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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the MAA Third Quarter 2021 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, the Company will conduct a question-and-answer session.
As a reminder, this conference call is being recorded today, October 28, 2021. I will now turn the call over to Tim Argo, Senior Vice President of Finance of MAA for opening comments.
Thank you, Mallory, and good morning, everyone. This is Tim Argo, Senior Vice President of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; Robert DelPriore, our General Counsel; Tom Grimes, our COO; and Brad Hill, our Head of Transactions.
Before we begin with our prepared comments this morning, I want to point out that as part of the 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.
These reports, along with a copy of today's prepared comments, and an audio copy of this morning's call will be available on our website. During this call, we will also discuss certain non 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, which are available on the For Investors page of our website at www.maac.com.
I'll now turn the call over to Eric.
Thanks, Tim, and we appreciate everyone joining us this morning. Our third quarter results were well ahead of expectations. Growing demand across our Sunbelt markets continues to drive strong rent growth and high occupancy, steady job growth, favorable migration trends, wage growth and escalating pricing of single-family housing are all driving strong performance for apartment rents across our portfolio.
We're carrying significant pricing momentum into calendar year '22. Resident turnover remains low. Collections remain strong, occupancy is high and rent-to-income ratios remain very affordable. This all suggests to us that we have good capacity in the market for the pricing trends that we are currently capturing.
As we think about next year, we believe leasing conditions across our markets will remain favorable. Our Sunbelt markets continue to capture good job growth, driving positive migration trends. New move-ins year-to-date from households relocating to our Sunbelt markets constitute 14% of our new leases as compared to just over 10% in the same time frame of 2020.
High pricing trends associated with single-family housing are further supporting strong demand for apartment housing. In the third quarter, move-outs among our resident base to buy a home were down 12% as compared to prior year, and move-outs to rent a home were down 38%.
We continue to keep an eye on pressure surrounding supply chain challenges and inflation trends. Year-to-date, our biggest pressure on operating expenses is building repairs and maintenance costs, which are up just over 6%. Pressure is associated with both materials and labor.
We expect year-over-year increases in repair and maintenance expenses will likely hold in the 6% range through the end of the year. Our current development pipeline remains on budget for both development costs and timing for unit deliveries.
We're working into our planning and pro formas more cost and unit delivery contingencies as we expect the supply chain challenges to be with us through next year. But again, at this point, our current predevelopment pipeline remains fully on track and we expect to start several additional new projects in 2022.
In summary, our markets continue to capture strong demand driving robust rent growth that will carry into 2022. And MAA's uniquely diversified approach across the Sunbelt region, supported by a very strong balance sheet, has the Company well positioned to take advantage of the outlook for continued strong leasing fundamentals in our markets.
We continue to build strength in our technology platform and their operating capabilities. Our redevelopment program and several repositioning projects will drive higher earnings opportunity from our existing portfolio. We expect to capture meaningful expansion in our operating margins over the next couple of years.
In addition, our external growth pipeline continues to expand and will deliver meaningful value accretion over the coming years. MAA is well positioned heading into 2022 and we're excited about the prospects for continued outperformance in the coming year. I'd like to thank the MAA team for the tremendous progress this year and the very positive results.
I'll turn the call over to Tom. Tom?
Thank you, Eric, and good morning, everyone. We saw strong pricing performance across the portfolio during the third quarter. Blended lease-over-lease pricing achieved during the quarter was up 15%. As a result, all in-place rents or effective rent growth on a year-over-year basis grew 6.3%.
This is nearly 5x the 1.3% growth of the first quarter. Average effective rent growth is our primary revenue driver. And with the current blended pricing momentum, we expect it to continue to strengthen through the remainder of the year. In addition, average daily occupancy for the quarter was a strong 96.4%.
As outlined in the release, we saw steady progress from our product upgrade initiatives. This includes our interior unit redevelopment program as well as the installation of our smart home technology package that includes mobile control of lights, thermostat and security as well as leak detection.
For the full year 2021, we expect to complete just over 6,000 interior unit upgrades and installed 22,000 Smart Home packages. This will bring our total number of smart units up to 47,000 units. We're in the final stages of completing the repositioning work on our first eight full repositioned properties and have another eight that are underway this year.
Leasing activity for October has been strong. New lease-over-lease pricing month to date for October is running close to 20% ahead of the rent on the prior lease. Renewal lease pricing in October is running 13% ahead of the prior lease. As a result, blended pricing for the portfolio is up approximately 16% so far for October.
Average daily occupancy for the month is currently 95.9% which is 30 basis points better than October of last year. Exposure, which is all vacant units plus notices through a 60-day period, is just 6.8%. This is 10 basis points better than prior year. This supports our ability to continue to prioritize rent growth. We are well positioned as we move into the fourth quarter and '22.
I'd like to echo Eric's comments and thank our teams as well, have shown tremendous adaptability and resilience over the last year. I'm proud of them and excited about their progress in 2021.
Brad?
Thanks, Tom, and good morning, everyone. The already robust investor demand for multifamily properties in our footprint has strengthened. Transaction volume is at a record high as investors are looking to buy into the strong rent growth outlook in our Sunbelt markets. Strong leasing fundamentals, coupled with robust investor demand continues to push pricing growth. putting further downward pressure on cap rates.
While the main focus of our capital deployment effort is currently on development through our in-house development and our repurchase program with third-party developers, we remain active in the transaction market and are actively evaluating a number of acquisition opportunities.
For the moment, new development provides a more attractive investment basis, higher stabilized NOI yield and higher long-term returns to capital. We believe that as we move further into the recovery part of the cycle, we will likely find more compelling opportunities for acquiring stabilized and lease-up properties.
