Camden Property Trust (CPT) — Q4 2017 Earnings Call Transcript

Good morning and thank you for joining Camden’s fourth 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 fourth 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 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 email after the call concludes. At this time, I’ll turn the call over to Ric Campo.

Good morning. By now, you understand today is Groundhog Day. And this day always reminds me of the classic Bill Murray movie in which he relives Groundhog Day over and over again. For the thousands of our Houston area neighbors whose homes were flooded by Harvey and have not yet moved back into their homes, every day feels like Groundhog Day. So much progress has been made, and yet so much work remains to be done in the Houston area. Fortunately, for 98% of the people that live in the area who were not flooded, life has returned to normal within a few days of the flood. All Camden’s communities are as good as new including Camden Spring Creek, which had homes flooded. The recent uptick in oil prices and the Astros’ great win in the World Series have lifted Houston’s spirits and economic activity. Harvey’s initial positive impact on the multifamily business has carried over into 2018, as Keith will share with you in his market-by-market report card. Houston’s rating improved from last year’s D and declining to this year’s B and improving; amazing what a year will do to the market rating sometimes. I want to thank our Camden team members that stepped up and really showed what neighbors helping neighbors meant for the Hurricane Harvey and Irma relief efforts that we did as a Company. During 2018, we will mark Camden’s 25th year as a public company. A few highlights of where we have come from I think are in order. We started in three Texas cities and now are in 15 diversified, growing markets throughout the country. We began providing 6,000 homes to customers and now provide 56,000 homes to customers, improving the lives of our customers one experience at a time. We began with a $194 million market cap and have grown to over $11 billion, providing shareholders with solid returns, growing dividends, and increasing stock prices from the beginning. In the beginning, the multifamily industry was really a slow adapter to technology. Today, we embrace cutting-edge technologies to help our employees perform better and take care of our customers better, and we have provided customers with cutting-edge technologies that they really appreciate. More importantly, we started with a workforce of about 250 people and now provide jobs to nearly 2,000 full-time employees and 5,000 construction workers, creating an amazing customer and shareholder-focused culture that has been recognized in consecutive years on the Fortune 100 best companies to work for list with six top-10 finishes. We look forward to the next 25 years and really embrace the opportunity to continue improving the lives of our employees, our customers, and our shareholders one experience at a time. I’ll turn the call over to Keith for his market-to-market update now, thanks.

