Mid-America Apartment Communities Inc (MAA) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the MAA Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, October 26, 2017.

I would like now to turn the conference over to Tim Argo, Senior Vice President, Finance for MAA.

Thank you, Savannah. 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, everyone. FFO results for the third quarter, ignoring the credit associated with the mark-to-market adjustment on our preferred stock derivative, were ahead of our expectation. This result was achieved despite the unexpected expenses incurred during the quarter associated with the 2 hurricanes that affected our operations in Houston and in Florida.

Leasing conditions in the third quarter, particularly in our larger markets, reflect the impact of elevated new supply levels and is more evident at the higher-end price point and more urban-oriented locations in the portfolio. On a comparative basis, we continue to see better pricing performance across the majority of our secondary markets and more suburban locations.

Most importantly, however, job growth and the resulting demand across the overall portfolio continues to hold up. While it varies somewhat by market, the ratio of job growth to new supply across the overall portfolio is in the range of 5 to 1, representing a generally healthy supply/demand scenario, which enables us to capture strong occupancy and low resident turnover while generating solid growth in lease renewal pricing. We remain positive on internal earning growth prospects over the next few quarters for several reasons. First, projections continue to support a pullback in the permitting of new construction. As a result, we expect the current new delivery pressures to show some moderation over the back half of 2018. Our early projections of job growth to new supply across the total portfolio in 2018 reflect a slight improvement as compared to the trends in 2017. As a result of our balanced portfolio with investments across a wide range of markets and submarkets, we believe that overall market fundamentals, as they apply to our markets, will remain supportive of good demand, strong occupancy and solid overall pricing opportunities with renewal pricing continuing to outpace new lease pricing.

Secondly, as Tom will outline in his comments, we are (technical difficulty) benefits associated with reconciling the Post portfolio operation to MAA's practices, and we're confident this momentum will carry well into next year as a lot of the foundation was laid this year, especially on the revenue management side and will be more impactful on leasing activity in 2018. We have both the legacy MAA Portfolio and the legacy Post portfolio well positioned for the slower winter leasing season and start to next year.

And thirdly, we see a steady and growing contribution from our development in lease-up pipelines in 2018. One of the real value-add components we captured through our merger with Post was the development pipeline. And while it was at its most dilutive point in 2017, we will see this become a net positive contributor to earnings in 2018.

As we've seen over the last couple of quarters, supply pressures continue to be more evident in the legacy Post portfolio. Despite these pressures, we continue to make progress in reconciling revenue management practices. The performance differences between the legacy Post and MAA Portfolios continue to narrow. During the quarter, within the legacy Post portfolio, we captured average daily occupancy of 95.7%, which was within 15 -- 50 basis points of the average daily occupancy generated by the legacy MAA Portfolio. This is the best comparative result since our merger.

In addition, the legacy Post portfolio captured strong growth in lease renewal pricing during the quarter, equaling the results captured from the legacy MAA Portfolio. New lease pricing moderated in August and in September from the trends we saw in July as new supply pressures picked up in several submarkets in the latter part of Q3. We will have to work through new supply challenges in several submarkets before rents on leases written to new move-in residents meaningfully improve. But we're encouraged with the continued strong performance in renewal lease pricing, while at the same time, seeing resident turnover remaining low.

With new construction permitting trending down as well as the great progress having been made over the year in repositioning the legacy Post portfolio to our revenue management protocols, we're optimistic that new lease pricing will show improvement in 2018.

Our most persistent challenge continues to be external growth. Despite an increase in new supply and the associated pressure on new lease pricing, cap rates and market pricing on acquisition opportunities remains very robust. We continue to underwrite and actively review a number of opportunities. But absent some combination of attributes that creates a highly motivated seller, it's been a challenge to achieve pricing on acquisitions that we believe meet our disciplined protocols governing capital deployment. We're also analyzing several new development opportunities, but likewise, find that upward pressure on construction labor and material costs is challenging our willingness to commit capital at the moment. I expect we'll get some activity underway on both the acquisition and development fronts over the coming year, but certainly, the buying bonanza or a rise in cap rates that sometimes accompanies supply induced moderation in leasing conditions hasn't shown up in this cycle, at least not yet. We have the balance sheet in a very strong position with ample capacity to support this opportunity when it does appear.

Out team continues to make great progress in working through the many tasks associated with integrating the legacy Post platform with our MAA operating practices. As we've seen over the course of this year, the early wins surrounding reductions in property operating expenses continued in Q3. As noted in the third quarter, growth in same-store expenses was impacted by hurricane-related expenditures, and we fully expect the fourth quarter to reflect the positive trends we saw earlier this year. We remain excited about the additional opportunities remaining to capture in 2018 surrounding revenue management protocols, maintenance operations and a significant unit interior redevelopment opportunity that will carry forward well past next year.

Finally, I want to send my thanks and appreciation to our team for their hard work over the busy summer season and the extra effort that was required from this year's active hurricane season.

MAA has completed a significant amount of growth and change over the past few years, and the platform is in a significantly stronger position.

We hope to see many of you at our upcoming Investor Day on November 13, where we plan to lay out the strengths of the platform and our outlook for the company.

That's all I have in the way of prepared comments, and I'll now turn it over to Tom.

Thank you, Eric, and good morning, everyone. Same-store revenues for the quarter were up 1.7% over the prior year with 96.1% average daily occupancy. Looking at this by portfolio, the legacy MAA portfolio revenues were up 2.4% with 96.2% average daily occupancy and effective rent growth of 2.8%. The legacy Post portfolio had revenues of negative 0.5% with 95.7% average daily occupancy and effective rent growth of 0.2%.

The performance gap between the 2 portfolios is driven by higher new supply in the Post submarkets as well as differences in our operating practices. We have, of course, been focused on achieving full alignment in operating practices between the 2 portfolios. We have made good progress and results are starting to show up. This momentum will carry into 2018. We have improved Post occupancy by 50 basis points since the beginning of the year, and we feel we have another 40 basis points to go.

