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Mid-America Apartment Communities (NYSE:MAA)

Q2 2013 Earnings Call

August 01, 2013 10:00 am ET

Executives

Leslie Bratten Cantrell Wolfgang - Senior Vice President, Director of Investor Relations and Corporate Secretary

H. Eric Bolton - Chairman, Chief Executive Officer and President

Albert M. Campbell - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Thomas L. Grimes - Chief Operating Officer and Executive Vice President

Analysts

David Toti - Cantor Fitzgerald & Co., Research Division

Robert Stevenson - Macquarie Research

Richard C. Anderson - BMO Capital Markets U.S.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

David Bragg - Green Street Advisors, Inc., Research Division

Operator

Good morning, ladies and gentlemen, and thank you for participating in the MAA Second Quarter 2013 Earnings Conference Call. The company will share -- first share its prepared comments, followed by a question-and-answer session.

At this time, we would like to turn the call over to Leslie Wolfgang, Director of Investor Relations. Ms. Wolfgang, you may begin.

Leslie Bratten Cantrell Wolfgang

Thank you, Howard, and good morning, everyone. This is Leslie Wolfgang, Director of Investor Relations for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

Before we begin 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 Safe Harbor language included in yesterday’s press release with 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.

In addition, I want to point out that in this morning's call, management will be making some prepared comments related to the pending merger of MAA and Colonial Properties Trust. However, because we are currently in the SEC review process of the joint proxy statement and prospectus related to the pending merger transaction, management will not be taking questions related to the proposed merger. Q&A at the end of the call will be limited to matters related to our second quarter earnings.

In connection with the proposed transaction, MAA will include a definitive joint proxy statement of the company in Colonial and a registration statement filed with the SEC that will also serve as a prospectus for MAA. Investors are urged to read the joint proxy statement and prospectus and other relevant documents filed with the SEC if and when they become available, because they will contain important information. You may obtain a free copy of the definitive joint proxy statement and prospectus filed with the SEC at the SEC's website at www.sec.gov, or on our website at www.maac.com, or by contacting our Investor Relations Department at (901) 682-6600.

MAA and our directors and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in respect to the proposed transaction. You can find information about the company's executive officers and directors in our Definitive Proxy Statement filed with the SEC on March 22, 2013. This shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction, in which such offer, solicitation or sale, would be unlawful prior to the registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

I'll now turn the call over to Eric.

H. Eric Bolton

Thanks, Leslie, and good morning, everyone. Before getting into a discussion about our results for the quarter, I do want to provide a quick update on progress surrounding our merger with Colonial Properties. As Leslie mentioned, we are in the SEC review process of the joint proxy statement and prospectus. We expect to have the definitive proxy mailed out to shareholders as soon as that process is complete. We do continue to believe that we will be able to close the transaction sometime in September.

At this point, we are all well into preparations for the integration of the 2 operating platforms. We anticipate having all the appropriate transaction, execution and reporting task up and running on a consolidated basis at closing.

As outlined in our earlier announcement, we expect the full systems integration process will take place over the course of the next 18 months. Our management team is in full consolidation planning and execution mode and we remain comfortable with the earlier assumptions made surrounding synergy gains and the various benefits to be derived from this combination, which were outlined in our prior announcements and presented at the Navy conference back in June.

Assuming the transaction closes as expected, when we release our third quarter results, we will be in a position to provide an updated earnings outlook for 2013 on a combined company basis. The key takeaways from this morning's call are that we continue to feel good about the projections provided at the time we announced the merger on June 3 and that integration work is fully underway and proceeding very well.

Assuming we're able to close our merger sometime during September, our reported results for the quarter and for full year 2013 will obviously have a number of merger-related and one-time transactions included. The overall merger transaction will be recorded as an acquisition for accounting purposes, which, depending on the exact timing of the close, will potentially require the inclusion of MAA standalone results for a portion of the third quarter with combined results for the remainder of the quarter. MAA will record acquired assets at market value and incur a significant portion of the total expected deal cost on the closing date. We intend to provide you with clear communication of the details with our third quarter release, which will be following the expected closing date of the merger.

I also want to take a moment to offer my thanks and appreciation to our hard-working associates at both MAA and Colonial. As with most merger transactions, there has been a significant amount of work going on, a lot of late nights and some tough personnel decisions in connection with putting the 2 organizations together, while also, of course, staying focused on taking care of our existing residents, properties and operations.

