Earnings Call Transcript - MAA Q4 2023

Andrew Schaeffer, Treasurer and Director of Capital Markets

Thank you, Carrie and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team participating on the call this morning with prepared comments are Eric Bolton, Brad Hill, Tim Argo and Clay Holder. Al Campbell, Rob DelPriore, and Joe Fracchia are also participating and available for questions as well. Before we begin with our prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our filings with the SEC, which describe risk factors that may impact future results. During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplements are currently available on the Investors page of our website. A copy of our prepared comments and 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.

Eric Bolton, CEO

Thanks Andrew and good morning. Core FFO results for the fourth quarter were ahead of our expectations. Higher non-same-store NOI performance and lower interest expense drove the outperformance. As expected during the fourth quarter, a combination of higher new supply and a seasonal slowdown in leasing traffic increasingly weighed on new resident lease pricing during the quarter. Encouragingly, we did see some of this pressure moderate in January with blended pricing improving 130 basis points from the fourth quarter performance led by improvement in new lease pricing. Stable employment conditions, continued positive migration trends, a higher propensity of new households to rent apartments and continued low resident turnover are all combining to support steady demand for apartment housing. We continue to believe that late this year, new lease pricing performance will improve and we will begin to capture recovery in that component of our revenue performance. In addition, with the pressure surrounding higher new supply deliveries likely to moderate later this year, we continue to believe the conditions are coming together for overall pricing recovery to begin late this year and into 2025. As you may have seen last week, MAA crossed a significant milestone marking the 30-year anniversary since our IPO. Over the past 30 years, MAA has delivered an annual compounded investment return to shareholders of 12.6%, with about half of that return comprised of the cash dividends paid. Through numerous new supply cycles and various stresses associated with the broader economy, MAA has never suspended or reduced our quarterly dividend over the past 30 years, which, of course, is a key component of delivering superior long-term returns to REIT shareholders. Today, I'm more positive about our outlook than I was this time last year. Today, as compared to a year ago, we have more clarity about the outlook for interest rates with downward movement likely later in the year. More REITs associated with material economic slowdown or recession are dissipating. Inflation pressures on operating expenses are declining. The demand for apartment housing and absorption remained steady. And with clearly declining permits and new construction starts, we have increasing visibility that competing new supply is poised to moderate. With a 30-year track record of focus on high growth markets, successfully working through several economic cycles, an experienced team and proven operating platform, a strong balance sheet and long-term shareholder performance among the top tier of all REITs, we're confident about our ability to execute on the growing opportunities in the coming year and beyond. Before turning the call over to Brad, I do want to take a moment to say a big thank you to Al Campbell, who will be officially retiring effective March 31st. Al has been with our team for the past 26 years and has served as our Chief Financial Officer for the past 14 years. Al has been instrumental in the growth of our company, transitioning us to the investment grade debt capital markets and has built a strong finance, accounting, tax internal audit platform for MAA. Al leads our company and finance operation in strong hands with Clay and his team. Overall, grateful for Al's service and tremendous accomplishments. So thank you, Al, for all you've done for MAA. And with that, I'll now turn the call over to Brad.

Brad Hill, CEO

Thank you, Eric, and good morning, everyone. As mentioned in our earnings release, we successfully closed on 2 compelling acquisitions during the fourth quarter at pricing 15% below current replacement costs. Both properties fit the profile of the type of properties we expect to continue to emerge throughout 2024. Properties in their initial lease up, with sellers focused on certainty of execution with the need to transact prior to a definitive deadline. Our relationships with the sellers and our ability to move quickly and execute on the transactions utilizing the available capacity on our line of credit without a financing contingency were key components of MAA being chosen as the buyer for these properties. MAA Central Avenue, a 323-unit mid-rise property in the Midtown area of Phoenix, and MAA Optimist Park, a 352-unit mid-rise property in the Optimist Park area of Charlotte, are expected to deliver initial stabilized NOI yields of 5.5% and 5.9%, respectively. We expect both properties to achieve further yield and margin expansion as a result of adopting MAA's more sophisticated revenue management, marketing and lead generation practices as well as our technology platform. Additionally, we expect to achieve operational synergies by combining certain functions with other area MAA properties as part of our new property potting initiative. Due to continued interest rate volatility and tight credit conditions, transaction volume remains tepid, down 50% year-over-year and 16% from the third quarter. We continue to believe that transaction volumes will pick up later in 2024, providing visibility into cap rates and market values. For deals we tracked in the fourth quarter, we saw cap rates move up by roughly 35 basis points from third quarter. Our transaction team is very active in evaluating additional acquisition opportunities across our footprint with our balance sheet in great position to be able to take advantage of more compelling opportunities as they continue to materialize later this year. Our forecast for the year includes $400 million of new acquisitions, likely in lease up and therefore, dilutive until stabilization is reached. Despite pressure from elevated new supply, our two stabilized new developments as well as our development projects currently leasing continue to deliver good performance, producing higher NOIs and earnings than forecasted in our original pro-formas, creating additional long-term value. New lease rates are facing more pressure at the moment, but these properties have captured asking rents on average approximately 20% above our original expectations. Our four developments that are currently leasing are estimated to produce an average stabilized NOI yield of 6.5%. We continue to advance predevelopment work on several projects, but due to permitting and approval delays, as well as an expectation that construction costs are likely to come down. We have pushed the three projects that we plan to start in 2023 into 2024. We now expect to start between 3 to 4 projects this year, with 2 starts in the first half of the year and 2 starts late in the year. Encouragingly, we have seen some recent success in getting our construction costs down on new projects that we're currently repricing. As we have seen a meaningful decline in construction starts in our region, we're hopeful to see continued decline in construction costs as we progress through the year. Our team has done a tremendous job building out our future development pipeline. And today, we own or control 13 well-located sites, representing a growth opportunity of nearly 3,700 units. We have optionality on when we start these projects, allowing us to remain patient and disciplined. Any project we start this year will deliver first units in 2026, aligning with the likely stronger leasing environment supported by significantly lower supply. Our development team continues to evaluate land sites as well as additional pre-purchase development opportunities. In this constrained liquidity environment, it's possible we could add additional development opportunities to our future pipeline. The team has our portfolio in good position. Our broad diversification provides support during times of higher supply with a number of our mid-tier markets outperforming. As we ramp up activities in 2024, we're excited about the coming year. Beyond the new external growth opportunities just covered and as Tim will outline further, we continue to see solid demand and steady absorption of the new supply delivering across our markets and remain convinced that pricing trends will begin to improve late this year and into 2025. In addition, we continue to make progress on several new initiatives aimed at further enhancing our leasing platform to further position us to outperform local market leasing metrics during the supply cycle. Before I turn the call over to Tim, I want to say thank you to all of our associates at the properties and our corporate and regional offices. I want to thank you for coming to work every day, focused on improving our business, serving our residents and exceeding the expectations of those that depend on us. With that, I'll turn the call over to Tim.

