Good morning, ladies and gentlemen. Welcome to the MAA Second Quarter 2018 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, the company will conduct a question and answer session. As a reminder, this conference is being recorded today, August 2, 2018.
I will now turn the conference over to Tim Argo, Senior Vice President, Finance for MAA.
Thank you, Priscilla, and good morning, everyone. This is Tim Argo, Senior Vice President of Finance for MAA. With me are Eric Bolton, our CEO Al Campbell, our CFO Tom Grimes, our COO and Rob Del Priore, our General Counsel. Before we begin with our prepared comments this morning, I want to we'll 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 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. Reconciliations to comparable all GAAP measures can be found in our earnings release and supplemental financial data. I'll now turn the call over to Eric.
Thanks, Tim, and good morning. Leasing conditions across our markets continue to reflect strong demand for apartment housing. During the Q2, we captured meaningful improvement in pricing with a blended lease over lease growth rate of 3.3%. This is 90 basis points better than Q2 of last year and the best quarterly lease over lease rent growth captured since our merger with Post. Looking at pricing trends for new move in residents on a lease over lease basis, where new supply and competition generate the highest pressure, we captured a significant 170 basis point improvement over last year.
Resident turnover remains at a historically low level and rent growth of renewal leases during Q2 was a strong 5.9%. We believe pricing trends have reached an inflection point And we expect to see positive momentum over the next several quarters. We're encouraged with the positive momentum in rent growth and believe this will with the stronger revenue growth that we expect to capture over the second half of the year, we continue to capture very favorable performance in year over year growth in operating we are comfortable with our outlook for same store NOI performance. I'm particularly encouraged by the emerging and improving trends in pricing performance across the legacy Post portfolio, as I work over the past year to strengthen and reconcile revenue management practices takes hold through this year's leasing season, we are beginning to capture the positive impact. This is despite the fact that many of the legacy Post submarkets of on-site operating practices.
Merger related activities continue to wind down. During July, we successfully wrapped up the final systems conversion work and completed the consolidation of the legacy MAA and legacy Post operations onto one management and reporting platform. This has been a significant effort by every part of our company. We're excited to have this effort behind us and to now be in a position to further Harvest opportunities associated with being on one operating and reporting system. As outlined in our earnings release, acquisition activity remains fairly quiet for us as aggressive pricing keeps us largely on the sidelines.
We did initiate 2 new development projects during the second quarter, both of which are expansions of existing properties. Each project is located on land parcels adjacent to existing communities that we already owned. In summary, while we still have a few months of a busy leasing season ahead of us, I'm encouraged with the performance and progress year to date. We continue to believe that the back half of the year will play out in line with our expectations. We continue to capture great early benefits from our merger with Post in the area of operating expenses and G and A synergy and improving pricing trends are now clearly evident.
While new supply pressures are currently creating some headwind, our revenue management practices and the improvements made in the legacy Post portfolio operation are beginning to make an impact. Merger integration activities are essentially complete and we now look forward to now executing on a fully consolidated platform. We continue to believe that based on permitting data and projected new starts as well as what we are seeing on the ground in our various submarkets that we will see some moderation in new supply pressure in a number of our markets in 2019. With continued strong employment expectations, we're optimistic that leasing conditions across our footprint will continue to see positive momentum. I want to thank all of our MAA associates for their hard work That concludes my comments and I'll now turn the call over to Tom.
Thank you, Eric, and good morning, everyone. Our operating performance for the 2nd quarter came in as expected with building momentum and rent growth, continued strong occupancy and overall trends that support our outlook for the year. The integration work on the operating platform was evident in our leasing during the quarter. We saw blended lease over lease performance of the combined portfolio grow 3.3 in the 2nd quarter, which is 170 basis points higher than the 1st quarter 90 basis points higher than the same time last year. Encouragingly, post blended lease over lease pricing was up 2.5% during the 2nd quarter, which is a strong 2 10 basis points better performance than this time last year.
