Q3 2023 Earnings Summary
- MAA is experiencing historically low resident turnover rates, which remain low despite new supply entering the market.
- Strong demand fundamentals continue to support healthy absorption rates, underpinned by solid employment markets, low turnover, strong collections, wage growth, and positive migration trends.
- The company remains confident in the long-term prospects of its key markets, such as Atlanta, due to strong job growth drivers and demand dynamics.
- Significant decline in new lease rates in heavily supplied markets, particularly in Austin where new lease rates are down in the high negative single digits, around negative 5% for October.
- Pressure on mid-tier assets (B+, A-) in larger markets with more new supply, narrowing the rent gap between these assets and newer developments, which could impact rent growth and occupancy.
- Operational challenges in Atlanta due to unique factors such as supply pressure, earlier operational issues (winter storm, fire), and fraud concerns leading to increased write-offs and weaker occupancy and pricing compared to other markets.
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Rental Rate Outlook
Q: Will lower rental rates persist, or is recovery expected?
A: Management expects rental rates to remain in the current range for a few months, with negative new lease rates around -4% to -5%. They anticipate an acceleration in new lease rates in spring 2024 as normal seasonality returns. Renewal rates remain strong at 4% to 5%, and turnover rates are expected to stay low. -
Impact of Supply and Interest Rates
Q: How are supply and higher rates affecting rental rates?
A: Aggressive pricing by merchant builders, driven by higher interest rates, has led to quicker moderation in new lease pricing. Developers are rushing to lease up properties before year-end, causing competitive pricing practices. Management doesn't expect conditions to worsen materially and anticipates improvement in the back half of 2024. -
Acquisition Strategy and Yields
Q: What metrics drive your acquisition decisions?
A: Management prioritizes acquiring assets with stabilized yields comparable to their cost of capital, around 5.5%. The recent Phoenix acquisition matches this yield, with expectations to increase it by 100 to 200 basis points through operational efficiencies and revenue management. -
October Rent Growth Figures
Q: What are the October rent growth numbers?
A: In October, blended rent growth is around 0%, with new lease rates at -5.3% and renewals at 4.4%. -
Turnover Rates
Q: How are you maintaining low turnover rates?
A: Turnover rates remain near historically low levels, declining 40 basis points, due to reduced move-outs to buy homes amid higher interest rates. Move-outs due to rent increases were half of last year's. -
Atlanta Market Challenges
Q: What's affecting performance in Atlanta?
A: Atlanta faces unique issues including supply pressure, prior weather-related damages, and fraud concerns. Occupancy improved by 40 basis points from Q2 to Q3. Fraud issues are being addressed, leading to better revenue quality and reduced delinquencies. -
Expense Outlook
Q: Do you expect changes in operating expenses?
A: Management anticipates moderation in operating expenses, including personnel and maintenance costs. Property tax growth, currently around 6%, is also expected to moderate as valuations taper. -
Rising Interest Rates Impact
Q: How are rising rates impacting leasing and landlord behavior?
A: Higher interest rates have caused merchant builders to aggressively price lease-ups to stabilize quickly, intensifying competition. This pressure is expected to persist for a few quarters but should improve as supply pressures ease.
Research analysts covering MID AMERICA APARTMENT COMMUNITIES.