Tim Argo, CFO

Thank you, Brad, and good morning, everyone. Same-store NOI growth for the quarter was right in line with our expectations with slightly lower operating expenses offsetting slightly lower blended lease-over-lease pricing growth. Expanding on Eric's earlier comment on new lease pricing, developers looking to gain occupancy ahead of the holiday season and the end of the year did put further pressure on new lease pricing, particularly in November and December. However, because traffic tends to decline in the fourth quarter, again, particularly in November and December, we intentionally repriced only 16% of our leases in the fourth quarter and only about 9% in November and December. This resulted in blended lease-over-lease pricing of minus 1.6% for the quarter comprised of new lease rates declining 7% and renewal rates increasing 4.8%. Average physical occupancy was 95.5% and collections remained strong, with delinquency representing less than 0.5% of bill grants. These key components drove the resulting revenue growth of 2.1%. From a market perspective in the fourth quarter, many of our mid-tier metros performed well. Being invested in a broad number of markets, submarkets, asset types and price points is a key part of our strategy to capture growth throughout the cycle. Savannah, Richmond, Charleston and Greenville are examples of markets that led the portfolio and lease-over-lease pricing performance. The Washington, D.C. metro area, Houston and to a lesser extent, Dallas/Fort Worth were larger metros that held up well. Austin and Jacksonville are 2 markets that continue to be more negatively impacted by the level of supply being delivered into those markets. Touching on some other highlights during the quarter, we continued our various product upgrade and redevelopment initiatives in the fourth quarter. For the quarter, we completed nearly 1,400 interior unit upgrades, bringing our full-year total to just under 6,900 units. We completed over 21,000 smart home upgrades in 2023 and now have over 93,000 units with this technology and we expect to complete the remaining few properties in 2024. For our repositioning program, we have 5 active projects that are in the repricing phase with expected yields in the 8% range. We have targeted an additional 6 projects to begin in 2024, with a plan to complete construction and begin repricing in 2025. Now looking forward to 2024, we're encouraged by the relative pricing trends we are seeing thus far. As noted by Eric, blended pricing in January was 130 basis points better than the fourth quarter. This is comprised of new lease pricing of negative 6.2%, an 80 basis point improvement for the fourth quarter and notably a 150 basis point improvement from December and renewal pricing of 5.1%, an improvement of 30 basis points from the fourth quarter, while maintaining stable occupancy of 95.4%. Similarly, renewal increases achieved thus far in February and March average around 5%. As noted, new supply being delivered continues to be a headwind in many of our markets. While we do expect this new supply will continue to pressure pricing for most of 2024, we believe we have likely already seen the maximum impact to new lease pricing and that the outlook is better for late 2024 and into 2025. It varies by market, but on average, new construction starts in our portfolio footprint peaked in the second quarter of 2022. Based on typical delivery timelines, this suggests peak deliveries likely in the middle of this year with some positive impact on pricing power soon thereafter. While increasing supply is impactful, strength of demand is more indicative of the pricing power in a particular market. Job growth is expected to moderate some in 2024 as compared to 2023, but growth is still expected to be strongest in the Sunbelt markets. Job growth combined with continued in-migration accelerates the key demand factor of household formation. Separately, the cost gap between owning and renting gapped out considerably in the back half of 2023, even before considering the impact of higher mortgage rates. Move-out to buy a home dropped 20% in the fourth quarter on a year-over-year basis, and we expect a continued low number of move-outs due to home buying to contribute to low turnover overall in 2024. That's all I have in the way of prepared comments. Now I'll turn the call over to Clay.

