Mid-America Apartment Communities Inc (MAA) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the MAA First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, April 27, 2017. I will now turn the conference over to Tim Argo, Senior Vice President, Finance, for MAA. Please go ahead, sir.

Thank you, Jessica. Good morning. This is Tim Argo, Senior Vice President 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 would like 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. I will now turn the call over to Eric.

Thanks, Tim, and good morning, everyone. FFO results for the quarter were ahead our expectations as property operating expenses, interest expense and merger and integration cost all came in lower than expected. While leasing conditions across most markets reflect varying degrees of moderation as a result of increased levels of new supply, we continue to see strong demand across our markets, with high resident retention, and MAA's balanced portfolio continues to capture solid results. We are off to a terrific start with integration activities in our merger with Post Properties. The early results and improved operating efficiency and NOI margin enhancement are very encouraging. In the first quarter, our operating team was able to improve the NOI margin within the legacy Post same store portfolio by 130 basis points as compared to prior year. Our initial efforts on the revenue side were focused on stabilizing occupancy, lowering exposure and reconciling practices associated with lease renewal pricing. During the quarter, our Asset Management group also completed the retooling of key market data within our revenue management system associated with each of the legacy Post Properties, and as a result, we head into peak leasing season well positioned to optimize on pricing performance. Our operating teams have also captured some early wins on the expense side of the equation with renegotiated pricing and new contracts. We have much more left to accomplish and opportunity to harvest, but we're certainly encouraged with the early trends and the longer-term opportunities to be captured in our merger with Post.

Our unit interior redevelopment program had a record first quarter performance, with over 1,500 units redeveloped with significant rent bumps and attractive long-term prospects that Tom will outline in his comments. During the first quarter, substantial work was completed in initially scoping out this effort at a number of the legacy Post Properties and, as Tom will outline, the early indications are very promising. We expect to see this activity ramp up quite a bit at the legacy Post locations over the course of this year and throughout 2018.

Al will walk you through our update of FFO guidance, but we're encouraged with the start to the year. And while we did make some offsetting adjustments to same store revenue and expense performance assumptions, we continue to be comfortable with our initial guidance for same-store NOI. Or said another way, we're reaffirming our original same store NOI guidance of 3% to 3.5% growth over the prior year. With continued steady employment trends coupled with MAA's diversified and balanced portfolio approach, and with the upside we expect to capture from enhanced operating efficiencies and margin improvement, especially within the legacy Post portfolio, we are optimistic about our ability to drive NOI results as outlined in our guidance for the balance of the year.

Good progress continues with our lease up and new development pipelines and we look forward to getting those properties fully earnings productive over the next several quarters.

As noted in our earnings release, we did make one acquisition during the quarter. It's an opportunity very much in line with the sort of investments that we've captured over the past couple of years, which was a newly developed property in its initial lease-up that had fallen out of contract earlier. The transaction market and pricing continues to be competitive, as we've seen over the past couple of years, and we will continue to be patient and disciplined in navigating through the pipeline of opportunities being presented.

We are off to a great start for the year and I appreciate the great results being generated by our MAA associates as we deliver today while also building for tomorrow. That's all I have in the way of prepared comments. I will now turn the call over to Tom.

Thank you, Eric, and good morning, everyone. Our first quarter same-store NOI performance of 3.6% was driven by revenue growth of 2.8% over the prior year and strong expense control. The top line was driven by rent growth as all-in-place effective rents increased 2.9% from the prior year. All leases signed during the quarter were up 1.3%, but we've seen some persistent weakness through the first quarter on new lease pricing. So let's jump into that area first.

For the same store portfolio, new lease rates on a lease-over-lease basis were down 3.2% for the quarter. As expected, the submarkets incurring higher levels of supply bore the brunt of the pressure on capturing new residents during the slower winter months. We expect new lease pricing will remain challenged in a number of locations over the first -- over the next few quarters as the new supply pipeline fully delivers. But we expect to see some improvement as we move into the more favorable leasing season.

Encouragingly, leasing velocity has picked up and new lease pricing has improved by 190 basis points from April month-to-date as compared to the first quarter. In addition, as Eric touched on, we've completed most of the foundational work associated with repopulating our revenue management system with updated data from the legacy Post locations and with improved occupancy and exposure positioning, where we should be -- we are where we should be heading into the summer. Renewals for the combined portfolio were still strong for the quarter at 6.1%. Renewals signed for MAA remained robust at 6.6%. Post-renewal rates responded well under the MAA pricing approach. In January, they were up 4%; in February, 4.7%; March they increased to 5.4%; and so far in April, they're coming in at 5.7%. For perspective, renewals signed on the Post assets for April of last year were up 4.8%. As a result, blended rents have improved 120 basis points from 1.3% in the first quarter to 2.5% April month-to-date. Occupancy exposure trends are strong across the board. April month-to-date average daily physical occupancy of 96% matches our very strong April of last year. Our 60-day exposure, which is current vacancy plus all notices for a 60-day period, is just 7.9%, which is better than last year. The strength in this area gives us a solid foundation as we head into the busier season.

On the market front, revenues in Phoenix, Raleigh, Nashville and Jacksonville stood out from the group. In addition, it's worth noting the effective rent growth coming from markets like Charleston, Richmond and Memphis were all above 4%. In both portfolios, Houston remains our only market level worry bead and represents just 3.5% of our NOI. We will continue to monitor closely and protect occupancy in this market. Currently, our combined Houston market's daily occupancy is 96.2% and 60-day exposure is just 7.6%.

