Mid-America Apartment Communities Inc (MAA) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the MAA Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, January 31, 2019.

I will now turn the conference over to Tim Argo, Senior Vice President, Finance for MAA. Please go ahead, sir.

Thank you, Denise, and good morning, everyone. This is Tim Argo, SVP of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; Tom Grimes, our COO; and Rob DelPriore, our General Counsel.

Before we begin with our prepared comments this morning, I would like 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 forward-looking statements section in yesterday's earnings release and our 34-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. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data, which are available on the For Investors page of our website at www.maac.com.

I'll now turn the call over to Eric.

Thanks, Tim, and good morning. We wrapped up 2018 slightly ahead of where we expected, with FFO per share of $6.06 per share, excluding the noncash mark-to-market accounting adjustment related to the preferred shares. We're encouraged with our fourth quarter results as the positive trends and rent growth and high occupancy are clearly evident. While the new supply pipeline in several markets will challenge near-term rent growth, we're encouraged with the continued strong demand for apartment housing across our markets. Our portfolio continues to benefit from strong job growth and overall high demand for apartment housing.

We continue to believe that new supply pressure in 2019 will remain elevated, but down slightly from 2018. Tom will cover more details concerning our higher concentration markets. But broadly, when weighting our market exposures by percentage of NOI and refining the analysis to neighborhood-specific assessments of new supply, our latest update is very similar to the information we shared at NAREIT in November. In summary, we expect 48% of our portfolios' market exposure will show some level of improvement in 2019 with lower supply as compared to prior year. 44% of our market exposure is expected to see slightly higher levels of new delivery in 2019, and 8% of the portfolio exposure will see current year deliveries in line with prior year new deliveries.

Assuming the demand side equation remains strong, we expect the positive pricing momentum we've seen over the back half of 2018 to continue through calendar year 2019. As we continue to work through the later stages of the current cycle, we do expect to see developers get a little more aggressive with their lease-up tactics and have dialed that into our expectations for 2019. With the goal of maximizing long-term revenue results, we remain focused on continuing to capture the encouraging trends in rent growth. Given where we are in the cycle, we expect that it might come at the cost of a low current occupancy. But let me be clear about this. As Al will outline in his comments, we do expect to post strong occupancy in 2019 of 95.9% average daily occupancy throughout the year, which represents only a slight 20 basis point moderation from the record high 96.1% average daily occupancy throughout 2018.

As commented in our third quarter earnings release, our merger integration activities are now complete. We're very pleased with the results over the last couple of years in harvesting the expense synergies we had previously identified surrounding property level operating expenses and G&A overhead costs. We do expect to see year-over-year growth and expenses begin to normalize in 2019. As expected, the opportunities on the revenue side of the equation surrounding various revenue management practices and significant redevelopment opportunities within the legacy Post portfolio have been slower to capture than the expense side given the new supply pressures in a number of markets. However, despite this pressure, the improving pricing trends within the legacy Post portfolio over the past couple of quarters are encouraging. And in addition, we will be executing on a higher number of redeveloped opportunities this year within that part of the portfolio.

Are 4 projects in lease-up continue to become increasingly productive and in line with our expectations. We expect to see all 4 properties stabilize over the course of this year. We expect to see our new development projects in Raleigh and Denver begin initial leasing and occupancy over the back half of this year, with our newest project in the Frisco submarket of North Dallas coming online early next year. We started a new expansion project at our Copper Ridge community in North Fortworth this month on existing owned land. At this point, we're also working predevelopment at new development projects in Phoenix, Denver, Orlando and Houston that we expect to start later this year.

In summary, we're encouraged with the continued momentum in pricing that we're capturing despite the new supply headwinds in several of our larger markets. We believe our portfolio focused on the strong job growth Sunbelt region, diversified across markets, submarkets and price points appealing to the largest segments of the rental market continue to position MAA for solid performance over the full real estate cycle. Our balance sheet is at a strong position and certainly able to support the external growth opportunities we're currently executing on and any others that may emerge. After 2 years of merger activities that are now complete, our platform is stable and stronger. We look forward to the performance opportunities in 2019.

I'm going to turn the call over to Tom now.

Thank you, Eric, and good morning, everyone. Our operating performance for the fourth quarter came in as expected, with building momentum and rent growth continued strong average daily occupancy and improving trends that set us up well for 2019. The results of the integration work on the operating platform were evident in our leasing momentum during the quarter. We saw blended lease-over-lease performance of the combined portfolio grow by 1.6% in the fourth quarter, which is 150 basis points higher than the same time last year. Average daily occupancy remains strong at 96.1%. As a result of the steady positive trend and blended pricing, we saw our revenues buck seasonal trends, and they accelerated from 2% in the third quarter to 2.3% in the fourth quarter. Our elevated supply levels have pressured rent growth in several of our markets, particularly Dallas and Austin, we're still seeing good revenue growth in a number of our other markets. Among our highest concentration markets, Phoenix, Richmond, Tampa and Orlando are our strongest revenue growth markets.

Expense performance was steady for the fourth quarter at 3%. This includes 5.8% growth in real estate taxes, which was partially offset by reductions in building, repair and maintenance as well as marketing.

For the year, our total expense growth was just 2%. While we have captured the scale and labor opportunities available during this merger, we still expect to continue our disciplined expense practices. Our annual operating expense growth rate since 2012 has been just 2.4%, well below the sector average.

The favorable trends continued into January. All pricing indicators are trending ahead of last year. Currently, same store January blended lease-over-lease rates are up a healthy 3.1%, which is 260 basis points better than January of last year. Average daily occupancy for the month is a strong 96%. Our 60-day exposure, which represents all vacant units and move-out notices for a 60-day period is a low 7.2%. We are well positioned for 2019.

Our focus on customer service and retention, coupled with social trends supporting steady renter demand, continued to drop down resident turnover. Move-outs for the overall same store portfolio were down 7% for the quarter. Move-outs to home buying and move-outs to home renting were down 5% and 12%, respectively. On a rolling 12-month basis, turnover was a historic low of 48.5%. This level of turnover was achieved while increasing renewal rents, a notable 6.1%.

