Camden Property Trust (CPT) — Q4 2016 Earnings Call Transcript

Good morning and thank you for joining Camden's fourth quarter 2016 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 our subsequent events. As a reminder, Camden's complete fourth quarter 2016 earnings release is available in the Investor 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 Rick Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President; and Alex Jessett, Chief Financial Officer. We will try to complete the call within one hour today. Since we already have 13 people in the queue this morning, we ask that you limit your questions to two and then rejoin the queue if you have additional items to discuss. If we're unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes. At this time, I will turn the call over to Rick Campo.

Good morning. The on-hold music for our call today was provided by five different artists. The first person to send the correct response to the following question to Kim Callahan will get a shout out on this call and will win the right to help select the music for our next quarterly call. The question is, who are the five artists and what do they have in common? 2016, by any measure, was a great year for Camden. We stayed focused on our game plan and exceeded our ambitious expectations for the season. It was a year of blocking and tackling at its finest by our team. Our offensive game plan stayed conservative, with no acquisitions and a slowing development pipeline. We ran the score up by improving the quality and the geographic makeup of our property portfolio by selling nearly 13% of our properties into a very receptive market that would be difficult to replicate today. We used the sales proceeds to fund development, pay down debt and return capital to our shareholders through a special dividend. We added new depth to our bench by adding two new Board members, Heather Brunner and Renu Khator. Heather has an impressive background in new technology and social media which is an area that requires quick feet, agility and speed in order to compete. Renu brings a unique knowledge from her perspective of running the University of Houston on what our future customers need, how they live and how to connect with them which will help our teams to design future successful game plans. I want to give a shout out to two of our Hall of Fame Board members, Gardner Parker and Lewis Levey, who will be leaving the Board in May. They have provided sage guidance and support for many years and we will miss them deeply. 2017 looks like another good year for Camden. We will continue to block and tackle with a strong defensive balance sheet and a team that is focused and ready to take advantage of any of our opponents' weaknesses. I have absolutely no idea why my comments today sound like a half-time speech, so I will turn the call over to Keith Oden while I try to figure it out.