Thank you, Ric. In line with our previous years, I will use this call to discuss the market conditions we anticipate in Camden’s markets for 2018. I will evaluate the markets from best to worst by assigning a letter grade to each and indicate whether we believe the market will improve, remain stable, or decline in the upcoming year. After the market overview, I will share more insights on our fourth-quarter operations and our guidance for same property performance in 2018. We expect same property revenue growth to be between 2% and 5% this year in most of our markets, with an average growth rate of 3% at the midpoint of our guidance. The markets projected for 2% to 5% growth encompass nearly 90% of our same property pool, and 11 of our 13 markets have received a B grade or higher this year. Our highest rating for 2018 goes to Southern California, which we rate as an A with a stable outlook. Our portfolio there has been performing well, averaging a 5.5% annual same property revenue growth over the past three years. About 25,000 new apartments are anticipated to open this year alongside 120,000 new jobs, resulting in a manageable jobs-to-completions ratio of 4.8. Denver also received an A rating but with a declining outlook. It has been among our top markets in recent years, and we anticipate another strong performance in 2018 with around 40,000 new jobs expected. However, supply will remain high, with 13,000 new units expected to be delivered this year, which may slow revenue growth from the 5.3% we achieved last year. Raleigh, Orlando, and Phoenix all received an A minus rating with stable outlooks. Each of these markets boasts favorable operating conditions with balanced supply and demand. Raleigh is seeing consistent new developments, with 5,000 to 6,000 new units added yearly, and 22,000 new jobs projected for 2018. Orlando is expected to gain over 40,000 new jobs this year with only 7,000 completions, while Phoenix anticipates 50,000 new jobs and 9,500 new units. Following these are Atlanta and Tampa, both earning B plus ratings with stable outlooks. Atlanta is projected to create 55,000 new jobs in 2018, with around 11,000 to 12,000 new apartments also scheduled for delivery this year. Houston has jumped five spots in our ratings this year, improving from a D and declining in 2017 to a B and improving now. After experiencing negative same property results for two consecutive years, our Houston portfolio is expected to see a 3% revenue growth in 2018. Job growth has spiked from under 20,000 in 2016 to around 50,000 last year, and we project it will reach 80,000 this year. After two years of heavy supply, we expect a significant drop in new deliveries in 2018, with fewer than 3,000 completions anticipated. Washington DC retains a B rating this year with a stable outlook. Revenue growth for our DC portfolio averaged less than 1% from 2014 to 2016 but rebounded to 3.2% last year. We expect 2018 to mirror the previous year in terms of same property growth, with supply and demand metrics consistent with 10,000 to 12,000 completions and 40,000 new jobs projected. Dallas holds a B grade as well but with a declining outlook due to ongoing new supply in the area. Job growth has been solid, with nearly 70,000 jobs created last year and a similar number expected in 2018. However, with over 20,000 completions last year and another 20,000 units coming this year, the Dallas apartment market is expected to remain challenging and may limit our pricing power. We assigned Austin a B rating with a declining outlook this year. The new supply in Austin is expected to decrease slightly to 8,000 units in 2018 from 9,000 last year, while job growth was average in 2017 with around 30,000 new jobs, anticipated to fall to 22,000 this year. Given the current supply and demand dynamics, we anticipate revenue growth for Austin to be below average, at 1% to 2%. Conditions in Charlotte appear to have improved to a B level from a B minus, carrying an improving outlook. New supply has continued in Charlotte with 6,000 to 7,000 units delivered in the last two years, and a similar volume expected this year. Job growth is projected to gain momentum in 2018 with over 30,000 new jobs expected, hence we foresee our portfolio's revenue growth to exceed last year's 1.9%. Our last market, South Florida, received a C plus rating with a stable outlook. We began observing weaknesses in our South Florida portfolio in 2017, and the economic forecast for 2018 indicates a slowdown in job growth. While deliveries of new apartments are expected to remain steady, our communities will continue to face competition from additional for-sale and rental condominiums. Consequently, we expect limited revenue growth for our South Florida portfolio this year in the range of 1% to 2%. Overall, our portfolio rating stands at a B plus this year, a slight increase from last year's B rating, mainly due to the recovery we've seen in Houston since Hurricane Harvey. As noted earlier, most of our markets should see 2% to 5% revenue growth this year, with South Florida and Austin being the exceptions, projected at 1% to 2%. Therefore, we expect our total portfolio same property revenue growth for 2018 to be 3% at the midpoint of our guidance range, compared to an actual revenue growth of 2.9% last year, significantly driven by Houston's performance. Moving on to our 2017 operating results, same property revenue growth recorded at 3% for the fourth quarter and 2.9% for the full year. We experienced strong performance in the fourth quarter of 2017, with many of our markets achieving 3% to 6% revenue growth. The top performers for that quarter were Tampa at 5.6%, Orlando at 5.4%, Raleigh at 4.6%, and Atlanta, Phoenix, and the San Diego/Inland Empire all at 4.4%. Rental rate trends for the fourth quarter were in line with expectations, with new leases down by one-tenth of a percent and renewals up by 4.9%, resulting in a blended growth rate of 2.3%. Our preliminary results for January fall within a similar range, and February and March renewals are being sent out at just over 5%. Occupancy averaged 95.7% in the fourth quarter compared to 94.8% the previous year. January occupancy averaged 95.4%, up from 94.7% in January 2017. Annual net turnover for 2017 decreased by 200 basis points to 46% compared to 48% in 2016, which is encouraging. Move-outs to purchase homes were at 15.8% for the fourth quarter of 2017 and 15.2% for the entire year, slightly down from 2016 levels. I will now hand the call over to Alex Jessett, Camden’s Chief Financial Officer.

