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 reminder, this conference is being recorded today, January 31st, 2019. I will now turn the conference over to Tim Argo, Senior Vice President, Finance for MAA. Please go ahead, sir.
Thank you, Denise. 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 1934 Act filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website. During this call, we will also discuss certain non-GAAP financial measures.
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. 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 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.
When weighting our market exposures by percentage of NOI and refining the analysis to neighborhood-specific assessments of new supply, our latest update is very similar to the information we shared at NAREIT in November. In summary, we expect 48% of our 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 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 little current occupancy. 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 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. In addition, we will be executing on a higher number of redevelop 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 sub-market 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 Sun Belt region, diversified across markets, sub-markets, 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 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 and rent growth, continued strong average daily occupancy, and improving trends that set us up well for 2019. The results of the integration work on the operating platform were evident in our leasing momentum during the quarter. We saw blended lease-over-lease performance of the combined portfolio grow by 1.6% in the fourth quarter, which is 150 basis points higher than the same time last year. Average daily occupancy remains strong at 96.1%. As a result of the steady positive trend in blended pricing, they accelerated from 2% in the third quarter to 2.3% in the fourth 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 were 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, 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% and 12% respectively. On a rolling 12-month basis, turnover was a historic low of 48.5%. This level of turnover was achieved while increasing renewal rents a notable 6.1%.
On the redevelopment front, in the fourth quarter, we completed 1,600 units, which brought us to a total of 8,200 unit interior upgrades for the year. For 2019, we again expect to complete close to 8,000 in-unit interior upgrades. As a reminder, on average, we spend $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 actively leased sub-communities, Sync36 and Post River North in Denver, Post Centennial Park in Atlanta, and phase two of 1201 Midtown 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 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%-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 two 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 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 the preferred shares acquired during the Post merger. Excluding this adjustment, our FFO per share for the fourth quarter was $0.01 above the midpoint of our prior guidance, with the majority of this outperformance produced by favorable interest expense during the quarter.
Our overall same-store performance for the fourth quarter was in line with our expectations as continued pricing momentum produced the 2.3% year-over-year growth in total revenues, which accelerated, as Tom mentioned, from the 2% in the third quarter. Overall blended lease pricing growth combined new and renewal pricing finished the full year at 2.5%, which was 80 basis points above the prior year. Same-store expense growth of 3% for the fourth quarter was primarily driven by a 5.8% growth in real estate tax expense, which represents 36% of total same-store operating expenses, as pressure late in the year from certain municipalities, primarily Atlanta and Dallas, impacted the fourth quarter. For the full year, real estate tax expense grew 4.2% as compared to our initial guidance of 3.5%-4.5% for the year.
During the fourth quarter, we completed construction of one development community and expansion community, a phase of a community in Charleston, which leaves three communities under development at year-end, with a total projected cost of $118.5 million, of which about $87.5 million remained to be funded 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%-6.5% on average from our development portfolio once they're completed and fully stabilized.
During the fourth quarter, we had two communities complete lease-up and reach stabilization, which we measure as 90% occupancy for greater than 90 days, which left four communities in lease-up at year-end, including the recently completed community mentioned earlier. Average occupancy for our lease-up portfolio end of the year at 62.4%. As Tom mentioned, leasing is going well for the group, we expect growing earnings contribution during 2019 and into 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 an additional $530 million of secured mortgages maturing in early 2019.
Given the volatility of the credit markets during the fourth quarter, we revised our financing plans and entered a 30-year fixed rate secured mortgage for $172 million and a $300 million variable rate unsecured 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 five 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.