Thanks, Coach Campo. Consistent with prior years, I'm going to use my time on today's call to review the market conditions that we expect to encounter in Camden's markets during 2017. I will address the markets in the order of best to worst by assigning a letter grade to each one, as well as our view on whether we believe that that market is likely to be improving, stable, or declining in the year ahead. Following the market overview, I will provide additional details on our fourth quarter operations and 2017 same-property guidance. In 11 of our 13 markets, we anticipate same-property revenue growth in the 3% to 5% range this year, with a weighted average growth rate of just under 4%. These markets represent over 80% of our same-property pool and are all rated a letter grade of B or higher. Our top ranking this year goes to Denver which we rate an A, but with a declining outlook. Denver has been one of our top markets for the past several years, averaging nearly 7% annual same-property revenue growth over the last three years. We expect to see a steady rise in new supply coming online which will likely temper the pace of revenue growth during 2017. Around 10,000 new apartments are expected to open this year, with 30,000 to 40,000 new jobs created, putting Denver's jobs to completions level below equilibrium. Phoenix rates an A-minus rating with a stable outlook. Phoenix has also been one of our top markets for the past several years and we expect another strong year this year. Over 50,000 new jobs are expected during 2017, with only 7,500 new units scheduled for delivery. This looks like another really good year for our Phoenix market. Dallas gets an A-minus rating with a declining outlook. Dallas was our number one market for revenue growth last year at 7.7%, but it faces more headwinds this year from new supply. New developments have been coming on steadily, with around 20,000 new units delivered last year and another 20,000 expected to open this year. However, job growth in Dallas has been very strong, with over 90,000 jobs added in 2016 and estimates are great for 2017 with another 70,000 new jobs projected. Overall demand for apartments should continue, given the strength of the Dallas economy, but revenue growth will moderate during 2017 as new supply hits the market. Our next four markets, Atlanta, Southern California, Raleigh, and Orlando, each earned B-plus ratings with a stable outlook. All of these markets faced healthy operating conditions, with a reasonable balance of supply and demand metrics. Overall, new deliveries in these markets should increase slightly during 2017 while job growth moderates a bit, providing growth rates more in line with long-term historical levels. In Atlanta, estimates call for 53,000 new jobs in 2017, with 13,000 new apartments scheduled for delivery this year. Southern California is projected to have an aggregate of 110,000 jobs, 28,000 new apartment units in the areas of LA, Orange County, and San Diego, where we operate our portfolio. 2017 should look a lot like 2016 in Raleigh, with job growth of over 20,000, new deliveries of around 5,000 apartments. And Orlando is expected to create 38,000 new jobs and see 8,000 new apartment homes completed. Up next is Tampa, with a B-plus rating and a declining outlook. Our Tampa portfolio ranked number three for revenue growth in 2016 at over 7%; much better than what we originally anticipated in our budgets. Tampa should see close to 30,000 jobs created this year, with around 6,000 new units delivered, but we expect conditions to moderate a bit during 2017, hence our declining outlook. Washington, DC moves up a few spots this year to a B rating with an improving outlook. Revenue growth has averaged less than 1% in DC for the last three years, but we saw steady improvement over the course of 2016 and we budgeted a little over 3% growth for 2017. Completions this year should remain in the 10,000 range, but job growth estimates are strong, with over 70,000 new jobs projected in the DC Metro area. We give South Florida a B rating, with a stable outlook again this year. South Florida has been a consistent performer for us over the years and conditions should remain constructive there, with around 10,000 new units being completed against 37,000 new jobs in 2017. Austin earned a B as well, but with a declining outlook, given the continued wave of new supply there, coupled with slowing economic conditions. Austin has surprised us to the upside the past two years and we think 2017 will be the year where the surge of new apartments finally begins to take its toll. Completions should remain steady in the 8,000 to 10,000 range. But job growth has been slowing over the past year and could result in only 20,000 new jobs created in 2017, resulting in a jobs-to-completions ratio of approximately 2 to 1 and that would be one of the lowest of all Camden markets. Conditions in Charlotte are currently a B-minus with a stable outlook. Charlotte added around 7,000 units last year and another 7,000 completions that are expected in 2017. Job growth should remain healthy with nearly 30,000 new jobs projected, but our occupancy and pricing power will remain challenged during 2017 as more new communities come online. We're expecting our portfolios in Charlotte's revenue growth to improve slightly during 2017 from the 2.1% growth we achieved last year. And it should come as no surprise to anyone that Houston ranks last for our portfolio this year, with a rating of D and conditions are expected to decline during 2017. Over the past 24 years of operating in the Houston market, our same-store revenue growth has ranged from a low of minus 4%, which actually happened twice during the recession years of 2003 and 2010, to a high of 11% growth in 2012. Our 2017 results will most likely resemble the previous lows. Houston produced only 10,000 or so jobs in 2016 and most estimates for this year are in the 25,000 to 30,000 range for new jobs. New supply has been significant for the past several quarters and will remain elevated for the next few quarters, with 10,000 to 12,000 new apartments expected to open during 2017. While that is still elevated, it does represent a 50% reduction from the 2016 deliveries. Looking out into 2018, completions should drop to around 6,800 apartments. And assuming a modest recovery in employment growth, we could see a return to equilibrium. Overall, our portfolio rating is a B this year, down from last year's B-plus rating, but a decent starting position for 2017. As I mentioned earlier, the majority of our markets should average 3% to 5% revenue growth this year, with the outliers being Charlotte in the 2% to 3% range and Houston near a 4% decline. As a result, we expect our 2017 total portfolio same-store revenue growth to be 2.8% at the midpoint of our guidance range. This compares to our actual revenue growth last year of 3.9%, and roughly half of that decline comes from our weaker outlook for Houston versus last year. Now a few details on our 2016 operating results, same-store revenue growth was 3.1% for the fourth quarter, 3.9% for the full year of 2016. We saw strong performance during the fourth quarter, with most of our markets recording 4% to 6% revenue growth. Our top performers for the quarter were Dallas at 6.3%, Denver at 6.1%, Orlando at 5.9%, Atlanta at 5.3%, and the San Diego area at 4.9% growth. Rental rate trends for the fourth quarter were as expected, with new leases down 1.6%, renewals up 4.5%, for a blended rate of 1% growth. And our preliminary January results are in a similar range. February and March renewals are being sent out at around 5% increases. Occupancy averaged 94.8% during the fourth quarter compared to 95.5% last year. January occupancy levels have averaged 94.8% as well which is about 50 basis points below January 2016 levels. Net turnover for 2016 was again a positive 300 basis points lower than 2015, 48% versus 51%. The move out to purchase homes was 16.7% for the fourth quarter of 2016 versus 15.4% for the full year and those are both up slightly from 2015. At this point, I will turn the call over to Alex Jessett.

