Mid-America Apartment Communities Inc (MAA) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And thank you for participating in the MAA third-quarter 2013 earnings conference call.

(Operator Instructions)

At this time, we would like to turn the call over to Leslie Wolfgang, Corporate Secretary. Ms. Wolfgang, you may begin.

Thank you, Stephanie, and good morning, everyone. This is Leslie Wolfgang, Corporate Secretary for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

Before we begin with our prepared comments this morning, I want to point out that, as part of this discussion, Company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the Safe Harbor language included in yesterday's press release and our 1934 Act filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website.

I will now turn the call over to Eric.

Thanks, Leslie, and good morning, everyone. I would like to start my comments this morning by expressing my appreciation for all the hard work over the summer months by our folks at MAA and Colonial. We obviously had a busy summer, as our most active leasing season was also highlighted by quite a bit of work surrounding the integration of our Companies' operating and reporting systems, ensuring we were ready to execute as a combined Company upon closing our merger. Advisors for both Companies did a terrific job, and the merger transaction was successfully closed on October 1.

Our property associates and the entire management team from both Companies really pulled together, and we are now successfully up and running as a combined operation. As noted in our earnings release, both MAA and Colonial portfolios ended the quarter with strong occupancy, and, as a result, we are well positioned for the fall and winter leasing season. I would also like to thank Tom Lowder and the entire Colonial management team for their hard work and enthusiastic support in positioning our now-combined Company for a strong start.

As reported in yesterday's earnings release, MAA's core FFO per share for the third quarter was $1.25, and at the top end of our guidance range. MAA's same-store NOI performance of 4.6% was in line with our expectation, and the outperformance in FFO was due to a combination of better-than-expected lease-up in our development pipeline, and lower-than-expected interest cost. The midpoint of our forecast range for 2013 growth in same-store NOI of 5% has remained consistent all year.

As expected, during the quarter, leasing conditions continued to support more robust performance from our large-market segment of the portfolio. Houston, Dallas, Austin, Atlanta and Nashville all delivered solid revenue results. Sluggish employment conditions in Memphis and Little Rock held back rent growth and impacted our secondary-market segment of the portfolio in the third quarter.

We continue to believe that as we head into next year, as new supply delivers are likely to generate some moderation in pricing power, our secondary-market segment of the portfolio will provide a stabilizing influence on the overall portfolio performance. Next year's outlook for the ratio of new jobs to new unit deliveries is in the 8-to-1 range for our large-market segment of the portfolio, which is consistent with this year, while the secondary-market segment is forecasted to move from jobs-to-new-units ratio of 6-to-1 this year to well over 10-to-1 in 2014.

We were encouraged with the continued low resident turnover in Q3, as we turned only 1% more units in the third quarter this year as compared to Q3 of last year. On a rolling 12-month basis, turnover remains low at 57.6%. Moveouts to buy a house remain right around 20% of our overall moveouts, consistent with what we have seen for the last several quarters. Likewise, moveouts to rent a single-family home continue to hover in the 6% to 7% range of total moveouts. These numbers have been consistent for several quarters now.

While it wasn't officially part of our operation in the third quarter, I wanted to also provide a little color on the Colonial same-store portfolio in Q3. The portfolio captured year-over-year revenue growth of 4.7% in the third quarter, with the best performances coming out of Atlanta, Austin, Dallas, Charlotte, and Charleston, as each of these markets exceeded the average rent growth performance of the portfolio. Same-store occupancy made a strong recovery from the end of Q2, and ended the quarter at 96.4%, a 150-basis-point increase.

As expected, during Q3 there was some cleanup in final accruals and merger-related closing activities in the expense area, as same-store operating expenses came in high at 10.3%. A combination of one-time incentives and leasing commissions put in place shortly after the merger announcement, and real estate taxes, pressured expense performance in the quarter. We expect all expense line items to normalize in Q4, with the only continued pressure coming from real estate taxes.

We remain comfortable with the original assessment surrounding the expense synergies and opportunities to be harvested over the next few quarters from our merger with Colonial. We are well underway towards completing systems integration activities, and reworking a number of contracts and processes, that we expect will benefit both property-level NOI results and overhead costs.

The four development projects acquired through the merger are all on track, with leasing now underway at Colonial Reserve at South End in Charlotte and Colonial Grand at Randal Lakes in Orlando. In addition, we now have the vast majority of the remaining Colonial commercial assets and nonproductive landholdings currently in the market for disposition, and we will be working to recycle this capital into productive multi-family assets over the next year.

As outlined in our supplemental schedules to the earnings release, leasing continues to go very well at our existing MAA development and lease-up properties. In particular, our lease-up in Charleston has performed well ahead of our expectation, with 170 of the 270 units delivered during the quarter, and 231, or 86% of the units already pre-leased or occupied at this time.

Al will provide you with more details on his update of the balance sheet, but we are pleased to complete our inaugural bond offering in October. The transaction was well received, and we believe our now-combined balance sheet is in terrific shape. As we continue to drive higher levels of earnings productivity out of capital on the former Colonial balance sheet, we look to build on this balance sheet strength.

In summary, it was a busy quarter. We are excited to have the merger officially closed, and are optimistic about the opportunities surrounding the combination of MAA and Colonial. As the current real estate market cycle continues to play out, we believe our enhanced portfolio and full-cycle portfolio strategy, supported by a strong operating platform, puts the Company in a terrific position to continue to drive higher margins and more value from our existing asset base.

Additionally, we believe that over the next couple of years, there are going to be some good opportunities to opportunistically deploy capital. Our planned capital recycling activities and solid balance sheet position puts MAA in a terrific position to support this effort.

That is all I have in the way of prepared comments, and now I will turn it over to Al.

