy houses are way down. So all of those various factors, while not quite at the level we've seen with the record performance last year, they're still healthy and stronger than a typical year, if you will.

And Jamie, this is Eric. I'll add to what Tim just said, which covers a lot of reasons why we see the demand staying healthy. The other thing is just continued positive migration trends; 13% of the leases that we wrote in Q2 were for people moving into the Sunbelt for the first time. That compares to 15%, 16% during the peak of COVID. So while it's moderated, it's moderated just a little bit, and it's still well above where it was before COVID started. So these positive migration trends are still there. Any thought of some kind of reversal after COVID was over, I think we've dispelled that fear at this point. So there's just a multitude of factors that sort of go into it, and we're pleased with where we see demand continuing to hold up.

Okay. That's very helpful color. And then finally for me, your comments about expenses moderating into the back half of the year are certainly encouraging. As you think about '24 and the key line items, do you have a sense like do you think all of them will be down in terms of your expense growth rate?

I think as you talk about, I mean, it's too early to really get to a refinement for '24, but certainly, we would expect some continued moderation as some of the inflationary pressures begin to weigh on. The three main areas, obviously, are personnel, repair, maintenance, and taxes. Taxes would be the biggest. Certainly, it's going to follow the moderation of the top line. So it's a backward-looking thing. So you would naturally think that as '24 looks back to '23, which is a good year, but a more moderate year than '22, you should see some moderation there. So probably in those three that make up 70% of our expenses, you'll see some moderation at some level.

Any ballpark?

Hard to ballpark at this point. I don't think it would be probably a long-term rate, but somewhere between we are today and that.

And we will move then to Austin Wurschmidt with KeyBanc Capital Markets.

I'm just curious if you're finding that you're having to trade off some of that new growth to drive traffic or sustain occupancy at the 95.5% level. It seemed like July occupancy dipped from where we were tracking. And I'm just ongoing kind of think through as sort of seasonal demands lows and supply picks up, does that concern you as you move to the latter part of the year and heading into '24?

Also, this is Tim. On the occupancy front, we've been hanging in that 95.5% range for really all of the first half of the year, which we've been comfortable with, as we mentioned, with pricing being a little bit better than we thought. So we're willing to make that trade-off with the compounding growth we can get from rents. As we moved into July, I can see it moderated a little bit. There are some unique circumstances in Atlanta that we can talk about that are driving that down a little bit. If you kind of pull Atlanta out of that number, we'd be right back to 95.5% on occupancy, which we're comfortable being in that range. So it hasn't moved the needle. I don't think on the new lease rate a little bit. There is some supply pressure that we've talked about. But outside of that, I don't think there's anything specifically tied to occupancy necessarily.

And Austin, I'll also add a couple of points on that. The thing to keep in mind is we have a pretty extensive sort of redevelopment and some of the new technology initiatives, particularly the smart home initiative, that continues to fuel the opportunity for positioning the portfolio at a higher rent level, particularly as it compares to some of the new supply coming into the market. One of the benefits of the supply coming to the market, particularly when it's coming into the market on average 20% higher than the rents that we're charging, creates a more compelling value play for our portfolio to the rental market. So that's working to give us some momentum on the rent growth that we might otherwise not have. And then the other thing I would tell you is we track pretty actively why people leave us. When you look at move-outs that are occurring because people don't want to pay the rent increase, that has ticked down a little bit from where it was last year as a percent of our turnover, but it's still running higher than it has long term. And as Tim says, we're okay with that trade-off for a slightly lower proxy right now because that revenue growth associated with rents is really much more impactful in terms of compounding value over the long term. So we sort of like where we are right now and continue with this sort of trying to manage that tension between pricing and occupancy where it is right now.

Got it. No, that's helpful. It sounds like that occupancy and maybe even some of the frictional vacancy are like redevelopment was picking up a little bit from where you had originally expected. Second question, when you look across some of your larger markets, obviously, new lease growth is modestly positive. But when you kind of look across the larger markets where you're feeling some of the supply pressure more acutely, are there any that are notable in terms of lease today that you'd kind of highlight that we should be a little bit more focused on moving forward?

Austin, it's Tim. When you say gain to lease, meaning where there's ...

A couple of markets are noticeably above market rents. Yes.

