Q3 2019 Earnings Call
Good morning, ladies and gentlemen, welcome to the M. <unk> third quarter 2019 earnings conference call.
During the presentation, all participants will be I'll listen only mode.
Afterwards, the companies will conduct a question and answer session.
As a reminder, this conference is being recorded to date October 31st 2019.
I will now turn the conference over to Tim Argo Senior Vice President Finance for M&A. Please go ahead.
Good morning, everyone. This is Tim Argo Senior Vice President Finance for M&A.
With me are Eric Bolton our CEO .
Campbell, our CFO , Ron Delpriore, our general Counsel Grimes, our COO, Brad Hill, you'd be P. and head of transactions before we begin with our prepared comments. This morning, I want to point out, but as part of the discussion how many management will be making forward looking statements actual results may differ materially from our project.
We encourage you to refer to the forward looking statements section in yesterday's earnings release.
34 Act filings.
But the FCC, which describe risk factors that may impact future results. These reports well with a copy of today's prepared comments and then 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 presentation of the most directly directly comparable GAAP financial measures as well as reconciliations of the differences between non gap in comparable GAAP measures can be found in our earnings release and supplemental financial data, which are available on the for investors pays more website.
At Www Dot Mac dot com.
I'll turn the call over to Eric.
Thanks, Tim and I appreciate everyone participating in our call. This morning.
Pro forma starting the important third quarter leasing season was strong with continued solid momentum in rent growth and high occupancy, reflecting strong demand across our sunbelt markets and the great work performed by our on site associates resident turnover remains at historically low levels, despite lease renewal price mix.
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We believe at this point in the cycle, our best strategy remains a focus on pushing rent growth.
We're happy with Reformate, some rent trends and are encouraged with the momentum that will carry into next calendar year.
We're currently in the process its compiling a detailed outlook surrounding the new supply pipeline in 2020 any impact at each of our locations just point, we expect the elevated new supply levels, well likely persist in 2020.
Simply too much capital available to developers at this point do you expect any sort a meaningful pull back. However, also believe it is unlikely that we will see new supply levels meaningfully pickup from the current trends as rising costs among other things.
We'll keep new development from accelerating.
As we finalize property budgeting process I'm sure, we'll have markets that will likely experienced some increase in new supply next year in some markets that will experience a decline in new deliveries.
We'll have more to report on our specific expectations for 2020, well releasing fourth quarter results, but at this point you do not have any hike concerns surrounding next year's leasing environment.
Meanwhile, new supply remains elevated we continued to see strong demand fueled by job growth across our markets. That's growing population shifts in increased migration to the Sun belt.
We closed on the dispositions our property located in the little rock, Arkansas market during October and expect to close on the sale of the four remaining properties in that market before year end.
Based on current contract pricing, we expect to capture of 5.4% cap rate on this portfolio properties that has an average age of 21 years.
We're currently negotiating several went off property acquisitions and are hopeful that will close on one or more these deals by year end as has been the case over the past few years each of the opportunities we're underwriting our new properties in initial lease up.
The acquisition market remains very competitive so we continue to see a high volume of lease up transaction expected. We will have some successful acquisitions over the next few months.
As noted in our supplemental schedules to the earnings release, we now have six new development projects under way and expect to start an additional two projects located in Orlando in Houston before year end.
Finally, we continue to capture great performance out of our redevelopment pipeline.
In addition to our Barry earnings accretive unit into your upgrade program. We are planning to initiate in calendar year 2020, more extensive redevelopment efforts at several of the legacy post property locations.
We believe our expanding focus on redevelopment initiatives will generate very accretive returns on capital and further boost earnings growth from our existing asset base over the next few years.
I want to spend a big thank you Dr. team of associates for their work great results for the busy summer leasing season.
We are building positive momentum across multiple fronts of our platform and I. Appreciate all the hard work great progress I'll turn it over to Tom now.
Thank you Eric and good morning, everyone. Our operating performance for the third quarter was strong and exceeded our expectations. What the study demand for apartments, and our enhanced platform continued momentum in rent growth strong average daily occupancy and improving trends.
Same store effective rent growth per unit was 3.9% water. This is the result, this is a six straight quarter of year over year, improving you are you growth as a result, our year over year same store revenue growth was 4% highest it's been since 2016.
Revenue also increased 200 basis points sequentially.
Acceleration in revenues was widespread across our markets a year over year revenue growth rate, a third quarter exceeded the year over year growth rate and the second quarter in 16 of our 21 markets.
Revenue performance was one by study momentum and blended new and renewal lease pricing up 4.9% for the quarter, which is 190 basis points better than this time last year improvement in blend in pricing seen in Atlanta, Austin Nashville in Dallas was particularly impactful.
In addition to the great traction and blended lease over lease pricing average daily occupancy during the quarter remains strong and 96.1%.
Same store operating expenses were in line with our guidance, but higher than they have been recently as we mentioned on prior calls we've captured the benefits of they improved expense management platform on the post portfolio comparisons are now more normalized in year to date expense growth is now 3%.
