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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen. Welcome to the MAA Fourth Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, the companies will conduct a question-and-answer session. As a reminder, this conference is being recorded today, January 30th, 2020.
I will now turn the conference over to Tim Argo, Senior Vice President, Finance for MAA. Please go ahead.
Thank you, Priscilla. Good morning. This is Tim Argo, Senior Vice President of Finance for MAA. With me are; Eric Bolton, our CEO; Al Campbell, our CFO; Rob DelPriore, our General Counsel; Tom Grimes, our COO; and Brad Hill, Executive Vice President and Head of Transactions.
Before we begin with our prepared comments this morning, I would like to point out that as part of the discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the 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.
Thanks, Tim and good morning. Our first – fourth quarter results were better than expected has improved rent growth and record low resident turnover continue to drive positive trends and overall revenue performance. Over the course of last year, we focused on an opportunity to prioritize rent growth and push that agenda throughout the year. As a result, we carry good pricing momentum into the New Year.
Based on our updated analysis, we do now expect that the overall level of new supply deliveries in 2020 will run higher than in 2019. This will of course vary by market. As has been routinely commented on, the majority of the new supply continues to be higher end product at a high price point.
Based on our detailed submarket analysis, it’s important to note that the new supply forecasted to deliver in our markets in 2020 will be at rents that on average will be 25% higher than the rent across our properties in the same submarkets.
While we are certainly not immune to the impact of new supply, we see this pricing gap is generating good long-term opportunity, the price point of our portfolio, the quality of our locations, the diversified nature of our submarkets, the strength of our operating platform and a number of new initiatives that we are rolling out in 2020, along with the pricing momentum that was built in calendar year 2019 will continue to support steady growth in NOI over the coming year.
One of the benefits surrounding the new and higher price product delivering into the market is the expanding redevelopment opportunity created at a number of our properties. The price spread between the new supply and the existing rents that our properties creates opportunity to upgrade and still off – offer attractive value to our leasing prospects, while also generating a very accretive use of shareholder capital.
Our property upgrade and repositioning pipeline will expand in 2020, supporting above market rent growth at a number of locations over the next couple of years. We continue to find select opportunities to capture disciplined new external growth. We began the year with our new development pipeline at 2,100 units, representing $490 million in new investment. In addition, we have 640 new units undergoing initial lease-up, representing $146 million in additional new investment.
We did close on one new acquisition in Q4, consistent with the transactions we executed on over the past few years, this was a newly built property undergoing initial lease-up, we partially match funded the acquisition with new equity issue through our ATM program, thereby retaining plenty of growth capacity and protection for the balance sheet.
So in summary, our Sunbelt markets continue to capture great demand. MAA’s portfolio is uniquely balanced and well positioned across the region to capture this demand. Our redevelopment and new development pipelines are growing. Emerging new technologies and products will also support further NOI growth and the balance sheet is in a great position with ample capacity to jump on compelling opportunities. I want to thank our team of associates here at MAA for a great year of performance in 2019 and we look forward to another year progress in 2020.
I’ll turn the call over to Tom.
Thank you Eric and good morning, everyone. Our operating performance for the fourth quarter exceeded our expectations with the steady demand for apartments and our enhanced platform, we’ve continued momentum in rent growth and strong average daily occupancy. Same-store effective rent growth per unit increased 4.3% for the quarter, this is the seventh straight quarter of year-over-year improving ERU growth. As a result, our year-over-year same-store revenue growth was 4.1%, the highest it’s been since 2016. Effective rent per unit increased 60 basis points sequential – sequentially.
Revenue performance was led by a steady momentum in blended new and renewal lease over lease pricing, up 2.6% for the quarter, which is a 100 basis points better than this time last year. In addition, average daily occupancy during the quarter remained strong at 95.7%.
As we wrap up January average daily occupancy is still strong at 95.5% and compares to 96% in January of last year. Our 60-day exposure which is all vacant units and notices through a 60-day period is just 7.2%, 10 basis points better than this time last year.
Looking forward as Eric mentioned, our overall supply in our markets is expected to increase expected increase in 2020. The Dallas, Houston and Savannah markets are expected to be the most challenging, based on our pricing progress last year, along with current rent and exposure trends, we expect our leading revenue markets to be Phoenix, Raleigh, Austin and Nashville.
Of course, the new supply creates an opportunity for a redevelopment platform. In addition to our kitchen and bath program, we’re underway with an amenity upgrade program at 10 communities, there’s $20 million to $25 million investment in 2020, it’s primarily focused on legacy post assets, where the product was built in [excellent] [ph] locations, and new supply continues to push the rent of the submarket up. In these cases, we can update leasing centers, hallways and common areas create shared workspaces, outdoor gathering areas and rooftop decks to allow us to increase rent, while still offering compelling value in these submarkets.
Our technology platform also continues to expand. Our overhaul – overhauled operating system and new website has contributed to our ability to attract, engage and create value for our residents. Our tests on smart homes have gone well. The technology was installed in 15 communities with minimal disruption has been well received by our residents. We expect to install 24,000 smart home units in 2020.
