Mid-America Apartment Communities Inc (MAA) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for participating in the MAA Third Quarter 2015 Earnings Conference Call. At this time, we would like to turn the conference over to Leslie Wolfgang. Ms. Wolfgang, you may begin.

Thank you Kevin and good morning everyone. This is Leslie Wolfgang, Corporate Secretary for MAA; Tim Argo, SVP of Finance, he normally introduces our quarterly earnings call, cannot be with us this morning as he and his wife are awaiting the birth of their first child. We are excited to welcome the newest addition to the MAA family and we send them all our best. I do have with me Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

Before we begin with our prepared comments, I want to point out that as part of the discussion, Company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the Safe Harbor language included in yesterday's press release and our 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.

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-renter the queue or you're certainly welcome to follow up with us after we conclude the call.

I will now turn the call over to Eric.

Thanks, Leslie. Our third quarter performance was strong and record-high performance in both Core FFO and AFFO per share. The results were driven record-high effective occupancy and solid rent growth, producing an 8.1% increase in same-store NOI on top of last year's very solid NOI growth of 6.8%. After a busy couple of years of merger and integration activities, the MAA team has our operating and reporting platform in a strong position. I want to express my thanks and my appreciation for their hard work and tremendous results.

Leasing conditions across our Sunbelt markets continued to support high occupancy and solid rent growth. We believe our strategy in diversifying capital across this high-growth region with our product and a price point focused on serving a broad segment of the rental market enables MAA to capture the strong demand of the region while mitigating to some degree new supply pressures. We continue to see positive leasing momentum across the portfolio. Job growth in most of our markets, particularly in the large markets segment of the portfolio coupled with manageable levels of new supply, particularly in our secondary markets should combine to produce another year of positive leasing and pricing trends in 2016.

As outlined in a recently published report by the Urban Land institute on the Gen Y generation and their housing preferences, positive demographic trends should continue to generate growing demand for apartment housing, particularly in our Southeastern and Sunbelt markets. As outlined in the ULI study, a clear majority or 62% of this renter demographic identify themselves as residing in the south and west.

Interestingly, the Millennial Group also described themselves as being essentially equally weighted in their focus on living in the city versus living in the suburbs. And importantly, only 13% of this Millennial Generation according to the ULI study identify themselves as living in or near downtown areas. In our southeastern markets, it's important to remember that a lot of the employment centers and more appealing entertainment venues that create proximity demand for apartment housing are often located in more suburban or satellite municipalities and not in the downtown CBD or heavy urban submarkets.

And further, with the median rent for the Gen Y group at $925 per month per the ULI study, we believe our product holds appeal in terms of price point and as a result is well positioned to a attract this large renter demographic. Overall, we continue to believe MAA's focused portfolio strategy reconciles very well with this growing renter profile and supports our goal to deliver superior full-cycle performance. The meaningful reposition that we've accomplished with the portfolio over the past five years is making an increasing impact, as we've continued to recycle capital from some of our older investments and captured attractive internal rates of return upon sale, we've been able to repopulate the portfolio with newer properties that have enabled us to capture steady improvement in NOI margins, particularly on an after-CapEx basis.

Over the past five years, MAA's same-store NOI margin on an after-CapEx basis has improved 590 basis points. We expect to capture continued improvement in margins as our lease-up pipeline, new development pipeline and redevelopment pipeline continue to drive higher margin performance into the same-store portfolio. On the transaction front, robust deal flow and strong investor appetite continues to generate a lot of activity along with aggressive pricing.

We have a number of opportunities we are reviewing and continue to remain patient and disciplined with our underwriting. As you'll note in our updated guidance, we have pulled back a little on the volume of acquisitions that we expect to complete this year, but I continue to believe that more attractive buying opportunities will emerge as we work through the cycle. As Al will detail in his comments, through a combination of asset sales, internally generated free cash flow, reworking our credit facility and further deleveraging the balance sheet, we have added more strength to the balance sheet and meaningfully expanded the Company's external growth capacity. We remain poised to execute on attractive opportunities as they emerge.

That's all I have and I'm going to turn the call over to Tom.

Thank you, Eric; and good morning, everyone. Revenues for the quarter grew 6.1% over the prior year and 2.3% sequentially. Our record results were driven by year-over-year increase in revenue per occupied unit of 5.1% to $1,123 and a 90 basis point increase in average physical occupancy. October trends continue to be steady. Our 60-day exposure, which is current vacancy plus all notices for a 60-day period, is just 7.1%, down 70 basis points from the same time last year. October blended rents on a year-over-year basis are up 4.8%. Overall expenses remained in line, up just 3% and the only item that ran ahead of expectations was our personnel cost, has the strong revenue results are driving higher-than-expected performance based compensation. Personnel costs plus incentives were up just 2.2%.

On the market front, the vibrant job growth of the large markets is driving strong revenue results, 11 of our 13 markets exceeded 5% revenue growth. They were led by Atlanta, Orlando, Phoenix and Fort Worth. The secondary markets, which have lower supply pressure achieved 5.2% revenue growth. In these markets, we're benefiting from improved job growth, as well as a sophisticated operating platform that has competitive advantages across our footprint and markets. Revenue growth in Greenville, Charleston, Savannah and Jacksonville stood out.