As a reminder, our annual operating expense growth since 2000, each well has been just 2.4% well below the sector average. This is reflective of our long term focused on driving efficiencies in our operation.
The favorable same store trends continued in October as we've discussed we feel like in this part of the cycle. When demand is strong we should prioritize rent growth over higher occupancy average daily occupancy for the month was strong at 95.6 as compared to 96, one in October of last year.
October's blended lease over lease rents are up 4% month to date, which is well ahead of the 2.2% blended rent growth posted in October of last year and will support continued momentum in effective rent growth for the portfolio, which is important for a steady and sustained revenue.
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On the redevelopment right and the third quarter, we completed 2700 units, which keeps us on track to redevelop about 8000 units for 29 gene. This is one of the best uses of our capital on average year to date, we spend $5700 per unit and achieved an additional 10% in rent generating a year one cash on.
Cash return in excess of 20% our total redevelopment pipeline now stands in the neighborhood of 14 to 15000 units.
Our technology platform continues to expand our overhauled operating system in new website evaded our ability to attract engage and create value for our residents. The results are evident in our blended pricing traction our test on smart homes are going well the technology has been installed at 15 community and.
Some disruption and has been well received by residents were also exploring a range of AI chat customer resource management and prospect engagement tools.
Our teams have handled the busy season, very well and have us well position to move forward. We're pleased to be integration work of 2017 in 2018 in the rearview mirror were encouraged with the momentum in rank proud and excited about the opportunities ahead now.
Thank you Tom and good morning, everyone.
I'll provide some brief commentary on the company's third quarter earnings performance balance sheet activity and then finally on our updated guidance for the remainder of year.
Reported FFO per share of $1.72 third quarter included a couple of significant noncore items mine in the release, which added 16 cents per share of non cash earnings.
Excluding these items EPS for the quarter was $1.56 per share, which was a penny per share above the midpoint of our guidance and analyst consensus. This outperformance was primarily result of the continued stable pricing trends as outlined by Tom which produced deceleration in total revenue growth or.
Overall operating expenses also remained well under control real estate taxes and repair maintenance expenses. This is a primary areas of pressure for the quarter. These were partially offset by reductions in marketing and the moderation in personnel costs, we expect real estate taxes to continue producing some expense pressure for the year as aggressive idled valuations received in certain markets will produce.
As a growth in the top end of our range outline the full year.
Their maintenance expenses for the third quarter were impacted by difficult on your comparisons are projected to increase in a range of brand in quarter three <unk> the full year.
We couldn't do you continue to make progress sort of element lease up portfolio during the quarter owning 31 million toward the completion of our pipeline. This brings our year to date funding to 72 million with 125 250 million total funding projected for the full year.
During the third quarter, we were fairly active on the financing from where we reopened the bond series initially issued in everywhere Jewish an additional $250 million an unsecured notes interest rate of 2.9% of the remaining term about 10 years, we used the proceeds to pay off a 150 million all Danbury term loan which was do you early next year.
Lodging is low rate environment to fix more to extend the maturity of our debt portfolio, which is now seven years on average.
The remaining pro say proceeds were used to pay down a lot of credit in the year.
The quarter excuse me.
Finally, we are increasing both our AFFO and same store guidance for the full year to reflect strong third quarter performance. We're now projecting AFFO per share for the full year to be in a range of 6.66 54 per share or 650 at the midpoint, which includes the 16 since third quarter favorable noncore items in two cents per share related to the fourth quarter land sale gains.
And in the release.
Our updated fourth quarter guidance assumes no further impact from that or chair valuation or activity from the unconsolidated affiliate.
We're now projecting our same store revenues expenses and in a while it's all grow in a range of Threed sensing <unk> full year, which this is a 25 basis points increase in our same store NOI expectation for the full year.
And this adds about an additional two cents per share who year Oh.
Q3, Q4, combined which is partially offset by a penny per share reduction for the year later to generate interest expense changes mine.
That's all that we haven't way prepared comments, so Chris will now I'll turn the call back over you questions.
Certainly at this time, if he would like to ask a question. Please press star and one on your Touchtone phone you maybe it's all yourself from the question cute anytime bypassing the pound key.
Once again to ask your question. Please press star one it now.
And we will pause a moment to a lot of questions to Q.
Oh.
And our first question comes from Trent Trytwo from Scotia Bank. Please go ahead.
Hi, Good morning, So just looking at your blended lease rate growth. It was four nine for the quarter down a little bit from the intra quarter update in August . So there was some seasonal slowdown in September sounds like you're continuing to focus on rate growth over occupancy and it sounds like demand has held up well. So do you, but do you expect some love.
All of moderation for the rest of the quarter in mainly asking because you're starting to lap some of the improvements from the legacy post portfolio. So it's more difficult comps ahead, what kind of trajectory do you see from here.
Yeah trend I would expect it to moderate seasonally but you know with October we were 180 basis points better than last year, I would still expect us to run with a with a reasonable cushing over prior years pointed pricing, but you will see a moderate just as seasonal demand patterns come down and that's.
Primarily on on new lease right rents on renewal pricing. It continues to hold up pretty strong above 6% correct.
