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Mid-America Apartment Communities Inc
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Good morning, ladies and gentlemen. Welcome to the MAA Fourth Quarter 2018 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, the companies will conduct a question-and-answer session. As a remainder 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 non-cash mark-to-market accounting adjustment related to the preferred shares. We're encouraged with our fourth quarter results as a 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 weighted 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 our higher number of redeveloped opportunities this year within that part of the portfolio. Our four projects in lease-up continue to become increasingly productive and in line with our expectations. We expect to see all four 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 Fort Worth this month on existing owned land. At this point, we're also working pre-development at new development projects in Phoenix, Denver, Orlando and Houston that were 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 real markets continue to position MAA for solid performance over the full real estate cycle. Our balance sheet is in a strong position and certainly able to support the external growth opportunities we're currently executing on, in any others that may emerge. After two 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 in 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 remained strong at 96.1%, as a result of the steady positive trend and blended pricing we saw revenues buck seasonal trends and they accelerated from 2% in the third quarter to 2.3% in the fourth quarter. All 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've 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 homebuying and move-outs to home renting were down 5% and 12%, respectively.
On a rolling 12-month basis, turnover was at historic low of 48.5%. This level of turnover was achieved while increasing renewal rents, at 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 8000 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 one 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 lease-up communities, Sync36 and Post River North in Denver, Post Centennial Park in Atlanta and Phase two of 1201 Midtown and Mount Pleasant – in the 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 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. 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 two 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 non-cash 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 penny above the midpoint of our prior guidance with 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 and total revenues which accelerated as Tom mentioned are from the 2% in the third quarter. Overall blended lease pricing growth combined new and renewal pricing finished the year, the full year of 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 there from certain municipalities primarily Atlanta and Dallas impacted in 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 community in Charleston which leads to three committees 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 two land parcels during the fourth quarter, one in Denver and one 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 two communities completely leased up and reached stabilization which we measure as 90% occupancy for greater than 90 days. And we saw four communities in lease-up at year-end including the recently completed community we mentioned earlier. Average occupancy for our lease-up portfolio ended the year at 62.4%.
As Tom mentioned, leasing has gone well for the group and we expect growing earnings contribution during 2019 and to the 2020 as two of these communities are projected to stabilize in the first half of the year and the final two 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 and 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 six-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 supplement. We're also providing guidance and other key business metrics expected to drive performance in 2019.
Also, though we do expect to continue volatility in our NAREIT reported FFO results related to the non-cash accounting adjustment on the preferred shares, we did not include the adjustments in our forecast as these are both non-cash and really impractical to predict.
Net income per diluted common shares projected to be $2.11 to $2.35 for the full-year 2019. FFO is projected to be $6.03 to $6.27, 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 rent pricing which is new leases and renewals combined of 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 two 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 non-stabilized deals.
We also plan to resume our portfolio recycling efforts 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% or 4.1%, which is about 20 basis points above the prior year at the midpoint which represents $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 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 with 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 timing of some of these planned investments and the impact of several non-recurring items during the year, which impacted legal, casualty insurance and medical insurance policies for the year. We expect our total overhead growth for the longer term to be around 5% annually which is in line with the sector average.
That's all 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. Please go ahead. Your line is open.
Hi. Good morning, and thanks for taking the questions.
Hi, Trent.
Good morning. You called out supply pressures in Austin, Charlotte plus Dallas and Atlanta continue to see high levels of permitting new supply. And very much thank you for breaking out your NOIs into 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 decline?
Let me start. Trent, this is Eric and Tom can give you some more specifics. I mean, our confidence if you will as it pertains to 2019 rent growth despite the supply pressures is really based in what we see as continued very strong demand. And we see 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 deep 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 the rent trends that we're seeing are going to continue to hold up. One other thing I'll add, I do believe that as we get later in the cycle that developers may get evermore aggressive with some of their lease-up practices in an effort to get little quicker. And that's what really – we haven't seen any evidence of that yet, but I think it's the 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 – 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 to counter the cost of a little occupancy in 2019, we're, okay with that. We think that's a right long-term play to make.
