Good morning, ladies and gentlemen, and welcome to the MAA Third Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, the companies will conduct a question and answer session. As a reminder, this conference is being recorded today, November 1st, 2018. I would now like to turn the conference over to Tim Argo, Senior Vice President of Finance for MAA. Please go ahead.
Thank you, Chris. Good morning, everyone. This is Tim Argo, Senior Vice President of Finance for MAA. With me are Eric Bolton, our CEO, Al Campbell, our CFO, Tom Grimes, our COO, and Rob Del Priore, our General Counsel. Before we begin with our prepared comments this morning, I want to point out that as part of the discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the forward-looking statements section in yesterday's earnings release and our 34 Act filings with the SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website. During this call, we will also discuss certain non-GAAP financial measures.
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. The demand for apartment housing across our footprint remains strong and shows no signs of moderating. High demand and low resident turnover have supported our ability to capture strong occupancy and positive rent growth, despite the high levels of new supply in several of our markets. On a blended lease-over-lease basis, as compared to the prior in-place leases, rents grew by 3.1% in the third quarter. This is 60 basis points better than the same time last year. While we've not yet wrapped up our budgeting efforts for next year, we do expect that strong demand will offer the opportunity for continued positive momentum in rent growth during 2019, despite the new supply headwinds. As part of our fall budgeting process, we perform a robust and detailed assessment of the new supply outlook across our portfolio.
Supplementing the information from third-party research, we do a property-by-property and immediate submarket review to consider specifically how new supply is likely to pressure leasing across our portfolio in the coming year. Tom will share more in his comments, but our early assessment is that the 2019 new supply pressures at a portfolio level will likely moderate slightly from the volume of new deliveries in 2018 and support continued improvement in new lease rent growth in 2019. We continue to capture good results from the various expense synergies and new initiatives coming out of our merger with Post Properties, primarily in the area of repair and maintenance costs. As we approach the two-year mark since our merger, we do expect that we'll begin to see some of the initial lift from expense synergies start to moderate on a year-over-year basis as we move into 2019.
During the quarter, we did see some pressure from real estate taxes and hurricane cleanup. Al will speak to this in his comments, but with cap rates compressing further over the past year, as our annual tax bill started coming in over the last couple of months, the corresponding impact on real estate taxes has been evident. As noted in our updated guidance for the year, we've pulled down our expectation for property acquisitions and do not expect to close on anything between now and year-end. Significant pools of private capital continue to aggressively bid up pricing. As it has been for years, our capital deployment protocols are built around a goal to be earnings accretive in fairly short order. Today's pricing for stabilized properties, or even those still in initial lease-up, are rarely meeting our earnings accretion goal at this point.
On the development front, we're continuing to find opportunities that we believe will offer attractive and accretive NOI yields. As noted in our earnings release during the third quarter, we started construction on a phase two expansion at our Sync36 property in Denver, bringing our current development pipeline to $148 million. We currently have additional sites, either owned or under contract, in Denver, Houston, Fort Worth, and Orlando that are currently in pre-development. We hope to get started with these projects at some point during the coming year. In addition to this development pipeline, we have another five properties representing over 1,600 units currently in their initial lease-up and all performing in line with our expectations. In addition to our new development and lease-up pipelines, we continue to capture strong returns on our redevelopment pipeline with over 6,500 units redeveloped so far this year, generating very attractive returns on capital.
We have another roughly 20,000 units that we expect to redevelop over the coming two to three years. In summary, the revenue momentum that we expected from improving pricing trends this year and the work completed towards stabilizing our operating platform are all coming together as expected. It's been a busy and transformative two years for MAA as our team worked to integrate the former Post portfolio, operations, and associates. We've retooled or replaced essentially every system and much of the technology platform of the company. As you might imagine, this has created a lot of demands on our team while also fighting the headwind of higher levels of new supply. I'm happy to report that the systems and associated policy and procedural transformation work, along with all staffing changes and integration activities, are now complete. The MAA operating platform and the balance sheet are stronger than ever.
I'm proud of the work and results accomplished by our folks. We're very excited to now move forward with more opportunity to grow higher volume from our existing portfolio of properties. Our lease-up, development, and redevelopment pipelines are all poised to drive higher value over the next couple of years. We look forward to finishing 2018 on a strong note and continuing the momentum over the coming year. That's all I have. I'll turn it over to Tom now.
All right. Thank you, Eric, and good morning, everyone. Our operating performance for the third quarter came in as expected, with building momentum and rent growth, continued strong occupancy, and improving trends that support our outlook for the year. The integration work on the operating platform was evident in our leasing momentum during the quarter. We saw a blended lease over lease performance of the combined portfolio grow 3.1% in the third quarter, which is 60 basis points higher than the same time last year. This brought our year-to-date blended rent increase up to 2.8%, which positions us to be well within the 2.25%-2.75% blended rent increase range for the year that we established to meet our revenue guidance range. This steady positive trend in blended pricing drove our sequential average effective rent per unit up 130 basis points from Q2 to Q3.
