Mid-America Apartment Communities Inc (MAA) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the MAA fourth-quarter 2016 call.

(Operator Instructions)

As a reminder, this conference is being recorded today, February 2, 2017.

I will now turn the conference over to Tim Argo, Senior Vice President Finance for MAA. Please go ahead, sir.

Thank you, Tanisha. 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 1934 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. I'll now turn the call over to Eric.

Thanks, Tim, and good morning, everyone. As recapped in yesterday's earnings release, we had a busy end to 2016. A significant amount of our focus was, of course, on completing the close of the merger with Post Properties. Our merger was closed, fully in line with our original expectations, and we had a successful launch of day-one consolidated operations on December 1.

In addition to our merger activity, during the quarter we were also successful closing on the sale of an additional five properties and completed the acquisition of a new lease-up property in the Charleston, South Carolina, market. Finally, during the quarter, we continued to make good progress on our development and lease-up activities, capturing solid same-store results and delivering overall core FFO results that were slightly ahead of our expectations.

With the merger transaction now closed and our operating reporting systems producing consolidated information, our attention now turns to completing the full integration of all support and reporting systems, reconciling more detailed policies and procedures, and ultimately positioning our platform to fully harvest the long-term benefits of the merger. I want to thank our team of associates, who are performing at a high level during a very busy time for our Company. We've been through this merger process before, and have developed a lot of strength and capabilities that are clearly on display.

Upon announcing our merger with Post, we outlined the fact that we expected the first year of consolidated operations would include some initial earnings dilution as we introduced three key variables that would have a near-term dilutive impact on year-one earnings. Specifically, those variables were the fact that we were bringing a $480 million development pipeline onto the balance sheet that was not yet productive. Secondly, we acquired a portfolio of properties exposed to different submarkets that, for the near term, would be facing higher supply pressure. And finally, that in combining the two balance sheets, we were meaningfully strengthening the MAA balance sheet through deleveraging the Company by over 600 basis points.

As outlined in our earnings release, our initial guidance for 2017 projects FFO per share of $5.72 to $5.92, or $5.82 at the mid-point, which includes $0.15 per share of non-recurring merger and integration costs that we expect to incur as we wrap up consolidation activities. It's important to note that, excluding the non-recurring merger and integration costs from both 2016 results and our 2017 forecast, the mid-point of our forecast represents only a 1.9% decline from prior year. This is despite the short-term pressure from the three factors just noted that will dilute earnings in 2017. This is a better result than we expected.

Our work to date on consolidating and reconciling property operations between MAA and Post has us even more enthused about the opportunities surrounding the long-term value proposition from this merger. Our work to date on consolidation of back office systems, reconciliation of property-level practices, rework of existing contracts to acquire the benefits of our enhanced scale, and the initiation of significant unit interior redevelopment opportunities cause us to remain very excited about the merger.

We expect the NOI margin enhancement opportunities we've previously discussed to become increasingly evident as we approach the end of this year and into 2018. In addition, we remain confident the $20 million of G&A and overhead synergy opportunity that we've previously identified will be fully captured in 2018.

Tom will discuss in more detail what we are seeing in the way of leasing conditions across the portfolio, but while demand remains strong, we expect the well-documented pickup in new supply trends will cost some moderation in rent growth versus prior year. Our combined adjusted same-store revenue guidance of 3% to 3.5% is largely the result of expected rent growth, and we expect to hold continued strong occupancy at around 96%, consistent with our performance in 2016. Demand for apartment housing remains strong across our markets, with leasing traffic consistent to what we've been experiencing over the past year.

Resident turnover or move-outs in the fourth quarter were down as compared to prior year. Encouragingly, based on the trends we see, with new permitting and starts across the majority of our markets, coupled with the feedback we receive from developers who find today's construction financing markets significantly more challenging, we remain optimistic that our markets will continue to hold up well, as employment markets and wage growth continue to support solid demand.

As noted in yesterday's earnings release, we were successful in acquiring one property in the fourth quarter. The acquisition has attributes consistent with essentially each of the deals we've acquired over the past couple of years, namely a high-end, newly developed property by a regional developer undergoing initial lease-up in a submarket seeing near-term supply pressure, which created an opportunity for a compelling acquisition.

We continue to look at a number of additional opportunities and find that, overall, cap rates appear to be holding up and generally in line to what we've seen over the past year. Our guidance for acquisitions in 2017 is in line with performance in 2016, but we remain hopeful that, as the year unfolds, we may see more opportunities that meet our long-established, disciplined approach to deploying capital. That's all I have in the way of prepared comments. I'll now turn the call over to Tom.

Thank you, Eric, and good morning, everyone. Our fourth-quarter same-store NOI performance for legacy MAA at 4.2% was driven by revenue growth of 3.6% over the prior year. On a sequential basis, we matched last year's strong seasonal revenue result and declined just 20 basis points from the third quarter to the fourth. The top line was driven by rent growth, as all in-place effective rents increased 3.9% from the prior year.

Occupancy and exposure trends were strong. January's average daily physical occupancy of 96% matched January of last year. Our 60-day exposure, which is current vacancy plus all notices for a 60-day period, is just 7.3%.

As expected, our pricing trends are showing some sign of moderation. During the quarter, blended-lease prices on a lease-over-lease basis increased 2%.

On the market front, the vibrant job growth of the large markets is driving strong revenue results. They were led by Fort Worth, Atlanta, and Orlando. The secondary markets continue their steady revenue performance. Revenue growth in Memphis, Greenville, and Charleston stood out.

In both portfolios, Houston remains our only market-level worry bead. After the merger, Houston represents just 3.6% of our portfolio. We will continue to monitor closely and protect occupancy in this market. At the end of January, our combined Houston market's daily occupancy was 94.3%, and 60-day exposure was just 7.3%.

