Earnings Call Transcript - MAA Q2 2024

Operator, Operator

Good morning, and welcome to Mid-America Apartment Communities or MAA's Second Quarter 2024 Earnings Conference Call. During management's prepared remarks, all participants will be in a listen-only mode. Afterwards, the company will conduct a question-and-answer session. This conference call is being recorded today, Thursday, August 1, 2024. I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening remarks.

Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets

Thank you, Julianne, 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. Rob DelPriore and Joe Fracchia are also participating and available for questions as well. Before we begin with 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 deck. 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.

Eric Bolton, President & Chief Executive Officer

Thanks, Andrew, and good morning. Core FFO results for the second quarter were ahead of expectations as the strong demand for apartment housing across our markets is steadily absorbing the new supply being delivered. This strong demand continues to support steady occupancy performance from our portfolio as well as blended lease-over-lease pricing that has consistently increased since the fourth quarter of last year. These positive trends are continuing into July. MAA's strategy has long focused on positioning our portfolio to capture higher full cycle demand to drive superior long-term value growth. To best mitigate the occasional periods of supply pressure, we have a unique portfolio diversification strategy involving both large and mid-tier markets. Further, by appealing to a broad segment of the rental market with a more affordable price point, as evidenced by our strong rent income ratios and sector-leading low delinquency performance, we believe we are able to drive higher demand and absorption across our portfolio. We continue to believe that new supply deliveries across our markets are currently peaking and we expect to see the volume of new deliveries decline over the back half of this year with 2025 ushering in a multi-year period where the growing demand for apartment housing will exceed the level of new competing supply. As detailed in yesterday's earnings release, we continue to find compelling opportunities to deploy capital in new acquisitions and development that will, we believe, deliver meaningful earnings accretion over the next few years. Our balance sheet remains strong and well-positioned to deliver on this future value pipeline that we are building. We believe that with the combination of the evolving market conditions poised to decline with the level of new supply delivering across our markets, the redevelopment and repositioning opportunities available to harvest within our existing portfolio, and the new growth pipeline that we're building through in-house development, our pre-purchase program with third-party developers, and the acquisition of newly constructed properties, MAA is positioned for meaningful growth and value over the next few years. Before turning the call over to Brad, Tim, and Clay for more details, I'd like to send my thanks and appreciation to our MAA associates for their dedication and tremendous service to our residents. MAA is capturing record levels of resident retention, high resident satisfaction ratings, and strong lease renewal performance, thanks in large part to your hard work. I'll now turn the call over to Brad.

Brad Hill, President & Chief Investment Officer

Thank you, Eric, and good morning, everyone. We continue to see solid demand in our markets supported by strong household formation and positive wage and job growth, leading to continued blended pricing momentum in July with stable occupancy. MAA's long-term strategy positions our portfolio as an attractive lower-cost alternative to the higher-priced new multi-family supply being delivered, as well as the available single-family housing options within our markets. Our renewal accept rates are at a record high and our Google scores continue to lead the sector, evidence of the value our residents find in living with MAA. With the backdoor controlled, we're very focused on the front door and encouraged by the improving traffic trends. Our property tours are higher than this time last year and our conversion of leads into leases is also up. With increased traffic, strong conversion, stable occupancy and lower exposure, our properties are well-positioned as we enter the back half of the year. As indicated in our release, we have made progress using our balance sheet capacity to support future earnings growth. In addition to the two second quarter construction starts that bring our under-construction pipeline at the end of the second quarter to 2,617 units at a cost of $866 million. In July, we provided financing to take out the equity partner on a 239-unit under-construction development in the SouthPark area of Charlotte. The project suffered an early delay that put the project's investment horizon outside of the equity fund's horizon. Our previous relationship with the developer and the equity partner provided us the unique opportunity to invest in an under-construction project with no entitlement risk and a materially shortened construction schedule with first units scheduled to deliver in the second quarter of 2025. The two second-quarter development starts were expected to deliver first units in mid-2026 and all three projects are expected to deliver average initial stabilized NOI yields around 6.4%, similar to what we are achieving on our current developments that are leasing. While new lease rates are facing slightly more pressure at the moment, rents achieved at our developments are well above our original expectations, driving higher than originally projected NOIs that should deliver stabilized NOI yields that exceed our original expectations by approximately 70 basis points. Pre-development work continues on a number of projects in our pipeline, which has increased to 11 projects, representing additional growth of over 3,100 units. We maintain optionality on when we start these projects, but we expect to start construction on one to two more projects later this year, bringing our development starts for the year to four to five at or slightly above our original guidance for the year and leading to a slight increase in our development spend for the year to $350 million. Construction costs have yet to decline broadly, but we are hopeful that as the current under-construction pipeline winds down, we could see more improvement in construction costs and schedules as we progress through the year, supporting our ability to start construction on additional opportunities at compelling yields. In the transaction market, volume remains low with cap rates generally in the low 5% range, with a number of transactions occurring well below 5%. Our team continues to find select but compelling acquisition opportunities generally in lease-up and on an off-market basis. In the second quarter, we closed on a 306-unit suburban property in Raleigh for approximately $81 million, which is 15% to 20% below replacement costs. This newly constructed property is currently in its initial lease-up and finished the quarter at 62% occupied. We have two additional acquisition opportunities in due diligence and upon successfully concluding our inspections we expect the closings to occur over the next few months. The three acquisitions are expected to deliver stabilized NOI yields on average just under 6%. Based on the activity our team is seeing in the market, we believe our forecasted acquisition volume of $400 million is achievable. We have two dispositions in the market, one in Charlotte and one in Richmond that we hope to execute on by the end of the year, but we are early in the process. Before I turn the call over to Tim, to all of our associates at the properties in our corporate and regional offices, I want to say thank you for your hard work and dedication that you show on a daily basis to our prospects, residents, and fellow associates. With that, I'll turn the call over to Tim.

