Camden Property Trust (CPT) — Q3 2018 Earnings Call Transcript

Good morning and thank you for joining Camden's third quarter 2018 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 opinion and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete third quarter 2018 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.

Thanks, Kim and good morning. I'd like to start by giving a shout out to John Kim of BMO Capital Markets for providing this quarter's honorable music. John got the honor by winning our Name That Music contest last quarter. John's theme for the call were songs from 2009, the year the Great Recession ended. Some of you may have found the songs recent, while to others they may sound ancient; that probably depends on how you were impacted by the recession. John didn't say this but I'd be willing to bet there are more than a few of you on the call today who were still in school in 2009. Time flies when you're having fun and speaking of fun, Camden's third quarter results would qualify as fun. Our onsite teams and our support teams performed better than we had expected, with solid revenue growth and great expense control driven by our targeted run rate initiative. Apartment fundamentals remained strong despite high levels of supply in most of our markets. Strong job growth and migration from high-cost and high-regulatory states has continued to support high apartment demand in Camden's markets. For the year, we have completed $600 million of combined acquisitions and development starts, which is in line with our original guidance. The mix has changed; however, our development starts were $100 million more than our guidance and our acquisitions are $100 million less than our guidance. We effectively traded lower-yielding acquisitions for higher-yielding developments, albeit the timing will be different on producing those yields. With that said, I'd like to turn the call over to Keith Oden.

Thanks, Ric. Last quarter was Camden's 100th quarterly earnings call. So this quarter begins the next 100. Honestly, I gladly take another 99 just like this one, as our results were solid and slightly better than we expected for both the quarter and year-to-date. Same-store revenue growth was 3.1% for the third quarter, 3.2% year-to-date, and up 1.1% sequentially. Our top markets for revenue growth for the quarter were Denver at 4.3%, Orlando at 4.1%, Houston and Phoenix both at 3.8%, and San Diego, Inland Empire at 3.6%. Our weakest three markets again this quarter with less than 2.5% growth were Dallas, Austin, and Charlotte, which are the most heavily supply-challenged markets in our portfolio. Overall rents on new leases and renewals are slightly better than planned year-to-date and look encouraging relative to our fourth quarter plan. In the third quarter, new leases were up 3.1%, renewals were up 5.5% providing a blended growth rate of 4.2% compared to 2.8% in the third quarter of last year. So far in October, new leases are basically flat, with renewals up 5% for a blended increase of 1.8%. October occupancy is running at 95.8% versus 96% last October. However, just a reminder that last year's October occupancy rate was influenced by the Hurricane Harvey occupancy effect which drove Houston's occupancy rate up to 97.5%. The Harvey effect will have a measurable impact on our Q4 comparisons to last year. Our third quarter net turnover rate fell again to 54% from 55% last year and remains below last year's 49% turnover rate at 47% through the first three quarters. In the quarter, move-outs to purchase homes dipped to 14.3% versus 14.6% last year, leaving us at 14.7% year-to-date and that compares to 15.2% last year. It appears that the gradual upward trend over the last several years in this metric may have stalled in 2018 at a level well below the historical norm and bears watching in coming quarters. I'd like to thank all of our Camden associates for an outstanding quarter, let's finish strong to close out 2018. I'd like to turn the call now over to Alex Jessett, Camden's CFO.

