Mid-America Apartment Communities' (MAA) CEO Eric Bolton on Q2 2016 Results - Earnings Call Transcript

| About: Mid-America Apartment (MAA)

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

Q2 2016 Earnings Conference Call

July 28, 2016 10:00 AM ET

Executives

Tim Argo - Senior Vice President Finance

Eric Bolton - Chief Executive Officer

Thomas Grimes - Chief Operating Officer

Albert Campbell - Chief Financial Officer

Analysts

John Kim - BMO

Rich Anderson - Mizuho Securities

Nick Joseph - Citigroup

Austin Wurschmidt - KeyBanc Capital

Gaurav Mehta - Cantor Fitzgerald.

Rob Stevenson - Janney

Tom Lesnick - Capital One

Drew Babin - Robert W. Baird.

Tayo Okusanya - Jefferies

Wes Golladay - RBC Capital Markets

Rich Anderson - Mizuho Securities

Conor Wagner - Green Street

Buck Horne - Raymond James

Dennis McGill - Zelman & Associates

Operator

Good morning, ladies and gentlemen. Thank you for participating in the MAA Second Quarter 2016 Earnings Conference Call.

At this time, we’d like to turn the conference over to Tim Argo, Senior Vice President of Finance. Mr. Argo, you may begin.

Tim Argo

Thank you, Leo. Good morning. This is Tim Argo, SVP 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 for 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-enter 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.

Eric Bolton

Thanks Tim and good morning everyone. As outlined in yesterday’s earnings release, second quarter results were ahead of expectations. Solid rent growth, supported by occupancy that matched last year’s strong results, generated same store net operating income that was ahead of our forecast.

Core FFO per share of $1.49 was at the top-end of our guidance with the favorable NOI performance driving the majority of the outperformance for the quarter. It’s also worth noting that Core AFFO was $1.25 per share for the second quarter, or 16% ahead of the second quarter of last year. As a result of the better than expected second quarter performance, combined with our outlook that leasing conditions over the rest of the year will support continued solid rent growth and strong occupancy, we’ve raised the expectation for Core FFO for the full year.

As discussed in our first quarter call, it’s important to keep in mind the record level of occupancy that was captured in the back half of last year, particularly in the third quarter, that will serve as this year’s comparative benchmark. But, to be clear, we anticipate the current strong occupancy and pricing trends will continue. For the full year we continue to believe that we will capture average physical occupancy at 96.2%, slightly ahead of last year’s record performance at 96.1%, while also driving solid rent growth that supports the year-over-year gains in revenue leading to our increased expectations for the same store NOI growth. Al will walk you through the more detailed assumptions in his comments covering our revised and increased guidance for both same store NOI and Core FFO.

Same store operating metrics remain strong with resident turnover in the second quarter down 4.6% as compared to the second quarter of last year. Daily physical occupancy averaged 96.2% throughout the quarter matching last year’s strong performance. Effective rent per unit increased 4.4% over the second quarter of last year and was up 1.4% on a sequential basis, with all of our markets registering both positive year-over-year and sequential rent growth with the exception of Houston which was down slightly by 0.2%. Tom will give you some additional insights on the operating trends we are seeing as well as outline performance differences across our markets.

Overall, we are encouraged with the continued levels of growing demand that is clearly keeping pace with new supply delivery across our diversified portfolio and balanced sub-market strategy. We continue to work through a very robust acquisition pipeline with deal flow running well ahead of last year. As outlined in the earnings release, we were successful in the second quarter with the acquisition of a new property in its initial lease-up in the Phoenix, Arizona MSA. This particular acquisition is a good example of the sort of opportunities we target involving a new lease-up development with a local developer and motivated capital that enables both our operating and transaction execution capabilities to capture a high-quality opportunity at a price that we believe will add to future value per share.

We expect to capture a stabilized NOI yield in the 6% range on this high-end new property once we complete the lease-up and execute on other opportunities associated with onsite operations and revenue management practices. As new supply continues to come on line in a number of our markets, we’re optimistic that additional opportunities will be captured later this year.

So in summary, we like the market trends we are seeing and the MAA team has the operating platform executing well, the balance sheet is in terrific shape and our transaction pipeline is very busy. With that I’ll now turn the call over to Tom.

Thomas Grimes

Thank you Eric and good morning everyone. Our second quarter NOI performance of 5.7% was driven by revenue growth of 4.4% over the prior year and 1.2% sequentially. We have good momentum in rents as all in place effective rents increased 4.4% from the prior year. In the second quarter, new rents and renewal rents executed during the quarter increased 5% on a blended lease over lease basis. We also matched the strong average occupancy of the prior year.

Overall same store expenses remain in line, up just 2.3%. Expense discipline has been a hallmark of our operation for years. Our industry leading initiatives, such as our vendor owned shop stocking program and our interactive marketing strategy, have allowed us to keep the expense line consistently in check. Third quarter trends continue the positive momentum. Average daily physical occupancy of 96.2% is in line with July of last year. Our 60 day exposure, which is current vacancy plus all notices for a 60 day period is just 7%, below our prior year by 50bps. New and renewal rents have built on the strong trends of the second quarter.