This is the highest sequential increase we've seen since the post-merger. As a result, revenues also increased 130 basis points from the second quarter to the third quarter. While elevated supply levels have pressured rent growth in several of our markets, particularly Dallas and Austin, we're still seeing good revenue growth in a number of our markets. Phoenix, Orlando, Richmond, and Jacksonville were our strongest revenue growth markets. Expense performance has been steady in both portfolios. In addition to the real estate tax pressure and storm costs, personnel and marketing were affected by a 4% increase in move-ins during the quarter. Despite these pressures, overall expenses within the same store portfolio were up just 2.3% for the quarter. The favorable trends continued into October. All key indicators are trending ahead of last year.
Overall same store October blended lease over lease rates were up 2.3%, which is 90 basis points better than October of last year. Average daily occupancy for the month was a strong 96.1%, which is 20 basis points better than October of last year. Our 60-day exposure, which represents all vacant units and move-out notices for a 60-day period, is just 6.1%, which is 50 basis points lower than last year. We are in good shape as we head into the slower winter leasing season. Our focus on customer service and retention, coupled with strong renter demand, continue to drive down resident turnover. Move-outs by our current residents remains low. Move-outs for the overall same store portfolio were down 30 basis points for the quarter. Move-outs to home buying and move-outs to home renting were essentially flat, representing less than 20% and 7% of our turnover respectively.
On a rolling 12-month basis, turnover remained at our historic low of 49.2%. The steady low level of turnover was achieved while increasing renewal rents by a strong 6%. Momentum is building on the redevelopment program across the legacy Post portfolio. Through the third quarter, we have completed 2,300 units and expect to complete 3,000 this year on the Post portfolio. On average, we're spending $8,900 per unit and getting a rent increase that is 11% more than a comparable non-redeveloped unit. As a reminder, we have identified a total of 13,000 Post units that have compelling redevelopment opportunity. For the total portfolio, we've completed 6,500 units, and we expect to complete over 8,000 interior upgrades for the year. On the legacy MA portfolio, we continue to have a robust redevelopment pipeline of nine to 12,000 units.
On a combined basis with the legacy Post portfolio, our total redevelopment pipeline now stands in the neighborhood of 19 to 22,000 units. Our active lease-up communities are performing well and in line with our expectations. Post South Lamar and Acklen at West End stabilized on schedule during the third quarter. Our remaining current pipeline of five lease-up properties are on track to stabilize on schedule. As part of our budgeting process for 2019, we're taking a deeper look at the supply affecting our markets. We take third-party data and cross-check the supply with our own asset by asset information. Performance by market will vary, but at this point, we believe overall our markets will improve modestly with some decline in deliveries. Our Dallas and Austin assets are expected to remain challenging with supply levels in the 3%-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. While we have not completed our budgeting process, assuming the demand side of the equation remains strong, at this point, we expect to see the positive momentum in rents realized in 2018 to continue into 2019. We are pleased to have the merger integration wrapped up, and we are encouraged with the building momentum in our revenues. I'm proud of the effort and hard work our team has put in over the last two years. We're glad to have this work behind us and look forward to finishing well in 2018 and moving on to 2019. Al?
Okay. Thank you, Tom, and good morning, everyone. I'll provide some additional commentary on the company's third quarter earnings performance, balance sheet activity, and finally, on guidance for the remainder of 2018. As Eric mentioned, overall performance for the quarter was essentially in line with expectations. FFO growth of $1.50 per share was in line with the midpoint of our guidance. Total revenue growth for the same-store portfolio of 2% for the quarter was primarily produced by a 2.1% increase in average effective rents, which continued to accelerate from the 1.7% increase in the second quarter. Our year-to-date revenue growth of 1.8% is in line with our full-year guidance, and the strong occupancy levels and blended lease-over-lease pricing performance for the quarter support our expectation of continued acceleration for both average effective rent growth and total revenue for the fourth quarter.
As Tom mentioned, same-store operating expenses during the quarter were slightly impacted by cleanup costs from Hurricane Florence and increased pressure on real estate taxes. These pressures are expected to continue into the fourth quarter, which I'll discuss a bit more in just a moment. However, despite these pressures, overall operating expense growth of just 2.3% still remains below our long-term average growth rate. FFO results for the third quarter were also slightly impacted by the mark-to-market valuation of our preferred shares, which produced $400,000 of non-cash expense for the third quarter. Though valuation has been volatile over the last few quarters, as we expected, the third quarter adjustment brings full-year impact to $300,000 of non-cash expense, which is pretty near our estimate of no net impact for the full year. We completed one development community during the quarter, Post Centennial Park, a high-end community located in Atlanta.
We also began the construction of an expansion phase of the community acquired last quarter, Sync 36, which is located in Denver. Phase one of this community contains 374 units, which remain in lease-up, and the second phase will add another 79 units, which are expected to be completed by the fourth quarter of next year. We now have four communities in active development, representing a total projected cost of $148 million. We funded total construction costs of about $13 million during the third quarter and expect to fund the remaining $102 million over the next 18 to 24 months to complete the pipeline. We expect to stabilize an NOI yield of 6.3% for this portfolio once completed and fully leased up. As Tom mentioned, our lease-up portfolio continues to perform well. During the third quarter, two communities reached full stabilization, which we track as 90% occupancy for 90 days.
