Good morning, ladies and gentlemen, and welcome to the MAA Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, July 27, 2023. 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, Aaron, 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, 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 an audio recording of this call will also be available on our website later today. After some brief prepared comments, the management team will be available to answer questions. I will now turn the call over to Eric.

Thanks, Andrew, and good morning, everyone. Leasing conditions across the MAA portfolio continued to reflect our steady employment markets, strong positive migration trends and continued low resident turnover. As a result, we are seeing good demand for apartment housing and are absorbing the new supply deliveries while supporting solid rent growth. In line with normal seasonal patterns, new lease pricing improved in the second quarter and the spread between new lease pricing and renewal pricing narrowed. Rents for new move-in residents jumped 100 basis points higher on a sequential basis as compared to the preceding first quarter. Renewal lease pricing in the second quarter remained strong, growing by 6.8%, driving overall blended pricing performance in Q2 to 3.8%, which is ahead of the original projections we had for the year. Occupancy remains steady with average physical occupancy in the second quarter at 95.5%, which is consistent with the preceding first quarter this despite a higher number of lease expirations during the second quarter. While we are working through a higher level of new supply deliveries across our markets for the next few quarters, with the demand trends holding up as they are, we expect to continue to drive top line results that will exceed our long-term historical averages as has been the case in prior cycles of higher supply, we see the demand supply dynamic holding up slightly better in our mid-tier markets and this component of our strategy continues to bring support to overall portfolio performance during this part of the cycle. As described in our first quarter report, we do expect to see moderation in year-over-year growth in operating expenses as inflation pressures ease a bit and some of the efficiencies we expect to capture from new tech initiatives increasingly make an impact. As Al will cover in his comments, we do now also expect to see some relief on property taxes coming out of Texas, which further supports our ability to reduce our outlook for expense growth over the back half of the year. The transaction market remains quiet. We continue to underwrite a few deals, but the limited number of properties coming to market, combined with strong investor interest continues to support low cap rates and strong pricing. We continue to expect that more compelling opportunities will emerge later this year and into 2024 and believe it's important to remain patient with our balance sheet capacity. Our new lease-up, new development and redevelopment pipelines will all continue to make solid progress and will provide attractive incremental additional earnings over the next few years. I did want to take a moment and express my deep appreciation to our on-site property teams for all their hard work and great service to our residents during these busy summer months. And with that, I'll now turn the call over to Brad.

Thank you, Eric, and good morning, everyone. As we've seen each quarter over the past year or so, second quarter transaction activity remains muted versus normal levels. Volatility and uncertainty in the debt market continued to cause the majority of sellers to postpone their sales processes, leading to a drop of more sale inventory on the market. For high-quality, well-located properties in our region of the country, there continues to be strong investor demand, causing cap rates to adjust slower than interest rate movements alone would indicate. Having said that, we have seen an average buyer cap rates move up to 4.9% in the second quarter from 4.7% in the first quarter, with most cap rates ranging between 4.75% and 5.25%. We continue to believe we're likely to see more compelling acquisition opportunities later this year and into next. So we remain patient as we wait for the market to continue to adjust. We are actively reviewing a number of acquisition opportunities, but with no potential acquisitions under contract at the moment. We've lowered our acquisition forecast for the year to $200 million at the midpoint. Our acquisition team remains active in the market and now and the team have our balance sheet in great shape and ready to quickly support any transaction opportunity should it materialize. Due to the lower funds needed for expected acquisitions, we've also lowered our disposition forecast for the year to $100 million at the midpoint. Our properties in their initial lease up continue to outperform our original expectations, producing higher NOIs and higher earnings and creating additional long-term value for the company. These properties are navigating the increased supply pressure well and on average, have captured in-place rents 22% above our original expectations. For the 4 properties that are either leasing or we'll start…