Our pre-purchase and development pipeline that includes both under construction and in lease-up projects stands at 2,999 units with a total cost of $710 million. While the size of our development pipeline will fluctuate due to the timing differences of starts and completions, we continue to make good progress towards growing the pipeline. Our in-house development team has multiple sites either owned or under contract that we expect to start construction on in 2022.
We have three sites in Denver, one of which is a three-phase site, a two-phase site in Raleigh and a site in Tampa. Additionally, we are negotiating on pre-purchase projects in Charlotte and Salt Lake City that we hope to start next year as well. Despite inflationary pressures on materials and labor, we expect stabilized NOI yields on our new projects to remain in the 5.5 to 5.75 range.
The strong leasing demand we're seeing across our portfolio is also evident in our lease-up properties, where we're seeing rents and velocity well above our pro forma. Because of this strong demand, we've moved up the expected stabilization date of our Sand Lake property in Orlando by two quarters with an expected stabilization date of third quarter '22.
All of our under-construction projects remain on budget and on schedule with yield expectations at or above our original projections. These projects have fixed cost construction contracts, so they remain on budget, but we are seeing increased material shortages due to strong demand and shipping delays. Our construction management team has done a great job in navigating these challenges and minimizing the impact to our schedules.
However, we expect these supply chain disruptions could add 60 days or so to any new starts next year. We've made great progress on our remaining dispositions for the year, which includes two properties in Savannah and one in Charlotte. The buyers are through their due diligence processes with hard earnest money deposits so the closing should wrap up fairly soon. Pricing on these 31-year-old assets is very strong, generating a levered investment IRR of 30%.
That's all I have in the way of prepared comments. I'll turn it over to Al.
Okay. Thank you, Brad. The continued very strong pricing trends and high occupancy through the third quarter produced revenue performance well above our prior expectations. Core FFO was $0.10 per share above the midpoint of our guidance range, with the outperformance essentially all coming from revenue.
Rent and lease pricing for the third quarter was 5% higher than projections, supported by an average physical occupancy about 50 basis points above projections. And as we expected, operating expense growth for the quarter moderated given some favorable prior year comparisons, but it is projected to return to the full year range during the fourth quarter.
As you saw in the release, this third quarter performance produced a significant increase to both our core FFO and same-store guidance for the full year. We increased projected core FFO for the year to $6.94 per share, which is $0.19 per share above our prior midpoint and now represents a 7.9% growth over the prior year.
The increase is driven by revised same-store revenue growth projection for the full year of 5.1% at the midpoint, which is based on continued strong pricing trends through the fourth quarter with some late seasonal moderation expected and we're assuming blended lease pricing averaging somewhere around 10% for full quarter.
We left our operating expense expectation for the year unchanged at 4.25% and 4.75% growth which produces revised same-store NOI growth for the year of 5.5% at the midpoint. We do expect some growing pressure from operating expenses as we move into 2022 with personnel costs, repair and maintenance costs and real estate taxes which combined to make up over 2/3 of operating expenses, all expected to begin showing some inflationary increases during 2022.
Our balance sheet remains in great shape. We completed several important financing transactions during the third quarter, which further enhanced our strength. We issued a combined $600 million in public bonds during the quarter, a barbell deal pairing 5-year and 30-year notes, which had very good pricing for both, have lended to a 2.1% effective rate, which supports our view that our current ratings are conservative.
These transactions also fixed over 99% of our debt and extended our average debt maturities to almost nine years, providing employee protection from a rising interest rate environment. We also executed an 18-month forward equity transaction which provides around $210 million of future funding for our growing development pipeline and based on current projections, this takes care of our equity needs for the next couple of years. That's all that we have in the way of prepared comments.
So Mallory, we'll now turn the call back over to you for questions.
We will now open the call up for questions. [Operator Instructions] We will take our first question from Rich Anderson from SMBC. Your line is open.
So obviously, because of that saying, unbelievable performance to this point. What concerns you though? I mean to me, this economy and this setup with wage growth and everything happening in a positive direction on top of the supply chain issues suggest at least a risk of -- if there is a new Fed Chairman name that we could see him or her showing might to combat what's going on and perhaps increase interest rates in the short end. I'm curious if you're worried about that. We got a GDP print for the third quarter of just 2%. Do you see these as the main kind of factors in terms of the risks going forward, because obviously, this type of growth can't happen forever?
Well, Rich, yes, I mean I think you're certainly hitting on some of the bigger variables that could change that would change the dynamic that we're operating within. I do think that we believe that if we do find ourselves in a rising rate environment, that first, this business that we're in, the apartment business offers, I think, some degree of hedge against rising pricing and rising cost in general as we have the ability to sort of reprice our service and our product pretty quickly.
Al and Andrew have done a terrific job of the balance sheet. We've got the -- all the metrics in a very, very strong position and I think, in a position to withstand pressures that we may see a various sorts in the capital markets. So I think that -- and then I think some of the supply chain issues that we've been referencing will continue to be with us for some time. Eventually, that get fixed, but I think it's going to be a while happening probably a couple of years or so.
And that may -- it will create some issues for us. But I think it will also potentially cause some delays in deliveries of some of the competing supply that may be coming into the market. So there's -- it's hard to sort of underwrite things right now. There's -- and obviously, there's just a whole lot of noise coming out of Washington, D.C. these days and discussions surrounding changes in tax policies and what degree that may or may not affect the economy and capital and how capital chooses to allocate and invest.