Expense performance was solid led by a few early wins in the Post portfolio. As a result of the improved scale, our national account pricing improved in both portfolios, but it was more impactful in the Post results. In addition, the renegotiation of end market contract services such as interior paint vendor and pool cleaning services aided the Post results. The increased scale also improved the pricing of our casualty insurance. Driven by this expense performance, the NOI margin on the Post portfolio increased 130 basis points from the quarter -- from the first quarter of last year.

Renter demand remained steady and our current residents continue to choose to stay with us. Moveouts for the portfolio were down for the quarter by 2.2% over the prior year and turnover dropped again to a low 50.5% on a rolling 12-month basis. Move-outs to home buying and move-outs to home renting remained consistent at 20% and 6% of move-outs.

As you know, much of the Post product is in inner loop areas that are seeing the most supply. While this puts pressure on the newer product, it creates opportunity on the well-located older product. There are 13,000 Post units that are in very good inner loop locations that have compelling redevelopment opportunities. We can make these great locations more competitive by updating the product. We have room to -- we will have room to raise rents and still be well below the rates of the new product coming online.

The early response to the Post redevelopment is impressive. At this point in our redevelopment, units are pre-leasing based only on the description of the units provided by our onsite teams or mostly on the description based by our onsite teams. Through April month-to-date, we have completed 80 units, but we've already leased 152 units on the Post communities. Given the quality of the locations, the redevelopment opportunity is more significant. On average, we're spending $8,600 and getting a rent increase that is 10% more on comparable non-redeveloped units.

As Eric mentioned, we're just getting started. We originally planned on doing 1,700 units in the Post portfolio. However, if the response to the product remains strong through our busier season, we will have the opportunity to exceed this amount.

For the full MAA portfolio during the quarter, we completed over 1,500 interior unit upgrades. On legacy MAA our redevelopment pipeline of 15,000 units to 20,000 units remains robust and on a combined basis, our total redevelopment pipeline is in the neighborhood of 30,000 units.

As you can tell from the release, our active lease-up communities are performing well. We moved the stabilization date for Innovation, 1201 Midtown and Colonial Grand at Randal Lakes Phase II up a quarter and moved Post Parkside at Wade back a quarter. These timing differences are minimal and do not have an impact on our return assumptions. Our new acquisition community in Nashville is on track and residents in Fountainhead in Phoenix and Innovation in Greenville will stabilize on schedule in the second quarter.

We're pleased with our progress thus far in the Post merger and remain confident in the opportunities ahead to create value by continuing to reconcile practices between these 2 companies.

Al?

Thank you, Tom, and good morning everyone. I'll provide some additional commentary on the company's first quarter earnings performance, the balance sheet activity and then finally on guidance for the remainder of 2017.

Net income available for common shareholders was $0.36 per diluted common share for the quarter. FFO for the quarter was $1.46 per share, which was $0.08 per share above the midpoint of our guidance for the quarter. We were encouraged by the solid first quarter performance, but the results included some noise related to the nature and timing of several items, which should be considered in the revised expectations for the remainder of the year. I'll provide a little more color in a moment. But in summary, $0.03 per share is related to favorable operating performance for the quarter, same store, non-same store combined. An additional $0.03 per share is related to lower-than-expected integration and interest cost combined for the quarter. And, finally, the quarter included $0.02 per share of noncash income related to a required mark-to-market adjustment of an embedded derivative.

About 2/3 of the favorable operating performance, or $0.02 per share, was related to the combined adjusted same-store portfolio, primarily due to operating expense performance, with the remaining $0.01 per share related to the non-same store portfolio, as lease up, development and commercial properties all performed a little bit better than expected for the quarter.

As mentioned, integration and interest cost together produced another $0.03 per share of favorability for the quarter, a portion of which is timing related. We remain confident in our full year projection ranges for each of these items. And then, finally, the first quarter results include the $0.02 per share of noncash income from an embedded derivative related to the preferred shares acquired in the Post merger. In short, accounting rules require that we bifurcate an assumed embedded derivative related to the call options on the shares. The derivative must be recorded as an asset and then mark-to-market each period through earnings. Volatile trading during the first quarter produced a sizable noncash adjustment which bears no real economic benefit and will potentially reverse at some point over the remainder of the year.

And I will outline our revised guidance for the remainder of the year in just a moment.

During the first quarter, we acquired a newly developed community located in Nashville for $62.5 million, which was in lease-up when acquired and about 77% occupied at quarter end. We also funded an additional $62.5 million of development cost during the quarter. We completed the construction of 2 development communities slightly ahead of schedule during the quarter, leaving 7 communities in our current development pipeline with an expected total cost of just over $505 million, of which all but $129 million has already been [funded]. During the quarter, Moody's Investors Service upgraded our investment-grade rating to BAA1 as stable, which reflects the strength of our balance sheet and brings all of our ratings, Moody's, Standard & Poor's and Fitch to the third level investment-grade. We expect to use these ratings this year as we plan to access the bond markets, refinance maturities and to pay down our credit line.

At quarter end, our leverage defined as debt-to-total assets for our public bond covenants was 34.1% and unencumbered assets were over 80% of gross assets. We also had over $460 million of combined cash and capacity under our credit facility to provide protection and support for our business plans. And finally, we revised our earnings guidance for the full year to reflect the first quarter performance and updated expectations for the remainder of the year. We're updating guidance for net income per diluted common share, which is reconciled to updated FFO and AFFO guidance in the supplement. Net income per diluted common share is now projected to be $2.54 to $2.74 for the full year 2017, reflecting the updated expectation of gains on planned disposition properties. FFO is now projected to be $5.74 to $5.94 per share or $5.84 at the midpoint, which includes $0.15 per share of merger and integration cost for the full year. AFFO is projected to be $5.15 to $5.34 per share or $5.25 at the midpoint. We are maintaining our overall expectation for Combined Adjusted Same Store NOI growth for the year in the 3% to 3.5% range. We now expect this to be produced by revenue growth in the 2.8% to 3.2% range and expense growth in the 2.5% to 3.5% range.