Thanks, Rick. Before I move to our financial results, I will provide a brief summary of 2016's strategic accomplishments. 2016 was a transformative year for Camden. We completed nearly $1.2 billion of dispositions with an average age of 23 years, nearly twice the average age of our total portfolio, at an average AFFO yield of 5.1%, generating an 11% unleveraged internal rate of return over a 17-year average hold period. We exited the Las Vegas market. We stabilized $425 million of development which created over $100 million of value. We returned $380 million to our shareholders in the form of a special dividend and we received two long-term credit rating upgrades, first from Fitch, who upgraded our ratings to A-minus; and second from Moody's, who upgraded our rating to A3. Our balance sheet remained strong, with net debt to EBITDA at 4.3 times, a fixed-charge expense coverage ratio at 5.3 times, secured debt to growth real estate assets at 11%, 78% of our assets unencumbered and 92% of our debt at fixed rates. Turning to the fourth quarter results, on the development front, we stabilized Camden Chandler in Phoenix, completed construction on The Camden in Hollywood, began leasing at Camden Lincoln Station in Denver and commenced construction on Camden North Bend in Phoenix. We have $850 million of developments currently under construction or in lease-up, with $240 million left to fund. Turning to financial results, last night we reported funds from operations for the fourth quarter of 2016 of $100.5 million or $1.15 per share, exceeding the midpoint of our guidance range by $0.01 per share. This $0.01 per-share out-performance was due to lower-than-expected same-store and development operating expenses, partially offset by slightly lower-than-anticipated same-store revenue. Our Camden technology package with bundled cable and Internet service is rolling out as scheduled and for the fourth quarter, contributed approximately 40 basis points to our NOI growth. For the year, this initiative has added 90 basis points to our same-store revenue growth, 170 basis points to our expense growth and 45 basis points to our NOI growth. We now have approximately 33,000 same-store units signed up for our technology package and the program continues to perform in line with expectations. Moving on to 2017 earnings guidance. You can refer to page 26 of our fourth quarter supplemental package for details on the key assumptions driving our 2017 financial outlook. We expect 2017 FFO per diluted share to be in the range of $4.46 to $4.66, with a midpoint of $4.56, representing an $0.08 per share decline from our 2016 results. The major assumptions and components of this $0.08 per share decrease in FFO at the midpoint of our guidance range are as follows: a $0.10 per share or $9 million increase in FFO related to the performance of our 41,988-unit same-store portfolio. We're expecting same-store net operating income growth of 0.8% to 2.8%, driven by revenue growth of 2.2% to 3.3% and expense growth of 4% to 5%. Each 1% increase in same-store NOI is approximately $0.055 per share in FFO. A $0.19 per-share or $17 million increase in FFO related to net operating income from our non-same-store properties, resulting primarily from the incremental contribution from our development communities in lease-up during 2016 and 2017 and the four development communities which stabilized in 2016; and a $0.04 per share increase in FFO due to lower interest expense, as we anticipate repaying a $250 million unsecured bond at its maturity in May and prepaying a $30 million secured floating-rate mortgage in February. We will use our current $250 million of cash on hand and borrowings under our $600 million line of credit to retire this debt. The interest rate on the maturing unsecured bond is 5.8% and the interest rate on the secured loan is currently 2.2%. The interest rate on our line of credit floats at LIBOR plus 85 basis points. Additionally, we're anticipating a new $300 million, 10-year bond issuance late in the year at approximately 4%. These positives are more than offset by a $0.36 per share or $33 million decrease in FFO related to lost NOI from the $1.2 billion of dispositions completed in 2016; a $0.04 per share or $3 million decrease in FFO, due primarily to increases in net overhead expenses which are budgeted to increase at approximately 3%; and finally, a $0.01 per share or $500,000 decrease in FFO related to the nonrecurring first quarter 2016 gain on sale of land. Our same-store expense growth range of 4% to 5% for 2017 is primarily due to insurance reimbursements and property tax refunds received in 2016 which we're not anticipating to recur at the same levels in 2017; and the continuation of our bulk internet rollout. As a reminder, in the first quarter of 2016, we received an approximate $1.5 million insurance refund from prior-year periods. And throughout 2016, but particularly in the fourth quarter of 2016, we received several property tax refunds from prior-year protests and appeals. We're not anticipating any insurance reimbursements in 2017, and as a result, we're anticipating our property insurance expense to increase by 11% year over year. Property taxes represent one third of our total operating expenses and are projected to be up 5.5% in 2017. 4% of the expected growth is core, the result of anticipated increases in assessments for our properties. The remaining 150 basis-point increase is due to a year-over-year reduction in anticipated refunds from prior-year tax protests. As I mentioned, we had great success in 2016 with our prior-year tax protest and current year appeals. As a result, 2016's full-year property tax expense increased by 2.8% as compared to our original budget of 6%, for a savings of approximately $3 million. Although we do anticipate some level of tax refunds in 2017, we do not anticipate it will reach the levels received in 2016. This level of success in 2016 creates headwinds for us in 2017, as indicated by the 150 basis-point year-over-year increase tied to prior-year tax protest refunds. Finally, we're anticipating an 8% increase in property utility expense in 2017 as a result of our continued bulk Internet initiative. Utilities represent 22% of our total operating expenses and this initiative is adding approximately 130 basis points to our 2017 expense growth, 65 basis points to our 2017 estimated same-store revenue growth, and 20 basis points to our same-store NOI growth. By the end of 2017, we will be complete with the rollout of our technology package. Excluding taxes, insurance and bulk Internet costs, the remainder of our property-level expenses are anticipated to increase at less than 2% in the aggregate. Overall, the average of our actual 2.2% expense growth in 2016 and our forecasted 4.5% expense growth in 2017 is 3.3% which is in line with our long-term historical expense growth rate of approximately 3%. Page 26 of our supplemental package also details our expected ranges of acquisitions, dispositions and development activities. The midpoint of our 2017 FFO-per-share guidance range assumes the following: $100 million in on-balance-sheet acquisitions and dispositions toward the latter part of the year, with no significant impact to our guidance and $100 million to $300 million of on-balance-sheet development starts. Last night we also provided earnings guidance for the first quarter of 2017. We expect FFO per share for the first quarter to be within the range of $1.06 to $1.10. The midpoint of $1.08 represents a $0.07 per share decrease from the fourth quarter of 2016 which is primarily the result of a $0.06 or approximate $5.5 million, decrease in sequential same-store net operating income. Of this amount, $3.5 million is due to sequential increases in property taxes, as most of the previously mentioned 2016 tax refund occurred in the fourth quarter and we reset our annual property tax accruals on January 1 of each year. $2.5 million is due to other expense increases, primarily attributable to typical seasonal trends. These increases in same-store operating expenses are partially offset by a slight increase in same-store operating revenue, a $0.02 per share decrease in FFO from the combination of lower equity and income of joint ventures due to the reasons outlined previously for our same-store portfolio; and higher overhead costs due to normal beginning-of-the-year compensation increases and the timing of certain corporate events. These decreases in FFO are partially offset by a $0.01 per share increase in NOI from our development communities in lease-up. At this time, we will open the call up to questions.

Thanks, just wanted to touch a little on Houston. You mentioned the negative 4% in terms of guidance for same-store revenue, but I'm wondering what the range assumes at the high and low end of guidance. How wide are the potential outcomes there? And then also, what are you seeing in terms of concessions today and expected in 2017?