On a blended lease over lease basis, our July rents increased 4.3% and early indications are that August will increase to 5%. On the market front, the vibrant job growth of the large markets is driving strong revenue results. They were led by Orlando, Fort Worth, Phoenix and Atlanta. The secondary markets continued to close the effective rent growth gap with the large markets. Since the third quarter of 2015, the rent growth gap between large and secondary markets has narrowed 60 basis points. Revenue growth in Jacksonville, Greenville, and Charleston stood out.

As mentioned, momentum is strong across our markets with occupancy, rent growth and exposure all showing positive trends. Our only market worry bead is Houston which represents just 3.4% of our portfolio. We will continue to monitor closely and protect occupancy in this market. As we approach the end of July, our Houston market’s daily occupancy is 95.2% and 60 day exposure is just 6.6%. Move outs for the portfolio were down for the quarter by 4.6% over the prior year and turnover remained low at 51.5% on a rolling twelve month basis. Move outs to home buying were down 1%. Move outs to home rental, which represent just over 7% of our total move outs, were down 5%. Our focus on minimizing the time between occupants again paid off, and we were able to reduce by one day the average vacancy between occupants which helped drive the second quarter average physical occupancy to 96.2%.

During the quarter we completed over 1,800 interior unit upgrades, bringing our total units redeveloped this year to just over 3,200. We expect to redevelop over 5,000 units this year. Our redevelopment pipeline of 15,000 - 20,000 units remains robust. As a reminder, on average we are spending about $4,500 per unit and receiving average rent increases of approximately $100 over a comparable non-renovated unit, generating a year one cash return of well over 20%.

Our lease-up communities are performing well. Station Square at Cosner’s Corner II closed the quarter at 99% occupancy. Cityscape at Market Center II is leasing well. They are currently 95.6% occupied and expected to stabilize on schedule in the third quarter of this year. Rivers Walk II in Charleston is 71% leased and Colonial Grand at Randal Lakes II in Orlando is 18% leased, both are on schedule. Our second quarter acquisition, Residences at Fountainhead in

Phoenix, Arizona is currently 78% occupied. At the midpoint of our summer season we are on track and the portfolio is performing very well, Al.

Albert Campbell

Thank you Tom and good morning everyone. I’ll provide some additional commentary on the company’s second quarter earnings performance and balance sheet activity and then finally on revised earnings guidance for the full year. Core FFO for the quarter was $1.49 per share, which represents a 10% increase over the prior year. Performance was $0.05 per share above the mid-point of our previous guidance. About two thirds or $0.03 per share, of this outperformance for the quarter was related to favorable property operating results, primarily due to operating expenses, as both personnel and marketing costs were better than expected for the quarter. Remaining $0.02 per share was primarily related to gains on casualty insurance claims settled during the quarter, as shown on the reported income statement. Strong rental pricing and continued high occupancy levels carried through the quarter, as expected, supporting the earnings performance.

As Eric mentioned, we acquired one new community during the second quarter, Residences at Fountainhead, located in Phoenix, for a total investment of 69.5 million. The community was in lease-up when acquired, and was 75.8% occupied at quarter-end. As Tom mentioned, lease-up continues to progress well, and we expect the community to complete its initial lease-up early next year.

During the second quarter we sold three parcels of commercial land and the remaining commercial JV property originally acquired in the Colonial merger for total proceeds of about 4.5 million, producing the small gains on sale of non-depreciable and depreciable assets reflected on the income statement for the quarter.

We had four communities, all phase II expansions of current properties, remaining under construction at the end of the quarter. We funded 16.1 million toward completion during the second quarter, and have an additional 48 million of the 97 million total projected cost remaining to be funded. We continue to expect stabilized NOI yields of 7.0% to 7.5% on average for these communities once completed and stabilized.

Our balance sheet remains in great shape. At quarter-end our, our leverage, defined as Net Debt to Gross assets, was 40.7%, 70 basis points below the prior year, while our Net Debt was only 5.7 times Recurring EBITDA. At quarter-end, 92% of our debt was fixed or hedged against rising interest rates at an average effective interest rate of only 3.8%, with well laddered maturities averaging 4.7 years.

At quarter end we had almost $600 million of combined cash and borrowing capacity under our unsecured credit facility providing both strength and flexibility for growth. Given our current expectations for acquisitions and dispositions over the remainder of the year, along with our projection for excess cash of 90 million to 95 million representing FAD less all dividends, we do not anticipate new equity needs this year and we expect to end the year with our leverage slightly below current levels.

Finally, as Eric mentioned, we are again increasing our earnings guidance for 2016 due to the stronger than projected performance. We’re increasing our Core FFO projection by $0.04 per share at the mid-point, to reflect both the $0.05 per share second quarter outperformance and our revised expectations for real estate taxes for the year, now expected to cost us an additional $0.01 per share over the remainder of the year, as valuations, mainly in Texas, came in a bit higher than expected.

Our forecast generally continues to be based on our current strong occupancy levels carrying through the year, with the toughest comps in the third quarter, combined with pricing performance continuing in the 4% to 4.5% range. Core FFO is now projected to be $5.77 to $5.93 per share, or $5.85 at the midpoint, based on average shares and units outstanding of about 79.6 million. Core AFFO is now projected to be $5.07 to $5.23 per share, or $5.15 at the midpoint, which produces a strong 64% AFFO payout ratio for the year.

