Good morning, ladies and gentlemen. Welcome to the MAA Fourth Quarter 2018 Earnings Conference Call. During the presentation, As a reminder, this conference is being recorded today, are 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 Del Priore, 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 atwww.mac.com. I'll now turn the call over to Eric.
Thanks, Tim, and good morning. We wrapped up 2018 are 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 4th quarter results as the positive trends in rent growth and high occupancy are clearly evident. While the new supply pipeline in several markets will challenge near term rent growth, we're encouraged with the continued strong demand for apartment housing across our markets. Our portfolio continues to benefit from strong job growth and overall high demand for apartment housing.
We continue to believe that new supply pressure in 2019 will remain elevated, but down slightly from 2018. Tom will cover more details concerning our higher concentration markets, But broadly, when weighting our market exposures by percentage of NOI and refining the analysis to neighborhood specific our latest update is very similar to the information we shared at NAREIT in November. In summary, we expect 48% of our portfolio's 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 of the equation remains strong, we expect the positive pricing momentum we've seen over the back half of twenty eighteen 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 his comments. We do expect to post strong occupancy in 2019 of 95.9% average daily occupancy we will see throughout the year, which represents only a slight 20 basis point moderation from the record high 96.1 percent our quarterly earnings call is expected to be approximately $1,500,000,000 average daily occupancy throughout 2018. As commented in our Q3 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 of expenses and G and A overhead costs, we do expect to see year over year growth in expenses begin to normalize in 2019. As expected, the opportunities on the revenue side of the equation surrounding various revenue management practices and significant redevelopment opportunities within the legacy Post portfolio have been slower to capture than the expense side given the new supply pressures in a number of markets. However, despite this pressure, the improving pricing trends within the legacy Post portfolio over the past couple of quarters are encouraging. And in addition, we will be executing on a higher number of redevelop opportunities this year within that part of the portfolio. Our 4 projects in lease up continue to become increasingly productive and in line with our expectations.
We expect to see all four properties stabilized 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 we expect to start later this year. In summary, we're encouraged with the continued momentum in pricing that we're capturing despite the new supply headwinds in several of our larger markets. We believe our portfolio focused on the strong job growth Sunbelt region diversified across markets, submarkets and price points appealing to the largest segments of the rental market continue to position MAA for solid performance over the full real estate cycle.
Our balance sheet is in a strong position and certainly able to support the external growth opportunities we are currently executing on and any others that may emerge. After 2 years of merger activities that are now complete, our platform is stable and stronger. We look forward to the performance opportunities in 2019. I'll turn the call over to Tom now. Thank you, Eric, and good morning, everyone.
Our operating performance for the 4th quarter came in as expected with building momentum and rent growth, continued strong average daily occupancy and improving trends that set us up well for 2019. 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 grew by 1.6% in the 4th quarter, which is 150 basis points higher than the same time last year. Average daily occupancy remains strong at 96.1. As a result of the steady positive trend in blended pricing, we saw revenues buck seasonal trends and they accelerated from 2% in the 3rd quarter to 2.3% in the 4th 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 other markets. Among our highest concentration markets Phoenix, Richmond, Tampa and Orlando are our strongest revenue growth markets. Expense performance was steady for the 4th 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, 60 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 on the call, we will continue to drive down resident turnover. Move outs for the overall same store portfolio were down 7% for the quarter.
Move outs to home buying and move outs to home renting were down 5% 12%, respectively. On a rolling 12 month basis, Turnover was a historic low of 48.5%. This level of turnover was achieved while increasing renewal rents, Notable 6.1%. On the redevelopment front, in the 4th quarter, we completed 1600 units, which brought us to a total of 8,200 unit interior upgrades for the year. For 2019, we again expect to complete close to 8,000 unit interior upgrades.
As a reminder, on average, we spend $6,100
of the quarter, we expect to incur
an additional 11% in rent, which generates a year 1 cash on cash return in excess of 20%. Our total redevelopment pipeline now stands in the neighborhood of 17,500 to 20,500 units. Our active LENA sub communities, Sync 36 and Post River North in Denver, Post Centennial Park in Atlanta in Phase 2 of 1201 Midtown and Mount Pleasant and on Mount Pleasant submarket of Charleston are all leasing up in line with expectations. Looking forward, as Eric mentioned, our overall supply in our markets is expected to improve modestly in 2019. We take the 3rd party data and then cross check 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 supply 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. I greatly appreciate the tireless efforts of our associates as we retooled the company over the last 2 years.
We are starting 2019 in a much better position than 2018 and we look forward to the coming year. Al?