On the redevelopment front, in the fourth quarter, we completed 1,600 units, which brought us to a total of 8,200 unit interior upgrades for the year. For 2019, we again expect to complete close to 8,000 unit interior upgrades. As a reminder, on average, we spent $6,100 per unit and charge an additional 11% in rent, which generates a year 1 cash-on-cash return in excess of 20%. Our total redevelopment pipeline now stands in the neighborhood of 17,500 to 20,500 units.

Our active leads in subcommunities, Sync36 and Post River North in Denver, Post Centennial Park in Atlanta and Phase 2 of 1201 Midtown in Mount Pleasant -- and on Mount Pleasant submarket of Charleston, are all leasing up in line with expectations. Looking forward, as Eric mentioned, our overall supply in our markets is expected to improve modestly in 2019. We take the third-party data and then crosscheck this supply data with our own asset-by-asset information. Performance by market will vary, but at this point, we believe overall, we will see some decline in deliveries.

Our Dallas and Austin assets are expected to remain challenging, with supplier levels continuing in the 3% to 4% of inventory range. We expect Charlotte to soften as supply picks up near our assets, and we expect the strength in Jacksonville, Orlando, Tampa and Phoenix to continue as all currently show supply decreasing. We're pleased to have the merger integration wrapped up and greatly appreciate the tireless efforts of our associates as we retool the company over the last 2 years. We are starting 2019 in a much better position than 2018, and we look forward to the coming year. Al?

Thanks, Tom, and good morning, everyone. I'll provide some additional commentary on the company's fourth quarter earnings performance, balance sheet activity and, then finally, on the key components of our initial guidance for 2019.

FFO for the fourth quarter was $1.55 per share, which included $0.02 per share of noncash expense related to the accounting adjustment of preferred shares acquired during the Post merger. Excluding this adjustment, our FFO per share for the fourth quarter was a $0.01 above the midpoint of our prior guidance, with the majority of this outperformance produced by favorable interest expense during the quarter.

Our overall same store performance for the fourth quarter is in line with our expectations as continued pricing momentum produced a 2.3% year-over-year growth in total revenues, which accelerated, as Tom mentioned, from the 2% in the third quarter.

Overall blended lease pricing growth, combined new and renewal pricing finished the year -- the full year at 2.5%, which was 80 basis points above the prior year. Same store expense growth of 3% for the fourth quarter was primarily driven by a 5.8% growth in real estate tax expense, which represents 36% of total same store operating expenses as pressure late in the year from certain municipalities, primarily Atlanta and Dallas, impacted the fourth quarter. And for the full year, real estate tax expense grew 4.2% as compared to our initial guidance of 3.5% to 4.5% for the year.

During the fourth quarter, we completed construction of one development community, an expansion community, a phase of a community in Charleston, which leaves 3 communities undeveloped -- under development at year-end, with a total projected cost of $118.5 million, of which about $87.5 million remain to be funding as of year-end. We also acquired 2 land parcels during the fourth quarter, 1 in Denver and 1 in Houston, both related to planned new development projects expected to begin during 2019.

Given our current pipeline and planned new projects, we expect total construction funding to increase in 2019, ranging between $100 million and $150 million. We continue to expect NOI yields of 6% to 6.5% on average from our development portfolio once they're completed and fully stabilized.

During the fourth quarter, we had 2 communities complete lease-up and reached stabilization, which we measure as 90% occupancy for greater than 90 days, and we still have 4 communities in lease-up at year-end, including the recently completed community mentioned earlier. Average occupancy for our lease-up portfolio ended the year at 62.4%. As Tom mentioned, leasing is going well for the group, and we expect growing earnings contribution during 2019 and end of 2020 as 2 of these communities are projected to stabilize in the first half of the year and the final 2 stabilizing later in the year.

Our balance sheet remains in great shape at year-end. During the fourth quarter, we had a fairly significant amount of financing activity as we paid off the final $80 million of Fannie Mae secured credit facility, which matured in December, an additional $530 million of secured mortgages maturing in early 2019. Given the volatility of the credit markets during the fourth quarter, we revised our financing plans and entered a 30-year fixed rate secured mortgage for $172 million and a $300 million variable rate unsecured 6-month term loan, which we expect to replace in 2019 with additional fixed rate financing. At the end of the year, we had over $490 million of combined cash capacity under our credit facility. Our leverage as defined by our bond covenants was only 32.6%, while our net debt to recurring EBITDAre was just below 5x.

Finally, we are providing initial earnings guidance for 2019 with the release, which is detailed in our supplemental information package. We're providing guidance for net income per diluted common share, which is reconciled to FFO and AFFO per share in the supplement. We're also providing guidance on other key business metrics expected to drive performance in 2019.

Also, though we do expect to continue the volatility in our NAREIT reported FFO results related to the noncash accounting adjustment on our preferred shares, we did not include the adjustments in our forecast as these are both noncash and really impractical to predict.

Net income per diluted common share is projected to be $2.11 to $2.35 for the full year of 2019. FFO is projected to be $6.03 to $6.27 per share, or $6.15 at the midpoint. AFFO is projected to be $5.39 to $5.63 per share, or $5.51 at the midpoint.

The main driver of full year 2019 performance is our same store guidance. Revenue growth projected to be 2.3% at the midpoint is based on continued strong average daily occupancy of 95.9% at the midpoint. And projected average blended rental pricing, which is new leases and renewals combined to 2.7% for the year, which is a modest improvement over 2018. We expect operating expenses to grow at 3.1% at the midpoint, coming off of 2 years of very low expense growth. We expect real estate taxes to continue to produce the most pressure, increasing 4.25% at the midpoint. And this expected same store revenue and operating expense performance produces NOI growth of 1.8% at the midpoint.

We expect the acquisition environment to remain competitive. We project total acquisition volume for 2019 to range between $125 million and $175 million and to consist primarily of nonstabilized deals. We also plan to resume our portfolio recycling efforts with projected disposition volume of $75 million to $125 million likely closing in the second half of the year.