Renter demand remains steady and our current residents continue to choose to stay with us. Move-outs for the portfolio were down for the quarter by 9% over the prior year, and turnover dropped again to a low 50.3% on a rolling 12-month basis. Move-outs to home buying dropped 5%, and move-outs to renting a house declined 14%.

The integration of Post is off to a good start. Progress is being made reconciling our pricing platform. We have centralized our pricing process and are now aligning pricing practices.

On the redevelopment front, opportunities that have been identified are greater than we initially expected. On the Post portfolio, we believe we have a pipeline of 13,000 units. We have already begun to upgrade units in the Post portfolio and look forward to updating you further throughout the year.

For the MAA portfolio, during the quarter we completed 1,300 interior unit upgrades, bringing our total units redeveloped for this year to just over 6,800. On legacy MAA, our redevelopment pipeline of 15,000 to 20,000 units remains robust. On a combined basis, our total redevelopment pipeline is in the neighborhood of 30,000 units.

Our active lease-up communities are performing well. River's Walk Phase II stabilized on schedule in the fourth quarter. Post Parkside at Wade is 61% leased and on schedule to stabilize in the third quarter of this year. Colonial Grand at Randal Lakes Phase II in Orlando is 69% leased and on schedule to stabilize at the end of this year.

Post Afton Oaks is 15% leased and in line with our expectations. Given the conditions in Houston, we have planned for it to stabilize in the second quarter of 2018.

Our new acquisition community in Charleston is on track. Finally, the Retreat at West Creek Phase II, which has not delivered yet, but is already an incredibly good 84% pre-leased.

We are pleased with our progress thus far on the Post merger. The operating structure of the combined Companies is in place and functioning well. There's a high degree of overlap in both systems and markets. The combined team is quite capable, and we are confident that by reconciling the practices between the two Companies that we will fully capture the opportunities of this merger. Al?

Thank you, Tom, and good morning, everyone. I'll provide some additional commentary on the Company's fourth-quarter earnings performance, the balance sheet activity, and then finally, on initial guidance for 2017.

Net income available for common shareholders was $0.44 per diluted common share for the quarter. Core FFO for the quarter was $1.50 per share, which was $0.01 per share above the mid-point of our previous guidance, despite $0.02 of dilution from the Post merger, which was not included in the previous guidance. Operating performance for the quarter continued to be strong, in line with our expectations. Interest expense and disposition timing combined to produce the majority of a $0.03 per-share favorable performance for the quarter, which was partially offset by the $0.02 per-share dilution from the Post merger.

Core AFFO for the quarter was $1.40 per share, which represents a 4.5% growth over the prior year, despite the Post dilution. Core FFO for the full year was $5.91 per share, which represents a 7% growth over the prior year. Core AFFO for the year was $5.29 per share, which represents a 10% growth over the prior year, and a very healthy 63% dividend pay-out ratio for the year, which is well below the sector average.

During the fourth quarter, we acquired one community for $70 million and sold five communities for $113 million in gross proceeds, completing our capital recycling plans for the year. Total gains of $32 million were recognized related to the dispositions during the fourth quarter. For the full year, five acquired communities combined to total $334 million of capital investment, while 12 communities were sold, producing combined gross proceeds of $265 million, and $80 million of recorded gains on sale.

We also funded $16 million of additional development costs during the quarter, bringing total development funding for the year to $59 million. Our total development pipeline at year end now contains nine communities, including the six acquired from Post, with total expected development cost of $562 million, of which $200 million remains to be funded. We expect NOI yields to average around 6.4%, once these communities are completed and stabilized.

During the fourth quarter, we completed several important financing goals for the Company. First, we assumed over $900 million of debt in the Post merger, with very minimal transfer costs. In conjunction with this, we expanded our credit facility to $1 billion from $750 million, and refinanced a $300 million term loan acquired from Post to extend the maturity date and improve the terms.

Also, as mentioned in our prior-quarter release, we postponed our original plans for a bond deal in late 2006 (sic) to allow the Post merger to close and enable us to capture the benefits of the additional balance sheet strength from the combined balance sheets prior to completing a new deal. Immediately following the merger, Standard & Poor's did upgrade our investment grade rating to BBB+ from BBB, which improved our current pricing on several of our borrowings, including our credit facility and term loans, and our expected pricing for future bond deals.

At year end, our leverage, defined as debt to total assets per our public bond covenants, was 33.9%, which is 700 basis points lower than the previous year. Our unencumbered assets were over 80% of gross assets. We also had over $540 million of combined cash and capacity under our unsecured credit facility to provide protection and support for our business plans.

Finally, we did provide initial earnings guidance for 2017 with the release. You will notice that we are providing guidance for net income per diluted common share, which is reconciled to FFO and AFFO in the supplement. Also, given the recent industry focus to a one common, non-GAAP earnings measure and a desire to simplify our earnings presentation, we are providing FFO guidance only on a NAREIT-defined basis for 2017. Of course, we will continue to clearly disclose significant non-core items, such as merger and integration costs, and the mark-to-market debt adjustment, in order to allow modeling as desired.

Net income per diluted common share is projected to be $1.82 to $2.02 for the full-year 2017. FFO is projected to be $5.72 to $5.92 per share, or $5.82 at the mid-point, which includes $0.15 per share of merger and integration costs. AFFO is projected to be $5.12 to $5.32 per share, or $5.22 at the mid-point.

The primary driver of 2017 performance is expected to be the combined adjusted same-store NOI growth, which is projected to be 3% to 3.5% based on 3% to 3.5% revenue growth and 3% to 4% operating expense growth. Our revenue projections include continued strong occupancy levels, averaging about 96% through 2017, combined with average rental pricing in the 3% to 3.5% range for the year. We expect operating expenses to remain under control, with real estate taxes the only area of expected pressure, which are projected to continue growing in the 5% to 6% range for the year.