At the end of the quarter, we have five communities remaining in lease-up, including the recently completed development community, with an average occupancy of 66.9% for the group at quarter end. We expect a growing contribution to our 2019 earnings stream from our lease-up portfolio, as two of these communities are projected to fully stabilize during the fourth quarter of this year, with the remaining three stabilizing during 2019. Our balance sheet remains in great shape. During the third quarter, we paid off $300 million of current year debt maturities using capacity under our unsecured line of credit. As previously discussed, we do anticipate pursuing additional financing over the next couple of quarters to refinance remaining current year and first half of 2019 debt maturities.
At the end of the quarter, we had over $674 million of combined cash remaining capacity under our unsecured line of credit. Our leverage, as defined by our bond covenants, was only 32.5%, while our net debt to recurring EBITDAre was just below five times at quarter end. As noted in the earnings release, we have recorded what we believe are appropriate reserves for defense costs in our Texas late fee class action lawsuits disclosed in our recent 8-K. We believe that our late fee policy and practices are in line with those of other Texas landlords and comply with Texas law. In addition, we have adjusted our loss reserves in our third quarter financial statements as a result of significant progress made toward the settlement of two legacy Post Properties lawsuits, the OJ case and the RC case, which were disclosed in previous filings as well.
Just to note, we don't plan to provide additional commentary or specific details on any pending lawsuits during the Q&A portion of our call. Given third quarter performance and updated expectations for the remainder of the year, we are updating certain guidance assumptions. First, we are maintaining our full-year guidance range for both same store combined lease-over-lease pricing growth, which is 2.25%-2.75% for the year, and same store total property revenue growth, which is 1.25%-2.25% for the full year. We now expect fourth quarter expense performance to be affected by the unforecasted cleanup expenses related to Hurricane Michael as well as increased real estate tax expense pressure due to specific pressure in Atlanta and Dallas. As final tax information was obtained for the year, very aggressive value increases in Atlanta and millage rate increases in Dallas are expected to impact our portfolio.
We will continue to aggressively fight these increases, revising our guidance for real estate tax expenses for the full year to an expected range of 4%-5%, 50 basis points increase at the midpoint. The combination of these items produced a revision to our guidance for total same store property operating expenses to an expected range of 2%-2.5% for the full year and to our same store NOI guidance for the full year to a range of 1.75%-2.25%, both representing a 25 basis points change to previous guidance at the midpoint.
Other notable changes to our guidance include a reduction in our estimated range of multifamily property acquisitions for the year, as well as projected full-year total overhead costs, which we count as G&A plus property management expenses. Given the competitive environment and proximity to year-end, we don't expect to close any additional acquisitions this year. Since our projections included primarily lease-up deals heavily weighted in the latter part of the year, this change has little effect on our 2018 earnings. Favorable impact from several items, including franchise taxes, insurance costs, legal costs, timing of final staffing changes related to the recent integration project, and other items, produced the expected overhead favorability for the full year.
Some of the spend impact is essentially timing related, we expect 2019 overhead costs to include less unusual and non-recurring activity, as well as more normalized staffing now that our merger integration efforts are fully complete. In summary, net income for delivered common shares is now projected to be $1.87-$1.99 per share for the full year. FFO is projected to be $5.99-$6.11 per share, or $6.05 per share at the midpoint. AFFO for the full year is now projected to be $5.38-$5.50 per share or $5.44 at the midpoint. That's all we have in the way of prepared comments. We'll now turn the call back to you for questions from all of you.
At this time, if you would like to ask a question, please press star and one on your touch-tone phone. You may withdraw yourself from the question queue at any time by pressing the pound key. Once again, to ask a question, please press star one now, we will pause a moment to allow questions to queue. Our first question comes from Trent Trujillo with Scotiabank . Please go ahead.
Hi, good morning. Thanks for taking the questions. First, from a guidance perspective, most of the annual leasing is complete, and you likely have pretty good visibility, as you alluded to in the prepared comments on what's left for the year. I'm curious why you still have the relatively wide range of outcomes for FFO in the fourth quarter. Maybe if you can frame the variability given where we are in this point in the year.
Hi, this is Al. I can comment on it. We've narrowed it down obviously to where it was from the third quarter, but just given the outcomes, it would be a big change in occupancy, a change in transactions. We had something significant that would cause us to be at the bottom end or the high end of the range, particularly, but we feel pretty good about the range.
I think one thing I'll add, Trent, is the preferred shares, and that has been fairly volatile over the quarter, so that can swing it quite a bit as well, which is out of our control, obviously.
Okay. Thank you. I appreciate the prepared comments on supply, but on your last earnings call, you mentioned deliveries in your markets were expected to drop about 18% in 2019. What has changed since then? Is it just a function of supply being pushed out? It seems like this is a pretty material change to the outlook versus just a few months ago.
