Mid-America Apartment Communities, Inc. (MAA) Q3 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for participating in the MAA Third Quarter 2012 Earnings Conference Call. The company will first share its prepared comments, followed by a question-and-answer session. At this time, we would like to turn the call over to Leslie Wolfgang, Director of Investor Relations. Ms. Wolfgang, you may begin.

Thank you, Howard, and good morning, everyone. This is Leslie Wolfgang, Director of Investor Relations for MAA. With me this morning are Eric Bolton, our CEO; Al Campbell, our CFO; and Tom Grimes, our COO. Before we begin with our prepared comments, I do 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. I'll now turn the call over to Eric.

Thanks, Leslie, and good morning, everyone. Thanks for joining us. Third quarter performance exceeded the midpoint of our guidance, with favorable leasing conditions that continue to support high occupancy and strong rent growth. Resident turnover remains low, with third quarter move-outs increasing only 0.7% as compared to the third quarter of last year. Rent growth trends also remained steady, with same-store effective rent growth of 5.2% in the third quarter, which is consistent with the 5.2% performance captured in the second quarter. We're currently under way with property level budgeting and forecasting for next year and expect that favorable leasing conditions will continue in 2013. From what we see at our properties, a continued recovery next year in the single-family housing market is unlikely to have a meaningfully negative impact on leasing conditions across our portfolio. Turnover associated with move-outs to single-family home buying drove only 18% of our turnover in the third quarter, which is consistent with the performance in the preceding second quarter. Likewise, turnover associated with move-outs to rent a single-family home only contributed to 6% of our move-outs in the third quarter, which is again consistent with the preceding second quarter. While it's reasonable to believe that a more robust recovery in the employment markets and economy could eventually drive more demand for single-family housing, these same factors will also support increasing demand for apartment housing as well. New apartment supply projections across our portfolio continue to look manageable when compared to the outlook for job growth and growing demand. Within our Large Markets segment of the portfolio, latest projections suggest a ratio of just over 8 jobs to each new unit expected to be delivered next year, which is stronger than the last upcycle we had over the 2004 to 2007 time frame. Within our Secondary Markets segment, the story is even better, with the job growth to new supply ratio projected to be just over 10:1 in 2013. In our large markets, you really have to get into submarket analysis to understand what threat, if any, emerging new supply is likely to have at specific locations. It's worth noting that in a number of the larger markets, new supply is more likely to create pressure on locations in more of the urban or core CBD submarkets and less likely to materially impact most of our locations. Within the secondary markets, in general, we just don't see much new permitting activity taking place, and would expect that this segment of our portfolio is more likely to capture improving performance as compared to our Large Markets segment towards the second half of next year. As noted in our earnings release, we had an active quarter for property transactions, selling 5 properties and acquiring 4. Over the past 3 years, we've added a total of $1.1 billion in new properties, with an average age of 3 years. And as a result, we believe we have materially strengthened our long-term earnings outlook. Construction activities and lease-up continues on our core development properties, and we look forward to more meaningful earnings contribution from this pipeline in 2013 and '14. You'll note in our earnings release that we recently closed on a land parcel near downtown Jacksonville and expect to be under way with development of 294 units at this site before year end. We expect to continue with an active capital recycling program next year as we steadily redeploy capital into higher-margin investments. Our strategy remains centered on value creation, primarily through the acquisition process, and we expect that our markets, the extensive relationships we have across the region and our established transaction execution capabilities will continue to yield attractive new investment opportunities next year. So in summary, we expect to capture record FFO per share results in 2012, outpacing last year's record result, and expect 2013 will likewise be another record year performance for MAA. That's all I've got. Al?

