Mid-America Apartment Communities Inc (MAA) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, thank you for participating in the MAA First Quarter 2015 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.

Thank you, Leo. 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. 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 SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website.

During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP measures can be found in our earnings release and supplemental financial data. When we reach the question and answer portion of the call, I would ask for everyone to please limit their questions to no more than two, in order to give everyone ample opportunity to participate. Should you have additional questions, please re-enter the queue or you're certainly welcome to follow up with us after we conclude the call. Thank you. I'll now turn the call over to Eric.

Thanks, Tim, and appreciate everyone joining us this morning. We had a strong start to the year with first quarter results ahead of our expectations. The outperformance was driven by solid operating results with same-store NOI growing 5.8% as compared to prior year. Tom will walk you through more specifics surrounding pricing and the factors driving revenue performance, but overall, we continue to enjoy a favorable leasing environment as job growth and strong demand across our markets are more than offsetting new supply deliveries.

Continued progress in harvesting the opportunities coming out of our merger with Colonial is also contributing to operating momentum. The lift in performance we captured in the back half of last year from a number of operating improvements and scale benefits are continuing to generate solid year-over-year results. All aspects of our operations are now fully consolidated onto one platform and we're looking forward to continuing to improve and fine-tune several processes that we believe will generate further lift in operating margin.

The balance sheet remains in a strong position and we expect to see coverage metrics continue to improve over the course of the year. In his comments, Al will recap more details, but we are particularly pleased with the progress in growing the unencumbered asset base. With a higher level of asset sales and growing free cash flow, our overall debt level as a percentage of gross assets is declining and it's also further strengthening the balance sheet.

As recapped in yesterday's earnings release, we had a very busy quarter with transactions. Including a group of properties that were sold earlier this week, we've completed the sale of 18 properties since the first of the year. We have an additional three properties under contract and are expecting to close on those sales later in this summer.

As we've outlined in last quarter's earnings release, we believe that market conditions and the transaction market supported an expedited execution of our plans to exit these 21 properties in smaller secondary markets. We're very pleased with the execution.

At an average age of 25 years and located exclusively in smaller markets, this group of 18 properties that has been sold has an average rent that is 21% below our same-store portfolio average. Based on trailing 12-month NOI, total capital spending averaging approximately $1,200 per unit and a 4% management fee, we captured a 5.6% cap rate on the sale of these properties.

Going forward, as we've been doing for the past few years, we will continue to consider opportunities to recycle capital from properties in markets where we believe we can reinvest to capture more attractive long-term value, but it's worth noting that with the dispositions being completed this year, in addition to the significant volume of dispositions and capital recycling completed over the past few years, we've now sold over 11,000 units since 2010.

As a result, you can expect us to execute our capital recycling on more of a match-funding basis going forward. In exiting an additional 11 markets this year, we have now repositioned the portfolio for stronger and more efficient execution.

I'd like to point out that as a result of this capital recycling, along with a number of other improvements we've made to both the operating and financial platforms for both the Legacy MAA and CLP portfolios, we've seen MAA's same-store NOI margin over the last five years improve 430 basis points. When considering capital spending on both recurring and revenue-enhancing items, the same-store NOI margin has improved 550 basis points since calendar year 2010.

On the acquisitions front, we continue to underwrite a number of new opportunities and deal flow remains high, but extremely competitive. As we move further into the new supply delivery cycle, I continue to believe that we'll see more investment opportunities that meet our long-established investment hurdles.

As noted in yesterday's earnings release, during the quarter, we started a Phase II expansion of our property in Fredericksburg, Virginia, and are currently planning to also start additional expansions at properties we own in Orlando and in Charleston. We also remain active with discussions with developers on several opportunities to acquire properties on a pre-developed or lease-up status.

In summary, we like the momentum we're seeing and believe that the benefits being harvested from our merger, coupled with the capital recycling we've completed, further supports a more efficient operation and higher internal growth profile. The balance sheet is well positioned and we remain poised but disciplined to continue to capture growth opportunities that we feel are likely to increase as we move further into the cycle. That's all I have in prepared comments, I?ll now, I'll turn the call over to Tom.

Thank you, Eric; and good morning, everyone. Our 5% revenue growth was driven by strong average fiscal occupancy of 95.6, up 60 basis points from the prior year, coupled with average rent per unit growth of 3.9% and good fee performance. April trends continue to be encouraging. Our 60-day exposure, which is current vacant plus all notices for a 60-day period, is just 8.3%; this is down 130 basis points from the same time last year. Our blended year-over-year pricing for April is up 6% which is 200 basis points higher than this time last year.

While expenses were better than we expected, there are few timing notes on the expense lines. Our personnel and marketing expenses reflect timing incongruities related to the discontinuation of legacy CLP programs last year. This affects first quarter comparisons only. We expect both lines to be below 3% for the full year.