Our high speed internet access initiative is deploying and will be a contributor to 2020 NOI growth. We’re also exploring a range of AI chat, customer resource management and prospect engagement tools. We’re pleased with the progress our teams made in 2019 and greatly appreciate their efforts, with a solid base of earned in rent growth as we head into 2020 and are excited about the opportunities ahead. Brad?
Thank you, Tom. Good morning, everyone. I’ll provide brief comments on what we are seeing in the transaction market, as well as on our transaction activity at Q4. As you’re all aware, the transaction market continues to be extremely competitive with record levels of liquidity and demand for multifamily properties.
Given the favorable migration and job growth trends that exist in our region of the country, investor demand for multifamily properties within our footprint continues to be robust, leading to deep better pools, aggressive pricing and compressed cap rates. Reflecting the positive job growth and strong demand, we expect supply to increase in 2020.
This increased level of supply should continue to support a historically high level of acquisition and pre-purchase deal flow. We remain disciplined in our capital deployment decisions and Al and his team have our balance sheet in great shape, allowing us to respond to compelling investment opportunities as they materialize.
As we’ve done in the past, we’ll continue to focus our acquisition efforts on new lease-ups. In Q4, we closed on the acquisition of The Greene in downtown Greenville, South Carolina. This was a recently completed asset, involving a developer and equity provider we’ve worked within the past. The asset was still in its initial lease-up with the equity requiring a certain and quick close by year end. We were able to execute on the acquisition at a stabilized market cap rate of 5.1%.
In 2020, we’ll also continue to pursue pre-purchase opportunities. As a reminder, this is a program where we partner with good developers that have access to great real estate. We bring the capital to debenture in return – and in return, we get access to an asset at a reduced basis with a clear path to a 100% ownership at stabilization. This program allows us to selectively pick well located, to be built assets, while minimizing our overall development risk.
In Q4, we closed and started construction on a 264 unit pre-purchase located nine miles southwest of downtown Orlando, in a very desirable high income, Dr. Phillips area. And finally in Q4, we took advantage of strong investor demand and pricing and sold all 5 of our assets and exited the Little Rock Arkansas market.
We had over 25 qualified bidders offer on these properties. We achieved good pricing for this non-core market with 24-year old properties, equating to a 5.4% market cap rate. We will continue to selectively prune our portfolio on an ongoing basis and we’ll have more to say about our specific 2020 disposition plans in coming quarters.
With that, I’ll turn the call over to Al.
Thank you, Brad and good morning everyone. I’ll provide some brief commentary on the company’s fourth quarter earnings performance, major financing activity and then finally on our initial guidance for 2020.
Reported FFO per share of $1.68 for the fourth quarter was $0.05 per share above the midpoint of our guidance with majority of this outperformance produced by property NOI as both operating revenues and expenses were favorable to expectations for the quarter.
FFO per share was $6.55 for the full year, which included several items considered unusual and not core to our business such as the market-to-market valuation of our preferred shares and gains on sales of land parcels. Excluding these non-core items, FFO for the full year would have been $6.26 per share. As to discuss more in a moment, we are providing earnings guidance for 2020 on a core FFO basis, which we believe will help provide a clear picture of performance.
We’re active on the financing front during the fourth quarter as we issued $300 million of new public bonds. We also retired $170 million of unsecured loans and $17 million of debt – additional secured debt. The effective interest rate of the new bonds will be 3.1% over 10 years, after considering the interest rate hedges related to the financings.
We ended the year with 98.4% of our debt fixed with an average duration of almost 8 years which is a record for the company. During the fourth quarter, we also issued $20 million in new equity through our ATM program, essentially match funding a portion of the Greenville property acquisition mentioned my Brad.
Finally, we are providing initial earnings guidance for 2020 with the release, which is detailed in our Supplemental Information package. Providing guidance for net income per diluted common share, which is reconciled at FFO, core FFO and core AFFO in the supplement. Core FFO for the full year 2020 is projected to be $6.38 to $6.62 per share or $6.50 per share at the midpoint. The definition of core FFO including a description of the items considered non-core can be found in our supplemental package.
The primary driver of 2020 earnings performance, the same-store NOI growth, which is projected to be 3.5% at the midpoint. Effective rent growth for the year is expected to be around 3.7% produced by 2020 lease-up release blended rental pricing growth of 3.4% at the midpoint, combined with the 2019 blended rental pricing of 4.4% achieved. This pricing combined with a slight decrease in average occupancy to 95.8% average for the year, brings projected total rental revenue to the 3.5% range.
Fees and other income items combined or projected to add an additional 20 basis points to 25 basis points to revenue growth for the year, with the primary driver being a 55 basis points contribution from the Double Play bulk internet program, which is partially offset by other fees and reimbursement items which are projected to remain essentially flat for 2020, primarily due to slightly lower occupancy. These items combined to produce our total same-store revenue growth expectation of 3.75% for 2020 at the midpoint.
