Our roundtable presentation with Regency. Today we're joined by Mike Mas, CFO, of Regency, and Christy McElroy, Investor Relations. I'm Lizzy Doykan, and I work with Jeff Spector, covering the retail REIT at Bank of America. So right now we'll pass it off for opening remarks by the Regency team, and then we can open it up to Q&A. And please feel free to jump in at any time with your questions.
Thank you, Lizzy. We appreciate that, and thank you, Jeff. You guys have done a remarkable, remarkable job hosting a really effective conference for us. We appreciate that. I am joined by Christy McElroy, our Senior Vice President of Capital Markets. And if I may just have a couple minutes just to say a few words about Regency. As noted on our earnings call last month, our second quarter was one of the strongest we've had in our 60-year history, which I think is saying something. And that's the combination across all of it, all aspects of our business, from leasing activity remaining very robust, to we had one of our largest quarters from a development starts perspective, with $175 million.
We're especially proud to have announced and have recently closed on the acquisition of Urstadt Biddle Properties. Through the first half of the year, our leasing volumes were 40% above our historical averages. That includes executing on the highest level of new shop leasing that we've had in over 10 years. So again, speaking to the demand that we are experiencing in our space. Operating trends, tenant demand for space remains strong. We do continue to benefit from the post-pandemic kind of secular tailwinds that we've all been talking about at some length. Those include suburban growth, those include hybrid work accruing to our benefit in our shopping centers. We're seeing solid demand across all of our markets, and in fact, around the country, and from a broad range of tenant categories as well.
Just to name a few, that would include grocers, off-price, medical, fitness, restaurants, pet services. I could continue. We have also had meaningful growth in our development and redevelopment pipeline, as I mentioned earlier. Over $400 million of projects currently in process. In the second quarter alone, we started 12 projects, and I mentioned totaling $175 million of investment opportunity, highlighted by a project in Long Island in this market, we call, called s , a 170,000 sq ft Whole Foods anchored development, that we'd be happy to discuss in more detail. Beyond those starts, our pipeline of projects grows as we confidently pursue the strategic objective to deliver more than $1 billion of starts over the next five years.
We think that our competitive set is positioning us to accomplish that strategic objective. We did announce the closing, as I mentioned, of Urstadt Biddle. Just to remind everyone, an all-stock transaction will be closed in the middle of August. We've grown Regency's footprint of high-quality, grocery-anchored centers in premier suburban trade areas here in the Tri-State Area. Our resulting portfolio is unequaled in its combination of scale, national reach, trade area demographics, high-performing, largely grocery-anchored, neighborhood shopping centers. We're pretty proud of that. The transaction is immediately accretive to core operating earnings per share. We're calling for $0.01 per share to 2023, and about a 1.5% accretion to 2024.
For us, from a capital markets perspective, we're proud of the stock-for-stock nature of the trade, preserving our, our best-in-class balance sheet position in the low end of our 5x-5.5x net debt to EBITDA range. So, before we open it up to questions, we've had a great first half of the year. We are well positioned to continue the momentum. We-- you know, the strength of our assets, the strength of our trade areas, the activity within our development pipeline, and the security of our balance sheet and our free cash flow generation, all supported by solid fundamentals in the space. So we'd be happy to take your questions.
Great. Thank you, Mike. And as Lizzy said, we want to make this as interactive as possible, so if you have questions, just raise your hand. I guess let's start off with, you know, retailer demand. I know we've been asking each of the companies about the retailer demand. You commented on that. I think since ICSC, the market investors have been really surprised by the strength in that demand, and as you it sounds like, again, across all categories and equal across markets. You know, again, just asking because we get the question, any, you know, changes in that anything you've seen in the last couple of weeks, any concerns as we head into the back half of 2023? And, you know, is most of this now.
Sorry, let's stop there, and then I'll ask the second part.
Sure. Short answer is no. We've continued to have a very productive year. You know, I went through some of the stats, and on a historical basis, they're pretty eye-popping. And the teams just continue to report good, solid, healthy demand. I think it'd be. When you have a record-setting quarter like we did in the second quarter, I would be hesitant to say we can replicate that level of productivity, but that doesn't mean we're gonna. We're not gonna have success. We have about, you know, our pipelines give us about six months or so of visibility into leasing activity. And that looks good, looks healthy, again, across the region, across the f rom a tenant perspective, we're not seeing any evidence of any slowdown.
We have great assets and great trade areas, and tenants looking to upgrade and move into high-quality, grocery-anchored centers, where we afford them the best prospects for success.
Thank you. And the second part is on, I guess, the 2024 leasing. One of your peers said they're mainly done with 2024 leasing at this point. You know, it's hard to validate that, but I don't know. I guess, you know, we are getting questions, of course, already on 2024. I'm not asking for guidance, but visibility on 2024. We all know that the leases you're getting, you know, the leases you're signing today, these stores, I assume, are not opening to maybe-
There's a lag.
Yeah, a lag.
I think that's what they're speaking to.
Yeah.
There's a lag in that.
So I guess, where do you stand at this point on, like, the 24 leases? Or is it mostly done at this point, and you're really, the new leases are more of a—you're talking about 2025 openings? Or no, these are—the leases signing today are still 2024?
We have work to do.
Okay.
You know, again, I'm being short of giving 2024 guidance, but I think we're set up for a healthy base rent growth setup. You know, again, let's put the macro aside for now, but just talking about the situation we find ourselves in. We're growing top-line percent leased, and we have room to run. We want to get the portfolio to 96%. That's where we've been historically. We believe we can, the portfolio should be able to achieve those levels going forward. That's approximately 100 basis points from where we are today.
That's small shop?
No, that's total.
That's total, total.
96% total. So if you break that down, 98% or so anchor occupancy, 93% or so shop space, that blends to that 96% objective. However, as you know, there's a gap between percent leased and percent commenced, and it's that 250 basis point SNO gap spread. That's where we need to commence that and deliver that space, and that's really what's gonna drive the near-term growth, is that movement in commenced occupancy. We are doing a lot of leases today that won't have an impact until 2025. That is true. But we have a lot of shop leases that we can sign today that will have an impact on 2024, and the teams are actively engaged in that. And, you know, we're excited to continue moving that pipeline forward.
Even outside of maybe your developments, there's very limited new construction. So, you know, how, where do you see that small shop occupancy increasing to? You're saying it's 93% today.
No, no.
93-
93% is our objective.
Is your objective.