Okay. Thank you and then on the Arkansas disposition I guess on the transaction market.
The Arkansas disposition, you pointed to roughly a five and a half cap last quarter, maybe no five for you just cited in the prepared remarks is within the realm of that but are you seeing improved pricing for assets such as though that you're seeking to sell it does that at all inspire you two oh look at additional potential disposition.
If you can get good pricing on older assets that maybe need a high levels of capex.
Oh, yes trend this Eric I'll I'll, let Brad talk about cap rates, a little bit, but I would tell you on your point about dispositions broadly you know we believe very much in the mid and the importance of cycling out of some of our investments every year and we had targeted earlier this year to.
Pulled the trigger on this little rock portfolio, and and that's what's happening and I'm sure as we go into next year, we'll have something similar that will T. Oh. We we are we don't have any significant need or desire to do anything bigger than that it really is just part of the on a normal discipline to continue to.
Look at our the yield were getting off our existing portfolio and always you know look to pull off the bottom. If you will every year a little bit of the capital that that we have invested assets are unlikely to create go forward performance that is as compelling as alternatives and so we'll just stick to that discipline.
As we head into next year, but nothing more significant than that Brad you. Yeah. Yeah. So try at this is Brad I'm just to give you a little bit of inside into you know, what we're seeing a transaction market.
Certainly little rock is a a smaller market within our our sunbelt focus in its certainly indicative of.
The demand for assets within our footprint, we had over 25 different buyers bid on those assets, which were all completely qualified.
Buyers for those so we were certainly excited about the participation we had there cap rates in our markets continue to be very strong and and I think we're certainly seeing that in little rock, which is no certainly a smaller market for us but.
The demand for those assets is extremely strong and you know, we don't see anything changing that going forward.
Thank you.
And our next question comes from Nick Joseph from Citi.
Please go ahead.
Maybe just following up on trends first question in terms of blended lease rate.
I didn't increase based on.
Third quarter results or is there an improvement until the fourth quarter as well.
Expected.
Nick This is Alan you know as you look at the full year of course, our guidance is for for the quarter blended obviously, that's coming off of what we saw in the in the third quarters. That's planned it seasonally we do expect something differ for the fourth quarter. The Tom's point earlier, we still expect to pretty healthy you know over the prior year in terms of portable core growth. So so we see.
Usually will come down, but but still have a strong.
So position Oh, I'll add one point to that Nick we've been running about 200 basis points better than last year. So far this year, where we're forecasting closer to 100 basis points spread in Q4, just as those comps have gotten a little bit tougher as as we started to see that pricing power late late 18.
Thanks for that.
Third quarter.
Nick for the third quarter, New unleash a new was up to seven renewal with seven which gives us the for non.
Thanks for that just.
Another smaller markets, but what's driving the strength in revenue growth in Birmingham and Phil.
Birmingham enhanced far in Huntsville running for for two years.
It has really been on a strong job growth trajectory, primarily driven by aerospace and attack. It does quite little pocket of northwest our northeast, Alabama that is that's just been doing very well and if you look back through the quarters in the last two years or seeing that strength has been there.
And in Birmingham is just picked up a little bit.
With the job growth.
During the year, along with over the last supply and it's been a good spot for us as well.
Thanks.
And our next question comes from Austin Wurschmidt from Keybanc capital markets. Please go ahead.
Hi, Good morning, everybody I was wondering if you could provide a breakout of the year to date lease over lease pricing for the legacy portfolio versus the post portfolio.
I give you a quarter to date real quickly in that wouldn't be for the new lease for maintenance three a proposed in five three for mid America.
Significant improvement on the posts on.
Pretty similar year to date, five one M&A and create a those are blend.
Thanks, and then so next year really the first year that you'll have a full year of post renovation hitting that renewal period I'm just wondering how you're thinking about the potential increases on those renovated units.
After the.
That first I guess renewal versus a non renovated asset [noise].
No they though renovate enough.
On a renewal basis, it really come in at very similar levels, there's almost no delta between that because that's a new resident coming in so it's not like the old resident got the renewal bomb and then the improvement. So we've seen no consistency on the renewal from that's held up quite well this year across the portfolio.
And both a b as well as opposed to and and ma'am.
Got it and renovate in non renovated.
Understood.
Then just last one can you remind us of the increases that you're targeting on the smart home investments and what you expect that contribution to be.
Just same store revenue as you roll into 2020 versus the contribution in 19.
Well, we're in a process of planning that at this point I mean, we've got early tests that give us hope it by market will be able to get a good bump on though.
On the revenue enhancement side, but really havent nailed that down is it.
As to implementation and forecast for 2020, and then they're also some expense savings to consider inadequate Jim.
Also this is I'll just add im certainly would expect that to grow toward the back of the year. So certainly very minimal impact first have you little bit wanted to back as we roll this out as Tom mentioned right.
Thank you.
Our next question comes from Haendel, St Juste with Mizuho.
Go ahead.
Hi Tech celebrate here for handling you guys have de Levered from five times debt for seven over the past year, where do you see your optimal leverage level at this point in the cycle and what is your view on.
