Mid-America Apartment Communities Inc

NYSE:MAA

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the MAA Third Quarter 2018 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, the company will conduct a question-and-answer session. As a reminder this conference is being recorded today, November 1, 2018.

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

[Tim Argo, Senior Vice President, Finance]

Thank you, Chris. And good morning, everyone. This is Tim Argo, Senior Vice President 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 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 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. The 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 will now turn the call over to Eric.

[Eric Bolton, Chairman and Chief Executive Officer]

Thanks, Tim. Good morning. The demand for apartment housing across our footprint remained strong and shows no signs of moderating. High demand and low resident turnover have supported our ability to capture strong occupancy and positive rent growth despite the high levels of new supply in several of our markets. On a blended lease-over-lease basis as compared to the prior in place leases, rents grew by 3.1% in the third quarter. This is 60 basis points better than the same time last year.

While we've not yet wrapped up our budgeting efforts for next year, we do expect that strong demand will offer the opportunity for continued positive momentum in rent growth during 2019, despite the new supply headwinds. As part of our fall budgeting process, we performed a robust and detailed assessment of the new supply outlook across our portfolio. Supplementing the information from third-party research, we do a property-by-property and immediate submarket review to consider specifically how new supply is likely to pressure leasing across our portfolio in the coming year.

Tom will share more in his comments, but our early assessment is that the 2019 new supply pressures at a portfolio level will likely moderate slightly from the volume of new deliveries in 2018 and support continued improved -- improvement in new lease rent growth in 2019. We continue to capture good results from the various expense synergies and new initiatives coming out of our merger with Post Properties, primarily in the area of repair and maintenance costs. As we approach the two year mark since our merger, we do expect that we'll begin to see some of the initial lift from expense synergies start to moderate on a year-over-year basis, as we move into 2019.

During the quarter, we did see some pressure from real estate taxes and hurricane cleanup. Al will speak to this in his comments, but with cap rates compressing further over the past year, as our annual tax build started coming in over the last couple of months. The corresponding impact on real estate taxes has been evident. As noted in our updated guidance for the year, we pulled down our expectation for property acquisitions and do not expect to close on anything between now and year-end. Significant pools of profit capital continue to aggressively bid our pricing. As it has been for years, our capital deployment protocols are built around the goal to be earnings accretive in fairly short order. Today's pricing for stabilized properties or even though still in initially lease-up are rarely meeting our earnings accretion goal at this point.

On the development front, we're continuing to find opportunities that we believe will offer attractive and accretive NOI yields. As noted in our earnings release, during the third quarter, we started construction on a Phase II expansion in our Sync36 property in Denver bringing our current development pipeline to $148 million. We currently have additional sites either owned or under contract in Denver, Houston, Fort Worth and Orlando they are currently in pre-development. We hope to get started with these projects at some point during the coming year.

In addition to this development pipeline, we have another five properties representing over 1,600 units currently under initial leased up in all performing in line with our expectations. In addition to our new development and lease-up pipelines, we continue to capture strong returns on our redevelopment pipeline with over 6,500 units redeveloped so far this year generating very attractive returns on capital. We have another roughly 20,000 units that we expect to redevelop over the coming two to three years.

In summary the revenue momentum that we expected from improving pricing trends this year and the work completed toward stabilizing our operating platform are all coming together as expected. It's been a busy and transformative two years for MAA as our team worked to integrate the former Post portfolio operations and associates. We've retooled or replaced essentially every system in much of the technology platform of the company. As you might imagine, this has created a lot of demands in our team, while also fighting the headwind on higher levels of new supply.

I'm happy to report that the systems and associated policy and procedural transformation work, along with all staffing changes and integration activities are now complete. The MAA operating platform and the balance sheet are stronger than ever. I'm proud of the work and results accomplished by our folks. I'm very excited to now move forward with more opportunity to grow higher volume from our existing portfolio of properties. Our lease-up, development and redevelopment pipelines are all poised to drive higher value over the next couple of years. We look forward to finishing 2018 on a strong note and continuing the momentum over the coming year.

And that's all I have, I'll turn it over to Tom now.

[Thomas Grimes]

Thank you, Eric. And good morning, everyone. Our operating performance for the third quarter came in as expected with building momentum in rent growth, continued strong occupancy and improving trends that support our outlook for the year. The integration work on the operating platform was evident in our leasing momentum during the quarter. We saw blended lease-over-lease performance of the combined portfolio grow 3.1% in the third quarter and just 60 basis points higher than the same time last year. This brought our year-to-date blended rent increase up to 2.8%, which positions us to be well within the 2.25% to 2.75% blended rent increase range for the year that we established to meet our revenue guidance range.

This steady positive trend in blended pricing drove our sequential average effective rent per unit up 130 basis points from Q2 to Q3. This is the highest sequential increase we've seen since the Post merger. As a result, revenues also increased 130 basis points from the second quarter to the third quarter. While 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 markets. Phoenix, Orlando, Richmond and Jacksonville were our strongest revenue growth markets.

Expense performance has been steady in both portfolios. In addition to the real estate, tax pressure and storm cost, personnel and marketing were affected by 4% increase in move-ins during the quarter. Despite these pressures, overall expenses within the same-store portfolio were up just 2.3% for the quarter. The favorable trends continued into October. All key indicators are trending ahead of last year. Overall same-store October blended lease-over-lease rates were up 2.3%, which is 90 basis points better than October of last year.

