Mid-America Apartment Communities, Inc. (MAA) Q1 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the MAA First Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, May 3, 2018. I will now turn the conference over to Tim Argo, Senior Vice President of Finance for MAA.

Thank you, Savannah, and good morning. This is Tim Argo, Senior Vice President 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 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 the 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. I'll now turn the call over to Eric.

Thanks, Tim, and good morning. First quarter results were slightly ahead of our expectation and reflect the continued solid demand for apartment housing across our markets. Occupancy is high, and rent growth on renewing leases is strong. However, elevated levels of new supply continue to weigh on our ability to drive rent growth on leases written for new residents. We expect the supply pressures will persist through most of this year, with trends moderating in 2019. But as we enter this busy summer leasing season, we are encouraged, with the number of trends that we are capturing, and continue to believe that revenue trends have bottomed out for the cycle. Our expectations, moving forward, are supported by favorable trends in several key variables. These include the continued strong job growth and demand for our apartment housing across our markets; our high occupancy levels; the strong performance being captured on renewal lease pricing; the improving pricing trends within the legacy Post portfolio; and finally, the continued strong performance on same-store operating expenses and continued improvement in operating margins. While supply pressures will remain evident in several of our markets for the next few quarters, continued favorable results in these key areas support belief, our belief, that we should see incremental improvement in NOI, moving forward, with better momentum in 2019 and supply pressures moderate. Resident turnover remains very low at 49.6% on a running 12-month basis. This is despite continued healthy growth in renewal lease pricing of 5.5% during the first quarter. This level of strong pricing performance in the face of higher new supply is a testament to not only the continued healthy demand for apartment housing in our markets, but is also a very positive statement about the quality of service provided by our on-site associates, and I really appreciate their efforts. The leasing pressures associated with higher levels of new development continue to mostly impact the higher rent properties in more urban-oriented submarkets within the portfolio. However, it's worth noting that the overall blended rent growth on leases signed in the first quarter within the more urban-oriented legacy Post portfolio did improve by 190 basis points, as compared to the first quarter of last year. As new supply pressures moderate, we believe the opportunity within the legacy Post portfolio for accelerated rent growth, as a result of both the execution of our revenue management practices and a meaningful redevelopment opportunities in the portfolio, will support much improved performance trends. As noted in the earnings release, our progress associated with managing operating expenses continue to drive strong results. Tom will cover more details in his comments, but we have been pleased with the early results within the legacy Post portfolio, as our various operating practices are fully implemented. And the efficiencies associated with our larger scale are making a positive impact on overall portfolio operating margins. Over the course of the summer, we expect to wrap up the work associated with the back-office and systems integration associated with our merger with Post. As we continue to refine and capture the benefits associated with having both portfolios on the same operating platform as well as accelerate the unit interior redevelopment effort, the value accretion that we've previously outlined within the Post -- for the Post merger is something we continue to feel confident about. As noted in our earnings release, during April, we closed on a property acquisition located in Denver. This off-market acquisition of this newly developed property was negotiated late last year, with the closing subject to the completion of the construction of Phase 1 of the project. The property is located adjacent to a recently approved new light rail station that will connect to downtown Denver, and located adjacent to high-end restaurant and retail shopping venues. This is a high-quality property in a terrific location that is a great addition to our Denver portfolio. We expect to get underway with the Phase 2 expansion of the property later this year. We continue to see heavy deal flow with our underwriting and transaction volume, reaching a 5-year high for the typically slower first quarter of the year. I continue to believe that as we work further into the cycle of new property deliveries, the capacity and optionality surrounding our balance sheet, along with our proven execution capabilities will yield increasing opportunity for our earnings-accretive external growth. In summary, we like to start to the year, and continue to believe 2018 will play out along the lines we expected. Demand remains high. Resident retention is strong, and rent trends looked to have stabilized. We're excited to be nearing completion of the final steps in fully integrating all operating and reporting activities of the legacy MAA and Post portfolios, and we remain very enthused about the long-term value proposition surrounding the merger. I appreciate all the hard work that our team has done over the past year in stabilizing our platform, and we look forward to the opportunity in front of us with the important summer leasing season. That's all I have in the way of prepared comments, and I'll now turn the call over to Tom.

