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Mid-America Apartment Communities Inc
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Good morning, ladies and gentlemen, and welcome to today's MAA First Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, April 28, 2022.
I will now turn the call over to Andrew Schaeffer, Senior Vice President, Treasurer and Director of Capital Markets of MAA for opening comments.
Thank you, Ashley, and good morning, everyone. This is Andrew Schaeffer, Treasurer and Director of Capital Markets for MAA. Members of the management team also participating on the call with me this morning are Eric Bolton, Tim Argo, Al Campbell, Rob DelPriore, Joe Fracchia, Tom Grimes and Brad Hill.
Before we begin with our prepared comments this morning, I want to point out that as part of this discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our 34-Act filings with the SEC, which describe risk factors that may impact future results.
During this call, we will also discuss certain non-GAAP financial measures. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data. Our earnings release and supplement are currently available on the 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.
Thanks, Andrew, and we appreciate everyone joining us this morning. MAA continues to capture robust leasing conditions across our portfolio, and we are carrying strong momentum in rent growth into the summer leasing season. Leasing traffic remains high, solid job growth, accelerating migration trends to our Sunbelt markets and the higher pricing hurdles for single-family ownership continue to fuel strong demand for apartment housing.
Almost 14% of the new leases we wrote in the first quarter came from move-ins relocating to the Sunbelt. This is an increase of 190 basis points from the first quarter of last year. Resident turnover continues to remain low with move-outs further declining by close to 6% as compared to Q1 of last year. These trends continue to support our ability to capture strong rent growth. The rents in place at quarter end within the same-store portfolio were on average 12.4% higher on a comparable basis to the prior year. And encouragingly, the new leases that went into effect in the first quarter were 16.8% higher than the expiring leases.
Pricing momentum remains strong heading into the important summer leasing period. Our largest pressures on property operating expenses were with personnel costs and repair and maintenance expenses as the tight labor market, inflationary pressures and supply chain issues make an impact. But with the strong top line performance, we continue to see strong NOI growth. And as detailed in our earnings release, we have increased our performance expectations for the full year.
Our new development pipeline continues to perform very well with 5 of the projects now actively leasing and capturing rents that are higher than assumed in our projections. As detailed in the earnings release, we have 3 other developments under construction that we expect to start leasing late this year.
In addition to the development detailed in the earnings release, we are also expecting to break ground on another 3 projects later this year located in Raleigh, Tampa and Denver. We're excited with the strong start to the year. Leasing conditions clearly remain very favorable. We have a number of initiatives underway with new technologies and redevelopment that will further fuel margin expansion and higher earnings growth from our existing portfolio and expanding new development pipeline will add -- will also fuel additional FFO growth over the next 2 to 3 years and the balance sheet is in a strong position to support our growth plans.
MAA strategy has consistently demonstrated more resilient performance during weaker parts of the economic cycle. But as a consequence of the many enhancements we've made over the past few years to the portfolio mix, to the operating platform, to the balance sheet and to our external growth capabilities, we're excited to now also see MAA's ability to post strong relative performance during recovery and the up parts of the market cycle.
In closing, I'd like to extend my appreciation to our team of MAA associates for their continued hard work and consistently strong performance. I thought I have in the way of prepared comments, and I'll now turn the call over to Brad.
Thank you, Eric, and good morning, everyone. During the first quarter, we continued to make progress towards growing our new development pipeline. We finished the first quarter with $444 million under construction and $740 million combined under construction and in lease-up at an average expected stabilized NOI yield of 5.9%.
The size of our total pipeline is up from $700 million at the end of 2021. During the first quarter, we started construction on a 352-unit project in Denver called MAA Park Central. This is the first phase of a 3-phase 1,000-unit project on land we purchased in late 2020.
Predevelopment work at our 3 young sites in Raleigh, Tampa and Denver is progressing. And subject to receiving acceptable construction costs, we expect to start construction on these projects this year. Additionally, we continue predevelopment work on several in-house and prepurchase developments that we hope to start over the next 18 months in Atlanta, Charlotte, Denver, Orlando, Phoenix and Salt Lake City. This pool of future development opportunities includes an entitled site in Denver that we purchased in the first quarter of this year.
The timing of planned construction starts can change as we work through the local approval and the construction bidding processes. But at this time, we expect to start construction on 1,600 to 1,800 units in 2022 and end the year with a pipeline of under-construction projects between $800 million and $900 million and a pipeline of total projects both under construction and in lease-up over $1 billion.
Our operating performance at communities and their initial lease-up is strong, and we're achieving rents substantially above our pro forma expectations. Reflective of the strong leasing demand in our markets, we reached stabilization at our MAA Midtown Phoenix community 2 quarters earlier than our original expectation, while also achieving stabilized effective rents more than 7.5% above our original pro forma expectations.
Our construction management team continues to actively manage all our projects and has done a tremendous job keeping labor and material cost increases from having an impact on our overall budgets. Material shortages and shipping delays are prevalent in the market today. And in many instances, necessitate us placing orders and making deposits much earlier in the process than we had to in the past to secure materials as well as our place in the delivery queue.
Despite these challenges, we delivered our last units at both MAA [Westland] and MAA Park Point on time during the first quarter. Our 2022 disposition plan is underway with 2 properties in the Fort Worth market currently under contract with an expected closing date later in the second quarter. Buyer interest was strong for these 30-year-old properties with one buyer winning the opportunity to purchase both. We plan to sell 2 additional properties later in the year.
Our transaction team also remains engaged in the transaction market, and we're actively evaluating several acquisition opportunities, and we continue to believe that as we get later in the year, more compelling opportunities for acquiring stabilized and lease-up properties are likely to materialize.
