Mid-America Apartment Communities, Inc. (NYSE:MAA) Q4 2023 Earnings Call Transcript
Mid-America Apartment Communities, Inc. (NYSE:MAA) Q4 2023 Earnings Call Transcript February 8, 2024
Mid-America Apartment Communities, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Please go ahead.
Andrew Schaeffer: 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 34x 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 -- for Investors page of our website at www.maac.com. 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: 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 as 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 start, 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: 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 space. 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, we'll 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 prepurchase 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 to all of our associates at the properties and our corporate and regional offices. I want to say 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 : 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 for 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 began 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, it 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 much 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 time lines, this suggests peak deliveries likely in the middle of this year with some positive impact of 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: 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 to 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 as to be comprised of lower new lease processing 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% results 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 to accretive to core FFO after stabilizing. 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 to refinance north of 5%. This expected refinance, coupled with the recently completed refinancing activities mentioned previously, results of $0.04 of dilution to core FFO as compared to prior year. That is all that we have in the way of prepared comments. So Carrie, we will now turn the call back to you for questions.
Operator: [Operator Instructions] We will take our first question from the line of Josh Dennerlein with Bank of America.
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