October to date, Post blended rents are up 2% on a lease-over-lease basis. This is 40 basis points better than October of 2016. Said another way, we have increased the Post blended lease rates on a lease-over-lease basis by 310 basis points from the first quarter and have driven average daily occupancy up by 50 basis points. This has occurred as the Post submarkets have faced growing competition from new deliveries. We believe that the data cleanup and resetting of the many variables within the revenue management system will drive enhanced performance as we work through the releasing of the portfolio on the coming year.

While it takes time for the improvement in pricing to show up in portfolio revenue performance, the expense progress has been immediate. Excluding the hurricane-related expenses, total expenses for the quarter were up just 1.4% and year-to-date expense growth for the Post portfolio is down 0.7%. That's driven by improvements in personnel, repair and maintenance as well as property and casualty insurance. As a result, the Post NOI margin is expected to improve 40 basis points this year. We expect this to grow as we see benefits from the completed foundational work of our revenue management systems and continue to harvest opportunities on the expense side of the equation.

Looking forward, we're well positioned for the slower winter months. October occupancy is expected to close at 96% and the 60-day exposure, which is all vacant units plus notices through a 60-day period, is below 7%. The early read on the fourth quarter renewals is encouraging as we are averaging 5.7% increases achieved and January offers went out at 7%.

While elevated supply levels moderated overall revenue growth, we're still seeing good growth in many markets. Fort Worth, Raleigh, Charleston and Richmond all stood out from the group.

Houston has been our market level worry bead, but it appears to be stabilizing. After hurricane Harvey, our occupancy increased from 96.2% to 97%. Our 60-day exposure there is just 4.2%. We have held pricing at pre-storm levels, but expect them to climb as normal operations return.

On the supply front, Dallas and Austin are facing the most pressure. Expected deliveries for 2017, are 16,000 for Dallas and 7,000 for August -- for Austin. These deliveries represent 3% of inventory in both markets. We are encouraged that job growth has remained strong in both Austin and Dallas. For 2017 August -- excuse me, for 2017, Dallas job growth is 2.2% and Austin job growth is 2.1%, which compares favorable to the 2017 national average of just 1.4%. This improves in 2018 with both markets expected to grow at 2.4% versus the national average of 1.5%.

Renter demand remains steady and our current residents continue to choose to stay with us. Move-outs for the portfolio were down 3.2% for the quarter. Turnover remained low at 50.4% on a rolling 12-month basis. Move-outs to home buying and move-outs to home renting were down 5.5% and 3%, respectively.

As you know, much of the Post product is in inner loop areas that are seeing the most supply. While this puts pressure on our newer product, it creates opportunity on the older product in excellent locations. We plan to invest $112 million to redevelop units in the Post communities over the next 3 to 4 years. This is our most accretive method to allocate capital. There are 13,000 units that have compelling redevelopment -- 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.

We're just getting away on the -- getting underway on the Post redevelopment program. Through the quarter, we have completed $9.5 million in renovations on over 1,100 units. On average, we're spending $8,600 and getting a rent increase that's 12% more than a comparable non-redeveloped unit.

On the full MAA Portfolio, year-to-date, we have completed over 6,500 interior unit upgrades. And 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. That translates into a total pipeline of $170 million of very accretive capital deployment opportunity.

As you can tell from the release, our lease-up communities are performing well. Leasing has gone better than expected at Charlotte, Midtown and Nashville, and that stabilization date was moved up a quarter -- to the fourth quarter of this year. The Retreat at West Creek II, Colonial Grand at Randall Lakes II, Post Parkside at II (sic) [Post Parkside at Wade II] and 1201 Midtown all stabilized on schedule this quarter. We're actively leasing the Denton II, Post South Lamar II, Post Midtown and Post River North and they are progressing well.

It's been a busy quarter for our teams and we're pleased with our progress. The building momentum in the Post portfolio is particularly encouraging. We look forward to continuing to capture value-creation opportunities on both the revenue and expense side of the equation.

Al?

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

Net income available for common shareholders was $1 per diluted common share for the quarter. FFO for the quarter was $1.50 per share, which was $0.06 above the midpoint of our previous guidance. The third quarter performance included $0.035 per share for noncash income from the valuation of an embedded derivative included with the preferred shares acquired from Post, which I'll discuss a bit more in just a moment.

Before considering a $0.02 per share impact from the hurricane-related costs, total property NOI for the third quarter, including Non-Same Store, was in-line with expectations. Favorable G&A, interest and other income produced the majority of the remaining outperformance for the quarter, offsetting the storm costs and producing $0.02 per share with additional favorability.

As briefly discussed in our prior releases, the $0.035 per share of noncash income related to the preferred shares acquired is, in short, due to accounting rules that require we bifurcate an assumed embedded derivative related to the call option on the shares. The derivative must be recorded as an asset and the marked-to-market each period through earnings.

Volatile trading during the third quarter produced a sizable noncash adjustment, which really bears no real economic benefit and will potentially reverse at some point in the future.

Higher supply pressures in many of our urban-oriented locations did pressure our revenue performance more than expected for the third quarter, primarily in the legacy Post portfolio.

Overall blended pricing of 2.6% for the quarter was below our projection of just over 3%. Also, average occupancy performance of 96.1% for the quarter, while strong, did not reach the high prior year level of 96.3% as projected, which drove the bulk of the difference from our projections from -- for the third quarter.

However, pricing trends for the Post portfolio continued to improve over the previous quarter, and we remain excited about the opportunity to capture stronger performance from operating practices over the next several quarters.

Partially offsetting the revenue moderation was continued strong expense performance during the quarter. Same-store operating expenses for the legacy Post portfolio, excluding real estate taxes, declined almost 5% compared to the prior year, as we continue to capture savings from both operating practices and scale.