The steady positive trend in blended price drove down our drove our sequential average effective rent up 1% from Q1 to Q2. This is the highest sequential increase we have seen since the Post merger. This improving pricing performance is primarily the result of new lease pricing on the Post portfolio, despite the fact that Post submarkets are experiencing heavy new supply, we saw new lease over lease rates improved by a significant 350 basis points in the 2nd quarter from the same time last year. Expense performance continues to be a bright spot for both portfolios, While improvement in revenue management practices are just now showing up in pricing, our programs to more aggressively manage operating expenses I've shown more immediate results. Overall, expenses within the same store portfolio were up just 1.1% for the quarter.
Total expenses on the Post portfolio during the quarter were down 1.8%. That was driven by reductions in personnel costs, repair and maintenance expenses, as well as property and casualty insurance. As a result, the 2nd quarter operating margin for the Post portfolio improved another 90 basis points. This is on top of the 130 basis point improvement we made in the Q2 of last year. We're pleased to see the rent growth improvement, which should further drive margin expansion within the Post portfolio.
July results show the continued benefit of our consolidated platform and momentum. Overall, same store July blended lease over lease rates we're up a strong 3.3 percent. Average daily occupancy for the month was 95.7 And we ended the month at 96.1 and will start August at 96.1. Our 60 day exposure, which represents all vacant units and notices for a 60 day period is a low percent, which sets us up well for the slower winter leasing season, the supply is documented. Currently, Dallas and Austin are facing the most pressure.
In 2018, we expect 22,000 deliveries in Dallas and in Austin, we expect 8,000 deliveries. We're encouraged by the job growth that has remained strong in both markets. Dallas job growth for the last 12 months was 3.4% and Austin job growth was 3.3%. These growth trends are strong and well ahead of nationwide trends. Looking forward, deliveries in our market are expected to drop 18% in 2019 and with continued with strong demand, we expect the leasing environment to improve next year.
While elevated supply levels have pressured rent growth in several of our markets, Dallas and Austin, we're seeing good revenue growth in a number of our markets. Phoenix, Richmond, Orlando and Jacksonville Truly stood out from the group. Our focus on customer service and retention, coupled with strong renter demand, continue to drive down resident turnover. Move outs by our current residents continue to remain low. Move outs for the overall same store portfolio were down 2.7% for the quarter, move outs to home buying were down 4% and move outs to home renting remain an insignificant cause for turnover and accounts for only 7% of our move outs.
On a rolling 12 month basis, turnover dropped to historic low of 49.2%. This Steady decrease in turnover was achieved by increasing renewal rents by 5.9%. Momentum is building on the redevelopment program across the legacy Post portfolio. Through the Q2, we've completed 1400 units and expect to complete 3,000 this year. On average, we're spending about or we're spending 8,700 and getting a rent increase that is 11% More than compatible, a comparable non redeveloped unit.
As a reminder, we've identified 13,000 post units that have compelling redevelopment opportunity. For the total portfolio in 2018, we expect to complete over 8,000 interior unit upgrades. On the legacy MAA portfolio, we continue to have a robust redevelopment pipeline of 9,000 to 12,000 units. On a combined basis with the legacy Post portfolio, our total redevelopment pipeline now stands in the neighborhood of 22,000 to 25,000 units. Our active lease up communities are performing well and in line with our expectations.
Our remaining pipeline of lease up properties, Ackland West End, The Dentons 2, Post Midtown, Post River North and Sync36 are all on track to stabilize on schedule. The stabilization date post South Lamar II was moved up a quarter to the Q3 of 2018 is at least up faster than we originally planned. We're pleased to have the merger integration winding down. I'm proud of the effort and the hard work our team has put in over the last 18 months. The results are progressing as we expected.
We're looking forward to continuing to capture value creation opportunities on both the revenue and expense sides of the equation as we move forward. Al? Thank you, Tom,
and good morning, everyone. I will provide some additional commentary on the company's 2nd quarter earnings performance, the balance sheet activity and then finally on our guidance for the remainder of 2018. Net income available for common shareholders was $0.52 per diluted common share for the quarter. FFO for the quarter was $1.55 per share, which was $0.07 per share above the mid 2nd quarter was primarily based on effective rent growth of 1.7%, which was encouragingly 30 basis points above our reported growth in the Q1. Average occupancy for the 2nd quarter also remained strong at 96%, who was 10 basis points below the prior year, slightly offsetting rent growth.
