Mid-America Apartment Communities' (MAA) CEO Eric Bolton on Q4 2015 Financial Results - Earnings Call Transcript

| About: Mid-America Apartment (MAA)

Mid-America Apartment Communities Inc. (NYSE:MAA)

Q4 2015 Financial Results Conference Call

February 4, 2016, 10:00 AM ET

Executives

Timothy P. Argo - Senior Vice President of Finance

H. Eric Bolton - Chairman and Chief Executive Officer

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

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

Analysts

David Toti - BB&T Capital Markets

Nicholas Joseph - Citigroup Global Markets Inc.

Gaurav Mehta - Cantor Fitzgerald & Co.

Robert Stevenson - Janney Montgomery Scott LLC.

Daniel Oppenheim - Zelman & Associates, LLC.

Thomas Lesnick - Capital One Securities, Inc.

Drew Babin - Robert W. Baird & Co.

Tayo Okusanya - Jefferies & Company, Inc.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Operator

Good morning, ladies and gentlemen. Thank you for participating in the MAA Fourth Quarter 2015 Earnings Conference Call. At this time, I would like to turn the conference over to Tim Argo, Senior Vice President of Finance. Mr. Argo, you may begin.

Timothy P. Argo

Thank you, Pricilla. Good morning, this is Tim Argo, Senior Vice President of Finance 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. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP measures can be found in our earnings release and supplemental financial data.

When we reach the question-and-answer portion of the call, I would ask everyone to please limit their questions to no more than two in order to give everyone ample opportunity to participate. Should you have additional questions, please re-renter the queue or you are certainly welcome to follow-up with us after we conclude the call. Thank you.

I'll now turn the call over to Eric.

H. Eric Bolton

Thanks Tim. MAA wrapped up calendar year 2015 with another quarter of strong performance. Importantly, we expect favorable leasing conditions across our region and the trend supporting record high occupancy and solid momentum in rent growth to continue in 2016.

As outlined in our earnings release, our forecast for MAA for the coming year is defined by continued record occupancy results consistent with what was captured in 2015 and rent growth that is also consistent with the strong momentum from last year and that remained well above long-term averages.

Operating expenses are expected to remain well in check with real estate taxes being the only item driving any pressure and reflecting the continued strong valuation in leasing fundamentals that are supporting the apartment market. During the fourth quarter, we captured positive pricing momentum across the portfolio on both the year-over-year and sequential quarterly basis.

Tom will provide you with more details surrounding leasing conditions across our markets. But overall, we believe the supply and demand dynamics across our high growth Sunbelt region coupled with a portfolio that is uniquely diversified across both large and secondary markets and that offers a price point appealing to the largest segment of the rental market will drive solid results in 2016.

As noted in yesterday's earnings release, we were successful in securing a couple of acquisitions in the fourth quarter, both of which have an efficient and accretive Phase II benefit to them, which enable the deals to work within our disciplined underwriting model.

We expect the transaction market in 2016 will be similar to 2015 with robust transaction activity fueled by a high level of new development and lease up projects being brought to market with the continued high level of investor and buyer interest surrounding current valuations.

We remain disciplined in our approach and have forecasted 2016 a comparable volume of acquisitions and new developments funding as compared to 2015 that we plan to match fund with the disposition activity and internally generated free cash flow.

With the start of expansion and our newly acquired Denton property in Kansas City, we now have a $117 million of new development underway with each of the five projects representing highly accretive Phase II expansions of existing successful properties.

During 2016, we also anticipate another active year of redevelopment through our very accretive kitchen and bathroom modeling program. Al will recap for you the changes in our balance sheet and transactions completed in fourth quarter, which further expands our growth capacity.

As noted in our earnings release through a combination of the capital recycling completed last year and the free cash flow now being generated, the balance sheet was further deleveraged in 2015 with debt to market cap at 32.2% by year-end. We anticipate continued strengthening of the balance sheet in 2016. In summary, we believe MAA’s balance sheet is well positioned for future opportunities as they emerge.

Before turning the call over to Tom, I want to say to all our MAA associates how much I appreciate all of your hard work and tremendous results in 2015. Thanks to your efforts. MAA produced top tier total investment returns for our shareholders in calendar year 2015 and we are well positioned to continue our legacy of outperformance over the full cycle as we head into 2016.

And with that I'm going to hand it over to Tom. Tom.

Thomas L. Grimes

Thank you, Eric and good morning everyone. Our fourth quarter NOI performance is 7.3% was driven by revenue growth of 5.4% over the prior year. We have good momentum in rents and saw effective rents increase 4.4% on a year-over-year basis and 70 basis points sequentially strong average physical occupancy contributed 70 basis points over the prior year.