In summary, we are increasing our FFO guidance for the full year by $0.02 per share. This is produced by the strong Q1 performance at 8% -- $0.08 per share performance above our guidance as mentioned earlier, combined with revised expectations for several items which offset symptoms of this favorable performance of the remainder of the year.

First, we expect volatility from the derivative accounting to reverse the $0.02 of noncash income over the remainder of the year. Also, we now expect our acquisitions to be a little later in the year and to provide us more lease-up opportunities, which cost an additional $0.02 per share in initial dilution for 2017, but we expect to be more accretive and value-productive over the longer-term.

In addition, revised guidance for real estate taxes is now expected to grow 5.5% to 6.5%, removes $0.01 per share over the remainder of the year. And, finally, though our integration cost were $0.01 per share favorable in Q1, we expect our total integration cost for the year to be in line with our original estimates, shifting the $0.01 per share to the remainder of the year.

Our guidance for acquisition and disposition volumes, development investment and total merger and integration cost for the full year remains unchanged. We also remain on track to capture the full $20 million of overhead synergies on a run rate basis by year-end. And we expect to continue capturing additional NOI opportunities included in our forecast, primarily in the later part of this year as operating practices and platforms become more integrated. So that's all we have in the way of prepared comments. Well, Jessica we'll now turn the call back over to you for questions.

(Operator Instructions) And we will take our first question from Nick Joseph with Citigroup.

Wondering if you could provide what same store revenue for the first quarter was for the MAA legacy portfolio and the Post legacy portfolio?

Sure, Nick. This is Tom. In the -- so for revenue expense, NOI and ARU for those revenue -- okay, for revenue was 1.3% for Post and MAA was 3.3%.

And then just in terms of the reduction of same store revenue growth, what drove that lower? Was it specific markets, was it the Post legacy portfolio? Was it more broad-based? If you could just provide a little more color there.

Nick, this is Al. That was really primarily related to the new lease pricing, as Tom mentioned in his comments. What we had seen in the early part of the year was new lease pricing, seasonally as it is, was negative beginning of the year and began the year in the 3% down range. But the other side of that is renewals were very strong. They were 6% over. And so what we had in our forecast was expectation as we moved into March and moved into the busier leasing season that the new lease pricing would begin to improve, and it stayed down in that 3% range longer than we expected. The good news is, as we moved into April, as Tom mentioned, we are seeing significant change, and it did, we did see the trends revert to more like we thought.

Nick, this is Eric. I'll also add that, I mean, the other thing, if you look at just the Post portfolio and the performance on new lease pricing in Q1, I would really characterize the performance by 2 things that went on. One is obviously that -- those are the submarkets where supply pressures are the greatest and that was clearly evident. But, secondly, we also made a conscious decision in Q1 to focus our efforts in the Post portfolio towards stabilizing certain variables and positioning that portfolio for a more robust level of performance in the more important summer leasing season. So namely what we did is we focused on pulling exposure down, improving occupancy and, importantly, repopulating our LRO revenue management system with all the correct and updated data that was frankly lacking. And so we've got all that accomplished in the first quarter. And as a consequence of that, we think that, that portfolio is in a much stronger position as we head into, frankly, the more busier, important season of the summer. The challenge you have is that when you do reprice some leases in that first quarter, I mean, you kind of carry them over quarters 2 and 3. And so as we -- but we thought that was the right trade-off, and we certainly think that the benefits are going to begin to really show up latter -- in later this year despite clearly there being more supply pressure in those markets, those submarkets. We think that there is real opportunity as the year plays out.

And just finally, in terms of the new same store revenue range, first quarter is obviously at the low end of that, so there is some assumed acceleration throughout the year. Can you walk through the assumptions that are underlying that new range in terms of occupancy and new and renewal lease rate growth? And how you would expect same store revenue to trend on a quarterly basis throughout the year?

Right, Nick, this is Al. I can give you the basis of for that is really we expect the legacy MAA portfolio to be strong in that initial 3% to 3.5% pricing range and to be pretty stable through the year in revenue performance. But what you have is you had -- the Post portfolio came onboard at a lower point and we expect that to increase over the year as we capture those opportunities for improvement that Eric mentioned. So that will continue and probably intensify in the third and fourth quarter. And so on a total performance for the adjusted combined portfolio, you will see continued slight improvement through the year, primarily in third and fourth quarter, making up that 2.8%, 3.2% range for the year.

Then the net result is just, not to be lost in this, we tweaked the midpoint by 25 basis points. And we think that it is a fairly modest adjustment but we think it was the right long-term decision to make.

And we will go next to Drew Babin with Baird & Company.

On some of the more CBD-focused REITs earnings calls, so far this quarter there has been some talk about elevated supply levels, kind of looking at the national data looking a bit worse kind of into the end of '17 and into '18, and sort of dismissing some of that data as being more kind of Sun Belt oriented and getting more suburban. And I guess my question is, are you seeing that and as you compete with new supply, is it mostly the product of just now having these Post assets that are generally more urban or are you starting to see more supply in kind of the MAA legacy suburban markets?