Though we do expect continued volatility in our NAREIT report of FFO results related to the non-cash accounting adjustment on the preferred shares, we do not include any adjustments 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-$2.35 for the full year 2019. FFO is projected to be $6.03-$6.27 per share, or $6.15 at the midpoint. AFFO is projected to be $5.39-$5.63 per share, or $5.51 at the midpoint. The main driver of full-year 2019 performance is our same-store guidance. Revenue growth, projected to be 2.3% at the midpoint, is based on continued strong average daily occupancy of 95.9% at the midpoint and projected average blended rental pricing, which is new leases and renewals combined at 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. This expected same-store revenue and operating expense performance produces NOI growth of 1.8% at the midpoint. We expect real estate taxes to continue to produce the most pressure, increasing four and a quarter 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 it consists primarily of non-stabilized deals. We also plan to resume our portfolio recycling efforts with projected disposition volume of $75 million-$125 million, 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%-4.1%, which is about 20 basis points above the prior year at the midpoint, which represents an $0.08 per share impact to our earnings. A portion of this projected increase is related to the continued impact of rising short-term interest rates, with the remaining portion primarily due to the declining mark-to-market adjustment related to the debt acquired from 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 include G&A and property management expenses combined, will range between $96.5 million and $98.5 million, reflecting a 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 capability, scalability, our cybersecurity, and which all of this 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, primarily due to the 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 for 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. Operator, we'll now turn the call back over to you for questions.
At this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You may remove yourself from queue at any time by pressing the pound key. Once again, that is the star and one on your touch-tone phone. 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. Very much thank you for breaking out your NOI into higher, lower, and similar supply buckets for 2019. 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? I guess another way of saying this, can you maybe talk about the magnitude of supply increases versus the magnitude of declines?
Well, let me start, Trent. This is Eric, and Tom can give you some more specifics. Our comfort or our confidence, if you will, as it pertains to 2019 rent growth despite these supply pressures is really based on what we see as continued very strong demand. 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. 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.
Ultimately, we do see this mix of roughly 48% of portfolio suggesting slightly lower supply pressure, 44% slightly higher, and about 8% being pretty consistent. 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. 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. We haven't seen any evidence of that yet, but I think it's reasonable to expect that it may come in certain areas. 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. We want to continue to capture that rent growth trend that we're seeing. We think we'll do so. 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.
All right. Just underlying, Trent, the confidence on the revenue side, the rent trends I touched on for Q4 and January, just to put those in perspective. For first quarter, blended rents increase was 45 basis points better than last year. In second quarter, it was 100 basis points better. Third quarter, 60. Fourth quarter, 150 basis points. In January, 260 basis points. 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 were seeing perhaps some early indications that deal flow might come back to you as things were starting to fray a little bit. It may have been very preliminary. Your guidance does call for some lease-up acquisitions, and you stated significant capacity on your balance sheet. 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?
Well, it's still very competitive. As you may know, 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 Multifamily Housing Council for a broker event, is what it's become almost annual meeting right now. They usually come back with a lot of leads, if you will, a lot of opportunities that I know they're talking about this week. There continues to be just a high level of interest by private capital in the space. We fully expect that this next year, 2019, will be as competitive as what we saw in 2018.
Having said that, again, we're just getting later in the cycle. 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. As a consequence of that, we're hopeful that that may create a little pressure, which creates some better buying opportunities for us. We're going to remain disciplined. We continue to have hope that 2019 is going to deliver a few more opportunities than. The volume is still high. We're going to continue to remain optimistic about 2019 opportunities.
All right. Thank you for the time. Appreciate it.
You bet.
Again, if you would like to ask a question, please press the star and one on your touch-tone phone. 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, 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?
Yeah. Hey, Nick, it's Tom. What we're really seeing, Mid-America is 2.6 on the portfolio, Post is 1.7. What to me is most interesting is the rate of acceleration on the Post side, which was second quarter 0.4 and now 1.7.
What are those?
On the revenue growth side.
Yeah. 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 were able to bring to the Post portfolio on the expense side, as well as sort of retooling some of the practices, intern activities, and with labor costs. 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. What's been slower to come online has been the opportunities on the revenue side. A lot of that is a function of really three things.
First of all, 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. Two, the market conditions, as a function of higher supply levels, have been more pressuring the Post locations, which we're battling that. Third, we have to just basically get into the revenue management practices. 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 management practices together.
