Camden Property Trust (CPT) — Q1 2017 Earnings Call Transcript

Good morning and thank you for joining Camden's first quarter 2017 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 first quarter 2017 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 be brief in our prepared remarks and try to complete the call within one hour. We ask that you limit your questions to two then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or e-mail after the call concludes. At this time, I'll turn the call over to Rick Campo.

Thanks, Kim, and good morning. Our music for today's call was recommended by Dan Smith from KeyBanc, who won our music trivia contest last quarter. Dan said he took a look at the calendar and immediately settled on a Cinco de Mayo theme. I will keep my comments short since we are the last multi-family company to report and I want to make sure that we have enough time to answer all of your questions about Houston. Our team produced first quarter operating metrics which were right on plan. I know that our team is ready for our peak leasing season and it will continue to improve the lives of our customers, their teammates, and our shareholders one experience at a time. I'll turn the call over to Keith now.

Thanks, Rick. Our first quarter results were right in line with our expectations, with same store revenue up 2.9% and up 0.3% sequentially. Most of our markets had revenue growth between 3% and 5% just as we had forecast. The revenue growth for our top five markets was Denver at 7.4%, Atlanta 5.1%, Dallas at 5% even, Phoenix at 4.8%, and Austin at 4.5%. As expected, our two weakest markets were Houston with a 3.3% revenue decline, and Charlotte with a 1.3% growth in the first quarter. During the first quarter of 2017, our new leases were down 0.4% and renewals were up 4.9% for a blended rental rate increase of 1.9%. In April, our new leases were up 0.3% and renewals up 4.9%, resulting in a blended increase of 2.1%. Our May and June renewal offers were sent out with an average increase of 5.6%. Qualified traffic is strong in every market and despite another year of above-trend rental rate increases in 2016, our occupancy rate remains high. We averaged 94.8% in the first quarter, and in April it was 95.1% versus 95.2% last year, again all of this in line with our expectations. The most important reason for maintaining our occupancy rate is the low level of net turnover, in Q1 the net turnover in our portfolio was 40%, another record low for our overall portfolio. The financial health of our resident base continues to be strong as our average rent as a percentage of household income was 18.3% for the quarter, and this metric has been in the 17% to 18% range for the last few years. However, the financial health of our residents is still not translating to many more moving out to buy homes, with the percentage for Q1 being 14.9% versus 15.3% for the full year of 2016. We do expect that eventually this stat is going to drift higher, but there is still a long way to go before we get back to the historical rate of 18% move-outs to buy homes. Finally, we recently learned that for the tenth consecutive year Camden was included in Fortune Magazine's list of the 100 best places to work. This is a remarkable honor for our company and a positive reflection on just how far the REIT industry has come since its reinvention almost 25 years ago. At this point, I'll turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. On the development front, during the first quarter of 2017, we stabilized Camden in Hollywood and began leasing at Camden NoMa Phase II in Washington, DC, and Camden Shady Grove in Maryland. Subsequent to quarter end, we stabilized Camden Gallery in Charlotte and acquired an 8.2-acre land site in San Diego for future development. We have $660 million of developments currently under construction or in lease-up, with $200 million left to fund over the next two years. We still anticipate $100 million to $300 million of on-balance sheet development starts later in 2017. Our balance sheet remains one of the best in the REIT world, and we are one of only six U.S. equity REITs with a senior unsecured credit rating of A3 or better for Moody's. The net debt to EBITDA is at 4.6 times, the fixed charge expense coverage ratio is at 5.3 times, secured debt to gross real estate assets is at 11%, and 80% of our assets are encumbered, with 93% of our debt at fixed rates. Our current ATM or at-the-market equity program has $315 million of remaining availability, and was filed under a shelf which will expire this year. As a matter of corporate practice, we intend to keep an active ATM program on file. Therefore, we plan to roll the current availability under the existing ATM to a new ATM, which we will file in the next few weeks in conjunction with the filing of a new shelf. Turning to financial results, last night we reported funds from operations for the first quarter of 2017 of $100.4 million or $1.09 per share, exceeding the midpoint of our guidance range by $0.01 per share. Our $0.01 per share outperformance for the first quarter was primarily due to three-quarters of a cent in lower same store operating expenses, resulting primarily from lower employee benefit costs, as we experienced lower than anticipated levels of health insurance and workers' compensation claims. Although we're encouraged by this trend, if the past is any indication of the future, these results might be timing-related rather than permanent savings. There was also three-quarters of a cent and higher net operating income from our development and non-same store communities, resulting primarily from each of our development communities leasing ahead of schedule, better than expected results from our stabilized non-same store Camden NoMa Phase I community, and better than anticipated net operating income from Camden Miramar, our student housing community in Corpus Christi, Texas. These positives were partially offset by slightly higher net corporate overhead, and higher than anticipated interest expense as a result of lower levels of capitalized interest which were due primarily to the accelerated construction of our Camden NoMa Phase II development, which we began leasing during the first quarter of 2017 ahead of our original forecast for leasing to begin in the second quarter. Last night we also provided earnings guidance for the second quarter of 2017. We expect FFO per share for the second quarter to be within the range of $1.11 to $1.15. The midpoint of $1.13 represents a $0.04 per share increase from $1.09 in the first quarter of 2017. This increase is primarily the result of an approximate 2.5% or $0.035 per share expected sequential increase in same store NOI as we move into our peak leasing period, an approximate $0.005 per share increase in NOI from our communities in lease-up, and an approximate three-quarters of a cent per share increase in FFO resulting from lower overhead costs due to the timing of certain corporate events, and an approximate $0.01 per share increase in FFO due to lower interest expense, as the interest savings from repaying our maturing 5.83%, $247 million unsecured bond at maturity on May 15, is partially offset by borrowings on our line of credit, higher rates on our secured floating rate debt, and lower levels of capitalized interest. We currently have approximately $180 million of available cash on hand, and will fund the remaining amounts necessary to repay the unsecured maturity utilizing our line of credit with an assumed interest rate of 1.9%, and an approximate $0.05 decrease in income tax expense, due to an anticipated second quarter Texas margins tax refund resulting from a prior year reduction in rate, and an approximate quarter of a penny increase in FFO due to a non-recurrence of our first quarter loss on early retirement of debt, which resulted from the acceleration of unamortized loan costs on a $300 million tax-exempt bond we retired last quarter. This $0.065 per share aggregate improvement in FFO is partially offset by an approximate $0.025 per share decrease in FFO, resulting from lower occupancy at our non-same store student housing community in Corpus Christi, Texas. Occupancy declined significantly from May through August at this community. As a result of our actual and forecasted development and non-same store results, we've increased the midpoint of our full-year FFO guidance by $0.01. Our new full-year 2017 FFO guidance is $4.49 to $4.65 per share, with the midpoint of $4.57, compared to our prior guidance of $4.46 to $4.66 per share with the midpoint of $4.56. As we've not yet begun our peak leasing season, we have left our 2017 same store guidance intact. At this time, we'll open the call up to questions.