We expect acquisition volume to range between $300 million and $400 million, with disposition volume ranging between $125 million and $175 million for the year. We expect to fund between $150 million and $250 million of development costs during 2017, projecting to fully complete six of the nine communities currently under construction. Given our expectation of generating $90 million to $100 million of internally generated cash flow in 2017, along with the anticipated asset dispositions for the year, we do not currently have plans to issue new equity during 2017.

Our guidance assumes we incur an additional $16 million to $20 million of merger and integration costs in 2017, and capture the full $20 million of overhead synergies on a run-rate basis by year end. We also expect to begin capturing additional NOI synergies, primarily in the latter part of the year, as the operating practices and platforms become more integrated.

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

(Operator Instructions)

We'll go ahead and take our first question from Rob Stevenson with Janney. Please go ahead. Your line is open.

Good morning, guys. Tom, can you talk a little bit around the same store revenue guidance in terms of what markets are likely to be materially above the range and then what markets other than Houston are expected to be below the low end of the range and where you have some concerns, even if it's not going to be Houston-level concerns, but where you're continuing to see weakening results for 2017?

I'll start with the strongest of the bunch. Frankly, it lines up pretty well with what 2016's results were. I would expect good things out of Atlanta, Orlando, Phoenix, Raleigh, Tampa, Jacksonville, Charleston and Memphis. I can't not mention Houston as a slower one and remind that it's just 3.5% of the portfolio.

On the slower but, frankly, we like some of the fundamentals out of it, are DC and Savannah. Both of those have the -- those will start a little slower, but they both have attributes that give us optimism toward the back half of the year.

Okay. What markets do you think at this point in time have the widest variability in potential results for 2017?

That is relatively, I would say, hard to predict for us, Rob. The supply side of the equation is relatively clear and if demand stays as expected, I would tell you it'll roll out about as we would expect. If we have some shock to the system in some way like we did with the oil shock in Houston, that would change volatility. I'm just not very good at seeing those shocks coming, Rob. But right now it, we would expect them to be in those ranges.

Okay. Eric, what are you thinking at this point in terms of new development starts in 2017, even if they are fourth-quarter loaded? What are you -- given what you acquired potentially in Post and what you've had working on at Mid-America, what does 2017 look like for starts for you?

The only project that you may see us start in 2017 is a Phase II opportunity we're currently looking at associated with the acquisition we made in the fourth quarter in the Charleston market. 1201 Midtown is the name of the property. We have an adjacent parcel of land there that we're currently looking at.

Other than that, I don't envision us starting anything new in 2017. Currently the combined development pipeline now represents roughly 3% to 4% of our enterprise value. That will probably scale down a little bit over the coming year to two years as we bring some product online and we are going to be active in the market looking for opportunity. You may see us acquire a land site or two, but I would not see us starting anything this year and probably it would be back half of 2018 before you'd likely see us start something

Okay. Al, the 3% to 3.5% same store revenue growth guidance, that's just the Mid-America portfolio or that includes Post?

No. That includes Post. Let me just clarify that, Rob. That's a great question. Is that the guidance we have put out is on an adjusted combined same-store basis. We'll label with that because it's both portfolios added together as if we owned Post in both years.

We have the numbers and that's what we know interests people, so we want to show that, although our technical same store is properties that we've owned for two years. That guidance is based on adjusted same-store performance with as if we owned both, 3% to 3.5% combined. Obviously, that's with Post coming out of the gate lower than MAA at the beginning the year and as we work through the back part of the year capturing some of the synergies trying to closing that gap. But that's a combined basis.

For the full year, how material is the difference if you were providing guidance for just the Mid-America portfolio and then for the Post portfolio? Does the back end -- does the back half on Post make up for the first half?

It doesn't make up for it but it tightens the gap. So in the zero to 50 basis points range for the full year, but when you're done because of the performance that we expect to capture from some of the things that Tom and his team are doing on pricing and expenses, you'll see more in the third and fourth quarters of the year.

Okay. Lastly, how much of the $0.15 or so from a non-core perspective is front-end loaded, or is that rateably throughout the year, it's $0.035, $0.04 a quarter?

It is front-end loaded. I would call it $0.40, $0.30, $0.15, $0.15 if I were modeling it, Rob, and that's just because half of that is people that are staying with us to help us integrate these systems that are identified as interim or part time, and as their projects are completed and they begin to roll off, you will see that come down. So I'd go with $0.40, $0.30, $0.15, $0.15 range.

Okay. Thanks, guys. Appreciate it.

Thank you. We'll go ahead and take our next question from Nick Joseph. Please go ahead. Your line is open.

Thanks. Just wanted to go back to one of the previous questions to clarify. Same-store revenue for the combined Company is 3% to 3.5%. How does that break down between Post and the MAA legacy portfolio?

MAA legacy portfolio for the -- well, two things of the segment. At the beginning of the year, Post is starting out lower, but through capturing synergies and things, by the year they closed that gap, so they're still below, but the gap is much tighter. So full year, call it between a zero and 50 basis points spread by the time you're done at the end of the year.

Okay. So just to clarify, Post is 50 -- or zero to 50 basis points dilutive throughout the year at different points.

Yes.

Nick, this is Tim. One point to add is that the Post portfolio represents about 25% to 30% of our total same-store portfolio, so that will help you do the balancing math.

Good point.

Perfect. Thanks. Eric, I'm wondering what your thoughts are on the DC market and if it's a long-term market for you?

To be determined. I would tell you, Nick, we're pretty excited about the properties that are there. We've been up there visiting with the teams and getting familiar with the properties, great assets, great locations. As you know, that DC market is starting to show some signs of recovery and for the foreseeable future we are -- we're enthused to be there and believe it will be a nice compliment to our portfolio and don't have any plans to make any changes.

Thanks.

You bet.

Thank you. We'll go ahead and take our next question from John Kim with BMO Capital Markets. Please go ahead. Your line is open.

Thank you. It sounds like supply growth is peeking for the most part this year, but I'm wondering if there are any markets that you're in where you think supply growth may be at risk of accelerating in 2018?

