Mid-America Apartment Communities Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 7.13 | About: Mid-America Apartment (MAA)

Mid-America Apartment Communities (NYSE:MAA)

Q3 2013 Earnings Call

November 07, 2013 10:00 am ET

Executives

Leslie Bratten Cantrell Wolfgang - Senior Vice President 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

Ryan H. Bennett - Zelman & Associates, LLC

Robert Stevenson - Macquarie Research

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

Omotayo T. Okusanya - Jefferies LLC, Research Division

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

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

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

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

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

Carol L. Kemple - Hilliard Lyons, Research Division

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

Operator

Good morning, ladies and gentlemen, and thank you for participating in the MAA Third Quarter 2013 Earnings Conference Call. The company will 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, Corporate Secretary. Ms. Wolfgang, you may begin.

Leslie Bratten Cantrell Wolfgang

Thank you, Stephanie. And good morning, everyone. This is Leslie Wolfgang, Corporate Secretary for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.

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 Safe Harbor language included in yesterday’s press 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.

I'll now turn the call over to Eric.

H. Eric Bolton

Thanks, Leslie, and good morning, everyone. I'd like to start my comments this morning by expressing my appreciation for all the hard work over the summer months by our folks at MAA and Colonial. We obviously had a busy summer, as our most active leasing season was also highlighted by quite a bit of work surrounding the integration of our company's operating and reporting systems, ensuring we were ready to execute as the combined company upon closing our merger. Advisers for both companies did a terrific job, and the merger transaction was successfully closed on October 1. Our property associates and the entire management team from both companies really pulled together, and we are now successfully up and running as a combined operation.

As noted in our earnings release, both MAA and Colonial portfolios ended the quarter with strong occupancy, and as a result, we are well positioned for the fall and winter leasing season. I'd also like to thank Tom Lowder and the entire Colonial management team for their hard work and enthusiastic support in positioning our now combined company for a strong start.

As reported in yesterday's earnings release, MAA's core FFO per share for the third quarter was $1.25 and at the top end of our guidance range. MAA's same-store NOI performance of 4.6% was in line with our expectation, and the outperformance in FFO was due to a combination of better-than-expected lease-up in our development pipeline and lower-than-expected interest cost. The midpoint of our forecast range for 2013 growth in same-store NOI of 5% has remained consistent all year.

As expected, during the quarter, leasing conditions continued to support more robust performance from our large market segment of the portfolio. Houston, Dallas, Austin, Atlanta and Nashville all delivered solid revenue results. Sluggish employment conditions in Memphis and Little Rock held back rent growth and impacted our Secondary Markets segment of the portfolio in the third quarter. We continue to believe that as we head into next year, as new supply deliveries are likely to generate some moderation in pricing power, our Secondary Markets segment of the portfolio will provide a stabilizing influence on the overall portfolio performance.

Next year's outlook for the ratio of new jobs to new unit deliveries is in the 8:1 range for our large market segment of the portfolio, which is consistent with this year. While the secondary market segment is forecasted to move from jobs to new units, ratio of 6:1 this year to well over 10:1 in 2014.

We were encouraged with the continued low resident turnover in Q3, as we turned only 1% more units in the third quarter this year as compared to Q3 of last year. On a rolling 12-month basis, turnover remains low at 57.6%. Move-outs to buy a house remained right around 20% of our overall move-outs, consistent with what we've seen from the last several quarters. Likewise, move-outs to rent a single-family home continued to hover in the 6% to 7% range of total move-outs. These numbers have been consistent for several quarters now.

While it wasn't officially part of our operation in the third quarter, I wanted to also provide a little color on the Colonial same-store portfolio in Q3. The portfolio captured year-over-year revenue growth of 4.7% in the third quarter, with the best performances coming out of Atlanta, Austin, Dallas, Charlotte and Charleston, as each of these markets exceeded the average rent growth performance of the portfolio. Same-store occupancy made a strong recovery from the end of Q2 and ended the quarter at 96.4%, a 150 basis point increase.

As expected, during Q3 there was some cleanup in final accruals and merger-related closing activities in the expense area, as same-store operating expenses came in high at 10.3%, a combination of onetime incentives and leasing commissions put in place shortly after the merger announcement and real estate taxes pressured expense performance in the quarter. We expect all expense line items to normalize in Q4, with the only continued pressure coming from real estate taxes.

We remain comfortable with the original assessment surrounding the expense synergies and opportunities to be harvested over the next few quarters from our merger with Colonial. We're well underway towards completing systems integration activities and reworking a number of contracts and processes that we expect will benefit both profit-level NOI results and overhead cost. The 4 development projects acquired through the merger are all on track, with leasing now underway at Colonial Reserve at South End in Charlotte and Colonial Grand at Randal Lakes in Orlando. In addition, we now have the vast majority of the remaining Colonial commercial assets and nonproductive landholdings currently in the market for disposition, and we'll be working to recycle this capital into productive multi-family assets over the next year.

As outlined in our supplemental schedules to the earnings release, leasing continues to go very well at our existing MAA development and lease-up properties. In particular, our lease-up in Charleston has performed well ahead of our expectation, with 170 of the 270 units delivered during the quarter and 231 or 86% of the units already pre-leased or occupied at this time. I will provide you with more details on this update of the balance sheet, but we are pleased to complete our inaugural bond offering in October. The transaction was well received and we believe our now combined balance sheet is in terrific shape. As we continue to drive higher levels of earnings productivity out of the capital on the former Colonial balance sheet, we look to build on this balance sheet strength.

In summary, it was a busy quarter. We're excited to have the merger officially closed and are optimistic about the opportunities surrounding the combination of MAA and Colonial. As the current real estate market cycle continues to play out, we believe our enhanced portfolio and full cycle portfolio strategy, supported by strong operating platform, puts the company in a terrific position to continue to drive higher margins and more value from our existing asset base. Additionally, we believe that over the next couple of years, there are going to be some good opportunities to opportunistically deploy capital. Our planned capital recycling activity and solid balance sheet position puts MAA in a terrific position to support this effort.

That's all I have in the way of prepared comments. And now, I'll turn it over to Al.