Turnover for the quarter was again down, decreasing by 1.7% over the prior year and down 100 basis points on a rolling 12-month basis to 53.3%. Move-outs to home buying were just 19.1% of total move-outs and well below historic norms. Move-outs to home rentals were down 6% and represent less than 8% of our total move-outs.

Our focus on minimizing the time between occupancy again paid off. The improvement in average days vacant helped drive the record average physical occupancy for the quarter to $96.6. Year-to-date, we have completed 4,200 interior unit upgrades, 2,300 of which were on legacy CLP communities, we're on pace to redevelop 5,000 units this year and expect the mix to favor the legacy CLP portfolio.

As a reminder, on average, we spend $4,500 per unit and receive $100 rent increase over a comparable non-renovated unit which generates a year one return of well in excess of 20%. Our four active lease-up communities are performing well. 220 Riverside is now 70% occupied and 84% leased, it's on schedule to stabilize in the second quarter of 2016. Colonial Grand at Bellevue to Phase II and The Retreat At West Creek are 92.3% and 94% occupied and will both stabilize in the fourth quarter.

Finally, our newest acquisition and lease-up, SkySong in Scottsdale is 89% occupied and on schedule to stabilize in the first quarter of next year. On the customer service front, our recommended score on apartmentratings.com which is currently the dominant rating site for multi-family reviews improved for the sixth straight quarter.

With Eric's comments about Millennials in mind, we invite you to take a look at our redesign website. This platform was built to continue on our appeal to Millennials and the way they prefer to search. Our URL structures and content management system were tweaked to strengthen our search engine strategy. Simply put, this means our website shows up higher on their search list without paying for higher placement. Once the website was improved, our page views increased by 5 times which gives us more leads at a lower cost per lead. In addition, I think you'll find it visually bold and easy to navigate. Al?

Thank you, Tom. And good morning, everyone. I'll provide some additional commentary on the Company's third quarter earnings performance, balance sheet activity and then on the revised guidance for the full year. FFO for the third quarter was $1.44 per share, core FFO which excludes certain non-cash and non-routine items was $1.38 per share. Recurring capital expenditures for the quarter were $15.8 million or $0.20 per share, which produced core AFFO $1.18 per share, providing strong coverage of our $0.77 per share quarterly dividend.

For the full year, core AFFO grew 11.3% over the prior year. The outperformance for the quarter was primarily produced by same-store NOI growth, driven by record-high average occupancy levels, 90 basis points above prior year and continued strong fee collections. Favorable real estate tax appeals and reduced insurance reserves related to claims experience also contributed to the strong earnings performance.

During the third quarter, we acquired two new communities for a total investment of $86.6 million. These purchases bring our full-year investment in acquisitions to $244.4 million for five new communities containing 1,409 units. We also funded an additional $10.5 million on development costs on our four communities under construction during the quarter, leaving only $54 million of the $120 million total expected cost to be funded. We expect NOI yields in the 7-7.5% range in these communities once completed and stabilized.

We also invested $8.2 million in our interior renovation program during the quarter, bringing our full-year investment in the program to just over $19 million for 4,290 units renovated. And as Tom mentioned, we continue to capture strong rent increases above non-renovated units, which are projected to produce unleveraged returns of over 14%. During the quarter, we sold three communities for gross proceeds or $121 million and recorded book gains of $54.7 million. These three sales bring year debt dispositions to 21 properties, averaging 26 years of age for $354.3 million gross proceeds producing $190 million in recorded gains. The average cap rate for these dispositions was 5.8% based on last 12 months NOI of 4% management fee and actual CapEx, which produced an average 14.1% return on our invested equity over the full life of these investments.

Our balance sheet ended the quarter in very strong position with leverage levels continuing to climb and coverage ratios growing further. At quarter end, our leverage defined as total net debt to gross assets was 39.9%, 140 basis points below the prior year. While our debt to recurring EBITDA was only 5.76 times, a record low for the Company.

Our recurring EBITDA continues to grow and reflect the quality of our earnings profile, covering our fixed charges over 4.2 times. Following end of the quarter, we recast our unsecured revolving credit facility, increasing our borrowing capacity to $750 million from $500 million, extending the maturity to 4.5 years and improving the terms to reflect our stronger credit profile. This new credit facility supported by 14 bank [Never] Group provides significant liquidity and growth capacity for the Company. And in conjunction with the new credit facility, we amended a $150 million term loan, also improving the terms and extending maturity date.

For the current year, we expect to produce about $80 million to $85 million of internal free cash flow, which is essentially core FFO less all CapEx and common dividend payments. This is expected to grow to just over $100 million for 2016. And given this free cash flow production and the completed dispositions, our 2015 plans do not include any new equity. We currently have over $420 million of total cash and credit available under our credit line, and we expect to end the year with our leverage about 100 basis points below prior-year levels.

And finally, due to the strong operating performance during the third quarter, we are raising our guidance for core FFO and AFFO for the full year. We're now projecting core FFO for the year to be $5.39 to $5.49 per share or $5.44 at the midpoint, representing a 9% growth over the prior year. Core AFFO is now projected to be $4.71 to $4.81 per share or $4.76 at the midpoint, representing an 11.2% growth from the prior year. Same-store in our NOI growth is now expected to be 6% to 7% based on revenue growth of 5% to 6% and expense growth 3.5% to 4.5%.

Our expected acquisition volume for the year is now $300 million to $400 million. That's all I have to now turn the call over to Eric for closing comments.