That's all I have in the way of prepared comments. So with that, I'll turn it over to Tom.
Thank you, Brad, and good morning, everyone. Performance for the quarter was once again robust, and we're off to a good start in 2022. We saw strong pricing performance across the portfolio during the first quarter. Blended lease-over-lease pricing achieved during the quarter was up 16.8% as a result, all in-place rents or effective rent growth increased 12.4% on a year-over-year basis and 2.6% from the prior quarter. Average effective rent growth is our primary revenue driver. And with the current blended pricing momentum, we expect it to continue to strengthen. In addition, average daily occupancy for the quarter was a strong 95.9%.
The strong demand environment continues to create new opportunities for our product upgrade initiatives. This includes our interior unit redevelopment program as well as installation of our smart home technology package that includes mobile control of lights, thermostat and security as well as leak detection.
At quarter end, we have completed 1,098 interior unit upgrades and installed 11,018 Smart Home packages. In 2022, we plan to complete over 6,000 interior unit upgrades and approximately 23,000 Smart Home packages. By the end of the year, we expect our total number of smart units to approach 71,000. For our repositioning program, we're in the final stages of repricing leases at the first of 8 properties in the program that are now complete, results have exceeded our expectations of another 8 projects that are underway this year.
The strong leasing activity continues into April. Lease-over-lease pricing on new rent leases for April is currently at 16.5% ahead of the rent on the prior lease. Renewal lease pricing in April is running 16.7% ahead of the prior lease. And as a result, blended lease pricing for the portfolio is up 16.6% thus far in April.
Average daily occupancy for the month of April is currently strong at 95.7%. And exposure, which is all vacant units plus notices through a 60-day period, is just 8.5%. Both numbers are in line with our expectations and support our ability to continue to prioritize rent growth headed into the busy summer season. Our teams are well prepared and looking forward to the busier summer season. I'm grateful for their time and commitment to serving all of our stakeholders. Al?
Okay. Thank you, Tom, and good morning, everyone. Reported core FFO per share of $1.97 was $0.06 above the midpoint of our guidance for the quarter. And virtually all of the outperformance came from revenue growth as rental pricing, occupancy and collections all combined to produce 150 basis points of outperformance to our revenue expectation for the quarter.
As Tom outlined, pricing trends continue to be strong through the first quarter and into April, as both new leases and renewals becoming effective during the quarter through solid double-digit growth over the prior lease. We continue to expect stable occupancy and strong rent growth through this year and with some impact from prior year comps and returned to more normal seasonal patterns during the fourth quarter leasing season, which did not occur last year.
Overall, same-store operating expenses were in line with expectations for the quarter, but we do expect continued inflationary pressure over the remainder of the year and particularly in personnel and maintenance costs, which I'll discuss just a bit more in a moment.
Our balance sheet remains in great shape, providing both protection for market volatility and capacity for strong future growth. We funded approximately $43 million of development costs during the quarter towards trajected $250 million funding for the full year.
As Brad mentioned earlier, we expect to start several new deals this year and early next year, likely expanding our total construction pipeline to between $800 million to $1 billion by year-end, which remains well within our risk tolerance limits. We ended the quarter with low leverage.
Our debt to EBITDA had a record low 4.27x, with virtually all of our debt fixed and well laddered over an average of 8.4 years and with $1 billion of combined cash and borrowing capacity remaining under our line of credit.
Also during the quarter, Moody's affirmed our debt rating of Baa1 and revised their outlook from stable to positive, bringing all 3 rating agencies now to a positive outlook. And this certainly reflects the strength of our balance sheet and the potential for upgraded ratings over the next several quarters.
And finally, given the first quarter performance and expectations for the remainder of the year, we are updating both our core FFO and same-store guidance for the full year. We increased our full year range for core FFO by $0.16 per share at the midpoint to $7.92 to $8.24 per share or $8.08 at the midpoint. This represents a 13% growth over the prior year. This increase is essentially all produced by higher revenue growth expectations as projected to continued strong pricing trends produce a 200 basis points increase in our effective rent growth, our expectation for the year to 12% at the midpoint compared to 10% in our prior guidance and 5.2% for the prior year performance.
As mentioned, our revenue projection for the full year is built on continued solid pricing performance and stable occupancy for the year with some impact from prior year comps of the second half and normal seasonal trends during the fourth quarter.
The trends with our property operating expenses remained largely in line with our original projections with some increased pressure expected from both from personnel and maintenance costs. The strong labor market, a robust development environment. And the continued supply chain issues are expected to continue to pressure our maintenance service salaries and materials costs.
We increased our guidance for total operating expenses for this by 50 basis points at the midpoint to 6%, reflecting the continued pressure. However, it's worth to note, this increase is more than offset by the revenue growth trends, which produced a revised same-store NOI expectation of 13.5% for the full year, which is [Indiscernible] above our prior guidance.
The forecast for our largest property operating expense line on the real estate taxes remains at 4% to 5%. I'll add also as a result of the continued labor market inflation assumed higher performance-based incentives, given the strong projected performance, we have also raised the midpoint of our total overhead assumptions for the full year. And the only other change to our guidance was an increase in the dollar value of our disposition volume, which was increased $25 million to a midpoint of $350 million, reflecting higher pricing expectations on assets being sold.
So that's all we have in the way of prepared comments. So Ashley, we will now turn the call back over to you for questions.
We will now open the call up for questions. [Operator Instructions] We will now take our first question from Neil Malkin from Capital One.
First question, I just kind of want to touch on immigration trends. I mean, obviously, that's been something that's been talked about for particularly since COVID started. But I was wondering if you can give an update on how those trends are going on either property or market level. Are you seeing those -- that inflow kind of remain steady? Is it increasing from the last couple of quarters in terms of people coming in from out of state?