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. It does suggest to us that we're going to see continued momentum. 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. 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. Just on total overhead, obviously up pretty meaningfully over 2018. Can you walk through the main drivers of that? Is this 2019 guidance a good baseline going forward, or are there any one-time items in there?
Hey, Nick, this is Al. I can walk you through that. I think 2019, certainly compared to 2018, was a fairly significant increase, but it has a lot 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. 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 were making investments for an integration and for the platform that we knew that we were going to put together, some of those came later than we expected as we wanted to get deeper into the project, into the process and really zero in on exactly what we wanted and what we'd want to invest in to make our platform what we want to be for the future. 2018 was lower. 2019, you'll feel the full run rate of that. We had some one-time items in 2018, some costs that were favorable that won't recur in 2019, and some of our insurance, our workers' comp and GL insurance, our medical insurance, and some of our legal costs were a little lower. We're glad to have that. We don't think that'll repeat in 2019. What I'll say is 2019 is a fairly large increase.
We would expect as we move to 2020, have a more modest increase. We think that 2019 is a full-year run rate of our platform that we expect. I think if you look at it over a three-year window, as 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%-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% in January. The average, I think you're assuming for the full year is 2.7%. Just curious what leads you to believe that lease rates will moderate later into the year.
I'll start with that, then Tom can jump in. I think one of the things going on, as you remember, we had some pretty favorable comparison on some leasing activity late last year. The fourth quarter of last year is when it really got challenging for us. I think some of the new leases we're putting on as we move into January are having really strong comparisons. I think as we move into the year, Tom will say that that may moderate somewhat, we feel good about what we've got for the full year.
No, absolutely. That sort of trend that I rattled off a little bit earlier, we'll have to start comparing to that.
The comparisons
The comparisons. We've got a good opportunity first part of the year. Don't expect to keep 3.1% all the way through.
Is that a function? I understand that from a spread perspective, that the spreads become more difficult. From an absolute level, I guess, is it just you're cautious to push rent on the same tenant two years in a row at a consistent level in order to sustain occupancy? 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. Can you just dive in a little bit there?
On the same resident back-to-back, that's on the renewal side. Renewals are strengthening and feel very comfortable with that in the 6%-7% range right out of the chute right now. The variable is on the new lease rates. We think we will have good performance there, just not the same gap that we had prior.
Also, 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. 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. I think most of the information I've seen from Axiometrics and others suggest that we'll get a peak in deliveries in Q2, right in the start of the spring leasing season.
That pushing on pricing may come at the cost of a little bit of a give-up on occupancy. 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. 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.
No, that's helpful. Then as far as the peaking in the second quarter, what have you seen as far as construction delays in your markets? Are you continuing to see them, or have they started to slow a bit?
About all I can tell you is I'm sure construction delays will continue. I think there's been no evidence whatsoever that the labor issues have gotten any easier. That typically is what's causing a lot of the delays to occur. The information that I alluded to that we saw from Axiometrics suggesting that it would peak in Q2, I fully expect that to slide a little bit into Q3. I don't know at this point. Something we're watching very closely. I would fully expect some of these projects to slip a little bit over the course of the year.
Thanks. Just last one. Just curious if you, in your forecast, when do you see supply growth in your sub-markets in Dallas begin to moderate?
We're seeing some early signs that it may moderate late in the year. I think Dallas is going to be challenging pretty much for the full year. It's way too early to call the end on that one, and will be challenging, particularly the first two quarters of the year.
Great. Thanks, guys.
Once again, that is the star and one on your touch tone phone to ask a question. 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 is only a 20 basis point dip, 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 is hard to know. I would think more likely it is 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 are seeing, I suspect, is going to continue to be low. The number one reason people leave us is because of some sort of change in their employment status, absent some sort of slowdown in the job market, which we don't anticipate, I don't think we are going to see more pressure on that front. 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.
As a consequence of that, I think that I am 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. We think that it may require a little bit of a concession on some days vacancy between turns on new move-ins, and we think that is the right trade-off to make right now in order to protect the strong rent growth improvement that we are seeing take place. Again, we are looking to capture very strong average daily occupancy of 95.9%. That is pretty darn strong, and we think we will do that this year.
