Camden Property Trust (CPT) — Q2 2015 Earnings Call Transcript

Good morning and thank you for joining Camden’s second 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 second 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 there are several multi-family calls today we will try to be brief in our prepared remarks and complete the call within one hour. We ask that you limit your questions to two then rejoin 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. A few weeks ago our team had to discuss topics for this quarter’s conference call and as always we started with the most important item, picking the pre-call music. It’s been a really hot summer here in Houston. The summer is in full swing so we decided to use songs about summer as a theme. We sorted through dozens of summer songs and settled on five, one of which was 'All Summer Long' by Kid Rock. A few days later I got a research report from our REIT analyst group whose name I won’t mention, except to say that the name rhymes with ‘Fernings Beat’. The report was an update on the residential REITs titled 'All Summer Long', an obvious reference to the song by Kid Rock. Honestly, what are the odds that we would both reference a somewhat obscure Kid Rock song in the same week? I’m guessing the odds are very low and certainly less than 20%. I’d like to thank our operating teams in the field and our corporate teams supporting our field teams for their contribution to our strong quarterly results. I know that some of you were surprised that we produced a strong quarter and raised guidance for the second time this year. We are, however, not surprised. We have built our portfolio based on a philosophy that geographic and product diversifications, in markets where population growth and job growth lead the nation, will produce long-term net operating income growth with lower volatility. Houston has been on everyone’s question list and is a great example of how geographic and product diversification has served us well over the years. For the last three years, Houston has led our NOI growth and our revenue growth and as Houston moderates, we now have Atlanta, Denver, and Austin leading the way for our revenue and NOI growth, producing very good numbers. During the quarter, we acquired two development sites that I think deserve discussion. They illustrate our disciplined strategy in this part of the apartment business cycle. It’s really difficult to compete for acquisitions given the low yields generated by the incredible flow of capital that continues to invest in the multi-family business. So, we’ve adjusted our objectives towards development and value creation and we've created significant value in our $1.3 billion of completed and under construction developments that will add $400 million of value to Camden’s NAV or nearly $4.50 a share. Development is also becoming more difficult as land prices continue to accelerate and construction costs and labor shortages are the order of the day. We acquired the two sites on very attractive terms. The first I’ll talk about is the Arts District in Los Angeles. We’ve been working on this project for three years. There have been multiple zoning and entitlement issues and everything you can imagine that goes on in Southern California, but we stayed with it. Since we’ve been working on this job for three years, we acquired the land for $86 a square foot in a market that’s $250 to $400 a square foot today and we’re ahead of most of our competition there. The land in Arizona is an interesting story. We bought the land from the State of Arizona adjacent to the Mayo Clinic, which is an incredible site that’s never been on the market and we’ve been working on for five years. This was a complicated transaction buying from the state in an open auction, not always the thing you want to do. However, since we were the only bidder, we bought the property for the lowest possible price. The fact that we were the only bidder was a result of the complexities and the timing required by the state for bidders to put up dollars and perform due diligence. So being the only bidder on an incredibly attractive site is how we create long-term value. These two transactions typify how you need to focus on a part of the market you’re in; if you can’t do acquisitions and you can’t do the things that you’re used to doing, it’s really about discipline and focusing on trying to create value wherever you can in this kind of cycle, and that’s what we are doing with these transactions. With that said, we’re very excited about what’s going on with Camden, and we appreciate our teams in the field. I’ll turn the call over to Keith.

