Mid-America Apartment Communities, Inc. (MAA) Q4 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for participating in the MAA Fourth Quarter 2014 Earnings Conference Call. At this time, we would like to turn the call over to Tim Argo, Senior Vice President of Finance. Mr. Argo, you may begin.

Thank you, Steve. Good morning. This is Tim Argo, SVP of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO. Before we begin with our prepared comments this morning, I want to point out that as part of the discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections. We encourage you to refer to the safe harbor language included in yesterday's press release and our 34-Act filings with SEC, which describe risk factors that may impact future results. These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP measures can be found in our earnings release and supplemental financial data. [Operator Instructions] Thanks. I'll now turn the call over to Eric.

Thanks, Tim, and good morning, everyone. Fourth quarter performance was strong, as favorable leasing conditions supported solid rent growth and continued strong occupancy, which along with good expense control, generated net operating income that was ahead of our expectations. As outlined in our initial guidance for calendar year 2014, momentum and operating performance increased during the year. Continued healthy leasing conditions, coupled with the growing benefits harvested out of our merger, supported the strong results that we expected over the back half of the year. Our merger integration activities are complete, and our focus is now fully attuned to further refining and enhancing our platform. The company is in a solid position as we look forward to 2015. As we ramp up 2014 with record earnings, I want to say to our entire team at MAA, thank you for your hard work and great efforts over the past 18 months to make our merger successful. Your efforts have our platform in a strong position and we have a great opportunity ahead of us to generate increasing value for our residents and shareholders. Solid revenue performance during the fourth quarter was driven by continued strong occupancy as average daily occupancy for the same-store portfolio was 95.5% or 40 basis points ahead of the prior year. Resident turnover remains low with the number of move-outs during the quarter, as compared to prior year, down slightly. Move-outs to buy a house were down 4.5% during the quarter. Taking a brief look at specific market performance for the quarter, Atlanta was our strongest market generating 7.6% revenue growth, with Houston, Dallas, Phoenix and Austin also generating good results. Within our Secondary Market segment of the portfolio, Greenville, South Carolina, generated strong growth in revenues at 7.3% over the prior year, with Savannah and Charleston also continuing to post solid performance. Looking at 2015, continued strength in employment trends across the Sunbelt suggest that despite projected higher levels of new supply coming online across a number of markets, rent growth prospects should continue to be above long-term trends. As outlined in our 2015 earnings guidance, we are forecasting revenue growth in the 3% to 4% range. We expect to be able to hold occupancy and capture the bulk of this performance from growing rents. Looking at the ratio of forecasted job growth to new apartment completions coming online in 2015, we expect to see our strongest performances out of Atlanta, Fort Worth and Phoenix. With steady improvement in new job growth forecast across a number of our Secondary Markets and continued modest levels of new supply, the ratio of job growth to new supply suggest that we should see also improving results from this segment of the portfolio in 2015. We expect to see good performances this year from Charleston, Fredericksburg, Greenville, and Savannah. As noted earlier, we have completed our most significant merger-related activities with all properties now on the same property management, revenue management, payables, accounting and management reporting platforms. The combination of adopting best on-site operating procedures and full integration of MAA's asset-management programs, coupled with benefits from a larger scale and synergy, resulted in an 80-basis-point improvement in operating margin from the Legacy-Colonial portfolio over the course of 2014. In addition, we captured a 30-basis-point improvement in the operating margin in the Legacy MAA portfolio during the year. At the time of our merger, we expected to generate combined NOI operating synergies of $0.05 to $0.11 per share, and now expect to fully capture the top end of this range. In addition with the organization now fully integrated, we expect to fully capture the anticipated G&A and overhead expense synergies of $25 million, or $0.32 per share, which is fully reflected in our guidance assumptions for 2015. Our redevelopment program continues to generate strong rent increases and long-term value. During 2014, we completed renovations of just over 4,500 units, which was a meaningful increase from the almost 2,600 units in calendar year 2013. We expect another big year of redevelopment in 2015, and are targeting in excess of 4,000 units with the much heavier emphasis on the Legacy-Colonial properties. In total, we believe we have 15,000 to 20,000 units of redevelopment opportunity within our same-store portfolio, and expect this program to be a multiyear contribution to earnings performance and value growth. As outlined in our guidance for 2015, we expect another active year of property dispositions and are targeting to sell $350 million to $425 million of properties, an increase from the $250 million of sales completed in 2014. Our capital recycling activity this year as compared to prior year will have a much heavier emphasis on multi-family assets and specifically legacy MAA properties located primarily in tertiary and select secondary markets. We expect to complete this disposition activity in the first half of the year, as we move to take advantage of current market conditions. Our transaction group is also busy with the increasing level of acquisition opportunities coming to market. As noted in the earnings release, we closed on 3 acquisitions in the fourth quarter, which were located in Atlanta, San Antonio, and Houston. We closed another acquisition in Kansas City in January. As one of the largest platforms focused exclusively on the Southeast and Southwest, a strong balance sheet with ample capacity, experience to efficiently execute for sellers and developers, and a focus on maintaining an active capital recycling program, we continue to be presented with a growing number of attractive new investments. We're estimating $400 million to $500 million of acquisitions in 2015, slightly ahead of the $400 million closed in 2014. We expect the opportunities to increase over the course of the year from both new, newly stabilized properties as well as properties that are still in their initial lease-up. We also continue to look at opportunities to prepurchase to-be-built properties and Phase II expansion of existing properties, but expect that at this point in the cycle, this will be a more selective component of our capital deployment activity, as we begin this year with $73 million of new development underway versus just over $200 million at this time last year. So overall, we expect a busy 2015 with continued stable leasing conditions and active capital recycling effort and a focus on further enhancing operating margins as we fine-tune and improve on a number of merger-related projects that were completed during 2014. We continue to feel good about our strategy and are excited about activities underway to further strengthen the platform. We look forward to another good year in 2015. That's all I have in the way of comments. I'll now turn the call over to Al.