Tom Lowder and his management team have been terrific to work with through this process, and we look forward to completing the merger and executing on a successful integration. I want to thank all of our associates at both MAA and Colonial for their hard work and service to our residents, to our shareholders and to each other.

And with that brief update on the merger, I'll now turn my comments to a discussion of the quarter's results. As detailed in yesterday's earnings release, operating performance reflects continued solid leasing conditions across the portfolio, same-store physical occupancy at the end of the quarter at 96%, slightly ahead of last year. Average effective rent for the quarter increased 4.1% as compared to the prior year and grew 1.2% on a sequential quarter basis. Resident turnover remains low with our 12-month turn rate through the second quarter at 57.2%, up slightly from 56.5% at the same point last year.

Move-outs associated with buying a house generate 20% of our turnover through the first half of this year, which is fairly consistent with last year at 19%. Move-outs associated with renting a house continues to not generate any meaningful pressure, driving only 6.8% of our move-outs year-to-date, which is also fairly consistent with what we've experienced over the past several quarters. Move-outs due to the amount of rent increase we're asking have moved down slightly from last year at 12% of our move-outs year-to-date, as compared to 13% last year.

We continue to be encouraged by the steady growth in rents. With our revenue growth year-to-date at 4.6% and based on the full year revenue guidance of 5% to 6%, we obviously expect that current pricing trends will continue over the second half of the year. As expected at this point in the cycle, the Large Markets segment of the portfolio continues to deliver better pricing performance when compared to the Secondary Markets segment. Austin, Houston, National, delivered some of our best results in the second quarter.

We continue to believe that forecasted new supply across our portfolio is unlikely to mature a [indiscernible] in leasing conditions over the next several quarters. The Texas markets continue to enjoy healthy employment conditions and should absorb the new supply coming on line without meaningful deterioration in pricing trends. The outlet for new job growth and new supply across our large tier markets in 2014 remains healthy at almost 8:1, well ahead of what is needed to generate positive absorption and drive what we believe will be continued solid rent growth, exceeding long-term averages.

And as employment trends continued to improve across our secondary markets, we're excited about strengthening leasing prospects and rent growth from this segment of the portfolio as well. As we've commented in the past, our secondary markets generally tend to not be as exposed to supply pressure and we believe bring a stabilizing influence to the overall portfolio's performance as new development ramps up in this phase of the cycle.

Leasing at our 4 new lease up properties continues to go well and was slightly ahead of our forecast. We've been particularly pleased with leasing pace at our Phase 2 lease up at 1225 South Church Street in Charlotte after having received the last of the 210 units in April, the property is already 98% leased and almost 80% occupied. This is very strong leasing and well ahead of our pro forma expectations. We expect to stabilize all 4 lease up projects around year end.

We'll remain active with capital recycling plans, with 4 properties sold during the quarter and 2 properties acquired. From all that we've seen, cap rates haven't moved in the past few months and investor appetite for our apartment real estate in both large and secondary markets remain strong.

That's all I have in the way of prepared comments. And now I will turn the call over to Al. Al?

Albert M. Campbell

Thank you, Eric, and good morning, everyone. I'll provide a few comments on the company's second quarter results, balance sheet activity for the quarter and on our updated view of premerger guidance.

Core FFO for the quarter, which excludes the $5.7 million in merger-related costs was $56.6 million or $1.27 per share, which is $0.05 above the midpoint of previous guidance and 12% above the prior year. Year-to-date, core FFO in the same basis was $111.8 million or $2.53 per share, which was 13% above the prior year. Same-store NOI guidance of 5.5% for the quarter was in line with our expectations and has continued strong occupancy and pricing strength supported total revenue growth of 4.4% for the quarter. Same-store operating expenses increased 2.9% for the quarter, with property taxes and insurance producing the largest portion of the increase. And operating expenses for the quarter, excluding taxes and insurance, increased only 1.4%. Year-to-date, same-store NOI increased 6.6%, based on a 4.6% increase in revenues and a 1.7% increase in operating expenses.

