Mid-America Apartment Communities Inc (MAA) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for participating in the MAA first-quarter (sic -- see press release, "second quarter") 2012 earnings conference call. The Company will first share its prepared comments, followed by a question-and-answer session. At this time, we would like to turn the call over to Leslie Wolfgang, Director of Investor Relations. Ms. Wolfgang, you may begin.

Thanks, Jonathan, and good morning, everyone. This is Leslie Wolfgang, Director of Investor Relations for MAA. With me this morning are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

Before we begin this morning with our prepared comments, 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 F 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.

I'll now turn the call over to Eric.

Thanks, Leslie. Second-quarter results were at the top end of our expectations, reflecting continued strong leasing conditions across our Sunbelt markets. Given the favorable second-quarter performance, accelerating rent growth and active acquisition pipeline, and the progress to-date on securing an investment grade rating, we have raised FFO guidance for the year, and expect another record performance in 2012. Property performance was driven by accelerating growth in pricing, with continued low resident turnover and high occupancy. We are encouraged by the trend in year-over-year pricing, with the second quarter's growth in average effective rent increasing to 5.2% as compared to 4.7% in the first quarter. We expect pricing performance will remain strong in the third quarter before we begin to see normal seasonal moderation in the holiday season.

The third quarter is always a busy leasing quarter for us, and we'll get a lot more clarity on real estate taxes over the next couple of months. But in summary, leasing conditions across our markets remain very good, and we are optimistic about NOI performance over the back half of the year. As detailed in the second-quarter release, the large market segment of our portfolio continues to perform very well, with 7.7% NOI growth for the quarter. Our secondary market segment also delivered very solid performance, with 5.2% NOI growth.

This difference in performance between market segments is in line with our full-cycle portfolio strategy, and it is what we expect at this point in the cycle. Until we see new supply trends pick up in a more meaningful way, I expect we will see this performance pattern with our large market segment outperforming our secondary market segment. However, with minimal new permitting activity underway in the secondary market segment of the portfolio, we expect that we will see the ratio of job growth to new supply begin to favor the secondary markets of the portfolio by mid-to-late 2013.

Let me expand on this point just a little. In thinking about the likely future direction of market conditions, and the outlook for leasing, we compare job growth forecast to expected new supply, which we base off of actual permitting activity. During the last recovery cycle, from 2004 to 2007, across our markets we saw seven new jobs created for each completed unit associated with new development permits being pulled, or a ratio of 7 to 1. Given the current increasing trend in permitting activity, and a continued slow recovery in the employment market, the current outlook for our large tier markets is that the ratio of new jobs to new supply will moderate from a current 14 to 1 to an expected ratio of 8 to 1 next year, more or less in line with national trends.

What is important to recognize is that this is still a very healthy leasing environment, and it's better than the ratios that we experienced during the last recovery cycle. And this is, of course, especially true considering today's lower propensity for new and existing households to become homeowners as compared to the 2004 to 2007 time frame.

Looking at our secondary markets, the story is even better. Based on the forecast we have, we expect the ratio of job growth to new supply in our secondary markets will actually improve slightly next year, to 11 to 1 from the 10 to 1 relationship that we have today. There are, of course, a lot of different ways to underwrite the risk associated with new supply increasing in a given market or region. But based on how we measure and assess the apartment leasing environment heading into 2013, we continue to feel good about our ability to capture solid rent growth across our portfolio over the balance of this year and through 2013.

On the transaction front, our Group remains active, and is underwriting quite a bit of opportunity at the moment. As outlined in our earnings release, we have raised our outlook for new acquisitions to a range of $300 million to $350 million. The environment remains competitive, but as we get closer to year-end, we find that our established record of being able to move quickly and definitively through due diligence, and close on the transaction, attracts more interest. We've closed on $191 million in acquisitions so far this year, and expect to continue with an active capital recycling effort into higher-margin investments over the next couple of years. As we pursue new investment alternatives, we remain committed to our Sunbelt footprint and our two-tier market strategy across the region.

As noted in our earnings release, Moody's assigned an initial investment grade rating to MAA during the second quarter, reflecting the work and commitment made to further strengthen our balance sheet and broaden access to capital. We have more work to accomplish in growing our unencumbered asset base, but we are well on our way towards completing this goal. We currently have over $260 million of capacity available from cash and in-place credit facilities, and are well positioned to continue supporting new growth objectives.

In summary, we're encouraged with the outlook for continued solid NOI growth from both our same-store and non-same-store properties. Our new development lease-ups are performing better than projected, and are expected to make an increasingly meaningful contribution to FFO performance over the next couple of years. We believe MAA is well positioned to continue capturing solid results in this robust part of the market cycle, while retaining solid downside protection as market conditions eventually cycle, or if more pronounced weakness in the economy were to occur.

