Mid-America Apartment Communities Inc (MAA) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for participating in the MAA Second Quarter 2016 Earnings Conference Call. At this time, we would like to turn the conference over to Tim Argo, Senior Vice President of Finance. Mr. Argo, you may begin.

Thank you, Leo. Good morning. This is Tim Argo, SVP of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

Before we begin with our prepared comments this morning, I want to point out that as part of the discussion, Company Management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the Safe Harbor language included in yesterday's press release and our 34 Act filings with the SEC, which describe risk factors that may impact future results.

These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP measures can be found in our earnings release and supplemental financial data. When we reach the question-and-answer portion of the call, I would ask for everyone to please limit their questions to no more than two in order to give everyone an ample opportunity to participate. Should you have additional questions, please re-enter the queue or you are certainly welcome to follow up with us after we conclude the call. Thank you. I'll now turn the call over to Eric.

Thanks, Tim, and good morning, everyone. As outlined in yesterday's earnings release, second quarter results were ahead of expectations, solid rent growth supported by occupancy that matched last year's strong results generated same-store net operating income that was ahead of our forecast. Core FFO per share of $1.49 was at the top end of our guidance, with the favorable NOI performance driving the majority of the out performance for the quarter. It's also worth noting that core AFFO was $1.25 per share for the second quarter, was 16% ahead of the second quarter last year.

As a result of the better than expected second quarter performance, combined with our outlook that leasing conditions over the rest of the year will support continued solid rent growth and strong occupancy, we've raised the expectation for core FFO for the full year as discussed in our first quarter call. It's important to keep in mind the record level of occupancy that was captured in the back half of last year, particularly in the third quarter, that will serve as this year's comparative benchmark. But to be clear, we anticipate the current strong occupancy and pricing trends will continue. For the full year, we continue to believe that we will capture average physical occupancy at 96.2%, slightly ahead of last year's record performance at 96.1%, while also driving solid rent growth that supports the year-over-year gains in revenue, leading to our increased expectations for same-store NOI growth. Al will walk you through the more detailed assumptions in his comments covering our revised and increased guidance for both same-store NOI and core FFO.

Same-store operating metrics remained strong with resident turnover in the second quarter down 4.6% as compared to the second quarter of last year. Daily physical occupancy averaged 96.2% throughout the quarter matching last year's strong performance. Effective rent increase -- effective rent per unit increased 4.4% over the second quarter of last year and was up 1.4% on a sequential basis, with all of our markets registering both positive year-over-year and sequential rent growth with the exception of Houston, which was down slightly by 0.2%. Tom will give you some additional insights on the operating trends we're seeing, as well as outline performance differences across our markets. But overall, we are encouraged with the continued levels of growing demand that is clearly keeping pace with new supply delivery across our diversified portfolio and balance sub-market strategy.

We continue to work through a very robust acquisition pipeline with deal flow running well ahead of last year. It is outlined in our earnings release, we were successful in the second quarter with the acquisition of a new property in its initial lease up in the Phoenix, Arizona MSA. This particular acquisition is a good example of the sort of opportunities we target involving a new lease-up development with a local developer and motivated capital that enables both our operating and transaction execution capabilities to capture a high-quality opportunity at a price that we believe will add to future value per share.

We expect to capture and stabilize NOI yield in the 6% range on this high end new property once we complete the lease-up and execute on the opportunities associated with onsite operations and revenue management practices. As new supply continues to come online in a number of our markets, we're optimistic that additional opportunities will be captured later this year.

So, in summary, we like the market trends we're seeing and the MAA team has the operating platform executing well, the balance sheet is in terrific shape and our transaction pipeline is very busy.

With that, I'll now turn the call over to Tom.

Thank you, Eric, and good morning, everyone. Our second quarter NOI performance of 5.7% was driven by revenue growth of 4.4% over the prior year and 1.2% sequentially. We have good momentum in rents as all in-place effective rents increased 4.4% from the prior year. In the second quarter, new rents and renewal rents executed during the quarter increased 5% on a blended lease-over-lease basis. We also matched the strong average occupancy of the prior year.

Overall, same-store expenses remain in line, up just 2.3%. Expense discipline has been a hallmark of our operation for years. Our industry leading initiatives such as our vendor-owned shop stocking program and our interactive marketing strategy have allowed us to keep the expense line consistently in check.

Third quarter trends continue the positive momentum. Average daily physical occupancy of 96.2% is in line with July of last year. Our 60-day exposure, which is current vacancy plus all notices for a 60-day period, is just 7%, below our prior year about 50 basis points. New and renewal rents have built on the strong trends of the second quarter. On a blended lease-over-lease basis, our July rents increased 4.3% and early indications are that August will increase to 5%.

