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Futures Rip Higher Amid Reports Of Truss Mini Budget “U-Turn” As CPI Looms

Futures Rip Higher Amid Reports Of Truss Mini Budget "U-Turn" As CPI Looms

US equity futures traded heavy for much of the overnight session…

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Futures Rip Higher Amid Reports Of Truss Mini Budget "U-Turn" As CPI Looms

US equity futures traded heavy for much of the overnight session ahead of the much-anticipated (and gloomy, having hammered stocks on 7 of 9 CPI days so far in 2022) inflation data at 830am ET (full preview here), even as gilt yields suspiciously slumped overnight as if someone was aware of some non-public news, before futures ripped sharply higher around 730am ET when first SkyNews...

... and then Bloomberg reported that UK's officials were likely to blink first in their showdown with the Bank of England (which recall is set to end its temporary bond buying tomorrow) and were discussing how they can back down from Prime Minister Liz Truss’s plans for a massive unfunded package of tax cuts. And while the officials are drafting options for Truss but no final decision has been taken and they are waiting for Chancellor of the Exchequer Kwasi Kwarteng to return to London from Washington, where he has been attending meetings of the International Monetary Fund, the person said, asking not to be identified commenting on private discussions.  Meanwhile, UK long-end bonds surge as the end of the BOE’s bond purchases intervention approaches.

And despite conflicting reports from other reporters such as the Guardian's political editor Pippa Crerar reporting that "No 10 rules out further changes to the mini-budget despite pressure from Tory MPs saying "the position has not changed""...

... the confusion was enough to spark some serious short covering across the risk complex which pushed futures more than 1% higher...

... because, as we noted earlier today, hedge fund positioning ahead of the CPI report is the lowest in 5 years!

The S&P index tumbled to its lowest since November 2020 yesterday, as concerns mounted about the impact of hawkish Fed policy, especially on rate-sensitive sectors such as semiconductors. Europe’s Stoxx 600 gauge steadied, while on currency markets, the dollar slumped as cable surged on hopes that Truss would U-turn and the BOE would go back to doing QT.

Among notable moves in premarket trading, US-listed Macau casino stocks fell amid concerns around the impact from China’s Covid Zero strategy, after the Communist Party’s People’s Daily newspaper ran a series of commentaries this week touting the benefits of the policy. Comcast Corp. and Altice USA Inc. rose after Citigroup Inc. analysts upgraded the cable company stocks given their ability to generate annual cash flow. Here are other notable premarket movers:

  • American Express (AXP US) declines 0.9% in US premarket trading, as Citi downgraded the stock along with shares of SLM Corp. (SLM US) and Velocity Financial (VEL US) amid likely “rather large” EPS impact even from mild US recession as credit losses build.
  • Applied Materials (AMAT US) falls as much as 1.3% in premarket trading after the chip- equipment maker slashed its earnings forecast as the semiconductor industry reacts to the Biden administration’s new restrictions on doing business with China.
  • Chip stocks are in focus after Applied Materials cut its forecast. Taiwan Semiconductor Manufacturing Co., meanwhile, lowered its capital spending target while setting its 4Q gross-margin target above expectations. Watch KLA (KLAC US), Lam Research (LRCX US), Qualcomm (QCOM US), Nvidia (NVDA US), AMD (AMD US)
  • US-listed Macau casino stocks fall in premarket trading amid concerns around the impact from China’s Covid Zero strategy, after the Communist Party’s People’s Daily newspaper ran a series of commentaries this week touting the benefits of the policy.
  • Wynn Resorts (WYNN US) -2.2%, Las Vegas Sands (LVS US) -1.4%, MGM Resorts (MGM US) -2.2%
  • Keep an eye on Owens & Minor (OMI US) stock as it was downgraded to neutral at Citi following the medical and surgical supplier’s “disappointing” third-quarter results on Wednesday. Analyst Daniel Grosslight said Wednesday’s 35% selloff seemed “punitive,” but was not “wholly unwarranted.”
  • QuidelOrtho (QDEL US) jumped 9% in extended trading on Wednesday after the health-care services company reported better-than-expected preliminary revenue for the third quarter, thanks to higher Covid-19 testing revenue.

Away from the US rollercoaster, the September reading of the consumer price index, due at 8:30 a.m. today, is expected to decelerate to an 8.1% annual pace amid a decline in gasoline prices. However, the so-called core figure, which excludes food and energy, is projected to have returned to a four-decade high. With investors already worried that underlying strength in the economy will prompt the Fed to keep aggressively raising rates, strategists have warned that hotter-than-expected inflation data could firm up bets of another large rate hike next month and fuel further stock-market declines. The index is already down about 25% so far this year and is in a bear market.

“I don’t think it’s quite time to buy the dip right now,” Oliver Kettlewell, head of fixed income and global portfolios at Mashreq Capital, said on Bloomberg TV. “You need to see data bottoming first and I don’t think the Fed will pivot anytime soon. There is more weakness in the stock markets to come. I don’t think it will fall 40-50%, but it certainly looks like it will get weaker from here.”

The third-quarter company earnings season also kicks off tomorrow and the key question for investors is whether profit margins remained resilient amid surging costs. Although analysts have downgraded estimates in recent weeks, some strategists have warned that the cuts don’t yet reflect the bleaker outlook for economic growth.

In Europe, travel, energy and banks are the strongest performing sectors. Euro Stoxx 50 rises 0.4%. FTSE MIB outperforms peers, adding 1%, FTSE 100 lags, adding 0.2%. Here are the biggest movers:

  • Norsk Hydro shares gain as much as 8% after people familiar with the matter said the Biden administration is considering a ban on Russian aluminum supplies.
  • Entain rises as much as 4.5% following its third-quarter trading update, with some analysts highlighting rising market share in the US and benefits from upcoming sporting events such as the FIFA World Cup.
  • UK domestic stocks gain as government bonds bounce back and the pound rises. British assets have been volatile as the Friday deadline for Bank of England’s emergency bond-buying program looms. Lloyds rises as much as 3.7% while Barclays gained as much as 1.8%.
  • Zotefoams shares surge as much as 30% after the polyethylene foam manufacturer said it expects earnings to be significantly ahead of market expectations. Peel Hunt said positive trends in key end markets makes them confident in the near term and future.
  • ASML shares fall as much as 3.2% after peer Applied Materials slashed its 4Q sales forecast, citing new US export control rules. Meanwhile, top customer TSMC reduced its 2022 capex target by about 10% amid a collapse in global chip demand.
  • Shares of Banca Monte dei Paschi drop as much as 20%, to a record low, after the Italian lender set the terms of its rights offer at a discount to the theoretical ex-rights price.
  • Aroundtown falls as much as 7.9% after Citi downgrades the stock to neutral and opens a negative catalyst watch on the real estate company as it prepares “for the worst.”

Earlier in the session, Asian equities fell for the fifth straight session as caution prevailed ahead of key US inflation data due later Thursday. The MSCI Asia Pacific Index slid as much as 1%, with consumer discretionary and communication services shares falling the most. Chinese tech shares plunged for a sixth day, the longest streak in almost a year, dragging down Hong Kong’s benchmark. Stocks in Japan and South Korea were also down. Chinese shares lost momentum amid a pick-up in Covid cases, after staging a strong intraday rebound in the previous session. Investors also monitored developments ahead of the upcoming Communist Party congress, which may introduce further policies to shore up growth.

A hot US consumer price index reading may spur another outsized interest-rate hike by the Federal Reserve at its next meeting. Minutes released Wednesday from the last meeting suggested some officials considered reducing the pace of rate hikes, but overall market sentiment remains jittery. Fed Officials Commit to Restrictive Rates But Calibration Needed The main MSCI Asian stock gauge is trading around its lowest level since April 2020, having fallen almost 30% this year.  The region’s stocks are “pricing in low expectations and limited investor appetite, after significant earnings and price underperformance as an asset class over the last decade,” said Sundeep Bihani, a portfolio manager at Eastspring Investments. But “a rising rate cycle, delayed Covid-19 re-opening versus the West and cash-rich balance sheets provide a good pathway to grow out of this underperformance,” he added.

Japanese stocks fell for a fourth day, dragged by telecoms and services providers, ahead of anxiously awaited US inflation data due later Thursday. The Topix fell 0.8% to close at 1,854.61, while the Nikkei declined 0.6% to 26,237.42. Daikin Industries Ltd. contributed the most to the Topix decline, decreasing 2.9%. Out of 2,167 stocks in the index, 381 rose and 1,725 fell, while 61 were unchanged.

Australian stocks, meanwhile, were steady ahead of the CPI report. The S&P/ASX 200 index closed 0.1% lower at 6,642.60 ahead of the US inflation data due later Thursday. Gains in financial shares were partly offset by losses in miners as gold price retreated. Qantas Airways was the best performer after the airline returned to profit following a streak of five consecutive half-yearly losses. Nib dropped after announcing a share placement. In New Zealand, the S&P/NZX 50 index fell 0.5% to 10,817.48.

In FX, Bloomberg dollar spot index falls 0.1%. CHF and JPY are the weakest performers in G-10 FX, NOK and GBP outperform. Pound reclaims $1.11.

In rates, treasuries were mixed after erasing declines, with 10-year note futures near Wednesday’s high ahead of the key CPI data at 8:30am New York time. US yields in belly of curve are richer by 1bp-2bp, steepening 5s30s spread; 10-year erased a 3.7bp increase, is near flat at 3.89% with gilts in the sector richer by 18bp. Sharp bull-flattening in gilts drove earlier price action; 30-year UK yields fall some 29bps to 4.53% while 10-year declines 20bps to 4.22%. Bunds 10-year yield -3.7bps to 2.27% and USTs 10-year yield is little changed.  After CPI, focal point of US session is 30-year bond auction at 1pm. This week’s Treasury auction cycle concludes with $18b 30-year bond reopening; its 3- and 10-year note sales tailed.

In commodities, WTI trades within Wednesday’s range at near $87.33. Like OPEC, the IEA Monthly Oil Market Report lowered 2022 oil demand growth outlook by 60k BPD to 1.9mln BPD, 2023 cut by 470k BPD to 1.7mln BPD. World oil demand will contract by 340k BPD Y/Y in Q4.  Spot gold gains traction as the Dollar declines ahead of US CPI, with the yellow metal back above its 21 DMA (1,672.50/oz). Base metals are firmer across the board amid the Dollar’s recent decline alongside the gains across stocks, with 3M copper back above USD 7,500/t, whilst LME aluminium outperforms.

Bitcoin tumbled again, sliding to $18,760 while ethereum dropped to a session low of $1,260.