Thanks, Brad, and good morning, everyone. Same-store revenue growth for the quarter was essentially in line with our expectations with stable occupancy low resident turnover and better blended rent performance than what we previously projected. Despite increasing supply pressure in some of our markets, blended lease-over-lease pricing of 3.8% comprised of new lease growth of 0.5% and renewal growth of 6.8% was better than our forecasted expectations. While occupancy was slightly below our expected range for the quarter, the resulting higher blended lease growth performance is a favorable trade-off providing a greater future compounding growth effect. As discussed last quarter, we expected new lease pricing to show a typical seasonality that is to accelerate from the first quarter and renewal pricing, which lagged new lease pricing for much of 2022 to moderate some, but still provide the catalyst to strong second quarter pricing performance. As Eric mentioned, this played out as expected with new lease pricing accelerating 100 basis points as compared to the first quarter and renewal pricing remaining strong. Alongside the pricing performance, average daily occupancy remained consistent with the first quarter at 95.5%, contributing to overall same-store revenue growth of 8.1%. The various demand factors we monitor remained strong in the second quarter with 60-day exposure, which represents all current vacant units plus those units would notice to vacate over the next 60 days, largely consistent with prior year at 8.5% versus 8.4% in the second quarter of last year. Furthermore, Quarterly resident turnover was down almost 2% from the prior year. Move-ins from markets outside of our footprint ticked up slightly from Q1 to 13% and rent to income ticked down slightly from Q1 to 22%. The employment market remains relatively strong also, particularly in the Sunbelt markets. While lead volume trailed the record demand scenarios…

Okay. Thank you, Tim, and good morning, everyone. Reported core FFO for the quarter, $2.28 per share was $0.02 per share above the midpoint of our quarterly guidance. The outperformance was primarily driven by favorable interest in overhead costs during the quarter, and a large portion of the overhead cost favorability is timing related with the cost now expected to be incurred in the back half of the year. Overall, same-store operating performance for the quarter was essentially in line with expectations. As Tim mentioned, blended lease pricing continues to outperform original expectations for the year and build stronger-than-expected longer-term revenue but was primarily offset in the second quarter by average occupancy slightly below forecast. Also, as expected, we began to see moderation in same-store operating expense growth during the second quarter with the growth of personnel, repair and maintenance and real estate expenses, tax expenses, excuse me, which combined represents 70% of total operating costs, all reflecting moderation from the prior quarter. We expect moderation for these items to continue through the remainder of the year, particularly for real estate taxes, which we'll discuss more with guidance in just a moment. As mentioned in the release, our annual property and casualty insurance programs renewed on July 1, and with combined premium increase of approximately 20%, which is in line with our prior guidance. During the quarter, we invested a total of $26.3 million of capital through our redevelopment, repositioning and smart reinstallation programs producing strong returns and adding to the quality of our portfolio. We also funded just over $51 million of development costs during the quarter toward the completion of the current $735 million pipeline, leaving $344 million remaining to be funded. As Brad mentioned, we also expect to start several new deals over the next 12 to…

[Operator Instructions] And we will take our first question from Eric Wolfe with Citi.

Apologies if I missed this in your remarks, but could you just tell us the blended rent growth you're expecting sort of for the full year now, that's been revised upward and then what that would be in the back half of the year as well?

Yes, Eric, this is Al. We had started the year, if you remember, with 3% for the full year, but the outperformance we've seen through the first half, that's increased that. So I think for the full year, we didn't put that in our guidance. But if you do the math on it, it's about 3.5% for this year. And that means largely sticking to the 3% for most of the back half, though we started in July, as Tim talked about stronger than that. So you're probably averaging 3.1%, 3.2% for the back half and that projection now.

Got it. Makes sense. And then you mentioned that new lease rates did come up as you expected in the second quarter, as you would expect, seasonally but there's still a pretty wide gap between new lease and renewal rate growth. So I was just trying to understand what your sort of expectation would be for new lease growth in the back half of the year? And then thinking through whether that's actually a good sort of proxy for market rent growth should the 2 kind of be around the same?

Eric, this is Tim. With new lease growth, we did, as you said, we saw it accelerate some as we expected. It didn't accelerate quite as much as what we would see in a normal environment. I do think there's a little bit of supply pressure impact on that. Having said that, I don't really expect it to decelerate as much as it normally might would in Q3. It's typically kind of around this time that you start seeing new lease pricing moderate a little bit as demand starts to moderate some. So I don't expect the volatility, if you will, to be quite as large on the new lease side. On the renewal side, we talked about it from the beginning of the year, there was a sort of unusual scenario last year where for the first, call it, 7, 8 months of 2022, new lease pricing outpaced renewal pricing quite a bit. So we knew we had some opportunity kind of mark-to-market those that were on the renewal rates as the first part of last year. So we've kind of reached a point where we're lapping those and starting to reprice those. That's where you've seen the renewal pricing moderate a little bit, but we still expect it to be quite a bit stronger than new lease rates, which is typical and really just kind of returning to a normal seasonality scenario.