You You may recall our Q1 revenue performance was enhanced by a 30 basis points year over year increase in occupancy, primarily built to support stronger pricing during our busiest leasing season. Perhaps most importantly, as mentioned before, our blended lease over lease pricing growth for the Q2, which is new and renewal leases combined, was 3.3%, which provides continued support to the momentum projected over the back half of this year. All of this combined with the strong 1.1% performance, as Tom mentioned, produced same store EMI growth of 1.7%, which is in line with our forecast expectation. Favorable FFO results for the Q2 were primarily produced by an unexpected settlement of a life insurance policy acquired with the post merger producing $0.04 per share of favorability Favorable G and A and interest expenses for the quarter, another $0.02 per share combined and finally favorable timing of some remaining integration expenses, another $0.01 per share. Our total expectation for integration expenses for the full year remains unchanged, but certain lease calls are now being incurred in the 3rd or 4th quarters.
We also had $2,800,000 of non cash income during the quarter related to the valuation of the preferred shares, which essentially offset the $2,600,000 of non cash expense recorded during the Q1, Making the full year impact insignificant, which is in line with our previous guidance.
And as a reminder, due to
the uncertainty in forecasting this non cash item, our our projections do not include any impact from valuation adjustments for in our full year guidance for this item. During During the Q2, we closed on acquisition of 1 new high end community, the 374 Unit, Sync36 located in Denver, which included a land parcel to develop an additional 79 units. We expect to begin additional units during the Q3, which will bring the projected total investment in the community to about $128,000,000 Once the final phase is fully completed and leased, we expect a we also continue to monetize non core land parcels acquired with the Colonial merger. We closed on the disposition of 29 Acre Land Parcel located in Las Vegas during the quarter. MAA received total proceeds of $9,500,000 for the sale, Producing a recorded gain of $2,800,000 during the quarter.
This brings total non core land sales for the year from 3 parcels, all acquired from Colonial, containing 66 Acres for total net proceeds of $15,200,000 and recorded gains of $2,900,000 for the year. During the Q2, we began the construction of 2 expansions of existing communities, Post Parkside at Way Phase 3 located in Raleigh and post Sierra at Frisco Bridges Phase 2 located in Dallas. We now have 4 communities under construction with a total projected cost of $219,800,000 Of which $97,000,000 remains to be funded. Once completed and fully leased, we do expect a stabilized NOI yield of 6.2% for the portfolio. As Tom mentioned, our lease up portfolio continues to perform well.
At the end of the quarter, we had 6 communities remaining in lease up, including Sync36, which is and lease up during the quarter, average occupancy for the group was just over 75% at quarter end and we expect 2 of the communities to achieve full stabilization during the 3rd quarter, which is 90% occupancy for 90 days, we expect 2 more to stabilize during the Q4 and remaining 2 to stabilize in the first half of next year, all of which provide a growing contribution to our 2019 earnings stream. Our balance sheet remains in great shape. During the Q2, we issued $400,000,000 in 10 year secured excuse me, unsecured senior notes at a 4.2% coupon rate. Proceeds from this issuance were used to pay down borrowings under our unsecured credit facility, bringing our combined cash and available borrowing capacity to $920,000,000 at quarter end. Our leverage defined by our bond covenants was only 33.1% At quarter end, our net debt to recurring EBITDA was just over 5 times.
Finally, given the strong second quarter performance, we are maintaining and confirming our same store guidance for the full year as both revenue and expense trends continue to be in line with our previous projections. Expectations for the remainder of the year are built on continued strong occupancy, 96% average for the remainder of the year and blended lease pricing, which is combined new and renewal leases, Averaging about 2.2% for the remainder of the year, which compares well to recent trends. We are increasing our net income and FFO per share guidance ranges for the full year to reflect the items mentioned earlier, we are also slightly narrowing our earnings guidance ranges to reflect the reduced uncertainty following 2 quarters of performance for the year. In summary, net income of diluted common share is now projected to be $1.85 to $2.05 for the full year 2018. FFO is projected to be $5.96 to $6.16 per or $0.06 per share at the midpoint, which includes $0.08 per share projected final merger and integration costs related to the post merger.