John, it's Tom. You'll see a little bit of supply growth in Austin, Nashville and Atlanta that tends to be more in the urban core area. We're not exposed to that in Nashville. We will see a little exposure to that in Atlanta and light exposure to that in Austin. But you're talking probably about a 1,000- to 2,000-unit bump in each of those markets.

John, this is Eric. I would tell you that based on just, again, I've had a lot of conversations with developers over the last several months, and it's a consistent message that financing is very difficult right now. Equity capital is available, but the financing is difficult and on that basis, it's hard for me to see supply trends in 2018 being certainly any worse than what they are in 2017. I would suggest that based on everything that we see right now, we likely will see supply, I believe, in our markets peak this year and portfolio-wide see a lower moderation take place in 2018.

Eric, can you just comment on why that's happening right now with the banks as far as financing developments?

Well, there has been a lot more information available and widely put out there suggesting that supply trends have picked up quite a bit, particularly in the high end of the market and in some of the more urban locations. As a consequence of that, the financing environment has just become a little bit more cautious about funding and financing apartment construction at the moment. As a consequence of that, again, I wasn't actually in attendance, but I talked to a lot of people coming out of the National Housing Conference last week and that was absolutely a consistent message that financing is just very difficult to come by right now.

When you put on top of that the rise in land costs, construction costs, construction labor in particular is becoming increasingly challenging, it's just hard to see at this point how supply trends begin to elevate in any way from where they are today. In fact, as I said a moment ago, I believe they will likely see fewer deliveries in 2018 versus what we're seeing in 2017.

Tom, you mentioned in your prepared remarks that move out to home buying and single-family rental declined this quarter and I'm wondering how much of that is seasonal or is it market driven as far as the market tightening?

That's a quarter-over-quarter comparison over prior year. In other words, it's relative to the same time last year, so it takes seasonality out of it, so that's an absolute drop.

Why do you think this is occurring?

There's a myriad of reasons out there and it was touched on in the Journal this morning with the new home buying stats, the homeownership rate dropping again. I just think it is people pushing back major life decisions. They're buying homes -- they're getting married later, they're buying homes later and they're investing in their pets, and so they tend to want to rent longer and value that flexibility.

Great. Thank you.

Thank you. We'll take our next question from Tom Lesnick with Capital One. Please go ahead. Your line is open.

Thanks. Good morning, guys. First you mentioned construction financing being really hard to come by. You would think that would give REITs that much more of a cost of capital advantage. At the same time, you talked about your acquisition opportunities, basically looking to buy recently developed assets. So I'm just wondering, what is the calculus in your mind between doing development yourself versus buying recently developed assets? How do you measure that risk-adjusted return?

Well, generally I would tell you, Tom, we look to get a little bit better yield, higher yield on the development side of the equation, given the fact that we're taking on more risk and we also are tying up capital in a non-productive fashion longer as a consequence of doing a development versus an acquisition. So call it 100 basis points spread or something of that nature, maybe a little north of that is what we tend to often -- or tend to look for. And given where we are right now, we're having a hard time making the numbers work on the development side, given the reasons I spoke of a moment ago regarding land cost and construction costs generally, particularly construction labor.

So we're just -- we're not finding and underwriting as realistically as we can. We really feel that it's tough to pencil out development right now. On the acquisition side it's been likewise hard to make the numbers work and hard to buy anything other than, again, the characteristics that I spoke of, which is really everything we've bought for the last two or three years is some regionally developed -- or development by a regional developer that really doesn't have the balance sheet or the wherewithal to carry the deal for a very long time or has impatient equity partner involved in the development that is anxious to monetize their investment.

As supply trends continue to come online this year, or new projects come online this year, I continue to be hopeful we'll find more of that opportunity and give us a chance to buy at a price point that is frankly pretty darn close to replacement value and without the construction risk associated with it. That's how we think about it right now and continue to stick to that level of discipline.

Got it. That's very helpful. Just one more from me. Now that you've got your hands on the Post assets, how would you triage the parts of the portfolio for redevelopment? What are the first assets you're going to consider and what are the metrics you're looking at on that?

Tom, I'll pick up on it a little bit with triage. It's not an emergency situation. They're in great locations and they're well maintained. We're really thrilled with the opportunity.

You start with a little bit older assets, but the locations in places like Atlanta and Dallas are phenomenal. There's a great core of opportunity in those two markets, and then followed probably by the Tampa assets and their locations and opportunities. There's a good bit of upside in Charlotte and DC as well, which I pretty much rattled off everything that there is short of Orlando and Raleigh, which Orlando has some opportunity as well, though smaller because the assets are newer.

It is really just a get in, get as many test units in as we can do in those various markets, hone the scope and then move forward. I will tell you it is likely that the opportunity to redevelop on a per-unit basis in the Post assets is going to be a little higher than the average 4,500 and we think we'll get -- we will get a larger rent bump for that. Because of the locations, we can do more upgrades like granite and countertops and get a return for them there. So we're excited not just in the volume, but in the bump and the quality of the bump that we'll get from the Post redevelopment opportunities.

Got it. Really appreciate that insight. Nice quarter, guys.

You bet. Thank you, Tom.

Thank you. Our next question comes from Rich Anderson with Mizuho Securities. Please go ahead. Your line is open.

Thank you. Good morning. First of all, congrats on moving to NAREIT-defined FFO. I for one appreciate that a lot. I hope more REITs follow suit. Second is on your AFFO guidance. Is that a quote-unquote normalized AFFO or is that simply -- is the difference just CapEx between your FFO guidance and your AFFO guidance?

Second, Rich. It is FFO guidance less the normal recurring CapEx [pull] out.

Okay. So you still have the merger costs and the debt mark to market in the AFFO?

(Multiple speakers) You would take the $5.22 midpoint plus $0.15 and that would be a more normalized AFFO, yes.

Got you. You mentioned 30,000 units in redevelopment cross hairs, roughly 1/3 of the portfolio. How long do you think it'll take to get through that chunk of activity?