Thank you, Eric, and good morning, everyone. I'll provide additional color on the Company's third-quarter earnings performance, balance sheet activity, and on updated guidance for the fourth quarter. As mentioned in the release, given the October 1 close of the Colonial merger, third-quarter results reflect only MAA activity, with combined reporting beginning in the fourth quarter.

There will, of course, be a good bit of noise from the merger in the fourth quarter, but we're going to work very hard to provide as much detail and clarity as we can to help project combined Company performance for the remainder of the year. We will discuss this a bit further in a moment as we address revised guidance.

Core FFO for the quarter was $55.4 million, or $1.25 per share, which represents 9.6% growth over comparable results for the prior year, and was $0.04 per share above the midpoint of previous guidance. The favorable FFO performance for the quarter was primarily produced by leasing activities, running well ahead of plan for the lease-up and development pipeline, adding about $0.02 per share, and from lower interest expense for the quarter due to the timing of the planned bond transaction, adding an additional $0.02 per share. As Eric mentioned, performance from the same-store portfolio was in line with expectations, as same-store NOI grew 4.6% for the quarter, based on 4% growth in revenues and 3.3% growth in operating expenses.

Continued rent growth and strong occupancy levels drove revenue performance, with real estate taxes being the primary area of expense pressure for the quarter, as we continue to see increases in key states, such as Texas and Florida. The real estate tax expense for the third quarter grew 13.5% over the prior year, based on the 7.5% to 8% growth rate projected for the full year this year, combined with the impact of a tough comparison to last year's 2.5% growth in the third quarter. Year-to-date same-store NOI increased 5.9%, based on 4.4% revenue growth and 2.3% growth in operating expenses.

We closed no acquisitions during the third quarter, but following quarter end, we acquired one additional new community located in Fredericksburg, Virginia, the 251-unit Haven at Celebrate, which will be operated as Phase 2 of Seasons at Celebrate, one of our existing communities purchased in 2011. Following this transaction, the gross purchase price of acquisitions year to date is $148.8 million, including the two communities purchased from MAA's joint venture fund.

We also sold four committees during the third quarter for total gross proceeds of $46.9 million, and one additional community following quarter end for $10.4 million in proceeds. These transactions bring year-to-date sales proceeds to just over $131 million, from nine communities averaging 26 years of age and representing a weighted average cap rate of 7.2%, based on in-place NOI after deducting a 4% management fee and $350 per unit in CapEx reserves. With these combined sales for the year, MAA exited five secondary markets, including Melbourne, Florida; and Athens, Thomasville, LaGrange and Valdosta, Georgia.

Progress on the Company's lease-up and development pipeline continued during the third quarter, with one community, Cool Springs in Nashville, fully stabilizing. And with the three remaining completed communities all achieving over 90% occupancy during the quarter, and projected to be fully stabilized in the fourth quarter, which we define as greater than 90% occupancy for 90 days.

We now have two MAA communities remaining under construction, with an expected total cost of $74 million for 564 units. We funded an additional $5.3 million in construction costs for these communities during the third quarter.

With the Colonial merger, we also acquired four additional communities under construction. The total construction pipeline now consists of 1,731 units in six communities, with a total expected development cost of $236.5 million, of which $93 million remains to be funded. We do expect to fund an additional $28 million on multi-family construction during the fourth quarter.

We completed the renewal of the Company's unsecured revolving credit facility during the fourth quarter. We improved the terms and increased the borrowing capacity to $500 million, with the option to expand it to $800 million, and extended the maturity date almost two years to late 2017. This expansion was an integral part of our plans to complete the Colonial merger and to support the larger Company scale in the future.

Also following the end of the quarter and the closing of the Colonial merger, we completed our planned inaugural unsecured bond offering. We were very pleased with the market reception, and we were able to execute a very successful financing, despite a volatile market backdrop. We issued $350 million of public bonds, with a 4.3% coupon price at 99.047% of principal, and we settled $150 million in forward interest rate swaps we entered earlier this year as part of the planned financing. The effective interest cost of the financing is 4.15% over the next 10 years, and the proceeds were used to pay off all of the borrowings under the revolving credit facility.

Our balance sheet ended the quarter in great position; the Company leverage, defined as net debt to gross assets, was 40.8%. Total leverage was 6 times recurring EBITDA, and MAA's fixed-charge coverage ratio, defined as recurring EBITDA to interest expense, was 4.7 times.

With the closing of the merger, and completion of the bond deal in October, MAA's balance sheet further strengthened. Our leverage levels remained essentially the same, but unsecured debt, unencumbered assets, and fixed-rate protection all increased. At the end of October, over 60% of MAA's assets were unencumbered. Secured debt was less than 25% of gross assets, and 98% of outstanding debt was fixed or hedged against rising interest rates, with an average maturity of 4.8 years.

Finally, we are providing updated guidance for the fourth quarter reflecting combined Company results. The full-year performance for the Company will be comprised of nine months of MAA stand-alone activity, and three months of combined activity for the fourth quarter.

There will be a good bit of noise in reported earnings for the fourth quarter. We're giving guidance on a core FFO basis, which excludes merger-related and certain other items, with the goal of providing more clarity and comparability to prior periods. Also, we've added a fair amount of detail in our supplemental data schedules with the press release to help model combined Company performance.

Core FFO for the fourth quarter is projected to be $1.09 to $1.19 per share, which is $1.14 at the midpoint, based on average shares of about 79.3 million following the merger. This is $0.06 per share below previous stand-alone guidance, which is in line with our expectations for the combined Company, given the nonproductive development pipeline and the land bank acquired from Colonial, as well as the remaining synergies to be captured in the next 15 to 18 months. Full-year core FFO is projected to be $4.81 to $4.91 per share, which is $4.86 at the midpoint.

