Camden Property Trust (CPT) — Q1 2019 Earnings Call Transcript

Good morning and thank you for joining Camden's first quarter 2019 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 first quarter 2019 earnings release is available in the Investors 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 e-mail after the call concludes. At this time, I'll turn the call over to Ric Campo.

Thanks, Kim, and good morning. Our pre-conference music today featured Keith Urban, who was recently named Country Music Entertainer of the Year. That's not why we chose him for our conference call music. That story is too long to tell and I'll let you call Kim for that story later. But to all of you Camden associates, it needs no explanation whatsoever. I want to give a big thank you to our Camden team for the hard work and focus that produced another solid quarter for Camden. You have clearly shown how you improved the lives of our team members, our customers and our shareholders one strength at a time this quarter. The first quarter operating performance was better than we expected. And as a result, we increased the same-store revenue and net operating guidance for the year. 2019 looks to be another strong year for Camden in the multifamily business. Apartment demand continues to be strong, driven by healthy job growth in our markets that continue to exceed the national average. In-migration continues to drive population and household growth in most of our markets. Recently released data from the U.S. Census Bureau's 5-year American Community Survey covering 2012 through 2017, identified the top regional magnets for young adults, ages 25 to 34, who are our largest customer group. This might surprise some of you but Houston led the country for millennial migration followed by Denver, Dallas and Austin. Seattle was the only West Coast market in the top 5. Our markets attracted over 245,000 millennials during this time frame. The migration was driven by strong job growth, low cost of living and the high quality of life offered in our markets. 2019 apartment completions are consistent with the levels in 2017 and 2018 and should be absorbed without much trouble. Our development business continues to create value for our shareholders. Recent developments have been leasing up in line with our budgets. We have completed $217 million in acquisitions in 2019 with a full year budget of $300 million. While the acquisition market remains competitive, I'm confident that our teams will hit or exceed our 2019 target. I'll turn the call over to Keith Oden for some observations on the markets.

Thanks, Ric. Our first quarter revenue results were a little bit better than planned, which is certainly a good sign for the balance of 2019. Overall, same-store revenues were up 3.7% for the quarter and 0.8% sequentially. First quarter of 2019 revenue growth was 4% or better in six of our markets with Denver at 5.5%; L.A. Orange County 5.2%; D.C. Metro 4.7%; Phoenix up 4.6%; Atlanta up 4.2%; and Orlando at 4% even. Contributing to our revenue outperformance for the quarter were D.C. Metro, L.A. Orange County and Atlanta. And as expected, our weakest markets were B-minus rated Austin, Dallas and South Florida. Regarding rents on new leases and renewals, in the first quarter, new leases were up 1.1% and renewals up 5.5% for a blended growth rate of 3.3% that compares favorably to the first quarter 2018 blended rate of 2.8%, and to the prior quarter of 2.4%. As we expected, we're seeing seasonal improvement in new lease rates from January through April. And we anticipate this trend to continue throughout our peak leasing season. April preliminary lease rates are running at 2.9% for new leases and 5.5% for renewals for a blended rate of 4% even. April results combined with our May, June renewals going out at a 5.7% average increase gives us confidence that our leasing momentum should meet our expectations through the summer months. Our qualified traffic continues to support above-trend occupancy levels across our platform. We averaged a strong 95.8% occupancy in the first quarter which matched the 95.8% last quarter, and was above our first quarter 2018 level of 95.4%. April occupancy came in at 96%, compared to 95.7% last April, and the net turnover rate for the quarter fell again to 38% versus 39% last year. Our rent-to-income continues to reflect strength as our average rent as a percentage of household income remained at 18.6%, the same as last quarter and only a fractional increase from the 18.3% last year. Interestingly, our move-outs to purchased homes fell slightly to 14% even versus 14.1% for the first quarter of last year and the full year rate in 2018 of 14.8%. Despite some recent reports of millennials returning to the single family for sale market in greater numbers, to the extent that reports are correct, we've yet to see an impact in our markets. Finally, for the 12th consecutive year, Camden was included in Fortune Magazine's list of the 100 Best Places to Work. We celebrate this honor on behalf of the entire REIT industry as an indication of how much progress we've made collectively in the last 26 years. Camden is a great place to work. It's also a great place to live. Congratulations to our team on achieving our goal of a 90% customer sentiment score in the first quarter. Your commitment to improving lives one experience at a time made this possible. Now I'll turn the call over to Alex Jessett.

Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activities. During the first quarter of 2019, we purchased for $97 million Camden Old Town Scottsdale, a newly constructed, 316-unit community located in Downtown Scottsdale. Subsequent to quarter-end, we purchased for $120 million Camden Rainey Street, a newly constructed, 326-unit, 8-storey building located in Downtown Austin. During the first quarter of 2019, we stabilized ahead of schedule, our Camden Shady Grove development in Rockville Maryland, generating a 7% stabilized yield. We also completed construction on both the first phase of our Camden North End development in Phoenix, and the second phase of our Camden Grandview development in Charlotte, and began construction on the second phase of Camden North End. Finally, subsequent to quarter-end, we purchased approximately four acres of land in the NoDa neighborhood of Charlotte, for the future development of approximately 400 apartment homes. On the financing side, during the first quarter, we completed a public offering of 3,375,000 shares generating net proceeds of approximately $328 million. We also repaid at par $439 million of secured debt with a weighted average interest rate of 5.2%. $200 million of this debt was repaid on February 1 with the remaining $239 million repaid on March 1. These secured debt repayments unencumbered 12 Camden communities, valued at approximately $1.3 billion. As a result, 98% of our debt is now unsecured and 99% of our assets are unencumbered. Also during the first quarter, we amended and restated our unsecured line of credit extending the maturity dates to March 2023 and increasing the capacity to $900 million. Our balance sheet is strong, with net debt-to-EBITDA at four times and a total fixed charge coverage ratio at 5.9 times. We ended the quarter with $242 million outstanding on our unsecured lines of credit. As of today, after taking into effect our first quarter dividend payments and the purchase of Camden Rainey Street we have $408 million outstanding which we anticipate refinancing with an upcoming unsecured bond issuance. Turning to financial results, last night we reported funds from operations for the first quarter of 2019 of $120.7 million, or $1.22 per share exceeding the midpoint of our guidance range by $0.02. Our $0.02 per share outperformance for the first quarter was primarily due to approximately $0.0075 in higher same-store net operating income resulting from higher occupancy and the timing of repair and maintenance expense, approximately $0.005 in better-than-anticipated results from our non-same-store and development communities, and approximately $0.0075 in a combination of lower overhead costs and higher fee and joint-venture income. The impact from our first quarter equity offering was offset by lower interest expense from the earlier-than-anticipated repayment of secured debt and lower amounts of debt outstanding. Last night based upon our year-to-date operating performance and our expectations for the remainder of the year, we updated and revised our 2019 full year same-store and FFO guidance. As a result of our better-than-expected first quarter same-store occupancy performance, we increased the midpoint of our full year revenue growth from 3.3% to 3.4%. Additionally, we increased the midpoint of our full year expense growth from 3.25% to 3.35%. This expense increase is driven entirely by higher-than-anticipated insurance expense resulting from a challenging insurance renewal environment. Our increased revenue guidance partially offset by our increased expense guidance resulted in an increase of the midpoint of our 2019 same-store NOI guidance from 3.3% to 3.4%. Last night, we also maintained the midpoint of our full year 2019 FFO guidance at $5.07 per share. There are several adjustments to our original guidance including the following increases to FFO. $0.005 from our anticipated 10 basis point increase to our 2019 same-store net operating income, approximately $0.01 from our first quarter outperformance not associated with same-store results, $0.02 of additional acquisition NOI resulting from our earlier-than-anticipated Camden Rainey Street acquisition. We are still budgeting an additional $100 million of acquisitions in the fourth quarter in line with our prior guidance, $0.015 of additional NOI due to the removal of $100 million of fourth quarter pro forma dispositions at the midpoint of our prior guidance. Due to the capital generated from our recent equity raise, we have removed dispositions from our current 2019 guidance. $0.095 in lower interest expense as a result of proceeds generated from our recent equity offering and our earlier-than-anticipated secured debt repayment partially offset by earlier acquisition spend and lower disposition proceeds. Our revised guidance now assumes we issue a $400 million 10-year unsecured bond in mid-June, at an all-in rate of approximately 4% after taking into effect in place forward-starting swaps. This $0.145 aggregate increase in our 2019 anticipated FFO per share is offset by the impact of the higher share count resulting from our first quarter equity offering. Last night, we also provided earnings guidance for the second quarter of 2019. We expect FFO per share for the second quarter to be within the range of $1.24 to $1.28. The midpoint of $1.26 represents a $0.04 per share increase from our $1.22 in the first quarter of 2019. This increase is primarily the result of an approximate 2% or $0.03 per share expected sequential increase in same-store NOI, due to higher expected revenues during our peak leasing periods and property tax refunds anticipated during the second quarter, an approximate $0.025 per share increase in NOI from our recent acquisitions and our communities in lease-up and an approximate $0.01 per share decrease in interest expense resulting from lower amounts of average outstanding debt. This $0.065 per share aggregate improvement in FFO is partially offset by an approximate $0.025 per share decrease in FFO resulting from the impact of a full quarter of additional outstanding shares after our late February equity offering. At this time, we will open the call up to questions.

