Mid-America Apartment Communities Inc (MAA) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for participating in the MAA First Quarter 2014 Earnings Conference Call.

At this time, we would like to turn the conference over to Tim Argo, Senior Vice President of Finance. Mr. Argo, you may begin sir.

Thank you, Keith. Good morning. This is Tim Argo, SVP of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

Before we begin with our prepared comments this morning, I want to point out that as part of the discussion, Company management will be making forward-looking statements. Forward-looking statements are based on current expectations, assumptions and beliefs as well as information available to us at this time. 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. We undertake no obligation to update any information discussed on this conference call.

During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP measures can be found in our earnings release and supplemental financial data.

I'll now turn the call over to Eric.

Thanks, Tim and good morning, everyone.

First quarter results were ahead of the midpoint of our guidance as operating performance came in a little better than we expected and G&A costs were lower. As outlined in our earnings release, given the better-than-expected Q1 result, we have increased our forecasts of core FFO and AFFO performance for the year.

During the quarter, we captured steady growth in effective rent per unit, increasing 3.2% across the combined same-store portfolio when compared to the prior year, which is consistent with the preceding fourth quarter's performance. Our large market segment of the portfolio continues to outperform at this point in the cycle, capturing 4% growth in effective rent per unit. Our strongest performances in rent growth came from Houston, Austin and Atlanta. Great growth in Memphis, Little Rock and Huntsville lagged within our secondary markets and weighed on revenue performance for that segment of the portfolio.

Physical occupancy at quarter end was a solid 95.5%, a 50 basis point decrease from the 96% posted at the same time last year. Resident turnover declined 7% during the quarter when compared to last year and remains low at 56.8% on a rolling 12 month basis. During the quarter, move-outs to buy a house declined by a significant 16% from prior year and constituted 18% of our total turnover.

As we head into the spring leasing season, rent growth is increasing and we are encouraged with the trends. During April, rents for new move-in residents increased by an average of 3.1% on a year-over-year basis and lease renewals for renewing residents increased 7.1%. As I will touch on, our largest line item expense pressure in operating expenses was property taxes, up 9.8% in Q1. While still early, we continue to believe that real estate taxes will increase in the range of 6% to 7% for the year.

Based on first quarter trends and our outlook for the rest of the year, we remain comfortable with our earlier guidance, calling for combined same-store NOI growth in the 4% to 5% range for all of 2014. During the quarter, construction wrapped up on our Randal Lakes property in Orlando with pre-leased occupancy currently standing at 55%. We expect to stabilize occupancy here in the first quarter of next year. We expect to wrap up construction on two other projects this quarter; our Lake Mary property expansion in Orlando and the South End property in Charlotte. Leasing continues to go well and in line with our forecasts at both properties. Of the 2,200 units we currently have under development or lease-up, we expect to have 2,000 of these units productive by year-end and fully contributing to core FFO growth in 2015.

On the transaction, market remains very competitive with the only acquisition completed during the quarter associated with our planned buyout of the joint venture we had in place. We have two properties remaining in our JV and we expect to close on the acquisition of one of these properties this second quarter and we're currently under contract to sell the other property. During the quarter, we closed on the disposition of one other apartment property and are currently marketing for sale another eight properties, including the JV asset just mentioned. We're finding a high level of interest and continue to feel good about achieving our planned dispositions in the range of $125 million to $175 million. In addition to these apartment property dispositions as previously outlined, we are proceeding with the disposition of the remaining commercial properties acquired in our merger with Colonial. We made good progress in the first quarter with commercial properties now constituting less than 1% of our total gross assets. We're actively working on several other transactions and expect to be largely complete with this effort by year-end.

Our management team continues to make terrific progress in completing the remaining integration activities surrounding our merger with Colonial. We expect to have the property management software integration complete in the next month. Accounts payable, financial reporting, payroll and all the other key system consolidation activities have been completed. Our teams worked hard to complete these integration efforts before we get to the busy summer leasing season. They've done a terrific job. And I really appreciate all the hard work. I'm confident that we are now well positioned to begin executing on the various opportunities that we've previously identified surrounding our merger and look forward to capturing more efficiency and enhanced margins over the next several quarters.