To the day ahead now, and the main data highlight will be the US CPI release for September. Otherwise from central banks, we’ll hear from the ECB’s Nagel and the BoE’s Mann.

Market Snapshot

  • S&P 500 futures up 0.5% to 3,605.25
  • STOXX Europe 600 down 0.3% to 384.73
  • MXAP down 1.0% to 136.16
  • MXAPJ down 1.1% to 440.03
  • Nikkei down 0.6% to 26,237.42
  • Topix down 0.8% to 1,854.61
  • Hang Seng Index down 1.9% to 16,389.11
  • Shanghai Composite down 0.3% to 3,016.36
  • Sensex down 0.7% to 57,242.19
  • Australia S&P/ASX 200 little changed at 6,642.61
  • Kospi down 1.8% to 2,162.87
  • German 10Y yield little changed at 2.31%
  • Euro little changed at $0.9705
  • Brent Futures up 1.0% to $93.35/bbl
  • Gold spot up 0.0% to $1,673.32
  • U.S. Dollar Index little changed at 113.28

Top Overnight News from Bloomberg

  • Chancellor of the Exchequer Kwasi Kwarteng said the Bank of England will be responsible if UK markets suffer renewed volatility after its bond-buying program ends on Friday
  • UK pension funds are dumping assets to meet margin calls as the BOE confirmed it will end emergency bond buying, and the reverberations are being felt everywhere from Sydney to Frankfurt and New York
  • Sweden’s inflation rate reached a three- decade high last month, driven by electricity prices and the weakness of the country’s currency, keeping alive bets that the central bank could opt for faster rate hikes than its current path suggests
  • Yen traders are readying for another volatile session Thursday with the release of key US inflation figures -- data which sent the Japanese currency tumbling 2% in a matter of minutes last month on its path toward intervention
  • A Chinese developer with state backing for domestic funding has defaulted on a convertible bond and warned it may face a similar fate on offshore debt, fueling concern about Beijing’s ability to contain a broader property debt crisis
  • European natural gas jumped as worries over major facilities in Norway added to supply risks from Russia. Benchmark futures rose as much as 9.2%, after earlier swinging between gains and losses. Norway’s Nyhamna gas project is being evacuated, Dagens Naeringsliv reported

A more detailed global summary of global markets courtesy of Newsquawk

European bourses saw a choppy start to the session but have since been trending higher despite a lack of fresh fundamental drivers. Sectors are now mostly firmer, although tech remains the laggard after TSMC cut its capex guidance and flagged a decline in overall chip industry next year. Stateside, futures have been moving in tandem with their European counterparts, whilst the tech-laden NQ lags vs its peers.

Top European News

  • ECB's Wunsch said it is better to start QT sooner than later, via a pre-recorded CNBC interview.
  • EDF Working Council said in the event of a normal or very cold winter, EDF will be forced to take some users off the electricity grid; capacities will not suffice.
  • Goldman Analyst Sees UK Property Prices Falling 20% on Rate Rise
  • NATO Countries Back German Plan for European Anti-Missile Shield
  • Monte Paschi Sets Terms on Rights Offer as Banks Back Deal

Asia stocks traded cautiously following the soft handover from Wall Street where markets ended the session marginally lower after hot PPI data and mixed FOMC Minutes which spurred a short-lived dovish reaction. ASX 200 was kept afloat by outperformance in its top-weighted financials sector and as earnings optimism provided a tailwind with Qantas shares flying high on expectations for a return to profit for the current 6-month period. Nikkei 225 was lacklustre following recent currency weakness and firm PPI data which climbed to a 5-month high. KOSPI underperformed after North Korean leader Kim guided a test firing of long-range strategic cruise missiles which hit a target 2,000km away and are capable of carrying nuclear weapons. Hang Seng and Shanghai Comp. were both subdued as China continued to advocate the strict zero-COVID approach with a Foreign Ministry spokesperson noting that China needs COVID security to achieve economic growth, although downside in the mainland was contained amid support for the property industry with China local governments to purchase houses as stimulus to help developers.

Top Asian News

  • China Semiconductor Industry Association said it opposes the US Commerce Department's export control regulations and hopes the US government can correct wrong practices in a timely manner, while it was separately reported that TSMC (2330 TT) received a 1-year US licence for China chip expansion.
  • TSMC (2330 TT/TSM) Q3 2022 (TWD): Net profit 280.9bln (exp. 265.64bln), Gross margin 60.4% (exp. 58.9%), and said the Co. faces challenges from rising inflationary costs in 2023; 2022 Capex seen around USD 36bln (vs prev. guidance of USD 40-44bln); sees Q4 business around flat; not considering share buyback
  • Samsung (005930 KS) has been granted a 1yr exemption from new US restrictions that block exports of advanced chips and related equipment to China, according to WSJ sources.
  • Chinese Health Official said China will continue to strengthen COVID prevention and control, will resolutely guard against large-scale outbreaks, Reuters.
  • Chinese local governments are to purchase houses as stimulus to support developers, according to China Securities Times.
  • Japanese Finance Minister Suzuki said excess FX volatility and disorderly moves can hurt the economy and financial stability, while he told the G20 that Japan is deeply worried about recent sharp FX volatility and explained that recent intervention was prompted by excess moves by speculators. Furthermore, Suzuki said they cannot tolerate excess FX moves by speculators and will take decisive action on speculative FX moves in which they are focused on FX volatility rather than the yen level regarding intervention, according to Reuters.

FX

  • DXY declined under 113.00 ahead of the US CPI metric, although likely as a function of GBP strength throughout the European morning.
  • EUR benefits from the pullback in the Buck, with EUR/USD back above 0.9700.
  • Antipodeans are also faring well alongside the improved risk tone across markets.
  • USD/CNH tested 7.2000 to the upside, whilst China continues with its zero-COVID policy ahead of the CCP National Congress.

Fixed Income

  • US Treasuries are still observing some caution before potentially key CPI data, but EU bonds are flying just a day after diving to new cycle lows.
  • UK debt is leading the mainstream recovery whilst there is chat in UK markets about another possible fiscal U-turn and/or the BoE relenting on buy-backs to offer further assistance beyond tomorrow, albeit all speculation at this stage.

Commodities

  • WTI and Brent front-month futures are modestly firmer intraday but off best levels after settling lower yesterday.
  • IEA Monthly Oil Market Report: lowers 2022 oil demand growth outlook by 60k BPD to 1.9mln BPD, 2023 cut by 470k BPD to 1.7mln BPD. World oil demand will contract by 340k BPD Y/Y in Q4.
  • Spot gold gains traction as the Dollar declines ahead of US CPI, with the yellow metal back above its 21 DMA (1,672.50/oz).
  • Base metals are firmer across the board amid the Dollar’s recent decline alongside the gains across stocks, with 3M copper back above USD 7,500/t, whilst LME aluminium outperforms

Geopolitics

  • Sites in Ukraine's capital of Kyiv were targeted by shelling early today, according to the administration in Kyiv cited by Sky News Arabia. Furthermore, Ukrainian President Zelensky's office later said that a critical infrastructure facility was hit by drone strikes in the Kyiv region, according to Reuters.
  • Ukraine President Zelenskiy said cannot have diplomacy with Russia today and cannot respect leaders who are killing and not respecting international law.
  • Saudi Arabia fully rejected statements criticising the kingdom after the OPEC+ output cut decision, while it said that statements critical of the kingdom are not based on facts and set the OPEC+ decision outside its economic context.
  • US officials are concerned the Russian oil price cap will fail as a result of the OPEC+ cut, according to Bloomberg.
  • North Korean leader Kim guided a test firing of long-range strategic cruise missiles which hit a target 2,000km away and are capable of carrying nuclear weapons, while North Korean leader Kim said focus should be on developing nuclear forces, according to Yonhap and KCNA.
  • North Korea reportedly cancelled a meeting with the EU diplomatic service, while the reason was unclear but followed two recent statements from Brussels that may have impacted DPRK decision-making, according to NK News citing sources.
  • Japan's Defence Minister said North Korea has likely achieved the capability of mounting a nuclear warhead on a ballistic missile that could reach Japan, according to Reuters.
  • US FCC is set to ban all US sales of new Huawei and ZTE equipment as well as some sales of video surveillance equipment from three other Chinese firms amid national security concerns, according to Axios citing sources.

US Event Calendar

  • 08:30: Sept. CPI MoM, est. 0.2%, prior 0.1%
    • CPI YoY, est. 8.1%, prior 8.3%
    • CPI Ex Food and Energy MoM, est. 0.4%, prior 0.6%
    • CPI Ex Food and Energy YoY, est. 6.5%, prior 6.3%
  • 08:30: Oct. Initial Jobless Claims, est. 225,000, prior 219,000
  • Continuing Claims, est. 1.37m, prior 1.36m

DB's Jim Reid concludes the overnight wrap

There’s been little relief for investors over the last 24 hours, with the major asset classes fluctuating between gains and losses as markets were left with plenty of global developments to digest. For much of the day it had looked as though we might see equities begin to stabilise, but ultimately the S&P 500 (-0.33%) nose-dived into the close to decline for a 6th consecutive session and hit its lowest level since November 2020. For reference, if we get a 7th consecutive decline, that would be the worst run for the index since February 2020 as fears about the global spread of Covid-19 ramped up. Whether that happens could largely hinge on today’s all-important CPI print from the US, which is the last big piece of data the Fed will get ahead of their next decision in just under 3 weeks’ time. Bear in mind it was only last month that the stronger-than-expected reading on core CPI sparked a big re-evaluation about when the Fed would slow down their rate hikes, with futures pricing out the chances they’d adjust to 50bp hikes in November in favour of a continued 75bps pace. In turn, that triggered the biggest one-day decline in the S&P 500 since June 2020, with a -4.32% move, so investors will be keenly attuned for any fresh surprises today.

Ahead of that release, we got an advance look yesterday at US inflation pressures last month from the PPI reading. That showed the monthly headline measure coming in above expectations at +0.4% (vs. +0.2% expected), which also meant that the year-on-year measure only fell back to +8.5% (vs. +8.4% expected). The core measure excluding food and energy was more in line with expectations however, coming in at +0.3%, with the year-on-year core reading at +7.2% (vs. +7.3% expected). In terms of what our US economists are expecting for today, they think that the headline CPI print will come in at +0.28% (vs. +0.12% in August) as energy continues to drag on the main print. However, they see core CPI which excludes energy and food prices coming in at a stronger +0.44% (vs. +0.57% in September), and it’s that reading which should get the most focus given last month’s upside surprise. In turn, those numbers should push the year-on-year CPI down to +8.1%, while core CPI should pick up to +6.5%.

