Oct 29, 2015
Operator
Good morning, ladies and gentlemen. Thank you for participating in the MAA Third Quarter 2015 Earnings Conference Call.
At this time, we would like to turn the conference over to Leslie Wolfgang. Miss Wolfgang, you may begin.
Leslie Wolfgang
Thank you, Kevin and good morning everyone. This is Leslie Wolfgang, Corporate Secretary for MAA.
Tim Argo, our VP of Finance who normally introduces our quarterly earnings call cannot be with us this morning as he and his wife are awaiting the birth of their first child. We're excited to welcome the newest addition to the MAA family and we send them all our best.
I do have with me Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO. Before we begin with our prepared comments, 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 the SEC, which describe risk factors that may impact future results.
These reports, along with a copy of today's prepared comments and an audio copy of this morning's call, will be available on our website. During this call, we will also discuss certain non-GAAP financial measures.
Reconciliations to comparable GAAP measures can be found in our earnings release and supplemental financial data. When we reach the question-and-answer portion of the call, I would ask for everyone to please limit their questions to no more than two in order to give everyone ample opportunity to participate.
Should you have additional questions, please re-renter the queue or you're certainly welcome to follow-up with us after we conclude the call. I'll now turn the call over to Eric.
Eric Bolton
Thanks Leslie. Third quarter performance was strong and record high performance in both core, FFO and AFFO per share.
The results were driven by record high effective occupancy and solid rent growth producing an 8.1% increase in same store NOI on top of last year's very solid NOI growth of 6.8%. After a busy couple of years of merger and integration activities, the MAA team has our operating and reporting platform in a strong position.
I want to express my thanks and my appreciation for their hard work and tremendous results. Leasing conditions across our Sunbelt markets continued to support high occupancy and solid rent growth.
We believe our strategy in diversifying capital across this high growth region with a production and a price point focused on serving a broad segment of the rental market enables MAA to capture the strong demand of the region, while mitigating to some degree new supply pressures. We continue to see positive leasing momentum across the portfolio, job growth in most of our markets, particularly in the large market segment of the portfolio, coupled with management levels of new supply particularly in our secondary markets should combine to produce another year of positive leasing and pricing trends in 2016.
As outlined in our recently published report by the Urban Land Institute on the Gen Y generation and their housing preferences, positive demographic trends should continue to generate growing demand for apartment housing, particularly in our Southeaster and Sunbelt markets. As outlined in the ULI study, a clear majority or 62% of this renter demographic identify themselves as residing in the south and west.
Interestingly, the millennial group also described themselves as being essentially equally weighted in their focus on living in the city versus living in the suburbs, and importantly, only 13% of this millennial generation, according to the ULI study identify themselves as living in or near downtown areas. In our South-eastern markets, it's important to remember that a lot of the employment centers and more appealing entertainment venues that create proximity demand for apartment housing are often located in more suburban or satellite municipalities and not in the downtown CBD or heavy urban submarkets, and further with the median rent for the Gen Y group at $925 per month per the ULI study, we believe our product holds appeal in terms of price point and as a result is well positioned to attract this larger renter demographic.
Overall, we continue to believe MAA's focused portfolio strategy reconciles very well with this growing renter profile and supports our goal to deliver superior full cycle performance. The meaningful reposition that we've accomplished with the portfolio over the past five years is making an increasing impact as we've continued to recycle capital from some of our older investments and captured attractive internal rates of return upon sale, we've been able to repopulate the portfolio with newer properties that have enabled us to capture a steady improvement in NOI margins, particularly on an after CapEx basis.
Over the past five years, MAA's same store NOI margin on an after CapEx basis has improved 590 basis points. We expect to capture continued improvement in margins as our lease-up pipeline, new development pipeline and redevelopment pipeline continue to drive higher margin performance into the same store portfolio.
On the transaction front, robust deal flow and strong investor appetite continues to generate a lot of activity, along with aggressive pricing. We have a number of opportunities we are reviewing and continue to remain patient and disciplined with our underwriting.
As you'll note in our update guidance, we have pulled back a little on the volume of acquisitions that we expect to complete this year, but I continue to believe that more attractive buying opportunities will emerge as we work through the cycle. As Al will detail in his comments, through a combination of asset sales, internally generated free cash flow, reworking our credit facility and further deleveraging the balance sheet, we have added more strength to the balance sheet and meaningfully expanded the Company's external growth capacity.
We remain poised to execute on attractive opportunities as they emerge. That's all I have and I'm going to turn the call over to Tom.
Thomas Grimes
Thank you, Eric and good morning, everyone. Revenues for the quarter grew 6.1% over the prior year and 2.3% sequentially.
Our record results were driven by a year-over-year increase in revenue per occupied unit of 5.1% to $1,123 and a 90 basis point increase in average physical occupancy. October trends continue to be steady.
Our 60 day exposure, which is current vacancy plus all notices for a 60 day period is just 7.1%, down 70 basis points from the same time last year. October blended rents on a year-over-year basis are up 4.8%.
Overall, expenses remain in line, up just 3%. The only item that ran ahead of expectations was our personnel cost, as the strong revenue results are driving higher than expected performance based compensation.
Personnel costs less incentives were up just 2.2%. On the market front, the vibrant job growth in the large markets is driving strong revenue results.
11 of our 13 markets exceeded 5% revenue growth. They were led by Atlanta, Orlando, Phoenix and Fort Worth.
The secondary markets which have lower supply pressure achieved 5.2% revenue growth. In these markets, we're benefiting from improved job growth as well as a sophisticated operating platform that has competitive advantages across our footprint and markets.
Revenue growth in Greenville, Charleston, Savannah and Jacksonville stood out. Turnover for the quarter was again down, decreasing by 1.7% over the prior year, and down 100 basis points on a rolling 12 month basis to 53.3%.