Average daily occupancy for the month was a strong 96.1%, which is 20 basis points better than October last year. Our 60 day exposure, which represents all vacant units and move-out of notices for a 60 day period is just 6.1%, which is 50 basis points lower than last year. We are in good shape as we head into the slower winter leasing season. Our focus on customer service and retention coupled with strong renter demand continued to drive down resident turnover.

Move-outs by our current residents remains low. Move-outs to over -- move-outs for the overall same-store portfolio were down 30 basis points for the quarter. Move-outs to home buying and move-outs to home renting were essentially flat representing less than 20% and 7% of our turnover respectively. On a rolling 12 month basis, turnover remained at our historic low of 49.2%. The steady low level of turnover was achieved while increasing renewal rents by a strong 6%.

Momentum is building on the redevelopment program across the legacy Post portfolio. Through the third quarter, we've completed 2,300 units and expect to complete the 3,000 this year on the Post portfolio. On average we're spending $8,900 per unit and getting a rent increase that is 11% more than a comparable non-redeveloped unit. As a reminder, we've identified a total of 13,000 Post units that have compelling redevelopment opportunity. For the total portfolio, we've completed 6,500 units and we expect to complete over 8,000 interior upgrades for the year.

On the legacy MAA portfolio, we continue to have a robust redevelopment pipeline of 9,000 to 12,000 units. On a combined basis with the legacy Post portfolio, our total redevelopment pipeline now stands in the neighborhood of 19,000 to 22,000 units. Our active lease-up communities are performing well and in line with our expectations. Post South Lamar and Acklen West End stabilized unscheduled during the third quarter. Our remaining current pipeline of five lease-up properties are on track to stabilize on schedule.

As part of our budgeting process for 2019, we're taking a deeper look at the supply affecting our markets. We take third-party data and then crosscheck the supply with our own asset-by-asset information. Performance by market will vary, but at this point, we believe overall our markets will improve modestly with some decline in deliveries. Our Dallas and Austin assets are expected to remain challenging with supply levels in the 3% to 4% of inventory range. We expect Charlotte to soften as supply picks up near our assets.

We expect the strength in Jacksonville, Orlando, Tampa and Phoenix to continue as all currently shown supply decreasing. While we've not completed our budgeting process assuming the demand side of the equation remains strong, at this point, we expect to see the positive momentum in rents realized in 2018 to continue into 2019. We are pleased to have the merger integration wrapped up and we are encouraged with the building momentum in our revenues. I'm proud of the effort and hard work our team has put in over the last two years. We are glad to have this work behind us and look forward to finishing well in 2018 and moving on to 2019. Al?

[Albert Campbell, Chief Financial Officer]

Okay. 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 finally on guidance for the remainder of 2018. As Eric mentioned, overall performance for the quarter was essentially in line with expectations. FFO growth of $1.50 per share was in line with the midpoint of our guidance. Total revenue growth for the same-store portfolio of 2% for the quarter, was primarily produced by 2.1% increase in average effective rents, which continued to accelerate from the 1.7% increase in the second quarter.

Our year-to-date revenue growth of 1.8% is in line with our full year guidance and strong occupancy levels and blended lease-over-lease pricing performance for the quarter support our expectation of continued acceleration for both average effective rent growth and total revenue for the fourth quarter. As Tom mentioned same-store operating expenses during the quarter were slightly impacted by cleanup costs from Hurricane Florence and increased pressure on real estate taxes. These pressures are expected to continue into the fourth quarter, which I'll discuss a bit more in just a moment. However, despite these pressures overall, operating expense growth of just 2.3% still remains below our long-term average growth rate.

FFO results for the third quarter were also slightly impacted by the mark-to-market valuation by preferred shares, which produced $400,000 of non-cash expense for the third quarter. No evaluation has been volatile over the last few quarters, as we expected the third quarter adjustment brings full year impact to $300,000 of non-cash expense which is premier or estimate of no debt impact for the full year. We completed one development community during the quarter Post Centennial Park, a high-end community located in Atlanta. We also began the construction of an expansion phase of the community acquired last quarter Sync36, which is located in Denver.

Phase I of this community contains 374 units, which remained on lease-up. In the second phase, we add another 79 units, which were expected to be completed by the fourth quarter of next year. We now have four communities in active development, representing a total projected cost of $148 million. We funded total construction cost of about $13 million during the third quarter and expect to fund the remaining $102 million over the next 18 months to 24 months to complete pipeline. We expect to stabilize NOI yield of 6.3% -- this portfolio once completed and fully leased up.

As Tom mentioned, our lease-up portfolio continues to perform well. During the third quarter, two communities reached all stabilization, which we track is 90% occupancy per 90 days. At the end of the quarter, we had five communities remaining in lease-up, including the recently completed development community, with an average occupancy of 66.9% for the group at quarter-end. We expect a growing contribution to our 2019 earning strength from our lease-up portfolio as two of these communities are fully stabilized during the fourth quarter this year with remaining three stabilized during 2018.

Our balance sheet remains in great shape. During the third quarter, we paid off $300 million of current year debt maturities using capacity under our unsecured line of credit. We have an additional $80 million of debt maturities during the fourth quarter. And as previously discussed, we do anticipate pursuing additional financing over the next couple of quarters to refinance remaining current year and first half of 2019 debt maturities. At the end of the quarter, we had over $674 million of combined cash and remaining capacity under our unsecured line of credit. Our leverage as defined by our bond covenants was only 32.5%. Our net debt-to-recurring EBITDAre is just below 5 times at quarter-end.