Same-store operating expenses will continue to have some pressure from real estate taxes and insurance costs for the year and we’ll also have the additional expenses related to the Double Play bulk internet program which is recorded on a gross basis. These items combined to produce projected same-store expense growth a 4.25% for the full year at the midpoint.
The forecast also assumes a modest increase in overall – of overhead cost just below 3% for the year and continue to use of our ATM program to essentially match fund expected acquisitions for the year with $80 million of new equity issuance projected of course, assuming we find accretive uses of capital during the year.
And that’s all we have in the way of prepared comments, Priscilla. So now we’ll turn the call back over to you for questions.
Certainly. [Operator Instructions] And we’ll take our first question today from Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.
Hi. Good morning, everybody. Brad, you mentioned supply is increasing in your markets in 2020, which I presume is off of your kind of detailed supply analysis. Could you quantify that thought and tell us which of your top markets have seen the biggest increases or decreases?
Hey – Austin, it’s Tom, I’m going to jump in. where, we really think that we’ll see the most pressure from new supply is in Dallas primarily it’ll continue to be challenged, but we’re – but it’s – that supplies coming in at 45% above our market – our [technical difficulty].
And then I think we would expect that Houston, Savannah and Charleston will soften over time as supply comes online, but feel like we’ve got you know, Phoenix and Raleigh will probably lead the pack in terms of performance and we’ve also got strong momentum in the face of elevated supply with Austin, Atlanta and Nashville.
And Austin real quick just to clarify when Tom says its supplies coming in at 45% on top of us that’s a rent gap between what we have in place with new supply that’s coming in is about 45% higher in rent than what our assets are.
Yeah, that makes sense. And then what’s the supply sort of for the overall portfolio? What are kind of the numbers when you compare what it was in 2019 and what you’re expecting for this year?
Yeah. So if you look at our radius, supply as a percent of inventory, we’ll – this 2019 was about 1% of supply delivered and this year, it’ll be 1.6% in 2020.
Got it. Thank you for that. And then kind of going back to the clarification on the rent for units being delivered versus what’s in place. Eric, you kind of highlighted that you know, across the overall portfolio, I think you said 25%. How does that 25% compared to the last two years to three years of where new supply was coming in versus you know, where your portfolio was at the time?
I don’t have those numbers right in front of me, Austin, but we reviewed them and it’s very similar to what it is this year.
I think as construction costs continue to escalate – our land costs continue to escalate, I think if you go back over the last several years, you’re going to find that that gap is going up. Certainly the rise in cost of construction is accelerating at a pace faster than unit growth is accelerating. So, I think if you go back over the last several years, you’ll find that that gap is probably spread somewhat.
Got it. That’s helpful. Thank you for the time.
And we’ll take our next question from Neil Malkin with Capital One. Your line is open.
Hey. Good morning, guys. First question on the operating expense side. Talked about implementing technology through several of the assets and units across your portfolio. I’m wondering if any of that is also pressuring operating expenses or is all that being capitalized? And then what are your expectations for payroll and insurance growth in 2020?
Let me make sure I’m understanding, can you tell me what you – in the first portion, what expenditures were you talking about specifically, Neil, to make sure I’m clear?
Yeah, yeah. So the elevated operating expenses, because yours mostly related to the bulk internet program, but I thought you’re also implementing a smart home technology package. Are those –
Okay. Okay, I know I got it. Yes, we are and a majority of that is capital. So just give you a little breakdown of the expenses. I think the midpoint as we talked about was 4.25% growth for the year and about 65 basis points that is related to the bulk internet program. And then, you have real estate taxes which are a third of our expenses as probably another 60 basis points. So if you strip all of that out, the other items, personnel, R&M, utilities, all those things are growing together about 3% for the year.
You know, Neil, I’ll add to that you mentioned specifically insurance, we’re expecting you know probably low double-digit increase for insurance program which will renew in July.
Okay, great. You know recently there has been some pretty strong homebuilder confidence. I’m wondering if you’re seeing that you know, play out in any way or anecdotally in terms of the people who are moving out of, they’re moving out to home purchase, and/or if the builders are you know, starting to focus more on at the entry level homes or still the sort of higher price point homes?
No, we’ve not seen the folks move out for entry level homes, in fact, move out to home buying was down 10% this quarter, and that’s part of what continues to drive our turnover down.
Okay, I guess last one for me, can you just talk about what cap rates have done? Just talk about maybe in your top five markets you know, over the last maybe 6 months for you know, A and versus B product?
Yeah. Hey, Neil this is Brad. You know, I’d say just broadly speaking, cap rates just continued to decline. I mean, certainly the demand for multifamily, if you heard anything about the NMHC Conference last week, where attendance was up record levels. So I think the demand for multifamily assets continues to be very, very strong.
And you know, every indication we have and you know, from selling properties to be very, very active in the acquisition market and the numbers we’re seeing in cap rates continue to come down. And I’d say the gap between As and Bs continues to compress and you know, we don’t – we certainly don’t see anything changing you know, the liquidity in the market that’s really driving that at this point.
