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Edited Transcript of MAA earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Mid-America Apartment Communities Inc Earnings Call

Memphis May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Mid-America Apartment Communities Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert M. Campbell

Mid-America Apartment Communities, Inc. - Executive VP & CFO

* H. Eric Bolton

Mid-America Apartment Communities, Inc. - Chairman, President & CEO

* Thomas L. Grimes

Mid-America Apartment Communities, Inc. - Executive VP & COO

* Tim Argo

Mid-America Apartment Communities, Inc. - Senior VP & Director of Finance

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Conference Call Participants

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* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Buck Horne

Raymond James & Associates, Inc., Research Division - SVP of Equity Research

* Hardik Goel

Zelman & Associates LLC - VP of Research

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the MAA First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, May 2, 2019. I will now turn the conference over to Tim Argo, Senior Vice President, Finance for MAA. Please go ahead.

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Tim Argo, Mid-America Apartment Communities, Inc. - Senior VP & Director of Finance [2]

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Thank you, Chris, and good morning, everyone. This is Tim Argo, Senior Vice President of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; Tom Grimes, our COO; and Rob DelPriore, our General Counsel.

Before we begin with our prepared comments this morning, I want to point out that as part of the discussions, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the Forward-looking Statements section in yesterday's earnings 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. A presentation of the most directly comparable GAAP financial measures as well as reconciliations of the differences between non-GAAP and comparable GAAP measures can be found in our earnings release and supplemental financial data, which are available on the For Investors page of our website at www.maac.com.

I'll now turn the call over to Eric.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [3]

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Thanks, Tim, and good morning. We're off to a good start for the year as the first quarter's growth and effective rent is the highest that we've captured over the past 8 quarters. Resident turnover remains at historically low levels and rent growth on renewal transactions continue to be strong. The increase in combined new and renewal lease rates on a lease-over-lease basis was 240 basis points ahead of the performance in Q1 of last year. We're, of course, just now entering the important spring and summer leasing season, but we certainly like the trends that we're capturing as the compounding benefit of steady rent growth continues to make a growing and positive impact.

Strong expense control continues to be evident, particularly in the areas of repair and maintenance cost and utility expenses. Our property and asset management teams continue their record of innovation and expanding use of new technology while also continuing to leverage the benefits of the larger scale of our platform.

Beyond these encouraging trends with the same-store portfolio, our new development portfolio, our current lease-up property portfolio and our redevelopment pipeline all continue to come online and will make increasing contributions to FFO over the next couple of years.

Our high-growth Sun Belt markets continue to capture steady job growth and solid demand for apartment housing. As pressures surrounding high housing cost and related cost-of-living challenges continue to influence population growth and migration trends across the country, we continue to favor our regional focus. Across our portfolio, average rent as a percentage of monthly income continues to hover in the 20% range, a very affordable relationship. We believe that through the full cycle, our regional markets will drive job growth and resulting demand for apartment housing that will outperform other regions of the country.

As recapped in our recently published annual report, after 2 years with a heavy focus on significantly retooling and integrating our operating platform, we believe that MAA is now even stronger and better positioned. We're excited to now be fully focused on capturing the opportunities associated with the enhancements that were made. We look forward to continued positive momentum over the coming year.

With that, I'll turn the call over to Tom.

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [4]

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Thank you, Eric, and good morning, everyone.

Our operating performance for the year started off well with continued momentum in rent growth, strong average daily occupancy and improving trends. Effective rent growth per unit was 3.1% for the quarter. This is the fourth straight quarter of improving ERU growth. For perspective, in the first quarter of 2018, this number was 1.4%, 1.7% in the second quarter, 2.1% for the third quarter, 2.4% in the fourth quarter, and now up 70 basis points sequentially.

Said another way, in the last year, we've doubled the -- our effective rent growth rate. We're pleased with the positive trend of this steady, compounding driver of long-term revenue growth. This, of course, is led by a steady momentum in blended lease-over-lease pricing. Blended lease-over-lease rents for the quarter were up 3.9%, which is 240 basis points better than this time last year. Average daily occupancy remained strong at 95.9%. Expense performance was steady for the first quarter, up just 2.1%. Marketing growth rate stands out in our report, but that was a result of a credit in last year's numbers. Adjusting for this anomaly, marketing expenses would be flat with prior year.

As a reminder, our annual operating expense growth rate since 2012 has been just 2.4%, well below the sector average. The favorable trends continued into April. We're on track for another month of strong blended lease-over-lease pricing. April blended lease-over-lease rents were up over 4%, which is well ahead of the 2.8% posted in April last year. Average daily occupancy for the month continued at a strong 95.9%. Our 60-day exposure, which represents all vacant units and move-out notices for a 60-day period, is 8.4%, which is in line with last year.