The more leverage to acquire assets given the low cap rate environment.
Well I'll start with that and.
We feel pretty good about why leverage we worked very hard over the last five years, bringing down right now about 32%. That's gross assets as he said high fours and that it was very good place to be particularly given the low risk or lower you know compared to risk our strategy. So we don't see needs to do anything significantly different in that as we look at our plans over the next year. So.
We also don't see a hugely for marginal capital we have and when you look at our acquisition plans or development Anil and asset sales that we expect to do come out with internal free cash flow that we do it's a pretty leveraged in Japan at this point. So we like where leverage is no need to do anything significant really either way to other but we are very happy to.
Your point, we have lot of capacity, we have a billion dollar could have silty if things do change in their opportunities that jump out. We certainly that's one option that we could use a it's a fun that so feel very good about that we can put snic amount of assets you know, what our balance sheet pretty quickly and not do harm to our ready also point out one of the other things it's worth noting is while the leverage is coming.
On the cost has come down the duration has moved out and I are duration on our debt Oh portfolio now is longer than it is out beyond anything we've ever had and our 25 year. So it's approaching that's around seven years will over seven years. So we're pretty pleased with where that's gotten too.
And on the development friend just seen two development starts this quarter was the projected yield or IR and how do you guys are you guys inclined to ramp up development to more significant level and do you see any potential opportunities in the market.
Well, yeah, right now I mean, the two new deals will start the between now and year end. In addition to what we already have a listed in the supplemental yeah. These are going to be a stabilized yield so north of 6%, 6% to 6.5% is where we're still believe we're going to end out in terms of stabilized NOI yield.
We were we believe that you know, we're pretty comfortable carrying 3% to 4% of enterprise value in terms of the development pipeline, which puts our number somewhere kind of the 500 to 700 million dollar range. That's about as far as we think we'll take it at any point in time, but yeah were.
Well with what we have right now and obviously, if those kind of yield it's still a pretty attractive.
Thanks, guys.
And our next question comes from John Kim from B.M.L. Capital markets. Please go ahead. Thank you Eric in your prepared remarks, you mentioned a more expensive.
Our next year.
Can you elaborate on that at all.
Number of units Redeveloping increase.
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And also.
The dollar amount that change.
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Well I'll start in them and Tom can add any detailed somebody we will continue with the redevelopment <unk> when I make reference to that I'm I'm really referring to the kitchen and Bath upgrade initiative you did interiors, if you will and that a that program will continue next year as it has we've been doing for for the past number of years, what's gonna be different is we are stepping up.
More extensive repositioning efforts at some of the legacy post locations, we have a portfolio of about 10 properties that we've initially identified that we believe offer superior location value a and given all the new supply that's come in around some of these locations that much much higher rent levels, we see every.
I wanted to go in and doing more extensive a amenity upgrades and some other a repositioning a capex spend that we think really elevates the property two or two and a completely different price point and the market. Certainly offers that are that opportunity. We think based on what we see happening around these folks.
Patients and so in aggregate that's about we think it would be a roughly about a $20 million spend next year that will work on that over the course of next year and I'm really begin to harvest the opportunity from that and in terms of rent growth in revenues, and then 2021 and beyond but but that that was one of the real asset.
Next is this merger with post that we were very drawn to was great real estate in great locations that has only gotten better as a consequence lot of this new supplies come into the market.
But those 10 properties be taken offline or they remain the same.
No John we we've done these kind of repositions and on assets before and what we found as the level disruption for the exterior work is 10 minute really minor and adult it allows us to do the work or around the resident were not foreseen turnover in this case and then.
Most of these were already underway on the kitchen and Bath. So it stays in same store.
Okay. It sounds like you're not that concerned about supply next year, but I'm wondering.
You may be concerned about on the demand side, it looks like homeownership rate ticked up in third quarter.
Additionally, and.
More attractive mortgage rates.
So can you comment on what you've seen as far as me about homeownership than anything else on the demand.
Well you know we haven't really seen any changes a of note on the demand side, Doug It continues to be quite strong our move outs due to home by move outs to home renting have been very consistent now for the past two or three years and we haven't really seen any change in behavior. We continue to not be worried about a single family.
<unk> either as a for sale for four ramp product I think that we're just to completely you know sort of different mindset now as it.
Relates to how people approach their housing.
Having said that you know the yes, you're right, we're not particularly nervous about supply picture next year to me. The the the thing I'm more nervous about long term is is to what degrees as job growth or their broader economy began to slow down due to yeah.
Various factors that we all read about and I think that are obviously with employment levels being as robust as they are right now.
Yeah, there's there's more risk to job growth moderating and there is accelerating from where we are right now so yeah. It's something we're going to continue to watch and monitor I will say this that Neil on <unk> on a from a regional perspective, we continue to believe if you want to begin to dial in expectations regarding Iran.
Session or expectations regarding a slowdown in the broader employment markets. We continue to believe that these sunbelt markets will hold up better.
That most other regions of the country Oh for all the reasons that that that you know regarding affordability and just a the the favorable.
Employment.