Overall, expenses remain in line, up just 2.4%. Expense discipline has been a hallmark of our operation for years. Our industry leading initiatives such as our vendor owned inventories shops stocking program, which will be completed this year have allowed us to keep the expense line consistently in check.

January demand trends continue the positive momentum. Average physical occupancy of 96.1 ran 94 basis points ahead of last year. A 60-day exposure which is current vacancy plus all notices for 60-day period is just 7%. This is a 120 basis points stronger than the same time last year. January blended rents on a year-over-year basis were up 5%.

Occupancy exposure at the critical beginning of the year are better than we have seen in recent years. On the market front, the vibrant job growth of the large markets is driving strong revenue results, they were led by our Orlando, Fort Worth, Atlanta and Phoenix.

The secondary markets achieved 4.4% revenue growth. And these markets were benefiting from improved job growth as well as a sophisticated operating platform that has competitive advantages across our footprint in markets. Revenue growth in Charleston, Greenville, Savannah and Jacksonville all stood out.

As mentioned above, our momentum is strong across our markets with occupancy, rent growth and exposure all showing positive trends. Our market worry to-date is Houston which represents just 3.5% of our portfolio. We will continue to monitor Houston closely and protect occupancy in this market. Turnover for the quarter was again down by 7.5%, and down 180 basis points on a rolling 12-month basis to 52.5%.

Move outs to home buying was down a 100 basis points and remain below historic norms. Move outs to home rentals was down 6% and represents just 7% of our total move outs. Our focus on minimizing the time between occupancy again paid off. The improvements in average days vacant between occupancy for the quarter of 2.5 days helped drive down the fourth quarter average physical occupancy or drive the record average physical occupancy to 96.1%.

During 2015, we've completed 5,781 interior unit upgrades, 3,200 of those were on legacy CLP communities. We expect to redevelop 5,000 units next year and expect the mix to continue to favor the legacy CLP portfolio. As a reminder, on average, we spent $4,500 per unit and receive $95 increase over our comparable non-renovated unit, generating a year one cash return of well over 20%.

Our active lease-up communities are performing well, and we completed construction of 220 Riverside in Jacksonville in the fourth quarter. As you will notice in our release we moved the stabilization of this community up to Q1 of 2016 rather than Q2, because of better than planned lease-up supported by rents above pro forma.

Colonial Grand at Bellevue II and Retreat at West Creek one both stabilized on schedule for the fourth quarter. Station Square at Cosner's Corner II and Cityscape at Market Center II are currently 67.5% and 82.1% at lease, and expected to stabilize in the fourth quarter and third quarters of this year respectively. We ended the 2015 in strong fashion and are well positioned for 2016. Al.

Albert M. Campbell

Thank you, Tom and good morning, everyone. I'll provide some additional commentary on the Company's fourth quarter earnings performance, balance sheet activity and then finally on initial guidance for 2016.

The record occupancy levels, continued pricing momentum and solid expense control during the fourth quarter produced record levels of core FFO per share for both the quarter and the full-year 2015. Core FFO, which excludes certain non-cash and non-routine items was $1.45 per share representing a 10% increase over the prior year.

Recurring capital expenditures for the quarter were $8.6 million or $0.11 per share, which produced Core AFFO of $1.34 per share providing strong coverage of our $0.82 per share quarterly dividend. Core FFO for the full-year was $5.51 per share also representing a 10% increase over the prior year.

And our Core AFFO for the year was $4.80 per share representing a 12% increase over the prior year. The outperformance for the quarter was primarily produced by same-store NOI growth driven by continued record high average occupancy levels during the quarter 70 basis points above the prior year. And our operating expenses also remained well under control during the quarter increasing only 2.4% over the prior year with favorable real estate tax appeals riding some benefit in the fourth quarter.

During the fourth quarter, we acquired two new communities for a total investment of $79 million including the land [purchase] (Ph) of two Phase II expansions which were both started during the quarter. These purchases bring our full-year acquisition investment to $327 million for seven new communities containing 1,782 units.

We also funded an additional $13.6 million of development costs for the five communities under construction during the quarter, all Phase II expansions leaving $74 million of the $117 million total projected cost to be funded as of year-end. We expect NOI yields in the 7% to 7.5% range for these communities once they are completed and stabilized.

We also invested $8.3 million in our redevelopment program during the fourth quarter, bringing our full-year investment in the program about $31 million. We continue to capture rent increases of 10% above the non-renovated units from this program.

During the fourth quarter, we completed several important financing goals for the year. We recast our unsecured revolving credit facility, increasing our borrowing capacity to $750 million from $500 million, extending the maturity to 4.5 years and improving the terms to reflect our stronger credit profile. We also refinanced $150 million term loan improving the rate about 25 basis points, extending the maturity and modifying the terms to be consistent with our new credit facility.

