May 8, 2016
Operator
Good morning, ladies and gentlemen. Thank you for participating in the MAA First Quarter 2016 Earnings Conference Call.
At this time, I’d like to turn the conference over to Tim Argo, Senior Vice President of Finance. Mr.
Argo, you may begin.
Tim Argo
Thank you, Lindy. Good morning.
This is Tim Argo, Senior VP of Finance for MAA. With me are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO.
Before we begin with our prepared comments this morning, I want to point out that as part of the discussion, company management will be making forward-looking statements. Actual results may differ materially from our projections.
We encourage you to refer to the Safe Harbor language included in yesterday’s press release and our 34 Act filings with 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 are certainly welcome to follow-up with us after we conclude the call.
Thank you. I’ll now turn the call over to Eric.
Eric Bolton
Thanks, Tim. As detailed in our earnings release, MAA started 2016 with solid first quarter operating results that were ahead of expectations.
Average daily physical occupancy at 96.2% and effective rent growth at 4.5% drove same-store revenues higher than forecasted. We expect the solid momentum in leasing across our portfolio to continue over the balance of the year.
As Tom will outline in his comments, in the first quarter, our properties continue to post low resident turnover, strong occupancy, and captured solid pricing performance. Importantly, we enter the busy summer leasing season with the portfolio well-positioned to take advantage of the favorable leasing conditions.
Given the strong start to the year, we have raised the midpoint of our earnings guidance for core FFO for the full-year to $5.81 per share. Investor interest in apartment real estate remains high across our markets and we continue to find the acquisition environment challenging with pricing reflecting strong demand from private and institutional buyers.
Cap rates continue to hold up, despite a higher volume of new supply coming into the market. Our deal flow and transaction pipeline is more robust than we’ve seen over the last of couple of years and we’re certainly underwriting a higher volume of opportunity.
We continue to believe that as we work later into the cycle, we will find more opportunities that meet our underwriting criteria. Until then, we plan to remain disciplined and deploy capital only when we are comfortable with the value proposition and earnings accretion to be captured.
As Al will recap, our balance sheet is in a very strong position and we continue to build capacity for future growth. As noted in our earnings release, Moody’s recently moved MAA’s current Baa2 rating to a positive outlook.
We believe our established record of producing steady value growth and strong operating performance coupled with credit and coverage metrics that are stronger than any point in our company history has MAA well-positioned to continue to build our long-term competitive advantages across our footprint. After several years of strong operating performance, questions surrounding the sustainability of the current leasing environment is certainly a hot topic.
Based on what we are experiencing across our portfolio, which is diversified across urban, inner loop, suburban and satellite city submarket locations in both large and secondary markets, demand does not appear to be weakening and all indications are that we will continue to capture good leasing velocity over the next few quarters. Conversations with a number of developers suggest that construction financing is becoming increasingly harder to secure and those pressures coupled with higher land and construction costs are raising the bar to justify new starts.
It’s worth noting that new construction permitting across our markets is down so far this year compared to the trends we’ve seen over the last two years. We continue to believe that new supply trends are unlikely to materially disrupt the positive momentum for apartment leasing within our submarkets.
Across our portfolio, the outlook for the ratio of new job growth to new apartment deliveries actually improves in 2017 as compared to this year. And while our crystal ball is certainly no better than anyone else’s, I do still believe our business retains cyclical patterns, it’s difficult to see any sort of near-term significant deterioration of leasing fundamentals.
While our occupancy comparisons get tougher in the back-half of the year, given the essentially full occupancy status of the portfolio last year, the rent trends remained encouraging. So overall, our focus for the balance of the year remains centered on taking full advantage of the great operating fundamentals to drive earnings and build platform strength and capacity, while remaining very active in the transaction market and disciplined in our assessment of new growth opportunities.
Before turning the call over to Tom, I do want to thank our MAA associates for their focus and efforts in preparing for the upcoming busy summer leasing season. You have the portfolio well-positioned and I very much appreciate all of your hard work and great results.
Tom?
Thomas Grimes
Thank you, Eric, and good morning, everyone. Our fourth quarter NOI performance of 7.1% was driven by revenue growth of 5.5% over the prior year and 1.1% sequentially.
We have good momentum in rents and saw effective rents increase 4.5% on a year-over-year basis. Strong average physical occupancy contributed 60 basis of revenue growth over the prior year.
Overall, expenses remain in line, up just 2.9%. Expense discipline has been a hallmark of our operation for years.
Our industry leading initiatives, such as our vendor owned inventory shops stocking program, which will be completed this year have allowed us to keep the expense line consistently in check. April demand trends continue the positive momentum.
Average physical occupancy of 96.2%, ran 40 basis points ahead of last year. Our 60-day exposure, which is current vacancy plus all notices for a 60-day period is just 8.2%, in line with the same time last year.
April blended rents on a lease-over-lease basis are up 4.8%. Occupancy exposure and pricing are all in good shape, as we head into our summer leasing season.