Thanks, Keith. And before I move onto our financial results and guidance, I would like to provide a brief update on our recent real estate and financing activities. At the end of the third quarter, we purchased Camden Thornton Park, a recently constructed 299-unit nine-story community in the Thornton Park neighborhood of Orlando for approximately $90 million. This community is directly adjacent to our existing Camden Lake Eola development, providing the opportunity for further operating efficiencies. Also, at the end of the quarter, we sold a 14-acre outparcel adjacent to our development sites in Phoenix for $11.5 million. During the third quarter 2018, we began construction on Camden Buckhead in Atlanta. This $160 million, 365-unit development will be the second phase of our existing Camden phase community and will consist of one-eighth and one-ninth story concrete building. Subsequent to quarter end, lease-up was completed at Camden NoMa Phase II in Washington D.C. This $108 million development is expected to deliver a stabilized yield of approximately 8.25%, creating over $80 million of value for our shareholders. For 2018, we have now completed $300 million of acquisitions and started $280 million of new development. We are not anticipating any additional acquisitions or dispositions in 2018. Turning to our recent financing activities, on October 1st, we repaid at par $380 million of secured debt consisting of $175 million of 2.86% fully rate debt and $205 million of 5.77% fixed rate debt for a blended average interest rate of approximately 4.4%. The repayment of this secured debt unencumbered 17 communities valued at approximately $1.1 billion. We repaid the secured debt using proceeds from a $400 million 10-year unsecured bond offering which we completed on October 4th. The effective interest rate on this new unsecured issuance is approximately 3.74% after giving effect to settlement of in-place interest rate swaps and deducting underwriter's discounts and other estimated expenses of the offering. After taking into effect these transactions, 79% of our debt is now unsecured and 90% of our assets are now unencumbered. Turning to financial results, last night we reported funds from operations for the third quarter 2018 of $117.1 million or $1.20 per share, exceeding the midpoint of our guidance range by $0.01. This $0.01 outperformance resulted primarily from approximately $0.005 in lower same-store operating expenses due to lower turnover costs, lower amounts of self-insured healthcare costs, and continued cost control measures, and $0.005 in higher non-same-store net operating income resulting from better-than-expected results from both our previously completed acquisitions and our current development communities. We have updated and revised our 2018 full-year same-store expense, net operating income, and FFO guidance based upon our year-to-date operating performance and our expectations for the fourth quarter. As a result of actual and anticipated future expense savings, we have reduced the midpoint of our same-store expense guidance by 45 basis points from 3.5% to 3.05% and increased the midpoint of our same-store net operating income guidance from 3% to 3.2%. Last night, we also increased the midpoint of our full-year 2018 FFO guidance by $0.02 from $4.74 to $4.76 per share. This $0.02 per share increase is the result of our anticipated 20 basis point or $0.01 per share increase in 2018 same-store operating results, approximately $0.005 of this increase incurred in the third quarter, with the remainder anticipated in the fourth quarter, and $0.01 of additional non-same store outperformance from our previously completed acquisitions and our current development communities, approximately $0.005 of this increase also occurred in the third quarter, with the remainder anticipated in the fourth quarter. Last night, we also provided earnings guidance for the fourth quarter of 2018. We expect FFO per share for the fourth quarter to be within the range of $1.20 to $1.24. The midpoint of $1.22 represents a $0.02 per share increase from our $1.20 reported in the third quarter of 2018. This increase is primarily the result of a $0.01 per share or approximately 1% expected sequential increase in same-store NOI driven primarily by normal third to fourth quarter seasonal declines in utility, repair and maintenance, unit turnover, and personnel expenses, a $0.01 per share increase in NOI from our development communities and lease-up, and a $0.01 per share increase in NOI from our recent acquisition of Camden Thornton Park. This $0.03 per share cumulative net increase in FFO will be partially offset by a $0.01 per share decrease in FFO resulting from a combination of higher overhead cost due to timing of certain corporate-related expenditures and slightly higher interest expense as the fourth quarter interest savings from our recent debt refinancing will be offset by higher amounts of debt outstanding and lower amounts of capitalized interest at several of our developments near construction completion. Our balance sheet is strong, with net debt to EBITDA at 4.1 times, and a total fixed charge coverage ratio at 5.5 times. We have $793 million of development currently under construction with $380 million remaining to fund over the next three years. As of October 25th, we have no amount outstanding on our unsecured lines of credit and $30 million of cash on hand. At this time, we will open the call up to questions.

Thanks. Just on Houston, you faced some difficult occupancy comparisons in Q4, so hurricanes are trending from a newer lease perspectives and then as you face more normalized occupancy comparisons next year, and I know it's pro forma guidance, but how is Houston looking in 2019?