Well, I think a couple things have transpired. One is, yeah, I do think there is some delays in delivery that are at play here. Candidly, we saw some pretty radical change over the course of the year in the third-party research data that we get, regarding supply outlook. We go through, as Al mentioned, or I'm sorry, Tom mentioned, we go through a pretty detailed annual process with our properties as part of our budgeting process. We're well into that at this point. Frankly, over the course of the summer, we saw a lot of the information that we sort of monitor and work with during the year, from some of these third-party data sources, really begin to change on us quite a bit.
As we began to dig in more to both their information as well as dig into or start our more detailed budgeting process, we began to see that while still down, supply overall is still going to be down from everything that we are seeing. We do think that the extent of the drop in new supply deliveries is perhaps not as great as we would've thought a few months back.
All right. Appreciate the color. I'll hop back in the queue. Thanks.
Okay.
Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
Hi. Good morning, guys. I was just curious, how much moderation are you assuming in blended lease rate pricing through the balance of the year?
Austin, this is Al. We've assumed, as we talked about all year, that we would see blended pricing accelerate to produce our revenue performance for the year. We always had revenue performance accelerating as you saw it did in Q3. I think overall revenue went from 1.5%-1.8%, so I think we saw what we expected in terms of momentum. We saw good momentum through the quarter, and Tom talked about a bit in his comments into October. I think what we always expected was to have pricing performance that was above last year's performance, about 60 basis points. We certainly saw that in the third quarter. We've seen that so far in the fourth quarter, that's what gives us a lot of confidence about our range and where we'll end up for the year.
I'll also say it's important to recognize that, as Al mentioned, our forecast for the year was built on an assumption that blended lease-over-lease pricing was going to be in a range of two and a quarter % to 2.75%-
Yeah
for the full year. Okay. Through September, year-to-date, we're at 2.8, above the top end of the range. Clearly, there is some moderation that we anticipate over the next quarter.
Which we projected and included in our guidance. I think the important terms of our guidance is the performance over the prior year, which we're seeing and we feel very good about.
Right. That's kind of what I was driving at. You're tracking ahead of that range. You've got a 90-basis-point spread in October. Do you expect to sustain that level of a spread, or could it even widen potentially through the balance of the year?
I believe it can widen, Austin. We will see. We don't want to guarantee that, but we're running 90 now, and we have favorable comparisons in November and December.
You may recall that candidly, in November, December last year, we saw, particularly in our Dallas portfolio and particularly in the Uptown submarket, we saw some fairly significant concession activity pop up, a bit unexpected late last year in November, December, which really put a big hit on effective pricing over the last two months of that quarter. We certainly don't see any indication that that is likely to repeat this year. I think we would just sum it up by saying, we think that the trends that we're seeing right now give us a pretty high level of confidence going into the final quarter of the year.
Great. Thanks for that. Just one more for me. With the decrease in the acquisition guidance, and some of the challenges you've had sourcing new deals, are you rethinking capital allocation at all between acquisitions and development?
One thing I'll say is, we're sourcing a lot of deals. We're underwriting more than we've ever. In the third quarter, we underwrote more than we've underwritten in any quarter over the last five years. Just a ton of deals out there. As I mentioned, the pricing has just really gotten to a point that we're having a hard time justifying pulling the trigger on any of these deals that we're looking at. Yeah, having said that, we are continuing to look for opportunities on the development front.
As mentioned, we started some things in the third quarter, as I alluded to, we've got a number of projects that we are working currently, either on existing owned land or land sites that we have under contract to in Denver, one in Fort Worth, one in Houston, one in Orlando, and another one in Raleigh. It's probably another year and a half before we pull the trigger on that one. Yeah, one of the things that we were looking forward to as coming out of the merger with Post is to sort of broaden our arsenal in terms of our ability to both recycle capital as well as support external growth. The development capabilities that came with that merger were something that we thought made sense for us at the point in the cycle we are in. Yeah, you'll see the development.
Right now, we're $148 million development pipeline. I certainly expect that's going to grow over the coming year. Also we're not going to go crazy with it. I think that if you look at our enterprise value right now, a half a billion-dollar pipeline is going to be right about 3% of our enterprise value. I wouldn't be surprised to see it scale up to $400 or $500 million over the next year. I doubt it'll get much bigger than that, but that certainly becomes more attractive to us at this point in the cycle.
Just one quick follow-up, if I may. Just curious how you're thinking about the risks from construction today, where we've seen cost overruns and certainly some delays in deliveries. How are you incorporating that, I guess, into your forecast for development yields?
Well, as thoughtfully as we can, I'll tell you that. Yeah, you're right. We've had to pull back on some projects that we were looking at, or we put some on mothballs, if you will, for a while we work through some cost issues. All the deals that we do are guaranteed cost construction contracts. We don't build it ourselves. We take a lot of effort to sort of lock in our costs before we actually commit and pull the trigger on it. We then take a thoughtful approach to lease-up assumptions. We generally are pretty good about nailing that outlook, and we've consistently been able to sort of achieve our lease-up velocity. This is a time to be careful, for sure.
We're taking a pretty careful approach in terms of how we lock in our costs before we commit to actually starting to move dirt on any opportunity we look at. In today's environment with rising costs, I certainly think that's the right approach.
Okay. Thanks, guys. Appreciate the time.
Thank you.