Thank you, Eric, and good morning, everyone. I'll provide a few comments on earnings performance for the third quarter, as well as a few highlights on investing and financing activities. FFO for the third quarter was $48.2 million or $1.11 per share, which is $0.02 per share above the midpoint of our prior guidance. Better-than-expected performance from both our same-store portfolio and development in lease-up communities produced the majority of this favorable performance for the quarter. Revenue performance was essentially in line with expectations, driven by the 5.2% growth in average effective rents over the prior year, reflecting a continued pricing momentum in virtually all of our markets. Operating expenses for the same-store portfolio were better than expectations, with lower-than-projected repair and maintenance, utilities and real estate tax expenses combining to produce about $0.01 per share of favorable results. The remaining $0.01 per share for the quarter was primarily produced by our development pipeline, as lease-up for the 2 communities with delivered units continuing to outperform expectations. As Eric mentioned, we were very active in property transactions during the quarter. We invested $218 million in the 4 new communities acquired, which brings our year-to-date acquisition volume to $345 million. Initial cap rates for these acquisitions averaged around 5.6% on first year's projected cash flows, after deducting a 4% management fee and a $350 per unit CapEx reserve, which is expected to grow to about 5.8% on completion of the significant upgrade projects at several of these communities. As part of the annual recycling plan, we also sold 5 communities during the quarter, for total proceeds of $47.3 million, producing a $16.1 million gain on dispositions recorded during the quarter. These sales bring our year-to-date disposition volume to about $100 million, and we have one additional community under contract to sell during the fourth quarter. And after completing this final sale, full year disposition volume is expected to be about $113 million for the non-communities averaging 25 years of age. The overall cap rate for these dispositions is expected to be about 6.8% based on the final in-place cash flows after deducting a 4% management fee and a $350 per unit CapEx reserve. Construction and lease-up continues to progress very well in the 4 communities under development. During the third quarter, we funded an additional $12 million toward completion of these projects, bringing the total investment to nearly $109 million or about 75% of the expected total cost of these projects. At quarter end, Ridge at Chenal Valley in Little Rock was fully delivered, while Cool Springs in Nashville was 75% delivered. Nearly 2/3 of the delivered units were already leased by the end of the quarter. Cool Springs is expected to be completed during the fourth quarter, while 1225 South Church in Charlotte is excepted to be completed in the first quarter of 2013, followed by River's Walk in Charleston to be completed in the fourth quarter of 2013. As mentioned in the release, we plan to begin construction of one additional development community located in Jacksonville during the fourth quarter, which we expect to be completed mid-2014. Our balance sheet ended the quarter in great position, and we continue to make progress to our rating goal. And as previously mentioned, during July, we received the first time investment grade rating from Moody's of Baa2, which is the second level of investment grade, which immediately reduced the cost of our outstanding borrowings under both our unsecured credit facility and term loan by 30 to 40 basis points. During the quarter, we also expanded our unsecured credit facility to $325 million and issued $175 million in secured -- in senior unsecured notes to pay down additional secured borrowings and to fund the acquisition and development activity. We also issued 813,000 common shares during the quarter at an average price just over $67 per share, for a total net proceeds of $53.7 million, which was also used to fund acquisition and development activity. During the quarter, we repaid an additional $43 million of secured debt, releasing the related mortgages, which along with our acquisition activity, increased our unencumbered asset pool to 51% of gross assets at the end of the third quarter, as compared to only 24% 1 year ago. At the end of the third quarter, our total debt, net of cash balances, was 44.7% of gross assets and just below 7x EBITDA. While our fixed charge coverage ratio for the third quarter was 4.3x, well above the rating agency thresholds. And also at the end of the quarter, 90% of our outstanding debt was fixed or hedged against rising interest rates, resulting in total effective rate of 3.7% for the quarter. We believe these metrics put us in a very good position to pursue an additional credit rating from S&P, with the goal of achieving a full investment grade position later this year or early next year. And finally, given the third quarter performance and updated expectations for the remainder of the year, we are increasing our FFO guidance for the full year by $0.04 per share at the midpoint, $0.02 of which relates to the third quarter performance, with the remaining $0.02 relating to the revised expectations for our same-store and non-same-store portfolios over the remainder of the year. Our updated FFO guidance for the year is now a range of $4.46 to $4.56 per share, $4.51 at the midpoint, which is a 13% increase over the prior year. And the key assumptions included in our forecast are wholly-owned acquisition volume of $345 million to $400 million, a $50 million increase to the top end of our guidance range; disposition volume of about $113 million, only depending on one additional community under contract; and development funding of $80 million to $85 million for the year. We also expect our leverage to fund these net debt-to-gross assets to end the year in the 44% to 46% range, with about 90% of our debt fixed or hedged, with an average interest cost between 3.7% and 3.8% for the full year. That's all that we have in the way of prepared comments. So, Howard, I'll turn the call over to you for questions.

[Operator Instructions] Our first question or comment comes from the line of David Toti from Cantor Fitzgerald.

I just have a couple of sort of detail questions for you today. The expense diversions between the large and secondary markets was a little bit noticeable. Do you think there's a specific driver to that in the quarter?