During the quarter, 4 communities within our lease-up portfolio were fully stabilized and one development community, Post Midtown, was completed and moved into the lease-up portfolio. Our current lease-up portfolio now contains 3 communities, totaling 999 units with an average occupancy of 61.5% at quarter end. One community is expected to stabilize during the fourth quarter with the final 2 projected to stabilize mid to late 2018.

During the third quarter, we funded an additional $33 million of development costs, bringing our year-to-date funding to $143 million. Our current development pipeline now contains 5 projects with a total projected cost of $305 million, with only $70 million remaining to be funded. These 5 projects are expected to produce an average 6.3% stabilized NOI yield once completed and leased-up, with 3 of the projects projected to be completed by the first quarter of 2018 and the remaining 2 completed in the back half of 2018.

During the quarter, we sold 3 wholly-owned communities located in the 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. We currently have 2 additional communities located in Atlanta under contract for sale, which are expected to close during the fourth quarter for gross proceeds of approximately $98 million.

Our balance sheet remains in great shape. During the third quarter, we paid off $150 million of senior unsecured notes assumed from Post as well as a $14 million secured mortgage with our unsecured line of credit.

At quarter end, our leverage, as defined by our bond covenants, was 33.2%, while our net debt was only 5.3x recurring EBITDA.

At quarter end, 85% of our debt was fixed or hedged against rising interest rates at an average effective interest rate of only 3.5%, with well laddered maturities averaging 4.4 years.

At quarter end, we had over $795 million of combined cash and borrowing capacity under our unsecured credit facility, providing both liquidity and support for our business plans.

Given our current expectations for acquisitions and dispositions over the remainder of year, along with our projection for excess cash approaching $100 million, we do not anticipate new equity needs this year and expect to end the year with our leverage around current levels.

Finally, we updated our earnings guidance for the full year to reflect the third quarter performance and updated expectations for the remainder of the year. We are updating guidance for net income per diluted common share, which is then reconciled to updated FFO and AFFO guidance in the supplement.

Net income per diluted common share is now projected to be $2.76 to $2.86 per share for the full year of 2017. FFO is now projected to be $5.84 to $5.94 per share or $5.89 at the midpoint, which includes $0.15 per share of merger and integration costs for the full year. AFFO is projected to be $5.25 to $5.35 per share or $5.30 at the midpoint.

We adjusted our FFO guidance for the full year by adding $0.02 per share at the midpoint. We expect continued volatility in the noncash earnings related to the embedded option acquired with the Post preferred shares, and we have allowed $0.02 of this of the recent favorability to reverse during the fourth quarter.

We have also extended the recent operating trends through the remainder of the year, with projected fourth quarter revenue performance based on an expectation of continued stable occupancy at current levels and blended pricing on move-ins and renewals during the fourth quarter reflecting normal seasonality, averaging 1.5% higher on a lease-over-lease basis, which is in line with prior year. The combination of these factors, as well as a more favorable prior year comparison in occupancy, is expected to produce fourth quarter revenues above third quarter.

As you saw in our supplement, we are revising our guidance expectations for the Combined Adjusted Same Store portfolio. We now project revenues to grow 2% to 2.5% for the full year and operating expenses to grow 1.75% to 2.25%. This is expected to produce NOI growth for the year in the 2% to 2.5% range, including a 30 basis points impact from the storm costs incurred in third quarter.

We also revised guidance for acquisition volume for the remainder of the year to reflect the competitive landscape. The top end of our acquisition range now includes closing one additional deal prior to year-end. We also tightened our range for development investment for the year, reflecting revised timing of funding.

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're a little ahead of timing expectations for this as reflected in our revised guidance. As we also -- and we also expect to continue capturing additional NOI opportunities over the next several quarters as the operating practices and platforms become fully integrated.

And that's all that we have in the way of prepared comments, Savannah, so now we'll turn the call back over to you for questions.

(Operator Instructions) And we can go first to Nick Joseph with Citi.

It's been almost a year since you closed on the acquisition of Post. So curious how actual results have compared to underwriting, particularly in terms of operating performance?

Nick, this is Eric. We knew that at this point in the cycle that the submarkets that largely define the Post portfolio, we're going to be under more stress. I think the -- we also knew that we had some great opportunity to rework some operating practices and capture, we think, better performance than what was being delivered. But the pressure on the supply side, particularly in Dallas and Austin, has noticeably picked up in the last 90 days or so. And that has created some of the pressures that we're talking about here as it relates to outlook for the rest of this year. But the fact is, is that we did this merger with a goal of further enhancing our full-cycle strategy. We knew that at this point in the cycle, the Post locations would be under more pressure. But that at later parts on the cycle, those locations would really serve us very well and likely would exceed the performance expectations that we get out of the legacy MAA locations. So ultimately, we continue to feel very positive about the full-cycle enhancement that comes from putting the Post portfolio in with the MAA portfolio, none of that has changed as a consequence of anything that we've seen. And so we've explained in the past, the redevelopment opportunity is frankly bigger than we thought it was going to be. And so we remain very excited, and I will tell you, very confident in the $650 million value-creation opportunity that we've previously laid out that comes from this merger.

Appreciate that. And then just in terms of same-store revenue guidance. Year-to-date, it's been disappointing. You've reduced it twice. So I'm just curious what gives you the confidence in the fourth quarter that year-over-year growth will accelerate from what you've seen in the third quarter and this year?

This is Al. I think as we move into the fourth quarter, first, occupancy is a very strong level, it's 96%. Our exposure is low in the portfolio. We've seen pricing as we moved into -- as we talk about -- I talked about it in my comments, we're expecting fourth quarter pricing blended to be 1.5%, which is on top of the prior year. And we're seeing that or a little better already in October. And so those things provide comment -- I mean, confidence in that as we move through the rest of the year and what we've put out. And Tom, do you have anything to add to that?

