Mid-America Apartment Communities Inc (MAA) 2017 Q2 法說會逐字稿

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

Thank you, Lynn. Good morning. This is Tim Argo, SVP of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; Tom Grimes, our COO; and Rob DelPriore, General Counsel. Before we begin with our prepared comments this morning, I want to point out that as part of the discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the safe harbor language included in yesterday's press release and our 34 Act filings with the SEC, which describe risk factors that may impact future results.

These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website.

During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP measures can be found in our earnings release and supplemental financial data. I'll now turn the call over to Eric.

Thanks, Tim, and good morning. We were pleased with the solid results for the second quarter, with FFO performance ahead of our expectation. Pricing momentum continues to move in a favorable direction, and occupancy remains strong. Our portfolio of properties balanced across various submarkets and price points of the Sun Belt region, combined with our strong operating platform, continues to demonstrate an ability to better tolerate the elevated pockets of new supply present in several markets. The integration of the Post portfolio is making terrific progress, and as expected, the emerging positive trends in higher rents and occupancy are starting to build momentum. The initial opportunities surrounding expense synergies resulting from our reconciling operating practices and taking advantage of our larger scale have yielded some early wins on operating expense performance.

We expect these trends to continue over the balance of the year into 2018. While it's clear that current new supply trends have caused some moderation from last year's rent growth results, especially for new move-in residents, we continue to believe that at this point in the cycle, our legacy MAA portfolio locations continue to offer some offsetting balance or protection against the new supply pressures, which are more evident within the legacy Post submarket locations. Our property teams are doing a great job in taking care of our existing residents, with renewal lease pricing across the combined adjusted same-store portfolio continuing a solid trend in the 6% range, with a steady pattern of improvement in renewal pricing being generated out of the legacy Post portfolio. Resident turnover remains low, with our 12-month rolling turnover rate at 50.9% halfway through the year essentially matching last year's performance of 50.8%. So overall, while leasing conditions have become more competitive when compared to prior year, we continue to believe that a combination of our balanced portfolio focused on solid employment growth markets of the Sun Belt, coupled with the growing margin expansion opportunities from our merger with Post, will yield continued FFO growth and NOI performance that are in line with our expectation.

The transaction market remains highly competitive, as investor capital and interest in the multifamily market continues to outpace opportunities being brought to market. As noted in our earnings release, we did not make any acquisitions during the second quarter. However, we continue to underwrite quite a few deals and we'll continue to be patient and disciplined in our underwriting as more new development projects are brought to market over the back half of the year. Our lease-up and development pipelines are making solid progress. The 6 new properties currently in lease-up were 82.5% occupied at the end of the second quarter, and we expect to stabilize 4 of these communities in the current third quarter. Our 6 projects remaining under construction are also making solid progress, with additional leasing just getting underway now in Austin at Post South Lamar Phase II and in Atlanta at Post Millennium Midtown.

So in summary, we like the momentum we're seeing during our peak leasing season, and we remain excited with the upside opportunities to capture over the next couple of years from our merger with Post Properties. Our balanced portfolio of properties and strong operating platform continue to demonstrate an ability to deliver stable results through the cycle.

Before I turn the call over to Tom, I do want to express my appreciation to our entire team here at MAA. I appreciate your efforts over the busy summer leasing season in not only delivering great performance today, but also your extra efforts focused on completing our merger and consolidation activities, which are further strengthening MAA's platform for the future. And with that, I'll now turn the call over to Tom.

Thank you, Eric, and good morning, everyone. Progress made since the first quarter is encouraging, and we were especially pleased -- we are especially pleased with the improvement in pricing trends emerging from the legacy Post portfolio. For the second quarter, on a lease-over-lease basis, blended rents, which include both new and renewal leases, for the combined adjusted same-store portfolio, grew by 2.6%, an improvement of 130 basis points from the performance in the first quarter.

Breaking that down a little bit, lease-over-lease rents for the new resident leases written during the second quarter, were down 70 basis points. This is a significant 250 basis point improvement from the performance in the first quarter. This positive momentum on new lease pricing for the combined adjusted same-store portfolio continued in July, with new lease pricing turning positive, now up 30 basis points.

Renewal lease pricing within the combined adjusted same-store portfolio remained strong during the second quarter, growing 6.3%. The positive trends are most evident within the legacy Post portfolio, as blended rents on a lease-over-lease basis improved 150 basis points from the first quarter to the second quarter.

The trend continued in July, with Post blended lease-over-lease rents growing 2.6%. July's blended rent performance represents a 370 basis point improvement in rents from the first quarter for the legacy Post portfolio. This improvement drove the blended rent growth for the combined adjusted same-store portfolio up to 3.1% in July.