Thank you, Eric, and good morning, everyone. I'll provide some additional commentary on the company's fourth quarter earnings performance, balance sheet activity and then finally, on our initial earnings guidance for 2015. We had strong earnings performance in the fourth quarter, which produced record levels of FFO per share for both the quarter and the full year of 2014. FFO for the quarter was $107.4 million, or $1.35 per share, and core FFO, which excludes certain unusual or nonrecurring items was $104.7 million or $1.32 per share, which was $0.06 per share above the midpoint of our previous guidance. Solid operating performance during the quarter from both our same-store and non same-store portfolios produced about $0.03 per share of this favorability, with another $0.03 per share coming from favorable G&A and interest costs during the quarter. The majority of the G&A savings during the quarter came from reduced insurance costs as lower current claims and revised projections for health insurance, workers' compensation and general liability insurance impacted both the current costs and year-end accruals. Since we've now owned the Colonial portfolio for 15 months, we transferred the Colonial communities to our actual same-store portfolio during the fourth quarter. However, full year comparisons for 2014 continue to be presented on a pro forma combined basis in our release, as we did not own the Colonial portfolio for the first 3 quarters of 2013. For the fourth quarter, the same-store portfolio produced 5.6% NOI growth over the prior year, based on a 4.2% growth in revenues and a 2.1% growth in operating expenses. As Eric mentioned, solid pricing performance and strong occupancy continued through the fourth quarter, producing 3.6% growth in effective rent, with an additional 40 basis points of growth coming from higher-than-average occupancy -- higher average occupancy during the quarter. On a pro forma combined basis, same-store NOI growth for the full year was 4.2%, based on a 3.4% growth in revenues and 2.1% growth in operating expenses. And the majority of increase in operating expenses for both the fourth quarter and the full year was related to real estate taxes, which increased 5.8% for the full year of 2014. During the fourth quarter, we invested a total of $191.8 million in 3 new communities acquired, located at Atlanta, San Antonio and Houston. We also funded an additional $11.7 million of construction cost from development communities, with an estimated $12.3 million remaining funding to complete the 2 communities under construction at year end. During the fourth quarter, we sold Colonial Promenade Huntsville, a 23,000-square-foot retail center as well as Town Park Moreya, a 25-acre plot of undeveloped land, both acquired in the Colonial merger. Combined proceeds of $12.3 million were received from these sales, and recorded net gains of $200,000 on asset sales during the fourth quarter. The only significant financing transactions during the fourth quarter were the assumption of a $40 million loan related to the Atlanta acquisition, and an amendment to a $150 million term loan, which effectively added an additional 3 years to the loan and reduced the borrowing spread by 25 basis points, taking full advantage of our strong credit rating. At the end of the fourth quarter, our balance sheet remains in great shape. Total company leverage based on market cap was 37.3%. Our fixed charge coverage ratio was about 4x, and total debt to recurring EBITDA was 6.4x. Over 96% of our debt was fixed or hedged against rising interest rate, and 67% of our assets were unencumbered at year-end. Also we had over $460 million of total cash and credit available under our unsecured line of credit at year-end. Finally, we did provide initial earnings guidance for 2015 with the release. Core FFO was projected to be $5.09 to $5.33 per share or $5.21 at the midpoint, based on average shares and units outstanding of about 79.5 million shares. Core FFO per share is expected to be between $1.23 and $1.35 per share for the first 3 quarters of '15, and $1.28 to $1.40 per share for the fourth quarter. The primary driver of 2015 performance is expected to be same-store NOI growth, which is projected to be 3% to 4% based on a 3% to 4% growth in both revenues and operating expenses. We expect operating expenses to continue to have some pressure from real estate taxes, which are projected to grow between 4.5% to 5.5% for 2015. We plan a significant amount of transaction activity in 2015, as we recycle older assets and continue to dispose of commercial and land assets acquired from Colonial. We plan to sell 300 to 350 of multi-family communities in 2015 and an additional $50 million to $75 million of commercial and land assets. We expect to reinvest these proceeds and/or excess cash generated from operations into $400 million to $500 million of new multi-family assets. We also expect to begin a limited number of development projects during the year, consisting of Phase II expansion opportunities at 2 of our existing properties. And we also anticipate that we'll identify one additional opportunity on a prepurchase basis of a new development project during the year. Given the interest-rate environment and high demand for apartment assets in the current market, we believe the majority of the property sales will occur early in the year, and we're projecting about $250 million sales in the first quarter and the remainder $150 million or so in the second quarter. We project about $90 million of new acquisitions in the first quarter, really representing one deal that's already closed in January, and one additional deal currently well into the contract process. Other than these, we expect the remainder of the acquisitions to occur over the back half of the year as transaction volume continues to grow and opportunities expand, which is reflected in our 2015 guidance. We expect dilution during 2015 from both the initial loss of NOI yield or spread from selling older assets and buying new, as well as from the timing of the reinvestment, and as outlined in our earnings release, our current projections for 2015 includes dilution-related recycling plans as well as the new development projects mentioned earlier. Keep in mind that on an after-CapEx basis or cash flow basis, the dilution from this recycling is much smaller, as the initial spread between the older, higher capital needs assets we are selling is much closer to the yield on newer assets being purchased -- only about 25 basis to 50 basis points spread. Other key assumptions in 2015 include plans to refinance about $400 million of debt maturities in the fourth quarter and combined G&A and property management expenses for 2015 of $56.5 million to $58.5 million, reflecting the full synergy capture forecasted from the merger. Our current plans do not include the need for any new equity during 2015, and we expect to end the year with leverage defined as net debt to gross assets of 40% to 42% or 1% to 2% below our current leverage level, which is a very strong position given our lower risk or limited development strategy. That's all that we have in the way of prepared comments, Steve, and so now we'll turn the call back over to you for Q&A.

