Camden Property Trust (CPT) — Q2 2017 Earnings Call Transcript

Good morning and thank you for joining Camden’s second 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 subsequent events. As a reminder, Camden’s complete second 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 Ric Campo, Camden’s Chairman and Chief Executive Officer; Keith Oden, President; and Alex Jessett, Chief Financial Officer. We will try to be brief in our prepared remarks and try to complete the call within one hour, as we are the first of three back-to-back multifamily calls today. 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 email after the call concludes. At this time, I’ll turn the call over to Ric Campo.

Thank you, Kim, and good morning. Our music today was provided by recording star Ed Sheeran. As recently as 2013, Sheeran was best known in the U.S. as an opening act for Taylor Swift’s North American tour. This year, Sheeran became the first recording artist to have two songs debut in the top 10 in the U.S. charts in the same week and had a notable guest appearance on Game of Thrones. Sheeran’s story is a reminder of both how quickly things can accelerate, if you’re talented and are working in the right environment and that the pace of change in all areas of our residents’ life is faster than ever and will likely continue to accelerate. Our residents are increasingly choosing to live in communities that understand and adapt to their evolving lifestyle choices. As Malcolm Stewart, Camden’s Chief Operating Officer often reminds us, you don’t have to be young, you just have to think young. Our operations teams continued to produce solid results for Camden during the second quarter and for the year. I appreciate their dedication to improving the lives of our customers one experience at a time. Apartment demand continues to be strong, driven by positive demographics and a secular shift to rental housing as part of the sharing economy. Millennials are driving the sharing economy and are more interested in experiential activities as opposed to acquiring things including single-family homes. On the other end of the spectrum, from a demographic perspective, empty nesters are leaving their suburban homes for rentals in urban locations to take advantage of left commute time and more robust entertainment options. New supply competition is currently a factor in many of our markets. However, delivery should peak this year. We continued our capital recycling program this quarter with the acquisition of Camden Buckhead Square in Atlanta. This is our first acquisition in nearly three years. Last year, we sold $1.2 billion of non-core older properties. The proceeds we used to fund our development pipeline, pay down debt, pay a special dividend, and now to fund Camden Buckhead Square. Camden Buckhead Square was acquired at below replacement cost with a 5% FFO yield. Given the inventory of merchant builder product in the market combined with rising land costs and construction costs, we believe that other acquisition opportunities will be available going forward. Subsequent to quarter-end, we entered into an agreement to sell Camden Miramar, our only student housing property. The Houston apartment market is still challenging with new deliveries exceeding demand. We expect the market to stabilize next year. New construction starts peaked in 2014 at 24,000 and have steadily declined with 8,000 in 2016 and 6,000 starts expected each year in 2017 and 2018. While new deliveries have been delayed in some cases due to labor shortages, excess inventory should clear during 2018 and set Houston up for rent growth again. Houston has had a long history of strong recoveries following market weakness. Based on our view that there will be limited completions and competition from new developments in 2019 and 2020, we’ve decided to go forward with the construction of our Downtown Houston project, Camden Downtown. Construction will begin in the fourth quarter of this year with lease-up beginning in the fourth quarter of 2019 and stabilization expected in 2020. Camden Downtown represents a counter-cyclical opportunity to lock in construction costs at a time when it’s difficult for developers to get equity or construction financing. We’re looking forward to finishing the year strong and our management team and our operations teams are focused on that. And at this point, I’ll turn the call over to Keith Oden.

Thanks, Ric. We’re very pleased with our results which were in line with our expectations for both the quarter and year-to-date. Overall conditions remained healthy across our platform. Sequential revenue growth was 1.8% with every market posting a positive sequential increase, yes, even Houston. Other than the transactions which Ric covered, from our perspective, this was a very strong quarter. So, I’ll be brief with my remarks to allow more time for what’s on our mind. Turning to same-store results, revenue growth, which was 3.1% for the quarter is up 3% year-to-date. Most of our markets had revenue growth between 3% and 6% for the quarter, led by San Diego/Inland Empire at 6.1%; Denver at 5.8%; LA/Orange County, 5.6%; Dallas at 4.9%; and Atlanta at 4.8%. Expenses fell sequentially by 0.5% in the second quarter with a number of puts and takes, which Alex will address, leaving us with same-store NOI of up 3.2% sequentially and up 4.1% for the second quarter. Houston revenues fell 3.7% compared to the second quarter of 2016. Year-to-date revenues were down 3.5%, which keeps us on track to meet our full year forecast of roughly 4% revenue decline for the year. We expect continuously weak conditions in Houston as new supply continues to pressure merchant-built communities that continue to offer two to three months free rent as a lease-up concession. In the D.C. Metro, our revenue growth outperformed our overall portfolio with results up 4.2% for the second quarter and 4.0% growth year-to-date. We continue to be encouraged by the trends in our D.C. Metro portfolio. As we look at our markets and how we expect them to perform in the second half of the year versus our original plan, we see relatively minor variances. The top four outperforming markets relative to plan are projected to be Denver, Southern California, Dallas, and Orlando. This outperformance relative to plan is being offset by lower than planned revenues in Austin, Charlotte, and Southeast Florida due to direct competition from pockets of new supply. Rents on new leases and renewals continue to look good for achieving our outlook for the full year’s results. Second quarter new leases were up 1.6% and renewals were up 4.9% for a blended rate of 3%. July new leases and renewals are in line with the second quarter numbers. We’re sending out August and September renewal offers at an average increase of 5.5%. Additional operating stats for the quarter continue to support our full year outlook. Same-store occupancy in the second quarter averaged 95.4% versus 94.8% in the first quarter and 95.4% in the second quarter of last year. July occupancy was 95.6%, compared to 95.7% for the same period last year. The net turnover rate for the quarter was basically flat at 52% versus 51% for the prior year and 46% versus 47% year-to-date. Move-outs to home purchases were 15.6% for the quarter, with an expected seasonal increase from the 14.9% we saw in the first quarter. 2017 move-outs to purchase homes are in line with 2016 levels but still well below the long-term trend. At this point, I’ll turn the call over to Alex Jessett, Camden’s Chief Financial Officer.