The benefits of our strong operating platform on the legacy CLP communities continues to pay dividends. The more robust approach of our revenue management team has grown rents at CLP communities more than 150 basis points higher than their market peers. Our system customizations that allow for fees and collections to be automatically billed on the CLP platform has improved delinquency and fee collections for the quarter.

We're excited about our new repair and maintenance inventory process. With this new initiative, our vendor stocks and replenishes our on-site shops with their owned inventory. We then purchase the inventory when it's used by our teams. This maximizes our scale discounts and the speed of service to the resident. It minimizes the amount of time our teams spend on procurement and increases efficiency on site. This process gives us the right part at the right cost at the right time. This is another example of how our scale and operating sophistication creates value for our residents and our shareholders.

On the market front, vibrant job growth for the large markets is driving strong revenue results in places like Atlanta, Austin, Charlotte and Tampa. In the secondary markets, which have lower supply pressure, we're benefiting from accelerating job growth. In this group, Charleston, Greenville and Savannah stand out. Jacksonville's 4% revenue growth is also notable.

Further illustrating the demand of that market is our newly developed 220 Riverside project. We delivered our first units last week and that 294-unit community is already 58% pre-leased with rents above pro forma. We expect our four communities in Memphis to show year-over-year improvement, as the year plays out and job growth builds. We're in very good shape in Houston, but continue monitoring our portfolio closely and we will remain sensitive to any changes in demand.

During the quarter, Houston generated 6.6% revenue and rent growth. Turnover for the quarter was down 8%. For the month of April, Houston's average physical occupancy was 96.1% and year-over-year blended rents for April were up 7.7%.

It was at this time last year that the heavy lifting of our system integration improvements began. A year later, we are in a different place. Our platform is fully integrated, our people are having fun with the new systems and the benefits of the merger are being harvested. I'm excited about what our teams have accomplished thus far and looking forward to what's to come. Now, I'll now turn the call over to Al.

Okay. Thank you, Tom; and good morning, everyone. I'll provide some additional commentary on the Company's first quarter earnings performance, balance sheet activity and then the expectations for the remainder of the year.

FFO for the first quarter was $105.2 million or $1.34 per share. Core FFO, which excludes certain non-cash and non-routine items, was $95.6 million or $1.32 per share, as compared to $89.5 million or $1.21 per share for the prior year. This core FFO per share performance was $0.03 above the midpoint of our previous guidance and represents a 9.1% growth over the prior year.

Core AFFO for the first quarter was $94.6 million or $1.19 per share, producing a solid coverage over our $0.77 per share quarterly dividend. Strong results from our same-store portfolio, as discussed by Tom, produced the majority of the favorability to our forecast, as both our revenues and expenses were slightly favorable to projections. Performance from our lease-up properties also progressed as planned and our overhead and interest expenses were essentially in line with expectations for the quarter.

Our G&A expenses are a little front loaded this year, reflecting the timing of certain items, but we expect this to normalize over the course of the year and we remain very confident on our projection for combined G&A and property management expenses of $56.5 million to $58.5 million for the full year, fully reflective of the synergies captured from the Colonial merger. During the first quarter, we acquired one 298-unit luxury property for $46.5 million and we sold four older properties for combined proceeds of $53.3 million.

The vast majority of our recent disposition activity occurred during April, as we sold an additional 14 communities for combined gross proceeds of $180 million, which we'll use to pay down our line of credit during the second quarter. We also continue construction on the two properties under development at year-end and we began construction on a Phase II expansion at an existing community located in Fredericksburg, Virginia.

We funded $5 million of construction cost during the first quarter and we expect to fund an additional $25.5 million to complete these three projects. Our current plans anticipate $50 million to $60 million of total construction spending for 2015 just based on additional expansion opportunities as well.

To prepare for the planned asset sales, as well as to continue improving our balance sheet, during the first quarter we paid off $116 million of secured Fannie Mae debt as well as an additional $15.2 million single mortgage. We incurred $3.4 million of debt extinguishment charges related to these payoffs, but the vast majority of this expense was non-cash write-offs of deferred financing costs.

We also have about $315 million of debt maturities remaining for the year, primarily occurring in the fourth quarter. And as mentioned before, we currently plan to utilize the public bond markets to refinance this later this year. The average interest rate for the majority of these maturities is well above 5% which is projected to produce some fairly significant interest rate savings given current markets.

At the end of the first quarter, our balance sheet remains in great shape. Our total debt-to-market cap was 36.1%. Our fixed charge coverage ratio was over four times. Our net debt to recurring EBITDA was 6.2 times. Over 70% of our assets are now unencumbered, which is a record for the Company, and over 92% of our debt is fixed or hedged against rising interest rates. And given the level of asset sales and projected internal cash flow, our current plans for the year do not include a need for new equity.

At quarter end, we had over $335 million of total cash and credit available under our line of credit, supporting our liquidity; and we expect to end the year with our leverage on a debt to net gross asset basis to be about 41%, down from the 42.6% at the end of 2014.