Let me -- there are 2 points I will make. One is we are seeing permitting trends in our markets across the portfolio -- combined portfolio, permitting is down 10% so far this year as compared to last year. When we look at deliveries forecast, based on the information we have for '18 versus '17, they are down. So we think that there is growing evidence based on permitting trends and forecast for deliveries, coupled with all the other information that we get from developers we talk to regarding construction costs and financing challenges and so on and so forth, to believe that '18 is certainly not likely to be worse than '17 from a supply perspective. So, yes, I offer that first. Secondly, I mean clearly right now it's the higher price point more urban-oriented locations where the supply is more evident. And we don't see anything sort of indicating that there is a shift afoot to all of a sudden, developers redirecting their efforts on suburban locations and abandoning their urban locations. There is no evidence to support that and we certainly aren't seeing it based on our markets and what we monitor. So we think that '18 is shaping up to be based -- it's early and these things can change, of course. But based on everything we have to work with right now, there is a lot of evidence that '18 deliveries will be lower than '17 deliveries. And assuming the economy continues to show progress, when you look at sort of the ratio of jobs to deliveries, '18 is projected to be slightly better than '17.

That's very helpful. And then on the acquisition side, it sounds like things are a little slower to come along and that's been the general trend, as pricing is obviously pretty frothy. Do you anticipate any catalyst or trigger we should look to, maybe if not this year, probably more of a next year event where you see more merchant builders looking to sell properties that become value-add opportunities for you? What do you view the catalyst for more of that come to market and could there potentially be portfolios of assets like that?

Well, I think that I wouldn't read too much into Q1, just because it tends to be a slower transaction quarter anyway. We tend to do much more -- get busier and get more opportunity where deals that go into contract the first part of the year fall out and we tend to be more successful in the back half of the year. Having said that, the catalyst, I think it's going to be, just as we get later in the cycle, later this year, maybe into next year, some of these lease-ups that are underway or perhaps there is more of them out there now than there has been historically. We think that, that creates some level of pressure. It certainly creates pressure on some of these lease-ups in terms of pricing that we're hoping to get velocity of lease-up they were hoping to achieve. And if you throw a little prospect of rising interest rates in on top of that, collectively that may start to create the catalyst that creates more compelling buying opportunities. Having said that, we certainly see, as I mentioned in my opening comments -- we certainly see a lot of investor interest that is still pretty strong out there for multifamily. So we haven't really seen any evidence the cap rates have moved a little bit. I would suggest that maybe the number of people at the table putting bids in may be down slightly from what we saw a year or 2 ago. But the people that are there are still pretty aggressive overall. And so we're staying patient, but I think you just -- as we get later this year into next year, there may be a little bit more opportunity that makes sense for us.

And we will take our next question from Mike Lewis with SunTrust.

On the same store revenue, I understand there is the supply pressures in the Post portfolio were a little more than you expected. April is coming back. But you can't make up all of that, so you went ahead and lowered the guidance a little bit. But what gives you confidence after 2.8% same store revenue growth in 1Q that you could do 2.8% to 3.2% for the full year when it seems like we're in this several quarters in a row of kind of decelerating growth. Is it -- maybe it's some easier comps in the Post portfolio, maybe it's supply tailing off, just kind of what gave you comfort there?

Well, first of all, we weren't surprised by anything in the first quarter. We elected to make a conscious decision to, as we got into the Post portfolio, remember we closed on it in early December, but as we got into it, we believed that the thing to do was to really position the portfolio for stronger performance in the busier summer leasing season. Having said that, what gives us confidence that we will see some pickup is frankly, we're heading into the busier summer leasing season where leasing velocity and demand tends to really pick up. And we think that, that coupled with, candidly, what we do see are some comparisons in the Post performance from last year and the way that we execute with LRO, supply pressures notwithstanding, we think that getting to that midpoint of the range that we revised to, at 3%, is something that we feel pretty confident. And having said that, as Tom mentioned, I mean in his comments, I mean the progress that we've seen on renewal pricing in the Post portfolio is pretty impressive. And recognizing that we're renewing a bigger component of our portfolio than we ever have, that's helpful.

And so I think that there is a lot of trends that -- one of the things that I think is important that, not to get lost in all this, is when you look at the Post portfolio, not to be lost in sort of the opportunity that we're underwriting here is recognize that, that portfolio prior to the close of our merger was carrying an average rent level that was 44% higher than legacy MAA, 44% higher rent. But yet we were capturing 100 basis points higher NOI margin. We think that spells opportunity.

My second question. Some of the -- I guess as a whole the small markets are lagging a little bit, some particularly. Is there a trend going on there? Maybe jobs moving to larger markets more? Or are you starting to see some supply pressures in some of the smaller markets?

No, and if you look at the key driver of sort of performance in that, the secondary markets, 2.9% effective rent growth, the large markets, 2.9% effective job growth. If we look on the NOI side, you do see a trade-off that's primarily expense driven and it relates to a prior year comparison when we received a credit last year that didn't reoccur this year. So we're pleased with where the revenue trends are in those areas and, boy, places like Charleston just keep drawing jobs, building airplanes, building trucks, and building Volvos. And it is encouraging to see these secondary markets' performance closing the gap.

And we'll take our next question from Tom Lesnick with Capital One.

I guess, first, looking at Houston, the same store year-over-year comp stood out once again this quarter. Just wondering how we should think about that same store performance through the year. And then the second question on Houston. Historically, that's been one of the larger markets with respect to moving out to purchase a home for you guys. Just wondering how that metric is trending for that market right now?

Sure. When you think about Houston, we want you to think about it as 3.5% of our net operating income first. And then what I would say is, with the Post merger, we picked up more - or exposure really in the same store group in the first-time inner loop and had some significant stabilizing to do there and the trends are improving there, both in terms of occupancy exposure and asking rents. But we don't see Houston coming out of the woods this year. On home buying, it's been in line with our other groups. It's not booming on home buying and it's not well under, it's running about 20%.

Got it. And is there any bifurcation in performance between your more infill properties in Houston as opposed to the ones outside the loops?

Yes. Both have pressure, but the inner loop pressure is larger.

