Camden Property Trust (CPT) — Q1 2015 Earnings Call Transcript

Good morning and thank you for joining Camden’s First Quarter 2015 Earnings Conference Call. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions, and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete first quarter 2015 earnings release is available in the Investor Relations section of our website at camdenliving.com and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call. Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President; and Alex Jessett, Chief Financial Officer. As you probably know, another multifamily company is hosting their call at 1:00 p.m. Eastern Time today, so we will try to be brief in our prepared remarks and complete the call within 1 hour. We ask that you limit your questions to two then rejoining the queue if you have other items to discuss. If we are unable to speak with everyone in the queue today, we'll be happy to respond to additional questions by phone or email after the call concludes. At this time, I'll turn the call over to Ric Campo.

Thanks, Kim. One of the things that I was looking for in 2015 was a decrease in the amount of time that I spend talking about the oil business. But just like Bono, I still haven’t found what I’m looking for. During the quarter we continued our capital recycling program. We sold two older properties and started construction on Camden NoMa II in Washington D.C. We will continue to recycle capital, taking advantage of the robust demand and attractive pricing for our properties. Capital recycling improves our portfolio competitiveness, the quality, and the average age. We’ve increased the average revenue per month from $1,040 per apartment four years ago to $1,440 per apartment today. Our development program continues to add value to our cash flow and our net asset value. Camden’s geographic diversification continues to drive our strong revenue performance for the quarter and for the past four years. We favor markets with pro-business governments, strong job growth, strong population growth, and an educated and young workforce. We are currently seeing a market rotation in our portfolio in 2015, with Houston slowing due to the oil and gas economy and increasing supply here in Houston. While markets like Phoenix, Atlanta, and Southern California are accelerating, other markets are sort of holding their own as well. So, at this point, I really want to give a shoutout to our team Camden for such a strong start to the year. I really appreciate everything they do every day, taking care of our customers and taking care of their Camden customers. At this point, I’ll turn the call over to Keith Oden.

Thanks, Ric. We are off to a really good start for 2015 with the same-store revenue growth of 4.6% for the first quarter, which is virtually on top of last year’s first quarter revenue growth of 4.7%. And from a historical perspective, 4.6% revenue growth is really strong. As we reviewed the quarterly results with our operating team last week, all indications are that 2015 will be another very good year for Camden. For the first quarter, same-store average rents on new leases were up 1.3% and renewals were 6.3%, and that compares to 1.8% on new leases and 6.7% on renewals last year. For April, new leases were up 4% and renewals were up 6.5%, which compares favorably to 2.8% and 6.6% at this time last year. Based on this early strength, we point our guidance up by 25 basis points for the full year. May and June renewal offers have been sent out at roughly 7.5% increases. Channels of our markets had year-over-year revenue growth of 5.5% or higher, which interestingly is exactly the same number as in the first quarter of 2014. Our top five markets for quarterly revenue growth were Atlanta at 8.9%, Denver at 8.7%, Austin at 6.7%, Dallas at 6.2%, and Phoenix at 6.1%. Although Houston fell out of the top five, the growth for the quarter was still a respectable 3.9%. With the exception of Washington D.C. metro and Corpus Christi, all other Camden markets saw sequential revenue growth. Overall, our same-store portfolio averaged 95.5% occupancy for the first quarter, the same as last year and down just 1/10 of a percent from the fourth quarter. Occupancy in April averaged 95.9%, and we currently stand at 96% occupied portfolio-wide. Our budget contemplated rising occupancy rates into the second and third quarters, so the occupancy-related revenue gains will likely moderate in future quarters. Qualified traffic was strong across all of our markets, and despite our aggressive renewal rate increases, our occupancy rates remained above planned. In part, this reflects the second lowest net turnover rate we’ve ever reported at 43% versus 48% for the first quarter of 2014. Our residents' financial health remains strong, and our current average rent as a percentage of household income stands at 17.1% versus 17.2% for the same period last year. 13.2% of our residents moved out to purchase homes in the quarter, which compares to 13.7% in the first quarter of 2014 and 14.2% for the full year. All of the home purchase numbers remain well below our long-term average of 18% of move-outs to purchase homes. The homeownership rates reportedly fell again in the first quarter of this year to 63.7%, down from the peak of roughly 69%. Finally, since our last conference call, we learned that we’re once again included in Fortune magazine’s List of 100 Places to Work. In fact, we moved back into the top 10. Eight straight years on the list, five times in the top 10, which is a rarity. In all the years Fortune has compiled the list, only 10 companies have ever made it into the top 10 five or more times. We claim this on behalf of all our brotherhood in REIT land and we give credit to our Camden team, which has allowed us to achieve our vision of creating a great workplace. I’ll turn the call over to Alex Jessett, Camden’s Chief Financial Officer.