As noted in the earnings release, we have recorded what we believe are appropriate reserves for defend cost in our Texas late fee class action lawsuits disclosed in our recent 8-K. We believe that our late fee policy and practices are in line with those and other Texas landlords and comply with Texas law. In addition, we have adjusted our loss reserves in our third quarter financial statements, as a result of significant progress made toward the settlement of two legacy Post property's lawsuits DOJ case and ERC case, which was closed in previous filings as well.

Just to note, we don't plan to provide additional commentary for specific details on the pending lawsuits during the Q&A portion of our call. Given third quarter performance and updated expectations for the remainder of the year, we are updating certain guidance assumptions. First, we're entering our full year guidance range for both same-store combined lease-over-lease pricing growth, which is 2.25% and 3.25% for the year and same-store total property revenue growth, which is 1.25% and 2.25% for the full year.

We now expect fourth quarter expense performance to be effective by unforcasted cleanup expenses right to Hurricane Michael, as well as increase state tax expense especially to specific exposure in Atlanta and Dallas. As final tax information was obtained for the year very aggressive value increases in Atlanta, mileage rates increases in Dallas are expected to impact our portfolio. We will continue to aggressively fight these increases while revising our guidance. Real estate tax expenses for the full year is in expected range of 4% to 5%, 50 basis points increase at the midpoint.

The combination of these items produced a revision to our guidance for total same-store property operating expenses to an expected range of 2% to 2.5% for the full year. And to our same-store NOI guidance for the full year to a range of 1.75% to 2.25% both representing a 25 basis points change to previous guidance at the midpoint. Other notable changes to our guidance included reduction in our estimated range of multi-family property acquisitions for the year, as well as projected full year total overhead costs, which we count SG&A plus property management expense.

Given the competitive environment approximately at year-end we don't expect to close any additional acquisition this year. Since our projections included primary lease-up deals heavily weighted in the latter part of the year. This change has little effect on our 2018 earnings. Favorable impact from several items including franchise taxes, insurance costs, legal cost, timing of final staffing changes related to the recent migration project in other items produced expected overhead favorable to the full year. Some of this has been impact as essentially timing related and we expect 2019 overhead cost to include less unusual and non-recurring activity, as well as more normalized staffing merger integration efforts are fully complete.

In summary, net income per diluted common share is now projected to be $1.87 to $1.99 per share for the full year. FFO is projected to be $5.99 to $6.11 per share or $6.05 per share at the midpoint. AFFO for the full year is now projected to be $5.38 to $5.50 per share or $5.44 at the midpoint.

So that's all we have on the way of prepared comments. We'll now turn the call back to you for questions. Operator?

[Operator]

[Operator Instructions]. And our first question comes from Trent Trujillo with Scotiabank. Please go ahead.

[Trent Trujillo, Scotiabank]

Hi. Good morning. Thanks for taking the questions. First from a guidance perspective most of the annual leasing is complete and you likely have pretty good visibility as you alluded to -- in your prepared comments on what's left for the year. So I'm curious why you still have the relatively wide range of outcomes for FFO in the fourth quarter, so maybe if you can frame the variability given where we are at this point in the year?

[Albert Campbell, Chief Financial Officer]

This is Al. I can comment on that. We narrowed it down obviously to that what was in the third quarter, but just given outcomes it would be a big change in occupancy, a change in transactions. We had something significant that causes to be bottom end or the high end of the range, particularly, but we feel pretty good about the range. I think one thing I'll add Trent is the preferred shares and that has been fairly volatile over the quarter, so that can swing quite a bit as well, which is out of our control obviously.

[Trent Trujillo, Scotiabank]

Okay. Thank you. And I appreciate the prepared comments on supply, but on your last earnings call, you mentioned deliveries in your markets were expected to drop about 18% in 2019. So what has changed since then because, is it just a function of supply being pushed out because it' seems like it's pretty material change to the outlook versus just a few months ago.

[Eric Bolton, Chairman and Chief Executive Officer]

Well, I think a couple of things have transpired. One is yes, I do think there is some delays in delivery that are at play here. But candidly, we saw some pretty radical change over the course of the year in the third-party research data that we get regarding supply outlook. And we go through as Al mentioned -- I'm sorry, Tom mentioned, we've gone through a pretty detailed annual process with our properties, as part of our budgeting process, but and we're well into that at this point.

But frankly over the course of the summer, we saw a lot of the information that we sort of monitor and work with during the year from some of these third-party data sources really begin to change on us quite a bit. And then as we began to dig in more to both their information, as well as dig into or start our -- add more detailed budgeting process. We began to see that while still down supply overall is still going to be down from everything that we are seeing. We do think that the extent of the drop in new supply deliveries is perhaps not as great as we would have thought a few months back.

[Trent Trujillo, Scotiabank]

Alright. Appreciate the color. I'll hop back in queue. Thanks.

[Operator]

And our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt, KeyBanc Capital Markets]

Hi. Good morning, guys. I was just curious how much moderation are you assuming in blended lease rate pricing through the balance of the year?

[Albert Campbell, Chief Financial Officer]

Austin, this is Al. We've assumed as we talked about all year that we would see blended pricing accelerate to produce our revenue performance in the year. We always had revenue performance accelerating as we saw, we did in Q3. I think overall revenue went from 1.5% to 1.8%. So I think we saw what we expected in terms of momentum. We saw a good momentum through the quarter and Tom talked about in his comments in October. So I think what we always expected was to have pricing performance that was above last year's performance about 60 basis points. And we suddenly saw that in third quarter. We've seen that so far in fourth quarter. So that's what it gives a lot of confidence about our range where we end up for the year.