We are maintaining the midpoint of full-year NOI guidance for the legacy MAA same-store portfolio at 5%, based on revenue growth of 4% to 4.5% and expense growth of 3% to 3.5%. We expect the legacy Colonial portfolio to produce revenue growth in the fourth quarter of 3.25% to 3.75%, which would equate to a full-year revenue growth of 4.25% to 4.75%, which is within previous guidance ranges provided. NOI is projected to grow 2.5% to 3% for the fourth quarter, mainly due to operating expense growth of 4.75% to 5.25%, primarily related to pressure from real estate taxes.

We now expect acquisition volume to be $175 million to $225 million for the year, and disposition volume to be $131 million, which is the current year-to-date total, as the remaining disposition plan for the year is now expected to close in early 2014.

We expect G&A and property management expenses combined for the fourth quarter to be $14.5 million to $15.5 million, excluding merger and transition costs, which reflects about half of the expected synergy capture on a run-rate basis for the year. Total combined transaction costs related to the merger are still expected to be about $60 million in total, with around half projected to be incurred during the fourth quarter.

Also, we expect to record a mark-to-market adjustment related to the assumption of the Colonial debt balances of around $90 million, which will be amortized over the remaining life of the Colonial's outstanding debt, or about four years, and will be excluded from the calculation of core FFO. AFFO for the full year, defined as core FFO less recurring capital expenditures, is projected to be $4.20 to $4.30 per share, and our current annual dividend rate is $2.78 per share.

That's all we have in the way of prepared comments so, Stephanie, we will turn it over to you for questions.

( Operator Instructions )

Ryan Bennett, Zelman and Associates.

Thank you for the color in terms of the Colonial portfolio as of the third quarter. I'm just curious if you can provide some more color in terms of your top four pro forma markets and how Colonial's assets performed relative to MAA's legacy assets in the third quarter?

Sure, Ryan, this is Tom Grimes.

There are probably top markets for Austin, Charleston, Atlanta, and Dallas. They did well in those markets. Austin was 7-2, Charleston 7-1, Atlanta 6-8, and Dallas about 6-3.

That was on a revenue or NOI, sorry?

That is on a revenue basis.

Got it.

In terms of the guidance for Colonial going to the fourth quarter, does seem to be a substantial deceleration on the revenue front. Is there any particular markets that might be driving that into the fourth quarter here, given the occupancy is relatively high?

Let me just address the detail ratio, and let Tom give some color on the markets. But if you look at the full year as a whole, I think both Colonial and we had projected continued growing revenues with some slight moderation in the fourth quarter. I think if you look at the guidance, the midpoint of the fourth quarter revenue was 3.5%, which is slight moderation but pretty strong still. And so I will let Tom give color on where that is going to come from.

On an overall basis, the portfolio is 95.5% with just 8% exposure, which is vacancy plus on notice. Traffic is strong. So we sort of feel like the portfolio as a whole, both Colonial and MAA, well positioned for the fourth quarter and pricing for 2014.

Got it.

Just in terms of your asset sales that you have completed since you entered the second quarter, can you give a specific pricing on those assets in particular, instead of just the pool to date, and how that pricing came in relative to your expectations?

This is Al.

We sold the four assets, and I think they came in all pretty close to expectations. We've been working those quite a while. We sold Marsh Oaks in Jacksonville for $7.1 million, Three Oaks in Valdosta for right at $12 million, Wildwood in Thomasville, Georgia, for just short of $13 million, and Shenandoah Ridge in Augusta, Georgia, for $15 million.

I would put the cap rate on those somewhere around 7.5 on a blended basis for all four of those.

That is right. For average 30-year-old assets.

Got it. Thank you.

Thanks, Ryan.

Rob Stevenson, Macquarie.

Al, can you help -- a little greater detail, reconcile the sort of $1.25 core FFO in the third quarter down to the $1.14 midpoint of the fourth quarter? I assume that there is some seasonality, there is probably some dilution from the merger, and then what else feeds into the decline on a sequential basis?

First of all, let me say that the majority of out-performance in the third quarter was sort of one-time items, it was the quickly lease-up on development that got there faster than expected, but the overall run rate is what we expected, so that is a one-time kick.

And then the interest expense was sort of a one-time kick because of the timing of the bond. And we ultimately did it, we just did it a little later than we thought we would, so had some savings in the third quarter.

How much was that? How much was that combined, you think?

About $0.04, those two, $0.02 a piece those divided.

So that was really -- we had -- $1.21 was our guidance, our midpoint for the third quarter, so that really provided that addition. So if you look at what we gave as guidance originally for the fourth quarter, it was $1.20 per share, Rob, but now we are at $1.14. I would tell you virtually all that is the Colonial merger, and really what that is, as expected, you got continued synergies that we are going to capture. We did state $25 million, we feel confident in that. We have captured, I think-- in the fourth quarter, we expect to capture about half of that on a run-rate basis, as we will start to see, you know, work force reductions, system changes, things like that, but we will still have [Cap] to capture over the year annual.

Obviously we acquired the development pipeline, which we paid over $100 million for, and is not yet productive. We expect to make that productive. And as we sell non-core assets or land bank over the next couple years, that will be productive. So the point I'm making is -- $0.06 dilution in the fourth quarter is the widest range that you will see, and we would expect to see that narrow each quarter as we continue to work through those plans.

Okay.

Does the Colonial portfolio go into the same-store immediately?

No. We will probably -- we will obviously be reporting combined results, but it technically it will not be going into the same store because, we defined our same store for our SEC reporting. So what you will see us do is call it consolidated results and have some language to actually work through that, but we will, on a technical basis, have to keep it out of same store, but we will give you the information to help you to see a combined and separate [if possible].

Okay.

See the same store going forward into a what, a year from now, until the fourth quarter?

Yes.

Will it wind up just being the MAA legacy portfolio?

Yes.