Well, we are in the process of putting together our bottom-up budgets, so we look at all kinds of different data providers and if you look at what Ron Witten has in his outlook for 2019 in Houston, he has got revenues going up somewhere in the 4% to 5% range. We'll see where ours come out; clearly, the comparison is tough because of occupancy in the fourth quarter but that normalizes pretty quickly in the first part of next year. On occupancy, we've trended back down to about 95% as we expected we would by the second quarter. So I don't think there will be much of that noise in the numbers. Houston continues to recover very nicely. Last month, we got a report that showed that the trailing 12-month job growth in Houston, Texas was 128,000 jobs. So that's enough to move the needle even on a metropolitan area like Houston. So things continue to recover very nicely. The nice thing is that recently, up until recently, the job growth had been coming pretty much without participation by the integrated oil companies, and within the last two quarters, we have really seen a shift in that, they've begun to hire again at their full capacity. So I think that bodes well for Houston's job growth in 2019. Obviously, we have a very constructive supply scenario for Houston next year with around 8,000 apartments that are going to be delivered into the Houston Metropolitan area, which is sort of a rounding error in terms of total supply. So if we get really good job growth here in 2019, which is kind of what's projected in most people's numbers versus 8,000 new apartments, that's really good math for our business.

Thanks. And just on the balance sheet, after repaying the secured debt earlier this month, it looks like the only remaining secured debt is coming due next year. How do you think about the use of secured debt as part of the overall capital stack going forward?

Yes, we fundamentally believe that we should be an unsecured borrower. So we've got $439 million of secured debt that's coming due in the first quarter of 2019 and our intention is to not take that out with additional secured debt.

Hi guys, this is Shirley Wu calling in for Juan Sanabria. Congrats on a great quarter. Moving to 2019, outside of Houston, which market do you believe are set to reaccelerate or decelerate from 2018 that is actually in your higher side markets like Dallas?

Yes, we're in the process of putting together our game plan in all of our markets, and obviously we can look at aggregated data from data providers. The one that we rely on most is Ron Witten's numbers. His model for Camden's markets shows total revenue growth for 2018 at somewhere around a little over 3.2%, and if you look at 2019, that number goes up to about 3.7% in his high-level aggregated number. Clearly, Ron is looking for an improvement across the board, a slight improvement of about 50 basis points in our entire portfolio. For each individual market, we'll have to wait and see until we get our final results and review process for our 2019 revenues; we'll provide some guidance on that in the first part of 2019. But overall, if you think about the drivers in our business, if you look at employment growth and supply, there's really not a huge difference between the outlooks for 2018 and 2019. Job growth comes down a little bit across our platform, new completions stay relatively flat, but the change in the ratio of new jobs to completions doesn't move that much; we're a little bit above five times for 2018, and that drops to a little bit below five times for 2019. So overall, just looking at the macro data and not drilling down to each individual market, which is the purpose of our budget process, you would just look at the macro data and say that 2019 should look a lot like 2018 with maybe some slight improvements. We'll have to see how it plays out.

That's great. Are there any markets in particular that you might be concerned about in terms of supply and rent not being there?

Well, the supply-challenged markets that we have right now are the three weakest markets: Austin, Dallas, and Charlotte. If you look at the supply numbers for 2019, there's very little relief coming in any of those three markets. Dallas gets a little bit better, Austin actually gets a bit worse on supply, and Charlotte is about the same. You can expect us to continue to be facing headwinds in those three markets due to supply.

Thanks again for allowing me to be your host music DJ.

Absolutely, well done.

On your turnover rate of 47%, can you comment on any markets that are meaningfully higher or lower than your portfolio average?

Historically, when you look out on a year-over-year basis, you always have markets that have higher versus lower turnover rates; but if you look at them by comparison, there's nothing that stands out in our portfolio. We've had a 2% difference in the turnover rate from last year, and that would be consistent across the platform, but within that set of data, you've got turnover rates that vary by as much as 7% or 8% up and down from the average in our portfolio. We can provide that data offline if you like.

I think it's interesting to think about turnover in regard to the migration patterns of Americans and how that's changed over the years. There’s a secular change where people are making moves less frequently, primarily because Millennials are a different breed compared to the baby boomers, who were always willing to move to a new city for a job. Today, with the unemployment rate as low as it is and the competition in the job market, it's much more difficult to relocate people from their market when they have a home and kids. You do still have outmigration from California and some eastern cities, but generally speaking, people are staying put longer in their homes and apartments. It's also noticeable that people are getting married or having children later in life, which further affects turnover rates.