Move outs to home buying were just 19.1% of total move outs and well below historic norms. Move outs to home rentals were down 6% and represent less than 8% of our total move outs.
Our focus on minimizing the time between occupancy again paid off. The improvement in average days vacant helped drive the record average physical occupancy for the quarter to 96.6%.
Year-to-date, we've completed 4,200 interior unit upgrades, 2,300 of which were on legacy CLP communities. We're on pace to redevelop 5,000 units this year and expect the mix to favor the legacy CLP portfolio.
As a reminder, on average, we spent $4,500 per unit and receive $100 rent increase over our comparable non-renovated unit, which generates a year one return well in excess of 20%. Our four active lease-up communities are performing well, 220 Riverside is now 70% occupied and 84% leased.
It's on schedule to stabilize in the second quarter of 2016. Colonial Grand at Bellevue II -- Phase II, and the Retreat at West Creek, are 92.3% and 94% occupied and will both stabilize in the fourth quarter.
Finally our newest acquisition in lease-up, Skysong in Scottsdale is 89% occupied and on schedule to stabilize in the first quarter of next year. On the customer service front, our recommend score on ApartmentRatings.com, which is currently the dominant rating site for multifamily reviews improved for the sixth straight quarter.
With Eric's comments about millennials in mind, we invite you to take a look at our redesigned website. This platform was built to continue our appeal to millennials in the way they prefer to search.
Our URL structures and content management system were tweaked to strengthen our search engine strategy. Simply put, this means our website shows up higher on their search list without paying for higher placement.
Once the website was improved our page views increased by five times which gives us more leads at a lower cost per lead. In addition I think you'll find it visually bold and easy to navigate.
Al?
Albert Campbell
Thank you, Tom and good morning, everyone. I'll provide some additional commentary on the Company's third quarter earnings performance and balance sheet activity and then on the revised guidance for the full year.
FSO for the third quarter was $1.44 per share. Core FFO, which excludes certain non-cash and non-routine items was $1.38 per share.
Recurring capital expenditures for the quarter were $15.8 million or $0.20 per share which produced Core AFFO of $1.18 per share providing strong coverage of our $0.77 per share quarterly dividend. For the full year, core AFFO grew 11.3% over the prior year.
The outperformance for the quarter was primarily produced by same-store NOI growth driven by record high average occupancy levels of 90 basis points above prior year and continued strong fee collections. Favorable real estate tax appeals and reduced insurance reserves [indiscernible] claims experience also contributed to the strong earnings performance.
During the third quarter, we acquired two new communities for a total investment of $86.6 million. These purchases bring our full year investment and acquisitions to $244.4 million for five new communities containing 1,409 units.
We also funded an additional $10.5 million on development costs on our four communities under construction during the quarter leaving only $54 million of the $120 million total expected cost to be funded. We expect NOI yields in the 7% to 7.5% range on these communities once completed and stabilized.
We also invested $8.2 million in our interior renovation program during the quarter, bringing our full year investment in the program to just over $19 million for 4,209 units renovated. As Tom mentioned, we continue to capture strong rent increases above non-renovated units, which are projected to produce unleveraged returns of 14%.
During the quarter, we sold three communities for gross proceeds of $121 million and recorded book gains of $54.7 million. These three sales bring year to date dispositions to 21 properties averaging 26 years of age for $354.3 million gross proceeds producing $109 million in recorded gains.
The average cap rate for these dispositions was 5.8% based on last 12 months NOI, a 4% management fee and actual CapEx, which produced an average 14.1% return on our invested equity of the full life of these investments. Our balance sheet ended the quarter in a very strong position, with leverage levels continuing to climb and coverage ratios growing further.
At quarter end, our leverage defined as total net debt to gross assets was 39.9%, 140 basis points below the prior year. While our debt to recurring EBITDA was only 5.76 times, a record low for the Company.
Our current EBITDA continues to grow and reflect the quality of our earnings profile, covering our fixed charges over 4.2 times. Following the end of the quarter, we recast our unsecured revolving credit facility, increasing our borrowing capacity to $750 million from $500 million, extending the maturity to 4.5 years and improving the terms to reflect our stronger credit profile.
This new credit facility supported by [indiscernible] provides significant liquidity and growth capacity for the Company. In conjunction with the new credit facility, we amended our $150 million term loan also improving terms and extending the maturity date.
For the current year, we expect to produce about $80 million to $85 million of internal free cash flow, which is essentially core FFO less all CapEx and common dividend payments. This is expect to grow just over $100 million for 2016, and given this free cash flow, production and the completed dispositions, our 2015 plans do not include new equity.
We currently have over $420 million of total cash and credit available under our credit line, and we expect to end the year with our leverage about 100 basis points below the prior year numbers. Finally, due to the strong operating performance during the third quarter, we are raising our guidance for core FFO and AFFO for the full year.
We're now projecting core FFO for the year to be $5.39 to $5.49 per share or $5.44 at the midpoint representing a 9% growth over the prior year. Core AFFO is now projected to be $4.71 to $4.81 per share or $4.76 at the midpoint, representing an 11.2% growth from the prior year.
Same store NOI growth is now expected to be 6% to 7%, based on revenue growth of 5% to 6% and expense growth of 3.5% to 4.5%. Our expected acquisition volume for the year is now $300 million to $400 million.
That's all I have. So, now, I'll turn the call over to Eric for closing comments.
Eric Bolton
Thanks Al. MAA's strong performance this year reflects both the favorable leasing conditions across our regional footprint as well as the benefits from our merger with Colonial Properties that closed two years ago this month.