Albert M. Campbell

Thank you, Eric. And good morning, everyone. I'll provide additional color on the company's third quarter earnings performance, balance sheet activity and on updated guidance for the fourth quarter. As mentioned in the release, given the October 1 close of the Colonial merger, third quarter results reflect only MAA activity with combined reporting beginning in the fourth quarter. There will, of course, be a good bit of noise from the merger in the fourth quarter, but we're going to work very hard to provide as much detail and clarity as we can to help project the combined company performance for the remainder of the year. We will discuss this a bit further in a moment as we address revised guidance.

Core FFO for the quarter was $55.4 million or $1.25 per share, which represents 9.6% growth over comparable results for the prior year, and was $0.04 per share above the midpoint of previous guidance. The favorable FFO performance for the quarter was primarily produced by leasing activities running well ahead of plan for the lease-up and development pipeline adding about $0.02 per share and some lower interest expense for the quarter due to the timing of the planned bond transaction, adding an additional $0.02 per share.

As Eric mentioned, performance from the same-store portfolio was in line with expectations, as same-store NOI grew 4.6% for the quarter, based on 4% growth in revenues and 3.3% growth in operating expenses. Continued rent growth and strong occupancy levels drove revenue performance, with real estate taxes being the primary area of the expense pressure for the quarter, as we continue to see increases in key states such as Texas and Florida. The real estate tax expense for the third quarter grew 13.5% over the prior year, based on the 7.5% to 8% growth rate projected for the full year this year, combined with the impact of a tough comparison of last year's 2.5% growth in the third quarter.

Year-to-date same-store NOI increased 5.9% based on 4.4% revenue growth and 2.3% growth in operating expenses. We closed no acquisitions during the third quarter but following quarter end, we acquired one additional new community located in Fredericksburg, Virginia, a 251-unit Haven at Celebrate, which will be operated as Phase 2 of Seasons at Celebrate, one of our existing communities purchased in 2011.

Following this transaction and the gross purchase price of acquisitions year-to-date is $148.8 million including the 2 communities purchased from MAA's joint venture fund. We also sold 4 communities during the third quarter for total growth proceeds of $46.9 million and one additional community following quarter end for $10.4 million in proceeds. These transactions bring year-to-date sales proceeds at just over $131 million from 9 communities averaging 26 years of age and representing a weighted average cap rate of 7.2% based on in-place NOI after deducting a 4% management fee and $350 per unit in CapEx reserves.

With these combined sales for the year, MAA exited 5 Secondary Markets segment, including Melbourne, Florida and Athens, Thomasville, Lagrange and Valdosta, Georgia. Progress on the company's lease-up and development pipeline continued during the third quarter, with one community, Cool Springs in Nashville, fully stabilizing. And with the 3 remaining completed communities all achieving over 90% occupancy during the quarter and projected to be fully stabilized in the fourth quarter, which we defined as greater than 90% occupancy for 90 days.

We now have 2 MAA communities remaining under construction, with an expected total cost of $74 million for 564 units. We funded an additional $5.3 million in construction cost for these communities during the third quarter.

With the Colonial merger, we also acquired 4 additional communities under construction. The total construction pipeline now consist of 1,731 units and 6 communities, with a total expected development cost of $236.5 million, of which $93 million remains to be funded. We do expect to find an additional $28 million on multi-family construction during the fourth quarter.

We completed a renewal of the company's unsecured revolving credit facility during the fourth quarter. We improved the terms and increased the borrowing capacity to $500 million, with the option to expand it to $800 million, and extended the maturity by almost 2 years to late 2017. This expansion was an integral part of our plans to complete the Colonial merger and to support the larger company scale in the future.

Also, following the end of the quarter and the closing of the Colonial merger, we completed our planned inaugural unsecured bond offering. We are very pleased with the market perception. We are able to execute a very successful financing, despite a volatile market backdrop. We issued $350 million of public bonds with a 4.3% coupon price at 99.047% of principal, and we settled at $150 million in forward interest rate swaps we had earlier this year, as part of the planned financing. Effective interest cost of the financing is 4.15% over the next 10 years, and the proceeds were used to pay off all of the borrowings on a revolving credit facility.

Our balance sheet ended the quarter in great position. The company leverage, defined as net debt to gross assets, was 40.8%. Total leverage was 6x recurring EBITDA, and MAA's fixed charge coverage ratio, defined as recurring EBITDA to interest expense was 4.7x. With the closing of the merger and completion of the bond deal on October, MAA's balance sheet further strengthened. Our leverage levels remained essentially the same, but unsecured debt, unencumbered assets and fixed rate protection all increased. And at the end of October, over 60% of MAA's assets were unencumbered. Secured debt was less than 25% of gross assets, and 98% of outstanding debt was fixed or hedged against rising interest rates, with an average maturity of 4.8 years.

Finally, we're providing updated guidance for the fourth quarter reflecting combined company results. And the full year performance for the company will be comprised of 9 months of MAA stand-alone activity and 3 months of combined activity for the fourth quarter. There will be a good bit of noise in reported earnings for the fourth quarter, so we're giving guidance on a core FFO basis, which excludes merger-related and certain other items with the goal of providing more clarity and comparability to prior periods. Also, we've added a fair amount of detail on our supplemental data schedules with the press release to help model a combined company performance.

Core FFO for the fourth quarter is projected to be $1.09 to $1.19 per share, which is $1.14 at the midpoint. Based on average shares of about $79.3 million following the merger. This is $0.06 per share below previous stand-alone guidance, which is in line with our expectations for the combined company, given the nonproductive development pipeline and the land bank acquired from Colonial, as well as the remaining synergies to be captured at the next 15 to 18 months. Full year core FFO is projected to be $4.81 to $4.91 per share, which is $4.86 at the midpoint.

We're maintaining the midpoint of full year NOI guidance for the legacy MAA same store portfolio at 5% based on revenue growth of 4% to 4.5% and expense growth of 3% to 3.5%. We expect the legacy Colonial portfolio to produce revenue growth in the fourth quarter of 3 1/4% to 3 3/4%, which would equate to a full year revenue growth of 4 1/4% to 4 3/4%, which is within previous guidance ranges provided. NOI is projected to grow 2.5% to 3% for the fourth quarter, mainly due to operating expense growth of 4.75% to 5.25%, primarily related to pressure from real estate taxes.

We now expect acquisition volume to be $175 million to $225 million for the year, and disposition volume to be $131 million, which is the current year-to-date total, as the remaining disposition plan for the year is now expected to close in early 2014. We expect G&A and Property Management expenses combined for the fourth quarter to be $14.5 million to $15.5 million, excluding merger and transition cost, which reflects about half of the expected synergy capture on a run-rate basis for the year.