On the market front, the vibrant job growth of the large markets is driving strong revenue results of 5.9%. They were led by Orlando, Fort Worth, Atlanta and Charlotte.
The secondary markets achieved 4.6% revenue growth. In these markets, we are benefiting from improved job growth, as well as a sophisticated operating platform that has competitive advantages across our footprint in markets.
Revenue growth in Charleston, Greenville, Savannah and Jacksonville stood out. As mentioned above, momentum is strong across our markets with occupancy, rent growth and exposure all showing positive trends.
Our only market worry bead is Houston, which represents just 3.5% of our portfolio. We will continue to monitor closely and protect occupancy in this market.
Move-outs for the portfolio were down for the quarter by 4.4% over the prior year and turnover remained low at 52.2% on a rolling 12-month basis. Move-outs to home buying were down 4.6%.
Move-outs to home rentals were also down 14% and represent less than 7% of our total move-outs. Our focus on minimizing the time between occupancy, again paid off, the decrease in average days vacant between occupants for the quarter helped drive the first quarter average physical occupancy to 96.2%.
During the quarter, we completed over 1,400 interior unit upgrades. We expect the redevelopment – we expect to redevelop approximately 5,000 units this year.
As a reminder on average, we spend about $4,500 per unit and receive an average rent increase of $95 over a comparable non-renovated unit. This generates a year one cash return of well over 20%.
Our active lease-up communities are performing well. You will notice in the supplemental data that we completed the construction of Station Square at Cosner’s Corner II during the quarter.
It’s currently 94.2% occupied and due to the stronger than expected lease-up, we’ve moved the stabilization date forward one quarter to the third quarter of 2016. Cityscape at Market Center II is leasing well.
They are 84% leased and expected to stabilize on schedule in the third quarter of this year. We are off to a solid start and are well-positioned, as we head into the summer leasing season.
Al?
Albert Campbell
Thank you, Tom, and good morning, everyone. I’ll provide some additional commentary on company’s first quarter earnings performance, balance sheet position, and then finally on revised earnings guidance for 2016.
Core FFO, which excludes certain non-cash and non-routine items was $1.44 per share for the quarter, which represents a 9% increase over the prior year. And this performance was $0.05 per share above the midpoint of our previous guidance.
The strong performance for the quarter was primarily produced by favorable property revenues, which was broad based, average occupancy, average effective rents, fees and collections were all slightly better than expectations for the quarter producing about two-thirds of the favorability. Operating expenses, interest and G&A expenses combined to produce the remainder of the favorability.
During the first quarter, we acquired one new community located in Fredericksburg, Virginia for a total investment of $61 million, which was stabilized on acquisition. We also sold one commercial property during the first quarter, Colonial Promenade Nord du Lac located in Covington, Louisiana, which included both operating retail and land parcels.
Total proceeds for this disposition were $33.2 million and we recorded a total gain on sale of $2.4 million related to the transaction. Also, this property represented the final wholly owned operating commercial assets acquired from Colonial.
During the quarter, we completed the construction of one new community Station Square at Cosner’s Corner Phase II, located in Fredericksburg, which remains in lease-up and was 78% occupied at quarter end. We have four communities, all Phase II expansions remaining under development at the end of the quarter.
We funded an additional $13 million of construction costs during the quarter and expect to fund about $63 million to complete the current development communities over the next year or so. We continue to expect NOI yields in a 7% to 7.5% range for these communities, once completed and stabilized.
We also invested $6.2 million in our interior redevelopment program during the first quarter, capturing rent increases of 9% above non-renovated units. Our balance sheet remains in great shape.
As Eric mentioned during the quarter, Moody’s affirmed MAA’s unsecured debt rating of Baa2 and revised the outlook on the company to positive from stable. Now two of the three primary rating agencies have a positive outlook on MAA, which further exhibits the strength of our balance sheet.
At quarter end, our leverage defined as net debt to gross assets was 40.7%, and defined as total debt to market cap was 29.7%. Our recurring EBITDA covered our fixed charges of 4.2 times.
At quarter end, 93% of our debt was fixed or hedged against rising interest rates, at an average effective rate of just 3.7%, with well laddered maturities averaging 4.6 years. We also had over $645 million of total cash and credit available at quarter end, providing flexibility.
And finally, as Erik mentioned, we are revising our earnings guidance for 2016 with this release. We are increasing our core FFO projection by $0.03 per share at the midpoint to reflect both the strength of the first quarter results and also the offsetting impact of revised transaction volume and timing.
Core FFO is now projected to be $5.71 to $5.91 per share, or $5.81 at the midpoint, based on average shares and units outstanding of about 79.6 million. Core AFFO is projected to be $5.01 to $5.21 per share, or $5.11 per share at the midpoint.