Thanks, Al. MAA's strong performance this year reflects both the favorable leasing conditions across our regional footprint as well as the benefits from our merger with Colonial Properties that closed two years ago this month. The value proposition that we identified at the time we announced the merger, including both stated expense synergies as well as incremental revenue opportunities, have been fully realized and are on track to be exceeded. We believe we have the portfolio, the operating platform and the balance sheet, all well positioned for what we expect to be both continued favorable leasing conditions and increasing opportunities to capture new value growth as we head into 2016. That's all we have in the way of prepared comments. So Kevin, will turn it back to you for questions.

Thank you. (Operator Instructions) Nick Joseph, Citigroup.

Thanks. For the fourth quarter implied same-store revenue growth guidance of 4.6% at the midpoint, can you walk through the underlying assumptions for occupancy, rent growth and the fee income?

Absolutely, Nick. This is Al and I think as we look at the fourth quarter, the story really is continued pricing trends that we've seen this year. We're going to have a little tougher comps on occupancy and fees in revenues and that will fall to the bottom line about the 4.5 to 4.6 kind of implied midpoint. Pricing in the 4.25, 4.5 range. We do expect to pick up a little bit of occupancy year-over-year from the high levels we have now, but comp will become tougher and then combined that with the fees and it will fall down to the 4.5, 4.6 implied on the revenue growth.

Thanks. And then, can you remind me if the units in the redevelopment program are included in the same-store pool?

They are. Our policy is unless we do renovation that substantially disturbs or causes a very lengthy disturbance to the performance we leave it in same store and for annual basis, I think it would be probably a 40 or 50 basis points impact on a full-year basis each year.

Thanks. And then, just last question, like to get your thoughts on the transaction market today, both for the large and secondary markets, if you're seeing more opportunities with stabilized assets or with pre-sale opportunities.

Nick, this is Eric. I would tell you, most of where we see our opportunity is on the sale of pre-stabilized situations or in some cases, new development that's trying to get started and looking for capital. We continue to not spend a lot of time chasing after fully stabilized situations. Those are much more easier financed and that's where we see pricing really the toughest. And from our perspective, we're not going to go out and compete in a market based on price, we're looking to capture some value for our ability to execute for the seller, whether it is urgency of close or the ability to handle some complexity or the ability to not have to worry about some of the financing issues that often allow these buyers in these markets are depending on. So most of what we're after at this point is pre-stabilized situations.

Thanks.

Thanks, Nick.

Rob Stevenson, Janney Capital Markets.

Thanks, good morning guys. Al, what's the current thinking in terms of property tax increases? I mean are we past the big increases and they start normalizing over the next year or so, and you talked about the incentive comp for employees. Anything else expense wise on the horizon that's likely to have a major impact on the same-store expenses going forward?

I think those are the two main items, Rob. And just on taxes, as we've talked about for a while, the pressure has been over the last few years really from Texas and Florida. As we began this year, Texas came out very aggressive with their assessments and so we've dialed that into our number and really worked hard and appealed virtually every property in Texas and had some favorability in the third quarter, because we were successful on that end. And also as they came out with the actual rates, the [mileage] rates, you had the valuation and the rates. The rates came in a little lower growth than we would expect as well, so that certainly benefited the third quarter. As you talked about in our insurance reserves, we're self-insured for some of our reserves and our claims experience has been a little better than we thought, that benefit us a little bit. So those are two things in the third quarter. I don't expect any significant -- I think in the fourth quarter, you won't have that credit from real estate taxes impacting the fourth quarter and it's a pretty big component of your expenses, but full year, we expect taxes to rise 5%; the last year, it was 6%. Next year, who knows, but we would expect, as we've been saying for a while continued slight moderation over the next few years until eventually it gets down to the 3% long-term average that it's been over time, but that may take a couple of years.

Okay. And then in terms of the same-store revenue growth has essentially been sort of turbocharged relative to the peer group by the occupancy increases this year. It seems like you're going to be hard-pressed to even keep occupancy at sort of 96.6, let alone increase it from here. How should we be thinking about same-store revenue growth over the next five, six quarters without the benefit of an occupancy tailwind.

Well, Rob, this is Eric. We're not prepared to give 2016 guidance at this point. But what I can tell you is that based on everything that we see, the leasing environment should remain as robust as what we've seen this year. We think that it's going to continue to support a very solid occupancy performance. We think that the strong occupancy performance that we've captured this year, we likely will be able to continue to hold it. We don't see any material deterioration in occupancy by any means and we think that we can do that while also getting rent growth, it's going to be pretty comparable to what we've been seeing this year.

I think that some of the lift that we got this year from merger-related activities will begin to moderate a little bit. We'll hold those performance levels, but the incremental lift will become a little bit more difficult because as you say, we're essentially full. I mean a lot of the performance lift that we got this year and frankly some of the surprise in the third quarter was some of the great work that Tom and his team are doing on managing our days vacancy between turns and they've made some significant improvement in that over the course of this year and again, we think we'll carry that going into next year. But incremental improvement would be a little bit more difficult.

Okay, thanks guys.

Thanks Rob.

Conor Wagner, Greet Street.

Good morning.

Good morning, Conor.

Al, you mentioned that the benefit from the redevelopment activity will be about 50 BPs to same-store revenue growth this year. Do you have an estimate for what it was in 2013 and 2014?