And then the second part would be, are those people from out of state also bringing with them higher average incomes compared to, I guess, you want to call it in-state move-ins?
Neil, this is Tom. Just to give you the broad trend for first quarter start and '19, move-outs from outside the footprint were 9.1%; in '20, they were 10.1%; in '21, they were 12%; and this quarter, they were 14%. So accelerating across the board. And then we see places like Phoenix are now 22%, Tampa 18%; Nashville, 29%; 15% Charleston. And yes, we see -- so those trends are continuing and they're coming in at higher salaries as well.
Yes. Makes sense. And then maybe I wanted to touch on the acquisition side. You guys have been kind of shying away from that, just given the low cap rates. And now with interest rates going up, I'm just curious about your comment about acquisitions, potentially pursuing some of those in the back half of the year. What are some of the trends that give you confidence that you might have some success there? Is it just elevated deliveries? Is it higher interest rates, maybe reducing competition? Any kind of color on the opportunities you see and why you have some more confidence versus the prior quarters?
Yes, Neil, this is Brad. I'd say, first of all, we've continued to remain active in the acquisition space for the last few quarters. Certainly, pricing has been very frothy in that area. And so it's really hindered our ability to execute in that area. And we've said the last couple of quarters that we do think that opportunities will increase as we get later into the cycle and into this year.
And generally, what we end up seeing is something changes, and something changes to drive the market a little bit closer to us where we -- where our execution capabilities are a little bit more valued. And I think what we're seeing right now is that play out a bit where our ability to execute via speed, where we're able to come in and close on an acquisition within really 30 days. Our ability to close all cash certainly becomes more valuable to some of the folks in the market. And certainly, we're seeing that at this point. We thought that, that would likely be the case this year. And I think just given some of the geopolitical things that are going on, the interest rate movements, as you referenced, are playing out, where we do believe that we'll be able to execute in that arena this year.
Does that mean to do with potentially cap rates backing up at all? Or do you expect cap rates to be flat to even compress further?
We're really early. Interest rates have moved 100 basis points in the last 60 days. And so what I would say on cap rates is for well located, well executed properties. There's really no movement in cap rates. In fact, in the first quarter on the deals that we looked at, cap rates actually went down. Now that's the full quarter. That's likely not the case in March and April, where there have been some folks that high-levered buyers that have paused for the moment.
But I would say that instead of getting 10 bids invest in finally, you're getting 4. And the deals that are well located, well executed, are still getting done. So I wouldn't say it's a result of cap rates changing. It's really a result of folks looking to certainty of execution more so than maximizing price. And I would say that where we are right now is bids have been blowing through the top end of broker guidance. Now they're getting the top end of their guidance. And deals are still getting done, especially for the asset types that we're selling and then the asset types that we're looking to buy.
We will now take our next question from Brad Heffern from RBC Capital Markets.
Can you walk through where rent income ratios are currently? And any changes?
Yes, Brad, this is Tim. If you look at our entire portfolio right now, rent income is about 23% that captures everybody that's in a unit right now. So it's gone up a little bit over the last couple of years, but still remaining fairly low and feel like there's still plenty of room to move in terms of our rent performance.
Okay. And can you talk about where renewal offers are being sent out currently?
Sure, Brad. April is, I think I mentioned, is currently running 16.7%. May in the 17% range, and June in 16% right now. But June's a little early for full understanding. So they continue to be very robust.
We will now take our next question from Austin Wurschmidt from KeyBanc.
So I was just trying to understand, I mean, we saw new leases now trending a little bit below renewals in the first quarter and a slight bit, I guess, in April. And you've seen average daily occupancy just now start to tick down here more recently. So I'm just trying to understand if this is a trend that you think you can -- that can persist for some time, or if there's been just now to the point where you're receiving some pushback on the renewal pricing and that may ultimately lead to need to, I guess, bring those down as we move through the year.
Yes. I'll tackle kind of the first part of that. And I wouldn't see anything that I would characterize as a slowdown. It is very steady. We're few weeks into April or wrapping up April at mid-16s. And I'll tell you, we've certainly gotten some pushback on renewal increases. But those folks that are leaving for price, we're replacing with someone paying 27% higher. So what we see on this is good accept rates for renewals, both in terms of the number of people that are renewing and the increase. We are seeing closure below and occupancy continues to run in a level that we're very comfortable running in our demand metrics on leads per exposed units are as high as they've been. So short term, we feel pretty darn good about where pricing is.
Austin, this is Eric. I'll also add that, obviously, we're just now getting into the peak leasing season and where demand tends to pick up and leasing traffic really tends to pick up. So I think the fact that we're carrying the sort of renewal rates that we are and the new lease rates that we are through the last 6 months of the fall and winter heading into now, the more robust part of the year, I'm feeling pretty good about the trends that we're seeing.
No, that's helpful. I guess just trying to understand, I guess, the opportunity cost or turnover cost associated if you're backfilling at a lower rent increase on average across the portfolio.
Just to -- yes. And so I think important to recognize we're backfilling, if you will, with someone paying 27% high and total turnover is down 6%. So we're not increasing turnover at this point, and we're repricing at a high rate on those folks that did choose to leave for price.
Understood. No, that's helpful color. And so what is market rent growth across the portfolio today? And could you give the current loss to lease.
Yes, Austin, this is Tim. I'll hit the loss to lease part. So if you look at the blended rents for, call it, March compared to our March ERU, it would imply about 8% loss to lease. You got about $1,600 was our effective rents in March versus ERU of 14.84%. If you look at just the new lease prices where our absolute new lease prices are still running a little bit higher than renewals, it's actually about 10% based on that number.