On the market front, the vibrant job growth of the large markets is driving strong revenue results. They were led by Orlando, Fort Worth, Phoenix and Atlanta. The secondary markets continue to close the effective rent growth gap with the large markets. Since the third quarter of 2015, the rent growth gap between large and secondary markets has narrowed 60 basis points.

Revenue growth in Jacksonville, Greenville and Charleston stood up. As mentioned, momentum is strong across our markets with occupancy, rent and exposure all showing positive trends. Our only market worry bead is Houston, which represents just 3.4% of our portfolio. We will continue to monitor closely and protect the occupancy in this market. As we approach the end of July, our Houston market's daily occupancy is 95.2% and 60-day exposure is just 6.6%.

Move-outs for the portfolio were down for the quarter by 4.6% over the prior year and turnover remained low at 51.5% on a rolling 12-month basis. Move-outs to home buying were down 1%. Move-outs to home rental, which represents just over 7% of our total move-outs, were down 5%. Our focus on minimizing the time between occupancy again paid off and we were able to reduce by one day the average vacancy between our occupants, which helped drive the second-quarter average physical occupancy to 96.2%.

During the quarter, we completed over 1,800 interior unit upgrades, bringing our total units redeveloped this year to just over 3,200. We expect to redevelop over 5,000 units this year. Our redevelopment pipeline of 15,000 to 20,000 units remains robust. As a reminder, on average, we're spending $4,500 per unit and receiving an average rent increase of approximately $100 over a comparable non-renovated units, generating a year-one cash return well over 20%.

Our lease-up communities are performing well. Station Square at Cosner's Corner II closed the quarter at 99% occupancy. Cityscape at Market Center II is leasing well. They're currently 95.6% occupied and expected to stabilize on schedule in the third quarter of this year. River's Walk II in Charleston is 71% leased and Colonial Grand at Randal Lakes in Orlando is 18% leased, both are on schedule.

Our second quarter acquisition at Residences of Fountainhead in Phoenix, Arizona is currently 78% occupied. At the midpoint of our summer season, we are on track and the portfolio is performing very well. Al?

Thank you, Tom, and good morning, everyone. I'll provide some additional commentary on the Company's second quarter earnings performance, balance sheet activity and then finally on the revised earnings guidance for the full year.

Core FFO of the quarter was a $1.49 per share, which represents a 10% increase over the prior year. The performance was $0.05 per share above the midpoint of our previous guidance, about two-thirds or $0.03 a share of this out performance was related to favorable property operating results, primarily due to operating expenses as both personnel and marketing costs were better than expected for the quarter. The remaining $0.02 per share was primarily related to gains on casualty insurance claims settled during the quarter as shown on the quarter's income statement. Strong rental pricing and continued high occupancy levels carried through the quarter as expected supporting earnings performance.

As Eric mentioned, we acquired one new community during the second quarter, Residences at Fountainhead, located in Phoenix for a total investment of $69.5 million. The community was in lease-up when acquired and was 75.8% occupied at quarter end. And as Tom mentioned, lease-up continues to progress well and we expect the community to complete its initial lease-up early next year.

During the second quarter, we sold three parcels of commercial land and remaining commercial JV property originally acquired in the Colonial merger with a total proceeds of about $4.5 million producing a small gains on sale of non-appreciable and depreciable assets reflected on the income statement for the quarter. We have four communities all Phase II expansions of current properties remaining under construction at the end of quarter. We funded $16.1 million to completion during the second quarter and we have an additional $48 million on the $97 million total projected cost remaining to be funded. We continue to expect stabilizing NOI yields of 7% and 7.5% on average for these communities once completed and stabilized.

Our balance sheet remains in great shape. At quarter end, our leverage, defined as net debt to gross assets, was 40.7%, 70 basis points below the prior year, while our net debt was only 5.7 times recurring EBITDA. At quarter end, 92% of our debt was fixed or hedged against rising interest rates at an average effective interest rate of only 3.8%, with well-laddered maturities averaging 4.7 years. At quarter end, we had almost $600 million of combined cash and borrowing capacity under our unsecured credit facility, providing both strength and flexibility for growth. And given our current expectations for acquisitions and dispositions over the remainder of the year, along with our projections for excess cash of $90 million to $95 million representing FAD less all dividends, we do not anticipate new [equity] this year and we expect to end this year with our leverage slightly below the current levels.

Finally, as Eric mentioned, we are again increasing our earnings guidance for 2016 due to stronger-than-projected performance. We are increasing our core FFO projection by $0.04 per share at the midpoint to reflect both the $0.05 per share second quarter out performance and our revised expectations for real estate taxes for the year, now expected to cost us an additional $0.01 per share over the remainder of the year as valuations mainly in Texas came in a bit higher than expected.