Our next question comes from Nick Joseph with Citi. Please go ahead.
Thanks. Eric, you just mentioned the strong pricing in the market. I know you're focused on earnings growth, but given the current dynamic, would you opportunistically sell into this strong pricing?
Nick, we've recycled quite a bit of capital over the last five years. Something approaching $3 billion. We've obviously paid with that with a lot of earnings that we've conceded as a consequence of that recycling. Of course, the most recent merger with Post was a fairly initially dilutive deal for us. I will tell you this. We very much like the footprint that we have. We very much like the sort of the market mix that we have. We don't see any real need to radically alter the profile of the portfolio. I do think that as we go into next year, this is the first year, calendar year 2018 is the first year we haven't sold anything in as long as I can remember, probably over 15 years. I think that you'll see us probably get back to recycling a little capital next year.
It won't be a lot, but I do want to get back to that practice, and we will likely do some next year. As some of this development opportunity starts to pick up, obviously the redeployment of that capital becomes easier to accomplish. I think you'll see us do a little bit more next year.
Thanks. Just for same-store expenses, do you assume any baseline expense impact for potential hurricanes in initial guidance, similar to what you would do with snow removal costs or anything like that?
You talking about for the fourth quarter, Nick, or as we look into next year?
No.
Fourth quarter.
Going into the year. On initial guidance, do you assume that there'll be some costs associated with the hurricane because-
Oh, with hurricanes, no, we do not. No, we don't, Nick. That's just something we think at the beginning of the year that we really can't anticipate. Many years we don't have certainly any significant costs. We were unfortunate last year and this year, but that's something we do not forecast currently.
Okay, thanks.
Our next question comes from Robert Stevenson with Janney. Please go ahead.
Good morning, guys. You guys did a chunk of rehabs during the quarter, roughly 6,000 per unit versus your year-to-date cost of roughly a little over 5,700. If I back those out, you have a pretty substantial jump from what you paid in the third quarter versus what you were through the first six months of the year. Was that just a mix in doing more heavy stuff? Or is that indicative of the cost pressures that you're seeing from a labor especially, but also from a material standpoint as you do rehab these days?
No. Fair question, Rob, you've almost answered it. We are not seeing cost escalation issues in the rehab arena. The vendors and the materials that we use, it's not heavy lumber, it's not concrete, it's not glass. We're not rebuilding them. The vendors are a different set of vendors than are on our construction jobs. They're local guys that specialize in redevelopment. What you are talking about is dead on correct. We did more units that had full granite countertops and cabinets. It shifted actually from like 22% to about 30% in our mix this go around. This is really driven by the post side of things.
If you look at on just an apples-to-apples basis, our cost per renovate, especially on the post side, has dropped about $200 a unit just as we've sort of gotten in a groove on it and are improving in that area. Mostly the increase is because more of the post portfolio is coming into the mix.
It's two things.
Okay. On the development pipeline, what's the current expected stabilized yield on the four projects that you guys have under construction currently? How do you guys think about starting new projects? Some of your peers talk about it as a spread over comparable acquisitions. Is it absolute that we're not going to do anything that doesn't get us to a mid to high fives at least stabilized yield? How does that sort of work internally at MAA these days?
Well-
I can tell you the yield first on that, Rob. It's about 6.3% on the portfolio, which as we think is about 150 basis points over an acquisition of a similar quality product in today's marketplace.
Rob, I would tell you that as I commented on in my prepared comments, we're really guided by a NOI yield analysis and assessing the accretive nature or not of that yield. I will tell you that any development that we do today and would start today, we'd want to be fairly comfortable or actually really comfortable that we're going to be looking at a stabilized yield at six or higher. Really keep that spread, as Al made reference to, between sort of the yields that we see today on any acquisition of a stabilized asset. More importantly, we think at that kind of yield, we're going to be value accretive and earnings accretive to the long-term earnings trend of the company. That's kind of where we underwrite to six or north of that.
Okay. Al, that 6.3%, that's just on the four that are currently under construction, or does that include the five that are in lease up?
Just the four under construction right now. The ones that are leased up, we have some that are acquired, some mixture of properties in there. It'd be a little bit low, but you'd still be better than higher than a yield on an acquisition portfolio overall.
The other five is 6.2%. It's right there with the development.
Okay. 6.3% on the four and 6.2% on the five.
Right.
Right.
All right. Thanks, guys.
Our next question comes from Drew Babin with Baird. Please go ahead.
Hey, good morning.
Morning, Drew.
Quick question for Al on the balance sheet. Obviously, a lot of secured maturities for next year, I think you had talked before about potentially taking those out with an unsecured offering in the fourth quarter. Is that still possibly in the plans? Would there be any thought to extending your overall duration, maybe I think mixing maybe a 30-year in somewhere or anything like that? Would that still make sense given the flatter yield curve?
Yes, great question, Drew. In our plans right now, as I talked about, we had about $300 million maturing in Q3, have another $80 million in Q4, and we have about $500 million maturing in the first half of 2019 that we may well want to get ahead of. We are thinking about that. We think we'll be active. Assuming the markets are favorable and open for us over the next several months, we think that we'll potentially pursue some activities, and we would expect to do a pretty sizable financing to replace some of those. We are looking at potentially pushing out our durations. I would say right now, given the shape of the yield curve, there's strategy you can take that would help you push your durations out and keep the cost relatively similar to a 10-year deal.