In terms of our same-store guidance, the 50 basis points on either side of the revenue target would also apply to Houston. We want to provide context that a revenue decline of 4% was the lowest point for our Houston portfolio in the last 24 years, and that has occurred twice before. However, those were during recessions, and we're not in a recession now. The current situation is more specific to Houston's employment in the oil sector. Last year, we created 15,000 new jobs, and it appears we'll see 20,000 to 25,000 new jobs in 2017. What distinguishes this time is the significant number of new apartments being delivered, with over 10,000 expected in 2017. While reaching a 4% decline is a different scenario, it's a range we've carefully considered. There’s always some volatility in a declining market, making forecasting trickier. In the first quarter of this year, we guided Houston revenues down 1% year to date, and we ended the year at down 1.2%. Our teams managed to keep us on track for 2016 and expect to do the same for 2017. Houston may experience a bit more volatility, but we've accounted for the associated risks. Regarding free rent or concessions, we don’t really offer those; we use net effective pricing within our revenue management system, which factors everything into net effective rent. However, in the lease-up markets, the advertised rent often shows two months free, but the reality is that it’s closer to three months free for most merchant-built properties. This trend is a challenge in areas with a lot of supply. Merchant builders tend to follow the crowd, leading to similar concession amounts. It seems we may have reached a bottom in the last few months of the year. When concessions reach about three months free, it becomes economically unviable for merchant builders to bring in new residents, creating a floor. Therefore, in Houston, two to three months free rent is likely to be common throughout 2017.

What we are seeing is that after treasuries increased sharply post-election, many properties under contract without hard earnest money experienced considerable retraining. This is one factor at play. Additionally, we are further along in the cycle, and there are concerns about supply, which all investors share, particularly regarding the next three to four years in a potential recession. As a result, many are hesitant to act. While transactions are still occurring, the types of properties we sold would likely face much greater challenges today in terms of volume, given our current position in the cycle. Currently, there is a standoff between buyers and sellers. Buyers believe they should receive deeper discounts due to the rise in treasuries, while sellers are unwilling to lower their prices, creating a stalemate. The outcome in this arena will depend on how the economy develops. There are certainly positive aspects related to growth from infrastructure investments, deregulation, and tax reforms. However, there are also unpredictable factors due to various circumstances within the administration. Many people are taking a cautious approach, thinking it could turn out well, but unsure of the potential volatility that might arise.

It's Austin Wurschmidt here. Just following up on Nick's last question there, what is, ultimately, what you're seeing in the transaction market, what do you think that means for cap rates over the next 6 to 12 months? Or have you seen any movement in the last several months?

Cap rates are difficult to predict. Most believe they have shifted within a 20 to 25 basis point range, resembling a poker game where each side is waiting for the other to show signs of uncertainty. Even with a 25 basis point change, interest rates remain historically low and have not increased significantly in relative terms. The factors influencing cap rates are primarily liquidity, which remains abundant, and supply-demand dynamics, where a decrease in supply is met with strong demand cycles. Many are utilizing floating-rate interest to finance their investments. Regarding inflation, if growth leads to rising interest rates, inflation typically follows, which can be advantageous for the multifamily sector. It may take time to see how this unfolds. For Camden, we sold $1.2 billion last year, maintaining a stronger cash position than ever before, alongside the lowest debt levels. We are assessing our next steps, similar to others in a cash-rich position, yet we find limited opportunities. In Houston, for example, while there is an expectation to acquire premium properties, they are currently unavailable, as sellers are hesitant to adjust their pricing expectations. Ultimately, the key question remains: what will the cash flow growth rate be moving forward? This uncertainty is something we all grapple with.

Appreciate the detail there and then just wanted to dig in a little bit more on Houston and the guidance and what you're assuming. Are you assuming any type of stabilization or perhaps, inflection later this year in Houston's operating trends? And then, how far do you think Houston's occupancy could fall before it bottoms? It's continued to trend lower here the last several quarters. I'm just curious where you think we could find a bottom within your portfolio.

I believe that 2017 in Houston will be very challenging. An additional 10,000 apartments are set to enter a market that is clearly oversaturated. The impact will vary based on the location of our properties. The positive aspect is that we have a diversified portfolio, with some assets in suburban areas that have been less affected. In contrast, areas where new supply is concentrated are facing stronger competition. Currently, we expect a 4% decline in revenues for Houston this year, with occupancy rates about 200 basis points below the long-term average, hovering around 92% to 92.5% for most of 2017. If we manage to absorb the new supply with competitive pricing, while not contending with builders offering significant rent concessions, we might see some job growth by the end of the year. However, we are fully prepared for a challenging year in Houston, as indicated by a 4% revenue decline—historically, one of the lowest points for our portfolio. With 30 years of experience in this market, we understand the difficulties ahead.

One interesting aspect of Houston is the job to supply ratio. If you compare that to 2016, Houston should have experienced a significant negative absorption for apartments due to the influx of supply relative to jobs. However, it saw positive absorption, with around 15,000 to 16,000 units being absorbed despite only 15,000 jobs. This raises questions about the situation. The real factor aiding absorption in Houston is the new supply, particularly high-rise buildings that were not available in the past. Many individuals are selling their suburban homes and relocating to the urban core, contributing to the absorption of this new supply. This trend is expected to continue. The single-family market remains robust, selling more homes last year than in 2015, with prices still rising. There is momentum in the market, driven by 6.7 million residents discovering appealing housing options that weren't available before, leading to higher levels of absorption than anticipated.