[Eric Bolton, Chairman and Chief Executive Officer]

Well, I'll also say it's important to recognize that as Al mentioned our forecast for the year was built on an assumption that blended lease-over-lease pricing is going to be in the range of 2.25% to 2.75% for the full year. Okay. Through September year-to-date, we're at 2.8% above the top end of the range. So clearly, there is some moderation that we anticipate over the next quarter.

[Albert Campbell, Chief Financial Officer]

Which be projected and put in our guidance I think important terms or guidance the performance over the prior year, which we're seeing and we feel very good about.

[Austin Wurschmidt, KeyBanc Capital Markets]

Right. And then, that's kind of what I was kind of driving at. You're tracking ahead of that range. You've got a 90 basis point spread in October. Do you expect to sustain that level of a spread or could it even widen potentially through the balance of the year?

[Eric Bolton, Chairman and Chief Executive Officer]

I believe it can widen Austin. We will see. We don't want to guarantee that. But we're running 90% now and we have favorable comparisons in November and December.

[Albert Campbell, Chief Financial Officer]

You may recall that candidly in November, December last year, we saw particularly in our Dallas portfolio and particularly in the uptown submarket, we saw some fairly significant concession activity pop up, a bit unexpected late last year in November, December which really put a big hit on effective pricing over the last two months of that quarter. And we certainly don't see any indication that, that is likely to repeat this year. So I think we just sum it up by saying, we think that the trends that we're seeing right now give us a pretty high level of confidence going into the final quarter of the year.

[Austin Wurschmidt, KeyBanc Capital Markets]

Okay. Thanks for that. And then just one more for me. With a decrease in the acquisition guidance and some of the challenges you've had sourcing new deals, are you rethinking capital allocation at all between acquisitions and development?

[Eric Bolton, Chairman and Chief Executive Officer]

Well, one thing I'll say is I mean, we're sourcing a lot of deals I mean, we're underwriting more than we've ever -- in the third quarter, we ended up more than we've underwritten in any quarter over the last five years, so I mean just a ton of deals out there. But as I mentioned the pricing is just really gotten to a point that we're having a hard time justifying pulling the trigger on these deals that we're looking at. And so yes, having said that, we are continuing to look for opportunities on the development front.

As mentioned, we started some things in the third quarter. And as I alluded to, we've got a number of projects that we are working currently either on existing own land or land sites that we have on the contract two in Denver, one in Fort Worth, one in Houston, one in Orlando and another one in Raleigh that we might -- it's probably another 1.5 years before we pull the trigger on that one. But yes, we've -- I mean one of the things that we were looking forward to as coming out of the merger with Post is to sort of broaden our arsenal in terms of our ability to both recycle capital, as well as support external growth and the development capabilities that came with that merger or something that we thought made sense for us, at the point of cycle we're in. So yes, you'll see the development. Right now, we're $148 million development pipeline.

I certainly expect that's going to grow over the coming year. But also we're going to be -- we're not going to go crazy with it. I think that, if you look at our enterprise value right now $0.5 billion pipeline is going to be right about 3% of our enterprise value. So I wouldn't be surprised to see a scale up to $400 million or $500 million over the next year. I doubt, it must be bigger than that, but that certainly becomes more attractive to us at this point in the cycle.

[Austin Wurschmidt, KeyBanc Capital Markets]

So just one quick follow-up if I may. Just curious how your thinking about the risks from construction today where we've seen cost overruns and certainly some delays in deliveries. How are you incorporating that I guess into your forecast for development yields?

[Eric Bolton, Chairman and Chief Executive Officer]

Well, as thoughtfully as we can, I'll tell you that. Yes, you're right. We've had a pullback on some projects that we were looking at or we put some on mothballs if you will for a while, while we work through some cost issues. All the deals that we do are guaranteed cost construction contracts, so we don't build it ourselves. And so we take a lot of effort to sort of lock in our cost before we actually commit and pull the trigger on it. And then we take a thoughtful approach to lease-up assumptions and we generally are pretty good about nailing that outlook.

And we've consistently been able to sort of achieve our lease-up velocity. But yes, this is the time to be careful for sure and we're taking a pretty careful approach in terms of how we lock in our cost before we commit to actually starting to move down on any opportunity that we look at in today's environment with rising cost. I surely think that's the right approach.

[Operator]

And our next question comes from Nick Joseph with Citi. Please go ahead.

[Nick Joseph, Citi]

Thanks. Eric, you just mentioned the strong pricing in the market. And I know, you're focused on earnings growth, but given the current dynamic would you opportunistically sell into this strong pressure?

[Eric Bolton, Chairman and Chief Executive Officer]

Nick, we've recycled quite a bit of capital over the last five years, something approaching $3 billion. We've obviously paid with that -- with a lot of earnings that we conceded as a consequence of that recycling. And of course, the most recent merger with Post was a fairly initially dilutive deal for us. So I will tell you this, we very much liked the footprint that we have. We're very much like sort of the market mix that we have. We don't see any real need to radically alter the profile of the portfolio. I do think that as we go into next year, this is the first year -- calendar year 2018 is the first year. We haven't sold anything in as long as I can remember prior to 15 years and so.

I think that you'll us probably get back to recycling a little capital next year and it won't be a lot, but I do want to get back to that practice. And we will likely do some next year and some of this development opportunity starts to pick up obviously, the redeployment of that capital becomes easier to accomplish. So I think you'll see us do a little bit more next year.