Thanks, Ric. As Ric mentioned, the operating conditions across our portfolio remain very strong. Same store revenue growth for the second quarter was up 5.2% and 2.2% sequentially. The quarterly revenue growth of 5.2% represents our best growth rate in eight quarters and 12 of our 16 markets had revenue growth of better than 5%. Our top four markets for revenue growth were Atlanta at 9.2%, Austin at 8.4%, Denver at 7.9%, and Phoenix at 7.2%. Houston and DC Metro continue to perform in line with expectations, posting revenue growth year-to-date of 3.7% for Houston and 0.6% for DC Metro. As a reminder, in my market-by-market outlook for 2015, I assigned DC Metro a letter grade of C with a stable outlook and I rated Houston as a B market with a declining outlook. Both of these markets are performing slightly better than our original budget and it’s in line with our expectations for the first half of the year. Regarding Houston’s performance year-to-date, it’s perhaps a little surprising that our original revenue guidance is holding up in light of the substantial downward revisions to the employment growth outlook. Our original budget for Houston was based on an employment growth estimate of 60,000 new jobs for the year. Despite adding 4,000 jobs in June, Houston’s job growth rate year-to-date rounds to zero. Based on the weak job growth in the first half of the year, the employment growth estimates for Houston have been revised downward by Whitman Associates to 23,000 for the full year and by the Greater Houston Partnership to 25,000. Although there are certainly more bearish estimates out there, we believe it’s still possible that Houston ends the year with about 20,000 net new jobs. Based on historical data from the Greater Houston Partnership, Houston typically adds 50% to 60% of its annual job growth in the months from September to December. While Houston’s job growth is well below our original estimates, our revenues year-to-date are slightly ahead of budget, which seems like a conundrum. We think there are two factors that have helped soften the impact of lower job growth. First, the skilled labor shortage has most likely pushed back the scheduled multi-family deliveries by at least a quarter. This is an issue in every market where we're building and it's particularly acute here in Houston. Whitman is estimating 22,000 completions for the year in Houston, however, we believe some of these deliveries will be pushed into 2016. Secondly, we believe that there is a much higher level of pent-up demand for new apartment homes than we anticipated at the beginning of the year. In the four years leading into 2015, Houston added 400,000 new jobs and completed only 40,000 new apartment homes. Using the five-to-one ratio of jobs to apartments as a measure of equilibrium, an estimated excess demand of 10,000 apartment homes was created. Some of the current absorption is undoubtedly coming from this pool of excess demand. Despite the downward revision to job growth, our regional budget for Houston revenues still looks achievable at roughly 3.5% for the year, and obviously Houston job growth in the second half of the year will greatly influence our outlook for 2016 results when we get to that. Back to our overall portfolio results, new leases for the second quarter were up 4.5%, renewals were up 6.7%, both better than the second quarter of ‘14 which were 3.6% and 6.3% respectively. July new leases were up 5.2% and renewals were up 6.8%, again both ahead of last year's results of 3% and 6.6%. August and September renewals were sent out averaging an 8.3% increase, and we're currently renewing leases in the 7% range. Our same store occupancy averaged 96% in the quarter, up from 95.5% last quarter and from 95.6% in the second quarter of 2014. July occupancy averaged 96%, and we currently stand at 95.8%. Our net turnover rate year-to-date was 48%, down 500 basis points from the 2014 levels, and our move-outs to purchase new homes remains historically low across our portfolio at 14.8% versus 14.6% in the second quarter of last year. To all of our associates, we greatly appreciate your dedication to providing living excellence to our residents, especially during the dog days of summer. Hang in there, the long hot summer will be over before you know it. And as Kid Rock sings in 'All Summer Long', now nothing seems as strange as when the leaves begin to change or how we thought those days would never end. We'll see you soon. Now, I'll turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. Before I move onto our financial results, a brief update on our second quarter development activities. During the quarter, we reached stabilization at three communities: Camden Lamar Heights and Camden La Frontera, both located in Austin, Texas, and Camden Boca Raton in Florida. These three communities had a combined cost of approximately $135 million, delivered a 7% plus yield, and created approximately $50 million of value for our shareholders, based on current market cap rates. Additionally, during the quarter we completed construction at Camden Hayden, a $44 million development in Tempe, Arizona, began leasing at Camden Glendale, a $115 million development in Glendale, California, and began construction at Camden Shady Grove, a $116 million development in Rockville, Maryland. Also during the quarter, we purchased two land parcels for future development in Los Angeles, California, and