And with that, I'll now turn the call over to Al for more insights on our Q2 results.

Thank you, Eric, and good morning, everyone. I will provide comments on earnings performance for the second quarter, as well as a few highlights regarding investing and financing activities. FFO for the quarter was $48.3 million, or $1.13 per share, which was $0.06 above the midpoint of our prior guidance, and represents another record for the Company.

This strong result for the quarter was produced by several areas of our business all performing above expectations, including the same-store portfolio, development activities, as well as financing costs. Same-store NOI grew 6.5% in the second quarter, based on a 4.6% increase in revenues and a 1.9% increase in operating expenses. Revenue growth was driven by a 5.2% increase in effective rents compared to the prior year, which was essentially in line with expectations. Operating expenses moderated more than projected from the first quarter, primarily due to personnel and repair and maintenance costs producing about $0.02 per share of favorability to our forecast.

Non-same-store communities, consisting of development and recent acquisitions, also outperformed expectations during the second quarter, producing an additional $0.02 per share in favorability, the majority of which was related to the two development communities currently in lease-up, Cool Springs in Nashville, and the Ridge at Chenal Valley in Little Rock, which are both ahead of plan. The remaining $0.02 per share favorability for the quarter comes from financing and acquisition costs. About half of this, or $0.01 per share, is timing in nature related to lower than projected deal volume in the second quarter, which we now expect to occur in the third quarter.

During the second quarter, we acquired two wholly owned communities, and purchased the remaining two-thirds interest in one community from Fund II, the Company's joint venture. And in July we purchased an additional wholly owned community, bringing year-to-date acquisitions, including the joint venture purchase, to just over $191 million, at an overall average NOI yield of about 6%. As part of our disposition plans for the year, we sold one community during the second quarter, and four additional communities in July and early August.

These sales bring year-to-date proceeds from property dispositions to about $88.5 million, for which we expect to report a total net gain of about $33 million. We have two remaining communities planned for sale this year, which are in the contract phase, and we expect our overall cap rate for this year's disposition portfolio to be about 6.75%, based on in-place earnings after deducting a 4% management fee and a $350 per unit CapEx reserve.

Construction and lease-up continues to progress very well in the four communities currently under development. During the second quarter, we funded an additional $16 million toward completion, bringing the total investment to $97.1 million of the expected full construction cost of $143.6 million. One-third, or 405, of the planned units were delivered as of the end of the second quarter, which were 96% leased at rent levels exceeding pro forma. We expect to complete the construction on three of the four communities by year-end, with the remaining community to be completed in the fourth quarter of 2013.

Regarding our balance sheet and financing activities, during the second quarter we used unsecured proceeds from our recent term loan and bank credit facility to fund acquisition and development activity, and to repay secured agency debt. During the quarter, we repaid an additional $150 million of our agency credit facilities, releasing the related mortgages, which, along with the acquisition activity, increased our unencumbered asset pool to 48% of gross assets at the end of the second quarter as compared to 31% at year-end.

As Eric mentioned, in July we received a first-time investment grade rating from Moody's of Baa2, which is the second level of investment grade under their rating scale. This rating, along with our existing BBB rating from Fitch, reflects the solid progress toward our balance sheet goals, and immediately reduces the costs of our borrowings under both our bank credit facility and recent term loan, which have built-in investment grade pricing options. The credit spreads on borrowings under these agreements are now 135 to 150 basis points over LIBOR, or a 30 to 40 basis points reduction from the first quarter.

We ended the second quarter with our balance sheet in a very strong position. Our net debt was 43.5% of gross assets, and 6.7 times EBITDA, and our EBITDA covered fixed charges 4.4 times. And also at the end of the quarter, 91% of our outstanding debt was fixed or hedged against rising interest rates, resulting in a total average effective rate of about 3.8% for the quarter. We believe these metrics put us in a very good position to pursue an additional credit rating from S&P, with the goal of achieving full investment grade position late this year or early next year.

And finally, given the second-quarter performance and updated expectations for the remainder of the year, we're increasing our FFO per share guidance for the full year by $0.09 per share at the midpoint, $0.06 of which relates to the second quarter. For the remainder of the year, we do expect our same-store and non-same-store portfolios combined to add about $0.04 per share to the results, and expect an additional $0.01 per share contribution from lower borrowing costs, primarily related to receiving the additional investment grade rating earlier than anticipated. We expect these favorable items to be partially offset by about $0.02 per share of additional acquisition costs related to both the timing of deals and the volume of deals this year.