Thank you, Tom, and good morning, everyone. I'll provide some additional commentary on the company's 4th quarter earnings performance, balance sheet activity, and then finally on the key components of our initial guidance of 2019. FFO for the Q4 was $1.55 per share, which included $0.02 per share of non cash expense related to the accounting adjustment of the preferred shares acquired during the post merger. Excluding this adjustment, our FFO per share for the Q4 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 Q4 was in line with our expectations as continued pricing momentum reduced the 2.3% year over year growth in total revenues, which accelerated, as Tom mentioned, from the 2% in the 3rd quarter.
Overall blended lease pricing growth combined new and renewal pricing finished the full year at 2.5%, which was 80 basis points above the prior year. Same store expense growth of 3% for the 4th quarter was primarily driven by 5.8% growth in real estate tax expense, which represents 36% of total same store operating expenses As pressure late in the year from certain municipalities, primarily Atlanta and Dallas impacted the Q4. 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 Q4, we completed construction of 1 development community and expansion community phase of the community in Charleston, which leaves 3 communities under development at year end with a total projected cost of $118,500,000 Of which about $87,500,000 remain to
be funding as of year end.
We also acquired 2 land parcels during the Q4, 1 in Denver and 1 in Houston, both related to planned new development projects expected to begin during 2019. Given our current pipeline and planned new projects, we expect total construction funding to increase in 2019 ranging between $100,000,000 $150,000,000 We continue to expect NOI yields of 6% to 6 point on average from our development portfolio once they are completed and fully stabilized. During the Q4, we had 2 communities complete lease up and reach stabilization, which we measure as 90% occupancy for greater than 90 days, which left 4 communities in lease up at year end, including the we recently completed community mentioned earlier. Average occupancy for our lease up portfolio ended the year at 62.4%. As Tom mentioned, Leasing is going well for the group and we expect growing earnings contribution during 2019 and into 2020 as 2 of these communities are projected to stabilize in the first of the year and the final two stabilizing later in the year.
Our balance sheet remains in great shape at year end. During the Q4, we had a fairly significant amount of financing activity As we paid off the final $80,000,000 of Fannie Mae secured credit facility, which matured in December, and additional $530,000,000 of of secured mortgages maturing in early 2019. Given the volatility of the credit markets during the Q4, we revised our financing plans and entered a 30 year fixed rate secured mortgage for $172,000,000 and a $300,000,000 variable rate unsecured 6 month term loan, which we expect to replace in 2019 with additional fixed rate financing. At the end of the year, we had over $490,000,000 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 dividend rate was just below 5 times.
Finally, we are providing initial earnings guidance for 2019 with the release, which is detailed in our supplemental information package. We're providing guidance for net income per diluted common share, which is reconciled to FFO and AFFO per share in the supplement. We're also providing guidance on other key business metrics expected to drive performance in 2019. Also though we do expect continued volatility in our NAREIT reported FFO results related to the non cash accounting adjustment on the preferred shares, we do not include any adjustments and in our forecast as these are both non cash and really impractical to predict. Net income per diluted common share is projected to be $2.11 to $2.35 for the Full year 2019, FFO is projected to be $6.03 to $6.27 per share or $6.15 at the midpoint.
AFFO is projected to be $5.39 to 5.63 our earnings per share were $5.51 at
the midpoint. The main driver
of full year 2019 performance is our same store guidance. Revenue growth projected to be 2 point 3% at the midpoint is based on continued strong average daily occupancy of 95.9% at the midpoint and projected average blended rental pricing, which is new leases and renewals combined at 2.7% for the year, which is a modest improvement over 2018. We expect operating expenses to we are 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 We expect the acquisition environment to remain competitive. We project total acquisition volume for 2019 to range between $125,000,000 175,000,000 and to consist primarily of non stabilized deals.
We also plan to resume our portfolio recycling efforts with projected disposition volume of $75,000,000 to 125,000,000 likely closing in the second half of the year. We expect to end 2019 with our leverage near current levels as a percentage of gross assets producing an average effective interest rate of 3.9 percent to 4.1 percent, which is about 20 basis points above the prior year at the midpoint, which represents an $0.08 per share impact to our earnings. A portion of this projected increase is related to the continued impact of rising short term interest rates, With the remaining portion primarily due to the declining mark to market adjustment related to the debt acquired from both 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 costs, which we included G and A and property management expenses combined will range between $96,500,000 $98,500,000 reflecting more normalized run rate for 2019, which includes a full year carry of investments we made in our people, facilities, systems and web presence to improve our operating platform, capabilities, scalability, our cybersecurity and which all of this which was planned as part of the merger integration efforts.
Our total overhead costs for 2018 were actually below our original estimates for the year and actually declined from 2017, are 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 costs of the year, we expect our total overhead growth rate over the longer term to be around 5% annually, which is in line with the sector average. That's all that we have in the way of prepared comments. So operator, we'll now turn the call back over to you for questions.