Tim Argo, Chief Operating Officer

Thanks, Brad, and good morning, everyone. As previously referenced, demand in our markets continues to be strong as evidenced by steadily improving lease-over-lease rates on new move-in residents and stable lease-over-lease rates on renewal residents. Pricing growth does continue to be impacted by elevated new supply deliveries, but showed improvement over the first quarter as traffic patterns increased. These factors contributed to new lease pricing on a lease-over-lease basis of minus 5.1%, with renewal rates for the quarter staying strong, growing 4.6% on a lease-over-lease basis. These two components resulted in lease-over-lease pricing on a blended basis that was an improvement of 70 basis points from the first quarter. Average physical occupancy was 95.5%, up 20 basis points from the first quarter and collections continue to outperform expectations with net delinquency representing just 0.3% of billed rents. All these factors drove the resulting same-store revenue growth of 0.7%. Our unique market diversification strategy that Eric mentioned continues to benefit overall portfolio results. While some of our larger markets are being more heavily impacted by new supply deliveries, many of our mid-tier metros remain steady. Similar to last quarter, Savannah, Richmond, Charleston and Greenville are all outperforming the broader portfolio from a blended lease-over-lease pricing standpoint. Our portfolio balance between large and mid-tier markets and diversification of submarkets within the market help strengthen performance through the cycle. Austin, Atlanta and Jacksonville are markets that continue to be more negatively impacted by the absolute level of supply being delivered into those markets. While we have slowed some of our various product upgrade and redevelopment initiatives in this elevated supply environment, we do continue to execute where it makes sense with the expectation of reaccelerating next year. For the second quarter of 2024, we completed nearly 1,700 interior unit upgrades, achieving rent increases more than 8% above non-upgraded units. For our repositioning program, we have three active projects that are in the repricing phase. We will begin construction on an additional six projects in the third quarter with a plan to complete construction and begin repricing in 2025 in what we believe will be an improving leasing environment. With July now wrapped up, we're encouraged by the early third quarter trends. Average physical occupancy for the month of July of 95.5% is in line with the second quarter and current occupancy is 95.8%. This stability in occupancy combined with the lower 60-day exposure that Brad noted sets us up for more pricing power for the remainder of the summer as we also start to lap weaker new lease pricing that became evident beginning in August of last year. Accordingly, July blended pricing of positive 0.3% is up from the first and second quarters and the month of June. New lease pricing has improved each month since March. Furthermore, the year-over-year change in asking rents for August is expected to be positive for the first time since February of 2023, 18 months ago. As we have discussed over the last few quarters, new supply being delivered continues to be a headwind in many of our markets, and it is resulting in prospects shopping longer and being more selective. However, we still believe the long-term outlook is similar to what we discussed last quarter. That is, we expect this new supply will continue to pressure pricing for much of 2024, but we believe we have likely already seen the maximum impact to new lease-over-lease pricing growth and that the supply/demand balance continues to improve from here subject to normal seasonality. It varies by market, but on average, new construction starts in our portfolio footprint peaked in mid-2022 and we have seen historically that the maximum pressure on leasing is typically about two years after construction start. While supply remains elevated, the strength of demand is evident as well. Absorption in the second quarter in our markets was the highest of any quarter since the third quarter of 2021. Wage growth remained strong with our rent-to-income ratio in the second quarter dropping a bit to 21%, the lowest level in three years. Additionally, we saw resident turnover continued to decline in the second quarter, and we expect it to remain low with fewer residents moving out to buy a home. The 12.4% of move-outs in the second quarter that were due to residents buying a home was the lowest ever for MAA, slightly lower than what we saw in the first quarter. That's all I have in the way of prepared comments. I'll now turn the call over to Clay.