The value proposition that we identified at the time we announced the merger including both stated expense synergies as well as incremental revenue opportunities have been fully realized, and are on track to be exceeded. We believe, we have the portfolio, the operating platform and the balance sheet, all well-positioned for what we expect to be both continued favorable leasing conditions and increasing our opportunities to capture new value growth as we had into 2016.
That's all we have in the way of prepared comments. So, Kevin, we'll turn it back to you for questions.
Operator
[Operator Instructions] Our first question comes from Nick Joseph with Citigroup. Your line is now open.
Nick Joseph
Thanks. For the fourth quarter implied same-store revenue growth guidance of 4.6% at the midpoint, can you walk through the underlying assumptions for occupancy, rent growth and the fee income?
Albert Campbell
Absolutely Nick. This is Al, and I think, as we look at the fourth quarter, the story really has continued, pricing trends that we've seen this year.
We're going to have a little tougher comps on occupancy and fees and revenues and that will fall to the bottom line about the 4.5 to 4.6 kind of implied midpoint, pricing in the 4 to 4.5 range. We do expect to pick up a little bit of occupancy year-over-year now from the high levels we have now, but the comp will become tougher and then combine it with the fees that will fall down to the 4.5, 4.6 implied on revenue growth.
Nick Joseph
Thanks. Then, can you remind me if the units in the redevelopment program are included in the same-store pool?
Albert Campbell
They are. Our policy is, unless we do a renovation and it substantially disturbs or causes a very lengthy disturbance to the performance we leave it in same store and for annual basis, I think, it would be probably a 40 basis point or 50 basis point impact on a full-year basis each year.
Nick Joseph
Thanks, just last question. I'd like to get your thoughts on the transaction market today, both for the large and secondary markets, if you're seeing more opportunities with stabilized assets or with the presale opportunities.
Eric Bolton
Nick, this is Eric. I would tell you, most of where we see opportunities on the presale -- are sale of pre-stabilized situations or in some cases new development that's trying to get started and looking for capital.
We continue to not spend a lot of time chasing after fully stabilized situations. Those are much more easier financed and that's where we see pricing, really the toughest.
From our perspective, we're not going to go out and compete in a market based on price. We're looking to capture some value for our ability to execute for the seller, whether it is urgency of close or the ability to handle some complexity or the ability to not have to worry about some the financing issues that often a lot of these buyers in these markets are depending on.
So, most of what we're after at this point is pre-stabilized situations.
Operator
Our next question comes from Rob Stevenson with Janney. Your line is now open.
Robert Stevenson
Thanks. Good morning, guys.
Al, what's the current thinking in terms of property tax increases? I mean, are we past the big increases and they start normalizing over the next year or so and you talked about the incentive comp for employees, anything else expense wise on the horizon that's likely to have a major impact on the same store expenses going forward?
Albert Campbell
I think, those are the two main items Rob and just on taxes, as we've talked about for a while, the pressure that has been over the last few years really from Texas and Florida, as we began this year, Texas came out very aggressive with their assessments and so we dialed that into our number and really worked hard in the field, virtually every property in Texas, and had some favourability in the third quarter because we were successful on that and also as they came out with the actual rates, the millage rates, you have the evaluation and rates, the rates came in a little lower growth than we'd expected as well. So that's certainly benefited the third quarter.
As we talked about in our insurance reserves, we're so self-insured for some of our reserves. I mean, our client experience has been a little better and we thought that benefitted us a little bit.
So, those are two things in the third quarter. I don't expect any significant -- I think in the fourth quarter you won't have that credit from real estate taxes impacting the fourth quarter and it's a pretty big component of your expenses, but full year, we expect Texas to rise, 5%.
The last year, it was 6%. Next year, who knows, but we would expect as we've been saying for a while, continued slight moderation over the next few years until it eventually gets down to the 3% long-term average that it's been over time, but that may take a couple of years.
Robert Stevenson
Okay, and then in terms of -- the same store revenue growth has essentially been sort of turbocharged relative to the peer group by the occupancy increases this year. I mean, it seems like you're going to be hard-pressed to even keep occupancy at sort of 96.6%, let alone increase it from here.
How should we be thinking about same-store revenue growth over the next five, six quarters without the benefit of an occupancy tailwind?
Eric Bolton
Well, Rob, this is Eric. We're not prepared to give 2016 guidance at this point, but what I can tell you is that based on everything that we see, the leasing environment should remain as robust as what we've seen this year.
We think that it's going to continue to support very solid occupancy performance. We think that the strong occupancy performance that we've captured this year, we likely will be able to continue to hold it.
We don't see any material deterioration in occupancy by any means, and we think that we can do that, while also getting rent growth that's going to be pretty comparable to what we've been seeing this year. I think that some of the lift that we got this year from merger-related activities will begin to moderate a little bit.
We'll hold those performance levels, but an incremental lift will become a little bit more difficult, because we're -- as you say, we're member essentially full. I mean, a lot of the performance lift that we got this year and frankly, some of the surprise in the third quarter was some of the great work that Tom and his team are doing on managing our days vacancy between turns and they've made some significant improvement in that over the course of this year, and again we think we'll carry that going into next year, but incremental improvement will be a little bit more difficult.
Robert Stevenson
Okay, thanks guys.
Eric Bolton
Thanks Rob.
Operator
Our next question comes from Conor Wagner with Green Street. Your line is now open.
Conor Wagner
Good morning. Al, you mentioned that the benefit from the redevelopment activity will be about 50 bps to same-store revenue growth this year.
Do you have an estimate for what it was in '13 and '14?
Albert Campbell
Probably similar to that but we've been doing that program for several years Conor. I'd say pretty close, probably a little over, because we'd increased the program this year, but somewhere in that call it, 40 basis point to 50 basis point range [indiscernible].