Probably similar to that, but we've been doing that program for several years, Conor, I'd say pretty close, probably a little lower because we've increased the program this year, but somewhere in that call it 40 to 50 basis points range at NOI level.

Hey, that's helpful and then on the reduction in frictional vacancy, is that portfolio wide? Is there more of the benefit there with the Colonial Properties?

It is weighed a little bit heavily on the Colonial side, but we've picked up improvement everywhere, but weighs a little higher there as our approach to monitoring and managing the components of the average days vacant have come to play on that portfolio.

And then, just follow-up on that, is that more -- is it advertising, is it how you get the unit data at the time just based on better leasing or is it better job of you guys actually doing the work to turn the unit as far as cleaning any necessary repairs?

Yes, it's really a combination of those things. We reduced the amount of time that it took to physically turn the unit, that doesn't do you any good if you didn't lease it faster. And we've really had a focus on pre-leasing the unit and locking in those days early. So we were able to pre-lease a larger portion of our units and lock in a lower time frame.

Okay. Thank you so much.

Certainly.

Austin Wurschmidt, KeyBanc Capital.

Great, thank you. Good morning. You guys have talked a lot about aggressive pricing on acquisitions, cap rates, I think you mentioned have been in the low 5% range. So I was just curious about your thoughts on what type of growth you think that apartment investors are underwriting today.

I don't know what they're underwriting because I don't know what their return expectations are. I mean obviously, to some degree, they're taking advantage of the very low interest rate environment to -- there is a cost of capital benefit that they are dialing into their assumptions. So it's hard to know and of course it's going to vary quite a bit, I think by market and by property. I think that you can see some of these more stabilized value-add opportunities where there's a repositioning play, and I'm certain that people get pretty aggressive on their assumptions as to what they can do there. You take something this brand new where there's really not a redevelopment or repurposing of the interiors or anything of that nature and market expectations will vary based on the market. So I don't know, it's hard to know what expectations are of any particular investor. I mean from our perspective, we've been in these markets for a long time. We feel like we have a pretty good handle on what they can do over a long period time and we apply that logic to any situation we look at. So it's hard to know what they're thinking.

That's fair. And then, as you guys are trolling for new acquisitions given your comments on sort of suburban living in your markets, is there any submarkets or anywhere you're particularly focused today on the acquisition side?

We like really most all the markets that we're in right now and whether it's in Dallas, whether it's in the McKinney, Frisco, Las Colinas, Plano area, but let me also add. I mean we are also interested in continuing to explore opportunities as they emerge in some of the more traditional downtown or CBD areas as well. As you know, that's where a lot of supply is being delivered into the marketplace and we think that may be very well where some of the best buying opportunities emerge over the next year or so. Ultimately, what we're after is we're after a balanced portfolio. We're deploying capital with a long-term horizon associated with it. We're looking to build a portfolio of assets that will deliver steady, growing cash flow and so having a blend of both the downtown, the inner loop, satellite city, traditional suburban, we're interested in keeping a balance of all that.

Thanks. And then just last one from me is, how did the October rent growth stack up versus last year?

It was about flat with last year, it's 4.8%, similar to Q3 and flat with October of last year. (multiple speakers).

Thank you.

Rich Anderson, Mizuho Securities.

Thanks, good morning and great quarter. If I could just clarify the redevelopment impact on same-store is a positive 50 basis points, not negative because of downtime.

Correct. And Rich, we only take about 7 extra days to do a renovate versus a non-renovate. So that is not much of a drag.

Okay. And that doesn't qualify one of my two questions. So Eric, did you have any look or any knowledge of the EQR asset sale? And if so can you talk about that and/or the benefits in general of just being bigger than you are already today?

Well, no, we didn't know about it, and I'm certain it would not have been a viable candidate for that transaction. The benefits of being bigger. I mean, within our footprint, I mean we see and know about every deal that comes to market, we certainly are seeing a lot of opportunity and we're getting approached more so than we ever have in the past about not only one-off opportunities, but bigger opportunities as well. And I think that and just being in the markets that we're in now and being bigger in those markets, I mean there are certain efficiencies that we have as a consequence from an operating perspective. Some of the things that Tom and his team have done have clearly enabled us to make some headway in terms of our operating margins coupled with the recycling that we've done. So I think that there's clearly some benefit that we feel like we're creating for shareholder capital for both the legacy CLP shareholders and MAA shareholders as a consequence of the scaling up that we've done.

Right. But I'm really talking about entity-level type getting way bigger type of as opposed to a one-off type stuff.

I'm sorry. Are you asking are we interested in getting way bigger?

Yes.

No.

Okay.

[That's the main], I answered your question, no, not really.

Okay. And then to the other side of that, can you comment at all and give your input on some of the private equity interest in multi-family, to what degree do you sense some interest in your stock to any type of color that you can get from the private side would be interesting?

I think there's clearly a lot of evidence that private capital has a huge appetite for a partner real estate and as evidenced by some of the transactions have been announced over the last few weeks, I mean clearly there is a buy end to the Southeast markets and there's a buy end to not only some of the more urban-oriented locations, but suburban assets as well. So, I would just say just there's a lot of interest and we like what we're doing, we like the portfolio that we have, feel like we're hitting on all cylinders right now, but I mean clearly there is a lot of interest out there.

Yes. Okay, thank you.

John Kim, BMO Capital Markets.