Finally, we are maintaining our current guidance for core FFO and AFFO for the full year. We were encouraged by the first quarter performance from our same-store portfolio, as we continue to capture benefits from the Colonial merger. But as mentioned in our last call, we do expect tougher comparisons in the back half of this year, as post-merger, more-normalized quarters began to compare to periods of synergy capture last year.

We feel good about our current operating momentum, but given that the bulk of our leasing activity and significant transaction activity are ahead of us for this year, we'll wait to revisit guidance with our second quarter earnings report.

As a reminder, our Core FFO is projected to be $5.09 to $5.33 per share or $5.21 at the midpoint based on average shares and units outstanding of about 79.5 million. Core AFFO is projected to be $4.43 to $4.67 per share or $4.55 at the midpoint, which is a 6.3% increase over 2014. The major components of this guidance are outlined in our supplemental data package that accompanied our press release. And also I will point out that we added some additional detail regarding our operating expenses to our supplemental disclosures this quarter, which is on page S3. And so we hope you find this helpful.

That's all I have and I'll now turn the call back over to Eric.

Thanks, Al. Before opening the line for questions, I want to extend my thanks and appreciation for the hard work and excellent service our associates working on site at our properties provide for our residents.

Our company culture is based on a strong service-oriented mindset for both those who directly serve our residents and those of us who support them in our corporate and regional positions. As a result of this focus, MAA will be recognized later today as first among apartment management companies across the country as having the best online reputation based on an independent online power ranking survey conducted by J. Turner Research.

This recognition follows our designation earlier this year as having the best online reputation among the publicly traded apartment REITs. This recognition speaks to both our team's dedication to serving our residents as well as to the strength and sophistication of our operating platform. That's all we have in the way of prepared comments. So Leo, I'm going to turn it back to you for Q&A.

(Operator Instructions) Rob Stevenson, Janney.

Good morning, guys. Al, what drove the tweaks in the third and fourth quarter guidance today versus what you knew first week of February or so?

Hi, Rob. It's really timing of items. As we mentioned in the comments, we feel good about our full-year guidance, we've re-affirmed that, we'll re-address that in the second quarter call. It?s really timing of items and I would say primarily transaction activity.

The biggest unknown at this point really is more the transaction activity. We've sold a lot of assets. Obviously, we have planned in our forecast to put that capital back to work throughout the year and so that timing of that changed a little bit causing most of that.

Okay. And then, Tom, can you talk about where new and renewals were sort of month by month on the trend there? And then, sort of, are there any markets where you're seeing very big gaps between those or where you're seeing the biggest gaps?

Rob, it was pretty consistent across the board and so on a year-over-year basis, new leases were 5.6; renewals 5.7; blended 5.7; for April, it's 6.4, 5.6 and 6.0. And then, looking forward, May 7.5; and where offers went out at 7.5 we've gotten 6.8; and June 7.5, 6.1 at this point.

Gaurav Mehta, Cantor Fitzgerald.

Yes, thanks, good morning. Just a couple of questions on your same-store numbers. So if I look at your NOI, it's 5.8% for 1Q and then you just gave the number for new and renewals, it seems encouraging. And I know you mentioned that you are expecting tougher comps towards the second half of the year. But going from 5.8% to 3% to 4% guidance, it seems like there?s quite a bit of slowdown. So outside of tough comps, is there anything else you're looking at?

Not really. I think that it's -- again what we are facing is the reality that a lot of the improvements that we began to capture in our operating metrics out of the Colonial portfolio really began to show up in the back half of last year, as well as some lift that we got from some scale benefits and re-working a lot of contracts.

And so we'll be comparing against those comps, all that improvement, all that lift of course is permitted if you will, but just on a year-over-year basis, the comps get a little bit more challenging. And to be honest with you too, I mean I think that we're carrying fairly strong occupancy at this point and we were carrying fairly strong occupancy in the back half of last year.

And so, lift on a year-over-year basis in effective occupancy becomes pretty challenged. And there is some assumption that if the economy continues to improve and we begin to see the employment markets continue to show recovery, I think it's also reasonable to assume there may be a little bit of pickup in turnover that begins to take place.

So, those are all the various variables that I think one has to think through over the back half of this year. We don't certainly see anything materially weakening, and you're right, all the trends that we're seeing right now are pretty darn encouraging. But we still got a long way to go and now that really gets us to where we feel pretty adamant that we ought to just hold tight at this point and then readdress it as we get to the end of the summer.

Okay. And my follow-up question is on transactions. So you sold assets for economic cap rate of 5.6%. As you look to deploy that capital towards acquisitions, what kind of cap rates are you targeting?