Thanks, Keith. Before I move on to our financial results and guidance, I have a brief update on our recent real estate activities. During the second quarter, we reached stabilization at Camden Gallery, a $59 million development in Charlotte, which is currently 97% occupied and is expected to achieve a 7.75% stabilized yield. Also during the quarter, we completed construction at Camden NoMa phase II in Washington D.C. and began construction at Camden Grandview phase II in Charlotte. Additionally, during the quarter we acquired, for $20 million, an 8.2-acre land site in San Diego for future development and acquired, on June 1st, for $58 million, Camden Buckhead Square, a 250-unit stabilized operating community in the Buckhead submarket of Atlanta. We purchased this 2015 built community at an approximate 12% discount to replacement cost and expected to generate an approximate 5% yield. Finally, subsequent to quarter-end, we entered into a contract to sell Camden Miramar, our only student housing community, which is located in Corpus Christi, Texas, for approximately $78 million. Closing of this sale is not guaranteed and is subject to, among other items, satisfactory due diligence and financing by the purchaser. However, as I will discuss later, we have included the impact of this sale in the midpoint of our revised earnings guidance. We have $670 million of developments currently under construction or in lease-up with $170 million left in funds over the next two years. We anticipate up to $300 million of additional on-balance sheet development starts later in 2017. Our balance sheet remains one of the best in the REIT world with net debt to EBITDA at 4.5 times, a fixed charge expense coverage ratio at 5.7 times, secured debt to gross real estate assets at 11%, 80% of our assets unencumbered, and 88% of our debt at fixed rate. Turning to financial results. Last night, we reported funds from operations for the second quarter of 2017 of $106 million or $1.15 per share, exceeding the midpoint of our guidance range by $0.02 per share. Our $0.02 per share outperformance for the second quarter was primarily due to $0.01 per share in higher same-store NOI, resulting from a combination of higher than anticipated occupancy and both lower than anticipated repair and maintenance costs due to general cost control measures and lower employee benefit costs, as we continue to experience better than anticipated levels of health insurance and workers’ compensation claims, 0.5% in higher net operating income from our development and non-same-store communities, resulting primarily from each of our development communities leasing ahead of schedule, a quarter of a cent from the previously mentioned Atlanta acquisition, and a quarter of a cent from a combination of higher interest income and lower overhead costs. We have updated and revised our 2017 full year same-store and FFO guidance based upon our year-to-date operating performance and our expectations for the remainder of the year. Our same-store revenue performance has been slightly better than expected for the first six months of the year, driven primarily by higher levels of occupancy. We are encouraged by this trend. However, it is still too early to tell how pockets of supply will affect the few of our markets for the remainder of 2017. Therefore, we are maintaining the midpoint of our same-store revenue growth guidance at 2.8%, but are tightening the range to 2.55% to 3.05%. We have reduced the midpoint of our same-store expense guidance from 4.5% to 4.1% and tightened the range to 3.85% to 4.35%. As a result of actual and anticipated lower expenses related to health insurance and workers’ compensation and successful property tax appeals, primarily in Houston. We now expect our full year 2017 property tax increase to be 4.75%, as compared to our original budget of 5.5%. As a result of reducing our full year expense guidance, we have increased our 2017 same-store NOI guidance by 20 basis points at the midpoint to 2% and tightened the range to 1.5% to 2.5%. Last night, we also reaffirmed and tightened the range for our full year 2017 FFO per share. Our new range is $4.51 to $4.63 with the midpoint of $4.57. Although the midpoint is unchanged, there have been some changes to the underlying assumptions. As compared to our prior guidance, our new guidance assumes an additional $0.01 per share from our 20 basis point increase in same-store NOI, $0.015 per share from the acquisition of Camden Buckhead Square late in the second quarter, and $0.005 per share in additional contributions from the accelerated leasing of our development communities, partially offset by lower levels of interest capitalization. This $0.03 of aggregate improvement is entirely offset by the anticipated disposition of our Camden Miramar student housing community in the beginning of the fourth quarter. We built and have owned Camden Miramar since 1994. Over the past 23 years, this has been a very successful investment for Camden and our shareholders. Upon disposition, we anticipate this investment will have generated a 16.5% unleveraged internal rate of return over its 23-year hold period. We believe this is an appropriate time to make the strategic disposition, given this asset is located on a ground lease with just over 20 years remaining. At the contract price, this disposition represents an AFFO yield of 8.75%. This disposition will have a meaningful impact on our fourth quarter NOI as the community will be occupied for the full semester. As a reminder, occupancy and NOI at this community are strong during the school term but decline significantly during the summer months. Last night, we also provided earnings guidance for the third quarter of 2017. We expect FFO per share for the third quarter to be within the range of $1.14 to $1.18. The midpoint of $1.16 represents a $0.01 per share increase from $1.15 reported in the second quarter of 2017. This increase is primarily the result of an approximate three-quarters of a cent per share increase in NOI from our development and non-same-store communities, an approximate $0.005 per share increase in FFO related to our completed Atlanta acquisition, and an approximate $0.005 per share increase in FFO due to lower interest expense as the interest savings from repaying our 5.83% to $247 million unsecured bond and 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. As a reminder, we still anticipate issuing a $300 million unsecured bond later this year. This one and three-quarter cent per share aggregate improvement in FFO is partially offset by an approximate $0.005 per share increase in income tax expense due to a non-recurring Texas margin tax refund resulting from a prior year reduction in rates, which we recognized in the second quarter. Our sequential NOI is anticipated to be relatively flat as revenue growth from higher rental and fee income in our peak leasing periods is offset by our expected increase in property expenses due to normal seasonal summer increases in utilities and repair and maintenance costs, and the timing of certain property tax refunds recognized in the second quarter. At this time, we’ll open the call up to questions.