That's where we've been, that's where we've been in the past percent leased. You know, you're asking, can it be higher than that? I think is what you're suggesting. We always want some churn in our portfolio at the same time. We're an active redeveloper of our properties. Some of the vacancy we have is, we would call strategic. You also wanna be mindful of your merchandising mix. You don't want to renew every tenant. In fact, you want to encourage some churn and some upgrading in your merchandising quality. All of that leading to better foot traffic, all of that leading to a more synergistic experience for our retailers. So I still think 93% is the right minds, the right eye level.
Just to confirm on the regions, again, there's the strength is really, you know, equally across all regions? There's not a particular regional focus?
From an operations perspective, no. We are seeing success across the board and through the portfolio. So no, on the geography. From a capital allocation perspective, we are mindful of our gap in Phoenix. We like the Phoenix market. We don't own anything currently in Phoenix. We would like to allocate some capital to that market, and we're dedicating some human capital to that effort. But we're gonna do it the right way, with the right assets and patiently and with some discipline. Otherwise, from a geography. You know, the other element I'd add to the leasing is, on the tenant front, medical is a theme that has been growing in our portfolio and our leasing activity.
And in the first quarter, in fact, it was our highest level of new leasing activity, which is saying something. Typically, if you would ask me that question, the answer would be restaurants. We typically do more restaurant leasing than anything. Medical popped up, and that's. I think that's emblematic of this growing theme. Wellness, the wellness theme throughout our tenant roster is pervasive, and we're taking advantage of that going forward.
How would you characterize your watch list today? And especially if you could talk about Rite Aid, which, you know, that's, that's been more so in the headlines recently. So if you could talk about your exposure there and what we can expect.
Sure. So our watch list, generally speaking, has historically hovered in the 1.5%-2% of ABR area. That's the nature of our business. You're gonna have retailers come and go, so to speak. We are closer to the bottom end of that range today than we have been historically, so closer to the 1.5% area. The highlights or the watchiest of the watch list, you would agree, is Rite Aid. We have 50 basis points of exposure to Rite Aid. That would include our recently picked up exposure to our Urstadt Biddle. Next up would be JOANN, from a 20 basis points perspective. These aren't, I don't think these are surprises to you, Lizzy.
What we have confidence in is the quality of our locations and the quality of. Actually, the quality of their productivity in our locations. So in our experience at Regency, we tend to have less exposure. We also tend to have the right exposure, so that when tenants are forced to reorganize themselves, our sites are generally the winning locations within their portfolios, and they continue. Or, as in the case in Rite Aid, with high-quality locations, often benefiting from drive-throughs, end caps, out parcels, pretty. These are locations that are, you know, sought after, and we believe that the re-leasing effort will be successful for us.
And then I know, so Kroger, Albertsons is set to sell over 400 stores to C&S, a new grocer operator. And we've been gathering thoughts on, you know, what it means for your portfolio exposure to both grocers and maybe just overall thou ghts on the deal.
Sure, I'll stop short on the deal, because I think these are some. You know, there's some headlines and some narratives out there, but we're still short of a lot of details, frankly. But as we kind of zoom out and just think about the announced potential deal, a few thoughts. One, if afforded the option between a SpinCo solution to satisfy regulatory concern and C&S, we like that C&S option, incrementally to the SpinCo option. You have a proven entity with a long track record of success in the Grocery business, largely from a wholesale and back-of-house perspective, but they understand the business. They also have operated stores from a retail perspective, and they have that in their pocket as a skill, and we value that.
One element of the announcement that we also like is the fact that brands seem to be tied to the locations. So you're not dealing from a consumer perspective of a change in brand, which can be very disruptive, as we've seen in the past. Examples would include Safeway acquiring the Dominick's chain in the Chicago market, the, you know, the Haggen experience with respect to that transaction in Southern California. We like that consistency. So on balance, I think, you know, marginally positive for Regency. But what's most important, it all essentially it boils down to our to our real estate. We have a lot of confidence in the locations of the Kroger and Albertsons portfolio within our portfol- within our assets.
In combination, it's 103 locations across both brands, including our stat. Only 17 of those locations are located within 1 mi of one another. But when you look into the details of why, you clearly see that that overlap is not really overlap. Those markets are high density, high good demographics, and high degrees of productivity. The overlap isn't overlap, it's necessary distribution to high-density markets. So at the end of the day, we have very high-quality locations, proven grocery store locations, that will be successful through the ownership.
Turning back to, you know, leasing, can we talk a little bit about pricing power, leasing spreads? You know, where, how do you feel about pricing power? And one of the questions we're getting across all retail strips and malls is, you know, still on the quality of the leases. You know, how are you. How, I guess, how are you trying to take advantage of the strength in demand, besides, of course, the leasing, you know, trying to get as much rent as possible?
Yeah. You know, you're gonna, you number one, it starts with asset selection, and just picking the right market within which to invest, picking the right trade area within that market, and then being hyper selective about the asset. And when you have that, that's when you can start to build leverage, right? And Regency, our approach, I mean, this won't sound different to other landlords, is we wanna maximize on all fronts, and that would include merchandising. We wanna make sure we have the right mix of tenants at a shopping center. Credit, we wanna make sure that we're commanding the market appropriate rent on a per square foot basis. You wanna maximize your ability to capture pass-through expenses.
You wanna maximize lease provisions and flexibility within those lease provisions, control provisions, what have you. You wanna maximize our control. You wanna maximize your contractual embedded rent increases. I think we do a really good job of that, at Regency, and the teams are exerting that control and that power where we have it, to a really positive level. If we can deliver. You know, on the surface, what you see is rent spreads, and those are cash point-in-time metrics, last rent to new rent. If we can deliver upper, mid to upper single-digit rent spreads, we're gonna meet our strategic articulated objectives, which are to grow same property NOI in the 3% area over a sustained period of time.
And that within, below that kind of surface-level rent spread metric, now you can get into factors such as contractual rent increases. We are benefiting from 2% in-place contractual rent increases in our portfolio today. So effectively, kind of on an annual basis, riding up closer to where market growth is. So the maybe a better way to think about the spread at the time of lease execution is comparing GAAP rent spreads. And in that metric, we're in the mid double digits, like the mid-teens, from a GAAP rent growth perspective. And that, again, I think is a pretty healthy indication of the power that our portfolio has. So, we're pushing on all fronts.
We realize the power and the quality of our real estate, and we're gonna command kind of market-leading terms across the board.
One of the pushbacks we get on strips, and it's not a Regency pushback, is, you know, CapEx and the amount of money the landlords, you know, are giving to the tenants to build out space. And if you disagree with this, please, you know, counter it, but it just, you know, it's even come out. You know, a few people have mentioned it to me at the conference. You know, look at the gap between FFO multiples and AFFO multiples. Again, you know, strips are in such a great position, and there's this pricing power. Why is there, you know, this, this differential?