We expect continued solid revenue growth over the remainder of the year, with only slight moderation in the fourth quarter. Operating expense growth over the remainder of the year will be impacted by real estate taxes due to challenging prior year comparisons. Credits recorded in the back half of the prior year produced only about 1.5% growth in real estate taxes, resulting in tough comparisons over the next 2 quarters, as compared to the last year.

Our performance and FFO results for the second quarter was mainly produced by recent development communities leasing and ahead of plan, revised timing of financing transactions and lower than projected G&A cost for the quarter. These items combined to produce about $0.04 per share of favorability for the second quarter, with an additional $0.01 per share coming from gains of settlement of casualty claims, which are included in FFO, per NAREIT's definition.

During the second quarter, we acquired 2 communities, one community was acquired from Mid-America Multi-family Fund I, which was the only remaining community in the fund and that fund is now closed. The second community was purchased during lease up and was 72% occupied when acquired. The gross combined purchase price for both communities was $71.1 million, including an $18.3 million loan relating to the Fund I community, which was assumed by the company.

We also sold 4 communities during the second quarter, for total gross proceeds of $74 million. The 4 communities averaged 23 years of age and were sold for a blended cap rate of 6.6%, that's based on in-place NOI after a 4% management fee and $350 per unit CapEx reserve. And also these sales represented an exit from 2 secondary markets for the company, Athens, Georgia and Melbourne, Florida.

Progress on the company's developed pipeline continued during the second quarter with one community being completed and moving into the lease up growth. We now have 2 communities remaining under construction, with an expected total cost of $73.8 million for 564 units, of which $36 million remains to be funded.

We funded a total of $8.6 million of development costs in the second quarter and expect an additional $25 million to be funded over the remainder of the year.

We also have 4 communities remaining in lease up, 3 developed by MAA and the one recently acquired. These 4 communities were 82% occupied on a combined basis at the end of the quarter and we expect 3 of these communities to be fully stabilized by the fourth quarter, with the final community projected to be stabilized in the first quarter of next year.

We completed a number of key balance sheet plans during the second quarter. During May, we entered foreign interest rate swap contracts to effectively lock the rate on $150 million of our bond financing plan for later this year. Our time improved, fortunately, as we were able to complete the trades before the recent rise in Treasury rates. And given the expected timing of the pending merger, we now expect our bond offering will occur late third quarter or early fourth quarter this year.

Also, after quarter end, we've received commitments from our bank group for a new upsized, unsecured credit facility. The new facility will provide initial borrowing capacity of $500 million with expansion capacity of up to $800 million.

New facility reflects current or improved market pricing and provides the company for liquidity and growth necessary to support the planned larger company. Closing of the new facility is expected over the next couple of weeks.

Our balance sheet ended the quarter in growth position. The company leverage, defined as net debt to gross assets, was 43.2%. Total debt was 6.3x EBITDA and MAA's fixed charge coverage ratio defined as EBITDA to interest expense was a solid 4.2x.

At the end of the quarter, 88% of our debt was fixed or hedged against rising interest rates over the next 4 years and our total average interest rate was 3.5%. We plan to increase the duration of our interest rate maturities over the long term, with a long-term bond financing plan later this year.

Finally, given the second quarter performance, we're increasing our FFO guidance for the year. We're now projecting stand-alone FFO, excluding the merger related cost, to be $4.83 to $5.03 per share, which is $4.93 at the midpoint. This range represents a $0.06 per share increase over the midpoint of previous guidance.

We're maintaining our same-store guidance, which continues to project solid pricing performance and stable occupancy, supporting 4% to 5% revenue growth for the full year. We expect operating expenses over the remainder of the year to increase 3% to 4% in total, with real estate taxes producing the primary expense pressure for the year as mentioned before.

Given the pending merger, we now expect timing of funding transactions primarily to planned bond transaction to produce about $0.01 per share of additional favorability that is now expected to occur a bit later than previously planned.

AFFO for the full year on a stand-alone basis and before merger-related cost is now expected to be $4.21 to $4.41 per share. And our current annual dividend rate is $2.78 per share.

And that's all that we have in the way of prepared comments. So, Howard, I'll turn the call over to you for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question or comment comes from the line of David Toti from Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

Al, just a question for you sort of looking into '14, the focus in the last couple of years relative to the capital structure has been distancing the company from the GSEs and moving towards an unsecured rating. What do you think your top goals will be after the merger relative to balance sheet activities?