Thanks. I just want to start on Houston. You mentioned a potential stabilization next year, just curious if that’s more of a flat unit rental rate growth year-over-year or if you think there could be actually a slight acceleration or if it’s just less of a fall than what you’ve seen this year?

Yes. Without providing specific projections for net operating income growth in Houston, we view stabilization as the process of absorbing the excess supply currently in the market and finding residents for those units. Once that occurs, we believe we can move toward achieving a more normalized occupancy rate, after which we can consider rental increases. Looking ahead to our 2018 projections for Houston, we acknowledge that there is excess inventory being actively marketed by the builders. It's common to see lease concessions of two to three months in communities that have been leased up. They are working to identify the market demand and are making progress. We expect continuous good absorption. For 2018, if conditions remain as currently expected, we estimate that around 6,000 additional apartments will enter the market. Based on the average job growth estimates for Houston next year, which is around 45,000, this should be enough to stabilize the market, increase occupancy rates, and ultimately lead to rental rate increases. Previously, we've mentioned that we expect 2017, with a decline in top-line revenues of around 4%, to be the low point of the cycle, and we maintain that belief.

And then just in terms of development, you mentioned starting new projects in Charlotte and buying the land in San Diego and starting in Houston later this year. So, what are the expected yields on those developments and how do those compare to the developments currently in progress?

Current development yields are about 7, varying based on averages, with higher yields compared to lower ones in California. In California, transactions similar to those in San Diego are in the 5.5 to 6 range for stabilization. In Houston, yields need to be higher because of the market there. Overall, in central regions of the country, stabilized yields are around 6.5, give or take. Yields have certainly decreased from previous levels we've achieved. For example, our Camden NoMa project has an 8% yield, which is difficult to attain presently. We were fortunate to have purchased the land at a favorable price some time ago, and we also managed to enter the market effectively during a downturn in the construction sector, and lease-up is progressing well. With current land prices and rising construction costs due to labor shortages, it’s become more challenging to reach those yield numbers. We estimate that our development yields are approximately 50 basis points lower than they were a year ago when considering new projects.

Thanks. Just to clarify, those are on in place rents or on trended rents?

In Houston, we generally use trended rents because it's not feasible to apply three months of free rent from a new development to our development model. Typically, they are based on trended rents.

Just curious, you guys saw some good acceleration in Houston’s occupancy this quarter. I’m wondering if you think that that’s no longer going to be a drag on same-store revenue growth going forward and if that first quarter number 92.3 could end up being a bottom in occupancy in that market?