Thanks. Just want to start on Houston. How is it trending relative to your expectations so far this year? And do you still expect same store revenue growth for Houston to be down about 4%?

Yeah. We do Nick. I would say it's really right on top of our expectations, and that would be true of all of our other markets as well. There is not a nickel for the difference between where we ended up the first quarter and where our original guidance was. We did give specific guidance on Houston that we thought 2017 would sort of be the low water mark. We still think that that's most likely to be true and we gave specific guidance of down 4 on revenues. And again, based on everything that we see and that we have seen in the first four months of the year, we think that's still the right place to be for Houston for 2017.

Thanks. And then just in terms of same store revenue growth more broadly, and I know you made changes and it's before the peak leasing season. But are you maintaining the components as well that you expect 50 basis points I guess lower occupancy this year to about 65 basis point benefits from the bulk internet rollout?

That's correct.

So, if you think about trying to get to the midpoint of guidance, it sounds like you need to see that rent growth throughout the year at about 2.7% or so? I think in the first you came slightly below that, just given the amount of supply you're seeing delivered this year. Can you give us some comfort in terms of reaching that midpoint and maintaining the rent growth that you saw in the first quarter?

If we thought we were going to hit the midpoint, we would have changed the guidance. So we are in pretty good shape. I mean we do a full bottom-up reforecast market-by-market. So, we are very detailed in how we approach this. We're fortunate to have a ton of people in these markets that have been doing this for our company for many, many years, and we take great comfort from that. So, if you think about the big picture, the deceleration in Houston in our model has been basically offset by the improvement in Washington, D.C. And if you had to do a weighted average of the numbers of percentage concentration in D.C. versus Houston, the math for those two markets is basically a push with where we were last year. And then, beyond that, we have a bunch of other markets that we are still continuing to see really good growth in Dallas, Denver, Tampa, and Atlanta. So, we're still seeing a pretty good trend across the platform. I guess I'll go back to the original guidance that we gave in my letter, and I wouldn't change a single one of them. We provided specific guidance on ten markets that we graded as stable. One is improving, which was Washington, D.C., and then the balance of them are in decline. So, I wouldn't change any of that, and with all that said, I think we still feel like we're in good shape to get to the midpoint of our guidance range for same store NOI.

Thanks.

Yeah. Hi. Good morning. Just first one to touch on DC, and had a little bit of occupancy benefit this quarter. And I was just wondering if we should view this quarter's revenue growth as a trend? Or would you expect that to moderate given that occupancy benefit? And then just any additional color you can provide on pricing power in that market headed into the peak leasing season will be helpful?

Yeah. We had a really good quarter, again, in line with our plans. We did slightly better on NOI overall, but really in line with what we expected to see. The strength in occupancy has certainly carried over into April in D.C. We see great traffic. Our folks are more optimistic in there, and their commentary about what's going on in the markets has been more positive than they have been in three years. So that’s all positive. 3.8% growth in revenue for the quarter is certainly a good start. I think that we are likely to see that as part of a trend that carries out throughout 2017. Again, we had D.C. as our only market that I rated as improving, and it looks like we are in good shape to achieve that.