Thank you, Eric, and good morning, everyone. Our operating performance came in as expected. Revenues for the first quarter were 1.8% over prior year, with 96.3 average daily occupancy and 1.4% effective rent growth. Expenses increased just 1.6% over the prior year, and NOI increased by 1.9%. Looking at revenue drivers by portfolio in the first quarter, as compared to the prior year, a legacy MAA portfolio generated revenue growth of 2.3% with 96.4 average daily occupancy and effective rent growth of 1.8%. The legacy Post portfolio had 0.4% revenue growth, with 95.8% average daily occupancy and 0.2% effective rent growth. Supply has been elevated in our markets for several quarters. Despite the supply headwinds, we saw the blended lease-over-lease performance of the combined company grow by 1.6% in the first quarter, which is 40 basis points higher than the same time last year. This is primarily driven -- this is primarily the result of new lease pricing on the Post portfolio, which improved by a significant 260 basis points in the first quarter from the same time last year. This is further supported by improving monthly trends during the quarter. Blended pricing growth for the overall same-store portfolio on January was 0.7%; February, 1.8%; and March, 2.2%. Expense performance continues to be a bright spot for both portfolios. While improvements in revenue management practices are just now showing up in pricing, our programs to more aggressively manage operating expenses have shown more immediate results. Overall expenses within the same-store portfolio were up just 1.6%. This includes the $900,000 of winter storm related cost incurred during the quarter. Adjusting for storm cost, our expense increased less than 1%. Total expenses on the Post portfolio during the quarter were down 2.2%. That was driven by reductions in personnel cost, repair and maintenance expenses as well as property and casualty insurance. As a result, the first quarter operating margin of the Post portfolio improved another 90 basis points. This is on top of the 130 basis point improvement we made in first quarter of last year. We still have room to run with our expense management programs on the legacy Post portfolio, and expect continued progress in 2018. Our operating disciplines are now fully in place, and at current run rate, the savings will continue. April results show the benefit of our consolidated platform and momentum. Overall same-store average daily occupancy in April was 96.2%, which is 10 basis points higher than the prior year. This is driven by a 50 basis point year-over-year improvement in the legacy Post portfolio. Overall, the same-store April blended lease-over-lease rates were up 2.9%, which is 90 basis points better than blended rents in April last year. Our 60-day exposure, which represents all vacant units and notices for a 60-day period, is a low 8.3% and in line with prior year. The supply picture is well documented. Dallas and Austin are facing the most pressure. In 2018, we expect 22,000 deliveries for Dallas, and in Austin, we expect 8,400 deliveries. We're encouraged that job growth has remained strong in both markets. Dallas job growth was at 2.5% in 2017, and expected to increase to 2.6%. Austin job growth was 3.3% in 2017, and expected to remain robust again at 3.3% in 2018. These growth trends are strong, and well ahead of nationwide trends. All elevated supply levels have pressured rent growth in several of our markets. We're seeing good growth in a number of markets, Phoenix, Richmond, Orlando and Jacksonville stood out from the group. Our focus on customer service and retention is paying dividends. Move-outs by our current residents continue to remain low. Move-outs for our overall same-store portfolio were down 2.3% for the quarter. Move-outs to home-buying were down 3%, and move-outs to home-renting were essentially flat with last year. Home renting remains an insignificant cost for turnover and accounts for less than 6% of our move-outs. On a rolling 12-month basis, turnover dropped to a historic low of 49.6%. The steady decrease in turnover was achieved while increasing renewal rents by 5.5%. Momentum is building on the redevelopment program across the legacy Post portfolio. In 2017, we completed renovation on 1,700 units. We've completed an additional 560 in the first quarter, and expect to complete 3,000 units this year. On average, we are spending $9,400 in getting the rent increase to this 11% more than a comparable non-redeveloped unit. As a reminder, we've identified a total of 13,000 Post units that have compelling redevelopment opportunity. For the total portfolio, in 2018, we expect to complete over 8,000 interior unit upgrades. On the legacy MAA portfolio, we continue to have a robust redevelopment pipeline of 10,000 to 12,000 units. On a combined basis with the legacy Post portfolio, our total redevelopment pipeline now stands in the neighborhood of 25,000 units. As you can tell from the release, our active lease-up communities are performing well in Houston, Post at Afton Oaks, stabilized in the first quarter, as expected. Our remaining pipeline of lease-up properties, the Denton II, Post South Lamar II, Post Midtown, Post River North and Acklen West End are all on track to stabilize on schedule. We have begun leasing Post Centennial Park in Atlanta. 2017 was a year of significant change for our organization. We started 2017 with 2 completely operating platforms and teams. We're pleased with the bulk of the integration work. The Post portfolio is behind now us. We have started 2018 with a much more aligned and cohesive operating platform and team. Results are progressing as expected. We look forward to continuing to capture value-creation opportunities on both the revenue and expense sides of the equation, as we finalize full integration activities in 2018. Al?