Yes, I would just say, Nick, in October, as Al mentioned, we were below 7% on exposure. And on the post assets, the blended new lease pricing is about 40 basis points higher than October of last year. And that's -- if that holds true in the quarter, that will be the first time we've seen that hold in the quarter. We're encouraged by that.

And we can go next to Austin Wurschmidt with KeyBanc Capital Markets.

Just wanted to understand some of the moving pieces in your FFO guidance if you strip out some of those onetime items and the hurricane costs. So it seems like there was about a $0.03 per share net benefit from onetimers, which is then being offset by the decrease from lower same-store NOI and lower G&A. You mentioned there was a $0.02 reversal, I believe. So net-net, stripping those out, is the $0.02 increase coming from other kind of noncore items that you expect to be recurring, either in interest expense or some other line item? Can you just clarify that, please?

Yes. I mean, we've looked at it a couple of ways, Nick -- I'm sorry about that, Austin. And I think, the main point we make is whichever way you look at, there's a lot of noise in the quarter and the updated guidance for the year includes that. But whether you look at including the noncash benefit from the option as well as the storm costs, you have a beat of about $0.02. And whether you exclude or strip out both of those items, you have a beat of about $0.02. So that's kind of how we thought about that, and we can walk that through. The way I would think about the fourth quarter or the full year update to the guidance is, we had a third quarter beat of $0.06. We have allowed -- about $0.035 of favorability in the third quarter came from that option. We've allowed for about $0.02 of that to turn around, as we do expect to continue volatility in that as interest rates rise, probably. And then we adjusted our guidance, as you said, from same-store to some of the other items in our forecast. And all of that together combines for another $0.02. So $0.06 minus those -- that $0.04 is a $0.04 beat -- I mean, excuse me, a $0.02 beat. But however you look at it, I think it will shake out to be about a $0.02 beat.

That's helpful. And then on the redevelopment side, you mentioned you've done about 1,100 units so far with achieving a 12% rent increase. What markets have those redevelopments been in at this point? And given that new lease rates have been stubbornly low across the Post portfolio, I mean, what gives you the confidence you can continue to achieve that as you roll it out across other markets?

Yes. So I mean, we're active in just about every Post market, except for Raleigh, which is brand new. And what we do with that, Austin, I mean, we are continuing to test renovated units next to non-renovated units, and -- so that you're making sure that you're getting that price increase. Our redeveloped or renovated units are leasing about 4 days faster than our non-redeveloped on those opportunities. And frankly, we believe, long [term], that it will work. If for some reason, that particular redevelopment doesn't work, we just stop it and we wait for the next opportunity. But frankly, we've been accelerating at this point and feel pretty good on the returns.

And also, I would tell you that what we see is even with some of these more competitive submarkets of the Post locations with new supply, even with the effective pricing that these new communities are trying to offer to get leased up. We're still able to undercut their pricing through this redevelopment effort and still create a very creative use of capital. So while, certainly, I understand the point that the new lease pricing is under more pressure in some of these submarket locations, the redevelopment opportunity is so significant that it is not really creating a meaningful headwind to that effort.

That's a good color. And then just last one for me, I wanted to touch on Dallas. You mentioned that's been a heavy supply market. Occupancy was down 100 bps year-over-year. Revenue growth was flat. I mean, is Dallas at risk of going negative -- is revenue growth in Dallas at risk of going negative into 2018?

Yes. I think, we need to monitor Dallas closely and I think that is a risk. We saw sort of the concession environment in Dallas, I mean, pick up in the latter part of the quarter and we think there's pressure there.

What I would...

Any particular submarket...

What I would tell you is, I mean, the uptown submarket is clearly where the most pressure is occurring for our portfolio that we're seeing a little bit in North Dallas, but the uptown market in particular. What gives us -- what I think happens in Dallas is, I think, it probably is under more pressure over the first 2 quarters of next year and probably gets a little bit easier over the last 2 quarters of next year. We think that renewal pricing will continue to hold strong. We'll continue to capture very -- pretty strong occupancy. The problem will run in -- or the challenge is that the prior year comps are tougher in the first half of the year and they get a little bit easier in the back half of the year. So I think that, on balance, if I look at Dallas as a whole for the year, I have a hard time getting to a negative result. But I think you may see more pressure in the first half of the year versus the back half of the year. The question for Dallas is, if that job growth holds as well as it is in '18 -- early look at '18 is pretty darn strong, frankly, a little bit better than '17, Dallas will be okay.

And what are concessions today in Dallas? You mentioned that they had increased.

Yes. No, it ranges by submarket. So we're seeing 1 to 6 weeks free. We're seeing in the market, in like Frisco and McKinney and other parts of North Dallas, uptown, as Eric touched on a little more aggressive. We've got several comps that are doing 2 months free, but normal is about 1 to 2 months free in uptown.

And we can go next to Michael Lewis with SunTrust.

So a lot of talk about Austin and Dallas. As I kind of look down the markets that decelerated the year-over-year growth from quarter-to-quarter, Nashville, Tampa, South Florida, Greensville, Jackson, maybe all storm related. I was just curious if there's any -- if there's a trend in any of those worth talking about, and maybe it relates to the storm. I know in Houston, a lot of us are looking at that, thinking, that, that makes the market tighter and market rent might go up. Are there other markets like that maybe in Florida?

I would tell you that the storm benefits Tampa, Orlando, Jacksonville, not to the degree that Orlando -- that Harvey did in Houston. The other thing that goes on is Orlando, particularly gets a ton of immigration from Puerto Rico, and that is a -- that's a market that may well get tighter as a result of, frankly, the tough times that they're having down there.

Okay. And the deceleration in same-store revenue growth in like Nashville and Tampa, is there anything going on there? Or is that just a...