Great. Thanks. And then just wanted to touch on Houston quickly, you guys outlined 25,000 to 30,000 jobs and 10,000 to 12,000 new units in that market, and you compared it to a couple of years in the past. I think 2003 perhaps and 2010 maybe where same store revenue was down 4%. And I was just curious what the jobs to completions ratio looks like over those prior two periods that saw a similar revenue growth decline as what you're projecting in guidance?

Well, probably a lot worse. I don't have the exact numbers in front of me, but we had – because in those two prior periods we had really significant job losses in Houston. So, as you can see it was a much different scenario than what we are dealing with today. The other thing to consider is that the economy in Houston during those two previous periods was fundamentally weaker than anything that we've seen in this downturn. This downturn was almost exclusively limited to the oil business. It didn't really ever spread over into other parts of the Houston economy. And so, what it feels like, if you happen to own apartments in Houston, it doesn't feel like a very good place to be. However, absent that, the oil patches are in the process of a pretty robust recovery in terms of price of oil and drilling activity across all of the major and mid-major companies. So Houston, even though the apartment sector is weak, it's primarily a supply-induced weakness that once the market clears, and we expect that to happen sometime early in 2018, where you get this glut of apartments that find residents, and market rents have to go through their adjustment to accommodate, which is already in the process of happening. Houston is really well poised for a recovery in economics, which will immediately spill over into better support for rental rates. So, it's different. I would say that in terms of supply, it was similar, but the job numbers were worse. And the economy felt like throughout those two prior periods that we were in a recession. And I can tell you, it just doesn't feel like we're in close to that in Houston in terms of an overall economic impact. But having said that, we have 22,000 apartments that we need to work our way through in terms of deliveries over the next 15 to 18 months.

Let me just add a couple of points to the Houston story a bit. So, when you look at just the apartment side of the equation, obviously an office probably is – the office is much worse than apartments, because leased apartments have great price elasticity. You lower the price and you can fill up your apartments, because people need a place to live and they don't need a place to work if you don't have a job, if you don't have jobs to people to fill those jobs. At the end of the day, Houston in the last 12 months added 63,000 new residents. 35,000 people came from abroad and 28,000 people came to Houston domestically. When you throw that onto the natural birth rate, there was a population increase in the last 12 months of 125,000 people. So you have this inertia of 6.8 million people living in this region. The starts or actually completions are down 50% from 2016 to 2017. They will be down 50% again from 2017 to 2018. At the same time in the last 12 months, job numbers were somewhere around 30,000 jobs. And when you look at that actually produced more jobs in the first quarter than anybody thought would happen, but in the end, you still have to get through the supply issue. But the good news is that it's very manageable when you start looking forward.

Is it fair to say the big difference is just the levels of concessions from new supply?

Absolutely, if you're in the competitive market from a lease-up perspective in the energy patch, and in the urban core, it's three months free. The worst thing that a merchant builder can do is be the last one to get three months free, right? So, that's pretty much a cap; they generally don't tend to go much more than that. But you know, when you think about three months free and what it does, it's taking a $2.80 rent down to about $2 or $2.10 or something like that, which increases the ability of the customer to pay. So, what happens is, it's a boom for people who want to live in high rises and really in great urban locations, and the consumer is doing really well. Right now, there are lots of options and the prices are great. That three months free doesn't translate to the occupied market though. Because when you look at our down 4% in our projections, we are not in those zero occupied, like a merchant builder who just opens their doors, and so they're willing to cut prices at that level. Also a lot of the products are very high-end products and that's where the biggest problem for rental is, is in the high end. Our suburban locations are doing much better than the urban locations, and that's kind of the A versus B or urban versus suburban kind of story, which is very typical in this discount cycle.

So, just to put some numbers around Rick's commentary, so three months free is 25% off rental declines for merchant builders, which is where most of the market is right now. But again, they're trying to have a very different task, they're trying to get from very low occupancy to something that's stabilized. So in our portfolio, if we end up within our range, which we think we will at somewhere around 4% down revenues for the year, that's the mix of some 8s and 9s and some flats. Believe it or not, we still have assets that had positive revenue growth in the first quarter, albeit slight positive numbers. So, they get down 25% on asking prices from a number that was probably too high, were down 9% on asking prices on rents, on our market clearing number. So, I think that's kind of where it ends up, that's where it ended up in the last two down cycles and we'll slug it out. We think we can achieve what we've given guidance to in Houston and better days are ahead because Houston is a dynamic place and it continues to attract people both domestically and internationally, along with the embedded growth of the population. So I think we've got a clear 22,000 apartments.

Thanks for the comments, and I'll leave the floor.

You bet.

Hi. Thanks for taking my question. I was just wondering if you can comment on the new leases versus renewal lease-up growth for Q1 in Houston, and then how it's trending in Q2?