Thank you, Tom, and good morning, everyone. I'll provide some additional commentary on the company's first quarter earnings performance, balance sheet activity, and then finally, on guidance for the remainder of 2018. Net income available for common shareholders was $0.42 per diluted common share for the quarter. FFO for the quarter was $1.44 per share, which was $0.01 per share above the midpoint of our guidance. First quarter performance included $0.02 per share of noncash expense from the valuation of the embedded derivative related to the deferred shares issued in the Post merger, and this was not included in our original guidance. Same-store performance, G&A expense and interest expense were all slightly better than expected, and combined to produce the out-performance for the first quarter. During the first quarter, we did not acquire any communities. We did, however, close on the disposition of 2 land parcels acquired in the Colonial merger for $5.9 million in total proceeds. These sales produced net gains of about $200,000 recorded during the quarter. As Eric mentioned, in April, we closed on the acquisition of Saint 36, a 374-unit, high-end community located in Denver. The acquisition included a land parcel to develop an additional 79 units as part of the Phase 2 expansion, which we expect to begin later in 2018. Including the Phase 2 expansion, the total investment is expected to be approximately $128 million. Following quarter end, we also closed on a disposition of an additional land parcel located in Las Vegas for total proceeds of $9.5 million, which will produce a $2.8 million gain that will be recognized during the second quarter. Also, during the first quarter, we completed construction of one of our development communities, Post River North, located in Denver. The community was complete on plan with a total investment of $88.2 million and is expected to be stabilized in early 2019 at a 6.4% NOI yield. We currently have 2 communities remaining under construction with a total projected cost of $125.8 million, of which all but $24.4 million was funded as of quarter end. Including Post River North, our lease-up portfolio now contains 5 communities, totaling 1,509 units. Average occupancy for the group was 56.1% at quarter end. We expect 4 lease communities to stabilize in the second half of this year, and the remaining community to stabilize in the first half of 2019 at an overall average stabilized NOI yield of 6.4%, which will ultimately produce over $21 million of NOI. Our balance sheet remains in great shape. During the first quarter, we paid off an additional $38 million of secured debt, pushing our unencumbered NOI to over 85%. We also executed $300 million of forward interest rate hedges to secure future bond financings projected for later this year. At quarter end, our leverage is determined by our bond covenants, was only 33.1%, while our net debt-to-recurring-EBITDA was just over 5x. We also had almost $600 million of combined cash and borrowing capacity under our unsecured credit facility at quarter end. Finally, we are maintaining and confirming our outstanding guidance for all major components of our forecast, including net income, FFO, AFFO, same-store performance and transaction volumes. In summary, net income per diluted common share is projected to be $1.78 to $2.08 for the full year 2018. FFO is projected to be $5.85 to $6.15 per share or $6 per share at the midpoint, which includes $0.08 per share of projected final merger and integration cost related to Post merger. AFFO is projected to be $5.24 to $5.54 per share or $5.39 midpoint. For the second quarter, FFO is projected to be $1.43 to $1.53 per share or $1.48 per share at the midpoint. While we expect the continued volatility related to the valuation of the deferred shares acquired with the Post merger, our projections do not include any further valuation adjustments over the remainder of the year, as these adjustments are both noncash and impossible to predict. We remain on track to capture the full $20 million of overhead synergies related to the Post merger as well as other NOI and earnings opportunities outlined with the merger, which are reflected in our current guidance this year. That's all we have in the way of prepared comments. So Savannah, we'll now turn the call back over to you for questions.

[Operator Instructions]. We can take our first question from Nick Joseph with Citi.

You did 1.8% same-store revenue growth in the first quarter and full year guidance is for 2% at the midpoint. And I know you've talked about an acceleration throughout the year, so I just want to get a sense of the pace, how do you expect it to trend? And do you expect 4Q same-store revenue at the high end of full year guidance around 2.2%?

Nick, this is Al. I will say, in general, as we've talked about before, what -- forecast is built on this year is really a few major components. Occupancy remaining strong at 96% through the year, certainly, through the back part of the year. Renewal pricing being consistent, 5%, 5.5%, and then new lease pricing being the key to that performance over the back half of the year. We have discussed that we do expect new lease pricing to be above prior year, and that will drive blended pricing -- I think for the remainder of the year, what we would expect to see was some more in the 70, 80 basis points range to capture our guidance at the midpoint. I'll tell you, though, in the first quarter of the year, we've captured 40% -- 40 basis points improvement over the prior year, as Tom mentioned. And April, actually, was much better than that at 90 basis points. And so we feel very good about the trend and the prospects, and so far what we lined up and outlined for guidance, we're right on track.

But then from a same-store year-over-year basis by the end of the year, you should be towards the top end of the guidance [indiscernible] acceleration.

That's right. [indiscernible] The revenue -- good point. The revenue based on that would build, as we went through second quarter, would still be on the lower end. It would grow in the third and fourth more significantly.

And then just wanted to get your view on the Houston market. We saw same-store revenue growth in the first quarter. Actually, a little lower year-over-year than what we saw in the fourth quarter, so just what you're seeing there today?