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. You called out supply pressures in Austin, Charlotte, plus Dallas and Atlanta continue to see high levels of permitting and new supply. And very much thank you for breaking out your NOI into higher, 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 And I guess another way of saying this, can you maybe talk about the magnitude of supply increases versus the magnitude of declines?
Let me start, Trent, this is Eric and Tom can give you some more specifics. I mean, our Comfort or our confidence, if you will, as it pertains to 2019 rent growth despite the supply pressures is really based in what we see as continued very strong demand and we've seen no evidence that the demand side of the equation is weakening. We continue to see very low move out occurring and the job growth numbers continue to be encouraging. So with that level of demand, when we start looking at our particular locations and as Tom mentioned in his call, we take the Axio data and other sort of macro level data and we do a deeper dive with it Into specific neighborhoods and so forth where we're located. And ultimately, we do see this mix So roughly 48% of 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 As long as that's there, we think the trends that we're seeing are going to continue to hold up.
The one other thing I'll add, I do believe that as we get later in the cycle that developers may get ever more aggressive with some of their lease up practices in an effort to get full quicker. And that's what really we haven't seen any evidence of that yet, But I think it's reasonable to expect that it may come in certain areas and that really led us to Introduce the notion that we'll maintain strong occupancy, but it may not be Quite at 96.1 percent that we did in 2018, we believe that really to protect long term revenue growth That rent growth really matters and we want to continue to capture that rent growth trend that we're seeing. We think we'll do so. And if it comes at the cost of a little occupancy in 2019, we're okay with that. We think that's the right long term play to make.
Just underlying the confidence on the revenue side, the rent trends I'll touch on for Q4 and January just to put those in perspective. For Q1, blended rents Increase was 45 basis points better than last year and second quarter is 100 basis points better, 3rd quarter 60, 4th quarter 150 basis points in January 2 60 basis points. So we feel good about The underlying results that we're seeing on the pricing trends.
As it relates to the transaction market on the Q3 call, Eric, you mentioned that you were seeing perhaps some early indications that deal flow might come back Fewest things were starting to fray a little bit. It may have been very preliminary. But your guidance does call for some lease up acquisitions and you stated Significant capacity on your balance sheet. So can you maybe give us an update on how you're viewing the transaction markets, the deal flow, what opportunities are out there, what you're looking at And how competitive it is to find accretive deals that meet your standards at this time?
So it's still very, very As you may know, I mean, the market tends to take a little bit of a breather during the very early part of the year. I know our transaction team is out at the National Well, the housing conference broker event is what has become almost annual meeting right now and they usually come back with A lot of leads, if you will, a lot of opportunities that I know they're talking about this week. There continues to 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 Then 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're going to remain disciplined, but we continue to I have hope that 2019 is going to deliver a few more opportunities. And I mean the volume is still high, but we're going to continue to We remain optimistic about 2019 opportunities.
All right. Thank you for the time. Appreciate it.
You bet.
We'll go ahead and take our next question from Nick from Citi. Please go ahead. Your line is open.
Thanks. It's been 2 years, but now that the integration with Post is complete, are you seeing any difference in same store growth or margins in 2019 between the two portfolios?
Yes. Hey, Nick, it's Saum. What we're really seeing, Where Mid America is 2.6% on the portfolio post is 1.7%. What to me is most interesting is the rate of acceleration on the post side, Which was 2nd quarter 0.4 and now 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 2 years on the expense side of the equation as we've 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 costs and that's what really fueled some pretty low year over year expense growth that we've had for the last 2 years, not only and particularly in the post portfolio, but in aggregate, the overall MAA portfolio had pretty strong 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 got to there's some training and there's some people things that you have to sort of get stabilized and get right And that takes a little time too. 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 the training and all 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 out of the MAA portfolio. So it does suggest to us that we're going to The 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 just on the total overhead, obviously, up meaningfully over 2018, can you walk through the main drivers of that? And then is this 2019 guidance a good baseline going or are there any one time items in there?
Hey, Nick. This is Al. I can walk you through that. I mean, I think 2019 certainly compared to 2018 was a fairly significant increase, but it has a To do really with some of the activity in 2018 and there was a good bit of noise still in the year related to some things going on. So if you look at 2018, it actually declined from 2017 and was a good bit lower than what we had put out initially in our guidance early on in the year, really for a couple of reasons.
One, as We're making investments for an integration and for the platform that we knew that we were going to put together. We some of those came later than we expected We wanted to get deeper into the project, into the process and really 0 on exactly what we wanted and what we wanted to invest in to make our platform what we want to be for the future. So 'eighteen was lower, 'nineteen you'll feel the full run rate of that. And then we had some one time items in 2018, some costs that were a little April that won't recur in 2019 and some of our insurance or workers' comp and GL insurance or medical insurance and some of our legal costs were lower. We're glad to have that.