Picture that we think continues to fuel growth in the southeast well a in a recession, yeah, we all sort of suffer a little bit but in a recession I would tell you that our reach in the country. We believe on the demand side of equation holds up a lot better than other regions of the country.
Great. Thank you.
And our next question comes from Wes Golladay from RBC capital markets. Please go ahead.
Good morning, guys. If we didn't make the assumption that job growth will be at least comparable to this year. When we look to next year would you assume distract you would be to remain push rate over occupancy.
Yes, we do we think at this point in the cycle.
If that's the thing to do I I think the thing you have to appreciate the at least the way we look at it is the variables that really drives revenue over time, better or more so than any other variable is rent growth and we think when you can get rent growth you bear to get it and and even if that comes at the expense of a little short term pressure.
Sure regarding higher vacancy from a year over year perspective, we think that's the right trade off to make and so at this point in the cycle that's exactly what we're doing.
Okay, and then looking at developments looks like he started one in Orlando This quarter, you're gonna start one next quarter in Orlando is that more of a high conviction call on Orlando is that just what opportunities are falling right now.
It just happens to be two opportunities that fell away. One is yeah. We're self developing in downtown Orlando, which is the one that is a noted in the supplemental and then a and then the other opportunity is a in more in a suburban location a is with a developer we've got a I'd say, it's really a a pre purchase or something there.
That the developers Gonna Bill for US if you will and were restructuring isn't an issue initially as a JV they'll build it out and then upon stabilization will take them out.
So just happened to be I mean, we like Orlando, a lot Oh and continue to feel very good about the prospects that market long term, but just happens to be a where these job to do so popped up.
Got it thank you.
And once again that is star and one to join the question Q. Our next question comes from drew Babin from Baird.
Please go ahead.
Hey, good morning.
Warner <unk>.
A quick question its good to see Om revenue growth kind of accelerate sequentially in Charlotte and I guess going to the other kind of post legacy heavy market on the Atlanta and Dallas I think you are you mentioned that leasing spreads were pretty strong third quarter. Both of those are we at the point, where we might really fios markets take a sharper acceleration.
Into next year, and I guess, how should we think about how some of the Capex plans, you're talking about how do they kind of it in and might take kind of a <unk> view on that fire in the next year.
Yeah, the I mean really what Oh that hit on true is sort of the current momentum and I I wouldn't expect to see Atlanta Austin in Nashville continue to improve based on what we've done this far and then <unk> Dallas is a place that is improving but it'll run a little bit weaker than its peers right.
Now the additional redevelopment that we touched on earlier the repositioning of the.
Amenity packages in them in the next year the building that benefit will really come in 20 2020, excuse me 2021.
Good news exterior innovations, you're you're mixing that in the context of Dallas.
Yes, there are those 10 properties were looking out there are a couple in Dallas.
Okay, they're spread across the footprint, though but primarily as Eric mentioned in though and post portfolio.
Okay. Thanks for that and then the the retail acquisition made in the quarter one of your existing properties, what would the size of that or am I didn't see them out and there is a relatively nominal in terms of the outspend.
Yeah, Yeah, it's pretty small is it was 14000 feet. So.
Acquisition, there is really ground floor retail of an asset that we currently own. We just you know feel that it's better to own and control the retail.
Assets, it's on the ground floor so.
Yes, it's pretty small.
Okay, and then last one for me al on the balance sheet and another since asking a different way earlier deliberately refi or where it is is it where it is because that's exactly where you want it could be or is it where it is because it becomes very difficult to acquire properties in your market [laughter] and yeah, There's obviously still gonna be assets like little.
Okay that makes sense for disposition.
You know do you might we see that leverage ratio to pick up at the margin a little bit next year with redevelopment development type need on is that something that you're okay, where.
What I'm, saying, yeah first of all we hope we had the opportunity to invest and very high quality investments that do need additional apple levers, we certainly comfortable that if we need to I was saying when coupled where it is we feel like we had good access to capital all pieces of capital drew in so so we will look to protect the one that range, but b, but know that we had to flexibility.
We do add to that leverage you know I'm fairly sizable amount if necessary to it available. So how could use. So so were we built that flexibility habit for our business plans that we were not you know we've got the ticket but use it when necessary.
Great and appreciate the detail government.
And our next question comes from Rich Anderson with SMBC. Please go ahead.
Thanks, Good morning, everyone.
I want to.
So so a I appreciate the pushing rent expense of occupancy sort of mindset and the current environment.
And obviously youve determined that the economics of that strategy are the best way to go but at what point and do you have a occupancy level in mind, where.
You have to kind of flip the switch back the other direction I know you've lost a little bit occupancy relative to year ago, and the third quarter I'm just wondering.
What that number is where you say a perhaps isn't working as wells, we have to kind of reassess.
Well it is a day rich it's all about trying to.
Managed revenue performance and optimize revenue results and we're trying to optimize revenue results, both near term and long term and I think that if we find ourselves in a scenario where the overall revenue results are trending to a point that you know that that and lower than what we.
I would like and we see evidence that we're.
Creating more turnover as a consequence of being too aggressive with our our rent practices, particularly on renewals. A then it's it's an easy call to make at that point to back off a little bit on the on the participation of rent growth in.