AFFO is now projected to be $5.35 to $5.55 per share or $5.45 at the midpoint. The 3rd quarter FFO is projected to be 1 point $0.45 to $1.55 per share or $1.50 at the midpoint. We continue to remain on track to capture the full $20,000,000 of overhead synergies related to the post merger as well as the other NOI and earnings opportunities outlined with the mergers, which are all reflected in our current guidance. So That's all that we have in the way of prepared comments, Priscilla. We'll now turn the call back over to you for questions.
And we'll take our first question today from Nick Joseph with Citi. Your line is open.
Thanks. Just starting on same store revenue guidance, maintained range implies a meaningful ramp in 2H versus year to date results. Thank you for the components that you just gave. Are you trending towards the midpoint above or below? And then from a quarterly perspective, how do you expect
I think we typically lay our guidance out Nick, this is Al, I'm sorry. We typically We'll lay our guidance out trending toward the midpoint. And as we talked about, that performance is going to be based on pricing performance for the year, expected Stable occupancy of around 96% average. And so our pricing guidance is 2.25% to 2.75% for the full year, which is new and renewals combined and blended leasing. As we talked about, I think through July, we actually achieved 2.8%.
And so that leaves about 2.2% on average for the remainder of the year, and I think we feel that that's Achievable.
And from a quarterly perspective, would you expect it to accelerate from 2Q to 3Q and then into 4Q?
I I think we would expect 2 things there. I think we would expect pricing to follow seasonal trends, which would be strong, continued strength in the Q3, seasonally softening in the 4th quarter, But the continued compounding of strong price influence into our portfolio will drive effective rent per unit, which is the average of all of your leases at one time, That will continue to grow. We expect that to be grow in the 3rd quarter and even more so in the 4th quarter to drive that rent excuse me, the revenue performance close to the midpoint.
Thanks. And then you mentioned the 18% drop in deliveries expected next year. Which markets are projected to have the largest decrease and then which will continue to see pressure?
Nick, it's Tom. The trade off is really across the board with only BC and Atlanta seeing slight increases, but it's really pretty widespread and it's not being driven by any one market.
Thanks.
Thank you. We'll take our next question from Austin Wurschmidt with KeyBanc Capital. Your line is open.
Hey, good morning guys. Just wanted to start off with a clarification. Al, I think you just mentioned 2.8%, which I thought you said The blended lease rates for July, but in the release, I thought it said you achieved 3.3%. Can you just clarify those two numbers?
Yes, Austin, that's a great question. Let me clarify that. I was 2.8% was referring to the average for the full year 7 months together. And so we did achieve for the month of July 3.3%, which shows that trend was growing. 2.8% year to date.
Yes, 2.8% year to date. I'm sorry, but the month of July was 3.3%. So the momentum is building.
Got it. And so can you kind of compare, you mentioned 2.2% needed to achieve the midpoint in guidance, with sort of stable occupancy. How does that 2.2 compare? I guess the first half you answered the question largely in the 2.8 or just a little below that. But how does that also compare versus last year In the second half of twenty seventeen.
Yes. Go ahead, Nick. I mean, the last half blended for 2017 Was 1.6%, which is a bit of a fall off for us last year. We're assuming 2.2% going forward and feel pretty good about that and that's what helps
To your point, Austin, we do expect the Q4 to moderate, it does seasonally. And so in the last year, our prior blended pricing in Q4 was flat blended. And so We believe we'll exceed that. We're projecting to exceed that this year, have a strong Q3 based on July and continued August and September performance for Q4. We projected to moderate some with seasonality Be above last year by 60 basis points or so.
That's helpful. And then can you just give us a sense in terms of the backdrop of Supply in the back half of the year, do you expect it to ratchet down or ramp up kind of portfolio wide in the back half of the year this year before Seeing a year over year decrease in 2019?
No, it is, it's awfully consistent. Last year, again, we saw A real change in the volume of supply that occurred this year that has been relatively consistent throughout the quarters and Acted to be pretty consistent the rest of the year.
Last year, we really saw a big ramp up in the last several months of the year, In Dallas, particularly the Uptown Circle. Correct. Yes.
And we don't expect that to occur this year.