On the redevelopment front, in the first quarter, we completed about 1,700 units, which keeps us on track to redevelop 8,000 units in 2019. This is one of our best uses of capital. On average, we spend $6,100 per unit and achieve an additional 11% in rent, which generates a year 1 cash-on-cash return in excess of 20%. Our total redevelopment pipeline now stands in the neighborhood of 16,000 units to 17,500 units.

The latest market delivery information is in line with our prior forecast. Job growth in our markets is expected to be 2.1% versus 1.6% nationally. As long as demand remains strong, we expect the positive rent growth will continue to build. Our teams are pleased to have the work of 2017 and 2018 in the rearview mirror. We're encouraged with the momentum in rent growth and excited to have our transformed platform fully operational. Al?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [5]

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Thank you, Tom, and good morning, everyone. I'll provide some additional commentary on the company's first quarter earnings performance; our balance sheet activity; and then finally, on updated guidance for the remainder of the year.

FFO of $1.58 per share for the first quarter was $0.11 per share above our guidance for the quarter. Excluding 2 items not included in our forecast, a gain on the sale of a land parcel and the preferred share adjustment, which we'll discuss more in just a moment, FFO for the quarter was $1.51 per share, which was still $0.04 per share above the midpoint of our guidance.

Operating results were $0.02 per share favorable to our prior forecast, with positive contributions from both same-store revenue and expense performance during the quarter. Continued strong occupancy supported the favorable rental pricing trends outlined by Tom, while favorable repair and maintenance and utilities costs offset continued pressure from real estate taxes during the quarter.

The real estate tax expense growth of 6% for the quarter includes the impact of some timing of appeals, and we still expect our total cost to grow in the range of 3.75% to 4.75% for the full year. Favorable performance for interest expense and other income during the quarter primarily related to our recent bond deal and casualty gains, combined to add the remaining $0.02 per share to FFO for the quarter.

We also sold a small land parcel located in Atlanta during the quarter, which was acquired in the Post merger. The parcel was not a viable development for us and was sold as an alternative use. Given significant uncertainty regarding ultimate closing of the sale, the gain of $0.08 per share was not included in our original guidance for the year. In addition, we incurred noncash expense of about $0.01 per share during the quarter related to the mark-to-market adjustment of our preferred shares, which consistent with our practice was also not included in our forecast.

During the quarter, we completed a significant portion of our financing plans for the full year with the issuance of $300 million in new 10-year public bonds at an effective rate, including the impact of settled swaps, of 4.24%, and with the closing of an additional $191 million of fixed rate mortgages priced at a very attractive 4.43% for 30 years. The proceeds were used to pay down our unsecured line of credit, which will be used to provide the majority of financing needs for the remainder of the year.

We also continue to make progress on our development pipeline, funding $15 million during -- of construction cost during the quarter. We expect to fully complete 2 communities this year and also likely start additional projects as part of our $100 million to $150 million total projected funding for the full year. Now we continue to expect the combined stabilized NOI yield on the development pipeline to be in the 6% to 6.5% range.

Our balance sheet remains strong. We ended the quarter with low leverage, which is 32.6% debt to total assets, with over 85% of our debt fixed or hedged against rising interest rates at an increased average maturity of 8 years. At quarter end, we had over $967 million of cash and funding capacity under our line of credit, and our current forecast is leverage-neutral.

Finally, we are revising our FFO guidance for the full year to reflect first quarter performance as well as our updated projections for transaction and debt financing plans for the remainder of the year, which are now expected to reduce FFO by about $0.03 per share compared to our previous forecast.

Also, just as a reminder, we do not forecast any future noncash adjustments to the valuation of our preferred shares. FFO for the full year is now projected to be $6.11 to $6.35 or $6.23 per share at the midpoint, which is an $0.08 per share increase of our previous guidance. We also announced we expect net income per diluted common share to be $2.19 to $2.43 per share for the full year.

We're certainly encouraged with the strong first quarter performance, but we still have a very important leasing season ahead of us, a busy leasing season ahead of us, and our comparisons do become a bit more challenging over the remainder of the year. We are maintaining our previous same-store guidance, and we plan to revisit these projections with our second quarter earnings release.

So that's all that we have in the way of prepared comments. So Chris, we'll now turn the call back over to you for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Al, you mentioned the current development pipeline has an NOI yield of about 6% to 6.5%. How does that compare to the new starts expected this year and the recent land acquisitions?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [3]

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You're talking about the new Phoenix deal that was a prepurchase that we announced, Nick, is that what -- the comparison of that?