Thanks, Keith. Before I move on to our financial results and guidance, I’ll provide a brief update on our recent real estate activities. During the fourth quarter, we reached stabilization at Camden Lincoln Station, a $56 million development in Denver, and began construction on Camden Downtown Phase I, a $132 million development in Downtown Houston. Additionally, late in the quarter, we completed the $78 million disposition of our only student housing community Camden Miramar, which is located in Corpus Christi, Texas. We built and owned Camden Miramar since 1994. And over the past 23 years, this was a very successful investment for Camden and our shareholders, generating a 16.5% unleveraged internal rate of return. We made the strategic decision to sell this asset given its age, use, and its location on a ground lease with just over 20 years remaining. At the sale’s price, this disposition represents an AFFO yield of 8.5% and an FFO yield of 10.5%. This disposition FFO yield was driven in large part by the short remaining duration of the ground lease and the capital-intensive nature of this asset due to its age, use, and location directly on the Gulf Coast. Subsequent to quarter-end, we purchased Camden Pier District in St. Petersburg, Florida, for approximately $127 million. This newly constructed 358-unit, 18-storey concrete building was purchased at a year-one yield of just under 5%. We ended the quarter with no balances outstanding on our unsecured line of credit, $370 million of cash on hand, and no debt maturing until October of 2018. Our current cash balance after purchasing Camden Pier District, the January 2018 payment of our fourth-quarter dividend, and the payment of property taxes which are disproportionately due in January, is approximately $160 million. Moving on to financial results. Last night, we reported funds from operations for the fourth quarter of 2017 of $114.6 million or $1.18 per share, in line with the midpoint of our prior guidance range of $1.16 to $1.20 per share. Contained within the $1.18 per share of FFO was approximately $0.005 in higher same-store insurance expense as a result of estimated freeze damages at our Georgia, North Carolina, and DC area communities, offset by approximately $0.005 in higher non-same-store net operating income, driven by the slightly delayed sale of our Camden Miramar student housing community. This sale occurred on December 12th as compared to our forecast for December 1st. Moving on to 2018 earnings guidance. You can refer to page 26 of our fourth-quarter supplemental package for details on the key assumptions driving our 2018 financial outlook. We expect our 2018 FFO per diluted share to be within the range of $4.62 to $4.82 with a midpoint of $4.72 representing a $0.19 per share increase from our 2017 results. The major assumptions and components of this $0.19 per share increase in FFO at the midpoint of our guidance range are as follows. An approximate $0.13 per share increase in FFO related to the performance of a 41,968-unit same-store portfolio. We are expecting same-store net operating income growth of 1.5% to 3.5% driven by revenue growth of 2.5% to 3.5% and expense growth of 3.5% to 4.5%. Each 1% increase in same-store NOI is approximately $0.05 per share in FFO. An approximate $0.15 per share increase in FFO related to net operating income from our non-same-store properties resulting primarily from the incremental contribution from our development communities and lease-up during 2017 and 2018, the four development communities which stabilized in 2017, and our one stabilized acquisition completed in June of 2017. An approximate $0.06 per share increase in FFO related to the net operating income from our January 2018 acquisition of Camden Pier District, an approximately $0.08 per share increase in FFO due to assumed additional $380 million of pro forma acquisitions spread throughout the year, and an assumed year-one yield of 4.5% and an approximately $0.05 per share increase in FFO due to the nonrecurring nature of our 2017 hurricane-related charges. This $0.47 cumulative increase in FFO per share is partially offset by an approximate $0.16 per share reduction in FFO resulting from additional shares outstanding as a result of our September 2017 equity offering, an approximate $0.08 per share decrease in FFO related to lost NOI from the disposition of our Camden Miramar community, an approximate $0.04 per share decrease in FFO resulting from the combination of lower third-party construction fees, lower interest income resulting from lower cash balances, and higher corporate depreciation and amortization due to the implementation of a new back-office system expected to come online in the third quarter of 2018. We are anticipating overhead expenses to be flat in 2018, resulting from a combination of general cost control measures and the impact of a construction-related settlement in which we will receive a reimbursement of legal fees expense in prior periods. We’re also anticipating interest expense to be flat in 2018 as the repayment of debt in 2017 is offset by 2018 higher borrowings under our unsecured line of credit combined with lower amounts of capitalized interest resulting from the completion of construction of three developments in 2017 and three developments in 2018. The interest rate for our line of credit floats at LIBOR plus 85 basis points and we anticipate draws under our line of credit beginning in June. Additionally, we anticipate paying off $175 million of secured floating-rate debt with an anticipated interest rate of 2.3% in the second half of the year, and we anticipate repaying $205 million of secured fixed-rate debt with an interest rate of approximately 5.7% late in 2018. Our current guidance does not anticipate any early debt prepayments and any resulting penalties. We currently anticipate issuing $400 million of unsecured debt late in 2018 at an all-in rate of approximately 3.75%. In anticipation of this offering, we have entered into $200 million of forward starting swaps, partially locking in the 10-year treasury at 2.34%. Our same-store expense growth range of 3.5% to 4.5% for 2018 is primarily due to increases in salaries and benefits and taxes. Salaries and benefits represent 20% of our total operating expenses and are anticipated to increase by 6.5%. This increase is a result of two factors. First, our benefit-related expenses in 2017 were unusually low, trading at tough comparisons. In 2017, we experienced unusually low amounts of self-insured healthcare expenses resulting in our 2017 increase in salaries and benefits to be less than 1%. I’ve discussed this trend on past calls and said at the time that I did not believe this trend could continue. And second, we are being responsive to the effects of general labor tightening and are making market-driven wage adjustments where appropriate. The two-year average increase in salaries and benefits averaging 2017 and 2018 is 3.7%. Property taxes represent a third of our total operating expenses and are projected to be up just over 4% in 2018. 3.5% of the expected growth is core, the result of anticipated increases in assessment for our properties. The remaining increase is due to a year-over-year reduction in anticipated refunds from prior year tax protests. We had success in 2017 with our prior year tax protests and current year appeals. As a result, 2017’s full year property tax expense increased by 4.1% as compared to our original budget of 5.5%. Although we do anticipate further tax refunds in 2018, we do not anticipate reaching the levels received in 2017. Excluding salaries and benefits and taxes, the remainder of our property level expenses are anticipated to increase at less than 3% in the aggregate. Page 26 of our supplemental package also details other assumptions I’ve not previously mentioned. We’re anticipating at the midpoint $100 million in dispositions late in the year with no significant impact to our guidance, and we’re anticipating $100 million to $300 million of on-balance sheet development starts spread throughout the year. Last night, we also provided earnings guidance for the first quarter of 2018. We expect FFO per share for the first quarter to be within the range of $1.11 to $1.15. The midpoint of $1.13 represents a $0.05 per share decrease from the fourth quarter of 2017, which is primarily the result of an approximate $0.035 decrease in sequential same-store net operating income. Of this amount, $0.02 is due to sequential increases in property taxes, resulting from both higher fourth-quarter 2017 tax refunds and the reset of our annual property tax accrual on January 1st of each year. The remaining $0.015 of the sequential decrease in same-store NOI is due to other expense increases, primarily attributable to typical seasonal trends including the timing of onsite salary increases. These increases in same-store operating expenses are partially offset by a slight increase in same-store operating revenues, and approximate $0.025 per share decrease in FFO due to the disposition of our previously mentioned student housing community. As a reminder, occupancy and NOI at this community were strong during the school term but declined significantly during the summer months, and an approximate $0.01 per share decrease in FFO due to a combination of lower third-party construction fees and lower interest income resulting from lower cash balances. This $0.07 aggregate decrease in FFO is anticipated to be partially offset by an approximate $0.015 per share increase in acquisition NOI and an approximate $0.005 decrease in combined overhead expenses, resulting from the previously mentioned reimbursement of legal fees, expense in prior periods, partially offset by the normal beginning of the year compensation increases and the timing of certain corporate events. And finally, our balance sheet is strong with net debt to EBITDA at 3.5 times and fixed charge expense coverage ratio at 5.5 times, secured debt to gross real assets at 11%, 80% of our assets unencumbered, and 92% of our debt at fixed rates. We have $736 million of developments coming under construction or in lease-up with $280 million left to fund. At this time, we’ll open the call up to questions.