We don't think that will repeat in 2019. So what I'll say is 2019 is a fairly large increase. We would expect as you move into 2020 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 There were 3 windows I talked about, the decline in 2018, the rise in 2019 and the 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. That's very helpful.
We'll go ahead and take our 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 10th January, but the average I think you're assuming for the full year is 2.7%. So just curious what leads you to believe that lease rates will moderate Later into the year.
I'll start with that and then Tom can jump in. I think one of the things going on, as you remember, we had some pretty favorable comparison Some leasing activity late last year. Q4 of last year is when it really got challenging for us. And so I think some of the new leases we're putting on As we move into January or having really strong comparisons, I think as we move into the year, Tom will say that that may moderate somewhat, but we
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 good the comparisons, we've got good opportunity 1st part of the year, but don't expect to keep 3.1 all the way through.
Is that a function? I mean, I understand that from a spread perspective that the spreads become more difficult, but from an absolute level, I guess, Is it just you're cautious to push rent on the same tenant 2 years in a row at a consistent level or In order to kind of in order to sustain occupancy or I guess I don't fully understand the comp discussion in a stable supply environment, I would think maybe you could still push I guess at a similar rate. So can you just dive in a little
bit there?
On the same resident back to back, that's on the renewal side and renewals are strengthening and I feel very comfortable with that in the 6% to 7% range right out of the shoe 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, Asahi, I mean, we certainly intend and expect that our ability to push rents in 2019 will be comparable to what we did
in 2018. We don't
see any reason Opposed 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 from Axios and others suggest that We got a peak in deliveries in Q2 right in the start of the spring leasing season. It may come at the cost that pushing on pricing may come at the cost of a little bit of a give up on occupancy and we think it's important to be willing to make that trade off right now In order to sort of protect the long term revenue goals that we have. So, but to answer your question, no, we absolutely don't believe we're going to need to back off on the pushing on the rents, it's just that the prior year comparisons that we're comparing against are just a little harder as we get later in the year.
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 So ever 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 Axios 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.
Thanks. And then just last one, just curious if you in your forecast, when When do you see supply growth in your submarkets
in Dallas begin to moderate?
We're seeing some early signs that it may moderate late In the year, but I think Dallas is going to be challenging for the pretty much for the full year. It's way too early to call the end on that one and will be challenging particularly the 1st 2 quarters of the year.
Great. Thanks guys.
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 realize it's only a 20 basis point dip. But do you believe as part of that the turnover rate will Increase during the year or it will take longer to lease out vacant units or a combination of both?
It's No, I would say likely I would think more likely it's going to come primarily through just a 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 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 2 reason people leave us is to go buy a house, that seems To not becoming any worse for sure, maybe even slightly better. So as a consequence of that, I think that I'm optimistic that the turnover component remains fairly static in 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, we're looking to Capture very strong average daily occupancy of 95.9 percent. 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 already answered this, but what do you think renewals will be this year versus the 6% you got last year?
I would think we would be between 5.5% and 6.5% for the year on that, trending a little higher than that in January, But I wouldn't feel comfortable in the 5.5% to 6.5% range.
Okay. On the expense side with tax increases of 4.25%, overhead costs going up 5%, as I realize some of that is in G and A. Is 3% same store expense growth the new norm for the foreseeable future?
I mean, I
think if you look at John, this is Al. If you look at our long term average is close to 2.5%, I think the real estate tax, I think what we have gone over the last couple of years is really good performance for 2 years, 2% on average last couple of years, driven by reductions in repair and maintenance and marketing in some of the areas where we were able to strong synergies from our deals and we had the tax pressure offsetting that somewhat. We had about 5% growth in real estate taxes over those 2 years and still we're able to put the 2% Total expense growth forward. So I think going forward, what you'll see is personnel, if those other lines will be under control, The more close to normal levels of growth personnel 2%, 2.5%, repair and maintenance closer to 3%, modest growth in the other line items and taxes then being A third of your costs in the 4 quarter range producing the majority.
One way of looking at it is that, when you think about real estate taxes comprising the large 3% growth rate on all the other line items. And so I think that the new norm is my guess is going to be closer to 3% and at any given year, a lot of it's going to be up or down as a consequence of real estate taxes.
And We will hope over time, a couple of years real estate taxes begin to moderate, but right now there's a lot of pressure from Texas, from Georgia and not surprising.
The low cap rate environment feeling that.
Got it. Okay. And then on your market commentary and as far as where you're seeing the greater supply pressure, Back in November at NAREIT, you guys were saying Austin, Charlotte and D. C. Were the 3 major markets.
It looks like Dallas has moved up into that bucket.