All right. And then just underlying trend, the confidence on the revenue side, the rent trends I'll touch 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 basis points, 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. Thank you very much. As it relates to the transaction market on the third quarter call, Eric you mentioned that you're 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 market, the deal flow? What opportunities are out there? What are you looking at? And how competitive it is to find accretive deal that meets 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 Nashville Housing Conference for a broker event. It has become almost annual meeting right now. And they usually come back with a lot of leads if you will, a lot of opportunities. 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 what 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 2018, and as a consequence of that we're hopeful that, that may create a little pressure which create some better buying opportunities for us. We are going to remain disciplined but we continue to have hope that the 2019 is going to deliver a few more opportunities. I mean, the volume is still high, but we're going to continue to remain optimistic about 2019 opportunities.
All right. Thank you for the time. Appreciate it.
You bet.
[Operator Instructions] We'll go ahead and take our next question from Nick from Citi. Please go ahead. Your line is open.
Thanks. It's been two years, but now that the integration with the Post is complete, have you seen any difference in same-store growth and margins in 2019 between the two portfolios?
Yes. Hey, Nick. This is Tom. What we're really seeing – in Mid-America is $2.6 and portfolio to 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. That's on the revenue growth side.
Yes, what I would say Nick is that, we saw incredible opportunities that we harvested in the first two 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 two 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 three things.
First of all you've got a – there's some training and then 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, a 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 reprice portfolio and bring all of the training and all of the revenue 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 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 of 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.
Thanks. 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?
Hey, Nick. This is Al. I can walk you through that, and I think 2019 certainly compared to 2018 was a fairly significant increase, but it has a lot to do really with some activity in 2018 and there was a little bit of noise still in the year relates to some of the things going on. So if you look at 2018 it actually declined from 2017 and was a little bit lower than what we had put out initially in our guidance early on in the year, only for couple of reasons.
One, as we're making investments for an integration and for the platform that we knew that we're 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 – on exactly what we wanted, and what we wanted to invest in to make our platform and what we wanted to be in the future.
So 2018 was lower, 2019 you feel the full run rate of that and then we had some onetime items in 2018, some cost that are due and payable, that won't recur in 2019 and some of the insurance and workers' comp and real insurance and medical insurance, since our medical costs were been lower. We're glad to have that – we don't think that will repeat in 2019. So what I will say is 2019 is a fairly large increase.
We would expect as you move to 2020, we have a more modest increase. We think that 2019 is a full-year run rate of our platform that we expect and I think if you look at our three-year windows, I talked about the decline in 2018, rise in 2019 and a more modest rise in 2020. We expect it to be in line with the long-term sector average of 5% to 6%. That's how we built it.
Thanks. It’s very helpful.
We'll go ahead and take the next question from Austin from KeyBanc Capital Markets. Please go ahead your line is open.
Hi, good morning. 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 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 before. Since, I think some of the new leases we're putting on and as we move into January, are really strong comparisons. I think as we move into the year as Tom will say that that may moderate somewhat, but we feel good that we've got…
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, that from a spread perspective that the spreads become more difficult, but from an absolute level I guess, is it just your, you are cautious to push rent on the same tenant two years in a row at a consistent level or in order to kind of, in order to sustain occupancy or 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?
I mean, 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 now – 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 also adding to that, 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 2019 versus 2018 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've got the peak in deliveries in Q2 rather than start of the spring leasing season.
It may come at the cost that, that pushing on pricing may come at the cost of a little bit of a give up on occupancy. And we just 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, 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.
That's helpful. And then as far as the peaking in the second quarter, I mean, 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?
Yes, 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.
Okay. Thanks. And 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. Its way too early to call the end on that one and we will be challenging particularly the first two quarters of the year.
Great. Thanks guys.
[Operator Instructions] We'll go ahead and take our next question from John Kim from BMO Capital Markets. Please go ahead.
Thank you. On your occupancy guidance for the year, I relate it's only 20 basis points but do you believe as far as 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 number one 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 number two 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 2019 relative to 2018. 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 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 of the 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, looking to capture a very strong average daily occupancy of 95.9%, I mean that's pretty darn strong and we think we'll do that this year.
I apologize, if I missed this or if you've already answered this but, where do you think renewals will be this year versus 6% last year?
I won't think we would be between 5.5% and 6.5% for the year 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%, I realize some of that in G&A, is 3% same-store expense growth is 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 average, it's close to 2.5%. I think the real estate tax, I think what we have gone in the last couple of years is really good performance for two 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 a tax pressure offsetting that somewhat.