Clay Holder, Executive Vice President & Chief Financial Officer

Thank you, Tim, and good morning, everyone. We reported core FFO for the quarter of $2.22 per share, which was $0.03 per share above the mid-point of our second quarter guidance. Just under $0.02 of the favorability was related to favorable same-store expenses and $0.015 was driven by a combination of favorable overhead cost, interest expense, and non-operating income partially offset by about $0.01 in storm cost. Our same-store revenue results for the quarter were essentially in line with expectations. As Tim mentioned, we saw sequential quarter-over-quarter improvement in both blended pricing and occupancy while same-store revenues again benefited from strong rent collections. Our same-store expense performance, particularly in repairs and maintenance, real estate taxes and personnel costs was favorable compared to our expectations for the quarter. Repair and maintenance costs continue to show moderation, growing at 1.8% compared to second quarter last year. At this point in the year, we have better visibility into our real estate tax expense for 2024, which we will discuss more with our revised guidance in a moment. During the quarter, we funded nearly $80 million of development cost of the current expected $866 million pipeline, leaving an expected $328 million to be funded on this pipeline over the next two years. Considering the Charlotte opportunity and the additional development starts that Brad mentioned and adjusting for those properties we will complete over the remainder of 2024, we expect our development pipeline to grow to just under $1 billion, which our balance sheet is well-positioned to support. During the quarter, we invested approximately $12 million of capital through our redevelopment, repositioning, and smart rent installation programs, which we expect to produce solid returns and continue to enhance the quality of our portfolio. Our balance sheet remains in great shape. We ended the quarter with nearly $1 billion in combined cash and borrowing capacity under our revolving credit facility, providing significant opportunity to fund future investments. Our leverage remains low with net debt-to-EBITDA at 3.7x. And at quarter end, our outstanding debt was approximately 93% fixed with an average maturity of 7.4 years at an effective rate of 3.8%. During May, we issued $400 million of seven-year public bonds at an effective rate just below 5.4%, using the proceeds to effectively pay off a $400 million bond maturity in June that had an effective rate of 4%. While our next scheduled bond maturity isn't until the fourth quarter of 2025, we expect to be in the market prior to that date to support ongoing investment opportunities. Finally, we are reaffirming the mid-point of our same-store NOI and core FFO guidance for the year while revising other areas of our detailed guidance that we've previously provided. Given our operating results achieved through the second quarter, we are making slight adjustments to our guidance associated with rent growth and occupancy. We are lowering the mid-point of effective rent growth guidance by 35 basis points to 0.5% and average physical occupancy guidance by 20 basis points to 95.5% for the year. Total same-store revenue guidance for the year was revised to 0.65%, which also reflects stronger expected rent collection performance over the back half of the year. We are lowering our property operating expense growth projections for the year to 4.25% at the mid-point. As previously mentioned we have better insight into our real estate tax expense for 2024 and have lowered the mid-point of our guidance to 4%. The lower guidance is primarily due to favorable Texas property valuations as compared to our original expectations. Also, we renewed our property and casualty insurance program on July 1 and have achieved a combined premium decrease of around 1%. The changes to our property operating expense projections, combined with our updated same-store revenue expectations, results in reaffirming our original expectation for same-store NOI at negative 1.3%. In addition to updating our same-store operating projections, we are revising our 2024 guidance to reflect favorable trends in G&A and interest expense. As Brad previously mentioned, we also increased the mid-point of our development spend to $350 million. The impact of these adjustments, combined with the $0.03 of expected storm costs associated with Hurricane Beryl in the third quarter, resulted in us maintaining the mid-point of our full-year core FFO guidance at $8.88 per share while narrowing the range to $8.74 to $9.02 per share. That is all that we have in the way of prepared comments. So Julianne, we will now turn the call back to you for questions.

Operator, Operator

Thank you. We'll now open the call for questions. Our first question comes from Eric Wolfe from Citi. Please go ahead. Your line is open.

Eric Wolfe, Analyst, Citi

Hey, thanks. I was hoping you could discuss your seasonality assumptions and what you're expecting for the fourth quarter this year versus what you saw last year.

Tim Argo, Chief Operating Officer

Eric, can you repeat that a little — I lost you a little bit there at the beginning.

Eric Wolfe, Analyst, Citi

Sure. I was hoping you could discuss your seasonality assumptions and what you expect for the fourth quarter this year.

Tim Argo, Chief Operating Officer

Okay. Got you. Yes, I mean, I think from a seasonality standpoint, we've seen it play out kind of like we thought so far where we continue to see some acceleration through about this time of the year. And then I think as we get later into the fall and winter, we'll see that normal seasonality. Now having said that, and I alluded to it a little bit in my opening comments, we're in a really good spot right now with our current occupancy. We're in a good spot with exposure lower than what it was this time last year. And so we feel like with what we're seeing — particularly, I mentioned that asking rents for August are a little bit higher than what they were this time 12 months ago. It's the first time we've seen that in 18 months. So I'd say that all to say, I think the normal seasonality could extend out a little bit longer. July is typically when it peaks in a normal seasonality. We think that could extend for a month or six weeks or two months and then start to moderate as we get into the back half of the year. But the adjustments we made to the pricing guidance was really just on new lease pricing, and most of that occurred in the second quarter. We made a couple of minor tweaks to Q3 and Q4, but essentially held our expectations for what we saw for that. So net-net, it was really about a 100 basis point decrease in our new lease pricing assumption, renewals holding steady, and that seasonality is standing out a little bit more than it typically would.

Eric Wolfe, Analyst, Citi

Thanks. That's helpful. And then it looks like your guidance includes some uplift from other revenues. Could you just talk about what the opportunity looks like there and whether that contribution could potentially increase as we go into 2025?