Good morning. I was interested in your remarks on your prepared comments on the reduced move-outs to home rentals and home buying, I know it's just one quarter, but why do you think this is occurring in your markets at this point in the cycle?

It's been pretty consistently that way this year honestly, home buying has bounced in the 18% to 19.5%, that's the reason for move-outs and home renting [really never call it hold]and is moving back. I mean it's a large drop percentage wise, but it's not very many units. So to me, John, honestly, it's a little more of the same old same home.

Okay. And then in this quarter, Houston held up relatively well but with weaker sequential rent growth as your other markets. Have you noticed anything in the last quarter or so as far as increased turnover or slower leasing velocity?

Yes, I mean now, I'll just give you a Houston update. At this point, it's just 3% of our portfolio and as you point out, it did well, turnover is actually well down. Turnover for Houston was down 10% with home buying at that market dropping significantly. We expect it to remain above 95%, but do expect new lease rents to soften a bit. So, new lease rents are about flat, renewals through the end of the year are up 4%, that's different than it has been in the prior six months. And job growth there is lower than it's been, but positive for 2016 and I think at this point, absent some sort of recovery in oil and gas with the amount of new supply occurring that you would expect rents to be under pressure for a little while.

On a scale of 1 to 10, 10 being very concerned, 1 not concerned at all, where would you rate Houston?

6 maybe, something like that. I think we're going to see it soften on rents. I think we'll hold on occupancy. I can't predict the oil and gas futures market. I just don't have that club in my bag. So that will depend, but long-term, we love it and it will produce opportunity -- if it drops off further than we expect, it will produce some buying opportunity for us. We've got plenty of room in our portfolio to add in Houston if the opportunity is there.

Thank you.

Wes Golladay, RBC Capital.

Good morning to everyone. Excellent quarter, sticking with the top of the softening market are there any other markets where you've seen initial signs of softening.

No, honestly, that's -- Houston is the one sort of worry beat for us at a material level.

Okay. And then with the strong leasing environment, is it harder to negotiate with the developers or they just still looking to move onto the next project. Can you give us a sense of deal volume and your close rate versus prior quarters?

It's been pretty consistent, Wes. I mean the deal volume is pretty high, close rate is pretty low. We're seeing a lot of opportunity. I think that we're going to have to see -- developers are still holding pretty strong right now with their ask pricing. So I think that the fundamentals of being as strong as they are and continuing to be as strong as they are, we haven't seen any real movement in cap rates or any real sense that pricing is starting to soften in any way.

Okay, thanks for taking the question and keep up the good work.

Thanks, Wes.

Thanks, Wes.

Gaurav Mehta, Cantor Fitzgerald.

Yes. Thank you. Good morning. Going back to the transaction market, can you comment on what you're seeing for the older assets that you have sold so far? Is there room to maybe sell more than what you have sold?

We feel like -- I mean the appetite is very good out there for really any apartment real estate right now, whether it be brand-new or slightly older. Having said that, we took advantage of it and we sold 21 assets this year and have only picked up 5 thus far. So, it's a huge net seller this year. We like where we have the portfolio at this point. We exited 11 tertiary markets. We very much believe in the same strategy that we've had for some time. We like the markets that we're in, we like the split between large and secondary markets. So we're not after any sort of -- we've done the transformation that we were after.

When you look over the last five years, as I've mentioned, we sold over 13,000 apartments, so we've accomplished a lot of the repositioning that we are after. I mean going forward, we will continue to obviously always look at opportunities to recycle capital where we can create better returns on that capital for the long term, but we'll be in a position to be a little bit more patient with the process, we'll be looking to clearly match fund, our acquisition needs with dispositions and so it will be a different approach. This year, we stepped up and went ahead and made the decision to pull capital out of a number of assets that we felt like in markets that we didn't -- were not really long-term hold for us. So what we're left with today, we're pretty comfortable with.

Okay. And a follow-up on large and secondary markets. If I look at the revenue variance between large and secondary, it seems like it has been converging for the last few quarters. Would you say is that really a function of you exiting the 11 slower-growth secondary markets or is there something else going on in those markets?

Well, I think it generally is a function of, as we continue to move further into the economic recovery, these secondary markets are starting to pick up a little bit more traction on employment growth. These secondary markets continue to not see the supply pressure, volume that you see in the larger markets. And so, as you may see, if you will, a little moderation take place at some of the larger markets. As a consequence, supply continue to come into those markets. The secondary markets being a little later to show economic recovery and employment recovery are starting to get a little bit more traction on the demand side of the equation and still are not seeing the level of supply pressure that you see in some larger markets, so it's playing out as we expect. I think as you get further into the cycle, you continue to see that performance delta begin to close a little bit. I think you actually have to get into much more of a recessionary-type environment for the secondary markets to actually outperform. We've seen that in the past. We saw that back in 2008-2009 and part of 2010. I don't think we're headed back to that kind of environment, but you never know and that's why they're there.

Okay, thank you.

Buck Horne, Raymond James.

Hey, thanks, good morning. I guess, that Eric, if you could go back to some of the comments you made about the study that you were talking about earlier, very interesting trends and I'm just wondering if you've got any data in the Mid-America portfolio that maybe supports some of the stats you're talking about. I mean have you seen any changes this year and the median age of new tenants, are you seeing a skew toward the younger renders coming in or likewise have you seen any changes in the median income of your new tenants, are you getting that higher credit quality renter coming in?