I apologize if I missed this or if you already answered this, where do you think renewals will be this year versus the 6% you got last year?
I would think we would be between 5.5% and 6.5% for the year on that. Trending a little higher than that in January, but I would feel comfortable in the 5.5%-6.5% range.
Okay. On the expense side, with tax increases of 4.25%, overhead costs going up 5%, I realize some of that is in G&A. Is 3% same store expense growth the new norm for the foreseeable future?
I think if you look at, John, this is Al, if you look at our long-term averages closer to 2.5%, I think the real estate tax, I think what we have going over the last couple of years is really good performance for two 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 capture strong synergies from our deals. We had the tax pressure offsetting that somewhat. We had about 5% growth in real estate taxes over those two years and still were able to put the 2% total expense growth forward.
I think going forward, what you'll see is, personnel, those other lines will be under control, but more close to normal levels of growth, personnel 2%- 2.5%, repair and maintenance closer to 3%, modest growth in the other line items, and taxes then being a third of your costs in the 4.25% range, producing the majority.
One way of looking at it is that when you think about real estate taxes comprising the large percentage it does of our overall tax expense base, that growth rate almost by the math implies a lower, less than 3% growth rate on all the other line items. So, I think that the new norm is, my guess, is gonna be closer to 3%. At any given year, a lot of it's gonna be up or down as a consequence of real estate taxes.
Yeah. We would hope over time, a couple of years, real estate taxes begin to moderate, but right now, just a lot of pressure from Texas, from Georgia, and not surprising.
The low cap rate environment fueling that.
Got it. Okay. On your market commentary, and as far as where you're seeing the greatest supply pressure, back in November at NAREIT, you guys were saying Austin, Charlotte, and D.C. were the three 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 D.C. still a market where you see elevated supply?
Yeah. D.C. is still a market in the elevated bucket. Dallas is very close to even. In some looks, it is slightly higher, in others, it's slightly lower. John, I just expect it to be pressured and about the same as next year.
Yeah. I think, John, we would say Dallas is still kind of in that same bucket, it's elevated both years, 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, where do our weakest, or within the market, which has the largest delta between assets?
The largest delta between basically, 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. Which markets are most likely to have a surprise to the up end or downside in 2019 relative to where you guys set the median expectation?
Yeah, sort of what I'd tell you is that comes down maybe to the change in the back half of the year. I would tell you that Charlotte are relatively strong right now, we're expecting some supply there, especially later. So that may change over time. Nashville looks like it may be better later half of the year, it's challenging, very challenging right now.
Okay. The 8,000 units you expect to renovate this year, are these all gonna be on turns, or are you gonna take some units out of service to do that?
They will all be on turns.
Okay. Lastly from 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's pretty much burned off. You will probably have the preferred that you'll know of. We did not put any of that in our forecast, because it's just almost impossible, virtually impossible to predict. Those are the key non-cash items in 2019. The bad news is we've had a good bit of noise over the last few years with some of those items, Rob. I think as we move forward 2019, 2020 and beyond, we're very glad to be in more stable years with less of that noise and should have more consistent growth production. I'll add one point, Rob. Absent anything on the preferred, which is non-cash, there's about $500,000 or so left on that debt mark-to-market non-cash.
Virtually gone
That's pretty much it.
Yep.
Okay. At NAREIT and a normalized or core FFO should be, at this point in the year, you guys think would be fairly consistent but for anything that happens on the preferred and that $500,000 of debt?
That's right. Excluding the preferred, we think those numbers 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.
Hey, Drew.
Morning.
With regard to Dallas, Atlanta, and Charlotte, kind of being your three biggest markets, but also the three 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 two to three, two range for the year for those three markets? 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?