We have about 5% growth in real estate taxes over those two years and still where we put a 2% total expense growth – forward. So I think going forward what you'll see is personnel – if those other lines will be under control but more close to normal level of growth. Personnel 2% to 2.5%, repair and maintenance closer to 3%. Modest growth in other lines and taxes being one-third of your cost in the fourth quarter range producing the majority of…
One way of looking at it is that, even if you think about real estate taxes comprising the large percentage of our overall tax expense base that growth rate almost by the math implies a lower, less than 3% growth rate on all of the other line items. And so I think that the new norm is my guess is going to be closer to 3%. In any given year a lot of it is going to be up or down as a consequence of real estate taxes.
And we will help over time, a couple of years real state in Texas being 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 NAREIT, you guys are saying Austin, Charlotte and DC were the three major markets. It looks like Dallas has moved up into the bucket. I'm wondering what changed in the last couple of months with Dallas? And also if D.C. is still on market, we see how they will display.
Yes, I mean 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 its slightly lower but John I would just expect it to be pressured about the same as next year.
Yes, I think, John we would say Dallas is still kind of at the same bucket, but its still, it's elevated both years but not necessarily getting way better or way worse.
Okay, great. Thank you.
We'll go ahead and take our next question from Rob Stevenson from Janney. Please go ahead. Your line is open.
Thank you. Tom, which markets have the widest spend of likely same-store revenue outcomes when you did your budgeting for 2019?
Meaning where do I 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 to pick the middle or somewhere below the middle or 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 to the top end or down side in 2019 relative to where you guys set the median expectation?
Yes. And then it's sort of, what I'll tell you is that comes down maybe to the change in the back half of the year, and I would tell you that Charlotte were relatively strong right now. And – but it is we're expecting some supply there especially later and so that may change over time, and then Nashville, it looks like, it's 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 terms? Or are you going to take some units out of service?
They will all be on terms.
Okay. And then lastly for me, Al what's the known non-cash or non-recurring things impacting FFO in 2019?
Non-cash Rob? It's a much cleaner year in 2019. The fair market value of the desk is pretty much burned off. You would probably have the preferred but you know what, we didn't not put that in our forecast, because it's just almost impossible, mostly impossible to predict. But those are the key non-cash items in 2019. I think, as the good news as 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. But I think as we move forward 2019 - 2020 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 non-cash was about $500,000 or so less than that debt mark-to-market non-cash and that's pretty much…
Virtually gone.
That's pretty much it.
Yes.
Okay. So NAREIT, normalized the core FFO should be, at this point in the year you guys think would be fairly consistent but for anything that happens on a preferred and that $500,000 of debt?
That's right. Excluding the preferred we think those numbers will be very close.
Okay. Thanks, guys. Appreciate it.
And we’ll go ahead and take our next question from Drew Babin from Baird. Please go ahead. Your line is open.
Hey, good morning.
Hey Drew. Good morning.
With regard to Dallas Atlanta and Charlotte kind of being your three biggest markets those are the three markets where you had a lot of Post Legacy assets would you say the lease-over-lease blended pricing expectations are above the midpoint of the two to three range for the year for those three markets? I mean, if not, what in the case of Dallas, I would assume they might be lower. How this 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 it's under pressure. But Frisco, Plano and McKinney are all seeing their fair share as well. Atlanta and Charlotte a little bit different. Inside, the perimeter Atlanta, outside the perimeter Atlanta two different markets. We're very strong outside the perimeter end market in Atlanta and the majority of the headwinds that we have on supply are Peachtree Road, Midtown, Downtown and it really inner loop and in Charlotte it's sort of a similar picture where Uptown/Downtown South Church area seeing a little bit more supply and the suburb is broadly stronger. So Dallas, a little bit wider spread and it's more targeted in the Atlanta and Charlotte markets.
Okay. And we would say, 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 the $2.7 at midpoint on that lease-over-lease?
Yes, the number of renovations 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 we're still over $500 million at the end of the year. And I'm not sure if that includes the turmoil 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 Drew. It's a good point. Just – in context we paid off about over $600 million – just over $600 million of debt in the – late in the year as we talked about and we had a plan as we talked about a few quarters to do bond, it will active in the bond market late in the year but the market volatility really causes us to be little more patient there 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 a secured 30-year behind of $172 million we saw and we put $300 million term loan which is – it was short-term term loan which we would expect to be active in the bond markets only here to replace that.