I wouldn't say anything significant. We do have some negative new lease rates in a couple of the larger markets, but they're in the negative 1% to 5% range. So it's not a huge variance in what we're seeing overall. There's nothing significant that I would point out.

Or those that are at that kind of negative 1%-ish range?

I want to highlight that Austin and Phoenix have shown some softness, and we've discussed these two markets for some time as they have been among our weaker performers, certainly affected by supply issues. The long-term outlook is positive with strong demand fundamentals, but these two markets stand out as having a higher concentration of challenges.

We will go next to Brad Heffern with RBC Capital Markets.

For some of the markets that are lagging their normal seasonal trends, like you obviously just mentioned Austin and Phoenix, but some of the other ones as well. Do you think that that's entirely due to elevated supply? Or are there any other factors that you would call out that might be driving that?

No, I don't think it's primarily supply. I mean, supply is somewhat widespread across several of the larger markets in particular. And then it's nuanced by market, obviously, and depending on where our portfolio is relative to some others. I mean, Charlotte is a good example. It's getting a high level of supply, similar to some of these other markets, but it has performed well, and it's just kind of where our portfolio is positioned versus where the supply is coming in. So generally, I'd say supply, again, going back to the demand side. If you look at job growth across our markets compared to national averages, we're pretty consistently higher than average across all those markets. So there's obviously nuances by market but nothing notable outside of that.

Okay. Got it. And then on the balance sheet, obviously, you've been setting record low leverage numbers every quarter for a while now. What do you think the likelihood is that we'll see these sub-4x numbers stick around for the long term? Or I guess, what are the circumstances where you would potentially take leverage back up to a more normal level?

So Brad, this is Al. And we've talked about, for I think several quarters now. Certainly, we love the strength of our balance sheet, but our leverage is really below where we want it long term at this point. We've been patient to allow opportunities to come to us. So in our credit rating at A minus, 4.5 would be something you could be very confident, so we're a full turn below that right now. So significant opportunity there, but willing to be patient to allow Brad to find the right investments.

We believe that as we move further into this year and especially into 2024, there are early signs suggesting that opportunities will begin to increase. As Brad mentioned, we have observed a slight shift in cap rates on a quarter-to-quarter basis. He and his team are currently in discussions with several merchant builders about potential opportunities. We remain confident that more opportunities are on the way.

And we will move next to Michael Goldsmith with UBS.

In response to an earlier question in the Q&A, you talked about new lease not accelerating as much as you expected. Does that mean that new leases have the rent growth has peaked earlier in the season than it had in the past? And then the second part of that question talked about you don't expect it to decelerate as quickly, why is that?

Well, one nuance there. The new lease pricing has done what we expected. It didn't decelerate or it didn't accelerate less than we expected. It accelerated a little bit less than what we've seen in the last couple of years, but in line with, if not slightly better than expectations. So what we've seen is new lease pricing accelerate, just not quite as much as it may do in a lower supplied environment. So I think at the same time, given all the fundamentals we're seeing and the various metrics we talked about earlier, I don't expect that new lease rate to drop off quite as much as it might normally for kind of the same reason it has accelerated as much. So that's how we see it playing out. But really have been as if not better than expected.

And then as a follow-up, there's a lot of new supply coming in your markets. Tenants or potential tenants have a lot of options to choose from. Are you seeing a longer time for tenants to make a decision? Or maybe like between your traffic to visit and the time between that and when they sign our conversion rates being low? What are you seeing in the trends there? What are you seeing in the trends from that perspective?

Not really anything, Michael. It's probably taken a little bit longer for us to get an answer on the renewal side, but ultimately, as I mentioned, our renewal accept rates are better than they were a couple of years ago in a similar environment and kind of where we expect to see them. Our conversion rates are in line with the period as well. So nothing notable other than, I mentioned, the leads are down a little bit from what we saw last year, but we would have expected that with the growth we saw last year.

And we will go next to Alex Goldfarb with Piper Sandler.