We agree, and we do think it's something to highlight, and we do place a lot of emphasis on the amount of CapEx. And Mike talked about the cash re-leasing spreads. He talked about the impact of the contractual rent growth and the GAAP re-leasing spreads, but we also provide disclosure on net effective rent as well, because we do focus on that in terms of the holistic leasing economics, right? And a case in point, and our disclosure, the way we look at it, is what is the net effective rent over the life of the lease, including the impact of that CapEx, of that capital outlay, as a percentage of your GAAP rent, again, over the life of that lease?
We trend in that mid-80% range, which we think is really, really good. Case in point is, and we've had a lot of these discussions over the last, you know, several weeks to months, about re-leasing the Bed Bath boxes, right? So there's been a lot of talk. We, you know, ourselves included, 20%-25% cash re-leasing spreads on the Bed Bath boxes. But what is the true, what is the true economics of that? What, like, what is the bottom line impact on your AFFO, which we are intently focused on? When you do the math, we've talked about $50 per sq ft-$70 per sq ft capital outlays on those boxes.
When you do the math on that, and you think about, you know, that upward lift on your cash rent spread, the embedded contractual rent growth, and that capital outlay, you're getting to about a mid-70% range on a net effective over your GAAP rent percentage basis. That's right in line with where we do anchor leasing. So if you think about that, on our overall portfolio, we average about mid-80%. Anchor space, we're getting about mid-70%. The Bed Bath boxes are right in line with that from an economic perspective. And our shop space, we're doing better. We're doing mid-80s, upper 80%.
Agree with you, intently focused on CapEx, and I think as you look at AFFO growth over, you know, over the last 10 years, over the next 10 years, we will do better.
I guess let's follow up on the comment that you are looking to enter Phoenix. You know, I guess, can you talk a little bit more about that? Why Phoenix? And, you know, is that- does that mean, you know, acquisitions first versus development or, you know, looking at both at the same time?
So it's the obvious kind of hole in our national platform, and what I mean by that is, it's a very large market, a liquid market, so there's an opportunity set there. And there is a multitude of. We see the world in 3-mi rings. Like, there's a multitude of 3-mi rings, like trade areas, within which we think we can have success, and we think that the portfolio should have an allocation to that market for those reasons. We're gonna go in with discipline. There's a reason we haven't invested there. I doubt that we'll jump into the market from a development perspective. I think, our experience has been you acquire, and then over time, you build market relationships, and then you build. And we'll be careful.
You know, we don't. While we aspire to invest in that market, we're gonna be smart and disciplined with our incremental funds and our incremental investments going forward, and we're not gonna jump into Phoenix just to put a flag on the map. So I've mentioned it before. It's an opportunity from a geography perspective for us, but we could be here, sitting here a year from now and having the same conversation because of our disciplined approach to asset selection.
Okay. One topic that came up this morning on one of the thematic panels, I was mentioning to Christy, we did a logistics panel, you know, retailers and retail boards discussing, you know, theft in the stores, and it's such a major problem. This expert was saying that, you know, some retailers have started to, you know, have less inventory, you know, ship more often. And, you know, I was sitting there thinking, again, the benefit of the brick-and-mortar is, you know, having that store experience. The store experience is having that inventory. And then, if I. You know, from a retailer standpoint, if I'm there and I'm seeing, you know, different things, I'm probably buying more than I initially thought I would.
Mm-hmm.
I know you guys have, you know, a very good relationship with your retailers. I don't know if this is a topic you guys are discussing or you're hearing about, but I'm just, you know, gonna say that it came across as a bit of a negative, right, on brick-and-mortar and a concern. Again, this was a logistics panel, but, you know, I just thought I'd mention it.
We talk our book, too.
Yeah. It's fair. It's a fair observation. We read the same headlines. We've seen the same examples. Our commentary will be limited to what we see, though, in our portfolio. And across our portfolio, we're just not seeing evidence of that theme resulting in significant changes in foot traffic or sales productivity. We are seeing in select cases. And remember, again, our perspective is so important. We're largely suburban. But where we are more urban or near urban, you do see changes within the store. Whether that be more care around self-checkout, and which interestingly has been, I think, part of the shrink problem, is trying to figure out how to use technology without it being abused.
But also, you know, to smaller ticket items being behind, you know, glass doors. You know, and that does impact the experience. But Jeff, it's just not; it hasn't been a material narrative in our conversations with our tenants, nor has it been a material growth line item in our expenses. We are spending, on the margin, more on security appropriately. We want to ensure that we have the most inviting, safe shopping experience that we can possibly offer for our end consumer and for our tenants, and I think we've been largely successful.
Can I make one comment?
Yeah.
Nor has it changed this greater appreciation for brick-and-mortar stores that we've kind of continued to see post-pandemic, and is a real structural, you know, positive trend for us in terms of the value of the brick-and-mortar store and the profitability of the brick-and-mortar store.
Okay.
Can we talk about the latest on your development pipeline and, you know, any opportunities you might see in the near term, and maybe expand on the funding strategy there for your pipeline?
Sure. Let me talk about opportunities 'cause we're super excited about it. Christy can speak to funding. We, you know, I'm kind of sitting up straight 'cause we do see this. We think we're uniquely positioned in this marketplace at this point in time to really take advantage of a dislocation. Tenant demand, we just talked about how healthy it is, and specifically from a grocer perspective, they, the need and desire to expand their footprints and to grow their platforms. We need some development. On the right side here, on the other side, we have the vast majority of development in our business happens locally. And what a local developer can't do is what's in the middle, the financing of these projects.
The dislocation that's occurring in the capital markets from a construction lending environment and investment perspective is more limited. Regency, afforded by its financial position, complemented by our tenant relationships and our expertise in development, that's where I think, we think we can fit in really nicely and start to really drive opportunities and grow our investment pipeline over time. Development, we're in the development business, we have been for a long time, and we did $175 million of project starts last quarter over 12 projects. That's an incredibly large number that we have, and we continue to see a growth in that pipeline over time, and the hallmark of that will be our funding strategy, and I'll let Christy speak to that.
Yeah, and as we think about growing that spend, that annual capital allocation from $130 million today of spend in 2023 to, you know, our eye level is at $250 million annually, that is largely self-funded, right? So as we think about $150 million of free cash flow today, on a balance sheet, leverage-neutral basis, that gives us upwards of $300 million plus of total investment capacity. And so, you know, again, including the allocation of debt. And so, without the need to raise equity, we can fully fund where our eye level is from a development, redevelopment perspective, and then anything excess capacity that we have, we can put towards acquisitions, we can buy back stock, we can, you know, we can de-lever.