Phoenix, Arizona. Subsequent to quarter end, we completed construction at Camden Flatirons, a $79 million development in Denver, Colorado. As we do each quarter, on page 17 of our quarterly supplemental package we've adjusted our cost and timing for our developments to reflect our current estimates. The only significant change relates to our Camden Paces development in Atlanta, Georgia. We've increased our cost estimates by approximately 6%. Half of this increase is associated with own enhancements and the remainder relates to previous weather delays. This community is currently 57% leased and should deliver a 7% yield. Moving onto financial results, last night we reported funds from operations for the second quarter of 2015 of $102 million or $1.12 per share. These results were $0.02 per share better than the $1.10 mid-point of our prior guidance range. This positive variance resulted almost entirely from better than expected operating performance from our consolidated and non-consolidated communities, as both rental and fee income continue their favorability to plan, driven primarily by higher occupancy and additional pricing power which enabled us to collect higher net fees at move-in. Our turnover for the quarter was 400 basis points better than this point last year while our occupancy for our same-store portfolio averaged 96% for the second quarter of 2015, which is 40 basis points higher than the second quarter of 2014. Each of our markets registered positive sequential revenue growth in the second quarter. Our new Camden technology package with Internet service is rolling out as scheduled and for the second quarter contributed approximately 45 basis points to our same-store revenue growth, 100 basis points to our expense growth, and 20 basis points to our NOI growth, all in line with expectations. Regarding property taxes, the majority of our assessments are now in, and although many of our initial tax assessments were higher than we had originally anticipated, we've had some degree of success with our protests and appeals. Last quarter, we told you that we expected property taxes to increase 7% on a year-over-year basis. At this time, we remain comfortable with that estimate. Based upon our strong year-to-date operating performance and our expectation of continued outperformance for the remainder of the year, we've revised upwards and tightened our 2015 full year revenue and NOI guidance. We now anticipate 2015 full year same-store revenue growth to be between 4.75% and 5.25%, expense growth to remain between 4.75% and 5.25%, and NOI growth to be between 4.75% and 5.25%. As compared to our prior guidance ranges, our revised revenue midpoint of 5% represents a 50 basis point improvement and our revised NOI midpoint of 5% represents a 75 basis point improvement. For the second time this year, we've also revised upwards our full year 2015 FFO per share outlook. We now anticipate 2015 FFO per share to be in the range of $4.47 to $4.57 versus our prior range of $4.40 to $4.56, representing a $0.04 per share increase to the prior midpoint. This increase is anticipated to result entirely from same store outperformance, as indicated by our 75 basis point increase in the midpoint of our full year 2015 same-store net operating income guidance. Part of this outperformance occurred in the second quarter and we anticipate this outperformance to continue throughout the remainder of the year. Our revised full year 2015 FFO guidance assumes $100 million in wholly owned dispositions and $100 million in wholly owned acquisitions, both occurring in the fourth quarter with acquisition yields in the high-4% and disposition yields in the high-5% range. Last night, we also provided earnings guidance for the third quarter of 2015. We expect FFO per share for the third quarter to be within the range of $1.12 to $1.16. The midpoint of $1.14 represents a $0.02 increase from the second quarter of 2015. This $0.02 per share increase is primarily due to higher property net operating income as a result of an approximate 1% or $0.01 per share expected sequential increase in same-store NOI, as revenue growth from the combination of higher rental and net fee income as we continue into our peak leasing periods more than offsets our expected increase in other property expenses due to timing of second quarter property tax refunds and normal seasonal summer increases in utilities and repair and maintenance cost, alongside an approximate $0.01 per share increase from our non-same-store communities as the additional NOI contributions from our six communities and lease-up will be partially offset by the lost NOI from our student housing community in Corpus Christi, Texas. Occupancy declined significantly from June through August for this community. Turning to the capital markets, we anticipate completing the refinancing of our existing $500 million line of credit in the next few weeks. This will increase our borrowing capacity by $100 million to $600 million in total, extend the maturity date by four years, and decrease our borrowings by about 20 basis points. Our balance sheet remains one of the strongest in the REIT world, with debt-to-EBITDA in the low five-times range, a fixed charge expense coverage ratio at five times, secured debt to gross assets at 12%, 80% of our assets unencumbered and 85% of our debt at fixed rates. At this time, we'll open the call up to questions.

