Monogram Residential Trust, Inc. (NYSE:MORE)
Q2 2016 Earnings Conference Call
August 4, 2016 17:00 ET
Kara Smith - Investor Relations
Mark Alfieri - Chief Executive Officer, President and Chief Operating Officer
Peggy Daly - Executive Vice President, Property Management
Dan Swanstrom - Executive Vice President and Chief Financial Officer
Jim McGinley - Senior Vice President and Chief Development Officer
Michael Kodesch - Canaccord Genuity
Richard Hill - Morgan Stanley
Greetings and welcome to the Monogram Residential Trust Second Quarter 2016 Conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Kara Smith, Investor Relations for Monogram Residential Trust. Please go ahead, Ms. Smith.
Good afternoon. Thank you for joining us today for Monogram Residential’s second quarter earnings conference call. In addition to the press release distributed this afternoon, we have filed a supplemental package with additional detail on our results and our portfolio, both of which are available in the Investor Relations section on our website at www.monogramres.com.
On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, including without limitation, those contained in Item 1A, Risk Factors of Monogram Residential’s Annual Report on Form 10-K for the year ended December 31, 2015, and its other SEC filings that may cause actual results to differ materially from those discussed today. Examples of forward-looking statements include those related to revenue, operating income, financial guidance, as well as non-GAAP financial measures, such as same-store results, FFO, core FFO, and AFFO.
As a reminder, forward-looking statements represent management’s current estimates and Monogram Residential Trust assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the Company’s filings with the SEC and the definitions and reconciliations of non-GAAP measures contained in the supplemental information package available on the Company website at www.monogramres.com.
This afternoon’s call is hosted by Monogram Residential’s Chief Executive Officer, President and Chief Operating Officer, Mark Alfieri; Executive Vice President of Property Management, Peggy Daly, and Executive Vice President and Chief Financial Officer, Dan Swanstrom. Also participating on today’s call are Monogram Residential’s Senior Vice President and Chief Development Officer, Jim McGinley; and Senior Vice President and Chief Accounting Officer, Howard Garfield. Management will make some prepared comments, after which we will open up the call to your questions.
Now, I will turn the call over to Mark.
Thank you and welcome to our second quarter 2016 conference call. This afternoon, I will discuss the second quarter results, update you on our progress on the development program and introduce our expanded guidance for 2016. Peggy will follow with a summary of the portfolio performance. Dan will then provide more detail on our financial results and balance sheet and discuss the factors assumed in our guidance. After our prepared remarks, we will open up the call to your questions.
We are pleased with the second quarter results here at Monogram as we generated another quarter of solid NOI growth couple with continued progress on our development program. As previous discussed our efforts in 2016 are focused on the completion and lease up of our development which sets a stage for a significant growth in the coming years as well as ongoing work to drive consistent same store NOI growth in this stabilized portfolio.
Year-to-date our proportionate share of same store revenue and NOI growth was 3.9% and 5.8% respectively. For second quarter proportionate share of annual same store revenue increased by 3% and our annual same store NOI increased by 4.2%. As properties are stabilized and completed, we are seeing lift over time to our quarterly results. Sequential growth this quarter and core FFO of $1.7 million or 1 penny per share reflects an important flexion point for us as newly completed properties begin to contribute in excess of interest expense. As we have discussed, we expect the development portfolio not yet stabilized to contribute significant embedded NOI which will enhance our annual run rate core FFO and AFFO once completed and stabilized.
This quarter, we added four new development properties to our quarterly stabilize same-store portfolio. These properties represent 1059 total unit and $115 million of total capital investment at our share in Dallas, Houston and Southern California. With the addition of these properties to the quarterly same-store portfolio for the second quarter, the proportionate share of the quarterly stabilized same-store revenue and NOI growth was 4.1% and 6% respectively. We continue to feel the effects of additional supply being delivered into certain market and we’re seeing growth moderate from a torrid pace at our two downtown San Francisco asset to a more normal but healthy pace. Additionally, our two West Houston properties continue to be impacted by the oil market. With that in mind, we are revising our full-year NOI guidance to 4.25% to 5% while reducing our expectation of same-store revenue growth to 3.3% to 3.6%.