As we look forward to the CPI print later, there are some initial signs of markets recovering their poise, with the VIX index of volatility (-0.06pts) ticking lower for the first time in a week. That coincided with continued falls in US equities, as mentioned, with the S&P 500 down -0.33% and the NASDAQ a hair lower at -0.09%, although futures today are pointing modestly higher, with contracts on the S&P 500 (+0.16%) and the NASDAQ 100 (+0.11%) both advancing. One factor supporting the amidst the broader uncertainty was some positive corporate news as we head into earnings season, with PepsiCo (+4.18%) being one of the top performers in the S&P after they increased their profit and sales outlook for the rest of the year. That said, the European indices were much less positive, with the STOXX 600 (-0.53%) losing ground for a 6th consecutive session, and European equity futures are pointing towards further losses again today.

Those equity losses yesterday came as we got the minutes from the recent September FOMC meeting, which reflected the growing debate on the Committee about the risks to over- or under-doing the tightening cycle. Several participants highlighting the need to maintain a restrictive stance as long as necessary and the danger of prematurely easing policy, while several participants observed risks would become more two-sided as policy moved into restrictive territory. There was also continued debate about the form of labour market softening that would be required to help return inflation to target; would unemployment go up or job openings go down? This debate isn’t new in Fed commentary, but the emphasis placed on both camps drove Treasury yields a bit lower following the release. In terms of yesterday’s comments, President Kashkari said earlier in the session that the bar for a monetary policy pivot was “very high”. By the end of the day, 2yr Treasury yields had fallen -1.5bps, 10yr yields retreated -5.1bps, while pricing for the November FOMC was almost unchanged at +73.9bps. Overnight, 10yr yields (+2.5bps) have seen another move higher, trading at 3.92% as we go to press.

Back here in the UK, there was still plenty going on yesterday, with the main development being that a BoE spokesperson reiterated Governor Bailey’s comments from Tuesday evening that their intervention in the gilts market would come to an end tomorrow as planned. The spokesperson said that “temporary and targeted purchases of gilts will end on 14 October” and that this “has been made absolutely clear in contact with the banks at senior levels.” That message also pushed back against what the FT had reported in the small hours of yesterday, where they said that the BoE had privately signalled they could extend the intervention past Friday’s deadline.

Against this backdrop, UK assets remained volatile, with the 30yr gilt yield (+2.3bps) rising above 5% at one point for the first time since the BoE’s intervention began, before paring back nearly all those gains to close at 4.80%. In fact, the 30yr was actually one of the few maturities to see yields rise on the day, with 2yr gilt yields down -20.3bps, and 10yr gilt yields down -0.4bps. However, there were other signs that investors were still nervous, with implied sterling-dollar volatility over the next month moving higher once again to the levels seen right after the mini-budget announcement in late September. Interestingly, there was also a warning from the Conservative chair of the Treasury Select Committee, Mel Stride, who tweeted about the government’s tax cuts that “Credibility might now be swinging towards evidence of a clear change in tack rather than just coming up with other measures that try to square the fiscal circle.” In the meantime, we heard from BoE Chief Economist Pill too, who pointed towards further rate hikes in saying that “I am still inclined to believe that a significant monetary policy response will be required to the significant macro and market news of the past few weeks.”

Elsewhere in Europe, sovereign bonds had followed a similar pattern to gilts, with sharp rises early in the session to fresh multi-year highs before those gains were then pared back significantly. For instance, yields on 10yr bunds had exceeded the 2.40% mark at one stage, before only closing up +1.4bps at 2.30%, whilst yields on 10yr OATs (+3.0bps) and BTPs (+6.2bps) echoed that movement. Those moves came as we heard from ECB policymakers, including President Lagarde who confirmed that discussions on QT had started. There were also comments from others on the Governing Council, including Austria’s Holzmann (one of the biggest hawks) who said that markets were “spot on” about the ECB’s plans, and that a 100bp hike was “beyond what we would need to signal to the market that we are serious. The Netherlands’ Knot separately said that policy rates were “still way below neutral” and that “at least two more significant hikes” were needed before the ECB got back into “the range of plausible estimates for neutral”.

Staying on Europe, our colleagues in corporate credit research have separately published a report analysing risk-free hedges in place (link here), and start to quantify the impact on leverage loan and HY issuers. The report may be sector-biased, but the thought process has broader market implications worth considering.

This morning in Asia, the major equity markets have followed the moves lower in the US and Europe ahead of that US inflation print later on. Currently, the Kospi (-1.14%) is the biggest underperformer, although the Hang Seng (-1.00%), the Nikkei (-0.48%) and the CSI (-0.29%) have also lost ground. The main exception is the Shanghai Composite (+0.16%), which has made modest gains. Those moves have occurred amidst further weakness for the Japanese yen, which has remained above the 146 level this morning against the dollar, having hit a post-1998 low yesterday of 146.97 per US Dollar. That follows comments from BoJ Governor Kuroda, who promised to keep monetary easing in place, contrasting with the other central banks. Separately, data this morning showed that producer prices had risen more than expected in September, coming in at +9.7% year-on-year (vs. +8.9% expected).

Looking at yesterday’s other data, UK monthly GDP unexpectedly contracted in August with a -0.3% decline (vs. unch expected), and July’s growth was revised down to +0.1% (vs. +0.2% previously). Elsewhere, Euro Area industrial production grew by +1.5% in August (vs. +0.7% expected).

To the day ahead now, and the main data highlight will be the US CPI release for September. Otherwise from central banks, we’ll hear from the ECB’s Nagel and the BoE’s Mann.

Tyler Durden Thu, 10/13/2022 - 08:04

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Tennessee Population Grows As Residents Leave More Liberal States

Tennessee Population Grows As Residents Leave More Liberal States

Authored by Chase Smith via The Epoch Times (emphasis ours),

Peace and…

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Tennessee Population Grows As Residents Leave More Liberal States

Authored by Chase Smith via The Epoch Times (emphasis ours),

Peace and quiet is still a major draw for people moving to smaller-yet-growing states such as Tennessee from more crowded ones such as New York, but lower taxes, great personal freedom, and conservative politics have been bringing even more people in recent years.

The Tennessee Welcome Sign is seen in 2014. (Chase Smith/The Epoch Times)

Tennessee surpassed 7 million residents in 2022 for the first time, according to U.S. Census Bureau estimates, making it the seventh-fastest-growing state in the United States by population last year.

States such as Tennessee have become attractive to individuals beyond the natural environment, mountains, and rivers. Those interviewed by The Epoch Times who moved from Illinois and New York said lower property taxes, low or no state income tax, and more conservative populations have become attractive reasons to move to the southeast.

According to the bureau, the Southeastern United States is the most populated region of the country, with nearly 129 million residents, and it was the largest-gaining region in 2022, growing by 1.1 percent, or 1.3 million people. Most of the increase in population came from other U.S. states (867,935) while a smaller percentage came from international migration (414,740).

The West was the only region to also increase in population, with an annual increase of 0.2 percent. The Northeast and Midwest both lost residents overall to other regions.

Corporate World to Homesteading

We wanted to be out in the middle of nowhere,” said Matt Moreno, who moved to Spring City, Tennessee, with his wife, Marla, from the Chicago area in 2020. “We were tipped off about the property and came here fresh out of the corporate world in Chicago. We thought at first it might just be a temporary move, not permanent, and we could maybe make an Air BnB out of it and move back up north once COVID was over.”

The Morenos, both in their 30s, grew up in an area of northern Illinois about an hour north of Chicago and less than a half-hour south of Kenosha, Wisconsin—where riots and looting dominated the public psyche just around the time the Morenos were packing up to head south.

Matt Moreno works in real estate, while Marla Moreno sells herbal medicine products. While the natural environment and ability to become more homesteaders than city-dwellers were attractive, so were statistics such as lower crime, lower taxes, and conservative politics.

You see a lot of people here with guns on their side, but we feel safer here,” Matt Moreno said.

The move wasn’t the easiest decision to make, he said, noting that he wasn’t good with his hands or “mechanically inclined” coming from the corporate world.

Matt and Marla Moreno are seen in the surrounding nature of their mountain home in Tennessee, after moving from the Chicago area. (Courtesy of Matt Moreno)

“The thing about the area that surprised me the most was the sense of community,” he said. “In Illinois, people will run you over and flick you off in the street. When we came here, neighbors came together to help us get established.”

Moreno got into the real estate world in Tennessee quickly after moving and said now he has been able to help other couples and families wanting to move to the area from similar situations he was in.

Aside from the natural beauty and culture, he said the political climate was another major reason for their move.

Tennessee is a very conservative state with conservative values, and to be honest, that attracted me,” he said. “Illinois had an extremely liberal workforce, and I like being here among like-minded thinkers.”

Other positives for Moreno include the lack of state income tax in Tennessee, which is why a number of people have told him they’re moving to the state, too.

Moreno said they had some learning experiences, such as learning that the mountain they lived on was quite windy and the tents they put up to store his wife’s products for her herbal medicine line wouldn’t hold up.

They also got into homesteading, starting with a goat they found for sale on Craigslist. They quickly discovered goats are social animals, so they bought a second and then a third. Then came chickens and ducks.

“We felt people were rude and only cared about money where we were,” he said. “It’s peaceful here. We have trails to access and hike. It’s just a very different world.”

In his work as a real estate agent, one of the main questions people have is about any restrictions on building on land for sale. They’re usually surprised to learn that there are none and are really excited about that fact, he said.

Living in a rural area comes with some inconveniences, such as driving longer distances for shopping or eating, but Moreno said he wouldn’t trade the location.

From Upstate New York to Southeast Tennessee

The Morenos’ sentiment was shared by Lynne Jornov, a nurse who moved south with her husband, Gary, in 2018. At first, they moved to Soddy-Daisy, but relocated to the small town of Dunlap after about two years.

Lynne Jornov’s job as a nurse allows her to work anywhere, while her husband’s work as a trucker gives him flexibility as well. The two said the main reasons for their move were taxes and conservative values.

“The cost of running a small business in New York was … pretty much unmanageable,” she said. “That, together with property taxes, [made us realize that] we could retire and own our own home outright and still have to pay $10,000 a year in property taxes just to stay there. That was a little eye-opening, along with the political insanity up there. It just wasn’t worth it anymore.”

She said that although their families are still in New York, she and her husband “had to do something” and move. They also wanted to get into agriculture, with a few cows, to become more self-sufficient.