Yes. It's most --

This is Tom, by the way.

Yes, sorry. Dial it down a second, Tom speaking. I think the Gen Y study by you a lot reflected reality, not really a change. So our rent income ratio has bounced between 17% and 18% and that's been very good. Average income of $66,000; 50% of our residents are Gen Y and another 15% in that 35% to 40% or another 20% in that 35% to 44% grew. So what we are seeing is across all facets of our portfolio, large and small. Our reality ties pretty closely to what that ULR study shows demographically.

Yes, I will say, Buck, that we are seeing income levels continue to move up in our portfolio, both as a consequence of improving employment market and frankly as we continue to improve the quality of the portfolio that we see that happening. But after four or five years of pretty steady rent growth, our rent to income ratios are holding very consistent in that 17% to 18% range. So by definition, of course, incomes are going up and at levels sufficient to keep that ratio in line. So the point obviously in putting some of this information out is just to bring home the fact that we see a lot of appeal amongst this millennial generation for a lot of these suburban locations in the Southeastern markets. And it doesn't all have to be downtown.

Great, and very helpful. And switching to kind of the financing market, it sounds like the GSEs have tightened up their belt at least through year-end on funding some new projects that are out there until they can reset their allocations and I'm wondering if you've seen any changes in pricing from life cos or pension money that's out there and just how does that fit with your balance sheet capability and is it possible that you might see some deals come through before year-end that you guys can act on and might give you some upside to the acquisition budget?

I'll certainly give you on what we're seeing in the agencies and life insurance companies, Buck, and consistent what you're saying, they've both I think hit their capital couple of months ago, and what we're seeing is a lot of deals come that are really when they get across their desk, they're pushing them to January-February. So we definitely -- and yes, the life companies are there, but I think giving up a window there, I don't think they're being aggressive and priced pick up volume, I think there is a kind of holding their pricing standards when they are there is what we're hearing. So, we would certainly expect that there would be potential opportunity as you said, we haven't -- we still have one at $100 million this year left dialed into our guidance for our acquisition. So we're hopeful that as we move closer to year end with that year-end point drawing clear there will be some people who for our portfolio reason or for some reason when a deal done by year-end, and our strategy is to have very low cost and very flexible capital, and we certainly had that with our credit facility, $750 million, we have plenty of capital. So we could certainly take advantage and our leverage is as low as it's ever been. So if that opportunity comes, we're certainly ready to take advantage of that and we think that's possible. Going forward, I think that agencies, we have heard that they still will have some commitment to the environment next year and feel good that that will continue to produce support and for liquidity next year.

Right very helpful, guys. Thank you.

Thanks, Buck.

Dan Oppenheim, Zelman.

Thanks very much. I was wondering, if you can talk a little bit more in terms of the acquisitions here in terms of just looking for more through the end of the year, is that something where you have some identified at this point or is that where you're there is a hope, there will be some will be some sellers with urgent timeline in the last two months of the year?

We've got one opportunity currently under contract that we're working through due diligence on right now that would get probably close to half of that opportunity or should it close, but we typically just over the years have always seen in the last couple of months of the year, people get a little bit more anxious about getting something done and we track a lot of deals over the course of the year that we pass on or that we feel like pricing has gotten away from us and oftentimes, those deals fall out of contract and then they circle back around and that typically happens the last couple months of the year. So we're going to be patient as I mentioned earlier, but we think it's conceivable that we'll get another deal or two done by year-end.

Okay. And then, in terms of the disposition environment, I think you did a great job earlier this year in terms of selling based on just the appetite from buyers out there and I heard your comments in terms of being happy and comfortable with the current market position because there is a difference between the -- with the supply demand dynamics in the market versus the efficiency side and with some of the secondary markets which it's still pretty small in terms of the overall value there, how do you think about that in terms of the efficiency? If this environment continues, would you look to sell out of some more of those markets?

But we feel like that we are able to handle the operations of those secondary markets on a fairly efficient basis because of course recognize that they're all in the Southeast and so we can get to them all fairly easily, fairly quickly. We have divisional offices in Atlanta and in Jacksonville and in Nashville, in Dallas and in Charlotte and so it's pretty easy for our folks to stay connected and we don't think that we really give up a whole lot in efficiency and we gain a whole lot in diversification, value and benefit.

Great, thank you.

Tom Lesnick, Capital One.

My first question just has to do with the potential for rising rate environment, obviously yesterday people on the street (inaudible) and probability of a rate hike jumped up by year-end, but some of your private competitors in the Southeast likely need a greater amount of leverage in order to execute deals. And therefore, the logic is that cap rates in your markets might be more sensitive to a rate increase. I guess, what's your view on that and since you are the largest [efficiency], so to speak, does that actually give you an increased competitive advantage for acquisitions?

We do think that in a rising rate environment, where cap rates get to move up a little bit and financing costs move up a little bit, we do probably net-net get more of a competitive advantage in that environment. I do think that we have seen a lot of fairly large institutional capital, institutional investors in most of these markets that we are in in the Southeast. And so these are the folks who have clear execution capabilities and strong balance sheets, but as you point out, they are using the financing environment to their advantage right now, I do think that, if we do see over the next couple of years, that dynamic change a little bit that it net-net probably creates more external growth opportunity for us.