Yes. I mean, Tampa, it really is a split between the Post assets and the MAA assets. But October for Post is now 95.9% average daily. In October, blended rent increase is 2.8% there. And then legacy MAA is was 96.2%, but frankly, they were just facing a tougher comp with higher occupancy in prior quarter and last year at 96.5%.

And Nashville is a market that got a fair amount of supply this year. We think it starts to -- I mean, if you look at the early projections for next year, the supply levels moderate in Nashville a good bit, and we think Nashville probably has an easier go of it next year versus this year.

Okay. And then the -- on the development side, realizing that it's tough to -- maybe to find new developments, you hope to find some in the next year. But on the stuff that's underway, is there anything on labor or other costs that's maybe squeezed on the cost side? And then anything in the markets on the rent side to cause you to maybe adjust your yield assumptions on the stuff that's underway?

No, nothing. We're far enough along, frankly, in what we already have underway at this point that any material change in our forecast is highly unlikely. I mean, all those contracts are very well set and not really subject or at risk of any sort of cost escalations. And so everything that we've got underway right now, we don't have any concerns about delivering the stabilized yields that we've long believed were going to be there.

And we can go next to Drew Babin with Robert W. Baird & Co.

Following up on -- another development question. I noticed the stabilized yield expectation went to 6.3% from 6.5% this quarter. Is that the effect of Post midtown exiting the pipeline? Or is something happening with the rent projections for the pipeline as a whole?

No. This is Tim, Drew. That was the impact of moving Post Midtown to the lease-up group. It was about a 7% yield, still expect it to [base] and the other one stayed as is.

And then as far as Post at Afton Oaks goes, in Houston, I noticed the occupancy went up quite a bit in the third quarter relative to the 2Q. Do you think Harvey had a positive impact there? And did you see anything in October sort of post 3Q of this evidence of continued strength there?

Yes. I mean, Harvey was a significant benefit there. And we jumped from 62% to 80% -- or 64% to 84% in just a few weeks, honestly, Drew, in that helped us a lot there on the lease-up.

Okay. And lastly on the concession environment, and I appreciate the color on what's going on in Dallas. I was hoping you could point out any other markets where the concessions are, in some cases, 2 months or that severe. And I guess, given that supply was a relatively known quantity going into this year, the concession environment has been a little more competitive. What do you think is behind that as far as the private developers are concerned? Is there worries about interest rates on [mini] term loans? Is it -- is there are some other factor that might be causing them to be more aggressive with concessions right now?

Austin, I can't speak to developers' motivation. I'd tell you, Austin, is the other market where we're seeing, on average, probably 1 month and in a few pockets, in certain submarkets, it might jump to 2, but on average it's 1. And I think that has to do with the amount of supply in the market, and folks very interested in getting their product stabilized.

Drew, I would -- this is Eric. I would tell you, yes, I absolute believe that, as we get later into this cycle in markets like a Dallas, particularly in a submarket like uptown, where you've got quite a bit of supply coming online, I think with the likelihood of some eventual rise in rates, I think developers are getting most anxious to go ahead and get leased up and get things stabilized, prove out their rent as best they can. And it's the one thing that gives me some belief that there may be more compelling buying opportunities as we get into next year because I think that a lot of these guys are rushing for the door in terms of getting the property stabilized. They'd much rather come to market and sell it well into the lease-up where they've got a track record they can point to in terms of rents and leasing velocity. The concession is notwithstanding, they'll really look at just the stated rents and use that as a basis to try to capture really robust pricing on the sale of the asset. And so I think there is increasing pressure on the developers to get leased up, and I think that's what's leading to some of the more active concession practices that Tom has alluded to.

And we can go next to Gaurav Mehta with Cantor Fitzgerald.

So I think in your prepared remarks, you talked about new lease moderation in August and September. I was wondering if that was only restricted to Austin and Dallas or you saw that trend in other markets as well?

I'm sorry, Gaurav, I didn't hear the first part of the question.

[Starting] in the prepared remarks, you said new lease moderated in August and September. I was wondering if that was only in Austin and Dallas or you saw that in other markets as well.

It was most pronounced in Dallas and Austin. That is -- that was the heavy concessions coming into play in those markets. Nothing dramatically out of the ordinary in the other ones.

Okay. And I'm sorry if I missed this, but can you provide new lease and renewal growth rate for 3Q?

Yes. New lease and renewal for the third quarter were -- new lease was 0.357% and 2.6% blended.

0.3% was new. Renewals were 5.7%.

Renewals were up 5.7%. Sorry, I'm...

And new lease was a negative point (inaudible).

And blended was 2.6%.

I'm having trouble getting that out to today, Gaurav. New lease, negative 0.3%; renewal, positive 5.7%; blended, 2.6%. Sorry to re-trade on you -- or re-report.

And we can go next to John Guinee with Stifel.

John Guinee here. Couple questions. First, construction cost, up; rent, slower; land, not really moving down yet or landowners not reflecting lower expectations on land. What are the merchant builders targeting on a yield on costs relative to what's your targeting? And then second is, you've got about $57 million of land on your balance sheet, which looks to me like maybe that could support 2,000 to 3,000 units, what's your thinking on that land?

Well, the land that we do own, there is -- you're right, there is some of it that we do believe we will want to move on, and we are, in particularly, looking at sites in Dallas and in Raleigh currently. But as I alluded to in my opening comments, based on where we are seeing, in the current environment, cost coming out at, we are -- we have not yet actually pulled the trigger to start on these projects. We also have a site in Denver that we're excited to get underway at some point. My guess is these things will start to make more sense next year, and we will likely, I would hope, be underway with some of this next year. As far as merchant builder yield on cost, I don't know exactly what you're looking to do. My guess is they're not, probably, I mean, looking for yields that are materially different than what we would look to achieve. The difference is that they're going to use a lot more leverage in order to sort of finance their investment, buildup and construction and so forth. And there's a consequence of that, come in with a pretty competitive blended cost of capital. But from our perspective, as we look at underwriting and look at the cost and the current leasing environment, we just -- we've elected to hold off on starting anything new just yet. I think, like I said, it'd make more sense next year.