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

Okay. Thank you, Eric and good morning everyone. I'll provide some additional commentary on the Company's first quarter earnings performance, some balance sheet activity for the quarter and finally on updated earnings guidance for the year.

FFO for the quarter was $97.4 million or $1.23 per share. Core FFO, which excludes non-routine items, primarily merger and integration costs, was $95.6 million or $1.21 per share, which was $0.03 per share above the midpoint of guidance provided. About half of the favorable performance compared to our forecasts came from property operating results as both the same-store and the non-same-store portfolios slightly outperformed. And the remaining favorability came from lower- than-projected G&A costs as bonuses, health insurance and professional fees were all below projections for the quarter. The combined same-store portfolio NOI grew 2.6% for the quarter based on 3.1% growth in revenues, which was produced by the 3.2% growth in effective rents.

Property operating expenses increased 3.9% for the quarter with over two-thirds of this increase coming from real estate taxes, which grew 9.8% over the prior year. In our forecasts, as Eric mentioned, for real estate tax expense growth for the full year remains at 6% to 7% with the first quarter comparison impacted by prior year credits and the timing of accrual adjustments during the prior year.

During the first quarter, we acquired the remaining two-thirds interests in two communities from Mid-America Multifamily Fund II, our legacy MAA joint venture for $38.8 million and we assumed loans totaling $31.7 million. We also closed on the sale of one multifamily community located in Columbus, Georgia for gross proceeds of $10.6 million, which produced a gain of $5.5 million recorded during the first quarter.

As mentioned in the release, during the first quarter, we sold two operating commercial assets acquired with the Colonial merger; Brookwood Village Mall and CC Brookwood Village, an office asset, for a combined $80 million in gross proceeds. And also during the first quarter, we sold five commercial land parcels acquired with the Colonial merger for combined proceeds of about $3.3 million. The Company recorded total gains of $3.1 million during the first quarter related to the sale of these commercial and non-core assets that we acquired from Colonial.

Current construction and lease-up of our development pipeline continued to progress well. We funded an additional $16 million of development costs during the first quarter and fully completed one community, Randal Lakes in Orlando, Florida. We now have four communities totaling 999 units under construction with $47.3 million of projected funding remaining to complete this development. We also had four communities in lease-up at the end of the quarter with an average occupancy of 66%. Three of the remaining lease-up communities and two of the development communities are now expected to stabilize during 2014 with the remaining communities in lease-up and construction expected to stabilize in 2015.

Our balance sheet remains in great position. At the end of the first quarter, Company leverage based on market cap was 39% and based on gross assets was 41.8%, which is 190 basis points below the prior year. And perhaps more important is that at quarter end, total debt was only 6.2 times recurring EBITDA and fixed charge coverage ratio was 3.6 times, both comparing well to the multifamily peer group. At the end of the quarter, 97% of our debt was fixed or hedged against rising interest rates for an average of about four years. And since year-end, we have executed $250 million of interest rate swaps to effectively lock a portion of the interest rate on future financing transactions, which we expect to further increase the duration of our interest rate protection. At quarter end, MAA's unencumbered asset pool was 63.9% of gross assets and we had about $618 million of cash and credit available under our unsecured line of credit.

Finally, based on our first quarter performance, we are increasing our core FFO guidance for the full year by $0.04 per share at the midpoint. We now project core FFO to be between $4.84 and $5.04 for the year. Quarterly core FFO per share is expected to be $1.15 to $1.27 for the second quarter, $1.19 to $1.31 for the third quarter and $1.21 to $1.33 for the fourth quarter. Core FFO for the full year is now expected to be $4.09 to $4.29 per share, which represents about a 70% dividend payout at the midpoint.

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

(Operator Instructions). David Toti, Cantor Fitzgerald.

Just a couple of small questions. First, what's left on the Colonial integration in terms of I guess in two dimensions, one, internal systems and operations and staffing and two, costs?