Yes, and Nick, it's Tom. Last year, we ran with high occupancy and negative rent growth. As you know, the hurricane changed that a bit, and it takes time for the revised pricing to be replaced on each unit. So just to give you a flavor for what's coming, April blended rents in Houston were up 7.5%, and we think revenues will continue to fall. We just need that repricing to get on through the system.

And we can go next to Austin Wurschmidt with KeyBanc Capital Markets.

As it relates to supply, you guys have laid out a table in your investor deck that showed quarterly supply growth by market and indicated some fairly significant decreases by quarter. I was just curious, one, do you still think that that's the case that we should see it ratchet down, I guess, each quarter throughout the year? Or have you seen some of that pushed, I guess, later into the year? And then second, do you think you're already feeling the impact from some of that supply, as properties tend to lease prior to completion?

Yes, I mean, the answer to your question is yes. We do think that some of the supply based on the most recent and updated information we have appears to be slipping a little bit later into the year. And yes, you're right, we do begin to see some of the pressure on, particularly, as I've mentioned, the new lease pricing prior to the actual deliveries of the unit, as pre-leasing activity starts up. But I will tell you that the slippage, if you will, of some of the supply until later in the year in some respects is not such a worrisome thing in the sense that it's slipping into the more robust time of the year for leasing anyway. What was really a problem last year, is we saw slippage take place in the third quarter with deliveries that we thought would happen in the third quarter move into the fourth quarter, which of course is the worst leasing quarter of the year. So moving some of the Q1 deliveries into Q2, Q3 is not such a bad thing, given that leasing activity is more robust. Having said that, I also want to quickly mention, while the revision that we're seeing on supply being pushed out a little bit is accompanied by also a higher job growth forecast than what we started the year with, we've seen job growth pick up on a blended basis about 40 basis points more than we expected starting this year. So while the supplies picture is moving around a little bit in terms of timing, we're encouraged with continued healthy demand and job growth taking place, which I think is going to be helpful.

Any particular markets where -- that job growth? Or the big drivers of the improved job growth outlook?

Yes, Austin. This is Tim. I mean, I'm really seeing Austin and Dallas push up which is -- they've been drivers now for a few years, and they just continue to be job engines that will be helpful as our -- obviously, 2 of our larger markets.

All right. And then as far as expenses, clearly, another quarter of expense savings from Post, and really kept expense levels low. As revenue ratchet higher through the year, should we think about expenses also ratcheting a little bit higher? Or do you think that maybe the initial outlook is a little bit conservative and that you're finding continued opportunity to keep that kind of towards the lower end of the range on the full year guide?

Austin, this is Al. I would say we feel good about the guidance that we have for full year for expenses, which is 1.5% to 2.5%. Now with the first quarter at 1.6%, that would tell you that what we're expecting on the remaining 3 quarters is somewhere around 2%, maybe a little up north of 2%, blended for the back half of the year. I think that's what would we expect overall.

If something else obviously, some of the early wins we were getting on the expense side began showing up early in the last half of last year. So the comps, the comparisons to prior year get a little tougher as we get towards the back half of the year. The absolute savings continues, but the comps just get a little bit hard, which will of course affect year-over-year results.

I appreciate that. And then just last one for me, on the $128 million total investment on the Denver deal, can you give us the breakout between Phase 1 and Phase 2 as well as what the going in yield on that deal was, and then what you ultimately expect it will be on stabilization?

Well, the Phase 1 was something approaching $94 million.

It's $104 million.

$104 million, and the balance is what we expect to spend...

$148 million overall.

Yes, what we expect to spend on Phase 2. The stabilized yield that we expect to get out of this project is upper-5 range, as it gets -- Phase 2 gets fully built out and leased up. So we, as I mentioned in my comments, it's an incredible location. And we think that as we continue to build out our Denver presence, we think this is going to be a great addition. But we expect to be in the upper-5 range on the stabilized NOI yield on this deal over the next couple of years or so.

So does that put Phase 2 at north of a 6% yield on a stand-alone basis?

Yes. The Phase 2 is a smaller 79 unit, as you can -- you can do the math on that, which will be a very efficient addition because it will use most of the amenities and things from Phase 1 obviously.

And the Phase 1 was about 68% occupied when we bought it, so that'll give you an indication of sort of the initial yield.

And we can go next to Rob Stephenson with Janney.

Other than this Phase 2 on the newly-acquired asset, what other land are you controlling these days for future development? And how much of that you're thinking is going to start within the next 12-or-so months?