Thank you, guys, very much.
Thanks Neil.
Thank you. We’ll go next to Nick Joseph with Citi. Your line is open.
Thanks. I hope you can give a little more color on the bulk internet program. In terms of the contracts with the providers, how long are those typically and then from a rental perspective, do all units need to opt into the program or is there an opportunity to opt in or opt out?
No. On the first when there, 5 year to 7 year contracts depends on the provider and we’ve got the option to opt out for 3 years I believe but don’t hold me into that, Nick. On the – as the rollout goes, all residents participate in it. And when we did this, you know, we had the bulk cable program for a while, we decided to add high speed internet access.
When we did that, we looked at our market and who’s already subscribing for high speed internet access and 80% of our residents are already paying for the speed that we’re providing or less. So it’s an upgrade and they’re paying less through us for that. Part of the reason that our results were a little better than we expected in the fourth quarter is, Nick, we really assume that would roll in on new leases on renewals, but the number of existing residents that chose to opt in mid lease was higher than we expected.
Thanks. That’s helpful. And then maybe to that point, where are you in terms of the rollout? And then how long will it take to be fully deployed?
We have one provider done and the next provider underway, and I would think we’d be deployed by May – fully deployed by May, with some carryover the benefit, of course in the 2020, because they’ll ramp up from there.
Right, thank you.
Sure.
We’ll go next to John Kim with BMO Capital Markets. Your line is open.
Thank you. Tom, in your prepared remarks you mentioned current occupancy is at 95.5%, which is 50 basis points lower than last year. Can you just comment on how concerned you are that occupancy may come in at the low end of your guidance or potentially lower than that given new supply?
No, [technical difficulty] as you will have noticed for the last year, we’ve really felt like and continue to feel that with demand, the way that it is now is the time to raise rents and build our effective occupancy and that is the basis for which our steady rent growth from quarter-to-quarter and the growth that we’ve seen throughout the year is built. And we’re willing to give up a little bit of occupancy on that though, 95.5%, very solid from our perspective.
But we feel pretty good about that this time of the year I’ll expect it to be a little lower than I would expect that you’ll see that climb as the year goes on, but we’re certainly not going to be shooting for 96.2% to 96.4% you know, we’re very happy in the range that we’re in and it’s starting right where we thought it would.
And can you provide commentary on how you see job growth or other demand drivers in your markets this year versus last year?
Yeah. I mean, job growth, we see no slowdown at this point. And the – you know, we continue to see interest in the Sunbelt and in migration trends, renewal rates continue to stay in the 6% to 7% range right now. So we’d anticipate those coming down a bit this year. But right now, demand is very strong and for that reason, we’ll continue to prioritize rent growth.
Okay. And then your development pipeline increased to $490 million this quarter. Can you just comment on how big you feel comfortable with the pipeline is going forward? And are you developing at any different spec as far as adding smart home technology or any new technology as part of the development program?
This is Eric, John. I – you know, we’re very comfortable where the development pipeline is at this point. I mean, we’ve established the tolerance that we felt very comfortable with, the 3% to 4% of enterprise value, which should put the pipeline tolerance, if you will, at $500 million to $700 million. So at $490 million we’re pretty comfortable with where it is at this point.
We have several other projects that we’re working on now, if you will, in a predevelopment sense, that we will start anything else this year. We do have a couple of land sites that we either own or tied up, but I suspect it will be early ‘21 before we’ll get those projects going. So we’re very comfortable with where the pipeline is at this point. And yes, as this new product is being developed, the smart home technology and a lot of the new technology services and products that Tom has alluded to, they were certainly a part of you know, what we build going forward.
Great, thank you.
And we’ll take our next question from Haendel St. Juste with Mizuho Bank. Your line is open.
Hi, Zach Silverberg here with Haendel. Just a quick follow-up on John’s question. How do you guys view new development yields against IRRs and how do they turn against IRRs compared to acquisitions?
You know, we’re generally seeing right now that our stabilized yields out of our development are somewhere in the 100 basis points to 125 basis points higher than what we are capturing on the acquisitions as Brad alluded to The Greene, the deal we bought in Greenville stabilized yield that just over 5%. We’re seeing our stable – our projected stabilized yields on our development pipeline right now trending anywhere from 6% to 6.5%. So you know, call it a 100 basis points, 125 basis points spread.
All right, thanks. And could you provide an update on the quarter and year-to-date leased rates between those legacy post portfolio and the MAA portfolio? And is there any extra opportunity that we should view this year between the two of them?
Yeah, we do – or I do not have that information in front of me, we’ve largely narrowed that gap or that gap is narrowed, to be honest with you and differences between post and Mid America assets in the same submarket are negligible. Now going forward as I touched on with our redevelopment program and amenity upgrade, we do still have opportunities in those very strong locations to update the exterior and amenity packages there, and that is more of a 2021 impact that we’ll see from the work that we do –
Tom is referring to the post – the legacy post locations for the upgrades, so we’ll probably see more robust rent growth emerge out of the post, but it’s more a function of the upgrade as opposed to market differences.