The trends are similar for average daily occupancy. In July, the MAA portfolio remained steady at 96.1%, and the Post portfolio, which ran 90 basis points behind the legacy MAA portfolio in the second quarter, closed the gap to 50 basis points at 95.6%. 60-day exposure, which is all vacant units and notices for a 60-day period, for both portfolios is now just 7.4%, very strong for this time of year.

We expect the gap between the portfolios on both rent growth and occupancy to continue to narrow as the benefits of our operating approach come to bear on the Post communities. We've completed most of the foundational work associated with repopulating our revenue management system with updated data from the legacy Post locations, and they are benefiting from the improved occupancy and exposure positioning.

We are pleased with the improvement of this portfolio in our critical busy summer season and believe it will be well-positioned as we head into the slower winter months.

Expense performance follows a similar pattern. RM costs were down by 2.2%, led by a few early wins in the Post portfolio. As a result of the improved scale, our national account pricing -- our national accounting pricing improved in both portfolios, but was more impactful in the Post results. In addition, the renegotiation of in-market contract services, such as interior paint vendor and pool cleaning services, aided the Post results.

We have improvements still to come. At the end of the second quarter, the Post communities are still running 25% higher on a maintenance cost per unit basis than the legacy MAA portfolio. We expect this gap to close as our approach to turning units, which is less reliant on expensive contract labor, takes hold.

Driven by these improvements in revenue and expense, the NOI margin on the Post portfolio increased 130 basis points from the second quarter of last year. While elevated supply levels moderated rent growth, we're seeing good growth in many markets. Fort Worth, Raleigh, Charleston and Jacksonville stood out from the group. In both portfolios, Houston remains our only market-level worry bead and represents just 3.7% of our NOI. We will continue to monitor closely and protect occupancy in this market. Currently, our combined Houston market's daily occupancy is 95.3% and 60-day exposure is just 7.9%.

Renter demand remains steady, and current residents continue to choose to stay with us. Move-outs for the portfolio are in line with prior year, and turnover remained low at 50.9% on a rolling 12-month basis. Move-outs to home buying and move-outs to home renting remain consistent at 20% and 6% of move-outs. As you know, much of the Post product is in the Inner Loop -- is in Inner Loop areas that are seeing the most supply. While this puts pressure on the newer product, it creates opportunity on the older product in excellent locations. There are 13,000 Post units that have compelling redevelopment opportunities. We can make these great locations more competitive by updating the product. We have room to raise the rents and still be well below the rates of the new product coming online.

Momentum is building on the Post redevelopment program. Through June, we have completed 423 units. On average, we are spending $8,600 and getting a rent increase that's 13% more than a comparable non-redeveloped unit.

For the MAA portfolio, during the quarter, we've completed over 2,300 interior unit upgrades. 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.

As you can tell from the release, our active lease-up communities are performing well. Leasing has gone better than expected at Charlotte at Midtown in Nashville, and that stabilization date has been moved up a quarter to the fourth quarter of this year. Innovation in Greenville and Residences at Fountainhead in Phoenix stabilized on schedule during the quarter. Our 4 communities scheduled to stabilize in the third quarter are on track to do so.

We are actively leasing the Denton II, Post South Lamar II and Post Millennium Midtown, and they are progressing well. It has been a busy quarter for our teams, and we're pleased with our progress. The momentum building in the Post portfolio is particularly encouraging. We look forward to continuing to capture value creation opportunities on both revenue and expense sides of the equation.

Al?

Thank you, Tom, and good morning, everyone. I'll provide some additional commentary on the company's second quarter earnings performance, balance sheet activity and then, finally, on guidance for the remainder of the year. Net income available for common shareholders was $0.42 per diluted common share for the quarter. FFO for the quarter was $1.48 per share, which was $0.07 per share above the midpoint of our guidance for the quarter. The earnings outperformance was primarily related to favorable interest, G&A and integration costs during the quarter, with each producing about $0.02 per share of favorability. An additional $0.01 per share was provided by favorable performance in our lease-up and development properties, which are included in our non-same-store portfolio.

Our combined adjusted same-store NOI performance was in line with expectations for the quarter. And the integration expense savings were mainly related to timing of costs which we expect to incur over the remainder of the year.

I'll outline our revised guidance for the full year in just in a moment. During the quarter, we completed the construction of 2 communities: Post Parkside at Wade II located in Raleigh; and Post Afton Oaks located in Houston. We also began the construction of one new community, a Phase II expansion of 1201 Midtown, a community located in Charleston that we acquired late last year.

During the second quarter, we funded an additional $50 million of development costs, bringing our year-to-date funding to $110 million. Our current development pipeline now contains 6 projects with a total projected cost of $396 million, with only $103 million remaining to be funded.