Thanks, Keith. Before I move on to our financial results, a brief update on our first quarter transactional activities. During the quarter, we sold two communities with an average age of 24 years for a total of $114 million, delivering to our shareholders an unleveraged internal rate of return of 10.8% over a 19-year hold period. These communities were sold at an average FFO yield of 6.4% and an average AFFO yield of 5.2% based on trailing 12-month NOI. The difference between the FFO yield and the AFFO yield is $1,300 per door in actual CapEx. During the quarter, we completed construction at Camden La Frontera and Camden Lamar Heights, both in Austin, began leasing at Camden Chandler in Phoenix and Camden Southline in Charlotte, and commenced construction at Camden NoMa Phase II in Washington D.C. Also during the quarter, we finalized our third fund agreement with Texas teachers. Camden will have a 20% ownership in this new fund, which has a total investment capacity of approximately $450 million based upon 70% leverage. The midpoint of our current earnings guidance does not include any investments in this third fund in 2015. Moving on to our financial results. Last night, we reported funds from operations for the first quarter of 2015 of $98.5 million or $1.08 per share. These results were $1.8 million or $0.02 per share better than the $0.06 midpoint of our product guidance range. This $0.02 per share positive variance primarily resulted from $1.1 million in better-than-expected operating performances from our communities and $500,000 in lower-than-expected corporate expenses. The $500,000 positive variance in corporate expenses is primarily driven by timing and lower employee compensation costs. The $1.1 million better-than-expected performance from our communities is a result of the following. Property revenues from our same-store communities exceeded our forecast by $1.3 million as both rental and fee income were favorable to plan. Our new Camden technology package with internet service, which we discussed last quarter, is rolling out as scheduled and contributed approximately 30 basis points to our first-quarter same-store revenue growth in line with expectations. Property revenues from our consolidated non-same-store and developing communities exceeded our forecast by $500,000 as a result of better-than-expected occupancy at our student housing community and accelerated leasing at our developing communities. Our Camden Boca Raton development is now 95% leased and our Camden La Frontera development is 96% leased, both ahead of schedule. The $1.8 million in better-than-anticipated property revenues from our consolidated communities was partially offset by $700,000 in higher-than-expected property tax expense, which makes up approximately one third of our total operating cost. Certain property tax refunds we anticipated receiving in the first quarter will now be received in the second quarter, and late in the first quarter, we saw larger-than-anticipated tax valuation increases for our Houston and Austin communities and adjusted our tax accruals accordingly. Property values continue to increase in all of our Texas markets, and the tax assessors are taking notice. Our original operating budgets were based upon a 5.75% full-year increase in property taxes, which we now anticipate to be closer to 7%. On page 14 of our supplemental package, we’ve provided a closer look at the components of our same-store expense growth for the quarter. Excluding property taxes, the quarterly results from many of our expense line items included certain timing and nonrecurring events in current and prior quarters, which were accounted for in our original budget. We expect each subsequent quarter's total expense growth to be in a 4% to 5% range. For the full year 2015, we anticipate larger than usual expense increases for taxes and utilities, with the remaining expense categories averaging in an approximately 2.5% increase. In line with expectations, our new Camden technology package with internet service contributed approximately 70 basis points to our total first-quarter same-store expense growth and approximately 340 basis points to our total utility increase. The combined revenue and expense component from this technology initiative added about 10 basis points to our total same-store NOI growth for the quarter. Based upon our first-quarter operating results, we’ve revised our 2015 same-store guidance. We now anticipate full year 2015 same-store revenue growth to be between 4% and 5%, expense growth to be between 4.7% and 5.25%, and NOI growth to be between 3.5% and 5%. As compared to our prior guidance ranges, our revised revenue midpoint of 4.5% represents a 25 basis points improvement, our revised expense midpoint of 5% represents a 25 basis point increase, and our revised NOI midpoint of 4.25% represents a 25 basis point improvement. The expense increase is entirely driven by higher property taxes. We’ve also revised our full year 2015 FFO per share outlook. We now anticipate 2015 FFO per share to be in the range of $4.40 to $4.56, versus our prior range of $4.36 to $4.56, representing a $0.02 per share increase to the prior midpoint primarily driven by our first-quarter performance. Last night we also provided earnings guidance for the second quarter of 2015. We expect FFO per share for the second quarter to be within the range of $1.08 to $1.12; and the midpoint of $1.10 represents a $0.02 increase from the first quarter 2015. This $0.02 per share increase is primarily the result of the following: A $0.04 per share increase in FFO due to growth in property net operating income as a result of an approximate 2% or $0.03 per share expected sequential increase in same-store NOI as revenue growth from the combination of higher rental and fee income as we move into our peak leasing periods, combined with the receipt of prior year tax refunds, more than offsets our expected increase in other property expenses due to normal seasonal summer increases in utility and repair and maintenance costs. And an approximate $0.01 per share increase from our non-same-store communities as the additional NOI contribution from our nine communities in lease-up will be partially offset by the lost NOI from our first-quarter dispositions and lower occupancy at our student housing community in Corpus Christi, Texas. Occupancy declined significantly from May through August at this community. The growth in our property net operating income is being partially offset by a $0.02 per share decrease in FFO due to higher property supervision and general and administrative expenses resulting from delayed first-quarter corporate overhead costs and the timing of our annual trust manager compensation costs. Finally, our capital position remains very strong. We finished the quarter with $174 million of cash on hand, no amounts outstanding under our $500 million unsecured line of credit, and a net debt to EBITDA ratio of 5.3 times. At this time, we will open up the call to questions.