I'm wondering what's changed in the last couple of months with Dallas and also is DC still a market where you see elevated supply?
D. C. Is still a market in the elevated bucket. And then Dallas just sort of Dallas is very close to even. In some looks, it is slightly higher.
In others, it's slightly lower. But John, I would just expect it to be pressured and about the same as next year. Yes.
I think, John, we would say Dallas is still kind of in that same bucket, But it's still it's elevated both years, but not necessarily getting way better or way worse.
Okay, great. Thank you.
We will 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 band of likely same store revenue outcomes when you did your budgeting for 2019?
Meaning where do we think our strongest markets will be and where do our weakest or within the market which has the largest Delta between assets?
The largest delta between basically the up end, the top end of the range and the bottom end of the range. I assume that Al made you pick the middle or somewhere below the middle from a conservative basis in most of your markets when you were going through From an earnings standpoint, but like which markets are most likely to have a surprise to the up and or downside In 2019 relative to where you guys set the median expectation.
Yes. And it's sort of what I'd tell you is that It comes down maybe to the change in the back half of the year. And I would tell you that Charlotte relatively strong right now And but is we're expecting some supply there, especially later and so that may Change over time and then Nashville, looks like it's it may be better later half of the year, but it's challenging, very challenging right now.
Okay. And then the 8,000 units you expect to renovate this year, are these all going to be on turns or are you going to take some units out of service
They will all be on turns.
Okay. And then lastly for me, Al, what's the known non cash or non recurring Things impacting FFO in 2019?
Non cash, it's a much cleaner year in 2019. The fair market value of the debt is pretty much burned off. You will probably have the preferred, but you know what, I mean, we did not put any of that in our forecast, because it's just almost impossible, virtually impossible to predict. But those are the key Non cash items in 2019, I think as and the good news is we've had bad news is we've had a good bit of noise over the last few years with 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 on the preferred, which is non cash, there's about $500,000 or so left on that debt mark to market non cash and that's pretty much it. Virtually gone. That's pretty much it.
Yes. Okay.
So NAREIT and normalized or core FFO should be at this point in the year, you guys think would be fairly consistent, but for Anything that happens on the preferred in that $500,000 of debt?
That's right. Excluding the preferred, we think those numbers would be very close.
Okay. Thanks guys. Appreciate it.
We'll go ahead and take our next question from Drew Babin from Baird. Please go ahead. Your line is open.
Hey, good morning. With regard to Dallas, Atlanta and Charlotte, kind of being well, being your 3 biggest markets, but also the 3 markets where you have A lot of post legacy assets, would you say that lease over lease blended pricing expectations are above the midpoint of the 2.2% to 3.2% range for the year for those three markets? And if not, like in the case of Dallas, I would assume they might be lower. How does uptown stack up Versus the northern suburban assets where I know there's a lot of supply kind of out in Frisco and Plano now?
Yes. No, they're lower. And Dallas, as you mentioned, Uptown is under pressure, but Frisco, Plano, McKinney, all seeing their fair share as well. Atlanta and Charlotte are 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 Our Peachtree Road, Midtown, Downtown, really in our loop. And in Charlotte, it's sort of A similar picture where Uptown, Downtown, South Church area seen a little bit more supply And the suburbs broadly stronger. So Dallas a little bit wider spread And it's more targeted in the Atlanta and Charlotte markets.
Okay. And you would say though that the post legacy assets, if you kind of broke those out with some of the redevelopments and renovations, would you say that those assets are doing better than kind of the 2.7 midpoint On that lease over lease.
The number of renovates that we have done thus far on the post Side of things, Drew, is not enough to really impact that just yet. It's building and it will come. But those Post properties are facing a little bit uphill battle on the supply ride in their backyard.
Okay, that's helpful. And one question for Al, just on the line balance, I think it was still over $500,000,000 at the end of the year. And I'm not sure if that includes the term loan or not, but as you look out to maybe more permanently finance that, what are the options on the table in guidance?
If you
could start with that, I have a follow-up.
Right, absolutely. No, the term loan is not in our line of credit outstanding balance there, Drew. That's a good point. This is in context, we paid off about over $600,000,000 just over $600,000,000 debt in the late in the year as we talked about and we had planned As we talked about a few quarters to do, bond yield will be active in the bond market late in the year, but the market volatility has really caused us to be a little more patient in that. And so we talked about doing $600,000,000 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 Secured 30 year of 172 you saw and we put a $300,000,000 term loan which is a short term term loan which we will expect to be active in the bond markets early in the year to replace that. So Going forward, what you should see you should expect in your model is a bond deal in the 1st part of the year replacing that 300 And maybe a couple of 100,000,000 more of debt whether and we'll be opportunistic whether it's bond or whether It's mortgage, secured mortgage, averaging about 4.5% rates what we have in the forecast for us for the year. So markets will give us what they give us, that's what we've dialed in. Okay.