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [4]

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No. The development starts for later in the year and then the land that you acquired in Orlando. Are you also underwriting the 6% to 6.5% for that?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [5]

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Right. Right. And that was the intent of the comment to say really we've got -- the current deals we have underway as well as the ones we plan to start later this year, all of those will be in the range of 6% to 6.5% in general. And the total pipeline then would obviously be in that range as well. So none are -- none we see at below that level at this point.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [6]

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All right. Perfect. And how does that compare to cap rates in those markets today?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [7]

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I would tell you, Nick, for the quality of assets that we're looking to develop, I mean, those cap rates are going to be 4.75 -- 4.5% to 4.75% is routinely what we're seeing today.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [8]

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And Eric, you mentioned the strength in the markets. I'm wondering if you're seeing new residents, and I'm sure you track where they're moving from. Any population flows or any change in trends from the Northeast or other high-tax states just driven by the change in tax laws?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [9]

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I'm going to let Tom answer that. Tom?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [10]

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Nick, sort of the best -- I mean certainly we're seeing some shift and change, and we're seeing strength in the Sun Belt. Honestly, the best explanation I've seen of this is a third-party firm tracks U-Haul Rentals. And it costs 25% less to move back up North than it does to move to the Sun Belt, but we are -- we don't have specific information on exactly that. But it is -- the trends are positive.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [11]

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I would tell you, Nick, that we continue to -- I think Nashville is going to continue to see some migration inflows, if you will, coming out of the Northeast, particularly as the AllianceBernstein move begins to shape up. I think the Raleigh area continues to attract a lot of particularly technology-based jobs both from Northeast, West Coast. Of course, Austin has been doing that for some time.

So I think that we don't particularly track exactly, as Tom says, where people come from necessarily. But just anecdotally, based on the information and the conversations we're having with residents, we are seeing growing evidence that folks are moving out of some of these higher-cost areas of the country.

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [12]

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And then in Phoenix, we see -- Phoenix, Denver, Dallas, Austin, we see inflows from California, as you would expect.

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Operator [13]

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And our next question comes from Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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So within the last month, a roughly $1.5 billion suburban class A Sun Belt portfolio traded for what looked like a high-4 cap rate. How interested were you in that portfolio? And how do you view the pricing with respect to, I guess, one, other transactions you're seeing in the market; and two, perhaps as a validation of the value of your portfolio?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [15]

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Well, I mean, honestly, Trent, we didn't look at it. That's not really what -- the asset quality that we're looking to add to the portfolio for the kind of growth rate we want to achieve, organic growth rate we want to achieve going forward. It's older portfolio than typically we take a look at.

Having said that, certainly, based on the pricing that we are seeing, that pricing is in line, maybe a little bit aggressive. Routinely, the new product that we're looking at, still leased up or just recently stabilized in the markets throughout our region, are trading anywhere from 4.5% to 4.75% cap rate. So high-4, call it a 5 for that portfolio is probably about right, in line with the market. It just depends on, frankly, what sort of upside opportunity they saw in the portfolio from either a CapEx redevelopment or operating perspective.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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And quick follow-up. So I think we all appreciate the year-over-year and even sequential improvement in rate growth, which is great at a fundamental level, but it doesn't seem to be translating yet into accelerating same-store revenue growth, at least sequentially. So maybe if you can talk about how the improved pricing will flow to the bottom line. And then considering some persistent supply pressures in some of your larger markets, how confident are you that this improving spread can persist and what that may imply for the rest of the year?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [17]

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Well, I mean, we feel pretty good about the ability for the rent growth trends to continue based on everything that we're seeing. Supply levels, while they remain high in a number of markets, they don't appear to be getting any higher, if you will. And I would suggest that we're at a point broadly where supply levels are likely to show stability to slight moderation over the next, call it, couple of years. As long as the job growth continues to be as robust as it is, I think that sets up for the ability to sustain the kind of trends that we are seeing.

The ability for that rent growth trend to ultimately make its way to the overall revenue line, if you will, is a function of also the other 2 variables, to how they're performing, mainly occupancy and fees or other income. And we saw occupancy -- effective daily occupancy trade off a little bit from last year. As we contemplated in our guidance for the year, we think that's the right trade-off to be making at this point in the cycle and are comfortable with that assumption and comfortable with what we're seeing.

I think that as we get later in this year and particularly into next year, the occupancy performance likely starts to stabilize on a year-over-year basis. And therefore, the rent growth trends start to drive more directly to the bottom line. To some degree, the other area that we've seen underperform in terms of rent level -- or in terms of growth year-over-year in the revenue area is the other fees and the fee area in general. And because turnovers are so low and people are staying put, we're not seeing termination fees and other kinds of related fees associated with the move-in to move-out like we've seen in the past.

So the occupancy variable year-over-year and the fee variable year-over-year has worked against, if you will, the rent growth variable to result in the revenue performance that you see. We think those other 2 variables of fees and occupancy probably will start to stabilize going into next year and the rent growth becomes more impactful.

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Operator [18]

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And our next question comes from John Kim with BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [19]

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On the blended lease growth, it sounds like you have about 4% year-to-date through April. I realize you have tougher comps at the second half of the year, but what would get you down to the deceleration that's implied at the midpoint of your guidance of 2.7%?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [20]

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Yes. John, I mean obviously, what we're talking about is, is we're very encouraged with what we've seen through -- all the way through April, as Tom talked about. And it would take a number quite lower than that to get us down.