Okay. And then the second comment is, it's look like you've got about a $16 billion total enterprise value. And I think you quoted, maybe I got this wrong, about $112 million of redevelopment, kitchens and baths. Can that $112 million really even move the needle in terms of earnings growth or FFO growth?

Yes. I mean, it clearly can, I think. I mean, you're talking roughly 30,000 apartments out of 100,000 apartments that we think have significant rent growth opportunity associated with it. It's not a -- it doesn't happen in 1 quarter or even in 1 year. I mean, that's a 2- or 3-year endeavor. So it's a gradual sort of impact. But certainly, I think the impact, once complete, is pretty meaningful.

I'll just add to that...

That's a just the Post portfolio. For the combined portfolio, It's more like a $170 million. I think Tom mentioned that.

Yes, that's correct.

Just saying, we've done that program -- done this program successfully for many years, and it does contribute somewhere 25 to 40 basis points of revenue over time -- each -- annually as we do -- if we do this program every year at the same pace. And of course, we think we'll ramp this program up with Post over the next few years given the opportunities.

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

How much -- can you talk about the OpEx opportunities or synergies? You obviously have been very clear about the G&A and property management, but it sounds like you have some more levers to pull on the actual OpEx side. Can you just kind of talk about what that looks like heading into '18 and how that kind of feeds into what OpEx growth on a same-store basis could look like next year?

Sure. I'll take, certainly, the first part of it. The major driver on the operating expense is a combination of personnel and R&M costs. And we sort of blend those together as a total maintenance cost. And the Post communities were running close to 40% higher than the MAA communities on a per unit basis. And really that was a combination of our scale, which is we were able to reduce their contract purchasing costs by 10%. We were able to cut some of their vendor costs like a contract painting by 50%. And during the year, what we've been able to do is reduce that by about half, but we feel like Post is still about 20% higher than MAA. And it's just more of that sort of maturing of the platforms that we'll have another about 20% to go on that side of things.

So just to add that at all together, as you begin to look at next year, certainly not giving guidance at this point but just thinking about next year is, you have the opportunity from the Post continue capture, as Tom mentioned. You'll have general control on all the other expenses for the business. And then if you think about it, real estate taxes is 1/3 of that line item, has been our biggest pressure over the last few years, and it should begin moderating some. I mean, it will take several years for it to get back down to normal long-term run rate levels. But given the performance in Dallas and Austin and some of the Texas markets, and Texas being the biggest piece of that, we would expect some moderation to begin next year, helping us feel good about expenses for the full year next year.

All right, got you. And then on the other revenue side. On a per-unit basis, it seems like it's been -- it actually has been going negative slightly this year compared to your rental revenue growth. Can you talk about why that's happening? And do you see that kind of reversing course next year? Or what can kind of get that going or stop slowing like it is currently?

It's primarily occupancy related on volume. And we think as that picks up, we will pick up there as well.

And part of it in the third quarter was also reimbursements, which is utilities expenses, and utilities expenses was lower in the third quarter than it has been. And so the reimbursements for that were a little lower as well. And so over time, that will change as well.

I agree. And then the last one for me is, if you look at the job markets, your footprint pretty much screens the best out of any of the peers in terms of just strength of jobs, and wages are pretty strong as well, particularly in the secondary markets. Just could you comment on why you think you haven't seen that parlay into maybe stronger blended rents or more strength on the new lease side rather?

Well, I think, I mean, what's happened is that the supply trends, I think, have been gradually picking up. I think that, as we've talked about earlier, I think as we get later in the cycle, these lease-up projects and the merchant builders who brought them online get a little bit more aggressive in what they're prepared to do in terms of pricing to achieve move-ins sooner. And as a consequence of that, I think we just happen to be at an inflection point in this third quarter, where those trends really became pretty -- much more significant than what we'd seen earlier in the year. I think this will dissipate over the next 2 or 3 quarters as these projects get leased up. As I alluded to, the permitting is clearly expected to come down. And I think the sort of relationship between demand and supply starts to work more favorably in our direction over the back half of next year. We've had consistently steady strong demand, as you point out, as a consequence to good job growth in these markets that we're in. It's just that the supply side of the equation has created this moderation, and developer pricing tactics have become a little bit more aggressive at this point in the cycle. And so we're just at that point in the process or in the cycle where it's kind of the tough point, and we see it sort of troughing over the next couple of quarters and then starting a climb back. And I've always believed very much in the merits of deploying capital in a way where the demand is likely to be there and be the strongest over a full cycle. We know we're going to deal with supply pressures from time to time, and that there'll be points in the process where there's -- the pressure gets pretty intense and you just kind of put your head down and grind through it, and that's kind of where we are right now. But I think that we have a lot of confidence in the markets that we're in long term because of what you're alluding to, because we know the demand is likely to be there better than what we see in a lot of other markets across the country.

And we can go to next Buck Horne with Raymond James.

I think you guys have been pretty clear about the supply being the major issue. But just given where we stood at the end of July and kind of the sharpness of the deterioration or just the guidance reduction that occurred relative to where we stood last quarter, I just want to be clear that you think the pressure really is coming from external supply issues. Or was there any issue internally when you rebooted the Post LRO system? Was there any sort of hiccup internally that may have caused any revenue hiccup?