The 6 projects are expected to produce an average 6.5% stabilized NOI yield once completed and leased-up, with 4 of the projects projected to be completed by the first quarter of 2018 and the remaining 2 completed in the back half of 2018.

Just after quarter-end, we sold 3 wholly-owned communities located in Lakeland, Florida; Montgomery, Alabama; and Fort Worth, Texas. The total proceeds of $88.4 million represented a strong pricing for 28-year old assets, on average, and produced a 5.3% economic cap rate. We also exited 2 tertiary markets with these sales.

During the second quarter, we successfully used our enhanced credit ratings to complete a bond offering. We issued $600 million of 3.6% unsecured 10-year notes at an issue price of 99.58%, using the proceeds to pay down our line of credit.

During the quarter, we also prepaid $156 million of secured mortgages, further increasing our unencumbered assets to 83% of our total gross assets.

For our bond covenants, at quarter-end, our leverage, defined as debt to total assets, was 34%. And our consolidated net income -- our consolidated income covered our debt services by 5.2x. We also had over $877 million of combined cash capacity and our credit facility to provide protection and support for our business plans.

Finally, we increased our earnings guidance for the full year to reflect the second quarter performance and updated expectations for the remainder of the year. We are 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 $2.69 to $2.89 for the full year of 2017. FFO is now projected to be $5.77 to $5.99 -- excuse me, $5.97 per share or $5.87 at the midpoint, which includes $0.15 per share of merger and integration costs for the full year.

AFFO is projected to be $5.18 to $5.38 per share, or $5.28 at the midpoint. We're maintaining our guidance expectations for the combined adjusted same-store portfolio, which is expected to produce an NOI growth for the full year in the 3% to 3.5% range.

So in summary, we are increasing our FFO guidance for the full year by $0.03 per share, representing the addition of the stronger Q2 performance discussed earlier, partially offset by the $0.02 per share of integrations costs now expected to be incurred later in the year, along with an additional reduction of $0.02 per share related to revised acquisition timing and yields for the year.

And given the competitive environment Eric mentioned earlier, we now expect our remaining acquisition opportunities to occur later in the year, and all to be lease-up communities.

Our guidance for acquisition volume and total merger and integration expenses for the full year remains unchanged. We did increase our range for disposition volume, as our actual pricing expectation is exceeding our initial estimates, and we also narrowed the range of expected G&A costs and development investment for the full year.

We remain on track to capture the full $20 million of overhead synergies related to the Post merger on a run-rate basis by year-end. And we also expect to continue capturing additional NOI opportunities included in our forecast, primarily in the later part of this year, as the operating practices and platforms become fully integrated.

That's all that we have in the way of prepared comments, Lynn, so now I'm going to turn the call back over to you for questions.

(Operator Instructions) And we'll go ahead and take our first question from Nick Joseph with Citigroup.

Just in terms of same-store revenue guidance, I know you maintained it, so it looks like you're assuming an acceleration of growth into the back half of the year at about 3.5% versus the 2.5% you did in the first half. So I'm wondering if you can give the components of that in terms of occupancy assumptions, rate growth assumptions, any other revenue that makes you comfortable with that acceleration?

Okay. Nick, this is Al. I'll tell you, if you remember, we talked about in Q1 that what we needed to see for the rest of the year for our revenue guidance was to see renewals continue to be very strong, above 6%, which we definitely saw in the second quarter, about 6.3% on average. And we needed to see that new lease pricing, which was down a little longer than we expected in Q1, continue to see those positive trends that we began to see in April. And we did see that in May, June, and I think Tom mentioned July, and the very strong -- renewals were strong, over 6%, and new leases moved to positive territory, landing to about 3.1%. So that's all the positive trends that we needed to see. In terms of the back half, we need to continue to see that blended rent in the little over 3% range. We expect to see that from a couple of reasons: One, the MAA portfolio is very stable, very strong. We expect it to have some seasonality as we move through the back of the year, but hold strong in terms of renewals and new lease pricing. And then we expect to continue to capture some of the opportunities in revenue on the Post side, really supporting that further. And so the combination of those 2 give us really firm support for our belief in the revenue guidance that we've got. I will tell you we expect it to grow as we go through the year. I think our expectations for Q3 are 2.5% to 3% range-ish and Q4 are 3% to 3.5% as we continue to capture those synergies that we talked about.

And Nick, this is Eric. I would also add, though, that we also feel very confident in the expense guidance that we have out there. As we've talked about, we've seen some real opportunities emerging on that side of the equation. And as a consequence of that, we feel very confident where our NOI is likely to come out this year relative to expectation.