We have a lot of options in that regard, again, you know, without the need to raise incremental equity, and that equity decision can then be, you know, an opportunistic.
Can you just provide a bit more color on where these developments are regionally and, you know, what's sparking the developments? I know, you know, years ago, let's say, a tenant relationship, like a Target, would come to you and say, "Hey, we're thinking about this market or this area." What's sparking the, I mean, first, the where, where is it happening? And then second, you know, why? Why those locations?
Sure. And I think, let me start with, it's a I've been calling it the both-and scenario. We can have limited overall development exposure in the sector of where we play in commercial real estate, and Regency can thrive in that environment as a developer because there will be a more limited but appropriate amount of development occurring. And it depends, to your point, where you have Publix as a southeastern-based grocer moving and migrating up into the North. You have HEB doing the same in the Texas market, kind of moving and migrating up north into Texas, looking for new stores. You have Kroger and Albertsons talking collectively or individually, and maybe soon to be collectively, about the need for new stores to grow their footprints.
Whole Foods continues to grow their footprints, and we all know that they play a major role in our tenant roster. We will be there to help satisfy these winning grocers in their growing platform plans, and the evidence is supporting that. We're seeing it across our platform. We have development expertise in just about every market within which we invest, in just about every office that we have open, which is north of 22 offices at this point in time, and we're having conversations in all of them about opportunity sets. And, you know, those conversations, to your point, like, I think Sun Vet here in Long Island is kind of the poster child of why we're excited.
It's a local developer, had land in control, they owned it, and they controlled it, and they had a Whole Foods lease near, near execution, and the sticking point was capital. And that's where, again, Regency can come in. And with that combination, again, and because we're a developer, we understand the process. Because we have tenant relationships as a landlord, and we have capital, we can help those deals become unstuck. We can create win-win solutions, where the tenant gets the expansion they need, the developer maybe gets a little bit of equity and/or upside potential. You know, we're happy to structure deals creatively, and we have a big track record of doing that. We can be debt, we can be equity, we can be a JV partner, we can be all a hundred.
We can own the project. So long as these projects qualify and within our strict quality standards, we can be pretty creative in helping solve an equation. And oh, by the way, we can create value, 'cause you know, we're developing the spreads that are north of what we're seeing in the marketplace from a cap rate perspective.
What is that exactly?
Listen, there's very few data points to point to, but there are some, and there is an active and kind of growing, percolating market. We're seeing more packages being circulated. What we think is happening is, now that the banking disruption is seemingly behind us, at least from a maximum perspective, whether it's funds coming across their tenure horizons, and maybe that 10th year was 2021, which was COVID, and now they're in year 13, time to monetize and move on. Maybe it's a local owner of a shopping center who now has to refinance their secured debt, and, "Hey, maybe I don't want to absorb the higher cost of capital. Maybe I don't want to bring that equity check to the table.
Maybe I'll sell my property." That activity is starting to come up. We are seeing, again, very limited data points, but we're seeing core grocery-anchored, high-quality neighborhood shopping centers in the 6%-7% band. I'd say the bias is towards the six on that in that range, and it can depend on the growth profile, and the geography, and the quality of the asset, but that's generally what we're seeing on a limited number of. We have seen lower cap rates, by the way, interestingly, and I think when you see something lower, five handle, unusually high growth prospects, or there does seem to be a pocket of capital looking at in-place, assumable, three-handle debt as an asset. And maybe that'll bridge them to a better financing day ofthree to five years from now.
We're seeing some of that capital as well.
On the 6%-7%, are these larger price tags? You know, a couple of your peers have talked about, you know, discounts on larger price tags right now.
The comments I'm making are. Again, I go back to perspective. We're only looking at grocery-anchored shopping centers of high quality that would fit our parameters. That's. My comments would be limited to what we're seeing. We're not. We're a buyer of our strategy on an accretive basis. We're not a buyer of deals, like, because there is a discount.
Do you think the 6%-7%?
Would apply to that?
Is, I guess some are claiming that there's few buyers out there, so they're taking advantage of opportunity, and so-
I-
You know, if they're buying at a seven, that's not the market at this point, right? They're taking advantage of the situation.
I would say, for the deals that we are pursuing, there are surprisingly more bidders in the tent than you would otherwise expect, and it's it can be a pretty competitive process.
Okay.
For, again, a smaller format, grocery-anchored, high-quality shopping center.
Thank you. With that, we are out of time, but we have three rapid-fire questions we've been asking each management team. They're very quick answers. Lizzy?
Sure. First question, on the Fed: Do you believe the Fed is done hiking, yes or no? Do you expect the Fed to cut rates in 2024, yes or no?
Maybe is not an option. I'd say I'll go with no and no.
Do you believe real estate transactions will meaningfully pick up by the fourth quarter of 2023, the first half of 2024, or the second half of 2024?
I think we're seeing it right now. So I, I'd say, I'll just say first half of next year.
Last, are you using AI today to help you run your business, yes or no? Do you plan to ramp up spending on AI over the next year, yes or no?
Yes, we are using it today. No, on the ramp-up, but the color there would be, if we see a real opportunity to meaningfully decrease costs, or add value, we'll do it, but there's no plans to do it just for AI's sake.
Thank you very much.
Thank you.
Thank you, guys. Appreciate you.
I'm excited. You know, this is our last panel of the day on the second day. I hope everyone had a really good conference. I'm real excited to be joined by MAA. With that, I'll pass it over to Al for introductions, and he can introduce his team here.
Great. Thank you, Josh. We appreciate that. Thank you all for staying around the last meeting. As Josh mentioned, we're glad to be here. We always like to have an opportunity to tell the story of MAA. So we brought the full team today. Al Campbell, CFO. To my right, you have Brad Hill, who is our Chief Investment Officer. To his right, you have Andrew Schaeffer, who is our head of our Capital Markets and Investor Relations. To my left, you have Clay Holder, who is the Chief Accounting Officer, and also taking on some responsibilities for the company over the next couple of quarters. So we're glad to be here.
We thought what we would do is start with a few comments up front before we answer questions, talking maybe a little about who we are, our strategic focus for the people who don't know us as well. Very briefly, the current environment that we're working in today, big topic, I'm sure, of our theme of the conference, and then how we're positioned as a company, really, to execute through this environment. We're going to share that across the panel today. So I'll start with talking about really who we are and our strategic focus for those who are new to the company. Just briefly, on page six of the presentation that was on our website, I think you have handed out today, is a good starting point.