We expect the end of 2019 with our leverage near current levels as a percentage of gross assets, producing an average effective interest rate of 3.9% to 4.1%, which is about 20 basis points above the prior year at the midpoint, which represents an $0.08 per share impact to our earnings. A portion of this projected increase is related to the continued impact of rising short-term interest rates, with the remaining portion primarily due to the declining mark-to-market adjustment related to the debt acquired from -- of Colonial and Post mergers as the favorable fair market value adjustments from both mergers essentially burned off during 2018.

Our guidance also assumes total overhead cost, which we included G&A and property management expenses combined, will range between $96.5 million and $98.5 million, reflecting more normalized run rate for 2019, which includes a full year carry of investments we made in our people, facilities, systems and web presence to improve our operating platform, capabilities, scalability, our cybersecurity and -- which all of this which was planned as part of the merger integration efforts.

Our total overhead cost for 2018 were actually below our original estimates for the year and actually declined from 2017, primarily due to the timing of some of these planned investments and the impact of several nonrecurring items during the year, which impacted legal, casualty insurance and medical insurance costs for the year.

We expect our total overhead growth for -- over the longer term to be around 5% annually, which is in line with the sector average.

That's all that we have in the way of prepared comments. So operator, we'll now turn the call back over to you for questions.

(Operator Instructions) And we'll go ahead and take our first question from Trent from Scotiabank.

You called out supply pressures in Austin, Charlotte, plus Dallas and Atlanta continue to see high levels in permitting and new supply. And very much thank you for breaking out your NOI into a higher and lower and similar supply buckets for 2019, but how can you be confident in your ability to assert pricing power and show same store revenue acceleration at the aggregate level if these pressures persist in your largest markets? And I guess, another way of saying this, can you maybe talk about the magnitude of supply increases versus the magnitude of declines?

Let me start. Trent, this is Eric, and Tom can give you some more specifics. I mean, our comfort or our confidence, if you will, as it pertains to 2019 rent growth despite these supply pressures is really based in what we see as continued very strong demand. And we've seen no evidence that the demand side of the equation is weakening. We continue to see very low move-out occurring, and the job growth numbers continue to be encouraging. So with that level of demand, when we start looking at our particular locations, and as Tom mentioned in his call, we take the AXIO data and other sort of macro level data, and we do a deeper dive with it into specific neighborhoods and so forth where we're located. And ultimately, we do see this mix of roughly 48% of the portfolio suggesting slightly lower supply pressure, 44% slightly higher and about 8% being pretty consistent. But really, the confidence that we have is really driven by the demand side of the equation. As long as that's there, we think that the rent trends that we're seeing are going to continue to hold up. And one other thing I'll add, I do believe that as we get later in the cycle that developers may get ever more aggressive with some of their lease-up practices in an effort to get full quicker. And that's what really -- we haven't seen the evidence of that yet, but I think it's reasonable to expect that it may come in certain areas. And that really led us to introduce the notion that we'll maintain strong occupancy, but it may not be quite at 96.1% that we did in 2018. We believe that, really, to protect long-term revenue growth that your rent growth really matters, and we wanted to continue to capture that rent growth trend that we're seeing. We think we'll do so. And if it comes at the cost of a little occupancy in 2019, we're okay with that. We think that's the right long-term play to make.

And then just underlying the confidence on the revenue side, the rent trends I touched on for Q4 and January, just to put those in perspective, for first quarter, blended rents increase was 45 basis points better than last year. And second quarter was 100 basis points better; third quarter, 60; fourth quarter, 150 basis points; in January, 260 basis points. So we feel good about the underlying results that we're seeing on the pricing trends.

Okay, that's great color. As it relates to the transaction market, on the third quarter call, Eric, you mentioned that you were seeing perhaps some early indications that deal flow might come back to you as things were starting to fray a little bit. It may have been very preliminary, but your guidance does call for some lease-up acquisitions, and you stated significant capacity on your balance sheet. So can you maybe give us an update on how you're viewing the transaction markets, the deal flow? What opportunities are out there? What you're looking at? And how competitive it is to find accretive deal that meet your standards at this time?

So it's still very, very competitive. As you may know, I mean, the market tends to take a little bit of a breather during the very early part of the year. I know our transaction team is out at the National Multi Housing conference for a broker event, as what has become almost an annual meeting right now. And they usually come back with a lot of leads, if you will, a lot of opportunities that I know they're talking about this week. There continues to be just a high level of interest by private capital in the space. So we fully expect that this next year, 2019 will be as competitive as was we saw in 2018. But having said that, again, we're just getting later in the cycle, and I think that some of the lease-up properties will perhaps run into a little bit more headwind than what they may have experienced in '18. And as a consequence of that, we're hopeful that, that may create a little pressure, which creates some better buying opportunities for us. We're going to remain disciplined, but we continue to have hope that '19 is going to deliver a few more opportunities. And I mean, the volume is still high, but we're going to continue to remain optimistic about '19 opportunities.

(Operator Instructions) We'll go ahead and take our next question from Nick from Citi.

It's been 2 years, but now that the integration with the Post is complete, are you seeing any difference in same store growth and margins in 2019 between the 2 portfolios?

Yes. Nick, it's Tom. What we're really seeing -- we're -- Mid-America is 2.6% on the portfolio, Post is 1.7%. What to me is most interesting is the rate of acceleration on the Post side, which was second quarter 0.4% and now 0.7 -- 1.7%, on the revenue growth side.

What I would say, Nick, is that we saw incredible opportunities that we harvested in the first 2 years on the expense side of the equation as we renegotiated contracts and got some very huge benefits of scale that we're able to bring to the Post portfolio on the expense side as well as sort of retooling some of the practices in turn activities and with labor cost. And that's what really fueled some pretty low year-over-year expense growth that we've had for the last 2 years, not only -- and particularly in the Post portfolio, but in aggregate, the overall MAA portfolio had pretty strong expense performance. But what's been slower to come online has been the opportunities on the revenue side, and a lot of that is a function of really 3 things. It -- first of all, you got to -- there's some training, and there's some people, things that you have to sort of get stabilize and get right, and that takes a little time. Two, the market conditions as a function of higher supply levels have been more pressuring the Post locations, which is -- we're battling that. And then third, we have to just basically get into the revenue management practices. And as you know, particularly when the opportunity lies in the area of rent growth, it takes time for that momentum to build. You have to go through a full leasing cycle and repriced portfolio and bring all the training and all the revenue we have in practices together. And as what Tom is alluding to there, which gives us a lot of encouragement, is the improving pricing trends that we're seeing out of the legacy Post portfolio are far superior than what we're seeing on the MAA portfolio. So it does suggest to us that we're going to see continued momentum. And then as I mentioned in my comments earlier too, next year, we'll be redeveloping more the Post portfolio as a percentage of what we do in terms of overall redevelopment. So I think we're going to continue to see the momentum and the opportunities on the revenue side come together more so over the next couple of years.