Two questions on Houston actually. On the last call, you mentioned that you thought job growth to be at 50,000 to 60,000 and that guidance for same-store revenue would be about 3.4%. Do you have updates to either of those or are you still tracking towards that?

So the data provider that we rely most heavily on is Ron Whitten, and he still has Houston job growth numbers at about 63,000 for the year. I would tell you that his 63 is a soft 63 based on what he’s seeing right now preliminarily. He has not redone his forecast number, so his official forecast is still in the 63,000 range. As you know, one of the challenges is that the bid-ask spread on job growth in Houston for 2015 runs all the way from essentially 0 to the high end of the range, which is still in the 60,000 range. So, I think that’s the thing everybody is still trying to get their hands around. And we’ll just have to see as it plays out through the year. Obviously, the first quarter was weak not only in Houston, but weak all across the entire country in terms of job growth, so we’ll have to see how that pans out. We’ve not changed our forecast for the full year in terms of revenue growth for Houston. We’re still in the mid-3s. We still think that’s achievable, and the one thing that could make that slide is if the 0 turns out to be the case and not something closer to the 50,000 to 60,000 jobs that we’d forecast last quarter, then obviously that will come into play in the third and fourth quarter this year. But at this point, we still think that 3.5 is the right number for the year.

And I know you mentioned the values are increasing in all your Texas markets. Can you talk about cap rates in the transaction market in Houston specifically?

Sure, cap rates continue to be very sticky and low here in Houston. The thing that has changed is instead of having 15 to 20 aggressive bidders, now you have 8 to 10. This means you have fewer, but still enough liquidity and enough activity on the bid side to keep prices very high. Alex mentioned our fund, $450 million in acquisitions that we are trying to do for our fund, and we have been outbid on a number of Houston transactions where we just couldn’t stomach the price. When you get down to a 4.5 cap rate on a really high-quality property in Houston, that’s happening every day here. I wouldn’t say that if you have lower-quality properties that don’t have a good rehab story or they’re not in core locations, you probably have a lot less bid for that kind of property. But any kind of property that has quality like Camden's or anything in the B-plus or A category is still seeing voracious bids and high prices.

I'm hoping you could provide an update on D.C. In 2014, you were performing better than your peers, but this quarter you've shown some weakness.

We experienced a slight decline in revenue this quarter, down one-tenth of a percent. This marks the first negative revenue figure we've seen in D.C. since the downturn. However, our portfolio performed better than many of our peers, who all reported negative quarters last year. While we did see a decrease, it aligned with our budget expectations for the first quarter of 2015. We still anticipate positive revenue by the end of 2015, although it may not be substantial, likely in the 1% to 2% range for the year, which we believe is achievable. Overall, our outlook for D.C. matches our expectations, and we still foresee a positive revenue contribution from the region for the full year.

And then on your communities and lease-up, it has been successful and also it’s in a high supply market. So I was just curious if you’re seeing competitors not too much in terms of concessions or how you’re having so much success there?

Sure. The new development is still very robust around the country. And when you think about concessions, it just depends on which market you’re in and it depends on the sub-market. Most merchant builders are very quick to pull the trigger on free rent. The logic is you’ve got an empty building, so free rent is easy to give since all your units are not paying rent the day you open. So most people put in, including Camden, at least a month of free concession on new lease-ups. We have some markets, for example, like Boca, where we lease up Boca much faster than we thought. We were able to give very few concessions and in the early part of the cycle, there were really no concessions to be had. Today, they range anywhere from two weeks free or look-and-lease kind of thing, to in some markets a month free to six weeks free. It just depends on the sub-market. But it’s fairly typical, and even with those kinds of concessions, we’re leasing up generally faster than we anticipated. But there are concessions in the market just because of the nature of having an empty building that you need to fill.

Just going back to new sales, hoping you could give a little bit more detail on where renewals and new leases are trending so far in the second quarter?

Yes. So for April in Houston, the new leases came in at about 1.7% up, and the renewals came in at about 4%. So the weighted average of those two is just short of 3%. That trend has continued. It actually got a little better on the renewals that have been sent out; they have been sent out in the 4.5% to 5% range out into May and June. So, slight improvement from the first quarter, but keep in mind that when we gave our forecast for Houston in our guidance call, we graded Houston as a B market and declining. So I think that the market is rolling out exactly as we had anticipated in our guidance. So it’s stable, we’re continuing to push occupancy. We’ve got occupancy in Houston. The current occupancy is about 96%, which is higher than we would normally see this time in a year. It tells me that if we’re at 96% occupied and still able to get 2% to 3% increases on new leases that we are not under a whole lot of stress from an operating standpoint. But it’s early in the year and we will just have to see how the rest of the year plays out.