(Multiple speakers) But for modeling purposes, we're going to give you plenty, Rob, to help you, you know, [stare at one] if you want to.

Okay.

Can you talk about how the revenue expense and NOI guidance that you guys are giving for the Colonial same-store portfolio differs from the legacy MAA portfolio in the fourth quarter? Are those ranges fairly consistent with the MAA? Are you doing better in the MAA on expenses and revenue? Can you provide color there?

I would say it is pretty close in the two domain stores are one, slight moderation in revenues that we had predicted the same for the full year -- the real story is, though, expenses. It's taxes, where we both had a strong, tough tax number in the back half of the year. As we had growing expenses and continued to grow as we moved through the year and got sort of bad news on taxes and we both had sort of favorable comparisons, favorable situations last year that was created a tough comparison this year. Stories from both are very similar. Revenue is about as expected, slight moderation fourth quarter but very bad tax experience in the fourth quarter.

Are you guys planning on starting in the development spend guidance, is there any new starts there in the near term?

Rob, this is Eric.

Nothing near-term that we are planning to do at this point. We're focused on getting productive the pipeline that we have got right now. There is one the development site that Colonial has down in Orlando that we are taking hard look at and thinking about if we want to do anything on that next year.

Frankly, the other development sites, we're all looking to sell them at this point.

What is on the current pipeline, what is expected stabilized yield on the combined company development pipeline?

It's pretty similar what we have always stated. We have always said it's 7% to 8% range, Rob. We feel comfortable with that on a combined pipeline.

Okay, thanks, guys.

David Toti, Cantor Fitzgerald.

This is [Gaurav] in for David. A couple of questions on your guidance. You talked about seeing real estate expense pressure, but at the same time your interest expense guidance [have been low] a couple of times this year. Can you talk about what is offsetting the real estate taxes?

The other items -- everything but personnel, the big items in our -- obviously they are the strongest contributor, personnel, repair, maintenance, utilities, and all of those. We expect those to be modest growth and not significant pressure. It is all of pressure from taxes.

We have also done some -- moving more and more of our leasing online and doing a lot more sourcing of traffic online, so our marketing costs are coming down, and frankly, as Al said, to really offset some of the pressure on real estate taxes, it has been really across the board from personnel all the way down to landscaping it seems trending up and utilities have been positive as well.

Second question I have is on the synergy. So you talked about $25 million in expected overhead savings, and then also said that you expect additional savings from efficiencies. Are you going to quantify that is all, how much you are expecting?

The second portion, Rob, help me on the second portion of that question? Savings from what, on the second portion?

You also talked about that you expect additional savings in addition to $25 million, are you able to talk about that? Are you able to quantify how much you expecting?

I will tell you we will have a lot more to say about that when we put out our 2014 guidance.

Honestly it is in the NOI area. We are in the process of renegotiating a lot of contracts, from property casualty insurance, to buying paint, to buying appliances. All of that work is underway at the moment, and as we cobble together our 2014 guidance and finalize our budgets, we will have a lot more to say about the opportunities beyond the $25 million that we have talked about.

Great. Thanks for taking the questions.

Tayo Okusanya, Jefferies.

Good morning, just going back to the acquisition, now that the deal is now complete, could you talk a little bit about when you were initially underwrote the deal and when you closed, if there were any material changes in expectations or anything of that sort?

I will tell you, Tayo, not really.

We knew the company pretty well, and probably the only thing that was different than when we started the conversation earlier the year was the fact that they continued to sell off some of their commercial assets, sold One Ravinia, which was roughly a $90 million office project in Atlanta. And we continue to -- they have been very focused on continuing to get focused solely on the multifamily assets. They sold a few more commercial assets than when we started conversations, but as far as the multifamily assets and the balance sheet in general, there was really no surprises in terms of what we found or the underwriting that we assumed and how we ultimately closed the transaction.

I'll just add to that. On the assets they did sell Tannehill in Birmingham, which was addition to what you guys have seen from the second-quarter report, so it just continued that progress that Eric is mentioning. Revenues combined company were well less than 2% from commercial now.

I'll add -- we are continuing that effort. Virtually every commercial asset that they owned is in the market right now for disposition.

That's helpful.

In some of the Southeast markets, we're in a combined basis, you guys really are particularly large. Any thoughts on exposure in those markets, a little bit too heavy and probably rationalizing from a bad exposure?

We are going to be looking at that as part of our 2014 plans. We're pretty big in Dallas at this point, a little over 10% of the portfolio. Charlotte is a big market for us. And my guess is that there will be some recycling going on next year as we continue to move out of lower-margin investments and into higher-margin investments. But yes, we are certainly, sensitive to -- the weightings that we have in various markets now -- we generally like to not be much more than 10% in any given market. If there was a market to be heavy in, Dallas and Austin are not bad ones to be heavy in. But we will look to probably cycle a little bit there.

Okay, great. Thank you.

Rich Anderson, BMO Capital Markets.

Just want to understand what you mean by half of the synergies of the $25 million getting reflected in the fourth quarter, do you mean, you don't mean $12.5 million, you mean the run rate of $25 million?

Exactly.

And half of that, right?

(Multiple speakers.)

$3 million to $3.5 million, Rich, exactly right. That is a run-rate basis. It'll be half.

Figured that, just wanted to make sure.

From the standpoint of other savings, to an earlier question about renegotiating contracts and that type of stuff, are you expecting any of that to hit in the fourth quarter?

There will be a little bit of it as we start -- I will give you one example, is our property and casualty insurance. We expect significant savings next year as we redo the whole portfolio, but in the third quarter, we did bring them onto the same (pat) platform, and we will get somewhere, you know, $0.005 to $0.01 from that. There is beginning to already be some impact from that. I think it will be much larger next year as we --

(Multiple speakers)

Rich, I will tell you there are really two areas that we are working to finalize and monetize or forecast.