We were pleased to make some progress in the second quarter, ending with an average occupancy of about 93.1%. This is nearly 2.5% below our overall portfolio average, indicating it’s a laggard. If 92.3% is the low point, based on our current prelease data and looking ahead 60 to 90 days, we feel optimistic about improving occupancy in the third quarter. We believe that 2017 was likely the low point concerning the 4% rental decline or top-line revenue decline. It seems probable that 92.3% is the low point, but we are not satisfied with the 93.1% occupancy rate and are working hard to bring it back to a more typical level. Until we reach the 95% range, we will not make significant revenue progress on the leases.

Thanks for the detail there. And then, there has been some strength in the Houston housing market here more recently. I’m just curious about your thoughts on what the impact that can have on the rental market and whether or not you think that that will take share from rentals?

The interesting thing about Houston is of course in the last 24 months or 36 months, we’ve spent a lot of time talking about energy and what was going to happen to the Houston market overall. If you look at certain segments of the market, if you’re in the office building business, it’s kind of a tough market obviously. Multi-family is tough but not like office. When you look at industrial, retail and single-family, the market hasn’t missed a beat. Houston has a shortage of quality single-family homes and the markets have been very, very good and robust. I think last month or last quarter, Houston had a record number of sales at the high prices of homes. So, on one hand, Houston has done really well with single-family homes and it hasn’t been a real issue for the economy overall. But, when you get down to the whole issue of rental versus ownership or people losing market share to homes, we really don’t see a massive change in that scenario. Because when you think about it, people make a decision to either rent or buy not based on money generally, it’s based on lifestyle and their sort of what age group they’re in. And so, we haven’t seen a tremendous amount.

Yes. To provide some statistics, Ric is correct. In the second quarter, June was reported to have the highest single-family home sales in Houston's history, which is quite impressive. The percentage of move-outs to purchase homes in our portfolio was about 16% in Houston, compared to 15% across the entire platform. While many people are buying homes, they are not significantly moving out of our apartments.

And then, just as a quick follow-up, how does that 16% compare versus either this time last year or last quarter?

So, 16.5% in the first quarter of 2017, but if you go back to the fourth quarter, it was 15.9%, so in that range.

Thanks for the time. I was hoping you could just give a little bit more commentary on Washington D.C. You guys seem to be a little bit more upbeat than some of the other REITs that have commented. I was hoping you could talk about supply generally and kind of where you’re seeing pressures or not relative to the broader MSA?

It’s interesting because many are trying to understand our position compared to some of our competitors. Last quarter, we expressed a positive outlook regarding our portfolio in Washington D.C., but noted that our presence in the D.C. Metro area differs from others. To clarify, in our Northern Virginia portfolio, we saw approximately 5% revenue growth in the second quarter, outperforming the average of our other markets. In Maryland, the revenue growth was around 3.5%. The notable divergence is in the D.C. proper sub-market, where growth for the quarter was 2.2%. This is a shift because, until about mid-last year, the D.C. proper portfolio consistently outperformed both Northern Virginia and Maryland portfolios. Now, Northern Virginia contributes significantly more to our NOI compared to D.C. proper. This trend seems to be largely influenced by the distribution of our assets in relation to our competitors. Overall, when examining supply against job growth, the situation improved in 2018 compared to 2017. We remain optimistic about D.C., and I believe the variations are primarily due to the differences in our footprints.

And then you kind of hit on it in some of your prepared remarks, but just at this point, could you give us a sense of, particularly at the top-line same-store revenues? Where you feel the most comfortable within the range and points of variability to kind of hit the top or the bottom at this point?

Yes. I think the range we have set, I mean, we’ve tightened the range quite a bit, and as to get into the top or the bottom, I think it really comes down to how much of an impact the new supply actually shows up in the second half and how much of an impact we see from that. I mean, there is a fair amount of anecdotal evidence and not only in our own portfolio but just folks that we talk to and conversations and some of our other competitors who reported that there is a lot of slippage in delivery of multi-family units. And so to the extent that that phenomenon has happened to any meaningful degree in Camden’s markets, the apartments that we thought were going to be delivered in the first half that end up rolling over to the second half. So, I think the range from our perspective is more about how much of that supply has slipped, how much of it didn’t show up in the first half and how much of it is going to come back in the second half of the year. But I mean, I think our range is very appropriate for where we are halfway through the year.

And just if I could, what’s your expected split between the supply deliveries in 2017 first half versus second half and any thoughts on the percentage decline in 2018?