I think what we're saying is as we look at the next few months or the next 2 quarters, that's when we face the biggest part of our exposure, the vast majority of our leases. So at this point, we're not seeing -- we certainly believe and expect to continue to push pricing. But the question is going to be, are we going to be able to hold the occupancy while we're doing that? And we think at this point, we will. But as we talked about in the guidance, we're leaving ourselves room to work through those 2 quarters and then we'll have more to say about that and more clarity at the end of the second quarter.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [21]

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Okay. So that occupancy, that's more of a same-store revenue concept rather than the blended lease growth rate. But you're saying if you have additional vacancy, that might impair...

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [22]

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Yes. I'm saying it would offset the rent growth. I mean in other words, we're going to continue pushing price, and we believe we can hold that occupancy at a strong 95.9%, but that's the question as we hit the busy leasing season.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [23]

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John, this is Eric. If your point is, are we likely to continue to perform at the upper end of our pricing assumptions -- lease-over-lease pricing assumptions that we put out there, the answer would be yes. We think that the pricing trends are likely to continue, which would put us, more likely than not, well above the midpoint in terms of our assumption for pricing trends alone.

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [24]

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Right.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [25]

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This quarter you broke out revenue-enhancing and redevelopment CapEx. And can you just remind us what constitutes the difference between the 2?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [26]

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Yes. I mean we just wanted to give more information there and really provide as much clarity as we could there, John. I mean revenue-enhancing is the more typical CapEx that you do, the normal that you would do every year in a portfolio to continue to maintain it. The...

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [27]

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I think that's recurring.

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [28]

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I'm sorry?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [29]

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That's recurring.

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [30]

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Yes, recurring. I'm sorry, I said redevelopment, apologies. Recurring is the typical. Redevelopment is the capital that we actually -- that we measure and we add our returns or our growth on it, and we've talked about it. And as Tom talked about, it's one of the best uses of our capital that we have. We've had a program going on for many years now. We're able to spend fairly limited amounts of capital on interior units and produce really strong returns.

So that's really the difference. I think we have on redevelopment -- we have redevelopment, we have revenue-enhancing and then we have recurring. And we just want to give you clarity of those 3 buckets. And so revenue-enhancing is additional capital that is not specifically measured, but it's things that we do think add to the value of the community over time. So those are the 3 buckets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [31]

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But are the redevelopment units kept in the same-store pools? Because I noticed this quarter, you have (inaudible)...

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [32]

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Yes. Yes. they are. And when we've approached it because we do not -- we do them -- we don't force turns. We do them on turn. And so I think over time, we feel like that's the best thing to keep it in the same-store portfolio. And if we have situation where we do the entire community at one time, force the turn and felt like it was going to be extremely disruptive, we would pull it out. I think we have done it in the past. But the current pipeline that we're doing, we don't expect that and we're not taking it out of same store.

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Operator [33]

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And our next question comes from Austin Wurschmidt with KeyBanc Capital.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [34]

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Just curious what you guys would attribute the lease rate success that you've achieved thus far in the year to. Whether it's operating on a single revenue management system, is it you're starting to see increased contribution from the redev or just maybe a more benign supply environment? Can you kind of break out the pieces of that and tell us where you think -- what do you think is driving the success you've had so far?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [35]

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Sure. Austin, I think at a macro level, we've certainly shifted from a ramp-up in supply and a stabilization in supply. We feel like we've got our legs under us from a market standpoint and they're a little more stable, though still high, and we can push on that. Then the other piece of the puzzle is really the improvement, I would tell you, in the Post portfolio. And that is our systems and being -- operating on one system.

And let me give you an example of that. So in first quarter of 2017, the gap between blended lease-over-lease rates in the Post portfolio and blended lease-over-lease rates in the Mid-America portfolio was 290 basis points. Now it was sort of in our first quarter of having the Post portfolio. That gap has closed to just 50 basis points. And that's a result of both portfolios climbing over that time frame.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [36]

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So when you look across markets, is it fewer concessions, maybe in some of those Post markets that had supply? Where are you seeing the success in driving blended lease rates?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [37]

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I mean early on, the first thing to take was renewal rates, where we moved those from 4 to close to 6 now. And now it is new lease rates coming to bring stability. On a -- just on a year-over-year basis, it's primarily the new lease rates, though we're still up a little bit in renewals. On -- going back to 2017, it's really both on the Post portfolio.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [38]

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Got it. Appreciate that. And then just last one for me. Al, when you kind of strip out those onetime items in the first quarter and you look at what drove the beat versus your internal guidance, what line items would you attribute that to?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [39]

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We put it to really 2 major groups, $0.02 per share -- if you strip out those kind of unusual items, you get to about $0.04 per share outperformance from our guidance. $0.02 of that was operations, which was same store, pretty evenly split between revenue and expenses, I would say. We're encouraged with both sides of that performance. The other $0.02 was interest and other income that was a little favorable to what we expected primarily related to the timing of the bond that we did, a little better interest rate than we thought there. And then we had other income from a casualty gain that we had during the quarter that had some income from that. That's really the insurance proceeds over the cost of the books that we wrote off for that casualty loss. So those were the primary pieces.