So just trying to put a bow on the supply. It's obviously been a big topic. If I hear correctly from what you're saying, it sounds like it's really only Phoenix and Austin where it's really an issue. Atlanta has maybe another market, just given the occupancy dip that you talked about. But otherwise, the balance of your portfolio, it sounds like yes, there's supply, but it's not really competitive with you guys. You feel comfortable with the in-migration, the economic growth, the job growth to be comfortable with your rents. So is that sort of the main takeaway that the supply is really limited to maybe two or three markets for you guys, and that's it? All the other markets are fine. I just sort of want to encapsulate this.

Yes. I mean, there's also an advantage of the two that are the worst. I mean, I wouldn't say we only have two or three that are feeling any supply impacts. I mean, I think it is impacting several of our markets at some level. But what we've always talked about is with the demand being there, supply just sort of moderates things. It doesn't put a ditch. It says shocks on the demand side that really send rate growth negative for an extended period of time, and we're not seeing that. So, I mean, I wouldn't say there's only two we feel some supply pressure, but those are the most notable. But otherwise, demand is doing a pretty good job of mitigating things.

Your guidance for the second quarter appears quite broad, and I assume you are being conservative with your lower estimate of $2.18. Should we anticipate a quarter-over-quarter decline, or are there any unusual factors that could influence this, such as a one-time event, tax impacts, or returns? I'm trying to understand the potential reasons for a decrease in FFO.

Alex, this is Al. In the second and third quarters, you often notice some factors that affect same-store NOI, whether it be overhead or other items not included in your operating costs. The second and third quarters can be a bit unpredictable. We did outperform in G&A during the second quarter, but there will be some timing lag, and we expect to see some of those costs impacting us in the third quarter. So, nothing out of the ordinary. It's common for the second and third quarters to experience some volatility, but the key takeaway is that we anticipate continued strength for the year.

And we will take our next question from Nick Yulico with Scotiabank.

Tim, just going back to Atlanta. I know last quarter you talked about some weather issues affecting occupancy. Was there anything else driving the occupancy being lower there this quarter?

Yes. There are a few factors at play in Atlanta. While the supply isn't as high as in some of our other markets, it is still above what Atlanta typically sees, leading to some supply pressure. Recently, we had about 100 units come back online in the area due to storm damage and a fire at one of our properties, which has affected our leasing efforts. Additionally, the local courts have started to make progress with evictions and filings, which is encouraging after a long delay. Year-to-date, we’ve seen around 140 more evictions and skips compared to the same period last year, which is a positive sign for the long term. We're also noticing slightly better payment progress, though this has contributed to some occupancy challenges. Revenue and pricing have remained stable, albeit somewhat lower than the market and our portfolio. Overall, we are optimistic about the long-term outlook, even though we are facing some short-term pressures.

Can you provide insights on where concessions are most common, which competing products are involved, and where you are offering concessions within your current or development assets?

Yes. So for our portfolio, concessions are running about ... cash concessions are about 0.5% of rents. It's ticked up a little bit, but not significantly. I mean we do tend to net price with our pricing systems so don't use a ton of concessions. But broadly, at a market level and what we're seeing from some of the competitors. I would say you're at a month free is about where we're at in several of the larger markets. And for most, that is more kind of in-town central areas of the markets; you might see a little bit more if there's a lease-up in the area, but we're not seeing any more than a month and a half or so in any of our markets. Austin is one where it's a little unique in that we're actually not seeing a lot of concessions kind of in Central Austin but more in the suburbs where there's quite a bit of supply. That's one where concessions are a little more prevalent in the suburbs versus other markets where it’s more urban.

Sorry, I just want to add to that real quick. You asked about our lease-up properties. To Tim's point, we've got one in lease-up in Austin. That one, we're offering up to a month free, which is on select units, by the way, not across the board. We've got a couple of hundred units competing supply just in that same submarket. So I'd say that one is probably feeling the most pressure. But I will say that average rents on that property are a couple hundred to $400 higher than what we expected. The average concession usage there is significantly below what we expected. Most of our new lease-ups, we expect about a month free, and we've been significantly lower than that on this asset. All of our properties that are in lease-up right now, we're below what we generally pro forma, which is a month free. We're just offering that on select units as needed, so it's not a broad-based use of concessions that we're seeing right now.