Well, I mean most of what we're seeing today, we're seeing economic cap rates that would be 5% to 5.5%. Frankly a pretty tight spread. Most of what we're targeting of course is newly built, brand-new. So the CapEx requirements are fairly minor and are low. And so, based on what we're -- our hurdles and the criteria that we use as we think about deploying capital, the spread would be fairly narrow to what we've sold.

Alright. Thank you. That's all I have.

Thanks, Rob.

John Kim, BMO Capital.

Thank you. I guess my first question is on the economic cap rate of 5.6%, this is I think what was previously characterized as an AFFO yield. Correct?

Well, we talked about that a lot on our previous call, John. We talked about an FFO yield and then the cash flow, cap rate. I think we did discuss that the cash flow cap rate, which is our -- let me define that for a moment. Trailing 12 months' actual NOI, minus a 4% management fee and then minus the actual CapEx on this portfolio, which as Eric mentioned in his comments, is about $1,200 a unit and that's how that's calculated, 5.6%.

I think we did mention that in the previous call. There was some discussion about an NOI yield versus a cash flow. But cash flow obviously is what we feel is important. That's what you're selling to an investor and we thought that was a very, very good outcome.

What was the NOI yield?

The NOI yield was on a [NOI] basis was close to 8%.

Right, okay. And my second question is on the performance of the core versus your secondary markets, it noticed -- it (inaudible) this period, is this really showing that having scale in your markets drives the NOI growth and can you remind us what the balance of core versus secondary markets is ideal for you and under which timeframe?

Let me take the latter part of that question and then maybe Tom can take the first part of that. I would tell you that today, we are sitting roughly around 60% what we refer to as large markets and 40% I?ll refer to as secondary markets. And that's really kind of the portfolio strategy allocation that we're really after. And so to define one as core versus non-core, it's not the way we think about it.

I mean, it's -- we're after a certain portfolio mix, we feel like we have that now. And then, of course, what's happening in the secondary markets, broadly speaking, is that we are seeing things starting to pick up and improve there. And Tom, you want to (multiple speakers)?

Sure. I mean, at 3.7% year-over-year revenue growth along with 1% in sequential revenue growth, which tracks the large market groups pretty well, we're encouraged with the trends that we're seeing. And then furthermore, based on the recent recap of job growth released by the BLS just recently comparing Q1 of this year to Q1 of last year in the large markets, they've moved up by 40 basis points and our secondary markets by 120 basis points. So, we're sort of encouraged with the revenue line and the jobs picture looking forward in this group.

And these secondary markets generally continue to not see much in the way of supply pressure, not nearly as aggressive as you see in the larger market. So, a combination -- we've always felt that as we get further into the economic recovery that these secondary markets will begin to show their improved strength and we think that's what we're starting to see at this point.

Thank you.

Thank you, John.

Dan Oppenheim, Zelman & Associates.

Thanks very much. I was wondering if you can talk a little bit about some of the comments in terms of the second half of the year, in terms of just being -- having concerns whether turnover rises or just slowing based on the occupancy flows there.

But if you're looking at the trends in terms of renewals for May and June, are you seeing anything different in terms of the behavior of tenants, in terms of percentage renewing at this point or is there anything leading to that just in terms of the second half of the year or is it more just overall caution?

We're not seeing anything from marketing, leasing -- the market fundamentals or leasing fundamentals that causes us concern. I mean, occupancies are strong. As Tom outlined, rent trends are strong, turnover remains low. So there is nothing from an operating perspective or market perspective that gives us pause at this point.

I think, what we're just -- the point we're trying to make here is that we've got tougher comps coming up, we've got both in terms of the benefits we got last year from some of the benefits coming out of the merger and we were at fairly full occupancy towards the back half of last year.

And so I think the only thing that would cause -- and so going above and beyond those two sort of improvements last year is going to be challenging, because we're still carrying very strong occupancy and we're looking at, if you will, call it frictional vacancy a little bit and thinking about things we can do to sort of improve and minimize further downtime between turns and things of that nature.

So on the margin, we still think there are some opportunities along those lines on occupancy as well as in the operating platform. But fundamentally, a lot of the benefits that we got over the back half of last year present some challenging comps this year.

And the only other thing I would tell you that causes us to think that it's a time to sort of stick to what we think is going to happen at this point with our guidance is the fact that if the employment market continues to show recovery and we continue to see the job markets show recovery, I think that it's reasonable to expect the turnover may pick up just a little bit. That's typically what happens.

And that's okay. I mean, the demand side of the equation is very strong and our moveouts to rent increase continues to not be a worrisome trend. And so a little pickup in turnover is not something that worries us.

Now, the fact is, is it may cause vacancy to move up a slight amount as a consequence of that. But we're preparing for that and we think we've got a good chance to minimize that. But, that's just the context of what we're sort of working with here that causes us to think that we need to get through kind of the summer's leasing season and then take a look at where we are and at that point consider whether or not we may be making revisions to our current guidance.