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Operator [40]

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And our next question comes from Rob Stevenson with Janney.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [41]

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Tom, any markets that performed notably above or below expectations on a year-to-date basis?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [42]

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Nothing really stands out on the below expectations. Dallas, we expected to be challenging, but it's coming along, honestly. On the above, we're quietly pleased with how Austin's coming along.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [43]

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Any markets or what -- which markets, I guess, would you expect that you could see positive new lease growth in '19 on at this point?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [44]

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Seeing positive new lease growth?

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [45]

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Yes. Obviously, the renewals are healthy, but the new lease option...

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [46]

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I would tell you Nashville begins to look better in the back half of the year, I think. Supply is moderating a little bit there. And as Eric mentioned, AllianceBernstein just moved in. I mean Nashville is a booming market, and that has the potential to exceed our expectations, I think.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [47]

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Okay. And then last one for me. Where are you guys in the sort of technology spend? I mean it seems like all the apartment -- the large apartment guys these days are in an arms race to get to being able to have Alexa rent their units rather than have people at the locations and all of the automation that they wind up putting in to make leasing -- able to do it from phones, et cetera. How far down the road are you guys in terms of where you want to get to over the next couple of years? And what's the spend and what's the trade-off in terms of expenses that you could take out of the business from that?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [48]

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Yes. Rob, I mean, we're currently testing, working on and evaluating pretty much everything that you've heard out there: smart rent, smart homes, enhanced residential services portal, tech mobility, leasing automation in those the service features. We're still at the point where we're not talking about it a ton. We're really trying to find out exactly what those economics are. Early results are good, especially on the smart home testing. And we think that they have the potential to make a difference. But we're really in the testing phase at this point, and we'll have more to share as the year winds on, I would say.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [49]

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Al, what are you spending this year on that roughly?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [50]

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The majority of our spending that is doing that is -- we're a part of this real estate technology venture fund that you probably saw in our 10-K, Rob. And so we spend -- we're a part of that with a lot of some of our peers that really is designed to -- it's an investment that's designed to select, view all of these -- these companies are coming forward and select the winners and be a part of that discussion when it happens.

So in terms of our normal spend, our investment in driving technology right now, that's normal spend. That's part of our overhead or our G&A that we budgeted this year, that we've talked about, always improving our platform. We are testing these programs this year, as Tom talked about, and probably roll out a little bit more next year when we drive these programs through the portfolio.

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [51]

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And Rob, some of that investment is bundled in the total IT overhaul that we did as part of the merger. So things like maintenance, mobility and the resident portal improvements, those are embedded in the transition that we just went through. And then we're spending -- the most direct spend is on the smart home, where we're rolling units out at about $1,000 a unit or so. And we've got plans to test that this year.

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Operator [52]

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And our next question comes from Hardik Goel with Zelman & Associates.

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Hardik Goel, Zelman & Associates LLC - VP of Research [53]

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One of the things I wanted to ask about -- I've got 2 for you, is G&A. So we know G&A is going up a little bit. We discussed that last quarter. But looking at the cadence of G&A, typically, the first quarter was still a little heavier than guidance would imply. Are you guys still in line with your initial guidance range?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [54]

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We are. That's a great question. I think -- and I'll point you to one of the things that we've talked about and put out as we came off of year-end and discussed our guidance for the year is one of the presentations that we had done when we're out doing on the roadshows and some of the conferences, we put a slide that talked about that we expected first quarter to be the highest quarter for that. There's several expenses that fall in the quarter. It's some leadership conference things, some year-end audit things, a few things that's typically in the first quarter. So we had expected first quarter overhead to be about 28% of the year, came in right in line with that. And so we feel very confident with our full year projection.

I think what you should put in your model, you're thinking for the next 3 quarters obviously to get to our run rate -- to our full year run rate, it's more like 24% of the total of our guidance for the year.

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Hardik Goel, Zelman & Associates LLC - VP of Research [55]

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Got it. Yes. I saw those, I just wanted to confirm. The second one I have for you is on your same-store expense growth estimates. You guys talked about revenue. But on expenses, it seems like it would be pretty tough for you guys to not come in at the low end of your guide on expenses given that you guys outperformed, even though taxes were higher. Is there a tax headwind through the rest of the year? Or do you expect -- what do you expect on the expense side?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [56]

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There's 2 things, I think, are important to consider there. This is Al. Let me start with that. But really, R&M was favorable within the first quarter and utilities costs -- when I say R&M, repair and maintenance, excuse me, utilities costs. And so repair and maintenance was really favorable in the first quarter. We've got some remaining synergies from the Post merger, which were good to see. We're glad to get that.