That's helpful. And then final one from me. Turning to redevelopment for a second, I appreciate the detail you give every quarter with respect to the increase in rent from the redevelopment units. How is that trending on the Post units relative to the MAA units historically?

It's about a 10% bump versus, let's say, 9%. But it's larger dollar figures on the whole. We're spending -- the Post locations are just, they are spectacular. I mean, we're a little giddy about it. And with that we've got people building high-rises next door to us that gives us the freedom to go in and put in granite in most of them and do a little bit more robust. Like an $8,000 renovate, we're getting $150 improvement versus probably an $80 redevelopment and a $90 improvement. So, significant.

And we will take our next question from Rich Anderson with Mizuho Securities.

So if I can just double down on that last question. If you're spending more money on the Post redevelopments and getting a 10% return and you're getting 9% on a lesser amount of money in the MAA, why is the Post opportunity a better option?

Well, we're not saying it's necessarily a better option. What we're saying is that the submarket and the competition set that we're competing with supports an ability to invest. And frankly, in those locations, we have to spend a little bit more on the improvement, but we're getting a commensurate higher level of rent bump as a consequence of the higher investment that we're making, and ultimately the IRR, if you will, is very comparable to what we're seeing between both.

Sorry, Rich, I meant, it's sort of larger in terms of -- the numbers of it were larger and the opportunity as a percent of the portfolio is larger.

But I would say, we are excited that we're able to put out more capital at very strong returns in general. That helps our value production.

I get that. Anything you can get a 10% return on is good business. But what is the average? If it's $8,600 for a unit on Post, what is it -- what gets you 9% on an MAA, what's that number?

Closer to $4,400.

Okay, all right. Got it. So next question, if I could be maybe a little wax cynical here. The expense outperformance in the first quarter, maybe this is just me talking, offered the opportunity for you to introduce a new revenue range that, let's say, is easier to beat this year. I mean is that just too diabolical of a way of thinking about this?

I will just -- what we, as Eric mentioned earlier, what we're trying to do with that is, because we saw those new lease pricing trends go a little further into Q1 at the range they were than we expected, that had some impact in the future as our leases reprice. So we were just dialing that in, Rich, and we're going to feel that. Now we were very excited to see, as we got in on the expense side, contract opportunities that were greater than we saw. So we were very glad to see the offset, but really they are unrelated.

You give us more diabolical credit than we deserve.

And then last question, maybe for Eric. You -- often the call from -- the story from MAA has been this whole cycle story, when you look at the sine curve of your full cycle, it kind of is left downside, comparable upside. You know that story. Does the introduction of Dallas and Atlanta kind of disrupt this so-called full cycle opportunity? You would think it would. Those are bold bracket type markets. So you're giving up some of that in exchange for this, sort of, synergy story?

I don't think so, Rich. We think that ultimately what drives our full cycle performance profile first is really the focus on the region that we're in, that I would argue offers some of the best job growth dynamics and ultimately demand dynamics for our product over the full cycle. I think that the best way to manage through a down cycle is to really be well diversified and to have a very strong operating platform, and we think that with the combination of Post into our portfolio, that in a lot of ways we've further diversified who we are. While we certainly are in a lot of the same markets, we're in different submarkets. And I would certainly argue that with adding Post 20,000-plus units to our existing 80,000 units, I would say it probably definitely adds more performance upside in a strong part of the cycle, early part of the cycle. I don't -- it's hard to argue just at a very high level that it may not weaken a little bit, the downside part. But we don't -- protection if you will, but we don't think so. We got as a consequence of still retaining a strong level of diversification in both inner loop and suburban, and also being very well-balanced now between sort of A and B priced product and, candidly, having an operating platform that just keeps getting stronger and stronger and a balance sheet that keeps getting stronger and stronger, we think that the protection, if you will, during the down part of the cycle is the strongest it has ever been. And arguably, I would suggest that we may have improved our up cycle, our up part of the cycle performance profile a little.

And we'll take our next question from John Kim from BMO Capital Markets.

It's only been a couple of quarters since integration, but looking at the NOI margins, they actually declined sequentially during the first quarter. So I'm wondering what gives you comfort that you can improve it this year and is that really a stated goal for 2017?

Well, it is a stated goal, but first of all, it's not 2 quarters, it's 4 months. Second of all, we think that the margin enhancement opportunity, as I said a moment ago, just if you step back and just remember that this Post portfolio is a portfolio that was carrying 44% higher average rent but yet MAA was capturing 100 basis points higher NOI margin. There's just a lot of opportunity in a lot of different places. And what -- and so if you look at December, the month of December and you look at the first quarter, you have seasonal factors that are going on there. So I wouldn't read too much into that comparison. It's more of a seasonal trend. I think as the year plays out and you can start to really get seasonal -- take some of the seasonality out of the equation, you start really looking at year-over-year or comparable quarters year-over-year, I think that's where you will really start to see some evidence of margin enhancement.

So do you think we will be able to see it beginning in the second quarter versus first quarter based on the leases you've signed so far?

Well, I mean, we saw margin improvements in the Post.

130.

You started to see it on the Post side, and as you move into the third quarter you will start seeing it more, as third and fourth will capture the majority of those synergies for the year. So more heavily in those -- that period, John, I would say.

So I think important to look year-over-year, we improved the margins of total same store about 60 basis points, that's for the whole portfolio and 130 on the Post side of the portfolio.

Okay. The gap between new and renewal leases, I know you're expecting that to condense a little bit. But I'm just wondering if that 800 basis point spread is the widest you've seen?

It is probably the widest we've seen in this cycle, but it is always widest at this time of the year. The gap gets wider in the slower winter months and then it tightens in the summer months.