Our updated FFO guidance for the full year is now a range of $4.37 to $4.57 per share, which is $4.47 at the midpoint, or a 12% increase over the prior year. And as a reminder, the key assumptions included in our forecast are wholly on acquisition volume of $300 million to $350 million, disposition volume of $120 million to $125 million, and development funding of $80 million to $85 million for the year. We also expect our leverage to end the year in the 43% to 46% range, with about 93% of our debt fixed or hedged with an average interest rate ranging from 3.8% to 3.9% for the full year.

We currently have 1.7 million shares, or about $115 million capacity remaining under our current ATM program, and we intend to utilize our ATM program to essentially match fund our acquisition volume over the remainder of the year.

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

Certainly.

(Operator Instructions)

David Toti of Cantor Fitzgerald.

Eric, I want to go back to the secondary market performance a little bit, just so we can maybe understand some of the dynamics in the numbers. Is it possible you could disclose the new and renewal rates in the secondary markets in the quarter, and then possibly walk us through the change in occupancy on a year over year basis relative to those assets?

Sure, I'm going to let Tom do that. He's got the information handy here.

Yes, and I'll back into that real quick. On new and renewal rates for the secondary markets for -- sorry to be a little behind on this, but we had about 3% on new rates and 5% on renewals. And then on the occupancy component, I think that's covered in the Q, but down a bit, but really driven by military move outs in three of our markets in Columbus, Savannah, and -- Columbus, Savannah, and Virginia. Those were temporary moves, the 3rd Infantry Brigade deploying in Columbus, and a carrier moving out in Virginia, and those have recovered since.

And then another question for you is expense growth seems to have moderated somewhat in the second quarter, and we've seen rather elevated expense growth with other -- some of your peers. Is this aberrational in the quarter? It seems like you're tracking below guidance at the moment. Are you expecting bigger bumps in the second half? Is part of that tax driven potentially?

It is, David. This is Al. I can answer that. We still have our range of $3.5 million to $4.5 million for total expenses for the year. Now as we mentioned in the press release, we will probably end up at the low end of that. So some of the moderation that we saw in the second quarter will carry through, but a large part of it -- of the moderation was expected. It just occurred a little faster and a little sharper than we had projected. So we still think we'll end at the low end of that expense range we gave for the year.

A big portion, as you mentioned, is real estate taxes, which we have always said for the year was between 4% and 5%. The midpoint of that, 4.5%, is what we still expect, and we think that's about right, given the information that we received for the -- so far this quarter. The pressure points are coming from the places we thought, and it's about what we expected, and we'll have more for that -- on that in the third quarter, have more clarity, but we expect it to be the low end of our guidance in total for expenses.

And then my last question is just around something you guys mentioned relative to capital recycling going forward, now that some of your balance sheet goals are out of the way, and there's been some aggressive growth. What kind of assets can we expect to see in the disposition category in the next couple of years? How do you guys define assets that are ripe for disposition?

David, it really just starts with the process of identifying those assets that have the lowest after CapEx cash flow margin. And we have no real intent making any sort of -- to make any sort of strategic shift out of a given region or given market. It really is just looking at those investments that are producing after CapEx cash flow that are below the margins that we feel like we can get elsewhere.

What that means, as you might imagine, after CapEx cash flow, it often translates into lower -- or older properties, and also it translates into properties that have lower rent structure. And, as a consequence of that, you're going to see, obviously, then, us likely moving more and more out of some of the older properties, and some of the older properties, a lot of which came with the merger that we did with Flournoy Company back in 1997, also happen to be in some sort of beyond secondary, almost really you would define almost as tertiary markets, and so that's where you are going to see most of the capital cycled out of, our older assets and in some of the real secondary markets. We -- again, I remain very committed to the secondary market segment of our portfolio, but you're going to see us cycling capital probably a little more actively in that component of the portfolio.

Thank you. Rob Stevenson from Macquarie.

Eric, just as a follow-up to that last question, what is the gap between whatever it is the bottom 5%, 10%, 20% of your portfolio in terms of operating margin versus the average?

Al, what would you say?

I would say it's couple of percent. That's what I'd say, probably 2%, maybe 3% at the very bottom, but that's probably a good indication of it, Rob.

So over time, you are going sell assets that have 200 to 300 basis points lower operating margins, and so that should positively benefit your overall operating margins as a firm?

Absolutely.

And then, Al, just on the guidance level, you guys are tracking through the first six months, and maybe it's a question for Tom, but you're tracking at 4.5% revenue growth. Your guidance is 4.5% to 5.5%, I think. What's happening in the back half of the year that's going to cause an acceleration from where you were in the first half versus -- I think a lot of your peers are forecasting decelerating revenue growth?