Total combined transaction cost related to the merger are still expected to be about $60 million in total, with around half projected to be incurred during the fourth quarter.

Also, we expect to record a mark-to-market adjustment related to the assumption of the Colonial debt balances of around $90 million, which will be amortized over the remaining life of Colonial's outstanding debt, or about 4 years, and will be excluded from the calculation of core FFO.

AFFO for the full year, defined as core FFO less recurring capital expenditures, is projected to be $4.20 to $4.30 per share, and our current annual dividend rate is $2.78 per share.

That's all we have in the way of prepared comments. So Stephanie, we'll turn it over to you for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ryan Bennett with Zelman & Associates.

Ryan H. Bennett - Zelman & Associates, LLC

Thank you for the color in terms of the Colonial portfolio as of the third quarter. I was just curious if you could provide some more color in terms of your top 4 pro forma markets and how Colonial's assets performed relative to MAA's legacy assets in the third quarter.

Thomas L. Grimes

Sure, Ryan. It's Tom Grimes. They're probably tough markets for Austin, Charleston, Atlanta and Dallas. And they did well in those markets, Austin was 7 2, Charleston 7 1, Atlanta 6 8 and Dallas about 6 3.

Ryan H. Bennett - Zelman & Associates, LLC

Got it. And that was on a revenue or NOI?

Thomas L. Grimes

That's on a revenue basis.

Ryan H. Bennett - Zelman & Associates, LLC

Got it. And then I guess in terms of the guidance for Colonial going to the fourth quarter it does seem to be substantial deceleration on the revenue front. Is there any particular markets that might be driving that into the fourth quarter here, given that occupancy is relatively high?

Albert M. Campbell

Well, first, let me just address that the deceleration that Tom gives some color on the markets, but if you look at the full year as a whole, I think both Colonial and -- and we have projected continued growing revenues with some slight moderation in the fourth quarter. So, I mean, I think if you look at the guidance, the midpoint of the fourth quarter revenue is 3.5%, which is slight moderation, but pretty strong still. And so, I'll let Tom give color on where that's going to come from.

Thomas L. Grimes

Just on an overall basis, the portfolio is 95 5, with just 8% exposure, which is vacancy plus unnoticed, and traffic is strong. So we sort of feel like the portfolio as a whole, both Colonial and MAA, well positioned for the fourth quarter and pricing for 2014.

Ryan H. Bennett - Zelman & Associates, LLC

Okay. Got it. And then just in terms of your asset sales that you've completed since the end of the second quarter. Can you give us pricing on those assets in particular, instead of just the pool to date and how that pricing came in relative to your expectations?

Albert M. Campbell

Yes, this is Al. We sold the 4 assets. And I think they came in all pretty close to expectations. And we've been working those for quite a while. We sold Marsh Oaks in Jacksonville for $7.1 million, Three Oaks in Valdosta for -- right at $12 million. Wildwood in Thomasville, Georgia, for just short of $13 million and Shenandoah Ridge in Augusta, Georgia, for $15 million.

H. Eric Bolton

I'd put the cap rate on those somewhere around 7.5 or on a blended basis for all 4 of those.

Albert M. Campbell

That's right, for average 30-year-old assets.

Operator

Our next question comes from Rob Stevenson with Macquarie.

Robert Stevenson - Macquarie Research

Al, can you just help a little greater detail, sort of reconcile those sort of $1.25 core FFO in the third quarter down to the $1.14 midpoint of the fourth quarter. I assume that there's some seasonality. There's probably some dilution from the merger. And then what else sort of feeds in to the decline on a sequential basis?

Albert M. Campbell

Yes. Great question, Rob. First of all, let me say that the majority of outperformance in the third quarter was sort of onetime items. It was the quick lease up on development that got there faster than expected, but the overall run rate is what we expected. So that's sort of a onetime kick. And then the interest expense was sort of onetime kick of its timing of the bond that we ultimately did it, we just did it a little later than we thought we would, so had some savings in the third quarter.

Robert Stevenson - Macquarie Research

How much was that combined you think?

Albert M. Campbell

$0.04, those -- $0.02 a piece so that's about it. So that was really -- we had $1.21 was our guidance, our midpoint for the third quarter. So that really provided that addition. So if you look at what we gave as guidance originally for the fourth quarter, it was $1.20 per share, Rob. And so now we're at $1.14, I'll tell you that virtually all of that is the Colonial merger. And really, what that is, as expected, you've got continued synergies that we're going to capture. We did state $25 million. We feel confident in that. We captured, I think in the fourth quarter we expect to capture about half of that on a run-rate basis as we'll start to see workforce reduction, systems changes things like that, but we'll still have [indiscernible] to capture over the year. Obviously, we acquired the development pipeline, which we paid over $100 million for and is not yet productive. We expect to make that productive and as we sell non-core assets or land bank over the next couple of years, that will be productive. So the point I'm making is $0.06 dilution in the fourth quarter is the widest range that you'll see, and we would expect to see that narrow each quarter as we continue to work through those plans.

Robert Stevenson - Macquarie Research

Does the Colonial portfolio go into the same-store immediately?

Albert M. Campbell

No, we'll probably -- we'd obviously be reporting combined results. But technically, we'll not go into same store because we defined our same-store for our SEC reporting. So what you'll see us do is call it consolidated results and have some language actually work through that, but we will, on a technical basis, have to keep it out of same-store, but we'll give you the information to help you see it combined and separate life cycle.

Robert Stevenson - Macquarie Research

So the same-store going forward, until what, a year from now until the fourth quarter?

Albert M. Campbell

Yes.

Robert Stevenson - Macquarie Research

Will wind up being the MAA legacy portfolio?

Albert M. Campbell

Yes, that's right. But for modeling purposes, we're going to give you plenty, Rob, to help you [indiscernible] if you wanted.

Robert Stevenson - Macquarie Research

And then can you talk about how the revenue expense and NOI guidance you guys are given for the Colonial same-store portfolio differs from the legacy MAA portfolio in the fourth quarter? Are those ranges fairly consistent with the MAA? Or are you doing better in the MAA's on expenses and revenue? Can you sort of provide some color there?