Of course, we also executed a very successful bond issuance during the fourth quarter, issuing 400 million of 10 year notes at coupon rate of 4% priced at 98.99%, which complete our refinancing plans of 2015 debt maturity. We are very pleased with the investor support and execution of this issuance which we think and we believe provides further confirmation of this strength of our balance sheet.

At year-end, our leverage defined as net debt to gross assets was 190 basis points below the prior year at 40.6%. Our current EBITDA continues to grow and reflect the quality of our earnings profile, covering our fixed charges about 4.5 times.

At year-end 96% of debt was fixed or hedged against interest rates at an average effective rate of 3.8% with well out of maturities averaging five years and we also have over $700 million of total cash and credit available at year-end.

Finally, we did provide and issue earning guidance for 2016 with the release. Core FFO is projected to be $5.68 to $5.88 per share or $5.78 at the mid-point based on average shares in units outstanding of about $79.6 million. Core AFFO is projected to $4.98 to $5.18 per share or $5.08 at the mid-point representing about a 6% growth of the prior year.

The primary driver of 2016 performance is expected to be same-store NOI growth which is forecasted to be 4% to 5% base on a three and three quarters to four and a quarter percent growth in revenues. And two and three quarter to three and three quarter percent growth in operating expenses.

Our revenue projection include expectations of continued record high occupancy levels averaging 96.1% through 2016 combined with continued rental pricing above long-term trends similar to 2015 levels ranging 4% to 4.5%. We expect operating expenses to remain well under control with real estate taxes continuing to present the [indiscernible] pressure as the strong operating performance pushes valuations higher.

We expect acquisition volume to similar 2015 with $300 million to $400 million repurchases included in our projections; we also expect to fund an additional $50 million to $60 million of construction cost to the completion of the five communities under development.

We plan to essentially match fund these investments with $200 million to $300 million of multifamily dispositions starting with $60 million of commercial assets in land dispositions and with $90 million to $95 million of internally generated free cash flow.

And giving the timing required to recycle assets along with the initial loss of NOI deals, our forecast for the full-year includes $0.04 to $0.06 per share of dilution related to these 2016 dispositions points.

Our current plans do not include the need for new equity during 2016 and we expect to end the year with our leverage at another slight year reduction from the prior year.

That’s all that we have in the way of prepared comments, so Pricilla, we’ll now turn the call back over to you for questions.

Question-and-Answer Session

Operator

[Operator instruction] We will take our first question from David Toti with BB&T Capital Markets. Your line is open.

David Toti

Eric, quick question for you. Unlike many of you peers, the company appears to the projecting pretty decent acquisition volume in the year ahead. Can you give us a little more though as to where you see attractive opportunities in market? Is it because you are largely in markets with the recent competing, are you seeing yields become more attractive, what's the motivation for that picture volume?

H. Eric Bolton

Well, first of all, it's pretty consistent with what we did this year and we think the conditions in the market place in 2016 are going to be somewhat similar to what they were in 2015, if not more robust. As we get later in this cycle we just see more development projects in lease-up communities being brought to market. And our deal flow is running higher this time this year than it was at the same point last year.

So we think the transaction market is going to be very active over the course of the year. And so we put a number out there $300 million to $400 million which is consistent with - we did a little over $300 million this year and we will see what happens. I’m optimistic that we will see something that become increasingly compelling and we may find some situations where we have these Phase II opportunities associated with them like we did in December. And I think that we will see how things play out over the course of the year.

We have assumed in our guidance that we will do $200 million to $300 million of dispositions, we are going to wait on that. That will be more backend loaded over the course of year depending on what opportunities emerge on the acquisition front. So David it's not a specific detailed answer to you, but it's really more just to reflection of we think conditions are going to be consistent if not a little bit more robust from an activity perspective and that May yield some opportunities for us.

David Toti

Okay no that’s very helpful Eric, thank you. And my second question is just a quick one. I seem to recall the unit CapEx the money you are spending on sort of upgrading units to be producing yield that were around 12%, am I remembering wrong, it seem to be a little bit lower today.

Albert M. Campbell

I think what you probably return to is the internal rate of return data which is in the 11% to 12% range, but the rent growth compared to a non-renovate unit has consistently been 10% to 10.5% I think for a while. IR is higher than that.

David Toti

Okay, thanks for the detail today.

Operator

Thank you. And will move next to Nick Joseph with Citigroup. Your line is now open.