All right, that’s all for me. Thanks for the time guys.
We’ll go next to Rob Stevenson with Janney. Your line is open.
Good morning, guys. Tom, so same-store revenue guidance is 3.25% to 4.25%. What do you expect – where are you expecting your top markets to come out? Where are you expecting the bottom performers to come out? What’s the sort of spread that under – underpins that 3.75% midpoint?
I mean, Rob, [technical difficulty] that range to be on a blended basis, the top markets in that – probably in that for 4%, 4.5% range and the bottom markets in the 2%, 2.5% something like that. I’m estimating that to be honest with you, but that’s rough feedback.
Okay, so nobody is sort of close to flat or even negative or anything. It’s all sort of at least 1%, 1.5% positive at the bottom end?
Correct. I think on a blended basis, we would expect to get a full year traction and not have many people go backwards.
And Rob, I’ll tell you, you know, this is Eric. I mean, to some degree, the opportunity that we carry from 2019 into 2020, because of the focus on prioritization, on rent growth, it really puts us in a much better position to work through some of the supply pressures in these markets in 2020 and really enables us to avoid any the real weak performance metrics that you might – that you know, you were alluding to as a possibility. I think that, you know, we knew we’re heading into this year that we likely would see some moderation or some sort occur and that was part of the reason behind the logic of focusing so intently on the rent growth last year, which really helps us this year.
Where are you guys – on that topic I mean, how are you guys thinking about turnover for 2020 I mean, it was only 47% last year. I mean, are you anticipating it being sort of flattish, are you expecting more contraction, some re-expansion there? And how big of a benefit is that to you if it stays low from an earnings standpoint?
Yeah, as far as our expectation, we expect it to be up slightly, we don’t see any fundamental changes coming across the board, but it is, you know, honestly hard to assume that it will continue to drop, and that plays into our earnings forecast really minimally at this point, Al may add some color.
If you look at what we’ve got done then for occupancy, we’ve given ourselves about 15 basis points decline, there’s a little bit of increase in turnover applied and but nothing significant I would say.
Okay. And did I hear you guys correctly that you’re going to do 24,000 smart home unit installs in 2020?
That is correct, Rob.
Okay. And what is the cost for that? How much you’re doing per unit?
The average cost on that is $1,300 on the install and that gives you locks, thermostat, two lights, two moisture system sensors and an interactive flat panel display that’s the resident interface as well as their app.
And it’s more things that’s it’s important I think and doing your model, Rob, there the smart home program plus the amenity redevelopments that Tom has talked about we’re investing about $60 million in capital this year in that, which is very strong returns, but a lot of that will begin to come more strongly in 2021.
Okay, so I mean, in terms of units, though, that you redevelop in 2020, you know, instead of being 6,000 is that going to be wrapped up or is that going to be separate? So in other words, are you going from essentially 6,000 to 7,500 a unit on the redevelopment or I assume there might be some sort of cost savings if you’ve got to open up walls and do whatever anyway, but I mean, is that going to be wrapped up into a higher redevelopment per unit cost for the you know, whatever number of units you do redevelopment, interior or full scale redevelopment on?
Sure. And a lot of those programs are separate. And the reason that they are separate is because the timing is different in them. And if you remember on the kitchen and bath redevelopment, we do that on turn, when we install smart homes, we go in and we do the whole property at one time and then move people on to the product. So those programs are independent of one another.
And that’s really why I mentioned them, Rob, this is Al, if you think about it, the program that we’ve done for many years into your redevelopment part we’ll continue along at basically the same pace call it, 7 – 7,000 to 8,000 units at you know, 5,000 to 6000 per unit spinning on that and that’s been the same level and that’ll have a contribution to earnings growth.
On top of that, are the two programs that Tom was mentioning, the amenity redevelopment and of course, the smart home and those together about an additional $60 million that are great investments that have begun to pay off more in 2020 and that was really a point as we model it to help you lay that in right.
Okay. And then just last one for me, Al. Property taxes especially elevated any specific markets?
You know continues to be the same with tenders flow. I mean, what we have this year, when the beginning in the year you don’t know a lot, we’ll go back to that, Rob and what we do know is about a third of our portfolio is a revaluation year, we continue to expect pressure in Florida, Texas, maybe North Carolina a little bit this year. So we dial that in and so we know overall, we do expect our costs to come down a little bit, you know, the 4% to 5% range is 4.5% midpoint is about 50 basis points down.
And also, you know, we’re cautiously optimistic about some of the changes in Texas, the new law changes hard to know where that’s going to play out over the next few years. We don’t yet know how that’s going to affect both millage rates or valuations. So we dialed in what we think we’re going to have and over time, we’re hopeful that line begins to come down a bit, that 4.5% in 2020 is our expectation.
Okay, thanks.
Thank you. We’ll take our next question from Hardik Goel with Zelman & Associates. Your line is open.