We're definitely looking at that, and hopefully we'll have more to say that in the next couple of quarters' calls.
Okay. Given the spreads you see today, and it looks like the debt maturing next year is at a 5.9% contract rate, should we expect that the swap there would be, I guess maybe swap's the wrong word, but would the deal likely be accretive to earnings?
I would say keep in mind that the majority of our debt has already been fair market value pretty recently, mostly from the mergers. What you're seeing in our interest expense is in a rate that's pretty close to current market levels. On a cash basis, absolutely. I think on a cash basis, we absolutely will be a benefit to us. Because two mergers we've had, a lot of our debt is marked to market or you're feeling a rate that's similar to current market levels.
Okay, that makes sense. One last question just on the property taxes. I guess in past years, there's been some success with appeals on both the assessments and the millage rates that have kind of provided an NOI benefit maybe later in the year. I guess just how did those negotiations go this year? What was different this year? Are you seeing the municipalities and assessors just being more aggressive?
I think, overall, put it this way, Drew, as we've said in the past, we fight very hard anything we think is unreasonable. In Texas, that's the pressure. Texas and Georgia are our two pressure points right now. We've got 40 lawsuits going on. I think the unusual thing this year was really two specific areas. You had Atlanta, Fulton County, who really put out a very high valuation increase across the tax register. I'm talking in the 30% range across the register. Everyone believed, we saw that come out maybe the second quarter, but everyone believed typically what they do in that situation, they'll take the millage rates down significantly to a level, to mostly offset that and just put themselves in a better position going forward for tax valuation. They didn't do that this time.
They raised the valuation significantly and brought the millage rates down just a small amount. Unfortunately, that is something you can't fight the millage rates. We think there will be some fallout maybe over the next couple of years or maybe even later this year on that as politicians do their thing. That is what happened in Atlanta. It's pressure for sure. In Dallas, you had a situation where there was an additional millage rate increase in certain districts for school districts that was over 8% of the 10% increase in some of the districts, and it's so high that you have to put it for a vote in Texas. If it's over 8%, you have to put it for a vote. It's possible.
Long way of saying, we certainly think it's possible that we'll get some favorability in the future, maybe 2019 and beyond, as some of these things work through. It's going to take a lot of work through the system, and we adjusted our reserves for the remainder of the year to reflect what we think is a reasonable case.
Okay. Very helpful. Thanks, guys.
Our next question comes from Richard Anderson with Mizuho Securities. Please go ahead.
Thanks. Good morning, everybody. If I could go back to the development discussion, Eric and all, you mentioned supply pressure still around you, perhaps slightly less next year. You mentioned having to be careful at this point in the cycle. Agreed. Development costs are rising at a faster rate than NOIs. I think you would agree with that as well. Yet the development pipeline could rise by 2% or 3%, I'm sorry, two or three times in the next year to, you said, ($400 million-$500 million). I'm just curious, how is that possible that you can make the numbers work to the degree where you can see it grow that much in this environment? What's the MAA advantage to get 6+ type of stabilized yields despite all those things and those pressures happening around you?
It's a couple things. One, in some cases, the projects we're looking at are expansions of existing communities where you're leveraging off the existing infrastructure and amenities and the existing overhead of the in-place staff in phase one. You can create a little better margin from an operating and from an investment perspective on these expansion opportunities. Two, I think that we are, in some cases, executing on existing owned land sites as well that we have a lower basis on. Then I think other than that, as I think you probably know, we've had a history of being able to operate pretty cost efficiently at the property level over the years, and it's only gotten better or stronger, if you will, given our scale now.
I think a combination of all those factors offers up an opportunity for us to still deploy capital on the development side, where we are taking certainly some level of risk, more so than you would have in an acquisition, but risk that we feel very comfortable executing with. As I say, probably the biggest risk is that you commit to a project or you start it, then all of a sudden your construction costs get away from you. We're not going to take that risk. We go into it with a guaranteed fixed price contract with the contractor. We put in a lot of ample
Cushion in case we do run into some degree of problem. All those factors sort of come together to create, in our markets, at least in the regions that we're in, the markets that we're in, an ability to make these deals work at the levels and the numbers that we've been talking about.
Fake Pergo floors, I remember well.
Yep.
Sort of corollary to that question, Eric, do you see an opportunity down the road for broken deals to come back your way and buy value add maybe next year or late next year or into 2020? Are those types of things starting to sort of percolate behind the scenes, or is that just not being seen just yet?
Rich, I think that we are starting to see maybe some really early indication that things are starting to fray a little bit. The deal volume, as I mentioned, the deal volume is really high right now, and we are hearing more about deals not trading that had been under contract previously. The challenge, of course, is there's still a lot of very strong buyers waiting in the wings and waiting around the hoop just to jump on any of these deals. We used to be able to hang around the hoop without a lot of other people around us, and now there are a lot of people around us. I do think, as I'm sure you know, I hear just huge numbers of capital, private capital on the sidelines that are specifically earmarked to deploy in multifamily real estate.