The big driver of that -- I'll let Tom tell you some of the details, but the big driver of that was real estate tax. We had some credits during the third quarter, and so they impacted one segment more than they did another, and that was the main driver. Typically, you get a lot of information in the third quarter and that's pretty common that, that can happen.

And then on the -- David, on the operating level, we had a little bit higher turn level in the secondary markets in the late second quarter. And we're actually able to wring a little efficiency on the cost per turn in the third quarter on that. So we were able to spread our turn cost out a little bit and be more efficient there.

That actually leads into my next question, which was the turn is lower in the large markets, which is sort of counterintuitive. Is there any sort of dynamic that you think is happening to drive that?

Absolutely. Here in the small markets, we had again and sort of late second, early third quarter, we had some onetime exposure to military deployments, carrier deployments in Virginia and the 3rd Infantry Brigade in Columbus, Georgia, and that generated a little bit higher turn. That creates kind of a onetime market lull, and then it sort of snaps back out. So it's not a market fundamental shift in the secondary. It's really just sort of onetime move-out, and then it picks right back up.

October occupancy in the secondary markets was back ahead of last year, so it was just a onetime event.

Okay. That's helpful. And then my last question it just has to do with you sort of boosted guidance a little bit, but the underlying assumptions didn't move that much. Are you still pretty comfortable with the 4.5% to 5.5% range revenue growth for the full year?

We are comfortable with that. I think if you average out the first 3 quarters, you'll come somewhere to low -- below the midpoint of that range. I will say that given what we expect for occupancy, continued pricing performance and solid occupancy performance for the fourth quarter, we expect the revenue performance in the fourth quarter to be ahead of the average that we have so far, improving out a bit.

Yes, the secondary markets have been finding a little bit of an occupancy comparison headwind. That ends with the third quarter, and we're more optimistic. And well, it ends -- that headwind ends in the third and we're pretty optimistic about the fourth.

Our next question or comment comes from the line of Rob Stevenson from Macquarie.

Al, given your comments there, where -- as you head into fourth quarter here and into next year, where is your most significant expense pressures besides real estate taxes?

Taxes are certainly one. As we went into the year, I think that the context is we expect the taxes to be 4% to 5%. And so that was certainly the most significant pressure going into the year. I think in overall context, it's still -- it's the same message. Taxes now are 3.5% sort of 3% or 4% for the year expectations because we have better information now. That is the primary pressure that we expect. I think repair maintenance and utilities during the third quarter gave us some positive performance, and we're feeling very good about that. But I think in the fourth quarter, you will see some unfavorable comparisons on real estate taxes. For the full year, it's still going to be 3.5%, Rob, but we had a lot of information coming in, in the fourth quarter of last year, driving some credits last year. So for that one line item, you're going to see, though, good for the year and better for the year now, it's going to be unfavorable for the fourth quarter, so I would expect that.

So nothing else that should be sticking out besides taxes?

No.

Not really. At this point, no, we don't expect anything else.

And what's the rough magnitude of the breakdown on your expense side between, Al, real estate taxes as a percent and then just other sort of major groups?

I think real estate taxes and personnel costs are by far the largest and well over half. So those are the key drivers. And utilities are another big, big area. So and keep in mind that we do bill back the majority of our utilities back to our customers. But those 3 are really the drivers, the biggest dollars in that lineup.

Okay. And then I guess a question for you, Eric. I mean what's your thought here? I mean you've sold some assets, you've issued some stock, but where are you thinking to fund future acquisition and developments in terms of asset sales there, especially given where the implied cap rate is on the stock today? Does selling more aggressively, especially some of the older assets, to bring the average age down on the portfolio or continue to bring the average age down the portfolio make more sense in today's market?

We will definitely be selling more next year than we sold this year. We have a plan to really step up the recycling effort over the next 2 to 3 years. And as long as conditions support it, we plan to see that pace pick up a little bit. I would put order of magnitude somewhere around $150 million, maybe $160 million or so next year. But we really will see over the next couple of years more of a sort of a balanced funding plan, where we will be recycling into higher-margin investments, as well as on a net basis, we'll probably still be, we believe, a net acquirer and that will require the need to go back to the market at some level. But we think that the disposition of the recycling effort will become a greater component of our funding plans and needs over the next couple of years.

Okay. And then what's been the recent conversations with the board on the dividend?