One is the NOI area that Al was referring to, which includes property and casualty and all of the other things that I was mentioning earlier.

The second area of opportunity in the area of redevelopment opportunity within the portfolio. As you know, we have had a fairly active interior redevelopment initiative within our operations, and Colonial has not. As we've now visited most every property, we see some meaningful opportunity there. We will be moving that program into the Colonial portfolio, and we think that is going to be some real opportunity over the next several years, frankly. But exactly the impact for next year, we will have as I say a lot more to say about that here, when we release Q4 earnings.

If you were to take a shot at modeling this, let's just say $25 million of overhead synergies, G&A-type number, and then another, I'm just using a number, $25 million of other savings. If you have $50 million of total savings, how much of that $50 million would be a same-store impact, and how much would be outside of that?

Let me say it this way, Rich.

We are certainly not in a position to say we going to have a $25 million additional on top of that, but let's say this, if you take the additional NOI Eric is talking about, the potential redevelopment opportunities, and also the additional income we are going to expect to pick up from leasing up the development pipeline that is not earning right now, and from the recycling assets over the next several years, there is, we think, $0.30 to $0.45 per share opportunity in all of those things combined. We haven't yet -- we're not yet ready to break up components talk specifics. We will give you more color in Q4 as it relates.

$0.35-$0.40 of total savings, including the $25 million?

Yes. But that is leasing up the development pipeline, you know, monetizing the assets, and all and the NOI additions and the [reald up] program, all of that together, but yes.

It's some revenue, some cost savings.

Yes.

In terms of supply, Eric, you mentioned supply potentially being a headwind for you in your primary markets next year. Wouldn't that also be a significant problem for where the CLP portfolio is situated, that supply would be an issue, even maybe more so with them then they would from the legacy MAA portfolio?

Clearly Colonial has the bigger presence in larger markets, but let me give you some perspective on this.

When we talk about supply pressure, of course, it is pressure only to the extent that there is not jobs there to absorb the supply. We've used this jobs-to-supply ratio as a barometer to make an assessment of how weak or how strong the market is going to be, and how much pressure you're going to get from supply. You look at the large-market segment of the portfolio, both on a combined basis, the ratio of job growth to supply trends -- and this is using economy.com and [NAREIT's], and all of the same services that everybody uses, so these are not our numbers.

But the ratio in the large market segment this year is 8 to 1. Next year in the large market segment it is 8.5 to 1. It is hard to get anxious about a real supply problem at this point assuming -- this is an important assumption -- assuming that we continue to get steady job growth. The idea that the large markets are headed for some sort of cliff, I think, is a tremendous overstatement. I think that some moderation is to be expected, and of course it varies a little bit by market, but in aggregate, the ratios are pretty comparable next year to where we are this year. I think what is more important to also recognize is the secondary market component is different. That is why we have this component in our portfolio, because these segments of the portfolio, these markets do not get the supply pressure. These markets, though, are also very dependent upon job growth. They don't get a lot of supply, but they need job growth to absorb what little job growth they do get.

If you look at the secondary markets this year, that ratio in 2013 is about 6 to 1. Next year is going to jump to over 10 to 1. Again, it is hard to -- we think the secondary markets are going to be -- do exactly what they're supposed to do, as we get into 2014 and 2015.

Of those 6 or 10 jobs, how many of them are really career-oriented jobs, and how many are crossing guards?

In places like Charleston, it is Boeing. In places like Chattanooga, it is Volkswagen. In Savannah, it's Gulfstream and General Dynamics. These secondary Sun Belt markets have envious-quality manufacturing jobs coming to them.

I don't think we have any crossing guards. I'm not sure.

Two quick final ones.

Commercial sales, I should know this, but the value of that -- I know it is relatively small? And what you are thinking cap rates might be from out of the commercial, Colonial's commercial portfolio?

I'll tell you first, Rich, as I mentioned they had [progress on] Tannehill for a potential $40 million in the third quarter. The other major project, the Bruntwood in Birmingham, the mall and the office, and the [Norelock], the project in Covington, Louisiana. Those are two major ones. I think cap rates are just over eight, somewhere in that range, is what would expect.

And dollar value?

Dollar value, those three projects together? You are probably talking $120 million range.

I was going to say the total value for the operating commercial assets is $100 million to $120 million excluding Tannehill is where we have it.

Lastly do you still look at $60 million of merger-related costs in the fourth quarter?

We do. We stated that originally. We still feel like that is the right number. It is obviously composed of legal and advisory. It is composed of debt costs, debt assumption costs, and all those things. We still feel good about that number.

Let me follow-up on the synergy question you had earlier, Rich, just to make sure you understood. The $0.30 to $0.45 that I mentioned was above the state between the stated $25 million in synergies that we talked about. That is additional earnings from those areas.

You said $0.30-$0.45 is incremental over and above the $25 million of overhead savings.

Right. Actually over the next years as we work through that plan.

Okay, great. Thank you.

Haendel St. Juste, Morgan Stanley.

I appreciate a lot of color surrounding the merger, I know you can't talk about a lot of the items, are waiting to provide more detail in January. But can you help me understand on the land portion, what you are selling today in the marketplace? Who is the bidder in the Sun Belt, in terms of the land parcel today how the initial conversations are going? And any round numbers you can provide about to what the pricing expectations are.

There is the total bank of -- we have got the value roughly around $90 million. About $30 million of it is multi-family, and about $60 million of it is office retail, various out parcels, some single-family. We have got a vast majority of each of these parcels in the market at the moment. And pricing -- I mean, it's all over the board, but it's -- broadly speaking, it's all coming in line with -- as you can imagine, did a lot of work in valuing the stuff before we did the merger.