And with the 30 year mortgage you did in the 4th quarter, What was the rate benefit of doing that versus a 30 year unsecured? And then as you look out to this year, is a 30 year unsecured bond still on the table?
Yes, absolutely. One of the interesting things we saw late in the year was doing a 30 year bond as markets got volatile, The spreads really widened on that as you would expect as perceived risk. But on the secured market, which is more the private market, it was much tighter. And so we 4.4% rate on that all in, which is well below what we could have 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, want to get too much secured debt, but you could see us use a little bit more because we're we have about 8% of our Assets are encumbered right now, so it's very, very low. So we could do a little bit more. So you may see us next year do a little bit more of that if the rates are good and then have a bond deal in the $300,000,000 $300,000 $400,000,000 range.
Okay, great. Very helpful. Thank you.
We will 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 fat number after subtracting our revenue creating CapEx, it looks like you're going to be in the 4.25 dollars to $4.50 number in 2019. And I think you just Increase your dividend about 4% up to $3.84 How do you feel over time about being able to sustain a 4% plus dividend increase annually.
This is Eric. We Feel pretty good about that honestly. We think that we're going to be in a position. I mean, we go through various points in the cycle obviously, but we think we're trending back to a normal sort of same store internal earnings growth rate is going to be in the kind of 3% range or thereabout on a year over year basis. And then As we outlined, we do believe that the external growth front is going to get better at some point from an acquisition perspective over the next couple of years, we are increasing our ability to deploy capital and some pretty Creative 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 I was going to add another 1% or 2% to that and then you put a leverage on that. You start to get to a and 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 More beneficial from a FAD perspective with lower CapEx on the newer assets. So, I would tell you, we feel pretty darn comfortable about a long term sustainable Growth rate of that dividend in the 4% to 5% range.
Great. Thank you very much.
You bet.
Only. And we will go ahead and move on to Tayo Okusanya from Jefferies. Please go ahead. Your line is open.
Yes. Good morning, everyone. Question around the redevelopment of the apartments. The cost per unit was a little bit elevated this quarter. Just curious whether that's mix or whether that's a case of construction costs are going up in general.
And if That's because it's having any impact on the returns and the yield you're getting in development?
It's mixed Tayo. As we You can feather in more of the post portfolio that's at 8,000 per unit average roughly and that's Hold our average up over time.
And the good news on that Tayo is the rent increases, the economic returns are similar. This is relative to the larger capital, you'll get a higher return, higher rent increase. Yes, we don't compromise on returns.
Okay, got you. That's helpful. Then the second thing I wanted to kind of explore is 2019 guidance, the blended rate, again, 2.2% to 3.2%, so an average of about 2.7% or so. You're talking about renewals of 5.5% to 6.5%. So that means new rates will be kind of 0 ish Basically, for the year and I'm just curious, you made the comment earlier on that given the backdrop for your You will more likely push price, even at the risk of losing some occupancy.
But when I kind of think about renewals at 6% and new leases At about 0, and the risk that you may have a couple of developers getting aggressive with pricing, again, your ability it sounds like This whole year is going to boil down to the ability to kind of get 6% on renewals. Is that really the story this year? And that new leases are just going to be it is what it is?
I'll start with that and then Tom can add some color on that, Tayo. I think how we thought about the forecast was We're very happy with January performance, but as we look for the full year, we expect renewals to continue the trends that we saw largely from last year. And We've kind of assuming 5.5% to 6% range, 5.5% to 6% most likely for the year. And so new lease pricing is going to be the most competitive part. It has been.
And as we As the supply pressure continues in the markets 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 are going to be negative and under more pressure and some are more positive. So you might want to I don't know some of that, Amber.
Yes. I mean, and we touched on it earlier, new lease rates will be under pressure In town Atlanta, Charlotte later, Dallas and Austin, but That will vary from place to place. We'll also see, I think, strong new lease growth from Tampa, Orlando, Jacksonville, Phoenix. Right. So, hard to generalize.
Okay. That's helpful. Thank you.
We will go ahead and take our next question from Hardik Goel from Zelman and Associates. Please go ahead.
Hi, guys. Thanks for taking my question. I was just wondering on the land parcels you guys acquired in Houston and Denver, how you came upon that opportunity? How long have you been looking at that? And how you're underwriting development today on those?
And just a sense for what the yield might be on those?