Just hoping you could speak a little bit to the assumptions for 2017 outside of Houston where you said that was about half of the decline in same-store revenues. Maybe it would be easier if you could talk to some of your larger markets, DC, Dallas, LA, South Florida, what you're expecting on a new lease rate growth for the year.

Let me address it based on revenue so that we're comparing similar numbers with our performance in Houston. This year, we expect top-line revenue growth in DC to be slightly over 3%, around 3.3%. This represents a notable recovery after three years of growth below 1% in that market. In terms of ranking, DC has improved from being near the bottom last year to now being in the eighth or ninth position. While it is still not in the top half of our portfolio, a 3.3% growth is a significant improvement. For Dallas next year, we anticipate a revenue growth of about 4%. This follows last year's top-performing market growth of 7.7%, indicating a moderation built into our Dallas forecasts. In Southern California, which includes San Diego, Orange County, and LA, we expect to see slightly below 4.2%, approximating around 4% growth in top-line revenues, compared to last year’s approximately 5.5%. All these markets, even the previously best-performing ones, will experience some level of moderation, which is expected given the current cycle and the absorption of supply in these areas. Across 11 to 13 of our markets, top-line revenues are projected to be in the 3% to 5% range. Last year, we achieved an overall top-line revenue growth of 3.9%, and this year we have budgeted a midpoint of 2.8%, which includes Houston with a decline of 4%. Without Houston, the growth would be approximately 3.4% to 3.5% in contrast to last year’s 3.9%. This feels appropriate considering the distribution of our assets and the current cycle phase. The long-term average for this business is 3% top-line revenue growth. While we expect to be slightly below that at 2.8%, Houston is a significant factor in this figure. Excluding it, we would be looking at 3% to 4% growth, which would indicate a good year, aligning with our assessment of the portfolio as a B this year.

Okay, great and then I think you touched on it a little bit in a prior question with regards to Houston and if you see an inflection in the second half. But do you see the same-store growth? How should we think about that over 2017? Is there any acceleration in the second half as maybe some of the supply comes off or how should we think about that?

In 2016, we experienced a revenue decline of 1.2%. We are expected to remain in a declining trend for the next few quarters. However, if job growth improves to the projected range of 25,000 to 30,000, there may be a chance for improvement late in 2017. But to reach a 4% decline in revenues, we should anticipate significant declines in the first and second quarters. It's pretty flat. If you look at it quarter over quarter, I think you could anticipate just modest growth throughout the year and certainly no huge uptick in the fourth quarter. We always have a little bit of a seasonal decline based on occupancy in the fourth quarter, but it's relatively flat from a modeling standpoint.

A question for you, just to wrap up on Houston, if you speak to the office side, there's no hope in office recovery for at least the next few years just with all the vacancy, et cetera. Keith, you're writing off this year, but is your view that Houston apartments are down and out for several years or you think it could be shorter than that?

Alex, this is Rick. First, the great thing about apartments is that people need a place to live. You can't have a virtual apartment. You have to put your head on a pillow to sleep, may be able to stand in corner, but you need a place to live. Office, you don't need a place to office. And offices are getting smaller, people are using virtual offices, they're doing it from their home. So that's why we're in the multifamily business and not the office business. But I will let Keith finish the answer to that.

If you look ahead to 2018, the majority of the supply issue is expected to resolve. We are currently forecasting about 6,800 new apartment completions that year, which isn’t significant in a market of this size. We also anticipate approximately 50,000 to 60,000 new jobs, depending on the metrics you reference. While 2018 may seem distant, it's reasonable to expect Houston to begin recovering more steadily. If we gain around 25,000 jobs this year and the economy continues to progress, Houston might shift to a hiring mindset. This could lead to around 50,000 jobs in 2018, alongside 6,000 new apartments, resulting in a jobs-to-completion ratio of about 9, which is solid. This shift would elevate Houston from being the worst market for jobs to completions in 2017 to one of the better ones. Thus, my outlook is more focused on 2018 than on 2017, particularly given the number of new units that still need to enter the market. We’ll see how this unfolds.

Okay and then the second question is, just looking at your portfolio overall, the guidance for occupancy for next year is 94.9% which is essentially where you ended up in the fourth quarter, but down, call it 50 basis points, from where you averaged last year. My recollection is the last downturn, you guys were, I think down in like the 93% range. And you guys had lower occupancy than it seemed you would have wanted, especially versus peers. And I thought the focus the next go-round was keeping occupancy above 95% just to maintain that higher levels, even if you have to give up on rent. So, are you guys rethinking that or is my recollection wrong or where is occupancy going to go? Are we going to see it go back toward the lower side that we saw last cycle?

No, I would be surprised. We target 95% as an occupancy level. The past couple of years have been quite unusual with remarkable strength in some of these markets. From a revenue management perspective, we have been pushing rents aggressively and still maintaining above-trend occupancy levels. Our long-term target is 95%. It's important to note that the portfolio-wide occupancy figures include approximately 200 basis points below the long-term average for the Houston numbers, while everything else is projected at just above 95%. Outside of Houston, the markets remain in very good condition, generating 3% to 5% growth in top-line revenue, which suggests that we shouldn't face any pressure on occupancy.

Keith, can you talk a little bit about the DC market in 2017 and where you're expecting relative strength and where you still may have some pockets of weakness going forward?