And then just on the total overhead, obviously up pretty meaningfully over 2018. Can you walk through the main drivers of that? And then, is this 2019 guidance a good baseline going forward? Or are there any onetime items in there?

Nick, this is Al. I can walk you through that. I think 2019, certainly compared to '18, was a fairly significant increase, but it has a lot to do, really, with some of the activity in '18, and there was a good bit of noise still in the year related to some of the things going on. So if you look at 2018, it actually declined from '17 and was pretty, on a good bit, lower than what we had put out initially in our guidance early on in the year, really for a couple of reasons. One, as we're making investments for an integration and for the platform that we knew that we were going to put together, we -- some of those came later than we expected as we wanted to get deeper into the project, into the process and really zero in on exactly what we wanted and what we wanted to invest in to make our platform, what we wanted to be for the future. So '18 was lower. '19, you'll feel the full run rate of that. And then we had some onetime items in 2018, some cost that were unfavorable that won't recur in '19, and some on our insurance or workers comp, our [zseal] insurance, our medical insurance and some of our legal costs a little lower. We're glad to have -- we don't think that will repeat in '19. So what I will say is, '19 is a fairly large increase. We would expect, as you move into -- as we move to 2020, we have a more modest increase. We think that '19 is a full year run rate of our platform that we expect. And I think if you look at over a 3-year window, I talked about the decline in '18, rise in '19 and a more modest rise in '20. We expect it to be in line with the long-term sector average of 5% to 6%. That's how we built it.

We'll go ahead and take the next question from Austin from KeyBanc Capital Markets.

You guys mentioned you started out the year with blended lease rates of over 3% in January. But the average, I think, you're assuming for the full year is 2.7%. So just curious what leads you to believe that lease rates will moderate later into the year?

I'll start with that, and then Tom can jump in. I think one of the things going on is, as you remember, we had some pretty favorable comparison on some leasing activity late last year. Fourth quarter last year is when it really got challenging for us, and so I think some of the new leases we're putting on as we move into January are really strong comparisons. I think as we move into the year, Tom will say, that, that may moderate somewhat. But we do -- we feel good about what got us to that.

No. Absolutely, that sort of trend that I rattled off a little bit earlier. We'll have to start comparing to that. And so we've got -- the comparisons, we've got good opportunity first part of the year, but don't expect to keep [3.1%] all the way through.

Is that a function -- I understand that from a spread perspective that the spreads become more difficult. But from an absolute level, I guess, is it just you're cautious to push rent on the same tenant 2 years in a row at a consistent level? Or in order to kind of -- in order to sustain occupancy or -- I'll just say it. I guess, I don't fully understand the comp discussion in a stable supply environment. I would think, maybe, you could still push, I guess, at a similar rate. So can you just dive in a little bit there?

On the same resident back-to-back, that's on the renewal side, and renewals are strengthening. And I feel very comfortable with that in the 6% to 7% range right out of the shute right now. The variable is on the new lease rates, and we do -- we think we will have good performance there just not the same gap that we had prior.

But outside, I mean, we certainly intend and expect that our ability to push rents in 2019 will be comparable to what we did in 2018. We don't see any reason to suggest that we're going to have to back off. And the only thing that is different, if you will, in '19 versus '18 is that we think as we continue that same level of push on pricing, as we get later in the cycle and we get -- I think most of the information I've seen for AXIO and others suggest that the -- we got a peak in deliveries in Q2 right in the start of the spring leasing season. It may come at the cost -- that pushing on pricing may come at the cost of a little bit of a give up on occupancy. And we think it's important to be willing to make that trade-off right now in order to sort of protect the long-term revenue goals that we have. So -- but to answer your question, no, we absolutely don't believe we're going to need to back off on the -- pushing on the rents. It's just that the prior year comparisons that we're comparing against are just a little harder as we get later in the year.

Yes, that's helpful. And then as far as the peaking in the second quarter, what have you seen as far as construction delays in your markets? Are you continuing to see them? Or have they started to slow a bit?

About -- all I can tell you is, I'm sure construction delays will continue. I think there's been no evidence whatsoever that the labor issues have gotten any easier, and that typically is what's causing a lot of the delays to occur. The information that I alluded to that we saw from AXIO suggesting that it would peak in Q2, I fully expect that to slide a little bit into Q3. So I don't know at this point. Something we're watching very, very closely. But I wouldn't fully expect some of these projects to slip a little bit over the course of the year.

And then just last one. I'm just curious if you -- in your forecast, when do you see supply growth in your submarkets in Dallas begin to moderate?

We're seeing some early signs that it may moderate late in the year, but I think Dallas is going to be challenging for the -- pretty much for the full year. It's way too early to call the end on that one, and will be challenging, particularly the first 2 quarters of the year.

(Operator Instructions) We'll go ahead and take our next question from John Kim from BMO Capital Markets.

On your occupancy guidance for the year, I believe it's only a 20 basis points dip, but do you believe as far that the turnover rate will increase during the year? Or it'll take longer to lease-up vacant units? Or a combination of both?