Hi David. It's Tom. Of the -- really, the large thing on the systems is the conversion of legacy CLP communities over to the Yardi system that is largely done. We have four of our five operating divisions converted and the fifth one tees up for us in May. And so we'll be all on one system starting June 1. And then on the people side of it, we have really overhauled the commission structure, the pay structures and largely where we're in good shape there. No other changes coming.

And I'll just follow on very quickly, David, on the costs. As you saw in the release, we estimate about $9 million to $10 million remaining for the full year. First quarter, we had about $6 million of that and we still feel like that $9 million to $10 million is a good range for the year. We'll probably end up at the top end of that, probably more weighted toward remaining integration costs.

Okay. And then my second question has to do with revenue growth in aggregate in the secondary markets in the quarter at 1.9%. It was probably a little bit more muted than I would have expected at this point in the cycle for those types of markets. What are your thoughts around the dynamics of that growth rate, kind of what you're seeing in the revenue management system relative to occupancy balance? What's really behind that 1.9% number in your mind?

David, I think it is, at this point in the cycle the larger markets tend to be more affected by supply and the secondary markets more by jobs creation, we think 2014 is going to be a much improved year for jobs improvement. However, if you notice the first quarter numbers, I think weather both precipitation here and cool on the northern half of our portfolio slowed job growth a little bit. But I think that's sort of the key thing that we need going forward, we're optimistic we'll see it later on in 2014.

If you look at the ratios sort of the job growth to supply, I mean the numbers are still pretty compelling for the secondary market segment as a whole and, as I mentioned, I mean the segment frankly weighed down a little bit by Memphis' performance. Memphis, the market here -- just the job market here just really hasn't shown much recovery. But I think that we're -- we think as we get into the latter part of the year, we'll see better performance out of Memphis. Columbus, Georgia was another market where we've got a large property of a little over a thousand units there that weighed down performance for that segment. But we think that broadly speaking, we'll see some lift later this year. But we've always -- this is still what I would consider to be a pretty healthy portion of the cycle for apartment fundamentals and the secondary markets relative to our large markets will always continue to struggle to keep up just a little bit, but I think we'll see that gap begin to narrow later this year.

Okay. And then just my final question on that theme Eric is with regard to Atlanta, which is still posting pretty good numbers despite lots of concerns around supply. Would you say that those markets are benefiting from the strong employment growth still or are there other factors there at work?

I mean, I think Atlanta's markets -- Atlanta is pretty good. Just the job growth there is --

(inaudible) on jobs there and renewals there are going out, we're getting healthy rent growth rate with renewals at almost 8% and new leases frankly doing a little bit better than at almost 11%. So Atlanta, we're pretty optimistic on going forward.

Okay, thanks for the detail.

Ryan Bennett, Zelman & Associates.

Just following up on your comments on April's new move-in and renewal trends, I'm just curious what you are seeing or what you are sending out on renewals over the next couple of months now?

Yes, sure. Renewals for the -- are going out at for April, they went out at 7.4%, May 7.9%, June 8% and July 8.2%.

Got it. And then just digging in on the market level and looking at Raleigh in particular here in the quarter kind of what's been the momentum during the first quarter and into April, what do you kind of expect there in the peak leasing season?

Raleigh is one, who had -- you've got to back up to the second half of last year in Raleigh where they had I think jobs to completions in 2013 were roughly 3 to 1 and most of that was back ended. So we're working off a little bit of a supply hangover. It improves in this year to more of a 7 to 1 ratio, which is healthy, but we need to work through those. New lease rates are up about 1.2%. So -- but renewals are hanging there at 6%. So I think Raleigh will be under pressure for a little while and work itself out of it later in the year.

Got it, thanks. And one last question, just on the redevelopment front. Are you guys still on track in terms of the Colonial assets that you had positioned for redevelopment later this year?

Yes, absolutely. We're feeling good about that. We've got all the property scoped, we've got units executed in our markets, we've got an additional -- to what was in the release, an additional 400 units in process. This I would really expect to ramp up as we move into the busier summer season where we have more lease expirations hitting and we're right on target there. Very excited about that.

Okay, great. Thank you, guys.

Thank you, Ryan.

Paula Poskon, Robert W. Baird.