Albert M. Campbell

I would say it's pretty close and the 2 -- the main stories are: One, slight moderation of revenue that we had predicted the same for the full year. And the real story is though expenses. It's taxes where we both had a strong, tough tax number in the back half of the year as we had growing expenses that continued to grow as we move through the year and got sort of bad news on taxes and we both had sort of favorable comparisons, favorable situations last year that would create a tough comparison this year. So stories from both are both very similar. Revenue is about as expected. Slight moderation fourth quarter but very bad tax expansion for the quarter.

Robert Stevenson - Macquarie Research

And then, are you guys planning on starting in the development spend guidance, is there any new starts there in the near-term?

H. Eric Bolton

Rob, this is Eric. Nothing near term that we're planning to do at this point. We're focused on getting productive the pipeline that we've got right now. There's one development site that Colonial has down in Orlando that we're taking a hard look at and thinking about if we want to do anything on that next year. But frankly, the other development sites, we're all looking to sell them at this point.

Robert Stevenson - Macquarie Research

Okay. And then what's -- on the current pipeline, what's the expected stabilized yield on a combined company development pipeline?

Albert M. Campbell

It's pretty similar. We've always stated, we said 7% to 8% range, Rob, we feel comfortable of that on the combined pipeline.

Operator

Our next question comes from David Toti with Cantor Fitzgerald.

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

This is Gaurav Mehta with David as well. A couple of questions on your guidance. So you talked seeing real estate expense pressure, but at the same time, your -- the insurance expense guidance have been lowered a couple of times this year. Can you talk about what's offsetting real estate taxes?

Albert M. Campbell

Yes. I mean the other items and everything, personnel, the big items in our, obviously, the strongest contributor are personnel, repair, maintenance, utilities and all those. And we expect those to be modest growth and not significant pressure. It's all a pressure from taxes.

H. Eric Bolton

We've also done some -- moving more and more of our leasing online and do a lot more sourcing of traffic online so our marketing costs are coming down. And frankly, as Al said, to really offset some of the pressure on real estate taxes, it's been really across the board from personnel all the way down to landscaping, trend and utilities have been positive as well.

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

Great. Second question I have is on the synergies. So you talked about $25 million in expected overhead savings. And then you also said that you expect additional savings from efficiency. Are you going to quantify that at all how much you're expecting?

Albert M. Campbell

The second portion -- Gaurav, help me on the second portion of that question, savings from what on the second portion? I didn't get that.

Gaurav Mehta - Cantor Fitzgerald & Co., Research Division

So you also talked about that you expect additional savings in addition to $25 million. Are you able to talk about that? Are you able to quantify how much you're expecting?

Albert M. Campbell

I'll tell you, we'll have a lot more to say about that when we put out our '14 guidance. Honestly it's in the NOI area, we're in the process of renegotiating a lot of contracts from property and cash to insurance to buying paint to buying appliances. And so all that work is underway at the moment. And as we cobble together our '14 guidance and finalize our budgets, we'll have a lot more to say about the opportunities beyond the $25 million that we've talked about.

Operator

And our next question comes from Tayo Okusanya with Jefferies.

Omotayo T. Okusanya - Jefferies LLC, Research Division

Just going back to the acquisition. Now that the deal is now complete, could you talk a little bit about versus when you initially underwrote the deal and when you've closed, if there were any material changes and ran expectations or anything of that sort?

H. Eric Bolton

No. I'll tell you, Tayo, not really. We knew the company pretty well. And probably the only thing that was different than when we started the conversations earlier in the year was the fact that they continued to sell off some of their commercial assets, and -- sold One Ravinia, which is roughly a $90 million office project in Atlanta and we continued to -- they've been very focused on continuing to get focused solely on the multifamily assets. And so we -- they sold a few more commercial assets than when we started conversations. But as far as the multifamily assets and balance sheet in general, there really was no surprises in terms of what we found or the underwriting that we assumed and how we ultimately closed the transaction.

Albert M. Campbell

I'll just add to that. On the assets, they did sell, Tannehill in Birmingham, which was addition to what you guys have seen from the third -- from the second quarter report. So I'll just continue the progress that Eric has mentioned. So the revenues combined company are well less than 2% from commercial now.

H. Eric Bolton

And I'll add. I mean we're continuing that effort. Virtually every commercial asset that they owned is in the market right now for disposition.

Omotayo T. Okusanya - Jefferies LLC, Research Division

Okay, and that's helpful. And then in some of the Southeast markets where in a combined basis, you guys really are particularly large. Any thoughts on maybe the exposure in those markets, a little bit too heavy and probably rationalizing from a bad exposure?

H. Eric Bolton

We're going to be looking at that as part of our '14 plans. I mean we're pretty big in Dallas at this point, a little over 10% of the portfolio. Charlotte is a big market for us. And my guess is that you -- there will be some recycling going on next year as we continue to move out of lower margin investments into higher-margin investments. But yes, we're certainly sensitive to the weightings that we have in various markets now. And we generally like to not be much more than 10% in any given market. And so if there was a market to be heavy in, Dallas and Austin are not balance to be heavy in, but we'll look to probably cycle a little bit there.

Operator

Our next question comes from Rich Anderson with BMO Capital Markets.

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

So just want to understand by what you mean half of the synergies of the $25 million getting reflected in the fourth quarter. Do you mean -- you don't mean $12.5 million? Do you mean the run rate of $25 million? Half of that, right?

Albert M. Campbell

$3 million to $3.5 million, Rich, exactly right. That's a run rate basis that will be half.

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

I figured that. I just wanted to make sure. And from the standpoint of other savings to an earlier question about renegotiating contracts and that type of stuff. Are you expecting any of that to hit in the fourth quarter?

Albert M. Campbell

There will be a little bit of it as we started. I'll give you one example, as our property-casualty insurance, we expect significant savings next year as we redo the whole portfolio. By the end of the third quarter we did bring them on to the same platform, and we'll get somewhere $0.005 to $0.01 from that. So there's beginning to already be some impact from that. I think it will be much larger next year as we [indiscernible].

H. Eric Bolton

And Rich, I'll tell you, there's really 2 areas that we're working to sort of finalize and monetize our forecast. One is just the NOI area that Al is referring to, which includes property and cash and all the other things I was mentioning earlier. The second area of opportunity is in the area of sort of redevelopment opportunity within the portfolio. As you know, we've had a fairly active sort of interior redevelopment initiative within our operation and Colonial has not. And as we've now visited almost every property, we see some meaningful opportunity there. And so we'll be moving that program into the Colonial portfolio, and we think that that's going to be some real opportunity over the next several years frankly. But exactly, the impact for next year will have, as I say, a lot more to say about that here when we release Q4 earnings.