We also increased our same store NOI guidance to an expected range of 4.75% to 5.25% for the full year, based on higher revenue growth increased range to 4.0% to 4.5% and lower operating expense growth decreased range to 2.5% to 3.5%, which includes the impact of higher real estate taxes, now projected to grow 5.5% to 6.5% compared to the prior year. The other major components, including transaction and financing assumptions remain similar to our previous guidance.

That is all we have in the way of prepared comments, so Leo we will now turn the call back to you for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll take our first question comes from John Kim, BMO. Your line is open.

John Kim

Some of your markets have significant new supply expected over next few years, markets like Nashville, Charlotte and Austin where there is supposed to be about 9% new supply at least. And I know lot of this new delivery doesn't really compete with your asset directly, but I am just wondering if there are any markets that concern you as far as too much supply coming to market?

Eric Bolton

Yeah, I mean not at this point John. In Charlotte and Austin are good ones to talk about and I mean, they both have been delivering fairly high level of supply. I Charlotte that is quite isolated to sort of the urban core where just three of our assets are expect Charlotte to continue to be strong. In Austin, the development has largely been scattered most concentrated in the down town area but scattered across the MSA but it is largely you know will have a property to house a little bit of pressure from a single asset going up across the street then it will abate and honestly we have seen sort of similar things in Dallas as well but I think overall the fundamental line situation of strong job growth is continuing and it is allowing us to work through this deliveries.

John Kim

In this period you had revenue growth accelerate in Phoenix, Tampa and Dallas. I was wondering over the next 12 months what markets you're most bullish on, where you see revenue growth accelerate.

Eric Bolton

I think those and Orlando probably fit the bucket for us.

John Kim

Okay great, thank Eric.

Operator

Our next question comes from Rich Anderson of Mizuho Securities. Your line is open.

Rich Anderson

Thanks, good morning. Good quarter, of course. So, you're kind of putting up a positive spin on new supply coming online because it opens up acquisition opportunities as you described Eric. How should we think about that? I mean, is the supply picture to you currently a positive consideration or are you just trying to eke out some positives out of a negative consideration?

Eric Bolton

No, I think - I mean obviously supply in a market brings into question, your ability to raise rents and just operating fundamentals but as Tom was just going through there, I mean as we look at it today, permitting across our portfolio in 2017, is forecast to be down 10% from what it is this year. So on balance given the strong job environment that we continue to see across our region from an operating perspective while we are not getting the sort of trends that we saw two years ago, we are still doing very well and as we try to emphasize the trends that we’ve seen strong early this year. We expect those trends to continue, so from an operating perspective we are not nervous about supply trends at this point but -

Rich Anderson

I guess - of course, supply is a risk, I get that. But I was just wondering if there is an optimal amount of supply that gives you these acquisition opportunities and if you actually welcome some level to see -

Eric Bolton

Yeah, we do. I mean on the acquisition side of the equation, yeah absolutely right and what we liked to see particularly is more supply, comes on line particularly when it is concentrated and certain sub market and so forth which would often tends to be. We often see situations where like the situation I described that we just acquired in Phoenix where, you know so local developers or third party managed situation, they are really not in the business of leasing operating in a manner similar to what we are able to do and you through a little supply pressure into that sub market where they are trying to eke out the leas up, yeah, pressure mounts and buying opportunities emerge out of that. I mean all the deals that we acquired over the past year or so are very much along these lines where there leased up situations and we have got four or five deals on the hopper right now that we are underwriting pretty aggressively that are all very much along the same line. So I continued to feel that as over the next three or four quarters that we are going to see some good opportunities.

Rich Anderson

And then just, my second question is, do you feel like there is some sort of new paradigm emerging here? Obviously, your portfolio has always been thought to be low barrier, high-risk supply markets, offset by job growth, but the story today is a lot of urban development and maybe a causal factor to EQR’s [ph] problems. Do you expect this to reverse back to more normalized conditions where you know your markets become the centerpiece of supply risk or do you think that there's something changing in your world that actually makes you a little bit more supply - more tefloned [ph] I guess?

Eric Bolton

Rich, I don’t know, I will say this, you know we have always gone at this with a belief that we are trying to build a portfolio in markets and in sub markets and at price point that offer us the ability and you have heard me say this for years, outperform over the full cycle and you know market fats come and go, cap rates come and go but we are not driven by those things. We are driven by recurring cash flow, we deploy capital with that thought, we allocate capital across the region with that thought. We like the strong job growth metrics of the South East markets, we can’t do anything about supply per say other than just be sure we got a very competitive platform and that we know how to operate very aggressively. And basically we feel like we can compete with anybody and we can compete superior to a lot of people we compete within these markets. So the supply will do what it does, what I really more focused on is being sure we deploy capital where demand is going to be and we think that demand is largely a function of job growth and economic growth and we like the South East for that reason.

Rich Anderson

Right, so I guess - I was thinking maybe lenders are exercising different standards to providing debt financing to developers and maybe that's something that's changing, but maybe not, I guess so -

Eric Bolton

It will change it comes and goes, right now for sure, they are probably nervous about funding a lot of construction in urban core areas.

Rich Anderson

Right, thank you very much.

Operator

Our next question is from Nick Joseph of Citigroup. Your line is open.