We will have again a lot more to say about it, but I think the $90 million roughly of value that we ascribe to this portfolio, this land bank, we feel very confident that we will be able to get that monetized.

There has been no mark against it so far suggesting that there is nothing but upside, right? There's going to be gains to be reported on these parcels, no impairments?

That number I gave you is the marked number.

Understand the process, [of Sun Belt is out], what we will do is go by the process of recording these assets at what we believe is fair market value on October 1, so if everything worked out right, we would sell it exactly for that, hopefully we can have some addition, but that is how we approach it, it should be fair market value on initial recording.

In terms of the [recent] acquisition in Fredericksburg, was it opportunistic, did the development come to you, and are you seeing any more anxious sellers in some of your markets today?

The developer built the adjacent phase that we acquired back in 2011, so we had talked to him about this for some time, starting back in 2011. It wasn't really marketed. We all along had plans to buy this from him. We just wanted to get it to a certain lease status before we took it on.

In answer to your other question, yes, I think that as we began to see some of these projects come online increasingly in 2014 and 2015, I believe there's going to be some great buying opportunities emerge out of this.

We're in conversations currently with several developers on deals that they are either just starting or they are well into construction. With talk now of more supply coming into the marketplace, we are finding developers who are increasingly wanting to talk about going ahead and doing some sort of a prepurchase contract, which more or less allows them to get the risk off the table. And on a non-marketed basis, we're able to come in and offer them an exit, and we feel like bringing brand-new assets of the portfolio at pretty attractive pricing.

Appreciate that. One last one.

Earlier this week, we heard maybe it was last week, one of your peers identified Austin and Raleigh specifically as higher risk markets for next year. I would love to get your assessment on these two markets over the near term, given that they are now top-five markets within the pro forma portfolio.

We like Austin and Raleigh. We certainly wouldn't categorize them as high risk, but I think they are moving from fabulous to pretty darn good. Austin, this year, had three jobs for every one unit, and it will be about the same in 4, in 2014, excuse me, it's got 4% job growth coming on. We feel like we won't be able to do double-digit rent growth there any more, but it will still be stable for us, and then Raleigh is it the same. It was two to one this year, and is going to bump up to six to one, and be a little more stable, but it's held, both of them have held good rent growth so far. I think they will back off from white-hot to just solid, good, high-growth markets.

One last one, if I could. Earlier you, in response to a question, you mentioned rationalizing your portfolio in certain markets. The use of the proceeds -- I presume that they will be to largely fund redevelopment, some of those redevelopment opportunities within the Colonial portfolio that you talked about, or can you give us some thoughts on what the capital would be used for?

Is a combination of wherever the best opportunity is at the time. Certainly the redevelopment opportunity is very accretive and very accretive uses of capital, and we definitely expect that, that will be a big component of it. As I was talking a moment ago, we are also believing and optimistic that we're going to see some great external growth, new acquisition opportunities that will be compelling as well.

We will take a hard look at whatever the best capital deployment decision is at the time. It may very well be just continuing to strengthen the balance sheet in some way, whether that is -- depending on where we are being priced in the public market, and depending on -- would it feel very good about where our leverage level is at this point. We are committed to keeping the balance sheet very strong, so it is hard to -- we will again have a lot more to say about our planned capital deployment for 2014 as we get our forecast together. There will be -- I'm sure we will be able to put the recycled capital to work in an effective manner.

Stock repurchase will be on that menu of consideration as well?

If it makes sense.

Fair enough. Thanks, guys.

Karin Ford, KeyBanc Capital Markets.

Wanted to ask first about the MAA legacy portfolio. You said the performance of the portfolio was generally in line with what your expectations on the third quarter, so can you talk about what you saw coming in the fourth quarter that made you lower your same-store revenue growth midpoint by 25 basis points?

I think we just saw the beginning of the year, we put the guidance out saying that we had seen a modest decline in revenues in the back part of the year. We saw that, but we also saw declined expenses offsetting that, Karin, so I think we would say NOI growth at the midpoint is exactly the same, and we just took the top end of the range down a bit on the revenues and did the same on the expenses.

Can you give us some color on what you saw trend-wise in October from a rent standpoint?

For the consolidated company, the rents -- the asking rents were up about 5%, does that answer your question?

How did they trend from, say, August, September into October?

We don't have combined numbers on that. In terms of both companies together but --

The MAA legacy is fine if you can give us that.

MAA legacy on a trend basis was, bear with me just a second --

I think, broadly speaking, our rent growth has been in that 4% of 5% range, which is in line with the revenue guidance that we gave for the year. This year, for the most part, our revenue was all driven by rent growth. We have been seeing 4% of 5% rent growth throughout the course of the year and as Tom just mentioned, the asking rents in October were up 5% year-over-year. Now that's on a consolidated portfolio. I would expect the MAA component of that to still be right around 5% range as well.

Next question on Colonial. What quarter do you guys think that $0.06 dilution number that you have in 4Q, when do think that will turn positive next year?

I'll tell you, Karen, it is really hard to say, because it is a function of not only getting the NOI opportunity fully captured, but it is recycling capital, so it is selling properties and it is buying properties. Absolutely, timing those transactions and saying when that is going to happen is hard to say. We think the synergy component will be fully realized by the end of next year. We think that the opportunities surrounding the recycling of capital is a function of the transaction markets, and it is really hard to predict that. It could be a 12 to 24 month period of time. It is really hard to say.

I will say this, though, that the $0.06 of dilution goes down from here on a per-quarter basis, because we are realizing opportunity every quarter. This quarter is the biggest gap we have, in terms of dilution, as a result of the nonproductive assets and the development pipeline. As we continue to lease up the pipeline, it all starts to come more productive every day. Exactly when it turns positive, it is hard to say. Again, we will have a lot more clarity on that as we put out our plans for 2014.