Nicholas Joseph

Thanks. I'm wondering if you could talk about how you build up the guidance. The stock has slowing off this morning and we saw a similar reaction last year at this time. The initial 2015 guidance - a sense than 2015 guidance clearly prove to be conservative and the stock has been a top performer. So do the guidance process this year change at all relative to how you said it in the past and how do you think about the opportunity and what you would need to see in order to exceed initial guidance similar to what you saw last year.

Albert M. Campbell

Thanks Nick. This is Al. I'll tell you a bit how it was prepared this year. No real changes there, I'll tell you, what we are expecting for 2016 first and foremost is not any deceleration in momentum in our business, and what we’re projecting is for occupancy level of 96.1% which is above the way record high for the company that we had in 2015 to carry through 2016. And I'm talking about average 365 days for the year which is pretty strong access full.

And so on top of that I mean so you are flat with 2015 hold that level, on top of that we expect pricing levels to be consistent with 2015. Again, well above long-term averages and norms, we expect pricing to go up 4% to 4.5% and so that really is tradition that revenue growth and then we have the expense control we talked about the drop at the bottom line of NOI.

The comparison to 2015, I think the challenge there is that we had about 150 basis points of things in our 2015 revenue that were unusual. I hesitate to call them one-time, but similar to that one-time items such as we built our occupancy 75 basis points during the year getting to that 96.1% was on average 75% basis points in revenue above the prior year.

And then related to that we while we were building occupancy, we also had higher fee performance related to building their occupancy fee as either add fees, processing fees, pet fees all of those things. And also as we've talked about some during the year we've had a little better performance in 2015 in catching some of the final remaining portions of the synergies from our merger.

We really had a strong performance in 2015 and the fees, to give you context they grew 15% in 2015 over 2014. We certainly expect to hold a majority of those fees and carry that into 2016, but that growth rate - it would be more of a normalized growth rate going forward. So hope that gives the sum.

H. Eric Bolton

Hey Nick. The takeaway from that is that when you look at 2015 the surprise factor was occupancy and we had anticipated that coming out of 2014 that we would hold the 2014 occupancy which was pretty strong and we didn’t really contemplate seeing occupancy lift as much as it did over the course of 2015. And we and frankly I think many in this sector were surprised at how strong the markets were a last year and I think everybody for the most part was raising guidance over the course of the year.

As we got into 2016 guidance were coming off a year where average daily physical occupancy was higher than we've seen in our 22-year history. We ended the fourth quarter with the highest average daily physical occupancy we've ever had. So to go into 2016 within anticipation that we are going to beat that again and get above average daily physical occupancy of 96%, we just were a little hesitate to take that back and we think we are going to hold it.

We think that the conditions are great in our markets and great in our region and we think we are going to hold that record occupancy and we think we are going to get very solid rent growth of 4% to 4.5% as well. Again in line with what we saw this past year, but just the incremental lift in occupancy is not expected to repeat itself again in 2016 and that's the big difference between 2016 and 2015.

Nicholas Joseph

Thanks that makes sense and then just going back to David's question. What's the impact of the redevelopment spend on 2016 same-store revenue growth and what was the impact on 2015 same-store revenue growth?

H. Eric Bolton

Consistently about 20 basis points to 25 basis points impact pretty consistently.

Nicholas Joseph

Okay, thanks. And then just finally. Can you talk about your performance expectations of the large versus the secondary markets in 2016?

Thomas L. Grimes

I think what we would expect to see is the job growth in the large markets continue to lead the way, absent some sort of macroeconomic change on the demand side, we are expecting those to lead and expecting the Atlanta, Orlando, Phoenix probably to perform top set of that group. In the secondary markets where we get a little less supply, we’re seeing job growth build there and would expect to see places like Charleston, Greenville, and Jacksonville do well. But we would expect that large markets would continue to outperform secondary markets at this point.

H. Eric Bolton

Where the secondary markets really make a huge positive impact to our performance. Nick if you want to start to looking at a real sort of sea change and sort of the leasing environment where either we see a supply get way out of hand and relative to the demand and we get into recessionary environment or we see job growth really start to pull back.

That's where the secondary markets really start to hold up a whole while lot better than what you typically see in the larger markets, but at this point in cycle with fundamentals still being strong as Tom was outlining. We think that there still will be a reason for the large markets to continue to outperformance this point the secondary markets.

Operator

Thank you. We will take our next question from Gaurav Mehta from Cantor Fitzgerald. Your line is open.

Gaurav Mehta

Hi good morning. I just wanted to back to your comments on acquisitions and disposition, can you speak about cap rate spread that’s expecting between what you are selling and what you are buying?