I wanted to ask a question about the expected synergies with the CLP integration. Would you say, Eric, that you are realizing those synergies either faster or more strongly than you had anticipated?

I wouldn't say it's any faster than what we expected. I will say that we think that the opportunity is bigger than what we initially had thought, particularly, as Tom was just alluding to, some of the redevelopment opportunity, but we really believe that on the revenue side, some of the opportunities surrounding management of LRO and how we go about that. I think we really need to get into the busy summer leasing season to really begin to see a lot of that benefit come through and as we get into Q3 and Q4 in particular, that's where we think we'll see some opportunities more reflected in the numbers.

On the expense side, I think that it's trending about like we expected, a lot of the contracts, a lot of the rework of things that we identified early on have been completed. What we really are shooting to do is get this final step completed with the systems integration, which we'll wrap up this month and I think from that point just everything becomes a little bit easier from an executions perspective. So we really think that as we get into the busy summer season and the back half of this year, which is what we've always expected -- we've always expected a bit of a ramp up to take place this year and that certainly continues to be what we're experiencing.

Thanks and any further thoughts about the Vegas portfolio?

No. We need to get it a little fuller, to be honest with you, Paula. I think we've got opportunity there. We've got a good team in place. But we've got one property that's holding us back a little bit that needs to be addressed.

In terms of -- if your question's broader in terms of our continued desire to stay and so forth, I mean frankly, we're going to just continue to monitor that market this year. We are not of any mind to do anything different, not look -- really looking to add there at this moment. But we certainly like the two assets that we've got as Tom mentioned. We think that there're some opportunity from an operating perspective that we're going to sort of address over the course of this year and we'll probably take -- make a decision later this year as to what we want to do there going forward.

Great, thanks. And then just finally, I wanted to dig in a little bit to your comment, Eric, that the move-outs to home ownership had dropped significantly. Was that -- were the trends there pretty even across your markets or were there some markets that really jumped out at you?

No, Paula. It was surprisingly even. I mean, frankly I was spending some time just reviewing that and it's the same in primary as it is in second -- or as large as it is in secondary. There is no one market driving it, it's really across the board in the quarter.

Okay, thanks. That's all I have.

Haendel St. Juste, Morgan Stanley.

Would you guys talk a bit about your development lease-ups, the projects appear to be leasing up a bit ahead of expectations, which looks like some of the reasons for the upside this quarter? Can you talk a bit about the market demand and also if any concessions are involved?

Yes, Haendel, I would say we're on track in aggregate, and really right where we want to be as far as pricing goes. I mean, there is -- we planned for concessions in the markets and we're on target for those pricing goals, just to get us leased up. You may have noticed the Northern Virginia properties, we just pushed back a little bit on a quarter of stabilization by a quarter, and the way we look at that is we expect three months over 90 days occupancy to consider it exposed. So, honestly if you miss by one day by one unit, you push back. I don't think there's anything to worry about in that area We're right on track on this.

I would say in recap, I mean, Fredericksburg is a little sluggish, Charlotte is doing better than we expected, the Orlando properties are right on target. So on balance here, it's kind of reconciling to pretty much what we had expected.

Okay, thank you for that. And could you also talk a bit more about the eight properties, Eric, you mentioned that you're marketing for sale? Are you marketing them individually, as a group, are there any portfolio buyers out there and would you consider perhaps selling them sooner for maybe a little less to get -- to move back, getting them done quicker?

Well, I mean -- I'll certainly say we've seen a ton of interest. We've got one group that we've been talking with, that was interested in several of them. But by and large, we have found the best execution to occur sort of selling retail as opposed to looking for a wholesale buyer, and we ultimately believe we harvest the best value that way. But high level of interest I mean, I can -- in our situation and we're selling one in Macon, Georgia. We had a huge level of interest, 20 some-odd bids came in with a number of them -- nine to ten of them at or better than what we were expecting. So, it's a pretty frothy market out there. And we feel comfortable with the volume that we've got, I mean, obviously we are trying to remain sensitive to thinking about the balance sheet and coverage ratios, and of course, we're cycling out of a lot of commercial properties this year as well, which has a fairly dilutive impact.