We now expect to see a reduction in our same-store expense growth range from 1% to 1.5%. Also during the quarter, we continue to make progress on our development program which consists of eight properties, six in lease up two under construction with a total cost of $555 million and these properties were approximately 83% complete in aggregate at quarter end. During the quarter, we completed construction of Verge in San Diego and expect it will stabilize at a yield on cost of 6.3% which is more than 150 basis points higher than current cap rate and total estimated value creation from stabilization is approximately $29 million. Verge is now classified as an operating property in lease up. Additionally our leasing teams are hard at work at the six communities that are currently in lease up which are located in Boston, D.C., Miami, San Francisco, San Diego and Dallas. The average yield on cost for these communities is expected to stabilize at 6.2% with total value creation estimated to be approximately $113 million.
Cyan on Peachtree in Atlanta stabilized during the second quarter at a yield on cost of 7.9% with estimated value creation of approximately $17 million. We believe that completing over $555 million of exceptionally well located new communities in highly desirable market and an average yield on cost of over 6% will create substantial incremental shareholder value over the long term and add to our distributions over time. As these properties are delivered and stabilized, we’re realizing outsize returns while reducing the overall risk profile of our company and growing into our balance sheet. Aside from our property operations and development activity, I would like to note that we put into place enhancements to our corporate governance and disclosure for the second-quarter.
First, we took action to opt out of provisions of the Maryland Unsolicited Takeover Act or MUTA including unilaterally staggering or board without shareholder approval. This underscores our commitment to shareholders for operating with high standards of corporate governance in all aspects of our company. Second, having provided revenue and expense guide for proportionate same-store NOI last quarter, we are delivering on our promise to provide earnings guidance for the full year. At this time, we expect core FFO will range from $0.34 to $0.37 and AFFO will range from $0.35 to $0.38. Dan will provide more detail on the assumption behind these numbers in his prepared remarks.
Now, I will turn the call over to Peggy. Peggy?
Thanks Mark and good afternoon, everyone. On a macro level, we continue to see the multifamily sector benefit from steady job growth and homeowners near generational low. Our portfolio is extremely attractive to renters today who value highly eminent type communities and walkable neighborhoods. Our assets are situation in neighborhoods with proximity to restaurant, entertainment, cultural venues and employment centers. Our resident is rendered by choice driven by both life style and a desire to intentionally avoid the investment associated with homeownership.
Turning to our second quarter results, I would like to first note that of our 52 equity investments 32 fall into our annual same store pool. Our proportionate share of same store revenue was up 3.0% and NOI was up 4.2%. It is important to note however and as Mark mentioned, in Q2 we added four asset to our quarterly stabilized same store portfolio which posted 4.1% revenue growth and 6.0% NOI growth inclusive of these addition. Our proportionate share of property operating expenses grew a mere 0.7% year-over-year in our Q2 same store pool. We continue to benefit from a reduction in property insurance expense, reduced utility expenses and our team continues to manage controllable expenses. While real estate taxes were up in Georgia and Texas, overall real estate tax expense benefited from some positive prior-year tax adjustments during the quarter. Our consolidated same store weighted average occupancy was 95.4% for the second quarter. New lease rent trade out was slightly below 2% for the quarter driven to some degree by the trade out of short-term leases at premium rate for longer-term leases. Our average lease term on new leases was 11.2 months during the second quarter up from 11 month in Q1.
Renewal increases remained at a healthy mid 5% range. As I turn to market performance, please note that 87% of our proportionate share of our same store NOI is represented in the following major market Southern California, Northern California, Boston, Mid Atlantic, South Florida, Denver and Texas. All numbers that I mentioned will represent our proportionate share. Additionally, all market rent growth and supply projections that we will cite are from Axiometrics. Southern California represents approximately 11% of our Q2 same store NOI and in the second quarter we realize growth of 4.9% in same store revenue and 7.8% in same store NOI. However, as we add Blue Sol in Costa Mesa, our quarterly stabilized same store pool, revenue for the Southern California portfolio increased by 7.2% and NOI by 13.4%, new supply significant with the bulk of that inventory being delivered in the LA submarket. However, rents are projected to grow by 3% to 5% over the next three years as continued job growth in the cost of home ownership provides a healthy environment for multifamily absorptions.