“It was a tough decision,” she said. “[New York] was very beautiful, we had all four seasons. Of course, my parents are getting older and I would love to be there all the time, but we wouldn’t be able to live anywhere near as comfortably as we do here.”

She said the couple has grown children, so that wasn’t a factor in their decision, but they would have had a tough time raising their kids in New York’s current political climate.

Gary Jornov added that toll roads called “choice lanes,” which are currently being proposed by Tennessee legislators, aren’t something he would want to see.

This state needs to be conservative, that’s why we came here,” he said in an interview. “We want to keep conservative clause and not be taxed to death. Hopefully that doesn’t change here and stays the way it is.”

Lynne Jornov said she understands the concerns of Tennessee natives who may not want people from states with different cultural backgrounds to bring their values with them, but that’s not what they want anyway.

“We could’ve stayed in New York for that,” she said. “Tennessee is more of what we were looking for. Thank God we don’t have small kids because I wouldn’t want to raise a child in any of those places. Things they are doing and allowing are absolutely insane.”

Southward Move Followed by Millions

Jae Gillispie, who moved from a suburban area in Illinois, has documented her move with her husband to Pikeville, Tennessee, on social media for tens of thousands of viewers.

She said she left her job of 21 years, and her husband left his job of 25 years.

“We downsized,” she said. “No traffic. We love our little home. It’s just beautiful out here. I am so glad we did this. It was a huge risk, because we are not retired. We made decent money, good money, and now we make less than half of what we did, but it’s worth every penny.”

The couple moved to a rural area around 2 1/2 miles from Fall Creek Falls State Park, the largest and most visited state park in Tennessee, and around 14 miles from the small town of Pikeville.

If you’re thinking about moving out here, which a lot of people are, this state is going crazy. Everything has doubled and tripled in price because this is such a hot state right now,” she said, adding that they moved in 2020, just as the pandemic began. “It’s not cheap anymore, it’s definitely going up in price, but it’s the best move we ever made.”

She said that after 48 years in Illinois, they decided to leave for a variety of reasons, including taxes.

“The freedoms down here, you can’t beat that,” she said. “So just to set some of the people straight that care about transplants coming down—we’re not here to change anything, we’re pretty darn conservative.”

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MAA REPORTS FOURTH QUARTER AND FULL YEAR 2022 RESULTS

MAA REPORTS FOURTH QUARTER AND FULL YEAR 2022 RESULTS
PR Newswire
GERMANTOWN, Tenn., Feb. 1, 2023

GERMANTOWN, Tenn., Feb. 1, 2023 /PRNewswire/ — Mid-America Apartment Communities, Inc., or MAA (NYSE: MAA), today announced operating results for the…

Published

on

MAA REPORTS FOURTH QUARTER AND FULL YEAR 2022 RESULTS

PR Newswire

GERMANTOWN, Tenn., Feb. 1, 2023 /PRNewswire/ -- Mid-America Apartment Communities, Inc., or MAA (NYSE: MAA), today announced operating results for the quarter ended December 31, 2022.

Fourth Quarter 2022 Operating Results


Three months ended
December 31,



Year ended December 31,




2022



2021



2022



2021


Earnings per common share - diluted


$

1.67



$

1.60



$

5.48



$

4.61















Funds from operations (FFO) per Share - diluted


$

2.12



$

2.01



$

8.20



$

7.20















Core FFO per Share - diluted


$

2.32



$

1.90



$

8.50



$

7.01


A reconciliation of FFO and Core FFO to Net income available for MAA common shareholders, and discussion of the components of FFO and Core FFO, can be found later in this release. FFO per Share – diluted and Core FFO per Share – diluted include diluted common shares and units. 

Eric Bolton, Chairman and Chief Executive Officer, said, "We closed 2022 with better than expected results and carry good momentum into the new year.  As the broader economy adjusts to a higher interest rate environment, we believe that MAA is well positioned to capture another year of solid performance from our existing portfolio.  Supported by a strong balance sheet, the company is also in position to capture new growth opportunities that we believe are likely to emerge."

Highlights

  • During the fourth quarter of 2022, MAA's Same Store Portfolio produced increases in property revenues, operating expenses and Net Operating Income (NOI) of 13.6%, 7.9% and 16.8%, respectively, as compared to the same period in the prior year.
  • During the fourth quarter of 2022, MAA closed on the disposition of a 396-unit multifamily community in Maryland and a 288-unit multifamily community in the Austin, Texas market for combined gross proceeds of $157.7 million generating a gain on sale of depreciable real estate assets of $82.8 million.
  • As of the end of the fourth quarter of 2022, MAA had six communities under development, representing 2,310 units once complete, with a projected total cost of $728.7 million and an estimated $437.0 million remaining to be funded.
  • During the fourth quarter of 2022, MAA completed the construction of MAA Windmill Hill, a multifamily development community located in the Austin, Texas market and commenced development of multifamily communities MAA Breakwater located in the Tampa, Florida market and MAA Nixie located in the Raleigh/Durham, North Carolina market.
  • During the fourth quarter of 2022, MAA closed on the pre-purchase of a multifamily community located in the Charlotte, North Carolina market with development expected to begin in the second half of 2023.
  • As of the end of the fourth quarter of 2022, MAA had a recently completed development community and a recently acquired community in lease-up. One community is expected to stabilize in the second quarter of 2023 and one in the fourth quarter of 2023.
  • During the fourth quarter of 2022, MAA completed the lease-up of MAA Westglenn, located in the Denver, Colorado market, MAA Park Point, located in the Houston, Texas market and MAA Robinson located in the Orlando, Florida market.
  • MAA completed the redevelopment of 1,327 apartment homes during the fourth quarter of 2022, capturing average rental rate increases of approximately 10% above non-renovated units.
  • MAA's balance sheet remains strong with a historically low Net Debt/Adjusted EBITDAre ratio of 3.71x and $1.3 billion of combined cash and available capacity under MAALP's unsecured revolving credit facility as of December 31, 2022.
  • Subsequent to the end of the fourth quarter of 2022, MAA settled its forward sale agreements with respect to a total of 1.1 million shares of its common stock for net proceeds of approximately $204 million.

Same Store Portfolio Operating Results
To ensure comparable reporting with prior periods, the Same Store Portfolio includes properties that were owned by MAA and stabilized at the beginning of the previous year.

Same Store Portfolio results for the three and twelve months ended December 31, 2022 as compared to the same periods in the prior year are summarized below:



Three months ended December 31, 2022 vs. 2021


Twelve months ended December 31, 2022 vs. 2021



Revenues


Expenses (1)


NOI


Average Effective
Rent per Unit


Revenues


Expenses (2)


NOI


Average Effective
Rent per Unit

Same Store Operating Growth


13.6 %


7.9 %


16.8 %


14.9 %


13.5 %


7.6 %


17.1 %


14.6 %



(1) 

Excludes $0.2 million in storm-related expenses related to hurricanes that are recorded in Non-Same Store operating expenses.

(2) 

Excludes $1.8 million in storm-related expenses related to hurricanes that are recorded in Non-Same Store operating expenses.

A reconciliation of NOI, including Same Store NOI, to Net income available for MAA common shareholders, and discussion of the components of NOI, can be found later in this release.

Same Store Portfolio operating statistics for the three and twelve months ended December 31, 2022 are summarized below:



Three months ended December 31, 2022


Twelve months ended December 31, 2022


December 31, 2022



Average Effective
Rent per Unit



Average
Physical
Occupancy


Average Effective
Rent per Unit



Average
Physical
Occupancy


Resident Turnover

Same Store Operating Statistics


$

1,646



95.6 %


$

1,565



95.7 %


46.1 %

Same Store Portfolio lease pricing for leases effective during the fourth quarter of 2022, as compared to the prior lease, increased 2.2% for leases to new move-in residents, reflecting typically slower seasonal leasing volumes, and increased 10.1% for renewing leases, which produced an increase of 5.7% for both new and renewing leases on a blended basis. The rent-to-resident-income relationship for new leases signed during the fourth quarter of 2022 remained consistent with recent trends in the range of 22%.

Same Store Portfolio lease pricing for leases effective during the year ended December 31, 2022, as compared to the prior lease, increased 13.0% for leases to new move-in residents and increased 14.8% for renewing leases, which produced an increase of 13.9% for both new and renewing leases on a blended basis. 

Acquisition and Disposition Activity
During the fourth quarter of 2022, MAA closed on the pre-purchase of a multifamily community, Alta 10th, located in the Charlotte, North Carolina market. The community will be developed through a joint venture with a local developer.  Approximately $10 million has been funded as of December 31, 2022, primarily related to land, with development expected to begin in the second half of 2023.  During the fourth quarter of 2022, MAA also acquired a six acre land parcel in the Raleigh, North Carolina market for approximately $9 million and started development of MAA Nixie on the property.  MAA expects to begin multifamily development projects on four to six land parcels currently owned or under contract over the next 18 to 24 months.

During the fourth quarter of 2022, MAA closed on the disposition of a 396-unit multifamily community in Maryland and a 288-unit multifamily community in the Austin, Texas market for combined gross proceeds of $157.7 million, resulting in a combined gain on the sale of depreciable real estate assets of $82.8 million.  

Development and Lease-up Activity
A summary of MAA's development communities under construction as of the end of the fourth quarter of 2022 is set forth below (dollars in thousands): 




Units as of



Development Costs as of



Expected Project


Total



December 31, 2022



December 31, 2022



Completions By Year


Development












Expected



Spend



Expected





Projects



Total



Delivered



Leased



Total



to Date



Remaining



2023



2024



2025



6




2,310









$

728,700



$

291,699



$

437,001




2




2




2


The expected average stabilized NOI yield on these communities is 5.6%. During the fourth quarter of 2022, MAA funded $67.0 million of costs for current and planned projects, including predevelopment activities.

A summary of the total units, cost and the average physical occupancy of MAA's lease-up communities as of the end of the fourth quarter of 2022 is set forth below (dollars in thousands):

Total



As of December 31, 2022


Lease-Up



Total



Physical



Spend


Projects (1)



Units



Occupancy



to Date



2




694




74.6

%


$

198,128




(1) 

Both lease-up projects are expected to stabilize in 2023.

Property Redevelopment and Repositioning Activity
A summary of MAA's interior redevelopment program and Smart Home technology initiative as of the end of the fourth quarter of 2022 is set forth below:



As of December 31, 2022





Units



Units



Average Cost



Increase in Average





Completed



Completed



per Unit



Effective Rent per Unit





QTD



YTD



YTD



YTD



Redevelopment



1,327




6,574



$

6,109



$

133

















Smart Home



2,921




24,029



$

1,535



$

25


(1)



(1) 

Projected increase upon lease renewal, opt in or unit turnover.