Clay Holder, CFO

Thank you, Tim, and good morning, everyone. Reported core FFO for the quarter of $2.32 per share was $0.03 per share above the midpoint of our quarterly guidance and contributed core FFO for the full year of $9.17 per share, representing an approximate 8% increase over the prior year. The outperformance for the quarter was primarily driven by favorable interest and the performance of our recent acquisitions and lease-up during the quarter. Overall, same-store operating performance for the quarter was essentially in line with expectations. Same-store revenues were slightly below our expectations for the quarter as effective rent growth was impacted by lower lease pricing that Tim mentioned. Same-store operating expenses were slightly favorable to our fourth quarter guidance primarily from lower-than-expected personnel costs and property taxes. During the quarter, we invested a total of $20.7 million of capital through our redevelopment, repositioning and smart brand installation programs, producing solid returns and adding to the quality of our portfolio. We also funded $48 million of development costs during the quarter toward the completion of the current $647 million pipeline, leaving nearly $256 million remaining to be funded on this pipeline over the next 2 years. As Brad mentioned, we also expect to start 3 to 4 projects over the course of 2024, which would keep our development pipeline at a level consistent with where we ended 2023, in which our balance sheet remains well positioned to support. We ended the year with nearly $792 million in combined cash and borrowing capacity under our revolving credit facility, providing significant opportunity to fund potential investment opportunities. Our leverage remains low with debt to EBITDA at 3.6x. And at year-end, our outstanding debt was approximately 90% fixed with an average of 6.8 years at an effective rate of 3.6%. Shortly after year-end, we issued $350 million of 10-year public bonds at an effective rate of 5.1%, using the proceeds to pay down our outstanding commercial paper. Finally, we did provide initial earnings guidance for 2024 with our release, which is detailed in the supplemental information package. Core FFO for the year is projected to be $8.68 to $9.08 or $8.88 at the midpoint. The projected 2024 same-store revenue growth midpoint of 0.9% results from rental pricing earned in of 0.5% combined with blended rental pricing expectation of 1% for the year. We expect blended rental pricing to be comprised of lower new lease pricing impacted by elevated supply levels and renewal pricing in line with historical levels. Effective rent growth for the year is projected to be approximately 0.9% at the midpoint of our range. We expect occupancy to average between 95.4% and 96% for the year and other revenue items, primarily reimbursement and fee income, to grow in line with effective rent. Same-store operating expenses are projected to grow at a midpoint of 4.85% for the year, with real estate taxes and insurance producing most of the growth pressure. Combined, these 2 items are expected to grow almost 6% for 2024, with the remaining controllable operating items expected to grow just over 4%. These expense projections combined with the revenue growth of 0.9% result in a projected decline in same-store NOI of 1.3% at the midpoint. We have a recently completed development community in lease-up, along with an additional 3 development communities actively leasing. As these 4 communities are not fully leased up and stabilized and given the interest carry associated with these projects, we anticipate our development pipeline being diluted to core FFO by about $0.05 in 2024 and turning accretive to core FFO on later stabilization. We are expecting continued external growth in 2024, both through acquisitions and development opportunities. We anticipate a range of $350 million to $450 million in acquisitions, all likely to be in lease-up and not yet stabilized, and a range of $250 million to $350 million in development investments for the year. This growth will be partially funded by asset sales, which we expect dispositions of approximately $100 million, with the remainder to be funded by debt financing and internal cash flow. This external growth is expected to be slightly dilutive to core FFO in 2024 and then again, turning accretive to core FFO after stabilization. We project total overhead expenses, a combination of property management expenses and G&A expenses, to be $132.5 million at the midpoint, a 4.9% increase over 2023 results. We expect to refinance $400 million of bonds maturing in June 2024. These bonds currently have a rate of 4% and we forecast refinancing to be north of 5%. This expected refinance, coupled with the recently completed refinancing activities mentioned previously, results in $0.04 of dilution to core FFO as compared to the prior year. That is all we have in the way of prepared comments. So Carrie, we will now turn the call back to you for questions.

Operator, Operator

We will take our first question from the line of Josh Dennerlein with Bank of America.

Josh Dennerlein, Analyst

I appreciate all the color you provided on guidance. My first question would just be on the same-store revenue growth outlook. Can you provide us any more details on what would get you to the high and low end of guidance? And I guess, I'm really curious about what you would assume for the blended rate growth at the higher low end.

Tim Argo, CFO

This is Tim. So I think as far as the high end of the low end, I think we feel pretty comfortable with the renewal rates and they've been steady for the last few months. What we're seeing, as I noted, the next few months as being in that 5% range. I think that the new lease rates are what could certainly determine whether we get more to the high or low end, which is going to be a function of the demand side. We expect to see steady job growth, steady demand and migration, all those factors. So that's a little bit better. I think it obviously pushes new lease rates higher and then the opposite is true. But if you think about our full year guide, it's built on new lease rates for the year, and this will be seasonal, starting a little bit lower in Q1, accelerating to Q2 and Q3 and then declining a little late Q4, but somewhere in the negative 3%, 3.25% range on new lease for the year and expectations of the 4.5% to 5% range on renewals, which blends out to the 1% blended is what we're assuming for the full year.

Josh Dennerlein, Analyst

I appreciate that. And then there's a drag that you're assuming on the $400 million of acquisitions, is there a way to quantify that?

Clay Holder, CFO

Yes, you can consider our projections for new rates next year, along with the timing of acquisitions. We expect these to begin in the second quarter and continue throughout the year, estimating around four acquisitions at approximately $100 million each. We believe these will resemble the two acquisitions we completed in 2023 regarding their leasing performance and the impact on earnings in 2024.