Yes, let me just add to that point on that, too, Nick. I mean, I'm sure you can do the math on that. So what -- to Eric's point, NOI is where we are year-to-date and what we expect for the year, we expect to be well into the range on that. Expenses are coming on faster. We're doing really -- having a really good performance in that, as Tom mentioned. So that likely will come at the lower end of the range. And the revenue, likely as well, given the first half year results and the projections I just talked to you, we'll probably be in the lower end of the range as well, supporting the -- well into the range on NOI.

Okay, that makes sense. And then just in terms of the performance of the large markets versus secondary markets, it looks like the secondary markets actually outperformed in the quarter. Is that a trend you expect to continue? Or is that something unique to this quarter?

Yes, I think that trend will continue. At this point in the large markets, it's a supply issue, and the opportunities in the Post portfolio will add over time as revenue builds. So I think this is a place where I think those performances will -- that gap will narrow over time as we get the Post revenue process rolling along.

Yes, I would tell you, Nick, that I think that absent the opportunity embedded within the Post portfolio, the delta between the large and the secondary markets will probably continue to play out as we saw in Q2 for a while, given the supply dynamics that are going on with the larger markets having more supply. But the operating opportunity upside in the Post portfolio is going to really, we think, become increasingly evident in our results over the next several quarters and likely will offset some of that supply pressure to the point that we may see large markets resume outperformance of the secondary markets a little quicker than regular supply dynamics would support.

And Nick, maybe a good example of that would be our D.C. market. That is a -- that's a place where folks are arguing between whether it's a bad market or a mediocre market, but our Post blended rents for that market for the second quarter were up 4.6%. And we feel good about the opportunities that we see in this Post portfolio.

And we'll take our next question from Drew Babin with Robert W. Baird.

Talking about the increased disposition guidance resulting from pricing, and not necessarily higher volume of assets sold, was the 5.3% economic cap rate on the July sales a surprise? And I guess, could you give me a sense of -- or give us a sense of what the remaining dispositions for this year might look like in terms of being an MAA legacy or a Post legacy asset, or just some color on the timing as well.

Well, I mean, by definition, to some degree, it was a little bit of a surprise, given that it was above our range. But I -- we knew that the pricing would be good, just, frankly, it turned out to be a little bit better than we expected. We do have 2 other dispositions that we have planned for this year. Both are under contract. Both are legacy MAA locations. Both are in the Atlanta market. And we should have those closed sometime in the fourth quarter.

And our revised expectations of those 2 are included in our revised guidance.

Okay. And then on the acquisition side, obviously, the acquisition guidance didn't change despite just not a lot of activity so far this year. Is that -- I guess, what gives you confidence that, that number is a possibility in the second half of the year? Is there anything specific you're seeing? Or is it just kind of a, we'll wait and see type of approach to see what comes to market?

Well, 2 things. One is that we do think that the deals being brought to market are more likely to get -- to grow as opposed to shrink as more supply continues to come online. So we just think that there'll be more opportunities coming into the market. And secondly, historically, for the last several years, we've always had more success in making acquisitions in the back half of the year as compared to the first half of the year. We just find developers and sellers are a little bit more motivated as we approach year-end. And so we -- for those 2 reasons, we're hopeful that we will continue to be able to capture opportunity in the range that we've given.

That's helpful. And then one quick one on D.C. I mean, acknowledging it's not that large of a market for MAA, I still figure it's worth asking. Clearly, it sounds like you're not tremendously worried about D.C. as a market. Could you just talk about the positioning of the legacy Post assets around D.C., the exposure to defense rather than health care, different kind of dynamics within Washington that might help and/or kind of hurt that portfolio relative to the market.

Yes, no, I would tell you, much like our portfolio spread throughout the Sun Belt, that, that portfolio in D.C. is spread throughout. So there's a little bit -- there's some Northern Virginia exposure, there's Alexandria exposure. We're right there off the river in Pentagon City. That has some, obviously, some military exposure to it. And there's a little bit in Bethesda -- in Maryland. So frankly, it's sort of spread across the group. The one consistent opportunity, though, is one, I think, is pricing -- or 2 consistent opportunities that we see are pricing practices and redevelopment in those areas. And that's honestly where our optimism about D.C. comes, is we see opportunities operate differently, and that gives us an outside of the market growth opportunity.

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

On the deceleration of same-store revenue growth this quarter, despite the slight pickup in occupancy, can you just remind us, is this entirely due to rates? Or do you also offer incentives currently?