Well, we have been looking at both of these opportunities for quite some time, Probably anywhere from 6 to 9 months in advance of actually getting to a point where we were able to put them under contract. The opportunity in Denver is in areas just a little bit Northwest So downtown sort of halfway between Denver, downtown Denver and Boulder and area called Westminster that we are Well into predevelopment on, we'd expect to start later in the year in kind of the August timeframe. But this is something that based on our initial and we're still finalizing numbers and so forth, but we would expect A stabilized yield out of this investment somewhere in the 6.5% range on the Denver opportunity. The Houston opportunity Is just kind of west of downtown, sort of halfway between the Galleria area and the Energy Corridor area just off of I-ten. Again, it's something that we've it's an area going through some sort of regentrification.
We are pretty excited about the opportunity. And again, there we're looking at a start sometime late this year, probably in the November timeframe. And our early analysis on stabilized yield puts that at about 6.4%. So both very accretive opportunities based on the underwriting we're looking at right now. As we Approach these opportunities, I mean, we talk with we've got a group of developers or a group of contractors that we've done a lot of business with And get preliminary pricing for them, but we've worked with them enough to have a lot of confidence that the numbers we get from them are Something we have feel pretty good about and then we assume some escalation factor in that based What we do in predevelopment before the time we actually locked down the contracts and go to fixed price contracts.
So, want to come on all this, But we feel pretty good about the opportunities at this point.
And is that just as a follow-up, is that the same Sort of hurdle you would ascribe to the merchant build acquisitions you're planning on making? Is that 6 6% to 6.5% or is it a little lower than that?
It'd probably be 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 pre purchase is something that They are going to build, they will be the developer, they will take the majority of that risk. And so we're comfortable taking that Down at a slightly lower yield, it will still be well above 6%. But I think that it depends on the situation and 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 for me.
And we can go ahead and take our next is Jim Sullivan from BTIG.
Thank you. Guys, 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 $7,000,000 number, I think, of kind of credits And one off items that benefited the 2018 numbers. And if we adjust for that in the 2018 totals that you report for both management, property management and G and A, we're still getting an increase in 2019 of about 9% in the overhead line item, and I think there was some comment that there was kind of annualizing Some higher expenses that were put in place in 2018 that accounts for that. And but when I look at the individual items, So property management, for example, that's gone up, went up more than 4 went up about The 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've discussed. What accounts for that dichotomy? And when I say the 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 So they're going up nearly 3 times that. What explains that difference in yearly change?
Yes, Jim, this is Al. I think as we talked about, a lot of it has to do with comparisons to 2018 that you outlined. We certainly we actually had a reduction in costs in 2018. But in 2019, we will feel the full run rate of the investments we made in our platform that we've talked about all along are very important to produce the results that we expect for the future and 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, 2019 and then what we expect in 2020 and even going forward, but looking at a little bit longer period, It will blend to more of a 5% to 6% growth rate over time and I'm talking about both of those together. We think of it as overhead, which is the G and A plus Property Management together, we sort of manage it as overhead as a bucket. And so I think over a 3 year window, we feel that sector average 5% to 6% growth is what we're doing we'll do there. And so 2020 will be a little more modest because obviously we've made many of the investments and we'll be able to grow more That's how we thought about putting that together.
You do describe the 2 of those items together as a bucket, Adding summing up to overhead, but in 2018, the property management expense rose some 10% and G and A was down some Yes, it was down significantly. Presumably, most of the credits that you've talked about, the one time items benefited the G and A line as opposed to the property management line in 2018. Is that true?
No, I mean, they're all over the place because a lot of the people could be either one. I mean, so you're talking about people and systems costs are typically on the property management. So it can be the things I outlined 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 it's just I think it's a little easier to think about it as holistically.
Okay. And then a final question for me, kind of a macro, You've kind of made 2 comments today about growth rates. You've talked about kind of a longer term kind normalized same store NOI growth rate in terms of expectation of something like 3% annually. And yet when you've talked about The overhead expense line you've talked about, I think it's been described 2 ways, a long term growth rate of 5% is, I think, what you've indicated Some of your presentations before and I think today on the call you it was somebody mentioned 5% to 6%. And I guess That dichotomy seems inconsistent with a scalable platform.
One would have assumed with the post merger That you were building a scalable platform and part of that conclusion would be that maybe the overhead costs 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, just that, it's same store. It's not Assuming growth, it's the same portfolio in this year compared to the production power of the previous year.
I think
the important thing to think about in overhead and G and A as you're talking about growing companies For us and the sector, whether through acquisition, development or even many ways. And so your G and A over time is going to grow more than your same store And I think if you look at the sector average over time, that's what we were talking about in NAREIT over the last couple of years and what we mentioned earlier was if you look The sector average over time for that area is more like 5%. I think
the only question you have to look at, Jim, is you have to factor in the external growth component as well, Because this platform, the overhead platform, if you will, is supporting not only same store, but 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 Yes, the margin component there that you're sort of alluding to, I think starts to make more sense. The other thing to keep in mind is that you're talking about 3% growth, organic growth off a big number. You're talking about 5% growth on overhead on a smaller aggregate dollar number. So the dollar margin It's still growing.