Brad Hill, CEO

Josh, this is Brad. Just to add to that. Our assumption on the acquisitions is that obviously, as Clay mentioned, they're very similar to the ones we purchased last year. They're in lease-up. We're assuming about a 4.5% NOI yield contribution at the time of closing, given that those are in lease-up and given the comments that Clay made about where our current commercial paper is and where our cost of debt is you can kind of do the math on what the dilution there is.

Operator, Operator

We'll take our next question from the line of Austin Wurschmidt with KeyBanc.

Austin Wurschmidt, Analyst

Great. Eric, you remain confident that new lease pricing is going to improve this year, but it really sounds like peak deliveries don't hit until around midyear. And we've really yet to see, I guess, leasing volume pick up, so with kind of that expectation of the improvement in new lease rates for the year, do you think that lease rates get better in the back half of this year versus last year on sort of a lease weighted basis? I know things deteriorate late in the year, but more interested in sort of that period of July through October.

Eric Bolton, CEO

I will address your question, and Tim can add his thoughts as well. In general, we believe that as we enter the summer leasing season, leasing traffic typically increases. As mentioned in our earlier comments, we see no signs of demand declining. We expect that normal seasonal trends will continue. Currently, supply delivery is quite high, and we don't anticipate it increasing by another 10%. We feel we are at the peak of the supply situation during a period of weak demand. We expect supply to remain elevated, particularly in the first and second quarters and possibly into early third quarter. While it's challenging to predict by month, we believe that supply may start to decrease somewhat as we approach the fourth quarter. Thus, we expect the ongoing supply pressure will coincide with stronger leasing traffic and demand patterns over the summer due to seasonal trends, which suggests that new lease pricing will improve in the second and third quarters. As Tim mentioned, we anticipate that the typical seasonal moderation will begin in the fourth quarter. Additionally, we've started to notice the effects of supply pressure in 2023, particularly in the latter half, which may make year-over-year comparisons for new lease performance easier in the second half of 2024. Overall, that informs our outlook on future trends. Tim, do you have anything to add?

Tim Argo, CFO

Yes. I'll add on to what Eric was saying. If you go back to last year, I mean, our new lease pricing went slightly negative starting in July, and we got progressively got more so throughout the year. So there is a comp component that plays into this as well. So I do think to answer one of your questions, Austin is that new lease pricing does look better at the end of 2024 as compared to the end of 2023 with those comps, with supply getting a little bit better. Now, I think the improvement won't be as clear to see because it is a lower demand time of the year when you get into November and December, but I think the trends will be positive and really start to play out in 2025.

Austin Wurschmidt, Analyst

When do you think new lease rate growth could become positive? Additionally, I'm curious about which underlying assumptions in the same-store revenue guidance have changed the most compared to what you published in November of last year.

Tim Argo, CFO

I believe new lease pricing is unlikely to turn positive until 2025. Mid-year, we may see it approach flat rates, especially during peak demand periods. However, typically in a normal or good year, new lease pricing tends to be negative in the latter half of the year. Therefore, I expect that the adjustments will start to moderate in early 2025, making this the most probable scenario for new lease pricing. Regarding recent changes, our earnings reflect what we observed in November and December, where pricing moderated significantly during those months. The way we calculate our earnings considers all leases in place as of December 31 and estimates the range of growth for the rest of the year based on that pricing. This has resulted in earnings being around the 0.5 range, slightly lower than the figures discussed at NAREIT, largely due to the new lease pricing in November and December and the pressures from developers seeking occupancy.

John Kim, Analyst

I wanted to follow-up on that comment you just made on the earn in that basically half of what you expected in November. I realize the blended rates probably seen in lower than expected. But you also mentioned, Tim, in your prepared remarks that the leasing volume was very light fourth quarter is only 16% of leases overall. I'm just trying to understand that impact of the fourth quarter leases and why earn in come down so much in September month?

Tim Argo, CFO

Yes. It's straightforward. The other factor that contributed is that we noticed a decrease in turnover for the year, but in November and December, there was a greater number of new leases compared to renewals. This meant that new lease pricing had a larger effect on the blended rate. We expect this trend to continue into 2024, with turnover remaining low and leaning more towards renewals. Although new lease pricing improved in January, the blended rate has improved even more as we project lower turnover. This is a comparison during the lowest point of the year. We anticipate a positive blended rate in 2024. It's important to remember that this analysis reflects a particularly pessimistic time, but the downturn wasn't caused by pricing.

John Kim, Analyst

But when you calculate earn in, do you just take the blended lease change for your entire portfolio and just not weighted by number of transactions, such as essentially?

Tim Argo, CFO

No. We were discussing earn-in by referring to our total rents, which were $2 billion at the end of December. If we take the rent number for December and project it through 2024, we can determine the full year growth compared to 2023. The outcome will influence that figure now.

John Kim, Analyst

Okay. My second question is on acquisition yields, which your last 2 were at 5.5% and 5.9%. How do you see that move towards this year when you see more acquisition activity occur? And your recent bond rate is done at 5.1%. How does that change your view on initial yields that are acceptable to you?