Do you have any insight into how the new graduate job market is performing for recent college graduates in Houston? It seems they are starting to work at apartments. Any information on whether larger energy companies are advising graduates not to apply would be helpful.

The new graduates are not as strong as they were a year ago when there was significant hiring in the energy sector. They are not withdrawing offers, but there seems to be less hiring overall. My daughter recently graduated with a Masters in Geology and secured a position with an oil field services company, which is promising. From discussions with industry professionals, it appears that while fewer young graduates are being hired, companies are opting not to hire at all rather than pulling back on offers. In talking to a contact at a major oil company, he mentioned that he is likely to receive a retirement package, which will allow them to hire two younger individuals at a lower total compensation. This trend suggests a shift towards younger employees as older workers retire. Since the downturn, approximately 60% of jobs created have gone to those aged 30 to 40. I expect a similar pattern in the energy sector. Recently, I attended a university event, and I didn’t hear any concerns about recent graduates struggling to find work, indicating that the job market remains strong in areas like petrochemicals, healthcare, and the port.

If I can quote another YouTube song, it looks like you are running to stand still in taxes regarding the higher property taxes. So how did you comfortable that this won’t happen again in 2016?

That’s really one of the challenges we have here for sure. And of course, our State legislature is in session, and they meet every two years because they don’t want to meet every year because they might do something stupid. They are actually talking about a $3 billion property tax cut in the State right now. The challenge you have with where we are on property taxes here is that during the downturn, we pounded on the values big-time and got them down pretty aggressively, and now we are on the way up. I think that the good news is that we had substantial increases, and the question will be can we fight those increases effectively. We generally have been very effective at that, and one of the things I think that you have to remember on property taxes is that it’s not so much about whether the property tax evaluation is exactly what the current market value is of your property. Is there a fairness test, which means that if there are four properties in a line and your property happens to be assessed at a higher value than the one next to you, you can argue even though your value may not be as right as your net asset value of that property. You can argue for property tax reduction on a fairness basis. With that said, yes, we’re at risk about property taxes in Texas. But on the other hand, we’ve been fairly good battlers in that area, and hopefully we’ll be able to do that again in '16.

Okay, thanks for the color. On your balance sheet, you’ve been very consistent in using a very modest amount of floating rate debt compared to your peers. Is this something that you can contemplate increasing, and in particular how do you fund the $250 million maturity this year?

Yes, so obviously we do look at floating rate debt quite a bit. We think for us, probably about 20% is the maximum amount that we would like to go up to. Obviously, we are under that number right now. So we do think we’d have the capacity to take on some more float. We do have a $250 million bond maturity in June of this year, but as I said earlier, we’ve got full capacity underneath our $500 million line of credit, and we’re sitting on about $174 million worth of cash. So we’ve got a lot of options when it comes to how to handle that maturity. On the flip side of that equation, with interest rates as low as they are today, when you lock in a ten-year unsecured bond at 3.25% or 3.5%, five years from now that might look really good. So that’s the sort of push-pull, right? You can really feast on the incredibly low rates, but on the other hand, if you can lock up long-term debt at pretty historical lows, there are some compelling arguments about that as well.

Just a few quick questions. First on Houston. As we watch the oil price bounce around, obviously it had a low close to 40 and now it’s up in the mid-50s. Can you just help us understand how all your friends in the oil business view that? I mean they see a lot more long term than finance firms in the operator business. But still, it would seem like people are breathing a much better sigh of relief now that oil has rebounded versus the lows it was at. But just curious if that’s changed any of the sort of talking the chatter among your executive peers?

The interesting part of what’s going on is that a lot of people thought there’d be more sort of carnage in that space. You’d have more M&A; they actually, in the Houston Chronicle, published what they called a death list, and it’s the companies that are on the edge that levered up, and we’re blowing and going using short-term debt, you know, faster business and didn’t have positive cash flow. They made this list, and one of the top companies on that list, I think their stock price collapsed to about $1 a share, and their bonds were trading at $0.30 on the dollar. Well that company about a month ago got a $1.5 billion infusion on a secured basis to take out their challenges. Now they’re sitting, raising their stock, quadrupled, went from like $1 to $4 or something like that. What’s happened here is that there’s been a massive amount of capital that has been accumulated and is sitting on the sidelines, waiting for the big drop, almost like we were in 2009 and 2010. The big drop or the big value or the free lunch, if you will, never came for real estate, obviously, and it may not come for oil and gas because there’s so much liquidity and people are getting deals done. So there’s not a lot of carnage there, and the people that have low debt and prepared for the cycle are very excited about having opportunities to deploy capital in a lower-cost environment. On the one hand, people are talking about great things happening and being able to buy things, but on the other hand, there’s not a lot for sale. We do have these two big mergers that are going on right now with Shell and the BG Group and you also have Halliburton and Baker Hughes. There are going to be some divestitures around that, and in the discussions that I’ve heard with some of those people that are close to it, they said they have buyers lined up to buy their assets, and it’s going to be very robust pricing. Probably a lot less robust if it was a year ago when the price of oil was $100.