Great. If I could just follow up on the investment activity and being more patient there. I know you gave some commentary on this. But is that more of a view that, hey, cap rates seem like they're too low to where you're penciling they should make sense? Or is it also just a view that, hey, at some point, we're not sure exactly where market rents are going in some areas, there is supply coming. Maybe there's an opportunity to wait. You mentioned talking to merchant developers and just trying to tie together, I guess, valuation versus a view on, hey, fundamentals are becoming a little bit uncertain because of supply.

Right. Nick, this is Brad. I would say it's really the belief that we think cap rates will tick up a bit from where they are right now. I mean, the fundamentals generally are holding up pretty well within our region of the country, and we're not seeing distress certainly in our region and especially in these lease-up properties. We've seen cap rates tick up over the last year, 1.5 years, and really what we believe right now with the limited amount of inventory that's on the market, the capital that’s out there kind of piling up on each other on the assets that are coming to market. That is driving down cap rates. We also continue to see a high proportion of the deals that do trade or 1031 exchanges as well as loan assumptions. So we just believe that as the elevated supply that's occurred in our market over the last year, two years begins to come to market, those assets need to trade, merchant developers need to sell, and as that product comes to market, it's likely to spread out the capital a bit and we're likely to see cap rates continue to move up a bit from where they are today. Today, interest rates are at 5.5%, 5.75%. When you layer on to that just still good operating fundamentals, but not the 5%, 6%, 7% rent growth that we've seen over the last year. I do think that continues to point to a scenario where the negative leverage continues to decrease, which supports increasing cap rates. So just for context, after the GFC, the three-year period after that, we purchased 9,000 units over a three-year period. I don't know if this situation will be as fruitful as that was for us, but it certainly feels like our region is really primarily driven by merchant developers and product needs to trade at some point, and we're starting to see cap rates move up a bit. So we're going to be patient and hold our capacity for what we think will be a better opportunity.

And we will move next to John Kim with BMO Capital Markets.

I wanted to ask about your same-store revenue guidance. You narrowed the range, but you maintained the midpoint. But you started the year with 5.5% earn-in. So just to hit the top end of your same-store revenue guidance of 7%, you only really needed to achieve 3% lease growth rates for the year. You've already exceeded that. I think you've been saying that lease growth rates have come in higher than expected. So I know that occupancy offsets this a little bit, same with the fees, but your 6.25% midpoint seems very conservative today. I just wanted your response on this.

John, this is Al. A key point we haven't discussed today, which we've touched on before, is that the total revenue is slightly diluted by the pricing line due to other income components making up about 10% of our revenue stream that are not growing at the same pace, only increasing by 2% to 3%. This contributes to the dilution. Generally, the calculations you presented indicate a 5.5% carry-in plus half of this year's pricing performance, which we've previously mentioned as being between 3% to 3.5% blended pricing. Half of that brings us close to our expected effective rent growth this year, but those other income items do cause a slight dilution.

So is there a likelihood that you're going to achieve above the midpoint of your guidance?

I'm just saying that we believe the guidance is accurate. There are factors beyond effective rents that are impacting total revenue, John. Other income items are increasing at about 2% to 3%, which affects that figure. So when looking at total revenue, we adjusted it because we refined our estimates as we have more information closer to the end of the year. However, we still believe that the midpoint of 6.25% for total revenue is the right figure.

Okay. My second question is on the insurance premium that you got 20%. I know that's in line with your guidance, but it still came in probably lower than many of us had expected. And I'm wondering if there was any change in the coverage that you had to get that premium, whether it's self-insuring or reduced coverage or anything else?

Yes, John, this is Rob. Yes, in part, the property insurance premium is a big driver of it. It was up about 33%, and that was offset by a much smaller increase in our casualty lines, automobile workers' comp, general liability. So the balance result, as you said, was about 20%. We did have some changes on the retentions this year, about $1 million on our per occurrence and a couple of million dollars on our aggregate. We do have a separate freeze event deductible because of some of the events that were happening in the Southeast. But overall, we feel like the retentions we have are appropriate given the balance sheet strength we have and the spread of risk across the portfolio, given the geographic disbursement. And then as we've done for several years, we did take a portion of the primary insurance that we've got about $10 million of self-retention there that we feel very comfortable with, with an insurance product that caps our loss over three years at $15 million or so. So I feel like we're in really good shape there relative to the strength of the balance sheet.