Our forecast generally continues to be based on current strong occupancy levels carried through the year with the toughest comps in the third quarter combined with the pricing performance continuing in the 4% to 4.5% range. Core FFO is now projected to be $5.77 the $5.93 per share or $5.85 at the midpoint based on average shares and units outstanding of 79.6 million. Core AFFO is now projected to be $5.07 to $5.23 per share or $5.15 at the midpoint, which produces a strong 64% AFFO payout ratio for the year. We also increased our same-store NOI guidance to an expected range of 4.75% to 5.25% for the full year based on higher revenue growth increased the range to 4% to 4.5% and lower operating expense growth decreased the range to 2.5% to 3.5%, which includes the impact of the higher real estate taxes now projected to grow 5.5% to 6.5% compared to the prior year. The other major components including transaction and financing assumptions remain similar to our previous guidance.

That's all we have in the way of prepared comments. So, Leo, we'll turn the call back over to you for questions.

(Operator Instructions) John Kim, BMO

Some of your markets have significant new supply expected over next few years, markets like Nashville, Charlotte and Austin where there is supposed to be about 9% new supply at least. And I know lot of this new delivery doesn't really compete with your asset directly, but I am just wondering if there are any markets that concern you as far as too much supply coming to market?

I mean, not at this point, John, and Charlotte and Austin are good ones to talk about. I mean, they've both been delivering a fairly high level of supply. In Charlotte, that is quite isolated to sort of the urban core where just three of our assets are. I expect Charlotte to continue to be strong. In Austin, the development has largely been scattered, most concentrated in the downtown area, but scattered across the MSA, but it's largely -- we'll have a property that has a little bit of pressure from a single asset going up across the street and then it will abate. And honestly, we've seen sort of similar things in Dallas as well. But I think overall the funnel line situation of strong job growth is continuing and it's allowing us to work through these deliveries.

In this period you had revenue growth accelerate in Phoenix, Tampa and Dallas. I was wondering over the next 12 months what markets you're most bullish on, where you see revenue growth accelerate?

I think those and Orlando probably fit the bucket for us.

Rich Anderson, Mizuho Securities.

Good quarter, of course. So, you're kind of putting up a positive spin on new supply coming online because it opens up acquisition opportunities as you described Eric. How should we think about that? I mean, is the supply picture to you currently a positive consideration or are you just trying to eke out some positives out of a negative consideration?

No, I think that, I mean obviously, supply in a market brings into question your ability to raise rents and just operating fundamentals, but as Tom was just going through there, as we look at it today, permitting across our portfolio in 2017 is forecast to be down 10% from what it is this year. So, on balance given the strong job environment that we continue to see across our region from an operating perspective while we're not getting the sort of trends that we saw two years ago, we're still doing very well and as we try to emphasize the trends that we've seen strong early this year, we expect those trends to continue. So, from an operating perspective, we're not nervous about supply trends at this point, but -

I guess -- of course, supply is a risk, I get that. But I was just wondering if there is an optimal amount of supply that gives you these acquisition opportunities and if you actually welcome some level to see --

Yes, we do. On the acquisition side of the equation, yes, absolutely right. And what we like to see particularly as more supply comes online, particularly when it is concentrated in certain submarkets and so forth, which it often tends to be, we often see situations where -- like the situation I described that we just acquired in Phoenix, where it's a local developer, so third-party managed situation, they're really not in the business of leasing, operating in a manner similar to what we are able to do and you throw a little supply pressure into that submarket, where they're trying to eke out a lease up, pressure mounts and buying opportunities emerge out of that and I mean all the deals that we've acquired over the past year or so are very much along these lines, where there are lease up situations and we've got four or five deals in the hopper right now that we're underwriting pretty aggressively, that are all very much along the same lines. So, I continue to feel that over the next three or four quarters that we're going to see some good opportunities.

And then just, my second question is, do you feel like there is some sort of new paradigm emerging here? Obviously, your portfolio has always been thought to be low barrier, high-risk supply markets, offset by job growth, but the story today is a lot of urban development and maybe a causal factor to (inaudible) problems. Do you expect this to reverse back to more normalized conditions where you know your markets become the centerpiece of supply risk or do you think that there's something changing in your world that actually makes you a little bit more supply -- more tefloned, I guess?

Rich, I don't know. I will say this, we've always gone at this with the belief that we're trying to build a portfolio in markets and in submarkets and at price points that offer us the ability, and you've heard me say this for years, outperform over the full cycle. And market fads come and go, cap rates come and go, and we're not driven by those things. We're driven by recurring cash flow. We deploy capital with that thought. We allocate capital across the region with that thought. We like the strong job growth metrics of the Southeast markets. We can't do anything about supply per se, other than just be sure, we've got a very competitive platform and that we know how to operate very aggressively. And basically, we feel like we can compete with anybody and we can compete superior to a lot of people we compete within these markets. So, the supply will do what it does. What I really -- I'm more focused on is being sure we're deploying capital where demand is going to be and we think that demand is largely a function of job growth and economic growth and we like the Southeast for that reason and --

I was thinking maybe lenders are exercising different standards to providing debt financing to developers and maybe that's something that's changing, but maybe not, I guess so --

It will change. It comes and goes. Right now for sure, they're probably nervous about funding a lot of construction in urban core areas.