And we will go next to Jamie Feldman with Wells Fargo.

Great. I appreciate your comments on mid-tier markets outperforming the entire portfolio. Can you talk more about A versus B and how those are performing within your market?

Yes. This is Tim. It's -- the Bs are still outperforming a little bit. I would call it kind of a 40 to 50 basis point gap between what -- how we would define As versus Bs, and that's pretty consistent on the new lease side and the renewal side. So I think it's as part of the portfolio structure that we expect those markets that can be more of the B assets perform well and some of the supply or in most markets, the supply coming in, hasn't been quite as impactful on some of the more B assets. They've typically been much higher price, more urban-style assets and at a much higher rent than particularly some of the B assets.

Okay. And then in the press release, you talked about demand kind of maybe even better than your initial expectations and mitigating some of the supply risks. Can you give more color or maybe put some numbers around that? Maybe I don't know if you've looked in that detail, but like what percentage of job growth, do you need to mitigate that supply risk? Just more color on what gives you confidence in making that statement and what you're seeing.

Yes. So there's a few things that we typically look at as a leading indicator of demand. You obviously have job growth at a macro level, which continues to be pretty strong and certainly stronger in a lot of the Sunbelt markets and then more granularly, we look at exposure, lead volume, what we call lead per exposed unit, which is really a combination of those 2 metrics and then also looking at what our renewal accept rates are. So on lead volume and leads for exposed, it's not at the level it was in '22, which was record demand. But as I noted in the comments, you go back to kind of the 2018, 2019 time frame when we saw more normal, if you will, demand scenario, we have -- our lead volume leads per exposed is quite a bit higher than those times. So that's encouraging that our renewal accept rates remained strong and higher to that period as well. We have 60% accept rate for July, 58% for August and 43% for September, which is at or above where we would expect or we would like to see it. And then a couple of other metrics, rent-to-income continues to stay consistent, stay lower, actually dropped a little bit from what it was in Q1, turnover remains low and reasons people moving out to buy house is way down. So all of those various factors, while not quite at the level we've seen with the record performance last year, still healthy and stronger than typical year, if you will.

And Jamie, this is Eric. I'll add to what Tim just said, which covers a lot of reasons why we see the demand staying healthy. The other thing it's just a continued positive migration trends, 13% of the leases that we wrote in Q2 were for people moving into the Sunbelt for the first time. And that compares to 15%, 16% during the peak of COVID. So while it's moderated, it's moderated just a little bit, and it's still well above where it was before COVID had started. So these positive migration trends are still there. Any thought of some kind of reversal after COVID was over. I think we've dispelled that fear at this point. So there's just a multitude of factors that sort of go into it, and we're pleased with where we see demand continuing to hold up.

Okay. That's very helpful color. And then finally for me, your comments about expenses moderating into the back half of the year, certainly encouraging. As you think about '24 and the key line items, do you have a sense like do you think all of them will be down in terms of your expense growth rate?

I think as you talk about, I mean, too early to really get to a refinement '24, but certainly, we would expect some continued moderation, just some of the inflationary pressures begin to weighing. The 3 main areas, obviously, the personal repair, maintenance and taxes. Taxes, I would say, being the biggest, certainly it's going to follow the moderations of the top line. So it's a backward-looking thing. So you would naturally think that as '24 looking back to '23, which is a good year, but a more moderate year than it was in '22 that you should see some moderation there. So probably in those 3 that make up 70% of our expenses, you'll see some moderation at some level.

Any ballpark?

Hard to ballpark at this point. I don't think it would be probably a long-term rate, but somewhere between we are today and that.

And we will move then to Austin Wurschmidt with KeyBanc Capital Markets.

I'm just curious if you're finding that you're having to trade off some of that new growth to drive traffic or sustain occupancy in the 95.5% level. It seemed like July occupancy dipped from we were tracking. And I'm just ongoing kind of think through as sort of seasonal demands lows and supply picks up, does that concern as you move to the latter part of the year and heading into '24?