I would think that's three to five years or better. We're very disciplined about the volume that we put through the pipe, not from a scalability of production, but we think it's vital to test the units side by side with non-renovated units so that we can look you in the eyes and be confident that we've gotten the return and we've tested it against a unit that is not renovated and that return is real. For that reason, it takes a little bit of time, but we'd rather go steadily and know that we're getting a return than get out there.

The other thing is that, Rich, is we do these as apartments turn. We don't force turnover to occur and that protects the economic side. But we did over 6,000 units this year. I mean, we've looked at -- it may get to 7,000 units or something like that, so you can do the math. It's, as Tom said, it's probably a three- or four-year endeavor.

So if you did 6,000, 7,000 on your own, will that number naturally go up because you're a bigger company or do you think it stays in that range?

It'll probably stay in that range, maybe a bit more, but, yes.

But the Post items will be additive but not --

More to choose from. More to choose from. So by the time the fifth year comes along, what's the pace by which units start to become redevelopable? In other words, this is circular, right? By the time you'll add to that redevelop pool, do you have a sense of what number of units get to a point just because of the process of age become redevelopment candidates?

It really determines -- it depends on the market. If we feel like there's an opportunity to grow the top line by reinvesting, we have done that in some places and in others we've never revisited again. So, it's truly asset by asset, sub-market by sub-market.

I'll add to that, Rich. In our underwriting for those, we get our returns on a very conservative basis with less than 10 years underwriting with no kick-out value, so it leaves that opportunity if we choose to do that.

Also the number of tenants that put holes in the wall is also a function of that, I suppose, too, but hopefully you don't lease to many of those types of people.

No. We tightened our screening processes to help with that a little bit.

Good. Last question is big picture for Eric. With your Sun Belt interior focus have shown exactly what you want to show, which is stability through different cycles. But I'm curious, is this a forever thing or do you foresee a period of time in the foreseeable future where coastal starts to be a winner again and you just have to kind of muscle your way through those things, or do you think that there's something systemic about the business that puts the Sun Belt and interior locations in better position for a long time to come?

We're a big believer in the Sun Belt and the interior locations for several reasons. First and foremost, it starts with really how do we want to -- what earnings profile are we trying to create over a full cycle, what earnings profile are we trying to create over, call it, a 5- to 7-, 8-, 9-, 10-year horizon. We think that ultimately we can optimize that performance, that earnings performance, over that horizon by first and foremost focusing our capital in markets where we think the demand is more likely than not to stay stable and/or strong. This region of the country arguably over that horizon is going to produce some of the best and least volatile job growth over that period of time, so we like the demand-side dynamics in that region of the country and choose to allocate our capital in that way.

Having said that, we understand that these markets, like all markets, like coastal markets, can have supply pressure from time to time, and what we tend to do is just really balance our capital, diversify our capital across this region in order to try to mitigate some of that pressure, whether it is both A and B pricing asset -- or A quality, B quality priced assets as well as suburban and urban locations. That's what part of the Post rationale for us is the fact that it allowed us to further diversify our footprint and further diversify our product and capital across what we see as a very dynamic growth region.

The leading question is, the next chapter of this Company years from now maybe isn't to tap into California or more on the East Coast as a means to balance that discussion further or do you -- you're going to stay where you're at, so to speak?

We like staying where we are, Rich. I will tell you, the other attribute or the other factor that I really think a lot about is where can we take our shareholder capital and create a competitive advantage for it in what is a very, very competitive industry. We think that a lot of these markets that we choose to compete in offer dynamics and competition, frankly, that we can create a superior level of performance out of those markets and out of that create value. Going to a lot of these more institutionally owned markets with pretty sophisticated capital and pretty sophisticated operators, the opportunity to really carve out a differentiation and carve out a competitive advantage becomes much more challenging.

Ultimately, the value proposition is built around creating a competitive advantage, holding onto that, and then exploiting that. And we think the region we're in allows that.

Okay. Sounds good. Thanks. Appreciate it.

Thank you. Our next question comes from Drew Babin with Robert W Baird & Co. Please go ahead. Your line is open.

Good morning, guys.

Good morning, Drew.

Couple quick questions related to market balance, the large markets relative to the secondary markets. Do you plan to use your pipeline beyond 2017 to maybe increase your exposure in the secondary markets by using the (inaudible)?

What I would tell you, Drew, is really what we're focused on increasingly is just focusing our capital on the best growth market opportunities, or best growth markets that we see across the region that we focus on. Ultimately it's all about achieving diversification and balance such that we create the best risk-adjusted earnings performance we can over the full cycle. Some of these smaller markets that have very dynamic growth characteristics associated with it, places like Charleston, South Carolina, Greenville, South Carolina, you're going to continue to see us focus capital on markets like that and, of course, we continue to stay interested in markets like Atlanta and Dallas and into Houston and Phoenix as well.

It's really more a function of where do we think the job growth, demand side of the equation is likely to be the strongest, stay very balanced and then balance within those markets, both in more urban-oriented locations, as well as some of the suburban or satellite locations and then also be focused on an A- and B-priced product. Ultimately, we think it creates, as I said earlier, the earnings profile that we're after.

Also you talked before about Atlanta and Dallas as two potential markets where (inaudible) may manage exposure a little bit after the Post merger. In the disposition guidance for 2017, do you expect that some of those assets might be included in that number? Is there anything specifically that's in there?

You can assume that some of those acquisitions will come -- or dispositions, I should say, will come out of those two markets. We're in the process of really evaluating that at this moment and we'll have more to say on that later this year, but we've -- with 14% of our NOI now coming out of the Atlanta area, that's, frankly, a little more concentrated than we need to be long term.

Okay. Just lastly, on fourth-quarter dispositions, what were the nominal and economic yields on those?

On the dispositions themselves, after all CapEx, if you will, a cash flow yield on the dispositions is around a 6.2%. I'm sorry, what was the other part --?