Conor Wagner
That's helpful and then, on the reduction in frictional vacancy, is there -- is that portfolio wide or is there more of a benefit there with the Colonial Properties?
Eric Bolton
It is weighed a little bit heavily on the Colonial side, but we've picked up improvement everywhere, but weighed a little higher there as our approach to monitoring and managing the components of the average days vacant have come to play on that portfolio.
Conor Wagner
Then just a follow up on that. Is that more -- is it advertising?
Is it how you get the unit done? Is the time just based on better leasing or is it better job that you guys are actually doing the work to turn the unit as far as cleaning or any necessary repairs?
Eric Bolton
It's really a combination of those things. We reduced the amount of time that it took to physically turn the unit.
That doesn't do you any good if you didn't lease it faster, and we've really had to focus on pre-leasing the unit and locking in those days early. So, we were able to pre-lease a larger portion of our units and lock in a lower timeframe.
Conor Wagner
Thank you so much.
Operator
Our next question comes from Austin Wurschmidt with KeyBanc Capital. Your line is now open.
Austin Wurschmidt
Great. Thank you, good morning.
You guys have talked a lot about aggressive pricing on acquisitions, cap rates, I think you've mentioned it's been in the low 5% range. So, I was just curious about your thoughts on what type of growth you think that apartment investors are underwriting today.
Eric Bolton
I don't know what they're underwriting. I mean, I don't know because I don't know what their return expectations are.
I mean, obviously to some degree they're taking advantage of the very low interest rate environment to -- there's a cost to capital benefit that they're dialling into their assumption. So, it's hard to know and of course it's going to vary quite a bit.
I think by market and by my property. I think that you can see some of these the more stabilized value add opportunities where there's a repositioning play and I'm certain that people get pretty aggressive on their assumptions as to what they can do there.
You take something that's brand-new whether it's really not a redevelopment or a repurposing of the interiors or anything of that nature and market expectations will vary based on the market and so, I don't know. It's hard to know what expectations are of any particular investor, I mean, from our perspective, you know, we we've been in these markets for a long time.
We feel like we have a pretty good handle on what they can do over a long period of time and we apply that logic to any situation we look at, but, it's hard to know what they're thinking.
Austin Wurschmidt
That's fair, and then as you guys are trolling for new acquisitions given your comments on sort of suburban living in your markets, is there any submarkets or anywhere you are particularly focused today on the acquisitions side?
Eric Bolton
We like -- really, we like most all the markets that we're in right now and you whether it's in Dallas, whether it's in McKinney, Frisco, Las Colinas, Plano area but let me also add, I mean, we're also interested in continuing to explore opportunities as they emerge in some of the more traditional downtown or CBD areas as well. As you know, that's where a lot of supply is being delivered into the marketplace and we think that may be very well where some of the best buying opportunities emerge over the next year or so.
Ultimately, what we're after is we're after a balance portfolio. We're deploying capital with a long-term horizon associated with it.
We're looking to build a portfolio of assets that will deliver steady growing cash flow, and so having a blend of both the downtown, the inner loop, satellite city, traditional suburban we're interested in keeping a balance of all that.
Austin Wurschmidt
Thanks and then just last one for me is, how did the October rent growth stack up versus last year?
Thomas Grimes
It was about flat with last year at 4.8%, similar to Q3 and flat with October of last year.
Operator
Our next question comes from Rich Anderson with Mizuho Securities. Your line is now open.
Richard Anderson
Thanks. Good morning and great quarter.
If I could just clarify the redevelopment impact on same-store is a positive 50 basis points, not negative because of down time?
Thomas Grimes
Correct, and Rich, we only take about seven extra days to do a renovate versus a non-renovate. So that is not much of a drag.
Richard Anderson
Okay. So, now it doesn't qualify for one of my two questions.
So Eric, did you have any look or any knowledge of the EQR asset sale and if so can you talk about that and or the benefits in general of just being bigger than you are already today?
Eric Bolton
Well no. We didn't know about it and I'm certain we'd not have been a viable candidate for that transaction.
The benefits of being bigger, I mean, within our footprint, we see and know about every deal that comes to market. We certainly are seeing a lot of opportunity and we're getting approached more so than we ever have in the past about not only one-off opportunities but bigger opportunities as well, and I think that just being in the markets that we're in now and being bigger in those markets, I mean, there are certain efficiencies that we have as a consequence from an operating perspective of some of the things that Tom and his team have done, have clearly enabled us to make some headway in terms of our operating margins, coupled with the recycling that we've done.
So, I think that there's clearly some benefit that we feel like we're creating for shareholder capital, for both the legacy CLP shareholders and MAA shareholders as a consequence of the scaling up that we've done.
Richard Anderson
Right, but I'm really talking about entity level type, getting way bigger type of as opposed to one off type stuff.
Thomas Grimes
I'm sorry. Are you asking, are we interested in getting way bigger?
Richard Anderson
Yeah.
Thomas Grimes
No. To answer your question, no, not really.
Richard Anderson
Okay, and then to the other side of that, can you comment at all your input on some of the private equity interest in multifamily? To what degree you sense some interest in your stock to any type of color that you can get from the private side would be interesting.
Thomas Grimes
You know, I mean, I think there's clearly a lot of evidence that private capital has a huge appetite for apartment real estate and as evidenced by some of the transactions that have been announced over the last few weeks, I mean, clearly there's a buy into the Southeast markets and there's a buy into not only some of the more urban oriented locations, but suburban assets as well. So, I would just say there's lot interest and we like what we're doing.
We like the portfolio that we have. We feel like we're hitting on all cylinders right now, but I mean, clearly there's a lot of interest out there.
Richard Anderson
Okay. Thank you.
Operator
Our next question comes from John Kim with BMO Capital Markets. Your line is now open.