Nick Joseph

Thanks, Al, I'm wondering if you can give little more detail on the underlying assumptions that go into the back half of the year for same-store revenue growth guidance. You did 4.9% in the first half, the back half at the mid-point assumes 3.6% growth. You mentioned rent growth should be maintained at about 4% to 4.5%. There's the occupancy headwind of about 20 basis points. So, what else is driving or what are the other headwinds there to get from maybe that 4% down to the 3.6% implied by guidance?

Albert Campbell

Yeah, Nick sure I can give you some color on that. As personally just underlying what you mentioned we are not projecting the core fundamentals to decelerate in the back half and the core fundamentals for us are occupancy that would continue at the record 96.2 and the pricing growth. We expect to be in the 4% to 4.5%, we are certainly seeing that and expect to just to continue to see that through the back half. As you compare back to the prior year, the top of the comps are more difficult in two years, primarily third quarter and both the occupancy and your fees. Our fees and reimbursements that we have in our program that is a $30 million line item. So you put those two things together, that is getting you from 4% to 4.5% growth rate down to the 3.5% to 4% that is projected over the back half of the year. That is just you know math related to the comps to comps last year but the fundamentals of the business is strong and we expect that to continue.

Nick Joseph

Thanks, but what's a good run rate for fee growth going forward?

Albert Campbell

I would say that the issue with it for the back half is it was growing those two lines together we are growing comp of 7% to 8% last year. This year in to the future 3% more of a normalized growth rate, it is just last year as we are building occupancy, we just had as we talked about has it very end, we get capturing the final vestiges was called the Colonial, we had a very strong performance in those line items. So comparing back of 7% growth rate yielding torpidity long term is just not 3% something in the normal range as what we expect and it is pretty big line items that cause in the comparison.

Nick Joseph

Thanks. For those assumptions, are there any differences between what you're expecting from the large markets versus secondary markets?

Eric Bolton

On occupancy the headwind on the secondary is greater in the third quarter. Now it’s not that much Nick, pretty consistent with the transfer seeing right now.

Operator

Our next question is from Jordan Saddler of KeyBanc Capital. Your line is open.

Austin Wurschmidt

It's Austin Wurschmidt here with Jordan, touching a little bit on next question, building off of that, I mean, turnover is really down again this quarter. Do you feel like you've taken your foot off the gas at all on rental rate growth given trying to manage a little bit of the more difficult occupancy comps you face in the back half the year? And then could you also give us what the rental rate growth was last year for July and August?

Eric Bolton

Answering your first question, no we don’t think we have taken the foot off the gas at all. Turnover for move outs to rent increase moved from 14% of our move outs to 13%. So that is immaterial and we are getting 6.5% rent growth on that we feel pretty good about that and have it backed off at all on that. And then remind me your second question Austin.

Austin Wurschmidt

Yeah, just comparing the 4.3% increase you got in July and the 5% you expect in August, what were those numbers last year?

Eric Bolton

They were in the range last year, we will dig in for numbers, going increase over last year, it is within 50 basis points last year on appointed basis.

Austin Wurschmidt

Okay, thanks for that and then just, what is the average occupancy assumption you've got for the second half of the year?

Albert Campbell

96.2% and following on Nick’s point, I think we have a record high of 96.6% in the third quarter last year, call it some of that, I think back half of the year, last year was 96.4% given there.

Austin Wurschmidt

So, you'd say that occupancy will be a headwind sort of 20 basis points in the back half of the year?

Albert Campbell

Slight headwind just from the comp, but we have a very strong still 96.2% for the year is a record level, it is actually 10 basis points above 96.1% that was record level last year, so that is how we look at, we are going to continue strong occupancy, continue push price and we believe that forecast back half is good.

Austin Wurschmidt

Okay, thanks for taking the question.

Operator

We’ll take our next question from Gaurav Mehta of Cantor Fitzgerald.

Gaurav Mehta

Hi, good morning. Just going back to transactions, I was wondering if you could touch upon disposition, what you're seeing in the market and what's the timing of the sales of assets?

Eric Bolton

Well we are currently actually working on number of those transaction, we actually have seven properties currently in contract that we are working through due diligence on and we would expect assuming everything plays out as we think it will expect to close on those of those - most of those in the third quarter with the others probably in Q4.

Gaurav Mehta

Okay. And then going back to acquisition, I was wondering if you could comment on - if you've seen any distressed product in the market as a result of tightening lending standards?

Eric Bolton

Not really, what we are seeing are more evidence that some of the lease up velocity that was taking place last year, some of these new properties is slowing a little bit and so some of the properties are brought up out of the ground early this year that sort of get to that 50%, 60%, 70% leased status, that’s typically where you start to run into the most headwind, we have more of those in the market today and therefore, that’s where our belief that we will see more opportunities, that’s where that originates from.

Gaurav Mehta

And I guess last follow up. Are there any markets where you're seeing more of that product or its market wide in your markets?

Eric Bolton

It is pretty consistent across the board. I wouldn’t point anything unique, we are seeing, mean Houston is a market where folks have been focused on trying to find some great buying opportunities but we continue to see pretty front pricing in that market. So it is pretty consistent across the board.

Gaurav Mehta

Okay thanks for taking my questions.