It tells us a little bit about us. I think the one thing that I would say that's, it's a bit unique about MAA is really just our geographic footprint. is a bit unique in the space. Sunbelt Southeast region only. Well, you can see there that we have a portfolio that is very well diversified across the space. I think one of the key points is not only a number of markets, because we're in about 35 markets across the space, but also very importantly, is locations within the market. We're in the urban areas, the inner loop areas, in the suburban areas of most every market, we have very good coverage of the markets. Also in terms of product type and pricing point.
And so I think that diversification is really key to understanding our story and who we are, at the core about building a strong growing cash flow that through the full cycle as a company. We also have grown significantly over the last several years. We have very high level of acquisition and development capabilities with the company that allows us to continue adding high quality product to our portfolio through the full cycle. Brad will talk about that in just a moment.
Certainly very proud of our balance sheet, that Andrew will tell us about in just a moment, that we've really worked hard over the last several years to build, what we think is, we believe is somewhat of a blue-chip balance sheet that really provides not only strength, but strong opportunity in the current environment we're at today. And so. And then I think finally talk about just the track record. Now, you can see on slide number, the very first one, the very beginning of slide three. Not to be lost before we get into the comments is just really the track record that we have as a company now. Now we have, you know, 25, more than 25 years of experience in this region operating in strong markets, tough markets.
Through the cycle, you can see that the consistency of our business. We're a disciplined company, and just have really, you know, shown that you can perform well in this region and show the prospects. The dividend presentation at the bottom just shows that we have, you know, many years of continuing growth in earnings, cash flows, supporting that strong dividend that has never been cut. We're one of few people in the entire industry, certainly in the multifamily space, has never cut our dividend. And so we're very proud of that as a company, and we're positioned better today than ever to make that more certain. So that's a little bit about who we are. Just touch on briefly the current environment before I turn it over to Brad.
Page, I think a good place to do that would be page 14. Just quickly, one of the focuses is currently the pricing trends that we're seeing in our portfolio today. I think the backdrop for this is as we went into this year, you know, we outlined so, a story as part of our guidance, and part of the guidance was based on, you know, blended pricing performance, which is new lease. New leases blended together about 3% on average, and we expected this year to be a year coming off of a very strong, you know, performance the last couple of years, a more normalized period. I mean, that word normalized is certainly one you're hearing a lot in the conference, I'm sure, this week, but certainly that's what we expected.
And we're seeing that as we entered the year. First half of the year was strong. We actually outperformed that with 3.8%. You see blended price through the second quarter. On average, you see on the middle of the page there. As we move into July and we're seeing in August, we did see the moderation in that again. I would say that it was a little bit sooner than we had expected in our expectations, but there's several reasons for that I wanted to outline. One is we made somewhat of a choice in that.
If you look at the bottom of that page, I think we mentioned, one of us, maybe even Tim Argo, mentioned on the call that we had after the second quarter, that we, in July, our occupancy was about 95.3%. So we sort of made a choice as it, you know, given that we're moving into a more normal winter lease season this year, we haven't seen that in several years. We felt it was prudent to begin to protect occupancy, to build occupancy, to move into that. So we did that, made that choice. We probably built, you know, in essence, we built about 40 basis points of occupancy there that did cost us something in pricing in July and August.
I think also, not to be lost, and as you look at last year, and very strong performance we've had for a couple of years. Last year, the very peak performance of the pricing was in July of last year. So a bit of that as you're looking at the toughest comp in that July period, maybe the early August period. And then finally, certainly, supply in our region has been high for several years, several quarters, continues to be so, and so we're seeing cumulative impact of that a bit.
But the good news behind all of that, and I want the one message you hear, probably, I hope you hear from everybody on the stage in some way today, is that behind that, all this, the supply and all the picture that we're talking about, demand is strong. I mean, no matter how you look at our business today, we're seeing, you know, prospects of demand being good. Whether you're talking about the traffic levels in our portfolio, the leads that we're producing, the leads per exposed units that we're producing. I mean, if you look at last year, we're a bit down from those levels, but if you look at a normal last year, that's a strong year, we would point to 2018 and 2019, just pre-COVID, being a good picture of that.
Well, we're at or well above those factors in series. In fact, lead per exposed units were up 30%, and so from 2023 today versus 2018 and 2019. So we feel good about the demand levels we're seeing today. And that's one thing about our overall region we're in. You know, we have had historically good demand. We continue to have that today, and we continue to expect that into the future. And so I think that is the core of the business. Supply will come and go in our business, but the key factor is are you positioned well with demand to work through that? I think the answer to that still is yes.
As we look into to next year, we would expect the supply that's coming. I mean, many pictures have been probably outlined this week, but our expectation, hard to put a fine point on it, but we'd expect the peak of the supply deliveries to be sometime mid- on average next year. Could be a little later, could be a little earlier, but just on average, probably somewhere in the mid-year. But there's a very strong case to be building that following that, you know, you're going to see a meaningful decline in deliveries. The permitting today may not show that. Brad will talk about it in a minute, but certainly, what we're seeing and feeling expect is a significant decline in that, which starts to build a pretty strong case for 2025 and even 2026 to be, you know, the outperformance years.
I think if that's, if there's one message you hear from us today, probably that's the message that I would expect it to be. So with that, hopefully that gives you a good feel for who we are in the current environment. I'll turn it over now to Brad to talk about the opportunities we have.
Yep. All right. Thanks, Al. Yeah, one thing I wanted to just reiterate that Al talked about is really just the demand and really what our strategy is. For some of you who have been familiar with our story, you really know that our strategy is built on really the thesis of going where the demand is, and really building a portfolio that is maximizing our exposure to high-demand markets and areas, and that's really what we have. If you take a look at slide eight, and you look kind of more broadly at really the demand drivers, whether it's population growth, household formation, job growth, all of those in our region of the country are extremely strong. And we feel really good about those long term.
Kind of supplementing that are the migration trends. Certainly a trend that was occurring before COVID. We saw people moving into our region of the country before COVID started. The migration trends ticked up a bit during COVID. And then today, still 13% of our leases are coming from outside of our region. So the migration trends continue to be pretty strong. We really have not seen folks reverting back to where they came from. About 4%-5% of our folks that are leaving us are going outside of our region. But that's pretty consistent with what we saw before COVID. So again, that's just a little bit about our portfolio. We want to be located where the demand drivers are.
Slide nine just indicates some of the big job announcements that have been announced for our region of the country, just indicative of the types of jobs that are coming. These are jobs and facilities that are being built that will drive job growth for a number of years. So some of this, we're on the early stages of some of this job growth coming to our region of the country. So, in terms of external growth, you know, really we have a couple different avenues that we're focused on for external growth, and that's through development, predominantly in acquisitions. If you take a look at slide 18, gives a little bit of an indication of where we are as a company. We have about $730 million under construction right now.