As of December 31, 2022, MAA had completed installation of the Smart Home technology (unit entry locks, mobile control of lights and thermostat and leak monitoring) in over 71,000 units across its apartment community portfolio since the initiative began during the first quarter of 2019.

During the fourth quarter of 2022, MAA continued its property repositioning program to upgrade and reposition the amenity and common areas at select apartment communities. The program includes targeted plans to move all units at the properties to higher rents that are expected to deliver yields on cost averaging 8%. During the year ended December 31, 2022, work continued on properties selected for this program in 2021. For the year ended December 31, 2022, MAA spent $19.3 million on this program capturing yields on cost averaging approximately 17% between completed projects and those current projects where properties have begun repricing units to higher rents. 

Capital Expenditures
A summary of MAA's capital expenditures and Funds Available for Distribution (FAD) for the three and twelve months ended December 31, 2022 and 2021 is set forth below (dollars in millions, except per Share data):



Three months ended
December 31,



Year ended December 31,




2022



2021



2022



2021


Core FFO


$

274.7



$

225.2



$

1,008.2



$

830.6


Recurring capital expenditures



(13.9)




(19.3)




(98.2)




(81.1)


Core adjusted FFO (Core AFFO)



260.8




205.9




910.0




749.5


Redevelopment, revenue enhancing, commercial and other capital
expenditures



(61.9)




(39.1)




(194.9)




(154.0)


FAD


$

198.9



$

166.8



$

715.1



$

595.5















Core FFO per Share - diluted


$

2.32



$

1.90



$

8.50



$

7.01


Core AFFO per Share - diluted


$

2.20



$

1.74



$

7.67



$

6.32


A reconciliation of FFO, Core FFO, Core AFFO and FAD to Net income available for MAA common shareholders, and discussion of the components of FFO, Core FFO, Core AFFO and FAD, can be found later in this release.

Balance Sheet and Financing Activities
As of December 31, 2022, MAA had $1.3 billion of combined cash and available capacity under MAALP's unsecured revolving credit facility.

Dividends and distributions paid on shares of common stock and noncontrolling interests during the fourth quarter of 2022 were $148.3 million, as compared to $121.5 million for the same period in the prior year.

In January 2023, MAA physically settled its two forward sale agreements with respect to a total of 1.1 million shares of its common stock  and received net proceeds of approximately $204 million.

Balance sheet highlights as of December 31, 2022 are summarized below (dollars in billions):

Total debt to adjusted
total assets (1)


Net Debt/Adjusted
EBITDAre (2)


Total debt
outstanding



Average effective
interest rate


Fixed rate debt as a %
of total debt


Total debt average
years to maturity


28.4 %


3.71x


$

4.4



3.4 %


99.5 %



7.9




(1) 

As defined in the covenants for the bonds issued by MAALP.

(2) 

Adjusted EBITDAre is calculated for the trailing twelve month period ended December 31, 2022.

A reconciliation of Net Debt to Unsecured notes payable and Secured notes payable and a reconciliation of Adjusted EBITDAre to Net income, along with discussion of the components of Net Debt and Adjusted EBITDAre, can be found later in this release.

ESG
As of the end of 2022, MAA's corporate initiatives have led to significant progress in key social and environmental performance areas. We have achieved a 21.9% reduction in energy use intensity and a 30.8% reduction in GHG emissions intensity from our 2018 baseline, meeting our goal seven years before our original 2028 target, and we believe we are on track to achieve the same in indoor water use intensity. Additionally, we have updated 35% of our portfolio to maximize energy efficiency and now have 25 green-certified communities, with more in the pipeline.

We also have a number of community engagement efforts underway and have reported our progress through our annual Corporate Sustainability Report, CDP disclosure, and GRESB assessment, the latter of which we have now improved year over year since our first submission in 2020. We will continue to focus on deepening engagement, establishing new targets, and building an integrated pathway for ESG, which is an integral component of our continued resiliency and creates a positive impact for our residents, associates, and investors.

116th Consecutive Quarterly Common Dividend Declared
MAA declared its 116th consecutive quarterly common dividend, which was paid on January 31, 2023 to holders of record on January 13, 2023. The current annual dividend rate is $5.60 per common share, an increase of 12% from the immediately prior rate. The timing and amount of future dividends will depend on actual cash flows from operations, MAA's financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986 and other factors as MAA's Board of Directors deems relevant. MAA's Board of Directors may modify the dividend policy from time to time.

2023 Earnings and Same Store Portfolio Guidance
MAA is providing initial 2023 guidance for Net income per diluted common share, Core FFO per Share and Core AFFO per Share, along with its expectations for growth of Property revenue, Property operating expense and NOI for the Same Store Portfolio in 2023. MAA expects to update its 2023 Net income per diluted common share, Core FFO per Share and Core AFFO per Share guidance on a quarterly basis.

FFO, Core FFO and Core AFFO are non-GAAP financial measures. Acquisition and disposition activity materially affects depreciation and capital gains or losses, which combined, generally represent the majority of the difference between Net income available for common shareholders and FFO. As discussed in the definitions of non-GAAP financial measures found later in this release, MAA's definition of FFO is in accordance with the National Association of Real Estate Investment Trusts', or NAREIT's, definition, and Core FFO represents FFO further adjusted for items that are not considered part of MAA's core business operations. MAA believes that Core FFO is helpful in understanding operating performance in that Core FFO excludes not only depreciation expense of real estate assets and certain other non-routine items, but it also excludes certain items that by their nature are not comparable over periods and therefore tend to obscure actual operating performance.

2023 Guidance



Earnings:


Full Year 2023

Earnings per common share - diluted


$5.97 to $6.37

Core FFO per Share - diluted


$8.88 to $9.28

Core AFFO per Share - diluted


$7.96 to $8.36




MAA Same Store Portfolio:



Property revenue growth


5.25% to 7.25%

Property operating expense growth


5.15% to 7.15%

NOI growth


5.30% to 7.30%

MAA expects Core FFO for the first quarter of 2023 to be in the range of $2.14 to $2.30 per Share, or $2.22 per Share at the midpoint. MAA does not forecast Net income per diluted common share on a quarterly basis as MAA generally cannot predict the timing of forecasted acquisition and disposition activity within a particular quarter (rather than during the course of the full year). Additional details and guidance items are provided in the Supplemental Data to this release.

Supplemental Material and Conference Call
Supplemental data to this release can be found on the "For Investors" page of the MAA website at www.maac.com. MAA will host a conference call to further discuss fourth quarter results on February 2, 2023, at 9:00 AM Central Time. The conference call-in number is 877-830-2598. You may also join the live webcast of the conference call by accessing the "For Investors" page of the MAA website at www.maac.com. MAA's filings with the Securities and Exchange Commission (SEC) are filed under the registrant names of Mid-America Apartment Communities, Inc. and Mid-America Apartments, L.P.

About MAA
MAA, an S&P 500 company, is a real estate investment trust (REIT) focused on delivering full-cycle and superior investment performance for shareholders through the ownership, management, acquisition, development and redevelopment of quality apartment communities primarily in the Southeast, Southwest and Mid-Atlantic regions of the United States. As of December 31, 2022, MAA had ownership interest in 101,986 apartment units, including communities currently in development, across 16 states and the District of Columbia. For further details, please visit the MAA website at www.maac.com or contact Investor Relations at investor.relations@maac.com, or via mail at MAA, 6815 Poplar Ave., Suite 500, Germantown, TN 38138, Attn: Investor Relations.

Forward-Looking Statements
Sections of this release contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to our expectations for future periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future. Such forward-looking statements include, without limitation, statements regarding expected operating performance and results, property stabilizations, property acquisition and disposition activity, joint venture activity, development and renovation activity and other capital expenditures, and capital raising and financing activity, as well as lease pricing, revenue and expense growth, occupancy, interest rate and other economic expectations. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "forecasts," "projects," "assumes," "will," "may," "could," "should," "budget," "target," "outlook," "proforma," "opportunity," "guidance" and variations of such words and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, as described below, which may cause our actual results, performance or achievements to be materially different from the results of operations, financial conditions or plans expressed or implied by such forward-looking statements. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such forward-looking statements included in this release may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

The following factors, among others, could cause our actual results, performance or achievements to differ materially from those expressed or implied in the forward-looking statements:

  • inability to generate sufficient cash flows due to unfavorable economic and market conditions, changes in supply and/or demand, competition, uninsured losses, changes in tax and housing laws, or other factors;
  • exposure to risks inherent in investments in a single industry and sector;
  • adverse changes in real estate markets, including, but not limited to, the extent of future demand for multifamily units in our significant markets, barriers of entry into new markets which we may seek to enter in the future, limitations on our ability to increase or collect rental rates, competition, our ability to identify and consummate attractive acquisitions or development projects on favorable terms, our ability to consummate any planned dispositions in a timely manner on acceptable terms, and our ability to reinvest sale proceeds in a manner that generates favorable returns;
  • failure of development communities to be completed within budget and on a timely basis, if at all, to lease-up as anticipated or to achieve anticipated results;
  • unexpected capital needs;
  • material changes in operating costs, including real estate taxes, utilities and insurance costs, due to inflation and other factors;
  • inability to obtain appropriate insurance coverage at reasonable rates, or at all, or losses from catastrophes in excess of our insurance coverage;
  • ability to obtain financing at favorable rates, if at all, or refinance existing debt as it matures;
  • level and volatility of interest or capitalization rates or capital market conditions;
  • the effect of any rating agency actions on the cost and availability of new debt financing;
  • significant change in the mortgage financing market or other factors that would cause single-family housing or other alternative housing options, either as an owned or rental product, to become a more significant competitive product;
  • ability to continue to satisfy complex rules in order to maintain our status as a REIT for federal income tax purposes, the ability of MAALP to satisfy the rules to maintain its status as a partnership for federal income tax purposes, the ability of our taxable REIT subsidiaries to maintain their status as such for federal income tax purposes, and our ability and the ability of our subsidiaries to operate effectively within the limitations imposed by these rules;
  • inability to attract and retain qualified personnel;
  • cyber liability or potential liability for breaches of our or our service providers' information technology systems, or business operations disruptions;
  • potential liability for environmental contamination;
  • changes in the legal requirements we are subject to, or the imposition of new legal requirements, that adversely affect our operations;
  • extreme weather and natural disasters;
  • disease outbreaks and other public health events, such as the COVID-19 pandemic, and measures that are taken by federal, state, and local governmental authorities in response to such outbreaks and events;
  • impact of climate change on our properties or operations;
  • legal proceedings or class action lawsuits;
  • impact of reputational harm caused by negative press or social media postings of our actions or policies, whether or not warranted;
  • compliance costs associated with numerous federal, state and local laws and regulations; and
  • other risks identified in this release and in reports we file with the SEC or in other documents that we publicly disseminate.