It's hard to know. I would say, likely. I would think more likely it's going to come primarily through just slightly higher average number of days vacancy between turns. I think that for all the reasons Tom alluded to, the retention rate and the lower turnover that we're seeing, I suspect, is going to continue to be low. I mean, the #1 reason people leave us is because of some sort of change in their employment status, and absent some sort of slowdown in the job market, which we don't anticipate. I don't think we're going to see more pressure on that front. And then when you look at the #2 reason people leave us is to go buy a house. That seems to not becoming any worse, for sure, maybe even slightly better. So as a consequence of that, I think that I'm optimistic that the turnover component remains fairly static in '19 relative to '18. We just think that some of these lease-up projects will get a little bit more aggressive. We, as I mentioned, are committed to holding the -- as much as we can, the trend, and we think we can on rent growth. And we think that it may require a little bit of concession on some -- days vacancy between turns on new move-ins. And we think that's the right trade-off to make right now in order to protect the strong rent growth improvement that we're seeing take place. And again, we're looking to capture a very strong average daily occupancy at 95.9%, I mean, that's pretty darn strong. And we think we'll do that this year.

I apologize if I missed this if you already answered this, but where do you think renewals will be this year versus the 6% you got last year?

I would think we would be between 5.5% and 6.5% for the year on -- trending a little higher than that in January. But I would feel comfortable in the 5.5% to 6.5% range.

Okay. On the expense side, with tax increases of 4.25% overhead cost going up 5% as I realized some of that is in G&A. Is 3% same store expense growth the new norm for the foreseeable future?

I mean, I think if you look at the -- John, this is Al. If you look at our long-term averages, it's closer to 2.5%. I think the real estate tax -- I think what we have going over the last couple of years is really good performance for 2 years. 2% on average last couple of years, driven by reductions in repair and maintenance and marketing, some of the areas where we're able to capture strong synergies from our deals, and we had the tax pressure offsetting that somewhat. We have about 5% growth in real estate taxes over those 2 years and still ready to put the 2% total expense growth forward. So I think going forward, what you'll see is personnel -- those other lines will be under control, but more close to normal levels of growth, personnel, 2%, 2.5%; repair and maintenance closer to 3%; modest growth in the other line items; and taxes being 1/3 of your cost in the fourth quarter range producing the majority.

One way of looking at it is that if -- when you think about real estate taxes comprising the large percentage it does over our overall tax expense base, that growth rate almost by the math implies a lower, less than 3% growth rate on all the other line items. And so I think that the new norm is, my guess is going to be closer to 3%. And to -- in any given year, a lot of it is going to be up or down as a consequence of real estate taxes.

And we would hope over time, in a couple of years real estate taxes begin to moderate. But right now, there's a lot of pressure from Texas, Georgia and not surprisingly...

The low cap rate environment fueling that.

Got it. Okay. And then on your market commentary and as far as where you're seeing the greater supply pressure, back in November at NAREIT, you guys were saying Austin, charlotte and D.C. were the 3 major markets. It looks like Dallas has moved up into that bucket. I'm wondering what changed in the last couple of months with Dallas? And also, is D.C. is still a market we'll see an elevated supply?

D.C. is still a market in the elevated bucket. And then Dallas just sort of -- Dallas is very close to even. In some looks, it is slightly higher. In others, it's slightly lower. But John, I just expect it to be pressured in about the same as next year.

Yes. I think, John, we would say Dallas is still kind of in that same bucket. But it's still -- it's elevated both years, but not necessarily getting way better or way worse.

And we will go ahead and take our next question from Rob Stevenson from Janney.

Tom, which markets have the widest band of likely same store revenue outcomes when you did your budgeting for '19?

Meaning, where do we think our strongest markets will be and where do our weakest? Or within the market, which has the largest delta between assets?

The largest delta between basically the up end -- the top end of the range and the bottom end of the range. I assume that Al made you pick the middle or somewhere below the middle from a conservative basis in most of your markets when you were going through from an earning standpoint, but like, which markets are most likely to have a surprise in the up end or down side in '19 relative to where you guys set the median expectation?

Yes. It's sort of -- what I'd tell you is that, that comes down maybe to the change in the back half of the year. And I would tell you that Charlotte, relatively strong right now. And -- but is -- we're expecting some supply there especially later, and so that may change over time. And then Nashville, it looks like it maybe better later half of the year. But it's challenging, very challenging right now.

Okay. And then the 8,000 units you expect to renovate this year, are these all going to be on turns? Or are you going to take some units out of service?

They will all be on turns.

Okay. And then lastly for me. Al, what's the known noncash or nonrecurring things impacting FFO in '19?

Noncash? You know it's a much cleaner year in 2019. The fair market value of the debts pretty much burned off. You would probably have the preferred that you know of, and we did not put that in our forecast because it's just almost impossible, virtually impossible to predict. But those are the key noncash items in 2019. I think as -- and the good news is, we've had -- the bad news is we've had a good bit of noise over the last few years for some of those items, Rob. I think as we move forward '19, '20 and beyond, we're very glad to be in more stable years with less of that noise and should have more consistent growth production.

I'll add one point, Rob. Absent anything in the preferred, which is noncash, is about $500,000 or so less on that debt mark-to-market noncash and that's...

Virtually gone.

That's pretty much it.

Yes.

Okay. So at NAREIT, in a normalized or core FFO should be at this point in the year, you guys think would be fairly consistent but for anything that happens on the preferred and that $500,000 of debt?

That's right. Excluding the preferred, we think those numbers will be very close.

And we'll go ahead and take our next question from Drew Babin from Baird.

With regard to Dallas, Atlanta and Charlotte kind of being -- well, being the 3 biggest markets, but also the 3 markets where you have a lot of Post legacy assets, would you say that lease-over-lease blended pricing expectations are above the midpoint of the 2.2% to 3.2% range for the year for those 3 markets? And if not, like in the case of Dallas, I would assume they might be lower. How does uptown stack up versus the northern suburban assets where I know there's a lot of supply kind of out in Frisco and Plano now?

Yes. No, they're lower. And Dallas, as you mentioned, uptown is under pressure, but Frisco, Plano, McKinney, are all seeing their fair share as well. Atlanta and Charlotte, a little bit different. Inside the perimeter, Atlanta, outside the perimeter Atlanta, 2 different markets. We're very strong outside the perimeter end market in Atlanta and in the majority of the headwinds that we have on supply are Peachtree Road, Midtown, Downtown in -- really in our loop. And in Charlotte, it's sort of this -- a similar picture where Uptown, Downtown, South Church area seeing a little bit more supply, and the suburbs, broadly stronger. So Dallas, a little bit wider spread, and it's more targeted in the Atlanta and Charlotte markets.