For the first time in four years, the DC market appears to be quite favorable for us overall. The numbers are quite robust. In the DC Metro area, we're expecting around 10,000 new apartments. Currently, the job forecast we have for the DC Metro is approximately 78,000 jobs, resulting in a ratio of 7.5 jobs for each apartment completion, which is the highest in our portfolio for 2017. Previously, this ratio was one of the weakest in the area, but now it boasts the best jobs-to-completion ratio among our 15 markets. We're anticipating about a 3.3% growth in top-line revenue. In central DC, we're observing strong performance. We recently opened NoMa II and continue to see significant demand in that sub-market, leading us to expect good success. Overall, aside from a few small areas facing new competitive deliveries to our existing properties, the DC Metro market looks promising for us in 2017.

Okay, so College Park and a couple of other problematic assets shouldn't be materially different than the group average this year?

No. The College Park was specific to the construction issues and the balcony repairs that we had going on there and that's all behind us. There won't be any impact from the construction balcony issues in 2017 and we're looking for a really strong year.

How are you approaching development starts today? Anything initiated now won't be finished until late 2018 or likely sometime in 2019, depending on the construction type. You have several projects in Charlotte coming up. Considering your comments and Charlotte's low position in your ranking, are those projects delayed beyond a 2017 start? Or will you begin those in 2017 for a delivery in 2018 or 2019 in some of your other markets that aren't highly ranked?

We have slowed the growth of our pipeline, as we discussed in previous calls, due to the current cycle and uncertainties ahead. If new policies lead to faster growth and we feel optimistic about that, we might reassess our strategy. For now, we are aiming for development projects worth between $100 million and $300 million. We've postponed the development of our downtown project in Houston and are only proceeding with a few small additions in Charlotte. Overall, the development market is quite challenging for everyone. Large national development companies we engage with are reducing their projects due to difficulties in obtaining construction financing and various cost pressures. Many projects are delayed not only because of worker shortages, which are increasing costs, but also because achieving good returns has become more difficult. We hope for a market improvement that might benefit development. Our different financing approach compared to our competitors could allow us to increase our development pipeline if the situation improves.

And Rob, just to clarify on the two Charlotte projects, those are both townhouse projects that are being built on what essentially were out-parcels to existing assets. And it's a totally different product type than typical multifamily and they're both being done really primarily as defensive plays for the outparcel that is adjacent to our two large assets near downtown in Charlotte. So total development costs on those two projects combined is about $24 million, so we're going to go forward with those.

I'm not sure if you gave this or not I know you gave a bunch of numbers on the bulk cable benefit. What was in the fourth quarter, what was the benefit to same-store revenue growth?

In the fourth quarter it was very similar to what we had for the full year, but it was approximately 92 basis points to the revenue.

Okay, so the reason why I ask is that if I look at your 2017 same-store revenue guidance, excluding the cable benefit, it's 2.2% at the midpoint. And in the fourth quarter, your same-store revenue growth was 3.1%; minus the bulk cable benefit, it's a similar 2.2%. It doesn't seem then that you're building in much in the way of deceleration this year versus the fourth quarter which is a little unusual versus some of the other multifamily REITs which have mostly assume some level of deceleration this year versus the fourth quarter. So I'm hoping you could provide some thoughts on that.

We are experiencing some deceleration from Houston, but there is acceleration coming from Washington, DC. If you refer to Keith's earlier comments, our portfolio's overall ranking is in the B, B+ range. We believe that the remainder of our portfolio is holding its positions fairly well.

The top-line revenue was 3.9% and that obviously had some cable benefit in it. In 2017, that number goes to 2.8%, so you've got 110 basis points of quote, deceleration. We're really essentially through with the rollout of the cable program. There's a very small amount that's left. So on a year-over-year basis, that's in your 2016 number and then you've got deceleration coming from Houston, but also across the platform to get from the 3.9% to the 2.8%.

Right, okay, so going back to some of the market-level commentary when you talked about certain markets being declining or stabilizing or improving, that was relative to 2016 full-year numbers, not what you saw in the fourth quarter. Is that the way to think about it?

Yes.

When we provide guidance, we provide guidance based on what our middle-of-the-road expectation is; we don't try to build in over-conservatism or over-optimism. And if you look at last year as a guide, we raised our guidance twice, but only because the markets outperformed what we thought they would do. So we try to give basically what we think is going to happen. Obviously, the world changes in front of us and you have about 60 to 90 days of visibility in this market. So if you add 3 million jobs this year, we're going to beat our guidance. If you add 2 million, we're probably right in the middle of the fairway from our guidance, but it's all predicated upon a basic set of assumptions that are in place. So we don't try to be conservative or aggressive on guidance.

For many of your peers, there were some lighthearted comments about 2018, and while we’re discussing Houston, could you share your thoughts on whether you believe 2018 will be an improvement over 2017 when considering the overall portfolio?

Rich, I don't do whimsical. I will let Rick answer it.

Well, I can be whimsical from time to time. But if you look at just the supply and demand scenario, right, so we still have 2 million people that are doubled up in either roommate situations or living with their parents and they don't want to do that. So if you have decent job growth, more household formation, multifamily sets up really well. Two-thirds of the demand or two-thirds of household formation has been going to multifamily, primarily because of millennials. You look at over 50% of the job growth are going to people 34 and younger. So our business is set up to be really in a decent position, ex a recession or something like that. And when you look at the supply side with most merchant builders cutting their pipelines, cutting their pipelines in 2017, including us, then you can set up for a pretty interesting 2018 and 2019 for the multifamily business generally and I think that's probably where the whimsical view comes from people.