Hey guys, how are you? Thanks for taking my question here. I actually wanted to touch upon supply again. The way we look at it, it doesn’t seem to be as impactful as maybe you’ve mentioned. Beyond Dallas and Houston, the two markets that you’ve highlighted, can you give us a sense for supply and your, you know, maybe secondary, tertiary markets and how that’s shaping up?
Sure, probably the market with the secondary group with the largest impact is probably Charleston moving from 2.3% as a percent of inventory to 4.8%. Now we’re a little encouraged by that, because the – where the supply has been, where it lines up to our A assets is in Mount Pleasant and the Mount Pleasant moratoriums have finally taken an effect. And so while Charleston has seen higher, that supply has moved to the Upper Peninsula area, which is as you know is across the Ravenel Bridge from Mount Pleasant.
So we’ve – we’re a little bit optimistic there. But again, you know, we see Charlotte at 2.5% to 3.7%, others in the secondary market on our – Greenville goes from 2.1% of supply to 2.3%. So, not a lot of change. They’re probably the other market that has the biggest increased delta between 19 to 20 years in Savannah, Georgia you know, in 2019, they delivered 3% of the existing supply – market supply into the market in 2020 that jumps to 7%.
Now you recognize, Savannah is only 2% of our same-store NOI so it’s not a huge impact, but it’s kind of hit or miss you know, somewhere up a little bit, somewhere up or more than others, but because of the diversified nature of our capital across these particularly secondary markets, you know, we – it’s not particularly significant, but you know it varies a bit by market.
And just one quick follow-up, could you share the new and renewal for the quarter?
Yeah, sure. The new for the quarter was 90 basis points down renewal 7% blended 2.6%, which is a 100 basis points better than last year.
Thanks. That’s all.
Thank you. We’ll take our next question today from Rich Anderson with SMBC. Your line is open.
Hey, thanks. Good morning.
Hey, Rich.
So last year, your same-store growth sort of cadence, kind of climbed over the course of the year from 2.5% on the NOI line to 5% to end the year out in the fourth quarter. I’m wondering if that means sort of a mirror image in 2020 where, you know, you start the year somewhat stronger than you end it on the basis of, you know, increasingly tougher comps?
Well, I mean, certainly I think the prior year comparisons will be a little bit more challenging for us this year. A lot of the momentum that we had last year was a function of our, you know, clear focus that we had that going into last year about focusing on rent growth, you know, at the expense of a low occupancy give up, and that momentum you know, built over the course of the year.
So, I think that and which is really helping us this year as we carry a lot of that momentum that baked in, if you will, into 2020. We do think that as a result of some of the supply issues in a number of markets that our lease over lease pricing, if you will, the more current pricing that’s occurring in 2020 will be off a little bit from the trends that we saw in 2019, but a combination of the, you know, the carry forward that we have from last year and the, you know, the plans that we have this year still offer up you know, a blended lease over lease pricing performance for 2020 at 3.4%.
So, you know, we think you know that’s off a little bit from last year, but 3.4% of blended pricing performance in 2020 in the face of some of the supply pressures that we see on these markets, we feel pretty good about that actually. And still a strong occupancy that we think will capture as well. So, you know, I think these markets continue to show resiliency because of the strong demand in our portfolio in particular, because of the diversified nature of the markets that we’re in.
I’ll just add to give the how that’s slated into our projections to support that what Eric was saying is, all quarters and this year is going to be a little more stable just because of where we are. And all quarters are sort of in that 3.5% to 4% revenue range for the year and so second and third quarter maybe a little bit higher, but it’s – there all in that range much more stable.
I’ll add one point even though that blended pricing is a little bit lower in ‘20 as the smart home and the bulk internet start to take hold, it helps the back half of the year a little more than certainly the first half.
Okay, great, thanks. In terms of the external growth sort of projections for this year obviously more on the acquisitions. How much of that is sort of just pre-purchase opportunity? And how much of that is cost to capital that’s making deals work a bit more easily in 2020 versus previous years?
Well, I mean, we think that it’s more likely than not that the vast majority of the acquisitions that we do will be some pre-purchases of things to be built. We may – particularly as you get towards the back half of the year, we see the opportunity set improve a little bit for buying lease-up deals as we get closer to a year end and developers or owners get a little bit more motivated, get some things done.
But, you know, certainly, you know, our cost to capital has improved and it does at the margin, generate a little bit more flexibility in this regard. But at the end of the day, I mean, we’re really driven by, you know, can we deploy the capital and create a stabilized yield on that investment, that’s going to be accretive to our existing earnings profile. And that’s what really drives our mindset.
We pay attention obviously to our cost to capital, but just the idea that you know that there is all of a sudden, a better spread opportunity in and of itself is not what compels us to go out and start putting money to work. We want to be sure we’re adding earning assets they’re going to be accretive to the existing earnings profile of the company.
So declining cost to capital doesn’t mean you know, you’re willing to take a lower yield or does it influence your underwriting?