Yeah, no, they're lower. 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 are Peachtree Road, Midtown, Downtown, really Inner Loop. In Charlotte, it's sort of a similar picture where Uptown, Downtown, South Church area seeing a little bit more supply, and the suburbs broadly stronger. Dallas, a little bit wider spread, and it's more targeted in the Atlanta and Charlotte markets.
Okay. 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. Those Post properties are facing a little bit uphill battle on the supply right in their backyard.
Okay, that's helpful. One question for Al, just on the line balance, I think it was still over $500 million at the end of the year. I'm not sure if that includes the term loan or not. As you look out to maybe more permanently finance that, what are the options on the table in guidance? If we 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. Just in context, we paid off about just over $600 million of debt late in the year, as we talked about. We had planned, as we talked about a few quarters to do a bond deal to be active in the bond market late in the year, the market volatility really caused us to be a little more patient in that. We had talked about doing $600 million, maybe some long-term tenor and some normal tenor.
What we did, we revised our plans a little bit and did a little bit of secured 30 year of 172 that you saw, we put a $300 million term loan, which was a short-term loan, which we will expect to be active in the bond markets early in the year to replace that. I think in going forward, what you should see, you should expect in your model is a bond deal in the first part of the year replacing that $300 and maybe a $200 million more of debt, and we'll be opportunistic, whether it's bond or whether it's secured mortgage, averaging about 4.5% rates, what we have in the forecast for us for the year. Markets will give us what they give us. That's what we've dialed in.
Okay. With the 30-year mortgage you did in the fourth quarter, what was the rate benefit of doing that versus a 30-year unsecured?
Yeah.
As you look out to this year, is a 30-year unsecured bond still on the table?
Yeah, 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. On the secured market, which is more the private market, it was much tighter. We got a 4.4% rate on that all in, which was well below what we could have got in a bond, even when things were fairly stable. I think that was good execution. We honestly don't want to protect our balance sheet. We don't want to get too much secured debt, but you could see us use a little bit more because we have about 8% of our assets are encumbered right now, so it's very low. We could do a little bit more.
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-$400 million range, Drew.
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 FAD number after subtracting out revenue creating CapEx, it looks like you're going to be in the four and a quarter to $4.50 number in 2019. I think you just increased your dividend about 4% up to $3.84. How do you feel over time about being able to sustain a 4% + dividend increase annually?
This is Eric. We feel pretty good about that, honestly. We think that we're going to be in a position We go through various points in the cycle, obviously, but we think we're trending back to a normal sort of same store internal earnings growth rate that's going to be in the kind of 3% range or thereabout on a year-over-year basis. As we outlined, we do believe that the external growth front is going to get better at some point from an acquisitions perspective over the next couple of years. We are increasing our ability to deploy capital at some pretty accretive yields on new development. We think that over the next couple of years, the external growth picture gets a little stronger. It's going to add another 1% or 2% to that, and then you put a little leverage on that.
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 more beneficial from a FAD perspective with lower CapEx on the newer assets. I would tell you, we feel pretty darn comfortable about a long-term sustainable growth rate of that dividend in the 4%-5% range.
Great. Thank you very much.
You bet.
Once again, that is the star and one on your touch-tone phone to ask a question. We will go ahead and move on to Tayo Okusanya from Jefferies. Please go ahead. Your line is open.
Hi. 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 mixed or whether that's a case of construction costs are going up in general, and if that's the case, if it's having any impact on the returns and the yields you're getting from redevelopment.
It's mixed, Tayo. As we feather in more of the Post portfolio, that's at $8,000 per unit average, roughly. That's pulled our average up over time.
The good news on that, Tayo, is the rent increases, the economic returns are similar. It's just relative to the larger capital, you get a higher return.
Absolutely.
Higher rent increase.
Yes, we don't compromise on return.
We don't compromise on returns.
Okay. Gotcha. That's helpful. The second thing I wanted to kind of explore is 2019 guidance, the blended rate, again, 2.2-3.2, so an average of about 2.7 or so. You're talking about renewals of 5.5-6.5, so that means new rates will be kind of zero-ish basically, for the year. I'm just curious, you made the comment earlier on that given the backdrop for your portfolio, you will more likely push price, even at the risk of losing some occupancy. 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, it sounds like this all year is going to boil down to the ability to kind of get 6% on renewals. Is that really the story this year?