John, this is Al, and in talking about the decline of revenue from Q1 to Q2, it really boils down to the pricing that we -- new lease pricing that we had in Q1. And if you remember, we talked about the fact that new lease pricing is typically negative at the first part of the year, but our experience in Q1 was that it stayed negative through the quarter, longer than we expected. The good news was as we moved into April, we saw that trend change and move into -- move in a positive direction. But that impact of Q1, really, those leases fully rolled into our portfolio in Q2. And so that's when we felt the most impact from that period of time. And in fact, we expected Q2 to be our lowest revenue quarter for the year. That really wasn't a big surprise for us, but we also knew that the trends that we expect for the rest of the year had begun in April. We saw that in May, June, and even July continue, and so it impacted Q2 the most. But we feel good about the momentum in the portfolio going into the back part of the year.

Okay. So no incentives on renewals?

The effective 2.4% of rate growth includes the impact.

Yes, we're a net lease -- net rent shop, so can say every number that we give you on rent, lease-over-lease or ERU, or effective rent per unit, is all -- has all concessions in that number.

I got it. And then out of your large markets there's been a few of them where you had a significant drop of over 100 basis points sequentially. So that includes Austin, Charlotte, D.C., Nashville, Phoenix. Are there any of those markets that surprised you this quarter?

No, I mean, I think, frankly, they worked as we expected. We are seeing pressure in those areas. We're still optimistic. I think Charlotte is a different story than, let's say, Austin, and it's more bifurcated between the downtown pressure, where the suburban assets are doing a bit better. But not much on the large market side surprised us, John.

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

Tom, you said that the legacy Post portfolio had closed some of the NOI margin differential during the quarter. What is the NOI margin differential right now as we sit here today between Post and MAA legacy portfolios?

Hang on, we'll grab that, but the, I mean, at the initial, it was 100 basis points. And we've closed, I mean, we've frankly exceeded that 2 quarters in a row, with improvement of 130 basis points on Post each quarter.

And at this point, Rob, we've effectively brought the Post portfolio on top of and slightly ahead of the MAA legacy portfolio. And as you remember, we talked about that over time, over the first 12 to 18 months, we expected that Post portfolio to actually exceed maybe 100 to 150 basis points, because it well should, given the rent structure of that portfolio. So we're well, call it, halfway there, and we feel very good about that, where it is today.

We're pretty excited about that progress, Rob.

What is the time frame you think to get that extra, the other half done? Is that end of year? Is that into '18?

I think that's later in '18, Rob, because the -- I mean, what happens when you can get in and move the expense side down, we saw quick, early wins there and jumped on that immediately. But we -- the pricing trends we love, but that's pricing trends on a month or a quarter, and it just takes some time for all of that to compound through. So we're doing great on expenses. And we're right where we would expect to be on revenues on Post portfolio. That just takes longer.

Okay. Al, is there any material difference between where the legacy Post portfolio is now and where the MAA portfolio is on a real estate tax basis on assessed values and everything else, relative to what you guys think is reasonable?

I think it -- there's totally -- there's a different product type and even location in those 2 portfolios on average. So I think that's built in. I think there's not a tremendous difference right now, Rob. I think the opportunity on the real estate tax side, it's not a situation where you go in and can change valuations very quickly. It's going to take time, where our approach was a constant downward pressure, and we think, over time, that bore a better result for us. I think what we'll see on the Post side of the business is maybe that constant downward pressure will result in some improvements over the next few years. But right now, on a relative basis, not a significant difference from -- than what we had thought.

Okay. Eric, what was behind the sale of the land parcels during the quarter? What made those that you didn't want to go forward yourself on those?

As they all vary, some just in -- we just didn't feel like those were sites that would make sense for us to build out. And some of it is still some legacy stuff we picked up from Colonial. But largely, these are out-parcels that for a host of reasons we just don't feel like makes sense for us to develop.

Okay. How should we be thinking about development going forward? I mean, you inherited -- the bulk of the current pipeline is stuff you inherited from Post. When you fast-forward into early '18, the portfolio -- the current pipeline is going to fall by 75%. You're going to be left with not that much left in progress, with the 2 '18 -- the 2 latter half '18 deliveries. How are you thinking about backfilling? Are you going to be running at about $100 million of development? How should we be thinking about that going forward?

Well, we would like to, and we are actively working to find opportunities to start to repopulate that pipeline with projects. And David Ward and his guys are out looking at a number of opportunities right now. We've got a couple of parcels of land that we do own that we do feel like will make sense to develop on. One in North Dallas in particular I'm thinking about. There's an opportunity that we are actively working on in Raleigh. Another opportunity we're looking at in Denver. And so we do believe that over the course of the next 6 months, we will start to begin to slowly repopulate that pipeline, looking at deliveries that would then probably come online in the early 2000 -- mid-year 2019 is what we're working on at this point. But we intend to have something approaching no more than 3% to 4% of enterprise value. I mean, which is kind of where we are right now. We're really at about 3% of enterprise value in terms of the development exposure. As you point out, that's going to dwindle down next year, but we hope to get it back in 2019 and beyond.