Thanks for that. Alex, on the senior notes, it looks like an impressive move to lock in a 10-year period to reduce the effective interest rate. Can I ask how long the swap agreements' duration is?

Yes, so they're 10 years, and we started entering into them at the end of 2017 and completed them through early 2018. It’s for a 10-year period; the net settlement works in our favor, and we'll amortize that net settlement against interest expense over the full 10 years.

So that 3.7% is for the full period?

That's correct, yes, so 3.7%, 4% for the full 10 years.

Hi, good morning. First question: At the outset of the year, you were projecting DC to be a 3% revenue growth market, and you're tracking a little bit below that up to this point. There have been some recent comments from one of your peers concerning CBD fundamentals in particular, so I was curious, without giving 2019 guidance, what's your outlook or optimism for your suburban markets, Northern Virginia and Maryland over the next six to 12 months?

Yes, so the DC Metro rating at the beginning of the year was stable, which is pretty consistent with where we think we're operating. For the third quarter of this year, our average revenue growth in our portfolio is 3.1%; DC Metro also was 3.1%. This is the first time in a while that DC Metro has been in the top half of our revenue numbers, so that's a good sign. We're reasonably optimistic about our DC portfolio through the end of the year and into 2019. We have a very different footprint than many of our competitors in the DC market with a lot of suburban exposure, which has served us well over the last couple of years relative to the concept. We're in a transition in many of these markets where a ton of the supply has been more in the urban core. Our suburban markets have been a positive for us. Given the decline in new supply that’s inevitable and starts that are expected in the next couple of years, that will likely benefit the urban areas more than the suburban areas. So overall, we’re optimistic about where we are situated in DC in 2019.

Great, thanks for that. And as far as development, you mentioned the pipeline's around $700 million at this point. With some projects wrapping up early next year, what's your appetite for backing those developments at the right level moving forward?

We're very comfortable in the $200 million to $300 million development start annually going forward into 2019 and 2020. We have that pipeline of land or transactions that are in progress right now to start those projects between now and 2019 and 2020.

And could you quickly just provide the yield on the Buckhead development?

Yes, so we started it's trending at around a 6, plus or minus. It’s interesting because when you think about the development cycle, we first started building with 10 cash on cash in Houston and Tampa back in 2010, 2011, 2012, and over time as a result of increased construction cost and the time it takes to build, yields have compressed. But when you look at building to a six in today's market on an acquisition basis, it’s still a 4, 4.25, which is making a nice spread over what we could get on an acquisition for the development risk. We get to build what we want as opposed to buying someone else's building that wasn't necessarily built for us.

So I guess just a quick follow-up on the development question, do you see that spread between market cap rates and yields compressing given the increase in base rates combined with unabated cost acquisition on the construction side?

Yes, absolutely, spreads have tightened compared to where they were in the past. They were really wide and people were making wider spreads than ever in my career, and it’s gotten to the point where it’s more normalized, around a 150, 200 basis points positive spread between acquisition and development on the development side. The challenge is that it’s hard to find transactions like that, which is why we’re targeting $200 million to $300 million and not $500 million. It’s more difficult to get deals done and make the numbers work from that perspective. The 10-year treasury has gone up from the beginning of the year, and people are trying to understand why cap rates haven't gone up as fast. There's a massive wall of capital today that continues to flow into real estate, especially multifamily. We had a board meeting this week where HFF updated us on market conditions, showing $182 billion of unfunded real estate capital needing a home. When considering cap rates, market liquidity is the primary factor, not the 10-year.

That's helpful. If we apply that to Houston, clearly the supply is going down next year, which is favorable. Given the quickness of the supply response in a market like Houston and Camden's long-standing experience, how do you expect that picture to evolve as we get further into 2019? Do you see permits accelerating again given that wall of capital that would presumably still be interested in multifamily in a market generating 80,000, 90,000 jobs a year?