For the first quarter in Houston, renewals would have been flat. New leases are down 7% plus or minus. That carried over into April. I think that if you're projecting that over the balance of the year, how do you get to something less than 4% down on revenues? It's probably going to be pretty close to flat, trying to maintain flat on renewals and overall leases coming down maybe 6% or 7%, and we end up the year at down 3.5%. So, I think that's likely to see what we'll observe for the next couple of quarters for sure. And then, as we get to the back half of the year, that may get a little better because we run into a little easier comps, as some of the concessions that, you know, some of our taking rents down had already occurred in the third and fourth quarters of last year, so the comps get a little bit easier. But directionally, I think that's where we're headed.

Thanks. I was just wondering if you can also comment on the negative revenue growth in Houston for the quarter. If you can maybe break that down between your midtown assets versus the assets near the energy corridor in the suburbs?

Yeah. Sure. So, our midtown assets in the urban core would have been down 8% to 9% on new leases, roughly flat on renewals. As you go out into the other markets, your new leases are trending flat to up 1%. So, a big spread between suburban assets and the urban core for sure. But we are in a part of the cycle right now where our strategy to be diversified between urban assets and suburban assets is actually helping us quite a bit.

Good. Thanks for the color.

You bet.

Kind of use that segue on the urban versus suburban, could you just talk about the split between your portfolio as a whole, and the same store rent trends you are seeing between those two? And how supply looks looking forward between those two different segments of your portfolio?

The supply, I'll start with that. It's pretty straightforward. I can't give you the exact number, but I'm going to guess an order of magnitude of three to four times as much supply coming in the urban core than we do in the suburban markets across our platform. So, it's largely an urban core problem in terms of supply. You can scatter the suburbs or the city of the market like Houston, it’s so large and spread out that unless somebody happens to be building right next door to you, you just won’t have the kind of impact that you have when you have large aggregations of units being leased. In terms of the spread between what we think in terms of suburban versus urban assets, suburban assets are outperforming by about 1.5% in comparison to the urban assets across Camden's entire universe. So that’s not just Houston, but the supply challenges where we've got new construction going on in other markets is predominantly in the urban core, so it shows up in the spread, which has been that way for the last two years in terms of that outperformance, 1.5% suburban versus urban. If you go back five years, there were three straight years where the urban was outperforming the suburban. So it's just kind of where we are in the cycle.

And that 1.5% is same store revenues?

Correct.

And then what's the overall split between urban and suburban sites for the whole portfolio?

We'll get to the number, about two-thirds suburban to one-third urban, so we'll get the exact number.

Okay. And then just on supply, how are you guys thinking about across your portfolio 2018 versus 2017? And are you seeing any slippage on delivery time frames this year that can look into 2018?

The slippage on delivery time is in every market in every sub-market. There is not a single merchant builder that we talk to or our other folks in the REIT world that have not all experienced some degree, and in some cases pretty material delays, and we just don't have enough work crews. They just don’t have the construction workers to get these jobs all done concurrently. So that is going to continue to be a challenge. I know Ron Witten is one of our two data providers, and he has actually tried to incorporate the longer construction/lease-up period on his forecasting for multi-family completions. How well that's being captured, I think time will tell, but in our portfolio, if you look at Camden's markets for 2017, again using Witten's numbers, he's got a completion number across all markets at about 146,000 for this year, and he's got that dropping to 128,000 for his 2018 forecast. So, that’s a 10% to 12% decline in total completions, job growth he has estimated in those – again across our entire portfolio, he's got job growth in 2017 of 569,000 across Camden's markets, and he's got that kicking up to 579,000 in 2018. That number is roughly in equilibrium on the 2018 completions versus jobs number for 2017. We still have too many completions for the jobs available. But I mean, you got really strong job numbers this morning, so maybe that's the beginning of a trend. And we know for a fact that Camden's markets attract higher than the national average percentage when we get job growth.

Thank you.

You bet.

Thank you. Good morning down there.

Good morning.

Hey, enjoy the music. Just continuing on that supply topic, at a recent conference, I was talking to a few private developers and they were saying that some of the big merchandisers have talked about down 35% to 50% reduction in starts. But Keith, it sounded like in the supply numbers, if I heard you say it correctly. It didn't sound like 2018 was too different than 2017. So can you just give an update on what you guys are hearing from the merchant developers? And how you think the supply which we all expect to decline, but hasn't, how we should think about that coming in the next few years?

Sure. The anecdotal information we get from the largest merchant builders, they're all discussing the same thing, which is that they're lowering the number of starts, and they're lowering the number of starts for a couple of reasons. One of which is the challenge in just getting bank financing given the bank market, and that's part of the issue—not only the stress in finance. By getting construction loans, you get less of the construction loan, with more expensive costs, so their total costs of capital have gone up, requiring more equity or some mezz lending to bridge that gap. And so that's part of the issue. The other part is that because of the delays they've had in finishing projects, they haven't been able to sell those projects, so you have a certain amount of their capital that needs to be freed up, because they need to sell projects to do new projects. So, even though we haven't seen these numbers come down, it just feels like they have to be coming down based on the discussions that we've been having with folks.

Hey, Alex. If you look at completions, that's one thing, but when you're having conversations with merchant builders about their future book of business, those guys are probably more likely thinking in terms of what they're going to be permitting. And if you look at the permits that are projected from 2017 to 2018, these are axial metrics numbers. It goes from 135,000 to 104,000. So that’s almost a 25% to 30% drop in permits across Camden's entire platform. And that starts to get in the range of what you're hearing from the merchant builders that we talk to.