You may notice in our release, that we introduced one additional metric this quarter, Funds Available for Distribution or FAD, which represents core FFO less all capital spending, including discretionary items such as redevelopment and revenue enhancing capital, as well as corporate and casualty loss expenditures. The intention is to show the overall strength of our earnings and cash flow.
For the full-year, we expect our FAD or FFO less all internal CapEx to be sufficient to cover our total annual dividend with $90 million to $95 million remaining for investment or to build capacity for future growth. We are maintaining our guidance range for same-store NOI for the full-year, along with the other components of previous guidance with the one exception, our projected acquisition volume, which we now expect to be between $250 million and $350 million for the year.
Our current plans do not includes any need for new equity during 2016 and we now expect to end the year with our leverage about 130 basis points below the 2015 year end levels. So that’s all we have in the way for prepared comments.
So Lindy, we’ll now turn the call over to you for questions.
Operator
[Operator Instructions] Our first question comes from Jordan Sadler with KeyBanc Capital. Please go ahead.
Your line is open.
Austin Wurschmidt
Hi, good morning. It’s Austin Wurschmidt here with Jordan.
Just on the investment side, at the beginning of the year you talked about match funding acquisitions with dispositions and cash flow. Given that you’ve dialed back the acquisition assumption here a bit, what are plans with the excess proceeds now?
Eric Bolton
Well, at this point, we continue to believe that we will be able to put some money to work later this year. We do have a group of properties teed up for disposition that we will look at later this year for possible sale.
But it really comes down to finding an attractive use of capital right now, which is, as I alluded to is tough. But I can tell you, we closed the one deal earlier this year, we’ve got a couple of other properties that are currently under contract going through due diligence.
So we continue to believe that as we get later in the year, that we may find more opportunities. But we just felt like, given where we were with the transaction volume so far this year that – and based on our earlier assumptions that pulled back just a tad from what we initially had thought was the right thing to do.
But we’ll see how the year plays out.
Austin Wurschmidt
Are you still assuming a ratable sort of acquisition activity through the year, or do you expect it to be front or back-end loaded?
Thomas Grimes
We have been expecting really more toward the back-half of the year starting in July through the rest of the year. Usually, as Eric mentioned, the activity picks up, as people are playing for their portfolios for the year.
So we have sort of evenly July through the rest of the year a deal a month for six months. I mean, there is no magic to that, that’s just what we’ve assumed and we believe that’s the right thing to do right now.
Austin Wurschmidt
Thanks for the detail. And then just last one from me, just based on the heavy lifting you’ve done on the sell side, I mean, would you say you are more biased on the sell, or to sell additional assets or pull back, given how strong the transaction market is?
And would you consider selling more, I guess, to reduce leverage?
Eric Bolton
No, at this point, we’ve really accomplished a lot of the repositioning we were after with the portfolio. And so we don’t have any sort of strategic agenda surrounding repositioning the portfolio at this point, other than a plan to just every year look at opportunity to pull capital out of to say 10 or 15 assets where we feel like the future growth prospects are not as robust as we could perhaps achieve with another alternative investment.
And so it’s really now at a point where we’re just looking for a steady recycling program and really more focused on match funding that process, and looking to keep the balance sheet strong, the coverage metric strong as we continue to just build portfolio strength through this sort of steady recycling effort going forward.
Austin Wurschmidt
Great, thanks for taking my questions.
Eric Bolton
Yes.
Operator
And our next question comes from Nick Joseph with Citigroup. Please go ahead.
Your line is open.
Nick Joseph
Thanks. I’m wondering if you can talk about, where same-store is trending relative to initial guidance, recognizing you didn’t change it, but 1Q results were ahead of expectations, you now have April as well and some clarity in two renewals at least for May and June?
Albert Campbell
Let me give you a little color on that, Nick. That’s a great question on our guidance change.
So the summary of it is we’ve raised guidance FFO for the year $0.03 in total. That’s comprised of really two things.
We did add $0.06 per share to our operating performance, that’s about same-store and non-same-store, which both are doing well. There’s some several lease-up committees in non-same-store.
And so for that sort of it was in the first quarter and then so we haven’t increased that part of the year $0.02 and that’s really continued similar trends that we have, pricing of 4.5% continued very full occupancy of 96.2% on average, carrying through the year as we have projected on the fundamentals. But albeit at a little bit higher level, I mean occupancy level and the rent levels are coming off the Q1 performance was a little bit higher.
That $0.06 has been offset by the change in volume and the timing of the transactions we talked about that that offsets that and takes $0.03 of that back for the year, that’s where the net $0.03 comes from. And so, we’ve maintained our same-store guidance range for the year, but obviously doing the math on that.
We’re not at the midpoint. We’re moving toward the top part of that range now.
Nick Joseph
Thanks. Sorry, go ahead.
Albert Campbell
I was just going to say, well obviously as we get more activity in leasing and real estate taxes and of some of the big arms, we’ll take a look at that in the second quarter.