Okay. And you would say that the Post legacy assets, if you kind of broke those out with some of the redevelopments and renovations, would you say that those assets are doing better than kind of a 2.7% midpoint on that lease-over-lease?

The number of renovates that we have done thus far on the Post side of things, Drew, is not enough to really impact that just yet. It's building and it will come. But those Post Properties are facing a little bit uphill battle on the supply right in their backyard.

Okay, that's helpful. And one question for Al. Just on the line balance, I think it was still over $500 million at the end of the year. And I'm not sure if that includes the term loan or not. But as you look out to maybe more permanently finance that, what are the options on the table and guidance? If we could start with that, I have a follow-up.

Right. Actually, no, the term loan is not in our line of credit outstanding balance there, Drew. That's a good point. Just in context, we paid off about over $600 million -- just over $600 million of debt in late in the year, as we talked about. And we had a plan, as we talked about, a few quarters to do a bond deal to be active in the bond market late in the year, but the market volatility really cause us to be more a little more patient in that. And so we talked about doing $600 million, maybe some long-term tenure and some normal tenure. So what we did, we revised our plans a little bit and did a little bit of unsecured 30-year, the $172 million that you saw. And we put in a $300 million term loan, which is -- it was a short-term term loan, which we will expect to be active in the bond markets early in the year to replace that. So I think in going forward, what you should see is and you should expect in your model is a bond deal in the first part of the year replacing that $300 million, and maybe a couple of hundred million more of debt whether -- and it will be opportunistic, whether it's bond or whether it's mortgage -- secured mortgage, averaging about 4.5% rates, what we have in the forecast for us for the year. So markets will give us what they give us, and that's what we're -- what we've dialed in.

Okay. And with this 30-year mortgage you did in the fourth quarter, what was the rate benefit of doing that versus a 30-year unsecured? And then as you look out to this year, is the 30-year unsecured bond still on the table?

Yes, absolutely. One of the interesting things we saw late in the year was doing a 30-year bond as markets got volatile. The spreads really widened on that. As you would expect, it's perceived risk. But on the secured market, which is more in the private market, it was much tighter. And so we had 4.4% rate on that all in, which is well below what we could've gotten the bond even when things were fairly stable. So I think that was good execution. We don't -- we obviously don't want to. We want to protect our balance sheet. We want to get too much secured debt. But you could see use a little bit more because we're -- we have about 8% of our assets are encumbered right now, so it's very, very low. So we could do a little bit more. So you may see us next year do a little bit more of that if the rates are good, and then have a bond deal in the $300 million to $400 million range.

And we will take our next question from John Guinee from Stifel.

When I look at your, what I would call a true FAD number after subtracting out revenue creating CapEx, it looks like you're going to be in the $4.25 to $4.50 in 2019, and I think you just increased your dividend about 4% up to $3.84. How do you feel over time about being able to sustain a 4%-plus dividend increase annually?

This is Eric. We feel pretty good about that, honestly. We think that we're going to be in a position -- I mean, these -- we go through various points in the cycle, obviously, but we think we're trending back to a normal sort of same store internal earnings growth rate that's going to be in the, kind of 3% range or thereabout on a year-over-year basis. And then as we outlined, we do believe that the external growth front is going to get better at some point from an acquisitions perspective over the next couple of years. We are increasing our ability to deploy capital at some pretty accretive yields on new development. And so we think that over the next couple of years, the external growth picture gets a little stronger, and so it's going to add another 1% or 2% to that. And then you put a leverage on that, you start to get to a -- and of course, as we continue the recycling effort, we'll be selling off older assets and redeploying into newer assets, which is going to be beneficial from a -- more beneficial from a FAD perspective with lower CapEx on the newer asset. So I would tell you, we feel pretty darn comfortable about -- as a long-term sustainable growth rate of that dividend in the 4% to 5% range.

(Operator Instructions) And we will go ahead and move on to Tayo Okusanya from Jefferies.

A question around the redevelopment of the apartment. The cost per unit was a little bit elevated this quarter. Just curious whether that's mix or whether that's the case of construction cost going up in general? And if that's the case, if it's having an impact on the returns on the yield you're getting in the redevelopment?

It's mixed, Tayo. As we feather in more of the Post portfolio, that's at 8,000 per unit average roughly, and that's pulled our average up over time.

And the good news on that, Tayo, is that rent increase, the economic returns are similar, it's just relative to the larger capital. You get a higher return with higher rent increase.

Yes, we don't compromise.

We don't compromise on returns.

Okay, that's helpful. Then the second thing I want to just kind of explore is 2019 guidance. The blended rate, again 2.2% to 3.2%, so an average about 2.7% or so. You were talking about renewals of 5.5% to 6.5%, so that means new rates will be kind of 0-ish basically, for the year. And I'm just curious, you made the comment earlier on that given the backdrop for your portfolio, you will more likely push price even at the risk of losing some occupancy. But when I kind of think about renewals at 6% and new leases at about 0 and the risk that you may have, a couple of developers getting aggressive with pricing and your ability -- it sounds like this whole year is going to boil down to the ability to kind of get 6% on renewals? Is that really the story this year? And that new leases is just going to be, it is what it is?

I'll start with that, and then Tom can add some color on that, Tayo. I think how we thought about the forecast was, we're very happy with January performance. But as we look to the full year, we expect renewals to continue the trend we saw largely from last year. We -- we've kind of -- assuming 5.5% -- 5% to 6% range, 5.5% to 6% most likely for the year. And so new lease pricing is going to be the most competitive part. It has been. And as we -- as the supply pressure continues in the markets as high levels, that will be the point of most competition, so you're right. Doing the math, that is flat to slightly positive, I think, is what that general expectation would be. Different market to market, some markets are going to be negative but under more pressure, and some are more positive. So, you want to give color on some of that, Tom?

Yes. No, and we touched on it earlier. New lease right -- new lease rates will be under pressure in intown Atlanta, Charlotte, later at Dallas and Austin. But I -- that will vary from place to place. We'll also see, I think, strong new lease growth from Tampa, Orlando, Jacksonville, Phoenix, so hard to generalize.