[Operator Instructions] Our first question is from Rich Anderson from Mizuho Securities.

So can you break down the disposition-related dilution, the $0.19? You said, it's kind of a combination of timing and cap rate. When you look at the multi-family amount that you're selling, the $300 million to $350 million, how does those cap rates compare to new? Is that the 100 basis points or are you taking into account the commercial as well that you can see that spread?

I think, that spread is everything included, but primarily multi-family is driving that, Rich. And these assets, they're pretty close. So let me break that down for you. $0.19 that we outlined in the press release is made up of $0.16 from this recycling effort and $0.03 from development. So just putting development, and development's just carrying that capital during the year on the new projects that we talked about without having the earnings yet. The $0.16 is really $0.10 per share from the NOI spread loss, both the multi-family and the development that we will have. We're selling assets that are older, higher CapEx needs that have about a 8% NOI yield. We're buying assets that have a 5% to 5.5% NOI yield, so that's a 200 to 250 basis points spread. But let me point out, that's on an NOI business. When you look after CapEx, as we talked about, these are -- these older properties are 1,000 to 1,300 unit on CapEx, and so that makes that spread, call 25 to 50 basis points, much tighter. But we're showing the impact on FFO in this, so $0.10 from that and then $0.06 really from just timing of these transactions -- selling the assets, we talked about having activity early in the year and really reinvesting over the back half of the year, so hopefully that gives you your...

Okay. So but you're selling multi-family assets at an 8 cap -- NOI cap?

NOI yields, an NOI yield, that's before any CapEx. So that's...

I got you. I got you. I understand, but it's still a pretty big number. Okay. And what about the commercial stuff. You think, looking at -- those are -- it seems like $50 million to $75 million is just basically all of it?

We had a little bit of all of it, it's all the operating assets. We have one joint venture. We still have -- it's very, very minor left, $250,000 or so. But, yes, essentially all the operating commercial assets will be sold here in the first quarter.

We just have land left.

Okay. And then, when you look further out, not that I'm asking for 2016 guidance, but when you look further out, I mean, do you think that this is the last kind of year of this significant recycling downside to your numbers, are you kind of cleaning house of at this point? Or do you think, you will be a net seller for many years to come as long as cap rates stay where they are at.

No. I'll tell you, Rich, I mean, we see a window of opportunity right now to harvest capital out of a lot of older assets that we've owned for a long time that we feel offers a great value opportunity. So we're going to -- we're jumping on that opportunity. And we're going to move on it pretty aggressively early in the year. I think that, ultimately we're not interested in trying to overhaul the portfolio. There is not some sort of major transformation going on here. We still feel very much committed to our bifurcation between large and secondary markets. It's really just harvesting out of some smaller assets and the window of opportunity right now is very strong. So we're looking effectively to match-fund acquisitions with this effort. And we'll see how the market conditions continue to hold up. But if the market conditions continue to support an opportunity to pull capital out of assets that we feel like the after CapEx performance is going to -- over the next 10 years, not be as robust as alternatives we can find in some newer assets then we will continue at a pretty good clip, but it all -- it's a tough time to be a buyer as you know. And of course, relate -- this late in the cycle, frankly, piling a bunch of money into development is not something that's real high interest to us as well. So we'll just see how the reinvestment opportunities pan out. We're optimistic that we'll get it done. And -- but to suggest that we've got some sort of major overhaul, a major recycling that we're going to be doing for quite some time, I think is an overstatement.

So would you -- how much of the $300 million to $350 million is legacy MAA assets?

About 99%.

Is that right, okay. Interesting. You mentioned -- you just used the term late in the cycle, what do you mean by that?

Well, I think that we're at a point where a lot of supply is coming into the market and developers are pretty active. And I mean -- at this point, I mean the demand side of the equation supports it, but as we know, I mean this business, I still fundamentally believe has a cyclicality to it that we have to be mindful of, and we've been in a very healthy period for some time. And so I would argue that, that we're on the peak or the back end of the cycle to some degree. And I think that it's hard to see anything that's going to completely weaken anything materially in the near term, but I do believe that given the level of new supply coming into the market, that us ramping up a big development operation is certainly not the thing to do. And I'd rather just be an opportunistic buyer of this product coming into the market.

Okay. And then, just lastly, what do you do -- you said above trend rent growth, what do you define as trend?

Rich, we'll answer this, and then we're going to jump to another question. But I would tell you that trend for us is going to be at right around 3%, and -- so I think we'll be a little bit better than that.

Our next question is from Karin Ford from KeyBanc Capital.

I guess, Eric, I just wanted to go back to that comment you just made about where you think we are in the cycle. I wanted to probe to see if you feel that way about the secondary markets. They haven't participated in job growth, they didn't grow as much as the bigger markets did last year, and there was a really nice pickup here in the fourth quarter? So would you clarify those comments just to say -- do you feel differently about the secondary markets in those terms?