Got it. Okay. And then, I guess secondly then, in terms of the acquisitions, had that one in Kansas City in the first quarter. Clearly, you are well on your way to selling the multifamily communities with 233 million sold as of this week. As you think about buying the communities, are you more cautious on the ability to buy based on having discipline in terms of looking for the right yields on those given the competition in the markets right now?

Well, certainly, the market is very competitive. But I continue to believe that as we get later in the cycle and more of the new product comes online, we typically see at that point developers and equity partners become a little bit more likely to want to monetize their profits sooner rather than later as lease-ups and, depending on the locations, can become a little bit more challenging.

And you throw on top of that the prospect of rising interest rates a higher cost of capital, and I think the motivation to monetize profits from some of these developers grows even more. And so I don't believe we're likely looking at conditions weakening to a point where the environment becomes a buyer's market by any means, but the ability to source better buying opportunities, I think does improve slightly. And with our execution capabilities as a buyer, we think that that nets out to more opportunity as we get later into the year.

Haendel St. Juste, Morgan Stanley.

Hey, good morning, guys.

Thanks.

So, would you talk a bit more about the price, the demand for the assets you're selling? Did the pricing exceed your expectations? What was the type of the buyer that showed up, the depth of the demand? was there any retraining and was there a portfolio premium or perhaps discount in the negotiation for the price?

Well, I think that -- I mean this is a group that we've known for a while, we sold some properties to them last year. They have proven themselves as being very credible buyers, able to execute very well. And so, as we began to look at our disposition plans for the year, we had conversations with them as well as a few other groups; and it felt like that we would probably achieve better execution and better net returns for our shareholders approaching this on sort of a bulk basis, a transaction portfolio, if you will.

And so that's the way we went at it and this buyer that is a private equity, very credible, is representing institution capital that we've talked to and they were interested in everything we had to sell for the year. And so, we began conversations with them. And, no, there was no re-trading. We gave them an exclusive opportunity and frankly, the numbers came in better than we expected. And so, we were pretty pleased overall with how it turned out.

I asked that because I think that Fannie and Freddie had widened out their spreads by, I think it was 40 basis points since the start of the year. I?m just curious if that might be playing any part in your conversations with potentially interested parties for your assets.

You got to think about, when they increased their spreads, the Treasury rate also came down on the other side of that to help that as well, I think, Haendel. But given Eric?s comments on that, we didn't feel that in this transaction.

No, not at all. And I know that the buyer for these assets is using Freddie financing and so, they were pretty pleased with. I know they moved early this year to lock in their rates and we do feel that there was reason to move sooner rather than later on these disposition plans for all those reasons and so we're glad we got it done.

Okay. And then for the three under contract. Wondering, if you can talk a bit about how much -- talking about absolute dollars, perhaps cap rates, are they pretty similar to what you've sold already and maybe markets if you would?

Well, the assets that we have are in two other smaller markets. So we've got another and then another asset in Memphis. We'll be exiting two more smaller markets as a consequence of these last three sales -- prefer not to get into pricing at this point, but it's going to be very much in line with what we've been doing.

And the volume will pretty much complete our guidance expectations for the year. So that gives you the remaining dollars.

Tom Lesnick, Capital One.

Hi, thanks for taking my question. I know you mentioned the strengthening job market in some of your secondary markets. But I'm just curious, is there any evidence, anecdotal or otherwise, of an uptick in wage growth in any of those secondary markets? Are you seeing less sensitivity from your residents to rent increases?

We have not seen much sensitivity to rent increases from residents, that move-outs for rent increases remained at roughly flat. And then, our rent to income ratio has held steady at about 16.5% as we've gone through. So something is -- the correlation between the increases in rents is being supported by increases in wages looking at that ratio.

Okay, thanks. And then, just a bigger-picture question. Eric, I know you guys are just getting through the Colonial integration, but just given recent deal activity and consolidation in the apartment sector and that there are still several pure plays Southeast apartment entities, both public and private still out there. Are you guys amicable to further deal activity? What's your mindset as you kind of see the entire apartment space transact right now?

Well, I'm not going to speculate on M&A activity overall, but I do believe that our focus is just continuing to strengthen our earnings platform through executing on the strategy that we?ve laid out. And we are excited about the trends that we're seeing and what's being accomplished.

Having said that, I mean, yes. I mean, we're always -- we talk to folks all the time and we're always interested in exploring new investment opportunities. And so we remain in the market and we obviously learned a lot through the process with Colonial. We feel very good about the platform that we have in place and we're glad to see the dust settle a little bit and we're perfectly content to continue refining what we've got and improving what we've got, but we're also always open to other ideas and opportunities. So, we'll see what the future holds.

Rich Anderson, Mizuho Securities.

So, the last three remaining are apparently much larger assets, if it's three assets under $1 million or so, is there anything about the size -- assuming I had that right, is there anything about the size of the assets that's making it a slower process or is it to that same private equity buyer?