Albert M. Campbell

I think we'll see -- you'll see us have a balanced approach is a simple answer to that, David. And we're very proud of where we've come with our balance sheet and we've certainly achieved very good metrics that take us to the bond market this year. We feel like we'll be able to execute our inaugural offering in good position. And so you'll see us, over time, obviously continue to support that platform. But over the long term, continued commitment to our partners to have maximum access to capital will be our plan. So hopefully that answers your question, as to what you're looking for.

David Toti - Cantor Fitzgerald & Co., Research Division

If we start to see rates kind of -- spreads widen a little bit into the end of the year, do you think that would cause you to sort of take any kind of different direction relative to that approach?

Albert M. Campbell

Well, I'll say a couple of things to that. One is on the deal we're affecting -- doing this year, we've already locked in about half of it, we're fortunate with the trades that we did, as mentioned earlier. And where the market is right now, David, I would say that unsecured debt is probably -- it's inside of agency right now. We would probably -- if we did a deal a day, you're probably talking about 4.5% all-in costs. And I think if we did a similar agency deal today, you're probably talking about 4.75% for a 10-year deal, on both of those. So I think you would see us just continue to have a balanced approach, maybe taking, tactically, over time, the best solution at the time, but making sure that we keep our appropriate metrics in balance with what our plans are.

David Toti - Cantor Fitzgerald & Co., Research Division

Is there a reason you don't consider [indiscernible] at this point, given your scale and kind of where yields are, would that be an attractive option in a rising rate environment?

Albert M. Campbell

I'll think what we look at it is that given the cost of debt and equity right now, that seems to be the best for our combined cost structure right now. Having said that, if we had a reason to ramp up our development pipeline in some way because of opportunities we had or some other things in our funding change, we would look at that. But I think, right now, debt and equity are our primary sources.

H. Eric Bolton

Certainly, David, we've been in the preferred market in years past. And if conditions weren't going back, we'll certainly do that.

David Toti - Cantor Fitzgerald & Co., Research Division

It seems like if you think about your cost of capital going up in the next couple of years and you can lock in a slice of it at a relatively attractive yield into perpetuity, it might be a nice option.

Albert M. Campbell

There's certainly a lot of demand for that in the marketplace, David.

David Toti - Cantor Fitzgerald & Co., Research Division

Yes. And then my only other question, and forgive me if you touched on this, I'm still sort of struggling with the dynamics of the same-store guidance change and I sort of either, I guess, the sort of the changes either imply revenues are a little bit lower to hit the same midpoint as NOI or you're targeting the same revenues, but maybe NOI is going to come in a little bit lower? I guess, maybe help me through some of that dynamics in that range?

Albert M. Campbell

Right, okay. If you take a look at what we've done for the first 6 months, David, revenue's are about 4 6, expenses are 1 7, NOI's 6 6. And if you then compare that to what we have guidance for the full year, we have revenues of 4 to 5. So the midpoint of that is 4.5. So we expect revenues to continue to be solid and maybe that's implying a slight moderation in the fourth quarter, which we've talked about all year. On expenses, I think that's the key. We've had 1.7% increase first part of the year. And the implied guidance is 3.5%. And so, as I talked about, the pressure there is really real estate taxes. We have taxes, we believe, will increase 6% to 7% for the full year. You got to remember though, they're a quarter of operating expenses. And then on top of that this year, we have some challenging comparisons in taxes from the prior year. And the third quarter and fourth quarter of last year, we had some credits, we had some favorable appeals and had some valuations that came in better than we expected. So we had some credits in the back half of last year, making this year's back half a tough comparison for taxes. So, that's really the story of what's going on.

Operator

Our next question or comment comes from the line of Rob Stevenson from Macquarie.

Robert Stevenson - Macquarie Research

Al, just to touch a little bit on the -- more on the property tax issue. When you're sitting here today and once you get past the back end of the year with these big increases, is the expectation that the year-over-year growth starts to moderate on the property taxes. I mean in most of your municipalities, are you up to as much fair value or you think that there's probably still more room to run either on the assessment or the mileage rate in some of these areas?