Call back some of the occupancy it again in order to protecting overall revenue result that were after but I would I would tell you that you know again as I mentioned earlier I think that the variable that drives revenue resolves and value over the long haul is rent growth and it's very easy.
To get a consumed by the sugar high of year over year gain and occupancy to boost revenues and while you're enjoying your that short term phenomenon you are giving up long term performance opportunity and so I think it's it's a trade off the jeopardy, very thoughtful about and right now we think the right thing to do it.
As protect longer term revenue performance through gaining as much rent growth as we can and tolerate a little give up on current opportunity on revenues to higher vacancy.
Okay, great and speaking of the renewal. It you know, 7% I think you said in October .
I made a misstep I think it's in the range.
Thats kind of you know.
Way.
Above average relative to your peers by perhaps a significant amount.
Is that achievable in the future Where's that coming from is it tied in with the post merger or you know where is that or is that a natural level of renewal activity that you think is something you can repeat for the first it is a you know rich I'll tell you six to six and a half has been pretty natural and study when yeah.
I can't when we did the first set of renewals on on post we got a bomb, but we're a long over with our pricing system and on platform in place on that property and so that is that is a fairly consistent number across a property in six six and a half were excited with seven or seven two.
In October I'm, certainly won't promise that to you going forward, but you know where it or at a point where people appreciate where they're living where our resonate where our teams are taken very good care of the residents, there's hesitancy to move and it's a pain to move and as long as we create value for.
Okay.
Housing markets are getting more expensive everywhere, we're able to put through a fair increasing we've been able to do that pretty consistently.
I just move to the pain.
And then the last question or perhaps Eric Yeah. Your cost of capital today is that level you haven't seen before probably in history of your company both absolute relative basis, you know premium the NPV and you know a cash flow multiple that is very much comparable to your peers, which hasn't always been.
In the case in history, how is that changing your approach to external growth. I know you said you think you'll have some opportunities to acquire some lease up assets and that in the near term, but it is your narrative changing from an external growth standpoint or are you are you kind of applying the same price.
This isn't just a considering this cost of capital decline as you know icing on the cake.
No I mean, I think that that into a large degree of it are our approach in our thoughts about deploying capital remained consistent with what we've always done.
And clearly we think about our cost of capital is as a as a key component to deciding can we put capital out I will say that that you know as we like for the balance sheet is at the moment is Alan so talking about early like our leverage we like.
Our our capacity as are the balance sheet, and having said that if if we find a.
Strong evidence going forward that we're going to be able to put some more money to work than what we've assumed then we will you know think about other forms of capital other than debt in an effort to keep the balance sheet strong we're not going to materially weaken the balance sheet in an effort to capture growth. So we all understand that is.
I'd point, you know equity has to factor into the equation and and if we feel like that we can a with a high degree of certainty put that capital to work then yeah, we wouldn't hesitate to move in that direction, but I'm not going to you know go to go go asked for capital.
And how do we can put to work I've got to be very very confident we can put a tour.
Okay, great color. Thanks, Eric Thanks, everyone you bet.
And our next question comes from John Guinee from Stifel. Please.
Please go ahead.
Great. Thank you, but to a two questions. Your your peers are spending a lot of time and effort in dollars.
Aggressively dealing with rent control is there right control show up anywhere in your markets, maybe a D.C.R. Austin.
And then the second question is a it looks like you're building your last two most recently announced developments at about a.
270000, a unit what do you what kind of product are you building there that a wrap product or a podium or what are you building in Denver and Orlando.
Well I'll take the first part of question Brad you can take the second what I would tell you John No. We have not really seen any you know real evidence of a yeah rent control per se certainly nothing like what we've heard coming out of California, New York across our footprint or I mean, I think that you know the.
Or more often than not what we see some of the local folks doing in Austin in Nashville in some places like that is talking about requiring a more being more aggressive about requiring affordability component to every new development that gets approved so certain percentage of the years have to be limited in terms of the rent levels.
Relative to you know median income in the in the area and so forth. So I think that that's where we see.
And the only thing that we really see suggesting.
Efforts by local officials to keep the housing costs are getting out of hand, but no real rent control a narrative that that we're aware of Brad.
This is Brad.
So do they were doing Denver right now is a worst through.
Costs in Denver, certainly are elevated.
From what we've seen in last years.
Unfortunately, walkup product surface art.
Elevators service and then the.
No no land.
That's a 11 story kind of high rise.
They are structured.
You can build <unk> 11 story concrete structured parking for 270000 the unit.
Yeah. So that you know, we're using I'm kind of a different construction techniques and frock, which is the design build from and they have done. This a number of times throughout the Florida market and it's really a proprietary system those guys use and they're able to.
Well part of the a product off site and really bring it on site in Iraq.
And it keeps the construction time period, a little bit more options Uh huh.
Concise reduces the time frame their interest costs things like that and then they also guaranteed the cost of it. So it's a it's a slightly different technique theirs, they really perfected.
The cost now.
Ah interesting thank you.