Albert M. Campbell

Well, if you look at it on a cash flow cap rate basis, certainly just looking what we sold this past year, 21 properties that we sold, the cash flow cap rate was around $5.8, I mean we are buying at around $5.5. So from the cash flow perspective it's pretty close, when you look at sort of NOI yield, initial NOI yield particularly if you assume as we do that some of the acquisitions that we make are still in lease-up and not yet fully stabilized.

We gassed out more so, it can be 150 basis points or so. And therefore that’s why from an earnings perspective we've assumed $0.04 to $0.06 of earnings dilution in our guidance predicated on that gap in NOI yield, both as a function of the higher yielding assets that we are selling coupled with the non-stabilized nature of what we assume we’ll be buying.

Gaurav Mehta

Okay and my second question is you mentioned Houston as one of the market that you are monitoring, are there any other market that you are concerned about in 2016 outside of Houston?

Albert M. Campbell

Houston is the one with that demand dynamic that’s traded down. We would like to see a little more job growth come out of Little Rock and Norfolk but we are relatively slightly exposed to those markets, but Houston is the main worry there.

H. Eric Bolton

But no other ones that we are particularly concerned about, I mean when you look at the job growth and the supply dynamics and the ratio between those two they are all well above what would be defined as healthy absorption.

Gaurav Mehta

Okay thanks for taking my questions.

Operator

Thank you. We will move next to Rob Stevenson with Janney Montgomery Scott. Your line is open.

Robert Stevenson

Thanks Al. Can you talk about any in terms of the fees what was the gross level of fees in 2015 versus 2014 and what's in the 2006 guidance in terms of the magnitude, in terms of the overall little over billion dollars of revenue that you guys had this year?

Albert M. Campbell

To answer that is it's certainly not in scope as large as the rents and other. It's probably about $50 million and again the majority of growth this year came from of add frees, these processing fees, pet fees and those are the main drivers of growth.

Thomas L. Grimes

[Multiple speaker]. This things associated with increasing occupancies.

Albert M. Campbell

Right, but the large part of that $50 million is you also have water reimbursement, cable reimbursement other thing and the growth came in some of fee related to growth and occupancy this year.

Robert Stevenson

It was like $42 million in 2014 and up $50 million in 2015 and I mean just modest sort of growth in 2016 is how you thinking about it this year?

Albert M. Campbell

Exactly, right exactly right.

Robert Stevenson

Okay and then when you look at the core FFO guidance, when you are sitting here today what is the difference between core and NAREIT from the things that you know today?

Albert M. Campbell

The biggest thing is fair market value of debt adjustment. And the others are acquisition cost and then gains, loss or distinguishment of debt and some small things. But the big number what's driving at difference is really fair market value of debt. And I will tell you Rob, we chose to when we did the merger a couple years ago, we had that significant number for that. We chose to pulled back out of AFFO, because it's non-cash and we are getting an credit and interest.

And we just feel like it was better to show it without that because it's not cash and so some other people do it defiantly, we know it's a little bit confusing, but that’s the main difference and we will continue to do that until that burns. It will burn off in another couple of years and tat significant difference should decline.

Robert Stevenson

Okay and then lastly what is the 100 basis points of turnover cost, turnover goes up 100 or 200 basis points this year. How do you think about that impacting the expense side equation?

Albert M. Campbell

Usually about $0.01 to $0.015 per percent on that Rob, I mean it's meaningful to our business in terms of the actual impact of AFFO given the size and scale of the company, its smaller than you would think.

Thomas L. Grimes

So 1% quite stood a penny and a half roughly of AFFO.

Robert Stevenson

Okay, thanks guys.

Operator

Thank you. We will take our question from Dan Oppenheim from Zelman & Associate. Your line is open.

Daniel Oppenheim

I was wondering if you can talk a little more in terms of large and secondary market, I think comments about large - performing here in 2016 kindly I think we will look some of the trends recently in terms of that I think that will continue. But you mentioned Houston in terms of challenges but the number of other larger markets where there is more supply coming and wondering how you think about that in terms of not so much as the absolute level but the level of deceleration that could come through in large markets versus in the secondary markets?

H. Eric Bolton

Dan, since what we are seeing as in large the 2015 looks an awful lot - 2016 looks an awful lot like 2015. It should fill down the way we keep - try to keep in mind the balance between demand and supply, the jobs to completion ratio and they are at about seven for both years in a row and job growth 2015 for that combination of markets is 27 and it's about the same for 2016.

I think related to our portfolio specifically, this has been worn out in the media I think a little bit but it is true the demand in some of these large markets is coming into the urban areas where we have a little less - the supply is coming in where there are a little less exposure important clarification there. thank you. Where we've got a little more and the inner loop satellite cities and suburban like exposure.