I’m focusing specifically on Camden’s market. While I could provide national statistics, that's not something we prioritize. Looking at Camden’s markets for the full year, we see completions in 2017 versus 2018. By averaging the forecasts from Wheaton and Axiometrics, we can observe a significant difference between them. Based on their average, we expect completions in Camden's markets to decrease from approximately 150,000 apartments in 2017 to about 125,000 in 2018. That's a drop of around 25,000 to 30,000 apartments across Camden's portfolio. If we compare the second half of 2017 to the first half of 2018, we anticipate a further decrease of roughly 14,000 apartments in Camden's portfolio. The data we analyze shows consistency, indicating that 2017 is likely the peak for completions in Camden's portfolio. Moving forward, we will need to reassess. There is a chance that some deliveries projected for the latter half of 2017 could extend into 2018, but I would be surprised if that shift were enough to make total completions in 2018 exceed those in 2017.

Thanks. Good morning, afternoon here. Keith, you talked about the D.C. market a little bit and you also talked about Dallas being an outperformer. Is there any material differences pursuing the various sub-markets in Dallas that you guys are operating in?

Yes. Dallas is experiencing similar trends as Houston in the supply-driven submarkets. The Uptown area in Dallas currently has an excess of inventory, affecting our lease-up at Victory Park due to competition from new developments. Our suburban properties in Dallas are performing better than urban core assets by 100 to 200 basis points. The disparity is mostly supply-driven, with a larger percentage of new supply located in urban areas, which is true for both Dallas and Houston. However, Dallas hasn't faced challenges as severe as those in Houston. We continue to see growth in top line rents within our Dallas portfolio, with urban assets contributing, although they are no longer leading the market compared to suburban properties. The main difference is that Houston added 10,000 to 11,000 jobs in 2016, while Dallas added 8,000. This dynamic economy has been able to handle the new inventory, but sub-markets with significant supply will certainly feel the impact.

So, the signs of hope that I would point out, especially for our portfolio are two things, number one, that although we’ve been successful in 2017 on the property tax side, we still do have property taxes increasing four and three quarters percent. That should revert back to the norm of about 3% very soon. The second sign of hope is that the insurance market still continues to be very favorable for us. And hopefully, when we go to our renewal next year, we’ll start to see some benefits from that.

Okay. And is that offset by wage pressure or what are you guys seeing there?

Yes. So, what’s interesting for Camden specifically is that when you look at our full year salaries, we actually think it’s going to be relatively flat, 2017 as compared to 2016, and that’s driven by lower than expected benefits and lower than expected workers’ comp claims. So, once you strip that out, we’re still working right around the 3% range.

Good morning. You talked about your first acquisition in nearly three years and some opportunities going forward. I’m wondering how much cap rates have moved up for a; new products and how much you expect to acquire over the next 12 months.

I don't believe cap rates have increased significantly for new products, as there remains strong demand. In the first quarter, we observed a 17% decline in multifamily sales nationwide, and while it decreased again in the second quarter, it was only about 1%, partially due to Greystar's acquisition of Monogram. Fundamentally, although bidding has slightly decreased, cap rates remain quite stable, particularly for high-quality properties. The challenge we face with merchant builder products that need to clear the market in the coming years is that historically, their margins have been remarkably high, ranging from 50% to 60%, rather than the usual 10% to 15% or 20%. Consequently, even though rents are depressed due to the prevalence of free rent in the market, cap rates haven't really increased. Instead, it's the NOI that has decreased, bringing into consideration the relationship between asset value and replacement cost. For instance, we acquired Buckhead Square for around $230,000 per door, while the current replacement cost is over $260,000 per door. Although the cap rate was low, there is free rent involved. However, replacing that property today would cost us 12% more than our purchase price, which will likely keep cap rates down. In Houston, for example, deals are trading at sub-4 cap rates, with one downtown property expected to trade at a 3.6% current cash-on-cash return, even with 2.5 months of free rent included. Investors are purchasing at low replacement costs and cap rates because they anticipate rental rates to increase over time. Historically, after downturns like the one in 2002, revenue growth stabilized and then grew over 5% for several years. Therefore, buyers are not overly concerned with needing higher cap rates, ignoring the fact that free rent will eventually expire. As a result, cap rates have not really increased.

But given this unique dynamic of buying below replacement costs, how big can this acquisition program be?

In our guidance today, we generally have a net of acquisitions compared to dispositions. It's an evolving market and I believe there could be significant acquisition opportunities in the next 18 months. Currently, we are exploring the periphery of this potential. We need to be patient, as there will be a lot more products released in the next two to three years compared to what we have today. Thus, we could easily increase our acquisition appetite to around $300 million, but for now, we are keeping an eye on the situation. Our balance sheet is very strong, providing ample capacity for acquiring new properties. These are the types of properties we will focus on for future acquisitions. After not acquiring much in the past three years, we clearly have the desire to expand. We have positioned our portfolio and balance sheet for growth through both development and acquisitions as we plan ahead.

Okay. I thought I’d ask the question since you’re going to be exiting the business. But given your success in student housing, why have you not invested more historically, is it just too different of a business from multi-family?