No, it really doesn’t. We – we do not want to, you know, begin to just take on a bunch of lower yielding investments, just simply because the cost to capital is adjusted as it has. We’re trying to compile a long-term earnings growth profile for the company and we’re trying to protect that long-term earnings growth profile, and just adding a bunch of low-earning investments, because our cost to capital happens to be where it is, you know, really runs counter to that long-term objective.
Well, and you say lower cap rates sometimes lead to higher growth in the second year of ownership, but that’s just and I think another observation. Anyway, last question for me, I appreciate the positive wrap or you’re putting around the supply, which you know, it makes sense to me in terms of premium relative to where your rents are, but clearly it rather not be the case, right? I mean, this is making the best of a not so great situation from a supply perspective, with concessions that can be offered newer product and a strong job market, people might have a willingness to you know, to entertain optionality. So in your mind, while you see some opportunity out of the supply picture, what is the risk though, that this could you know, actually have be more damaging when you consider that the health of job markets in your you know, neck of the woods?
Well, certainly, I think the supply picture and the supply pressure, you know, as – and talked about, it does create some short-term pressure and as evidenced in our guidance. I mean, we assume that our lease over lease pricing in 2020 on a blended basis runs about 100 basis points below 2019. So there’s no question that you get into these heavier supply scenarios, particularly where there’s leasing concessions coming into the market, that there are some short-term pressure generated.
And as I mentioned, that can vary quite a bit by market and in a bigger market like a Dallas, you know, you’re going to see more pressure than you are in a smaller market like a Greenville, South Carolina and that’s why we tend to be very focused in our efforts to deploy capital across the region in both large and secondary markets in an effort to something you’ll remember, Rich in an effort to get our full cycle performance profile that we’re after.
So you know, I certainly acknowledge and we do that there is going to be some near-term pressure from some of the supply we’ve got that dialed in, we think appropriately into our guidance. But I will tell you, the fact that there’s a lot of this new high price product that’s coming into our locations. We think that long-term that’s a good thing, it says good things about our neighborhoods, it says good things about the value of the real estate in those neighborhoods, and it creates the opportunities that we alluded to, to continue over the next few years to get some not only good rent growth because of the improvement we’re making in the assets, but also great returns on our capital. This is the most accretive use of money that we have right now as this redevelopment initiatives. So, you know, yeah, we’ll deal with a little short-term pressure, but the long-term value play is pretty darn attractive.
Got you. Thanks, Eric. Thanks, team.
You bet.
Thank you.
We’ll move next to Drew Babin with Baird. Your line is open.
Good morning. A quick follow-on question to Rob’s question earlier on the Texas tax revenue caps. It sounds to me like that is not baked into your same-store expense guidance range at all. It seems like you know, maybe a longer-term benefit. Is that true or is there any kind of directional benefit that’s beginning to influence guidance there?
No I mean I think we dial in what we think it’s going to be our best estimate at this point, Drew I mean, you know, the cap is not at a taxpayer level, it is at the market level and so I think there still some things to be worked out exactly how that’s going to play to each individual asset, the valuation and the millage rates that in the year for all of the markets.
So we dial in what we think it’s going to be and I think – what we would say is, over time, hopefully those walls are helpful in restraining the – perhaps the rows of taxes in Texas, and that’s hard to say taxes in Texas, but, but I think in the short-term is yet to be seen exactly what it’s going to play out and it’s the best when we put our best estimate on that.
Okay, and one follow-up on the same-store revenue build up, the blended leasing spreads from ’19, blended leasing spread in guidance, marrying that with the occupancy guide and Double Play impact it would seem like the revenue build up goes towards the high end of guidance, which I would surmise, there’s maybe some other ancillary type items that may be a little flattered and dragging on that which you know, that was a trend kind of throughout 2019 as well. Can you talk about what kind of the growth in other, aside from the Double Play? What was that other income growth in ‘19? What will it be in ‘20? And is there anything going on in that to kind of drive new other income you know, in the 2021, anything else you’re kind of doing?
I think the easiest way to do that, quickest way to maybe, Drew is to just say talk about what our growth would have been, our guidance would have been without assuming the bulk internet program this year. And we would have had, you know, mid quarter range somewhere around 3.2% growth revenues, 3.6% for operating expenses, and 3% for NOI and then so you have the bulk internet program on top of that.
And so – so that can kind of help beat on. I think the 3.2% on revenue is a combination of the rents that we put on the table this year. The 3.4% blended lease that we expect to get combined with what we did last year, that’s helpful, giving up a little bit on occupancy, 15 basis points or so.
Then the other fee income items other than the bulk internet you know, the reimbursement items and trash test fee, other items they’re effectively flat with last year essentially, which, you know, your growth rate would move a little bit, get you down to that 3.2% expectation for the year. And then on expenses, we talked about 3.6% and really everything but real estate taxes would have been about 3%. So I hope that’s helpful and gives you what you’re looking for.