Buck, this is Eric. Absolutely not. We have not had any internal hiccup, or however you want to define it, at all. And we -- the surprise frankly -- and we have a lot of concentration of assets in Dallas in that uptown area. And that, in particular, is where we saw some pretty aggressive pricing practices really kick in. As we sat at the end of July, we were matching prior year occupancy. Our blended rent growth across both portfolios was moving in a very positive direction. And for the quarter, we candidly had a very difficult prior year occupancy comparison to deal with, particularly on the Post side, of all things. They really ran up the occupancy in Q3 last year. Now it materially fell off right after that, particularly as you get towards the end of the year and into next year. But they had a very full portfolio third quarter of last year, so we had a difficult comp. I mean, what's interesting to look at when you just look at sort of where we came in on revenues relative to our expectation, the vast majority of the miss, if you want to think about it that way, was occupancy. And it was a 27 basis points difference in terms of this year's occupancy -- effective daily occupancy versus last year's effective daily occupancy. It was really strong this year, but it was really, really strong last year. So 27 basis points off, and that's what really -- we thought we could get there, but we -- as we started heading into the winter, we thought we better back off a little bit on some of these pricing practices and try to get that occupancy protected as best we can as we head into the winter months. And as we start to look at sort of what's happening in the market, we thought, I think it's going to be a slugfest in some of these submarkets for the next, call it, 2 quarters. And then you get on top of that kind of normal seasonal activity. And when you put all of that together, it suggests to us that we ought to sort of adjust as we have.

Okay, that's very helpful color. Just on -- going back to the supply outlook for going into next year. You mentioned you are feeling better about the second half of next year with permitting trends. But maybe just thinking a bit more broadly in terms of your secondary markets and maybe just your suburban locations, whether it's legacy MAA or otherwise, just are you starting to see developers push out into the more suburban or secondary markets to -- chasing a little bit more development yield? How does the supply outlook look out there?

We haven't really seen any pressure there, Buck. And I mean, the outlook next year is better than this year in that segment of the portfolio. I mean, these -- I knew sooner or later these secondary markets would outperform the large markets. And finally, we're here. And it's been that way now, last quarter and this quarter, and probably be that way for the next couple of quarters. So they're doing exactly what they're supposed to do for us, and we're not seeing anything change in terms of pressure in those markets. I think they're holding up quite well.

And Buck, where we think about improvement in terms of deliveries for '18, it's actually in large markets. Atlanta drops from 8,600 to 6,500, Charlotte goes down from 5,100 to 3,300, Houston gets a ton better and Orlando actually improves modestly as does Tampa. So those were -- that's really where we think of it improving is those markets.

And we can go to next to Nick Yulico with UBS.

Going back to the guidance, specifically, on same-store revenue. So your prior guidance assumed that you would have same-store revenue accelerate in the back half of the year and part of that was because of new lease growth also improving. And so I'm trying to understand your previous thinking of why you thought that was reasonable that would happen, especially when you have 25% exposure in Atlanta and Dallas, where there is a lot of supply. Why are you still optimistic now versus building in some caution?

Yes, I'll start and then I'll let Al. Because new lease pricing had been steadily climbing for 7 months straight and there had never been a decline until we got to August. And so it was moving at a very steady pace up. And in Dallas, in particular, and somewhat in Austin, we saw pricing practices and the market get considerably more aggressive as we start to get towards the end of leasing season and efforts are made to get stabilized before things really slow down when you get into the holiday season. So based on what we saw happening, it suggested to us that we should moderate our thinking a little bit. But until we got to August, new lease pricing across both portfolios was steadily improving and steadily moving up. And we -- July was the best month we'd had. So that's sort of what fueled it a little bit. And Al...

I'll just give you what was in there, and exactly -- Eric's points were exactly what occurred. And so if you remember talking about it, Nick, we said what we were seeing was very good in July. We're seeing blended pricing of 3%. So we felt like that the trends were great, and we carried that through the year. Saying we'll get blended pricing of 3% or a little better for the year. We'll get occupancy on top of the prior year levels. And so though occupancy in the third quarter was very good, at 96.1%, it was a very tough comp to the prior year. And that was the biggest piece and then reached the 96.3%. And so blended pricing we dig, it was 2.6%. It's good pricing, but didn't reach the -- we saw the falloff in August and September in [primary] locations that Tom and Eric talked about. So that's what occurred. It caused us to look at fourth quarter and then roll that through the fourth quarter, put a little bit more seasonality and normal trends in our forecast. Now, having said that, we still believe, as we talked about, in the positive attributes to come in revenue the next several quarters from the Post and the improvements we're doing in practices, that is still to come. It's just taking a little bit more time in terms of the laying out in the future than what we had before.

Right. I guess, it goes back to an issue that's happened before in the multifamily industry where companies are looking at pricing data realtime and then supply hits and there's an impact, and it's a surprise to the negative. And it goes back to, I guess, the question of how you're actually forecasting with future supply impact. And so I'm wondering if you've changed your thinking now? As you are still going through some markets like Dallas, Atlanta, others where there's meaningful supply, does that change how you think about, ultimately, when you're going to forecast for 2018 and the supply impact?

Certainly it rolled into fourth quarter, a change. As we talked about, we took our -- as you just saw, the guidance come down and we moderated to more seasonal norms. And so as we'll have to look -- we haven't -- we'll have to look at '18 and consider that. But we'll certainly enter '18 with expectations to continue capturing on the Post side of the business as well as the normal seasonality in the supply trends.