We have parcels already that we own in Fort Worth, in McKinney, North Dallas, satellite city in North Dallas, McKinney, Texas, and we have a site in Cherry Creek submarket in Denver. We would expect potentially to be underway with all of that very late this year, maybe a little bit. The Cherry Creek site may slip into early next year, but we're still working to predevelopment on those 3 opportunities. We also control opportunities, another opportunity, and also, we have a phase 3 opportunity in Raleigh, North Carolina with an existing property that we will likely pull the trigger on later this year. In addition to that, we have another site in Denver that we are working that we have on the contract. And we also have a site in Orlando that we are working on.

Okay. I mean, from a timing standpoint, I mean, it sounds like that most of this is going to wind up being either late '18 or '19 starts, which means that, basically, I would imagine then that there's basically the expectation to little to no deliveries at all in '19, is that correct?

That's correct.

Okay. And then, Tom, any markets that -- you're 1/3 of the way through the year now that you're seeing might be a little bit stronger, a little bit weaker than you guys were initially expecting?

Yes. Honestly, Rob, not out of the shoot. I mean, we expected headwinds in Dallas and Austin and those are there. But we're pleased with the job growth there and then very pleased with places like Phoenix and Orlando right now.

Okay. And then, Al, one last one for you. In terms of the hard cost on unit turnover, what are you guys spending these days?

I think it's around $1,000 per unit with -- $1,000, $1,200, all on things depending on whether you replace carpet or not. That's a big factor in there. I think that pushes it at the high end if you replace carpet. You do that every 5 years or so, and so I think that's roughly what we would say today.

Okay. And given the reduced level of turnover, are you able to do that with the existing Mid-America staff? Or you're having to bring in outside contractors to do that?

And that's one of the key things that has helped us with the Post portfolio is we're handling close to 80% of those turns in-house, meaning, sort of paint and carpet cleaning. The carpet installation and replacement, the capital item that Al mentioned, we contract that out. By comparison, Post really use contract labor for the overwhelming majority of their paint and carpet cleans.

And we can go next to Dennis McGill with Zelman & Associates.

First question, can you give a couple of steps around new leases? I think you had said the Post new leases were up 260 bps year-over-year. Can you just fill in the holes as far as what new lease was for the overall portfolio, and then maybe the pieces and then how that trended versus 1Q '17?

Yes, sure. New lease rates were, for the first quarter, combined same-store, new lease was negative 2.3, renewal, 5.5; blended, 1.6. And then for April, new lease rates are 10 basis points positive. Renewals are 5.6, and blended, 2.9. And then just on roughly on a blended basis, to save some math, but I'll go into detail if you want it, first quarter was up 40 basis points versus last year on blended, and April is up 90 basis points.

Got it. And then I guess the only question within that, so Post new leases, I think you said were up 260 basis points year-over-year.

That's correct.

What did the legacy MAA do in the first quarter on new?

Legacy MAA on blended -- you said new lease rates?

Right.

Bear with me just a second. MAA new lease rates were about flat for the quarter.

Perfect. Second question, you know that the operating platforms will be finalized on the synergy later this year. Where will we see the most obvious benefits once that's done either expense-wise or revenue-wise?

Well, I will tell you, it gets a little hard to point to specific things. Generally, a lot of the expense savings that we hope to get as a result of just renegotiating a lot of contracts and services for various services and supplies and products that we use, and that really wasn't so much a function of the systems conversion and consolidation effort, if you will. I will tell you, on the revenue side is where I think the opportunity comes from in terms of where the opportunity is as a result of putting both companies on the same platform. We, frankly, just get more efficient in how we manage the company. Right now, our regional leadership and -- are working with two different systems and having to look at two different sets of reports, and our LRO or revenue management system is not as fully optimized because of having to, if you will, still interface with two versions of our property management software. So there's lot of inefficiencies, frankly, that we have in terms of just how we manage the business by having the portfolios on 2 different systems. And I think as a consequence, and we're about halfway through the conversion process at this point. We'll wrap up here in another 90 days or so. And I think it ultimately just gets to a point where we have more efficiency now. The other thing that comes from this is, frankly, with the new system, we're introducing a little bit more robust activity as it relates to sort of web-based activities as a new consolidated web platform that is being finalized, and so it's a lot of things. A lot of them are subtle. But in aggregate, we think it just creates a lot more ability to bring intensity to the things that we really want to focus on as opposed to a lot of focus on putting systems together. We sort of are able to, if you will, get back to work in a much more intense fashion as a consequence of the merger.

I might just add to that too if the question is what is remaining to capture from those opportunities. Then one of the things we've talked about is the redevelopment. Remember, we're capping that over three years or so, and the plan this year to capture 1/3 of that. So it will take several years to roll that off to see that portfolio opportunity out at the pace we're doing this. So there are several things that will keep providing opportunity for us in the future.

And when you flip the switch in 90 days or so, and you're on the same platform, how long will it take you after that to get to a stabilized, fully efficient run rate on the revenue management?