(Operator Instructions) We will go ahead and take our next question from Hardik Goel from Zelman & Associates.

I was just wondering on the land parcels you guys acquired in Houston and Denver, how you came upon that opportunity? How long have you been looking at that? And how you're underwriting development today on those? And just a sense for what the yield might be on those?

Well, we had been looking at both of these opportunities for quite some time, probably anywhere from 6 to 9 months in advance of actually getting to a point where we were able to put them under contract. The opportunity in Denver is in areas just a little bit northwest of Downtown, sort of halfway between Denver -- Downtown Denver and Boulder is an area called Westminster that we are well into predevelopment on. We expect to start later in the year in the kind of the August time frame. But this is something that, based on our initial -- and we're still finalizing numbers and so forth. But we would expect to stabilize yield out of this investment somewhere in the 6.5% range on the Denver opportunity. The Houston opportunity is just kind of west of Downtown, sort of halfway between the Galleria Area and the Energy Corridor area, just off of I-10. Again, it's something that we've been -- it's an area going through some sort of regentrification. We are pretty excited about the opportunity. And we're again, there, we're looking at -- to start sometime late this year, probably in the November time frame. And our early analysis on stabilized yield puts that in about 6.4%. So both very creative opportunities based on the underwriting we're looking at right now. As we approach these opportunities, I mean, we talked with -- we've got a group of -- or a group of contractors that we've done a lot of business with and get preliminary pricing for them. But we worked with them enough to have a lot of confidence that the numbers we get from them are something we have a -- feel pretty good about. And then we assume some escalation factor in that based on what we do in predevelopment before the time we actually lock down the contracts and go to fixed-price contracts. So more to come on all this, but we feel pretty good about the opportunities at this point.

And does that -- just as a follow-up, is that the same sort of hurdle you would ascribe to the emergent build acquisitions you were planning on making? Is that 6.5%? Or is it a little lower than that?

Yes, it'd probably a little bit lower than that. It depends on the situation. If we've got an opportunity that we're working with right now in Phoenix in a -- with Crescent on, essentially a prepurchase or something that they are going to build. They will be the developer. They will take the majority of that risk. And so we're comfortable taking that down at a slightly lower yield. It will still be low, about 6%, but I think that it depends on the situation. It depends on just the risk that we underwrite. But all these opportunities we're looking right now are going to be well north of 6%.

(Operator Instructions) And we can go ahead and take our next question from Jim Sullivan from BTIG.

Guys, just want to drill down a little bit more on the discussion about expenses for '19. I think back in NAREIT, you were talking about a $7 million number, I think, of kind of credits and one-off items that benefited the '18 numbers. And if we adjust for that in the '18 totals that you report for both management -- property management and G&A, we're still getting an increase in 2019 of about 9% in the overhead line item. And I think there was some comment that there was kind of annualizing some higher expenses that were put in place in '18 that accounts for that. And -- but when I look at the individual items, property management, for example, that's gone up. It went up more than 4 -- went up about 10% in '18. It's going up about 14% in '19. And yet, this is occurring at a time when same store revenue growth is not going up that much for all the reasons we've discussed. What accounts for that dichotomy? And when I say that dichotomy, your operating expenses that you can control that is other than real estate taxes are going up as you've indicated below 3%, but management expenses are going up nearly 3x that. What explains that difference in yearly change?

Yes. Jim, this is Al. I think as we talked about it, a lot of it has to do with comparisons to '18 that you outlined. We certainly and we actually had a reduction in cost in '18. But in 2019, we will feel the full run rate of the investments we made in our platform that we talked about all along are very important to produce the results that we expect for the future, in our people, systems, facilities, web presence, all those things that we talked about. And so when you look at '19 to '18, it does look high. But if you look at '18, '19 and then what we expect in '20, and even going forward, but looking at it a little bit longer period, it will blend to more of a 5% to 6% growth rate over time, and I'm talking about both of those together. We think of it as overhead, which is the G&A plus the property management together. We sort of manage it as overhead as a bucket. And so I think over a 3-year window, we feel that sector average 5% to 6% growth is what we're doing, we'll do it there. And so 2020 will be a little more modest because obviously, we've made millions in investments and we'll be able to grow more efficiently in the other areas. That's how we thought about the next year.

You do describe that 2 of those items together as a bucket adding -- summing up to overhead. But in 2018, the property management expense rose some 10%, and G&A was down some -- it was down significantly. Presumably, most of the credits that you've talked about, the onetime items benefited the G&A line as opposed to the property management line in '18. Is that true?

Yes. I mean, they're all over the place because a lot of the people could be either one. I mean, so you're talking about people and systems cost are typically on the property management, so it can be -- the finger in our outline could be easily on either side of that and so I think that's one of the reasons we really try to look at it together and just it's more simple to say, look, we have overhead structure this total, and we're managing it that way. And so it's just -- I think it's a little easier to think about it as holistically.

Okay. Then a final question for me. Kind of in macro, you've kind of made 2 comments today about growth rates. You've talked about kind of a longer-term kind of normalized same store NOI growth rate in terms of expectation of something like 3% annually. And yet when you've talked about the overhead expense line, you've talked about -- I think it's been described 2 ways, a long-term growth rate of 5% is I think, what you've indicated in some of your presentations before. And I think today, on the call you -- it was -- somebody mentioned 5% to 6%. And I guess that dichotomy seems inconsistent with a scalable platform. One would have assumed with the Post merger that you were building a scalable platform, and part of that conclusion would be that maybe the overhead cost would not be increasing at the same rate as the overall revenues. Is that wrong? Am I thinking about that incorrectly?

Well, I think what you have to think about is same store. It's just that. It's same store. It's not assuming growth. It's the same portfolio in this year compared to the production part of the previous year. I think the important thing to think about in overhead and G&A is you're talking about growing companies for us and the sector whether through acquisition development or even many ways. And so your G&A over time is going to grow more than your same store for growing companies. And I think if you look at the sector average over time, that's what we were talking about in NAREIT over the last couple of years. And what we mentioned earlier was, if you look at the sector average over time for that area, it's more like 5% to 6% growth.