Eric Bolton

Thank you.

Operator

Thank you. We’ll take our next question from Rob Stevenson of Janney. Your line is open.

Rob Stevenson

Good morning guys. Tom, is there any of your top 10 markets other than maybe Houston where redevelopment isn't penciling today, where you are not able to get the returns that you would want in order to put capital to work.

Thomas Grimes

The redevelopment program is going strong Rob and it is generally not sort of a market by market decision. So it is has a bias there but in those assets are working every now and then, we will test a property to see if it works and then back off pretty quickly but there are no ongoing redevelopment jobs that we have backed off on or cancelling and on the tests that we do, we are generally seeing the same go forward rate as we had in the past. That is a place where new development does help us a little bit on assets that is 10 years old and they build right next to year, the latest and greatest and charge $500 bucks more, we can pop out the nice from micro counter tops and put in granite and charge 200 or something like that. It gives us an opportunity to grow that program.

Rob Stevenson

And then, Tom or Eric, I mean, when was the last time when you go back and look at the secondary markets actually outperformed your large markets for any length of period of time? I know it has gotten smaller as a percent, it gets you down to like 35% of NOI, now. But I'm just curious as you think about the portfolio going forward and sources of capital and things of that nature, whether or not that goes significantly lower because it seems like it's been a while since those markets have really outperformed?

Eric Bolton

You have to go back to really late 2008 throughout most 2009 time frame when we saw obviously a fairly deeper session taking place in the country. We saw the employment markets really take a beating and those kind of environments, recessionary environments, where job loss is really driving sort of the economic landscape, that tends to be where the secondary markets hold up a lot better and you can actually get to a point where the secondary markets are outperforming the large markets, both in terms of occupancy and in our ability to hold rents. So I think they are really more for that purpose for sort of severe economic or economic downturn conditions, I think that what you are going to see is as we have continue to cycle capital out of some of the older investments that we would had as you have pointed out, a lot given the sort of base rich notion of the company and where we sort of came from allow the over asset happen to be in some of the more tertiary market of the portfolio and that’s where we cycled out a lot of we have accident close to 20 property over the last several years, selling over 13000 apartments. I think as we go forward you will see us continue with the primary focus on cycling out of some of the older assets where the CapEx requirements are growing and the after CapEx is likely to show more moderation and that will continue to adds an example to seven properties that we have under contract right now. Three of them are [indiscernible] sale in North Carolina, one of them is in Greensborough, one of them is in Huntsville. I think that - but having said that you will see us continued to look at opportunities in places like Charleston, Kansas city, Fredericksburg, clearly other secondary markets but we think that newer assets where we think the return on capital will be better over the next several years versus what we are selling.

Rob Stevenson

Okay, thanks guys.

Operator

We’ll take our next question from Tom Lesnick of Capital One.

Tom Lesnick

Hi, guys good morning, thanks for taking my question, I guess first, I was just curious, how is June across your markets? And I guess in that context, could you provide a little insight on what the quarter trends were like, were they consistent across all three months or was there some choppiness there?

Eric Bolton

Tom, they were really pretty consistent in terms of how rents went, blended rents went through, so June fits in line with what the quarterly average was and you know I guess there weren’t a lot of difference between May, June and July and what the second quarter was to answer you on market level.

Tom Lesnick

That's very helpful. And my second question, what's your view on the fragmentation opportunity today across apartments in the Southeast; I mean, I guess if you look where stock price is today and the current premium to NAV with that, what's your appetite for acquisitions and scale at this point?

Eric Bolton

Well, I mean we are very interested in pursuing opportunities, as I mentioned in my prepared comments our deal flow is running probably 30% higher than it was this time last year, we are pushing hard on underwriting and processing as much opportunity as we can. I think as always though our focus is centered on ability to make an investment and ultimately capture a NOI yield and cash flow growth rate out of that investment that is at or better than the long term average that we are goal, that we have for the company and so we are not one to be, I mean while we are certainly aware instances to the concept surrounding our focus on capturing our spread between our current cost to capital and current cap rates. You know our focus is just always instead centered on capital allocation model, with priority on capturing NOI yield that meets or exceeds long term earnings growth profile we have for the company and ability ultimately to achieve higher return on capital long haul that is better than what we think our investors are expecting.

Tom Lesnick

All right, thanks guys appreciate it.

Eric Bolton

Thanks Tom.

Operator

Our next question is from Drew Babin of Robert W. Baird.

Drew Babin

Good morning guys.

Eric Bolton

Good morning Drew.

Drew Babin

In the first quarter, it looks like you had about a 40 basis point lift in your same-property revenue growth from fees, but wasn't accounted for by rent growth and occupancy growth. There seemed to be some contribution there that seemed to be absent in the second quarter and I was just wondering whether that was sort of a deceleration off of more rapid fee growth in past years or whether there's anything deliberate going on at the property level, maybe being a little less aggressive with these?

Eric Bolton

I’ll give you some color and then Tom can jump in it. If you think about the first quarter Tom, we had a little bit remaining year over year occupancy lift in the first quarter and as you build occupancy fees come with that and so that happen I think in the third quarter, fourth quarter and the first quarter to a smaller extend but that very fact is part of the big discussion earlier that has given a confidence we can pay back the last year. We think these going forward going to grow in good normalized growth. We are having just very high, very good growth last year related to growing occupancy in the final vestiges of Colonial.