John Kim
Good morning. I was interested in your remarks on your prepared comments on the reduced move outs to home rental and home buying.
I know it's just one quarter, but why do you think this is occurring in your markets at this point in the cycle?
Eric Bolton
It's been pretty consistently that way this year, honestly. Home buying has bounced in the 18% to 19.5% as a reason for move outs and home renting really never caught hold and is moving back.
I mean, it's a large drop percentage-wise but it's not very many units. So, to me, John, honestly, it's a little more of the same old same old.
John Kim
Okay, and then in this quarter, Houston held up relatively well, but with weaker sequential rental growth as your other markets. Have you noticed anything in the last quarter or so as far as increased turnover or slow releasing velocity [ph]?
Eric Bolton
Yes, I'll just give you a Houston update. At this point, it's just 3% of our portfolio and as you point out, it did well.
Turnover is actually well down. Turnover for Houston was down 10% with almost -- with home buying at that market dropping significantly.
We expect it to remain above 95%, but do expect new lease rents to soften a bit. So, new lease rents are about flat.
Renewals through the end of the year are up 4%. That's different than it has been in the prior six months.
Job growth there is lower than it's been, but positive for '16 and I think, at this point, absent some sort of recovery in oil and gas with the amount of new supply occurring that you would expect rents to be under pressure for a little while.
John Kim
On a scale of 1 to 10, 10 being very concerned and 1 not concerned at all, where would you rate Houston?
Eric Bolton
6, maybe. Something like that.
I mean, I don't -- I think we're going to see it soften and on rents I think we'll hold on to occupancy. I can't predict the oil and gas futures market.
I just don't have that club in my bag. So, that will depend, but in a long term, we love it and it will produce opportunity.
If it drops off further than we expect, it'll produce a buying opportunity for us. We've got plenty of room in our portfolio to add in Houston, if the opportunity is there.
John Kim
Thank you.
Operator
Our next question comes from Wes Golladay with RBC Capital. Your line is now open.
Wes Golladay
Good morning, everyone. Excellent quarter.
Sticking with the topic of softening markets, are there any other markets where you're seeing the initial signs of softening?
Eric Bolton
No. Honestly, Houston is the one sort of worry bead for us at a material level.
Wes Golladay
Okay, and then, with the strong leasing environment, is it harder to negotiate with the developers or are they just still looking to move on to the next project? Can you give us a sense of deal volume and your close rate versus prior quarters?
Eric Bolton
It's been pretty consistent, Wes. I mean, the deal volume is pretty high.
Close rates are pretty low. We're seeing a lot of opportunity.
I think that, we're going to have to see -- developers are still holding pretty strong right now with their asset pricing. So I think that the fundamentals of being as strong as they are and continuing to be as strong as they are is -- we haven't seen any real movement in cap rates or any real sense that pricing is starting to soften in any way.
Wes Golladay
Okay, thanks for taking the question and keep up the good work.
Thomas Grimes
Thanks Wes.
Eric Bolton
Thanks Wes.
Operator
Our next question comes from Gaurav Mehta with Cantor Fitzgerald. Your line is now open.
Gaurav Mehta
Thank you. Good morning.
Going back to the transaction market, can you comment on what you're seeing for the older assets that you have sold so far? Is there room to maybe sell more than what you've sold?
Eric Bolton
We feel like -- I mean, the appetite's very good out there for really any apartment real estate right now, whether it be brand-new or slightly older. Having said that, we took advantage of it and we sold 21 assets year and only picked up five thus far.
So, huge net sell this year. We like where we have a portfolio at this point.
We exited 11 markets -- 11 tertiary markets. We very much believe in the same strategy that we've had for some time.
We like the markets that we're in. We like the split between large and secondary markets.
So, we're not after any sort of -- we've done the transformation that we're after and when you look over the last five years, as I've mentioned, we've sold over 13,000 apartments. So, we've accomplished a lot of the repositioning that we are after.
I mean, going forward, we will continue to obviously always look at opportunities to recycle capital where we can create better returns on that capital for the long-term, but we'll be in a position to be a little bit more patient with the process. So, we'll be looking to clearly match fund our acquisition needs with dispositions and so, it'll be a different approach.
This year, we stepped up and went ahead and made the decision to pull capital out of a number of assets that we felt like -- in markets that we didn't -- were not really long-term hold for us, but -- so what we're left with today, we're pretty comfortable with.
Gaurav Mehta
Okay, and a follow up on large and secondary markets. If I look at the revenue variants between large and secondary, it seems like it has been converging for the last few quarters.
Would you say is that really a function of you exiting the 11 lower growth secondary markets or is there something else going on in those markets?
Eric Bolton
Well, I think it generally is a function of, as we continue to move further into the economic recovery, the secondary markets are starting to pick up a little bit more traction on employment growth. These secondary markets continue to not see the supply pressure volume that you see in the larger markets and so as you may see, if you will, a little moderation take place in some of the larger markets as a consequence of supply continuing to come into those markets.
The secondary markets being a little later to show economic recovery and employment recovery are starting to get a little bit more traction on the demand side of the equation and still are not seeing the level of supply pressure that you see in some larger markets. So, it's playing out as we expect.
I think as you get further into the cycle, you continue to see that performance delta begin to close a little bit. I think you actually have to get into a much more of a recessionary-type environment for the secondary markets to actually outperform.
We've see that in the past. We saw that back in 2008, '09 and part of '10.
I don't think we're headed back to that kind of an environment, but you never know and that's why they're there.
Gaurav Mehta
Okay. Thank you.
Operator
Our next question comes from Buck Horne with Raymond James. Your line is now open.
Buck Horne
Hey, thanks. Good morning.