Also, this is Tim. On the occupancy front, we've kind of -- we've been hanging in that 95.5% range for really all of the first half of the year, which we've been comfortable with, as we mentioned, with pricing being a little bit better than we thought. So we're willing to make that trade-off with the compounding growth we can get from rents. As we moved into July, I can see it moderated a little bit. There is some unique circumstances in Atlanta that we can talk about that's driving that down a little bit, if you kind of pull Atlanta out of that number, we'd be right back to 95.5% on occupancy, which we're comfortable being in that range. So it hasn't it hasn't moved the needle. I don't think I'm a new lease rate a little bit. I mean there is some supply pressure that we've talked about. But outside of that, I don't think there's anything specifically tied to occupancy necessarily.

And Austin, I'll also add a couple of points on that. The thing to keep in mind is we have a pretty extensive sort of redevelopment and some of the new technology initiatives that we're particularly smart home initiative, that continues to fuel the opportunity for positioning the portfolio at a higher rent level, particularly as it compares to some of the new supply coming into the market. One of the benefits of the supply coming to the market, particularly when it's coming into the market on average 20% higher than the rents that we're charging, it creates a more compelling value play for our portfolio to the rental market. And so that's working to give us some momentum on the rent growth that we might otherwise not have both of those things. And then -- the -- so I would just tell you -- and the other thing that I would tell you is we track pretty actively why people leave us. And when you look at move-outs that are occurring because people don't want to pay the rent increase, has ticked down a little bit from where it was last year as a percent of our turnover, but it's still running higher than it has long term. And as Tim says, we're okay with that trade-off for a slightly lower proxy right now because that revenue growth associated with rents is really much more impactful in terms of compounding value over the long term. So we sort of like where we are right now and continue with this sort of trying to manage that tension between pricing and occupancy where it is right now.

Got it. No, that's helpful. It sounds like that occupancy and maybe even some of the frictional vacancy is like redevelopment was picking up a little bit from where you had originally expected. Second question, when you look across some of your larger markets, obviously, new lease growth is modestly positive. But when you kind of look across the large markets where you're feeling some of the supply pressure more acutely, are there any that are notable gain to lease today that you'd kind of highlight that we should be a little bit more focused on moving forward?

Austin, it's Tim. When you say Gain to lease, meaning where there's …

A couple of months are noticeably above market rents. Yes.

Not -- I wouldn't say anything significant. Even -- we do have some negative new lease rates on a couple of those larger markets, but none of them are getting to out about, I mean they're kind of in that negative 1%, 5% range. So it's not a huge, huge variance in what we're seeing overall. So nothing significant that I would point out.

Or those that are at that kind of negative 1%-ish range?

So you've got -- I would point out Austin is, 1 that's been a little softer also in Phoenix, and we've talked about those 2 markets here for a while are kind of the 2 that I would point out that have been our weaker performers and certainly have some supply impact. It's great about the long term, obviously, we have great demand fundamentals, but those have been 2 that probably lead the list in terms of our higher concentration markets.

We will go next to Brad Heffern with RBC Capital Markets.

For some of the markets that are lagging their normal seasonal trends, like you obviously just mentioned Austin and Phoenix but some of the other ones as well. Do you think that that's entirely due to elevated supply? Or are there any other factors that you would call out that might be driving that?

No, I don't think it's primarily supply. I mean, supply is somewhat widespread across several of the larger markets in particular. And then it's nuanced to by market, obviously, and depending on where our portfolio is relative to some others. I mean, Charlotte is a good example. It's getting high level of supply, similar to some of these other markets, but it's performed well, and it's just kind of where our portfolio is positioned versus where the supply is coming in. So generally, I'd say supply, again, going back to the demand side. If you look at job growth across our markets compared to national averages, we're pretty consistently higher than average across all those markets. So there's obviously nuances by market but nothing notable outside of that.

Okay. Got it. And then on the balance sheet, obviously, you've been setting record low leverage numbers every quarter for a while now. What do you think the likelihood is that we'll see these sub-4x numbers stick around for the long term? Or I guess, what are the circumstances where you would potentially take leverage back up to a more normal level?