Thomas Grimes

I would say the other thing that has been a headwind on fees is barely and frankly and that positive is it with turned down consistently we are getting less and less in the way of termination and spread fees which worked for us but those are material feels and then secondly in the first quarter we had a sort of lights out delinquency bad debt month, we are still very, very good where we are but not quite as good.

Drew Babin

Okay that all make sense. And then one other question on some of the markets you mentioned throughout the Southeast, both large markets and secondary markets seems like demand growth is continuing to track very well, based on your comments? But it looks like just on a pure rent growth basis, there was a little bit of deceleration in few of the markets, we just wondering kind of is that supply issue primarily, not direct but indirect, you know is that something potentially could burn off of the coming quarters, what is behind that?

Eric Bolton

Of course, this is going to depend on the market we are talking about and so forth but broadly I would tell you that wherever we see any sort of if you will deceleration quarter over quarter basis in a given market more often than not it is a function of supply issue in a particular sub market affecting given property or something to that degree. I mean fundamentally the demand dynamics, job growth, population trends, all the other sort of factors that drive renters and leasing prospects to our properties all those fundamentals continue to show evidence of sustained strength and consistent with what we have been seeing for some time and where there is moderation if you will is going to be pockets of supply here and there.

Drew Babin

Okay, thank you, that’s helpful, great quarter.

Eric Bolton

Thanks Drew.

Operator

Our next question is from Tayo Okusanya of Jefferies. Your line is open.

Tayo Okusanya

Good morning everyone. So, just a quick question around supply, I know we've all kind of harped on is it seems like you guys are acknowledging that some of your markets are seeing increased supply and that it's manageable, but are there any markets where you start to worry that supply starts to overwhelm the system, and then you suddenly lose pricing power similar to what we're kind of seeing in New York and San Francisco?

Eric Bolton

I would tell you that I mean obviously we worry about hold of comp but two things that I would tell you is that obviously a lot of the supply that we are seeing in some of our markets it is tending to me more concentrated in some of the more urban core centric areas which happens to be where we don’t have a lot of exposure and so we don’t see anything suggesting that anything different is likely to ply out in the near term, so we continue to feel okay about that. We have been saying that supply had picked up over the last couple of years, so I mean we are not, it is not like it is a new thing. I mean it is just happens to be in areas that we don’t have a lot of concentration. But I would tell you if you are trying to get at what it is going to change the chemistry, what is going to change the leasing dynamic in a material way and put us into a scenario where we are having same kind of pressures that some of these portfolios in San Francisco and New York are having. From my perspective the only thing that really materially weakens the chemistry for us is that we see a material weakening on the demand side of the equation. We see some sort of economic recession take place in a material way that causes job loss to come back into the equation and jobs to really start to pull back and in absence some sort of major disruption on the demand side of the equation right now it is hard to see anything it is going to cause material disruption in the positive leasing chemistry that continues to allow us to deliver we think pretty above long term performance. It is moderated from what it was a couple of years ago as a consequence really, a little supply but honestly just tougher comps and that’s where the pressure has been but the strong trends per say are going to continue from what we see today.

Tayo Okusanya

That's helpful and then I'll just - again thanks for some of the comments on the back half of the year and what it could look like. Apart from some of the revenue pressures that you discussed, anything on the operating expense side that results in a weaker same-store NOI growth in the back half of 2016 versus the back half of 2015?

Albert Campbell

I think Tayo as we talk about a little bit in the call, very expense control, just as Tom said one of the hallmarks and we are very proud to continue that and across the lines as personnel, marketing for sure, very much under control. The one exception is real state tax as we talked about, we did get majority about valuations come out in the second quarter which is typical. In the beginning of year you sort of guessing on that just based on trends and so came out a little higher than we thought particularly in Texas as valuation in Dallas and Houston didn’t soften like we had thought hope did it would any. So I think that’s where the only pressure expenses is, we raised our guidance a percent at the midpoint on real estate tax guidance. Now we think it will grow about that 6.5%. That’s you know thorough to be operating expenses but even with that we reduce, we were able to reduce midpoint of our expenses for the year by about 25 basis points. So some revolve that is, now we expect to be well under control.

Tayo Okusanya

Got it, okay. Thank you.

Operator

Our next question is from Wes Golladay of RBC Capital Markets.

Wes Golladay

Good morning guys. Great quarter, looking at the demand side, job growth in US has tapered off a bit. Have you changed your outlook on demand for your portfolio?

Eric Bolton

Yeah, Wes at this point we have - I mean we will be taking a hard look at expectation for 17 as we work towards developing initial guidance and so forth on that. But as we see here today you know we haven’t seen any evidence that weakness in employment trends are going to create any issues for us of course the other thing that’s a strong under pinning to the demand component of our business is just all the sort of psychology surrounding home ownership versus rending their homes and all the demographic factors that are continued to work in our favor and so those powerful forces are there and they are going to continue from many thing that we see would allow us powerful forces to really be unleashed of courses, is a good job employment scenario where people can get the job. From what we see, employment trends tend to generally some of the particularly larger markets across the South East tend to be at the high end relative to what we see elsewhere across the country and that’s largely frankly why we tend to focus, as much as we do on that region.