We will have that conversation with the board as we always do in early December. We -- in early December, every year, sit down with our board and update our 3-year business strategy. And as part of that process, discuss dividend payout. And so we will do that in the first week of December.

Okay. And then just lastly, you guys entered K.C. this quarter. I mean what other markets out there or are there other substantial markets that interest you at this point and where you're seeing decent deal flow where you could enter with buying a couple of assets?

No other real target market that I can point to right now. We continue to like the footprint. We continue to be very committed to the idea of bifurcating capital between large and secondary markets roughly in the same weighting we have today. As a consequence of our stepped-up efforts of recycling capital out of some lower margin, older investments into higher margin, newer investments as a focus of that, it just so happens that a lot of our older properties are in some of our secondary or more tertiary markets. And so, you'll be seeing much more active recycling taking place in that particular component of the portfolio. And so markets like Kansas City and San Antonio and Charleston and Savannah, those are some of the secondary markets that we would like to continue to fill out in.

Okay. I mean and I guess just to add to that, I mean is there any inclination on your part to partner with some merchant developers in some of those areas? If you can't find enough product to buy in the secondary markets as a whole to keep your sort of weighing between the secondary and primary markets sort of relatively consistent? Or with that, would we likely to see some of the secondary markets NOI sort of tailing down and the primary markets becoming an increasing portion of the NOI or the company?

No, I think that, clearly, we do have a lot of conversations always going on with developers in some of these secondary markets. And that's why you see us deploying capital in development in markets like Little Rock and Charleston and Jacksonville. You're not going to see us do development in Dallas and Atlanta. We let others do that. But, yes, in an effort to kind of keep our portfolio strategy intact and continue to execute on this recycling effort, to the extent that we deploy capital with development, it will be a secondary market focus.

Our next question or comment comes from the line of Mr. Rich Anderson from BMO Capital Markets.

So I just want to get back to the fourth quarter guidance or the fourth quarter revenue number. It implies you going from 4.2% revenue growth to 6.7% revenue growth? Is that right?

No, that wouldn't be the math I would -- what I would say is the first 3 quarters gets you somewhere around the lower end of the range. We expect the fourth quarter to be a strong quarter, so I would expect the full year to be below the midpoint of the range, maybe closer to the bottom of the range, but still be -- but the performance of fourth quarter is stronger than the third quarter. And probably with the first 3 quarters -- first 2 quarters, yes.

Okay. So if your revenue range for the year is 4.5% to 5.5% and you're running at below 4.5%, you're saying you get -- by getting -- am I doing that right? I mean...

The first 3, you average out to close to 4.5% and if you finish strong in the fourth quarter, you'll end up somewhere around, call it, 4.75% to something like 4% or 4.6% to 4.8% range, Rich, and that's sort of the thinking.

Okay. So you don't think you'll -- maybe I'll take it offline because it seems like you need to do more than that. And you're also saying the top end of the range, so are you saying the NOI number is more...

NOI is top end of the range.

Right. Is more of an expense-driven phenomenon?

Yes. That's what we've talked about. And we really -- we talked about that a little bit in the second quarter, begin saying that our range in expenses -- we didn't change our range in the second quarter -- but we said we'll be toward the bottom end. We had a little more favorable performance in expenses in the third quarter, and so we felt the need to move the range. And so revenues will end up in the range below the midpoint for sure but have strong performance in the fourth quarter, stronger than the first 3. That's the expectation.

So speaking on external growth, I know you're primarily an acquisition story, but it appears you are at least contemplating to doing more development in the future. And you say that, at the same time, you're saying you'll step up recycling, and using dispositions more as a funding element to your story. So I don't know, it seems like 2 different directions you're going in terms of taking on risk? And can you just talk a little bit about your development mindset? I probably asked this question here every quarter, but your development mindset as it relates to where you think you are in this game. Are we in the sixth inning, seventh inning? Just talk to me about that.

Well, we think that development will remain a limited part of our external growth story. I mean kind of order of magnitude, we think that external growth on sort of a steady state basis via acquisitions will probably be somewhere between $300 million to $400 million a year. Our development pipeline, we're kind of comfortable carrying up to about $150 million at any one point in time. We've got 4 projects, currently 2 are nearing lease-up, stabilized status. The other 2 will be delivered next year, 1 in January of next year. So we think that we're at a point that we can reload that pipeline, and thus we did the deal in Jacksonville that we just alluded to. I do not believe that, that for a host of reasons that us being a big developer is the right thing to do. And our platform, our approach to development, as we're doing again in Jacksonville, is essentially to enter into a negotiated fixed price contract with the developer. We handle the lease-up, they build it for us. They are free to walk away, we own it.