So I think there are a lot of worry beads out there in that regard. And from our perspective, we've long believed that the right thing for us to do is just simply orient our capital towards markets where we believe the demand for what we do is likely to be the most stable and the strongest over a full year over a full cycle. You've over the years have heard that -- me oftentimes make reference to the notion that we're trying to be the best full cycle performer we can be. And I think it starts, frankly, with protecting the downside in protecting against risk.
And for that reason, that's why we focus the way we do on the Sunbelt and have for 27 years. And then it's also, frankly, why we choose to allocate capital the way we do across the region with a real bend towards both a healthy combination of larger markets as well as secondary markets and with an affordable price point, we think it all just combines to create a higher degree of appeal for our product and thereby sort of sort of drive more stability and the ability to weather down cycles better.
I'm excited about the opportunities that are coming in terms of the emerging recovery cycle, and we've got some exciting things happening with development. We've got ample capacity and strengthen the balance sheet to cover risks surrounding that. We've got some pretty exciting things we're doing with redevelopment, which are going to drive revenue growth opportunities off our existing asset base. And then we've got some exciting things we're doing with technology then I think it could continue to create performance advantages for us in the markets where we do business. So, I feel like we're probably as well positioned as we could be for whatever the future holds. And time will tell.
That's great, Eric. And just a quick one maybe for Tom. With everything going up in price, including apartment rents, have you seen any indication that people are starting to at least consider doubling up to save some money? Has there been any more of that happening in your portfolio to this point?
No, Rich. It's -- the sort of popularity has stayed sort of the same with 1s and 2s being most popular and the efficiency is still the least, only 4% exposure to those in their mid-teens on rent growth, and they're above 95% occupied. So, we're there. But I mean, we they really -- we see people staying put.
Our renewal conversations though at higher rates than they've ever been or easier because everybody sees the noise in the market and the price of single-family homes and those kind of things, so there has not been a retrenchment. And then on -- as far as affordability goes, we continue to stay in the same area where we've been in that 21%, 22% range. So, our sense is salaries are adjusting and folks are continuing as is.
We'll go to now Brad Heffern with RBC Capital Markets. Your line is open.
Just based on the October stats that you gave, it doesn't really seem like there was any seasonality hitting those numbers yet. So then you talked about that 14% averaging out to more like 10% over the whole fourth quarter. So are you seeing preliminary signs of seasonality. Am I interpreting that correctly?
I think -- Brad, this is Al. I'll take that in those comments as my comments. I think what we have put into our expectations is continued strong trends. I mean October was a little ahead of the quarter, as you mentioned. And so we're seeing that in October, maybe into November, but we do believe there's going to be some seasonal, call it, holiday moderation even as we get into the last month of the quarter we put that in the forecast.
And so that kind of brings us to that 10% average. But I'll say this, but also -- the fourth quarter is the lowest number of leases that we do for any other quarter. And so, even if it's a little higher, a little bit lower, it really won't have that big of an impact on that performance. And so we feel like that was the right range to put in.
Okay. Got it. And then I appreciate the comment just now on rent income that it hasn't really moved around that much. Can you just talk about, I guess, what the underlying driver for that is? It just seems surprising if you have new lease up 20% and some of these blended numbers up 15%, like it doesn't seem like the underlying wages would have kept pace with that.
Yes. And Tim has some more detailed data on this. But roughly, from '19 to '20, it's moved probably 150, 200 basis points, but it has not moved material, and it's still incredibly affordable. So, it is a shift or what we're seeing is the people coming in the front door are more qualified. So it may not be the rate. It may not be salaries that are coming up, but the people that we are attracting are easily able to pay for the rent.
I'll add one comment to that. I mean if we go back to the Q3 of '19, two years ago, income for our residents has gone up about 17%. So while rents have increased quite a bit, our incomes have as well. We're not seeing a huge difference in terms of the type of resident where they work, similar sector, a lot of professional services, a lot of financial, a lot of health care. But we are seeing a little more single, slightly younger actually we moved from, call it, 75% single to about 82% single. But overall, incomes are generally keeping pace with great growth.
We will take our next question from Nick Joseph from Citi. Your line is open.
Maybe just following up on the seasonality. What's the loss to lease for the total portfolio today?
Nick, this is Tim. I'll answer that. We look at it a couple of different ways. But if you take all of those leases that went into effect in September, so new leases and renewals, and compare that to our September ERU or all in-place leases in September, it's about 11% or so, if you look at it that way. And obviously, that changes daily. If you have the same question in December, probably a little bit different answer.
The other thing I'll add, if you -- the way we think about it is how is that earned in or baked in to play into 2022. So if you look at our 10% blended lease or release guidance that we gave for the full year 2021, with most leases being on average, 12 months or so, we would expect about half of that to carry into next year. So earned in or baked in rate growth of about 5% right now heading into '22.
That's very helpful. And then you made a comment about the supply chain disruptions and the impact. How does that impact your market supply expectations for 2022?
Well, it's kind of hard to give you any real specifics on that, Nick, but I would generally tell you that as this supply chain issue continues to prolong in terms of an impact, I've got to believe that it's going to create some construction delays for some of the projects underway.
I mean, we just we were anxious about delivering some heart plan siding at one of our projects in Austin that we currently have under construction, and we were really reaching a deadline in the last two or three weeks where we were going to have to make a decision to either hold out and wait and create a delay or make a change to a different type of siding just because we couldn't get the order in.
And at the last minute, it did come in thankfully. And so everything is still on schedule there. But I -- we're hearing more and more discussion about material delays and challenges. And of course, it's been that way for some time over the course of the past year with appliances and other things, but we're hearing it more broad spread and more -- including more items than ever.