But I think we expect that that's sort of -- we've come to the end of that. We expect for the remainder of the year for those costs to be more normalized, call it, in the 3% range. And then on the utilities, they were lower than expected because we had a mild season in the first quarter, mild seasonal cost reduction in the first quarter. I think that will normalize more as we go into the year.

So I would tell you, as we look at the remaining 3 quarters of the year, you should consider something more in that 3% range, put everything together. But taking the first quarter performance and that together, we probably are going to be below the midpoint of our current guidance but still in that guidance for the year.

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Operator [57]

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And our next question comes from Drew Babin of Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [58]

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Wanted to talk about capital recycling. It sounds from the way that fundamentals are unfolding across the Sun Belt, potential for distressed acquisitions, things like that might not be there yet as it really hasn't been for a couple of years. And I guess I was hoping for an update on -- are you seeing that anywhere? Are you seeing developers may be looking to sell more assets? How is your pipeline looking as it pertains to things I just mentioned?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [59]

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Drew, this is Eric. Our deal flow continues to be incredibly high. I mean we're looking at more deals on a quarterly basis now than we have over the last 5 years. So there's a lot of opportunity that continues to come into the market. We continue to see what we believe to be incredibly aggressive pricing that continues to, in our mind at least, make it a little bit more difficult to pull the trigger on some of these opportunities that we are looking at.

So we are staying active. We are in conversations on 2 or 3 opportunities right now that I hope will come together over the course of this year. And we're optimistic, but we're also staying disciplined. And I think that given the operating environment that we're in and what appears to be the prospect of sort of stable interest rate environment going forward, the sector continues to attract a lot of capital and we see values holding up quite well. If anything, values going up a little bit as a consequence of improving NOI performance.

So we're patient, and we're going to remain that way. We've got dialed into our assumptions this year, as you know, call it, midpoint about $100 million of dispositions, which we think is important to maintain that at this point. And we'll be working through that process later this year. We've got the funding that we've identified as it relates to what we do think we'll do on acquisitions and development funding.

So I mean we've got sort of uses -- sources and uses of cash sort of identified. Obviously, just recycling of what we have, a combination of dispositions and free cash flow. We certainly don't see a need for equity this year. But I'm continuing to be hopeful that the acquisition environment will become easier.

At the end of the day, I mean our focus is really built around trying to ensure that we're going to create a stabilized NOI yield that's accretive to our existing portfolio and create a return on capital that will be accretive to our shareholders versus what we expect to get out of the existing portfolio. So at today's pricing, it continues to be a challenge.

Having said that, as we continue to roll in some of these technologies and some of these other operating focus items that we've talked about, we think that that's going to continue to work in our favor to perhaps start to make some deals a little bit more compelling as we go into the year. So deal flow is high; pricing is still aggressive.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [60]

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And on the disposition side, remind me, are those likely to be just noncore assets or potential exits from some smaller markets? I just forget if that was mentioned on the last quarterly call.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [61]

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We're taking a look at that right now and trying to finalize that. But more likely than not, these are going to be just -- I mean we really approach it on an asset-by-asset basis and look at situations where we think the go-forward after-CapEx NOI growth rate is likely to show not the kind of growth trajectory consistent with the rest of the portfolio. And more often than not, that translates into some of the older assets that we've had.

We very much like the footprint that we have, as I mentioned earlier. We like broadly the markets we're in. But given the history of the company and when you think about where some of the older assets are, there probably are a few outlier, smaller markets that you'll continue to see us exit from.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [62]

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And then just one question for Al on the balance sheet. There's another 30-year secured mortgage executed during the quarter. I was curious whether that was on a set of properties that was previously encumbered by secured debt. And also too, I think last quarter, there was a $300 million very short-term unsecured term loan. And I guess my question is, does the new secured mortgage kind of directly replace that or pay that down? What are the moving parts there?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [63]

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I wouldn't necessarily put it direct. But I think, overall, if you think about what we had outlined last year as our financing plans, we had said we're going to do about $600 million, $300 million more in a 10-year, maybe 30-year in the -- I mean, sorry, $300 million in a 30-year. I think if you look back last year, the market's kind of collapsed in terms of public bond financing late in the year.

And so what we did is we moved earlier in the year. We saw an opportunity in the secured market to do 30-year. We did 2 deals and, combined, over $300 million at a very attractive rate. They are secured with 7 properties for this one we just did and I think a similar number of properties for the first one.