Absolutely. When considering the food chain in multi-family housing, student housing presents a solid business opportunity; however, the cash flow can be quite volatile. For example, Camden Miramar is currently fully leased, but during the summer, it was only 40% leased. This cash flow volatility is one challenge. Additionally, managing student housing differs significantly from managing market-rate housing. The same can be said for senior housing. We have a few properties catering to those aged 85 and older, and it's an entirely different approach. Success in these sectors requires distinct mindsets and strategies. While I believe that both student housing and senior housing companies perform excellently, combining them complicates management efforts. I prefer that our management team concentrate on what they excel at, which is managing market-rate housing that they know very well.

Good afternoon, or good morning for those of you in a different time zone. I have two questions. First, I'd like to revisit the merchant build and the pricing opportunities you've mentioned. You've acquired a development site in San Diego, but you're also discussing the potential to acquire more of these merchant build developments over the next few years. Do you anticipate scaling back your development efforts as more opportunities for merchant builds arise, or do you believe there is a balanced approach between the two, with the internal rates of return for development and acquiring merchant assets being fairly comparable?

So, Alex, the opportunity regarding merchant-built products is highly specific to certain submarkets. For instance, in our Buckhead acquisition, around 2,500 apartments were delivered as merchant-built products within approximately 18 months in that submarket. While this isn’t significant for Atlanta as a whole, the 2,500 new apartments in Buckhead represent a major event. This situation created a supply bubble where merchant builders had to adjust their pricing strategies to compete. They incorporated free rent into their rent rolls and faced pressure at the end of their ownership periods, as their investors sought returns on capital. However, they hadn’t fully utilized the embedded rent concessions, resulting in a compromised rent roll due to the influx of competition entering the market simultaneously. Therefore, this is a situation that varies by submarket. That said, several submarkets where we operate currently have or will likely face similar conditions. We anticipate opportunities in Charlotte and are aware of developments in Houston. This aspect largely hinges on the current supply challenges in several of our markets. On a separate note, regarding the land purchase in San Diego, we probably won’t commence construction on that product for another 18 months, followed by two years to complete it, which means we’re looking at a three-year timeline. This is in a submarket in San Diego where there has been almost no new construction, presenting a different scenario. In response to your question, we would be eager to pursue both avenues. To revisit Ric's earlier response, if we had the chance to acquire $400 million or $500 million worth of Camden Buckhead with the specifics and submarkets we desire to operate in, we would move forward with that acquisition. Ultimately, it comes down to finding the right balance. When it comes to development, if we can achieve a favorable risk-adjusted rate of return, we will proceed. Likewise, if acquiring merchant-built products presents a similar risk-adjusted rate of return, we will pursue that opportunity as well.

And then, Alex, going back to your real estate tax comments to prior question. You mentioned 4.75% now and hoping that goes back down to 3%. Would you say that all of your properties have been marked to market or your view is that there are still some of your markets where the property taxes haven’t been fully marked to where the tax assessors think they should be?

We approach property tax assessments by emphasizing equal and uniform valuation. This means that no matter our assessment of an asset's value, it must be valued similarly to other comparable assets. When we evaluate our portfolio, we focus on the values assigned to our assets by assessors compared to similar assets, rather than trying to determine the precise market value of the real estate.

Okay. So, do you feel then, as you guys did that exercise that everything is valued where it should be on a peer-related basis or there are still some areas where you think there are gaps and therefore that’s why you still think it’s elevated now and you’re not sure when it could be down to the normal 3%?

No. We think as compared to the peers, we think we’re appropriately valued.

I just have a couple of questions just on Houston and the revenue growth for the quarter. Thanks for all the color so far on the supply and your expectations. I was just wondering if you can break down the revenue growth for the quarter for Midtown assets versus maybe the energy corridor and suburbs?

I don’t have the specific details for those assets, but I can provide a general overview. The areas closer to the urban core, where much of the development is taking place, are facing significant challenges. In contrast, the energy corridor has a lot of supply, similar to the urban core. Both of these markets are experiencing a situation where supply exceeds demand. When looking at the suburbs, it appears that high-quality urban core assets are being affected more severely than suburban B plus assets, primarily due to less competition between the B and A categories. Additionally, some B properties are starting to feel pressure as A rents decrease, making it more affordable for those in the higher end of the B market to move into an A at a lower price than they would typically pay.

So, Jeffrey, in terms of specific, the numbers around Ric’s commentary on the Downtown and Midtown assets, roughly down 10% and 11% on the Uptown product, suburban assets are flat to up 2%. So, the blend of that gets you to roughly to 3.5% that were down year-to-date in Houston. So, there is a substantial difference of where the supply impact is happening, and if you got merchant-built product, it is given too much free rents, you’re going to have to respond to that from a pricing standpoint. But those are roughly the ranges and numbers that we’re dealing with.