Tim Argo, Chief Operating Officer

Yes. I think it's not a huge piece. It's growing a little bit more than rents currently with where our occupancy is. There is fee income, application fee income — that sort of thing. So it's providing a little bit, nothing out of the ordinary. In a normal environment, it would be somewhat in line with rents. We do have some opportunities over the long term with ubiquitous Wi‑Fi that we're testing this year. And I think over the next several years that will be a bigger opportunity for us, but nothing material necessarily in the short term.

Eric Wolfe, Analyst, Citi

Great. Thank you.

Operator, Operator

Our next question comes from Nick Yulico from Scotiabank. Please go ahead. Your line is open.

Nick Yulico, Analyst, Scotiabank

Thank you. I just wanted to see, I think, I don't know if you gave this, apologies. But is there a way to get just sort of the blended lease pricing that is assumed to the back half of the year? I know you said you adjusted in the full year; I just want to make sure we're clear on that.

Tim Argo, Chief Operating Officer

So for blended for the back half of the year, for full year new lease we're somewhere in the 4.25% range, which is about 100 basis points lower than what it was in our original guidance. And we're still in that mid-4 to 5 range on renewals. So somewhere in the 0.5% to 1% blended in the back half of the year is how that plays out.

Nick Yulico, Analyst, Scotiabank

Okay. Great. Thanks. And then just second question is, you talked about some of the markets where you're seeing more impact from supply, Austin, Atlanta, Jacksonville. As you look at some of the supply deliveries or what's happening with competitive concessions in those markets, do you have any sort of visibility right now when you think some of those markets would be not as much of a drag on overall new lease pricing? Thanks.

Tim Argo, Chief Operating Officer

I think all those markets are in somewhat of a similar timeline, saw similar peak in starts and deliveries that are pretty consistent across the portfolio where we saw starts peak in mid-2022 and kind of seeing the peak of it right now. So markets like Austin will still have elevated supply next year, not going to be quite as much supply as we had this year. Job growth is really strong. So I think for all three of those, in particular, I would expect 2025 to look better than what it does in 2024. It's not going to flip to be one of our lead markets, but I think it will be more in line with the portfolio and be less of a drag in 2025 for sure.

Nick Yulico, Analyst, Scotiabank

And just a quick follow-up on that. Is there anything you're seeing on the ground right now that would point to some of that concessionary impact already easing? Or is it still a wait and see?

Tim Argo, Chief Operating Officer

We haven't seen it get worse. We saw concessions pick up quite a bit in the back part of 2023 and then come back down in early 2024 and then been pretty steady throughout 2024. Broadly somewhere between half a month and a month is pretty consistent across markets. There are some pockets with more lease-ups: Downtown Austin probably closer to two months. Midtown Atlanta is probably our worst concessionary environment right now, sometimes pushing three months where there's lease-ups, but not really any heavier than it was the last couple of quarters. I think we're in a much more stable environment, both in terms of interest rates and when the supply picture is going to start to look better. So I don't see that necessarily getting any worse from here.

Eric Bolton, President & Chief Executive Officer

Nick, just to follow on what Tim is saying, late last year in the fourth quarter there was a lot of uncertainty out there surrounding the demand side of the business and the overall economy and the job market and the supply delivery is really starting to make an impact. I think that prompted a lot of pretty aggressive concessionary practices in the marketplace late last year. But as the year has continued to unfold, we've all been pleasantly surprised with the very strong demand that we continue to see taking place. Stability is more evident than I think people initially feared it was possible, and as a consequence of the strong demand that we're seeing and clear visibility that new supply deliveries are poised to start declining, I think the market is starting to feel a little bit more comfortable with the practices and the lease-up programs in place.

Nick Yulico, Analyst, Scotiabank

Thanks, Eric, Tim. Appreciate it.

Operator, Operator

Our next question comes from Josh Dennerlein from Bank of America. Please go ahead. Your line is open.

Josh Dennerlein, Analyst, Bank of America

Yes. Good morning, guys. Just wanted to touch based on the insurance renewal looked pretty favorable versus maybe what you were forecasting before. Any changes to what you're covering or any color on how you got that pretty decent renewal?

Rob DelPriore, Executive Vice President & Chief Administrative Officer

Hi, Josh, this is Rob. Framing it up, if you look at the last three years of insurance renewals in the aggregate, our costs have gone up about 50%. We've had good positive claims experience, and we have long relationships with our insurers. Given the claims history and where this wound up, we wound up with the same coverage levels that we had last year. We caught a break with a stabilizing insurance market and favorable claims history.

Josh Dennerlein, Analyst, Bank of America

Okay. All right. Great. And then on the real estate taxes, is there any more variability across the rest of the year? Or are you kind of locked in at this point for the back half on real estate taxes? And how should we think about the cadence from here? I think some of the states have different assessment times, so just trying to think through some lag on a go-forward basis.