Albert M. Campbell

I think a good way to think about that, Rob, is looking at taxes over the long term. If you look at the last 6 years and you add them all to get an average, including this year, which is 6% to 7% growth, taxes have only -- that's less than 2% growth somewhere around 1 8, 1 9, and 1 7. Eric's got the number there. But -- so I mean long term, its -- we definitely expect it to be in that range. I think this year we and everyone expected the pressure particularly from tax -- particularly from the strong markets where there's been a lot of growth coming online. You may continue to see that a little bit over 2014, but you would expect over the next few years of that to kind of move into more of a normal band.

Robert Stevenson - Macquarie Research

Okay and when you look at the colonial portfolio, is that located in anywhere that's behind the times on the property tax issue. In other words, are there big jumps left there or are they move through things just like you have over the last couple of years?

Albert M. Campbell

I think you'll see they'd move through pretty close to us. And as they report today, and as you talk to them, I'm sure that you're seeing similar in taxes this year and probably have similar expectations going forward. And as we blend the portfolios, we don't see any major differences in the trends that we've seen.

H. Eric Bolton

Yes, they're still very similar footprints.

Robert Stevenson - Macquarie Research

All right. And then given the move in interest rates, does it have you guys -- you guys have done about half year disposition expectation for the year? Any inclinations given the interest rate sensitivity, probably, on some of your assets that you would probably want to sell of expediting that and raising that capital sooner rather than later?

H. Eric Bolton

Well, I mean, we're constantly looking at it, Rob. But we're pretty pleased with what we've been able to accomplish. We've -- as mentioned so far, we've got several others under contract right now and we are obviously in the process of taking a broader look at the combined portfolio and disposition plans. And I think that we will look at expediting perhaps a little bit more next year. But obviously we're also having to lay a lot of different crosscurrents here. But I think that, broadly speaking, we continue to believe that a steady, disciplined approach to recycling capital is the right approach. And we've demonstrated over the years, a clear ability to exit these secondary markets when it made sense because of where we were with the asset. And Fannie and Freddie continued to demonstrate a high degree of willingness to finance a lot of these assets. And so while we're going to continue to keep -- we certainly have a more aggressive posture in cycling this year than we've ever had. And we'll likely keep the same pace up, I would suspect, over the next year.

Robert Stevenson - Macquarie Research

And then, Al, help me understand, if I think about the 1 27 in the second quarter and maybe there's a couple of pennies of sort of nonrecurring stuff in there, then you've got the headwinds from the property taxes and you've just sold $70-some million of income producing assets, and so there's some level of drag from second quarter to third quarter on a core basis. But what would have to happen for you guys to fall all the way down from 1 27 into the 1 16, 1 15, 1 18 sort of range, what is the major driver of the bottom end of the range for both the third and fourth quarters?

Albert M. Campbell

Well, I think -- just to -- one thing, before the major drivers of that to help understand the third and fourth a bit, Rob, is third quarter has historically had its high level of operating expenses. It's the hot summer months and so that is -- if you go back and look, that has been in terms of FFO per share, that has shown volatility in the past and I think you'll see that again this year. In the fourth quarter, what you're going to see is because of our deal volume, we've moved a lot of that in the fourth quarter, we expect a lot of that to close in the fourth quarter. You have acquisition expenses there. And then we've put our deal further back in the year and so when we do the $350 million deal or whatever size we end up making it, we'll be taking our fixed rate debt from 88% fixed to about 93% fixed. So you'll feel that impact in the fourth quarter. So that right off the bat. And I think the major thing that could happen to push us to the bottom or at the top of that range really is significant changes in timing of these transactions, primarily dispositions and acquisitions and the big change in there. And obviously, fundamentals could change, occupancy changes would have a big impact. But I think acquisitions would be the biggest.

H. Eric Bolton

I would tell you, Rob, the biggest variability is the transaction timing that Al's mentioning. I mean we feel pretty good about the operating metrics and the trends there. It's the variability and the timing of transactions that really is the hardest thing to pin down and what drives the need for the range that we have.

Robert Stevenson - Macquarie Research

And then just lastly, what's the current expectation for the stabilized yield on the development pipeline?

Albert M. Campbell

About 7.5 to 8 now, Rob.

Operator

Our next question or comment comes from the line of Rich Anderson from BMO Capital Markets.

Richard C. Anderson - BMO Capital Markets U.S.