Yes, Houston clearly has the best story in America right now: lowering supply and increased job growth in a very dynamic market. We do indeed expect starts and permits to rise in 2019 and 2020. The good news is that you can't build your project fast enough to negatively impact probably 2019 and part of 2020. The market is very transparent, and decision-makers on the equity and debt sides can see what’s out there. When the supply-demand dynamics get out of whack, they slow down, like Houston has gone from 20,000 units to 7,000 or 8,000 units this year. Houston will ramp up because it has the story, but the question is how many can get done given the cost environment and return requirements.

Yes, just to put some numbers around that, that's all correct. Witten's got completions in Houston at 6,000 this year, and I think that's going to be accurate. His projection for next year is 7,000 completions and he has that ramping up to 13,000 in 2020. So yes, absolutely, that's likely to happen, but 13,000 completions in a metropolitan area like Houston will be manageable due to the job growth.

Good morning; and echoing John's comment, Alex, congrats on your timing on that debt issuance.

Thanks.

So two questions here. First, just going back to DC, the common market sentiment is that Amazon is going to pick Crystal City for HQ2. Just curious your thoughts on the impact to your portfolio. Two, is DC a great developer's market not a great operator's market, in your view? Would Amazon's announcement result in ramping up from developers, meaning landlords don't get the benefit, or do you think there may be some long-term benefits for landlords?

Yes, first of all, I hope you're right about Amazon because that would be a great benefit to us and many others. We have a decent-sized footprint that would be impacted by that location decision, no question about it. Regarding DC Metro, supply hasn't been the challenge there recently; it's primarily been weaker job growth. If you look at what's coming this year, we have about 10,000 completions in DC Metro in 2018; it looks like it ramps up a little to around 12,000 next year and then back down in 2020. That's not historically troublesome on the supply side. If you look at job growth, Witten has it at about 39,000 this year and that drops to 22,000 in 2020. Of course, Amazon is a game changer for all that, but unlike many other markets, it’s not the high supply in DC that has been limiting our ability to push rents, it's primarily job growth.

Okay. The second question is your comments regarding preference for development versus acquisition seem consistent with what’s been happening, but you raised money over a year ago to acquire a bunch of properties. That's proven difficult. Do you think the jump in rates will spur some merchants to sell quicker, due to increasing impact of rates on their IRRs, or do you believe that rising interest rates will not change the pace at which merchants sell their products?

Last year, we thought that would happen in 2018, and it didn’t. If you look at the stats on sales in 2017, the number of multifamily sales was down from 2016, and we thought it would be down again in 2018, but it turned out to be way up for 2018. There is definitely more merchant builder stress, and they must sell to reload their balance sheet because banks won't let them just keep building without tangible assets. That is one difference that could help us buy at decent prices, but on the flip side, we thought that was going to happen in 2018, which didn't, and, importantly, we see many of them refinancing instead of selling. So, there's still the chance that merchant builders do eventually sell, and the question is whether there will be enough buyers. I think right now there are, and that’s why we decided to shift our acquisitions guidance while increasing our development targets ultimately.

Good morning, guys. Alex, how much of the same-store expense savings are moving down from your 3.5% to about 3% guidance for the year? Is it a timing issue versus stuff you expect to be sustainable into 2019?

Yes, none of it is timing at all. As I said on a couple of past calls, two factors are occurring: number one, people are just not getting sick as often, which is good news for all of us. The second is that we're becoming very efficient on our R&M and unit turnover cost, and there is no reason to believe that should not be easily replicated in the future.

Okay. So none of the savings here is from property taxes that could spike back in 2019?

No, and in fact if you think about it, we started the year with a 4% same-store expense growth, and we had assumed property taxes would be up 4.2%. We now assume property taxes are going to be up 6%, and yet we're at 3.05% same-store growth, so property taxes were worse than expected, but all other categories were far better than expected, overcoming the unexpected increase in Atlanta property taxes.

And then, Keith, of your better-performing markets, which ones have the smallest gap between new lease and renewal growth rates? Which markets are closest to an inflection point of meeting or possibly crossing in the future?