And so, I think we feel pretty good about the volume that we've gotten teed up this year, we probably will see them sell a little faster than we expected over the course of this year. But we're pretty optimistic with what we've been seeing in the way of interest.

And following up on that, I don't know if you've disclosed or if you are willing to, but can you discuss perhaps some of the markets, some of the nature of the assets? Are they more legacy Mid-America, Colonial, the older assets, can you talk a bit more about any general commentary on the state of the eight assets?

They are a mix of both large and secondary markets, and they are a mix of both legacy MAA and legacy CLP. Frankly, our approach is simply to take those assets that we believe or that we are seeing generating the sort of the lowest AFFO operating margin that we have in the portfolio and looking to recycle that capital into more productive investments. And it's the same approach we've been taking for the last couple of years, and so when we completed our merger with Colonial, we put the entire portfolio together and sort of peeled off the bottom ten or so that we felt like had the lowest margin growth prospects associated with it. That again, that's AFFO after CapEx, and typically what that translates into are obviously older assets. So average age is going to be 20, 25 years old, in some cases even older.

As it so happens, a lot of the history, particularly on the legacy MAA side, the way this Company was sort of formed and grew, a lot of the older assets tend to be in some of the more tertiary markets within the secondary market component of the portfolio. So, that just happens to be where we're seeing more disposition activity occur. But on balance, we are -- I would say probably at this point, what we're selling, 60% or so of it, is coming out of the secondary markets and the balance out of the larger markets. It's all older, and that's kind of a profile.

Okay, and one more if I may. Can you talk a bit about the multifamily financing environment from the agencies and banks perspective? There'd been some talk of fears that Fannie and Freddie were potentially going to cut -- curtail here a bit, but they've recently conveyed their desire to be leaders in financing here, in light of the heightened competition from banks, life cos., et cetera. Can you talk a bit about that?

I will tell you that with what we're selling and talking to the buyers, both agencies are pretty active and we're seeing particularly Freddie being pretty active and they are -- I know a lot of the buyers again that we're talking with are talking to both agencies and finding a lot of receptivity to their financing needs.

Appreciate it. Thank you.

Jeff Gaston, KeyBanc Capital.

I was wondering if you could provide a little detail about the split between the legacy Mid-America portfolio performance versus the Colonial Properties? And also, do you still expect a lift from the Colonial Properties in the second half?

Yes. The short answer is yes to both. We did see a little stronger revenue performance on the legacy CLP side, primarily driven by improvements in fees and delinquency and reimbursements. So that was relatively quick, and we do feel like as Eric mentioned earlier, there's an opportunity for us as we move into the year to smooth out some of the volatility and -- that occurred around the merger in terms of occupancy, and we feel like there is a repricing opportunity going forward.

Great. And then you saw it's pretty significant outperformance as far as the G&A and the property management expenses in 1Q. Could you give us a sense of what the proper run rate for the year would be?

Yes, this is Al. Jeff, that was -- I would say we had a little favorability in the first quarter, about $0.01 per share that we talked about, and -- but that was a few items that was bonuses, we talked about, health insurance and professional fees were a little lower in the first quarter than we thought. I think the run rate -- with the projections for the full year, we took it down about $1 million dollars, if you saw it in our guidance and that's about right for full year. So, I think the run rate was pretty close, a little lower than we had started with in our guidance last quarter.

Could you give us a sense as far as what it might be for G&A versus the property management?

Really, I don't have that. We typically project that in total in the portfolio. Let me see if I can pull that detail for you. It's going to be pretty close to the run rate we had in the first quarter in terms of the split. It's a pretty representative split is what I am saying.

okay, all right. That's helpful. There's room I questions, thanks a lot, guys.

Michael Salinsky, RBC Capital Markets.

First question, just the, Eric, the lease numbers, the renewal and new lease numbers you gave, were those lease-over-lease or those year-to-date, I mean, year-over-year?