Thanks. For same store revenue growth, at the beginning of the year you expected a 25 to 50 basis points benefit from the bulk internet initiative. What does the updated guidance assume for that?

Right now, it's rolling out exactly as we had anticipated. So we are still in line with that estimate, might be a little bit towards the high end of that range.

Okay, and then when looking into 2016, is there going to be a continued benefit from that or will it lead absent anything else to deceleration in kind of the other revenue line?

So 2015 and 2016 are both rollout years. Obviously, more of the rollout is in '15 than '16 and then ultimately this will become a meaningful number for us, probably around $5 million.

Okay, thanks. And that's true on the expense side as well, right?

That's correct. Generally, what happens is you will see more of the expenses upfront.

Okay, so the actual NOI benefit will be more focused in 2016 in terms of the growth rates?

That's correct.

Good morning, down there. Hey, just quickly on the development, you guys obviously walked through the background on each of these deals. But at the same time your common theme on this quarter has been difficulties in finding attractive acquisitions and development sites. So should we anticipate more developments from you guys or will these two sides be sort of one-offs that you guys have been working for some time and therefore we shouldn't expect a pick-up in new development starts from you?

Definitely these projects have been worked on for quite a while and we continue to - our teams continue to try to find those needles in the haystack, like we found in these two transactions. We think the development business is definitely more difficult today and it’s harder to cancel deals. We definitely pass on more than we buy. We have been consistent in our discussion about where we are on the development cycle and where we are in the permit cycle overall and as we finish developments, we'll start others. But we definitely have peaked in terms of the total under construction that we have now and will be adding anywhere from $200 to $400 million annually going forward on the development, assuming we find the right deals.

Okay. And then the second question is, of course, Houston. Oil has taken another leg down. Clearly - well it seems that the initial oil decline didn't translate to massive job losses that was some concern over Houston apartments. Now with the latest job losses the headlines talk about more job cuts and it seems like more are coming to the office rather than out in the field. So can you just give us what you are hearing from your oil neighbors and what's going on recently with this oil decline and the lay-off announcements?

Sure. You definitely have seen some announcements, especially from some of the big integrated oils, and so we are not sure what to expect there. There have been some big numbers, but when I talk to the people that are actually running these companies locally, they tell me that they are definitely tightening their belts. But they are not doing any massive type of scenarios; because the challenge they have is that they have, in terms of being able to replace those employees in the future, they have some real issues with that and so they are trying to hold on to all their talented tech people and geologists. There are more support people that are probably being let go that weren't otherwise. So, we have not felt that, and even though they talk about it, it’s still a really big employment market here and so we haven’t seen much of that. I will tell you that in some of the conversations with some of the big oil companies, for example, there is a 50-storey building that’s been planned to house one of the big oil companies downtown and they already have two 50-storey buildings. What they were telling me in their office, I’m not going to name them, but they have an office in California where they are headquartered, and they said that the downturn is actually supporting their thesis to their management that they need to go to a lower cost market, including Houston. So that building, given construction cost is falling, is likely to be started and those people will move here in the next couple of years.

So I’ll just add, Alex, I think we are going to continue to see net job losses in the oil industry in Houston. But I think June was kind of interesting because we got 4,000 net new jobs, which got us to basically flat for the year, but within that 4,000 net new jobs there were 6,000 total jobs created and about 2,000 lost in oil-related jobs. So the net of 4,000 is not that bad a number if we can continue to see that. And there is a lot of information from the Greater Houston Partnership that indicates that even in recession, Houston has historically created jobs in back-end loaded months between September and December. So we just need to see whether that pans out again this year and if it does, then I think that bodes pretty well for 2016, considering what we’ll be looking at for 2016. But yeah, I think clearly those job losses in the oil patch are going to continue; the question is how much and then how much is the offset from all other sectors of the economy, which continue to grow.

The other thing I didn’t mention was the downstream operations. Because when you have the big oil, with oil prices down and natural gas prices still very low as well, there is still a big boom going on from a construction perspective around the Gulf Coast and on the east side of Houston for all our petrochemical factories and what have you. As long as the U.S. economy continues to do well and manufacturing continues to do well, those basic products have to be made. There are something like $30 billion under construction and a $50 billion backlog of new primary chemical activities and plans going on in the Gulf Coast. So that part of the equation should add jobs on the construction side and on the product manufacturing side of the equation that will hopefully offset some of the layoffs in the G&A side of the energy business.

Okay. Thank you.

Thanks. Good morning. Just one more on Houston. I mean wouldn’t it be expected that this wouldn’t be the year where you would see any meaningful impact to your performance in Houston, that it would be a second or third year impact? I mean if somebody who’s lost my job, the last thing I am going to do is double down and leave my apartment. I probably want to give that some time and then reconsider a year later or something like that. So wouldn’t this - isn’t the real litmus test here going to be 2016?