I'll tell you what the forecast is built on, and Tom can come in and give you some operating reasons on why that is. But the acceleration in the third quarter is because a lot of leasing activity comes in the third quarter, and that's when we give get our pricing power, so we expect some movement there.

And in the fourth quarter, I think it's the continued trend that we see this year. We'll have some moderation from seasonality projected, but in large element, the trends forward will continue. And there's a comparison opportunity in the fourth quarter this year compared to the prior year, that's a big part of the acceleration in the fourth quarter. And so that's been built in our forecast all year, I would say, and so far it's performing about in line with expectations. Is that --

Yes, Rob, it's really just a compounding of the new rent growth. We will see some seasonal moderation in the fourth quarter on pricing, but what we've built in on pricing will matter more than those few leases that rent at a lower number in the fourth quarter, and we have got some good occupancy comparisons in the fourth quarter as well.

And then, Eric, what are you seeing today in terms of the market for acquisitions? Are you seeing a lot of people bringing product on to market to try to get it out under the current tax regime and try to get them closed by year-end? Has that not been a factor thus far? Any interest in OP units, et cetera?

Well, there's certainly a lot of volume in the market right now. We're underwriting a whole lot of deals, more than I can remember us ever looking at. So it's very active. I do think that there is some motivation, by a lot of capital to take advantage of what is obviously a very attractive financing environment or very attractive operating environment, and probably one of the more favorable tax windows that we'll have some for some time. So all those factors I think are suggesting that anybody that has got any intent on moving out of investment, they're looking to do that between now and year end.

I think that occasionally we'll run into folks that are looking for some sort of tax-free exchange, but honestly not very often. I think more often than not, we see that with some of the portfolio transactions that occasionally come across, but on most of these one-off transactions that we're doing, it's really more just cash acquisitions.

You looking at any new markets this round?

Not -- well, Kansas City is the market that we've been looking at some deals in. We're -- but other than that, no. We continue to like the region and broadly the footprint that we're in.

Rich Anderson from BMO Capital.

Can I just get back quickly to the margin discussion. Can you quantify that? What absolute level of operating margins do you think you can buy at? Is it over 70%? What's the number?

I don't think it's that high. It's going to be in the -- l would call it 60% to 70% range.

And the number out there, Rich, just to clarify, the 2% to 3% is probably the bottom level of what we'll be selling from the mid-point of the portfolio. That's a good point. The new assets that we buy will have the lowest -- the best margins, and probably better. The gap will be wider than that.

Next question is on development. I'm curious what your thought process is to be a developer at any level, given the incremental risks associated with development and it is such a small percentage of your overall operating strategy, why even bother developing? You probably are not going to get paid for it anyway, in my opinion. What are your thoughts on that?

My thought is this. We do not want to be a developer. We do, however, want to find opportunities to deploy capital in new assets on an attractive basis, and we think that the way to accomplish that is to essentially outsource our development operation by essentially hiring developers to come to us with opportunity. We negotiate a contract, they essentially take the development risk because these contracts with fixed price. We take the lease up, and that's really it.

And we are also mindful of how much of that we're willing to take on the balance sheet at any given point in time. But we just don't think that being a big developer and taking on the overhead associated with that is the right thing for us to do.

Let me just add to that, Rich. Remember, our NOI yield expectation for our current pipeline is 7.5% to 8%. Compare that to 6.5% on acquisitions right now, so there's still a good spread there to capture in this part of the cycle, and our developments we're doing are ahead of plan. So that's all good news.

Okay, that is fair. Eric, I'd like to get to the conversation you had about jobs per permit -- unit permit. I think you said it was running at 7 times in the last cycle, and it's higher than that this time around because of the lack of desire to own a home. I think that's what you said. Is that about right?

Well, it's -- yes, during the last recovery cycle, it was 7 to 1; during this particular year it is 14 to 1, so it's double, if you will. But it's really a function of two things. One, it's a function of the propensity for renters to stay in the rental market, but fundamentally, it's because there hasn't been any supply delivered into the market for the last couple of years.

Right, but what are these jobs that are being created? Are they construction jobs? Are they -- what kind of jobs are they, and do they all matter to you as an apartment landlord?

Rich, this is Tom. We can run through it. In Houston, it's oil and gas. In Dallas, it's technology. In Charleston, it's manufacturing, you know, across the Sunbelt. It's a range of things that are not temporary in nature and are -- frankly have been historically strong to the Sunbelt. So, they're there and we're chugging along. They matter. Every job matters.

These are just coincidental events, right, that jobs are happening, and permitting is happening, but they're not necessarily tethered together one to one? Is that what you're trying to say? I'm just trying to understand the logic a little bit.