So the same buyer and no, I mean there is nothing in particular about the size that's making it a challenge. We just stage these things to accommodate their needs and they are all under contract and we're pretty confident it will happen, but yes, you're right. I mean, one of them in particular is a large community, over 1,000 units, but no complications per se that I can point to.

Okay. And then, some people are asking whether or not you should be raising your guidance and you?re talking about the tough back-half comps. But maybe if I think about it a little bit differently, do you think you executed even faster than you thought you might have going in and hence is there earlier than expected dispositions maybe weighs on your FFO growth more than you thought? Is that a rational line of thinking?

Yes, I think there is some truth to that. I think that's part of it, but I think it's really the uncertainty surrounding acquisitions more than anything that causes us to be reluctant to jump on any kind of increase at this point.

I mean, we felt like that, that the value opportunity, the value creation opportunity associated with expediting as quickly as we could on the dispositions made sense. And even at the risk of pressuring earnings a little more than we expected this year, we think it was the right thing to do long-term from a value perspective.

The acquisition, as I said earlier, I mean, we're talking to a lot of people about a lot of different ideas right now and a lot of different opportunities. It's competitive and the thing that?s easy to do right now is lose your discipline and we're not going to do that.

And so we're going to remain patient, I'm encouraged with the deal flow, I'm encouraged with the activity that we see taking place with our transactions team and we're having a lot of conversations and there's lot of reason to be optimistic, but I can't be certain. And so we just think at this point, be a little bit cautious on our ability to put the money to work and hopefully, we'll have something good to say later this year.

Michael Salinsky, RBC.

Good morning, guys.

[Good morning].

Eric, where do you see the better opportunities currently, either primary or secondary? And as you're underwriting growth rates on transactions today, how does the growth rate being underwritten for a primary market compare to a secondary market just at this point of the cycle?

Well, I?ll tell you, the buying opportunities are pretty competitive across the board. I mean, we've been looking at transactions down in South Florida, Atlanta, Phoenix, based on what we believe is very reasonable, not conservative by any means underwriting, deals trading at sub 5 cap rates. We've just lost on a couple of deals in secondary markets like Kansas City and San Antonio, foreign capital buyers, sub 5 cap rates.

And so it's pretty aggressive across the board and I think that for us, what we're finding more opportunity with right now is talking with developers on deals that are either getting ready to get started or they're in lease-up.

And I think that there is some evidence building that folks are getting a little bit more anxious to go ahead, as I said in my comments, to monetize their profits that they've got. And we're looking, of course, to bring brand-new product into the portfolio on something at less than a full retail price. And that's where we find those opportunities generally is -- at this point in the cycles with developers who are in the early stages of development and/or lease-up and we're comfortable taking on the lease-up risk.

And that gets us to that question you're asking about sort of rent growth. Of course, it varies in underwriting, it varies a lot by market obviously. But I would tell you that we're probably a little bit more cautious in our rent growth forecasting today than where we were say a year ago or two years ago. I just feel like we're a little further into the cycle.

I think that supply continues to not be a worrisome trend at this point relative to the demand side of the equation. But I would not be as aggressive today in underwriting as I was a year or two ago.

That's helpful. Then, just thinking along the same lines there. You mentioned development, potential buying out, taking on lease-up risk. What's the right spread today? I think you mentioned a 5 to 5.5 cap rate, what's the right spread on a property, where you will take lease-up responsibility versus a ground-up to justify the added risk, particularly at this point in the cycle?

It's going to be 100 basis points to 150 basis points is generally what we're looking at and again, it varies somewhat by specific opportunity and other metrics. But, we're looking for 100 basis points to 150 basis points spread generally.

Okay.

Tayo Okusanya, Jefferies.

Hi, yes. Good morning. Two quick ones from me. The first one, I may have missed this, but could you give us a sense of just your general outlook for Texas at this point, just kind of given all the oil and gas concerns?

Sure. Tayo, Texas, in general, I?d just bat it around by market is -- Houston is performing admirably for us at this point. The feedback we get from our folks on the ground makes us want to monitor it closely; the oil and gas jobs are having an effect in Greater Houston. We're not seeing that effect at our properties at the moment, but we remain attune to them.

Austin continues to move on along and do very well. We're excited about it, honestly and it seems to be managing the new supply well, which tends to be focused more in the Downtown Central Austin area. And then Dallas and Fort Worth, Fort Worth honestly a little more encouraged than Dallas, but both are good.

Dallas just has heavy supply in Uptown moving up Plano which affects just probably three of our properties in the Medical District and a little new construction around Las Colinas. But we're still optimistic about Texas, in general, the oil and gas concerns in Houston are benefits to those other markets who are paying less at the pump.

Okay, that's helpful. And then, just in regards to asset sales going forward in -- I know you're planning to do stuff on a more match-funded basis going forward. But could you just talk to us, especially in the secondary markets, about just how deep the buyer pool is there?