Northern California which represent 19% of our Q2 same store NOI remain strong even through rent growth is moderating from exceptionally high level. For Q2 Northern California produced same store revenue growth of 4.5% and NOI growth of 8.7%. New supply in downtown San Francisco has put temporary pressure on rent growth but our asset in the surrounding bay area continue to post double digit NOI growth. We expect new supply to moderate and absorb over the next six to eight quarters and rent growth in the downtown area is expected to resume a 4% to 6% range over the following couple of years. Our Boston portfolio which represents 10% of our Q2 same store NOI is located in the Suburban submarket which are performing much stronger than the downtown market. As a result, our Q2 same-store revenue growth was 4.5% and NOI was at 3.7% impacted somewhat by real estate tax growth. While Boston has seen increases in inventory through the end of 2017, the bulk of this new Class A inventory is impacting the urban Boston market, so we continue to see steady revenue growth with our suburban asset.
Our Texas portfolio which currently represents 14.7% of our Q2 same-store NOI had Q2 same-store revenue growth of 0.9% and NOI growth of 4.9%. As we look to the benefits of adding our stabilized developments into same-store, it’s noteworthy to mention that with the addition of our three new developments in Texas into our quarterly stabilized same-store pool in Q2, our revenue growth was up 5.4% and NOI up 10.5%/. In Dallas, our in town assets have been challenged by significant new supply within a 4 mile radius much of which is currently being delivered or anticipated to be delivered by 2017 which resulted in a more modest revenue growth in our Q2 same-store Dallas portfolio. The story here is still a positive one as the inventory should be substantially absorbed within the next 12 to 18 months, employment fundamentals remain strong and there is limited new inventory on the horizon. Looking ahead, as the new inventory is absorbed, our asset locations are A plus, and we will likely see 3.5% to 4.5% revenue growth trend over the following couple of years.
While our West Houston asset continue to see challenges from both new supply as well as economic factors relating to the oil industry, our Inner Loop assets are performing well. Houston also benefited from positive growth from a new addition to our quarterly stabilized same-store pool, Muse Museum District. As a result of this addition, our quarterly stabilized same-store revenue growth in Houston was up 4.8% and NOI was up 6.8%. This strong performance was driven by our asset is the Inner Loop. Though we experienced a 6% decline in revenue at our West Houston asset, please note that these two assets represent approximately 3% of our Q2 same-store NOI. While Houston’s new supply is meaningful, by the end of 2017 once absorbed there is little to nothing behind it. In Denver, which represents 12.5% of our Q2 same-store NOI, new supply has been absorbed at a steady pace due to strong demand fundamentals in the market. We expect that new supply will temper rent growth from the levels we’ve experienced over the past several years. That being said, our Q2 same-store revenue growth remained a healthy 3.4% with NOI up 3.5%. Because our assets are in close proximity to the bulk of new delivery, we expect that trend to continue through yearend. Our Florida markets are strong with manageable new supply delivery. Q2 same-store revenues in Orlando were up 5.5% and 3.5% in Fort Lauderdale. As a result our Q2 same-store NOI for the region was up 5.6%. We expect Florida to be a steady performer this year.
D.C. has been a challenging market for us in prior years but we have turned that corner. With the exception of the Tysons Corner submarket where the increase in supply is more concentrated, your experience seem positive albeit moderate revenue growth in the region. In Q2, our mid-Atlantic region which represent 16% of our Q2 same-store NOI posted a 1% increase in same-store revenue and 1.5% growth in NOI. To quickly recap the status of leases on our new development, we continue to experience healthy absorption with rent generally at or above expectation. We stabilized Ev in San Diego and CYAN in Atlanta in Q2 slightly ahead of schedule and are effective around 3% above pro forma. We anticipate the stabilization of three more assets in Q3.
With that, I will turn the call over to Dan.