And then as far as market rent growth, just curious where you are year-to-date? And I guess whether anything's changed as far as your projection across your markets for this year that led you to increase guidance 200 basis points this early in the year given we received guidance just a couple of months ago.
Austin, this is Brad. I'll start with that, and Tim and Tom can add some color if they want. I think what we saw was we had always expected going back to when we gave guidance at the beginning of the year that we would have strength in the first quarter and begin to move into a situation where we have prior comp -- strong prior comps as well as the fourth quarter, some normal seasonal trends impact us that we didn't have last year.
That general trend is still in our expectation, albeit the first quarter was just much stronger than we had. I mean pricing came in at 16%, you saw 16.8% for the quarter continued through April, as Tom mentioned, to be mid-16s, the same level. So I think that just went stronger and longer than we thought it would. So it caused us to expect the same continued shape of that curve for the year, given the comps was based, but just moved it up 200 basis points. And everything went up 200 basis points.
Austin, I'll add that as I alluded to and Tim or Tom mentioned as well, I mean our move-ins from people moving from outside the Sunbelt into our markets continues to grow. But the other thing that's changed, frankly, in the last 90, 120 days or so is with the change happening on mortgage rates and in interest rates. The hurdles to home buying just continue to grow. And I think that is continuing to fuel some level of demand for apartment housing as well that is running than we expected.
We do continue to have in the back half moving to a mid-single-digit kind of growth based on those prior year comps and that fourth quarter season we talked about, which is still strong on a relative basis in terms of years past, outside of the COVID period with that's still built into our -- we think we can do that, and we'll just have to see what performance is.
Is that mid-single-digit blended lease rate growth or same-store revenue growth?
Yes. Same store revenue growth will obviously -- will continue -- the math is math. It will accelerate next quarter and stay high through the year just based on what we've done in the last several quarters.
We will now take our next question from Nicholas Joseph from Citi.
Brad, you talked about kind of the inflation and supply chain challenges with development. So as you think about the starts for later in the year, how much of construction costs moved, I don't know, either on a year-over-year basis or from earlier in the cycle just as you think of pricing those deals?
Yes. Nick, this is Brad. So yes, we build into all of our projections, depending on when we expect those projects to start some level of cost escalation, and I would say that varies based on the market. And I would say also that the cost increase that we've seen varies based on market. And I'll tell you, some markets right now are seeing cost increases that are pretty substantial. But I'll also point out that the way that we approach our developments and the way we underwrite our developments is pretty conservative.
As I mentioned, we do keep in our underwritings, if we're going to start a project later this year, we've got cost escalation built in our construction costs, but we're also not trending rents until we get to that point. And based on what we're seeing in our markets across the board, there's significant level of rent increases occurring between now or when we put our project under contract and when we ultimately move to construction that we're not recognizing until we get to the point where we start construction. So we're conservative in how we underwrite these, and we do expect construction costs to continue to rise.
When we started this year, we kind of expected a construction cost increase of, call it, 8% across the board. And I would say that that's probably increased to 10% or 12% this year.
That's helpful. And that's kind of my second question, right? So if you think about, obviously, rents have moved up pretty meaningfully as well. So when you blend that together, how does kind of the underwritten untrended deals look today for some of those projects versus when you initially contemplated this?
Yes. I mean the projects that we have today that are under construction actively. I think we're averaging about a 5.7% yield right now on our underwritten rents. And on those that are under construction, we have construction costs that are locked in on projects that we are modeling going forward.
We continue to expect those yields to be in the, call it, 5.25%, 5.5% range. So there is some movement there. But when you compare that to still what we're seeing on the acquisition side, where the yields are 3% to 3.5%. The spreads continue to be in that 150 to 200 basis points range. And so we still continue to believe that taking into account the risk associated with development and the costs and all those things that, that 150 to 200 basis point spread is still a good place for us to be putting our capital.
We will now take our next question from Nick Yulico from Scotiabank.
Just going back to the guidance on the year, particularly on the 12% effective rent growth. I mean, I know you talked a little bit about this, but I'm honestly still a little bit confused. I mean if you did over 12% in the first quarter, within that, I really struggle to see how blended pricing would be below 10%, mid-single digits, as you said in the back half of the year and how you could still get to that 12% number for the year? I mean just any additional clarity on that would be helpful because it really feels like the blended pricing that's embedded in guidance on new and renewal leases is assumed to be pretty strong over the next couple of quarters.
This is Al, and I can try to address that, and maybe Tim and Tom can look at it some more. But I think it comes down basically to the fact that it takes our average leases a year. And so if you look at the trends in our pricing over the last several quarters, go back to 2021 and started the year lending pricing at 2.7% and went to 8%, 8% to 15%, 16% in the third and fourth quarter, and then we put another 16.8% up in the first quarter this year. So I think what we're -- though we expect our blended pricing to be impacted by the trends this year, both prior year comps and the seasonal trends we talked about, that strength that we put in for the last several quarters is going to play out for another few quarters.
And so I think if you think about our leases in the average year, that math will play out. So I think there's -- what we would expect is that revenue, given the leasing that we've done in the last several quarters will continue to accelerate. It should continue to generate in the next quarter to be pretty strong over the remainder of the year given those mid-single-digit new pricing and blended pricing performance that we expect to put in the back half of the year. So that's how it works out, basically, you got to take in the context of your lease and how that's building up and then winding down over time.
Okay. I guess when you're saying that blended pricing getting down mid-single digits. Is that a fourth quarter issue? Or is there any of that in the third quarter as well?