So Brad, this is Al. And we've talked about for, I think, several quarters now. Certainly, we love the strength of our balance sheet, but our leverage is really below where we want long term at this point. We've been patient to allow opportunities come to us. So in our credit rating at A minus, 4.5 would be something you could be very confident so we're a full turn below that right now. So significant opportunity there, but willing to be patient to allow Brad to find the right investments.

And we do think that as we get later in this year and particularly into 2024, that we are seeing early indications that would suggest that opportunities are going to start to pick up. As Brad alluded to, we have seen cap rates moved just a tad on a sequential basis quarter-to-quarter. And we're talking -- he and his team are talking to another -- a number of merchant builders right now about some opportunities. So we continue to feel confident and comfortable that more opportunity is around the corner.

And we will move next to Michael Goldsmith with UBS.

In response to an earlier question in the Q&A, you talked about new lease not accelerating as much as you expected. Does that mean that new leases have the rent growth has peaked earlier in the season than it had in the past? And then the second part of that question talked about you don't expect it to decelerate as quickly, why is that?

Well, one nuance there. The new lease pricing has done what we expected. It didn't decelerate or it didn't accelerate less than we expected. It accelerated a little bit less than what we've seen in the last couple of years, but in line with, if not slightly better than expectations. And so what we've seen is new lease pricing accelerate, just not quite as much as it may do in a lower supplied environment. So I think at the same time, given all the fundamentals we're seeing and the various metrics we talked about earlier, don't quite expect that new lease rate to drop off quite as much as it might normally for kind of the same reason been accelerated as much. So that's kind of how we see it playing out. But really have been as if not better than expected.

And then as a follow-up, there's a lot of new supply coming in your markets, tenants or potential tenants have a lot of options to choose from. Are you seeing a longer time for tenants to make a decision? Or maybe like between your traffic to visit and the time between that and when they sign our conversion rates being low. What are you seeing in the trends there? What are you seeing in the trends from that perspective?

Not really anything, Michael. It's probably taken a little bit longer for us to get an answer on the renewal side, but ultimately, as I mentioned, our renewal accept rates are better than they were a couple of years ago in a similar environment and kind of where we expect to see them. Our conversion rates are in line with period as well. So nothing notable other than -- I mentioned the leads are down a little bit from what we saw last year, but we would have expected that with the growth we saw last year.

And we will go next to Alex Goldfarb with Piper Sandler.

So just trying to put a bow on the supply. It's obviously been a big topic. If I hear correctly from what you're saying, it sounds like it's really only Phoenix and Austin where it's really an issue. Atlanta has maybe as another market, just given the occupancy dip that you talked about. But otherwise, the balance of your portfolio, it sounds like yes, there's supply, but it's not really competitive with you guys. You feel comfortable with the in-migration, the economic growth, the job growth to be comfortable with your rents. So is that sort of the main takeaway that the supply is really limited to maybe 2 or 3 markets for you guys, and that's it. All the other markets are fine. I just sort of want to encapsulate this.

Yes. I mean also an advantage of the 2 that are the worst. I mean I wouldn't say we only have 2 or 3 that are feeling any supply impacts. I mean I think it is impacting several of our markets at some level. But what we've always talked about is with the demand being there, supply just sort of moderate things. It doesn't put a ditch. It says shocks on the demand side that really send rate growth negative for extended period of time, and we're not seeing that. So I mean I -- like I said, I wouldn't say there's only 2 we're feeling some supply pressure, but those are the most notable. But otherwise, demand is doing a pretty good job of mitigating things.

Okay. And then the second question is your guidance for the second quarter is rather wide. And I'm assuming you guys are pretty conservative route, but [$2.18] on the low side, just low, obviously. So should we expect a decline quarter-to-quarter? Or are there some oddball things that could come up that would drive like I'm just trying to think why would FFO go down? And maybe you'll say, hey, it's a onetime item. There's some sort of tax impact or returns or something like that, that we're going to see.

Alex, this is Al. I think, you see in the second and third quarter often, some things that are below same-store NOI, whether it be overhead, whether it be -- so just some items that are more -- that are not in your operating costs. And so second and third quarter, they tend to be chunky. What we're seeing is some of those costs we talked about that we outperformed in the second quarter on G&A. But that would be timing lag. Some of that's going to come back to us seeing some of that in the third quarter, which expects that a little bit. So nothing unusual. You see that second and third quarter be a little volatile, but the important point is just the projection for the year, continued strength.