And then the second question is on the property tax. You discussed Texas a bit, but broader when you think about Florida and some of the other heavy property tax states, how much of a mark do you think still exists in your portfolio between where as far as the big true-ups? Do you expect still a lot more, or in your view have most of the assessors taken your properties to market?

Obviously, we evaluate that constantly. I think we have a very good team that contests all of these taxes on a regular basis. Tax assessors have been getting more aggressive in some of these markets, but Florida, particularly, we’ve done a pretty good job of keeping them in check, and it’s not a market that we look at and think there’s a tremendous amount of risk.

That's like a hard question to really answer because the problem is that net asset value or the value of the property is interesting in a discussion but not what really drives the tax discussion; what drives it is the relative valuations of the properties in the marketplace you’re comparing yours with. So, most of the properties are probably substantially under their market value; the question is how much are you under the market value compared to your competitors' gross history, and that’s where you negotiate.

I mean, you’re not obviously giving 2016 guidance, but if you’re raising the impact of real estate taxes this year, we saw the same thing with post where they’ve been hit with that in successive years. Is this something you think is going to be an issue over the next few years, or your view this one-time pressure is more this year and otherwise it’s just normal property tax?

Since property tax is a third of our operating cost, we are vigilant and we are focused on this every single day with our team in the field. Assessors want to have values going up. The good news is we get hit sort of regionally; what has happened right now in Texas is getting smacked and a couple of years ago Florida was hit. It’s always going to be something that we’re worried whether it’s above trend. Next year, it’s likely to be above its long-term trend or three, but we’ll be seven, we hope not, but I’m not sure what the numbers will look like in '16. The key is making sure that you are constantly focused on it and have the best people prioritizing it, and we have that.

So Ric, is there one care right now about West Texas being up 11% this year up 40% from the trough? Is that having any impact on business in Houston or people who have kind of letting that off for the time being?

It doesn’t have an impact because when you think about companies that have debt, and their debt is tied to their production value and the value of the assets in the ground, it’s important to them because they have more value when they’re starting marking their assets to market and they compare to their debt. So, it is a big deal to have it up 10 or 11 bucks. I think the biggest issue that most people feel they just need less volatility. They want to make sure that if they get $60 oil or $58, they can live with that as long as they believe that it’s not going to $30.

I think just to add to that, the stack is probably more directly impacting and impactful, not necessarily the gyrations in the price of West Texas crude; it’s the drilling rate count. That is probably a more meaningful thing to watch in terms of directional impact on the overall economy. We’re down at 932 rigs, which is about half of what we were a year ago, but the rate of decline in rig count has slowed pretty dramatically. I think the last decline was about 20 rigs or so, and at one point, they were dropping 75 to 80 rigs on a weekly basis. So, I think watching the rig count over the next quarter or two is probably more telling about the prognosis for the oil patch in Texas throughout 2015 and into 2016, assuming that oil stays approximately in some band around $45 to $60 a barrel.

Because it’s forward-looking?

The impact on employment is significant because the likelihood of job loss is closely tied to how close your job is to an oil rig. This idea holds true when considering the recent layoffs, especially those in oil field services companies and major producers, which have predominantly affected workers in the oil sector. Many of these individuals are no longer in Houston. A significant decline in active rigs inevitably affects Houston's job market. The uncertainty around the extent of this impact is likely contributing to the range of job losses being estimated from zero to 60,000.

The decline in rig also is driving force to pushing oil prices up?

It is, but it’s less than you might think because you’re talking about drilling rigs, dropping 50 over an overall week by week basis. That production does come on pretty quickly, but in the scheme of World Oil Supply, it’s a drop.

The other challenge with supply dropping is at the frac wells both in Texas and in North Dakota. Once they drill and they deplete really fast, something like 45% to 50% in the first year, which means that they bring that oil out really fast. You still have, even though the rig count drops, you still have production ramping up, because you’re bringing that oil out really fast. I have heard anecdotally that people are now drilling wells, testing them out, and then copying them waiting for lower oil prices rather than bringing the oil out and selling it and then having to store in Oklahoma. So that’s been an interesting situation now where they are drilling companies.

The tankers are waiting offshore to get a better price.