That's a good point, Karin. I do feel differently about it for a lot of reasons you just mentioned. I do think that these secondary markets have clearly not seen the level of robust job growth, and they're clearly not seeing the level of new supply. And this is why we have them in the portfolio, because we do believe that as conditions eventually moderate in some fashion that these markets tend to not move off this sort of steady-state level as much as you sometimes see in the larger markets. And just to clarify sort of the comment, I don't anticipate, by any means, that we're going to see any material deterioration or any sort of material weakening beginning to take place in the apartment real estate fundamentals. I mean, we've got too many favorable sort of macro variables, demographics and all the things that everybody knows about -- attitude towards home ownership and all those other factors that are really going to, I think, propel a very strong demand side performance for some time. But I do believe that just as a consequence of the sector continuing to attract a lot of interest and capital, supply is going to continue to pick up, and the job growth improvement trends will begin to moderate at some level. I mean, we're not going to go to 3% unemployment, and so there will be some level of moderation that will eventually take place. So I think that over the next couple of years, it's hard to see anything absent of recession or absent some sort of cataclysmic event elsewhere that really causes the economy to retract in a meaningful way. It's hard to see anything causing a significant weakening in apartment fundamentals over the next 2 or more years.

And then, Karin, on the secondary markets, jobs to completions improves to about 13, and we see job growth really is the key factor in these markets driving it. It will move from 14 and 16 [ph] to 2015 at 25. And we've certainly been happy with the performance of Charleston, Greenville and Savannah. It's just a matter of getting a few others some job growth and getting them off the mark.

Thanks for the color.That's helpful. My second question is just on revenue growth for 2015. Can you talk about what revenue growth you've already earned into the rent roll? And what type of ability you've seen to push rents here early in the year in 2015, just what the post quarter trends have been? And have you seen any impact in your tenancy with the decline in gas prices?

Karin, this is Al. I'll cover the first part and let Tom cover the second portion of that. But if you look at our overall portfolio and our forecast, we think we have about 2% sort of baked in or earned in based on the contracts we have in place and the current pricing of the marketplace. So we feel good about our projections for the year, and that's pretty strong. And then on top of that, we expect to get -- to get to our mid-point of our guidance, we'd need similar pricing over the remainder of the year and capturing that back half. And I'll let Tom...

Yes. And Karin, blended rates for January on a year-over-year basis were 4.4%. That's up 63 basis points from January of last year and exposure's about 50 basis points lower. We're seeing higher traffic as well, so very encouraging trends as we move into January.

And -- or do you think gas prices have -- had any impact yet?

Karin, I think that everybody is enjoying having a little bit more money in their pocket as a result of that. And we believe that, that will benefit for us down the road. Our rent to income ratio is very low at 16%; this just helps this. Does it make a difference today in our sort of lower demand part of the cycle? I don't think so. But it will have a compounding effect as we get into the year.

Just one last quick one. Can you just tell us what the accretion was from the development that you completed in 2014 and 2015?

When we -- you mean in terms of how much is contributing to the forecast or the guidance in '15 overall?

Correct, yes.

Yes. I'll just break that down real quick. I guess the main components driving our earnings, are same-store portfolio, which is adding about $0.23 per share from the midpoint of our growth. Then there's about $0.15 to $0.18 per share that's going to be added from our non same-store portfolio, which includes recently acquired deals, this development, which is a big part of it is the development coming to fruition, Karin, you're talking about, and those things all coming together about $0.15 to $0.18. And then obviously, you got this $0.16 per share from recycling offsetting that to get you down to our change for the year.

Okay. So large chunk of that, $0.15 to $0.18 is development. Okay.

Yes, obviously we have 5 deals undergoing at the end of last year, or 4 -- excuse me, and a large part of that is productive this year.

And our next question is from Haendel St. Juste from Morgan Stanley.

So quick question on your same-store revenue guidance. I just want to make sure I understand this correctly. The current same-store revenue out that you have does not contemplate the dispositions in it, is that right?

The dispositions -- our portfolio has been pulled out of our same-store, Haendel, because we -- when we target them, we pull them out so that we can have a consistent same-store portfolio throughout the year. So yes, it does not include that.

Got you. Okay. And then, curious on -- you haven't given, I don't think, new versus renewal trend specifically for 4Q and January? And what you're asking for in February, March?

Yes. Sure. On a year-over-year basis for the fourth quarter, new leases were up 4%, which is about 40 basis points higher than prior year. Renewals were up 5% for a blended of 4.7%. Going -- looking forward on renewals, January, we asked for about 8%, we got 7.3%; for February, we asked for about 8% again and got 7.1%. And then, in March, it was 6.5%.

Got you. And a couple of quick follow-ups. I guess, your thoughts on Houston from an investment perspective. I heard the other day from a peer of yours, looking opportunistically for development opportunities there. Just curious on your thoughts there in terms of acquisitions, potential dispositions given what could present some -- the dislocation -- expected dislocation that could present some opportunities in Houston over the course of this year and early next year?

Well, Haendel, this is Eric. We like Houston long term. We think there are going to be some good opportunities emerge over the course of this next year. And we're going to continue to be active in the market looking for opportunities. I absolutely agree with the point.

And what was the move-out of the home buying during the quarter?

It was down from 21 to 20, Haendel, I believe. Yes, 21 to 20, down 4.5%.

Okay. I'm just curious, Eric. As you sort of look ahead, we've heard from some of the builders here that they're feeling a bit more bold up [ph] it sounds -- starts estimates are up 20 percentage year-over-year, credit is slightly improving. It's certainly painting the picture for a slightly more competitive headwinds from the for sale markets and given your footprint and a lot of where the builders are expected to build, just curious on what your thoughts are for that competitive dynamic as we roll through this year into next year?

I'm sorry what -- and that was the competitive dynamic associated with apartments or...

The fit for sale single-family?