I think what you have to look at, Jim, is you have to factor in the external growth component as well. Because this platform, the overhead platform, if you will, is supporting not only same store, but it's supporting external growth as well. And I think to the extent that we can capture organic internal growth and new external growth on a combined basis at a growth rate that is beyond the 5%, then I think the margin component there that you're sort of alluding to I think starts to make more sense. The other thing to keep in mind is that you're talking about 3% growth, organic growth off a big number. You're talking about 5% growth on overhead on a smaller aggregate dollar number, so the dollar margin is still growing.

And I think the important point that you want to...

The only comment I would make on that latter point is that, as you probably know, many of your peers report NOI and same store NOI after property management expenses rather than before. And if we were in your case, to look at the same store NOI computation you have in the sup and compute it that way, the growth in same store NOI would be lower. It would be closer to about a 1.4% number. So we understand the same store is not total NOI. NOI -- nonsame-store NOI tends to be about 7% or so of total NOI, so it's a much smaller number. We do understand there's extra cost involved in that effort, of course. But still, we tend to look at property management expenses as driven by revenue line, and G&A line -- I don't know. I would contend based on our analysis that over time the G&A line has not grown as much as the overall revenue line for the company as we -- for most of the companies we cover. So just a thought as you think about the scalability of the platform. And I guess I can leave it at that.

I understand your point. I understand your point.

And we will go ahead and take our next question from Daniel Bernstein from Capital One.

Just wanted to touch a little bit on the comment on the developers becoming a little bit more aggressive on leasing. Is that just the assumption you're making? Or you're actually seeing some of that more aggressive leasing, whether it's discounting, giving away 3 months' rent, I just wanted to understand where that comment is coming from?

It's really more of an assumption at this point, Daniel. Tom can give you some perspective on what we're seeing and more specifically with the use of concessions. But it hasn't really changed a whole lot over the last sort of 60, 90 days. But we just think that as you get later in the cycle and particularly if some of these projects continue to face later deliveries and we get into the busy summer season, we just think that it's entirely possible that you may see a little -- it'll vary by sub market, but you may see a little bit more aggressive practice. But we have not seen any real evidence of that as of yet.

(Operator Instructions) I'm sorry, go ahead.

No, that's fine.

If you mind, I'll add just one more here. That refers to your partner developers. Have you seen increased concession or competition from single-family residents -- rentals?

No. I mean, I'll say no. We are not tracking them. Move-outs to single-family rentals is such a small percentage. And while there is a company that has reasonable scale, they're scattered out and really don't affect our markets. So I could not speak to what their pricing is.

Our move-outs to single-family rental is only about 6% or 7% of our total move-out. It's been that way forever. It hasn't really changed. So it's not really a pressure point for us.

(Operator Instructions) We'll go ahead and take our next question from John Pawlowski from Green Street Advisors.

Eric, could you provide some thoughts on how your external growth strategy in your smaller secondary markets might look in a world where liquidity from Fannie and Freddie either declined meaningfully or goes away. Understanding nobody knows what's going to happen and we've been waiting in vain for 10 years for something to happen, but would you expect to see more dislocation in pricing in your smaller Southeast metros? And would you act on that?

The answer is yes and yes. I would think that if Fannie financing were to, for whatever reason, pull back, I think you're going to see it have more of an impact on transaction activity in some of the smaller markets. It'll certainly have an impact in places like Dallas and Atlanta as well, but I'm thinking of markets like Greenville and Richmond and Nashville and Savannah and Charleston, and I think you could see more of an impact in those markets. And yes, we absolutely continue to feel very strongly about the merits and the value of having capital deployed in some of these higher growth, more secondary markets, believing that the long-term performance profile from an earnings perspective over time out of those markets fits very much with our portfolio strategy. And we would certainly jump on opportunities that might come about as a consequence of what you described.

And just so I get sense for sensitivity, again, purely hypothetical, do you think in your average smaller secondary markets, values fall by 5% more than the Atlantas of the world? Is it 10% more? How big could you think it could be if Fannie and Freddie went away overnight?

I think to some degree, it really depends on just how aggressive institutional capital continues to stay and direct their resources towards multifamily housing. I think that while Dallas or Atlanta may not feel it as much as a secondary market, as you know, there is just a ton of capital out there that continues to want to deploy in multifamily. And despite -- if the agencies pulled back for some reason while -- on the margin, it will have an impact on some of these smaller buyers. I think some of the more well-capitalized, private capital balance sheets would probably not be as impacted. And so some of these more dynamic secondary markets may still find a fair amount of interest. And so I -- it's hard to say to what degree a Charleston, South Carolina is impacted versus a Dallas. I don't really know. It just depends on how much interest private capital still has on a Charleston -- in large, well-capitalized balance sheets, private balance sheets you have on the Charleston.

Understood. Last one for me. What job growth assumptions underpin your 2019 revenue growth outlook?

I would tell you, basically, it's built on an assumption that things continue pretty much like they are right now. I think that our forecast can withstand a little moderation in job growth, but not a lot, candidly. And I think that if we saw the employment market and job growth trends severely pull back, I think it's a different ballgame. But I -- we've had, as you know, and I know you pointed out in a lot of your research that the job growth rates are going to likely moderate at some point. And I think that there's no indication near term that there we're headed to that sort of scenario. And so our '19 assumptions are built on a continuation of what we see. But frankly, at some level, I kind of look forward to it happening. And while it's going to be depending on where we are in the supply cycle, it could be a painful 2 or 3 quarters as we work through that. But certainly, we think that some of these lease-up projects and some of the supply coming online, we'll face some pretty severe pressure, which is going to create, we think, some great opportunities to capture some value on an acquisition side. And we've got a balance sheet ready to jump on that should it happen. But anyway, we think '19 looks a lot like '18 on that regard.

And we'll go ahead and take our final question from Buck Horne from Raymond James.

My questions have all been answered.

Well, operator, I think that's all the questions. And so we appreciate everyone joining us this morning. And with that, we'll just terminate the call. Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.