Clay Holder, Executive Vice President & Chief Financial Officer

Hey Josh, this is Clay. I think we have pretty good visibility across the portfolio at this point with the exception of Florida. That's the one that typically lags the rest. Keep in mind Florida has a cap on their valuations. We have a pretty good idea of where they'll ultimately end up. The other missing piece is around the millage rates, and that's fairly across the board. But again, same story with Florida property valuations, we have pretty good visibility as to what we think those will be as we wrap up the rest of this year.

Josh Dennerlein, Analyst, Bank of America

All right. Thanks, guys.

Operator, Operator

Our next question comes from Michael Goldsmith from UBS. Please go ahead. Your line is open.

Michael Goldsmith, Analyst, UBS

Good morning. Thanks a lot for taking my question. It sounds like the adjustments to the guidance reflect the pressure in the first half and the original assumptions for the second half remain relatively unchanged. So what gives you confidence in that just given seasonal slowing trends and also elevated supply? Thanks.

Tim Argo, Chief Operating Officer

This is Tim. I mentioned a couple of things on that. One, we're at a really good spot from an occupancy exposure standpoint. As we said here this time last year, we were a little bit more of a hole in terms of occupancy and exposure. We're in a better spot this year. A couple of things I didn't mention earlier: mid-July of last year is when new lease rates really started to drop off — they hit a cliff there in mid-July and continued that way through December. So that really creates an easier comp scenario for us as well. As we sit here at the beginning of August, we're starting to lap some of those comparisons. Then I think as we've said, we do expect the impact from supply to start to moderate a little bit in the back part of the year. It won't manifest itself too much with seasonality, but we were in a period of increasing supply this time last year, while we think we're in a period of decreasing pressure from supply this year. So where we are with occupancy exposure, the comps, the supply situation, and continued demand with low turnover and strong renewals, rent-to-income remaining solid, we don't see any change on the demand scenario other than normal seasonality later this year.

Michael Goldsmith, Analyst, UBS

Thanks for that. And my follow-up question is on the renewals. How are they trending at an ask versus take rate basis? Thanks.

Tim Argo, Chief Operating Officer

We were at 4% in June. We're actually in the 4% to 4.5% range for July and August, with September expected to be more towards the higher end of that range. So we're seeing strength there. Our renewal accept rates are higher than they were last year, really higher than they've been in the last few years. We expect that to hold up pretty well through the rest of the year.

Michael Goldsmith, Analyst, UBS

Thank you very much. Good luck in the back half.

Operator, Operator

Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead. Your line is open.

Jamie Feldman, Analyst, Wells Fargo

Great. Thank you. I just want to talk more about the development opportunities. I appreciate your comments about ramping up to $1 billion of potential spend. Can you talk more about how much more you think you could ramp up? Is the land already on your balance sheet? Would you need to go out and buy it? And how would you fund as you throttle up the development pipeline?

Brad Hill, President & Chief Investment Officer

Jamie, we would feel comfortable given our balance sheet strength and size ramping up our development pipeline to about 4% to 5% of our enterprise value, which would take our pipeline to about $1 billion to $1.2 billion. That's what we've been working with over the last few years. In 2022, our pipeline was about $450 million and today we've almost doubled that. We feel really good about the trajectory that we're on. We have sufficient pipeline of owned and controlled sites on our balance sheet. We've got about 11 projects that we currently control. A number of those would be ready to start very quickly if construction costs come down or rents improve sufficiently to drive the returns up to where we think they need to be. So we've got a good pipeline ahead of us and we're in a really good spot. Clay, I'll let you handle the other part of that question.

Clay Holder, Executive Vice President & Chief Financial Officer

Jamie, as far as where we think that funding would come from, we would look to fund that first through additional debt given our leverage at 3.7x. We would look to move that up at least to 4.5x or maybe 5x. That's a significant number, that's almost over $1 billion of capacity. So we've got plenty of opportunity there of how we would go about funding that, especially in an environment where rates we expect would continue to decline over the next year or so.

Jamie Feldman, Analyst, Wells Fargo

Okay. And then just a quick follow-up on that. You mentioned if construction costs decline, what line items are you watching the most to see if they pull back where that would be most helpful?

Brad Hill, President & Chief Investment Officer

We don't need a large decrease in construction cost because the other piece of the puzzle is likely to see some improvement on the schedules side of things, which have extended a bit over the last few years given the amount of product in the pipeline. So we don't need costs to come down a lot to make some of these projects feasible or to get the economics more in line. We have seen some improvement: the project we started in Charlotte in the second quarter saw construction costs come down a few million dollars. I think you'll likely see it come from some contraction in contractor margins. We've seen those margins increase substantially over the last couple of years. Framing and lumber and things of that nature are down right now, so you might not get a lot there, but margins are where we expect to see some relief.

Jamie Feldman, Analyst, Wells Fargo

Okay. And also, as we think about your historically low turnover, do you expect to maintain that kind of retention and renewal pricing power in a potentially lower interest-rate environment despite some pent-up demand for homeownership? How are you thinking about that over the next year or so if rates continue to decline?