Brad Hill, CEO

John, this is Brad. I'll start off with that. Well, certainly, we were fortunate with the 2 acquisitions that we executed in the fourth quarter. And we felt like we got really good pricing on those for the reasons I mentioned really in my comments, but we haven't seen a lot of activity in that area. And so even in the first quarter here in January, we've seen a little bit of an uptick in terms of the deals coming out. We were at NMHC last week and certainly think that volume picks up a little bit as we go through the year. But we haven't seen a lot of opportunities coming that way. Now we do think as we continue to get further into the year that pressure given where interest costs are for the developers, given the supply pressures that they're likely to feel that the urgency from some of these developers to execute on transactions will continue to increase, and we're certainly hopeful that yields additional opportunities. The other thing that we are watching, frankly, is some of the larger equity sponsors and what their exposure is to other sectors, whether that's retail or office and some of them have big exposures to multifamily development and some of them have liquidity needs, which states that they execute transactions in some of the multifamily space. So we're having some discussions with folks like that. We're certainly hopeful that that will yield some opportunities. But I do think that the pricing expectations on the seller side is still a bit lower than where we think pricing needs to be pricing expectations are still low 5s. So we still need to see some movement up in cap rates from where those expectations are for the market to really pick up. So it's an area that we continue to work on. And we do think that there'll be more opportunities as we get through this year.

Operator, Operator

And we'll take our next question from the line of Jamie Feldman with Wells Fargo.

Jamie Feldman, Analyst

Great. I appreciate all the color on rents and how you think you can inflect more positive, but I guess this is like a case study. If you think about your weakest market, your deepest supply challenged market, and what do you think the pace of rents look like in that market or the kind of quarterly improvement? Or is it still weak into '25? I think just looking for like the worst-case scenario so we can build on the better.

Tim Argo, CFO

Well, I mean I will say when we talked about construction starts that peaked somewhere around the middle of 2022 that is pretty consistent across our markets. There are a few that were a little bit later that or few a little bit earlier than that. So it is a relatively consistent supply wave in terms of the timing Obviously, some markets are getting a lot more supply than others, which drives under overperformance. I mean Austin is the market we talked about forever that is our weakest one right now. I mean it's just getting a ton of supply, it's very widespread throughout the market, whereas some other markets are a little more targeted. So that's 1 that has probably been the worst new lease performance right now. So I mean, I think a market like that will continue to struggle through most of 2024, probably be 2025 before it starts to see a little bit of improvement. But I would say that, again, sort of the cadence of supply is relatively consistent across most of our markets.

Eric Bolton, CEO

To complement what Tim mentioned, while the flow of supply remains relatively stable, there are notable variations between different markets. The proportion of new supply in relation to the existing stock can differ. Additionally, market conditions influence demand and the factors driving it. In a market like Austin, which is likely our most oversupplied market when compared to the percentage of existing stock, we also see strong job growth. As a result, absorption rates in Austin may be higher than in Dallas or other markets that are also experiencing a surge in supply, but not at the same magnitude. Dallas is seeing considerable job growth, while Jacksonville doesn’t have the same level of job growth as Austin. Therefore, it's important to be cautious when applying insights from one market to our entire portfolio regarding performance expectations, as these can vary significantly. This is why we maintain a diverse portfolio, including mid-tier markets that are performing more steadily than others. As Tim and Brad pointed out, the pace at which any specific market moves through the supply pipeline largely depends on the demand factors present in those markets. We believe Austin has significant long-term potential for us and is likely to demonstrate a strong recovery by late this year or more likely into early 2025.

Jamie Feldman, Analyst

That's helpful. The question seems to stem from the general expectation that many markets will improve by the end of the year. I'm trying to understand which market may experience the most prolonged difficulties, considering both job growth projections and supply. This way, we can monitor the worst-case scenario.

Tim Argo, CFO

Yes. I would put Austin in that group for sure.

Brad Hill, CEO

Yes, I agree with everyone. There's a lot of supply coming in, and honestly, without significant job growth, the situation would be worse than it currently is. While we're seeing a considerable number of jobs, it's going to take some time to address these issues.

Tim Argo, CFO

I think we would be comfortable increasing our leverage to around 4.5% to nearly 5%. However, it will take a considerable amount of time, given the current rate of growth, to reach that level.

Dan Tricarico, Analyst

It’s Dan Tricarico on for Nick. Brad, you talked about the improving absorption in the back half of the year. Can you comment on what you're seeing on the demand side, job growth migration that gives you this confidence? Maybe the general economic outlook embedded in the guide? Maybe said another way, what household formation or job growth scenario gets you to the low end of guidance?

Brad Hill, CEO

Yes. Well, I'll start out Tim can certainly jump in here. But a couple of points I'll make here on the demand side is definitely the traditional demand drivers that we see, whether it's job growth, population growth, migration trends, all of those are still very, very positive and steady within our region of the country. And those will continue to be significant drivers over the long term for us. But we also see another dynamic that's kind of at play here. And a big part of that has to do with the single-family market and really has to do with the affordability and the availability that we see there. As Tim mentioned in his opening comments, we've seen a significant decline in the move-outs to buy a home. That's down 20% year-over-year with us. And if you look at the cost of buying a home in our region of the country, it's up significantly over the last couple of years, the monthly cost of homeownership is about 50% to 60% higher than the rents are within our region of the country. So that's a significant hurdle for most people. We've also seen the construction starts in the single-family sector continue to decline. So the inventory level of available single-family continues to decline. And so, we think that's a pushing segment of demand into multifamily. And it's also pushing folks to stay longer in multifamily. We've seen the average tenure of our residents almost 2 years now. So that's got a demand component to it as well. And then we've also seen some preference shift within the demographics that are our rental demographics, honestly, and that is a preference to live alone. And so that also is extending the household formation numbers that we're seeing. And so all of that really combines to a point that Eric made in his comments, which is that apartment rental continues to make up a higher percentage of the occupied housing. And so as we look out and see demand in our region of the country, those traditional drivers continue to be important, but there's also this other component that is really adding to the demand component that we see in our region of the country. Tim, what would you add?