And I think the point is
that the only comment I would make on that latter point is that As you probably know, many of your peers report NOI and same store NOI after Property management expenses rather than before. And if we were in your case to look at the same store NOI computation you have in the sup and Compute it that way, the growth in same store NOI would be lower. It would be closer to about a 1.4% number. So we understand the same store is 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 and A line. I don't know, I would contend based on our analysis Over time, the G and A line has not grown as much as the overall revenue line for the companies we for most of the companies we cover. So just a thought as you think about the scalability of the platform and I guess I can leave it at that.
I understand your point.
We will go ahead and take our next question from Daniel Bernstein from Capital One.
Hi, good morning. Just wanted to touch on the comment on developers becoming a little
bit more aggressive on
leasing. Is that just an assumption you're making or have you actually seen some of that more aggressive leasing, whether it's discounting, giving away free I just want to understand where that comment is 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 more specifically with the use of concessions, but it hasn't really changed a whole lot over the last sort of 60, 90 days, but we just think that as you get later in the cycle And particularly if some of these projects continue to face later deliveries and we get into the busy summer season, we just think that it's it's highly possible that you may see a little bit and it will vary by submarket, but you may see a little bit more aggressive practice, but we've not seen any real
and again to ask a question sorry, go ahead.
No, that's Michael. If you
mind just I have just one more on here. That refers to the apartment developers. Have you seen increased concessions 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.
But our move outs to single family rental is only about 6% or 7% of our total move out has been that way forever and hasn't really changed. So it's not really a pressure point for us.
Okay. That's all I had. Thank you.
We'll go ahead and take our next question from John Pawlowski from Green Street Advisors.
Thanks. Eric,
could you provide some thoughts on how your external growth Strategy in your smaller secondary markets might look in a world where liquidity from Fannie and Freddie either declines meaningfully Clear or goes away, understanding nobody knows what's going to happen and we've been waiting in vain for 10 years for something to happen. But would you expect to see more dislocation of pricing in your smaller Southeast metros and would you act on that?
The answer is yes and yes. I would think that if Fannie financing were to for whatever reason pull back, I think you're going to see it have more of an impact on transaction activity in some of the smaller markets, it will certainly have an impact in places like Dallas and Atlanta as well. But I'm thinking of markets like Greenville and Richmond and Nashville and Savannah and Charleston. And I think you could see More of an impact in those markets and yes, we absolutely continue to feel very strongly about the merits and the value of having capital deployed in some of these higher growth, more secondary markets believing that the long term performance profile from an earnings perspective over time out of those markets fits very much with our portfolio strategy and we would certainly jump on opportunities that might come about as The consequence of what you described.
Makes sense. Just so I get a sense for sensitivity, Cole, do you think in your average smaller secondary markets, values fall by 5 More than the Atlanta's of the world, is it 10% more? How big could you think it could be if Fannie Fray went away overnight?
I think to some degree, it really depends on just how aggressive Continues to stay and direct The resources towards multifamily housing, I think that while Dallas or Atlanta may not feel it as much as a secondary market, as you know, there is just a ton of capital out there that continues To want to deploy in multifamily and despite the if the agencies pull back for some reason while on the margin, it will have an impact on some of these smaller buyers. I think some of the more well capitalized private capital balance sheets would Probably not be as impacted. And so some of these more dynamic secondary markets may still find A fair amount of interest. And so, it's hard to say to what degree a Charleston, South Carolina is impacted versus Dallas. I don't really know.
It just depends on how much Interest private capital still has on a Charleston large well capitalized balance sheets, private balance sheets have on the Charleston.
Understood. Last one from me. What job growth assumptions underpin your 2019 revenue growth outlook?
I would tell you basically it's built on an assumption that things continue pretty much like they are right now. I think that our forecast can withstand a little moderation in job growth, but Not a lot candidly. And I think that if we saw the employment market and job growth trends Severely pull back. I think it's a different ballgame. But we've had, as you know, and then I 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. And so our 2019 assumptions are built on a continuation of what we see. But frankly, at some level, I I look forward to it happening. While this is going to be depending on where we are in the supply cycle, it could be a painful 2 or 3 quarters as we work through that. But certainly we think that some of these lease up projects and some of the supply coming online will face some pretty severe pressure, which is going to create, we think some great opportunities to capture some value on an acquisition side and we've got a balance sheet ready to jump on that should it happen.
But anyway, we think 2019 looks a lot like 2018 on that regard.
All right, great. Thanks.
We'll go ahead and take our final question from Buck Horne from Raymond James. Please go ahead. Your line is open.
Thanks, guys. My questions have all been answered, so I'll
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 any time.