And I just -- I think that as we get into next year, if it continues at the trends that we're currently seeing, I got to believe that supply coming into the markets next year is going to be a little bit below current expectations.
Our next question will be from Chandni Luthra from Goldman Sachs. Your line is open.
Thank you. Good morning. This is Chandni Luthra from Goldman Sachs. And congratulations on a really strong quarter. Could you perhaps talk about -- you said that you think that given your balance sheet you could get aggressive on development. Could you perhaps give us some color on where do you think development can go for you in this part of the cycle as we think about, say, as a percentage of enterprise value?
Well, this is Eric. And one thing I will say, we do not intend to -- I wouldn't use the word aggressive. We intend to be very not -- I mean, we will see some growth take place with our development pipeline, currently, including our lease-up, we're sitting on about $700 million of total funding.
We funded a good portion of that at this point. And as Brad alluded to, we've got several projects that are getting teed up that we would likely pull the trigger on in 2022. I wouldn't be surprised to see the overall aggregate, if you will, amount of development to get to $1 billion, maybe a little bit over $1 billion.
But recognize that the actual funding obligation in a given calendar year for that kind of pipeline is going to be approaching $400 million or something of that nature is something that we're very, very comfortable in dealing with. But in terms of enterprise value, if we get to $1 billion on a $28 billion or so sort of enterprise value balance sheet, we think that, that's still very comfortable and something that we're very comfortable executing on.
Got it. That's great color. And then you briefly talked about sort of cap rates seeing further downward pressure earlier in the call. I mean, can you give a little -- can you throw a little bit more light there? What are you seeing? How much compression are we talking about? And what's that doing to your yield expectations?
Yes, this is Brad. I can give you a little bit of color to that. If we go back to, call it, first quarter of this year, cap rates on new deals in the market that we were underwriting and looking at, cap rates were about 4%.
Second quarter, they were at, call it, 3.75%. This quarter, that's down to about 3.25%. And these are really trailing three-month cap rates. So these are trailing cap rates that we're looking at. So you can see in the last quarter, we've seen probably a 50 basis points or so further compression of cap rates versus what we saw in the second quarter.
So we continue to see a significant amount of capital looking in our markets, looking for to deploy for reasons I mentioned in my comments. So, we don't see any reason on the horizon right now that that is going to stop. In fact, we are hearing more and more stories from our brokers that we're talking to that cap rates are in the mid- to upper twos in some of the markets, depending on what the growth looks like.
So again, as I mentioned last quarter, I think from here, it feels like cap rates probably come down a little bit more. But we have certainly seen, as we get later in the year and as often is the case, we have seen bid sheets lighten up a little bit.
Some of that is because we've had a historical amount of volume this year. So folks maybe have met their allocation or maybe there's just a little bit of deal fatigue as we get later in the year. But Nevertheless, the pricing that the winning bidder is willing to pay is -- continues to be aggressive driving those cap rates down.
We'll take our next question from Austin Wurschmidt from KeyBanc. Your line is open.
So Al, you mentioned that the 10% blended lease pricing in 4Q was baked into the guidance despite kind of where you're tracking at this point through October. I'm curious, did you assume any additional moderation in occupancy? Or does it -- do you expect to kind of hold within that high 95% range through the balance of the year?
We definitely put our guidance -- you've seen our update Austin. We expect to average for the year about 96%. So down a little bit from where we have been. But as Tom mentioned, October occupancy was down just a little bit. Nothing -- it's still in the high 95s. We expect something in the high 95%, something like that.
But I think as we mentioned, the pricing growth that's the average for the whole quarter. Taking into account the last part of the quarter, which may be some seasonality, even call it, like we said, even holiday traffic really slows down during that period. But as we mentioned, it really shouldn't have that big impact from the quarter, not as much as we would in other quarters because there's just very few leases that are signed.
Understood. That's helpful. And then just switching over to development. A couple of questions. Eric, you mentioned the $1 billion, you've talked about it previously. I mean do you think that you can scale up to that level, to $1 billion or a little bit north of $1 billion, by next year?
And then secondly, you guys have talked about the projects and lease-up being a drag this year, but even less of a drag next year, a drag still nonetheless, but with the rent growth that your markets have achieved relative to what you underwrote, could that now be a tailwind at this point into next year?
Well, in reference to your first question, yes, we're very comfortable with our ability to execute with a development operation that gets the pipeline to $1 billion, a little over $1 billion and recognize that we're doing it in two different ways. We've got an in-house platform where we've got in-house development and in-house construction oversight.
Now we do not actually act as a general contractor ourselves. We always contract that with third-party general contractors. So we're not actually building it ourselves, but we are overseeing the construction. And then in addition to the in-house execution that we've got what we refer to as a pre-purchase program, we're essentially joint venturing with third-party developers, and they really do the construction.
And a lot of the development work and we just oversee what they're doing. So yes, I mean, with the staffing that we have today, we feel very confident in our ability to execute at that kind of volume given the ways that we're doing that. And then -- I'm sorry, the second part of your question was what?
It was just on sort of the earnings contribution from the [Multiple Speakers]. Earlier in the year, you talked about it being a pretty significant drag this year and more modest drag next year, but still a drag. And I was just curious with the rent growth that your markets have achieved relative to what I presume you underwrote was much more conservative. I'm wondering if that's now a tailwind at this point.