Nick Joseph, Citigroup.

I'm wondering if you can give little more detail on the underlying assumptions that go into the back half of the year for same-store revenue growth guidance. You did 4.9% in the first half, the back half at the mid-point assumes 3.6% growth. You mentioned rent growth should be maintained at about 4% to 4.5%. There's the occupancy headwind of about 20 basis points. So, what else is driving or what are the other headwinds there to get from maybe that 4% down to the 3.6% implied by guidance?

Nick, sure I can give you some color on that. As (inaudible) just underlined what you mentioned, we are not projecting the core fundamentals to decelerate in the back half and the core fundamentals for us are occupancy that will continue at a record 96.2% and the pricing growth that we expect to be in the 4% to 4.5%; we are certainly seeing that and expect to continue see that through the back half. As you compare back to the prior year, the comps are more difficult in two areas, primarily third quarter, in both the occupancy and your fees and our fees and fees and reimbursements that we have in our program, that's a $30 million line item. So, you put those two things together that's getting you from 4% to 4.5% growth rate down to the 3.5% to 4% that's projected over the back half of the year. That is just that you know math related to the comps, tough comps last year, but the fundamentals of the business are strong and we expect that to continue.

Thanks, but what's a good run rate for fee growth going forward?

I would say you know the issue with it for the back half is it was growing -- those two lines together were growing 7% to 8% percent last year. This year -- into the future 3% more normalized growth rate, it is just that last year as we are building occupancy we just had -- as we talked that we had very -- capturing the final (inaudible) was called the Colonial. We have very strong performance in those line items, so comparing back to 7% growth rate [yield] into perpetuity long term is just not -- so 3% something in the normal range is what we expect, and it's a pretty big line item that's causing that comparison.

Thanks. For those assumptions, are there any differences between what you're expecting from the large markets versus secondary markets?

On occupancy, the headwind on secondary is greater.

In the third quarter, yes, so other than that not much, Nick.

Pretty consistent with the trends we're seeing right now.

Jordan Sadler, KeyBanc Capital

It's Austin Wurschmidt here with Jordan, touching a little bit on next question, building off of that, I mean, turnover is really down again this quarter. Do you feel like you've taken your foot off the gas at all on rental rate growth given trying to manage a little bit of the more difficult occupancy comps you face in the back half the year. And then could you also give us what the rental rate growth was last year for July and August?

Answering your first question, no, we don't think we put -- taken the foot off the gas at all. Turnover for move-outs to rent increase moved from 14% of our move-outs to 13%, so that's immaterial, and we're getting a 6.5% rent growth on that. We feel pretty good about that and haven't backed off at all on that. And then remind me your second question, Austin?

Yes just comparing the 4.3% increase you got in July and the 5% you expect in August, what were those numbers last year?

They were in the range last year and we -- I'm digging for numbers, saw an increase over last year, it's within 50 basis points from last year on a pointed basis.

And then just, what is the average occupancy assumption you've got for the second half of the year?

96.2% and follow on mix point. I think it was record high of 96.6% in the third quarter of last year (inaudible) some of that, I think the back half average last year was probably 96.4%.

So, you'd say that occupancy will be a headwind sort of 20 basis points in the back half of the year?

It is a headwind just from a cost, but we are strong, still 96.2% for the year is a record level. It's actually 10 basis points above that 96.1% that was a record level last year. So, that's how we look at it and continue strong occupancy, continue push pricing and we believe that forecast back half is good.

Gaurav Mehta, Cantor Fitzgerald.

Just going back to transactions. I was wondering if you could touch upon disposition, what you're seeing in the market and what's the timing of the sales of assets?

Well, we are currently actually working on a number of those transactions. We actually have seven properties currently in contract that we're working through due diligence on and would expect, assuming everything plays out as we think it will, expect to close on those -- all of those -- most of those in the third quarter with the others probably in Q4.

Okay. And then going back to acquisition, I was wondering if you could comment on -- if you've seen any distressed product in the market as a result of tightening lending standards?

No, not really. What we are seeing are -- more evidence that some of the lease up velocity that was taking place last year at some of these new properties is slowing a little bit and so some of the properties that were brought out of the ground early this year that sort of get to that 50%, 60%, 70% leased status that's typically where you start to run into the most headwind.

We have more of those in the market today and therefore that's where our belief that we'll see more opportunities, that's where that originates from.

And I guess last follow up. Are there any markets where you're seeing more of that product or it's market wide in your markets?