The second question is about the immediate impact on the office sector. If someone loses their job, they are unlikely to inform Ric Campo about leaving their apartment, which suggests a longer-term effect on your business and the multifamily sector. If this situation continues and 2016 shows a decline compared to 2015, considering your discussions about recycling capital, why wouldn't you be more inclined to sell in Houston now before the impact of 2016 is felt?

I think it’s all about, at the margins, we’ve sold assets in Houston, and it doesn’t make sense to me really to sell the assets we have here. When we look at our asset pricing model and we rank our assets and we rank which ones in our portfolio are the right ones to sell, Houston is not even in the bottom third in terms of forward return on invested capital growth rate. To me, I look at our portfolio globally and I don’t react and try to tie into the market because we’re going to be long real estate 100% of the time, and I want to be long the right properties in the markets that we are going to be in long-term, and we want to sell those properties that are going to grow slower in terms of return on invested capital and on real cash flow on AFFO. We have other assets in our portfolio that just have higher priority sales.

It’s been a while since you guys have been involved in the M&A game. But obviously have had an appetite historically. I’m curious where we are in the cycle and just the opportunities that seem to be out there. What sort of your current latest thinking on the environment?

I find it interesting to observe, but we have not participated in mergers and acquisitions recently, as our focus remains elsewhere. When considering the purchase of a company or engaging in M&A, it primarily depends on whether it offers a strategic advantage that would enhance our long-term growth in net asset value or cash flow. There are also tactical opportunities that may not significantly alter our situation but can enhance the quality of our portfolio and future growth rate. If such an acquisition can be executed without using leverage and without causing significant dilution, then we would be inclined to pursue it. The current challenge in company-to-company M&A is that given our stock price, our position is not favorable for exchange. Being valued substantially below our net asset value makes it difficult to acquire another company while paying a premium at NAV and offering additional stock at a discount. This approach does not make sense. Furthermore, M&A decisions are often influenced by social factors rather than solely by the desire to sell. We have achieved successes in this area in the past, and all of our strategic moves have created long-term value for Camden and our shareholders. If a suitable opportunity arises that is financially sound, we would welcome it, but I currently do not see many options. Over the past 20 years, we've managed to retain only about nine companies out of 35.

Hi, this is indiscernible. You've mentioned previously about the decline in construction costs in D.C. and possibly Houston, and you are starting a new project in D.C. this quarter. Are you planning to initiate any projects in Houston, or is that situation stable for now?

We have our construction starting in Houston. We did last year, which was towards the last year, which is McGowen Station, and we do think that construction costs are going to come down in Houston. The McGowen Station project has a fairly long lead in terms of being able to go to start building; we’re building a 400-space parking garage and a Camphor Park, a three-acre park adjacent to the property which will take us probably into the fall to get to the point where we’re actually going vertical on our building. So we are going really slow on our buyout on our job and hopefully we’ll be in a situation where we can get some favorable pricing later in the fall and towards the end of the year, but I do think construction costs are going to come down here. When you look at office buildings, for example, there are 17 million square feet under construction right now, and there likely won’t be a lot of speculative construction going forward. A lot of that staff, about 4.5 million square feet, is Exxon’s new facility up in North Houston and that’s almost finished. What’s happening is the construction workers that are working on those jobs and construction contractors are looking on the horizons saying where is my pipeline. The pipeline is going to shrink pretty dramatically. If you don’t have your project financed today, it’s highly likely that you’re not going to get finance. The pipeline that we see today, what is coming online in 2015 and 2016, you’re going to probably see a significant drop, at least a 50% drop from ’16 to ’17. That should have downward pressure on construction costs when construction companies today are at premium margins and may get back to more normal margins.

So, just to be clear, would you start another one in Houston this year?

Probably not. We have one that we started and I think we have two tracks of land in downtown. The downtown market is really robust and doing well, but even if we wanted to start this year we really couldn’t because we finish with plans, and it could be a ’16 start. But we watch the market and make sure that our timing is right on that.

Just want to stick with Houston here. If we’re at 3:9 today and it sounds like 3:5 is sort of the expectation for the year, I guess. Would you expect the number two to end the year at the lowest level, or do you think we’ll bottom out sometime in 2015 and potentially have the opportunity to see that go up again in 2016 or towards the end of 2015?

My guess is that you would draw a straight line from 3:9 down to a mathematical average of 3:4 because the timing of the supply is the wildcard in that forecast. It gets back to the job numbers, whether it’s in the bearish or bullish end of the spectrum. What we’re seeing right now and what’s happening in Houston is completely in line with the plan we laid out because when we laid our plan out, the 22,000 apartments they’re going to be delivered in 2015 were 100% notable. Now, there has been a little bit of shifting in the timing of the deliveries of those apartments just because contractors haven’t had enough labor to get the units turned, but they’re coming, and it’s pretty easy to identify where they are and where the impacts are going to be. We did that on a submarket basis around our communities, and we think we have properly anticipated and put a fence around the supplying impact, and then you are left with the question of demand and job growth.