You compare that with where we ended 2021 at about $420 million or so. So significant growth has occurred over the last couple of years. We think there's an opportunity for us to continue to grow that platform to about $1 billion-$1.2 billion in terms of size of the platform. That will be about a $400 million-$500 million annual spend number. Our team has made great progress in that. Today, we own and control 12 sites for future development. About 3,400 units are in that pipeline. The great thing about that is we control when we start those, so we can slow that process down if we need to. We can speed it up if we need to.
So we're very patient in that, and we have a lot of optionality about when we start that program. Additionally, we are looking to deploy capital through acquisitions. It's been slow the last couple of years for sure. You know, we're still waiting for the transaction market to pick up a bit. We're starting to see early signs of that process starting. The number of projects that are coming to market starting in the third quarter has increased. And as we've been saying for a few quarters now, you know, as that volume picks up, we do expect cap rates to come up as the capital is spread out a little bit more, and I think we're starting to get to that point.
So here in the back half of this year, we do expect that we'll be a little bit more active in that area than we have been historically. You know, our goal on an annual basis is about $400 million or so of acquisitions. And you pair that with where we are on the development side. So we have a significant amount of external growth that we're really focused on on a long-term basis. So, with that, I'll turn it over to Andrew to give you a little bit of information about how we look to fund that.
Thanks, Brad. The balance sheet continues to be in great shape with sector-leading metrics, and A-minus rated. Right now, we have 100% fixed rate, and thus have full availability on our commercial paper program and line of credit. We also had $150 million in cash, as of 6/30/2023. On our metrics, debt to gross assets was 27.5% versus a sector of 30%. Net debt to EBITDA is 3.41x versus a sector of 4.73. So frankly, we're underlevered right now, it's where we want to be in a, in a cycle to support Brad and all his acquisition and development opportunities.
The weighted average maturity of our debt is 7.5 years, with an average interest rate of 3.4%, and we have very manageable maturities over the next few years.
Yeah, I appreciate those opening remarks, guys. Maybe just going back to something you said early on, Al, about just how you thought the occupancy was a little bit weaker, so you started pulling back on rate. Just like, what—like, what wasn't. I guess, before August, just thinking about the occupancy levels, like, what wasn't. Did you just weren't getting the traffic? 'Cause, just trying to tie that comment about the occupancy being below expectations versus, like, demand is really good.
I think it goes back to what you've heard us talk about over the last several quarters, probably last couple of years, really, is that we have really focused on pushing price through this, through the strength in the cycle and have been effective with that, and really haven't, in the last couple of years, really haven't had to deal with a normal seasonal environment that we typically would have. Typically, you would have, you know, your first quarter and your fourth quarters are more seasonally challenged, your second and third are the ones where you have stronger pricing growth, particularly in new lease pricing. Your renewals tend to be stable through the year, but new leases is the most competitive point. So I think we continued that through the first half of this year.
I think what we saw as we get into July and August was the, I guess, the impact, the combination of all those things we talked about earlier, was one. The prior comps began to be a challenge, the combination of accumulation and supply. Just, we began to see the typical moderation begin that we've seen in the past. And so, we had continued to focus on price. Our occupancy got down to about 95.3%. Still not a bad place to be, but I think as we, w e're comfortable with being in that 95% range.
We feel like we continued to put keep the foot on the gas for pricing, but feeling that we're approaching, you know, a leasing season that's more normal, with more challenging. In the winter, you know, we chose to build our occupancy up to that 96 range, and I think you'll see us, you know, somewhat protect that as we move to the back part of the year, and as we look into early next year.
Okay. And then just thinking about, like, what's built into guide from here on out, what was assumed as far as new lease rate growth?
We had for the full year, we were saying about 3% on average. We outperformed that in the first half, so I think, and we still believe that's the right level for the full year at this point. So I think that would put the second half a little bit below 3%, call it 2.5 range, something like that, 2-2.5 range. But I think in terms of overall revenue, what you're seeing is that we're giving up a little bit of price in the back half from that expectation, that we're gaining in that occupancy that we've built. And so in terms of our revenue position and our earning position, we're in really good shape in the back half than what our expectations were.
Sorry, was that on blended or new?
It was blended. Did you say new?
Yeah. Well, yeah, what's the expectation on the new?
I think for the expectation on the two components is we would expect renewals to be pretty stable on the 4.5%-5.5% range band for the back half of the year, and the new lease be the most competitive point, call it, you know, 1.5, maybe, you know, from 0 to -2 down, you know, as the most competitive point for the remainder of the year. That's our expectation at this point.
Okay. Any questions from the field on the operating update? Maybe just congrats on your announced retirement, Al. Just curious, just, you know, what drove the decision and how do you feel like the transition's gonna go? Like, at any- are you gonna stay on? I think it's through year-end.
Staying on as CFO through March 31st, and then I'll be around through the end of the year in a capacity, just in a supportive capacity. So I think the story there is, I mean, first of all, I appreciate that. I'm very excited about my future, just personal things that I want to pursue, but I'm very excited about the company. And, I mean, I think hopefully you see today, you know, we've got tremendous talent in MAA, and we have, over the last few years, really built a lot of talent. So Clay is gonna be taking over that role at the end of March. He's well prepared for that, his background and preparation from what he's been doing the last couple of years preparing well.
So I think we feel, we feel very, very blessed to have that as a company, that deep bench.
Awesome. And congrats, Clay. I guess, when you think about your new role as CFO going forward, just like, what are the new responsibilities versus, you know, like, that you hadn't been working on before when, as you take on that, that position?
Yeah, sure. I mean, primarily, it's working with Andrew and his team, and getting more involved in the capital markets. Also working with our tax team and you know, working with those guys from a dividend planning standpoint, those sorts of things. But too, I think it's even more than that. It's just helping kind of set that strategic vision for the company and continue to execute, do the things that we've been doing all along. And you're not going to see us change our momentum or how we're addressing these things. It's gonna be just rolling right along where we've been.
Oh, maybe, sorry, one more question on just, like, the operating update. Was there a wide variance across markets as far as, like, how the quarter has been trending? Just kinda curious where, where maybe things have been doing better and where's things a little bit worse, and if there's any thoughts on, like, what's driving it, if it's supply or something else.