Okay. It makes sense. Last question, do you -- I'm asking everyone, do you know if Astec owns any of your stock?

We are unaware of that at this time.

Actually, more to the point, though, what do you think about M&A? I mean you guys obviously are a great organization. I'm not suggesting -- I hate to see you go, but I mean do you think the endgame for the sector will be some consolidation, public-to-public consolidation? Not maybe commenting on your situation specifically, but just as a general thought about M&A in the space?

I don't think that there's any sort of macro trends or macro needs afoot that would suggest that we're going to see a flurry of M&A start to take place. I think when it takes place, what M&A that does occur, is typically company-specific issue that has arisen, either it's -- for a host of reasons, somebody just decides that staying independent or staying in the public market doesn't make any sense. And so I don't think that there's any -- I don't see any huge initiative under way to have it or need, frankly, for the sector to shrink down to half the number of companies it is today, as an example. I just think it's a case-by-case situation, and companies decide what they want to do.

And for you guys, you feel pretty good about just continuing to do your thing? But if you ever got the right price, you would have a conversation because that's your fiduciary responsibility? Is that the right way to think about it?

I mean, certainly, we understand what our fiduciary responsibilities are. And I mean, we're always going to do the right thing for shareholders. Having said that, we're very comfortable doing what we're doing. We felt like that we've demonstrated the ability to create great value for shareholders over a long period of time. We feel like we're fulfilling a particular niche in this sector that I think the market appreciates in various points in the cycle, more times or more so than others at various points in the cycle, but we're comfortable doing what we're doing.

Our next question or comment comes from the line of Mr. Michael Salinsky from RBC Capital Markets.

First question, probably for Tom. Can you talk about new lease and renewal growth in October, as well as on how that compares to the third quarter? And also, where you kind of sit portfolio-wide from an occupancy standpoint at the end of October? Just trying to get comfortable with the revenue guidance you guys talked about there.

Yes, sure, sure. And I'll just bang through on third quarter and October numbers here. Starting with new lease, 2.8%; October, 2.4% -- or excuse me, 2.8%; for our third quarter, 2.4%; for October renewals, 6.1% and 4.7%; for blended, at 4.3% and 3.4%; and then occupancy is running ahead of October by about 20 basis points or so, where it has been running about on an average basis about 40 basis points behind. And so, we feel pretty darn strong. We also have, another forward-looking metric would be exposure. This time last year, we had exposure of 9.3, which is our 60-day uncovered, and we're at 8.3 this go around. Traffic for October was outstanding, turnover was down. So we feel pretty good going forward.

Okay, that's actually very helpful. A couple bigger picture questions. First one, can you define what you mean by favorable for '13? Not asking for guidance, but just I want to get your thoughts on '13 at this point, given where we are in the cycle?

Well, I think that we're going to continue to be in a position to see steady rent growth. I mean the metrics that -- I know that there's hand-wringing over 2 issues: over this resurgence or recovery in the single-family market; and then, obviously, the conversation about new supply. We continue to believe that the threat surrounding single-family is overblown. As I've noted in my earlier comments, in the third quarter, we did not see any increasing pressure associated with single-family, either rental or for purchase, and just continue to believe that the dynamics surrounding single-family home buying are unlikely to create any pressure for us, meaningful pressure, this next year. On the supply side, I mean clearly, supply is picking up. But again, when you look I mean the way we have to try to get comfortable with supply is compare it to forecasted demand or forecasted job growth. And supply in and of itself is not a problem. It's only a problem if there's not enough demand to absorb it. And when we look at the ratio of job -- new job projections to supply in our large markets next year, it's better than it was in the last upcycle. And in the secondary markets, it's outstanding. It's only 10:1 next year. Our 10:1, which is very strong. So we continue to not to see anything out there that would suggest any material weakening in 2013 performance, as compared to 2012. The comparisons, the prior year comparisons, year-over-year comparisons, are a little more difficult just as a consequence of continuing to compare against these growth numbers that we're putting up every year. But and then when you look at the other metric that people look at in terms of ratio, rent to income, we're still right around 17%, which is well below the peak we were back several years ago at 20%. So there's just a lot of reasons for us to suggest that there doesn't appear to be looming significant headwinds going into next year.