[Nick Joseph, Citi]

Thanks. And then just the same-store expenses, do you assume any baseline expense impact on potential hurricanes in initial guidance, and what would you do is no removal cost or anything like that?

[Albert Campbell, Chief Financial Officer]

You're talking about the fourth quarter Nick or for as we look into next year?

[Nick Joseph, Citi]

Going into the year, so on initial guidance do you assume that there'll be some costs associated with the hurricane?

[Albert Campbell, Chief Financial Officer]

Hurricanes, no, we do not. It's not something -- no we don't Nick. That's just something we think at the beginning of the year that we really can anticipate many years we don't have certainly any significant cost and so we're unfortunate last year and this year, but something we do not forecast currently.

[Operator]

And our next question comes from Rob Stephenson with Janney. Please go ahead.

[Robert Stevenson, Janney Montgomery Scott]

Thanks. Good morning, guys. You guys did a chunk of rehabs during the quarter roughly 6,000 per unit versus your year-to-date cost of roughly a little over 5,700. So if I back those out I mean you have a pretty substantial jump from what you paid in the third quarter versus what you were through the first six months of the year. Was that just a mix in doing more heavy stuff or is that indicative of the cost pressures that you're seeing from a labor especially, but also from a material standpoint as you do rehab these days?

[Eric Bolton, Chairman and Chief Executive Officer]

Fair question, Rob and you've almost answered it. We are not seeing cost escalation issues in the rehab arena. The vendors and the materials that we use its not heavy lumber. It's not concrete. It's not glass. We're not rebuilding them. And the vendors are different set of vendors than are on our construction jobs. They're local guys, that specialize in redevelopment. So what you are talking about is dead-on correct.We saw -- we did more units that had full granite counter tops and cabinets just as -- it shifted actually from like 22% to about 30% and our mix just go around. If you look at, and this is really driven by the Post side of things. If you look at on just an apples-to-apples basis, our cost per renovate especially on the Post side has dropped about $200 a unit just as we've sort of gotten in a groove on it and are improving in that area.

[Thomas Grimes]

But mostly the increases because more of the Post portfolios coming into the mix and …

[Eric Bolton, Chairman and Chief Executive Officer]

It's two things and it is two things.

[Robert Stevenson, Janney Montgomery Scott]

Okay. And then on the development pipeline, what's the current expected stabilized yield on the for projects that you guys have under construction currently? And how do you guys think about starting new projects? Is it -- some of your peers talk about it is a spread over comparable acquisitions? Is it absolute that we are not going to do anything that doesn't get us to a mid to high 5s at least stabilized yield I mean, how does that sort of work internally at MAA these days?

[Eric Bolton, Chairman and Chief Executive Officer]

Well, I can tell you the yield first on that Rob, it's about 6.3% on the portfolio, which has we think is about 150 basis points over an acquisition of a similar quality product in today's marketplace.

[Albert Campbell, Chief Financial Officer]

And Rob I would tell you that as I commented on in my prepared comments we really guided by an NOI yield analysis and assessing the accretive nature or not of that yield. And I will tell you that any development that we do today and would start today, we'd want to be fairly comfortable or actually really comfortable that we're going to be looking at a stabilized yield at six or higher and really keep that spread as I made reference to between sort of the yields that we see today on any acquisition with stabilized asset. But more importantly, we think that kind of yield we're going to be value accretive and earnings accretive to the long term earnings trend of the company. So that's kind of where we underwrite six north of that.

[Robert Stevenson, Janney Montgomery Scott]

Okay. And Al that six-three is that just on the four that are currently under construction, does that include the five during lease-up?

[Albert Campbell, Chief Financial Officer]

Just four under construction right now. The ones in the lease-up, we have some that are acquired some mixture of properties and there, so it will a little bit low, but it's still be get better than higher than a yield on an acquisition portfolio.

[Eric Bolton, Chairman and Chief Executive Officer]

The other five or six-two, so it's right there with the development.

[Robert Stevenson, Janney Montgomery Scott]

Okay. Six-three on the four and six-two on the five.

[Albert Campbell, Chief Financial Officer]

Right.

[Robert Stevenson, Janney Montgomery Scott]

Alright. Thanks guys.

[Operator]

And our next question comes from Drew Babin from Baird. Please go ahead.

[Andrew Babin, Baird]

Quick question for Al on the balance sheet. Obviously, a lot of secured maturities for next year. I think you talked before about potentially taking those out with unsecured offering in the fourth quarter. Is that still possibly in the plans and would there be any thought to extending your overall duration need I think mixing maybe a 30 year in somewhere or anything like that? Would that still makes sense given the flatter yield curve?

[Albert Campbell, Chief Financial Officer]

Yes. Great question, Drew. We absolutely -- in our plans right now, as I talked about, we had about $300 million maturing in Q3. We have another $80 million in Q4 and we have about $500 million maturing in the first half of 2019 that we may well want to get ahead off. So we are thinking about that. And we think we'll be active -- assuming the markets are favorable and open for us over the next several months. We think that we'll potentially pursue some activities. And we would expect to do a pretty sizable financing to replace some of those.

And we are looking at potentially pushing on our durations. And I would say right now given the shape of the yield curve their strategy you can take that, that would help you push your duration's out and keep the cost relatively similar to a 10 year deal. So we're definitely looking at that and hopefully we'll have more to say that in the next couple of quarters calls.

[Andrew Babin, Baird]

Okay. Given the spreads that you see today and it looks like the debt maturing next year sort of 5 times to 9 times rate. Should we expect that the swap there would be -- just maybe swaps around, would the deal likely be accretive to earnings?