Thanks. Maybe just starting with Houston. Could you give us the underlying assumptions for that 3% revenue growth in terms of new and renewal pricing and occupancy? And then, just generally, how dependent are you on that 80,000 job growth assumption number, just given that you’re coming into the year with such high occupancy?

We are currently maintaining an occupancy rate of 97% in Houston, slightly above that. We anticipate that this will gradually decline throughout the year, settling around a more typical range of 94% to 95%. This expected decrease is due to individuals who were displaced from their homes still residing in rental apartments as they navigate the lengthy process of repairing their primary homes. In our previous call, we expressed caution about providing guidance on short-term lease requests, as we believed that a three-month lease wasn't feasible for most situations, and this has proven to be accurate. We now estimate that many may need six to even nine months to a year, unfortunately, for a significant number of people. We are trying to anticipate when this shift will occur, but we are navigating unfamiliar territory with the scale of the impact and displacement in Houston. We expect our occupancy to trend back down toward 94.5% to 95%. Regarding leases, we are issuing new leases at flat rates and renewals around 4% in Houston. We believe this range will hold throughout the year. Our estimate for revenue growth from same-store properties in Houston next year is around 3%. This has been a challenging forecasting process for our teams, with numerous factors to consider. As for our dependence on the projected 80,000 job growth, we believe we are less vulnerable to fluctuations in that number than in the past, primarily due to the alleviation of supply issues. Looking ahead, we expect around 7,000 new apartments to be completed in 2018, a significant drop from the 20,000 to 22,000 delivered over the past three years. This supply reduction, coupled with a more optimistic outlook for job growth, particularly in light of recent oil price increases, indicates a more vibrant Houston economy. Overall, we are optimistic about our plans for Houston in 2018.