Great. And then just one more for me on sort of the investment side. You talked and have repeatedly kind of discussed the challenges in the acquisition market Due to the competitiveness, but could we see a ramp, I guess, in the development pipeline or even a bigger ramp in the redevelopment program, as you look to what opportunities you have to reinvest your available cash flow?
Austin, this is Eric. We're looking at a couple of other development opportunities It's another adjacent land parcel that we own that we're looking at. We've got a couple of other sites, an existing owned site in Denver, another site on contract another site in Orlando under contract another site in Raleigh under contract. These would all be things that if we do pull the trigger on some of these, it would be next year, Frankly, before we would do that, so you're not going to see us create a really significant development pipeline. I think We've sort of laid out a parameter of no more than 3% to 4% of enterprise value, which is going to be in that sort of $400,000,000 $500,000,000 range for us.
But we do continue to feel that that ought to be part of our external growth story at some level going forward. What I'm encouraged by frankly is just we while it's been frustrating on the acquisition front given where pricing is, we haven't been able to put much money to work. I will say though that our deal flow, our deal volume is higher in Q1 and in Q2 year to date is higher than we've seen in the last 5 years. So, I mean, we are looking at a lot of things right now and continue to have a number of conversations with developers About prepurchase opportunities and sort of funding the development as we go, things of that nature. So I continue to be encouraged Later in the cycle that more opportunities are going to emerge.
As Al mentioned, the balance sheet has got is in great we've got a lot of capacity. We're going to stay disciplined. We're going to stay patient. But I continue to believe that opportunities are going to emerge, which is going to facilitate our ability to pick up the pace of growth a little bit.
Thanks for taking the questions.
Thank you. We'll go next to Rich Anderson with Mizuho Securities. Your line is open.
Thanks. Good morning, everyone.
Hey,
Haresh. So,
the pipeline of redevelopment, 22,000 to 25,000 units, Pretty substantial, obviously. But I'm curious, first question is, are there units within a community Are in that and others that are not in the same community? In other words, do you kind of identify a building with X number of units and that's a redevelopment Opportunity or is there something about some buildings where some are redevelopable and some are not?
Rich, it is in general, it is a property by property assessment. And the way that we figure out whether The market will accept that as through a pretty rigorous testing process that we do. But generally, it works on the property or It does not work on the property. Every now and then there's a particularly studio floor plan type They may be more sensitive to the renovate than others and we might leave that out, but that honestly is a rarity. But We pick the units, test the units and then roll forward on the property.
Got you.
The only hesitation we ever have, we Force turnover. So we do it on turns. I think if we start forcing turnover, we start driving up vacancy We start impacting negatively the economics on the RenovA program. But as Tom mentioned, it's really a more systematic approach and it really affects All units at a given community for the most part.
Yes, correct.
So that leads to my next question. You said you don't Force the process, but I guess why not? I mean, if you have this great rent growth potential in front of you, Not that you could force anything, but if you someone's lease expires and you say, well, I'm going to raise your rent by kind of Above market rate and if they take it, great. If they don't, you got a redevelopment opportunity right there. Is that something that you think about?
Yes. I mean, we have considered that and thought about that, but those what you mentioned on the pros to it, the pros strong now, 6% reprice, no additional investment, no downtime in average days vacant And no turn costs. So we feel like that's a our approach is a little more stable.
Got you. Fair enough. Last question is for anyone in the room. The theme this quarter has been low turnover. You guys mentioned it, pretty much everybody is mentioning it.
We have a pretty good economy. You would think people would be More inclined to look around and improve their residents to some degree. I'm curious what your thoughts are as why turnover is so low. Is it just simply the housing market is sort of questionable, Single family market or is it something else that's driving it down?
Rich, this is Eric. I think there are a couple of things that play here. One is what you refer I think the housing market in general is challenged increasingly by the lack Portable single family housing, I think that we see the rental side of that business continue to really ratchet up with pretty High rent growth, we see pricing for starter homes continuing to move up. There's just Not enough supply out there and as a consequence, I think it's becoming increasingly more expensive. But I think the other thing that is at play here a little bit is It's more a function of just demographic and societal society changes.