But I wouldn't directly relate them. I'm just saying as part of our long-term plan, we were able to adjust and just continue to perform on pushing our duration of our maturities out a little further, get some 30-year debt in there, but also not get too much secured debt is good. We obviously are very glad that we've done that. We're glad to continue to increase our relationship with the partners we have there. But I think you'll see us manage our balance sheet. 90% of our NOI is still unencumbered, unsecured right now. And so you'll see us continue to protect that, but within proper parameters, do both types of debt over time. So that was a piece of the overall plan.

On the $300 million term loan, we'll pay it off this year. And as you heard us talk about, we're now thinking about -- part of our plans for this year is maybe potentially do another bond deal late in the year because the market is wide open and really to handle that and to bring some of the future maturities forward, potentially.

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Operator [64]

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And our next question comes from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [65]

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A few curiosity questions. Looks like you sold 1 acre of land on Peachtree Road in Atlanta for $9 million. Is it really only 1 acre? And when is land worth $9 million an acre in Atlanta? And then also, any more color on the Poplar Avenue office building?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [66]

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John, this is Eric. Yes. this acre of land -- it's actually less than an acre. But I mean candidly, it's right on Peachtree Road right next to Lenox Mall. I mean it's the heart of Buckhead. This is a residual piece of land associated with a condominium development that Post had done many, many years ago. The site is incredibly tight. It will be incredibly difficult to, we thought, to do multifamily on. And we were approached by someone who has a different plan for how they intend to use that land, and we worked it. We were cautiously optimistic, but frankly, skeptical that we would get it done. Therefore, it wasn't in our guidance. But we were most happy to get that done in the first quarter. So it is just what you're reading. It was a big win for us.

The Poplar Avenue site, this is -- we've been in the same office building for 24 years. And we -- I had owned the building, it was part of the IPO. And we long outgrew that space and had our corporate staff split into 2 different locations for the last 5 years. And so we finally had an opportunity to get everyone back together in a new building in close proximity to our location. We don't own it. We're just renting office space. But we sold it and rather use that capital in apartments. So we've been in it for a long time and glad to be gone.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [67]

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Okay. And then the second question. Sync36 in Denver, it looks like Phase 1 cost you about $280,000 a unit, but the budget for Sync Phase 2 is about $310,000 a unit. Did the cost really go up 10% that quickly? Or are there some allocation things we should think about?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [68]

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It was really -- more -- no, cost had not gone up that much. It was really there was some allocation. When we negotiated the transaction with the developer, they had this one adjacent piece that had some unique aspects to it that created the cost numbers that you're seeing. But...

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [69]

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It is also a lower number of units that -- we view the project as a whole. So you kind of have to put them together to think about that. And so when we underwrote it, we underwrote it together. And the whole project is well in line with our hurdle expectations and our plans. And so it's an allocation thing. But in total, it works well.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [70]

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Is it a podium or a wrap?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [71]

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It's actually a surface park product.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [72]

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Wow. For $300,000 a unit? Okay.

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [73]

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There's allocation in there. I mean...

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [74]

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That's a small -- the second one is a small number of units. The first phase is much larger, so when you blend it down, you're going to be under $300,000.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [75]

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But you also -- Denver -- that's what Denver -- that's normal for Denver. You look at a cost per unit in a market like Denver, and that's pretty routine.

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [76]

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For high-quality products.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [77]

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Yes.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [78]

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Surface park though?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [79]

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Yes.

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [80]

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Yes.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [81]

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Wow. Okay. thanks. Good quarter.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [82]

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Thank you.

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Operator [83]

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And our next question comes from Buck Horne from Raymond James.

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Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [84]

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I just want to go back to guidance for just a second, Al, if you could. I guess -- so we raised the guidance $0.08 for the noncash gain on the land sale. But I think there was also -- you mentioned an offsetting $0.03 drag from just the timing of transaction activity. Just can you elaborate on just the moving parts there and just the changes on the timing of acquisition, dispositions that drove that change to the guidance?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [85]

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Yes. Absolutely. Buck, that's a good question, I think. So the outperformance in the first quarter was $0.11 per share. And so we just put that performance into the -- obviously rolled that in as actual performance. And so -- and what we talked about was on the back part of the year, we did have some changes to our transactions and to our debt plans that cost us $0.03 per share. So net that out, it's $0.08.

And I'll give you the details of that. It's About $0.01 for -- I talked about it just a minute ago, we're planning on potentially doing another debt deal later in the year to take care of some of our -- maybe our future financing as well as pay down our term loan that we talked about earlier.

We also had $0.01 per share of earnest money forfeiture from that land sale that we talked about. I mean we had -- actually, as we talked about, didn't have it in our guidance because we were really uncertain about the closing, and we had actually included in our plans that likely it would fall apart and we would get the earnest money forfeited. So that's about $0.01 per share actually that comes out in the back part of the year.