Thanks. And then, just what was the final impact of the tech package rollout on 2017’s same store revenue expense and NOI, and then, what’s assumed the impact in 2018?

For 2017, revenue was approximately 65 basis points, expenses were around 130, and NOI was close to 20. In 2018, revenue is about 10 basis points, expenses have improved to a positive 20 basis points due to the renegotiation of some contracts, resulting in an NOI that is approximately 20 basis points.

Just hoping you could talk a little bit about the acquisition environment, kind of the pipeline you have today. I think you said you expect the acquisition to be evenly spread out. But, any color on what you’re seeing? You guys raised equity in the fall and it’s been slow to allocate that. But, just what you are seeing in the pricing and what markets you are looking at?

The acquisition market remains highly competitive. We recently attended the National Multi Housing Council meeting in Orlando, which saw record attendance with 5,800 participants, compared to 2,600 when I was Chair. There's a significant amount of capital still investing in multifamily properties. However, due to slowing rent growth and decreasing net operating incomes in various markets over the past year, capital has increasingly focused on value-add opportunities. This approach involves purchasing older properties, upgrading them, and enhancing their value, particularly as lower cap rates on core assets and sluggish growth rates have made it challenging for investors to achieve their target internal rate of return. We anticipate a competitive environment continuing this year. We've evaluated numerous properties but will not make acquisitions solely because we have capital. Our goal is to ensure that any acquisitions fit our strategic framework, which centers on buying below replacement costs in lease-up scenarios, such as the property we acquired in St. Pete and another in Atlanta. These properties typically come with embedded concessions and may not be fully leased yet. Once we complete the lease-up process, we can start reducing concessions and enhance customer focus, thereby increasing cap rates to more comfortable levels. Currently, investors are positioning themselves for potential sales, and we expect to see 15% to 20% more assets available for sale this year compared to last year, reflecting our place in the cycle. We aim to acquire properties in markets where we are underrepresented and where we foresee strong long-term growth prospects. As such, we remain flexible regarding our buying strategies within those markets, while focusing on locating assets that meet our criteria of below replacement costs and enhancing yields over the next 12 to 24 months.

Could you discuss the expected trajectory for same-store revenues in Dallas and Atlanta, as well as your observations on recent new leases in those two markets?

So, I’m sorry, Juan. Was it Dallas and Atlanta?

Yes, sir.

Okay. So, we have Dallas on our rating as B and declining, and that’s just strictly a result of the new supply that’s going to be delivered this year. We’re going to see another really strong year of employment growth but there are just too many apartments that need to be absorbed. So, we ended last year, revenue growth in Dallas, at about 4.4% and we’ll be around 3% this year. So, still overall a good year for Dallas, just certainly, we think it’s decelerating from the strength that we’ve seen in the last two years. Atlanta, we have as a B plus and a stable market. And again, if you’re just comparing to last year, Atlanta was at revenue almost 5% for the full year, and we’ve got that a little bit over between 3% and 3.5% for 2018. So, again, good year, solid, a little bit of bias towards too many apartments relative to the 5 to 1 ratio long-term, but still okay in terms of the overall results in both those markets.

Just curious in terms of how you’re thinking about returns today given the recent move in the base rate. And then, you also mentioned you’re focused on market share underrepresented. Can you share what markets those are? Not sure if I missed anything there.

Certainly. Our largest markets are concentrated in Washington, DC and Houston. However, in areas like Tampa and Orlando, we're generating about 4% to 5% of our net operating income. In Phoenix, we have less market exposure. We are looking to improve our presence in areas where we are currently underrepresented. What was the first part of your question?

Just how you’re thinking about returns today with the recent move in the base rate?