I mean you're doing a lot with this one private equity shop, but kind of who else is [missing] around and what are they kind of -- and in general, just how strong is the market in those secondary markets who you're looking to sell?

I would tell you, it's very strong. I was alluding to some of the pricing that we?ve seen recently on some transactions in Kansas City and in San Antonio. But, we get calls all the time from folks who are looking to deploy capital in secondary markets and multi-family real estate. And these are smaller buyers to institutional buyers along the lines of who we're selling to today.

So it's quite strong, I mean, and we're -- of course, Fannie and Freddie and the agency financing is wide open for secondary markets as well. And so I think that as a consequence of exiting these 11 markets this year that I would characterize smaller more tertiary in nature than most of the residual secondary markets that we have left over, I would think that the buyer pool for any future sales that we may have would be as strong or stronger than what we're seeing right now.

Drew Babin, Robert W. Baird.

Good morning, guys.

Morning. Morning, Drew.

A question, in the second half of the year, just given what you were saying with the expense growth comps as well as possibly flat to slightly down occupancy, the revenue growth and the NOI growth is going to have to mostly come from rent growth. Can you kind of quantify how ROI renovations you've done since Colonial acquisition may kind of help boost revenues?

And then also whether -- any turnover that you're expecting in the second half of the year, whether you look at that as an opportunity to maybe get into the units and tune things up to get better rents?

Yes. Drew, we did about 2,000 units on the Colonial side last year and we'll do about similar for a total of 4,000. So, on a year-over-year basis, we're going to be doing about the same. So the comparative bump is not materially there. If we do units sooner which we're running a little bit ahead, we will do that.l But all in all, it's about 20 basis points of revenue bump that will come from the redevelopment program.

Now, we are also midway or really early in the rollout, very early in the rollout of our washer and dryer program which works very similar to our redevelopment program. Essentially adding washer dryers to the mix, to the unit and charging an additional fee. We test that, we run that, just like we do the [renovate] program. That could generate about an extra $0.5 million in the back half of the year.

Okay, I appreciate the detail. And then, lastly, just on Raleigh and then kind of Florida in general, markets where the rent growth has been kind of below average for the portfolio. Could you just maybe talk about Raleigh and how the supply growth may or may not be trailing off there?

And then kind of just talk about Florida. There is always some supply in Florida, not always the highest quality supply. But what do you think is underpinning some of the marginal weakness in multiple Florida markets?

I'll start with Raleigh, and what I'd tell you, Drew, is obviously -- that's been a high sales growth market. I mean, excuse me -- a high delivery market for a while. It's been specifically high in that Brier Creek area, which we have high exposure to. We're pretty encouraged that is stabilizing and we like our rent trends so far in Raleigh and we like where we're going.

Just to give you an idea, average occupancy in Raleigh right now is 95.6%; exposure is just 81%, that's down 260 basis points from the prior year and April blended rents are 38%. So honestly, we feel like our portfolio in Raleigh is rebounding now and poised to continue. On the Florida side, honestly, we're pretty excited with what Jacksonville and Orlando and Tampa are doing right now and feel pretty good about them going forward.

David Segall, Green Street.

Hello. I was just curious on the developments. Do you have any sense of why was the stabilization date delayed by a quarter for both Riverside and Bellevue and also why the budget increased slightly since last quarter?

I'll address the delay, I mean in Bellevue, we had some weather delays over the winter that pushed us back a little bit, but everything is on track at this point. And so just some weather delays.

In Jacksonville, we just ran -- the developer ran into some construction delays that were just fairly minor in nature, but in an effort to just be sure that we had the property at a point where we were comfortable allowing people to move in and we just pushed delivery back just a tad.

And as Tom mentioned, our pre-leasing is going extremely well there. And so we're delivering units there starting I guess next week and move-ins are starting next week, but the property is already 58% pre-leased. So where -- our returns and expectations on both of those deals are very much intact.

The increase in the cost, I'll just give you a little color on that, is really primarily capitalized taxes and the interest, because of the slight delay Eric mentioned. And obviously on an IRR basis, that's the same cash as we'd expected. It's no different, so it doesn't affect the returns.

Great. And do you have a sense of the expected yield on the Fredricksburg expansion?

I think probably about 6 to 6.5 on that expansion, which is kind of a wholesale price as we talked about, as Eric talked about before. So we look to capture not a full development yield, but pretty close.

Jordan Sadler, KeyBanc.

Hi, it's Austin Wurschmidt here with Jordan. Just wanted to touch on CapEx for a moment. You guys mentioned on the dispositions, CapEx is running at about $1,200 per unit. In the first quarter, it looks like CapEx was a little over $10 million. I'm not sure what that was on a per unit basis. But just curious what you're expecting sort of on the residual portfolio from a CapEx perspective?