Nominal NOI as well.

Nominal was just over 7%. That was before CapEx and (inaudible).

All right. Great. Thanks, guys.

Thank you. We'll take our next question from Tayo Okusanya with Jefferies. Please go ahead. Your line is open.

Good morning. Thanks for the details around the guidance. Just a quick question. I understand that the $20 million in G&A is built into it as a ramp-up process, but could you talk about total synergies that are built into the 2017 guidance of the annualized $60 million to $70 million you do expect from the Post deal?

Right. That's a good question, Tayo. 2017 is primarily focused on capturing the overhead. The biggest impact will be from the overhead synergies of the $20 million and as we said, as you mentioned, it'll grow over the year, but by the year end we will have captured, on a runway basis, that full $20 million that we talked about.

In addition to that we will have some NOI synergies that we talked about that we will begin to capture, more so in the third and fourth quarter, but then they begin to grow. Initially, they will be focused on the pricing performance in the revenue section and mostly revenue, a little bit of expense, but it'll take 2018 to really begin to see the most of that NOI additional synergy to be harvested. So the majority of 2017 is overhead with, call it, $4 million to $6 million into our forecast for other synergies, NOI level synergies, and that's really what we see.

We also are seeing some balance sheet synergies, because, as I mentioned, we got upgraded by S&P right on the merger announcement and that immediately took our cost down on our financing instruments, our term loans, our line of credit, and so we expect $2 million in interest savings right off the bat there. Those are really the three that you'll see the impact in 2017 on. Three areas.

And the total amount of that is, what, $25 million of the $60 million to $70 million you're expecting, or could you just give us a number?

Yes. I don't have that totaled up, really, but that's about the right range.

Tayo, this is Tim. I'd say about $20 million to $25 million range for everything, including the cost of debt and NOI and overhead.

Okay. That's helpful. That's great. Then second question, fourth-quarter results, some of your secondary markets did experience pretty negative same store NOI growth. A lot of it seems to be driven by just huge increases in operating -- same-store OpEx. Could you just talk a little bit about what's driving some of those big increases in some of those markets?

Yes. Primarily, what you're looking at on the large number like Savannah is taxes, to be honest with you, Tayo. On the coastal items with Savannah, Jacksonville and Charleston, you also had some Hurricane Matthew storm mitigation expenses.

Okay. That's helpful. That's great. Lastly, could you just talk a little bit just January, February trends in regards to asking rents and renewals and things of that nature?

Yes, sure. For MAA, average physical occupancy was 96.2%, consistent with last year's record performance. Exposures were just under 7.2%, which is 22 Bps better than last year and Tayo, that's all current vacant plus notices, 60 days out, and then blended rents were up 2%, so about in line with where they were in the fourth quarter.

Got you. Thank you.

Thank you. Our next question comes from Dennis McGill with Zelman & Associates. Please go ahead. Your line is open.

Good morning and thank you, guys. First question had to do with the guidance for the full year, the 3 % to 3.5% on the top line. How would that phase through the year by quarter, roughly?

That's pretty consistent with a little increase as you move into the back part of the year because of the synergies that we talked about on the Post side of the business, but pretty consistent with a little bit of ramping from that.

Okay. The number you gave, I want to make sure I got this correctly, the 2% blended, that was the fourth-quarter number just for legacy MAA?

2% on the rent? Sorry, Dennis. I was looking at another stat.

That's okay. You disclosed 2% blended rent growth. I just wanted to clarify that was fourth quarter just for legacy MAA?

Well, it was fourth quarter legacy MAA. It was also January MAA.

Okay. Just for the fourth quarter, then, can you split that between new lease and renewal as well?

Yes, sure. New lease and renewal for MAA for the fourth quarter was renewals were 6.1% and then as expected, new leases were about 1.4%, so you have seasonal slowdown there.

Yes. Also for the fourth quarter, any color you can provide on legacy Post as far as same-store metrics, their revenue, NOI as well?

Yes, sure. Their revenue was 2.3%, occupancy 95.8% and they had rent growth of 2.2%.

Okay. Last question, more big picture, as everyone is trying to get their arms around supply and when it peaks, whether it's this year, next year, mid year, late year, et cetera, just curious, Eric, from your perspective, when we think about supply, it's beyond just when it's delivered. There's a tail to it. There's some rolling effects that take some time to really get back to something more normal. Wondered from your history and perspective in various markets, how do you think about that tail effect? When a product does come to market, how long does it really take to get back to a balance where the pricing pressure from new lease ups and then when you cycle those original leases are fully out of the market?

Well, I mean, how long it takes is a function of how much supply did come into the market and then how strong the demand side of the equation is and obviously, ultimately just how strong the absorption is. It's going to vary. We see nothing at this moment that causes us to believe that the demand side of the equation and demand dynamics are showing any signs of weakening, and so if you take a market other than Houston, where the demand side of the equation did in fact, collapse.

So you take a market like Houston, where it was the demand side of the equation that disrupted the calculus of what was happening in that market, that's a two-year process, to work through it as you wait for weak demand to take on what supply had been built up. You take a market like, say, Nashville that's been getting a lot of supply but also having great job growth dynamics there, Nashville will see -- broadly is likely going to see a little weaker year this year. But, again, as I was saying earlier, that the supply side of the equation looks to be showing signs of tapping the brakes and as long as the demand stay strong, I would think a market like Nashville is back on its feet in 2018, no problem.

So it just varies on those variables a little bit, but broadly speaking, the markets where we see supply has caused moderation to occur. Absent any disruption on the demand side of the equation and absent any acceleration of supply trends, there's reason to believe that 2018 shows a little more strength than 2017.

As you think about 2017 just in from first half, second half, is it fair to say as you look at that revenue pressure, most of that has already been felt from supply and you feel like the pricing pressure now has stabilized, which allows you to see pretty stable growth through the year?