Okay. That's helpful. And then, switching and going out to the West Coast, you guys announced that San Diego land purchase, it's been a while since you hear much less about San Diego. So, can you just sort of give an update on that market? And two with that purchase, is it more because of where the yields are relative to where they may be in L.A. or is there something that you're seeing in San Diego that makes you want to put some money to work there?

Well, we of course are in both of those markets and our development folks have been scouring those markets trying to get figure out deals that work, and it’s been a very difficult process. The projects that most of the merchant builders are doing out there, the yield starts with the five and very low five, and that's a challenge for us, so we just aren't going to go there. The San Diego deal was a unique opportunity to do an off-market transaction with a seller of a property that was a really complicated structure, and so we were very happy to be able to do that. We think that both the L.A. and San Diego markets are doing very well for us, and we've done great with our Camden Glendale project, leasing them up and creating a lot of value there. So we really like the San Diego market and we really like this site because it was off-market. We didn't have to compete with other developers for it, which was really good.

And versus that low five yield? How does this yield look?

Well, we think it's either a high five or low six.

Good morning, guys. Can you talk a little bit about South Florida and what you're seeing in that market? And how different is your performance between the various sub-markets down there right now?

So overall, our South Florida performance is on plan with where we thought it would be. We still have challenges with a lot of high-rise products that are being built. Fortunately for us, the stuff that is being built and pro forma rents that have been brought in the market are at or above $3 per square foot. We got a couple of high-rises there that we are in the midst of repositioning that we think ultimately will be very competitive with the new product. But the bulk of our stuff in South Florida is garden low-rise and mid-rise product, which is just a totally different price point than where most of the new supply is. So that's helped us to a certain extent. We think that my original guesstimates for the year, we had Miami as being stable. We had Fort Lauderdale as being stable. I still think that sounds right to me based on our first four months of operation. So I think we're reasonably well positioned to hit our plan this year in both those markets.

Okay. And then, how about Atlanta? I mean it continues to be a strength for the multi-family guys that have been there. What do you think there in any material differentiation between the various sub-markets for you guys?

Our portfolio is very spread out in Atlanta and that not unlike our Houston portfolio, just smaller. Great first quarter in Atlanta. Again, I believe it was our second or third highest rated market for 2017 ahead of the B+ and stable. We still think that's right. We're still over 95% occupied and had a great first quarter. So I think, Atlanta is – we did a little over 5% revenue growth in the quarter, and that's pretty on track with our plan. We do have some supply that's going to be an issue in Atlanta later this year, particularly in the Buckhead area as there is just a lot of stuff that is being brought to market right now. So we are probably going to have to deal with some of the supply challenges in the Buckhead sub-market. Again, we have a very good mix of Buckhead and then other suburban markets that are being served very well in Atlanta.

Okay. Thanks guys. I appreciate it.

You bet.

Good morning.

Good morning.

A quick portfolio management question. You talked in the past about on the bottom, probably 5% to 10% of your portfolio, these candidates that are proving in a given year. Does the amount of cash you have on the balance sheet change thinking with regard to whether you sell those assets or maybe think about putting some update capital on that?

No. What we clearly have cash on the balance sheet, and we have the best balance sheet in multi-family land right now and we are happy about that given where we are in the cycle. However, we are going to continue to manage our portfolio over time. You are not going to see a $1.2 billion in sales like we did last year, just because we think we can hit the market right at the perfect time to sell those older assets. But we will continue to play this trade, which is when you think about it, since 2011 we sold $2.1 billion of assets at roughly a little over a 5% AFFO yield. And when you think about that relative to what we've acquired and developed, the negative spread between our acquisitions and our dispositions given that we sold 20 plus year old assets with high CapEx. We've had a negative spread of 27 basis points on those trades. I will tell you that, in my business career, I've not seen that spread as tight as it is today. And so we can continue to do that and we will. So, when you think about acquisitions, we've only done – we did $2.1 billion of dispositions and only $643 million in acquisitions, and none in the last three years. And mostly we put our money in development because you can get a much better spread in the development side of the equation, so you don't have a negative spread there; you actually have a positive spread of probably 160 to 170 basis points on that trade. So we will continue to prune the portfolio. We've gotten most of our sort of low hanging fruit finished. But one of the things I think we've been watching is that when you think about the supply side and the amount of merchant builder product that has been developed over the last two to three years, and the rise in construction costs that you're seeing. What's happening now I think is going to continue to shrink and narrow dramatically, and we're going to be able to acquire properties potentially going forward at below replacement costs. In order to reload their portfolios, the merchant builders will have to sell some assets to do that, and we're already starting to see a little bit of that come to market. I think the idea of selling older properties and buying newer properties has a very small sort of negative spread if you will on old versus new that is something we're going to continue to do.

It's helpful and maybe the next here up in your portfolio assets spread, they aren't necessarily sales candidates do you want on the portfolio, might we see a directional pick-up in ROI CapEx by project.