I think it's happening. I think it will be instant, frankly. I think it happens. What remaining little inefficiencies we have sort of dissipates as a consequence of finally being on the same system.

And Dennis, Dennis, what I would tell you is, I think most of the benefit of the revenue management system on the Post portfolio, we're really beginning to capture that now, and you're seeing that in the new lease rates, and just be streamline reporting and quicker reacting.

Okay, great. And then just last question, Eric, you talked to turnover being at historic lows, and we're seeing that not just across the multi-family space, but pretty much all of housing. Any thoughts from your perspective how much of that is changing consumer behavior versus not having anywhere to go because of inventory constraint?

I think that a lot of it is a change in behavior. I think that we certainly continue to see average age, average income continue to move up -- within our resident portfolio over the last couple of years. We continue to see the percentage of female versus male continue to move up as a consequence of the last two or three years with the trend. Certainly, the ability to go out and buy a starter home is more challenging, and I'm sure that factors into it to some degree. But I think -- I continue to believe that a lot of it is more social, and more about just our behavior patterns of our resident profile as much as it is anything.

And Dennis, we've seen our single rate go up about 1 percentage point, which indicates supporting sort of Eric's point, we're not seeing people get married and sort of be backlogged in the unit in some way, shape or form, assuming that a married couple is more likely to buy a house than single.

And we can go next to Nick Yulico with UBS.

This is Trent Trujillo, on with Nick. I just wanted to circle back. I appreciate all the comments that you had on supply. Just wanted to circle back on that topic both. So given peak supply across your market, you said in first quarter, plus some slippage that maybe you're experiencing it right now, can you speak to the level of concessions you're seeing across some of your larger urban market of, perhaps, Atlanta, Dallas, Houston and D.C., and how that's trended since the start of the year?

Sure, Trent. And I'll just move well through it with Atlanta and going down at concessions. It's really about submarket in Atlanta. We've got 1 to 2 months free in Buckhead and Midtown. There are pockets of 1-month free, depending on specific lease-up places, like Roswell Road in 285 or the perimeter, has a little bit of pressure with 1 month outside the perimeter. Concessions are really pretty rare there. In Austin, we've got -- we see sort of 1 month in Cedar Park, which is north area and in South Austin. The tightest part is -- or the most pressured is sort of that South Congress Lamar corridor, and we're seeing 6 weeks to 2 months there. That's pretty similar with what we saw earlier. And then in -- and in Dallas, we're seeing 1 to 2 months in Frisco, Plano and Richardson. Uptown is running close to 6 weeks, which is actually slightly better than what we saw previously. It was running closer to 2 months. And uptown supply is about 2,000 units, which is about -- we expect that in '18, which is about what it was in '17.

And perhaps, regarding acquisitions, how competitive is the transaction market, and can you speak to the amount of deals you're currently considering? I think earlier, Rob had mentioned something about the land sites that you were looking at. But I think, last quarter, you mentioned you had quite a few acquisition deals under review, but just the 1 closed in the Denver market after quarter end, so any commentary on that would be helpful.

Yes. I mean, the transaction market is incredibly competitive. We, as I mentioned in my call comments, we -- I mean, the number of deals that we underwrote in the first quarter is the highest we've had in over 5 years in the first quarter, which is typically a very slow quarter for deal activity. So we continue to see a lot of volume. But we've seen cap rates, if anything, over the last 6 months move down a little bit. I mean, routinely, you're in 4.5 to 4.75 range in some of the bigger markets, and you're low 5 -- 5 to 5.25, and perhaps, some of the smaller markets has more capital, and continues to weigh into some of these more, if you will, non-coastal markets or more secondary markets. So it's incredibly competitive. And we continue to remain active in the market, but believe that based on the hurdles and the disciplines that we're holding ourselves accountable for in terms of any capital deployment that -- where the pricing is right now, it's just hard to really justify some of the pricing that we see happening. And so we're going to remain patient, frankly, as we think that -- as we get a little later into the cycle. I think later this year, supply trends being what they are, that the opportunities may get a little bit more favorable, but it's pretty competitive right now.

And we can go next to Drew Babin with Baird.

Question on the improvement and new lease pricing year-over-year within the legacy Post portfolio. Would you say that this is directly attributable to the ROI CapEx on some of these units you've acquired? And I guess, can you speak to how you're pricing those units relative to new supply in places like Uptown, Dallas, Atlanta and Austin?

Drew, we haven't done enough of that CapEx to really move the number. This is really a direct reflection of where pricing was last year when we were just getting started on the merger and supply was picking up. And our ability to get -- last year, we were really on 2 different pricing systems completely. We were just beginning to push renewals up, and we were adapting to the portfolio. So I would tell you, the uptick is significant in terms of just us learning the portfolio and getting our practices and habits in systems in place. And then sorry, what was the second part of your question, Drew?