Hi. Good morning. Just curious, the improvement you've seen in blended lease rates appears to have been driven largely by new lease rates. And I was just curious, do you think we could see a scenario where new lease rates nearly achieve the same level as renewals this year?

I don't think we're going to see anything like that. However, we did observe a decent increase in the April numbers, with new lease rates jumping to around 2.8%. It's more likely that renewal rates will remain in the 5% to 5.5% range throughout the year. I would be surprised if new lease rates rise significantly above the April figure. Instead, we can expect steady improvement. The 2.8% growth may not even be repeated in the next couple of months, but for the entire year, that should be a reasonable projection for new lease rates. So, overall, we can anticipate a blended lease rate gain of about 3% to 3.5% for the year.

Got it. Thanks. And then Ric, just curious what gives you the confidence that you think you can meet or exceed your acquisition targets given you have talked about how competitive the transaction environment's been? You clearly had some success early this year. But just curious again what gives you the confidence and then what metros you're focused on? And are the deals that you're seeing from here stabilized transactions or more of the lease-up?

Sure. Meeting the target is straightforward since it's just $100 million. Exceeding it should also be manageable as many of the transactions we're considering are valued at over $100 million. The purchasing power of $100 million isn't what it used to be. Regarding the markets, we are satisfied with our current locations, although there appears to be more potential in the Sunbelt regions. We're observing a good number of merchant builder properties that have gone through the leasing phase but haven't fully stabilized or been operated as stabilized assets. This situation allows us to capitalize on the upside relative to the current cap rate. All the properties we've acquired recently share similar characteristics, having been purchased in the mid-four range, with concessions being applied and Camden's special services introduced. We expect these factors to boost cash flows into the 5s by the end of the second year. Most of our acquisitions have been at substantial discounts to replacement costs, ranging from 10% to 17% or 18%. For example, the Rainey Street project we acquired is at least a 17% discount compared to what it would cost to construct it today. That's the kind of opportunity we're pursuing.

Great. Thank you.

Hi. This is Michael Griffin on for Nick. So it seems that you've run at lower leverage levels recently, especially given the equity raise. How should we think about leverage levels going forward for the remainder of the year? And then sort of have your long-term leverage targets changed at all?

Sure. We've been discussing our leverage strategy since 2009, aiming to reduce it over a moderate timeframe, and it has taken us 10 years to reach this point. We want to maintain our leverage between four times and five times debt to EBITDA. We've moved away from the debt to market cap concept since it has become outdated following the events of 2008 and 2009. We plan to stay within this range. During the first quarter, the bond market faced significant challenges, especially towards the end of the fourth quarter and into the early part of the first quarter, but it improved dramatically along with the stock market. At that time, we opted to access the equity markets instead of the bond markets due to the bond market's volatility. We aim to be cautious, partly because we believe in operating with lower leverage, which should yield a better valuation multiple from investors over the long term. Additionally, as we approach what may be the longest recovery period in U.S. history this June, it seems wise to maintain lower leverage at this late stage in the cycle. We prefer to lean towards the lower end of the leverage spectrum so that when a downturn occurs, we have sufficient resources to acquire properties from those who may need to sell due to higher levels of debt.

Got it. Thanks, so it’s very helpful. One other quick question on the Camden Rainey Street. You'd mentioned previously that Austin is one of your lower-growth markets. I'm just curious is this more an asset-specific play kind of to get more exposure to the market maybe. Sort of a little color kind of on that would be nice.