Okay, that makes sense. Maybe just another question with a little bit of a different slant here, but obviously you're long-term positive on Houston. You’ve mentioned some additional land tracks, but I was just wondering if you’ve made comments that cap rates really haven’t moved on income-producing. I was just wondering if land prices have changed at all, and do you have any interest in picking up some additional land in Houston?

Land prices have changed somewhat. They went from white hot to too hot, and there were opportunities in the land segment where people are selling land at a big discount. We might look at that, but you haven’t seen any bargains or anybody in trouble. You have a classic situation here where people expect you’ll have the job losses and everything they talk about in Houston, and they go to find some value, but guess what there is no value anymore; value is defined. I’ve got to find somebody who is down on their luck and willing to sell me a property for $0.50 on the dollar. Land, for example, that was going for selling numbers like $200 a foot and up from $100 a foot, now it’s $150 a foot. But it’s still pretty high, and in order for that land to be utilized properly in development, you still have to build a very high-end product very densely. So there really is not a lot of value opportunity there; there are guys who are definitely looking who are trying to find something. But we still see land that was under contract closing at really high prices here. So there are not a lot of great values; we are searching for it.

Good question on the way supply is going to shape up in ’17 for D.C. Based on what I’m looking at, it looks like things trail off a little bit in ’16, but there are rumblings that maybe some supply is coming in ’17. I was hoping you could talk about it’s early to kind of pinpoint a number, but where that supply might be coming on especially relative to Camden?

Our forecast for new supply in D.C. this year is about 11,000 apartments and we’ve got it coming down to about 7,000 next year; and then in ’17, the number, if it’s not too much less reliable is also around 7,500. If you get the kind of job growth that we are currently forecasting for the D.C. metro area, which is in the range of 40,000 to 50,000 jobs, 11,000 of new supply is not a really troublesome number. If you get that 40,000 to 50,000 jobs and then if you look out into the ’16 and ’17 timeframe, unless something changes quickly that ’16 number of 7,500 apartments is going to be fairly reliable. In that case, for equilibrium, you need to create another 30,000-35,000 apartments in the D.C. metro area. I certainly hope that would be something that a number that we could surpass if we get some kind of recovery in the D.C. metro area with 30,000 to 40,000 jobs. The D.C. metro area is still fairly anemic relative to long-term employment growth in that region. So I think the wildcard is still the only employment side of things. Right now, completions, because they would be fairly manageable in D.C. metro.

Any indication at this point in terms of submarket within the D.C. metro and where the supply is more likely to be concentrated?

You’ve got a fair amount of construction going on right now in the District. Historically, that’s been the area that’s been the strongest in terms of bringing in new people to live in the District, where people want to live for a whole host of reasons, and the historical rent growth has been better there. When we look at the D.C. metro and we kind of look at it property community by community, when we account with our game plan for 2015 with our operating teams, it’s not really submarket related in terms of Northern Virginia or Maryland versus D.C. proper; it’s really submarket driven with regard to new supply. So if you have a community that’s got two new lease-ups that are considered comparable and in the same submarket, that community is going to struggle with the lease-up. It doesn’t really matter what part of Northern Virginia or what part of the D.C. metro is in; it’s more a matter of find out where this new supply is coming online and that is likely to be where the pressure is going to be; it certainly has been that case for our portfolio.

Hi guys, this is Chris for Ian. I’m just curious if you could update us on the shadow pipeline NoMa to put $115 million into your $300 million guidance. It sounds like you’ve got Shady Grove and content logistic for 2016. Are you kind of done with starts for the year, or do you think that will come online this year, or will it start?

Okay, on NoMa, there are definitely two to three other projects here, including other one-based projects, which is right across the street from us. NoMa is an interesting case because, if you think about, three years ago NoMa was a place that was kind of nowhere; now you have a robust workable area with very, very high demand. We leased up NoMa Phase I ahead of schedule and ahead of budget on rents and returns. We really like the Phase II investment and we like NoMa long-term. I think it’s going to be fine there with the number of apartments that are coming up; it’s not over-committed or over-saturated; there is not too much to absorb, I don’t think. Especially when some of the additional improvements are done in the NoMa area, it’s looking very good.

Just to clarify, Shady Grove has not been shelved as a 2015 start. I think that was the second point.

Yes, the second question was about Shady Grove. Shady Grove is a start for 2015.

If you add those two together, that’s roughly $200 million, which is kind of mid-range of our guidance of $100 to $300 million starts.

The Atlanta deal is probably a 2016 start, not a 2015 start. If you look at our pipeline on page 17, you can see there are four in the pipeline, and Shady Grove is one of the other three, likely to be either starting at the end of sometime in 2016 or even 2017, depending on how we feel about Houston.