I guess, Eric, if you could go back to some of the comments you made about the study that you were talking about earlier -- very interesting trends and I'm just wondering, if you've got any data in the Mid-America portfolio that maybe supports some of the stats you're talking about? I mean, have you seen any changes this year in the median age of new tenants?
Are you seeing a skew towards younger renters coming in or likewise have you seen any changes in the median income of your new tenants? Are you getting that higher credit quality renter coming in?
Thomas Grimes
Yeah.
Eric Bolton
This is Tom by the way.
Thomas Grimes
Yeah, sorry. Dial it down a second.
Tom speaking. I think the Gen Y study by ULI reflected reality, not really a change.
So, our rent income ratio has bounced between 17% and 18%, and that's been very good. Average income of $66,000.
50% of our residents are Gen Y and another 15% in that -- or another 20% of that, 35 to 44 group. So, what we're seeing is across all facets of our portfolio, large and small, our reality ties pretty close to what that ULI study shows demographically.
Eric Bolton
But, I will say that we are seeing income levels continue to move up in our portfolio, both as a consequence of improving employment market and frankly, as we continue to improve the quality of the portfolio that we see that happening, but after four or five years of pretty steady rent growth, our rent to income ratios are holding very consistent in that 17% to 18% range. So, by definition of course, incomes are going up at a level sufficient to keep that ratio in line.
So, the point obviously in putting some of this information out is just to bring home the fact that we see a lot of appeal amongst this millennial generation for a lot of these suburban locations in the South-eastern markets, and it doesn't all have to be downtown.
Buck Horne
Great. Very helpful, and switching to kind of the financing market.
It sounds like the GSEs have tightened up their belt at least through year end on funding some new projects that are out there till they can reset their allocations. I'm wondering if you've seen any changes in pricing from LICOs or pension money that's out there and just how does that balance -- fit with your balance sheet capability and is it possible that you might see some deals come through before year end that you guys can act on, it might give you some upside to the acquisition budget?
Albert Campbell
Well, I'll certainly give you on what we're seeing in the agencies and life insurance companies, Buck and consistent with what you're saying, they've both -- I think have hit their cap a couple of months ago and what we're seeing is a lot of deals that come that are really -- when they get across their desk, they're pushing for January -- January, February. So we definitely -- and yet the life companies are there, but I think given the open window there I don't think they're being aggressive in price to pick up volume.
I think they're kind of holding their pricing standards when they're there, is what we're hearing. So, we would certainly expect that there would be potential opportunities.
As you say, we still have what, another $100 million this year left to dive into our guidance for our acquisitions. So, we're hopeful that as you move close to year end with that year end point drawing clear, there'll be some people who for a portfolio reason or for some reason want a deal done by year end and our strategy is to have very low-cost and very flexible capital and we certainly have that with our credit facility, $750 million.
We have plenty of capital. So, we can certainly take advantage and our leverage is as low as it's ever been.
So, if that opportunity comes we're certainly ready to take advantage of that and we think that's possible going forward. I think that agencies we have heard to date, they still will have some commitment to the environment next year and feel good that that will continue to produce support for liquidity next year.
Buck Horne
Very helpful guys. Thank you.
Eric Bolton
Thanks Buck.
Operator
Our next question comes from Dan Oppenheim with Zelman. Your line is now open.
Dan Oppenheim
Thanks very much. I was wondering if you can talk a little bit more in terms of the acquisitions here in terms of just looking for more through the end of the year.
Is that something where you've some identified at this point or is that where there's a hope that there'll be some where there'll be some sellers with an urgent timeline in the last two months of the year here?
Eric Bolton
We've got one opportunity currently under contract that we're working through due diligence on right now that would get probably close to half of that opportunity should it close, but we typically just over the years have always seen in the last couple of months of the year. People get a little bit more interested about getting something done and we track a lot of deals over the course of the year that we pass on or that we feel like pricing has gotten away from us and often times those deals fall out of contract and then they circle back around and that typically happens the last couple of months of the year.
So, we're going to be patient as I mentioned earlier, but we think it's conceivable that we'll get another deal or two done by year end.
Dan Oppenheim
Okay. Then in terms of the disposition environment, I think you did a great job earlier this year in terms of selling based on just the appetite from buyers out there and I heard your comments in terms of being happy and comfortable with the current market position.
So, I guess, there's a difference between the content with the supply demand dynamics in a market versus the efficiency site and with some of the secondary markets where it's still pretty small in terms of the overall value there, how do you think about that in terms of the efficiency if this environment continues would you look to sell out of some more of those markets?
Eric Bolton
We feel like we're able to handle the operations of those secondary markets on a fairly efficient basis, because of course, recognize that they're all in the Southeast and so we can get to them all fairly easily, fairly quickly. We have divisional offices in Atlanta and in Jacksonville, in Nashville, in Dallas and in Charlotte, and so you know, it's pretty easy for our folks to stay connected and we don't think that we'd really give up a whole lot in efficiency and we gain a whole lot in diversification, value and benefit.
Dan Oppenheim
Great. Thank you.
Operator
Our next question comes from Tom Lesnick with Capital One. Your line is now open.
Tom Lesnick
Good morning. My first question just has to do with the potential for a rising rate environment.
Obviously, yesterday people on the Street read through the Fed announcement and the probability of a rate hike jumped up by year end, but some of your private competitors in the Southeast likely need a greater amount of leverage in order to execute deals, and therefore the logic is that cap rates in your markets might be more sensitive to the rate increase. I guess, what's your view on that and since you're the largest fish in the sea, so to speak, does that actually give you an increased competitive advantage for acquisitions?
Eric Bolton
Well, we do think that in a rising rate environment where cap rates get to move up a little bit and financing cost move up a little bit, we do probably net-net get more of a competitive advantage in that environment. I do think that we have seen a lot of fairly large institutional capitalists, institutional investors in most of these markets that we're in, in the Southeast and so these are folks who have clear execution capabilities and strong balance sheets, but as you point out, they are using the financing environment to their advantage right now.