It's pretty consistent across the board. I wouldn't point to anything unique. We're seeing - I mean, Houston is a market where folks have been very focused on trying to find some great buying opportunities. But we continue to see pretty firm pricing in that market. So, it is pretty consistent across the board.

Rob Stevenson, Janney.

Tom, is there any of your top 10 markets other than maybe Houston where redevelopment isn't penciling today? Where you are not able to get the returns that you would want in order to put capital to work?

I mean the redevelopment program is growing strong Rob, and it's generally not sort of a market-by-market decision, so it's asset-by-asset and those assets are working, every now and then we will test a property to see if it works and back off pretty quickly, but there are no ongoing redevelopment jobs that we have backed off on or aren't penciling. On the tests that we do, we're generally seeing the same go forward rate as we had in the past. And that is a place where new development does help us a little back. An asset that's 10 years old and they build right next to it the latest and greatest and charge $500 more, we can pop out the nice from micro countertops and put in granite and charge $200 or something like that. It gives us an opportunity to grow that program.

And then, Tom or Eric, I mean, when was the last time when you go back and look at the secondary markets actually outperformed your large markets for any length of period of time? I know it has gotten smaller as a percent, it gets you down to like 35% of NOI, now. But I'm just curious as you think about the portfolio going forward and sources of capital and things of that nature, whether or not that goes significantly lower because it seems like it's been a while since those markets have really outperformed?

You have to go back to really 2008 -- late 2008 throughout most of 2009 time frame, when we saw obviously a fairly deep recession taking place in the country. We saw the employment markets really take a beating. In those kind of environments, a recessionary environment where job loss is really driving sort of the economic landscape, that tends to be where the secondary markets hold up a lot better. And you can actually get to a point where the secondary markets are outperforming the large markets, both in terms of occupancy and our ability to hold rents. So, I think though they're really more for that purpose, for sort of severe economic or economic downturn conditions, I think that what you're going to see is -- as we have continued to cycle capital out of some of the older investments that we've had, as you point out, a lot -- given the sort of base, the origination of the Company and where we sort of came from, a lot of the older assets happen to be in some of the more tertiary markets of the portfolio and that's where we've cycled out a lot. We've exited close to 20 properties over the last several years, selling over 13,000 apartments. I think as we go forward, you'll see us continue with the primary focus on cycling out some of the older assets where the CapEx requirements are growing and the after CapEx NOI is likely to show more moderation. And that will continue to, as an example, the seven properties that we have under contract right now, three of them are Winston-Salem, North Carolina, one of them is in Greensboro, one of them is in Huntsville and so I think that -- but having said that, you'll see us continue to look at opportunities in places like Charleston, Kansas City, Fredericksburg, clearly other secondary markets. But we think that in newer assets where we think the return on capital would be better over the next several years versus what we're selling.

Tom Lesnick, Capital One

I guess first, I was just curious, how is June in (inaudible) markets? And I guess in that context, could you provide a little insight on what the quarter trends were like, were they consistent across all three months or was there some choppiness there?

Tom, they were really pretty consent, in terms of how rents went -- blended rents went through. So, June fits in-line with what the quarterly average was. I guess there just wasn't a lot of difference between May, June and July and what the second quarter was to answer on a market level.

That's very helpful. And my second question, what's your view on the fragmentation opportunity today across apartments in the Southeast. I mean I guess if you look where stock price is today and the current premium to NAV with that, what's your appetite for acquisitions and scale at this point?

Well I mean we're very interested in pursuing opportunities. As I mentioned in my prepared comments our deal flow is running probably 30% higher than it was this time last year. We are pushing hard on underwriting and processing as much opportunity as we can. I think that as always though, our focus is centered on an ability to make an investment and ultimately capture NOI yield and a cash flow growth rate out of that investment that is at or better than the long-term average that we are -- goal that we have for the Company. And so we're not one to be -- while we're certainly aware and sensitive to the concepts around and focus on capturing our spread between our current cost of capital and current cap rates, our focus is just always instead centered on the capital allocation model with a priority on capturing an NOI yield that meets or exceeds the long-term earnings growth profile we have for the Company, and an ability ultimately to achieve an IRR, return on capital over the long haul, that's better than what we think our investors are expecting.

Drew Babin, Robert W. Baird

In the first quarter, it looks like you had about a 40 basis point lift in your same-property revenue growth from fees, but wasn't accounted for by rent growth and occupancy growth. There seemed to be some contribution there that seemed to be absent in the second quarter and I was just wondering whether that was sort of a deceleration off of more rapid fee growth in past years or whether there's anything deliberate going on at the property level, maybe being a little less aggressive with these?

I'll give you some color and then Tom can jump in at. If you think about the first quarter time, we had a little bit remaining year-over-year occupancy lift in the first quarter. And as you build occupancy, fees come with that and so that happened I think in the third quarter and fourth quarter and the first quarter to a smaller extent. That very fact is part of that big discussion earlier, that's given us a tougher comps as we compare back to last year. We think fees going forward are going to grow in line -- in good normalized growth. We were having just at a very high, very good growth last year rent related to the growing occupancy and the final vestiges of the Colonial.