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 to the full year, we expect renewals to continue the trends that we saw largely from last year, assuming 5% to 6% range, 5.5% to 6% most likely for the year. new lease pricing is going to be the most competitive part, it has been, and as the supply pressure continues in the markets at high levels, that will be the point of most competition. 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.
you might want to give color on some of that, Tom.
Yeah. No, and we touched on it earlier. New lease rates will be under pressure in inside Atlanta, Charlotte later, Dallas, and Houston . That will vary from place to place. We'll also see I think strong new lease growth from Tampa, Orlando, Jacksonville, Phoenix.
Right.
hard to generalize.
Okay. That's helpful. Thank you.
again, to ask a question, please press the star and one on your touch-tone phone. We will go ahead and take our next question from Hardik Goel from Zelman & 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 had been looking at both of these opportunities for quite some time. Probably, anywhere from six to nine months in advance of actually getting to a point where we were able to put them under contract. The opportunity in Denver is in areas just a little bit northwest of downtown, sort of halfway between Denver, downtown Denver, and Boulder, an area called Westminster, that we are well into pre-development on. We'd expect to start later in the year, in kind of the August timeframe. This is something that based on our initial. 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-10.
Again, it's an area going through some sort of gentrification. We are pretty excited about the opportunity. Again, there, we're looking at a start sometime late this year, probably in the November timeframe. Our early analysis on stabilized yield puts that at about 6.4%. Both very accretive opportunities based on the underwriting we're looking at right now. As we approach these opportunities, we've got a group of contractors that we've done a lot of business with, and get preliminary pricing for them. We've worked with them enough to have a lot of confidence that the numbers we get from them are something we feel pretty good about. We assume some escalation factor in that based on what we do in pre-development before the time we actually lock down the contracts and go to fixed price contracts.
More to come on all this, but we feel pretty good about the opportunities at this point.
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 6.5% 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 of something that they are going to build. They will be the developer. They will take the majority of that risk. We're comfortable taking that down at a slightly lower yield. It'll still be well above 6%. I think that it depends on the situation. It depends on just the risk that we underwrite. All these opportunities we're looking at right now are going to be well north of 6%.
Got it. Thank you. That's all for me.
Once again, that is your star and one on your touch-tone phone to ask a question. We can go ahead and take our next question from Jim Sullivan from BTIG.
Thank you. Guys, just want to drill down a little bit more on 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. If we adjust for that in the 2018 totals that you report for both property management and G&A, we're still getting an increase in 2019 of about 9% in the overhead line item. 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. When I look at the individual items, property management, for example, that's went up about 10% in 2018. It's going up about 14% in 2019.
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? 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 expenses are going up nearly three times that. What explains that difference in yearly change?
Yeah, 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 actually had a reduction in cost in 2018. 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 in our people, our systems, our facilities, web presence, all those things that we talked about. When you look at 2019 to 2018, it does look high. 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'll blend to more of a 5% to 6% growth rate over time. 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. I think over a three-year window, we feel that sector average 5% to 6% growth is what we'll do there. 2020 will be a little more modest because obviously we've made many of the investments, and we'll be able to grow more efficiently in many of our areas. That's how we thought about putting that together.
You do describe the two of those items together as a bucket, summing up to overhead. In 2018, the property management expense rose some 10%, and G&A was down significantly. Presumably, most of the credits that you've talked about and the one-time items benefited the G&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. The things that I outlined could be easily on either side of that. I think that's one of the reasons we really try to look at it together and just it's more simple to say, look, we have an overhead structure of this total, and we're managing it that way. I think it's a little easier to think about it holistically.
Okay. Then a final question from 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. 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 what you've indicated in some of your presentations before. I think today on the call, it was somebody mentioned 5%-6%. I guess that dichotomy seems inconsistent with a scalable platform. One would have assumed with the post-merger that you were building a scalable platform, and part of that conclusion would be that maybe the overhead cost would not be increasing at the same rate as the overall revenues. Is that wrong?