Yes, I think where you can get surprise, frankly, Nick, is when you see practices get noticeably more aggressive in given submarkets or markets. And if you happen to have, as we do, a fair amount of concentration in a given market or 2, it can create an era of conservatism or skepticism about what the future is going to look like versus what you were thinking before. I mean, we think, we're going to -- as I said, I mean, we think we're going to do great on renewal pricing as we have been, as Tom alluded to. I mean, our January renewal notices went out at 7%. We think that the occupancy comparisons start to get a little bit easier, but the new lease pricing got noticeably weaker in July and September. And as a consequence of some pretty aggressive actions that we saw coming into the market, and we happen to have a lot in Dallas and Austin, as you know. And so that's really the story. There's nothing more to it than that. And the occupancy, as it relates to Q3, the occupancy being off last year by 27 basis points was the vast majority of, if you will, the miss in terms of revenue expectations. Of course, we also have some pressure on expenses from the hurricane, the both hurricanes. Now as we start to look forward, we think these practices in Dallas and Austin will be there for a while. So we're going to dial it into our expectations. We think the expenses get better. We will -- we're past hurricane season now, so we'll be back to where we had been running. And that's what caused us to pull our same-store guidance for operating expenses down from what we had before, and it's where we came out.

Okay, it's helpful. Just lastly on Atlanta, what is your outlook for that market? I mean, that's one where there's still a fair amount of supply delivering, the numbers haven't gotten down to the point of Dallas at this point. But how are you thinking about where you are on the supply impact stage for Atlanta and how that market could perform in the coming quarters?

I mean, I think, next year, we're encouraged about continued strong growth and job growth and a falloff in -- a falloff there and -- excuse me, continued strong growth and a falloff on job growth and a falloff on deliveries compounded with just steady improvement on the Post side. I think those things will work in our...

When you look at Atlanta next year, I mean, the projections that we have today, which we'll certainly be updating as we approach forecasting for 2018. But the ratio of job growth in that market to supply deliveries is around 7:1. That's a pretty healthy dynamic. And so we think Atlanta will continue to outperform Dallas next year.

And we can go next to Tayo Okusanya with Jefferies.

First question, when you start to look at 4Q '17 trends, specifically October trends, anything you're seeing in there that starts to make you feel a little bit better about the supply issue in some of the markets that you're highlighting?

I think the markets that we're worried about, primarily Dallas and Austin, will continue to be under pressure in the fourth quarter. We think job growth will continue to be good, and we'll just sort of grind it out next year. One encouraging, at really a same-store level, is from September to October, Post blended rates moved up from 1.6 -- Post blended rates moved up 40 basis points.

Got you. Okay. And then the second one for Al. Al, again, I'm still trying to reconcile the kind of guidance of $0.02 increase at the midpoint because the $0.03 benefit from the non-rental -- from the derivative income, you're reversing that out in 4Q. And so the $0.02 increase, if I'm getting this right, is there's lower same-store NOI growth but there's better G&A and better leasing of development. Is that the way I should be thinking about this that kind of all net out?

I think that's exactly right, Tayo. Let me just give you how exactly. So we had $0.06 performance in third quarter that carried, let's push that forward and coming out of that to the $0.02 revision is, preferred, we've taken $0.02 of that back saying that's going to turn around. I don't know what's going to happen, but it's certainly going to be volatile. If interest rates go up is likely to come back. And then combined same-store vision plus all the other things going on, do take another $0.02 per share, adding to $0.04. So it gets down to $0.02 impact for the full year. And so you are on point as to exactly what's happening.

And we can take our last question from Dennis McGill with Zelman & Associates.

First one, just on the fourth quarter guidance, I guess, the question I would have when you go through and revise based on what you saw in the third quarter, you're still left with a fairly wide range, especially for a quarter where there's not a lot of leasing activity still to be decided. So can you just maybe explain, kind of, the thoughts behind that and what would drive results to either end of that spectrum?

Biggest -- I think the biggest thing would be occupancy performance. I don't know if that's -- let me -- if you think about it, you only have 1 quarter to go on that. I mean, rental pricing takes more time to really build in. So it would be occupancy and then all the things going on with expenses and other. We feel good about where occupancy is today. We feel like that the exposure is low, as Tom mentioned. So we -- our forecast is built on that expectation and feel like it's pretty solid, but it can change, and so we left room for that in 2% to 2.5% in the revenues because things can change. But...

One of the challenges with that occupancy variable and forecasting it is that it has a very meaningful impact on a quarter, particularly when you're talking about 100,000 apartments. A 50 basis point swing or 20 basis point swing on that many units in terms of average daily occupancy equates out to a meaningful number. So I think that really rationalizes why we have the range that we do. And it also is the factor that would cause us to be at the upper end or lower end of that range is a difference on occupancy, no question about it.

Okay. Can you just remind me what the percentage of leases that are expiring this quarter would represent?

We're at -- we intentionally bring lease expirations down, and they range from 5% to 6% a month. So that would be --

It'd be 15% to 18%.

Yes, 15% to 18%.

It's going to be below 20% of the portfolio.

Okay, great. And then last question, just, Eric, you had made a comment about the valuations not seeming to -- seemingly maybe being elevated today and you laid out a very logical argument about why you would likely see deterioration as you move into next year with all that's going on with lease-ups and development, and so forth. Why do think the market hasn't gotten in front of that with respect to valuations today? Why are they not adjusting before that were to happen versus simultaneously?

I don't know, Dennis. I think that-- I mean, capital -- investment capital likes multifamily. I mean, there's a lot to like there long term, and there's a lot of good things -- as you well know, a lot of good things on the demographics and lifestyle and all those other kind of factors that suggest that multifamily real estate is going to be good. And if you have any kind of a multiyear horizon to how you're willing to think about deploying capital into that kind of demand dynamic, I think people -- compared to alternatives in the commercial real estate spectrum, it stacks up pretty darn well. And so I think that that's ultimately what is causing, I think, despite some moderation in leasing fundamentals. Compared to alternatives, multifamily still looks pretty darn good.

And this does conclude today's Q&A session. I can turn it back over to our speakers for any additional or closing remarks.

No additional comments from us. And we hope to see everyone, November 13, at our Investor Day in Dallas. And everyone, take care. Thank you.

Thank you, Savannah.

You're very welcome. This does conclude today's call. Thank you everyone for your participation. You may disconnect at any time, and have a great day.