I would say the other thing that has been a headwind on fees, it's really frankly a net positive as -- with turnover down consistently, we are getting less and less in the way of termination and lease break fees, which work for us, but those are material fees. And then secondly, in the first quarter, we had sort of a lights out delinquency, a bad debt month and we're still very, very good where we are, but not quite as good.

And then one other question on some of the markets you mentioned throughout the Southeast, both large markets and secondary markets seems like demand growth is continuing to track very well, based on your comments? But it looks like just on a pure rent growth basis, there was a little bit a deceleration in a few of the markets. I was just wondering kind of -- is that a supply issue primarily, not direct, but indirect? Is that something that potentially could burn off in the coming quarters? What is behind that?

Well, of course it's going to depend on the market we're talking about and so forth, but broadly, I would tell you that wherever we see any sort of, if you will, a deceleration on a quarter-over-quarter basis in a given market, more often than not, it is a function of supply issue in a particular submarket affecting a given property or something to that degree. Fundamentally, the demand dynamics, job growth, population trends, all the other sort of factors that drive renters and leasing prospects to our properties, all those fundamentals continue to show evidence of sustained strength and consistent with what we've been seeing for some time. And where there's moderation, if you will, it's going to be pockets of supply here and there.

Tayo Okusanya, Jefferies.

So, just a quick question around supply, I know we've all kind of harped on is it seems like you guys are acknowledging that some of your markets are seeing increased supply and that it's manageable, but are there any markets where you start to worry that supply starts to overwhelm the system, and then you suddenly lose pricing power similar to what we're kind of seeing in New York and San Francisco?

I would tell you, Tayo, that I mean obviously, we worry about it all the time, but two things that I would tell you is that obviously a lot of supply that we are seeing in some of our markets it is tending to be more concentrated in some of the more urban core center areas, which happens to be -- where we don't have a lot of exposure. And so, we don't see anything suggesting that anything different is likely to play out in the near term. So, we continue to feel okay about that. I mean we've been saying that supply has picked up over last couple of years. So, we're not -- it's not like it's a new thing. It just happens to be in areas that we don't have a lot of concentration in. But I would tell you, if you're trying to get at, what's going to change the chemistry, what's going to change the dynamic -- leasing dynamic in a material way and put us into a scenario where we're having the same kind of pressures that some of these portfolios in San Francisco and New York are having. From my perspective, the only thing that really materially weakens the chemistry for us is that we see a material weakening on the demand side of the equation. We see some sort of economic recession take place in a material way that causes job loss to come back into the equation and jobs to really start to pull back and absent some sort of major disruption on the demand side of the equation, right now, it's hard to see anything that's going to cause a material disruption in the positive leasing chemistry that continues to allow us to deliver we think pretty above long-term trend performance. It's moderated from what it was a couple of years ago as a consequence, really a little supply but honestly just tougher comps and that's where the pressure has been but the strong trends per se are going to continue from what we see today.

That's helpful and then I'll just -- again thanks for some of the comments on the back half of the year and what it could look like. Apart from some of the revenue pressures that you discussed, anything on the operating expense side that results in a weaker same-store NOI growth in the back half of 2016 versus the back half of 2015?

No, I think Tayo as we talked about a little bit in the call, very good expense control, which is as Tom said one of the hallmarks and we're proud to continue that, I think across the line was personnel, R&M, marketing for sure very much under control. The one exception is real estate taxes we talked about, we did get majority are valuations come out in the second quarter, which is typical -- beginning of the year you sort of guessing on that just based on trends, and so it came a little higher than we thought, particularly in Texas as valuations, Dallas, and Houston didn't soften like we had hoped it would any. So, I think that's where the only pressure on expenses is, so we raised our guidance 1% at the midpoint on real estate tax guidance and now we think it'll grow 5.5% to 6.5%, that's a third of the operating expenses. But even with that we're able to reduce the midpoint of our expense expectations for the year about 25 basis points. So, summary of all that is, we expect to be well under control.

Wes Golladay, RBC Capital Markets

Great quarter. Looking at the demand side, job growth in US has tapered off a bit. Have you changed your outlook on demand for your portfolio?

Yes, Wes, at this point, we haven't. Obviously, we will be taking a hard look at expectations for 2017 as we work towards developing guidance, initial guidance and so forth on that. But as we sit here today, we haven't seen any evidence that weakness in the employment trends are going to create any issues for us. Of course, the other thing that's strong underpinning to the demand component of our business is just all those sort of psychology surrounding homeownership versus renting their homes and all the demographic factors that are continuing to work in our favor, and so those powerful forces are there and they're going to continue from everything that we see. What allows those powerful forces to really be unleashed of course is a good job, employment scenario, where people can get the jobs. And from what we see, employment trends tend to generally, inside of these particularly larger markets across the Southeast, tend to be at the high end relative to what we see elsewhere across the country and that's largely frankly why we tend to focus as much as we do on this region.