I think that the deal flow and the opportunities, I think, are starting to pick up. The buyer pool is still pretty aggressive. We are hearing and seeing more deals fall apart, a little early indication on that. I'm optimistic that next year we may see the tide turn just a little bit.
Okay, great. Thanks for the color.
You bet.
Our next question comes from John Kim with BMO Capital Markets. Please go ahead.
Good morning. You had a slight increase in your development yields, it sounds like, this quarter versus last. Is that because rents have been trending better than expected, or is that due to mix?
It's really more the mix of properties that we had in there, John. I think 6%-6.5% yield is pretty consistent on the deals that we've seen. I think there's a little bit different mix. About a six a couple quarters ago, I think there's a little bit different mix of properties in that.
I think you alluded to this in your prepared remarks and in other answers to questions, with your balance sheet at five times net debt, EBITDA, can you just list your priorities as far as use of capital development, redevelopment, and acquisitions?
Right now, without a doubt, our most accretive use of money is in redevelopment. We're going to push that agenda as aggressively as we can. You can't push it too far, and you start to really change the economics. We're going to continue to push that agenda as much as we can. The good news is there's a lot of opportunity there. We're just now really getting into the Post portfolio, and that's where we see some of our best yield opportunity on that redevelopment capital. I think after that, as I alluded to, some of the development deals that we're looking at continue to pencil out pretty accretively. We're going to be mindful of the risk on that, but continue to pursue that agenda. We're just going to remain patient on the acquisition side.
We continue to underwrite a lot and look at a lot, but we're just not pulling the trigger on anything right now given the pricing we'd have to pay and the outlook for sort of rent growth that we think is there over the next few years. The two just come together to create an outlook that, to me, is not particularly appealing from an earnings accretion perspective. We're just going to wait on that and wait for pricing or something to change the dynamic there.
On your 2.3% growth on blended leases in October, can you give the new versus renewal and also the 90 basis point improvements, any difference between legacy Post and legacy MAA?
Yeah. Okay. The improvement on new leases was 110 basis points in October, and the renewal was 60 basis points. Both MAA and Post were pretty much neck and neck on that one. MAA was 1.1 better than last year, and Post was 1% better than last year and about the same on renewals.
Thank you.
Our next question comes from Daniel Bernstein with Capital One. Please go ahead.
Hey, good morning.
Good morning.
Sticking to the development questions, which seems to be the flavor of the day, have you thought about doing any, instead of on-balance-sheet, maybe something that's more funding developers, like lend-to-own and taking some of that risk off on the development side, or maybe with private equity and not taking all the on-balance-sheet risk at this point in the cycle?
We have. We've had some conversations with a number of people about that. In fact, we're working an opportunity currently in the Phoenix market much along the lines of what you described. One of the things that I've always felt that we wanted to be focused on is, as we do have these conversations to come in and talk with the developer in providing the funding, I think there needs to be a clear pathway for us to ultimately secure ownership of the asset. I think just deploying capital as a lender is not what we really want to do. I think that we ultimately want to control the asset at the end of the day, once the property is fully built and leased out. We're having a number of those kind of conversations.
As I said, we're working on one opportunity right now that may come together.
Are there any particular markets that you would want to develop in or gain scale in? Some of your markets that are 3%, 4%, 5% of NOI, assuming market conditions are right for that, would that help the investment yield on development if you gain scale in a particular market?
Sure. It certainly enhances our operating efficiencies as we grow scale in a given market. Yes, that's why we're looking at trying to grow our presence in the Denver market right now. We mentioned in our call, we've got one expansion project that we initiated in the third quarter in Denver. We've got two other land sites currently, one owned and, well, both owned actually at this point, that we may very well pull the trigger on next year. Denver's the market that is high on our target list at the moment. Orlando, we mentioned. Really any of the Florida markets, we find a lot of appeal there. Raleigh is another market that we've got a site under control there. All those markets are in that 3%, 4% range that you're alluding to. Houston, we've got a site under contract there as well.
The answer to your question is all those markets offer opportunity to pursue this and create a little bit more scale and operating efficiency.
Okay. One more quick question. It seems like marketing expenses went up sequentially. I know that's a much smaller bucket than taxes and some of the other ones. Is there anything that we should read into that in terms of going forward expense growth?
The quarter, we spent a little more on marketing expenses and drove about 20% more leads and a higher level of move-ins during the quarter. It was actually a little behind in Q1 and Q2 and expected to be back in line in Q4. No real read-through on that, just timing more than anything.
Okay. Just normalizing.
Yes, sir.
Okay. All right. That's it. Thank you for taking my questions.
You bet. Thank you.
You bet.
Our next question comes from John Guinee with Stifel. Please go ahead.
Great. Thank you. About nine months ago, we were in Orlando for the NMHC conference. If you listen to the research guys, who I think are pretty good, every one of them said B product, secondary markets, lower price point, had a greater potential for top-line revenue growth than A product in urban markets. Looking at the REITs year-to-date, that doesn't seem to have been the case. Any thoughts on, is that correct in my recollection of the research forecast at the beginning of the year, and that it maybe hasn't quite played out that way?