And we will take our next question from Nick Yulico with Scotiabank.

Tim, just going back to Atlanta. I know last quarter, you talked about some weather issues affecting occupancy. Was there anything else driving the occupancy being lower there this quarter?

Yes. A couple of things going there. I mean Atlanta is experiencing a decent amount of supply. It's not quite as high as some of our other markets, but relative to what Atlanta typically gets there. There is some supply pressure. But a couple of other things impacting that. You mentioned one of them. We had sort of late first quarter, early second quarter over the course of 2 or 3 months. We had about 100 units come back online in Atlanta, which was a mixture of some units that were down to storm damage and then a fire at one of our properties. And so pulling those back into the portfolio and meaning to lease those up had some impacts. And then secondly, which is hinders us a little bit in the short term, but is positive on the long term is Atlanta and the counties there have started to progress some on evictions and filings and doing court dates and kind of working through that whole process, which has been a real laggard in terms of our markets for working through that. So we actually year-to-date have seen about 140 more [Indiscernible] and skips this time versus the same period last year. So a good thing, as I said, long term, and we are seeing a little bit better payment progress there, but it kind of doubled down on some of the occupancy pressure there. Revenue and pricing has held in okay. It's a little bit below the market, but not are a little bit below the portfolio but not too bad. And overall, we obviously still feel good about it long term, but just running through a little bit of pressure right now.

Okay. And then in terms of -- if we think about new supply and concessions being offered across markets. Can you just give a feel for where concessions are more prevalent, competing product and where you're also offering concessions in the existing assets or in any of the development assets?

Yes. So for our portfolio, concessions are running about -- cash concessions are about 0.5% of rents. It's ticked up a little bit, but not significantly. I mean we do tend to net price with our pricing systems who don't use a ton of concessions. But broadly, at a market level and what we're seeing some of the competitors. I would say you're at a month free is about where we're at in several of the larger markets. And for most, that is more kind of in-town central areas of the markets, you might see a little bit more if there's a lease up in the area, but we're not seeing any more than a month and a half or so in any of our markets. Austin is one where it's a little unique in that we're actually not seeing a lot of concessions kind of in the Central Austin but more in the suburbs where there's quite a bit of supply. That's one where concessions are a little more prevalent in the suburbs versus other markets where it's more urban and fill.

Sorry, I just want to add to that real quick. You asked about our lease-up properties. To Tim's point, we've got 1 in lease-up in Austin. That one, we're offering up to a month free, which is on select units, by the way, not across the board. We've got a couple of hundred units competing supply just in that same submarket. So I'd say that one is probably feeling the most pressure. But I will say that average rents on that property are a couple $300 to $400 higher than what we expected. And then the average concession usage there is significantly below what we expected. Most of our new lease-ups, we expect about a month free, and we've been significantly [indiscernible] that on this asset. And then I would just say, all of our properties that are in lease-up right now, we're below what we generally pro forma, which is a month free, just we're offering that on select units as needed. So it's not broad-based use of concessions that we're seeing right now.

Great. If I could just follow up on the investment activity and being more patient there. I know you gave some commentary on this. But is that more of a view that, hey, cap rates seem like they're too low to where you're penciling they should make sense? Or is it also just a view that, hey, at some point, we're not sure exactly where market rents are going in some areas, there is supply coming. Maybe there's an opportunity to wait. You mentioned talking to merchant developers and just trying to kind of tie together, I guess, valuation versus a view on, hey, fundamentals are becoming a little bit uncertain because of supply.