Eric, I think you said when you announced the merger that you thought that Colonial would have a better growth in the MAA legacy portfolio next year. Now that you gotten to know the portfolio little bit better from here, do still believe that, that will be the case?

I believe that the markets that Colonial brings to the portfolio tend to be higher job-growth markets on a balance basis. There are little bit more exposed to supply, because they are the large markets, but as we have said all along, our whole approach is built around the idea of trying to establish what we refer to as a full-cycle performance profile. You may call it a balanced profile, but we think it is appropriate to weight capital in large markets where you perhaps have a little bit more exposure to supply, but you also get the benefits of more robust job growth, and allocate a portion of capital to secondary markets, where you're not as exposed to supply, but you are more dependent on job growth. We are trying to weight both sides of the equation a little bit in an effort to create this full-cycle profile.

Having said that, Colonial brings -- our ratio of large to sort of secondary moves up from about 55, 45 large, 45 secondary, that is based on legacy MAA, to now roughly around 60-40 large as a result of the comb -- 60% large, 40% secondary as a result of this combination.

We think that, on balance, we are a little bit more exposed to higher-growth markets as a consequence of the merger, and we are glad of it.

Last question for me, what are you guys thinking in terms of property taxes for next year? Do think you will still be under pressure from a lot of your municipalities, or do think that will start to ease in 2014?

This is Al.

I think you would see a little bit of easing. I think the important thing is to look at taxes over the long term. The last six years [incremental growth], call it 8% percent growth. They have grown six years, 2%.

I think definitely over a long term, a more modest growth pattern, we definitely -- we would expect that we are at the peak of the pressure. So not yet ready to put out guidance for next year, but we believe we will see some moderation next year, and we will put more color on that in the next --

It won't be 8%.

We don't expect it to be 8%. We will put that out next quarter, but you should see some moderation.

Great, thank you.

Paula Poskon, Robert W. Baird.

Eric, what exactly is left to do in terms of integrating either the people, the systems, the reporting structures, et cetera?

The people portion is done. We have completed that, but one of the big steps we have got left to do is integrate the property management systems. They were on Yardi, we are on MRI. Will be converting to Yardi in the first half of next year. We have got some consolidation to do on the AP system -- the accounting and general ledger system. A fair amount of systems work left to be done over the next 6 to 9 months.

Thanks, that's all I have.

Michael Salinsky, RBC capital markets.

Eric, bigger picture question, if you look at 2014, 2015 and 2016, how much of the Colonial portfolio would you say is core versus order assets that don't fit the MAA definition there? Going forward, how should we think about recycling of apartment capital over the next couple of years, given the 133 that you did, the 131 year-to-date?

I would tell you that it's all core in the sense that it is markets that we want to be in. There is really no market exposure that we are being introduced to as a result of this merger that we don't feel good about. Having said that, our recycling plan is really predicated on, as it has been for MAA for a while now, rotating capital out of lower after CapEx margin investments into higher CapEx margin investments. I would tell you that a reasonable run rate for us is going to be around $150 million to $200 million of restocking going on every year just to ensure we are continuing to refresh the portfolio with higher-margin investments.

2014 will be a year that we will be taking a look at things, because, as you know, we also have a fair amount of recycling that we are committed to doing in terms of the commercial assets as well. We're putting a high priority on rotating out of these commercial assets, and there is dilution associated with that.

I would tell you that there is nothing non-core that comes from this, and it really for us is going to be recycling, just as a discipline, lower-margin investments to higher-margin investments, and I would put that number at $150 million to $200 million.

Second question. Within the Colonial portfolio specifically, relative to when the transaction was announced to where you stand today, how much turnover at the property level have you seeing in terms of personnel?

Mike, virtually none. We had really the advantage of being able to work with those property teams and a go-forward, multi-site team. We started talking to them as early as June. We had the multi-site team combined from both companies by mid-July, and we were meeting and visiting properties on a regular basis by August. Frankly, because of the great cooperation we had out of Birmingham, we were able to communicate with folks. We had not had any material turnover that was merger related on either side of the fence. We have got a great team going forward.

Other than what we have planned for. We made some changes at the multi-site level, but that was all done early on.

Given your comments then on supply starting to taper a little bit next year in your small markets, and then being pretty comparable in your larger markets, is there any, how do you think about new development starts, realizing those wouldn't be until 2016 probably at the earliest, [or from]2014?

I would tell you that we continue to believe in our model which is not being a big developer. Having said that, we will do perhaps a little bit, an order magnitude $150 million, maybe $200 million, but again our model is more built around the notion of outsourcing the risk and the operation, where essentially we enter into prepurchase transactions for something that is being built by a developer that we have a lot of confidence in.

I would tell you that what we would probably be targeting mostly would be some of these more high-growth, vibrant secondary markets for that sort of activity. I've often thought about -- the idea of building in Dallas or building in Atlanta, I step back and say, why? Let others do that, because there's plenty of it that happens and I would just rather be an opportunistic buyer in those markets.

But take a market like Charleston, as an example, where we get a prepurchase development deal like I just described here, and we just got most of the units this quarter, and the darn thing is already 86% leased. It is unbelievable in some of these stronger secondary markets what you can do, because of there's just not that much supply. That probably would be where we would target what limited development we did do, is in some of these vibrant secondary markets.

Finally, in terms of the market, your revenue growth, you reduced a little bit. You are seeing pressure in real estate taxes. What are you seeing in terms of asset pricing right now? Have you seen any moderation in cap rates in the last 90 to 120 days or is it still holding pretty firm there?

It's holding firm, Mike.

We saw a little bit of noise back about three months ago, when there was some talk about the Fed was suggesting that they were going to start to pull back a little bit. But the market quickly got past that. And I can tell you, we are still seeing, in our large markets, transactions based on our underwriting trading anywhere from just under 5 to 5.5 all day long. And we are seeing transactions in secondary markets in 5.25 to 5.75 range for high-quality new assets that we are interested in borrowing. We haven't really seen a lot of change.