Now the projects that you were just talking about, are those Post development -- I mean, Mid-America and Post development assets? Or are these assets that you guys are likely to do with some sort of merchant developer, like MAA used to do in the past?

No, these would be -- well, it depends. I mean, a couple of them are where we would be the developer. And we are having conversations with several folks right now of them -- along the lines of what we've done in the past, where it's a prepurchase of something effected -- with a merchant builder, a prepurchase of something they're going to build. Those things are -- get complicated sometimes in the negotiations in terms of lease-up and so forth, but we will be pursuing both, where we will be the developer. We will not be the general contractor ever, but we would be the developer. And we're also looking at some prepurchase of things to be built.

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

Can you hear me now?

Yes.

Okay, sorry about that. So Eric, a lot of momentum and a good story about integrating Post into your system and all the margin improvements and all that. I'm curious, how much is Post sort of coming to the rescue in terms of your perspective of the fundamental picture for more multifamily? If not for merging the 2 companies, how much more negative would you feel about your prospects? And maybe how would you be operating differently with just your -- with your legacy MAA portfolio in hand?

We'd be fine. I mean, we were absolutely fine with our legacy MAA structure and balance sheet. I mean, what Post brought, frankly, was an opportunity to be a little stronger in a different part of the cycle than what legacy MAA would be on its own and brought, as I've mentioned in the past, also another mechanism, another avenue of opportunity for us to grow externally and deploy capital through development. But this is a part of the cycle where the legacy MAA assets on a combined basis tend to hold up a little bit better, as demonstrated by the fact the secondary market group outperformed the large market group in the quarter. So we don't view Post -- the addition of the Post assets as coming to the rescue at all. We view the addition of the Post assets as an add-on to what was already a pretty strong full cycle performance profile that's only gotten stronger as a consequence of adding assets in locations that will give us more exposure, better performance during a different part of the cycle.

Okay, fair enough. And then just kind of an unrelated follow-up question. You've been a component of the S&P 500 now for several months. I'm curious if you've been having any different conversations with non-dedicated REIT investors? And if the -- if you can comment at all on a different perspective from a maybe a changing investor base. If the answer is no, then it's a simple answer. But is there anything there that you can kind of communicate as getting a different kind of class of investors into your stock?

Well, I think that there has been a noticeable change, Rich, in 2 ways: One, we just see a lot more people than we used to see, I mean, these meetings, and whether it's NAREIT or any of these other conferences that we attend. Property tours have really picked up. And so we're seeing a lot more people, different groups of people, than we've seen in the past. And secondly, we've always believed that our strategy and our approach in the way we think about creating value over the long haul has a strong appeal to the generalist investor, if you will. And so the opportunities that we have to tell our story and to talk about the track record and the philosophies that we bring to the multifamily REIT space, I think, continues to resonate pretty well with this group. And so we're excited about the positive impact long term, we think, from being exposed to this more generalist crowd.

And we'll take our next question from Austin Wurschmidt with KeyBanc Capital Markets.

I just wanted to touch on seasonality a bit and how you guys are thinking about that as we enter the back half of the year. When do you start to see the impact of new lease rates from seasonality? And should we expect something different within the Post portfolio versus legacy MAA, I guess just given some of the operational upside that you're starting to see?

Austin, this is Al. I think what's built into our expectation for the back half of the year is largely MAA portfolio continues to stay pretty stable with slight seasonality, as we expect. But remember, through -- from April through June, July, the MAA portfolio was 3%, 3.3%, 3.5% in blended rent growth, so very stable. And we expect it to stay stable, maybe moderating a little bit. But then support coming from the continued capture of the Post synergies in the back half. So I think we expect revenue to be, in the third quarter, to be higher than the second quarter and then in the fourth, higher than the third and so the continued trend in that. The one seasonal item that I will bring out that I want to remind people of, that would make -- if you don't remember it, it may look unusual, is last year, Post had a very significant reduction of real estate taxes in the third quarter, had a 10% reduction as they recorded an adjustment in that quarter. So one thing we'll see as we move into the third quarter is our expenses, I think they'll still be around -- they'll still be not outsized significantly, but that would impact that. I think our NOI for the third quarter will be slightly impacted. That may be the lowest for the year, but then coming back in the fourth quarter being the strongest in the year. So those are the general trends that we expect.

And then on the Post side, was there any occupancy opportunity late in the year that you could talk about? And what's the potential upside there. I think more towards the fourth quarter?