So I think in going forward what you should see is – 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 it will be opportunistic whether it's bond, 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've dialed in.
Okay. And with the 30-year mortgage you did in the fourth quarter what was the rate benefit of doing that versus the 30-year unsecured? And then as you look out to this year, is the 30-year unsecured bond is 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'd expect the perceived risk, but on the secured market which is a more of private market, it was much tighter, and so we had 4.4% rate on that all-in which is well below 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 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.
Okay, great. Very helpful. Thank you.
We'll take our next question from John Guinee from Stifel. Please go ahead. Your line is open.
Great, thank you. Nice quarter. When I look at your, what I would call a true fab number after subtracting that revenue creating CapEx, it looks like you're going to be in the $4.25 to $4.50 number in 2019. And I think you just increased your dividend about 4% after $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, we look at 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 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 and 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 could 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 us more beneficial from a fab perspective with lower CapEx on a newer asset. So I would tell you we feel pretty uncomfortable about a long-term sustainable growth rate of that dividend in the 4% to 5% range.
Great, thank you very much.
You Bet.
[Operator Instructions] And we will go ahead and move onto Omotayo Okusanya from Jefferies. Please go ahead. Your line is open.
Hi, yes, good morning everyone. 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 are going up in general? And if that's the case if it has any impact on the return on the yield...
It's mixed Tayo. As we feather in more of the Post portfolio that's $8,000 per unit average roughly and that's pulled by average up over time.
And the good news on that Tayo as the rent increases, the economic returns are similar, this is just relative to the large capital you get higher results, higher rent increase.
We don't compromise. We don't compromise on returns.
Okay that's helpful. And the second thing I want to kind of explore is 2019 guidance the blended rate again 2.2% to 3.2%, so an average about 2.7% or so. I'm just talking about renewals of 5.5% to 6.5% so that means new rates will be kind of a 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're 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 zero and the risk that you may have, a couple of developers getting aggressive with pricing and your ability – it sounds like, this full year is going to boil down to the ability of kind of get 6% on renewals? Its like exactly the story this year, and that new leases is going to be – it is what it is?
I'll start with that and Tom can add some color on that Tayo. I think, how we thought about the forecast was, we are very happy with January performance, but as we look for the full year we expect renewals to continue to trend. So we saw the logic from last year, we would 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 market at 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 will be negative, but under more pressure and some are more positive. So you want to give color on some of that, Tom?
Yes, and we touched on it earlier. New lease rate – new lease rates will be under pressure in town Atlanta, Charlotte. Later, Dallas and Austin, but that will vary from place to place. We also see I think strong new lease growth from Tampa, Orlando, Jacksonville, Phoenix. So its hard to generalize.
Okay, that's helpful. Thank you.
[Operator Instructions] We will go ahead and take our next question from Hardik Goel from Zelman & Associates. Please go ahead.
Hi guys, thanks for taking my questions. I was just wondering on the land parcels you guys acquired in Houston and Denver how you came up on 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 have been looking at both of these opportunities for quite some time probably anywhere from six months to nine months in advance of actually getting to a point where we're able to put them under contract. The opportunity in Denver is in the areas just a little bit northwest of downtown sort of half between Denver, Downtown Denver and Boulder an area called Westminster that we are well into predevelopment on.
We expect to start later in the year and the kind of the August time frame, but this is something that based on our initial – 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 I10.
Again it's something – it's an area going through some sort of regentrification. We are pretty excited about the opportunity and again there, we're looking at start, sometime late this year probably in the November time frame. And our early analysis on stabilized yield puts that 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 developer – 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 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 of 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 describe to the emerging build acquisitions you're planning on making? Is that 6.5%? Or is it a little lower than that?
Yes, it's 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, 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's still be low about 6%, but I think that it depends on 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%.
Got it. Thank you. That's all from me.
[Operator Instructions] And we can go ahead and take our next question from Jim Sullivan from BTIG.
Thank you. Guys, I just want to drill down a little bit more of the discussion about expenses for 2019. 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 2018 numbers.
And if we adjust through that in the 2018 totals that your 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 were some comment that there was kind of annualizing some higher expenses that were put in place in 2018 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 2018. It's going up about 14% in 2019, and yet this is occurring at a time when same-store revenue growth is not going up that much for all the reasons we have discussed.
What accounts for that dichotomy? When I say 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 3 times that. What explains that difference in yearly change?