The stock is weak today and I guess maybe that has something to do with decelerating, I'm not condoning the move, but decelerating same-store in the second half shouldn't be a big surprise, but I guess it is. But the other thing is, Colonial is reporting, I know you're not commenting on them, but they produced 4.3% same-store revenue growth for the second quarter. Some might view that as distracted with the merger and all of that sort of stuff. But let's put that issue aside. I mean do you think that there is a kind of, do the 2 companies have a difference in theory about running property operations and do you think that you, MAA, could eke out more performance in that portfolio, putting aside the synergies and everything else, do you think that you're doing something differently that you can apply there?

H. Eric Bolton

Well, Rich, I mean, that's all to be more fully explored and demonstrated. I mean we are really into the weeds right now on putting the 2 platforms together and we will have a lot more to say about that particular subject after we sort of get the merger closed and we get into projecting 2014 and Q4 2013. But let me also just say that on this notion of decelerating fundamentals. It really, I just want to highlight the fact, we're talking about real estate taxes. Revenues are absolutely hanging in there. We absolutely feel good about the trend that we've posted so far this year and we'll continue to hold up. Revenues aren't moderating, expenses aren't going up with the exception of one line item and that's real estate taxes. And that happens to be because we had a tough prior year comparison because of a bunch of credits took last year, so...

Richard C. Anderson - BMO Capital Markets U.S.

If I said decelerating fundamentals, I didn't mean to say that, I meant decelerating internal growth and that's what I meant. And I'm in the camp that, it looks great, so you're preaching to the choir. But let me just ask you just once more on Colonial, did the 4.3% same-store revenue growth, was that in line with your expectations this quarter?

H. Eric Bolton

We didn't have expectations, we didn't define expectations. I will say this, Rich, I mean, clearly, it's been a busy period over the last 60 days since we've announced this transaction. And it's had a lot of focus from both companies. And it has been in some ways a trying time because we're having to put the 2 organizations together. And as I mentioned in my comments, there's a tough personnel decisions that come from that. So to assume or conclude that perhaps there was some pressure on the quarter as a result of all these other stuff going on, is not an unreasonable assumption to make.

Richard C. Anderson - BMO Capital Markets U.S.

You mentioned earlier on the call that 20% of your turn was from people buying homes, 6.8% was people to go and rent a home and those were kind of in line with expectations. They kind of do sound a little bit higher than I thought, but maybe can you put that into context with what -- where it has peaked in the past? I don't think you've ever seen move-outs to buy a rental home as high as -- close to 7%, have you?

H. Eric Bolton

Well let me -- I'm going to give you just a perspective on this real quick and then I'm going to let Tom answer your question more specifically. But just to give you some context, this time last year, turnover associated with moving out to buying a home was running at around 19.6% or so. So it's been steady for the last couple of years. And move-outs to rent were 6% last year. We're at 6.8% now. So there's no noticeable trend that causes us any concern at this point. And then specific to your point, Tom?

Thomas L. Grimes

And, Rich, this builds on fundamentals a bit. The peak was March 2007 where move-outs to home buying were 33.4% of total turns. Important to note, I think, at that time, that our effective rent growth was 4.9%. And we believe that in the Sun Belt that a healthy home building industry and a healthy economy leads to people buying houses, people getting jobs and people renting plenty of apartments.

Richard C. Anderson - BMO Capital Markets U.S.

And then last question is on development. Obviously, Colonial brings an increased development pipeline to the table for you. I'm curious, I mean, I think you've addressed this, but I'm wondering if your thought process has changed a little bit on the longevity of your development strategy, is this going to be kind of Michael Jordan playing baseball or trying to give it a shot and then go back to basketball? Or are you going to stay with development for a while and make it a bigger part of your asset base?

H. Eric Bolton

The short answer is, we're not going to change our strategy, Rich. I continue to believe very much that we, first of all, want to be sure we have a platform by which we can direct capital into brand-new product, to-be-built product. But having said that, in this region of the country, I continue to believe that if a cycle is sort of a 6-year cycle that maybe there's a year to 2, where it makes sense to take on the risk of being the developer ourself. But we continue to believe that the bulk of the cycle in an effort to find opportunities to deploy capital in new construction and new development, that the best way to do that is be an opportunistic buyer of that. And we will bring the development team of Colonial on to our platform, which we're excited about because they are going to continue to be able to help us to work with developers to find opportunities to come in and provide capital, provide an opportunity for them to exit that development on a basis they find attractive, on a basis that we find very attractive. And ultimately, I believe, find ways to deploy capital and brand-new product that yields very, very close to what it would be if we were the developer ourself, but doing so without the risk on our balance sheet.