It's definitely focused on the specific asset. We've kept an eye on this property for a couple of years. It is located in the downtown area on the east side of Austin, which is not in the main downtown section, making it more affordable. The rents in the core downtown area are about $3 per square foot and higher, but they are less expensive on the east side. We appreciate being in the downtown area because it's only two miles from the University of Texas, and Google is starting a project right across the street. This property complements our portfolio in Austin and increases our net operating income, which is important. It also provides a good balance between high-end urban downtown properties and our suburban offerings. We value that urban-suburban mix since it helps us manage market cycles effectively over time, providing good diversification.

Got you, that’s it for me.

Thank you. On your acquisition pace being ahead of last year and ahead of guidance, are you more optimistic with your underwriting as far as rental growth assumptions? Or is this mainly a function of your cost of capital improving?

I believe it's a combination of both. We've noticed a slight increase in rental growth in some markets. Considering that we are in a late cycle, as things have been good for quite some time, we experienced a rise in revenue growth. This gives us some confidence that the positive trend could continue longer than many anticipate. Additionally, having our debt at a low level enhances our capacity to adopt a more optimistic approach and invest in more properties than we might have otherwise.

And then, you quoted an 18.6% rent-income ratio. That's lower than many of your peers. But it's even lower than your main Sunbelt peer. I think they quoted 20% yesterday. Can you just remind us the parameters of how you calculate this figure?

Yes. That's household income divided by total monthly rental expense.

No. Average not, median in household?

No. It's the average.

Hi. Good morning. Thanks for taking my question. Good quarter and new start to the year. So, occupancy was up pretty materially in Atlanta, Dallas and Charlotte on a year-over-year basis, each by about 100 basis points. These are also markets noted for having elevated supply. So can you talk about how you're able to achieve these occupancy levels? And how you're thinking about maximizing revenue in these markets during peak leasing season?

Our portfolio is currently at 95.8% occupancy, which is historically strong for us. We've aimed for a mid-95% occupancy rate for quite some time. The occupancy levels really depend on the supply in each market. In Charlotte, Dallas, and Atlanta, there is a noticeable amount of supply, but it varies based on our presence in those markets. In Atlanta, while there’s significant activity in the Buckhead area, many neighborhoods aren't experiencing new developments. The same holds true for Dallas, though it’s less pronounced in Charlotte. However, Charlotte continues to see enough job growth to maintain solid absorption rates. Additionally, as Ric mentioned, domestic in-migration to our core markets with job growth is contributing positively to our ability to absorb new units. Historically, job growth and supply dynamics would raise questions, but I believe that in-migration is a significant factor. Moreover, a large portion of those moving to our markets comprises millennials aged 25 to 34, who prefer renting. Overall, each of our markets maintains a 95% plus occupancy rate, which is a great position to be in.

Thank you for that detail. And you touched on Charlotte and you made that land purchase this past quarter very recently. Can you talk about the opportunity that you see there and what kind of stabilized yield you're anticipating that to go maybe how that compares to cap rates? Thanks.

Yeah. Absolutely. So it's the NoDa neighborhood in just outside of Downtown Charlotte. It's about 400 units, total cost is going to be about $100 million and we are anticipating a yield of about 6.5%. So very healthy spread to what you can get on a new acquisition.

Thank you so much.

Hey, morning down there. How are you? Just a few questions on your markets. Some of the stuff that jumped out L.A./Orange County was your strongest revenue growth market and some of your peers had commented on their calls recent weakness. So curious, is this just specific because of where your assets are located versus maybe no Downtown L.A. or what have you that maybe you guys were better off based on where your assets are located? Or have you seen some subsequent close quarter weakness in your L.A./Orange County assets?

No, we're still seeing performance consistent with the first quarter, which is really strong, but our outperformance relative to our plan in L.A. and Orange County was $150,000 in revenues. It wasn't a big surprise for us. A significant part of the improvement in L.A. and Orange County came from our Camden Community in Hollywood, which benefited from concessions rolling off from the previous year. Additionally, we had a one-time increase in signage income in the first quarter due to timing from the prior year. Of the total outperformance of $150,000, a substantial portion was attributed to Camden, but again, we anticipated this. Our footprint differs slightly from many of our competitors in L.A. and Orange County, but our performance is aligning well with our expectations for the year.

Okay. And then the second question is on rent control. Colorado, the legislature voted down the overturn of the 40-year ban statewide there. We'll leave California aside because that's been enough discussed. Do you feel that your other markets would go more the way of Colorado where politicians would understand that invoking rent control is counter to housing? Or are you getting a sense in some of the other Sunbelt markets where you are that maybe what is a coastal phenomenon may creep in to some of your markets?