Nick Joseph
Right, and then in terms of the occupancy comment, you said basically flat at 96.2%. Do you expect any variance between the quarters or should we expect pretty flat occupancy quarter-to-quarter?
Albert Campbell
We’re assuming it’s pretty to hold, I mean it’s full at 96.2% right now and we expect to hold that through the year now. And the comps for prior year as we talked about, they’ll get a little more challenging in the remaining three quarters of the year.
I think last year Q2 was around 96.1%, Q3 was higher 96.5%, 96.6% maybe and the last quarter was 96.1% or 96.2%. So what we would expect is to hold 96.2% through the year and drop the pricing to 4% to 4.5% as we talked about and that will come fall to the bottom line of NOI.
Nick Joseph
Thanks. And just the last question, the spread between the large and the secondary markets narrowed in the first quarter from what we saw in 2015.
Do you expect that to continue to narrow?
Eric Bolton
Yes, I think at this point, we feel like it will tighten as things go by, but we wouldn’t expect secondary markets to start outperforming the large markets. Right now large, job growth is so good and the situation is stable, that we would expect those to continue to lead the way for us.
Nick Joseph
Thanks.
Operator
And our next question comes from Rob Stevenson with Janney. Please go ahead.
Your line is open.
Robert Stevenson
Hi, good morning, guys. Given your commentary around acquisitions and given where you started delivering more in the development pipeline, what’s the sort of shadow pipeline that you have in terms of back half of 2016 starts or 2017 starts and how active are you out there looking for land or partners to do development projects with?
Eric Bolton
We’re pretty active talking to a lot of people. I will say this, I mean, our model and our strategy is not to bank land and so we’re not a true developer in the sense that we’re going to go out and look for land and go through zoning processes and go through the process that one typically has to go through from a full development perspective.
Our model is really built around, looking for using the relationships that we’ve got to work with developers that perhaps have if you will, projects ready to go or looking to tie up an opportunity that we find particularly attractive and essentially go at it on a pre-purchase basis. We’re having a lot of those kind of conversations right now.
Obviously at this point in the cycle, we’re being pretty careful with our underwriting and our assumptions. We’ve looked at a number of them since so far this year and frankly just couldn’t get comfortable pulling the trigger on a number of deals believing that the – what the developer was anticipating in terms of rent levels and rent growth, we couldn’t get comfortable with it.
But yes, we’re looking a lot of things right now. We’ll see what the back half of the year holds.
Robert Stevenson
Okay. And then, I mean, given the commentary around acquisition is being difficult, et cetera, with this free cash flow, I mean is there the ability to pull forward some of your redevelopment opportunities and get to them faster than you otherwise would have with the additional capital allowing you to drive rental rate higher in the interim?
Thomas Grimes
Yes. I mean Rob there is always the opportunity to do more, but there is not an opportunity to do it better.
We really want to be very disciplined in our approach of allocating capital in that area, and what we want -- this is an area where it’s very easy to look out with rose colored glasses and what we’re trying to do is turn a unit and redevelop it and make sure that a another unit is matched next to it. So that we know that the market is telling us that we’re getting that return that we’re telling you all that we have the return.
So we’ll remain pretty methodical on that and we’re comfortable with our current pace and feel good about that.
Robert Stevenson
Okay and then Tom, realizing that it’s only 3.5% of your portfolio, can you sort of talk about what you’re seeing in Houston and is it certain submarkets there that are really getting hit hardest or is it just general malaise across the entire market?
Eric Bolton
No. I mean I will tell you.
Houston during the quarter at 1.4% and we are a little more out of the inner loop if you will. I think the suburbs are holding up reasonably well.
We have one community in the energy corridor and it’s a hair lower. But as a group we’re holding on to 96% occupancy.
Turnover there is down 4.4%, delinquency trends are better and exposure is at 9%, which is little higher than the company average, but it’s hanging in there. Well, hanging in there is a wrong word, but it’s pretty consistent across the Board.
Robert Stevenson
Okay. And then Al, what was the cap rate on the acquisition in the first quarter?
Albert Campbell
It was about -- I’ll give you through the NOI yield was just over 6%, 6.1% and the cap rate, which is an economic was about 5.75%, 5.80%.
Robert Stevenson
All right, thanks guys.
Operator
And we’ll take our next question from John Kim with BMO Capital Markets.
John Kim
Thanks. In your large markets, the expense growth was actually higher sequentially than it was year-over-year, I imagine a lot of that was due to taxes.
But did this come in ahead of your expectations and is there a concern that expense growth might come in at the high-end of your guidance range?
Albert Campbell
John, I’ll give you some of this, and Tom might have some on this as well. But no, I mean the tax – there tends to be a lot of volatility sequentially on expenses, particularly from Q4, Q1 and you put your finger on taxes, is a big issue.
Lot of times you have favorable appeals or final results coming in at the end of the prior year. And then in the next year, you’re starting with taxes, which are a quarter of your operating expenses or more and you’re starting on a full run rate for the year.