And we will go next to Conor Wagner with Green Street.

Tom, where was overall renewals in April? I know you gave it for the Post portfolio, but for the combined portfolio, please?

Sure. Renewals for the group was, in April, was 64.

Okay. And Eric, if you could tell me what you are thinking about the development pipe, the development platform and possibly adding some land to it, if you guys are exploring those opportunities?

Conor, we are exploring them. We haven't really done anything at this point in terms of any commitments. The only thing that I suspect that will get started this year is an expansion of a community that we own in Charleston that we closed on in December of last year that has a Phase II component to it. But we are -- David and his team are pretty active out looking for opportunity at the moment. We haven't really committed anything at this point. If we did find a very compelling site with an opportunity to get that site productive pretty quickly and it all made sense given where we are in the cycle, we wouldn't hesitate to pull the trigger on it. But I think that one of the things going forward that we'll be very sensitive to is development is never going to be a huge part of who we are. Even at today --at over -- just over $500 million pipeline, it still only constitutes about 3% to 3.5% of enterprise value. We think it will probably -- we would like to keep it in that range. So we'll never -- we never see it approaching -- I don't think we'll ever see approaching 6%, 7% of 8% of who we are in terms of enterprise value. Secondly, one of the things that we're going to be very focused on is ensuring that if any land position is taken, that it's something that we're confident we can get productive in, in short order, within 12, 18 month kind of time frame. Banking a bunch of capital on the balance sheet is not productive, it's not sort of what we do. So that -- those principles sort of guide how we move forward.

Great. And then maybe as a team if you guys can comment briefly on the operating trends you see in the D.C. market?

Operating trends on the DC market are positive. I think you know [Rhonda] and the team there is a stable good bunch. And I think we see steady improvement in that area and are thrilled with the redevelopment opportunity. So I think strengthening is how I would characterize that, and improving.

And we will take our next question from Gaurav Mehta with Cantor Fitzgerald.

So you talked about seeing improvement in new lease growth in April versus first quarter. I was wondering if you could comment on in which markets you are seeing that improvement?

Yes, sure, Gaurav. That -- when we look at on a seasonal basis, it's really following the trend with the sharpest improvement in those areas where Post and MAA overlap. So with the upswing, it is Atlanta, Dallas, Orlando, Tampa where we've seen sort of the biggest changes.

Okay. And I guess, in your prepared remarks in regards to Post portfolio, you also mentioned a focus on lowering exposure to certain markets. I was wondering if you could comment on what's the timing on selling assets, and are those markets Atlanta and Dallas where you plan to lower exposure?

Well, we have targeted in our guidance $125 million, $175 million of dispositions this year. We are about to come to market fairly soon with that group. There is some Dallas, Atlanta in that group. But we're going to be approaching that in a fairly sort of steady fashioned. We will -- we do have a goal over the next 2, 3 years to pull down our exposure in Dallas and Atlanta just to really get the portfolio allocation where we are more comfortable with it. But there is no immediate plan to do anything radical in terms of a major shift. You will see that just steady workdown over the next 2 to 3 years.

And we will take our next question from Austin Wurschmidt from KeyBanc.

Just wanted to touch. You mentioned that the new lease rates, softer new lease rates drove the reduction in same store revenue. But got the sense that renewals were also a little bit stronger than you expected. And was wondering if that's offset any bit of softness in new lease rates at all?

Renewals were about where we expected them, Austin. We expected to be able to make the improvement on the Post side and then Mid-America side has been solid in that 6% to 6.5% range for some time.

What we roughly expect going forward is that the new lease pricing will improve and turn positive and that renewals will remain strong.

And then could you just break down how -- what you expect renewals to come in for MAA and Post into May and June?

Sure. They are -- we've got Post continues its improvement to May to 5.9%. Mid-America continues above 6%. June is a little early to tell, but I would expect those trends to continue.

Great. You talked about a lot of the NOI synergies that you expect to capture in 2017 from Post just being back half weighted. And was just wondering if you're still comfortable with that $4 million to $5 million that you had previously underwritten?

We are absolutely, this is Al. And we are comfortable with that. And we were very encouraged in the first quarter that we had a little quicker start on the expenses than we had thought. And that even adds to that encouragement. But a large part of that is still going to be in the back half of the year as we really begin to compound the revenue improvements, some of these things that Eric and Tom have been talking about in the third and fourth quarter.

Great. And then can you just remind us again of when you expect the transition onto a single revenue management platform?

We have transitioned the revenue management platform work got done in the first quarter. We're all on one system.

Is that -- and that's much sooner than anticipated, correct?

No, again the revenue management component of it is -- went as planned.

The part you're thinking about, Austin, is more the back-office accounting, AP, and then also the property management system that is where the leases are contained is separate. The LRO system kind of sits on top of that, its own function and that is combined and working well.

And that transition is really just an upgrade in systems and that gets done late fourth quarter, early first of next year.

And we will take our next question from Rob Stevenson with Janney.

Eric, you talked a couple of times during the call on the upside that you guys expect on the NOI margin from the Post assets. Beyond that, what's the biggest upside out of Post going forward today, if you started the clock today, that you expect to achieve?