Richard C. Anderson - BMO Capital Markets U.S.

And just lastly on that, do you have a number of how big development will be as a percentage of your assets when you combine the company, and what your comfort level is longer term?

H. Eric Bolton

I would say $200 million to $250 million or close to a $9 billion balance sheet.

Richard C. Anderson - BMO Capital Markets U.S.

That's your comfort level or that's...

Albert M. Campbell

That's about where we would go.

Operator

Our next question or comment comes from the line of Karin Ford from KeyBanc Capital.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

I was wondering if you guys could provide us with some July trends on rent and occupancy and what's happened since the end of 2Q?

H. Eric Bolton

Sure, Karin. July looked good, occupancy's still strong at 96%. Traffic was up 4.6%. And our asking rents on new lease prices was at 4.3%, which is really the best we've seen it this year.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

What about your renewal notices, what type of levels are you seeing further out?

H. Eric Bolton

Looking forward to the -- for the rest of the -- sort of out through October, is we're sending close to 6 and we're getting about 5 4 on that.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Next question is just on Texas. I heard your comments earlier about you don't feel like supply is really been hitting results there. Just taking a look at a market like Dallas, where year-over-year revenue growth slowed about 200 basis points from 1Q to 2Q. I just want to understand -- reconcile those two things and comments from some of your peers that a market like Dallas is starting to get impacted from -- by new supply and why do you think your portfolio is being insulated, if it is.

H. Eric Bolton

Karin, I don't think we mean to imply that new supply has no factor or bearing on a permanent pricing or the market. But I think what we're really trying to say is places like Dallas that are seen -- that have very healthy economy and are seeing some influx of new construction that job growth is at a point where fundamentals are still very, very good. And while there are some moderation to it, it is not the beginning of the end for a market like Dallas.

Albert M. Campbell

I would tell you, Karin, that one of the metrics that you hear talked about a lot, that we focused on a lot as well is sort of this comparison of jobs to new supply coming into a given market. And at least the information that we have from initial metrics and moodys.com and so forth suggest that in 2013 that, that metric is roughly around 10:1 jobs to every new unit. And in 2014 that jumps to 11:1. So -- and if equilibrium is around 5:1 or perhaps 6:1, clearly Dallas is showing a little moderation, but it's still going to be better than average and better than historical long-term run rate and we feel good about it.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

And then, just a last final question just on the mechanics of guidance. It looked like you guys had lowered expense growth guidance, about 50 basis points between 1Q and 2Q, but the other 2 components, revenue and NOI, stayed the same. I just -- was there any other -- was there any reason why NOI growth stayed the same even though you moved expenses down a little bit?

H. Eric Bolton

Not really. I mean that wasn't a significant change in that expense, Karin. And so we were not perfectly on the midpoint one way or the other that may move us to right on the midpoint of 5 on NOI somewhere closer to it. We're maybe a little above it before, but nothing significant.

Operator

Our next question or comment comes from the line of Michael Salinsky from RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Eric, you touched a little bit upon the acquisition market and disposition market. Can give us a sense of pricing? I mean we've seen a pretty big move in the -- from Fannie and Freddie rates over the last 90 days, is that impacting pricing in the secondary markets? And also, as you look out to the acquisition pipeline what's kind of your -- what should we expect in terms of pricing and what's kind of your expectation when we start to see some upward movement in cap rates?

H. Eric Bolton

Well, I mean, so far it hasn't really transitioned into the actual -- the cap rate market as far as we can see. And we continue to see deals in this past quarter that we were losing in the large markets that were trading somewhere between 4.5 to low 5 range. And the secondary market trading anywhere from 5 to 5.5 range for the kind of product that we're looking to buy. And so while NOIs are remaining pretty healthy, investor appetite is certainly very healthy despite the fact that interest rates have moved up a little bit, it hasn't really translated into any material -- certainly, material change in cap rates. We haven't really seen any change whatsoever, continue to -- in the properties that we're taking the market to sell, older properties in some of these secondary markets. I mean, they're moving fine and we've sold 4 properties so far this year at an average cap rate of 6 8. This is a 25-year-old product in small market. So no real change.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Just a second question, as a bigger picture question. As you looked across your markets, obviously supply ramping, when do you expect supply across your markets to peak? And then given that we've seen a little bit of backup in the multifamily housing start numbers here, what's kind of the expectation for peak supply across your markets?