Austin, this is Tim. I mean, I think the key there is we've got we have three deals, I think, in that property pipeline that are -- that will move sort of -- that will complete here in the fourth quarter. And so still, even though we're certainly getting rents as good, if not better, than we had originally pro forma. There's still going to be for the bulk of next year, pretty low occupancy, you take some time to lease up. I think there'll still be a drag. But I do think we'll get to sort of that breakeven cost of capital yield a little bit quicker. So all in all, not as much of a drag as it would have been, but still be somewhat of a drag this year.
We will take our next question from Alexander Goldfarb from Piper Sandler. Your line is open.
First -- two questions. First, was -- as you guys plan 2022, and obviously, you're not giving guidance now, but you had 8% blended spreads in the second quarter, 15% now. Obviously, on the sell side, we're all imagining where our numbers could go based on these trends. But internally, as you guys sit there and underwrite next year, how do you reasonably underwrite next year, given that historically, you're probably looking at 3%, 4%, maybe 5% rent growth, whereas now your teams are -- I mean presumably, you guys could be 10% rent growth for next year with these type of numbers and a loss to lease. So how do you comfortably underwrite next year without us saying, hey, you're sandbagging, or you guys saying, hey, we left our targets too low and our field team is going to clean up?
Well, we do it really, really thoughtfully and carefully. I'll say that. I mean we're in the middle of, frankly, of doing that right now. For us, it really starts with kind of a bottom-up approach, and we have a very robust budgeting process that we go through at a property-specific level. We look at all the supply dynamics.
We think about the baked-in trends that we have. And we -- and then at a top level, we think about job growth, we think about sort of the variables that drive demand, all of which we think are going to continue to be very positive into next year. And then in addition to that, we also have the variables surrounding what we're doing with both new technologies and various things that we think are going to create some upside as well as what we're doing with both redevelopment and repositioning efforts. So there's a lot of variables that go into it, and we underwrite them each of those in very specific ways in order to build up to what we what we think is the right expectation to establish.
So I think that, as Tim alluded to, I mean, we're going to obviously be carrying in some great baked in performance stronger than I've I can remember it ever being. And I think that we'll see where we get to. It's -- I'm not really going to be able to give you a specific answer, Alex, other than just to say we try to go at it in a very detailed fashion. And I think when we wrap up our process, which will be done leading up to a Board meeting we have in December. We'll -- it will be arrived at in a pretty thoughtful manner, I can assure you that.
Right. But it would seem like something upper single digits or 10%-ish for rent growth next year is not unreasonable. Would that be correct, Eric?
I mean it's -- with the baked in that we're looking at, coupled with some of the redevelopment and some of the market fundamentals, just assuming those continue to stay as strong as they are, I think what you're saying is not unreasonable. But we'll have more to say on that later.
Okay. The second question is on cap rates. You -- obviously, we all know where cap rates have gone. But as far as the total IRR, have IRRs changed so that -- people are paying low 3s, you have 15% rent growth, et cetera. So have IRRs held firm? Or have you seen IRRs also compressing because the cap rate compression more than offsets any rent growth that people are baking in?
Well, this is Brad. I think it really depends on what your long-term rent growth outlook is certainly putting in one year of 15%, 20% rent growth helps. But what does that look like in years 2 through 10, I think that's really what's going to drive whether your IRRs are coming down or staying flat. I'd say, generally speaking, IRRs are coming down.
But to what degree is going to depend on to what degree you believe this outsized rent growth is going to continue, certainly for a couple of years. But outside of that, you've got folks that are dialing in substantial rehab components on assets to help drive those rates up. So I'd say it just depends, but my general comment would be that IRRs are down to some degree.
We'll take our next question from Amanda Sweitzer from Baird. Your line is open.
Following up on that conversation on returns I may have misheard you in the prepared remarks, but it does sound like your tone has changed a bit on pursuing stabilized acquisitions. And if that's the case, what is giving you greater comfort today? Is it mainly being driven by that kind of continued improvement in your cost of capital?
Amanda, it's Eric. I think that -- I mean, obviously, the cost of capital factors into it in a big way. But I think that as we just feel like we're getting later into the cycle, supply and starts are -- have picked up a bit this year, and we'll get into more deliveries potentially next year. coupled with probably some growing levels of distress here and there, surrounding supply deliveries and supply chain challenges that we've been hitting on or talking about.
I just think that we are getting more optimistic that we're going to see some struggling lease-up situations out there. And we really believe that, that is where we have the best opportunity to execute on an acquisition of a stabilized asset at a price point that we're comfortable executing with. And so, I just think the conditions are evolving to a point that you may see more distress with some of the stabilized assets, particularly lease-up assets, and we're optimistic that, that may yield an opportunity or two this next year.
Amanda, I'll add one thing to that. As we -- we're getting to a point, we are seeing select instances where there is some aspect of a transaction that appeals to a seller other than the highest price, whether it be a timing, a year-end close or something of that nature. And as Eric said, as we get into situations where some supply chains causes some delays, we are seeing folks using more pref equity, mezzanine equity, things of that nature. So their capital stack gets a little bit more expensive as those delays occur, which could open up some opportunities for us to take advantage of an opportunity here or there.
Okay. That makes sense. And then you also mentioned you're excited about your kind of next wave of tech initiatives. Can you talk about what those initiatives are after the Smart Home implementation is complete?
Amanda, I'll give you a kind of a quick update on what's going on. This year, we expanded our call center solution. We deployed lead nurturing software which is really just an automated prospect engagement tech that interacts with our prospects earlier and sort of extends the sales process. We upgraded our virtual touring, we launched mobile maintenance and mobile inspections. Sort of the next tools coming are improved self-touring, improved multi-location sales support to simplify online leasing this year, we were able to reduce 30 positions.