Thanks. And then, I saw your acquisition guidance was revised slightly lower at the midpoint. Are we to read through on that and assume that, maybe that's -- you guys are just being a little bit more conservative at this point in the cycle, or how should we be looking at your investment in the external versus internal value creation opportunities going forward?

Well, I mean, I think the read-through on that is just more a function of what the external market is experiencing as opposed to any change in our part. We've always had a fairly disciplined approach to how we deploy capital. We've got some very defined protocols that we've used for over 20 years and in some market environments, it creates a little bit more of a challenge to find ways to put money to work on a basis to sort of meet those hurdles because the market's gotten a little bit frothy, which is the situation we find ourselves in right now. So there's no change from our perspective internally on anything that we're doing, it's just market conditions have created that. So that's the point. I'm sorry, what was the second part of your question?

Just, I mean kind of given that view, will we expect to see you perhaps increase your redevelopment program going forward and look for internal value creation opportunities?

Well, we certainly are working that angle of capital deployment as aggressively as we can. I think Tom and his team are looking at something around 5,000 units this year. We probably will have some comparable to that next year. What we find is that if we begin to accelerate that or push that in a more aggressive fashion, we typically start to run into a little more vacancy loss and a little bit lower return on the capital, when we start to press that agenda much more aggressively. So we're going to push it as far as we can, but we're not going to pushing it to pull, we start to compromise returns and we think it roughly around 5,000 units a year is about what we can handle without -- and keeping the returns very, very attractive.

And in keeping the test, correct. I mean it is very important to us on renovate. It's easy to do a renovate and think that you got it. It's harder to do a renovate and know that you've got the return. So when we are doing a renovation, we do the redeveloped unit and we lease it right next to a non-redeveloped unit and we measure the distance is between the two so that we know we're getting a fair return on our capital. If you go too hard, you lose the ability to be disciplined about it.

Okay, thanks. Appreciate the insight. Nice quarter guys.

Thank you.

Drew Babin, Robert W. Baird.

Good morning.

Good morning, Drew.

More of a top-down question. Many of your markets have benefited a lot from just not a lot of new supply deliveries in kind of the 2010 to 2012 time frame and elevated supply growth that we've seen in the last few years has really just kind of filled that void. Assuming demand kind of consistent with 15 levels going forward in 2016, 2017, 2018, how much runway do you believe there is before the inflection point where supply kind of just caused some marginal deceleration in fundamentals and kind of what markets do you expect that to happen in quicker and which markets the dropoff in new supply?

Drew, I've long believed that where you begin to see the dynamics in the chemistry, if you will, in the leasing environment materially change is really driven on the demand side of the equation. I think that the supply levels that we're seeing today, as you point out, in many cases or just in some cases, in some markets catching up, they certainly -- we've got a completely different sort of dynamic now with the millennial generation and the whole psychology and various changes in society, they continue to create sort of an elevated level of demand, at least for some time that we haven't experienced in the past.

So it's really hard to see any sort of a material weakening taking place over the next couple of years as a result on the assumption that the economic environment and the job growth environment continues at its current pace. I think where you see things really change materially is all of a sudden, we have a shock to the economy, we have a shock to a particular market, take Houston as an example where all of a sudden, the demand dynamics change and you frankly in many cases never see it coming and it catches everybody off-guard a little bit and then you still, of course, have this supply pipeline that's still coming online and you got to kind of work your way through that and that's where you see material change in the leasing environment, material change in your ability to push pricing.

So absent a tech meltdown in Atlanta or a further oil breakdown in Houston or some other sort of market-specific kind of event that I could point to, broadly speaking, as long as the economy stays healthy, we'll be okay, but if we have some sort of a crisis elsewhere in the world or something happens that causes the US economy to all of a sudden nosedive, I think that that could really change the equation quite a bit because we'll still have the supply coming online and we'll have to deal with that. But we don't see that happening and meanwhile what we attempt to do is continue to build strength in the portfolio, continue to recycle capital, get it exactly positioned as we want, stay balanced, stay diversified, build balance sheet strength, so that when those things do happen, you need to see a material change in the environment where first of all, okay and second of all position to take advantage of it.

Thanks for the insight. And in your markets, and I'll use Dallas as an example, a good deal of supply coming online this year and it's looking like next year as well is kind of concentrated in the CBD sort of the same high-end, high-rise type of product in deliveries for maybe the second half of 2016 into 2017, they are starting to see developers kind of target the suburbs a little more at the margin than they have been the last couple years?

I don't think there's any real evidence on that. I think that we find that construction costs continue to create some pressure and I think that's uniform across whether you're talking about more urban locations or suburban locations. I think that we've not seen any evidence to suggest that all of a sudden now, suburban locations are going to be more exposed to overdevelopment. I think that we continue to see a lot of interest in developers focusing on some of these infill locations. You may see a little bit more effort taking place at some of these sort of what I'll call inner loop areas where they can go in and areas being re-gentrified in some fashion and they go in and do some teardowns, we've seen some of this happening in north of downtown Atlanta area as an example, in the Buckhead area. But I don't think there is any evidence at this point that we can see suggesting that suburbs all of a sudden are going to be the big focus for developers going forward.

Thank you. Great quarter.

Thanks, Drew.

Tayo Okusanya, Jefferies.

Hi, yes, good morning, great quarter. As I start to look out a little bit further, 6 months to 12 months, could you just talk a little bit about operating expenses and kind of where you think that's going to be going, specifically like is it you're going to have another year like this year with taxes where things may start off pretty high and then maybe start to moderate later on?