Well, when we give our numbers, when we talk about new lease rates, that's year-over-year. And so we -- because it really sort of supports and drives the overall revenue performance. So, new lease rates being up in April, 3.1% that's year-over-year. And when we talk about renewals, we're talking about what's the rent increase we gave our existing customer. And so, it's really more of a lease over lease, if you will. So the 7.1% that I quoted for April was, the existing customers who stayed with us are paying 7.1% more.

Okay. Anything on the other income side, pushing through this year that we should expect above trend growth?

No, not really, not that I can point to right now. All the other associated fees and so forth are performing pretty much in line with what we expected.

There are some, obviously, in fees and other things related to the synergies and opportunities we expect from the Colonial portfolio. That's a part of that.

We've got that all built into our forecast.

That's all built into our forecast.

That's helpful. Second question, Al, you look like you had some good success on the land sale front there. Obviously, one of the components of driving that accretion you guys have talked about is eliminating the non-income producing assets. Of the land that sits there today, how much do you expect you can move in 2013 at this point versus how much is going to take a little bit more blocking and tackling in 2015 and 2016?

The majority of the dispositions this year were for operating commercial, Mike, we're focused on that first as we talked about and we had about $150 million in dispositions in total, about $130 million or so of that is expected to be in the commercial, which we did $80 million in the first quarter as we saw and so we expect a little bit more over the remaining of the year. So I think what you'll see us is have a lot more focus on those land parcels in 2015 and 2016 as we move forward.

And I would tell you, Mike, that that roughly, call it 40% -- 35% to 40% of it is multifamily related sites and where we think that that will get pushed through reasonably quickly, I would say likely before the end of the year. Some of the other is a little bit more difficult. It's remaining retail outparcels. There's a single-family component -- parcel down in Gulf Shores that's fairly sizable that will probably take a little more time and I think that -- the lion's share will be gone by the end of this year I'd expect. But what's left will probably take a couple of years.

Al, still expecting the bond offering kind of mid-year?

That's our plan and we've been preparing the balance sheet for that obviously. And as you can see we have about $450 million in debt maturities about mid-year. And so our plan now is to, if things go well, access the public markets and take care of that. And good news is, we've seen very good market activity over last few months. And so, our expectations for rate have actually improved a little bit since the fourth quarter. So we look forward to that.

Okay. And finally Eric, you touched upon the acquisition market being a bit more challenging, a lot of competition. Can you just talk about pricing in the primary versus secondary market and any s you've seen in the last, call it 90 days?

There hasn't really been a lot of change in the last 90 days, it's still very intense. I mean, we're seeing assets, the kind of quality that we're looking to buy trading [4.5% to 5%] in some of the larger markets and frankly not much higher than that in some of the secondary markets we are interested in buying in, Charleston and San Antonio and Jacksonville and some of these other markets. I mean, we're still seeing newer assets very much in the [5% to maybe 5.25%] range. So I put the spread at maybe 25 basis points, perhaps as much as 50 basis points. But broadly, it's been that way for about the last year or so and I think that with the fundamentals continuing to remain fairly strong and of course rates being where they are, I think it's going to take a more significant rise in interest rates before you'll see any really cap rate movement, the interest is pretty darn high right now.

That's all from me, guys. Thank you.

Buck Horne, Raymond James & Associates.

I know this has been asked a little bit, and you kind of danced around it. But I just want to understand the renewal numbers a little bit more clearly because it seems like those are really strong renewal growth targets that you guys are getting. Are you getting more aggressive with the price increases this spring? And how much is this change in the move-outs to buy a home affecting your desire to push pricing this spring?

Really, the pricing decision of how aggressive we push has less to do about what we think is happening in the home buying market and just sort of what our exposure and what our fundamentals are and right now there are good and we are, with our yield management practices jumping all over that. And that's kind of the push point and I -- but repeat your question a little bit. I want to make sure I'm staying on point, I got distracted by the home buying point. That's --

I'm just want to kind of -- I think you just -- combining the two data points to me is really striking that you saw such a sharp decline year over year in the move-outs, and you've got such strong and accelerating renewal notices going out. I am kind of wondering if the two are playing together or is there something just more structural about the Colonial portfolio that's allowing you to push pricing a little bit more aggressively, just understanding how much --.