H. Eric Bolton

I think it's going to be 2015, late 2014 and then sort of first half of 2015 .

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

And just a follow up to that is how are you managing accordingly? I mean, is it -- is there an apprehension starting new developments and focusing more so in acquisitions? And can we see a reacceleration in development than in '15?

H. Eric Bolton

Yes, I think this -- we're not planning to ramp up any more development, that's for sure. We think the best thing to do is be in a position to be on the sidelines ready to buy some of this product that gets delivered in late '14 and '15. That probably doesn't pencil out as well as a lot of people were hoping. And I think that it very well could be that by late 2015, 2016 that getting back into traditional development for a couple of years may make sense, we'll have to look at it at that point in time, but that's how we're preparing for it.

Operator

Our next question or comment comes from the line of Haendel St. Juste from Morgan Stanley.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

I wanted to follow-up on an earlier question. Eric, you mentioned that move-out to renting remained consistent in the 7% range, relatively unchanged in the last couple of quarters. But there continues to be a substantial amount of buying from the institutions in the Sun Belt markets. And it does take some time, 3, 4, 5 months for the homes to be renovated and rented. So I'm curious if you think the 7% is a bit of a ceiling? And how much higher do you think that number could go up?

H. Eric Bolton

Well, I don't think it goes a whole lot higher, Haendel. I mean maybe it goes to 7.5% or something, I don't know. I continue to believe, very much, though, that people make a decision on renting a home versus renting an apartment based on a lifestyle decision. And I think that a lot of people who are interested in renting these homes are folks who are previous homeowners become accustomed to that lifestyle and want that kind of product. The people that we're renting to by and large are sort of young professionals. And they're really not wanting that kind of a lifestyle. So I think that -- my point is -- the point I was trying to make in my call, or comments earlier, is our long-term run rate for many, many years was somewhere in the 4% to 5% range. We saw it kind of move up to 6% -- to 7% in the last year. So I just don't see it moving a whole lot more than that.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

You also mentioned that you think the U.S. Texas markets should be able to absorb the supply fairly well. Curious as to your view on the supply versus job dynamics in some of your Southeast markets, places like Charlotte, Raleigh, et cetera.

Albert M. Campbell

Now, Charlotte looks well-suited for it. Raleigh is one that's been a little bit of a surprise for us. It's at 5:1 ratio right now. And frankly, we would expect it to be a little bit softer. But it has worked very well. We've got an effective rent growth of close to 5% there and it's chugging along. I think the interesting dynamic on this is really job growth coming in 2014 for our Southeast secondary markets. And that they will begin to come to the table a little more aggressively as job growth really picks up in 2014.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

One last one. You talked about no real change in buyer underwriting or cap rates here in the last 60 days. Curious if you're seeing any change -- or I guess no real change in cap rates, but I'm curious if you're seeing any change in buyer underwriting. And if so, how much of that has that changed?

H. Eric Bolton

Not for what we've seen, no real change. I think that we track all the deals that we don't get and try to understand as best we can what was it that the buyer that got the deal from us. Were they willing to accept a lower return? Or were they forecasting higher rent growth, what? Just what was it and we obviously can't get into all those. We don't get all that information. But I -- we haven't -- I mean, I think that to some degree it's probably people getting a little bit if their debt cost to capital cost are moving up a little bit and all things being equal the IRRs being the same requirements and so forth, I just assume they're being a little bit more aggressive on exit cap assumptions or rent growth assumptions or something, I don't know. But I think that broadly, the investor appetite just remains so high for this product type in both large and secondary markets that they're covering the difference somehow.

Operator

Our next question or comment comes from the line of David Bragg from Green Street Advisors.

David Bragg - Green Street Advisors, Inc., Research Division

My questions have been answered.

Operator

[Operator Instructions] I'm showing no additional audio questions at this time. I'll turn the conference back over to you.

H. Eric Bolton

Okay. Well, thanks, Howard. We appreciate everyone joining us this morning and we'll be talking to you soon. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

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