Well, certainly the combined balance sheet of the 2 companies has certainly resulted in a much stronger consolidated balance sheet and we, as Al mentioned, will be approaching the bond market later this year as a consequence of putting the 2 companies together. As you recall, when we closed the merger, S&P upgraded us to the third rung of investor grade that day. Moody's did so recently. And we sliced off a fair amount of interest expense on an annual basis just as a consequence already and we think going forward that will continue to pay some benefits. I would tell you that other than the NOI opportunity, the redevelopment opportunity is quite significant and as Tom mentioned in his comments, that is proving to be -- just I think that opportunity is going to be bigger than -- far bigger than we ever really imagined it would be. So we're very excited about what we see happening there. And that's something that will play out frankly over the next 3 or 4 years. And beyond that then I would tell you was one of the benefits of putting the Post platform with MAA was frankly just another opportunity to deploy capital in an accretive manner through new development. And at this point in the cycle, we're being pretty careful about any commitments in terms of cranking up any more new development. But we certainly again believe that, that platform, supported by our operating platform and balance sheet, is going to be another component of long-term value creation that we're very attracted to.

Okay. And when you guys look at supply, not just in an overall market or submarket, but supply that should directly impact your assets or especially the Post assets given the sort of more urban nature of that, are there any markets or submarkets where you think that the worst is yet to come from a supply standpoint in terms of lease-up concessions, et cetera, that is going to sort of push down rental rate growth within the Post portfolio?

Not that you're not already aware of, Rob. I mean that sort of Buckhead corridor is seeing the expected level of supply come onboard. Same with uptown in Charlotte and inner loop Dallas, let's say. But, I think largely, we're beginning -- we felt that and we will continue to and then it improves in '18.

The only market I would add that's worth monitoring is Dallas. I think that, that Dallas inner loop area is getting a fair amount. So we will keep an eye on that one. But I would agree. I think all the others are -- there is no reason to expect that it is going to deteriorate from where it is today.

And then Houston drops in the half again and Nashville drops off by 3,000 units. There are some bright spots out there as well.

Okay. And then, Tom, when you were talking earlier about the weakness in new leases in the Post portfolio, was that concentrated in a couple of assets that were facing some supply issues? Was that fairly widespread? How would you sort of characterize that? Is that a submarket, a market or just a portfolio sort of issue at this point?

It was fairly widespread. It was sort of probably weakest in Houston, the gap was, and then strongest in places like Tampa or D.C.

Okay. And then last one for Al, I think that I heard you say something about $0.01 impact on property taxes. Was that to the positive or the negative side for the remainder of '17?

That was to the negative side, unfortunately, on that. And I think what really what that is, is we just moved our range to 5.5% to 6.5%, 50 basis points increase. And we still feel good about the expectations for tax rates and the valuations. It's really more related to as we get information, you get into it, we think we may have a little less favorability on appeals that we're making that will fall into favorable results in '17 from '16 than we had in '15 to '16. So we feel like over time as we go forward, tax rates will continue to moderate a little bit, but in '17 we have a little bit of noise.

Okay. So help me reconcile that then. So if property taxes are roughly 1/3 of the expense load and those are going -- you are revising that upward, but then you're taking same store expenses, same store expense guidance down for the year, what overwhelms the increase in property taxes, where are you seeing the benefits to be able to lower the same store expense guidance?

The benefits that we're seeing and getting in earlier on some of the synergy opportunities have been really, really good, Rob. And so we've been able to get into contracts with contract labor and our vendors and insurance pricing and have been able to get favorability earlier than we expected and maybe a little more than we expected. And so that more than offset that $0.01 increase in real estate taxes and expenses.

And we will go next to Tayo Okusanya with Jefferies.

Two questions from me. The first one again around the reduction in the same store revenue guidance. The new rental rates that was again trending negative in the first quarter, again, you kind of mentioned that part of the whole process of why you were signing leases at those rates was the kind of setup to go into the spring leasing season. But I guess, I'm trying to understand a little bit, how exactly does that benefit you going into the spring leasing season if your tenant signs a lease and that tenant is going to be in there for at least a year?

Well, basically if in the first quarter, let's just say that over the course of the year, you have 100% of your leases to renew, or to -- or 100% of your units to reprice. In the first quarter you're going to reprice, I don't know, 20% of them, 18% of them. In the second and third quarter, you going to reprice 65%, 70% of them. And so we would rather reprice or be in a position - a stronger position to reprice when you're going to be repricing a higher percent of your portfolio over the course of the year. So you can, if you will, sacrifice a little pricing on a smaller portion of the portfolio in order to gain more robust pricing on a bigger percent of the portfolio in the second and third quarter and net-net for the year come out with a better result.

And, I mean, all of the pricing, a lot of them, if you will, is driven by exposure. And with what Eric was saying, we improve the exposure on the Post assets by 190 basis points and it's now 7.2% going into that season, and that pushes the rates up on more people more aggressively.

Okay. I think I got to understand that. But I guess, against the backdrop of rising supply in some of the key markets, how confident are you that -- again that upside in pricing that you want in the spring will actually happen if again you kind of have more supply in the market. Isn't that kind of what's putting more pressure on the new rental rates?

Well, but you also have more leasing velocity that takes place in the summer months as well. If you will, demand picks up in the summer months versus the winter months.

And we believe there is a non-market opportunity there, Tayo. Going back to Eric's point about the margin, we feel like there is rent gap to close based on the progress that we're making on the renewal side of Post and where we look at where those units are priced in the market that -- and when you add in redevelopment, that we can grow the Post new lease rents at a greater than market opportunity.

That's helpful. And then just also on the same store OpEx for 1Q. You saw a much bigger decline in your larger markets versus your smaller markets. Does that have anything to do with just the fact that you have more of an overlap of the Post properties in the larger markets and so some of the synergies was what was driving that versus the smaller markets?

Yes, that's a fair point.

That's correct.

And we will go next to Neil Malkin with RBC Capital Markets.

Eric, I think in the last call you talked about stricter lending standards making it more difficult not only in general for incremental supply to occur this cycle, but because of that, more lending would be focused toward the more certain or more highly sought-after urban markets and would actually have an even more beneficial impact to your Sun Belt markets with less construction financing happening there. Are you still confident in that? Are you still seeing that? Or are you seeing a willingness of banks to lend to -- for construction financing in your market?