Quick question on the Southern California that may sound like the D.C. question from earlier. But speaking about Los Angeles and Orange County, it looks like Camden had a pretty big sequential acceleration in revenue growth there. And I was just wondering what sub markets are the strongest, which are the weakest and maybe why Camden’s performance seems to look a little different than some of the other companies reporting?

When we assess each asset in our Southern California portfolio, we see consistent performance between the Long Beach market and LA/Orange County. There is overall strength. However, we have one or two assets facing more competition due to new developments in Irvine, which presents a slight challenge. These two assets are affected by the additional supply in that area. Beyond that, we are seeing strong performance overall, particularly in two of our top five markets, San Diego and LA/Orange County. There is very limited supply compared to other markets where we operate, and the economy is clearly showing signs of recovery. So, I’ll give you a couple of the highlights and the one that you mentioned on Houston is going to be the largest; we’ve got a real significant drop off there. Dallas comes down by 4,000 apartments in total supply, Atlanta down by 2,200, Austin down by 2,300, D.C. Metro down by 3,000, and San Diego down by 2,000. So, those would be the top five or six in terms of the declines; that’s a year-over-year decline, completions in 2017 versus 2018.

I guess following up on that, are there any markets where you do see a pickup next year?

Not a single one. We got 14 red numbers. I really wanted to mention earlier when we talked about Houston on the supply side that we received a very interesting statistic this morning from the U.S. Census Bureau. It reported that the total permits issued in Houston, Texas for multifamily apartments for the entire month of June was 90. We've been doing business in Houston for a long time, and I don’t recall ever seeing a statistic like that, even during other severe contractions, especially those more related to job losses, where we didn’t see numbers like that. When we discuss new permitting activity and the development pipeline completely shutting down, it's not just a theoretical concept. That is an astounding statistic we received this morning, so I wanted to provide some additional context on that.

Lot of questions answered already but I wanted to hit on a topic that I think has been addressed on calls past and it relates to this sort of jobs required jobs to creating another unit of apartment demand that ratio that you’ve seen historically in your markets. And I am wondering if some of those ratios are changing, just given the composition of the workforce and other things going on, I’m thinking of markets such as Austin, such as Dallas, maybe some others. If you have any sort of general comments on that, if you’ve noticed any changes?

Historically, over the last 20 years, the common understanding was that for every five jobs created, there would be one unit of multifamily housing demand. Many groups still reference this ratio, but I believe it is no longer accurate. A prime example is Houston, where in 2016, the city experienced virtually no job growth, with figures suggesting only about 10,000 jobs added, yet we delivered 15,500 apartment units that year. This apparent discrepancy can be explained by two main factors. First, there is significant pent-up demand resulting from a prolonged housing shortage. Over one million millennials currently live with their parents or share housing with roommates, unable to afford their own homes. This indicates a continued need for multifamily housing. Additionally, as millennials prioritize experiences over ownership, many are delaying marriages, childbirth, and home purchases. This societal shift has fundamentally altered the demand for multifamily housing relative to job growth. The second factor is related to the types of new developments being built today, which resemble hotel-style living with various amenities like conference centers, art studios, and golf simulators—features that were unavailable five years ago. Many empty nesters are now choosing to move into more urban areas, such as Sugar Land or the Woodlands, where they can lease apartments at prices comparable to their suburban homes while enjoying closer access to amenities. This mix of millennials, pent-up demand, and empty nesters moving from the suburbs to urban areas is reshaping the notion that five jobs are required to create one unit of multifamily demand.

Thanks. Alex, you alluded to the upside to occupancy you’re seeing year-to-date. I think for July, you’re 50 bps ahead of original guidance of 94.9%. What’s the current expectations for full-year average occupancy?

Yes. So, when we look at the second half of the year, we think that occupancy is going to be fairly consistent with what we saw in the second half of last year. So, you’re looking at right around a sort of a 95.3 type range for the second half. So, you can blend that with what we have in the first half and you got a full-year number.

Okay, great. And then, the Technology Package has been a pretty good success past couple of years. I’m curious what additional revenue growth initiatives you have in the hopper and how it’s going to impact full-year 2017 and 2018 revenue growth?

So, what we are running through our numbers today is everything that you know about which is our Technology Package and we still think that that equates to 65 basis points of additional revenue in the full year 2017. Obviously, we have lots of talented folks and we’re always looking for new initiatives. And when we have something that we’re ready to announce, we’ll certainly let everybody know about it.

Hello, everyone. Looking at the Buckhead acquisition, how are you looking at supply impact on results of the property next year? It looks like Buckhead will have a decline in supply but Midtown and Downtown have a bit of an uptick. Do you think that will impact the results there?