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And our next question comes from Neil Malkin from capital One Securities. Please go ahead.
Good morning, guys.
Uh huh.
Not sure if you mentioned, it but increasing total overhead.
Was that due to I guess performance better than expected or planned accruals for that.
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Yeah.
Neil This is Alan Yeah, we had a slight increase for our guidance for the year. There. It's really two things and call. It was what you mentioned we had very good performance. This year. So some of it was our incentive plans and many of our regional operating Pfos were well deserved and also we had some additional technology investments that were they were and we're making this year.
You know certain certainly both there are good investments are goes bands and suite you saw our vision our guidance and we feel good about that number for the full year.
Alright, great makes sense.
Next.
You know demands, obviously very strong sunbelt markets, but just in terms of forward.
Demand are estimating that.
Track.
Development office development in your market Preleasing.
Things like that or do you mind or sort of.
Relocation headquarters relocation things like that in order to kind of [noise].
Forecast, what incremental demand will look like.
Yeah, I mean, it's it's a we certainly oh, yeah monitor and track corporate relocations and some of the bigger announcements that take place none of these markets that over the next several years are going to are going to drive demand and and you know it's it's it's it that that.
Notoriously hard thing to forecast with any real.
Certainty.
In terms of the the job growth scenario, we really you know step back and look at.
At the macro factors and then we look at the macro factors that a market level or whether it'd be I you know some of the good things happening in Nashville, Austin, or Raleigh, and Charlotte and and so it. It's we bring together a lot of different inputs in an effort to get confident that given market is likely to see good job growth.
Okay, and good wage growth both of which are important the of the thing. That's you know really difficult to two really Rafi head around is you know exactly you know when is the broader U.S. economy are going to materially slow down in moderate or I predicting a recession. If you will that have becomes a little.
More of a challenge and but yeah again from our perspective, but we take a lot of comfort and is that a where are we to face a a broader overall U.S. economy slowdown we continue to believe that that our story focus on these sunbelt markets.
Particularly a diversified very well in both sort of a and b product in a more affordable product in general you know puts us in a good position for any sort of a material slowdown and if you go back and you look at at the it recession or more material slowdown periods historically over the last one.
Five years, you'll find that our store it tends to hold up better and we still think that will be the case. The next time it happens.
Fair enough last one for me given your moved it to push rents.
Makes sense to more aggressively.
Pursue acquisitions, particularly given the strong performance of your stock year to date.
Well you know as I as I mentioned, where we were looking at actively look a couple of deals right now a one that we expect to have a hopefully into contract. This week, we'll see if it gets through due diligence and actually gets done, but you know where we're pushing we're pushing as hard as we feel like we should I think that at the end of the.
Hey, you know it I mean, we're clearly thinking about you know the spread in terms of our cost of capital and then the kind of the the yield that we would get a but we're also making sure that as we deploy capital that were really stretching the earnings profile of the company going forward. So yeah, we want to be sure that we're going to get to a point where or whatever stabilized yield.
We're going to get out of whatever the new investment would be is is going to be better. If you will then then the than the then the go forward yield out off the existing portfolio and so it's all about just making sure that we're adding investments to create a more robust earnings profile going forward versus you know the existing asset base and.
And yeah, we think that I'm, giving you know what we see happening now with just you know continued high levels of new lease ups are coming to market that you were going to see a more opportunity over the coming here.
Hi, Thanks for that.
And our next question comes from Rob Stevenson from Janney. Please.
Please go ahead.
Hi, Good morning, Tom.
On a same store relative weakness in Dallas in Orlando anything more than just the supply issue there.
Okay.
Oh on no I mean, frankly job growth is is great. Both places both are leading markets in Dallas as I mentioned, we like the traction than in the improvement we've gotten on.
Blended rents there and on you know and on.
Our revenue growth, which has gone from negative to in first quarter negative point turn first quarter 2.9 to one five on on Dallas and then on Orlando, What we're really seeing is the be asset class holding up quite well and them a little bit of pressure on name on the a swing there.
On a both have extraordinarily job growth stories.
What about Dallas I mean are you seeing any any major bifurcation in terms of A's versus bees in that market with with Dallas. There. There is a split there what though with the product and it's also an urban suburban spent a little bit up towns a little bit tougher than oh portfolio, but places like.
Fresco in Plano are a product is feeling some pressure.
But the but to be holding up reasonably well in Dallas.
Okay, and and 2020, I mean, you've talked a little bit about this but in 2020 or any your markets by your data sources, our estimation likely to be seeing Pete deliveries in 2020 or are we basically as the paying mostly gone through the Python and most of your markets now.
I think early to tell on that but as Eric mentioned in his remarks, you know it is it's unlikely that we see him come down materially and and it's unlikely that we'll see a huge ramp up the market by market, we're still going by the asset by asset build up of where supply is hitting scrubbing that number's comparing.
Third party running it through Brad's team too and we'll have more to say on that and our fourth quarter release.
Okay.
How significant are fees and your overall revenue number I mean, you guys are topline 1.2 billion in change year to date, how much of that fees versus just straight out rent.