Well, you have to roll through it. We've had a number of new lease trends that have been under pressure for a while and ultimately it starts to have an impact on the renewal pricing as well. So we're going to see the pressure really throughout the course of 2017 and then by the time you get to early 2018, depending on the market, you could begin to see the pressure lessen. As we get new lease pricing back on a healthy trajectory, and new lease pricing is a leading indicator of what's happening, and right now the indication generally is more negative than positive, and it's going to take the better part of this year to get that trend reversed.

Okay. Sorry, so just last follow up, I promise, but I want to make sure I understand this correctly, then. If you're assuming that new lease pressure does take some time through this year, then the fact that revenue growth is stable pretty much through the year is really only a function of the Post synergies, so absent the Post synergies, you'd see deceleration otherwise?

Well, yes. We would definitely see deceleration this year otherwise. There's no question about it, for all the reasons that we've just been talking about.

New-lease trends are not as robust this year as they were last year, and ultimately that will mitigate what we're able to do on renewals at some level. Market conditions do suggest deceleration this year and we are feeling that. Our situation is a little bit unique in that we do see some opportunity on the Post side of the portfolio that probably helps to mitigate some of that pressure and creates what appears to be a more consistent performance year over year.

Okay. That makes a lot of sense. Appreciate it. Thanks, guys.

Thanks, Dennis.

Thank you. We'll take our next question from Conor Wagner with Green Street Advisors. Please go ahead. Your line is open.

Good morning. On the Post assets, what is the (technical difficulty) this year?

I'm sorry, Conor, you broke up there. We didn't hear that question.

The impact of redevelopment on the Post assets this year, how much will that contribute to revenue growth in that portfolio?

About $1 million for the year, for the full year. It'll take final for that program to ramp up and be as fully productive as we expect it to be in 2018 and even going forward, but we got, call it, $1 million addition in 2017.

Great. Thank you. What is your overall forecast for job growth for the year and how do you see that trending?

Broadly speaking, it seems like the economists generally are gathering around an expectation of 150,000, 200,000 jobs added a month. We continue to believe that our markets in the Southeast, Southwest regions will get a good healthy component of that, so on a macro basis we think that the employment trends in 2017 are pretty consistent to what we've been seeing in 2016.

Thank you. Then Eric, earlier you talked about taking shareholder capital to markets where you have competitive advantage. How does DC fit into that outlook for you?

I also talked about the fact we're trying to create a balanced earnings profile and that the DC market has dynamics associated with it that are different and offer some diversification for us. So we're going to continue to evaluate that market and meanwhile harvest the opportunity that both those assets that have some redevelopment associated with it and the recovery in that market have to offer, harvest that opportunity for capital over the next couple of years and then we'll evaluate from there.

Great. Thank you so much.

Thanks.

Thank you. Our next question comes from Wes Golladay with RBC Capital Markets. Please go ahead. Your line is open.

Good morning, guys. You mentioned that 14% in Atlanta might be a little too much. What is your optimal limit for a market and over what time do you think Atlanta will get to that level?

I would generally tell you that once you get above 10% of the portfolio in a given market, it starts to create some nervousness, at least on my part. There's no magic to that. To some degree a 10% or 12% allocation in a given market, you have to also look at how you diversify from a price-point perspective, you have to look at how you're diversified from a sub-market perspective, you have to look at what is the redevelopment opportunity that may or may not exist in that portfolio.

So there's a number of factors that we think about, but once you get to 10%, I really start to challenge our thinking a little bit in terms of why do any more in that market and we have to have enough diversification there to support it. I would think that for us it's probably a couple years or so to make that transition in Atlanta.

Okay. Looking at some of the one-off assets, it looks like you're buying into supply. How much competition are you seeing for these assets? Are some of these retrades?

Almost every one of them are a retrade and we still see -- there's not as many people in the process as there was, say, a year or two ago, whereas when a product would come to market there would be 12 people in the tent, now there's five or seven. I can't think of a deal that we've bought for the last two years that wasn't a rebound transaction where the deal had been on a contract before.

What are your thoughts about Houston? Would you buy more into that market now that you've reduced your exposure?

We would. We would. We believe in the merits of Houston long term. It's a much more diversified market than it has been historically. Obviously still a lot of oil and gas there, but, yes, we've got capacity to do more in Houston should the opportunities present themselves.

Okay. Thanks a lot and congrats on closing the merger.

Thanks.

Thanks, Wes.

Thank you. We'll take our next question from Buck Horne with Raymond James. Please go ahead. Your line is open.

Hey, good morning, guys. Quick question for me on the balance sheet. Just thinking about now that you've closed the deal and successfully you rerated the balance sheet here, do you think about utilizing a little bit more leverage potentially to drive some acceleration in the growth if you can do so without jeopardizing the new ratings you've got? Is there any wiggle room to potentially use a little bit more leverage going forward?

Hey, Buck, this is Al. We really want to protect the strength of our balance sheet, for sure. We like where are. It's a big part of our -- cost of capital is very important to producing the returns that we need for our investors, so we like that. So no significant change there.

I will tell you, though, this year if you take the amount of investment from the acquisitions we plan to make, funded with dispositions and with internal capital, we are leveraging up a little bit, call it between 50 and 100 basis points, still well below 35% debt to assets, so it's really a very safe place to be. I'll tell you as you move into 2018 with development funding likely to decline some, that will probably trickle back down a bit as our internal cash flow and earnings growth, internal cash flow picks up and even grows from there.

Summary of that is, we like where we are. It may fluctuate a little bit around where we are as we execute our business plan, but no significant changes in that.

Maybe following that with the internal cash flow you are looking to drive this year, how do you think about the payout ratio for the dividends and maybe longer term what your target maybe for the payout ratio?

The way we look at is from a long-term perspective is what growth rate in the dividend do we believe our business model really supports and right now, the way we think about it, we think that we've got a model and a portfolio in place that will sustain a core 6% earnings growth rate over a long period of time. It'll fluctuate a little bit year over year, but broadly we think we've got a business model that supports that 6% growth rate and ultimately we think that keeping the payout ratio where it is, then, by definition would mean an annualized 6% growth rate in the dividend.