Sure. I think it's a combination of both. I mean frankly, we feel pretty good about where the markets are going just in terms of overall supply and demand, and where our exposure is at this point, and really it's more of a forward look that we're making on those pricings that we've quoted. And then I think they had a similar system but with a different approach. And in that, we see the opportunity to do some repricing, and are taking advantage of that opportunity.

And I think, Buck, this is Eric, just following on what Tom was saying. I mean, the performance is not really related in our way of looking at it and thinking about it to the reasons for move-out. I mean, as Tom mentioned, really our approach to managing renewals was a function of, obviously looking what the market is doing, looking at what our exposure is, and that gets back to sort of how you define your tolerance levels and how you operate LRO. And we've always taken an approach to try to keep a lower level of volatility in terms of our exposure settings and a lower level of volatility as we get in from a lease expiration management perspective. And what we think that that enables one to do is ultimately be a little bit more aggressive on pricing. And so, by taking some of the volatility that we felt like was existing within the former legacy CLP portfolio, we think that that's going to manifest itself in much more stronger pricing performance, particularly as we get into latter part of this year. And that's where a lot of lift comes from and it really has nothing to do with move out recently.

Understood, thank you. Secondly, I was wondering if you could drill down a little bit more on the Texas markets, and noting that there has just been such tremendous job growth and demand in Texas, but there is also quite a bit of new supply that is getting underway in most of the major markets. But it seems like some of that supply may be more concentrated in certain submarkets and I want to understand how you view the supply pressure in the Texas areas relative to your portfolio? Are you seeing any signs that supply is going to be more of an impact or is it less of an impact in the Texas markets? Where you guys are positioned?

Sure, Buck. In Dallas and Houston, I think we feel very good about where those markets are and a ton of that construction coming on in Dallas in the uptown market, which we have limited exposure to. On the Austin front, we are really monitoring supply. But the jobs engine has been able to absorb it pretty well in Austin, and we're optimistic about how it's doing and it's 6% new lease growth, and 8.6% on the renewals. So we're watching Austin and feel pretty good about Dallas and Houston.

Thank you, guys.

Tayo Okusanya, Jefferies.

First question, just around Colonial and some of the questions that were asked earlier. In regards to the synergies, it does sound like things are moving along pretty well just from the cost perspective. Trying to understand the other pieces in regards to again, not purchases in bulk, the ability to kind of push Colonial rents a little bit more aggressively versus what Colonial was doing before. How those parts are kind of coming together, and when would kind of expect to start to see the benefits of that showing up in the numbers?

I'll just start with the guidance portion of it. I think what you see is the majority of that's built in the second and third quarter, and the fourth quarter, Tayo, because, in terms of the -- a lot on the revenue side you need to see the leases come due and have the opportunity there and have time to work through all the contracts. So, if you look at the guidance, I think what you'll see is, we had anticipated all along accelerated growth in both revenues and NOI in the second, third and then for the fourth quarter.

And then those -- almost the same thing on the expense side, Tayo. We are a business that does most of its volume over the next four months or so and the benefits of the way we've structured the Company and the pricing opportunities that we go in and then just sort of the efficiencies that we're driving in terms of how we turn units, those will begin to sort of manifest themselves in sort of mid second and early third quarter.

Okay, that's helpful. And then just on the transactions that were done during the quarter, I may have missed it, but did you give any cap rate information on the commercial asset sales?

We did. We can give it on -- on we had -- it's about 8.25% to 8.5% cap rate range on the $80 million that we sold. You've got to understand there was a -- it was a mall asset and office asset there combined and that's the combined cap rate. I think you'd say that the mall is older asset, it was probably a higher cap rate, but that was the average.

Okay, that's helpful. And then the third question I guess, some of the smaller markets you're in where you only have one or two assets, I know there had been some conversation earlier on about potentially exiting those markets because of lack of synergies. Just kind of curious where that stands and if' we should be kind of expecting some of that going forward.