I think that clearly the 2016 - the jury’s out on 2016. There is still 20,000 apartments that are going to deliver in 2016 and the question will be whether there are enough jobs to support that. Keith mentioned a couple of things being the pent-up demand that we’ve had because of the job growth that we had prior to this downturn. And the other thing - what he didn’t mention, though, was the inversion that’s happening here, which is the people moving from the suburbs into the urban core and a lot of the development is in the urban core. It’s still the case that the traffic is not really great here and people continue to do that. Anecdotally, just to give you a sense, some of the high-rises that have been developed in Houston today; which, high-rise product, you really didn’t have a lot of high-rise products in Houston, maybe five or six buildings max from a rental perspective. Now we have something like ten that are in lease-up and what’s happening is there is a whole new product that has opened up in Houston. And in terms of high-end urban, high-rise, and so one of the lease-ups that’s going on right now with one of our competitors, for example, we went through the data on that, and the average income for this project - and by the way this is $3 a square foot, average unit of 1,500 square feet, so at a $3,000 average, or actually more than, $4,500 average apartment rent, and they are giving zero concessions in Houston today. Zero now, not some but zero. The project’s 80% leased, it’s a 30-storey building in the Galleria, and the average age of the person leasing this property is 55 years old and their average income is $385,000 a year. Now, those folks are not energy accountants getting laid off. Those folks are people making the decision they want to move in from their house in the suburbs and live in the urban core. And so there’s a fair amount of that going on as well, but I mean at the end of the day 2016 will be determined based on what the overall economy does for Houston. Do we have more pent-up demand? Do we have some of this inversion going on that’s actually helping the market more than we thought? And you’re right on the issue of people hunkered down. When people have a tough situation and they are laid off and they have the funds to stay in their apartment, they do tend to hunker down. So your turnover rates go down, which means that we don’t have to lease as many apartments because our people are staying longer in those apartments, and so it will definitely depend on what happens job-wise in 2016, and then how the supply plays out. At least we know that the supply is going to play out in ‘17 and ‘18 because it’s really hard to get a new deal financed in Houston today.

Great color, thanks and then a bigger picture. How do you get to the top end of your FFO guidance range, seems like something very special would have to happen in the third and fourth quarter, more like the fourth quarter?

Yeah, obviously I think a lot of it comes down to whether we end up being at the very high end of our NOI range. If we are at the very high end of our NOI range that will get us most of the way there and then obviously there’s also timing on acquisitions and dispositions can have an impact too.

So no, nothing one-timish land gains, anything like that in the fourth quarter that gets you to the top end?

No.

Yes, good morning. Just a question on the balance sheet. You paid off your $250 million June maturity with your credit facility and I just want to get your thoughts on long-term financing with the rates coming down here. How are you guys thinking about just continuing to use the balance sheet or going a little bit longer out on the lending curve?

Although Treasuries have been moving around a lot and I think the tenured is at 2.20 today, and if you assume that we can borrow say 160 on top of that, I think 3.8% for ten-year money is a great rate and we’ll do that all day long. We obviously do look at longer, we looked at 30s before; we’re not quite sure whether that’s something we want to do just yet, but certainly we think in this type of interest rate environment, it’s still very attractive to go along when you can.

We are old school real estate people that match long-term assets with long-term liabilities. We hate short-term debt, floating-rate debt. We have a certain amount that we’ll keep but the bottom line is that real estate, if you look at the real estate frames over the history of time, it’s all about financing, short or long-term assets, and then all of a sudden you have a hiccup in the capital markets and somebody needs to fund and they can’t fund. That’s why we are trying to take our maturities out. I think if you look at our maturities we have one of the longest maturities in the apartment sector and it’s not long enough for us. But it’s the longest. And then the other thing is that when you think about financial flexibility long term, as Alex said at the beginning of the call, we have 80% of our assets that are unencumbered, meaning that they have no mortgages on them. So we do have a financial hiccup like we had, maybe you don’t call ‘08 '09 as a hiccup, maybe it’s a retching, then we have the ability to put mortgages on those assets. So we’re old school long-term fixed rate kind of shop here.

I appreciate that color. And just lastly, just want to get your thoughts on where you see margins moving over time. I mean do you think Camden is able to maintain the same store revenue growth in the mid to high 4s? And also on the expense side, it’s been running high over the last several quarters, is there much more tax assessment catch-up left that would cause you to kind of keep expense growth in the 4% to 5% range?