Next year, we'd expect a headcount reduction, and we're doing this on natural turns. There's not a headcount reduction cost with this of about another [50]. But in short, technology is just allowing us to shape and refine and change the resident journey so that every step of it is easier for the resident, which helps us capture them and help revenues and it's more efficient on the expense side as well.
We will take our next question from Rob Stevenson from Janney. Your line is open.
You guys give guidance one year at a time, but presumably have some internal numbers run out several years at a time. Looks like given your guidance and what you did last year, you're going to average mid- to high 3% same-store revenue growth over the 2020, '21 period. When you're sitting back two years ago, Halloween 2019 before COVID, is this about where you guys expected to be in terms of portfolio rents and combined same-store growth over the two-year period?
Or is there something here that some markets that have been disappointing, where you thought that you'd be higher than this, maybe a little lower than this? How would you sort of characterize that versus your own internal sort of budgeting over the 2021 period?
Well, that's an interesting question, Rob. I mean we certainly, in October 2019, did not foresee what happened over the last couple of years. I would tell you that, yes, I think, broadly speaking, when you think about a long-term sort of top line performance for our asset class. We would put it at -- call it, 3.5%, plus or minus, over a long period of time.
And I think in a highly competitive business like ours, where pricing is part of the competition tool set. I just think that, that's a pretty reasonable assumption to make. And then our challenge as a management team is then to think about how do we take volatility out of that performance stream I think that, particularly as a REIT paying hopefully a steady growing dividend, it's really important to think about that.
And that's why we have the strategy that we do in an effort to try to remove some of the volatility, but yet still be in a position to drive that kind of top line growth. Now we do believe that over time, also with platform capabilities that we should deliver results -- top line results that would be if you will, superior to normal market trends, both as a combination of just balance sheet strength we have, the technology platform that continues to build out and add capabilities, a very robust revenue management system.
And then the things that we're doing with repositioning and redevelopment. So to say that over the last two years, at the end of the full two-year cycle, we achieved revenue growth that was kind of in line with where we thought we'd be in October 2019. That's probably not too far off. It's a little more volatile than we would have liked, but we got through it just fine.
And any markets, based on that that have sort of disappointed, if I told you where you'd be operationally back in October 2019? Presumably supply markets, oversupplied markets were weaker, there were some issues like the DCs or the Houston, et cetera, but any markets that sort of stick out to you over the combined two-year period that are still either abnormally strong relative to what you would have thought or weaker than where you would have thought?
I mean, the markets that have just been incredibly strong for us and continue to be are -- particularly Phoenix and Tampa, I would point to. Orlando had a dip there that we never would have expected in October of 2019. Orlando is a market that dipped than we would have expected, and that was a lot of impact surrounding COVID and the shutdown of the entertainment and theme park businesses in that market.
And Houston has been a bit of a laggard as well, more so than we would have expected. But I think that, broadly speaking, the portfolio did what we hoped it would do. And then some of our or secondary markets, markets like Greenville and Charleston and Savannah, Nashville, Jacksonville have continued to produce the kind of the more steady results that we count on during times of volatility. And Atlanta has been -- it was a little weaker earlier last year, but it's come back really strong. So I wouldn't point to anything really surprising other than just those few I mentioned there.
Okay. And then lastly for me. Al, when you take a look at property taxes today, I mean, any of your markets where you've basically got a bull on your back given the increase in values, the trades in the market, rents are going, et cetera? Is there any markets where you're really seeing material upward pressure even despite the material upward pressure over, call it, the last almost decade?
I think I would say on that, Rob, is a combination of growing top line and great revenue growth and declining cap rates, as Brad talks about, has put pressure almost everywhere in our portfolio. There are areas that are more aggressive that we do expect more pressure. We talked often about particularly Texas and Florida. Those two are the most aggressive programs, and they're both combined a little over 50% of our tax liability.
So we expect that to be the biggest area in 2022 to really a challenge. Now we'll fight everything as we do. And we'll see what happens. There's some factors that help us a bit in 2022, and then we'll have some areas that aren't assessing. I think Tennessee, North Carolina, they're not reassessing this year, parts of our Georgia portfolio because we've appealed and we've completed those, and there's kind of a lot for one year or two when you've completed appeals.
So there some areas that are not going to see assessments that's going to be helpful, but Texas and Florida are going to really challenge us. And so we're preparing for that. And with the growing top line and driving cap rates you expect that we've talked about mid- to upper single-digit kind of expectations in some of those markets. And so that's what -- we'll have more to say about that as we end the year and put out guidance and it's certainly as we move into next year, but that's where the pressure should come from.
We will take our next question from Anthony Powell from Barclays. Your line is open.
Just a question on the disposition to Savanna and Charlotte, just maybe cap rates there and I guess, why selling those properties? And what's your disposition to guess outlook for the next couple of years?
Yes. This is Brad. First, I'll just start with why those properties. But we go through a process every year where we -- there are obviously multiple departments here that we sit down with and kind of go through what we want to look to sell potentially for next year. That involves looking at properties that have cash flow and CapEx needs that are above what we're looking for in our overall portfolio has generally trend to older properties.
We've got some where maybe there's some regulatory issues that we're looking at that we evaluate. We've got properties that are in markets where the rent growth is not really what we want it to be. So we go through that process every year really to identify the opportunities for us to sell for the following year.
The other side of that is we're looking at what can we handle in terms of dilution and then what our cash flow needs for the year, our funding needs. So all of that kind of goes into our process, and we're in the process of doing that now for next year. So we'll certainly have more to say about that with our release for next year. But in terms of what we're selling this year, the two in Savannah, the one in Charlotte, we raised our guidance in terms of that. Pricing was quite a bit higher than what we expected, frankly.