Right. Nick, this is Brad. I would say it's really the belief that we think cap rates will tick up a bit from where they are right now. I mean the fundamentals generally are holding up pretty well within our region of the country, and we're not seeing distress certainly in our region and especially in these lease-up properties. We've seen cap rates tick up over the last year, 1.5 years and really what we believe right now with the limited amount of inventory that's on the market, the capital that's out there kind of piling up on each other on the assets that are coming to market. So that is driving down cap rates. We also continue to see a high proportion of the deals that do trade or 10.31 exchange as well as loan assumptions. So we just believe that as the elevated supply that's occurred in our market over the last year, 2 years, begins to come to market. Those assets need to trade, merchant developers need to sell and as that product comes to market, it's likely to spread out the capital a bit and we're likely to see cap rates continue to move up a bit from where they are today. Today, interest rates are 5.5%, 5.75%. And I think when you layer on to that, just still good operating fundamentals, but not the 5%, 6%, 7% rent growth that we've seen over the last year. I do think that, that continues to point to a scenario where the negative leverage continues to decrease, which supports increasing cap rates. So just for context, after the GFC, 3-year period after that, we purchased 9,000 units over a 3-year period. And I don't know if this situation will be as fruitful as that was for us, but it certainly feels like our region is really primarily driven by merchant developers and product needs to trade at some point, and we're starting to see cap rates move up a bit. So we're going to be patient and hold our capacity to what we think will be a better opportunity.

And we will move next to John Kim with BMO Capital Markets.

I wanted to ask about your same-store revenue guidance. You narrowed the range, but you maintained the midpoint. But you started the year with 5.5% earn-in. So just to hit the top end of your same-store revenue guidance of 7%. You only really needed to achieve 3% lease growth rates for the year. You've already exceeded that. I think you've been saying that lease growth rates have come in higher than expected. So I know that occupancy offsets this a little bit, same with the fees, but your 6.25% midpoint seems very conservative today. I just wanted your response on this.

John, this is Al. I think the important point there, we didn't cover today, we've talked about it a bit in the past is that there is a little bit of dilution in that total revenue from the pricing line because there's other income components that are about 10% of our revenue stream that aren't growing, if they call it 7%. And so they're going 2% to 3%. And so that dilutes it some. So that's probably the difference there. But in general, the math that you laid out was the 5.5% carry in plus half of the pricing performance we've gotten this year, which is we've talked about was 3% -- 3.5% blended pricing, half of that. That gives you pretty close to the effective rent growth expectation we have this year and then those other income items dilute that just a bit.

So is there a likelihood that you're going to achieve above the midpoint of your guidance?

I'm just saying that the guidance is -- we think the guidance is accurate. There are things other than effective rents that are affecting that total revenue, John. There's items that are other income related that are growing call it, 2% to 3% that bring that down. So if you're looking at total revenue, I think the -- we brought it in just because we narrowed it, which we typically do, just because we have a little more information getting closer to the end of the year, but that midpoint of 6.25% in total revenue, we still feel that's the right number.

Okay. My second question is on the insurance premium that you got 20%. I know that's in line with your guidance, but it still came in probably lower than many of us had expected. And I'm wondering if there was any change in the coverage that you had to get that premium, whether it's self-insuring or reduced coverage or anything else?

Yes, John, this is Rob. Yes, in part, the cost -- the property insurance premium is a big driver of it. It was up about 33%, and that was offset by a much smaller increase in our casualty lines, automobile workers' comp, general liability. So the balance result, as you said, was about 20%. We did have some changes on the retentions this year, about $1 million on our per occurrence and a couple of million dollars on our aggregate then we do have a separate freeze event deductible because of some of the events that were happening in the Southeast. But overall, we feel like the retentions that we have are appropriate given the balance sheet strength we have and the spread of risk across the portfolio, given the geographic disbursement. And then as we've done for several years, we did take a portion of the primary insurance that we've got about $10 milllion of self-retention there that we feel very comfortable with, with an insurance product that caps our loss over 3 years at $15million or so. So I feel like we're in really good shape there relative to the strength of the balance sheet.

And we will move next to John Pawlowski with Green Street.

Brad or Eric, I just had a follow-up question regarding the glimpses and signs of better acquisition opportunities you're starting to see. Can you just give me a sense for whether you're seeing notable signs and broad-based sign of capitulation on pricing from merchant builders struggling with higher debt service costs on their lease ups?

Yes, John, this is Brad. Yes, I would say we're not seeing capitulation at this point. I think what we're seeing is selectively developers are looking to take some risk off the table on select assets when it makes sense for them to do so. I mean just for context in the first quarter, we track, I think, 7 deals that we had data points on. We're up to, call it, 14 in the second quarter. But I would also say the majority of those are not necessarily merchant developed assets. So again, not a lot of data points there. We've seen a few but not broad-based. I do think that, that is what we continue to monitor because as we get later into this year, to my comments earlier, I think the merchant developer profile and need to transact increases. But we haven't seen that really open up broadly at the moment.