That's very helpful. Then a final question, if you look at a couple of the recent Atlanta purchases as well as the Kansas City purchase, they tend to be more kind of urban mid-rise type of product, and you also made a comment about moving to kind of higher margins. Should we -- is that any change in strategy there on the investment side? Or is it more opportunistic than what you've traditionally done?

It's really more opportunistic, Mike, I think because I mean we're committed to the idea of bifurcating cap between the large and the secondary markets. Now within those markets, whether it's an urban, more downtown-oriented location or suburban location, we're sort of indifferent on that. There, once we get into the market, we're looking for good submarkets where people want to live that where we can find properties that we feel like we can acquire on a very favorable basis. And a lot of these southeastern markets, a lot of the favorable places for people to live, a lot of where the employment centers are, are out in the suburbs. Likewise, there's some great places near downtown and downtown. So we kind of -- and we think that there's some probably good things about being diversified, both suburban and urban. As opposed to concentrating on one particular end market.

And, Mike, the last -- the couple of purchases, just to remind the core stuff or the urban stuff is getting some press. But Lake Nona is suburban outside of Orlando and a great medical district, and Bronco and San Antonio, both good old bread-and-butter mid-America good suburban garden stuff. So we're buying a little of both now, which is probably the difference, not an abandonment of our suburban roots.

Our next question or comment comes from the line of Dave Bragg from Zelman & Associates.

Could you just quickly take us from the 5.2% increase in average effective rents to the 4.2% revenue growth in the quarter?

Yes, I got it. And, Dave, I mean it's essentially, it's 2 main drivers. First, our average effective occupancy or average what you would call our physical occupancy was off 40 basis points from prior year. That's driven by a 70-basis-point gap in the secondary markets, which I think I touched on a little bit earlier. But just in case folks missed it, but it was really driven by some turnover related to military deployments in some of the secondary markets. The second component of that is we had great savings in utility rates, this go around. We were excited about that. The downside of that is, though, that our utility recovery fees or our reimbursement revenues were down, that's another 40 basis points of it. We're very happy with that happening because our recovery is probably -- rate is about 80%. We'd rather see it on the savings. Those are the 2 big drivers.

I'll just add to that, Dave. There's been some questions about the guidance and so -- in the fourth quarter, just want to make it clear, what we're seeing is that we're expecting continued strong pricing performance of average brands. We saw 5.2% in the last 2 quarters consistent -- continuation of that, on top of the stable occupancy and minimal impact from utilities and those things that Tom just talked about. So what we expect is the top pricing rent to drop to the bottom of the revenue line in the fourth quarter.

Occupancy should be more neutral than negative for us.

Yes.

That's very helpful. That gets us there on the fourth quarter. And then the other question just as it relates to revenue growth and guidance, when you think back about your prior outlook or your initial outlook of 4.5% to 5.5%, that top half of the range, which is less likely now, what didn't play out? Was it performance in secondary versus large markets? Or was it rent games on either renewals or new move-ins or the utility reimbursement or occupancy. Can you just talk about the drivers of the -- where you're trending now versus the thought that you had earlier?

I'll give you, I think it was a little bit of each of those line items, Dave. I think it was a little bit of pricing not quite as sharp as we thought, but a lot more coming from probably occupancy. Average occupancy for the year has been a little lower than we had projected going in and then some impact from the utilities and other things. And remember that utilities and those things are reimbursements in revenue from the expenses that we got benefit from in the bottom line. So I would say, it's really no single area. It's spread across small impacts in several of those areas.

But worth noting, I mean the midpoint of that revenue range was 5%. We think we'll probably come in for the year at 4.7% or something in that range probably. And so we're not talking about some sort of significant miss here. We're talking about at the margin, probably as Al just mentioned, probably a little bit lower effective occupancy just as a consequence of pushing the rents in and some of this -- this military, our secondary market segment in the third quarter took a little bit of a hit because of this onetime event that Tom has referred to. But secondary markets were back in October, running ahead of last year. So it's -- there's no trend here that is worrisome.

Got it. And then the third quarter new move-in and renewal numbers of, I think you said 2.8% and 6.1%. Could you split those out for us in the secondary versus the large markets?

Yes, give me 2 seconds. So that is -- so I've got that for the quarter, but not for the month, if that's cool.

The quarter's fine.