Yeah. I'll go on, on slide 12, there's a good picture of that, and I think that investment was done. So it shows by market there. And really, the point of that slide is to show that, you know, diversification in our portfolio that we talked about is a really important part of our strategy. And it does mitigate the supply, you know, and helps our ability to work through that as it comes. You know, we're certainly gonna feel that supply, like, you know us, but this really helps us. So you can see there, it shows the number of markets, some markets that we're in, in each market the percentage of exposure that we have to new supply coming in.
But I think also that third, the really important one, the price gap on that third, that third column there shows that, the amount of price, the new product that's coming in is above our average in that market. And so the point of all that is to show that, that is, you know, just because, you know, overall market has a high level of, of, supply, you've got to get deeply understand the sub-market dynamics, understand your competitive position, and then the outcome of all that is, is the far right column, the price and blend pricing growth. So, so, and I think that to the point you're making, what are the most challenged markets today? Probably you see there, Atlanta, Austin, and Nashville pop out, really for different reasons. And, and, and, Atlanta is, is a market where we've had.
You know, late last year, early this year, we had some storms that took some units offline. We repaired those units, put them back on early this year, took on 100 units more, had a fire early in the year as well. And so that, as we took those units back on at one time, that caused a little bit of an occupancy issue in Atlanta, not significant, but one that we need to work through. And then one of the things that Atlanta, as a market, you probably heard, is there's a little bit of a fraud issue in some of the markets in Atlanta.
So that's something that in the first half of the year, we really changed our procedures to help us. It cost us a little bit of occupancy in the first, maybe in the second quarter, but really allowed us to get the right residents in there so that when they got it, we knew we were comfortable that they were quality residents, and they could pay the rent. So we're kind of beyond that, and we think the future in those markets will be better. Though it is, it causes some performance right now. I think Austin is just more a pure supply issue, and that is where it's a great demand market, but it's got, you know, the overall portfolio is probably got 4%-4.5% supply to the stock.
It's 8% in Austin, and so just a significant level of supply there. And so that's really a pure story there. Though we're in a good competitive position here, and the new product coming in is $660 higher than our product. It's just the absolute volume, which is causing some of that. And then, and so those are the main ones I think are going up. The one that's not on that chart is Phoenix, which is, you know, it's a bit challenging.
I think Phoenix has been a great market for many quarters, and probably not on this chart because of the size of our portfolio, but it's probably feeling a little bit of price fatigue just because it's been so good for so long and has gotten some supply. So those are the ones that I think underperforming. And over, and strong performers, Brad, you might want to talk about.
Yeah, I was just gonna indicate on the strong performer markets, the Carolinas, really throughout the Carolinas, doing better than our portfolio average just generally. There is some supply, especially if you look at Charlotte, but the demand is really exceeding the supply in that market. And then you look at a market like Orlando, there is a little bit of supply there, but just that and Austin are probably the two markets with the strongest demand across our portfolio. So they could. Orlando continues to perform better than our portfolio average as well.
So, if the price gap is that after concessions from, like, the new supply?
Net effect, yeah.
Yeah.
It's so we're a net pricing shop, so it's after, yeah.
Okay.
Net.
Like, if they start increasing concessions, like, how many more weeks would kind of maybe equalize it or make it comparable?
Yeah, I mean, if you think, you know, two months is 16% or so, and our average rent is $1,600, you know, so, you start to get into, you need about three months. You know, the average gap here is $352 at the top of that. So you need to be getting to 2.5 months to three months to start equalizing-
Okay
the two, before, you know, it makes sense to, you know, from a pricing perspective. But, you know, what you have to take into account there is certainly the friction of moving.
Mm-hmm.
Because you think of the dynamics of how these properties are concessed. The concessions are upfront concessions, so you know, if they concess $352 on effective basis, and give, you know, two to three months free rent, the rent's gonna be $352 higher the month they start paying. Which means when they get to the end of that lease, they're gonna renew off of that rate. So the renter has to be convinced that they're gonna be willing to move again in a year if they make that move.
So there's just a lot of friction that we believe and we see with our residents in terms of relocating that really causes the differential between us and new supply to be needs to be material before folks are willing to relocate. And we find that. You look at our renewal stats, you know, the rates, both the rates we're getting, as Al mentioned earlier, and then the retention that we have right now is at record highs. You know, folks are wanting to stay where they are at the moment. And certainly, the single-family housing market is a little bit of a tailwind for us there and helps support, you know, residents wanting to stay with us a little bit longer.
Okay. And then, I guess, trying to think about, like, the cadence, like, more supply is coming. Like, do you think the concessions can build to that level, or?
You know, we're certainly not seeing it right now. You know, where we see supply more acutely is through our lease-up deals, and we're just not seeing that. You know, really across the board, the most we see in markets right now are, call it six weeks, but we're not seeing it broadly. You know, we generally underwrite in our new developments about a month free, and we haven't had to use that.
Mm-hmm.
We're still not using that right now. We have a project in Austin that's in lease-up right now. Windmill Hill has two competing projects just within a mile or so from the property, and selectively, we're using concessions on select units that, you know, maybe aren't in the right location of the building, but we're not having to use them broadly to compete. Really, we want to use price as the last point of competition with our competitors, and we really want our folks to focus on the product, to focus on the selling of the asset before they're focused on price.
Okay. Any questions from the field? Yep.
Question about the chart here. Is it appropriate to say that yes, supply is coming to your markets here, is going to be in more, and that's going to adjust the price. You're not going to be able to get as much price as you need. Is that correct, first of all? Second of all, do you have any sense of where the supply is coming? Is it your peer group, or is it some other provider of some other type, or if it's some other type? What do you see, or do you have any insight into how potential refinance saving or transition financing is going to go with that, given the change in base rates that's going to start happening last year or so?
Well, you can jump in on that. Yeah. Yeah. You know, our strategy in the acquisition space for the last few years has really been focused on, you know, properties that are in lease-up, late in the lease-up, which is targeting exactly what you're talking about. Normally, the maximum pressure that a property faces is when it gets to 70 or 80% occupancy, when the back door opens up, and it's really more difficult to get the property stabilized. You know, that's where the maximum pressure builds, and I think in an environment where interest rates are, you know, went from what a developer underwrote at 3% to now 7-8%, that math begins to be a little bit more difficult for those. And that's really what we've targeted in terms of our acquisitions plan.
In terms of, you know, really what is driving the development in our market, it's merchant developers. If you think about what their business model is built on, it's develop, lease it up, and sell it. Because their capital at some point has to be refinanced. They have a construction loan that they've got to get out of. So, you know, if you look back to the construction that's taken place in our region since 2020, 2021, supply has definitely been higher. The last year, transaction market has been shut down, and that's part of our, the reasoning why we've been saying the transaction market is gonna open up. Cap rates are gonna have to move up because the merchant developers have to trade at some point.