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

If we were just to take a shot at modeling this, so let's just say $25 million of overhead synergies, a G&A-type number and then another, I'm just using a number, $25 million of other savings. If you have $50 million of total savings, how much of that $50 million would be a sort of a same-store impact, and how much would be outside of that?

H. Eric Bolton

Well, let me say it this way, Rich. I mean I wouldn't -- we're totally not in a position to say we're going to have a $25 million additional on top of that. But let me just say this, if you take the additional NOI you're just talking about, the potential redevelopment opportunities and also the additional income we're going to expect to pick up from leasing up the development pipeline that's not earning right now and from the recycling assets over the next several years, there's -- we think $0.30 to $0.45 per share opportunity in all of those things combined. We haven't yet -- we're not yet ready to break out the components and talk specifics. We'll give you a lot more color in Q4 as we release our...

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

$0.35 to $0.40 of total savings including the $25 million?

H. Eric Bolton

Yes, we're not -- that's leasing up the development pipeline, monetizing the assets and all, and the NOI additions and the real -- that program, all of that together but, yes.

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

Got you. So it's some revenue, some cost savings. In terms of supply, Eric, you mentioned the supply potentially being a headwind for you in your primary markets next year. I mean, wouldn't that also be a significant problem for where the CLP portfolio is situated, that supply would be an issue, even maybe more so with them than they would from the legacy MAA portfolio?

H. Eric Bolton

Yes. I mean, clearly, Colonial has a bigger presence in larger markets but let me give you some perspective on this. When we talk about supply pressure, of course, it's pressure only to the extent that there's not jobs there to absorb the supply. And we use these jobs to supply a ratio as sort of a barometer to make an assessment of how weak or how strong the market's going to be and how much pressure you're going to get from supply. And you look at the large markets segment of the portfolio, both on a combined basis, the ratio of job growth to supply trends -- and this is using economy.com and Reis and maybe all the same services that everybody uses. So these are not our numbers, but the ratio in the large markets segment this year is 8:1. Next year, in the large markets segment, it's 8.5:1. And so it's hard to get anxious about a real supply problem at this point, assuming -- this is an important assumption, assuming that we continue to get steady job growth. And so the idea that the large markets are headed for some sort of cliff, I think is a tremendous overstatement. I think that some moderation is to be expected, and of course, it varies a bit by market. But in aggregate, the ratios are pretty comparable next year to where we are this year. I think what's more important to also recognize is the secondary market component is different, and that's why we have this component in our portfolio because these segments of the -- the other portfolio of these markets don't get the supply pressure. These markets though are also very dependent on job growth, they don't get a lot of supply, but they need job growth to get -- to absorb what little supply they do get. If you look at the secondary markets this year, that ratio in 2013 is about 6:1. Next year, it's going to jump to over 10:1. And so, again, it's hard to -- we think the secondary markets are going to be -- do exactly what they're supposed to do as we get into '14 and '15.

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

But, I mean, of those 6 or 10 jobs, how many of them are really career-oriented jobs, and how many are crossing guards?

H. Eric Bolton

So, I mean, in places like Charleston, it's Boeing. In places like Chattanooga, it's Volkswagen. In Savannah, it's Gulfstream and General Dynamics. I mean, these secondary Sun Belt markets have envious quality manufacturing jobs coming to them. I don't think we have any crossing guards, I'm not sure.

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

Okay. Just 2 quick final ones. Commercial sales, what's the -- what do you -- I should know this but just the value of that -- I know it's relatively small, and what you're thinking cap rates might be from out of the commercial, Colonial's commercial portfolio?

Albert M. Campbell

I'm going to tell you, just first, Rich, as I mentioned they had progress in Tannehill for a potential $40 million in the third quarter. The other major projects, the Brookwood in Birmingham, the mall and the office, and the Norlock [ph], the project in Covington, Louisiana. Those are 2 major ones. And so I think cap rates are in that -- just over 8, somewhere in that range, I think, is what we would expect.

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

And dollar value?

Albert M. Campbell

Dollar value, those 3 projects together, you're probably talking $120 million range.

H. Eric Bolton

Yes. I was going to say that the total value for the operating commercial assets is $100 million to $120 million, excluding Tannehill, is where we have it.

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

Okay. And then lastly, do you still look at $60 million of merger-related costs in the fourth quarter?

H. Eric Bolton

We do. We stated that originally. We still feel like that's the right number. Well, it's obviously composed of legal and advisory. It's composed of debt cost, debt assumption costs, and all those things, we still feel good about that number. And let me follow-up on the synergy question you had earlier, Rich, just to make sure you understood. The $0.30 to $0.45 that I mentioned was above the stated $25 million in synergies that we talked about. That's additional earnings from those areas.

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

Okay. You said $0.30 to $0.45 of incremental over and above the $25 million of overhead savings.

H. Eric Bolton

Right. Perhaps over the next years as we work through that plan, yes.

Operator

Our next question comes from Haendel St. Juste with Morgan Stanley.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

I appreciate a lot of color surrounding the merger. I know you can't talk about a lot of the items, and are waiting to provide more detail in January. But can you help me understand on the land portion, what you're selling today in the marketplace? Who's the bidder in Sun Belt in terms of the land parcel today, how the initial conversations are going? And any round numbers you can provide about to what the pricing expectations are?

H. Eric Bolton

Well, I mean, there's the total land bank of -- we've got the value roughly around $90 million. About $30 million of it's multifamily, and about $60 million of it is office retail, various outparcels, some single-family. And we've got a vast majority of each of these parcels in the market at the moment. And pricing is -- it may follow the board. But I mean, broadly speaking, it's all coming in line with -- as you can imagine, did a lot of work in valuing this stuff before we did the merger. And so, we'll have, again, a lot more to say about it, but I think that the $90 million roughly a value that we ascribe to this portfolio, this land bank, we feel very confident that we'll be able to get that monetized.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay. And there's been no mark taken against it so far suggesting that there's just nothing but upside right here? There's going to be gains to be reported on these parcels, no impairments?

H. Eric Bolton

No, that number I gave you is the marked number.