And we were -- it skewed more on the new lease rates, it was up 4.7% and over 1% on the secondary markets, and then renewals were 6.4% and 5%.

And, Tom, could you actually tell us what the new move-in gains were over the prior release, which is more comparable, it appears?

Yes, on -- at a company-wide basis?

Yes.

We were -- new leases were 3.1% and 6.3% and 4.5% for blended. So, 3.1%, new; renewals, 6.3%; blended, 4.5%.

That's helpful. And my last question, Eric, on your opening comments on single-family housing. When you talk about the potential benefit, could you talk about your expectations there? And are you seeing any early signs of improved job growth in your markets? And which markets would, if not, in which markets would you expect to see that and how meaningful does that become on the revenue line?

Well, we are seeing slow recovery in employment markets taking place. As the news reports outline, the Texas markets continue to do quite well. We're -- Atlanta has been lagging, but it's showing signs of getting better as is Florida. I think that it's interesting, when you look at the impact of single-family move-out or move-outs due to single-family buying, it's actually as an example, it's actually created more pressure for us in our larger markets than it has in our secondary markets. So as I alluded to in my opening comments, the move-outs due to home-buying was only about 18%, on average. It's actually about 20% at our bigger markets in the quarter, but in the secondary markets, it was 15%. So I think that clearly as the economy hopefully begins to show more meaningful recovery and people begin to get more comfortable in their jobs, I do expect that we will probably see a little bit more activity surrounding turnover associated with buying homes. But I don't think we're headed back to anything close to what we were years ago. My guess is we get back to maybe 25% or something of our turnover and I think that that's probably a 2014 kind of phenomenon. But I think as we look into next year, it's just hard to see the single-family recovery derailing fundamentally, the rent growth and the revenue growth projections that we think we'll have going into next year.

Right. But my question is actually on the other side. Are you getting more optimistic surrounding the potential for incremental job creation related to new housing construction in your market? And are you seeing any signs of that yet?

Not really. I think that your point is right. I think a recovering single-family market can have a very good implications for job growth across the country. And so, we haven't seen it yet. But I think it very well could happen.

Our next question or comment comes from the line of Paula Poskon from Robert W. Baird.

Apologies if I missed this, could you guys just run through some of the tenant credit metrics like where your rent-to-income ratio is this quarter versus last quarter and a year ago average helpful income, readings from move-out, things like that.

Yes, sure. The rent-to-income ratio, as Eric called it, 17%. I like to refer to it as 16.9%. So it's up about 40 basis points, but a long way away from the 20% that it was a couple of years ago. Household income is about $57,000, which has grown over time. Rents have just grown at sort of a faster rate. And then as far as move-outs for economic reasons, and I can get you an exact stat, but those things are well down. And what I don't want to over answer the question, Paula, I'd rather circle back. I got those 2 things. What did you want about the move-ins and move-outs and that sort of stuff?

Well, really just any change in the trends and if there's significant -- if you're seeing a significant shift in the trends between primary and secondary markets, between large and secondary markets?

No. And along those things that Eric mentioned with Dave earlier, I think it's a little different than conventional wisdom that we have fewer homebuyers in our secondary markets than our primary markets. Our rent-to-income ratio is better in our secondary markets than our primary. And I think that's a little bit of a different issue as well. But they're great in both, to be perfectly honest.

So I know -- I realized that turnover is down, but for those new tenants that are moving in, is their credit quality better or worse than the tenants that are vacating? Is there any change in that trend?

Our average, we have a sort of safe rent score that we track and I don't have the exact data points for you. But it continues to trend up each quarter. It's just sort of a steady improvement.

And this is maybe more of a kind of anecdotal or perspective question, but portfolio-wide and then separating between large and secondary markets, what do you think -- how do you think the percentage shakes out between -- in your tenant base, between renters-by-choice and renters-by-force?

I mean if you looked at -- if you looked at the reasons for home-buying, you would come to the conclusion that the secondary markets have more renters-by-choice and they like being there and they're not exiting for home-buying. But I think that's about the only data point that we really have into that psychology, and I just wouldn't read too much into it. I think it is -- I think everyone is reacting similarly on realizing that the American dream is not always buying a home and that there's some financial stress that comes with that. And I think while we are not becoming 100% a renter nation, I think people are more comfortable with that today and I think until jobs pick up, you won't see home-buying pick up and you won't see a turnaround, I think it's 65% or so. Eric?