New factors may also emerge from time to time that could have a material adverse effect on our business. Except as required by law, we undertake no obligation to publicly update or revise forward-looking statements contained in this release to reflect events, circumstances or changes in expectations after the date of this release.

 

FINANCIAL HIGHLIGHTS

Dollars in thousands, except per share data


Three months ended December 31,



Year ended December 31,




2022



2021



2022



2021


Rental and other property revenues


$

527,965



$

463,575



$

2,019,866



$

1,778,082















Net income available for MAA common shareholders


$

192,699



$

184,719



$

633,748



$

530,103















Total NOI (1)


$

346,791



$

296,477



$

1,296,172



$

1,106,917















Earnings per common share: (2)













Basic


$

1.67



$

1.60



$

5.49



$

4.62


Diluted


$

1.67



$

1.60



$

5.48



$

4.61















Funds from operations per Share - diluted: (2)













FFO (1)


$

2.12



$

2.01



$

8.20



$

7.20


Core FFO (1)


$

2.32



$

1.90



$

8.50



$

7.01


Core AFFO (1)


$

2.20



$

1.74



$

7.67



$

6.32















Dividends declared per common share


$

1.4000



$

1.0875



$

4.9875



$

4.1625















Dividends/Core FFO (diluted) payout ratio



60.3

%



57.2

%



58.7

%



59.4

%

Dividends/Core AFFO (diluted) payout ratio



63.6

%



62.5

%



65.0

%



65.9

%














Consolidated interest expense


$

38,084



$

39,108



$

154,747



$

156,881


Mark-to-market debt adjustment



13




(36)




(77)




(270)


Debt discount and debt issuance cost amortization



(1,528)




(1,474)




(5,985)




(5,383)


Capitalized interest



2,582




1,939




8,728




9,720


Total interest incurred


$

39,151



$

39,537



$

157,413



$

160,948















Amortization of principal on notes payable


$

358



$

337



$

1,401



$

1,516




(1) 

A reconciliation of the following items and discussion of their respective components can be found later in this release: (i) NOI to Net income available for MAA common shareholders; and (ii) FFO, Core FFO and Core AFFO to Net income available for MAA common shareholders.

(2) 

See the "Share and Unit Data" section for additional information.

 

Dollars in thousands, except share price









December 31, 2022



December 31, 2021


Gross Assets (1)


$

15,543,912



$

15,133,343


Gross Real Estate Assets (1)


$

15,336,793



$

14,865,818


Total debt


$

4,414,903



$

4,516,690


Common shares and units outstanding



118,645,269




118,542,994


Share price


$

156.99



$

229.44


Book equity value


$

6,210,419



$

6,184,092


Market equity value


$

18,626,121



$

27,198,505


Net Debt/Adjusted EBITDAre (2)


3.71x



4.39x




(1) 

A reconciliation of Gross Assets to Total assets and Gross Real Estate Assets to Real estate assets, net, along with discussion of their components, can be found later in this release.

(2) 

Adjusted EBITDAre is calculated for the trailing twelve month period for each date presented. A reconciliation of the following items and discussion of their respective components can be found later in this release: (i) Net Debt to Unsecured notes payable and Secured notes payable; and (ii) EBITDA, EBITDAre and Adjusted EBITDAre to Net income.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

Dollars in thousands, except per share data (Unaudited)


Three months ended
December 31,



Year ended December 31,




2022



2021



2022



2021


Revenues:













Rental and other property revenues


$

527,965



$

463,575



$

2,019,866



$

1,778,082


Expenses:













Operating expenses, excluding real estate taxes and insurance



106,594




100,164




435,108




404,288


Real estate taxes and insurance



74,580




66,934




288,586




266,877


Depreciation and amortization



138,237




135,495




542,998




533,433


Total property operating expenses



319,411




302,593




1,266,692




1,204,598


Property management expenses



17,034




15,210




65,463




55,732


General and administrative expenses



14,742




14,121




58,833




52,884


Interest expense



38,084




39,108




154,747




156,881


Gain on sale of depreciable real estate assets



(82,799)




(85,913)




(214,762)




(220,428)


Gain on sale of non-depreciable real estate assets






(609)




(809)




(811)


Other non-operating expense (income)



23,465




(19,345)




42,713




(33,902)


Income before income tax expense



198,028




198,410




646,989




563,128


Income tax benefit (expense)



458




(7,790)




6,208




(13,637)


Income from continuing operations before real estate joint venture activity



198,486




190,620




653,197




549,491


Income from real estate joint venture



450




296




1,579




1,211


Net income



198,936




190,916




654,776




550,702


Net income attributable to noncontrolling interests



5,315




5,275




17,340




16,911


Net income available for shareholders



193,621




185,641




637,436




533,791


Dividends to MAA Series I preferred shareholders



922




922




3,688




3,688


Net income available for MAA common shareholders


$

192,699



$

184,719



$

633,748



$

530,103















Earnings per common share - basic:













Net income available for common shareholders


$

1.67



$

1.60



$

5.49



$

4.62















Earnings per common share - diluted:













Net income available for common shareholders


$

1.67



$

1.60



$

5.48



$

4.61


 

SHARE AND UNIT DATA

Shares and units in thousands


Three months ended December 31,



Year ended December 31,




2022



2021



2022



2021


Net Income Shares (1)













Weighted average common shares - basic



115,398




115,158




115,344




114,717


Effect of dilutive securities



251




458




239




322


Weighted average common shares - diluted



115,649




115,616




115,583




115,039


Funds From Operations Shares And Units













Weighted average common shares and units - basic



118,568




118,433




118,538




118,400


Weighted average common shares and units - diluted



118,646




118,637




118,618




118,519


Period End Shares And Units













Common shares at December 31,



115,480




115,337




115,480




115,337


Operating Partnership units at December 31,



3,165




3,206




3,165




3,206


Total common shares and units at December 31,



118,645




118,543




118,645




118,543




(1) 

For additional information on the calculation of diluted common shares and earnings per common share, please refer to the Notes to Consolidated Financial Statements in MAA's Annual Report on Form 10-K for the year ended December 31, 2022, expected to be filed with the SEC on or about February 16, 2023.

 

CONSOLIDATED BALANCE SHEETS

Dollars in thousands (Unaudited)









December 31, 2022



December 31, 2021


Assets







Real estate assets:







Land


$

2,008,364



$

1,977,813


Buildings and improvements and other



12,841,947




12,454,439


Development and capital improvements in progress



332,035




247,970





15,182,346




14,680,222


Less: Accumulated depreciation



(4,302,747)




(3,848,161)





10,879,599




10,832,061


Undeveloped land



64,312




24,015


Investment in real estate joint venture



42,290




42,827


Real estate assets, net



10,986,201




10,898,903









Cash and cash equivalents



38,659




54,302


Restricted cash



22,412




76,296


Other assets



193,893




255,681


Total assets



11,241,165




11,285,182









Liabilities and equity







Liabilities:







Unsecured notes payable


$

4,050,910



$

4,151,375


Secured notes payable



363,993




365,315


Accrued expenses and other liabilities



615,843




584,400


Total liabilities



5,030,746




5,101,090









Redeemable common stock



20,671




30,185









Shareholders' equity:







Preferred stock



9




9


Common stock



1,152




1,151


Additional paid-in capital



7,202,834




7,230,956


Accumulated distributions in excess of net income



(1,188,854)




(1,255,807)


Accumulated other comprehensive loss



(10,052)




(11,132)


Total MAA shareholders' equity



6,005,089




5,965,177


Noncontrolling interests - Operating Partnership units



163,595




165,116


Total Company's shareholders' equity



6,168,684




6,130,293


Noncontrolling interests - consolidated real estate entities



21,064




23,614


Total equity



6,189,748




6,153,907


Total liabilities and equity


$

11,241,165



$

11,285,182


 

RECONCILIATION OF FFO, CORE FFO, CORE AFFO AND FAD TO NET INCOME AVAILABLE FOR MAA COMMON SHAREHOLDERS

Amounts in thousands, except per share and unit data


Three months ended December 31,



Year ended December 31,




2022



2021



2022



2021


Net income available for MAA common shareholders


$

192,699



$

184,719



$

633,748



$

530,103


Depreciation and amortization of real estate assets



136,469




133,634




535,835




526,220


Gain on sale of depreciable real estate assets



(82,799)




(85,913)




(214,762)




(220,428)


Depreciation and amortization of real estate assets of real estate
joint venture



155




153




621




616


Net income attributable to noncontrolling interests



5,315




5,275




17,340




16,911


FFO attributable to the Company



251,839




237,868




972,782




853,422


Loss on embedded derivative in preferred shares (1)



10,743




16,052




21,107




4,560


Gain on sale of non-depreciable real estate assets






(609)




(809)




(811)


Loss (gain) on investments, net of tax (1)(2)



4,786




(26,644)




35,822




(40,875)


Casualty related (recoveries) charges, net (3)



(759)




(480)




(29,930)




1,524


Loss on debt extinguishment (1)









47




13,391


Legal costs and settlements, net (1)



8,000




(1,451)




8,535




(2,167)


COVID-19 related costs (1)



73




390




575




1,301


Mark-to-market debt adjustment (4)



(13)




36




77




270


Core FFO



274,669




225,162




1,008,206




830,615


Recurring capital expenditures



(13,825)




(19,297)




(98,168)




(81,106)


Core AFFO



260,844




205,865




910,038




749,509


Redevelopment capital expenditures



(23,755)




(15,835)




(101,035)




(85,467)


Revenue enhancing capital expenditures



(26,472)




(13,645)




(65,572)




(43,133)


Commercial capital expenditures



(1,938)




(1,539)




(4,692)




(3,842)


Other capital expenditures (5)



(9,822)




(8,086)




(23,595)




(21,561)


FAD


$

198,857



$

166,760



$

715,144



$

595,506















Dividends and distributions paid


$

148,306



$

121,505



$

554,532



$

485,898















Weighted average common shares - diluted



115,649




115,616




115,583




115,039


FFO weighted average common shares and units - diluted



118,646




118,637




118,618




118,519















Earnings per common share - diluted:













Net income available for common shareholders


$

1.67



$

1.60



$

5.48



$

4.61















FFO per Share - diluted


$

2.12



$

2.01



$

8.20



$

7.20


Core FFO per Share - diluted


$

2.32



$

1.90



$

8.50



$

7.01


Core AFFO per Share - diluted


$

2.20



$

1.74



$

7.67



$

6.32




(1) 

Included in Other non-operating expense (income) in the Consolidated Statements of Operations.