And then the remaining $0.01 is just transaction timing. Our acquisition, disposition plans, we continue to adjust those as we're selecting properties. And we see a little clearly the deals that we may buy in the year. So that cost us about $0.01.

So together, that's the $0.03. We beat $0.11 first quarter and took $0.03 out for those things.

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Buck Horne, Raymond James & Associates, Inc., Research Division - SVP of Equity Research [86]

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Got you. That's very helpful. And then secondly, just looking at some of the activity and the added development project in the Phoenix area. It looks like you're trying to enhance or considering enhancing the presence in the Southwest a little bit further. So I'm just wondering how you're thinking about your current scale in the Phoenix marketplace or if you -- is there anything else you want to do to optimize your scale there? Or -- and would you consider reentering a market like Las Vegas if the right deal came along?

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [87]

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Buck, this is Eric. I would tell you, I mean we like Phoenix a lot. I think that both Phoenix and Denver continue to have a very promising outlook over the next, call it, 10, 15 years. I think both of these markets are much more affordable than what you see on some of the West Coast markets. I think both markets are going to continue to attract a lot of job growth and population growth, migration trends. So we're very comfortable continuing to scale up our presence in the Phoenix market as well as obviously in the Denver market as well.

Vegas is a little bit of a different story, I think. I mean we like very much the 2 properties that we have there. They're doing great. That's a market that is doing pretty well right now. I don't see that economy as broadly diversified as I do of Phoenix and in Denver. Vegas obviously is -- has a lot of entertainment employment base as well as military that drives a lot of it. And you're seeing some other back-office, call centers. I think that you don't get the wage growth in that market like you do in Denver or Phoenix. So I wouldn't think that you'll see us scale up in that particular market in Vegas. But the other 2, for sure, we would.

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Operator [88]

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And our next question comes from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [89]

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Tom or Al, could you remind us what the lift -- the revenue lift for full year '19 is from just the earn-in on redevelopments?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [90]

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Earn-in on redevelopment? So redevelopment is typically 25 to 50 basis points in our -- in any year in our program. This year is consistent with what it was last year. So probably in that 25, 35 basis points...

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [91]

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Yes. So I mean that would be what it was if we took it out. But since it is similar to what we did last year, it's not part of the [graph]. It's (inaudible)...

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [92]

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But that's the built and booked -- you guys have to think as the built-in impact of that over time, if that's what you're asking, John, I think that's what we would say it is.

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [93]

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Yes. On a year-over-year basis, we've been pretty steady at the same number of units.

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [94]

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Same program.

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [95]

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The year-over-year change is really not meaningful at all. But the overall impact on a permanent basis is the 25, 35 basis points.

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [96]

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If we were wrapping the program up, it would be -- in this year, it'd be at the higher end of that. But we've had this consistent number this year as we did last year. We did ramp up in last year some from pre-Post merger, but that's what we would expect as built in.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [97]

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Yes. The question, to be more clear, is if you didn't do any redevelopments these last few years, how much lower would...

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [98]

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25 basis points. 25 to 30. That's kind of built in on a recurring -- on an ongoing basis.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [99]

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Okay. And that kind of probably ramps next year a bit?

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Albert M. Campbell, Mid-America Apartment Communities, Inc. - Executive VP & CFO [100]

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No. I think -- I mean that would only ramp if we ramped our program up next year. And I think right now, we expect to do about the same number of units next year that we did last year and the previous year. So that's probably the contribution from that program. Now we certainly -- we're hopeful that we'll have continued pricing performance and other things, but that's from that redevelopment program specifically that we expect next year.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [101]

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Okay. And then Tom, I was hoping you can give some color on the demand side of the equation as Houston's heading into peak leasing season. It's tough to disentangle what's organic, structural improvement in a market versus just a market that's still just coming out of the basement a bit. So how bullish or concerned or kind of middling of feelings do you have of Houston right now?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [102]

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Yes. I would say -- I mean their jobs to completions are still in a healthy range at 9 to 1. I would expect Houston to still be steady from a growth standpoint, John. But I don't think we'll see the blended rent growth change that we saw between 2017 and '18. Certainly, one of our more stable and steady markets, but I think it was like an 800 basis point change in blended rents last year, and that will moderate to more normal.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [103]

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Does it stay in that mid-4% revenue growth range these next few years?

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Thomas L. Grimes, Mid-America Apartment Communities, Inc. - Executive VP & COO [104]

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So far, blended's hung right in there.

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Operator [105]

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And it does appear that there are no further questions over the phone at this time. I would like to go ahead and turn it back to the speakers for any closing remarks.

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H. Eric Bolton, Mid-America Apartment Communities, Inc. - Chairman, President & CEO [106]

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Well, thanks, everyone, for joining us and appreciate you being on the call. We'll see most of you at NAREIT in a few weeks. So thank you.

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Operator [107]

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This does conclude today's program. Thank you for your participation. You may disconnect at any time.