The way we look at our pricing on these assets is we're looking at a yield our trailing 12-month NOI yield and what we're getting on the proceeds there. And from that basis, we're getting about a 4.2% yield on those. And just for cap rate comparison purposes, just so you can compare across markets that's about a, call it, a 3.25 to 3.5 market cap rate. So very good pricing that we're able to achieve. And just as a reminder, those are 31-year-old assets that we're selling in those markets. And so very, very strong pricing that we're seeing.
We will take our next question from Alex Kalmus from Zelman & Associates. Your line is open.
I wanted to double click on the struggling lease acquisition targets you mentioned earlier. Given just the robust revenue growth you're getting, it's hard to imagine that lease-ups would be struggling. I'm curious what's driving that, in your opinion? Is it the cost side? Is it unknowledgeable outsiders marketing in the market? What's driving the opportunity?
Well, just to confirm, I mean, our lease-ups are actually not struggling. Our lease-ups are running well ahead of expectations in terms of our pro forma and both in the leasing velocity and rents that we're getting what I was making reference to was out in the market, if you will, as we get later into the cycle, I think that there are some other development projects that are out there that may start to run into some challenges surrounding supply chain delivery issues late deliveries.
And I was suggesting that some of that may come into play with other third-party developers that are out there that may then drive some purchasing opportunities for us as we get into next year. But our lease-ups are actually doing very well and better than we expected. So just -- that's what I was referencing. We're not talking about struggling lease. So it's not ours. I'm talking about some others as we get it later into next year.
Right. Right. Yes. I was referring to the potential opportunity set for acquiring those, not your own but thanks for clarifying. And just looking at the where the demand is coming from? You mentioned the out-of-state relocations are doing well and moving out to single families down. What about the shift between apartment renters within the market? Are you noticing a trend where they may be within the apartment renters that going a little more suburban or any other trends there?
No. The trend has continued on urban versus suburban back in 2021 -- or in 2020 it sort of peaked there. The pricing gap there was 260 basis points as suburban, I would say, it's safe to say was favored and urban was affected a little bit more by supply, that's narrowed to 60 basis points, and both are excellent now. So we're seeing -- and we saw that with AB assets. The delta has just closed and the strength is across the board now. So both AB and urban suburban assets are within the norm of our blended rent growth for the quarter for 15-plus percent growth. So that delta has closed.
We will take our next question from John Pawlowski from Green Street. Your line is open.
Brad, just one clarifying question on the cap rates you referenced for Charlotte and Savannah, [4.2] on trailing 12 months, but the -- was it the -- or was it the buyer kind of market cap rate that you're referring to in the low threes once you adjust for tax reinsurance. Is that accurate?
Yes, that's correct.
Okay. And then, Al, you mentioned growing personnel pressure you expect over the coming years. Could you just give us a bit more detail? Are we talking closer to 5% or 15%? Just order of magnitude, what you expect in terms of personnel cost pressures?
I mean I would refer to the three primary areas that I've talked about, John. And all of them, the three -- probably the largest expense categories we have or close to it. I'd say I would look at personnel, whereas repair maintenance and taxes, all of those combined, there are probably 2/3 of our expenses mentioned those.
And on personnel, obviously, and I'll let Tom give the details, it's just challenging today to keep our workforce to keep all the positions we need, and it's very competitive, and you may have more details on exactly what that will be next year.
We haven't really -- we're going through the details now to look at property by property, market by market, the challenges we're seeing. So -- We'll have more to say about that when we put our fourth quarter out. But in all of those categories, you're looking at, call it, a mid-single-digit kind of number likely for 2022, somewhere plus or minus something for all three of those.
Yes. John, this is Eric. I mean the thing I would tell you is that what we're obviously working to do to combat some of the pressures on labor costs with -- among our own workforce is we are continuing to introduce more technologies that are, frankly, allowing us the opportunity to eliminate positions we eliminated leasing positions this year, we'll probably be looking at eliminating close to 50 next year through attrition.
And I think that there are various things that we're doing like that in an effort to sort of react to not only opportunity surrounding new technology that's coming into becoming available. But in an effort to sort of push back some of the pressures surrounding what's happening in the labor markets, broadly speaking, where we probably to date experienced the most pressure from a labor cost perspective is on contract labor we are forced to go out and hire third-party vendors or third-party contractors to come in and do certain activities that's where we've seen more of the pressure from a labor perspective.
But we believe that through various programs that we have within our company from an HR perspective, coupled with the efforts that we've got underway with new technologies and the ability to get more efficient with our headcount levels that we'll probably keep the labor cost itself. I'm going to put it in probably a 4% to 5% range would be, I would think, comfortable to be able to deliver on that kind of performance.
We will take our next question from John Kim from BMO Capital Markets. Your line is open.
Historically, you've been able to push renewals either than new lease rates, just given the cost and inconvenience for residents to move around. When do you think that environment returns?
John, right now, we're -- as you mentioned, we're probably $300 behind on renewals of where we would historically be. So that opportunity is still to be captured. And I would -- as long -- right now, new lease rates are moving at such a pace -- it is -- we are behind the mark on renewals. It is honestly pretty difficult to predict when that gap closes, but we're encouraged by the trajectory.
And behind the mark, meaning that the new lease prices for new move-in customers is $300 more than what we're charging on a renewal lease. And frankly, as long as the demand level stays as high as it is, and we get the tailwinds from the migration trends and what's happening with single-family housing and so on and so forth.