Thanks, Peggy and good afternoon everybody. In my comments today, I will briefly review our second-quarter results update you on our balance sheet, liquidity and development program financing. Finally, I will discuss our expanded guidance which includes as Mark mentioned core FFO and AFFOr guidance for the full year 2016. This afternoon, we reported net loss attributable to shareholders of $9.2 million or net loss of $0.06 per share compared to a net income of $49.2 million or $0.29 per share for the second quarter of 2015. The primary difference between the two quarters was a gain on sale of $48.6 million in the second quarter of 2015. Core FFO was $14.3 million or $0.09 per diluted share and AFFO was $14.7 million or $0.09 per diluted share for the second quarter of 2016. This compares to core FFO of $21.5 million or $0.13 per diluted share and AFFO of $21.7 million or $0.13 per diluted share for the same period of the prior year.
As discussed in more detail on our supplemental, the year-over-year decreases in core FFO and AFFO are primarily attributable to promote and disposition fee income of $4.5 million received in the second quarter of 2015 related to the acquisition of certain PGGM JV interest as well as property dispositions completed in 2015 and increased interest expense net of reduction in capitalized interest associated with our development activity. In total, these items more than offset increases in NOI from our same store portfolio, stabilize non-comparable and lease up property.
I would also like to note that core FFO and AFFO for the second quarter of 2016 include an add back from FFO of approximately $2 million of severance expenses related to a workforce reduction. These are one-time expenses incurred this quarter in our G&A expenses that we expect will result in approximately $2 million of annual G&A savings going forward. On a sequential quarter basis, second quarter 2016 core FFO and AFFO both increased by approximately $1.7 million or $0.01. We are starting to see positive NOI contributions to earnings from recently stabilized communities including Cyan on Peachtree in Atlanta and Symantec Peachtree Atlanta and Ev in San Diego as well as communities and lease up including Verge in San Diego and SoMa in Miami.
Please note that within our supplemental package you will find all the itemized adjustments between NAREIT defined FFO and our core FFO as well as additional disclosures to calculate our AFFO. As of June 30, 2016 we had total consolidated debt outstanding of approximately $1.6 billion. Our proportionate share of contractual debt outstanding totals approximately $1 billion, of this $700 million is fixed rate debt which consist substantially of mortgages with a weighted average interest rate of 3.7%. Our remaining debt outstanding is variable rate which includes $281 million related to construction financing and $47 million outstanding on our credit facilities. In total, our proportionate share of net debt to gross total asset at gross book value was approximately 39% at the end of the second quarter.
Regarding our 2016 debt maturities at June 30, we had about $70 million of remaining debt maturities in 2016 at our share representing approximately 7% of our total debt. Post quarter end we refinanced $56 million and our share of mortgage debt onto two properties, Argenta and The Gallery at NoHo Commons. For each property, we obtained a new five-year mortgage at a fixed rate of 2.8%. This compares favorably to the prior interest rate of 3.2% for Argenta and 4.7% for NoHo Commons. We now have only one remaining maturity for $13 million that comes due in the fourth quarter
Turning to our liquidity position, at quarter end we had available capacity on both of our credit facilities of $261 million and approximately $48 million of cash available on our proportionate balance sheet leaving us with approximately $310 million of total liquidity. At quarter end, our existing development program was approximately 83% complete and our share of estimated remaining development cost to complete total is $113 million. In April, we completed a $14 million financing at our shares on the Caspian Delray Beach construction project. As a result, we now have only one remaining development project Lucé in Huntington Beach, California for which we currently plan to obtain new construction mapping. This project represents approximately $80 million of the total remaining development cost to complete of $113 million. Now, I would like to turn to our outlook for 2016. As Mark mentioned, we are updating our previous same store 2016 NOI guidance to 4.25% to 5% from our previous range of 4.5% to 5.5% which is based on revised same store revenue and expense growth expectations of $3.3 million to 3.6% and 1.0% to 1.5% respectively.
With respect to our earnings outlook, we expect that we will achieve full year core FFO within a range from $0.34 to $0.37 and AFFO within a range from $0.35 to $0.38. We have included in our supplement the main components of our second-half 2016 guidance supporting these ranges. Our full year 2016 outlook implies a second-half 2016 AFFO per share range of $0.19 to $0.22 as compared to year-to-date AFFO per share of $0.16. We expect increased NOI primarily from the lease up and development properties as well as growth from the stabilized properties to drive incremental AFFO growth in the second half of 2016. With seven of our remaining development communities expected to be completed and stabilized by the end of 2017 we expect significant embedded NOI to continue to flow through to AFFO throughout 2017. In closing, we are pleased with our second-quarter results as well as our continued progress on completing and leasing up our development program. That concludes our prepared remarks. We will now open the call for questions, operator.