So that created a lot of volatility that is one significant point that that’s probably the trend across. Maybe, Tom you may add?
Thomas Grimes
No and also, I mean John, that’s the point. I think we’re quite confident in our ability to manage expenses and guidelines for the rest of the year on those items.
John Kim
Okay. And then, I think Tom you mentioned that move-outs were low this period.
What do you attribute this to and is this sustainable?
Thomas Grimes
It is not just sustainable. It’s been going on for probably four straight years that we’ve seen declining turnover numbers.
The driver again this year was the reduction in home buying, where folks continue to appreciate the flexibility of leasing a home, job transfer is the other reason for moving, and it stayed fairly steady. But it’s really home buying that’s pushing the change.
Eric Bolton
Typically John I’d tell you that, what I think probably causes turnover to materially start to move up, frankly, as we start to see the economy start to heat up. Because as Tom alluded to the two biggest factors that create turnover, are people leaving us to buy a house or they’re -- which is actually the number two reason.
The number one reason, people leave us is because of a change in their employment and a job transfer and things of that nature. And what we typically see is, when the economy starts to really get even more robust, turnover can pick-up a little bit.
But of course with that improving economic environment, it also continues to create more demand for our product. And so we tend to think that as we see maybe a little pressure on turnover expenses that we likely will capture it in more robust rent growth, if we do in fact see material pick-up and turnover begin to occur.
John Kim
So would you characterize the employment growth as moderate and not very strong right now in your market?
Eric Bolton
Yes, I would say it’s better than – a little better than moderate, but we’ve seen it stronger, that’s for sure. I think it’s in pretty good position right now and of course we’re seeing people stay in our apartments longer than they ever have and lease terms have lengthened out, a good bit.
So we – it’s hard to see anything right now that’s going to materially change the turnover pattern absent a major change in sort of economic conditions.
John Kim
Thank you.
Operator
And our next question comes from Rich Anderson with Mizuho Securities. Please go ahead.
Your line is open.
Rich Anderson
Thanks. Good morning, great quarter.
So even though you’re not saying it, anyone who is kind of listening to this call is probably expecting a same-store guidance increase next quarter, and I could appreciate you holding off and doing that this early in the year. But what would have – what would it take for you to have to reiterate your 4% or 5% same-store NOI growth?
And I’ll just tell you, we put in 4% average same-store NOI growth for the remaining three quarters of the year to get you just below 5% for the full-year. You said you’re confidence – confident in expense control.
So it’s hard to imagine it won’t go up, but I’m just curious what has to happen for it to stay the same?
Albert Campbell
Well, I think you put your finger on it Rich, and your math is, I would agree with that in terms of expectations for the remainder of the year. And I think what we’re betting on or expecting is to continue stay very cool in occupancy 96.2% through the year and then have pricing growth of 4% to 4.5% that would be little above the midpoint on that that continues to go out well.
And if those things occur, I think we’re confident that that the math that you indicated and the position range is correct. So we would have -- it would have to be a fall off in occupancy and rents as we push through the year.
Obviously expenses, it could be as well, but I think we’re more confident in the historical and current control events.
Eric Bolton
I think the two biggest line items are, the year-over-year change in occupancy and the year-over-year change in real estate taxes, and I think both of those line items get a lot more clarity over the next three months and I think that that’s really what it comes down to. The rent trends are there…
Albert Campbell
Yes.
Eric Bolton
And as long as we don’t see any volatility beyond what we anticipate in terms of performance on occupancy we’ll be good. And of course we don’t really get good clarity on real estate taxes until really late in summer.
Albert Campbell
Yes.
Rich Anderson
So you’re saying the occupancy and taxes become more – there is more clarity because they become more difficult comps?
Eric Bolton
No, just because we get more information. We have obviously more of our leases expiring in the busy summer months than we typically do in the winter months.
And so reprising and releasing those units with that greater level of lease expiration activity, that’s a point of volatility, if you will. And then as I mentioned, we won’t see clarity on real estate taxes until late Q2 or early Q3.
Rich Anderson
Okay. And then can you comment on some of your Florida markets, in particular Orlando was really strong.
And the reason why I’m asking about that specific market is, because others have been pointing to Florida as an area of strength, but I’m not so sure how long that will stay intact. And so I’m wondering if those are areas where you might consider pruning as long as it’s really hot and just a comment under long-term prognosis of your plan in Florida, in some of your key Florida markets?
Thomas Grimes
I will take the performance side of things. To us, Florida is moving along nicely and we expect that to continue.
There is not a sign, early sign that a slowdown is coming in Orlando, Tampa or Jacksonville or South Florida for that matter. So we feel like those frankly were a little behind the Texas markets and Atlanta coming on board strongly.
So we feel like they’ve got ways to run on that one.
Rich Anderson
Okay, great. Thank you.
Thomas Grimes
Thanks Rick.