What I'm trying to say is that I think in order to have a healthy leasing environment, one has to obviously look at the amount of new supply coming into the market. And whether you should be alarmed or not about that level of new supply coming into a market depends on whether or not there's going to be enough job growth to handle and absorb that supply. And while I think there's a lot of hand wringing that's starting to take place about permitting activity being up as much as it has grown over the last couple of years, obviously from very depressed levels, I don't think it's something to be overly concerned about. I think we're going to go from an environment where we've seen, if you will, just unbelievably good fundamentals to probably, as a result of supply coming into the market, to an environment where it's going from unbelievably good to just really good. And I think that's where we're trending.

That clarifies that. Thanks. And then Eric, last question for you, probably you've asked this -- or been asked this question many times, but you consider your Company kind of a defensive -- or having defensive characteristics maybe not shared by some of your peers, a full cycle type of story. So why should -- if fundamentals are white hot right now, what would be the reason for people to buy MAA stock and not some of your peers, or are you saying maybe that things are starting to get to peaking conditions, development is starting to pick up, and then that in itself is a reason to maybe look at MAA a little bit more closely because of its defensive characteristics?

You know, again, our objective is to be the best full cycle performer that we can be. And I think that while we have defensive characteristics, if you will, I think that we also have the capability to be very competitive in this phase of the cycle also.

And our objective is to be in a position to deliver very competitive performance within the growth cycle, if you will, and to retain, though, the downside protection as much as we can. I think that our story should have appeal for -- it to some degree depends on your investment horizon. Our thought process is built on the basis that we think to deliver the -- that our shareholder performance horizon that we're aiming for is really designed to match or align the horizon that we use for deploying capital. When we buy properties, those properties are assumed to be owned 7 to 10 years. That's the kind of horizon that we have to think about in terms of delivering performance for shareholders as well, because that's how we deploy capital.

And of course over that kind of a horizon, you have up parts and you have down parts. And what I can tell you is that over that kind of a horizon, and if you look at over the last 7 to 10 years, and you look at our total shareholder return and what it's been compared to others, what's important to recognize is that roughly about two-thirds of that performance for our shareholders has been the dividend that we've paid.

And we think ultimately that's what the REIT platform is all about. It's all about trying to deliver total shareholder return over a long period of time, a lot of that return being composed of the dividend. So our objective is to take some of the cyclicality out of the equation, take some of the cyclicality out of the performance in an effort to support the ability to fund a steady growing dividend no matter what, through the good times and bad times.

And so I think you have to be willing to bring a little bit of downside protection into your story and on to your balance sheet in how you deploy capital. You have to have that component in there to achieve that kind of long term performance. And in return, what you have to be willing to do is give up perhaps a little bit of the froth at the very top end of the market. And we thank that's okay. We're comfortable with that kind of a profile.

Well said. Thanks very much, guys.

Michael Salinksy from RBC Capital Markets.

You talked about developments running a little bit ahead of underwriting. Can you give us a sense of how much that is running ahead and where you expect those to pencil out now?

We're feeling pretty good. Venue in Nashville we expect it to be 41% occupied and they're 53% occupied. And we expected a half month's rent concession to do lease-up in there, and we're not running with any lease-up concessions. And the same story really at Ridge. We expected them -- they are actually a little further ahead, to be 22%, and they're 52% occupied. The same story on the lease, obviously.

I was just going to say, as Tom mentioned, it's all about timing of the lease-up and a lack of concessions. As we entered the year, I think we had $0.10 to $0.12 per share dilution from our pipeline. And it is probably going to be more like $0.04 to $0.06, $0.04 to $0.07 this year. So it's a very good story.

I think the yields that we'll achieve on this portfolio continue to be 7.5% per 8%, but the IRR, once we're done with these things, will be better, because we're avoiding largely dilutive hot prospects at the initial part of these projects.

That's encouraging. Second question, more operations. Can you give us what new lease and renewals rents, on a lease over lease basis, were in the second quarter, and also for July, and where you ended July on an occupancy basis?

July on occupancy was 96%, and then new lease was -- for the second quarter was 42%, renewals 62%, and for July 32% and 65%.

That's lease over lease, correct?

That is year over year. Lease over lease was 41% and 66% and 4% and almost 7% for July.

Al, a question for you. You talked on your last call about looking at a term loan or private placement in the second half of the year. Is that still on the plan for 2012, and also where would you expect pricing, given the debt upgrade there?

It is, Mike. As we talked about before, and you've seen on our balance sheet, we paid down our secured financing from our agencies, using a bit of our credit facility, and so we expect one more transaction this year, probably in the range of $100 million to $150 million, likely private placement term loans, the best product at the time, and we'll have more on that in our upcoming releases.