Single-family, I'm sorry. Okay. Haendel, we continue to not to be worried about mounting pressure from single-family. I think that -- yes, that, I mean, you know all the dynamics surrounding people's attitude and people putting those decisions off later and all the sort of issues that go with that. I mean, we continue to believe that, ultimately a strong single-family housing market ultimately is a good thing for the economy and ultimately is a good thing for the apartment business. I think the job creations that come out of that, particularly in this region of the country, tend to drive positive things for the economy, the trickledown effect of a healthy housing environment has -- continues to -- we think ultimately create positive implications for demand for apartment housing. And to give you just a perspective on that, I mean, if you go back to sort of the 2006, 2007 time frame, where arguably the single-family housing market was at a fairly robust level, we were generating some of the strongest rent growth we've ever generated in our 21-year history with rents on average year-over-year going up 5%-or-so. So we think that a vibrant housing market is a good thing.

I appreciate that. I was just sort of looking back through my notes here. It looks like the move out of for home buying you said this quarter were -- you said were down to about 20%, is that -- if I heard it correctly?

That's right.

It looks like over the course of last year that was more in the low-to-mid teens?

I mean, last year it was 20%. It was -- 1,842 moved out for home buying versus 1,759. Now, Haendel, it will change by quarter. So, it's a little higher actually in the fourth quarter I think than it was in the second, as people who are trying to get into houses right at the end of the year due to their closings. But the trend for the year and the trend for the quarter is down.

Our next question is from Michael Salinsky from RBC Capital.

I'll stick to the 2 questions here. Just first question in terms of your assumptions for 2015 for revenues, what is the breakout between primary and secondary markets, so if you look at the 3% to 4%, what would you expect for the primary versus secondary? And also in terms of rank, what would you assume in those?

I think, probably on a rounded basis from the primary, probably 4%, and the secondary, closer to 3%. And so, that gives you the 100 or maybe a little over, spread between -- through the year, so that's the assumptions in general that we put in, Mike.

And the bulk of -- and the revenue growth will largely come strictly from rent growth.

Yes, pricing is...

We plan to hold occupancy fairly consistent.

Actually, I give a little -- we plan to give a little bit occupancy back about -- only about 10 basis points, because we do expect turnover to increase just a little bit with the job market, Mike, but in general, it's pricing this year.

Okay. That's helpful. Second question. Eric, it was a bit of a surprise to see the big pickup there in the acquisition forecast, just given the aggressive pricing we're seeing both -- even in the Sunbelt [indiscernible] right now. Can you just give us a little color where you're sourcing that? Have acquisition cap rates or IRR targets changed at all? Or is your growth forecast increased enough to offset that?

No. I mean, cap rates haven't really moved, Mike. It just continues to be a consequence of -- frankly, we're seeing more activity just as more of this new construction comes on line, developers are increasingly -- we're finding anxious to pull their money out of the deals that they've either just started or just started leasing. And they want to pull the money out and get -- and start another project as soon as they possibly can. So I think just as a consequence of not wanting to miss out on this window of opportunity for the next 2 to 3 years of what is expected to be very good leasing fundamentals and a good time to -- as a developer arguably to try to bring something online. We're just seeing a lot more transaction volume; it's starting to really pick up. It hasn't really manifested itself in any way that we've seen in increasing cap rates. There is still a lot of cap out there. But just as a consequence of the volume and then as I said just given our focus on these markets now for as long as we've been in, and I mean, we're seeing a lot of deals that are on an off market basis, deals that had fallen out of contract. I mean, a number of these deals that we just closed on, had all been on a contract previously. And we had been tracking the process and they came back around; for whatever reason the deals fell out. So it's really just a volume-related sort of thing that we see creating -- growing opportunity and that's what's really driving it.

And our next question is from Buck Horne from Raymond James. Buck Horne - Raymond James & Associates, Inc., Research Division: I wanted to go back to the question about Texas, maybe just a little bit more broadly in your thoughts about future investment allocations to the entire state, just given the overall energy outlook with Mid-America's exposure being a little bit elevated. How do you think about not only just Houston, but Fort Worth, Dallas, Austin? Have you seen any signs yet of rising turnover or bad debt in any of those Texas markets' job turmoil?

Buck, I would say just quickly, no, we haven't seen anything in our numbers from a bad debt or rent trends or anything that would suggest any weakness at this point. But broadly speaking, I mean, we continue to feel very good about the Texas markets overall. Houston being only 3% of our NOI, we feel like that we've got room to expand our presence in Houston frankly and not really create too much of a concentration risk broadly speaking for the portfolio overall, and to give you a perspective on this, just -- where we're surrounding oil pricing and any particular weakness coming out of Houston, if we saw, as an example, instead of 3% NOI growth out of Houston, if we saw 0% NOI growth out of Houston in our portfolio, the impact for us over the course of a year will be less than a $0.01 a share for FFO. So it's just not a worry for us generally on this question surrounding Houston and oil pricing and so on and so forth. But having said that, I mean, we continue to believe the Texas economy, just the pro-business environment there, great quality of life, great standard of living, low cost of living, lack of state income tax and the way that, that economy continues to track businesses out of the Northeast, off the West Coast is going to continue to cause Dallas and Austin, San Antonio and Houston continue to be a very prosperous place to do business. And now having said that, I mean, our current investment allocation from a portfolio perspective to both Dallas and Fort Worth and Austin are -- is fairly full. You're not going to see us grow our presence much in those 3 markets from where we are today, and we will be doing some recycling I'm sure over the next several years. But in terms of growing our presence given our current size, we'll likely -- unlikely to grow a lot more there. Houston's a market where we feel like we do have some growth capacity and same with San Antonio.