Sure. It's important to note that many people mistakenly believe that the 10-year treasury is the primary factor influencing cap rates. In reality, it's actually the fourth most significant factor. Many are using floating rate debt, so while they may consider the 10-year treasury, the flattening curve is also raising the cost of that debt. Cap rates are very stable, primarily because the most significant factor affecting asset prices is the liquidity available in the market for financing those acquisitions. Currently, the market is flush with liquidity, and numerous financial institutions, including Freddie Mac, Fannie Mae, and life insurance companies, are actively seeking to lend for apartments. Remarkably, life companies are providing financing at lower rates than Freddie and Fannie. Additionally, there’s a substantial wall of equity capital that needs to be invested. Hence, liquidity plays a crucial role in shaping cap rates. The second factor is the fundamentals of supply and demand. Although we are at the tail end of an eight-year recovery cycle, supply and demand dynamics remain favorable. Markets are not experiencing widespread negativity or recession. As we look toward 2019 and 2020, many anticipate a decline in new developments due to rising land prices and associated costs. There’s a consensus that supply may decrease in the coming years while demand remains strong, particularly among millennials. Across different age groups, including millennials and baby boomers, there’s a rising tendency to rent apartments. Notably, since 2014, the demand for market-rate apartments among those aged 55 and over has increased significantly, mirroring that of millennials. This trend of increasing rental propensity within this demographic over the past decade suggests a promising demand outlook for the next three to four years. Therefore, supply and demand fundamentals are favorable. The next major concern is inflation, which also impacts cap rates. Currently, low unemployment rates and wage pressures are influencing the 10-year treasury. There’s a perception that we might be transitioning to an inflationary environment, which benefits short-term leases and provides the capacity to raise rents. Considering the 10-year treasury, even at its current level, remains low compared to long-term interest rates, I do not expect pricing to shift significantly. In fact, competition may intensify as investors consider inflation-protected assets, like multifamily properties. Overall, I don't foresee any considerable movement in cap rates given the 10-year tenure, and without a significant shift in supply and demand dynamics or unforeseen economic shocks, the competitive landscape is likely to remain stable.

I appreciate the detailed response. As a follow-up to the first point, considering the current liquidity in the market and the fact that we've passed the peak of CMBS maturities, do you think there is a chance we will see more portfolio deals this year, and would that be something you're interested in?

I think we’re interested in portfolio deals and one-offs. The challenge with portfolio deals is that you typically have to take everything, which isn’t always ideal. However, we’re examining various activities. I believe there will likely be an increase in sales this year because the merchant builder model, which is how properties are constructed, has encountered issues. Merchant builders are struggling to reload their balance sheets as they are holding onto assets longer than usual. This delay is primarily due to extended construction times and a gradual addition of inventory, which has helped the market by preventing an oversupply. Despite these challenges, merchant builders need to sell to finance their next deals. Additionally, the equity aspect is also relevant, as they have investments tied up while funds are unwinding with other properties. They prefer not to hold onto assets for too long, as their leveraged IRR decreases with time if prices remain stable. Therefore, I think this will drive more sales, likely more portfolio sales, and we are going to explore all of these options.

Good morning, guys. What’s the expected stabilized yield on the current development pipeline? And what have you guys been achieving on the stuff that’s completed and are stabilized in the last year or so?

Our overall portfolio yield is around 6.25 to 6.5. The high rises are lower while the mid rises are higher. Unfortunately, the trend in development yields is declining, primarily due to being further along in the cycle and higher comparables, along with the longer construction timelines. For the last group of fully stabilized properties, our yields were likely in the 7 range, but now we are down to the low-6 range at this point.

We are driven by long-term, unlevered internal rates of return that exceed our long-term weighted average cost of capital. While market conditions are important for our decisions, the crucial factor is ensuring that the financials are viable from the outset. A good example is our land in South Florida, where we struggled to find a feasible development approach for a long time. I recall the Boca project, where we owned the land for about eight years before it became viable for development. Once it did, it offered the right yield. Our focus is primarily on the long-term unlevered internal rates of return we can achieve, rather than just on market conditions. We engage in developments today due to land and construction costs. For instance, in Charlotte, where we have constructed three properties, the average construction costs for those projects have risen by approximately 30% compared to what we budgeted three years ago, while rents have not increased by the same percentage, which impacts yields significantly.