And John, I would tell you, as you get later in the year and you get into the slower leasing season sort of during the holidays and Q1 of next year, a lot of these lease-ups are going to see more pressure. Just leasing traffic is not as robust during that time of the year. And so we do think that we're heading into an environment where more likely than not pressure will build for some of the lease-up projects that are happening out there, and that may trigger some opportunity.

Okay. Makes sense. Final question for me. Tim, you talked about the mid-tier markets outperforming over coming quarters. Could you just give us a sense a rough range of the blended rent spreads you expect in your mid-tier markets over the second half of this year versus the more supply lead in larger metros?

Yes. I mean, it obviously varies by market. There are some doing much better than others. But I would say and depending on what -- which market you divide in mid-tier versus not, you're probably somewhere in 100 to 150 basis point blended spread. So year-to-date, we're seeing several that are in that 4.5% to 5% range compared to our upper 3s overall portfolio. So I do think 100 to 200 basis points spread is probably about right.

And we will move next to Rob Stevenson with Janney.

I know you have quite a lot of data on your residents. Do you have the data on the percentage of residents with student loans outstanding? And what do you think the resumption of payments is going to have impact wise on ability to pass-through future rent increases in '24?

Yes, Rob, this is Tim. We talked about that a little bit. We do not have insight into that. We outsource sort of our credit check and income verification. So we don't have insight into that, certainly at any broad level and actually as part of income qualification and rent-to-income checks, you're not allowed to use student debt as part of that. So really don't have much insight into that, to be honest.

Okay. And then, Al, how are you reading Texas in terms of this property taxes going forward? Is this just a onetime distribution of the surplus? Or are you expecting to see fundamental changes there and lower levels of property taxes in Texas going forward?

No, Rob, we would read this at some level, it should be an ongoing benefit. I mean every -- what we've seen over the last several years is Texas because of the strength of the state has had really high valuations come out, property valuations. And we've seen millage rate rollbacks some more than others in different municipalities because of that because there is some limitation at the revenue level and budgetary level on taxes they can do. So we had projected a rate rollback. Now this because the overall budget surplus goes well beyond that. And so they basically recognizing that the [indiscernible] are full, recognizing that the state is doing very well, but valuations overall are very strong. So they're permanently reducing that rate, if you would, by legislation. Now the other side of that is in the future, if the economy in Texas is different, they could undo it. But this should be a permanent ongoing impact that's pretty significant. I mean it caps out to be something like $0.20 per $100 of value for your property values, and that's pretty significant.

And any other markets where you're seeing property taxes trending above or below your expectations from earlier this year?

Not really. I think the one outstanding to really get the final information on other than Texas is Florida. It's the one that comes in late. And so we need to see the millage rates there. We've got the values. We need to see the millage rates coming in like a pretty significant. But other than that, getting a pretty clear picture at this point. We're about 70% of the knowledge at this point, I would say, Rob.

And our next question comes from Anthony Powell with Barclays.

Just wanted to walk through maybe the medium-term outlook for lease spreads. It sounds like you expect new lease spreads to be in the 0% to 1% range for the next couple of quarters. Is that renewals go to 0% to 1% maybe early next year as well? Or kind of remain above new for a while?

Yes. I think I would expect renewals to remain above new, and that's not unusual. I mean, what we saw last year where new lease rates were quite a bit higher than renewals is more the exception than the norm. And so with renewals, you've got obviously, somebody that has lived with you and hopefully you provided good resident service and have an asset that they enjoy living in, and so there's some friction costs to move and all that. So typically, we would see renewals pretty consistently above new leases. So I don't expect it to get down to the new lease level.

Got it. And can you remind us what's your peak level of supply delivery on a quarterly basis? Is it first half of next year? And just when do you think supply starts to come down in your market?

Yes. I mean it's difficult to nail down to a quarter, but I think our belief right now is kind of peaking early 2024 and then starting to trend down and then really set up for a good position as we get into 2025 in terms of lower deliveries.

We have no further questions. I'll hand the call to MAA for closing remarks.

We appreciate everyone joining us this morning and obviously follow up with any other questions that you may have. And that's all we have this morning. So thank you for joining us.

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