Operator
And our next question comes from Drew Babin with Robert W. Baird.
Please go ahead. Your line is open.
Drew Babin
Good morning.
Eric Bolton
Good morning Drew.
Drew Babin
A quick question on your ROI CapEx projects related to Colonial. Now that some of those properties are now in their second year post renovation, is there any clarity on what year two cash flow yields may look like on those properties?
Is it likely to look a lot like year one or is there some kind of diminishing benefit to the renovations?
Albert Campbell
I’ll just give an overall stroke on that Drew and not on a property – project-by-project basis. But one thing you’ll notice in our guidance this year is that our cash flow growth is partly built on the fact that our recurring CapEx needs go down a little bit this year.
And that’s planned and expected, and it’s a good part of our growth story. And so as we bought Colonial and we worked through some of those issues and had a little higher recurring CapEx for 2014, a little bit in 2015.
And so 2016 is a better place to be to, kind of, touch on some of your comments, I don’t have a property by property or project by project, I think, we look at it as overall portfolio at this point. But it certainly reflects the points that you’re making.
Drew Babin
Okay, thank you. And then secondly on the Fredericksburg acquisition, I think you mentioned that it was $61 million.
I mean, looking in supplemental to the year-to-date NOI of $300,000, I’m just curious, is there a renovation that was just completed? You said it was acquired and stabilized, so I’m just hoping to kind of square away where the cap rates come from?
Albert Campbell
That’s just one month, that thing was bought, but really had one month of operation, call it March. And so $300,000 really just represented that one month, Drew, so you wouldn’t read too much into that.
That was really there to provide you the ability to pull that out for NAB building purposes, if you wanted to. And so, you can – you would have to get a full-year run rate that’s accurate, which we can provide for you offline, if we need to.
Drew Babin
Right, okay. I just thought that was a quarterly number which would…
Albert Campbell
Yes, you could take that really times 12 probably and get close.
Drew Babin
Okay. That’s helpful.
Thank you.
Operator
And our next question comes from Ivy Zelman with Zelman & Associates. Please go ahead.
Your line is open.
Ivy Zelman
Thanks for taking my question, guys, I appreciate it. If you are thinking about maybe the next few years and strategically some of the biggest opportunities that you are excited about and then maybe where you would be the most challenged and most concerned, I know you don’t have a crystal ball on the economy, but as you think about it just from a competitive perspective, or where you feel that there is the greatest challenges versus the greatest opportunity, just to see how you guys are thinking about?
Thanks.
Eric Bolton
Well, Ivy, this is Eric. I would tell you that, I’m more excited about sort of the next four or five years and I can ever remember.
We think we have the – both the platform and the balance sheet in such a strong position that as the opportunity unfolds over the next four or five years, I think that the opportunity for us to capture new growth – new value, if you will, is going to get better. I think that the thing that I think you have to think about is that, at some point over the next four or five years interest rates will probably start to move up a little bit.
I think, we all hope, of course, the economy continues to move along, but it is cyclical. And while we’ve had some great performance dynamics over the last four or five years, it probably does moderate at some point over the next four or five years.
And as a consequence of rising rates and as a consequence of perhaps reaching more normalized sort of trends from an operating perspective, I think our competitive advantages in the markets where we focus are capital growth. And I think our ability to create value versus what these markets are what – versus what people typically associate with these markets grows.
And at the end of the day, what we are attempting to do is find a way to take shareholder capital and create a competitive advantage for, both in terms of how we are able to deploy capital and then how we are able to operate those investments once we make them. And I think both of those things get better for us over the next four or five years.
Ivy Zelman
That is extremely helpful. And I think the value add and what you are doing to drive the cash flow is very impressive.
So congratulations, guys. Thank you.
Eric Bolton
Thank you.
Albert Campbell
Thanks, Ivy.
Operator
And our next question comes from Neil Malkin with RBC Capital Markets. Please go ahead.
Your line is open.
Neil Malkin
Good morning, gentlemen. Nice quarter.
Eric Bolton
Hi, Neil.
Neil Malkin
First question, we’ve been hearing some rhetoric that now that the supply is probably peaking particularly in urban markets, now that comparatively land and pricing are more advantageous in the suburban areas. Are you seeing any early indications that supply maybe getting a little bit more elevated in some of your suburban markets that it performed well?
Eric Bolton
No, really not, Neil. I mean, I think that the pressures on construction costs, the pressures on land costs, those pressures continue to exist in the suburban locations as much as they do in the urban locations.
And I would tell you, as I mentioned in my prepared comments, I mean, we see permitting next – so far this year is down significantly from what it’s been for the last two years, 40% to 50% down. And so – and when you look at sort of the expectation of deliveries and contrast that against expected job growth, next year looks stronger than this year.
So, we haven’t seen any evidence suggesting that supply issues that have – the supply that has been creating more issues in some of these more core markets in urban – heavy urban oriented locations is now going to migrate to the suburbs, we certainly see no evidence of that at this point.