We are seeing new supply continue to come into Atlanta. The Buckhead submarket is fairly contained in that if someone prefers Buckhead, they are likely to stay there, possibly moving to Uptown but mostly wanting to lease in Buckhead. Most of the 2,500 new apartments that started are at the very end of the development. The next addition in Buckhead is expected to be an extension of our Paces community. However, it's quite challenging to find sites in the Buckhead area, and land costs will keep rising. We feel secure in Buckhead and believe that as we move into next year with no new supply coming online, we should see a significant rebound in rents, likely more than just a 3% or 4% increase due to previously depressed rents. Historically, when there is a supply issue in a healthy economy, rents tend to recover quickly to their prior peaks once the supply issue is resolved. Therefore, we are confident that we will see rents return to what the average person is willing to pay in that submarket once the supply situation improves. We evaluate revenue projections thoroughly, considering various new supply factors that could affect our communities within that submarket. We approach it from multiple perspectives. It's helpful to consider whether a market is likely to generate more or fewer units. Ultimately, the crucial aspect is understanding how many completions of those units will occur near or have an impact on the community where we operate.

I wanted to ask about the downtown Houston development start. It’s a fairly large deal at $125 million. Can you give us your latest thoughts on where you’d like to have your capital allocation to Houston in light of that? Would you consider a JV in that deal or selling some assets in Houston? Where do you want Houston to be as part of the portfolio?

First of all, we would not consider a joint venture. We are very anti-joint ventures. We have one of the cleanest balance sheets in the multifamily sector and we have one big joint venture with Texas Teachers, but it’s blind pool unilateral decision-making process with Camden only. So that’s number one. In terms of where, we like Houston long-term. Houston is a dynamic market; it is going through its weak period right now because of supply. It weathered the energy storm very, very well relative to historic energy downturns that we’ve had in the past. We’re at about 10.5%, I think, of our net operating income in Houston right now. And if we did nothing else, this would take it up about by 2020 to about 11.25 or something like that. It is a large project; it will be one of our premier assets, it’s a high-rise 21 stories. And we’re moving more towards this kind of concrete construction just because it holds up better long-term versus wood. I think when you think about where we want to be portfolio-wise, I like where we are in Houston because I like the market long-term. Will we continue to recycle capital the way we have in the past? Absolutely, we’ll continue to look at our portfolio on an ongoing basis and decide which assets are going to be slow growers, and then reinvest that capital into higher growth, higher quality assets. So, when we think about this $125 million investment in the context of Camden, it’s not that huge of growth into our portfolio. But, will we sell other assets to fund it? Perhaps. Capital recycling is not something just do and stop; it’s something that you have to do all the time. If you go back to our history, I think we only own two or three of our original IPO assets, if you can imagine that, and we’ve recycled billions and billions of dollars, and we’ll continue to do that.

Hi. Thank you, guys. I know we’re running over, so try to be quick here. First question, just has to do with the balance sheet. If you were to underwrite a scenario similar to today for the next 18 months or so and see some opportunities to take advantage of the acquisitions as you said, where would you be comfortable taking leverage in that scenario to accomplish that?

So, if you think about where we’re today, we have the absolute strongest balance sheet in the multifamily space, debt to EBITDA 4.5 times. Would we be comfortable in that increasing a little bit? The answer is yes, but probably not much more than sort of a 5-time type ratio.

Okay, perfect. And then on the ancillary income side, I think in the front half of the year, all the ancillary income was about 100 basis points. How much of that was the technology side?

Yes, it was almost entirely. So, if you look at the first half of the year, technology impact was basically 90 bps.

Okay. And so, that’s going to roughly 30 bps on the back half?

That’s correct.

So, of the total 150, it’s pretty evenly split in 2017, looks like about 76,000 in the first half and roughly 74,000 in the second half.

And just one follow-up to the Houston development question. Correct me if I am wrong, but didn’t the scope of that project increase $100 million this quarter? And just curious what increased it.

Sorry, you said $100 million.

Yes, from looking at the development pipeline, Camden, what was Camden County last quarter $170 million and now Camden Downtown is the new name, split in two phases but the aggregate cost is $270 million.

That's a good question. We were in a holding pattern regarding Camden County, deciding between a mid-rise and a high-rise. Ultimately, we chose to proceed with a 21-story high-rise, which comes to roughly $125 million. We haven't finalized our plans for the second phase yet, initially considering it as a twin tower, which contributed to the increased cost. From what we initially estimated, project costs in Houston have continued to rise. We anticipated a decrease in costs due to the energy situation and a decline in multifamily construction starts, but that has not happened. The situation in Houston is complicated by ongoing petrochemical projects, schools, and medical centers, and we haven’t observed any drop in costs. The increase is a result of rising costs and the shift in project type.

And we also added an escalation factor to the second phase for Camden Downtown. So that’s why you’re seeing a higher number for the second phase because they will be started several years later.

Okay. But the best guess on aggregate outlay for these two sites is $270 million right now?

That’s correct.

Assuming we build the second phase as a comparable tower 21-story high-rise product at phase I is yes. But that decision is way down the road.