Okay, and it sounds like the Double Play program is being implemented kind of fairly rapidly and so the benefits will be kind of mostly in 2020. Is there anything else you’re doing on the other income side that might help ‘21 kind of coming off of that ‘20 comp, any other additional you know apartment fees, things like that anything else kind of in the hopper that’s being worked on or the technology element, you know, might that move the needle as well?
Well I would tell you that a lot of the Double Play, I mean, we’re going to roll it out over the course first half this year, but I really think the full year benefit will be more next year.
It’s about half this year and half next year, because while we deploy it, and will be deployed in May, residents have to sign up for when they do on lease and renewal.
I think that that’s going to build up over this year and we’ll see more benefit in 2021. The other thing, though, that Al alluded to, and we talked about here is this repositioning effort that we’re doing with Double Play and with the more enhanced amenity upgrades. What’s happening is we’re investing a lot of that capital this year, this calendar year 2020 in the real rent growth that fund that will actually emerge in 2021. So that’s really what’s a play here. A lot of that benefit will play out next year, not this year.
Okay, that’s all very helpful. Thank you.
Thank you. We’ll take our next question from Rick Skidmore with Goldman Sachs. Your line is open.
Good morning. Thank you. Eric, you mentioned in your prepared comments some new initiatives in 2020, perhaps I missed the number, but can you – perhaps speak to what those new initiatives are that you’re focused on in 2020?
Well, you know, Tom can jump in here. I mean, it’s – now it’s bulk – Double Play initiative, the high speed internet program that we’re rolling out was what I was referencing, we got the more the smart home technology implementation that we’re going to be rolling out this year.
And then as I was just mentioning, we’ve got some repositioning opportunities with some of the legacy post assets that will be rolling out this year, and are working on this year, and as I was just mentioning, you know, and then as Tom alluded to, there’s some other new technologies, the AI chat, some other things that were, you know, self-touring and other things that we’ll be testing out later this year. We don’t really expect any impact this year, but we’re going to continue to evaluate those programs for possible implementation in 2021.
Great, thank you.
Thanks Rick.
And we’ll go next to John Pawlowski with Green Street Advisors. Your line is open.
Hey, thanks. Maybe just a follow-up to your response to Drew’s question. So it sounds like if the rollout for the Double Play internet goes as expected, the NOI contribution or the NOI lift in 2021 is greater than the 50 bps in 2020? Is that accurate?
More comparable, I would say. I mean, we’re rolling out, there’s two phases of program, two major providers that we’re doing it in 2020, you know, we’ll have a full layer of one of those providers building the second one. So I would say probably something – it wouldn’t increase, it might be something comparable.
Yeah, I think equal, maybe slightly a little less since we’ve got the biggest provider in line now and we’re working on the rest of the portfolio.
Okay. And then Tom, listening to your comments on which markets do you think will lead the pack and which markets may lag? Is it a fair read that your – as an aggregate the smaller or secondary markets will be below average in terms of same-store revenue growth?
I don’t – well I don’t have them split exactly that way. But we’ve got you know, some encouraging places on both sides of that – on both sides of that equation. So I think we are probably the runaway leaders are Phoenix and Raleigh but I’ll tell you Birmingham, Huntsville and play – and Memphis have been pretty solid players for us and we would expect that to continue.
Okay, and then final one for me if I could sneak it in there. DC revenue growth has been accelerating nicely for you – for you last few quarters and then slowed meaningfully this quarter. So is there anything idiosyncratic this quarter that hit the DC market or the fundamental slowing in your eyes in the market?
We don’t believe the fundamentals are slowing. It’s really a comparison between the prior year, the two quarters. So last quarter – in the third quarter, we had a 30 basis point occupancy comparison tailwind that juiced revenues a little bit. And this quarter in the fourth quarter of ’18 we were at 96.6%, and we’re 96% this go around. So we had a 60 basis point headwind.
Okay, thank you.
And we’ll take our final question today from John Guinee with Stifel. Your line is open.
Hey guys, good morning. This is Aaron Wolf for John. Two quick questions. Can you provide any detail on the price per unit on the Greenville asset that you recently acquired and also on the Little Rock, Arkansas portfolio?
Yeah, so this is Brad here. Let me get the details of that up in front of me. So the price per unit on the Greenville deal. Excuse me. Want to make sure I get you the right number there. So that was [268,000] [ph] a unit for the Greenville deal, which as we said a moment ago was a 5.1% cap rate on that asset. And then I’m sorry, your second question?
Little Rock. Little Rock.
Yeah, so our Little Rock assets we sold, the total price there was just under [150,000] [ph] [technical difficulty] it was 109,000 a unit.
Okay, great. Thank you. And one last helpful and one last for me you may have disclosed this already. I apologize if you did, but the average share price on the ATM activity in the quarter?
You can get from the press release, the proceeds and the shares that’s around $136 a share I believe what that will come to.
Okay, great. Thank you so much.
Thank you.
Thank you.
And this does conclude our Q&A session for today as well as our call. We would like to thank everyone for your participation today. You may disconnect at any time.