[Albert Campbell, Chief Financial Officer]

Keep in mind -- I would say keep in mind that majority of our debt has already been fair market -- value at fair market value pretty recently, mostly from the mergers and so, what you're seeing in our interest expense is a rate that's pretty close to current market levels. Now on a cash basis, absolutely, I think on a cash basis, absolutely it will be a benefit to us because two mergers we had a lot of our debt is mark-to-market. We're feeling the rate at similar to current market levels.

[Andrew Babin, Baird]

Okay. That makes sense. And one last question just on the property taxes. I guess in past years there has been some success with appeals on both the assessments and the mileage rates and you've kind of provided in NOI benefit maybe later in the year. And I guess, just how did those negotiations go this year? What was different this year? Are you seeing the municipalities and assessors just being more aggressive?

[Albert Campbell, Chief Financial Officer]

I think, overall we -- put it this way, as we said in the past we fight very hard anything we think is unreasonable. In Texas, we've got 40 that's the pressure Texas and Georgia two pressure points right now. We've got 40 losses going now. I think the unusual thing this year was really two specific areas. You had Atlanta, Fulton County, who really put out a very high valuation increase across the tax register. I'm talking in the 30% range cross register and so everyone believed, we saw that come out maybe in the second quarter.

But everyone believed, typically what they do in that situation take mileage rates down significantly to level the part to mostly offset that and just put themselves in a better position going forward for tax valuation. They didn't do that this time. They raised the valuation significantly and brought the mileage rates down just a small amount. So unfortunately that is something you can't fight the mileage rates, so we think there will be some fallout maybe over the next couple of years or maybe even late this year on that as partitions do their thing, but that is what happened in Atlanta. It's pressure for sure.

And in Dallas you had a situation where there was an additional mileage rate increase in certain districts, but school districts that was over 8% or 10% increase in some of the districts and it's so high that they have to have -- they have to put it from both in Texas. If it's over 8% share for both. So it's possible long way of saying, we certainly think it's possible that we'll get some favorability in the future maybe 2019 and beyond as some of these things work through. But it's going to take a lot of work to the system and we adjusted our reserves for the remainder of the year to reflect what we think is a reasonable case.

[Andrew Babin, Baird]

Okay. Great, helpful. Thanks, guys.

[Operator]

And our next question comes from Rich Anderson with Mizuho Securities. Please go ahead.

[Richard Anderson, Mizuho Securities]

Thanks. Good morning, everybody. So if I could go back to the development discussion Eric and Al you mentioned supply pressure is still around you perhaps slightly less next year. You mentioned having to be careful at this point in the cycle the REIT, but development costs are rising at a faster rate than NOI. I think you would agree with that as well. But yet the development pipeline could rise by 2% or 3% I'm sorry, 2 times or 3 times in the next year or two you said $400 million to $500 million. I'm just curious how is that possible that you can make the numbers work to the degree where you can see it grow that much in this environment? What's the MAA advantage to get six plus type of stabilized yields despite all those things and those pressures happening around you?

[Eric Bolton, Chairman and Chief Executive Officer]

Well, it's couple of things. One, I mean, in some cases the projects we're looking at are expansions of existing communities, where you leverage off the existing infrastructure and amenities and the existing overhead of the in-place staff in Phase 1. So you can create a little better margin from an operating and from an investment perspective on these expansion opportunities. Two, I think that we are in some cases executing on existing owned land sites as well that we have a lower basis on.

And then I think other than that as I think you probably know we've had a history of being able to operate pretty cost efficiently at the property level over the years and then it's only gotten better or stronger if you will given our scale now. And so I think a combination of all those factors offers an opportunity for us to still deploy capital on the development side where we are taking certainly some level of risk more so then you would have in an acquisition, but risk that we feel very comfortable executing with and as I say probably the biggest risk is that, you commit to a project or you started and then all of a sudden your construction cost get away from me and we are not going to take that risk.

I mean we go into with the guarantied fixed price contract with the contractor. And we put in a lot of ample cushion in case, we do run into some degree of problem. But all those factors sort of come together to create in our markets at least in the regions that we're in -- the markets we're in an ability to make these deals work at the levels and the numbers that we've been talking about.

[Richard Anderson, Mizuho Securities]

Okay. Fake Pergo floor as I remember well..

[Eric Bolton, Chairman and Chief Executive Officer]

Yes.

[Richard Anderson, Mizuho Securities]

And then if sort of to correlate that question. Eric, do you see an opportunity down the road for broken deals to come back your way and by value add maybe next year or late next year into 2020? Are those types of things starting to sort of percolate behind the scenes or is that just not being seen just yet?

[Eric Bolton, Chairman and Chief Executive Officer]

Rich, I think that we are starting to see maybe some really early indication that things are starting to fray a little bit. The deal volume -- as I mentioned, the deal volume is really high right now. And we are hearing more about deals not trading that have been under contract previously. The challenge of course is there's still a lot of very strong buyers waiting in the wings and waiting around the hoop just to jump on any of these deals. We used to be able to hang around the hoop with a lot of other people around us and now there are a lot of people around us so.

But I do think, as I'm sure, there's just -- I hear just huge numbers of capital -- private capital on the sidelines that are specifically earmarked to deploy in multifamily real estate. So I think that the deals flow and the opportunities I think are starting to pick up, but the buyer pool is still pretty, pretty aggressive. But we are hearing and seeing more deals fall apart a little early indication on that. So I'm optimistic that next year, we may see the tide turned just a little bit.