I guess just there's more of these renovated units come to market maybe in the peak leasing season. I guess, what's the pricing strategy relative to the new supply in these markets? Is there a certain kind of gap relative to where the new supply is delivering as far as the rent goal that you're targeting to sort of your value proposition relative to the benefit from it?

That's what we're so excited about the Post portfolio on is -- Post did a really, really fine job of picking locations that stood the test of time. So essentially, what you've got is we have mid-rise product that was 8 to 10 years old, let's say. And we're being shaded out by high rises that are looking for $3 a foot. So we're able to upgrade the unit, great bones, well-developed property, and we're able to stay even with the upgrade in units $200 to $500 less than new lease pricing. It's a real sweet spot for us.

That's really helpful. And lastly, Al, just a question on the balance sheet, unsecured bond pricing right now for 10 years, if you could kind of give maybe the spread economics there, and then whether MAA would consider doing anything with a duration of over 10 years, given kind of a flat yield curve?

Yes, Drew, that's a good point. I mean, both the underlying treasury rates, 10-year rates has gone up recently, and the spreads have gone up a little bit in the bond market. But 10-year bond, if we do once a day, it'd probably be around 4.3 to 4.5 range, something like at. But keep in mind, as I mentioned, we've done $300 million of hedges in preparation for some financing this year. So when and if we do a deal this year, we'll be a little bit lower than that, I would say. And so that's -- and what was the second question, second part of that?

30-year.

Oh absolutely, no question. And one of the things we've talked about before is we've worked very hard our balance sheet over the last few years. Now we're at a point we've got a lot of public bonds outstanding on liquidity. We think we're ready to go to potentially a 30-year market at some point. And one of the things that we are looking to do to continue to strengthen our balance sheet is push our duration or maturities out. That's a specific target for us over the next few years, Drew. So can't tell you when we would do that. Obviously, we're going to work tactically when the market gives us that opportunity, but we do expect to seek that kind of activity over the next year or two.

And we can go next to Tayo Okusanya with Jefferies.

A couple of questions for me. First of all, you are quickly increasing your exposure to the overall Denver market. Just curious how big you expect to get in Denver over the next few years, and why you're kind of exclusively focusing on that market?

Well, we've been looking at the Denver market for, frankly, the last several years. We continue to believe that the growth dynamics there are very compelling. I think that there's just a lot of good things associated with -- I think the next 10 years likely that occur in Denver from a job growth perspective and migration and household demand for that market. Some of the West Coast markets continue to become prohibitively expensive to live in. We think that the markets like Denver, Phoenix, continue to find favor with a lot of households and employers as well. As a result of the merger we did with Post, you may recall, they actually had a development project already underway there, and so that really gave us the toehold into the Denver market that we've been working to find for several years. And then as a consequence of now spending more time in the market, we are -- we went out and created an off-market opportunity on the Sync36 acquisition that we looked at. As I mentioned, we also have another site in the Cherry Creek submarket, very compelling and high-end submarket there, just a little bit southeast of downtown that Post had already on balance sheet that we're working on. So we're going to continue to -- and then we've got another site that we're working that we recently have been working for the past year or so sort of tie-up. So it's just a very slow methodical process that we're continuing to work through, both in terms of development as well as acquisition. And we'll be patient as we look to build out our presence in the Denver market, but we very much like the growth dynamics in that market, and continue to feel that it's a good fit for us.

So that's helpful. The second question is for Al. Just kind of going back to same-store effect, again, really good quarter holding those costs down. But kind of going forward, I guess, with where your guidance is, could you just talk a little bit kind of category-by-category where you still think you might be able to hold cost down? I know this quarter, in particular, was repairs and maintenance, and even property tax is only up 2.6%. But I'm curious for the rest of the year, how do you see that mix that will keep you within that low guidance range?

Yes. I think for the rest of the year, you'll definitely continue to see repair and maintenance be a good performer for us, Tayo. You'll probably see personnel be in line what it is now. Repair and maintenance continues to show favorability, as we're capturing more of the Post opportunity. I think taxes, real estate taxes, will be pretty consistent. It was 2.6 for Q1, but there are some timing of the prior year appeal finalization. So 4% for the full year on that is about the right picture. And then I think we will say marketing expenses will be low, long term, in the lower end of, not negative, but low 0 to 1% kind of range. And so I think those are the key drivers of it, as you look at the back half of the year. The insurance renewal that we have last year is providing a lot of opportunity. In the first half of the year, we do renew in July, July 1 this year. We have an increase projected, so that's a little bit of a wildcard. We feel like our increase that we're having there is correct, but that's yet to be determined.

And we can go next to John Pawlowski with Green Street Advisors.