(2) 

For the three and twelve months ended December 31, 2022, loss (gain) on investments are presented net of tax benefit of $1.3 million and $9.5 million, respectively.  For the three and twelve months ended December 31, 2021, loss (gain) on investments are presented net of tax expense of $7.1 million and $10.8 million, respectively.     

(3) 

For the three and twelve months ended December 31, 2022, MAA incurred $5.8 million in casualty losses related to winter storm Elliot (primarily building repairs, landscaping and asset write-offs).  During the year ended December 31, 2021, MAA incurred $26.0 million in casualty losses related to winter storm Uri. The majority of the storm costs are expected to be or have been reimbursed through insurance coverage.  An insurance recovery was recognized in Other non-operating expense (income) in the amount of the recognized losses that MAA expects to recover. Additional costs related to the storms that are not expected to be recovered through insurance coverage, along with other unrelated casualty losses and recoveries, including the receipt of insurance proceeds that exceeded its recorded casualty losses from winter storm Uri, are reflected in Casualty related (recoveries) charges, net.  For the three and twelve months ended December 31, 2022, MAA recognized a gain of $1.4 million and $29.0 million, respectively, from the receipt of insurance proceeds that exceeded its casualty losses related to winter storm Uri. These adjustments are primarily included in Other non-operating expense (income).

(4) 

Included in Interest expense in the Consolidated Statements of Operations.

(5) 

For the three and twelve months ended December 31, 2022, $1.1 million and $3.1 million, respectively, of corporate related capital expenditures are excluded from other capital expenditures.  For the three and twelve months ended December 31, 2021, $12.7 million and $44.5 million, respectively, of reconstruction-related capital expenditures relating to winter storm Uri and corporate related capital expenditures are excluded from other capital expenditures. The capital expenditures relating to winter storm Uri have been reimbursed through insurance coverage.

 

RECONCILIATION OF NET OPERATING INCOME TO NET INCOME AVAILABLE FOR MAA COMMON SHAREHOLDERS

Dollars in thousands


Three Months Ended



Year Ended




December 31,
2022



September 30,
2022



December 31,
2021



December 31,
2022



December 31,
2021


Net Operating Income
















Same Store NOI


$

332,199



$

315,616



$

284,425



$

1,242,695



$

1,061,572


Non-Same Store and Other NOI



14,592




13,744




12,052




53,477




45,345


Total NOI



346,791




329,360




296,477




1,296,172




1,106,917


Depreciation and amortization



(138,237)




(136,879)




(135,495)




(542,998)




(533,433)


Property management expenses



(17,034)




(16,262)




(15,210)




(65,463)




(55,732)


General and administrative expenses



(14,742)




(12,188)




(14,121)




(58,833)




(52,884)


Interest expense



(38,084)




(38,637)




(39,108)




(154,747)




(156,881)


Gain (loss) on sale of depreciable real estate
assets



82,799




(1)




85,913




214,762




220,428


Gain on sale of non-depreciable real estate
assets






431




609




809




811


Other non-operating (expense) income



(23,465)




(1,718)




19,345




(42,713)




33,902


Income tax benefit (expense)



458




1,256




(7,790)




6,208




(13,637)


Income from real estate joint venture



450




341




296




1,579




1,211


Net income attributable to noncontrolling
interests



(5,315)




(3,392)




(5,275)




(17,340)




(16,911)


Dividends to MAA Series I preferred
shareholders



(922)




(922)




(922)




(3,688)




(3,688)


Net income available for MAA common
shareholders


$

192,699



$

121,389



$

184,719



$

633,748



$

530,103


 

RECONCILIATION OF EBITDA, EBITDAre AND ADJUSTED EBITDAre TO NET INCOME

Dollars in thousands


Three Months Ended



Year Ended




December 31,
2022



December 31,
2021



December 31,
2022



December 31,
2021


Net income


$

198,936



$

190,916



$

654,776



$

550,702


Depreciation and amortization



138,237




135,495




542,998




533,433


Interest expense



38,084




39,108




154,747




156,881


Income tax (benefit) expense



(458)




7,790




(6,208)




13,637


EBITDA



374,799




373,309




1,346,313




1,254,653


Gain on sale of depreciable real estate assets



(82,799)




(85,913)




(214,762)




(220,428)


Adjustments to reflect the Company's share of
EBITDAre of unconsolidated affiliates



338




338




1,357




1,352


EBITDAre



292,338




287,734




1,132,908




1,035,577


Loss on embedded derivative in preferred shares (1)



10,743




16,052




21,107




4,560


Gain on sale of non-depreciable real estate assets






(609)




(809)




(811)


Loss (gain) on investments (1)



6,068




(33,713)




45,357




(51,714)


Casualty related (recoveries) charges, net (2)



(759)




(480)




(29,930)




1,524


Loss on debt extinguishment (1)









47




13,391


Legal costs and settlements, net (1)



8,000




(1,451)




8,535




(2,167)


COVID-19 related costs (1)



73




390




575




1,301


Adjusted EBITDAre


$

316,463



$

267,923



$

1,177,790



$

1,001,661




(1) 

Included in Other non-operating expense (income) in the Consolidated Statements of Operations. 

(2) 

For the three and twelve months ended December 31, 2022, MAA incurred $5.8 million in casualty losses related to winter storm Elliot (primarily building repairs, landscaping and asset write-offs).  During the year ended December 31, 2021, MAA incurred $26.0 million in casualty losses related to winter storm Uri. The majority of the storm costs are expected to be or have been reimbursed through insurance coverage.  An insurance recovery was recognized in Other non-operating expense (income) in the amount of the recognized losses that MAA expects to recover. Additional costs related to the storms that are not expected to be recovered through insurance coverage, along with other unrelated casualty losses and recoveries, including the receipt of insurance proceeds that exceeded its recorded casualty losses from winter storm Uri, are reflected in Casualty related (recoveries) charges, net.  For the three and twelve months ended December 31, 2022, MAA recognized a gain of $1.4 million and $29.0 million, respectively, from the receipt of insurance proceeds that exceeded its casualty losses related to winter storm Uri. These adjustments are primarily included in Other non-operating expense (income).

 

RECONCILIATION OF NET DEBT TO UNSECURED NOTES PAYABLE AND SECURED NOTES PAYABLE

Dollars in thousands









December 31, 2022



December 31, 2021


Unsecured notes payable


$

4,050,910



$

4,151,375


Secured notes payable



363,993




365,315


Total debt



4,414,903




4,516,690


Cash and cash equivalents



(38,659)




(54,302)


1031(b) exchange proceeds included in Restricted cash (1)



(9,186)




(64,452)


Net Debt


$

4,367,058



$

4,397,936




(1) 

Included in Restricted cash in the Consolidated Balance Sheets.

 

RECONCILIATION OF GROSS ASSETS TO TOTAL ASSETS

Dollars in thousands









December 31, 2022



December 31, 2021


Total assets


$

11,241,165



$

11,285,182


Accumulated depreciation



4,302,747




3,848,161


Gross Assets


$

15,543,912



$

15,133,343


 

RECONCILIATION OF GROSS REAL ESTATE ASSETS TO REAL ESTATE ASSETS, NET

Dollars in thousands









December 31, 2022



December 31, 2021


Real estate assets, net


$

10,986,201



$

10,898,903


Accumulated depreciation



4,302,747




3,848,161


Cash and cash equivalents



38,659




54,302


1031(b) exchange proceeds included in Restricted cash (1)



9,186




64,452


Gross Real Estate Assets


$

15,336,793



$

14,865,818




(1) 

Included in Restricted cash in the Consolidated Balance Sheets.

NON-GAAP FINANCIAL MEASURES

Adjusted EBITDAre

For purposes of calculations in this release, Adjusted Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate, or Adjusted EBITDAre, represents EBITDAre further adjusted for items that are not considered part of MAA's core operations such as adjustments related to the fair value of the embedded derivative in the MAA Series I preferred shares, gain or loss on sale of non-depreciable assets, gain or loss on investments, casualty related (recoveries) charges, net, gain or loss on debt extinguishment, legal costs and settlements, net and COVID-19 related costs. As an owner and operator of real estate, MAA considers Adjusted EBITDAre to be an important measure of performance from core operations because Adjusted EBITDAre does not include various income and expense items that are not indicative of operating performance. MAA's computation of Adjusted EBITDAre may differ from the methodology utilized by other companies to calculate Adjusted EBITDAre. Adjusted EBITDAre should not be considered as an alternative to Net income as an indicator of operating performance.

Core Adjusted Funds from Operations (Core AFFO)

Core AFFO is composed of Core FFO less recurring capital expenditures. Core AFFO should not be considered as an alternative to Net income available for MAA common shareholders as an indicator of operating performance. As an owner and operator of real estate, MAA considers Core AFFO to be an important measure of performance from operations because Core AFFO measures the ability to control revenues, expenses and recurring capital expenditures.

Core Funds from Operations (Core FFO)

Core FFO represents FFO as adjusted for items that are not considered part of MAA's core business operations such as adjustments related to the fair value of the embedded derivative in the MAA Series I preferred shares, gain or loss on sale of non-depreciable assets, gain or loss on investments, net of tax, casualty related (recoveries) charges, net, gain or loss on debt extinguishment, legal costs and settlements, net, COVID-19 related costs, mark-to-market debt adjustments and other non-core items. While MAA's definition of Core FFO may be similar to others in the industry, MAA's methodology for calculating Core FFO may differ from that utilized by other REITs and, accordingly, may not be comparable to such other REITs. Core FFO should not be considered as an alternative to Net income available for MAA common shareholders as an indicator of operating performance. MAA believes that Core FFO is helpful in understanding its core operating performance between periods in that it removes certain items that by their nature are not comparable over periods and therefore tend to obscure actual operating performance.

EBITDA

For purposes of calculations in this release, Earnings Before Interest, Income Taxes, Depreciation and Amortization, or EBITDA, is composed of net income plus depreciation and amortization, interest expense, and income taxes. As an owner and operator of real estate, MAA considers EBITDA to be an important measure of performance from core operations because EBITDA does not include various expense items that are not indicative of operating performance. EBITDA should not be considered as an alternative to Net income as an indicator of operating performance.