Wes Golladay

Okay and have you seen any, I guess, secular trends where big corporations are now moving into your markets, I think Dallas and Fort Worth have been a big beneficiary of that over the last few years, but I guess throughout your portfolio, are more companies getting ready to move to your cities and do you have any - I guess, next year that would be noticeable?

Eric Bolton

The South East continues to be a place lending significant manufacturing jobs, Volkswagen expanding and BMW expanding, probably largest Auto plant in North America outside of Greenville, and Tristan [ph] which already has Boeing rocking all along has picked up Volvo as well, General Dynamics expanding. So we are seeing those things happen as well as with Panama Canal opening up, our port locations have opportunity goes well. So those are continuing.

Thomas Grimes

And the markets as you mean, Atlantic continues to be a very strong magnet for corporate relocation just great quality life airport capability there and so and so. I mean Dallas, Fort Worth, Atlanta, I think Charlotte and Orlando, we are seeing really good things in terms of job grow and corporations moving operations to Orlando as well.

Wes Golladay

Okay thanks for all the color.

Operator

We’ll move next to Rich Anderson of Mizuho Securities. Your line is open.

Rich Anderson

I sort of keep it going but I'm just trying to think of the land gained projection. How much of that is completed and are there any kind of gains or actually should I say land proceeds, are there any more gains expected for the third or fourth quarter?

Eric Bolton

Nothing significant Rich, I will tell that is us continuing to move through, almost two small talk about now because of the income statement want to walk that through for you. So three parcels of land from the Colonial Merger, the remaining joint venture we had very small and the gains are small. It is all about half a million dollars on the income statement. So we have another few parcels of land we make sale of the course of the year and really the point there is, we value those well, we are getting gains on that sale, we don’t think it will be significant but we are glad to turn that with more productive capital in our properties and have a slight gain over the back half of the year.

Rich Anderson

Would you be able to tell us what NAREIT FFO would be from a guidance perspective relative to your 5.85% on a core basis?

Eric Bolton

I think it would probably and will have that right from Rich, I mean you have to get that with your offline but that certainly would be a little bit I am not sure that is higher, how many cents? $0.6 per share higher, that is not precision right now.

Albert Campbell

Around $6 FFO for the year Rich, given

Rich Anderson

$6 right. That said could you have a big debt mark to market that would be in the near eight number.

Albert Campbell

Correct, so from 585, excuse me.

Rich Anderson

Okay great, thank you very much.

Operator

Our next question is from Conor Wagner of Green Street.

Conor Wagner

Good Morning.

Eric Bolton

Good morning Conor.

Conor Wagner

On the redevelopment program, can you tell us how the units you did in 2014 are doing relative to their comps?

Eric Bolton

Our units done in 2014 relative to their comps.

Conor Wagner

Yes, you mentioned you get like 10% rent bump on the ones you are doing today. I was just wondering how durable that is, now that we're two years out from some of those redevelopments or the ones that you did in 2015?

Thomas Grimes

What happens there is that, you don’t have comps anymore if that make any sense because on something that all the unit has, it don’t have a comp to compare to because we redeveloped the whole property.

Eric Bolton

Tom is referring to comps meaning you know non-renovated units at the community. You are referring to the comps as what is happening in the market. And we would have to, we can get offline and figure out a way to pull that for you Conor but basically what we basically we do is, we do renovate, we go into our system and we make sure that the system knows that unit has had a capital infusion and therefore when we look at market rate trends over the next seven eight years, we take our comparison for our unit and that premium markup has to be there on a continuous basis for five or seven years or in other word, whatever premium we got to market when we initially did the deal, we track it to make sure that premium stays in place over the life of the investment that we make and there is, we have classification on buy unit where we can charge premiums for use, we can charge premiums for this upgrade, we can charge premiums for whatever, we got a lot of different premium levers and when we throw those levers they stay there and that becomes the benchmark that compares against the market.

Conor Wagner

So then, I guess you could say, if you track those units from 2014 you're obviously still able to get that premium?

Thomas Grimes

Yes.

Eric Bolton

Yes.

Conor Wagner

And then for your redevelopment plan, do you plan on doing a similar number of units in the 2017?

Thomas Grimes

What happens there is that, you don’t have comps anymore if that make any sense because on something that all the unit has, it don’t have a comp to compare to because we redeveloped the whole property.

Eric Bolton

I would think we would be in that ballpark, I mean hadn’t penciled it just yet, the pipeline continues. It can, and we feel good about the opportunity to do at least that.

Conor Wagner

And that's typically going to be about a $5 million boost to NOI in a given year, so that like 1% boost to NOI growth?

Eric Bolton

I think it is closer to 40 perhaps.

Conor Wagner

I guess, all right maybe from the rolling of the previous year, right. With the stuff that you're doing -

Eric Bolton

Double off, that would be correct.

Conor Wagner

You do it on a continual basis. And then last question just on renewals, where are you sending them out for August and September?

Eric Bolton

We are going out at 6.5% to 7%

Conor Wagner

6.5% to 7%, great. Thank you very much guys.

Eric Bolton

Okay thank you.

Operator

Our next question is from Buck Horne of Raymond James.