Well, I think overall, let me start with that, Tayo. We don't expect expenses as you move into the future, [you meant] 2016 to be higher than they are today. I think we do continue to expect some pressure on the relative basis from taxes, maybe a little less than we felt this year. So if we are five this year, maybe we see that come down, but overall it's still a third of our expenses and it will be higher than the growth rate of the other expenses. So I think across the board, we expect next year to be not was this year in expenses and under control.

Okay. That's helpful. And then, just in regards to particular markets, you did make some comments about Houston earlier on. In Atlanta, your same-store revenue also kind of dropped over 100 basis points quarter-over-quarter. Just curious if there's anything specific going on in that market?

No, Atlanta is our strongest market. So pricing momentum there is good, results are good. I think if you look at the year-over-year comparison, second quarter to year-over-year comparison and third quarter, it gives a little bit of an odd story, because the comp was much tougher in third quarter than it was in second quarter, but pricing momentum very strong in Atlanta and we're excited to be there and excited that it's a large market for us.

Okay. That's helpful. Thank you.

Haendel St. Juste, Morgan Stanley.

Hey.

Hey.

[Good morning], Haendel.

Can you guys provide a bit more color on the two assets acquired, the two lease-up assets during the third quarter, perhaps some thoughts on stabilized yields and underwritten IRRs? And then, what was the rationale for buying assets in Kansas City, where you own just, I think two assets in Newport News or Virginia Beach where you also own just a few assets? It seems a bit out of line with your goal of trying to rationalize some of your non-core market exposure. So is this that you're signaling your intent to build some scale in these markets? And now, you consider those to be a core markets for you or maybe more a reflection of the challenges of investing in some of your larger markets?

No, I think that both acquisitions are exactly in line with what our strategy is that we outlined. We've long said that Kansas City being a secondary market, we think fits very well within sort of the dynamic we're trying to create for the secondary markets segment of the portfolio. And so we've been active in that market looking for opportunities, being patient as we look for opportunities and the property that we acquired in Overland Park is, we acquired it at something around 5.2%, 5.3% cap rate, NOI stabilized yield around 5.7%, 5.8%. So we feel very good about that investment and it continues to add to what we expect to be a growing presence in Kansas City.

The acquisition in Virginia Beach, we've got several properties in that area. Again, it's a different dynamics and as far as that area is concerned, a lot more government-based employment, but we've made an effort to expand our footprint in that area. Fredericksburg is an area we focused on, Charlottesville, Newport News Hampton, we've got a fair amount of presence in that area and we plan to continue to stay active in that market as well. And likewise, again, that was a property that we've been tracking for a couple of years. We acquired it at more around a 5.5% cap, closer to again 5.8%, 5.9% NOI yield, somewhere in that range. And it's a brand-new asset, so we think it'll be a good long-term investment for us.

Okay, appreciate that. And then, one more, if I may, a quick one on capital allocation. So you allocated some of your decision proceeds towards paying down debt this quarter as opposed to buying assets and now you're about 5.75 debt to EBITDA, down from about 6 last quarter. So maybe you can show us an update on your leverage goals, saying where you want your leverage to be over the course of the next year or two years in terms of debt to EBITDA. And then, as part of these capital allocation and/or balance sheet management goals, how does stock buybacks play into your current thinking?.

Haendel, this is Al, I'll answer the first part. I think in general, our leverage goals really haven't changed. We've long been in the call it 40% to 42% debt to gross assets is the right leverage level given our strategy with a lower risk, minimal development, high-quality cash flow, diversified markets, that makes sense for our Company. We're below the low end of that right now, not so much focused on that as much as being patient on the acquisitions side. We recycle capital, we haven't yet -- we're net sellers to the tune of about $100 million, $110 million right now. And so we're being patient with that. But we're comfortable with 40% to 42% range. I think over time as we move forward, you'll probably see us stay closer to the lower end of that range, particularly as we just continue to build and maintain balance sheet strength to have opportunity for the future, when things change in a year or two, when we don't know, but things certainly do at some point. We want balance sheet strength to take care of that. So our strategy in that area really hasn't changed and we feel like it's strong. We do think that the debt to EBITDA, we do expect to stay below 6 times, I think it's an important mark and so that was good to see.

And Haendel, I mean on the share buyback, I mean it's something we've done in the past. We obviously understand the approach, we understand the logic behind it, it's something we continue to monitor and keep an eye on. At this point, we feel like we can create better returns long term with being patient with the capital that we have, deleveraging a little bit, building capacity for what we think could be better buying opportunities in the future. And looking for the opportunities and scratching a coin for a few opportunities that we have gotten this year and those are going to be good returns on capital, we believe and -- but should the market turn particularly negative for some reason and we find ourselves trading at a persistent, meaningful discount to value, we certainly understand the logic behind using capital to reinvest in existing portfolio through share buyback and we'll continue to monitor it.

Remind me again, do you have a current authorization in place, and if so what's the capacity?

There is one there, it's been some time ago. We visit with our Board on this periodically, but we do have a plan that's been there for some years where we will probably be updating that at some point later this year.

All right, thank you.

You bet.

And it appears, we have no further questions at this time. I'll turn it back to our speakers for any closing remarks.

No closing remarks. So thanks everybody for joining us and we'll see a lot of you at NAREIT in a couple of weeks. Thank you.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.