Thank you. [Operator Instructions] Our first question comes from the line of Michael Kodesch with Canaccord Genuity. Please proceed with your question.
Hi good evening, guys. Really appreciate all the color there. Lot of good market color. My first question has to do with leverage. I think you know you guys, I think were down about a turn on net debt to EBITDA, little under a turn on net debt to EBITDA. And I was wondering what your thoughts were on that progress and then also where you are guys are at on asset sales, I think you had mentioned potentially look at selling off the Vegas, New Jersey, Orlando and Georgia assets, some of those non-core stop, so just any color there would be really great.
Sure Michael, this is Dan. I will take the first question on leverage and then Mark can chime in on your second question. We have as you know and it’s on page 41 of your supplement. We provide our debt to EBTIDA numbers and we also provide adjusted excluding development activity and so when you back out the development debt in the not-income-producing EBTIDA associated with that, we are at about 7.5% net debt to EBITDA and as we said before, we intend to finance the remaining development with construction financing. So we have about $113 million left to spend on that and the primary source of proceeds there is construction financing, so as we look forward, we capture the embedded NOI from our development properties as well as incremental debt on those construction financings, we expect to kind of stabilize in that kind of plus or minus net debt to EBTIDA e times range. And then I can turn over to Mark for the second part of your question.
Hi Michael, how are you doing?
Going good, thanks.
On dispositions, we continue to pursue dispositions in non-core markets and you know I think we mentioned last quarter that we had engaged a few brokers and we are still looking at that and hopefully we will be able to give you some more color next quarter.
Okay, I really appreciate the color. I think you know looking at my next question, looking at some of the initial retail base of your investors, I think trading at current valuations, some of those retail investors are now in the money and I was wondering if you guys have been seeing a pickup in sales at all there?
Michael, that’s been the case since the outset once in distracting it guidance or intelligence has told us that once we eclipse about 980 a share, retail sales picked up to about 1 million shares a week, so a pretty substantial clip. Below that point, they dropped off dramatically and if you go down closer to $9 a share, they were next to nothing. So yes, we expect that there is still significant retail selling happening right now.
Do you have any idea, how much of that base is left?
Just what was reflected in the last quarter numbers which I think showed 35% retail but obviously there’s been significant movement since then with our stock price.
Okay thanks and then just on my final question, I know you guys kind of put out a press release on this recently but I was wondering if there is any update to the ongoing planned [ph] contention with Behringer Harvard on the promote date and then just where does that promote strike price maybe stand today?
Okay, yes, as we mentioned in the release there is a special determination committee that will be completing the work in the third quarter. And so we should have some clear update on termination of that date in the third quarter and the strike price that we estimate as of July 29, 2016 as 11.50 a share.
Excellent, that’s all from me. I will jump back into queue if anything else. Thanks guys.
Thank you. Our next question comes from the line of Zon Tim [ph] with CMO. Please proceed with your question.
Thanks good afternoon. So you provided the same store results on 32 properties and then there is another metric that the stabilized same store on 36 property. So I guess the simple question is, is your guidance based on the 36 or 32 same store guidance.
The same store guidance of 4.25% to 5.0% is based on the 32 properties.
Okay and I read the definition a few times and I don’t see the difference between the two, can you just explain in common English what the difference is between the 30 and 36?
The 32 properties are based on an annual same-store definition in the same store bucket this January and the prior January. And then given the substantial volume of developments in our program, we thought it was helpful to provide more real-time results. And so those are in the 36, those are properties that are stabilized for the first time this quarter as well as a prior-year quarter.
Okay so the 36 is a more updated same store pool than and the 32 is just kind of at the beginning of the year and doesn’t change.
That’s right, right.
Okay, that’s helpful. Are you offering any more incentive? You mentioned that Houston is being quite challenging now. Can you just talk about incentives on some of your stabilized assets and if that’s increased?