Am I thinking about that incorrectly?
Well, I think what you have to think about is same store is 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 in G&A is you're talking about growing companies, for us and the sector, whether through acquisition or development or even many ways. Your G&A over time is going to grow more than your same store for growing companies. I think if you look at the sector average over time, that's what we were talking about in NAREIT over the last couple of years, and what we mentioned earlier was if you look at the sector average over time for that-
For that area, it's more like 5%, 6%.
I think what you have to look at, Jim, is you have to factor in the external growth component as well. Because this platform, the overhead platform, if you will, is supporting not only same store, but supporting external growth as well. I think to the extent that we can capture organic internal growth and new external growth on a combined basis at a growth rate that is beyond the 5%, then I think the margin component there that you're sort of alluding to, I think starts to make more sense. The other thing to keep in mind is that you're talking about 3% growth, organic growth, off a big number. You're talking about 5% growth on overhead on a smaller aggregate dollar number. The dollar margin is still growing.
I think the fuller point-
Well, 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. 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. We understand the same store is not total 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. Still, we tend to look at property management expenses as driven by revenue line and G&A line. I don't know.
I would contend, based on our analysis, that over time, the G&A line has not grown as much as the overall revenue line for most of the companies we cover. Just a thought as you think about the scalability of the platform, and I guess I can leave it at that.
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 a little bit on the comment on the developers becoming a little bit more aggressive on leasing. Is that just an assumption you're making or are you actually seeing some of that more aggressive leasing, whether it's discounting, giving away free month's rent? I just want to understand where that comment's 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. We just think that as you get later in the cycle, and particularly if some of these projects continue to face later deliveries and we get into the busy summer season, we just think that it's entirely possible that you may see a little. It'll vary by sub-market, but you may see a little bit more aggressive practice. We've not seen any real evidence of that as of yet.
again, to ask a question I'm sorry, go ahead.
No, that's fine. If you mind, just I had just one more on here. Just that refers to the apartment developers. Have you seen any increased concessions or competition from single-family residence rentals?
No. 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 six or seven% of our total move-out, and it's been that way forever and hasn't really changed. It's not really a pressure point for us.
Okay. That's all I had. Thank you.
Again, that is the star and one on your touch-tone phone to ask a question. 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 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. 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'll certainly have an impact in places like Dallas and Atlanta as well. 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.
Yes, we absolutely continue to feel very strongly about the merits and the value of having capital deployed in some of these higher growth, more secondary markets, believing that the long-term performance profile from an earnings perspective over time out of those markets fits very much with our portfolio strategy, and we would certainly jump on opportunities that might come about as a consequence of what you describe.
Makes sense. Just so I get a sense for sensitivity, again, purely hypothetical, do you think in your average smaller secondary markets values fall by 5% more than the Atlantas of the world, at 10% more? How big could you think it could be if Fannie and Freddie went away overnight?
I think to some degree, it really depends on just how aggressive institutional capital continues to stay and direct their resources towards multifamily housing. I think that while a 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. Despite 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. So some of these more dynamic secondary markets may still find a fair amount of interest. 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 sheets, private balance sheets have in 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. I think that if we saw the employment market and job growth trends severely pull back, I think it's a different ball game. We've had, as you know, and I know you pointed out in a lot of your research that the job growth rates are going to likely moderate at some point. I think that there's no indication near term that we're headed to that sort of scenario. Our 2019 assumptions are built on a continuation of what we see. Frankly, at some level, I kind of look forward to it happening.
While it's going to be, depending on where we are in the supply cycle, it could be a painful two or three quarters as we work through that. 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. We've got a balance sheet ready to jump on that should it happen. Anyway, we think 2019 looks a lot like 2018 on that regard.
All right, great. Thanks.
we'll go ahead and take a 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'll end the call there. Thank you.
Great. Thanks.
Thanks.
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 any time.