Got it. I think I misunderstood your last comments. So just going back to D.C. quickly, you talked about how supply and different submarkets affect rent growth, but just want to talk about what you’re actually seeing on the ground right now referred by some of the peers that the CBD is actually kind of catching up with the suburban markets. What are you seeing in the different sub-markets of Washington D.C.?

Actually in the, since the end of the quarter, I think I gave you the April new lease and renewal numbers for D.C. which are pretty good. They were 2.3% on new leases and 4.3% on renewals, and that’s a weighted average of about 3.2%. That was for actual in April. Our renewal offers that have gone out in the entire D.C. metro area have actually gone out at about 4.6%. I think I also shared with you that our occupancy rate is currently at a little bit above 96%. We were 94.7% occupied in the first quarter; there are a whole lot of reasons for that obviously due to the weather, but notwithstanding that we’re back at 96% occupied and our new lease and renewal numbers are stronger now than they were in the first quarter. So all that sounds a lot more constructive to me. I think that’s why we still feel that despite the one-tenth down in the first quarter on revenue, that by the end of the year, we’re going to have a positive revenue number for the D.C. metro.

Hi, I have a quick question before David goes. I'm following up on your comments regarding your belief that your stock is significantly undervalued compared to its net asset value. You appear to have greater confidence in the outlook for asset values in Houston than in the public market, so why aren't you buying back shares at this time?

We've always stated that we would repurchase our shares if they were available at a significant discount for an appropriate length of time. The issue we've encountered this year is that the volatility has been quite extreme. It's fluctuated from $82 to $72 to $79 and wherever it stands today. The challenge is that we need to sell assets before buying back the stock. If we are to proceed with this plan, we must ensure that we have sufficient time to execute it, and we haven't been presented with that opportunity due to the high volatility. However, if we do have a timeframe that allows us to sell assets and buy the stock at a substantial discount, we will take that action.

Okay, and based on your past experience doing this and we all know you put an active buyer of your stock in the past, how much time does that usually take?

It has to be more than a week or two, potentially extending to a month. The main challenge is the long blackout periods during which we can't buy any stock. People may ask if we are buying our stock right now, but we are limited to specific time windows for such actions due to these blackout periods. It is essential for this situation to be persistent and last more than a month.

And is it fair to assume that given the significantly better value seen in your stock than in the transaction market, you’ve put in any of your acquisition plans on hold for now?

Well, we have $450 million to spend from the fund. So no, we haven’t put our acquisitions from the fund on hold. If you look at our history, the last three years, we have been a net seller of property. The question will be whether we are going to continue to be a net seller of property. So clearly to me, the thing that's attractive to trading assets in the capital recycling part is that we've been able to trade older 20-plus year old assets for newer assets to the very, very low spread to negative spread to real cash flow or AFFO. To me, that’s a good thing to do in an environment like this. Generally, the spread between older assets and newer assets has been very wide, and we’re really seeing historically tight spread there. So we will continue to try to turn those assets that way, increase the quality of the portfolio, raise the rents, or decrease the average age. So we may do some of that as well. But that wouldn’t preclude us, if we have the opportunity with a reasonable amount of time, just to sell assets and buy stock either.

Great. This is David. Can you talk about the difference in performance between your urban Houston assets and some of your suburban Houston assets? It looks like the higher price, more well-located properties have had some rent growth. I’m curious if you could just kind of talk about that.

It's interesting to note that we do look at this over a four-year timeframe, where the difference in the As and Bs is minimal. Currently, there is more pressure on urban properties, but I don't think that's due to the product type or the renters' mindset. It's primarily because most of the new supply is coming online in those areas. I believe it's more useful to examine where new supply is appearing in a growing market, as it will likely have an impact on rent increases. This doesn't mean people's preferences for where they want to live have changed; it indicates that there is a significant amount of construction and new deliveries in urban areas, which is affecting some of our urban communities. I would emphasize that the key distinction in the marketplace is simply more supply.

Yes, it’s a cycle. Today, clearly, the urban properties are under more pressure than the suburban properties. Said very simply, the As are definitely going to outperform the Bs. That’s part of what happens in this cycle.

That’s why we also have a diversified product base within our portfolio of a fair amount of Bs and As; we like to keep them that way. So that we have a balance of that; we’re not sitting all in the urban core, and then when the market gets to where it is today, we end up suffering more than having to balance the portfolio.

Great. And last question: Do you expect the rents on the NoMa Phase II to be comparable to Phase I, and what kind of yield are you expecting for that development?

Sure. We think they’re going to be higher than, but slightly higher than, because new pain is always more expensive than old pain, not but two will be a couple of years more finished. Our yields are very robust; the yield we have is interesting. Number one is an 8% plus or minus; I think our number two is projected, David, I think maybe 7.5% plus or minus on NoMa 1. The interesting thing about people love to talk about D.C. and lack of rent growth, but on the hand, we can develop a $115 million project and have an 8% yield, and the market can still survive that to create a lot of new asset value.

Thank you for joining us on the call today. We look forward to seeing you soon.