This is Peggy, I will dive into that. Clearly in Houston, I think we really have two markets there in Houston, West Houston which is in the energy quarter continues to really experience depressed demand. So, those rents and by the way, we offer effective rents in our stabilized portfolio so we don’t have what you would want to call “incentives or concession” within our stabilized pool. We just moderate effective rents up and down. So those rents went negatively as I mentioned. The Inner Loop assets have, however, had a very strong quarter. We do those things with the supply in the Houston market at that point to decelerate some through the rest of the year over what we produced in Q2. Through the rest of the portfolio, I would, I will try to share a lot of color on the variety of markets but clearly San Francisco is dialing back some as everybody knows, it’s kind of effecting a lot of our peers as well. So our rent growth is not a robust specifically our downtown properties as opposed to our outside Bay Area properties. But we are seeing some moderation also happening in Denver and Dallas.
On page 26 of your supplemental, this all kind of tied into my prior question but so your period any occupancy have gone up sequentially is down year-over-year but up sequentially and your monthly rental revenue per unit has also gone up sequentially as well. And this is on your same store pool, I understand this whole page is consolidated. But why the slowdown in your same store guidance if these two metrics are either stable or moving up?
Once again, this is Peggy. I will jump in on that. I think ultimately when we originally provided guidance, we sought our rent, new rent growth I will say our renewal growth is coming in and continuing to come in at a very healthy pace. But our new rent growth did not have the type of uplift in the seasonal growth that we typically experience in Q2, as a result and you can see on a year-over-year basis, our occupancy was down to some degree. So our growth wasn’t as great. Those are embedded through the rest of the year. We think that that growth will or new leases will be more moderate than we originally projected because of those markets that I touched on.
Okay thanks for that and then my final question is on development pipeline, the 06/3 stabilized yield also did not move in the first quarter, but have you changed at all your definition of what the stabilization period is, has that been delayed at all and you can just remind us how long it takes to basically get the position?
I can comment on the first part. You know we haven’t changed the definition in terms of the project NOI yield at stabilization. As you noted over – since the last quarter sequentially the net number is till 6.3%. We did have a few movements up and down Cyan on Peachtree stabilized at 7.9% versus an 8.2% last quarter but that was more than offset by an increase in SoMa at 7.2% this quarter versus 7% last quarter and Nouvelle 5.6% this quarter versus 5.3% last quarter. As it relates to and you can clarify, I am not addressing your question but as it relates to the timing, we also do provide guidance updated each quarter on the actual estimated completion date as well as stabilization date. And so SoMa we updated the stabilization from the fourth quarter of 2016 to the third quarter and on Verge we updated it from the fourth quarter of 2016 to the third quarter of 2016, so both of those projects quarter-over-quarter expected to stabilize sooner. And then Zinc on Cambridge we pushed out a quarter with now estimated stabilization of 2017. So those were the only three properties where we updated our estimated stabilization date from the last quarter.
So the new supply that, sorry go ahead.
I am sorry, just to jump in, we define stabilization at 90% they occupied.
So the new supply that’s picked up in many of your markets that impacting more your stabilized basket not so much your development, is that a fair assessment?
That’s very fair assessment. I mean, I think we continue to see all things considered people like new and so they gravitate towards the new in town especially where this new supplies being delivered a lot are through merchant builders trying to get absorption, stabilization, so they can spilt those asset, so there is upfront concessions and so when you start doing effective rent over our stabilized assets they are very nominally closed. So it really from a stabilized perspective hurt us to some degree. Now on our lease up, because we are new and in some of our markets we are ahead of the new supply, we have been able to have very strong absorption and for the most part rents above what we perform at.
Great, thank you.
Thank you, our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your questions.
Hi guys, how are you? Thanks for your – just a couple of quick questions from me. You know as a you look forward obviously some of the slowdown in San Francisco and I know you don’t have a lot of properties if any in the New York market but that seem to have caused a lot of people off guard. So you know you made some comments about a slowdown in Dallas and maybe Denver as well. What kind of factors are you tracking at this point to make sure that you guys feel comfortable that maybe are there supply versus demand technicals don’t get out of balance in some of the markets going forward?