And Buck, just some local coverage in Houston. Of our properties there, we only have one in the energy corridor. It has about 25% exposure of employment to oil and gas. On the economy front, job transfers are up, which we view as a healthy reason, up 9. They've lost 1 job in the last 60 days and delinquencies improved by 10 basis points. So -- and frankly pretty healthy fundamentals, if you didn't read the press and you just looked at the numbers, we -- Houston looks pretty good. Buck Horne - Raymond James & Associates, Inc., Research Division: That's a very helpful answer, very thorough. A quick follow-up, though. Given your earlier comments about you are seeing developers get a little bit more aggressive, supply is certainly ramping particularly in some of the primary markets, I'm kind of thinking of places like Austin and Charlotte as well, would you look to potentially downsize or reallocate capital away from markets that you think may have excess supply pressure over the next couple of years? Would you reduce your exposure to some of these primary markets in advance of some of that supply delivery?

Yes. I would tell you, Buck, that we'd be unlikely to move a bunch of capital out of a given market, because what we worry regarding a 2-year window, where supply may be a little bit excessive. I mean, when we buy these assets and deploy this capital, I mean, it's sort of a full cycle mindset that we go in with. And so, I think that what we typically do when you see markets get a little bit sort of out of balance, it's a time to think hard about any sort of fine-tuning that you want to do from a recycling effort as a result of rotating out of some older assets and the newer assets or things of that nature. But sort of wholesale changes to market mix and market allocation as a consequence of periodic supply issues is not something that we think we should be doing.

Our next question is from Dave Bragg from Green Street Advisors.

Eric, can you please elaborate on your statement that you'd look for opportunities in Houston. How are you adjusting your underwriting? And what change in values or cap rates do you have to see to account for lower growth prospects in that market?

Well, Well, I think, obviously we would be pretty cautious right now in terms of rent growth outlook for the next couple of years or so. I mean, the deal that we closed on in November, this was located in Northwest Houston. It's exactly adjacent to the new Hewlett-Packard Campus that employs 10,000 people. It's half -- less than half a mile from Houston's Northwest Medical Center and Saint Luke's Hospital. And so we feel good, but given Houston and the concerns that we all know about, I mean, I think we assume 2.5% rent growth the first year and pretty modest for some time. I think that when -- I think we have to see how this plays out, Dave, to understand the likely -- how bad it gets or how we can may -- it may become. I believe that it's probably likely that this doesn't persist much more than a couple of years, and I don't think we can get back to $100 oil, but I don't think we stay at $40 either. So -- and of course, the Houston economy has continued to diversify itself a little bit over the last 10 years or so, and we think that between the healthcare industry and logistics and shipping and the port activity, that Houston has got a vibrant-enough economic base, absent oil and gas, that it's not going to just be anywhere close to sort of the same level of pressures that you see in a market like Washington, that is so influenced by federal employment levels and federal government trends, I think Houston has got a little bit more of a diversification to it. And so I think that this is possibly a good time to buy. But at this point, I can tell you that some of the things we've been looking at, we haven't seen any worry come into the pricing yet, and we may not be able to buy down there, given the continued healthy appetite that capital has for multi-family in general including in Houston, so it's just a -- it will continue to be a wait and see. And obviously, if we close any deals this year, we'll be glad to talk to you about it.

Okay. Second question relates to the possibility of being an opportunistic buyer. You've spoken about that in the past, given that potential for overbuilding in some of your markets. Should we see a material change in asset values, both in the private market and the public market, could you talk about how well positioned you believe the balance sheet is or will be to allow you to take advantage of those opportunities?

Yes. I mean, Dave. This is Al. We certainly feel that our balance sheet is in very good shape to take advantage of opportunities. And I'd point back to a recent time in history in 2009, '10 when it happened, we certainly didn't have nearly as strong a position or balance sheet and took great opportunity of it then. We think we're much better prepared today. And if those opportunities come forth, I mean, we have plenty of capacity, great relationships across the debt spectrum and we've worked hard on our equity programs, have ATM in place, have issued equity under overnights' prepurchase deals, all kinds of tools or methods in place. So we feel very good about our ability to raise capital to do that, and we'll certainly opportunistically be in a position...

And Dave, I will add. I mean, we're generating more free cash flow, if you will, than we ever have as a company, and we're selling more assets than we've ever sold as a company. So I mean, if we do a $400 million to $500 million acquisition volume year -- this year, which is the most we've ever bought in a given year, and we're doing it without issuing a $1 of equity, I think it gives you some sense of our capacity to handle opportunity.

Okay. And last question relates to the potential opportunity on the revenue side from lower gas prices. What are the strategic conversations like internally? Is this something that you just watch happen and you feel as though you'll reap the benefits or do you think that you can adjust yield star and push more aggressively on renewals than you would add $100 oil and capture a benefit proactively quicker?

And we are -- David, what we're doing is watching demand over the sensors and then maximizing that. So we feel comfortable that if there is the ability to push rents, our system and our approach to the system, it's not just the system, but it's the way you monitor it, would allow us to maximize that as it happened, if that make sense. In other words, we don't dial it in for macro changes in the marketplace, but we are accurate enough to exploit those when they occur.

And your portfolio is one of the most suburban portfolios of the apartment REITs, and with gas prices already down significantly, are you pushing harder on renewals today than you would have at $100 oil?

Dave, renewals went out at 8%, that is aggressive and that was -- that we feel like is what the market will bear. We are not adjusting ours for $100. We are adjusting it for how many people are moving out, how many people are looking. And we would expect resident quality to improve, we would expect delinquency to improve. But our residents aren't really folks that are right living on the edge, it's a matter of seeing the opportunity and exploiting the opportunity.