Tayo, this is Eric. Absolutely. I think as I alluded to earlier, we're primarily driven by a desire to cycle capital where we believe the after CapEx AFFO margin is likely to -- is lower and likely to not be as strong going forward and just so happens again that happens to be in some of our more tertiary markets where we also happen to have some inefficiencies. So we will be exiting some more of those markets this year. We exited a number of them last year and we think over the course -- in due course over the next couple of years, as we continue this recycling effort targeting on the parameters that I described, a consequence of that will be fewer and fewer of these tertiary markets within the portfolio.

Have you specifically identified which markets you are going to get out of yet or you are still in the process of evaluating that?

We've identified what we're planning to sell this year, but beyond that I mean, we've got it, but we're not going to -- we're not prepared to disclose that now. But we've got -- you'll see more of that over the next couple of years.

Thank you. Good quarter.

Thanks, Tayo.

(Operator Instructions). Dave Bragg, Green Street.

Eric, I wanted to follow up on the comments that you made regarding the transaction market and ask for your observations of private market buyer underwriting, are they accepting or underwriting to lower IRRs than they were a couple of years ago or generally speaking, are they looking for the recent period of above average NOI growth to continue for the next few years?

Dave, it's hard to know for sure. My guess is that the IRR requirements, IRR expectations have moderated a little bit from where they were a couple years ago. I expect that's probably part of it, but where we find just huge levels of interest are some of the older assets where there is presumably an opportunity for some sort of value add or some sort of redevelopment play that they can sort of dial into their modeling and ultimately cobble together a higher forward-looking NOI performance out and ultimately, cobble together an IRR to be, frankly, wherever it needs to be. So I think that these value-add opportunities, these 10, 12 or even older, 15, 20-year old assets offer just a lot of opportunity to get pretty creative in terms of how you think about creating value. And so I think there's some of that going on. But I do believe that probably IRRs have moderated, just a little bit. But as I alluded to, I mean we're seeing a huge level of interest, and these are all very sophisticated buyers, a lot of institutional capital behind them and a great track records of having closed a lot of transactions over the last couple of years.

Thank you for that. And regarding your revenue growth guidance and perhaps you discussed this last quarter and we missed it. But when we look at the revenue growth guidance range of 3.5% to 4.5%, do you have the same expectations for the MAA and Colonial Portfolios or do you have higher expectations for one of the two?

I'll give you the summary and Tom can give you some details on how, Dave, but I think obviously we have a little higher expectations for Colonial because we need to capture those synergies, both in terms of pricing and some of the -- capture stronger property performance not to repeat the volatility of last year. Some of the things we talked about in occupancy and pricing they had in the second and third quarter. So we clearly have a stronger expectation for Colonial portfolio.

Yes, I'm going to echo that. But it's a opportunity in price and occupancy in the third quarter -- second and third quarter and then we've got further opportunities on both portfolios with sort of fees and new opportunities or ideas that we've either added to the Colonial platform or brought from the Colonial platform to ours.

Okay. So just roughly speaking at the midpoint, would it be somewhere around 4.5% for Colonial and 3.5% for MAA or is it not that wide?

Probably not quite that wide. But that's pretty -- you're getting close to the range it would take. You can look at the overall guidance for the year, we're going to -- if we put out 3.1% in the first quarter and the midpoint is 4%, it's going to take something close to that to get to that. So that's pretty close.

But the gap -- the performance differential between the two is not quite --

Not quite as high.

-- 100 basis points. But it's —

I'd call it more like 50 basis points to 60 basis points.

Understood, that's helpful. My last question is just very specific to the new move-in gains. We think about it slightly differently. What was the increase on new move-ins as compared to the tenant that departed?

Using Eric's numbers, it was 2.2%, Dave. So 3.1% on a year-over-year basis, 2.2% on a lease-over-lease basis for April new lease rates.

Sorry Tom, I was really looking for the first quarter.

Okay. In the first quarter, it was 3% on a year-over-year basis and negative 1.1% on a quarter basis being weaker in January and strengthening through March.

Okay, thank you.

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

No further comments from us. We'll see everyone at (NAREIT in a few weeks. Thanks for joining.

Thank you, ladies and gentlemen. This concludes today's conference, you may disconnect at this time.