For the full year, we expect just over $900 -- call it $900 to $915 a unit for the -- call it the same-store portfolio. The first quarter CapEx was a little below the run rate for the year, but on the $52 million recurring is what we expect for the full year, so you can do the math on that.

Well, and $915 inclusive of -- people have different definitions of what CapEx is, but that includes both what we refer to or you often hear people call both recurring and revenue enhancing.

Right.

So that's an all-in number, if you will, at $900 to $915 for the remainder of the portfolio.

For recurring, we expect about $52 million for the full year. So you could [sneek in] back into what's remaining from last three quarters.

Hey, and it's Jordan here with Austin. I had a question regarding the gains reported during the quarter, a big number, $134 million on the stuff that?s teed up and I suspect there's going to be something incremental. One, what's the total number expected for the year and then what are the plans for those gains, as you see it now? Are we going to [10.31]? And then, I'll go from there.

Those are book gains, not tax gains, I'll start with there, but we do expect significant tax gains that are sort of in line with those numbers. We do expect to have more gains as we sell that remaining tranche in the second quarter or early in the third quarter when it occurs. And obviously, where -- we don't expect a special dividend or anything like that related to it, because we do plan to use both 10.31B?s and other tax-planning techniques or strategies to cover that. So, we're not concerned about any dividend issues or things along that line.

And so as it relates to -- so what do you think the total gains will look like, either book or taxable, however you want to present it? I suspect that taxable would be higher than book, but that's just a guess.

Tax gains will probably be somewhere in the 225 to 250 range. And as we mentioned, we have strategies that we expect through 10.31B?s and other strategies to have all that covered, but that's what we expect.

Buck Horne, Raymond James.

Hey, good morning. Thanks for the time here. Going back to the supply picture question, just -- I mean pretty strong accelerations in some markets that have been notable for the amount of new deliveries that have been coming to them, whether it's Austin or Charlotte, Houston and those types of markets. I think, you've spoken to this a little bit.

But I guess what I'm trying understand is to what extent do you think the portfolio is kind of insulated from that supply pressure given you made the bulk of deliveries going to urban core product. And I guess the real question is are you seeing any signs that the developers are extending out into the suburbs into your areas? Do you think that that might add to supply pressure going forward for your portfolio?

Of course, it varies a lot by market, but broadly speaking, I think you're right in that where most of the supply pressures are happening in some of those markets that you mentioned are in more of the sort of urban core area. And candidly that's what we're seeing.

The buying opportunities that we're talking to folks about and those markets are in those urban core areas because -- and I think that's where you're going to see most of the -- to the extent that the supply creates pressure on rent growth in any of these submarkets, that's where it's going to be. And so that's where we're hunting for opportunities right now.

But I think that a lot of our existing product in some of these larger markets are in some of the more suburban locations as Tom was mentioning in Austin, in Houston, in Dallas and in Fort Worth, and in Charlotte. I mean, the trends are pretty good. Talking about Raleigh there earlier, Brier Creek is a high end submarket area, Cary, they are holding up.

They got a little bit of supply last year and were a little weak last year, but the trends are pretty encouraging this year. And so I do think that as we get into this later part of the cycle where supply continues to come in and I mean, right now the demand is strong and we're not concerned with any of the trends that we're seeing.

And of course, you never concern until you are concerned. And I don't think that it is going to be the supply side of the equation that?s going to really disrupt the train, if you will. I think, one day something will happen on the demand side and things will start to slow. And that's where you'll run into some more noticeable moderation in terms of our ability to push rents.

I don't see that happening anytime soon, but that's typically the way it happens. And that's why we feel like it's important to keep a presence in some of these smaller secondary markets that we're in, because they tend to not to see the supply pressure and they don't tend to get as sort of out of balance, if you will, at any point. And we think that there -- it's an important part of protecting sort of the full cycle profile that we're after.

So at this point, I mean, we're still not seeing anything on the supply side that causes us any real worry. And wherever there may be little pockets of it here or there, it's generally where we're not, but I think that's also going to create some buying opportunities for us.

Very helpful. And just real quick, any signs in the turnover ratios for move-outs due to buying or renting single-family homes, anything noticeable there? I know turnover is low, but any color you can provide on that, helpful.

No, I mean, Buck, it went from -- buying house went from 18.7 to 18.8 of move-outs. I mean, it?s just flat and it's not moving and it's staying low, honestly and same on move-outs to renting.

Yes, move-outs to renting constitutes about a little over 7% of our move-out right now. And for 20 years, it's been in the 5% to 7% range. So we just continue to not worry about single-family housing either as a forsale or for-rent product is being a pressure point for us. And to the extent that the single-family housing market starts to show some meaningful recovery, I think that happens only because the employment markets are getting continued stronger. And I think that works in our favor as well.

This concludes our Q&A session. I would like to return the call to Eric Bolton for any concluding remarks.

No further comments from us. If you've got any follow-up questions, please call us and we'll see everyone at NAREIT. Thank you.

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