And the 2 metrics that we've monitored probably more than anything else about, are we pushing hard enough or not too hard, is really move-outs due to rent increase, and then, of course, the rent to income ratio in the portfolio. And both of those metrics are very supportive of being pretty aggressive right now on rents. And as Tom says, that's exactly what we're doing.

And we're also monitoring take rates and conversion rates. And if those go up, our price goes up. And if those goes down, our price goes down. Or we figure out is there a non-price reason for that and we attack our operation and refine it from there.

Our next question is from Tom Lesnick from Capital One.

I know you guys already talked about move-outs to purchase home already, but obviously, not everyone is in a position to buy a home. So I'm just kind of curious what percentage of your tenant base rents by choice and what percent of your tenant base, whether it be by savings, income or credit, really has no choice but to rent, and how has that trended over the last, call it, few quarters?

Yes. I won't be able to answer that directly. I would tell you 100% of our residents rent by choice, because they probably have other options available to them. With a rent to income ratio of 16, that's improved; at sort of the bottom of the cycle, that was as high as 20. And if you figure that, a bank is going to want what 25% down or the ability -- not 25% down, but the ability to -- the PNI is less than 20% to 25%, we feel like you've got a huge chunk of those renters who are choosing that option. I think it's more a lifestyle choice honestly, Tom, than I think it is an affordability choice. I think with a booming economy, there are folks who are interested in being close to jobs and close to good retail centers and value the flexibility of a lease and the services that our teams provide.

All right. Great. And I guess, shifting back to large versus secondary markets, I know you talked about limited supply and some of the secondary markets being later to the recovery. I'm just kind of curious to what extent income growth is limiting growth in those markets? And I guess, how the rent to income ratio differs between some of your larger markets and secondary markets?

Yes. And I don't have it for this quarter, but historically, affordability has actually been a little better in the secondary markets.

Our next question is from Tayo Okusanya from Jefferies.

Just a couple from us. Gentlemen, you did mention again in the new supply kind of starting to come online in some of your markets, can you just kind of identify the markets where you are most concerned about new supply?

Sure, Tayo. And I think it's more kind of an improving situation, where we're still monitoring Raleigh, which is 7:1. It is -- it's working its way out with stronger job growth. And Austin is worth monitoring as well at 5:1, but again it's been very resilient and largely our properties, which are more suburban in Austin, have not borne the brunt of the central core area. And then in Dallas, we have light exposure to the uptown with 1 property and 2 properties in Las Colinas, which you're seeing a little supply [ph] .

Okay. That's helpful. And then from an acquisition perspective, with the Gables transaction now done, are there any other kind of fairly large portfolios out there that kind of would fit thematically what MAA would be interested in buying?

Well, yes, there are a few opportunities that bounce around from time-to-time, and as we usually take a hard look at them. But I will tell you that in most cases, there's usually 2 issues that we find tough to get over. One is usually there is some asset quality in that portfolio that is -- that would be really a step back for us, that we find is not really worth the effort to try to bring in the portfolio and then turn it all around and then try to sell it. So usually there's asset quality issues. And then secondly, often, particularly in these private funds or private portfolios, usually have in-place financing that is not as attractive as the financing that we're able to put on and you usually have to bring the debt with it. And so ultimately, it creates an opportunity that is not as attractive as the opportunities that we're finding focused on fairly new product, fairly recently built, new or to-be-built product that we can come in and put the right debt structure on -- right financing structure that really keeps our balance sheet where we need to keep it, and really, we think materially more so improves long-term asset quality. So we'll continue to look at them, but we generally find there's usually something about it that is as not particularly as attractive as what we're doing otherwise.

Got it. And then just one more from me in regards to the Colonial portfolio. Just at this point, is there still any additional synergies you expected to kind of get out of that portfolio or it's been optimized at this point?

I'll just say, Tayo, if you think -- look at our guidance for the current year or for 2014 and our performance, we captured a lot of those synergies in the back half, third and fourth quarter particularly on the expense, so I think on a quarterly run rate, we feel like the expenses are pretty fully captured. There is a little bit of revenue left to capture, and I'd say we'll feel a little bit in the first and second quarters of next year, probably 2/3 out of the 3 quarters and all that opportunity has been captured on a run rate basis in Q4 though.

And I would also tell you, though, we've talked about having 15,000 to 20,000 units of redevelopment opportunity in the portfolio. The lion's share of that is the Legacy-Colonial asset base, and that's something that we'll be doing over 4,000 units this year, so that's something that we think over the next 2 to 3 years that we'll continue to capture in the way of a sort of opportunity out of this merger. Frankly, it's a bigger opportunity than what we initially thought it was when we went into the merger. So we -- as Al said, a lot of it has been sort of captured and we've sort of permanently, if you will, improved margins as a consequence of that. We do think as we get towards the latter part of this year, we'll start to sort of normalize, if you will, and some of that lift out of the merger starts to dissipate just as a consequence of year-over-year comparisons, but the redevelopment component will continue for some time.

Our next question is from Dan Oppenheim from Zelman & Associates.

I was wondering if you can talk a little bit about the -- those revenue expectations for 2015 again. You talked a lot about the expectation for some better results from the secondary markets. Do you think that -- how comparable do you think you will end up seeing the revenue growth in terms of the large versus secondary markets in 2015? And given your comments about the cycle, do you think we'll see a sort of switching point in terms of better performance from secondary?

Well, I'll answer the first part and probably Eric will answer some of the cycle comments, but just in terms of what is in our forecast and expectations for 2015, we're calling for something like 4% revenue growth, maybe a little bit higher from the large markets and around 3% for the secondary markets blending to our average for the year at midpoint of 3.5% in our range.