Have you seen any, I guess, secular trends where big corporations are now moving into your markets, I think Dallas and Fort Worth have been a big beneficiary of that over the last few years, but I guess throughout your portfolio, are more companies getting ready to move to your cities and do you have any -- I guess, next year that would be noticeable?

The Southeast continues to be a place for finding significant manufacturing jobs. So, Volkswagen expanding in Chattanooga; BMW expanding, probably the largest auto plant in North America, outside of Greenville; Charleston, which already has Boeing rocking on along, has picked up Volvo as well; General Dynamics expanding in Savannah. So, we are seeing those things happen as well as with the Panama Canal opening up, our port locations have opportunity to go as well. Those are continuing.

The markets that you may -- I mean Atlanta continues to be a very strong magnet for corporate relocation, great quality of life, airport capability there and so on. Dallas, Fort Worth, Atlanta, I think our Charlotte -

(inaudible) and Dallas.

And Orlando, we're seeing really good things in terms of job growth and corporations moving operations to Orlando as well.

Rich Anderson, Mizuho Securities

I'm just trying to think of the land gained projection. How much of that is completed and are there any kind of gains or actually should I say land proceeds, are there any more gains expected for the third or fourth quarter?

Nothing significant, Rich. I'll tell you that is continuing to move through, almost too small to talk about now, but because it hit the income statement, I want to walk that through for you. So, three parcels of land from the Colonial merger, the remaining joint venture we had very small and the gains are small, we saw about $0.5 million on the income statement. So, we have another few parcels of land that we may sell over the course of the year, and really the point there is, we value those well and we are getting gains on that sale. We don't think it'll be significant, but we're glad to turn that -- call it capital to a more productive capital in our properties and have a slight gain over the back half of the year.

Would you be able to tell us what NAREIT FFO would be from a guidance perspective relative to your 5.85% on a core basis?

I think it would probably -- I don't have that right in front of me, Rich. I'm going to have to get that with you offline, but that certainly would be a little bit -- I'm not sure per higher -- about $0.06 per share higher, that's not precision right now.

Around $6 FFO for the year, Rich.

$6? Right. That's right, because you have a big debt mark-to-market that would be in the NAREIT number?

Correct. From [$5.85], excuse me.

Conor Wagner, Green Street

On the redevelopment program, can you tell us how the units you did in 2014 are doing relative to their comps?

Units done in 2014 relative to their comps -

Yes, you mentioned you get like 10% rent bump on the ones you are doing today. I was just wondering how durable that is, now that we're two years out from some of those redevelopments or the ones that you did in 2015?

I mean what happens there is, you don't have comps anymore, if that makes any sense, because on something that old the unit has -- it doesn't have a comp to compare to because we've redeveloped the whole property.

We're talking about -- Tom is referring to comps being non-renovated units at the community. You're referring to comps as what's happening in the market and we would have to -- we can get offline and figure out a way to pull that for you, Conor, but basically, what we do is that when we do a renovate, we go into our system and we make sure that the system knows that that unit has had a capital infusion and that -- and therefore when we look at market rate trends over the next you know 7 years to 8 years, we take our comparison for our unit and it has to -- that premium markup has to be there on a continuous basis for 5 years or 7 years. So, in other words, whatever premium we got to market when we initially did the deal, we track it to make sure that, that premium stays in place over the life of the investment that we make. And there's -- we have classifications by unit, where we can charge premiums for [dues], we can charge premiums for this upgrade, we can charge premiums for whatever -- we got a lot different premium levers and when we throw those levers, they stay there. And that becomes the benchmark that compares against the market.

So then, I guess you could say, if you track those units from 2014 you're obviously still able to get that premium?

Yes.

Yes.

And then for your redevelopment plan, do you plan on doing a similar number of units in the 2017?

I would think we would be in that ballpark. I mean, I hadn't penciled it just yet, but the pipeline continues and we feel good about the opportunity to do at least that.

And that's typically going to be about a $5 million boost to NOI in a given year, so that like 1% boost to NOI growth?

I think it's closer to 40 bps.

I guess (inaudible) maybe from the rolling of the previous year, right. With the stuff that you're doing --

-- that would be correct.

You do it on a continual basis. And then last question just on renewals, where are you sending them out for August and September?

We're going out at 6.5% to 7%.

6.5% to 7%, great. Thank you very much guys.

Buck Horne, Raymond James.