Of our better-performing markets, every one has renewals exceeding those on new leases. That’s been the case for many quarters. If you look at our 2018 numbers, we were 5.5% on renewals and 3.1% on new leases, and I don't see a single market where we've gone the other way. Some may vary slightly up or down, but the general trend continues to be that renewals outperform new leases. I think this probably tightens in 2019 but I’d be surprised to see a shift between renewals and new leases.

Hi, good morning. Thanks for taking the questions. First, one of your peers indicated that some of its markets haven't yet started the normal seasonal decline in rent growth usually seen in the fourth quarter, so are you seeing this noticeably across any of your markets in your portfolio? If so, what would you attribute that to?

Yes, ours looks just like it has historically. In October, we're basically flat on new leases and 5% on renewals. That's typical and what we would expect. If you look at our budget, we would expect these results, so no big revisions from our original forecast in our portfolio. I'm not sure who that might be referring to; maybe they have a very different footprint than we do, but we're seeing what we have historically seen in the fourth quarter.

Turning back to Houston, regarding the McGowan development, can you remind us where concessions stand on that asset and what merchant builders are offering competitively in that area?

Sure. Developments in Downtown and Midtown are offering one to two months free, depending on the unit type. Some might say, how are you growing your same-store portfolio revenue when there's so much free rent in the development market? It’s interesting because existing portfolios maintain occupancy without imposing significant concessions. When a development is around 50% occupied, they have to offer concessions quickly to fill those units. A merchant builder is very quick to give concessions to fill them up as soon as they can.

Hey, good morning. When we look at your lease spreads, it seems to imply same-store should be accelerating. However, the guidance implies that Q4 is slowing. I'm not asking for a 2019 guide, but are leasing spreads telling us the right story or is it possible that occupancy or other factors could negatively impact same-store growth in 2019 while leasing spreads accelerate?

Yes, I’ll refer back to the overall guidance that Witten has in his numbers. If you look at the overall U.S., he has rates going up about 50 basis points, looking into 2019. Camden's portfolio specifically seems to reflect a similar increase. We’ll know better in a month or two how correlated our figures are, but that's currently the best evidence we have, which suggests we may see a reacceleration in revenues in 2019.

Hi, good morning. Ric, you mentioned in your opening comments migration into your markets from higher-cost tax regions. Do you see evidence of that, and how do you think that could contribute to demand?

The evidence is clear. If you look at census numbers for the last 10 years, the out-migration from California is significant. You have people leaving California for Phoenix, Austin, and other locations. Population growth in California, of course, is supported by immigration and births, but the out-migration is impacting demand in lower-cost areas. Anecdotally, our Phoenix team reports lots of new residents coming from California. Additionally, cost differences in U-Haul rentals demonstrate this trend; renting a U-Haul from Phoenix to California is cheaper than from California to Phoenix since more trucks are usually left in Phoenix when people move. This supports our demand in target markets.

Have you seen? I'm sorry, go ahead.

Yes, just some numbers around the migration because it is something that we track pretty carefully. For 2019 across Camden's 15 markets, it's projected that we’ll get an overall in-migration of 447,000 people. Within that, we have two cities projected to have negative growth and those are L.A. with an out-migration of 54,000 and Orange County with an out-migration of about 7,000. So those are negative numbers impacting the total, with L.A. projected to see 54,000 leave and Phoenix expected to welcome 54,000 in 2019. This trend underscores our movement towards lower-cost areas and less regulatory environments, and I think the impact of state tax limitations could further drive this trend.

That's great color. Just one last question: You mentioned improving efficiency around turnover, reflected in expenses. If you reverted back to more normalized turnover levels, do you have any sense of how much that could impact expense growth?

We’d need to run some numbers on a dramatic increase in move-outs to assess potential impacts. However, based on current trends, it appears we're set for lower turnover for a while based on the past couple of years.

Part of our expense control has been our initiative to target our run rate. This focuses on small-ticket items onsite and at corporate offices, making decisions on many small but impactful expenses. Our teams are committed to ensuring that every dollar spent is revenue-enhancing or justified on a business basis. This has led to significant positive impacts in our financial results.