Tim Argo, Chief Operating Officer

We track reason for move-outs. The decrease in move-outs to buy a home has been helpful to overall turnover decreasing. I do think turnover will tick back up if and when rates start to drop, but it probably needs to be a fairly material drop. Single-family home prices even ignoring rates have continued to go up while rents have started to moderate. With current interest rates, someone's average payment buying a house is about 40% to 50% higher than our average rent. So to fill that gap would take quite a decrease in interest rates. I expect turnover to pick up a little bit at some point, but usually when rates drop people buying homes corresponds to a strong economy, which can help rents. So I don't think it would be a one-for-one trade-off; it would have some revenue benefits as well.

Eric Bolton, President & Chief Executive Officer

Jamie, adding to what Tim said, the median house principal interest payment in our markets is about 40% higher on average than our average rent. So a significant moderation in interest rates would be required to restore the pre-pandemic levels of move-outs to buy homes. We've seen a steady decline of resident turnover for years, and I think it will likely take a few years to move back to some of the historical turnover levels.

Jamie Feldman, Analyst, Wells Fargo

Okay. Great. Thanks for your thoughts.

Operator, Operator

Our next question comes from Richard Anderson from Wedbush. Please go ahead. Your line is open.

Richard Anderson, Analyst, Wedbush

Thanks. Good morning. If you can help me sort of marry a few things here. It sounded very optimistic looking out beyond the near-term supply maximum impact to new lease is behind you, and August is looking good, yet you lowered your new lease rate guidance. I'm curious, is this kind of like final hurdle to clear type of thing or a beatable situation in the back half of this year? Can you bring those two pieces together?

Tim Argo, Chief Operating Officer

On the new lease rate piece, the biggest modification was Q2 new lease rates being a bit lower than we initially expected. People are shopping a little longer and being a little more selective in this elevated environment. We tweaked the cadence of new lease rates a little bit in the back half of the year, but I do think seasonality could extend out a little more. The impact to our revenue guidance from new lease pricing was primarily what occurred in Q2, which then flows into the back half of the year. Better new lease rates in the back half would largely play into 2025.

Richard Anderson, Analyst, Wedbush

Okay. Great. And when you think about 2025, how does the cadence look when you think about deliveries and lease-up tails? Does 2025 hit the ground running, or is it a slow evolution and the more significant growth doesn't appear until a year into 2026?

Tim Argo, Chief Operating Officer

The seasonality will be typical and there will still be supply pressure next year — less than this year but still present. I think you'll start to see new lease rates accelerate in spring and summer 2025, and blended lease-over-lease should improve, but it takes time to feed through all leases. Expect pricing power to start in spring/summer 2025 and for revenue impacts to be more notable late 2025 into 2026, with good earn-in into 2026 and less supply pressure where revenue growth meaningfully picks up late 2025 into 2026.

Richard Anderson, Analyst, Wedbush

Okay. Great. Thanks for the color. Appreciate it.

Operator, Operator

Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead. Your line is open.

Austin Wurschmidt, Analyst, KeyBanc

Yes. Thanks, everybody. Circling back to Tim's comments on asking rents turning positive in August, with comps easing from here, what's your expectation for the trend in asking rents through this year and into 2025 and, seasonality aside, when do you expect positive asking rents to translate into positive new lease rate growth?

Tim Argo, Chief Operating Officer

I think you'll see positive new lease rates probably by early to mid‑next year. If you look at our new lease rates as a proxy for market rents, July new lease rents were about 4% higher than at the beginning of the year, so it's closing the gap. It will moderate in winter with seasonality, but spring/early summer 2025 is where I'd expect to see positive new lease rates manifest.

Austin Wurschmidt, Analyst, KeyBanc

And with this move in asking rents, where does that put the portfolio today from a loss-to-lease or gain-to-lease perspective?

Tim Argo, Chief Operating Officer

If you look at all the leases we did in July, it's about 2% higher, so about a 2% loss to lease compared to our in-place rents. We're at a peak demand typical seasonality, so that may edge back down a little later in the year, but right now it's about 2%.

Austin Wurschmidt, Analyst, KeyBanc

That's helpful. Thanks for the time.

Operator, Operator

Our next question comes from John Kim from BMO Capital Markets. Please go ahead. Your line is open.

John Kim, Analyst, BMO Capital Markets

Thanks. Tim, you mentioned absorption is the highest since the third quarter of 2021. What's driving this? A few years ago, we had strong net migration to your markets, but that softened a bit. What's driving demand right now?

Tim Argo, Chief Operating Officer

It's a mix: job growth remains solid, migration ticked up a bit — about 12% of our move-ins were from outside our footprint in Q2, which is back to where it was 12 months ago. Wage growth, population growth, household formation and lower turnover all contribute. With less turnover, existing units are retained and that helps absorption of new units. So several factors combine to support strong absorption.

John Kim, Analyst, BMO Capital Markets

I wanted to clarify renewals. You had 4.5% to 5% in the first half of the year — is that what you're expecting in the second half? July was 4% — why was this month lower than expected, and will it ramp up in Q4?