Well you know, this is Mark, Richard. We track supply in each of our markets really monthly and had a really good insight to where supply is coming and we were very early. We were kind of the first supply out and now you’re seeing a wave that was really started in 2010 and 2013 and we really are hitting the peak supply numbers coming in. But I can tell you one of the things that I am encouraged about is when you look at the year-to-date permits and starts, permits are down 35% year-to-date and starts are down 22% year-to-date and so things are really starting to tighten up as it relates to the lending environment and also equity is going back. But to your specific point, if you look at some of our markets we kind of look at two things, one you’ve obviously got population and job growth and then two what is supply relative to total supply in the submarket. And as we look at that we feel like we’re in pretty good shape in most of our market even San Francisco at 3.6% additional supply over the next two years. But Dallas, Austin and Houston are big number. Dallas is 7% of existing supply over a two-year period coming in, so it’s a large number. What we are seeing in Dallas was that in town supply is slowing down dramatically and most of the supply is moving to the outer rims. So we think moving forward we are going to be positioned well but it’s going to be for the next 18 months or so you are going to be dealing with supply but it is also very submarket located. I can give you a lot of examples where even in a market like Dallas once that lease up has occurred you started ramping back up and getting a lot of momentum on rent growth once that property is stabilized that you have been competing with. So it’s a very localized and concentrated problem that we are seeing as it relates to dealing with supply.
But moving forward, we still feel very good about all the other metrics that the demographic still are very positive in the multifamily sector looking for 4, 5 to 7 years as these millennials continue to come in and our view is or these millennials are going to feed us, we’ve only got a 16% millennial population in our portfolio now. So we got a huge generation coming our way to these urban walkable location and we just think that with what’s happened with cost and lending and everything else that urban supply is going to be really choked down the next few years and – so we are still very positive over the next 3 to 5 years for growth. And then when I look at rent growth in our markets moving forward actual metrics charged rent growth and gives a projection over five years and if you look at the top 15 actual metric markets 13 of those are markets, so with – for growth over the five year period and so we think we are in the right spot. But our particular locations in some circumstances are dealing head-to-head with new supply and it’s really as Peggy indicated on a seasonal basis we just didn’t get the pop that we normally get.
Got it. That’s really helpful. Just two quick follow-up questions. Those on the lending side, we have obviously very much noted what’s going on the construction side of the equation and we see the same things going on with starts permits you do. You know what – do you see any sort of banks and I am really talking more about your development pipeline. How are you thinking about your development pipeline in combination of that tightening in construction lending?
Hi, this is Jim. We continually talk to lenders and mortgage brokers to be aware of market conditions and we continue to evaluate those. We believe that reasonable leverage construction debt while it’s more limited is still available for both construction banks and life companies. However the pricing is probably moved up 50 to 75 basis points over the course of this year.
Got it, that’s helpful. And then just one more thing, I have always looked at your company and thought your access to GSE financing is a competitive advantage. How do you think about when you finance a property via the GSEs versus the insurance market? I think maybe 50% to 60% of your portfolio is GSE financing but how do you think about that? Is it all pricing based or are there other metrics that you are looking at as well?
Yes it’s a combination of factors. Obviously, this is most refinancing rates are pretty strong out there, those were insurance brokers that provided strong rates and also with the GSE access as you noted, you know we think that’s an attractive financing path forward. So we kind of evaluate them based on a number of different factors. Some of our JV properties were probably more likely to get additional mortgage there and utilize the GSEs. As we move forward we have some wholly-owned assets in 2018 that mature and so depending on potential sources of capital at that point, we may look to give our balance sheet a bit more flexibility and try to unencumber a few of those assets. So it’s really a balance I would say between kind of cost that we can get term but also over the longer term we will start to consider trying to see if we can achieve more flexibility on the balance sheet also in terms of portfolio management as years down the road we look to you do some things with our JV portfolio.
Great, that’s very helpful. I will stop there.
Thank you. There are no further questions at this time. I would like to turn the floor over to Mark Alfieri for closing comments.
Thanks everyone for joining our call today. We’re pleased with our portfolio’s second-quarter results. Overall, we remain focused on driving significant NOI growth in coming quarters as we complete the lease up of our development community. We continue to believe our Class A close to market focus multifamily portfolio is positioned to outperform over the long term. We look forward to speaking with you again on the third quarter call. Thank you very much.
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
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