Neil Malkin
Okay. Great, thanks.
And then, on the – just considering supply is elevated, are you seeing more opportunities to acquire developments that are at the end of completion, or in lease-up currently, or is pricing just a little bit too aggressive for you?
Eric Bolton
Well, that’s – I mean, that’s – I do think that that’s where the biggest window of opportunity will continue to grow is those projects – new projects that are in the midst of lease-up. That is the point of sort of maximum pressure from a development perspective is, when you get to that point where most of all the units have been delivered, you are no longer in a position to be capitalizing a lot of the cost, you’re still in the lease-up mode, but yet you haven’t reached stabilization or break-even, if you will.
Usually you are late in the term of the construction financing. And if you are not getting the rents and/or so lease-up is not growing as fast as you thought it would, that’s where the most pressure is created.
And frankly, that’s where we think the better buying opportunities will continue to emerge. Now, we’ve seen some of those, but we’ve also seen some very aggressive investors willing to come in and make some what we feel to be some very, very aggressive assumptions and buy on that basis, which we are not going to do.
But I do think that as we get later in the cycle and later this year into next year and a lot of the supply continues to come online, I think, there could be some better buying opportunities.
Neil Malkin
Okay, great. And then last for me, can you talk about what new leasing renewal rates came in the first quarter and then how you are kind of seeing them trend into second quarter?
Albert Campbell
Yes, sure. On a lease-over-lease basis, blended was 3.8% [ph] for the first quarter and April, it pulled up to 4.8%.
Neil Malkin
And that’s blended in April?
Albert Campbell
Yes, that’s blended.
Neil Malkin
All right. Thank you, guys.
Nice quarter again.
Eric Bolton
Yes.
Albert Campbell
You’re welcome.
Operator
And our next question comes from Conor Wagner with Green Street Advisors. Please go ahead.
Your line is open.
Conor Wagner
Good morning.
Eric Bolton
Good morning, Conor.
Conor Wagner
In the acquisition market, are you seeing aggressive bidding across quality type and across markets? Are there any either quality types, or markets that are lagging behind?
Eric Bolton
To be honest with you, I mean, we are not looking at what I would consider to be a lot of B assets or even lower C assets, so I can’t really opine on that. But from a – we continue to see the higher quality assets’ pricing being pretty aggressive.
And that’s the same, whether it is a large market or whether it’s more a secondary market, we’ve seen some very aggressive pricing in places like Charleston, Greenville even Kansas City, we’ve seen comparable in many cases to what we see take place in a Dallas or Atlanta, even still Houston. I mean, we’ve seen some assets based on our underwriting trade at sub 5 cap rates in Houston.
So I think it’s again for the higher quality assets, which is what we tend to focus on from an acquisitions perspective.
Conor Wagner
But then on the disposition market, are you seeing the aggressive bid for their lower quality assets that you are looking to sell?
Eric Bolton
Well, we are about to get into the market on that front. But I mean all the indications are that we will see pretty good pricing relative to – similar to what we got last year would be our expectation, as we start to look at that side.
Conor Wagner
Thank you. And then on the redevelopment opportunities, are those focused in 2016 and any particular markets or is that spread evenly across the portfolio?
Thomas Grimes
No, it tends to focus and I’m going off the cuff here, but it is – it’s Charlotte, Raleigh, Charleston, Savannah, Orlando those are the drivers.
Conor Wagner
Great, thank you, very much.
Thomas Grimes
Opportunity, there is some level, pretty much across the portfolio.
Conor Wagner
Awesome, thank you.
Eric Bolton
Thanks, Conor.
Operator
Your next question comes from Tom Lesnick, with Capital One. Please go ahead.
Your line is open.
Tom Lesnick
Great. Good morning, everyone.
I guess first you guys have been increasing your asset allocation to Fredericksburg over the last several quarters. Obviously some of your peers have exposure to DC, but being that’s more in sell than Fredericksburg, what are you seeing in kind of the suburban Northern Virginia market, and what’s your outlook on that area for the next couple of years?
Thomas Grimes
It’s in full recovery mode, Tom. It is a kind of a pleasure to walk recently both the two assets that were developed and have the Phase II are right on 95% corridor, and doing quite well.
The Cobblestone Square project is unique. It is literally built right in the – Fredericksburg, it’s one of those great satellite cities and its sort of core is historic district that’s very vibrant.
We are right in the middle of that and very, very high demand from DC jobs. They’re walking distance to rail line and we’re seeing a positive rent growth, good occupancy, well exposure and demand on those three assets.
So I feel good about the future of Fredericksburg.
Tom Lesnick
That’s very helpful. And then I guess, following-up on some comments earlier about the transaction market generally.
As you guys just kind of seen a narrowing between large and secondary markets in terms of operating fundamentals, I know obviously some of your secondary markets don’t have as many trades, but across the entire spectrum, are you guys seeing a narrowing of cap rates between the large and secondary markets as well?