Yeah, so long-term same store revenue growth, 4%, if you look backward for the last 20 years, it’s been in the 3% range, high 2s, low 3s and I think that’s probably a more appropriate thought process for what the next ten years look like. Obviously, the last four years have been quite an anomaly relative to that long-term trend. On the expense side, the challenge that we've had has been exclusively contained in property taxes. So, we thought that there would be some relief this year; obviously, there wasn't particularly in the Texas markets. So that's going to be something that we're going to continue to probably have to deal with. We've been very effective over the years in terms of being aggressive on property tax increases. We're continuing that trend this year. It looks like we're going to have a ton of lawsuits on our Texas valuations that we're going to have to work our way through, but that's just part of the process and we know that that's something we're going to have to deal with. The interesting thing is about property taxes that we spent a lot of fair amount of time studying this because it’s obviously been a big issue in our same store expense numbers for the last two years. If you go back for - and do an analysis over 20 years in our portfolio, the average annual increase in property tax expense over that 20-year time frame has been 2.1%, which is actually less than all other non-property tax components of our expenses combined. So even though right now it’s very painful and it’s very painful to our same store results and certainly to all of our operations folks that are getting hammered with these property tax numbers, the reality is that it is - over a long period of time, it’s actually been pretty manageable. We think our property taxes are one of the only two expense line items in our - a lot of our expenses that ever go down. So we’re - it’s something that we do spend time on. Over the long periods of time, we think it’s manageable, but obviously it’s painful right now.

Just last question, I appreciate the color. Not to beat the dead horse, on Houston but can you just give us an update on where renewals are trending in the third quarter in Houston?

Yes. So the horse is not dead. He’s galloping and he has had a great run for the last four years, at a 100 degrees; he’s sweating pretty bad today too. So we said our renewals are going out right now at an average of roughly 8%. In Houston they are going out at about - that's portfolio-wide, in Houston they are going out at about 4% and we think we'll get them signed, most of them in the 3.5% to 3.75% range. So that's consistent with what we think we will end up for the year. I think in my prepared remarks, I said I thought we will end up revenue growth for Houston of about 3.5% for the full year and we are still pretty comfortable with that. So we just keep chopping away at it and the horse keeps running.

I appreciate that. Thank you so much.

Thanks, Ric or Keith. I was hoping you just talk a little bit about supply and where you see deliveries. If you think that they are sort of peaking in your market this year or do you think 2016 might be an easier number?

Yeah. So if you - in Camden’s entire portfolio, if you're looking at completions for 2015, our current working estimate looks like it’s about 133,000 over the entire - all of Camden’s markets combined. And that number looks relatively flat to 2016. Obviously, there is a lot of movement around in that number. Houston in particular is, as Ric mentioned, I think we are at probably 21,000 estimated deliveries this year although that may - some of that may slip into 2016. And if that trend continues then some of the ‘16 is going to slip into ‘17 but based on current thinking we're likely to get in this crop of 2015 class of apartments somewhere around 21,000 and that number comes down but not very much in 2016 to about 20,000. So we're working on the supply side. We're still going to have a fair amount of supply to work our way through in the next two years in Houston.

I think nationally, one other thing, the question we get a lot of is why if the permitting business is so good and, which it is obviously based on all the numbers that all of our competitors and public companies report, why wouldn’t starts go from 300,000 to 500,000? A lot of investors are worried about that, right because there is a lot of capital trying to invest in multi-family. I think one of the governors - there are actually two big governors on the system today. One is it is harder to make your numbers work from our land cost and construction cost and there's a limit of skilled labor. So everyone in the business is spending - staying up at night, thinking about can I get my project built and for how much? And then the next big thesis is that the financial crisis, when it happened, really did change the multi-family finance, as it relates to merchant builders, which create 85% of the entire market for new development. The merchant builder, prior to 2008 was able to guarantee debt from banks and the guarantees basically were infinite guarantees. There was no tangible capital behind their guarantees. Today, however, merchant builders have to have tangible capital, they must have real cash or real liquid securities on their balance sheets to guarantee certain amounts of debt. Now that has been flexed now and there are today, because the market is so good, they're requiring less than they did two years ago. But the fact is they're requiring tangible net worth, which is actual cash, not just real estate value in order to guarantee debt. So you have a natural governor on the amount of deals that can be done because we just don't have the amount of construction workers nationwide to do it. And the second, the financial, there is financial discipline in the banking system so far. Now do they get out of control in the future, who knows? I think it's going to be tough for that to happen for a while anyway.

And just one more thought on that and because I think it’s kind of interesting, and I'll give attribution to Ron Whitten, he did some interesting work on that. There is a lot of conversation about the June starts number which looked like it spiked to an annualized rate of about 450,000 of multi-family starts. But when you dig into that, there was a tax incentive in New York that was expiring, or it did expire at the end of June. There were roughly 8,000 starts, close starts in the month of June. If you annualize that it's about 100,000. If you back that out, you're back to about a 340,000 annual run rate on starts which looks pretty rational with where demand is.