Daniel Oppenheim

Got it. And then in terms of you talked about the blended rent growth of 5% in January, curious in terms of where the or you see in terms of the renewals that you are sending out that it went out for February and March versus the new leases?

Albert M. Campbell

Yes sure, we are getting about 6% on the renewals through March.

Daniel Oppenheim

Great, thank you.

Operator

Thank you. We’ll move next to Tom Lesnick with Capital One. Your line is now open.

Thomas Lesnick

First question. You have been obviously made improvement in people expertise in the secondary markets over the last year. But looking at average effective rent per unit obviously large, so [indiscernible] secondary by a pretty wide margin. I'm just wondering is there some limiting factor in the secondary markets like personal income growth that's keeping that number down or is that a strategic decision on your part to keep secondary market a little bit lower to push occupancy this year and is that something we could expect to see you guys push on the rent side now that occupancy is at 96%?

H. Eric Bolton

Sure. Tom and affordability in secondary's and non-issue, it's actually we have better rent to income ratios in secondary been in large in both - we’re talking a 100 basis points difference went roughly $17.5, $16.5 so not materially different, but it's a non issue there and I think now it’s a real balance on rent and occupancy. And one links to the other as demand in secondary looks very good at this point, occupancy in January average physical is actually higher now in secondary than large and we are in very good shape on our exposure, so we are optimistic about rents in secondary at this point.

Thomas L. Grimes

What I would also tell you Tom is that to some degree the spread and average rent between our large and secondary segment of our portfolios of function are the fact that we have I think a higher percentage of older properties. Some of the legacy assets that we've owned for a long time are in some of the secondary markets. Now that's changing and that's evolving as we continue to build out our presence in markets like Kansas City, San Antonio and Fredericksburg. Some of these newer markets that we've been getting into with newer assets.

But when you look at the age of the assets across the portfolio, we have percentage wise a higher concentration of older legacy assets to some of the secondary markets and I think that probably accounts for some of that pricing spread that you are mentioning.

Thomas Lesnick

Got it. And then looking at same-store operating expenses the dispersion of year-over-year comps in the secondary markets is pretty wide. This quarter I was just wondering, if there is anything in particular that was kind of driving the dispersion there across all of this secondary markets?

H. Eric Bolton

Texas is one factor in it and then Charleston obviously stands out, we had a weather event in Charleston where you probably read about it tons of rain there and we didn’t have any material damage, actually no units down or anything like that. But we did have a fair amount of landscape work that had to occur in that market during the fourth quarter just drying things out replacing some damages.

H. Eric Bolton

I think in aggregate, it was probably real estate taxes drove.

Albert M. Campbell

That’s a lot of the credits came in the Texas markets which are all in our - expect the San Antonio large segment.

Thomas Lesnick

And then one final question. Now with occupancy over 96%. Looking at where we stood relative to last year, how is your average day return time changed over the last year or so?

H. Eric Bolton

Average days return is with that is down 2.5 days, we would expect to drop another two next year. I think the thing that probably modes the best for revenues is that exposure at the end of January is down a 120 basis points and that's sort of the leading edge of our pricing power.

Thomas Lesnick

Great. Thanks guys, I appreciate it.

Operator

Thank you. Will move next to Drew Babin with Robert W. Baird. Your line is now open.

Drew Babin

Good morning, guys. First question, one Phase III you really outperformed the expectations in 2015 was property tax expense growth and the initial guidance for the year is - seems that also this year 4.5% to 5%, you hit that the low end of that ad I know this was in the third quarter, you had some successful appeals both in terms of [indiscernible]. What you are assuming for 2016 with your forecast in terms of whether you can qualify kind of win percentage any assessments and could that - what’s the potential for that number to possibly come in at the lower end of the range?

Albert M. Campbell

I’ll try to give you some color on that Drew, I think what happens in the begging of the year in year, you just don’t have a lot of information to go on, you talk to assessors, get a feel for what is happening in each jurisdiction and you start your estimates. As you move into second quarter, you have a little more information, third a lot and fourth you finalize I think that’s this year.

And so what happened last year as we start out the pressure was coming from Texas, Florida a little bit in Georgia as we have some revaluations occurring there. But we start out the year with expectation in 2015 really high numbers come out of Texas. Particularly in third quarter we started to get some information believing that was going to moderate low bit in the fourth quarter, we got that finalized notice and so that’s why it came down in 2015.

Looking into 2016, we are still getting very high numbers out of Texas and then we got some revaluation in Georgia and some in Florida. I would tell where we sit today, we expect to think about especially what they do, they are doing evaluation of assessments of 2016 looking backward to 2015. Record year for the company in many areas and so we expect those initial violations come out high and we expect to jump on early, hopefully have some success.