Tim Argo, CFO

Yes. I'll add a couple of points there. I mean, I think the job growth component and how much there is will probably be more likely the factor that determines to your original question, kind of high and low end, that sort of thing. I mean, I think we expect be in migration and all things Brad just noted to be there and that component of demand to be pretty consistent with what we've seen in the last couple of years. We've dialed in about 400,000 new jobs into our expectations for our markets for '24 that's down certainly from 2023, but still net positive and so expect job reprices in the subnet markets. And encouragingly, if you look at the national job growth numbers from January added, I think, about 350,000 new jobs in January. You compare that back to 2023, the average is about 250,000 a month. So while we do expect job growth to be down some to 2023, the early indications are that it's still holding up pretty well.

Dan Tricarico, Analyst

That's great color. Follow-up on development. You have 3 or 4 development starts this year, development starts. What markets are those in? And what are underwritten stabilized yields on those? And I guess, along the same line, you talked about Austin being the weakest. You stabilized Windmill Hill in Austin in the fourth quarter. Can you give us a sense of how that asset leased up versus your expectations? And obviously, a little bit more suburban, but how do you expect that asset to perform within the Austin market this year, given it's expected to be one of the weaker markets?

Brad Hill, CEO

This is Brad. I have a few comments. On the development side, we anticipate starting 3 to 4 projects this year, with 2 expected in the first half. One of these is located in Charlotte, and the other is in the Phoenix Chandler submarket. Additionally, we are working on 2 more projects, which are Phase II developments in Denver and Atlanta. Currently, we are focused on lowering construction costs to achieve our target yield of around mid-6s. We have made progress on the Charlotte project, achieving a 5% to 6% reduction in construction costs, which supports our yield objectives. We feel optimistic about our developments. The two projects later in the year are also Phase II, and we hope the yields will continue to improve as we manage construction costs. Now, what was the second part of your question, Nick?

Dan Tricarico, Analyst

The Windmill Hill project in Austin in the fourth quarter, how has that progressed?

Brad Hill, CEO

Yes, that asset performed extremely well for us. The average rents that we achieved on that asset were almost 24% higher than what we expected. So from a yield perspective, significantly outperformed what we expected. And part of that was you mentioned it's a suburban asset in Austin. Great execution on the property had 2 adjacent lease-ups going on at the same time as it, but we were very patient in how we leased that asset up. We didn't have to offer concessions to meet the market and really performed extremely well there. So I think, given the execution on the construction side as well as the leasing side, we did not have to compete quite as much head-to-head with some of the competition that was in that market, and we've got pretty good results there.

Operator, Operator

And we'll take our next question from Eric Wolfe with Citi.

Eric Wolfe, Analyst

So I understand your point on comps getting easier through the year, especially in the fourth quarter. But if the largest amount of supply is delivering in the middle of this year, it takes like a year to lease up. I guess why would your brands start recovering sort of later this year before the developments are fully leased? Isn't there typically like a compounding effect of the supply?

Tim Argo, CFO

I believe one factor is that while we are discussing comparable performance, the supply peaks were observed in the middle of 2022 and have remained fairly stable since then. We've maintained a consistent level of supply delivered over the last several quarters, along with steady demand. Absorption rates have kept pace well, even as supply has increased, although some markets differ slightly. The middle of the year tends to show the highest demand, and we think the correlation between this peak in demand and our incoming traffic has helped stabilize the situation. We believe that new lease pricing has likely bottomed out, which prevents matters from worsening beyond their current state, considering the usual seasonal variations and various demand influences we've discussed. After the peak, we experience a few months of pressure, but generally, we see conditions improving a few months after the final deliveries, which provides us with confidence for the latter half of the year as we anticipate some improvement.

Eric Bolton, CEO

As Tim mentioned, we expect that new lease pricing will moderate in the fourth quarter. It's important to note that we stagger our lease expirations intentionally, which allows us to reprice a smaller percentage of our leases during the holiday period of November and December. I understand the concern you're raising, but we believe we've factored this in through our expectations for new lease-over-lease pricing performance and seasonal patterns, as well as through our management of lease expirations throughout the year. We feel confident that our approach is appropriate. However, market conditions can vary greatly, making it challenging to draw broad conclusions regarding your point. Nonetheless, we do see signs in certain markets where supply pressures are beginning to ease late in the year, which may indicate early signs of recovery in new lease pricing performance as we move into 2025.

Tim Argo, CFO

I think one more point I'll add just back to the kind of the middle of the year. I mean, we're still dialing in somewhere in the negative 2.5% range during that strongest period of 2024 for new lease pricing. So we certainly don't see getting positives yet. But I think with the demand components that it will be a little bit better than what we're seeing right now.

Eric Wolfe, Analyst

And then just maybe a quick clarification on the earn in. Does that include your sort of loss or gain to lease in real-time changes in market rents? Or is it based purely off the leases signed up at one point in time? Just trying to understand if like real-time movements in market rents ends up impacting that earnings such that it's always going to end up being low end at the year-end.

Tim Argo, CFO

Yes. Well, for the earning like I said, it's basically just saying all the leases that were in place at the end of 2023, so call it all the December leases just held steady for all '24 that's earned in. I mean, loss to lease, how we think about that, if you look at all of the leases that went effective in January compared to our in place, it's about a negative 1% loss lease looking at it that way. But we are dialing it in as we said, positive 1% blended for the course of 2022.