I do think that if we do see over the next couple years, that dynamic change a little bit that net-net probably creates more external growth opportunity for us.
Tom Lesnick
Thanks, and then on I saw your acquisition guidance was revised slightly lower at midpoint. Are we to read through on that and assume that maybe that's you guys just being a little bit more conservative at this point in the cycle or how should we be looking at your investment in external versus internal value creation opportunities going forward?
Eric Bolton
Well, I mean, I think the read through on that is just more of a function of what the external market is experiencing as opposed to any change in our part. We've always had a fairly disciplined approach to how we deploy capital.
We've got some very defined protocols that we've used for over 20 years and in some market environments, it creates a little bit more of a challenge to find ways to put money to work on a basis that will meet those hurdles because the market's gotten a little bit frothy, which is the situation we find ourselves in right now. So there's no change from our perspective internally on anything that we're doing.
It's just market conditions have created that. So that's the point.
I'm sorry. What was the second part of your question?
Tom Lesnick
Just, I mean trying to get in that view, would we expect to see you perhaps increase your redevelopment program going forward and look for internal value creation opportunities?
Eric Bolton
Well, we certainly are working that angle of capital deployment as aggressively as we can. I think, Tom and his team are looking at something around 5,000 units this year.
We probably will have something comparable to that next year. What we find is that, if we begin to accelerate that or push that in a more aggressive fashion, we typically start to run into a little more vacancy loss and a little bit lower return on the capital when we start to press that agenda much more aggressively.
So, we're going to push it as hard as we can, but we're not going to push it a point we start to compromise returns and we think roughly around 5,000 units a year is about what we can handle without -- and keeping the returns very, very attractive.
Thomas Grimes
And keeping the test correct. I mean, it is very important to us to renovate.
It's easy to do a renovate and think that you got it. It's is harder to do a renovate and know that you got the return.
So, when we are doing a renovation, we do the redeveloped unit and release it right next to a non-redeveloped unit, and we measure the distance between the two so that we know we're getting a fair return on our capital. If you go too hard, you lose the ability to be disciplined about it.
Operator
Our next question comes from Drew Babin with Robert W. Baird.
Your line is now open.
Drew Babin
More of a top down question, many of your markets have benefited a lot from just not a lot of new supply deliveries, in kind of the 2010 to 2012 timeframe and elevated supply growth that we've seen in the last few years to really just kind of fill that void. Assuming demand kind of consistent with 15 levels going forward in '16, '17, '18, how much runway do you believe there is before the inflection point where supply kind of just causes some marginal deceleration in fundamentals and kind of what markets do you expect that to happen in quicker?
Eric Bolton
Drew, I've long believed that where you begin to see the dynamics and the chemistry if you will in the leasing environment materially change and it's really driven on the demand side of the equation. I think that the supply levels that we're seeing today as you point out in many cases are just in some cases, in some markets catching up, like certainly -- we've got a completely different sort of dynamic now with the millennial generation and the whole psychology, and in various stages in society to continue to create sort of an elevated level of demand at least for some time that we haven't experienced in the past.
So, it's really hard to see any sort of material weakening taking place over the next couple of years. As a result, on the assumption that the economic environment and the job growth environment continues at its current pace, I think where you see things really change materially is all of a sudden we have a shock to the economy.
We have a shock to a particular market. Take Houston as an example, where all of a sudden the demand dynamics change and you never frankly in many cases, never see it coming, and it catches everybody off-guard a little bit and then you still of course have the supply pipeline that's still coming online and you've got to kind of work your way through that and that's where you see material change in the leasing environment, material change in your ability to push pricing.
So absent a tech meltdown in Atlanta or a [indiscernible] oil breakdown in Houston or some other sort of market specific kind of event that I could point to broadly speaking as long as the economy stays healthy we'll be okay, but if we have some sort of a crisis elsewhere in the world or something happens that causes the U.S. economy to all of a sudden nosedive, I think that, that could really change the equation quite a bit, because we'll still have the supply coming online and we'll have to deal with that, but we don't see that happening.
Meanwhile, what we attempt to do is continue to build strength in the portfolio, continue to cycle capital, recycle capital, get it exactly positioned as we want, stay balanced, stay diversified, build balance sheet strength, so that when those things do happen and you see a material change in the environment we're first of all, okay and second of all in position to take advantage of it.
Drew Babin
Thanks for the insight. In your markets -- and I'll use Dallas as an example, a good deal of supply coming online this year and it's looking like next year as well is kind of concentrated in CBD sort of the same high end high rise type of product.
In deliveries for maybe the second half of '16 and '17, are you starting to see developers' kind of target the suburbs a little more at the margin than they have been in the last couple of years?
Eric Bolton
I don't think there's any real evidence on that. I think that, we find that construction costs continue to create some pressure and I think that uniform across whether you're talking about more urban locations or suburban locations.
I think that -- we've not seen any evidence to suggest that all a sudden now, suburban locations are going to be more exposed to overdevelopment. I think that we continue to see a lot of interest in developers focusing on some these infill locations.
You may see a little bit more effort taking place at some of these sort of what I call inner loop areas where they can go in and areas being re-gentrified in some fashion in they go in and do some teardowns. We see some of this happening in north of downtown, Atlanta area as an example area [indiscernible] so but I don't think there's any evidence at this point that we can see, suggesting that suburbs all of a sudden are going to be the big focus for developers going forward.
Drew Babin
Thank you. Great quarter.
Operator
Our next question comes from Tayo Okusanya with Jefferies. Your line is now open.
Omotayo Okusanya
Yes, good morning. Great quarter.