EBITDAre

For purposes of calculations in this release, Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate, or EBITDAre, is composed of EBITDA further adjusted for the gain or loss on sale of depreciable asset sales and adjustments to reflect MAA's share of EBITDAre of unconsolidated affiliates. As an owner and operator of real estate, MAA considers EBITDAre to be an important measure of performance from core operations because EBITDAre does not include various expense items that are not indicative of operating performance. While MAA's definition of EBITDAre is in accordance with NAREIT's definition, it may differ from the methodology utilized by other companies to calculate EBITDAre. EBITDAre should not be considered as an alternative to Net income as an indicator of operating performance.

Funds Available for Distribution (FAD)

FAD is composed of Core FFO less total capital expenditures, excluding development spending, property acquisitions, capital expenditures relating to significant casualty losses that management expects to be reimbursed by insurance proceeds and corporate related capital expenditures. FAD should not be considered as an alternative to Net income available for MAA common shareholders as an indicator of operating performance. As an owner and operator of real estate, MAA considers FAD to be an important measure of performance from core operations because FAD measures the ability to control revenues, expenses and capital expenditures.

Funds From Operations (FFO)

FFO represents net income available for MAA common shareholders (calculated in accordance with GAAP) excluding gain or loss on disposition of operating properties and asset impairment, plus depreciation and amortization of real estate assets, net income attributable to noncontrolling interests, and adjustments for joint ventures. Because net income attributable to noncontrolling interests is added back, FFO, when used in this document, represents FFO attributable to the Company. While MAA's definition of FFO is in accordance with NAREIT's definition, it may differ from the methodology for calculating FFO utilized by other companies and, accordingly, may not be comparable to such other companies. FFO should not be considered as an alternative to Net income available for MAA common shareholders as an indicator of operating performance. MAA believes that FFO is helpful in understanding operating performance in that FFO excludes depreciation and amortization of real estate assets. MAA believes that GAAP historical cost depreciation of real estate assets is generally not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies.

Gross Assets

Gross Assets represents Total assets plus Accumulated depreciation. MAA believes that Gross Assets can be used as a helpful tool in evaluating its balance sheet positions. MAA believes that GAAP historical cost depreciation of real estate assets is generally not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies.

Gross Real Estate Assets

Gross Real Estate Assets represents Real estate assets, net plus Accumulated depreciation, Cash and cash equivalents and 1031(b) exchange proceeds included in Restricted cash. MAA believes that Gross Real Estate Assets can be used as a helpful tool in evaluating its balance sheet positions. MAA believes that GAAP historical cost depreciation of real estate assets is generally not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies.

Net Debt

Net Debt represents Unsecured notes payable and Secured notes payable less Cash and cash equivalents and 1031(b) exchange proceeds included in Restricted cash. MAA believes Net Debt is a helpful tool in evaluating its debt position.

Net Operating Income (NOI)

Net Operating Income represents Rental and other property revenues less Total property operating expenses, excluding depreciation and amortization, for all properties held during the period, regardless of their status as held for sale. NOI should not be considered as an alternative to Net income available for MAA common shareholders. MAA believes NOI is a helpful tool in evaluating operating performance because it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance.

Non-Same Store and Other NOI

Non-Same Store and Other NOI represents Rental and other property revenues less Total property operating expenses, excluding depreciation and amortization, for all properties classified within the Non-Same Store and Other Portfolio during the period. Non-Same Store and Other NOI includes all storm-related expenses related to hurricanes. Non-Same Store and Other NOI should not be considered as an alternative to Net income available for MAA common shareholders. MAA believes Non-Same Store and Other NOI is a helpful tool in evaluating operating performance because it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance.

Same Store NOI

Same Store NOI represents Rental and other property revenues less Total property operating expenses, excluding depreciation and amortization, for all properties classified within the Same Store Portfolio during the period. Same Store NOI excludes storm-related expenses related to hurricanes. Same Store NOI should not be considered as an alternative to Net income available for MAA common shareholders. MAA believes Same Store NOI is a helpful tool in evaluating operating performance because it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance.

OTHER KEY DEFINITIONS

Average Effective Rent per Unit

Average Effective Rent per Unit represents the average of gross rent amounts after the effect of leasing concessions for occupied units plus prevalent market rates asked for unoccupied units, divided by the total number of units. Leasing concessions represent discounts to the current market rate. MAA believes average effective rent is a helpful measurement in evaluating average pricing. It does not represent actual rental revenue collected per unit.

Average Physical Occupancy

Average Physical Occupancy represents the average of the daily physical occupancy for an applicable period.

Development Communities

Communities remain identified as development until certificates of occupancy are obtained for all units under development. Once all units are delivered and available for occupancy, the community moves into the Lease-up Communities portfolio.

Lease-up Communities

New acquisitions acquired during lease-up and newly developed communities remain in the Lease-up Communities portfolio until stabilized. Communities are considered stabilized when achieving 90% average physical occupancy for 90 days.

Non-Same Store and Other Portfolio

Non-Same Store and Other Portfolio includes recently acquired communities, communities in development or lease-up, communities that have been disposed of or identified for disposition, communities that have experienced a significant casualty loss, stabilized communities that do not meet the requirements defined by the Same Store Portfolio, retail properties and commercial properties.

Resident Turnover

Resident turnover represents resident move outs excluding transfers within the Same Store Portfolio as a percentage of expiring leases on a rolling twelve month basis as of the end of the reported quarter.

Same Store Portfolio

MAA reviews its Same Store Portfolio at the beginning of each calendar year, or as significant transactions or events warrant. Communities are generally added into the Same Store Portfolio if they were owned and stabilized at the beginning of the previous year. Communities are considered stabilized when achieving 90% average physical occupancy for 90 days. Communities that have been approved by MAA's Board of Directors for disposition are excluded from the Same Store Portfolio. Communities that have experienced a significant casualty loss are also excluded from the Same Store Portfolio.

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Wonderful companies at wonderful prices?

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”1 This well-worn adage from Warren Buffett…

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“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”1 This well-worn adage from Warren Buffett has guided our investment approach for over thirty years and is the title of a piece we published in 2018.2 Given recent market conditions, we’ve chosen to revisit this concept.

Our goal to invest in “wonderful companies” never changes. However, what can change in rare instances is that “fair prices” for these high-quality businesses can occasionally become “wonderful prices.” We have always accepted that premium companies, like the ones in which we invest, may command premium valuations because, in our experience, Mr. Market3 tends to be fairly efficient most of the time. We say “most of the time” because now and then, we believe Mr. Market can overreact, creating opportunities to invest in these “wonderful” companies, but at prices that we would view as not just fair but increasingly “wonderful.” We could potentially be amid such an opportunity.

The Catalyst for Compression

In November 2021, the U.S. Federal Reserve surprised the market by stating its willingness to tighten monetary policy “sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives.” In other words, the Fed signaled that inflation might not be as transitory as it previously thought and, consequently, may have to raise interest rates quicker than expected.

Since then, many of what we view as wonderful companies with higher valuations have seen their price-to-earnings (P/E) multiples compress substantially. During calendar year 2022, 21 holdings across the three Polen Large Company Growth strategies5 saw their P/E next twelve months (NTM) contract by 30 per cent or more.6 This valuation contraction converged with decelerating revenue growth for many companies lapping the substantial growth rates they saw during the COVID-19 pandemic. Add on the macro fears around persistent inflation, and it’s been a rough go for the stock prices of some of our portfolio companies over the past few months. And while some level of underperformance is understandable, particularly in cases where growth rates have moderated, it’s starting to feel to us that Mr. Market is painting both the “wonderful” and the “fair” companies with an equally broad brush.

This observation is supported by the current valuations in our Focus Growth Portfolio. As shown in the chart below, at year-end 2022, ten holdings, representing approximately half of the portfolio by weight, were trading in the bottom decile of their 10-year forward P/E range and five holdings were trading in the bottom one percentile of this same range. This is despite the fact that the median EPS growth rate for 2023 of this same group of ten companies, per sell-side consensus from Factset, is currently 13 per cent, a level of growth that we view as attractive given recent concerns around a recession in the U.S. this year. And even if this consensus EPS forecast proves to be overly optimistic, we still view all of these businesses as having durable competitive advantages that we believe can enable each of them to generate annualized double-digit EPS growth over the next three to five years.

Forward 1-Year P/E, current vs. past 10 years (or IPO date) — percentile rank

Forward PE ratio

Source: Polen Capital, Bloomberg. Reflects all Focus Growth portfolio holdings as of 12-31-2022. Chart shows how Fwd 1-Yr P/E on 12-31-2022 compares to monthly observations going back 10 years, or to a given company’s IPO date. Data is expressed as a percentile rank, where 0% would indicate the least expensive a company has been vs the past 10 years and 100% is the most expensive. Please note Airbnb goes back to 9-30-2021; PayPal goes back to when it was spun out of eBay, 7-31-2015; Zoetis goes back to 3-31-2013;  and DocuSign goes back to 6-30-2018. All other securities go back 10 years. Please see the Disclosures section for additional information.

Key Lesson for Investors

We’ve witnessed the valuations of many high-quality growth companies compress over the past year, substantially in some instances. We’ve sought to look beyond today’s noise, using our fundamental, rational analysis to lean into our highest conviction ideas for the next three-to-five years. In the near term, significant P/E multiple compression can create performance headwinds and volatility, even for the high-quality businesses in which we seek to invest. But for patient investors, we believe this period is a reminder that Mr. Market can occasionally offer the unemotional investor “wonderful” types of companies at increasingly “wonderful” prices.

Past performance does not guarantee future results and profitable results cannot be guaranteed.

1 Buffett, Warren. Berkshire Hathaway Shareholder Letter, 1989. https://www.berkshirehathaway.com/letters/1989.html
2 The original article “Wonderful Companies at Fair Prices,” is available upon request.
3 “Mr. Market” is a term coined by another legendary investor, Benjamin Graham, in his 1949 book, The Intelligent Investor. It personifies the equity market as a hypothetical investor who can be driven by emotions at the expense of rational analysis.
4 “Minutes of the Federal Open Market Committee”, November 2-3, 2021. https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20211103.pdf
5 Polen Focus, Global, and International Growth strategies.
6 We included Shopify, owned in the Polen International Growth portfolio, in this group of holdings.  In this case of Shopify we utilized NTM Price/Sales instead of NTM Price/Earnings. This was due to the fact that Shopify’s EPS over the measured period is negative and thus skews its data.  In our view, Price/Sales still properly captures the contraction in valuation for the stock price for the period.

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