Okay, good. I don't know why I used that word, but. And then the second follow-up question is, and I don't know why, maybe I shouldn't be surprised to see Austin so far down the list. Is that one taking you a little bit by surprise by how weak it appears, relatively speaking? Or is that in the range of expectations when you were going into looking at this year?

Two things, Rich. One is that I have been surprised by the last two years in Austin, where the job-to-completion ratios were not favorable, yet our portfolio still achieved impressive numbers. We experienced 5.5% top-line revenue growth last year, and this year we are just above 3%. With 20,000 jobs in Austin and 10,000 new apartments, the job-to-completion ratio stands at 1.9, which ranks lowest in our portfolio. I've noticed that even with the reported job figures, it seems there are many more people relocating to Austin who are entering the job market, possibly going uncounted. The only way I can interpret the situation in Austin over the past couple of years, given the job growth versus completions and absorption, is that there is a distinct group of individuals arriving in Austin and integrating into the tech community, finding jobs, and paying rent in less conventional ways. Nevertheless, the strength over the last two years has surprised me. This year, we've focused on anticipating when the oversupply condition might manifest. With a 3.3% top-line revenue growth, I hope we have accurately assessed the situation for this year.

Keith, what new lease and renewal growth trends underpinned the 2.8% at the midpoint of 2017 revenue guidance?

Currently, we are seeing a decline of 1.6% on new leases for January, while renewals are up by 5%. Across our portfolio, a 1% growth in revenues and 5% in renewals aligns well with a 60% renewal rate, leading to an approximate top-line revenue growth of about 2% to 2.8%. That seems to be a reasonable estimate.

It's just a waiting game. Houston is a great city long-term and there are about 3,000 apartments that have been built in downtown Houston and it's creating a major buzz. Houston didn't have much of a downtown market up until the last couple of years and so those projects are filling up. They're definitely filling up at lower rents than the original developers had anticipated. But once those are filled, then when you think about the size of the city, 3,000 units is a drop in the bucket when you think about the fourth-largest city in America. So we're going to watch it. We're going to built them, build that building at some point. I think the $170 million was two buildings not one, so it's more like a $90 million building, plus or minus. We may get an opportunity where, if you think about what's been happening in the construction cost side of the equation here, construction costs continue to rise in Houston. Projects, I think one of the reasons that we have so much project buildings coming on right now is that every project that I know of is delayed at least six months because there's not enough construction workers to finish them. That is still the case in Houston, Texas. So, perhaps with the 50% or 60% drop in starts that we've seen here and the fact that no one is going to be building office buildings anytime soon here either, with the exception of there is a big deal that was done in downtown with Bank of America, that looks like it's going to start. But with that said, hopefully construction costs moderate and there might be a window of opportunity for us to start that building with a lower construction process and deliver it sometime in 2020 or 2021 and we will do that if that's the case. But we'll watch it. We're not compelled to do anything in this market until we start seeing some moderation in prices on the construction side.

Any sense of what you could sell that land for today?

I could sell the land for a lot more than what we paid for it. We got in the land at a really good price and land prices in Houston have not done anything but either stay flat or gone up. There have been a number of trades, for example, Chevron's selling one of their campuses because they consolidated people in downtown. And there are probably 10 bids on that campus at very, very high prices. People thought they would be able to come down here and buy cheap everything and there's just nothing cheap here. Now you could buy 1970s vintage office buildings for cheap here, but the challenge with those is they're 1970s vintage office buildings in probably poor locations and they ought to be cheap.

Assuming Houston does get to the equilibrium stage, how do you see revenue growth progressing? Will you have to work through a gain to lease after that?

I believe, as mentioned earlier, that the declines will be more significant in the first and second quarters, with some hope for moderation in that decline later on. We ended the year with a 1% drop, and our guidance for the year is a 4% decrease. We anticipate that the first and second quarters will show substantial decreases. Depending on whether it resembles the fourth quarter of 2017 or the situation in 2018, where we hit an inflection point and began to see positive changes, the loss to lease figures will fluctuate accordingly. However, I expect declines at least through the second or third quarter of this year regarding net effective rent.

Okay and then, can I get a quick update on what you guys are hearing from the energy executives in Houston? Are they looking to just maintain their current employment base or any thought process of hiring? We're seeing the Dallas fed base book indicates sublet space in Houston was declining for the first time in years. I didn't know if you were seeing anything positive on the employment front.

Most energy executives we speak with are cautiously optimistic, especially after this past weekend. Prices above $50 per barrel are beneficial for them. Each new rig creates about 200 jobs, and similar to the jobs that were lost at the rig, these are now being added back into the system primarily in the rig area. Some major oil companies have noted that during significant downturns, they tend to lay off more workers than necessary, which leads to a competitive hiring environment when prices rise again. While we haven't observed significant hiring increases in the energy sector yet, we have halted job losses. Reflecting on last year's figures, energy actually saw a net job loss of around 10,000 to 15,000, but we compensated for that through significant growth in other sectors. As long as we avoid further job losses, we can expect positive job growth from other areas within the energy sector. Overall, there is a sense of cautious optimism that the worst has passed and a recovery is underway.

What is your Houston job forecast for the year?

I think the jobs are anywhere from 25,000 to 30,000 jobs for the year.