We have some success in fighting what we think will come out built in our numbers, but hopefully we will meet that and even be able to have more success. But I’ll tell right now given the performance we had in 2015 the valuations are base off of income, it's hard to see those taxes begin the moderate significantly until the cycle changes. And so that’s what we are projecting to 2016.

Drew Babin

Okay and one more, despite the fact that that costs had likely bottomed both on secured and unsecured side, private equity remains pretty aggressive and within cap rates lower. As we look at the accretion between their cost of capital and what they are paying for assets. Are you hearing anything from private players that you talk to about LTVs debt rates that they are able to get to kind of feel this? just curious if you have any color there or anything that’s maybe a read through that you are looking at acquisition to obviously with lower leverage levels?

Albert M. Campbell

We continue to see private capital securing loan to values in 70% to 75% range pretty easily and the agencies remain very active and coming out of the national multifamily housing councils annual meeting back in January that mean all the feedback and all the information that we got is that probably capital. Both domestic and foreign indicates a huge appetite for multifamily real estate. It appears that the financing windows are wide open very much from a loan to value perspective very much consistent will what we saw in 2015.

I think that despite the slight bump that the Feds made in interest rates earlier. The expectation is that rates are going to continue to remain pretty low this year. So from our perspective it's really hard to see how the valuation market is going to change much, I think it's going to another active year, another fueled by a lot of investor interest. I think the only thing that potentially is going to evolve is I just think it maybe more deal flow, I think there may be more transactions in the market than we have seen in 2015. But I think it will still be a very robust environment.

Operator

Thank you. We will go next to Wes Golladay with RBC Capital. Your line is open.

Wes Golladay

You gave the color on the renewal leases for January, what you seeing on the new lease?

Albert M. Campbell

New leases in January on a year-over-year basis were [49] (Ph).

Wes Golladay

Okay and then you guys mentioned you record occupancy, do you plan to be more aggressive on the renewal leasing, I guess at least in the near term? And can you verify, you guys are backing in essentially flat rate growth or the similar rate growth versus last year?

H. Eric Bolton

Yes, our rate growth we expect to be very much in line with 2015 and that’s sort of that’s backed in.

Thomas L. Grimes

And then our pricing approach is more aggressive at this time this year than it was last year both because of the factor of lower exposure and system automatically relates that. But we are also managing the system at appropriate level, at a market level, at a core plan level depending on the time of the year and the cycle and we are more aggressive on our settings this year than we were at this time last year.

Wes Golladay

Okay so if we were to pick a point where you guys are probably surprise with the upset, would that be there you think you will come from?

Thomas L. Grimes

Probably but most likely.

Wes Golladay

Okay and then you mentioned more deal flow for the acquisitions now would this be more of the urban core properties you are you looking for? And are you seeing any developers get in trouble yet, are they just seeing capital markets in the stock market and might bring to the table?

Albert M. Campbell

Well, we are not particularly targeting more sort of urban core, what I would tell you is that’s where so much of the supply is being delivered that I think if that’s where the opportunities will emerge as some of these lease-ups run into trouble or they are not leasing either at the velocity or the rents that they had pro forma. So I just think that it’s a stock that’s continues to play out that’s more than likely where the opportunities will emerge.

We are not seeing what I would consider to be real operating distress or lease-up distress frankly where we see our opportunities are where we see private capital come in tie up a deal on very, very aggressive terms and then running to some kind of a problem in getting the financing or they don’t get loan proceeds equivalent to what they thought they were going to get and they you go back to the developer to try to re-trade the deal and developer sort of blows up and then they come back to us.

And so every deal we bought last year was on a rebound and I think that from an operating perspective we are not seeing any real weakness yet but I just think as the deal flow picks up we think that may very well yields to increase opportunity.

Wes Golladay

Okay, thanks a lot.

Operator

Thank you. Will take our next question from Tayo Okusanya from Jefferies. Your line is open.

Tayo Okusanya

I may have miss this earlier but could you talk a little bit about the timing in 2016 of the acquisitions versus the dispositions?

Albert M. Campbell

We have the acquisitions - we’re projecting pretty evenly spread throughout the year Tayo beginning somewhere in March maybe a $40 million to $50 million a month through call it Octobers and then the dispositions a little bit more towards the mid to back part of the year really looking to match fund those as much as we can as Eric mentioned in the start of the call and so you can kind of start at midpoint of the year and layer those in.

Tayo Okusanya

Okay, that helps. And then same-store NOI growth in the fourth quarter versus 3Q there is a material slowdown in secondary markets again markets like Little Rock, Arkansas that you mentioned and transaction in Mississippi and some of these other smaller markets Huntsville, Alabama, could you kind of talk specifically about what's happening in of the secondary markets that there was the slowdown?