I just started to look out a little bit further, 6 to 12 months, could you just talk a little bit about operating expenses and kind of what you think that's going to be going specifically if you think you're going to have another year like this with taxes where things missed out off pretty high and then everything started to moderate later on.
Eric Bolton
Well, I think, overall, let me start with that Tayo, we don't expect expenses as we move in the future, even in 2016 to be higher than they are today. I think we do continue to expect some pressure on the relative basis from taxes maybe a little less than we felt this year, except we were five this year and maybe we see that comedown but, overall it's still a third of our expenses and be higher than the growth rate of other expenses.
So, I think across the board we expect next year to be not sharing expenses and under control.
Omotayo Okusanya
That's helpful. Then just in regards to particular markets.
You did make some comments about Houston earlier on. In Atlanta, your same store revenue also kind of dropped over 100 basis points quarter over quarter and just curious if there's anything specific going on in that market.
Thomas Grimes
No, Atlanta is our strongest market. So, pricing momentum, there is good, results are good.
I think if you look at the year-over-year comparison, second quarter to year-over-year in third quarter and give us a little bit of an odd story because the cop was much tougher in third quarter than it was in second quarter, but pricing momentum very strong in Atlanta and we're excited to be there and excited that it's a large market for us.
Omotayo Okusanya
Okay. That's helpful.
Thank you.
Operator
Our next question comes from Haendel St. Juste with Morgan Stanley.
Your line is now open.
Haendel St. Juste
Can you guys provide a bit more color on the two assets acquired, the two leased up assets during third quarter? Perhaps some thoughts on stabilized yields and underwritten IRRs and then, what was the rationale for buying assets in Kansas City where you own just, I think two assets in Newport News or Virginia Beach, where you also own just a few assets.
It seems a bit out of line with your goal of trying to rationalize some of your non-core market exposure. So is this you're signalling your intent to build some scale in these markets and now you consider this to be core markets for you or maybe more a reflection of the challenges of investing in some of your larger markets?
Eric Bolton
I think that both acquisitions are exactly in line with what our strategy is that we outlined. We've long said that Kansas City being a secondary market, we think fits very well within sort of the dynamic we're trying to create for the secondary market segment of the portfolio and so we've been active in that market looking for opportunities, being patient as we look for opportunities and the property that we acquired in Overland Park is, we acquired it at something around 5.2, 5.3 cap rate, in a stabilized yield around 5.7, 5.8.
So we feel very good about that investment and it continues to add to what we expect to be a growing presence in Kansas City. The acquisition in Virginia Beach, we've got several properties in that area.
Again, it's a different dynamics as far as that area is concerned. A lot more government based employment, but we've made an effort to expand our footprint in that area.
Fredericksburg is an area we've focused on. Charlottesville, Newport News, Hampton.
We've got a fair amount of presence in that area and we plan to continue to stay active in that market as well and likewise again, that was property that we had been tracking for a couple of years. We acquired it at more around a 5.5 cap, closer to 5, again 5.8, 5.9 in yield somewhere in that range and it's a brand-new asset.
So, we think it'll be a good long-term investment for us.
Haendel St. Juste
I appreciate that and then one more, if I may, a quick one on capital location. So you allocated some of your disposition proceeds towards paying down debt this quarter as opposed to buying assets, and now you're about 5.75 at EBITDA down from about 6 last quarter.
So maybe you can share with us an update on your leverage goals today and where you want your leverage to be over the course of the next year, two years in terms of debt to EBITDA, and then as part of these capital allocation and/or balance sheet management goals, how does stock buybacks play?
Albert Campbell
Haendel, this is Al. I'll answer the first part.
I think in general, our leverage goals really haven't changed. We've long been in the 40% to 42% debt to gross assets as the right leverage level, given our strategy with the lower risk, minimal development high-quality cash flow diversified markets.
That make sense for our Company. We're below in that right now, not so much focused on that as much as being patient on the acquisition side.
We recycle capital. We haven't yet -- we're a net seller to the tune of about 110 million right now and so we're being patient with that, but we're comfortable with 40% to 42% range.
I think over time, as we move forward you'll probably see us stay closer to the lower end of that range particularly as we continue to build and maintain balance sheet strength to have opportunity for the future when things change in a year or two. When, we don't know, but things certainly do at some point.
We want balance sheet strength to take care of that. So, our strategy really hasn't changed and we feel like it's strong.
We do think that the debt to EBITDA, we do expect it to stay below 6. I think it's an important mark.
So, that was good to see.
Eric Bolton
And Haendel, on the share buyback, it's something we've done in the past. We obviously understand the approach.
We understand the logic behind it. It's something we continue to monitor and keep an eye on.
We, at this point, we feel like we can create better returns long-term with being patient with the capital that we have, deleveraging a little bit, building capacity for what we think will be better buying opportunities in the future and looking for the opportunities and scratching a corner for a few opportunities that we have gotten this year and those are going to be good returns on capital, we believe, but should the market turn particularly negative for some reason and we find ourselves trading at persistent meaningful discounted value, we certainly understand the logic behind using capital to reinvest in existing portfolio through share buyback and we'll continue to monitor it.
Haendel St. Juste
Remind me again, do you have a current authorization in place and if so what's the capacity?
Eric Bolton
There is one there. It's been some time ago.
We visit with our Board on this periodically, but we do have a plan that's been there for some years. We'll probably be updating that at some point later this year.
Operator
And it appears we have no further questions at this time. I'll turn it back to our speakers for any closing remarks.
Eric Bolton
No closing remarks. So thanks everybody for joining us and we'll see a lot of you at NAREIT in a couple of weeks.
Thank you.
Operator
This does conclude today's teleconference. You may now disconnect.
Thank you and have a great day.