Staying focused on Houston for a moment, you previously mentioned some conditions that could arise before we see stabilization in Houston regarding job creation compared to unit count. I was wondering, if that scenario were to unfold, how quickly could you transition from a minus 4% same-store revenue to something more typical? Is there a period needed for adjustments to price increases? Or, if the job outlook improves while unit counts remain low, do you anticipate an immediate increase in same-store revenue?

We have observed markets decline like this, and since we are not in a recession, it's primarily a supply issue along with moderate job growth. Merchant builders are facing pricing challenges because they are offering three months of free rent, equating to a 25% reduction in their pricing. We are not offering such concessions, so if our revenue decreases by 4% this year, there isn’t a seasoning effect necessary. You don’t need to raise your rent by 25% to return to strong growth. The future revenue growth, especially in Houston, hinges on job creation. If we see an increase of 3 million jobs, and particularly if Houston adds significantly more jobs than the current rate, we could experience substantial revenue growth in 2018. However, this depends on the overall job growth nationally, as Houston's performance will likely mirror national trends. We are not likely to face the energy-related drag we encountered previously, which means we won't need to bridge the large gap that merchant builders face.

Just to go back to one of the instances that I cited, we were down 4% in revenues in Houston in 2010. 2011, we were up 5% and 2012 we were up 10%. It when down 4%, up 5%, up 10%.

And then just another bigger picture question. Earlier you talked about buyers and sellers and the spread being wider, part of which was uncertainty about the direction of the economy and policy changes, some of which are seen as positive and others are seen as maybe more negative. From your perspective, as you think about all of the policy that is being considered today, what do you see as the biggest negative for your industry, for your Company?

I think the biggest negative is uncertainty and it's just the uncertainty that, A, the policies will be implemented. And then, B, that they won't be offset by some factor that no one is thinking about today that is caused by an administration that tweets in the middle of the night.

Right, so none of the policies per se, I'm thinking tax reforms, some of the GSE privatization, those things are not that concerning to you?

I believe that the growth from our policy initiatives, if fully implemented, would be very beneficial for our business. There are currently no negative signals for us. The real concern would arise if these initiatives are not enacted or if any unforeseen events negatively affect the economy. People often think recessions are merely the result of time, but that's not the case; they are triggered by unexpected occurrences. For example, the housing crisis in 2007 and 2008 came as a surprise, when we expected growth, only to face a significant recession. The true risk lies in the uncertainty about our future outlook. The stock market has surged, reflecting optimism, but it’s the unpredictability that makes us cautious about how we perceive the situation. We need to see more developments to understand what will happen and whether positive actions are indeed on the way.

I will be brief since we're running pretty long into the call here. But on the subject of policies, with regards to immigration, have you guys looked at the sensitivity of some of your larger markets, like LA or Houston, to potential changes in the immigration policy?

Immigration certainly has a positive impact on household formation, but it's only one aspect of the overall economy. A strict border policy is unlikely to significantly affect the apartment market in the short term. The more pressing concern with such policies is the pressure on wages and the difficulty of finding qualified workers. Currently, there are about 5.5 million unfilled jobs, largely due to a lack of qualified candidates. Many people think that immigration has suppressed wages, but the real issue is the shortage of skilled labor living in this country. For instance, the medical center in Houston consistently has around 10,000 to 15,000 open positions that remain unfilled because there aren’t enough qualified applicants. Additionally, tech companies in places like California and Austin are anxious about their ability to hire skilled talent. Therefore, I see this issue as more related to business capabilities rather than the apartment sector.

Rick, circling back to the proposed tax policy changes, such as deductibility of interest or the elimination of the 1031, I know it's all to be determined if they could be implemented. I'm curious, if those do come to pass, do you think those might put REITs in a relatively better position, vis-a-vis, say a privately held owner or a builder who tends to use higher leverage. I'm just curious how you think about those dynamics.

I believe that the interest deductibility issue and the 1031 exchanges are significant, but an even bigger concern is the carried interest. Currently, carried interest plays a major role, particularly for a merchant builder, as the cost of capital influences investment decisions. Our cost of capital hasn't changed dramatically because we rely on minimal debt and do not utilize carried interest, which means our tax rates will remain stable. From a competitive standpoint, our privately funded competitors who leverage more debt benefit from a lower cost of capital, as they typically have a structure of 70% debt and 30% equity. In contrast, we operate with about 25% debt and 75% equity. Therefore, if our competitors' cost of capital increases, it could be quite advantageous for REITs.

And then just one last one actually maybe for Keith. Beyond Houston, where do you see positive or negative inflection points in your markets as we roll into late 2017 and 2018? I know some, you mentioned have a declining outlook. I'm just curious where you see changes coming ahead. I believe the markets we are observing as declining are likely the ones we will continue to see. We are definitely at a turning point, or will be in 2017, particularly in Denver, Dallas, Tampa, Austin, and of course, Houston. Each of these markets primarily faces a supply issue. There is decent job growth, except for Houston, but the other four markets that are declining are experiencing this mainly due to an oversupply of apartments currently available. Once this oversupply is addressed in 2017, I expect all four markets will be positioned for a better performance, especially considering the pipeline expected for 2018, which is set to decrease overall. The current decline is simply a result of the supply needing to clear out. After that, I believe those markets will be ready for a strong year and recovery in 2018. This concludes the question-and-answer session. I would like to turn the conference back to Mr. Campo for closing remarks.

We appreciate you all being on the call today and look forward to visiting with you in the future. Thank you so much.