And I would tell you that as the cycle continues to mature, we typically do see the performance delta between the large and secondary market start to close a little bit, as a consequence of supply pressure picking up more actively in the larger markets versus the secondary markets. And then also typically the secondary markets are a little later in the recovery in terms of the job growth front. So we do believe that if you want to assume and contemplate sort of a flattening or a moderation at some level, we typically see the performance delta between the 2 segments start to flatten out. Now to really get into a situation like we had back in 2008, 2009 time frame, where our secondary markets were actually outperforming our larger markets, you have to get really much more into a severe sort of recessionary-type environment, because in those kind of situations, the large markets really get hit pretty hard as a consequence of more severe job loss and then more often than not, those markets have also been oversupplied relative to that. [Audio gap]

Got it. And then, on acquisitions, your recent acquisitions there in Atlanta [Audio gap] or do you think about given that there will be some of the legacy MMA assets likely in some of the secondary markets, would you think about sort of keeping the balance in terms of the weightings of large and secondary?

Yes. We absolutely are committed to staying broadly sort of balance 60% weighting of the portfolio in the larger markets and about 40% in the secondary markets. What you're seeing us do is technically pull out some older assets, where we feel like the after CapEx yields are likely to begin to show more severe moderation than what we would be able to achieve with some newer investment. As it so happens, given the history of our company, a lot of the older assets that we own are in some of the more tertiary markets of the Secondary Market segment of the portfolio, and thus, that's where the focus is at this moment in terms of harvesting capital out of these investments. But we will be absolutely committed to redeploying in the larger markets as well as secondary markets as we go forward. Unlikely we'll do tertiary markets, but I mean we will [Audio gap] We feel very committed to keeping a presence in those markets.

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

I was hoping if you could talk about the range of move out to buy ratios within the portfolio, sort of what markets you're seeing rent versus average cost of owning per month parity, where moving into a house is more just a financial decision versus markets where it's more of a lifestyle choice that involves commuting, things like that?

Yes. I would tell you, Drew, it really -- it appears to be -- to us less about that and more about vibrancy of the economy. Where we see home buying the highest is where we see job growth the highest. And where we see home buying the lowest is usually where job growth is the lowest.

Okay. And one follow-up on the balance sheet. In terms of refinancing your 2015 debt maturities, there's certainly -- it's a lower number than we saw at this time last year. Will you be -- is the plan to kind of do all that in one larger unsecured bond or are there other sort of unsecured debt options that you're looking at vis-a-vis term loans, things like that?

Well, we certainly have a lot of -- the full slate of options available to us, Drew, but I think most of that debt matures in a fairly tight grooving, the end of the third quarter. So we have about $370 million maturing. We're going to pre-pay a couple of more loans. So probably, in terms of placeholder [ph] expect us to be looking for about $400 million to $450 million of financing, I think, likely best option at this point is a public bond, a 10-year deal in that range, which if we did that today, it's probably, call it 3.3% to 3.5%, on a 10-year basis, something in that range.

Our next question is from Carol Kemple from Hilliard Lyons.

I just have a couple of questions on the developments. Earlier you talked about 2 properties where you expect to do some Phase II expansions at. When do you expect to break ground on those?

Well, we have just broken ground on one of them. And the other one would be later this year, probably third, fourth quarter of this year.

Okay. And then, you talked about buying one property that was probably still in development. Do you -- have you identified that property at this point?

No, we have not.

Our next question is from Karin Ford from KeyBanc Capital.

Just one quick follow-up. What do you think the growth differential is going to be between the assets that you're going to sell this year and the assets you're going to buy?

Well, I think, as part of that NOI yield spread, I think is the answer to that question, Karin. And I think we're going to sell assets, though they have a high NOI yield now, they're probably expected to grow over the next couple of years between 0 and 2%, and what we're buying is we're expecting to grow probably 4% on average.

Next, we have a follow-up question from Tayo Okusanya from Jefferies.

Just a follow-on along the same line as that Karin was asking. You mentioned earlier on that in regards to where we are in the cycle, the secondary or tertiary markets still feel like they're earlier in the cycle, they haven't kind of gotten the same kind of improvements that your primary markets have. But yet when you take a look at your acquisition and disposition activity, it's the stuff in the secondary markets that's being sold, when they are probably at the earlier -- or where hopefully they're about to just kind of go through the same kind of market improvement that the primary markets have gone through over the past few years? So I'm just kind of -- if you could just reconcile those 2 things for me, or why sell secondary when they haven't received the same boom that the primaries have and they should as the economy improves?

Well, because it's an optimum time to maximize sort of value capture out of -- pulling out of those markets, frankly in the sense that -- on the financing front. I mean, we're getting decent, if you will, NOI growth. I understand the point you're making that maybe next year or the year after is slightly better, but arguably, I would tell you that the financing environment that supports the capability to exit the investments on an attractive basis is better now than I've ever seen it. And I think that in an effort to sort of really harvest the best IRR and the best return on capital and create the most value for that capital, we think better to trade off a little current earning, if you will, in order to pull the capital out and get it redeployed into an investment that we think long term is going to likely create a better yield and a higher yield and a better return on capital. So it really is -- I understand the point you're making, but conceding, if you will, $0.19 of earnings this year is not something that we take lightly, but we think it's the right thing to be doing for value creation long term.

I'm showing no further questions. I will now turn the call back over to management for any closing comments.

No closing comments here. If you have any other questions or concerns you'd like to discuss, feel free to contact us anytime. Thanks very much.

Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect at this time.