Richard Anderson, Analyst

So what do you make of this January effect that's happening? Like you guys have seen this sort of recovery in January. Some of your peers, many of your peers have seen the same thing. It's still freak and cold outside. Why do you think January is recovering the way it is for you and others at this point?

Eric Bolton, CEO

There are two reasons for this. First, January doesn't have holidays, and people generally avoid moving during Christmas and Thanksgiving. The holiday effect is significant and influences people's willingness to move. Secondly, we've noticed that some developers were feeling pressure as the year-end approached. In the early part of the fourth quarter, as we neared the end of the year, developers became more aggressive in their leasing practices leading up to the holidays. This increased activity from developers tended to ease off a bit afterward. Once the holidays are over, even with the cold weather, people's readiness to handle the inconvenience of moving tends to improve, which contributes to an uptick in traffic.

Tim Argo, CFO

Yes, I think that's a good reason.

Brad Hill, CEO

Well, you're right, we do have a pretty big pipeline of projects that are ready that we could execute on. And really, it's just a matter of working the costs on those projects right now. I mean, as I mentioned, we are seeing early signs of coming down. On the project in Charlotte, call it, 5% to 6%. We do think we'll continue to see costs come down as we get later into this year. So while we do expect to start 3 or 4 projects this year, we have another 4 to 5 that are approved, were plans are nearly ready. And if costs came in, we could certainly pull the trigger on those. So we have the optionality to be able to do that. But we think it's prudent to be sure that the costs are in line. We do also agree with you that these line up very, very well from a delivery perspective into 2026. The other area where we are seeing opportunity that I think could yield itself more immediately, is in our pre-purchase area. So we are talking with developers on a number of opportunities where projects are approved, entitled, plans are complete and in some instances, GMPs are already in place. But given some of the other liquidity constraints out there that I was talking about earlier, and pressures in other sectors, the equity or even the debt has pulled out of the project. So we are evaluating projects in that way. And so if we can find well-located opportunities with good partners that meet our return requirements, we'll definitely lean into that area a little bit more.

Operator, Operator

And we'll take our last question from the line of Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb, Analyst

I have two questions, and I apologize for the background noise. The first is about renewals. I believe you mentioned you anticipate them to be around 5%, while new rents are down 3%, creating an 8% spread. Could you explain why that spread seems quite large, yet you mentioned it's consistent with historical trends? Additionally, could you discuss why existing residents would be willing to accept such an 8% spread compared to new residents?

Tim Argo, CFO

Yes, this is Tim. The gap is currently wider than historical levels; for instance, in January, we saw about a 1,100 basis point gap compared to 900 at the same time last year. Over the past few years, the first quarter typically shows around an 800 basis point gap, and even as we move into spring and summer, there's usually a gap where renewal pricing exceeds new lease pricing. There are several reasons for this. First, moving incurs both hassle and financial costs. There's also a customer service aspect; people who have been with us understand what to expect and the level of service provided. Our average Google star rating was 4.4 in 2023, the highest in the sector, with 80% of our ratings being 5 stars, which impacts our renewal pricing positively. Additionally, we invest significant time and resources into the renewal process. Both our corporate office and on-site teams carefully consider various factors and foster a sense of trust regarding the rates we offer. We anticipate the gap to narrow as new lease pricing increases in the spring and summer. As I mentioned earlier, in February, March, and April, we expect to average around 5%, which should remain stable, especially as new lease rates begin to rise during that period.

Alexander Goldfarb, Analyst

Okay. And then the second question is on the supply front, it only seems like a handful of your markets have supply issues, but pressure on new rent seems to be broad brushed. And yet, Sunbelt still as good economy, good jobs, good in migration. So how do you like we understand weakness in new rents in markets that have a lot of supply? But how do we interpret rent softness sort of portfolio wide, especially in the market that aren't beset by supply? And clearly, your price point seems to be affordable for the community. So I just want to understand the non-supply markets, why there's been pressure there as well?

Tim Argo, CFO

We are experiencing strong performance in several mid-tier markets, including Greenville, Savannah, Richmond, and Charleston. The supply levels do vary by market, and we notice a greater supply impact in larger markets and those with higher concentrations, like Austin, Charlotte, and Dallas. These markets are attractive due to healthy long-term demand, which is expected. This concentration is influencing our overall portfolio performance. In 2023, deliveries across all markets accounted for approximately 4% to 4.5% of inventory in our portfolio. Despite the variations among markets, most of our mid-tier markets have demonstrated good performance.

Operator, Operator

We'll take our next question from the line of Michael Goldsmith with UBS.

Michael Goldsmith, Analyst

My first question is about expenses. Can you explain which line items are experiencing significant pressure and how you expect expenses to trend throughout the year?

Brad Hill, CEO

Yes. I want to highlight a couple of things regarding expenses. Our uncontrollable expenses are a significant factor in the growth of our expenses. Real estate taxes are expected to rise by about 4.8% this year, which is reflected in our guidance. Additionally, insurance costs are increasing by approximately 15% to 16%. This will continue to pose a challenge as we move into 2024, similar to trends observed in previous years as the market adjusts. Regarding our controllable expenses, the primary factor there is likely repair and maintenance, while other expense categories are generally growing at around 4.1% or possibly even slightly lower.