And we will move next to John Pawlowski with Green Street.

Brad or Eric, I just had a follow-up question regarding the glimpses and signs of better acquisition opportunities you're starting to see. Can you just give me a sense for whether you're seeing notable signs and a broad-based sign of capitulation on pricing from merchant builders struggling with higher debt service costs on their lease-ups?

Yes, John, this is Brad. Yes, I would say we're not seeing capitulation at this point. I think what we're seeing is selectively developers are looking to take some risk off the table on select assets when it makes sense for them to do so. Just for context, in the first quarter, we tracked, I think, seven deals that we had data points on. We're up to call it, 14 in the second quarter. But I would also say the majority of those are not necessarily merchant-developed assets. So again, not a lot of data points there. We've seen a few, but not broad-based. I do think that is what we continue to monitor because as we get later into this year, to my comments earlier, I think the merchant developer profile and need to transact increases. But we haven't seen that really open up broadly at the moment.

And John, I would tell you, as you get later in the year and you get into the slower leasing season sort of during the holidays and Q1 of next year, a lot of these lease-ups are going to see more pressure. Just leasing traffic is not as robust during that time of the year. So we do think that we're heading into an environment where more likely than not pressure will build for some of the lease-up projects that are happening out there, and that may trigger some opportunity.

And we will move next to Michael Goldsmith with UBS.

In response to an earlier question in the Q&A, you talked about new lease not accelerating as much as you expected. Does that mean that new leases have the rent growth has peaked earlier in the season than it had in the past? And then the second part of that question talked about you don't expect it to decelerate as quickly, why is that?

Well, one nuance there. The new lease pricing has done what we expected. It didn't decelerate or it didn't accelerate less than we expected. It accelerated a little bit less than what we've seen in the last couple of years, but in line with, if not slightly better than expectations. So what we've seen is new lease pricing accelerate, just not quite as much as it may do in a lower supplied environment. I think at the same time, given all the fundamentals we're seeing and the various metrics we talked about earlier, don't quite expect that new lease rate to drop off quite as much as it might normally for kind of the same reason it's accelerated as much. So that's kind of how we see it playing out. But really have been as if not better than expected.

And then as a follow-up, there's a lot of new supply coming in your markets. Tenants or potential tenants have a lot of options to choose from. Are you seeing a longer time for tenants to make a decision? Or maybe like between your traffic to visit and the time between that and when they sign our conversion rates being low? What are you seeing in the trends there? What are you seeing in the trends from that perspective?

Not really anything, Michael. It's probably taken a little bit longer for us to get an answer on the renewal side, but ultimately, as I mentioned, our renewal accept rates are better than they were a couple of years ago in a similar environment and kind of where we expect to see them. Our conversion rates are in line with period as well. So nothing notable other than I mentioned the leads are down a little bit from what we saw last year, but we would have expected that with the growth we saw last year.

And we will go next to Alex Goldfarb with Piper Sandler.

So just trying to put a bow on the supply. It's obviously been a big topic. If I hear correctly from what you're saying, it sounds like it's really only Phoenix and Austin where it's really an issue. Atlanta has maybe another market, just given the occupancy dip that you talked about. But otherwise, the balance of your portfolio, it sounds like yes, there's supply, but it's not really competitive with you guys. You feel comfortable with the in-migration, the economic growth, the job growth to be comfortable with your rents. So is that sort of the main takeaway that the supply is really limited to maybe two or three markets for you guys, and that's it? All the other markets are fine. I just sort of want to encapsulate this.

Yes. I mean there's also an advantage of the two that are the worst. I mean, I wouldn't say we only have two or three that are feeling any supply impacts. I mean, I think it is impacting several of our markets at some level. But what we've always talked about is with the demand being there, supply just sort of moderates things. It doesn't put a ditch. It says shocks on the demand side that really send rate growth negative for an extended period of time, and we're not seeing that. So, I mean, I wouldn't say there's only two we feel some supply pressure, but those are the most notable. But otherwise, demand is doing a pretty good job of mitigating things. So having largely clarified this, I think we will wrap up our remarks and turn the call back to you, Aaron. Thank you.

We appreciate everyone joining us this morning and obviously follow up with any other questions that you may have. And that's all we have this morning, so thank you for joining us.

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