Right, now, that is helpful. Just one other question, looks like, I mean is your development pipeline going to be coming down, if I just look at the pipeline of communities versus what's underway right now? And are you starting sort of less incrementally now?

Yes, we are. We have a $1.1 billion under construction and when we finish, we will start, but we will start less than we're finishing over a period of time. We think it's prudent in this part of the cycle to do that.

So not only is it part - I mean is it not only that you think it's prudent, it's also just that you don't have as much land that you could really keep the pipeline this high?

Absolutely. We went through our legacy land that we kept during the down cycle and we're pretty much out of our legacy land in '16. And so we have to add new land to it, and the new land is just harder to add. And also we just think given where we are in the economic cycle and funding issues and we just we think it's prudent to sort of bring it down a little bit.

So just to put some big numbers around that concept. In 2016, we'll have roughly $750 million that rolls out of our development pipeline into stabilized. Our guidance for this year is $300 million in starts and we tell people that that's kind of what it’ll look like on a run rate going forward. So the math is pretty easy from there, the development pipeline’s coming down.

Good morning, guys. Can you talk about what the sort of monthly trends have been in the DC market? Have you seen more stability, more traction as we’ve gone from May to June to July or has it sort of been back and forth?

Well the big change for us, Rob, was the change in occupancy. We had a pickup in occupancy for the quarter. We had a negative revenue quarter-over-quarter per unit in the first quarter for the first time in this entire cycle. Most of our competitors have had numerous negative revenue per units, and it was a tenth to 1% negative. But we are pleased to see that jump backup. I think that obviously a chunk of that was occupancy. I would say that scrapping along the bottom still feels about right. I mean our budget for - our game plan for DC this year was revenue growth of somewhere around 1% maybe slightly better than that. And I think that's what we're on track to see. So it's hard to see that as being a real positive scenario and that’s why we've rated that market as C and stable. I think that's kind of what we're looking at through the balance of this year. I think if you look at on 2016 you get roughly on Whitman’s numbers, you get 40,000 jobs and we get about 8,000 new apartments and that again sounds a lot like equilibrium to me on a five-to-one ratio. But I think things are improving. I think the worst is probably over for most operators in the DC market. Our geography is a fair bit different than many of our competitors and I think that worst is probably over. But we are sort of scraping along the bottom in DC.

Okay, and then can you talk about the Atlanta market? I mean this has been multiple quarters in a row that this has been very, very strong from a rental rate growth. You were seeing somewhere probably between 2% and 2.5% new supply still being injected there. Is it just job growth has come in, in and above everybody's expectation that’s been driving this or has it been some other phenomena where people have been moving more towards the core, like Rick was saying in Houston. You talked about what about the phenomenon is that's been driving the Atlanta results.

So we are on the 2015 forecast for jobs is still 75,000 in Atlanta and multi-family completions looks like they are going to be roughly 10,000 apartments, and that's very, very healthy. If we think about Atlanta, it was a little bit late to the cycle, so we did not - and that's why you get 10,000 completions in Atlanta versus some of the other markets that are delivering more units. So from the standpoint of new supply, it's been delayed relative to some of the markets. But in terms of rent growth, in a market like Atlanta where you are growing that kind of jobs and you are a little bit out of balance on supply, I don't think it would be unusual to see Atlanta have another great year in 2016. If you just kind of look at the Houston experience, going back to 2011-’12-’13 and ‘14 we had - Houston was our top performing market for four years straight. So when the conditions are right and you don't have - and the supply doesn't kind of overwhelm the job growth, then you can have a pretty good run. I think that's where we are in Atlanta. Yeah, the market just seems very strong and no let-up in sight.

And I don't know where you guys are with your sort of supply numbers. But some of the data providers are actually showing less supply in '16 and '15. I mean if that's the case, I mean is there anything that really interrupts you guys being able to post sort of 8%-9% rental rate growth in that market for the foreseeable future?

If the job forecast is correct that we have, which shows another 70,000 jobs and roughly another 9,000 apartments is correct, then yeah, you are going to have another year in '16 that looks a lot like this year.

Great, we appreciate your time on the call today, and we hope that you have a great rest of the summer, and it's a nice summer long for you. Thank you very much. Take care.