[Operator]

And our next question comes from John Kim with BMO Capital Markets. Please go ahead.

[John Kim, BMO Capital Markets]

Good morning. You had a slight increase in your development yield It sounds like this quarter was flat. Is that because rents have been trending better than expected or is that due to mix?

[Albert Campbell, Chief Financial Officer]

I think it's common. It's really more of the mix of properties that we had in there John. I think 6% to 6.5% yield is pretty consistent on the deals that we've seen. I think it's a little bit different mix and then put 6% a couple of quarters ago I think there's a little bit different mix of properties in there.

[John Kim, BMO Capital Markets]

And I think you alluded to this in your prepared remarks and in other answer to the questions but with your balance sheet at $0.05 net debt-to-EBITDA, can you just list your priorities for these capital developments, redevelopments and acquisitions?

[Eric Bolton, Chairman and Chief Executive Officer]

Well, right now, without a doubt our most accretive use of money is redevelopment. So we're going to push that agenda as aggressively as we can without -- you can't push it too far and you start to really change the economics. But we're going to continue to push that agenda as much as we can. And the good news is, there's a lot of opportunity there. We're just now really getting into the Post portfolio. And that's where we see some of our best yield opportunity on that redevelopment capital. I think after that as I alluded to some of the development deals that we're looking at continue to pencil out pretty accretively. So we're going to be mindful of the risk on that, but continue to pursue that agenda.

And then just we're going to remain patient on the acquisition side. We continue to underwrite a lot and look a lot, but we're just now pulling the trigger on anything right now given the pricing we would have to pay and the outlook for sort of rent growth that we think is there over the next few years. The two just come together to create an outlook that to me is not particularly appealing from an earnings accretion perspective. And so we're just going to wait on that and wait for pricing or something to change the dynamic there.

[John Kim, BMO Capital Markets]

Okay. And then on your 2.3% growth on blended leases in October. Can you give the new versus renewal and also the 90 basis point improvements, any difference between legacy Post and legacy MAA?

[Thomas Grimes]

Yes. Okay. So the improvement on new leases was 110 basis points in October and the renewal was 60 basis points. In both MAA and Post were pretty much in neck and neck on that one. MAA was 1.1% better than last year. And Post was 1% better than last year and a about same on renewals.

[John Kim, BMO Capital Markets]

Thank you.

[Operator]

And our next question comes from Daniel Bernstein with Capital One. Please go ahead.

[Daniel Bernstein, Capital One]

Hi. Good morning. Sticking to the development questions seems to be the flavor of the day. Have you thought about doing any -- instead of on balance sheet maybe something that's more funding developers like loan to own, and taking some of that risk off on the development side and maybe -- or maybe with private equity and not taking all the balance sheet risk at this point in the cycle?

[Eric Bolton, Chairman and Chief Executive Officer]

We have -- and we've had some conversations with a number of people about that, that we're working an opportunity currently in the Phoenix market much along the lines of what you describe. We are -- one of the things that I've always felt that we wanted to be focused on, as we do have these conversations to come in and talk with the developer and providing the funding I think there needs to be a clear pathway for us to ultimately secure ownership with the asset. I think just deploying capital, so lender is not what we really want to do. I think that we ultimately want to control the assets at the end of the day once the property is fully built and leased out. So we're having a number of those kind of conversations. And as I said, we're working on one opportunity right now that may come together.

[Daniel Bernstein, Capital One]

Okay. Are there any particular markets that you would want to develop in or gain scale in? Some of your markets that are 3%, 4%, 5% of NOI, would that assuming market conditions are right for that -- would that help the investment yield on development to be gain scale in a particular market?

[Eric Bolton, Chairman and Chief Executive Officer]

Sure, it certainly enhances our operating efficiencies as we grow scale in a given market, so. But yes, I mean that's why we're looking at trying to grow our presence in the Denver market right now. We have -- we mentioned in our call, we've got one expansion project that we initiated in the third quarter in Denver. We've got two other land sites currently, one owned and one under -- well both owned actually at this point that we may very well pull the trigger on next year.

So Denver is a market that is high in our target list at the moment. Orlando, we mentioned really any of the Florida markets continued, we find a lot of appeal there. Raleigh, is another market that we've got a site under control. They're in all those markets are in that kind of 3%, 4% range that you're alluding to. Houston, we've got a site that -- on the contract there as well. So yes, the answer to your question is all those markets offer opportunity to pursue this and create a little bit more scale and operating efficiency.

[Daniel Bernstein, Capital One]

Okay. One more quick question. It seems like marketing expenses went up sequentially and I know that's much smaller bucket in taxes and some of the other ones. But is there anything that we should read into that in terms of going-forward expense growth?

[Thomas Grimes]

Yes. In the quarter we spent a little bit more on marketing expenses and drove about 20% more leads and a higher level of movements during the quarter. But we'd expect -- it was actually a little behind in Q1 and two and expect it to be back in line in four. So now real REIT through on that just timing more than anything.

[Daniel Bernstein, Capital One]

Okay. So just normalizing?

[Thomas Grimes]

Yes. Sure.

[Daniel Bernstein, Capital One]

Okay. That's it. Thank you for taking my questions.

[Operator]

And our next question comes from John Guinee with Stifel. Please go ahead.

[John Guinee, Stifel]

Great. Thank you. About nine months ago, we were in Orlando for the MMHC conference. And if you would listen to the research guys, so I think they're pretty good. Every one of them said B product, secondary markets, lower price point had a greater potential for top-line revenue growth than A product in urban markets. And looking at the REITs year-to-date that doesn't seem to have been the case. Any thoughts on -- is that a correct in my recollection of the research forecast since the beginning of the year and that have maybe hasn't quite played out at that way?