I was just browsing some of these stats that just hit the [tape] from the Census Bureau talking about a million new households are being formed all of them renters in the last quarter, at least on a year-over-year basis, and looks like the homeownership rate just hit the lowest level since 1965. I guess my question is are you guys surprised at this point in the cycle that move-outs to homeownership are not going up at this point, where the mortgage rates are at and what's happening out there? I guess is there any signs in your incoming tenants whether it's average FICO or rent to income or some other metrics that -- some thing is changed in the demographics or changed in the propensity to rent or preventing people from buying?

No, I mean, Buck, the rent to income ratio of our folk's bounces between 17% and 18%; their credit scores are very strong. These are folks that they could go buy a house tomorrow and are just choosing not to and there is really nothing in our sort of -- what we're seeing in demographics that makes us think that, I mean, it's 74% single right now or predominantly female there that just don't -- there just doesn't seem to be a lot of demand for owning your home out of our residents at this point.

Buck, I mean, you research this very well and you know a lot about this about these trends. But I just think it gets back to just the whole psychology of that 20-year-old to -- late 20-year-old, early 30-year-old today is just different than what it was years ago, and I think that as you know whether they're getting married later in life or starting family later in life, just life conditions are different today than they were years ago, and as a consequence to that they're just more inclined to want to rent their housing as opposed to making the obligation surrounding buying a home and it's hard for me to see how that's going to materially change. I think people are more motivated to make a decision to buy versus rent for lifestyle reasons and the attractive financing and low interest rate notwithstanding, I don't think it's going to compel people to abandon a lifestyle choice just because it gets a little bit more affordable.

I appreciate those comments. And just going back to the acquisition opportunities, have you seen or detected any changes to cap rate expectations in the market, just given maybe the surge of activity that you're seeing in the pipeline? What are cap rates for well located property in your markets, roughly?

We're still seeing very low 5%, high 4% cap rates pretty routinely. We haven't seen any evidence to suggest that cap rates have materially changed. We are just seeing more opportunity and of course where we focus on some of these lease-up opportunities, as you know those are situations that are little bit more difficult to finance and only the strongest buyers can really take on some of the initial dilution associated with acquiring a non-stabilized asset and our ability to execute on an all cash basis, from an acquisition perspective, really gets us a lot of opportunity versus allow the other comps that we run into -- our competitors that we run into. So, we haven't seen any evidence to suggest that cap rates have changed in any way. We are just seeing more opportunity and working that angle to our benefit.

Dennis McGill, Zelman & Associates.

First question just on Houston, interested in your perspective on where you think you are in the pricing cycle there, does it feel on the ground as though prices have stabilized or do you feel like there's more pressure ahead?

No, we're continuing to have pressure on new lease prices. So, I think that's going -- we're not quite at bottom on that. Renewals, we're still getting positive at 3% and 3.5%. So, I think we've got a little more tough-sweating in Houston. I mean, where -- so acquisition is a are very, very big market and it's going to vary a lot by submarket and some of our suburban locations are going to hold up better than some of the stuff around the gallery and well inside the loop. And so, it's going to vary a little bit. But I think Houston has got another three or four quarters to go before it -- I mean, the good news is supply has really stopped -- dead stop and I think that it just got to work through the absorption over the next three quarters or four quarters, and I think Houston becomes more of a recovery story, perhaps in late 2017 certainly by the time we get to 2018.

And then separately, a couple questions on turnover. When you look at your turnover today, I think in the past, there were times where it was in the low 60% range. Do you feel like normalized turnover is somewhere in that range or is it different today based the shift in the portfolio versus let's say 10 years ago?

I don't think we will get back to those really high turnover numbers, shift in the portfolio as well as shift in consumer habits around --

I think, as Tom said, there are two factors. As we have sold off some of the older properties that we had over the last several years, a lot of those properties were in some of these smaller more tertiary markets and some of those properties tended to be dominated by more of a military profile, where you tend to have a much higher turnover rate associated with the activity at the property. And I think that's a little bit at play in our portfolio, coupled with the other point Tom mentioned, which is just renter psychology today is so much different. Average length of stay in our portfolio is longer than it has ever been, average age is higher than it has been and I just think that the odds of getting back to 64% to 65% turnover, we just don't see anything that's likely to get us in that direction.

Of those 20 markets that Eric mentioned earlier that we exited, about eight were military.

So, if you thought about and appreciate that you probably are not going to get back to 64% or 65%. If hypothetically renter choices change and let's say it trends back to 60% over a couple of year period, what would that do to operating margin if you isolated that instance and let's say pricing power remains relatively similar 3% to 4% type range, if that happened over a couple of year period?

Every 1% change is about a $0.01 per share. So, it's not quite as significant as you think, but that's the impact you can think about.

And there are no further questions at this time.

All right we appreciate everyone joining this morning and follow up with us if you have any other questions. Thank you.

Thank you. This does conclude today's MAA Second Quarter 2016 Earnings Conference Call. You may now disconnect your lines and everyone have a great day.