Appreciate it. Thanks a lot. Thank you, guys.

Carol Kemple, Hilliard Lyons.

Can you share the number of units you actually purchase from Colonial? I know it has the same store count in the supplement, but what is the total number that is not in development?

It is just over 34,000 when you look at the exact number. Stabilized operating units were 34,147, in lease-up, 252, so total operating were 34,399, and there was 1167 in development.

Just want to make I sure understand this right. Your projected amortization of debt, market to market, that will be included in FFO but excluded from core FFO. Is that right?

Yes. It will be excluded from core FFO. We are going to -- we plan to provide guidance on core FFO, Carol, because we think that is a clearer picture, but reported FFO will have it in there, and per the [NAREIT] definition, yes.

Okay, thanks.

David Bragg, Green Street Advisors.

Can you share your observations so far on Colonial's use of LRO, and how it might differ from how you use it, and whether or not there is any revenue growth upside based solely on that transition?

Yes, obviously they use the same system as we do, do it. We operate it differently, Dave, and yes there is, we feel like some upside on it. We tend to set some base parameters out there on what range LRO can operate in and then let it optimise asset by asset and really get it down to working on individual floor plans in individual units. Colonial tended to take a -- make that band a little tighter and would force up at certain times, which tended to dictate prices more centrally than letting the system optimize. They used it well. We just see some opportunity in tweaking that.

Tom, how can we quantify that, do you view as to where their rents are versus where you think they could be?

I think we've got to spend a little more time diving into the system on that before I would be comfortable saying -- it is worth a percentage point of rent growth or something like that.

Dave, I would tell you, if you look at June 30 numbers, average rent and average revenue in our portfolio was a little bit higher than the Colonial portfolio. When you consider the fact that they have got a higher concentration of larger markets, you think it would be the opposite. I would tell you that we think there is definitely some opportunity there, and we are not ready to quantify just yet but it is there.

Next question is -- can you please reconcile the outlook I think that you shared on potential operating expense synergies, outside of course G&A and property management expense, you reconcile that with what I think was 10% expense growth in 3Q and 5% expense growth in 4Q for the Colonial portfolio.

Dave, this is Al. I'm trying to make sure I understand your question. Are you saying you're trying to get a better picture of the fourth quarter and where that change is coming from in terms of run rate? Let me make sure I understand what you're asking.

Earlier in the call, you seem to suggest that there are some other operating expense savings, opportunities beyond the $25 million of G&A and property management expense savings that you expect. Please correct me if I'm wrong on that, but I thought you said that.

But then we see Colonial expense growth up more than 10% in the third quarter and up 5% in the fourth quarter, so maybe it is really a margin question, what are margins in the Colonial portfolio today and where do you think they will come out at?

I think what we were discussing on the first part of that was potential NOI savings above the $25 million overhead savings. I think the difference there, Dave, that will come over a long period of time. That is not really a fourth quarter, that is more next year, even into some of the following year. That is a longer-term picture.

Talking about the fourth quarter, I think what I was trying to communicate, and I probably didn't do a good job of that, was that the main pressure is taxes for both our portfolio and their portfolio in the fourth quarter. We are having about a 10% increase seen in for both. Both because you are seeing a 7% to 8% increase in the current year growth rate and both had sort of a tough comparison last year because we were reducing accruals at the end of last year, because things came in more favorable. A lot of municipalities kicked the can down the road on the growth.

What I was trying to say was the other areas of operating expenses -- personnel, repair and maintenance, utilities, all landscape, all those things, they are more moderate, and so they're not really causing the pressure. 5% in total, taxes is the main point of growth.

Just to ask it a slightly different way, I think you said that COP's expense growth in the second half of the year is roughly 7.5%. I think that, that's above their original plan. Why did that occur, and what portion of these higher expenses are going to continue going forward?

What I would tell you, Dave, what I was commenting on what and what I think I said something about in my prepared comments, some of the pressure in the third quarter, the 10.3% in the Colonial portfolio, was a result of some one-time leasing incentives, and some accrual catch-ups, and some other things that we booked as part of the merger closed, and some things that they put in place just after they announced in early June that this transaction was going to occur.

As you may recall the Colonial occupancy really fell off at the end of the second quarter. We felt it was important to get it back before we got into the winter. So there was some one-time things done in the third quarter in an effort to address those issues and those concerns. On top of that, we had the expense pressure associated with real estate taxes, as Al was mentioning. As we get into the fourth quarter, we see real estate taxes still being a little bit of a pressure point for the reasons that Al mentioned. We are comparing against the prior year number that's very, very difficult. Those one-time it leasing incentives and other things that were done in Q3 will not repeat themselves in Q4, so we will expect to see same-store expense in Q4 on a year-over-year basis moderate back down into that 5% range or so, off of the 10% that we had in Q3.

The other part of your question surrounding expense savings, that comes from renegotiating contracts and all the other things that we're going to be doing that affect NOI. That is all stuff that we will get into next year. That is something totally different. I think -- Colonial's Q3 expense result was unusual, because of the company effectively was merging with us and a lot of things were done one time. I wouldn't read more into it than that.

Last question is, you're pretty sure of the sequential same-store revenue expense and NOI growth figures for the Colonial portfolio in 3Q?

Yes, we have it right here, hold on.

Sequential revenue growth was 2.5% and the sequential expense growth was 12.3% for both just the Colonial portfolio Q2 versus Q3, 2013. 2.5% in revenue, 12.2% in expenses.

I am showing no further questions. I will now turn the call back over to management for any closing comments.

No closing comments. Thanks, everybody, for joining us this morning, and we will see a lot of you next week. Thanks a lot.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.