I think there is probably 10 to 20 basis points in the fourth quarter and the third quarter. Both portfolios had really strong years last year. And so that will be a difficult comp.

And then just on the expense side, it sounds like you're confident that you'll be within the lower end of that range of the guidance you've laid out for the year. I mean, is this savings that you've already outlined and you're just seeing it earlier? Or is it on top of what you anticipated when you underwrote the portfolio?

Probably Tom and I can tag-team this one, but it's primarily coming from quicker capture of the Post opportunity. We had lined out both revenue and expense synergy opportunities, and we had about $4 million to $5 million that we'd capture in 2017, with the other $10 million or so -- $8 million to $10 million captured in 2018. And what we'd laid out initially was probably 2/3 would come from revenue and 1/3 coming from expense in 2017. I think we'll probably see that flip-flop. We'll probably see 2/3 come from expense, as we've really had good opportunity on that early, and 1/3 from revenue this year, with the revenue opportunity over the full period being absolutely there, maybe a little more. And some more of that will come in '18. I don’t know if...?

Yes. No, I think that's a fair assessment.

And we'll take our next question from John Guinee with Stifel.

I haven't been on the call before. Eric, a question for you. What I've noticed in all these supplementals from the apartment world is nothing on average unit size, nothing on per square foot of rental income, per square foot in terms of development costs. When you guys are talking internally, are you relying as much on per-unit or per-square-foot numbers? How do you think about that?

We generally think about, when we're talking about development costs, we generally think about in terms of per unit. And when we think about rents, it's a combination, I mean, it depends on the nature of the conversation we have. We do think a lot about per-square-foot rent levels out in the market and do some comparisons like that. But it -- I mean, on balance, I would tell you whether we're modeling on development or thinking about our competitive position in a given market, on rents, it's usually on a per-square-foot basis, and when we're talking about acquisition costs, development costs, it's usually -- kind of think about it on a per-unit basis.

We will take our next question from Neil Malkin with RBC Capital Markets.

First question, I know the Post portfolio being included in the same-store kind of blurs yours results. If you kind of go back a couple of quarters, it looks like more of a marked deceleration than probably was actually happening. I was just wondering if you could give us some perspective on what does it look like on the ground in your bigger markets, Atlanta, Dallas, Charlotte, Tampa, that -- or can you just talk about what's going on in terms of supply and demand? Particularly because you have an elevated suburban exposure, I was just wondering if you're seeing impact from supply kind of hit all areas?

No, it is not equal, as you mention. And I'll just hit a few of them. Atlanta, good job growth at 2.6%, but the bulk of the supply is really concentrated in the Buckhead, Peachtree Road area. So it's sort of Inner Loop, and that's affecting those Post assets -- the 85 corridor, 75 corridor, those are all seeing much less in the way of supply. I think completions in Atlanta, we'll have about 8,600. That'll drop next year to 6,500. And then you mentioned Charlotte, and it's for sure a tougher uptown, downtown picture, with rent growth in the suburbs closer to 4%. And it's flat in the downtown area. And then Dallas is probably the market where we would expect to see more supply coming up next year, maybe about 2,000 units or so. And it's a little more widespread. It is focused in that downtown corridor and then runs up a bit to Plano, Frisco and Las Colinas a bit.

Okay. And then I guess another follow-up in a different way. In your markets, job growth looks very strong, wages look very strong, but the rents continue to sort of slow down. I mean, is the Post portfolio having an outsized impact on the pace of revenue growth or rent growth? Or what do you think is kind of driving those phenomena, just given the strength on what you would think would be the demand side and ability to pay?

Absolutely, no. Post is a current drag on revenues, frankly. And that's why we're so excited. And you sort of see the differential between the numbers that I mentioned earlier, the 350 basis point improvement on rents from sort of the first quarter to July is -- we feel like that is non-market-related and we've got the opportunity to push outside of that. But Post assets baked-in pricing materially slowed our large market group and our overall revenues. And we are quickly, I think, unlocking the value, pushing new lease rates up, pushing renewal rates up, which translates into blended rent increases. That just takes time to compound and drive revenues up.

Okay, great. And then the last from me. You talked about looking at a project in Denver. Is that a market you want to build exposure to?

At this point, yes, it is. I mean, we're -- we've been studying that market for quite some time. As I think you may recall, Post had a development there that they were already committed to. There's another site that we have under contract, that Post had under contract, that we like very much. And so the short answer is yes, that's a market that we expect to grow in.

And we'll take our next question from Conor Wagner with Green Street.

On the redevelopment program, you mentioned the legacy MAA versus Post, but obviously, a lot of that is Colonial. Can you give us an update on how that's gone, and what's left for you within Colonial to redevelop?