I would say that given the impact of us having a better credit quality resident and continued growth in average income of our resident profile, we're definitely getting folks that are, if you will, more capable of being able to buy a home. But I think the decision, what constitutes renter-by-choice or renter-by-necessity has undergone a fundamental shift. And the bottom line is there's a lot more people out there that are renters-by-choice. And I think we'll stay in that mindset for quite some time.

Our next question or comment comes from the line of Tayo Okusanya from Jefferies.

Just a couple of questions. Going back to Kansas City, Missouri, trying to understand what kind of demand/supply fundamentals you're seeing in that market or whether there's demographics in that market that attracted you to it and the longer-term plan in regards to how big you can get to that market to take advantage of economies of scale.

Well, Kansas City fits into our definitions of a secondary market. It's -- the other REITs are not there. It's a market where we feel like we can come in and use our balance sheet and our operating platform and our execution capabilities and create very attractive returns for our shareholder capital. It's a market that tends to have more stable characteristics, it doesn't tend to get a lot of excessive supply as you might get in some of the bigger markets and thus, we like the stable nature of that particular market. Very stable employment base there and very affordable region of the country. And this particular opportunity was a newly built property with a broker involved and developer that we know and we were able to come in and provide them a very definitive quick close and make an attractive acquisition. But what we would expect over the next several years is to see our presence there grow by another 5 or 6 properties. We'll obviously take our time and be patient about it. But we like to market as part of our secondary market strategy.

Okay. That's helpful. And then just sticking to the secondary market strategy as well, when I go take a look at some of your same-store statistics, and then there's a section in your supplementary, the way you kind of talk about your individual markets that have less than $30 million in gross real assets. And I'm just kind of curious, I mean in those assets that means you basically have a handful of assets. I mean, what kind of economies of scale or what kind of margins are you kind of getting in those markets when you only have 1, 2, 3 assets in those markets relative to some of your larger markets? And is there a long-term plan to also grow those markets? Or is there a long-term plan to kind of exit some of these smaller markets where you do not have the type of economies of scale.

Well, I think that just as a consequence of rotating capital out of lower margin investments into higher margin investments, what that often translates into is selling both older assets and assets where we don't have much in the way of efficiency from scale in the given market. And so, the impact of that or the consequence of cycling, you're going to see over the next several years is that these -- some of these properties that are listed in that section you're referring to will probably get sold. And we just are able to we think recycle the capital in a more effective way into markets like a Kansas City or some of the other secondary markets. So we're mindful of really, first, the margin specifically on the investment and then the overhead efficiency as well. And that will drive us to cycle out of some of these properties.

Okay. That's helpful. And then this question is for Al. Al, if you do end up getting the second credit upgrade sometime over the next 1 to 2 quarters, how do you see that impacting your overall cost of capital?

I think it's -- we think it will have a direct impact on being able to access the bond market, probably 25, 30 basis points below where we just access the bond market on a private placement. And I think that will be the initial. I mean you've got to cut 2 phases to that, Tayo. You got 1, you can get your credit rating and you have your first time full rating, we'll go into market. I think we will have a benefit of 25 basis points or so immediately, hopefully. But then after we've been in the market for a while, maybe 1 year or 2, we'll have actually I think another step down as a well-known seasoned issuer in the market, maybe another 20 basis points or so. So let's call it, we had a spread of 235 on the recent deal, we could expect something like 200 on our initial deal then even south of that once become seasoned. So that's what we're expecting and we're hoping for.

It doesn't have any further impact on your line of credit, does it?

Well, no. The line of credit impact when we got our first 2 ratings, Fitch plus Moody's, we had the impact on the lines of credit; they were written a little differently and then -- so when you go to the full bond market, though, you really need all 3 to have your best pricing performance.

Our next question or comment comes from the line of Ms. Carol Kemple from Hilliard Lyons.

Do you all have anything under contract now that -- to buy that you expect to close on by year-end?

We're working on one other deal at the moment, Carol. It's in due diligence. Not sure it will get closed, but we're working on it right now. And that's probably the only other deal that gets done by year-end if it gets done.

Okay. And I think I missed this earlier. Overall, how much were new leasing prices up in renewals in the third quarter?

Sure. New leases were 2.8%, renewal 6.1% and blended 4.3%

I'm showing no additional audio questions at this time. I'll turn the conference back over to you.

Okay. No further comments. I appreciate everyone joining us this morning and we'll see you at NAREIT. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.