Your average monthly rental rent increased this quarter sequentially and that goes against the grain of pretty much all of your peers. Can you just explain that dynamic? Did you purposely focus on pushing the rates versus occupancy?

The most significant change in our portfolio was the shift in what happened in Houston from the third to the fourth quarter. Even during the second quarter call, we anticipated a 4% decline in rental revenues for Houston for the year. However, we saw a turnaround in the third quarter with a considerable sequential increase in Houston, which represents 12% of our footprint. This kind of shift is enough to impact our overall performance significantly. Houston is the only market I can identify with this major change; other than the usual seasonal fluctuations in some of our markets like Phoenix, which typically benefit from the fourth quarter compared to the third, everything else appears to be in line with our typical portfolio performance, with Houston being the notable exception.

It seems like it was pretty strong across the board but you’re basically saying you didn’t change anything as far as the rate versus occupancy trade this quarter?

Yes, absolutely. So, the redevelopments are new. In the past, we have been doing repositions. Redevelopments are a new concept, introduced in 2018. What we are going to do is combine a traditional reposition program with extensive exterior upgrades, and we are taking assets that will be redeveloped out of same-store. And we currently have three assets that are in that bucket, two in South Florida and one in Arlington. The total spend for those for 2018 is going to be somewhere around $25 million to $30 million.

Two market questions for you. First, just going back to Houston, Keith, in your response to one of the earlier questions, I didn’t know if you were saying that you expected Houston to end at 94% versus the 97% now. So, I didn’t know if I misunderstood that. And then, second is, when do you think that we’ll see a return of development in Houston, just given the dramatic drop off that we’ve had north of 60%? How long do you guys think before people start putting 2 by 4s in the ground again and we get supply coming back?

I mentioned that the occupancy level is expected to return to around 94% to 95%, as 97.5% is not a typical figure for Houston or any of our markets. I anticipate a return to normalcy, but we will likely see a 250 basis points reduction in occupancy over the course of 2018. Regarding new construction, many developers have been aided by the post-Harvey effects, and while there are ongoing discussions about new projects, the lengthy planning and permitting processes, even in Houston, make a significant restart of the development pipeline unlikely for 2019 and 2020. We initiated our Downtown community in the fourth quarter of last year, which is part of our legacy land portfolio that we bought years ago. This was a strategic move as we forecast 7,000 completions in 2018. Looking ahead, only about 5,000 apartment completions are expected in the entire Houston area for 2019, a remarkably low figure. Our Downtown building is a type 1 high-rise and won’t have units available until possibly late 2019 or early 2020.

I recently attended an Urban Land Institute event in Houston where an engineer discussed the city's new approach to detention and mitigation, which includes raising the elevations for new constructions. These changes could greatly hinder builders due to new regulations from Harris County that are now in effect, making construction more costly, land-intensive, and requiring additional fill dirt. The new Harvey regulations are driving up costs, and it's a typical government scenario where new developers face higher expenses, which may benefit those already established in the market. Additionally, starting in mid-February, the city is implementing a tough program that mandates developers to build above the 500-year floodplain by a certain amount. These new constraints were previously non-existent in Houston, adding more regulatory barriers that will limit development. Furthermore, lenders are hesitant to lend in Houston right now and are taking a cautious approach, leading to a lack of equity and debt capital flowing into the market. In areas that remained unaffected by flooding, there are still notable concessions occurring during lease-ups.

Okay. The second question is about Orlando, which seems to be benefiting from an influx from the Caribbean. Could you provide more details on your expectations for Orlando, specifically regarding rent and occupancy, which is currently at 97%, and also the supply situation as we look ahead to 2018?

Yes. Sure, Alex. We have Orlando as an A minus and stable. I mean, we expect it to be one of our best performers this year. We’re going to be probably in the 3% to 3.5% to 4% on top-line revenue growth, which is down from last year, but last year it was in the top 3 or 4 in our entire portfolio. And yes, it is true that there has been a very significant influx of people from Puerto Rico. We’ve done a lot of homework on this and it is true that the port of entry or the place of destination of a lot of the people from Puerto Rico is Orlando. So, they’re going to get the normal job growth that we would have seen in Orlando but we’re also going to see a big influx of other potential residents. So, Orlando, we have it as the third or fourth best market in our portfolio this year, so looking for another really good strong year in Orlando.