Now we have to see what happens, Nick. Obviously, what we've projected as a strong second quarter continuing because we started off and so we started off, Tom talked about that's coming in, in the third quarter a good bit just because that's where the really -- if you go back to last year, that's when pricing really accelerated when we took off.
So as the prior year comp at the quarter, you feel it. And then the fourth quarter has a little bit of prior year comp plus that season, so it's a little bit lower. So it's both of those, the average together is going to be in that mid-single-digit range for the second half.
And the other variable in all this to keep in mind, Nick, is that we're talking about blended assumptions here. But of course, what you see actually play out can vary a bit different between renewal pricing versus new lease pricing. And new lease pricing tends to be much more reflective of supply/demand dynamics going on in the market.
But we've, as Tim has alluded to earlier, we've got some mark-to-market or capture to still continue to recover with our renewal pricing. And then if turnover stays low, and we continue to execute a higher level of renewal versus new lease pricing, it can change the outcome a bit.
So what Al has laid out is sort of our best guess as to how things will play out over the back half of the year when you do consider the prior year comparisons are a little bit more challenging, and we are assuming a return to more seasonal patterns next year or later this year, which did not occur next year. But that mix between renewal and new lease pricing performance can change a little bit and that can create some variation in terms of the ultimate result we get.
We will now take our next question from John Kim from BMO Capital Markets.
I just follow up on that line of questioning. So you're able to push rents 16% to 17% this quarter off a comp period where you had 8%. Third quarter of last year, you had 15%. So shouldn't your renewals be about 10% in the third quarter if market rents don't move?
Yes. That sounds low to me for renewal --
I think renewals is kind of what's -- is where some of the opportunity is right now. I mean we're still in a situation where our new lease pricing is, call it, 2% or so. The absolute pricing is 2% or so higher than the absolute pricing we're getting on renewal. So that's kind of where we -- if you want to call it, return to seasonality, return to normalcies, those renewals catching up and then likely surpassing the new leases. So I do think the renewals will continue to be strong for quite a while.
At least 10%.
I would say so.
Okay. Al, what's likely that you get an A- credit rating this year? It seems like your net debt to EBITDA will continue to improve on an LTM basis. And can you remind us what the impact would be on incremental cost of debt if you get that rating?
John, it's a great question. I think -- and of course, the markets are a bit volatile right now, both rates as well as spreads have gone up now because of some of the concerns about all the factors. But I think we certainly feel good about that deposit. I don't think we need to do anything else in terms of our balance sheet to make that happen. I think what we said is our long-term debt-to-EBITDA range is probably 4.5% to 5%, and we're below that now. I would say we have capacity for growth for some of the things that Brad is talking about.
And so I think that we don't really need to do anything to let some time play out. I think there may be our boot would be there a little bit behind on catching up with the strength of the business, but we feel very good about where they are today. So we'll see what happens over the next few quarters. But hopefully, something happens there. We've already -- if you think about it, you should get about a 25 to 30 basis points impact on your borrowing costs say on average, a 10-year financing over time from going from a B to A rating. On our deals that we've done over the last couple of years, quite frankly, we've captured about half of that, John. I think we priced through a BBB+ rating and kind of move into -- almost touched A- at times and we got close.
So we've captured about half, but I think we probably pick up another 15 basis points from here in a normal, stable market. The good thing is work that Andrew and the team has done, we really don't have much financing to do in this year. We only have $125 million coming due. So we'll be in the market very -- I don't plan to be in the market, as we talked about. But if we are and the rate income, we expect another 15 basis points increase what we would have been able to do.
We will now take our next question from Alexander Goldfarb from Piper Sandler.
Two questions. First, on the asset pricing and the center pool, I think earlier to some of the questions you said that instead of pricing through the top end, it's now pricing at the top end, and there are maybe a fewer hitters coming forth to buy deals. Does that mean that multifamily is losing its luster? Or is there just a lot more supply out there? Or is the capital that was going to multifamily now going to other sectors outside of, let's say, the classic industrial and multifamily that was all the rage in the past few years?
This is Brad. No, I certainly don't think folks are going away from multifamily. And in fact, just given the strength of the fundamentals and the broader trends and migration and job growth and things like that in our region of the country, we're seeing as much capital today as we've ever seen in this space and then in our region of the country. So no, it's not that at all.
What I think that is, is a couple of things. One is the highly levered buyers are sitting on the sidelines at the moment, just trying to figure out what levers they're going to pull to try to get back into the market. Interest rates have moved so quickly for those folks that they're entering these deals at a negative leverage position, the rent growth that's in place in our region of the country helps them overcome that. So that's really what it is at the moment. It's not a reallocation of capital. It's not capital moving to sectors or anything of that nature at this point. It is simply folks on the sideline at the time being is the first point.
The second point is that there has been a flood of projects, deals come to market in March and April. Folks were trying to get ahead of some of the interest rate movements. So there has been a flood of deals that have come to market, frankly. And so I think that part has dispersed the buyer pool a bit amongst these deals. So that's the second component that I would say is limiting the buyer pool on individual deals. But in terms of the entire market, no, I don't think capital has moved away from this sector at all.
Okay. And then the second question is on gas prices. Are you seeing any impact on your residents? There are some people who say, because the Sunbelt is heavy drive and because of lower relativity customers the coastal markets, gas prices are a bigger deal. The offset is most of your residents I'm guessing are single and are probably more concerned about their beer budget than their gas budget. So just curious, if gas prices have any impact on your renters or if it's really just -- I don't let this nonissue, but sort of a nonissue?