Albert M. Campbell

Yes. I mean, understand the process, Haendel. This is Al. That what we will do is go by the process of recording these assets, what we believe is fair market value on October 1. So if everything worked out right, we'd sell it exactly for that. Hopefully, we can have some addition, but that's how we approach it. It should be fair market value on initial recording.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Got you. Okay. And curious on the recent acquisition in Fredericksburg, was it opportunistic? Did the developer come to you? And are you seeing any more anxious sellers in some of your Sun Belt markets today?

H. Eric Bolton

Well, the developer built the adjacent phase that we acquired back in 2011. And so, we had talked to him about this for some time, starting back in 2011. So, it wasn't really marketed. We, all along, had plans to buy this from him. We just wanted to give it to a certain lead status before we took it on. But in answer to your other question, yes. I think that as we begin to see some of these projects come online increasingly in 2014 and 2015, I believe there is going to be some great buying opportunities emerge out of this. We're in conversations currently with several developers on deals that they are either just starting or they are well into construction. And with talk now of more supply coming into the marketplace, we'll find developers who are increasingly wanting to talk about going ahead and doing some sort of a pre-purchase contract, which more or less allows them to get the risk off the table. And on a non-marketed basis, we're able to come in and offer them an exit, and we feel like bringing brand-new assets on the portfolio at pretty attractive pricing.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Appreciate that. And one last one. Earlier this week, we heard, maybe it was last week, one of your peers identified Austin and Raleigh specifically as higher risk markets for next year. I would love to get your assessment on these 2 markets over the near team, given that they're now top-five markets within the pro forma portfolio.

H. Eric Bolton

We like Austin and Raleigh. We certainly wouldn't categorize them as high risk but I think they're moving from fabulous to pretty darn good. Austin, this year, had 3 jobs for every 1 unit, and it will be about the same in 4 -- but it's also got, in '14, excuse me, it's got 4% job growth coming on. We feel like we won't be able to do double-digit rent growth there anymore, but it will still be stable for us. And then, Raleigh's sort of the same. It was 2:1 this year, and it's going to bump up to 6:1. It will be a little more stable but it's held -- both of them have held good rent growth so far. So they -- I think they'll back off from white-hot to just solid good high growth markets.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

And one last follow-up, if I could. Earlier, in response to a question, you mentioned rationalizing your portfolio in certain markets. The use of the proceeds -- so I presume that they will be to largely fund redevelopment, some of those redevelopment opportunities within the Colonial portfolio you talked about, or can you give us some thoughts on what the capital would be used for?

H. Eric Bolton

So it's a combination of just wherever the best opportunity is at that time. And certainly, the redevelopment opportunity's very accretive, and very accretive uses of capital, and we definitely expect that, that will be a big component of it. But as I was talking a moment ago, we are also believing and optimistic that we're going to see some great external growth, new acquisition opportunities that will be compelling as well. But we'll take a hard look at whatever the best capital deployment decision is at that time it may very well be just to continue to strengthen the balance sheet in some way, whether that is -- depending on where we're being priced in the public markets, and depending on sort of where we feel very good about where our leverage level is at this point. But we're committed to keeping the balance sheet very strong. So it's hard to -- I mean, we'll, again, have a lot more to say about planned capital deployment for 2014 as we get our forecast together but there will be -- I'm sure we'll be able to put the recycled capital work in an effective manner.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

And stock repurchase will be on that menu of consideration as well?

H. Eric Bolton

If it makes sense.

Operator

And our next question comes from Karin Ford with KeyBanc Capital Markets.

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

Wanted to ask first about the MAA legacy portfolio. You said the performance in that portfolio was generally in line with your expectations in the third quarter. So can you just talk about what you saw coming in the fourth quarter that made you lower your same-store revenue growth midpoint by 25 basis points?

Albert M. Campbell

Yes, I mean, I think we just saw -- at the beginning of the year, we've put the guidance out, saying that we would see a modest decline of revenues in the back part of the year, we saw that. But we also saw a decline in the expenses offsetting that, Karin, so I'm going to think we would say NOI growth at the midpoint is exactly the same, and we just took the top end of the range down a bit it on the revenues and then, the same on the expenses.

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

Okay. And can you just give us some color on what you saw trend-wise in October from a rent standpoint?

H. Eric Bolton

Sure. For the consolidated company, the rents -- the asking rents were up about 5%. And then, does that answer your question?

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

Yes, and how did they trend from, say, August, September into October?

H. Eric Bolton

We don't have combined numbers on that in terms of the both companies together but...

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

Just the MAA legacy is fine, if you can give us that.

H. Eric Bolton

Yes, no problem. MAA legacy on the trend basis was -- bear with me just a second, I've got it.

I think broadly speaking, our rent growth has been in that 4% to 5% range, which is in line with the revenue guidance that we gave for the year. I mean, this year for the most part, our revenue result was all driven by rent growth, and so we've been seeing 4% to 5% sort of rent growth throughout the course of the year. And as Tom just mentioned, I mean, asking rents in October were up 5% year-over-year, now that's on a consolidated portfolio. I would expect the MAA component of that to still be in kind of that...

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

Around the same range?

H. Eric Bolton

Right around the 5% range as well.

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

Okay. That's helpful. Next question's just on Colonial. What quarter do you guys think that $0.06 dilution number that you have in 4Q, when do you think that will turn positive next year?

H. Eric Bolton

I'd say, Karin, it's really hard to say because it's a function of not only getting the sort of the NOI opportunity fully captured, but it's recycling capital. So it's selling properties and it's buying properties, and absolutely timing those transactions and telling when that's going to happen is hard to say. We think that the synergy component will be fully realized by the end of next year. We think that the opportunities surrounding the recycling of capital is a function of the transaction markets and it's really hard to predict that, it could be a 12 to 24-month period of time, it's just really, really hard to say. I will say this though, that the $0.06 of dilution goes down from here on a per quarter basis because we are realizing opportunity every quarter. And so, this quarter is the biggest gap we have in terms of dilution and as a result of the nonproductive assets and the development pipeline. As we continue to lease-up the pipeline, it all starts to become more productive every day. And exactly when it turns positive, it's hard to say. But, again, we'll have a lot more clarity on that as we put out our plans for '14.

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

Eric, I think you said when you announced the merger that you thought that Colonial would have better growth than the MAA legacy portfolio next year. Now that you've gotten to know the portfolio a little bit better from here, do you still believe that, that'll be the case?