Tim Argo, Chief Operating Officer

4% to 5% is our full-year expectation. We were on the higher end in the first half and probably a bit lower in the back half. August is a little better than July and September trending a bit better than August. I think as we get into Q4 we'll trend more toward the mid-point around 4.5%. Renewals have always held up strong for us and with new lease rates increasing the gap narrows, helping renewals.

John Kim, Analyst, BMO Capital Markets

Got it. Thank you.

Operator, Operator

Our next question comes from Haendel St. Juste from Mizuho. Please go ahead. Your line is open.

Haendel St. Juste, Analyst, Mizuho

Hey guys, thanks for taking my questions. First, on the transaction market cap rates: early this year they were closer to 6%, now you're seeing low-5% cap rates. Are sellers more willing to engage and do you expect cap rates to be lower from here? Also, some color on IRRs for the assets you bought in Q2.

Brad Hill, President & Chief Investment Officer

Cap rates we're seeing are in that 5% range, which has been consistent for the last couple of quarters. We saw cap rates tick up a bit in Q4 last year and they've come down to around 5%. Given where expectations are with interest rates and less uncertainty in the market, I'd expect cap rates to stay in that range. There's optimism about fundamentals in 2026/2027 being reflected in the transaction market. Interest rates today are roughly 5.5% to 5.75%, so some buyers are accepting a little negative leverage in anticipation of growth. Where we're underwriting deals, our levered IRR hurdles are roughly 8%, and most acquisitions we're executing are delivering substantially more than that. We're not buying at 5 caps; our acquisitions are delivering NOI yields in the high 5s to close to 6%, and given our cost of capital we're achieving yields and IRRs substantially above that.

Haendel St. Juste, Analyst, Mizuho

You mentioned rent-to-income in the portfolio around 21%, the lowest in three years. Any rent fatigue or change in move-outs due to rent? And color on concessions usage in the portfolio today compared to last quarter or last year?

Tim Argo, Chief Operating Officer

Rent-to-income dropped a bit in Q2, based on the residents who moved in in Q2. Move-outs due to rent increases are down, and the move-outs to buy a house are also down, which is driving lower turnover. On concessions, overall for us it's minimal — somewhere in the 0.5% to 1% of overall rent is our concession practice. Broadly half a month to a month is common across markets. There are a few pockets with higher concessions in lease-ups: downtown Austin around two months, Midtown Atlanta often worse and sometimes pushing two to three months in lease-up scenarios. Overall, concession usage has been pretty consistent through 2024.

Haendel St. Juste, Analyst, Mizuho

And on insurance, any changes in approach like self-insuring more?

Rob DelPriore, Executive Vice President & Chief Administrative Officer

Our retentions are all the same as last year, with one exception: we increased our retention by $250,000 on our general liability for slip and fall protection due to pressure from insurers. The rest of our retentions stayed the same.

Haendel St. Juste, Analyst, Mizuho

Got it. Thanks, guys, and best of luck.

Operator, Operator

Our next question comes from Alexander Goldfarb from Piper Sandler. Please go ahead. Your line is open.

Alexander Goldfarb, Analyst, Piper Sandler

Good morning. Two questions. First, bad debt: can you talk about your resident credit profile now versus pre-pandemic? Are you back to where you were? Any markets elevated? Second, you've made a lot of adjustments to same-store assumptions but kept FFO mid-point unchanged. What's the best way to think about what drives FFO versus all these puts and takes?

Tim Argo, Chief Operating Officer

We're mostly back to pre-pandemic levels. Long-term delinquency was around 0.3% pre-COVID. We're probably slightly higher long-term now, maybe 0.4% to 0.5% overall. Atlanta has had more pressure historically, but we saw delinquency drop to about 0.5% in Q2 down from about 1.3% a year ago. Practices to catch fraud before it reaches the front door have helped. Outside of that, delinquency remains very low and mostly a non-issue.

Alexander Goldfarb, Analyst, Piper Sandler

Confirming: normal bad debt is 30 to 40 bps and currently you're about 15 bps above that?

Tim Argo, Chief Operating Officer

In Q2 delinquency was around 0.3% or 0.4%. There's seasonality. Long-term pre-COVID delinquency was in the 0.3% range. Long-term today might be roughly 0.4% to 0.5%.

Alexander Goldfarb, Analyst, Piper Sandler

Second, you're reaffirming FFO mid-point despite these same-store changes and a $0.03 hurricane charge for Q3. It sounds like same-store is important, but ultimately it didn't move FFO. So what's really the key driver of FFO versus these puts and takes?

Clay Holder, Executive Vice President & Chief Financial Officer

A couple of points: revenue plays into FFO and we adjusted revenue expectations after the first half performance and what we expect for the back half. We feel good about those expectations. From the expense side, property taxes and insurance renewals are significant and have been favorable, offsetting revenue adjustments. There's potential upside in personnel costs, repairs and maintenance. Those two items — property taxes and insurance — really offset some of the revenue adjustments, and favorable trends in G&A and interest expense helped offset the $0.03 of hurricane costs noted for Q3.