I think it's safe to say right now, surprising on a 10-year basis, and we may blend 7 and 10 year, so that will change somewhat, but safe to say somewhere in the 4% to 4.5%, maybe 4% to 4.25% expectation for that. It will probably be funded -- begin funding late third quarter and likely be staged somewhat, $50 million, $50 million, and $50 million, maybe $50 million a month for a few months late in the year, Mike. So that should help you model that get you pretty close to where we are.

A final question for Eric. We haven't really seen a whole lot activity on the GAV front. I was going after value add. What are you seeing in terms of value add, and does it still make sense today given the compression we've seen in Cap rates?

I think what we're finding is that the value add transactions that come to market, these are properties that we characterized as 8 to 12 years old. The competition on those is really fierce, because those are assets that are fairly easily financed. And in this environment, the private capital folks are able to get very attractive financing terms, and, as a consequence, put some pretty big numbers on the table.

And based on what deals we've seen, where pricing has trended, they've also made some fairly heroic assumptions regarding the ability to raise rents and capture a lot of value out of whatever repositioning plan they plan to execute on. So it's really frankly just a matter of very aggressive pricing in that particular transaction set that have caused us to not see a lot of opportunities there that make sense for us.

The final question, at this point in the cycle, you come with your concentrations in primary versus secondary, or is there an impetus maybe to increase the primary a little bit more to capture some growth over the next couple of years?

We've taken a hard look at this for quite some time and continue to believe that the current allocation that we have, which we define at roughly about 60% large and 40% secondary, optimally, the range is 60% to 65% large, and 35% to 40% secondary. We think that creates the optimum portfolio cash flow performance profile that we're after in terms of long term growth without -- with some of the volatility taken out of it. So we're pretty comfortable with the allocation we have now.

And, again, going back to my point in our prepared comments, when you look at where supply is starting to get teed up, it's -- as always, it's in some of the larger markets. In many cases, it's in a lot of the more urban locations for some of these larger markets. Eventually that's going to manifest itself into leasing conditioning in some of these larger markets.

As I quoted in my comments, the ratio of job growth to permits in the secondary markets are actually going to, at least based on what we're looking at and what we're seeing right now, are going to get better and more in our favor, if you will, next year, so I think trying to move a bunch of Cap out of secondary markets into large markets right now would be the absolutely wrong thing to do.

Dave Bragg from Zelman & Associates.

So those comments on portfolio allocation are helpful and, as was your -- the disciplined approach to dispositions that you conveyed, but the question is just within the secondary markets over the near term or intermediate term, what's the opportunity to reallocate within those markets and maybe increase your concentration to more desirable secondary markets and reduce concentration or exposure to some MSAs that you are in and are not as attracted to long term?

I think that's where a lot of the opportunity on this recycling effort is going to be aimed at over the next couple of years. Again, it starts with a definition of where are we seeing opportunities to redeploy capital in higher after CapEx margin cash flows, and what that is normally translating into is some of the older assets. As a consequence of portfolio transaction we went through back in 1997 with the Flournoy Company, it happens that a lot of the older assets are in some of these more tertiary type markets. So I think you'll see us over the next two years continue to cycle out of certain secondary markets and into I would call it perhaps secondary markets that are a little bit more well known.

Our goal is that we think that that process will yield higher after CapEx cash flow and likely, we think over time, that the public market probably puts a better multiple on that cash flow as a consequence of moving capital out of, let's say, making Georgia into Charleston, or out of making Georgia into Savannah. My guess is that over time, that creates a better performance profile for the Company, and I think also garners a little bit more appreciation in terms of pricing the company as a multiple of that cash flow.

Right, that makes sense, thank you. Next, could you talk about the Buckhead sub-market of Atlanta and your interest there? Investing in a sub-market like that seems a little different from your typical approach and so I was curious what you're seeing there and if we could interpret this as being any indicator of a shift in strategy towards more urban sub-markets?

Dave, it's really not any sort of shift in strategy. Our capital deployment practice is really geared towards first and foremost looking for those opportunities where we think where people want to live, and where there's good proximity to employment, good retail, and just desirable areas to live in.

And then it, from there, it becomes just a question of looking for opportunities that we could capture on pricing that make sense for how we model and deploy capital. And it just so happens that frankly, over the last two to the years, some of the better opportunities that we've seen have been in some of more the urban type sub-markets in some of these cities. That's where a lot of stuff was built over the last several years and where a lot of distress took place, and so consequently that's where some of the best buying opportunities have emerged for us this year.