Well, all I can really speak to is our Sun Belt markets in the Southeast. What I can tell you is, yes. I mean all the developers that we talk to continue to indicate that financing for construction projects is becoming more difficult to achieve. More equity required, lower loan to values, requiring them to either introduce more equity into the transaction and/or bring in some sort of mezzanine financing to bridge their funding needs, net-net putting pressure on the returns. And so, I think that, that evidence is starting to manifest itself as, as I mentioned earlier, permits so far this year are down 10% versus where they were last year. And when you look at the current pipeline and deliveries that we know are going to come online as we head into next year, known deliveries are down next year from what we're seeing this year. So I continue to believe that there is a likelihood that we're likely to see the worst of the supply pressure this year. Things can change, as I said earlier. But based on everything that we've got visibility on right now, there is nothing that causes us to believe that supply pressures are headed towards an acceleration in 2018.

Okay, great. And then can you talk about your pipeline or opportunity set for recently completed or in lease-up properties?

Well, it's -- we are looking at a lot of things right now. And we continue to have -- I think more opportunities are being brought online in terms of development and lease-up is underway. And I think just as we get later in the year, the opportunities become more compelling, because we often see the first, call it 6 months of the year, that people that plan to sell tend to get out there and market their opportunities broadly to the market. And often we see a lot of deals go under contract in the early part of the year that for a host of reasons don't get closed. And then as we get into Q3 and Q4, the opportunities often come back because they fall out of contracts. So we just tend to be much more successful in leveraging our execution capabilities and all-cash acquisition capabilities into sort of the value that we're looking for in the back half of the year. And so as supply does sort of come online increasingly over the course of this year and we get into that busy season where I think a lot of people are counting on a lot of good things happening, undoubtedly there is going to be, I think, more opportunities that will become available later this year. So we're going to be patient and see. I mean, given sort of the scale that we have, the balance sheet that we have and the focus that we have on this region, we know the deals, and in most cases everybody wants us looking at the deals. And our pipeline is fairly active right now. But we are being patient.

Okay, great. And then the last from me. Can you just talk about the Post properties in terms of how things are going on the ground? I'm assuming there was probably some turnover from leasing or property managers maybe that had some impact on the first quarter. How's that going? How is that transitioning? Do you feel comfortable that you have everything in place, kind of all the potential issues are behind you now, if any?

The answer is yes. So we think we've got everything settled down at this point. These things are hard. I mean they are just tough. You have got 2 organizations, very proud. Post has been around for 40 years and quite a legacy and there is a lot of emotion in all of this. And so you sort of have that challenge to work through initially. Secondly, frankly, we just at the property level, and frankly even at the corporate level, we approach the business, and philosophically in some ways, and in fact it's procedurally different. And as a consequence of those differences, we have different expectations for different positions. They may be called the same thing in both companies, but our expectations and the accountabilities that we establish in some cases were different. And so with those 2 factors, you have some people that sort of adjust and you have some people that don't adjust. And frankly you have some people that are in positions that ultimately we conclude they are unlikely to be able to be a good fit for that position given sort of the way we expect the position to perform, and so changes are made. So yes, we made again a conscious decision to address all that ASAP and we have made a conscious decision to address all that in the winter slower leasing season. And I would tell you at this point we are set. We feel like we've got a great team of folks in place. We've got all of the sort of the onsite leadership stabilized and we think we're in a great position as we head into the summer months now.

And we will take our next question from Dennis McGill with Zelman & Associates.

Just going back to the new lease growth in the first quarter, the negative 3%. Just backing into that and the impact on the guidance, is it about 200 basis points worse than what you would have thought going into the quarter?

You're talking about for Q1?

Q1, right, the negative 3% on new leases.

The expectation was more at the end of the quarter in March. We had expected to be in that range in the early part of the quarter. We expected the new lease pricing to improve as we moved into March and that was the expectation that was different.

So the 3% negative was fairly consistent through the quarter, is that what you are seeing?

In April, and just to follow up with your point about (inaudible) , in April, as Tom said, we did see about 200 -- or a 190 basis points swing in that.

We usually see that in March. It hit a little earlier, I think was the point.

Your range is correct. We usually see it in March and we saw it in April and we applied that to our guidance.

Okay. And then as you think about just the impact within the quarter and kind of compare where you ended up versus what you might have thought at the beginning of the quarter, what do you think drove the stepped-up competition. I would assume you have your arms around which products are around you and coming to market. So is there anything in particular you can put your finger on that would have caused either yourself or developers around you to get more competitive?

No, not really. I think that -- I mean again it's -- I think we were focused on not only the market conditions but the other sort of thing that we alluded to is that we had -- we made a conscious decision to address what we felt like were some weakness in the exposure and occupancy levels that we wanted to get addressed and before we head into that busier season. And I think also, as Tom alluded to, we also made a conscious decision to really focus on renewal practices in a very aggressive way in the first quarter and we have seen great results as a consequence of that. So I think that what we're talking about here is, on balance, is a fairly modest level of adjustment, 25 basis points in terms of a midpoint adjustment on revenue expectations. And it really just gets back to we just -- I think the supply levels broadly have just, in the slower leasing season of the first quarter, combined to just create a little later in the quarter pickup in pricing trends, on new lease pricing than what we typically see. And as Al alluded to, April was a significant jump in improvement and we usually see that earlier in the first quarter, and so just a little later as a consequence of supply trends.

And at this time, we have no further questions and I will turn it back over to you, Mr. Argo.

Thank you. We appreciate everyone being on the call and we'll see many of you at NAREIT. Thanks.

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