H. Eric Bolton

I believe that the markets that Colonial brings to the portfolio tend to be higher job growth markets on a balanced basis. They are a little bit more exposed to supply because they are the large markets. But as we've said all along, I mean, our whole approach is built around the idea of trying to establish a, what we refer to as a full cycle performance profile. You may call it a balanced profile, but we think it's appropriate to weigh capital in large markets where you perhaps have a little bit more exposure to supply, but you also get the benefits of more robust job growth. And I allocate a portion of capital to secondary markets where you're not as exposed to supply but you're more dependent on job growth. And so, we're trying to weigh both sides of the equation a little bit in an effort to create this full cycle profile. Now, having said that, Colonial brings a ratio of sort of large to secondary, moves up from about 55, 45, large, 45, secondary, that is based on legacy MAA to now roughly around 60-40 large as a result of the -- 60% large and 40% secondary, as a result of this combination. And so we think that on balance, we are a little bit more exposed to higher growth markets as a consequence of the merger, and we're glad of it.

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

And last question for me is what are you guys thinking in terms of property taxes for next year? Do you think that you'll still be under pressure from a lot of your municipalities, or do you think that will start to ease in 2014?

Albert M. Campbell

I think -- this is Al. I think you'd see a little bit of easing -- I mean, I think the important thing is to look at taxes over the long term. In the last 6 years, it's [indiscernible] this year, let's call it 8% growth. They've grown 6 years, 2%. And so I think, definitely, over a long term, a more modest growth pattern will definitely -- we would expect that we're at the peak of the pressure. So we're not yet ready to put out guidance for next year, but we believe we'll see some moderation next year and we'll put more color on that in the next year.

H. Eric Bolton

It won't be 8%.

Albert M. Campbell

We don't expect it to be 8%. That's what -- so we'll put that out next quarter but you should see some moderation.

Operator

Our next question comes from Paula Poskon from Robert W. Baird.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Eric, what exactly is left to do in terms of integrating either the people, the systems, the reporting structure, et cetera?

H. Eric Bolton

Well, the people portion is done. That's -- we've completed that. But one of the big steps we've got left to do is integrate the property management systems. They were on Yardi. We're on MRI. We'll be converting to Yardi on the first half of next year. We've got some consolidation to do on the AP system, the accounting and general ledger system. So a fair amount of systems work left to be done over the next 6 to 9 months.

Operator

Our next question comes from Michael Salinsky with RBC Capital Markets.

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

Eric, bigger picture question, if you look at '14 -- I mean, when you look at '14, '15 and '16, how much of the Colonial portfolio would you say is core versus kind of order assets kind of don't fit the MAA definition there? And going forward, how should we think about recycling of apartment capital over the next couple of years given the 133 that you've done -- 131 you've finished the year-to-date.

H. Eric Bolton

I would tell you that it's all core in a sense that it's markets that we want to be in. There's really no market exposure that we're being introduced to as a result of this merger that we don't feel good about. Having said that, our recycling plan is really predicated on, as it has been for MAA for a while now, rotating capital out of lower after CapEx margin investments into higher CapEx margin investments. And so I would tell you that a reasonable run rate for us is going to be around $150 million to $200 million of recycling going on every year just to ensure we're continuing to refresh the portfolio with higher margin investment. '14 will be a year that we'll be taking a look at things because as you know, we also have a fair amount of recycling that we're committed to doing in terms of commercial assets as well. And we're putting a high priority on rotating out of these commercial assets, and that there's dilution associated with that. But I would tell you that there's nothing non-core that comes from this, and really, for us, it's just going to be cycling just as a discipline, lower margin investments to higher margin investments. And now, we put that number at $150 million to $200 million.

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

Great. Second question. Within the Colonial portfolio specifically, relative to when the transaction was announced to where you stand today, how much turnover at the property level have you seen in terms of personnel?

Thomas L. Grimes

Mike, it's Tom. I mean, virtually none. We had, really, the advantage of being able to work with those property teams and then, we'll go forward multisite team. We started talking to them as early in June, and we had the multisite team combine from both companies by mid-July, and we were meeting and visiting properties on a regular basis by August. So, frankly, because of that great cooperation we had out of Birmingham, we were able to communicate with folks we have not had any material turnover that was merger-related on either side of the fence. We've got a great team going forward.

H. Eric Bolton

Other than what we had planned for, I mean, we made some changes at the multisite level but that was all done early on.

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

Just given your comments then on supply starting to taper a little bit next year in your small markets, and then being pretty comfortable in your larger markets, is there any -- how do you think about development starts -- new development starts realizing those wouldn't be until like -- until '16, probably, at the earliest, in '14?

H. Eric Bolton

Well, I would tell you that we continue to believe in our model, which is not being a big developer. Having said that, we will do perhaps a little bit, sort of order of magnitude, $150 million, maybe $200 million. But again, our model is more built around the notion of outsourcing the risk and the operation where essentially we enter into pre-purchase transactions for something that is being built by a developer that we've got a lot of confidence in. I would tell you that what we would probably be targeting mostly would be some of these more high-growth, vibrant secondary markets for that sort of activity. I've often thought about -- I mean, the idea of building in Dallas or building in Atlanta, I kind of step back and say, "Why?" I mean, let others do that. Because there's plenty of it that happens and I'd rather just be an opportunistic buyer in those markets. But take a market like Charleston as an example, where we did a pre-purchase development deal like I just described here, and we just got most of the units this quarter, and the darn thing's already 86% leased. So, I mean, it's unbelievable in some of these stronger secondary markets, what you can do because there's just not that much supplied. So, that probably would be where we would target what limited development we did do, is in some of these vibrant secondary markets.

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

Then, just finally, in terms of the market, I mean, your revenue growth, you reduced a little bit. You're seeing pressure in real estate taxes. What are you seeing in terms of asset pricing right now? Have you seen any moderation in cap rates in the last 90 to 120 days, or is it holding pretty firm there?

H. Eric Bolton

It's holding firm, Mike. We saw a little bit of noise back about 3 months ago when there was some talk about -- the Fed was suggesting that they were going to start to pull back a little bit, but the market quickly sort of got past that, and I can tell you, I mean, we're still seeing in our large markets transactions based on our underwriting trading anywhere from just under 5 to 5.5 all day long, and we're seeing transactions in secondary markets in 5.25 and 5.75 range, for high quality newer assets that we're interested in buying. So we haven't really seen a lot of change.