Now we think an added benefit from all that is that we probably do further diversify in some of these bigger markets with a mix of both suburban and urban locations, which I think probably have some value long term in terms of performance stability, but there's really no intent to make any shift from suburban to urban or one way or the other. It's really just let's go where people want to live. And as we've pointed out in the past, a lot of these southeastern cities -- a lot of the employment centers are out in the suburbs. That's what drove us out there to begin with. It's not because we -- it's necessarily some of the best buying opportunities. We wanted to go where people wanted to be, where they wanted to live.

And then it becomes a question of, okay, now let's find the best pricing opportunity. And it just so happens that these two recent acquisitions in Buckhead were presented to us. We liked the assets a lot, the pricing worked, and we bought them.

Can we interpret that your intermediate rent growth outlook for the urban sub-markets of Atlanta is pretty nicely superior to your outlook for the suburban markets and perhaps in part due to the lack of supply there?

I think that it -- of course every market and every situation is a little bit unique, but, no, I think that our outlook for rent growth is not -- we don't -- based on what we're looking at, we don't see it being particularly strong in suburbs versus particularly strong in the urban areas.

I think that you're right in that a lot of the supply that is picking up to some degree in some of these bigger markets today has been in more the urban core part of the city. And my guess is that you may see fundamentals flatten a little bit quicker there as opposed to some of the suburban locations over the next year or so.

But I think that the only thing that would -- it would really be more of a supply question and --. But from what we see right now, we're still expecting to capture pretty strong rent growth out of many of our suburban locations over the balance of this year.

And last question is can you update us on the competition you're seeing with single-family housing, move-outs to buy and rent?

Sure, Dave. The move-outs for home buying is up slightly, about 4% or 42 units, but still at 18.3% of total move-outs versus like 17.8%, and not a material move there, and certainly not up around the highs of the 30% that we've seen before. And the move-outs due to home renting has gone down. It was down 1.7%. It's now less than 6% of move-outs, and it's just -- it continues not to be much of a factor.

Paula Poskon from Robert W. Baird.

Apologies if I missed this in your prepared or earlier Q&A. Are you have currently marketing anything for sale?

We do have two other properties that are for sale right now that are in the contract phase, and expect them to close late third, early fourth quarter kind of range, Paula.

Have you already reclassified those, Al, as discontinued Ops?

One of them is in the balance sheet as available for sale. The other one is not, because it has yet to hit the bright -- or didn't at the end of the quarter hit the bright line for that test. But, yes, one is in there. You'll see it in the balance sheet.

And what's the Cap rate spread between what you're buying and selling at?

We have -- on the whole portfolio this year, we expect about 6.7% exit Cap rate. That's on in-place cash flow after 4% management fee, and $350 CapEx on the dispositions. So that's -- and we talked about on our buying has historically been 5.5% to 6% range. So hopefully that gives you somewhat that spread.

Yes, that is helpful, thank you. And are you considering moving more assets out of the fund on to the wholly-owned balance sheet? And what's the opportunity set there?

Not really. I think that the one transaction that we did in Austin was just a unique situation where the -- our partner was looking to create a transaction for their capital and we sort of looked at that property. Obviously there are some supplies trying to pick up in Austin, and they just felt that that was an opportunity to cycle out of that one.

We took a hard look at the asset, and given our horizon and the way we thought about the market, we were able to offer them a price that made sense for us, made sense for them, and so that's what we did. I think that more often than not, obviously, you're going to see us -- when we make a decision to sell an asset out of the JV, more often than not, it would be just be taken to market as opposed to us buying the interest back. But yet to be -- we're not actively selling anything else right now in any of our JVs.

That is helpful, thanks, Eric. And speaking of Austin, just one final question. There's certainly a lot of construction under way in terms of the purpose-built student housing close to campus there. Do you anticipate any impact in your Austin properties? Do you have a big percentage of your residents that are students?

No, we don't, Paula. We're out a bit from University of Texas. We certainly love the jobs that it throws off, but we are not heavily exposed to the UT students.

Buck Horne from Raymond James.

Could you give us an update on the rent income metrics for your incoming tenants and just how that may compare year over year?

Sure. The rent to income ratios -- and I'll back it up a bit. In 2008, 2009, it got as high as 19%, and it has steadily worked it way down, and we're at 16% rent to income ratio today.

How does that vary between large market versus second -- do you have that -- versus secondary markets do you have that kind of granularity?

I do not, not on that statistic.

But we can get that for you.

We'd be glad to get it for you.

I don't think it's that big a spread difference, to be honest with you.

And on your turnover, do you know how many move-outs were citing rent increases or the rent was too high as a reason of the move-out?