Eric Bolton
It’s been pretty consistent for the last year. So Tom, I would put the spread with the difference of roughly around 50 basis points and it’s been that way.
I mean, if you go back a couple of years ago, it was probably closer to 75 basis points or maybe a little bit more than that, but what we saw over – starting a little over a year ago, was just as the cap rates and the opportunities in the larger markets became so expensive, we saw capital getting more aggressive in the secondary market. So that spread in today is 50 basis points or less and depending on the quality of the asset and the location, I mean they can be almost right on top of each other frankly in some of these secondary markets.
Tom Lesnick
Got it. Would you expect that spread to continue to narrow or kind of stay the same?
Eric Bolton
There is nothing that we’re seeing right now suggesting that it’s going to gap out and spread. I mean, we continue to see a lot of investor interest in both large and secondary markets.
I think that, if you began to see a meaningful increase in interest rates, you could begin to see it spread a little bit, but the fundamentals being as strong as they are, investor interest in this space being as strong as it is, there’s certainly nothing to suggest near-term that we’re going to see any real change in cap rates from what we see.
Tom Lesnick
I appreciate it. Nice quarter guys.
Eric Bolton
Thanks Tom, thank you.
Operator
And your next question comes from Buck Horne with Raymond James. Please go ahead.
Your line is open.
Buck Horne
Hey, thanks. Good morning.
Most of my questions are answered, I just got one more. With the $90 million of kind of call it free cash flow, you guys are expecting to generate on annual basis.
As you sit here today, could you rank for us – how you think about the options or how to use the incremental free cash flow you’re spinning off, I mean, whether that’s dividend increase or debt reduction or acquisition, how do you think about potential uses of that free cash?
Eric Bolton
Well, our most accretive use of capital right now is frankly our redevelopment program and we’re going to – as Tom alluded to earlier, we’re going to push that agenda as appropriately as we can. But if we push it too hard, we start to compromise the return.
So – but absent that, I mean Buck I mean, frankly we’re comfortable with having the impact of the free cash flow for the moment at least showing up and just building balance sheet strength. And as Al alluded to, based on everything that we’ve got right now in our projections, we’ll see debt-to-gross assets decline another 150 basis points this year.
That’s on top of comparable level of decline that we got last year. So I think this is a point where that discipline is important.
And it always is important, but particularly right now. And if we wind up just not being able to put as much money out from an external growth perspective, and if you will, building capacity for the future opportunities I mean, that’s okay at some level.
I mean, we’re at a point right now where – we feel like our sort of annual long-term earnings growth rate for the – from a cash flow perspective is approaching around 6% or so. We raised the dividend about 6% last quarter or last – for this year if you will and I’ve always believed that, you want to sort of get the platform into position where you can compound cash flow and compound dividend growth sort of a comparable rates.
So for the moment, we’re just perfectly content to stay very active in the transaction market, stay disciplined and if the net result is, we’re just building balance sheet strength capacity for the future as a fall out or a residual result, that’s okay, we’re good with that.
Buck Horne
Okay, thanks, very helpful. And just back to the cap rate question, I think you spent some time talking about the spreads between large and secondary.
But just can you quantify for us, just generally what absolute level you’re seeing in – for Class A assets in some of your markets?
Eric Bolton
Well, I can tell you in Class A assets in some of the larger markets are going to be 5%. We’ve seen some go well below 5%, 4.5%.
I would tell you that in the secondary market, a high-quality assets going to probably be 5% to maybe 5.25%. But a lot of them I mean, we’re seeing a lot of stuff right around 5% in both large and secondary markets.
Buck Horne
Perfect, thanks very much.
Eric Bolton
You, bet. Thanks Buck.
Operator
We’ll go next to Drew Babin with Robert W. Baird.
Please go ahead. Your line is open.
Drew Babin
Hi, just a very quick follow-up and somewhat following on Buck’s question. In an environment where there seems to be a bid for every type of asset, obviously property tax assessments have been catching up rapidly in CBD areas, do you see any risk of more kind of secondary markets, and maybe haven’t seen the assessment to creep up as much yet, maybe at least directionally catching up to some degree?
Thomas Grimes
Don’t really see any pressure of that right now Drew. As we talked about Florida, Texas and Florida, that they’re most aggressive, so no direct pressure on that.
I mean other areas in our portfolio, pretty modest to normalized growth expectations. And obviously, we’ll get more information on that in the second quarter of this year.
Drew Babin
Okay, thank you.
Eric Bolton
Okay.
Operator
And we have no further questions at this time. I’d like to turn the program back to our speakers for closing remarks.
Eric Bolton
Thank you for joining us. And that’s all we have today and we will see everyone at NAREIT.
Thank you.
Operator
And this does conclude today’s program. You may disconnect at this time.
Thank you and have a great day.