As we get later into this year and into next year, we continue to believe that that pressure builds. You throw into that the stress that you have in the banking sector right now, you know, these assets need to trade at some point. You know, I think there's enough capital out there to really complete the transactions on this side. You mentioned that the properties are kinda left. You know, I think that transactions get completed on these. There's not distress in the market. I mean, the operating fundamentals are strong enough to where they're still cash flowing.
And then I think if you look back to construction costs when these started, even though, folks aren't going to get a home run on the deal, they may get a single out of it, there's still profit margin built into these, even if at lower cap rates. You know, the truth is, as part of our joint venture development platform, where we partner with developers, and we develop assets with them, with a clear path for us to own it 100%, generally, what we underwrote in 2020 and 2021 was a 5.25 cap rate. So we're just kinda getting back to really what the expectations were at the time these deals were started. So, I think transactions will continue to build from this point.
We're starting to see more brokers BOVs come out, projects hitting the market. So I think as you get to the back half of this year, and you get to the first half of next year, the transaction market continues to pick up from here.
The sense I get is you're saying that would be beneficial to you. Is that correct?
It would absolutely be beneficial to us.
Are those benefits baked into your guidance, or would that be a nice surprise to me?
Well, I think our guidance is built on that. If you're talking about acquisition volume, and built on what we've got in the pipeline now. So you can see what we've got for external growth. If those opportunities come, it will be added to. I think in terms of the point of the slide, it really was just to say that though supply is high, and it will be for several quarters, that our specific portfolio, the diversification, it doesn't totally eliminate that risk, but it certainly helps mitigate that some. It puts us in a pretty competitive position in terms of operating, you know, working through that supply. And then, so, you know, the opportunities come from, you know, on the asset side of the business, that just comes from this disruption.
As other people have pressure, and then more such friction, and Brad can take opportunities on that. But what we, our earnings guidance is based on what you're seeing in our release now. And so if we and hope we do have more opportunity, it will be upside on that.
Thank you.
Any other questions from the field? Maybe just, Brad, since you're the CIO, just thinking about the balance sheet, Al left a, you know, very low leverage in place for, you know, Clay to take over with. When I met with you guys a few weeks ago, talking about using that as a potential asset, like, how do you feel like the opportunity sets out there? And just also, like, where do you think the best opportunities are going to come? Is it going to be redevelopments? Is it going to be developments, external growth?
I mean, I think it's gonna be really all of the above. Those are, you know, redevelopments, certainly, and repositioning, some of our products or, or our projects are, are the best use of our capital. So first and, and foremost, we'll continue to, to work through that angle. And then from there, I think it is development and, and acquisitions, and, at different points in the cycle, we will lean into, those two methods at different degrees. You know, the great thing about our development pipeline, as I was mentioning earlier, is we have flexibility of when we start those. There, there's nothing that says that we have to start those projects by a specific point in time.
Generally, our entitlements are there for a long period of time, so it's not like those are burning off anytime soon. And I think as we get into a market where cap rates are increasing, certainly you know, the acquisitions become more compelling. And so we'll lean into acquisitions when it makes sense to do that. You know, what we want to do on our development is to continue and on acquisitions, to be disciplined in how we underwrite things, to be realistic with what the returns are, given where cost of capital is. And if you look back over the years, we have been quiet in the acquisition arena because, you know, we felt like cap rates were too aggressive, and-
well, and now that we're starting to see those move up a bit more, we think it's time to start finding opportunities to put our balance sheet at work. And on the development side, same thing. If we find opportunities that the returns make sense, we think it makes sense to start those as well, especially in the backdrop that Al talked about a little bit earlier, where we believe that the supply pipeline, delivery pipeline, as you get into late 2025 into 2026, is materially lower than what it is now.
I know if you look at certainly the permit data and the starts data, it's a little bit confusing 'cause it's hard to see where those numbers are coming from, given the developers we're talking to indicate their pipelines are off 50%, 60%, 70% this year. We believe you get late into 2025 and 2026, the delivery pipeline looks considerably lower than it does today, and the operating fundamentals looks really good at that point, which lines up really well with anything that we're able to start on the development side.
So one of the questions I've been getting a lot from investors is on the operating expense side. Can we go through kinda like the pain points or maybe better-than-expected kind of line items in there? Insurance is probably the first one. Just kinda any early indication of what might be happening for your renewal next year? Just any shade of color would be great.
Yeah, I mean, our insurance is a rather small part of our same-store operating expenses, roughly 5%. We renewed on July first of this year, and we'll have a 20% growth over last year's renewal. And so, you know, that'll be something we'll manage through, but again, we've got, you know, such a small part of our overall expense structure that we should be able to handle that just fine. As we look forward to next year, I mean, you know, insurers are still probably going to be looking to try to recoup some of the losses that they've had over the past several years, and so that could continue to be a challenge for us.
But again, you know, that's such a small part of our overall expense structure that we believe that we'll be able to manage through that. When you look at the rest of our operating expenses, you know, got personnel, repair and maintenance, and real estate taxes, that makes up a much larger share of our expense structure, so that's roughly 75% of it. Personnel and repair and maintenance, you know, we expect that to moderate from where it's sitting today, and it's been moderating over the first half of the year, and we expect that to continue over the latter half of the year. And we expect also that to, you know, going into next year as well. We'll have more to say about that in the coming months.
Real estate taxes, on the other hand, you know, something that we're still monitoring very closely. The Texas legislation should give us some relief there. So we're looking at, you know, continuing to look into that. But then as you see, cap rates move up, and some of our, you know, properties out there are stable off from a revenue growth standpoint. We expect those property valuations to slow down.
Mm-hmm.
That'll, that'll benefit us from the real estate tax standpoint as well.
Okay. Any last questions? If not, I have three rapid-fire questions that I've been asking all the management teams. The first one is, it's a two-parter: Do you believe the Fed is done hiking, yes or no? And do you expect the Fed to cut rates in 2024, yes or no?
Not done hiking, and likely start late 2024. Yeah, would you say?
Yep. Do you believe real estate transactions will meaningfully pick up by, A, the fourth quarter of 2023, B, the first half of 2024, or C, the second half of 2024?
Well, without defining meaningful, I'm gonna say first quarter of next year.
Are you using AI today to help you run your business, yes or no? And do you plan to ramp up spending on AI initiatives over the next year, yes or no?
Certainly use it today in certain areas, particularly in our marketing solution and areas of the business and lead traffic generation, and I'm sure it will grow in the future.
Awesome. Well, thank you, guys, and congrats again.
Thank you.
Thank you.
Appreciate it.
Yeah.