We think that, that probably fuels ability to continue to command a higher price, if you will, from a new move-in customer on a new lease. So when that changes and we go back to a scenario where renewal pricing is exceeding on an absolute dollar amount exceeding what we're charging new customers, hard to forecast, but we don't see it happening anytime in the next year or so.
And on the rent growth, I don't know if you still look at your portfolio as cost versus legacy MAA, but is there any difference between rent growth in Class A and Class B, just given supply in the market and affordability concerns?
There was, John. I mean on AB assets back in the fourth quarter of 2020, the gap was 310 basis points, and it's closed to about 70 basis points now with both very strong at 14.7% and 15.4%. So it is -- it's really more a market differentiation on performance than an asset class or urban suburban at this point. It has been very strong consistently.
Class A getting the higher rent growth or Class B?
Class A is 14.7%, Class B is 15.4%.
It's really -- where you see pressure on Class A is not so much a market function. It's more a supply issue. Whenever you see new supply coming into the market, more often than not, it is going to have a price point associated with the new construction in a location, frankly, oftentimes, that it's going to be a more direct competitor to our existing A-class product, A class portfolio. So to some degree, the performance delta is more a function of supply coming to the market and which part of our portfolio -- a price point of our portfolio is more likely to impact.
And are the developers of these new projects, are they offering concessions?
It varies. In some locations, they do and some they don't. It's hard to give you a widespread. I would tell you that the presence of concessions in the market generally does not exist today versus a year ago. And so broadly, concessions are -- you don't really see that much of the market anywhere at this point.
We will take our next question from Nick Yulico from Scotia Bank. Your line is open.
Al, I just wanted to go back to the expense topic for next year. I mean, it sounds like should we think about expense growth starting at 5% as a reasonable number higher than this year overall?
Yes. And that was really -- that's a good question, Nick. That's really kind of the point I was trying to get across earlier is that those three -- when you take those three largest areas we talked about, that's now we're 2/3 of the expenses and you've got that mid-single digits kind of number, that's certainly reasonable. And we'll have more to say about that as we move -- as we give our guidance, but that is going to be -- those three are going to be big drivers for next year and the pressure that we see on expenses.
Okay. And then my second question is just on rental pricing and how we should think about this because in the third quarter, right, you had -- blended pricing was up 16% -- I'm sorry, that was October 16%. I think it was 15% for the third quarter. When we look at some of the industry data, a year ago, rents in your markets were kind of not up -- they weren't really impacted here.
They were sort of slightly down year-over-year or maybe flattish -- and so it really feels like what's happening here in this quarter right now is you have this comparison period where the numbers are very high because a year ago, there was no rent growth. And so you're almost getting like two years of rent growth in one quarter or in October right now.
And so as we just kind of think about where rents could be trending going forward, realizing there's -- eventually hit some comp issues next year in the second quarter, third quarter because you had very strong quarters this year for markets.
But really the way -- is it the right way for us to think about blended pricing right now is something like half of what the number is, so it's maybe really 7% to 8% on an annual basis, not -- because it's not -- it's very hard to see how it continues at 15%. But is there a reasonable thing to think that, really, on an annual basis, it's sort of half of that right now?
Well, Nick, this is Eric. It's kind of hard to answer that specifically. The thing -- let me break it down this way and explain to you the renewal pricing performance is driven by a different set of factors.
Renewal pricing as we've alluded to earlier in one of the earlier questions, it has a lot more influence rounding the ability for us to be a little bit more aggressive there because people really just want to avoid the hassle of moving obviously, supply-demand dynamics factor into what we can do on renewal pricing to some degree as well.
But also, are they happy, have we done a good job of keeping them serviced and responsive to their needs and so on and so forth. So I think that what we find is that renewal pricing which is, call it, roughly half or so of the blended performance is it tends to be a lot more stable and tends to be a lot steadier, if you will, over the course of the year.
And I would tell you that back to what Tom was mentioning a moment ago, when you look at the absolute rent amount that is being charged for new moving customers versus the absolute rent amount being charged for renewal customers there is room to continue to push pretty hard on the renewal pricing without eclipsing or going above the new lease pricing.
So we think that the outlook and the trajectory for renewal pricing is likely to remain fairly stable and growing and positive more or less consistent with what we're seeing now and don't really see why that would materially weaken.
New lease pricing for new customers coming in tends to be a much more volatile number. And not only do you have market dynamics that come into play there, but you've also got seasonal factors that work into the equation a little bit. And so I think that as we think about what's driving rent growth this year and particularly as it relates to new lease pricing, new customers moving in.
There is some of the COVID unbundling, if you will, that's going on that, as you point out, will start to taper off, if you will, at some point. But the other variables surrounding job growth, migration trends, the inability for people to go out and buy homes at pricing that has gotten above what they can afford and so forth. Those variables are likely to continue for some time as we see.
And certainly, overall migration trends, the demand for apartment housing across our region has continued to be very robust. So I think that new lease pricing is probably inflated a little bit right now as a consequence of sort of coming out of COVID.
And so to some degree, if you want to think about moderation taking place as we get sort of past the code at influence altogether, it probably does show up a little bit more so in new lease pricing and to put a number to that right now is kind of hard because we don't know which of those variables is necessarily creating the most impact. I would tell you, probably as job growth and migration trends and what's happening to single-family housing more so than any sort of COVID unbundling effect that's going on.
We have no further questions. I will return the call over to MAA for closing remarks.
No closing remarks. We appreciate everyone joining us and, obviously, follow up with any questions you may have. Thank you.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.