If you look at our portfolio Today, our resident profile, 75%, 76% of our renter profile is single, not married. 52%, 53% are female. And I just I continue to believe that this is a demographic More so today than ever in the past is not really motivated to go out and move into a single family home, whether that be for rent or for purchase. And so I think it's a combination of those factors right now that are sort of helping the industry as a whole capture some pretty good retention.
I guess if you're single, you can't get divorced. So that's good. That's
right. That's right.
That's
all I have. Thanks.
You bet. Thanks, Rich.
I think we'll take our next question from John Kim with BMO Capital Markets. Your line is open.
Thank you. I guess one of the levers you have To maintain your same store expense growth at 1.3% for the year, is decline in building and maintenance costs of 6%. And I'm wondering if you're basically deferring some of these costs to future periods or capitalizing these costs into redevelopments or
Yes, we're doing neither of those, John. I mean, what really is driving it is putting our approach to repair and maintenance on a portfolio that was more heavily weighted to contracting out labor. At the end of the day, They did drastically increasing the number of paints that we do in house and the number of carpets We do in house the number of cleans that we have in house and that is 100% what is driving this. And Certainly nothing in the deferred maintenance or capitalizing those costs. And I'll tell you
the other thing that's been part of the equation as well is just The benefits of economy of scale. I mean, we renegotiated virtually every single contract we have for procuring services and products And that we use in the operation of on-site activities and all those prices went down as a consequence of the scale we got to. So There's no deferral going on, I can assure you that. It's really the point that Tom mentioned and the scale advantage.
So this is mostly attributable To post integration?
Right. Yes.
Yes. That is right. We've been talking about
that I think
the last several quarters, John. That was the first thing that was Really easiest for us to jump on and begin. It was actually a little better than faster than we'd expected. I think as we move into 2019, we expect that Normalize a bit, but the revenue opportunities are growing and will be contributing in 2019. So that's kind of how we think about it.
Okay. And then the 3.3% blended rent growth you got in July, I know you kind of forecast that's going to come down a little bit in the second half of the year. But how much visibility do you have on August as far as renewal rates and new lease growth?
Sure. I mean limited like none on new lease Obviously, because we haven't executed enough to do that. But as far as renewals, they're continuing to go out. August, September October all went out in the 6% range and we're getting back 5.5% in that range. So we feel good about that part of the equation.
So that's about 40 basis points lower than when you got in the 2nd quarter, is that correct?
Yes. I mean and I think we mentioned at NAREIT, Five9, we're really pleased with, but we didn't plan for that and one shouldn't we're playing on Five9 going forward.
Okay, great. Thank you.
Thank you. And we'll take our next question from Tayo Okusanya with Jefferies. Your line is open.
Hi, yes. Good morning. Could you talk a little bit about the markets where you are seeing still a lot of supply pressures? How these developers are competing? Are they are you seeing increased concessions?
Like what are they kind of trying to do to kind of Drive lease up in their assets and how is that impacting your portfolio?
Yes. I would tell you Tayo, I mean you're hitting on it in places like Atlanta, Austin and Dallas and just pockets of Atlanta really they're competing with concessions. I will tell you As we mentioned on an earlier Q and A, we saw a heavy hit of new development in late last year, it ramped up. And what we are seeing now as far as concessions in the marketplace in those kind of places is generally better than it was At that time, so they're still doing a month, 2 months free. It really depends on the submarket End market there, but there you're seeing that with that's how they're competing.
It's just upfront discounts of concessions.
Got you. Okay. And then second of all, when we kind of think about the back half of the year, I think you guys have been doing an amazing job just with managing OpEx growth. And your guidance seems to imply that that's going to continue for the rest of the year. But are there any potential kind of headwinds there that could make that number go up in the back
We don't Kyle, this is Al. We don't see any significant headwinds and we feel pretty confident in our current guidance on expenses for the back half of the year. As mentioned, We would expect that's a lot of that's attributable to the favorable performance from achieving the post synergies or opportunities, those scale and processes we talked about. So I think, as we move into 2019, the repair and maintenance and some of those lines may moderate to a more normal level. But as we mentioned, I think we expect the revenue part of the synergies to pick up stronger at that point as well.
Okay. And then just the last one for me. What's The latest kind of with the DC portfolio, how we trend for the quarter, how you're kind of feeling about that portfolio It's an outlier relative to your typical regional exposure.