So, we have been repositioning assets pretty aggressively for the last four years. We've got another pool of assets that we're starting to reposition this year. It's not anything at the levels that it was two or three years ago, but we will continue to look for opportunities to put capital back into assets that make sense for us to use on those long-term holds. My guess is that in our portfolio, as Rick mentioned, all the stuff that we wanted to sell, we sold last year and we've exited Las Vegas and then we've sold approximately $600 million, and then we've sold another $600 million of assets across our entire platform, and they represented the assets that we did not see sufficient upside to reposition and because of age and CapEx requirements, they just needed to become someone else's portfolio. So, the stuff that we wanted to sell, we got real aggressive and sold it last year.

Okay. That's all very helpful. Thank you.

Thank you. Good morning. One question from me, regarding Houston, your outlook for 2018 in the 4Q call, you characterized your expectations for Houston for 2018 to be perhaps equilibrium yet there was some optimism that it could be better. In your comments, you know here with three months on, I think your comment about job growth in Houston which has created more jobs than expected and as we look at the – what's happening, everybody expected of course permits to collapse there. But, you know, they have been very, very low here in the first quarter. So, just to make sure we understand it correctly, are you incrementally more positive about that forecast you had for – I won't say forecast, but your sense of where Houston would be in 2018. Are you perhaps a little more optimistic about achieving perhaps equilibrium or equilibrium plus?

I think that the numbers that have come in, in the first quarter are definitely better than we expected, and starts are definitely falling off the edge of the year. I was very surprised by the migration numbers because generally speaking, people don’t move to a market unless they think they can get a job. And you know it's very widely known across America that Houston has its issues with the energy business. Yet, we still had this great migration. So, I guess the real question for me is—so yes, we are more positive about Houston because of that – of the first quarter job numbers and migration numbers. But on the other hand, a quarter doesn't make the year and it doesn't make the 22,000 units that need to be absorbed here absorbed. So, we're guardedly optimistic, probably a little bit more optimistic than we were going into the fourth quarter call, but we still have to see how it all plays out. You know oil prices are down, they've fallen in the last couple of days, even though most of the oil companies are adding jobs back, not dramatically. So, I think it could surprise people on the upside in 2018, but on the other hand, we're going to wait and see obviously.

I think the overall economy as I've mentioned earlier, it just doesn't feel like there's been this big dislocation in the economy in Houston. It is just a matter of it being really contained to the oil and gas sector, and then it's bled over into people who own apartments and people who own office buildings. But the rest of the working public and the people on the streets, going about their daily routines in Houston, Texas seem to be—restaurants are full and there is traffic everywhere, and it just feels like it's a crazy time in Houston, not bloom times but still very robust and healthy from an overall economic standpoint. I think that Rick's point about the end migration is potentially a game changer. You've got 63,000 people who showed up and somehow or other, they've got to find their way into the economy whether it's showing up in the stats or not, and at some point, they need a place to live, and more than likely they are going to end up renting something before they make a permanent decision to own anything in Houston. So I think that's probably the upside. We expect that continue throughout 2017 and into 2018 you've probably got enough in the way of people sloughing around that are going to find their way into employment and then need an apartment, and then ultimately we get through the 20,000 plus or minus units by the end of this year or early in 2018. And then I think there probably is some upside from there.

Okay. Perfect. Thank you.

You bet.

So, I'll limit my Houston question. There is just one. I guess as you think about the cadence of year-over-year comps for same store trending through the year. When should we expect – I know you talked about 2017 being the bottom, and potentially 2018 getting better. But as you look at it from a quarterly timing perspective, when should we expect the inflection point to occur per se, and I guess I'd say that in the context that you guys actually had a positive same-store NOI comp in Q4 of 2016, so did that just set up an exceedingly hard comp optically for you guys this year?

Yeah, we're not – I'm not picking inflection points in 2017 for Houston, but still we were 3.3% for the quarter. We think that we're still going to be able to keep it under our— or down for the quarter. I think we still feel pretty good about maintaining it at the 4% level, but given your readout on, how that progresses, we'll just have to see. There is a lot of volatility around merchant builders are doing, where our direct comps that happens to be. When the merchant builders get close to a 90% number, three months free becomes one month free overnight. And then it's just a different war. So, as those people reach those—get to those—get to close to stabilization, your behavior changes pretty dramatically and that's good for the embedded base of our portfolio. But as far as reading out – I think – I wouldn't go any further than to say at this point, I still think down 4% in 2017 looks like the bottom to be.

One of the things I think is interesting is that people use this sort of jobs to completion ratio as a guide. If you use the jobs ratio as a guide in 2015 and 2016, Houston had about 16,000 jobs and during those two years, we absorbed 30,000 units. Well, wait a minute, yeah it’s 15,000 and we've absorbed 30,000 units. The ratio didn't make any sense obviously. And what was happening during that period is in 2014, Houston had over 100,000 jobs for three straight years in, you know, 2012, 2013, 2014. So, what’s happening is you had this momentum in this large market that took up a lot of absorption in the marketplace. So, the question on inflection is – will that continue to happen with this in-migration and the better than expected job growth and anybody's guess is to when that's going to happen. It just will happen. We just don't know when.