Eric, on the capital plan for 2018, I guess what specifically would you need to see to begin ramping dispositions? I understand you've done a lot of capital recycling in the past, but what would we need to change on the ground to pivot this position strategy?

Well, I think that, as you alluded to, I mean, we've worked a lot over the last 5 years, both as a consequence of capital recycling and 2 fairly significant M&A events that have really gotten the position of the portfolio more or less where we want it. I think that we've got the balance and the diversification. We shrunk, reduced, if you will, the number of markets that we're in pretty significantly as a consequence of -- we think created a little bit more efficiency in terms of how we were able to operate the portfolio. So I think that it's a long way of saying we sort of like where we are right now. I think the opportunity to then ramp-up recycling of capital by selling more assets really comes back to the opportunity to match or to fund or match -- fund the capital we pull out of those dispositions and into something that is attractive and would offer an improvement, if you will, in our long-term earnings growth rate over what we're selling. And we're having a hard time finding new deployment opportunities right now that are particularly compelling in terms of pricing. And so as a consequence, we think the right thing to do at the moment is to continue to clip the earnings coupons that we have coming out of a lot of the investments that we have today, keep our earnings coverage strong, keep the balance sheet strong, keep the optionality in place. And I think that we're at a point where, obviously, there's just a wall of capital out there that is continuing to chase multi-family real estate. I don't think it will always be this way, but I think that we're going to continue to be patient with the optionality that we have right now. And I think just selling a bunch of assets and using the proceeds in a compelling way right now is not a good environment for that right now. So we're -- and obviously, it's a good time to be a seller, but finding an attractive use of the capital without really creating earnings pressure associated with that is difficult to pull off right now.

Yes. But in certain markets, your comments about how competitive the bid is, and you're sitting in the bidding tent for acquisitions, not willing to underwrite the growth on certain deals that people are. So I guess, why not sell the dream to somebody else with comparable assets in your own portfolio? And balance sheet is in good shape, but build a war chest for another day, sell that dream today.

Well, we think we've got a pretty big war chest right now. And I think that giving up earnings right now doesn't seem to be particularly compelling for us. We think that the right thing to do right now is continue to enjoy the earnings that we're getting from the portfolio. We've put the organization through a significant amount of earnings dilution over the last 5 years, recycling over -- well over $1 billion of capital from high-yielding to low-yielding assets. Longer-term earnings growth rate is better as a consequence of these new assets. But we put the organization to a significant dilutive event, both in terms of the recycling that we've done through the merger with Colonial, and more recently, through the merger with Post. We have deleveraged the balance sheet massively over the last 5 years. So we've done a lot of dilution, if you will, earnings dilution over the last 5 years in order to position the company, we think, for a better future earnings growth profile, and a lot of that has been accomplished right now. So we don't see a big need to do more of it right now. We think, frankly, the thing for us to do over the next few years is to harvest the earnings out all the stuff that we've done for the last 5 years, and that's really where our focus is.

Okay. Last one for me, in terms of submarket supply backdrop, on the margin, you look forward to 2019 and 2020, do you expect supply to start laying on the legacy MAA footprint more than the Post footprint?

No, not really. I think that we continue to see that, frankly, what development does get done today. And I think I've seen the reason why this is going to change anytime given the significant rise in construction cost and significant rise in land cost. The only thing it pencils right now is to build a pretty high-end, very high-rent kind of product. It's the only way you can make it work. And so I don't think there's any reason to see that those conditions are going to change in such a fashion that all of a sudden, you're going to see a wave of modest -- more modest fleet price product starting to be built out. I just don't see that happening.

And we can go next to Wes Golladay with RBC Capital Markets.

I just want to go back to the questions on concession. On average, for the entire year, do you expect concessions to be less of an issue this year? I know you got hit last year, particularly in the fourth quarter, and that really hurt the guidance. But how should we look at the progression of concessions and new lease spread?

Yes, I want to take concessions. Well, new lease rates, I would expect on a net effect base, to continue to build on the pattern that they have for the first 4 months of the year. And then concessions, I would not expect. It really ramped up in the fourth quarter of last year, and we just don't see anything indicating that that's going to happen again this year.

Okay. And I don't know if you have the data handy, but do you have the new lease spread last year in the fourth quarter?

No, I do not have it at my fingertips. We can follow back up with you on that, Wes. But it is a number we're looking forward to comparing to.

And it appears we have no further questions at this time. I can go ahead and turn it back over to you, Eric, and the team for any additional or closing remarks.

Okay. Well, thanks, everyone, for joining us this morning. And I guess we look forward to seeing everyone in NAREIT in a few weeks, so thank you.

And this does conclude today's call. Thank you, everyone, for your participation. You may disconnect at any time, and have a great day.