Rent is about 93% of our our revenue on that and so so both reimbursements and fees makeup Ras so fees are about half that so briefly to half a cent AIDS. So so fairly meaningful, but but certainly it's about wins.
Okay. I mean from from you guys perspective, I mean are there still more fees.
The Q you know given that you guys can can grow and add to the system or is it just inflationary growth in the existing fees and other words you get out are you guys in suburban location is going to start charging for parking and other sorts of stuff to continue to drive the fees at up at above average rent rate or are we sort.
To settle down in terms of the fee growth in the overall composition.
Let me say something Tom something that didn't I'm sure I think what you're saying last year. So as you've seen our fees. It's kinda block you have programs are going to a significant increase in they stay stable for a couple years as we get to new programs Rollouts. What we've seen last couple of years. Rob is so fees have sort of the groans are less they rents I say hasn't moved in 2020 and 21 in Tom's got a couple of program.
Sure. He will talk about that as we build out of 2020 and more productive in 2021 will have.
Yes that line I'm going more in line with RIS policemen, Yeah, I think there a few things to do but I mean as al sometimes things keeping the main thing. The main thing rents is the deal and that's that's gonna be one tribes. This forward well have some opportunities on the technology front going forward well, but the rents will be the dry.
Several of our business going forward and the folks.
Okay, and then just one housekeeping item I'm not sure I saw it somewhere what was a price for the rigid channel disposition and then what type of sales price does though for the five four cap REIT indicate the remaining little rock portfolio.
The origination all deals it's about a 45 million 40 546 million and has talked about cap rate was pretty similar to the overall for the whole portfolio all the assets together or five point I think they're all pretty tight there man.
What is what is the gross sales price for all of the little rock portfolio or about $160 million somewhere in that range.
Excuse me, sorry, <unk> hundred 50 million, Okay. Perfect. Thanks, guys I forgot about next month.
And our next question comes from John Pelusi from Green Street Advisor. Please go ahead.
Thanks, Tom I wanted to go back to your eye renewal remarks renewal growth remarks, just so I understand it so in a normal course of business for this year you would've been in 66.5% renewal range and then the legacy post portfolio drove me a bit higher that are an accurate interpretation no sorry, John if I gave that impression that.
It's not we just had sort of a better group, we push the renewals out at different rates for different people based on where they are in a market and what the Submarket is doing and basically we we just had a higher except right at the higher price point, you know post was.
Right in there with Midamerican, but just slightly lower it is not post driving us to 7% it was more or the except to mix during the quarter. We got some of our asks.
Okay.
Maybe then if he can give some color.
Theories of what's going on in the ground to lead that higher you know acceptance of the higher rates. So if we if you gave me a job in supply forecast or the actual what actually happened and 29 team you know a year ago I, probably would have predicted a low or no right and I did so just curious you know why.
On the ground on the demand side is leading to that incremental lift and renewals you think.
John I can take a stab at that my my guess would have been like yours, a little bit lower than 7%, but I think as a as I touched on earlier. We are platform is substantially improved our teams are doing an awfully fine job of taking care of our.
Residence their renewing at a higher rate and I think part of that is because of us, but I think part of that it's just because of secular changes in society today, where people are saying single longer they are deferring a marriage there the deferring childbirth and thus there are different in our move outs.
The home buying continues to drop and did again this quarter.
So I think it as it is primarily those changes <unk> that are making a difference I would also add to that John . This is Eric that you know one of things I think you have to realize is that a lot of the supply that's coming into our market. As you know is pretty high price product I mean really high priced products and even though there may be some temporary.
Gary lease up concessions or other things done we are competing in this new some with this new supply against a much higher price point product than we ever have in the past what we've seen supply pick up a in years past in prior cycles when supply picked up a it tends to be more more of a balance stuff.
Price point product, whereas now given all the things that you know about relating to development cost and and so forth everything is so much more higher price right now, which I think is really also fueling a inability for us to be a little bit more aggressive all renewals and still hang onto a lot of people costs.
You've got the hassle of moving but if you're going to incur the house. The moving you got a really go to something that you know is is compelling either you know just so far superior product at a comparable price or are they even at a lower price and you know that I think there's a lot of the new product doesn't really offer that same dynamic.
As we've seen in past cycles.
Got a that Brad one quick one for you I'm curious what you saw earlier in the year, when Fannie and Freddie spreads a gapped out and I know they came back down pretty quickly, but within that time period was there any interesting bifurcation across your markets in terms of the strength of the bidding teds.
No, we we've really not seen a month affrication humans.
At all within our markets I think there's just so much demand out there for assets in our region.
The reason.
I think for the most part buyers are looking.
Not seen or any type of.
Demanding.
Hi.
<unk>.
Seems like there's folks have alternative sources.
Oh lined up.
Hi.
Oh.
Great. Thank you.
Thanks, John .
And it does appear there no further questions over the phone at this time I'd like to turn it back to the speakers for any closing remarks.
We appreciate everyone being on the call. This morning, and we'll see me they view it a navy in a couple of weeks. So thank you.
This does conclude today's program. Thank you for your participation you may disconnect at anytime.
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