[Thomas Grimes]

I'd be glad. Our experiences that it has and I would give you the example the Atlanta market. The Inner Loop, High End, Buckhead, Brookwood, Midtown Corridor has been very much under pressure and that's affected our Atlanta numbers. Outside the perimeter of the 85 Corridor or 575 Corridor and 75 those a little bit more suburban and skew toward B assets are performing at a higher rate. And so it's hard to get a pure read through on A versus B by looking at the REITs individually.

[Operator]

And our next question comes from John Pawlowski with Greenstreet. Please go ahead.

[John Pawlowski, Greenstreet]

Thanks. Eric or Tom I know the smaller metro you operated have been a little bit seeing better growth of late. When we step two or three years would you underwrite higher revenue growth in your smaller metros or your bigger metros?

[Thomas Grimes]

I think, over it depends on where you are in the cycle. And I think in the current environment where these larger markets are seeing more supply, they're going to be under more pressure from a rent to growth perspective then what you're going to see in some of the smaller markets they're not seeing as a percent of the existing stock quite the level of supply. But I think that as you get into another stage of the cycle where perhaps some of the supply pressures have pulled back a little bit recognizing that those larger markets tend to over time have more robust job growth over time, you then get back to the point of the cycle where the larger markets tend to outperform some of the smaller markets. So it really depends on where you are in the supply cycle and broadly in the economic cycle in terms of how the two different sort of types of markets perform.

I think that if we continue to see supply remained pretty elevated over the next couple of years, I think the larger markets will probably struggle a little bit more. But the good news of course is our markets are creating some fabulous job growth. And so, while the supply is elevated the demand side of the equation is so strong that it's keeping the performance from really being more problematic than you might think. One of the things that's interesting is just -- what gives me pause more than anything is when do something radically different happen, when do something radically a big change and it's usually a recession or some sort of massive pullback on the demand side of the equation that's always hard to anticipate.

If that kind of scenario plays out that's where you really see the smaller markets really start to outperform the large markets because those large markets tend to be much more susceptible to recessionary environment. So it's hard to really say over the next two or three years exactly how those two segments will perform relative to each other depends on these other factors, but I just come to conclude that better to be diversified than not diversified and be ready for whatever may come.

[John Pawlowski, Greenstreet]

Makes sense. And I know supply grabs all the air time on these calls and all the headlines. When you look at the demand backdrop in any of your markets, are you seeing any concerns, any leading indicators of concerns for the demand side of equation in your market?

[Thomas Grimes]

No. At this point it is steady as it goes. We're not seeing any pullback. But that information is more hypothesis than I think the supply is. We can get a B and are getting a better B on what our supply is. But what the job growth number is going to be for next year is more hypothetical. But more in the momentum feels good right now.

[Eric Bolton, Chairman and Chief Executive Officer]

Yes. And I would tell you that when you think about the demand side of the equation being a function of not only just the economy and job growth but also the other factors surrounding demographics and changes in society and sort of single-family housing affordability and all those other factors. Those factors I think are going to continue to be favorable toward rental housing broadly and apartment housing specifically.

So I think at this point, we don't see any real reason to expect that the demand side of the equation is going to pullback at all. And I think that as I say the one variable that's really hard to handicap right now is when those the next recession hit and to what degree this job growth get affected by that and how does it affect demand. No reason to see that coming anytime soon, but it's something we think about.

[John Pawlowski, Greenstreet]

Okay. Thanks for the comments.

[Operator]

And our next question comes from Omotayo Okusanya with Jeffries. Please go ahead.

[Omotayo Okusanya, Jefferies]

Hi. Good morning. For most of this year, I mean when I took a look at your supplemental you guys tend not to refer to larger markets versus secondary market that you used to pre -- the Post acquisition. I'm just thinking, do you still kind of think about your portfolio that way? And if you do, how do you kind of think about your smaller secondary market that regards to maintaining exposure there possibly selling down in some of those markets as you have over the past two years?

[Eric Bolton, Chairman and Chief Executive Officer]

As a consequence of all the transformation that we've been through for the last really five years starting with Colonial, then with Post and then just the recycling of capital. We've really think about diversification and earnings balance in a different way now and really think about it mostly in terms of sort of A and B product trying to cater to a balanced price point in the market -- diversified price point in the market. And we think about it in terms of submarkets whether it's urban, interlude, suburban or more satellite city. And so that has increasingly begun to define sort of our portfolio and certainly, how we think about earnings diversification.

I think that as we look at recycling capital more often than not it's driven by age factors and rising CapEx issues or moderating rent growth for whatever reason. And typically that translates into older assets or assets neighborhoods that have got some age on it, it's reached a point in the lifecycle, what we think better to put that money out and redeploy it. And often when you look at our older assets they tend to be in some of these smaller cities that we've had for some time. So I think that as we think about recycling you may see us continue to exit some of these legacy smaller cities that we have, but that's really more of a function of just asset specific issues as opposed to any sort of strategy change or any diversification change.

[Omotayo Okusanya, Jefferies]

Got it. Alright. Thank you.

[Operator]

And it appears there are no further questions over the phone at this time, I would like to go ahead and put it back to the speakers for any closing remarks.

[Eric Bolton, Chairman and Chief Executive Officer]

Okay. Well thanks everyone for joining us. And I'm sure we'll see most of you next week at NAREIT. Thank you.

[Operator]

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