Eric Bolton, President & Chief Executive Officer

Alex, to add to Clay, what drives FFO long term is NOI. A lot of details go into NOI, including revenue and expenses. Despite record levels of new supply, we're seeing stabilization in new lease pricing and renewal pricing is holding. We expect relief on operating expenses with technology and moderating inflation. So same-store NOI is the key driver of FFO, and we think variables that make up NOI are poised to show recovery over the next few years.

Alexander Goldfarb, Analyst, Piper Sandler

Thank you.

Operator, Operator

Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead. Your line is open.

Adam Kramer, Analyst, Morgan Stanley

Great. Thanks. I want to ask about the delta between the commenced and the signed leases in July.

Tim Argo, Chief Operating Officer

There's about a 50 basis point delta. With signed leases some go into effect that month and some later, and some may be canceled. We don't pay a ton of attention to signed versus commenced, but that's the delta.

Adam Kramer, Analyst, Morgan Stanley

That's helpful. And as a follow-up, on capital allocation: given current acquisition cap rates and development opportunities, how would you stack rank acquisitions versus development and other priorities?

Brad Hill, President & Chief Investment Officer

Our plan is to continue allocating to both acquisition and development. We'd like to lean a bit more into acquisition given immediacy of earnings, but given returns we're achieving — yields around 6% — we've been selective in acquisition. We still feel good about the $400 million acquisition guidance for the year. We've seen some opportunities where third-party developers can't get financing and are bringing us opportunities. In the short term we may find additional development opportunities versus acquisitions, but over the long term we like both avenues and expect them to be pretty evenly split on yearly spend.

Adam Kramer, Analyst, Morgan Stanley

Great. Thanks for the time.

Operator, Operator

Our next question comes from Omotayo Okusanya from Deutsche Bank. Please go ahead. Your line is open.

Omotayo Okusanya, Analyst, Deutsche Bank

Good morning. My question is on the regulatory perspective. With President Biden talking about implementing further rent control and with the election cycle, are you hearing anything in key states where you operate about potential rent control laws? Any exposure concerns?

Rob DelPriore, Executive Vice President & Chief Administrative Officer

Omotayo, regarding the federal 5% rent control proposal, we think there's election-year politicking. It requires an active Congress, and with a divided Congress it's unlikely to gain traction at the federal level. On the state level, 13 of the states where we operate — representing about 90% of our NOI — have state-level prohibitions on local rent control. We're not seeing movement at the state level and in most instances local rent control is blocked. So we're not that concerned about rent control impacting our markets.

Omotayo Okusanya, Analyst, Deutsche Bank

Thank you.

Operator, Operator

Our next question comes from Ann Chan from Green Street. Please go ahead. Your line is open.

Ann Chan, Analyst, Green Street

Hey, good morning. Do you expect a reacceleration in growth of any expense line items heading into next year?

Clay Holder, Executive Vice President & Chief Financial Officer

Ann, looking into next year, property taxes are the largest line item and we think they will continue to run in the 3% to 4% range, consistent with our adjusted guidance at 4% today. Insurance we renewed this year and will enjoy that into the first half of next year; I wouldn't expect another big decrease similar to the past couple of years, but also not another large increase if claims experience remains favorable. Personnel costs, repair and maintenance, marketing and those categories should run at a pretty normal rate and we've seen moderation over the past year. We would expect more normal 3% to 4% growth there rather than the larger increases seen in prior years.

Ann Chan, Analyst, Green Street

Thanks. Second question for Tim: can you share expectations for new lease growth in Atlanta for this year and when fundamentals should improve?

Tim Argo, Chief Operating Officer

Atlanta new lease rates have been in the high negative single-digits, negative 8% to 9%. We've seen a little improvement in recent months and some traction in occupancy in July. I think Atlanta will slowly get better and start to show signs into 2025, but it will likely take a bit longer than some other markets to get back to positive.

Ann Chan, Analyst, Green Street

All right. Thank you.

Operator, Operator

Our next question will come from Linda Tsai from Jefferies. Please go ahead. Your line is open.

Linda Tsai, Analyst, Jefferies

Hi. Where are you sending out renewals for August? And what are you getting for those? How does that compare to last year and historically?

Tim Argo, Chief Operating Officer

For August and September renewals, we're getting in the 4% to 4.5% range. We sent out around 4% depending on who accepts and lease term, which can vary. This time last year it was around 4.5% to 5%, so we're a little shy of that but expect to be in the 4% to 4.5% range for a period of time.

Linda Tsai, Analyst, Jefferies

With rent-to-income dropping to 21%, do you track how much average incomes of your residents have increased over the past few years?

Tim Argo, Chief Operating Officer

Yes, we track it. In Q2, average income is about $91,000. At the beginning of 2020 it was about $75,000. So it's trended up significantly and has generally followed rent growth, with rent-to-income ratios between roughly 20% and 23% over the last few years. Highest markets around 24% and lowest about 19%, pretty consistent across markets.

Linda Tsai, Analyst, Jefferies

Thanks.

Operator, Operator

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

Eric Bolton, President & Chief Executive Officer

Okay. No further comments and we appreciate everyone joining us. Reach out if you have any other questions you'd like to ask. Thanks very much.

Operator, Operator

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