Albert M. Campbell

And Tayo I mean it's a good observation that a transition from third quarter to fourth quarter a little bit lower on revenue and there is a seasonal factor to these markets and I don’t think it is odd to see them drop down. So either way going from third quarter to fourth quarter, there is lower traffic, there is lower demand and that pattern has repeated itself over the years with us and as usual we see good pick back up with the beginning in the year in those markets the secondary markets average physical occupancy for January is 96.6 so we've seen pop up there so I would expect that what you are observing is not change from the market dynamics, but seasonality as we move from third quarter to fourth quarter and mostly it will come back.

Tayo Okusanya

I don’t think they have dropped so much more versus the primary markets. Which is kind of what I was trying to get out.

Albert M. Campbell

Sure. And I think that's a difference in households moving to those markets, the secondary markets are in the fourth quarter they are just a little bit slower and you have lot more going on and they are large markets.

Tayo Okusanya

Okay. And then just last one from me. Just Charlotte and Raleigh, North Carolina were still good job growth particularly increasing the concern about supply. Could you just talk a little bit about what you are seeing then what's your outlook is for 2016?

Albert M. Campbell

Charlotte in particular is an urban suburban story a little bit and looking at the amount of product it's coming in South Church area is noticeable, there is a lot happening there, so a lot less happening in suburbs and that is where the majority of our exposure is. So we like the job growth and on the product that we have in Charlotte it is there is not a lot of comps going in next forward to it.

Similar story in Raleigh, over the last couple of years we saw fair amount of the supply coming in and the prior Brier Creek submarket where we exposed it's one of those appealing submarkets but that has burned off and it's shifted more to Downtown as well where we have one asset.

Tayo Okusanya

Helpful. Thank you.

Operator

Thank you. We’ll take our final question today from Jordan Sadler with KeyBanc Capital. Your line is open.

Jordan Sadler

Hi guys good morning and thanks for taking the question. Just kind of big picture I know you mentioned move outs for home purchases decline in the fourth quarter, but we have seen that sort of nationwide tick up a bit. Is there any concern that moves out around purchases could start to increase particularly in your more suburban locations.

Albert M. Campbell

Honestly there is no sign of that and that is something that's trended down pretty much every quarter this year and there doesn’t seem to be an interest both in and sort of psychology and lifestyle reasons that people are interested in moving at this point, we’re just simply not seeing that.

Jordan Sadler

What sort of the average age, I guess when you look across the portfolio of your renters?

Albert M. Campbell

We’re right at 38.

Tayo Okusanya

That's helpful. And then just lastly I was just curious when you think about the dispositions, how are you kind of coming through the portfolio and ranking I guess potential candidates for sale and how does that balance out between your large and secondary markets?

H. Eric Bolton

We take a look every year at every individual investment we have and we look at sort of the acted CapEx cash flow being generated off the investment and what it likely is going to trend out at over the next few years. And make a decision on which ones do we think are going to yield us the weakest or declining if you will cash flow and target those as ones that we need to recycle cap out of into something more compelling.

I think that we do this several year and we sold over 13,000 apartments in the last five years and so we take a very proactive approach to keeping certain level of recycling taking place every year. As we look at 2016 should the investment opportunity show up and then presents an opportunity to recycle money out of some investments, I would expect 2016 to be sort of evenly we split between both large and secondary markets, we have a good mix in both.

Tayo Okusanya

Great. Thanks for the detail.

Operator

And it looks like we do have a follow-up, we will go back to Tom Lesnick with Capital One Securities. Your line is open.

Tom Lesnick

Just one quick question. Looking at the acquisition for the quarter up to $79 million, how much is allocated to the non NOI producing Denton Phase II piece?

Albert M. Campbell

Sorry, how much is going non same stores there were no Denton…

Tom Lesnick

No the Denton Phase II development sight, how much of that $79 million…

Albert M. Campbell

Okay that was smaller, let’s say the number allocated to that was about $10 million its smaller, 55 units in smaller so about $10 million of that.

Tom Lesnick

Okay and are you guys able to provide cap rate anything on the acquisition that are actually produce in NOI at this point?

Albert M. Campbell

I think what I would say is once they are stabilized we would say five and a quarter likely, but obviously those aren’t stabilized but that’s the projection once they are stabilized.

Tom Lesnick

Okay, appreciate it thanks.

Operator

And we have no further questions. I’ll like to turn the call back to Tim Argo for any closing remarks today.

Timothy P. Argo

No further comments. Thank you.

Operator

Thank you ladies and gentlemen. This concludes today's conference. You may disconnect at this time.

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