No, I mean, DC has been steady for us. Blended Lease over lease rents for that group were 2.7%. We continue to be pleased with the teams there and the redevelopment opportunity And it is steady as it goes in DC for us.
Great. Thank you.
Thank you. We'll move now to John Pawlowski with Green Street. Your line is open.
Thanks. On the re dev portfolio, The incremental 4,000 units to be done the rest of this year, are those costs bought out? Is there any construction cost risk?
Those costs are not bought out, John. I mean, we have tagged them, but we're working with I won't call bought out, but fairly fixed pricing and we have not seen the volatility In dealing with renovate upgrades there that we have that I think the industry has experienced on construction cost. It's just it has not been a factor or a risk of our return.
Okay. On the broader pipeline of $22,000 $25,000 I guess how is it completely immune? Because I mean you still have labor shortages, so The material inflation is outpacing rent growth. So if the current environment persists, How do the economics trend on the broader pipeline in the next couple of years if construction costs broadly are outpacing inflation by a wide margin?
Yes. I mean, I would tell you, we don't have lumber in that number. We don't have concrete in that number and we don't have steel in that number. It's really appliances, in some cases a countertop and In sort of reskinning it, John, we're seeing it. And I think that's probably why it's different.
Understand your point and it's well made. We just don't have a history of those costs trending in line with construction costs.
Okay. Makes sense. And the comments on supply being down nearly 20% next year, Could you give us the one minute overview of how you identify what's competitive new supply and what's not competitive? Because candidly, when you roll up the market Level permitting, which I know is not great, but it does provide a directional proxy for supply growth. It doesn't paint the picture For anything near a 20% drop in supply in 2019, in 2020 looks pretty painful as well.
Yes. I mean, what we're doing there is looking at the Axiostata over our broad markets and then Adding all of those markets up and comparing them. So this is not an asset by asset build up, But it is our market buildup using that data.
I mean, we check it for reasonableness by I mean, we know what's happening obviously in our submarkets and our properties know what's under construction. I think it's pretty easy to get a pretty good Sense of what's going to happen 12 months out or so because if it's not under construction now, it's not going to deliver next year and we know that. I do share your opinion that as you start to look at what's happening with permitting, it Starts to suggest that 2020, maybe 2021, we might see a reacceleration of deliveries. But when you look at just if it's not under construction now, it's not going to deliver next year. So we do think that 2019 is shaping up to be A better year in terms of supply pressure, but I think beyond next year, I think it starts To get a little bit more questionable.
Okay. Thanks very much.
We'll take our next question from Wes Golladay with RBC Capital Markets. Your line is open.
Hey, good morning guys. Just want to go back to the revenue guidance for the year looking at the blended rent change. Assuming you're tracking a little bit above last year, you get to the high 2s in 3Q, you probably need about 1.5 Blended rent growth, my math is correct, in 4Q. And it sounds like that will all be driven by a little bit better new leasing. Last year, you were Flat for the blend and you highlighted to some degree that there was a lot of disruptive supply in Fortuna select markets.
It sounds like the supply will not be as disruptive this year, but do you think you can get a materially better new lease growth in 4Q?
Wes, one thing I'll mention as you talk about your math and doing that is keep in mind though that the In the quarter, there were
a lot of leases that
were signed in the Q2. So a simple average won't quite get you there. I think it's a little bit Better picture or lower picture for the Q4 if you consider the weighted average because of the number of leases in the Q3. But in general, I think we you outlined it correctly.
Okay. And then, I guess, last year, do you have a sense of how much the market Such as uptown, I think maybe a few other markets hit you. How much did that bring the overall new lease down? Was it a few percent just in those few markets alone for the overall Oil impact.
Those markets, stung. I don't have the exact breakdown, but particularly the way the Dallas Supply hit last year
was impactful. Okay. Thanks a lot guys.
Thanks, Vince.
And I am showing that we have no further questions at this time. I'll turn the call back today for any closing or additional remarks.
Well, Thanks everyone. We appreciate you on the call this morning. Any follow-up questions, just feel free to reach out to us. Thanks and talk with everyone later. Thank you.