I'd say it's a nonissue. It's one of many factors going on. And I think when you stack up sort of the different regions of the company or even the different of the country or even our submarkets, we're seeing steady performance in pricing, whether it's inner loop downtown walkable asset or a suburban asset with a drop. So just not seeing much on that on the renter side of things.
And Alex, we're also seeing wage growth take place at a pretty robust pace as well. So a combination of what's happening on the employment side and wages, I think, has muted any negative impact on the rise in gas prices so far.
We will now take our next question from Haendel St. Juste from Mizuho.
A couple of follow-ups here. I guess I heard you earlier mentioned that some markets are seeing very substantial development cost increases. I guess I'm curious which markets are those cost increases standing up more so and why more than other markets?
Yes. I mean 2 that I can think of are Denver and Phoenix and really those are more because they're kind of islands on their own, frankly, in terms of the sub trade base and the GC base. You consider Texas, where you've got Austin, Houston, Dallas, San Antonio. All those markets, contractors really go to all those markets, but that's not the case when you get into a market like Denver and Phoenix, they're more islands unto themselves. So your base of -- your pool is a little bit more limited. So you have a different impact in those markets.
Got it. Got it. Okay. On the development pipeline overall, you mentioned getting to about $1 billion by year-end that you're still within your -- I think, your comfort threshold. I guess I'm curious how much larger could you be willing to go that pipeline to, especially if you now factor in the rising rates and the supply -- increasing supply projects to come across Sunbelt over next year or 2?
We talked about in the past, Haendel, that we talk about 4% and 5% of our balance sheet kind of being the tolerance limit. We're well below that now. So we could go -- that's $1 billion to being 4 would be no problem for us given the surface line. Certainly, we're thinking about the marketplace and how things shape up. But our balance sheet is -- our leverage is very low as we talked about how we look at it. We're below our sort of our leverage thresholds right now with plenty of capacity. And so we have only a runway to continue funding in a market that's changing. So that's how we think about it.
Okay. Fair enough. And then one more, if you would mind just sharing some updated color on D.C. and Houston to your software market. I'm curious how those markets are faring its expectations coming into the year? And is there any [Indiscernible] optimism and maybe pessimism as you kind of think about this market [Indiscernible].
Haendel, D.C. is now 10.5% on blended rent for April. And Houston is 9.6%. So if we were 3 years ago, I would be telling you how well they were doing, but those are improving. They've improved over time. They probably moved from the mid 4s. It's just that, that still puts them at the lower end of our portfolio's growth rate. So they're improving modestly, I would say.
We will now take our next question from Anthony Powell from Barclays.
So your rental growth and lease spreads have been higher than a single family for the past few quarters, which is good. But in a lot of cases, now some of your monthly rents are converging with single family. So do you see that as a risk as single-family inventory increases? And could that be maybe a potential just headwind as you have maybe larger, I guess, homes available at both semi/full rents to what you're offering?
No. I mean there's just no threat at all. In fact, our in-house is, I mean, down 117 move-outs and is now just 3.2% of our reason for move-out. So it's a total nonfactor. And home buying, as you would expect, is down close to 23%. It's now just 18% of our move-out. So the affordability in those areas seems to be driving people to stay, and that's a big part of our production in turnover.
I might add one point to that, that even with the rate increases we've been seeing, our new lease rates are up about 30% over the last 2 years. But single-family home prices in our markets is up almost 40% over that same period. So relative affordability has actually got lower for single-family than it was a couple of years ago.
Sorry, I was a referring to single-family rents, I guess. I was looking at one of the large rental peers and looking at a market like Atlanta or Tampa. It seems like the actual monthly rents [Indiscernible].
Yes. And to be clear, move-out to rent increase is now down to 3.2% of our move-outs is at 100 basis points lower. So nonfactor there.
Yes. I think that, Anthony, it's also important to recognize, as Tom is alluding to, competition that we may have from people choosing to rent a home versus rent an apartment. I mean, it's just -- it's a nonfactor for us, and I think it really is a nonfactor because people are making a choice for renting housing based on a lifestyle need.
And given the demographic that we're serving and the demographic that defines our resident profile, these are not people that are choosing or want or desire the single-family lifestyle. They want the apartment lifestyle. So we just do not and never have really seen it as being a problem comparison.
Got it. That's clear. And just one more. I guess, one of the multifamily peers yesterday said that they're seeing just older tenured tenants in certain markets like Tampa move out as pricing increases? Are you seeing the same thing? And does that kind of factor into how you price in renewals in any of the markets?
And then affect how we price on renewals and our average length of stay has stayed consistent at about 20 months. So we're not seeing a real material change on that point. And we're so consistent with our renewal increases that the renewal people that have renewed, they're not generally that behind, it's more the new move-ins that are getting that higher increase.
We will now take our next question from Rob Stevenson from Janney.
Average same-store rents $14.69 a month. Where are monthly fees per unit today? And what type of growth rates are you passing through with fees? I assume it's not anywhere near the rental rate growth levels of mid-teens?
I mean, no, it is not. And that is -- those run from $100 and $150 a month, and they run more in the 3% to 4% range.
Are you seeing lower application fees given the lower turnover?
Sorry, say that again, Rob?
Are you seeing any decrease in application fees given the higher occupancy and the lower turnover, so just less units available in your portfolio. And so therefore, you're getting lower application fees that are pushing down fees a little bit in aggregate across the portfolio.
No, not materially. And fees are actually up a little bit as we've gotten back to more normalized operating conditions on things like late fees and term fees.
Okay. And then some of your peers have been talking about earning into 2023. So rental rates continue at current levels at the current trajectory through the prime leasing season. How much it baked in same-store growth is there going to be locked in for 2023 as we exit 2022? I think the peers have been talking about 3% to 4% in their portfolios for 2023 even if rents didn't increase from here. How are you guys thinking about that, the sort of where these leases are going to set you up for 2023 as a base?