Hey, Jim. This is Al. I think as we about talked a lot it has to do with comparisons to 2018 that you outlined. We certainly – we actually had a reduction in cost in 2018, but in 2019 we will feel the full run rate of the investments we made in our platform that we talked about are long, and very important to produce the results that we expect from the future in the people, systems, facilities, web presence all those things that we talked about and so when you look at 2019 to 2018 it does look high.
But if you look at 2018 to 2019 and what we expect in '20 and you're going forward and looking at a little bit longer period it will land 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 three-year window we feel that sector average 5% to 6% growth is what we're doing we'll do there, and so – 2020 will be a little more modest because obviously we made meaningful investments and we'll be able to grow more efficiently in the nearby areas. That's how we thought about the next year.
You do describe the two of those items together as a bucket adding summing it up to overhead, but in 2018 the property management expense rose 10% and G&A was down significantly. Presumably, most of the credits that you have talked about the onetime items benefited the G&A line as opposed to the property management line in 2018. Is that true?
No, they're all over the place because a lot of the people could be either one. I mean, so you're talk about people and systems cost typically in the property management so it can be, the things that 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 as more simple say, look we have overhead structure, this total and we're managing it that way. And so – I think it's little easier to think about it holistically.
Okay, then a final question for me kind of a macro. You've kind of made two 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 two ways a long-term growth rate of 5%, is I think, as you've indicated in some of your presentations before.
And I think today on the call 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 they be 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 – is that 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 an overhead in G&A as you talk about growing companies.
For us and the sector, where does the 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're talking about a 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 the only things you have to look at Jim is you have to factor in external growth component as well. Because this platform, the overhead platform if you will is supporting not only same-store but 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 of a big number. You're talking about 5% growth on overhead on a smaller aggregate dollar numbers, so the dollar margin is still growing.
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 sub 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 total NOI.
NOI, non-same-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 content based on our analysis that over time. The G&A line has not grown as much as the overall revenue line for the company, 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.
Hi, good morning. Just wanted to touch a little bit on the comment on the developers become 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 with the discounting given three months, so I just wanted to understand where that comments coming from a little bit?
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 lease 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 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 some market but you may see a little bit more aggressive prices. But we have not seen any real evidence of that as of yet.
Actually one here. Just – that refers to the apartment developers, have you seen increased concession or competition from single-family residence rentals?
No. I mean, I say no we're 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. 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.
Okay, good. That's all I had. Thank you.
[Operator Instructions] We'll go ahead and take our next question from John Pawlowski from Green Street Advisor.
Thanks. Eric could you provide some thoughts on how your external growth strategy and your smaller secondary markets might look in a world where liquidity from Fannie and Freddie are declined meaningfully and those are away understanding now we know what's going to happen and we've been waiting 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 work to – for whatever reason pull back, I think you're going to see it to have more of an impact on transaction activity in some of the smaller market. So 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 continued 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.
Makes sense. I guess, sense for sensitivity again purely hypothetical do you think in your average smaller secondary markets values fall by 5% more than the Atlanta of the world or 10% more? How big do 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 toward multifamily housing. I think that while Dallas or Atlanta may not feel it as much as a secondary market. As you know there's 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 well on the margin it will have an impact on some of these smaller buyers I think we are 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 – 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 large well-capitalized balance sheet, private balance sheet to have in Charleston.
Understood. Last one for me. What job growth assumptions underpin your 2019 revenue growth outlook?
Yes. I would tell you basically it's not 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, we 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 we're headed to that sort of scenario. So our 2019 assumptions are built on a continuation of what we see, but frankly at some level I can't look forward to it happening and while it's going to be depending on where we are in the supply cycle it could be painful two or three quarters as we work through that.
But certainly we think that some of these lease-up projects and some of the supply coming online, will face some pretty severe pressure which is going to create new things and great opportunities to capture some value on an acquisition side. And we've got a balance sheet ready to jump on that shouldn't happen, but anyway – we think 2019 looks a lot like 2018 on that regard.
All right, great. Thanks.
And we will go ahead to take our final question from Buck Horne from Raymond James. Please go ahead your line is open.
No, thanks guys. My questions have all been answered. So I will end the call there. Thank you.
Thanks Buck.
Well, operator I think that's all the questions. And so we appreciate everyone joining us this morning. 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 anytime.