Got it. I appreciate that color. And then regarding the expense side of the equation, obviously you guys had some expense pressure both sequentially and year-over-year in your comps, and there were just limited to one market. I mean there were several markets that were trending at above long-term levels. Could you maybe talk a little bit more about property tax, utilities, property insurance, and how you guys see that trending cadence-wise through the year?

Yeah. Absolutely. So, on the property tax side, we think the full year is going to end up for us up 5.5%. That's what we thought a quarter ago. We still think that's being issued today. Obviously, this was on a sequential basis was a very tough comp, because we got quite a bit of property tax refunds in the fourth quarter of last year, particularly in Houston. When you look at the insurance side, and we talked about this on the last in the first quarter of 2016, we got in refunds of approximately $1.5 million and by the way that insurance refunds were allocated across our entire portfolio. So, certainly negatively impacts the comparison on a quarter-over-quarter basis. Utilities for the most part, any increases there are being driven by the rollout of our tech package and where we are today on our tech package. If you think about our 42,000 same-store units, we've got about 37,000 of them that have been rolled out. So you should start seeing the impact on the expense side decline as we go throughout the year.

Got it. That's very helpful. Then my last question, I know this is a very small portion of the portfolio. But for Corpus Christi, could you just remind us what's going on there? I think you said—you have loans to housing asset, kind of what was the genesis of that investment and how do you see that asset long-term in your portfolio?

Are you asking specifically about the student housing asset? First of all it doesn't show up on our same-store pool.

Oh, it doesn't, okay.

No it doesn't. We have two assets in our same-store – three assets in separate from the Miramar, the housing product. So, the student housing product is doing great. We’re better than planned so far this year. So, that's not any part of what's showing up in these numbers. The decline in Corpus Christi is primarily because of the hits in the oil pacts that there were definitely affected in the South Texas market and then in particular to an asset we have there Camden Breakers. We're in the process of doing a pretty major exterior renovation and it's just messy and it's hard to drive the right kind of traffic and close at the percentage that we need. So, it's a small piece but it gets the attention it deserves and I think it's somewhat a market condition, but some of it right now is particular to that one asset. And when you have two assets in the same-store pool, it's going to be pretty volatile around quarter-to-quarter.

Understood and thanks for the clarification. Thanks guys.

You bet.

Hello everyone. Just can you give us your view on development cost inflation over the next few years? Why are you caring about lumber tariffs potentially happening and an infrastructure build being implemented; what will that do for labor costs?

Yeah, we're very concerned about labor cost and timber cost and lumber cost. You know, the challenge you have is that when you think about any kind of infrastructure build that the government is talking about doing, and you look at today’s print was 4.4 unemployment rate, it's a tough deal and we are not seeing any benefit from one of the things; when you think about Houston, the construction cost hasn't gone down in Houston even though construction is falling for multifamily because it's been offset by public sector spending and hospital spending and petrochemical spending. So, I think there is going to be continued pressure, big pressure on labor shortages and on product shortages, especially if the government gets an infrastructure build on this year.

Okay and then I want to go back to that comment about the Houston merchant builders getting to 90% lease up and then backing off the concessions. Is there any particular development company or any particular project that is really compressed in the market as a price setter? And once they get leased up, we might see a little relief?

I don't think so. I think it's across the board like it's—like my tongue-in-cheek comment earlier that you know the worst thing for a merchant builder is to be the last guy to get the three months free. So, they all immediately go there fast, and then the same thing happens once the market stabilizes. There is not one particular—I don't know, it's a very dispersed group of merchant builders. You might have the Tramcos of the world that have a lot of projects, but they don't control the market and there is not one group that really does that. It's a pretty broad competitive set.

And it's really sub-market specific. If you've got two new lease-ups that are within a one-mile radius of the property that you're trying to get leased up, it's going to be competitive until they get stabilized. But they do, yeah, they will run really hard for the exit, and they will kind of smash through the door at the same time. But the good news is that they run really hard for the exit.

And I think the other good news is that price elasticity is great. The consumer in Houston, Texas is having a field day in lease up and a lot of the product that was built, and we're talking about high-rises that never existed in a lot of submarkets here; those high-rises are as good or better than any for sale condo or product that you can see. So, if they open and all of a sudden they are crickets, with no one walking in the door, there are tons of people walking in the door and they are leasing these up and the consumers are getting great deals on them. One of the only concerns I have is if you move in at a 25% discount, how fast can they move that up for those customers, and whether those customers have to be moved out to be able to get to those higher levels. On the one hand, you know as an investor in Houston, and as someone who understands the market, I kind of like that potential problem for those people because we could easily buy and upgrade some of our portfolio by acquiring some of these assets below the replacement cost and even with the costs that have gone up significantly.

Great. Thanks a lot.