Yes, of that pipeline that I mentioned on the legacy MAA portfolio of roughly 15,000 units, that is primarily the Colonial pipeline that we're winding down. So we've still got room to run in that area.

And then, Tom, if you could tell us a little bit more about D.C. What you outlined on the Post assets is obviously positive, but you had a sequential occupancy drop, and as you mentioned, people think it's either bad or mediocre. Outside of the opportunity you have to just improve the Post assets, what are you seeing in the market broadly in terms of demand trends?

Yes, I mean, we are paying a little bit more for our demand with increased search costs. So I would say it is moderately harder to get people through the door, but certainly not impossible. And honestly, Conor, I hadn't spent a ton of time really understanding that, because the controllable easy opportunities are right in front of us, and we're kind of focused on that. I'm not willing to become the sage of the D.C. market just yet, but we feel good about our opportunities there.

And then finally, on the move-out to home purchase, you mentioned 20% overall for the portfolio. Is there any difference there in terms of just -- we know the overall number will be different between Post and legacy MAA, but is there any difference in the trend there in terms of a pickup in move-out to buy activity on legacy Post?

Yes, they are right on top of each other, Conor, maybe 100 bps lower on the Post portfolio right now.

And we'll take our next question from Buck Horne with Raymond James.

Just thinking about the development pipeline a little bit, have you guys noticed any trends in construction labor availability or -- and/or materials pricing, things like lumber, concrete, otherwise, that, obviously, those factors going up, is that affecting development starts in your areas? Are you seeing any signs that one or other inputs going into construction are easing or making it more difficult to get starts underway?

Look, I would tell you that we haven't seen anything that would suggest development is getting easier. I think all signs continue to suggest that if anything, it's harder. You mentioned construction costs associated with materials and labor, labor in particular, I think, is the area that is continuing to become increasingly problematic for developers. But what we continue to hear also is just that securing financing continues to be a challenge. It's available, but it's certainly more expensive than it used to be. And the kind of loan proceeds that one can achieve is not as great as it used to be, is what we consistently hear.

So as I mentioned, we are out looking at a number of opportunities and modeling a lot, but as it is on the acquisition side, development's hard to pencil right now on the basis that near-term -- certainly for near-term deliveries that makes any sense. So I think that on balance, I think the pressures are higher to support development today than they were a year ago.

Okay. And I do want to follow up a little bit on the comment about Denver, going back into that market, or adding to that market from what Post had. Is that something where -- is that a market where you do feel like you could internally develop enough property to get to scale? Or would you feel like you'd need to make a more portfolio-level acquisition to build up an efficient operation there?

Well, we think through a combination of both acquiring existing stabilized assets, acquiring current lease-up properties or to-be-built properties plus what we could do on the development side, that, that's a market that offers enough opportunity, that we could get to a scale that makes sense for us there. We're going to be patient with it. It's not something we feel like we have to accomplish in the next year. So we're going to be very consistent in our underwriting and our approach to thinking about how we grow our presence there. We do like the dynamics of that market long term. I think it does add some diversification to our portfolio that creates some benefits. And so -- but we're going to be patient with it. But whether it's buying or building, we think the market will yield enough opportunities to make it worth our effort.

And we'll take our next question from Hardik Goel with Zelman & Associates.

I just had a quick question on the Post portfolio specifically, and what you guys' new lease growth was there for the first quarter and the second quarter?

Yes, for the second quarter for Post, did you say, new?

New.

New.

It was down 4%. And I don't have the first quarter handy, but I think it was probably 200 bps or so, worse than...

Yes, it was down about 7% in Q1.

And I'm guessing that's part of where all the upside to the revenue guidance in the back half of the year is going to come from. Where do you see that really ending the year?

Well, this -- I'll tell you what we've seen so far is as the first part of the year was where the spread was really large, and as Tim talked about, the Q1 was the big -- the new leases were down the most. What we saw was, just on blended, for Post -- let me just talk blended for a minute, I think it's the best way to think about it -- we were below 1 blended, negative 1, for 3, almost 4 months in a row, through April. But then we moved into May and we went positive 0.7, positive 1.3 in June, and moved to July, positive 2.6. So that's a very good trend, and that's where the momentum we're talking about building, it definitely has been a drag on MAA's performance, but the momentum and the positive aspects of what we're doing, the pricing performance is definitely kicking in, and we expect it to drive some performance in the second half.

And we have no further questions at this time. I would like to turn the program back over to Mr. Argo.

Thank you, Lynn. We have no further comments. And just let us know if anybody has any further questions. Thanks.

This does conclude today's program. You may disconnect your line at any time, and have a wonderful day.