Operator

Our next question comes from Carol Kemple with Hilliard Lyons.

Carol L. Kemple - Hilliard Lyons, Research Division

Can you share the number of units you actually purchased from Colonial? I know it has the same store count in the supplement, but what's the total number that's not in development?

Albert M. Campbell

Just over 34,000. We could dig the exact numbers. Stabilized operating units were 34,147 and leased up, 252. So total operating were 34,399, and there was 1,167 in development.

Carol L. Kemple - Hilliard Lyons, Research Division

And then I just want to make sure I understand this right. Your projected amortization of debt, market to market, that will be included in FFO but excluded from core FFO. Is that right?

Albert M. Campbell

Yes, it will be excluded from core FFO. We're going to -- we plan to provide guidance on core FFO, Carol, because we think that's a clearer picture but reported FFO, we'll have it in there, in the part of the NAREIT definition, yes.

Operator

Our next question comes from David Bragg with Green Street Advisors.

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

Can you share your observations so far on Colonial's use of LRO, and how it might differ from how you use it, and whether or not there's any revenue growth upside based solely on that transition?

Thomas L. Grimes

Yes. I mean, obviously, they used the same system. We do, do it. We -- you operated differently, Dave. And yes, there is -- we feel like some upside on it. We tend to set some base parameters out there on what range LRO can operate in and then let it optimize asset by asset and really get it down to working on individual floor plans and individual units. Colonial tended to take a -- make that band a little tighter and force it up at certain times, which tended to dictate prices more centrally than letting the system optimize. I mean, they used it well. We just see some opportunity in tweaking that.

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

So, Tom, how could we quantify that? Do you have a view as to where their rents are versus where you think they could be?

Thomas L. Grimes

I think we've got to spend a little more time diving into the system on that before I'd be comfortable saying it's worth a percentage point of rent growth or something like that.

H. Eric Bolton

Dave, I would tell you, I mean, if you look at sort of June 30 numbers, average rent and average revenue in our portfolio was a little bit higher than the Colonial portfolio when you consider the fact that they've got a higher concentration of larger markets, you would think it would be the opposite. So I would tell you that we think that there is definitely some opportunity there, and we just -- we're not ready to quantify just yet, but we're -- it's there.

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

Next question is, can you please reconcile the outlook, I think, that you shared on potential operating expense synergies, outside of, of course, G&A and property management expense, reconcile that with the what I think was 10% expense growth in 3Q and 5% expense growth in 4Q for the Colonial portfolio.

Albert M. Campbell

Dave, this is Al. I'm trying -- let me make sure I understand your question. Are you saying -- you're trying to get a better picture of the fourth quarter and where that change is coming from in terms of run rate? Let me make sure I understand what you're asking.

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

Sure, Al. So, earlier in the call, you seem to suggest that there are other operating expense savings opportunities beyond the $25 million of G&A and property management expense savings that you expect. Please correct me if I'm wrong on that, but I thought you said that. But then we see Colonial expense growth up more than 10% in the third quarter and up 5% in the fourth quarter, so maybe it's really a margin question, what are the margins in the Colonial portfolio today and where do you think they will come out at?

Albert M. Campbell

Well, let me first -- I think what we were discussing in the first part of that was potential NOI savings above the $25 million sort of overhead savings. I think the difference there Dave, that will come over a long period of time. I mean, that's not really fourth quarter, that's more next year even into some of the following year. And so that's a longer-term picture. And talking about the fourth quarter, I think what I was trying to communicate, and I probably didn't a good job on that, was that the main pressure is taxes for both our portfolio and their portfolio in the fourth quarter. We're having about 10% increase, same for both. Both because you've seen a 7% to 8% increase in the current year growth rate, and both had sort of a tough comparison last year because we were reducing accruals up in the last year because things came in more favorable. It sort of was -- a lot of municipalities kicked the can down the road on the growth. So that, and so the other -- and what I was trying to say was the other areas of operating expenses: personnel, repair and maintenance, utilities, all of -- landscapes, those things, they are more moderate and so, they are not really causing a pressure, 5% in total. Real estate taxes is the main point of growth.

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

And just to ask it a slightly different way, I think you said that COP's expense growth in the second half of the year is roughly 7.5%. I think that, that's above their original plan. Why did that occur, and what portion of these higher expenses are going to continue going forward?

H. Eric Bolton

Well, what I would tell you, Dave, is -- what I was commenting on, or I think I've said something about in my prepared comments, some of the pressure in the third quarter, the 10.3 in the Colonial portfolio, was a result of some onetime leasing incentives and some accrual catch-ups and some other things that we booked as part of the merger close and some things that they've put in place sort of after they announced in early June that this transaction was going to occur. And as you may recall, the Colonial occupancy really fell off at the end of the second quarter. We felt it was important to get it back before we got into the winter. So there were some onetime things done in the third quarter in an effort to address those issues and those concerns. On top of that, we had the expense pressure associated with real estate taxes, as Al was mentioning. Now, as we get into the fourth quarter, we see real estate taxes still being a little bit of a pressure point, for the reasons that Al mentioned, we're comparing against the prior year number, that's very, very difficult. But those onetime sort of leasing incentives and other things that were done in Q3 will not repeat themselves in Q4. And so, we'll expect to see same-store expense in Q4 in a year-over-year basis moderate back down into that 5% range or so off of the 10% that we had in Q3. The other part of your question surrounding expense savings that comes from renegotiating contracts and all the other things that we're going to be doing that affect NOI, that's all stuff that we'll get into next year. And that's something totally different. And so, I think that -- it's just Colonial's Q3 expense result was unusual because of the company effectively was merging with us, and a lot of things were down onetime, but that's -- so I wouldn't read more into it than that.

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

Okay. Last question is, you're pretty sure of the sequential same-store revenue expense in NOI growth figures for the Colonial portfolio in 3Q.

H. Eric Bolton

Yes, we have it right here, hold on. The -- there it is, yes. Right here, okay. Yes, sequential revenue growth was 2.5% and the sequential expense growth was 12.3%. For just the Colonial portfolio, Q2 versus Q3, '13, 2.5% in revenue, 12.3% in expenses.

Operator

And I'm currently showing no further questions. I will now turn the call back over to management for any closing comments.

H. Eric Bolton

No closing comments. So, thanks, everybody for joining us this morning, and we'll see a lot of you next week. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

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