Now, as a consequence of some of the things that we're doing with this Post portfolio and driving down our cost to capital, we may very well see our growth rate, I hope, start to improve a little bit beyond where it is right now. But ultimately, the dividend is a more function, and the growth in the dividend on a sustained recurring basis, is more a function of core organic growth rate of earnings of the Company as opposed to we don't think about it so much in terms of payout ratio.

Thanks, guys.

Thank you. We'll take our next question from Nick Yulico with UBS. Please go ahead. Your line is open.

Thanks. Dallas is one market that screams to us as having a fair amount of supply under way. What are concessions like in the market and are you seeing it impact your pricing power yet?

Dallas is one that I probably should have mentioned as far as having supply come on board. We're a net effective rent shop, so the numbers that we have been giving you on our rents have been inclusive of concessions. You're seeing some people use them from time to time, half month or a month, something like that, but it is -- we've had relatively good results in Dallas thus far. But that's one that has -- will be facing some supply headwind in 2017.

Okay. That's helpful. Just last question, as you think about your same store expense guidance this year of 3% to 4%, is that growth likely to come down as you get into 2018, as you get some of the property level expense synergies from Post so that -- let's just assume your same store revenue growth is the same next year as this year, you're likely to see better same store NOI growth just from better expense growth?

There'll be two areas you may see it come down, Nick, in the future. One is real estate taxes. If you look at our expenses this year and what our guidance is, all the areas of our expenses other than real estate taxes are well under control. Taxes, which are about 30%, 35% of our operating expenses, are the one pressure point, really Texas, Georgia, Tennessee in this year continue to be some pressure in those areas.

That's the one thing to consider is that over time hopefully will come down and Texas in particular is very aggressive. Think about taxes as a backward-looking theme. 2016 was a good year. There were a lot of transactions that support a very low cap rate, so we expect values to push that.

In the other areas we expect to be pretty modest and under control. I do think as we move into 2018 and 2019 we will see some capture from the Post side which will hopefully blend. The other areas, repair and maintenance and some of the other areas down as well. In general you're correct with taxes and merger success.

That's helpful. Thanks, everyone.

Thank you. We'll go ahead and take our next question from Jordan Sadler with KeyBanc. Please go ahead. Your line is open.

Hi, good morning. It's Austin Wurschmidt here. Just wanted to touch on acquisitions and debt. What markets scream to you that you would like to improve your diversification in terms of the balance of A&B product you have or urban/suburban exposure? Also, what does guidance assume in terms of the net contribution from acquisitions? If you could provide any color there, it would be helpful.

Well, I'll take the first one and let Al do the second. In terms of markets where we may see some expansion, some growth and opportunities present themselves with a market like Charlotte, where we don't have a lot of the exposure to the downtown, more urban-oriented centers of Charlotte. Most of our locations there are suburban. A lot of the supply pressure that's taking place in Charlotte right now is more the downtown, fringe downtown areas, so I wouldn't be surprised to see opportunities come out of that market that fit a need that we have.

Somewhat similar story in Raleigh. Then also, as Tom mentioned, Nashville is another market that I feel like offers that opportunity. A lot of stuff going on in Nashville right now downtown, the Gulch area, where we have no exposure to, and we like the performance dynamics of Nashville long term. Those are the three that come to mind offhand.

I'll just add the spread for the year is pretty straightforward and simple in our model. We'd start from March through, say, November of the year pretty even spread (inaudible) something like it, Austin. That there's no science to that other than to spread that evenly as we could, where the activity will likely be. Then I'll say on the disposition side, that's different. We have basically two waves that we expect something mid year and something later in the year, similar to what we did this year and that's particularly how we do it.

One thing to add on the acquisitions, Austin, we are assuming about 40% of those deals would be these lease-up opportunities that Eric has talked about, so the blended yield may be perhaps a bit lower than a stabilized yield initially.

In 2017 and growing in 2018.

That's helpful. Are you assuming those get funded on the line, or would you guys look to do a potential bond deal at some point in the year to -- or cover the gap in the dispositions and acquisitions?

Initially start funding on the line. We look at our line as the liquidity for us to have flexibility and move as we want to in acquisitions, and then we move tactically throughout the year to -- if everything worked perfect from our maturities to our capital plans, we would do one bond deal a year and use our line of credit to manage around that. That's what we're thinking for 2017. We did postpone a deal that we were going to do late last year that's moving into 2017, so we'll likely early to mid year be in the market potentially for a fairly large deal to pay down our line of credit and to fund those acquisitions and development.

That's helpful. Then just last one for me, other income has been an item that has moved same-store revenue around a bit and been a tailwind at certain points as well as a headwind. What do you assume in terms of growth and other income and is there any opportunity there within the Post portfolio to drive other income?

Broadly, and Tom may add some components to it, but broadly what we see in 2017 is because of the components of other income, it's going to grow a little slower than our rent growth, and so that's why what you saw in the fourth quarter we had revenue growth of 3.6%, although we had effective rent growth 3.9%, so some of the components of that, our cable projects, our utility reimbursement program, they don't tend to grow as fast as our rents in some parts of the cycle, and so that's actually taken our revenue (inaudible) just a bit in 2017.

Jordan, where I would say the opportunity on the revenue side on the Post side is pricing practices, pricing management. We feel like there's upside opportunity there despite the market and we believe the redevelopment is a real and material opportunity. Those are fundamental and those are long term and we're excited about those opportunities.

Great. Thanks, guys.

Thank you. That does conclude our question-and-answer portion. I will now hand it back over to your speakers for any additional or closing remarks.

We don't have any further remarks. Appreciate everybody for joining the call.

That does conclude today's program. We'd like to thank you for your participation. Have a wonderful day and you may disconnect at any time.