Buck Horne

Hey there, good morning guys. Appreciate the time. I was just browsing some of these stats that just hit the tape [ph] from the Census Bureau talking about a million new households are being formed all of them renters in the last quarter, at least on a year-over-year basis, and looks like the homeownership rate just hit the lowest level since 1965. I guess my question is are you guys surprised at this point in the cycle that move-outs to homeownership are not going up at this point, where the mortgage rates are at and what's happening out there? I guess is there any signs in your incoming tenants whether it's average FICO or rent to income or some other metrics that - something is changed in the demographics or changed in the propensity to rent or preventing people from buying?

Eric Bolton

No, I mean Buck the rents to income ratio of our folks is about 17% and 18%. Their credit scores are very strong. Either folks that could go by house tomorrow are choosing not to and really nothing in our sort of what we are seeing in demographics that makes us think that I mean 74% single right now, or predominantly female there, they just doesn’t seem to be a lot of demand for owning your home out of our residents at this point.

Thomas Grimes

Buck, I mean you research this very well and you know lot about this but these trends but I just think it gets back to just the whole psychology that late 20 early 30 year old today is just different than it was years ago and I think that as you know whether they are getting married later in life or starting family later in life, just life conditions are different today than they were years ago and as a consequence to that, they are just more in kind want to rent their housing as supposed to making the obligations surrounding buying a home and it is hard for me to see how that is going to materially change. I think, people are more motivated to make a decision to buy versus a rent for life style reasons and attractive financing and low interest rate notwithstanding I don’t think it is going to compel people to abandon a lifestyle choice just because it gets little bit more affordable.

Buck Horne

I appreciate those comments. And just going back to the acquisition opportunities, have you seen or detected any changes to cap rate expectations in the market, just given maybe the surge of activity that you're seeing in the pipeline? What are cap rates for well-located property in your markets, roughly?

Eric Bolton

We are still seeing very low five, high for cap rates pretty routinely. We haven’t seen any evidence as to suggest the cap rates have materially changed. We are just seeing more opportunity and of course where we focus on some of these leased up opportunities as you know those are situations that are little bit more difficult to finance and only the strongest buyers can take on some of the initial dilution associated with acquiring a non-stabilized asset and our ability to execute on all cash basis from an acquisition perspective really gets us to a lot of opportunity versus a lot of the other constant that we run into our competitors that we into. So we haven’t seen any evidence to suggest the cap rates have changed in anyway. We are just seeing more opportunity and working that angle to our benefit.

Buck Horne

I appreciate it very much, thanks gentleman.

Thomas Grimes

Thank you, Buck.

Operator

And we’ll take question from Dennis McGill from Zelman & Associates.

Dennis McGill

Good morning, thank you guys. First question just on Houston, interested in your perspective on where you think you are in the pricing cycle there, does it feel on the ground as though prices have stabilized or do you feel like there's more pressure ahead?

Eric Bolton

We are continuing to have pressure on new lease prices, so I think that’s going we are not quite bottom on there, renewals were still getting positive at 3, 3.5. So I think we have got little more tough slotting in Houston and I mean we are so - of course Houston is a very, very big market and it is going to vary a lot of sub market and some of our suburban locations are going to hold up better than some of those stuff around the gallery and well inside the loop and so it is going to vary a little bit. But I think Houston has got another three or four quarters to go before I mean, good news is supply has really stopped, debt stopped and I think you just got to work through the absorption over the next three or four quarters and I think Houston becomes more of a recovery story, perhaps in late 17 certainly by the time it get to 2018.

Dennis McGill

And then separately, a couple questions on turnover. When you look at your turnover today, I think in the past, there were times where it was in the low 60% range. Do you feel like normalized turnover is somewhere in that range or is it different today based the shift in the portfolio versus let's say 10 years ago?

Thomas Grimes

Yeah, I don’t think we will get back to those really hard turn over numbers, shift in the portfolio as well as shift in consumer habits around.

Eric Bolton

I think as Tom said there is two factors, as we have sold of some of the older properties that we had over the last several years, a lot of those properties where in some of these smaller more tertiary market and some of those properties tend to be dominated by more of a military profile where you tend to have a higher turnover rate associated with the activity at the property and I think that is a little bit apply in our portfolio coupled with the other point Tom mentioned which is just renter psychology is so much different and average length of stay in our portfolio is longer than it has ever been and our average rent is higher than it has been and I just think that you know the odds of getting back to 64% - 65% turnover, we just don’t see anything that is likely to get us in that direction.

Dennis McGill

So, if you thought about and appreciate that you probably are not going to get back to 64% or 65%. If hypothetically renter choices change and let's say it trends back to 60% over a couple of year period, what would that do to operating margin if you isolated that instance and let's say pricing power remains relatively similar 3% to 4% type range, if that happened over a couple of year period?

Eric Bolton

Every 1% change it is about a penny for share so it is not quite a significant as you think but it is the best impact you could think about.

Dennis McGill

Okay perfect, thanks guys.

Eric Bolton

Thank you.

Operator

And there are no further questions at this time.

Eric Bolton

All right we appreciate for joining us this morning and follow up with us if you have any other questions. Thank you.

Operator

Thank you, this does conclude today’s MAA Second Quarter 2016 Earnings Conference Call. You may now disconnect your lines. And everyone have a great day.

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