Yes, yes. It's 13% of move-outs for us were at rent increase. And that's a number that we comfortably control, and it's been offset by a lack of job loss and job transfer, so we'll -- we're happy with that number. We have replaced those folks that move out with rents that are paying 8% higher than they were, so it's still making sense at this point.

And just one last one. This is kind a demographic question I have for you. I'm just thinking about the average age of your incoming tenant. Have you seen any changes in the average age of who you are renting to or at least who is walking through the door these days?

That's stayed largely consistent. I think we'll see it pull down -- or actually I think we'll see it track sort of the echo boomers mid-point, but it has not changed materially.

Swaroop Yalla from Morgan Stanley.

I would like to get some more color on the Florida markets. It looks like South Florida is doing quite well, and your bigger markets like Jacksonville and Orlando are not. So what is the cause of the dichotomy there and if you are considering relocating your capital there in Florida?

I'll answer that quickly. South Florida is -- it is -- you're looking at one asset in a very specific location with a good, good school district there in Coral Springs, and it weathered the storm extraordinarily well. So its specific sub-market has allowed it to do quite well over time.

On the Jacksonville front, Jacksonville is coming back reasonably well, but it's just not rebounding as fast as the Texas markets go, but we're encouraged by where it's heading. They've been able to grow rents reasonably well this year, and occupancy for the quarter was 95.7%; July it's picked up a little bit more to 97% exposure at 7.5%. So we feel like the fundamentals of Jacksonville, while they have been slower to turn than our asset in South Florida, has done -- is coming. There's more to come out of Jacksonville.

And then I was just wondering if you guys have the ratio of jobs to permits by individual markets? In particular, I'm looking -- I was thinking about Raleigh and Dallas and maybe even Austin? But do you guys have that by the market?

Sure, I would be glad to run through that. With Dallas, it's currently 10 to 3; Raleigh, the same thing, 10 to 3. We do actually have different numbers there, Swarup, I'm not making that up. And then just circling back to Jacksonville, it has been -- it's been a little bit -- it's been low at 6, which is that slow job creation coming on, but picks a ton next year, and it will be almost 12.

What we would be glad to do, Swarup, if you're interested is, offline just give us a call, and we can give it to you by market.

That would be very helpful. And lastly, Al, is there any update on S&P ratings, and if that will do anything further for your borrowing costs?

That's a good question, Swarup. We feel like that we're in very good position to continue our discussions with those -- with S&P, and we believe that by late this year, we're hopefully in a very good position to achieve our goals of getting ratings from all three. And once we do that, it will have an impact on borrowings, because I think we'll be in a position to access the full public bond market.

I know you have probably been seeing some of the transactions that have happened over the last few months, but it's been very aggressive. Some people rated at the Baa2 level have gotten very attractive 10-year financing costs, I'm talking in the 3.4%, 3.5% range for 10 years. So certainly that's very favorable for in the future for us, and we hope that we can achieve that level and get some of that type financing next year.

Andrew McCulloch From Green Street Advisors.

Just one follow up to David Bragg's question. Have you guys changed your underwriting assumptions at all on acquisitions? Mid-America has always been very conservative in its underwriting, especially on components such as exit Cap rates. In the secondary and tertiary markets, where you have historically targeted -- where competition is really less intense, you've always been able to source plenty of deals, even after this conservative underwriting. But in some of these primary markets like Buckhead, where you have been more active of late and where competition has to be a lot more intense, it's a little surprising you can win some of these deals, again under what's -- you've had historically very conservative underwriting. Can you just comment on that?

The answer is no, we have not changed our underwriting approach at all, and the methodology that we've used historically is absolutely being used again today. I think that honestly the two deals that we've acquired were just unique -- in Buckhead were just unique situations where the properties had been under contract previously before. The sellers involved had some very hard deadlines and some things that they had to get accomplished in a very short order, and we were able to move very quickly and definitively and offered that sort of assurance. These are brokers involved that we've done a lot of business with, and they really went to bat for us, and so the -- I mean, really, we find in today's environment that, really, it's just very competitive both in more of the urban areas, as well as in the suburbs.

And it really just comes down to looking for scenarios where our ability to move very quickly and definitively through the due diligence and close has a lot of value. And ironically, we find -- as you might imagine, we find that we get more value for that, if you will, as we get into the third and fourth quarters of the year. Often we find a lot of the transactions that are initially brought to market that we don't get -- we don't get under contract the first part of the year, they often come back around during the third and fourth quarter of the year, and that's when we're able to offer the seller our execution capability that they put a lot of value on. So, but no, quickly -- or in short, I will certainly add too that we have not changed our underwriting approach at all.

This does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

Okay. Well, Jonathan, I appreciate it, and thanks everyone for joining us this morning. Just let us know if you have any other questions. Thanks.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.