Thanks. Sorry to keep it going. And you kind of stole my question – one of my questions there, Rick, about what happens you know in Phase 2 of these three months concession situations. And you know that same customer stays for the 25% rent increase. Maybe you can speak in terms of history: is there going to be an uptick in turnover in the short term in Houston next year if all things go as planned, or how much does that delay the ultimate recovery in your estimation?

I think it's all a function of what the economy is doing and what – and whether the job growth is there in the migration phase. Because, when you look at that in migration for example, 35,000 of the 63,000 people that moved to Houston in the last 12 months are from abroad. We find that the foreign folks are much more accustomed to A, renting, and B, are moving into a lot of these high-rises as well. So if that continues, the good news is there is – in a market that's as large as Houston, 22,000 or 30,000 units is not a huge amount of inventory. So, it really remains to be seen what happens with that. Clearly if you had a recession that happened at the same time over the next couple of years, that wouldn't be good for recovery in Houston, but if you just have a go along, get along like we're doing now, it probably does fine. I do think that the psyche of the merchant builder today and the investors that have invested in these new projects here are definitely changing their views, and they are hoping and with reasonable hope to get the capital out with a small profit. We've had people approach us, for example, to buy lease-ups here, and their discussion is, well, I'm not prepared to buy lease-ups here today, but the idea that the merchant builders are being more realistic in terms of what their pricing might be in the future I think is going to be a good thing for her.

I've seen historically in these situations where you've got a lot of product that was developed under the circumstances with nobody coming, and those builders that had the product in the market are the ones stuck at pricing, but they're the ones ultimately leading the upward pricing, and once the markets clear—because you got that fixed asset, they can't reduce that forever.

Thanks. And then second question is—this is a dumb one, employment on tequila. But if you look back and what you've done is Washington, D.C. and you had some success with NoMa II. Do you look back and say, gosh, wish we had been maybe a bit more aggressive developing sooner to deliver into a better market? And if that is the case, how does that affect your strategy for development in Houston, or is it because it's a supply-driven weight right now that maybe you'd be less inclined to add development projects early to deliver in a better market in Houston later?

I think that's definitely a calculus that we are looking at. The question is as you hold land, it gets more expensive every day and if you think construction costs are not going down, but going up, and you think that you might be able to deliver into a strong market in the future that doesn't have a lot of competition, that's a—you know that's a different analysis that we are looking at for sure. The question ultimately is can you get the math to work? And then what your—you have to have a view of the market obviously. And we've done well in D.C. and a lot of people pulled back from there as some of our competitors did and work why we didn't.

Thanks.

Good afternoon, guys. I'll keep it short with just one here. Just curious in the context of a very low levered balance sheet shares trading significantly below our estimate of NAV; so just curious where share repurchases fit into the corporate finance matrix at this point for you guys?

Well, share repurchases have always been in our forte. We are doing multiple cycles of purchasing shares. The real issue becomes that the issue of volatility and can you get any kind of scale. I don't fundamentally believe—I don't think our team believes that nibbling at shares, just to say we think it’s below our NAV makes a lot of sense. So we can get size and we can sell assets for $1 on Main Street and buy the stock back at a discount on Wall Street, it's a rational trade to do, but ultimately, it doesn't do any good unless you can do it in size. And the challenge that we've had over the years is that the stock has been very volatile, and we get to the point where we think it's a really good value; all of a sudden, so does the market, and they drive the stock price up, and we can't buy. So, it's one of those kinds of interesting academic questions; it makes perfect sense to do it. The question is how you execute and can you execute it is where it really makes a difference.

Okay. Thanks.

Thanks. Can you share the average stabilize yield on the A projects you have either in lease-up or under development right now?

Sure. Our stabilize yields on average around 7%.

Okay. And that's on today's rents?

Yes.

Thanks. And Keith, you mentioned you reset your underwriting after each quarter passes. Can you share the occupancy new lease and renewal growth expectations for the last three quarters of the year that get you to the 2.8% midpoint of revenue growth guidance?

No. So, we go through a bottom-up reforecast of every community. And then we take those numbers, and we look at them and say, what is the progression? So he can give you the progression on new leases and renewals that we've already done, which we have provided for you today. But as far as going out into quarter-by-quarter progressions, that’s not something that we've ever done or prepared to do. But we're comfortable that we are going to get to the midpoint of our guidance on same store.

Okay. With the comments on delivery slipping to the back half of the year, is there any concern you're on track through the first five months of the year because deliveries have been light and then be back-weighted?

No. I don't think so, because most of the stuff that is forecast to be delivered in 2017 has already—I'm mentioned earlier that Witten has put some pretty good effort around trying to time to account for the delay in these projects. Most of the inventory that we know here in Houston, we have very good data on where they are from a construction and completion standpoint and also lease-ups. It's important that we for all the reasons Rick mentioned earlier, know exactly what's going on in all of this inventory that's out there because at some point needs to find a new home. And it’s 99.9% merchant builder product. Ultimately, they are not prepared, nor are they in a position to own these assets long-term. So, we tracked them very closely, and I am confident that the numbers that we are using for supply are good numbers.

Okay. Thanks.

You bet.

Well I appreciate your time today, and we will see you at the upcoming NAREIT meeting. So thanks. Take care.