So, Ric, when you think about 2019 and beyond, do you see the business being better three or four years from now than it is today? Or is sideways movement more likely? It seems that the days of high-single-digit growth at multifamily REITs even in the best times are probably over, and it's more a CPI plus type of business. Wondering how you feel about these longer-term observations?

I feel pretty good about our long-term business. You can't accurately predict three to five years ahead, especially considering potential recessions. However, if you assume similar supply and demand economics, with consistent job growth and interest rates creeping up, I foresee a good business trajectory.

I’d add that the ongoing weakness in home sales remains puzzling to many homebuilders. It shows up in our numbers regarding move-outs to purchases. Historically, many believed homeownership rates would recover post-recession, but recent trends indicate that this may not be the case. The average rate for move-outs to purchase homes is still very low compared to historical norms. Moving patterns and household formations are shifting, and this could impact our evaluations of supply and demand in the multifamily sector moving forward.

Yes, thanks for your comments about reasonable cadence of development starts. Is $300 million in acquisition volume a fair betting line?

We haven't really gotten there yet with guidance on acquisitions. We've sold quite a few properties and turned over some of our portfolio significantly over the last three to five years. We don't have a lot of low-hanging fruit in terms of dispositions remaining. It’ll depend on the market next year, but I don't see a robust acquisition year given current conditions. We haven't finalized our outlook yet.

In competitive markets, where cap rates seem rationally low right now, would you do something tactical? Not a full market exit, but perhaps sell strategically to improve your capital deployment elsewhere?

Well, we've exited markets in the past, like Las Vegas when we thought it was time to do so. Figuring out the tactical sales is complex. Selling low cap rate deals could be strategic, but there’s execution risk when you consider the reinvestment risks involved with that capital. While we have taken advantage of low prices before, we're currently focused on making the most informed decisions possible.

I wanted to get more detail on the expense side. When you look at taxes, has there been some sort of appeal success that's lowered the taxes as expected at the beginning of the year? What's your sense of how that's going to trend?

We started the year thinking property taxes would be up 4.2%, but we now think they will be up 6%. This increase is primarily due to higher than expected tax values in Fulton County in Atlanta. Year-to-date property taxes were driven partly by a prior year's impact; for example, in Q4 of 2017, property tax refunds occurred, primarily in Houston, and that isn’t expected to repeat.

Got it. That makes sense. Just one more question about your comments regarding supply. You’ve spoken about increased visibility and seeing further than ever before. Looking ahead, when do you see supply peaking, and when will it start to decrease meaningfully from what you’ve seen?

Witten's numbers show completion rates in Camden's portfolio remaining strong until 2020, around the same levels of 138,000 units, with 2021 and 2022 being the first years where you could see a significant reduction in deliveries. This is due to various pressures merchant builders are facing. The development market remains competitive but tighter financing is limiting construction activities. Hence, the numbers for 2021 and 2022 suggest we may see notable lower supply.

I just wanted to get a sense of whether you're tracking the average age of residents living in your buildings and perhaps the average age of people moving out to home ownership?

Well, we are seeing anecdotal evidence from baby boomers moving in. Many are leaving suburban homes where their children have grown up for city living. For example, we have properties in Houston's Galleria area with an average age around 10 years older than our overall portfolio average, primarily because the higher rents attract higher income demographics. Also, over the last 10 years, properties are far more appealing due to their quality and amenities. The significant shift has been in the ages of those looking to purchase homes; it's shifted to a later age due to multiple factors including student debt.

Got it. I didn't know how much you track that specifically regarding the current situation. One more question about leverage: Are you seeing increases in leverage by buyers in private equity seeking to improve their IRRs? It’s easy to track banks, but not as easy to track LTVs in non-bank settings. Do you think leverage is increasing?

The answer is no. Leverage isn’t increasing; in fact, we see a lot of very low leverage and no leverage being used by buyers right now. More than half of all loans in multifamily are floating rates. Although they can effectively achieve caps, there’s not much leverage happening with expectations for future cash flows; they're pretty cautious.

Thanks for the clarity. I'll hop off.

We appreciate you being on the call today. We will be at NAREIT in the next couple of weeks, and we hope to see many of you there. Thank you very much, and see you at NAREIT.