Go ahead.
Yeah. Our experience is that it has. I would give you the example of the Atlanta market. The Innerloop, High-End Buckhead, Brookwood, Midtown Corridor has been very much under pressure, and that's affected our Atlanta numbers outside the perimeter. Up the 85 corridor, 575 corridor, and 75, those a little bit more suburban and skewed towards B assets are performing at a higher rate. It's hard to get a pure read-through on A versus B by looking at the REITs individually.
Great. Thank you.
Our next question comes from John Pawlowski with Green Street. Please go ahead.
Thanks. Eric or Tom, I know the smaller metros you operate in have been a little bit seeing better growth of late. When you stare out two or three years, would you underwrite higher revenue growth in your smaller metros or your bigger metros?
I think it depends on where you are in the cycle. I think in the current environment, where these larger markets are seeing more supply, they're going to be under more pressure from a rent growth perspective than what you're going to see in some of the smaller markets that are not seeing, as a % of existing stock, quite the level of supply. I think that as you get into another stage of the cycle where perhaps some of the supply pressures have pulled back a little bit, recognizing that those larger markets tend to, over time, have more robust job growth over time. You then get back to a point in the cycle where the larger markets tend to outperform some of the smaller markets.
It really depends on where you are in the supply cycle and broadly in the economic cycle in terms of how the 2 different sort of types of markets perform. I think that if we continue to see supply remain pretty elevated over the next couple of years, I think the larger markets will probably struggle a little bit more. The good news, of course, is some markets are creating some fabulous job growth. While the supply is elevated, the demand side of the equation is so strong that it's keeping the performance from really being more problematic than you might think. One of the things that's interesting is just what gives me pause more than anything is when does something radically different happen?
When does something radically big change? It's usually a recession or some sort of massive pullback on the demand side of the equation that's always hard to anticipate. If that kind of scenario plays out, that's where you really see the smaller markets really start to outperform the larger markets, because those larger markets tend to be much more susceptible to recessionary environments. It's hard to really say over the next two to three years exactly how those 2 segments will perform relative to each other. Depends on these other factors. I just have come to conclude that better to be diversified than not diversified, and be ready for whatever may come.
Sure. Makes sense. I know supply grabs all the airtime in these calls, and all the headlines. When you look at the demand backdrop in any of your markets, are you seeing any concerns, any leading indicators of concerns for the demand side of the equation in your markets?
No, at this point, it is steady as it goes. We are not seeing any pullback. That information is more hypothesis than I think the supply is. We can get a bead and are getting a better bead on what our supply is. What the job growth number is going to be for next year is more hypothetical. Boy, the momentum feels good right now.
Yeah, I would tell you that when you think about the demand side of the equation being a function of not only just the economy and job growth, but also the other factors surrounding demographics and changes in society and sort of single-family housing affordability and all those other factors. Those factors, I think, are going to continue to be favorable towards rental housing broadly and apartment housing specifically. I think that at this point, we don't see any real reason to expect that the demand side of the equation is going to pull back at all. I think that as I say, the one variable that's really hard to handicap right now is when does the next recession hit and to what degree does job growth get affected by that and how does it affect demand?
No reason to see that coming anytime soon, but it's something we think about.
Okay. Thanks for the comments.
Thanks, John .
Our next question comes from Omotayo Okusanya with Jefferies. Please go ahead.
Hi. Yeah. Good morning. For most of this year, when I take a look at your supplemental, you guys tend not to refer to larger markets versus secondary markets as they used to pre the Post acquisition. I'm just thinking, do you still kind of think about your portfolio that way? If you do, how do you kind of think about your smaller secondary markets with regards to maintaining exposure there, possibly selling down on some of those markets as you have over the past few years?
As a consequence of all the transformation that we've been through for the last really five years, starting with Colonial, then with Post, then just the recycling of capital. We really think about diversification and earnings balance in a different way now, really think about it mostly in terms of sort of A and B product, trying to cater to a balanced price point in the market, diversified price point in the market, then we think about it in terms of sub-markets, whether it's urban, inner-loop, suburban, or more satellite city. That has increasingly begun to define sort of our portfolio and certainly how we think about earnings diversification. I think that as we look at recycling capital, it more often than not is driven by age factors and rising CapEx issues or moderating rent growth for whatever reason.
Typically, that translates into older assets or assets in neighborhoods that have got some age on it that has reached a point in the life cycle where we think better to pull that money out and redeploy it. Often when you look at our older assets, they tend to be in some of these smaller cities that we've had for some time. I think that as we think about recycling, you may see us continue to exit some of these legacy smaller cities that we've had, but that's really more a function of just asset-specific issues as opposed to any sort of strategy change or any diversification change.
Gotcha. All right. Thank you.
Thanks.
It appears there are no further questions over the phone at this time. I would like to go ahead and turn it back to the speakers for any closing remarks.
Okay. Well, thanks everyone for joining us, and I'm sure we'll see most of you next week at Nareit. Thank you.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.