Orlando, just to give you a sense of this Puerto Rican connection. So, the number one city in America with Puerto Rican heritage is New York City, the number two is Orlando. And so, we’re getting at least a 5% to 10% Puerto Rico sort of effects in our properties there. Right now, it’s sort of anecdotal but as long as Puerto Rico continues to be challenged, more people are flowing out.

Good morning, guys. What’s the expected stabilized yield on the current development pipeline? And what have you guys been achieving on the stuff that’s completed and are stabilized in the last year or so?

Our overall portfolio yield is around 6.25 to 6.5. High rises are performing lower, while mid rises are showing better performance. Unfortunately, the trend for development yields is declining due to being later in the cycle, with higher comparables, and the increased time required for construction. The yields from our last batch of fully stabilized properties were likely in the 7 range, but we are currently seeing yields in the low-6 range.

Just hoping you could talk a little bit about the acquisition environment, kind of the pipeline you have today. I think you said you expect the acquisition to be evenly spread out. But, any color on what you’re seeing? You guys raised equity in the fall and it’s been slow to allocate that. But, just what you are seeing in the pricing and what markets you are looking at?

The acquisition market remains very competitive. We recently attended the National Multi Housing Council meeting in Orlando, which had an unprecedented attendance of 5,800 individuals in the multifamily sector. This environment is quite intriguing as there is still significant capital flowing into multifamily investments. However, the focus of this capital has shifted towards value-add opportunities due to slowing rent growth and declining net operating incomes in many markets. The trend has leaned towards purchasing older properties, renovating them, and thereby enhancing their value, particularly because lower cap rates on core properties and reduced growth rates have made it challenging to achieve desired internal rates of return on a pretax basis. We anticipate continued competition throughout this year. We've assessed numerous properties, but we are selective about acquisitions, ensuring they align with our strategic goals. Our strategy emphasizes acquiring properties below the replacement cost, particularly in lease-up situations, such as our recent purchases in St. Pete and Atlanta, where we acquired below replacement cost and anticipated lower yields due to existing concessions. As we complete the lease-ups and adjust the concessions, we intend to elevate the cap rates to more favorable levels. Currently, there is a significant interest in sales from both sellers and investors as they await developments in the sales market. We estimate there will be 15% to 20% more assets available for sale this year compared to last year, reflecting the current stage of the market cycle. We aim to acquire properties in regions where we currently have less representation but where long-term growth prospects are strong, and many of our targeted markets fall into this category. We remain flexible regarding property acquisition locations, provided we can secure deals that meet our criteria of being below replacement cost, lease-up opportunities, and improving yields over the next 12 to 24 months.

Thanks. Maybe just starting with Houston. Could you give us the underlying assumptions for that 3% revenue growth in terms of new and renewal pricing and occupancy? And then, just generally, how dependent are you on kind of that 80,000 job growth assumption number, just given that you’re coming into the year with such high occupancy?

Yes. We’re currently operating at about 97% occupancy in Houston, which is slightly better than expected. We anticipate that this will level off as the year progresses, and we expect to finish the year at a more typical occupancy rate of around 94 to 95%. We believe this decline will occur as individuals who were displaced from their homes continue to navigate the lengthy process of restoring their primary residences. In our previous call, we were cautious in providing guidance regarding inquiries for three-month lease terms, as we felt that the impact of the recent events would make such short-term arrangements unfeasible in most cases, which has proven to be correct. What we are actually observing is that those short terms may extend to six, nine months, or even up to a year for many. We have tried to predict when this shift might occur, but we are dealing with unfamiliar territory in a market as large as Houston, given the extent of the impact and displacement. Nonetheless, we expect to trend back down to around 94.5 to 95%. Currently, we are issuing new leases at flat rates and renewals at approximately 4% in Houston, anticipating that we will maintain this range for the rest of the year. Our forecast for Houston's same-store revenue growth next year is around 3% for the full year. This has been one of the more complex tasks for our team as we have navigated numerous variables. Regarding our dependency on the 80,000 job growth, we believe we are less vulnerable to fluctuations in that number than in the past, mainly because we have addressed much of the overhang and supply issues. Although some of that will evolve over time, we are optimistic since in 2018, we expect only about 7,000 apartments to be completed, compared to approximately 20,000 to 22,000 delivered in each of the last three years. There is significant relief on the supply side, along with a growing optimism about the 80,000 jobs. Recent forecasts were made before the latest increase in oil prices, and there seems to be renewed energy within the Houston economy. Overall, we have a solid plan for Houston in 2018.