Tim Argo, CFO

I want to highlight a few points regarding our controllable expenses. Looking back at 2023, we expect all controllable items to see a notable moderation in 2024 compared to 2023, which is reflected in our guidance. Marketing is somewhat unpredictable; we had reasonable marketing costs in 2023, and we need to be cautious about our spending in this area given the current environment. As a result, marketing may not experience as significant a decrease as other areas, where we anticipate a good level of moderation.

Michael Goldsmith, Analyst

And my follow-up is on concessions. How have concessions and competing properties trended? And are you offering any concessions at your stabilized property?

Tim Argo, CFO

I mean the concessions for us are stabilized. It's pretty minimal, I think, across the portfolio. We're about 0.5% or so of rents and concessions. And with the way we price, there's a lot of net pricing, we don't do a ton of concessions. We do see it more in some of the lease-ups that we're competing against. I would say in general, concessions in the market and what we're competing against with went up a little bit in Q4, probably where we saw the biggest change, some of our Carolina markets, Charlotte and Raleigh were ones and we saw concessions pick up a little bit, but still in terms of lease-up and areas of lot development the concession practices is still pretty strong kind of that 1 month to 2 months range.

Haendel St. Juste, Analyst

Going back to your comments on your 5% renewal rate. I guess, I'm curious if that 5% renewal pricing does hold, but market rate growth is just 1%. Are you creating a loss to lease? And how do you feel about that going into next year in light of the outlook for rental rates to recover?

Tim Argo, CFO

Yes, the gap is currently a bit wider, but I expect it to narrow. We haven't observed any indicators extending all the way out to April, and we are still somewhat in the 5% range. This situation largely depends on the renewal mix. Typically, our average lease duration is around 20 months, and when customers renew, they often extend their leases. It’s important to note that we’re not in a situation where we have multiple renewals piling up, which would increase the gap. As I mentioned, while we currently see a wider gap, I anticipate it will narrow as we approach spring. I have no concerns about our current position.

Eric Bolton, CEO

And I'll just add, Handel that I mean, over time to the extent that obviously, the new lease pricing pressure we're seeing right now is obviously largely a function of supply coming into the market. If that begins to moderate late this year into 2025 in the event that we do see renewal pricing need to moderate a little bit more next year, call it, instead of 5%, we're in the 3% or 4% range. We also, though, expect new to start to show some improvement next year such that we probably continue to get the blended performance that we need and that we're after. So it's a give and take back and forth. We've always historically seen new lease pricing in that kind of 4% to 5% range. I don't recall it ever really materially getting a lot lower than that. Maybe there was a year back years ago where it got to 3%, but generally, when that's happening and certainly, we think that will be the scenario this time. By that point, our new lease pricing has started to show some improvements such that the overall blended performance continues to hang in there pretty well.

Haendel St. Juste, Analyst

I appreciate that Eric. I'm thinking ahead about the possibility of renewal rates needing to decrease next year and what that could mean for potential downside unless market rate growth improves, possibly reaching mid to upper single-digit growth. One more. I appreciate the color you guys gave on the building block of same-store revenue, but could you give us some color on what you're assuming for bad debt, ancillary, and for turnover?

Tim Argo, CFO

Haendel, regarding bad debt, we expect it to remain consistent with recent trends. We anticipate it will be around the 0.5 percentage point range, with turnover staying low, around 45% for our guidance. What was the last point you wanted to discuss?

Haendel St. Juste, Analyst

Fee income.

Tim Argo, CFO

Yes, the ancillary income is growing one. We're assuming it will grow pretty much in line with our overall effective rent growth, so right around that 1% level. Yes. I mean we've probably seen it gap a little bit. I mean RRBs, what you would call it these, or even if you want to think about suburban versus urban, suburban is outperforming urban kind of the CBD and the interim loop. If you think about suburban, we're probably about 80 basis points better in Q4 January on a blended lease-over-lease basis from what we're seeing on the secondary. A versus B in the way we think about our portfolio, it's about 55% A, 45% B, a little bit tighter there, probably about a 30 basis point gap with the B is doing a little bit better. Occupancy is pretty consistent for both. But I would say the biggest notable thing there is certainly suburban assets are outperforming a little bit of less supply in those areas as well.

Operator, Operator

And we'll take our last question from Brad Heffern with RBC Capital Markets.

Brad Heffern, Analyst

First, I just want to say congratulations to Al. Hope you enjoy your retirement. On your lease-ups, can you talk about how those are going in terms of pace? Obviously, you're outperforming on the rent side, but I'm just curious if they're taking longer than normal just given the supply backdrop?

Brad Hill, CEO

Yes, this is Brad. Those are pretty much in line with our expectations. Certainly, there's been a slowdown in the velocity in line with our overall portfolio kind of over the holidays and the winter months. But there's nothing material in terms of difference there versus what we expected. Our day break asset is leasing up a little bit slower and has been. But in general, all of our assets, and that's the one in Salt Lake City. But in general, all of our assets are leasing up pretty much in line with our expectations in terms of velocity, given the slowdown here over the winter season.

Tim Argo, CFO

Our blended rate is about 1%. We expect market rent to remain consistent with its current levels.

Operator, Operator

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

Eric Bolton, CEO

Alright. Thanks, everybody, for joining us this morning, and I'm sure we'll speak to many of you over the spring. Thank you.

Operator, Operator

This concludes today's program. Thank you for your participation and you may now disconnect.