Rob, this is Tim. I'll answer that certainly in terms of the guidance that we have for the rest of the year. The way we kind of look at it is that the blend of lease and release that we expect to get from the full year, roughly half of that should pretty much carry into the next year. So I think I guess a little more than that, I would call it somewhere around 5% now based on our guidance if pricing holds up better than we think, and certainly, that will impact that number as well. So every day that goes by, it helps us in '22, but also sets us up for '23 as well.
Okay. And then one quick one. How much of your redevelopment is being done by internal MAA staff these days versus contracted third parties? .
On the interior innovated, it's primarily a contractor base that's coming in and doing the countertops and cabinetry and flooring in those items. We do a little bit of the paying in-house, but it's primarily a contract process and always has been.
And is that an impediment at this point of getting that labor? Or are you guys still getting as much done as you want to at this point?
It's not an impediment at all, much like Brad has outlined in his comments about construction, we've seen some rate increase there, but the price opportunity that we're seeing from the markets is better. And then, of course, new supplies come into our markets, and that's given us additional opportunity to grow it to a higher price point.
So there's -- I would say there's some expense there, but it's not affecting the economics or saw in us down.
And we do have a follow-up question from Haendel St. Juste from Mizuho.
One more development question. One of your apartment peers entered the SFR development business this past quarter doing attached product, I think, in Houston. I guess I'm curious, one, if you have any plans to do so anything in the pipeline that perhaps contemplates an SFR development? And what's your thoughts overall on maybe adding that to your -- that type of product to your pipeline?
Haendel, it's Eric. The short answer is no. It's not something that we plan to jump on. We have spent a fair amount of time looking at it. We have studied a good bid over the last couple of years and have ultimately concluded that frankly, we can capture margin expansion and -- from the portfolio and earnings upside, we think, from the existing -- from our operations just through continuing to focus on the multifamily product that we have.
And I -- and certainly, the -- some of the things that we're doing with new technology and so forth, which is a lot of it obviously is being used in the single-family space as well. But when you apply it to our more condensed, if you will, apartment communities, where you've got 250 units often with shared structure and much more efficient from a CapEx perspective, we just ultimately believe and have concluded after studying a lot that we're better off to just stick to our knitting and stay focused on the apartment product.
And certainly, as we continue to look at ramping up our external growth, we've got plenty of investment opportunity and plenty of growth opportunity, we think, by focusing again on what we really know which is multifamily. So again, the answer is no, we're content to focus as we are.
We will now take our next question from Chandni Luthra from Goldman Sachs.
What are you hearing these days on the subject of rent control? We've seen increasing dialogue here. We've seen rent margins in Atlanta and kind of with election coming around later this year. Basically, how are you thinking about managing this dynamic? Do you see heightened risk going into 2023 if 2022 was basically, let's say, done at this point from anything material transpiring from a rent control standpoint? .
Chan, this is Rob. I'll start and then maybe turn it over to Tim and Al. But so across our markets, 13 of our states that represent about 90% of our NOI actually have in place state laws that prohibit rent control at a local level. So with that starting as a backdrop to it, it's very difficult to get rent control imposed across our portfolio.
So we have a group that is active in monitoring these along with the various apartment associations and trade industries that we're part of. So don't really anticipate any significant impact from rent control across any of our markets.
No, I'll add to what Rob is saying is what Tim alluded to earlier, with rent to income and our portfolio now running around 23%, it's still a very affordable level of rent relative to income that we are at right now. And most economists will tell you, once you get to 30% or better or higher, that you start to run into a problem.
So a combination of just the environment we find ourselves in, the issues and the fact that a lot of our states we operate really prohibit it, we just -- and the affordable nature of our product and relative to income. We're just not seeing any real evidence that we're at risk of any sort of meaningful efforts towards rent control or regulations to try to keep that in check.
Got it. And a quick follow-up. So earlier on one of the questions, you talked about 2023 in terms of where you are from capturing that loss to lease standpoint, you expect basically that going into 2023, you're looking at a 5% pricing for now. So big picture kind of thinking about where you guys were pre-pandemic. When do you think the market gets back to that 3.5%, 4%?
I don't know. I think that it's going to vary a bit by region of the country and by market. From where we sit here today, and I think about the fundamentals that are driving demand for housing in the Sunbelt largely as a function of the job growth that we are seeing and increasing embracing by employers of some level of remote working. And I think that's going to be with us for many years to come.
I just -- it's -- I see the demand side of the equation for our business as continuing to be quite strong in our markets for some time. And then I'll overlay on that, the pressures that Brad has been alluding to surrounding construction costs and development and the ability to secure effectively, in many ways, we are at kind of full capacity at the moment in terms of the ability for developers and construction companies to deliver supply.
So I think -- I mean, our biggest challenge, frankly, is just the prior year comparisons. It's -- and of course, that will -- we have that this year. And then going into next year, it will be more steady. But I think that as I think about a return to normal from a rent growth perspective, as you're framing it up, it's hard to see that happening over the next 2 or 3 years.
I think we're in a very unique window right now where I think the only thing that could change that, the only thing that could really weaken that is if we do, in fact, see the country slip into some form of a recession, and job growth begins to significantly slow and we go into a real downturn in the economy, which, of course, will affect everyone. But historically, of course, MAA has shown the ability to weather those downturns better than most. And again, I think a lot of that comes back to the markets and the way that we are uniquely diversified across the Sunbelt and the more affordable nature of our product.
So I think that my answer is fundamentally that I think the conditions are likely to remain pretty bullish for quite some time. And the only thing you can really materially weaken that would be a significant downturn in the economy, a recession, if you will. And even in that scenario on a relative or comparative basis. I like our story in that kind of scenario.
We will now take our next question from Rich Anderson from SMBC.
So speaking of recession, so the GDP print for the first quarter, surprising down 1.4%. How do you -- you speak about some of the protection that MAA has offered in the past about tougher economic climates. But I mean, is there a reason to be thinking out a couple of years or a year about all the good things that are happening today and being careful not to have sort of a hangover when this is all said and done because I might argue that this is not a forever thing. And Karma that you know what? So how do you manage this in light of the broader economic environment and the changes that are going on?
Well, Rich, it's a good question. And frankly, it's something we've been spending a fair amount of time thinking about because I do agree with you that -- I mean, one thing we know is the economy is cyclical and our business is cyclical. And I think that while it's hard for me to sit here today and see any reason to get particularly definitive about a downturn. There's a lot of uncertainty out there, and there's changes afoot. But as we think about how do we position the company and prepare for an eventual downturn, there really has always been 4 things that we have really focused our energy and efforts on.
One is just the portfolio strategy itself and ensuring that we are focused in markets that we think can weather downturns better than other regions and other markets in the country. We think that the price point that we have in the portfolio relative to others is an advantage to us should we find ourselves in that kind of situation. And as you know, we are a bit uniquely diversified also across the Sunbelt and that we have exposure to a number of secondary markets as well as the larger markets as well. And that balance and that diversification across the region, unique to our story, I think, really is one of the things that we're going to continue to hold on to and to protect as we think about cycling capital and growing the company.
The other thing that I would -- we focus on, of course, is the balance sheet and the capacity we have on the balance sheet, and you've now it's a long time, Rich. I mean our balance sheet has never been this strong. We've never had this much capacity. So we think we've got that position about as well as we can. The other thing is we continue to monitor very carefully about how much forward funding obligation we're creating for ourselves through new development. And as Al alluded to, we feel like that no more than 4% to 5% is kind of where we want to be. Right now, we're well below that and continue and certainly intend to stay there. So we -- while we've scaled up a fair amount, we're still in a very comfortable position such that if the capital markets close for some reason, we feel very confident that we can continue to complete all the obligations that we've created.
And then the final thing I'll point to, if you were to tell me a year from now that we for sure were going to recession, what would you be doing from an operational perspective, I would tell you we're doing exactly that. This is the time to be pushing for rents. When you get into a recession, the thing that will cause revenues to hold up better than they otherwise would is that you've got baked in performance in your revenues through the rent growth that you've been capturing over the prior year or so. So we think that this is for a host of reasons, is a good time to continue to be prioritizing rent growth over occupancy. And if you want to think about a recession, for sure, that's what we should be doing, which is obviously what we are doing now.
Okay. And then second question for me is about an hour ago, you talked about 14% of your leasing came from someplace else into the Sunbelt. But your urban peers are also claiming in migration to these days. So everyone's got immigration. It's a party. It's a migration party. And my question to you is that the 14% of leasing only tells half the story. Because what about the people that did not renew and are leaving your portfolio, where are they going?
And so I wonder if you know, perhaps the net is a positive inbound to Sunbelt. I'm not going to argue that. But I wonder if there's -- the back door is opening up a little bit as people perhaps are looking to the urban world and saying, maybe I can get myself a deal someplace else or get a big paying job or whatever the case may be. Is that something you monitor the back door and where people are going, not where people are coming from?
Yes. Rich, we do. And move-outs, who moved outside the Sunbelt area were just 4.3%, but less the area, and that's down from 4.5% last year. And it's not big enough that I've spent much time trying to figure out where they're going. So -- and that is pretty big in our favor.
We will now take our next question from Tayo Okusanya from Credit Suisse.
My question is more around innovation and technology. Hoping you could talk a little bit more about what you're doing in that area? And ultimately, what kind of margin expansion you expect from these initiatives that may be comfortable that they're all positive MPV projects.
Sure, Tayo, and I'll take the first part and kick it over to Tim to cover the margin expansion. But we've -- currently, what has either occurred or is in process as we expanded our call center solution. We've implemented lead nurturing software, which is automated prospecting engagement technology that interacts with our prospects earlier. It allows us to automate follow-ups. We've upgraded virtual touring. We've added a prospect-centric CRM. We've added mobile maintenance and mobile inspections. These changes just so far have allowed us to restructure 30 physicians in the office staff in 2021 that's benefiting us in '22. We're also getting better clarity on billing and higher resident satisfaction as a result of the inspection process. And then underway right now is improved self-touring, improved multi-location sales support, simplified online leasing, and we expect another 30 to 50 headcount reduction in '22, that will benefit '23. And then Tim can talk about -- a little bit about the margin expansion.
Yes. So regarding the margin, at least for 2022, we're expecting our total margin to go up somewhere between 150 and 175 basis points. Obviously, a lot of different factors playing into that, but a lot of the components, Tom mentioned, are included there. And so smart homes, one, for sure, the installations we're doing there that we can see on the top line. That's probably contributing 40 basis points or so this year to the margin. And then some of the efficiencies on the headcount side, the call center, the automated chat are contributing a piece of that as well. I think some of the foundational things we're doing now with the CRM that's currently getting rolled out and some of the other things that Tom mentioned will have more of an impact as we get into '23, and we'll define that more definitively as we move out to the next few months.
We have no further questions. I will now return the call to MAA for closing remarks.
Okay. Well, we appreciate everyone hanging with us today. And if you have any follow-up questions, obviously, just feel free to reach out to us at any point. So thanks for joining us this morning.
This concludes today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.