I don’t believe that will happen. There are several positive factors in most of our markets. When we consider our presence in these areas, it’s driven by pro-business attitudes, population growth, and employment growth, all of which contribute to job growth. Ultimately, these markets are affordable from a cost of living standpoint. Unlike larger markets experiencing significant rent increases due to a tight supply-demand balance that pushes housing prices up, we can build to meet demand in these other markets. There are no major markets where we operate that are seriously considering rent control. While discussions occasionally arise, particularly regarding lower-income groups like teachers and firefighters being pushed into suburban areas, housing becomes significantly cheaper as you move away from urban centers. The debate over living in downtown high-rises at $3 per square foot is interesting, but there’s no push to control that rent since people can find homes in the suburbs for around $1.20 or $1.30 per square foot.

Okay. Thank you, Ric.

Thank you, good morning. I'm not sure if you discussed this already, so I apologize if you did. But could you talk about your thoughts on 2020 supply in your markets, especially in the southeast where clearly demand is stronger than expected?

Yes. So for 2019 for the entire year looking at completions, looking at Ron Witten's work, it looks like we get about 137,000 apartments across Camden's footprint in all of 2019. For comparison, last year in 2018, we got 138,000 apartments. So it's virtually identical in terms of the supply. Now it's the location it moves around a little bit from market to market, but in the aggregate, it's almost identical in terms of the completions. The flip side of that coin though is job growth and in Witten's numbers in Camden's footprint for 2019 actually had a pretty sizable increase from last year. He had total employment growth of 557,000 across Camden's portfolio last year and he's got that number going up to 630,000 this year. I don't know what today's job's number is going to do to his forecast, but it certainly couldn't hurt what his forecast is. And the interesting thing within that is that if you look at the total U.S. employment growth and again this is not reflective of this morning's number, but total U.S. Witten has job growth coming down from 2.7 million nationally in 2018 to 2 million even in 2019. So a drop of 700,000 jobs nationally is his forecast and yet Camden across our portfolio we're picking up about 80,000 jobs more than last year, which reflects our thesis all along which is we are in and want to continue to be in markets that grow employment and population that's better than the national average. And clearly, we're seeing that in a pretty big way between 2018 and 2019.

Thank you. That's helpful. And are you able to comment on 2020 at this point?

It's coming, isn't it? No matter what you do, but we're not going to talk about 2020 and how we think the markets going to be.

That's fine. That’s all. I was only talking about…

If you leave it to completions and employment growth, Witten's forecast sure. I mean, he's got the supply in Camden's markets ticking up in 2020, although I can tell you it goes up to about 150,000 from 137,000. However, I would caution you that for the last three or four years every forecast for completions has been moved out further because it takes longer and because of the labor shortages on getting these communities turned, some of its product type, you've got more high-rise, so it just takes longer to construct and longer to lease up. So every forecast that we've seen for the last four, five years on year out deliveries, some of those deliveries are going to slip. But in the aggregate, yes, it's somewhere around 150,000 apartments unless subject to the slippage that we know occurs. So not a huge increase across Camden's portfolio.

Thank you, that's helpful. My second question is about Lincoln Square and the potential to convert the parking structure there into apartments, which we find to be very interesting. What other ideas are you considering, particularly in light of potential future disruptions?

The good news is it's quite challenging to disrupt a place to sleep because you cannot digitize that. A place to sleep typically requires a bathroom, and while a kitchen is not always necessary, this works in favor of apartments. Therefore, we believe that disruption will not significantly impact our business. However, we recognize that transportation will experience disruptions and the overall use of real estate will change. Currently, parking accounts for just over 50% of the built environment in America. With the rise of autonomous cars and ridesharing, projections indicate that the need for parking will diminish significantly within about 10 years. In our development of garages, like the one in Denver that has been referenced, we focus on using poured-in-place concrete instead of less durable options. This approach ensures the structures are sound and easier to adapt for future needs. We make it a priority to maintain adequate space for electrical and plumbing work, allowing for efficient modifications without disturbing existing concrete in the future. Although we invest a bit more in designing these adaptable spaces, it does not significantly affect our returns, which remain strong. We foresee many interesting changes ahead as everything transitions to mobile platforms. We are currently developing mobile solutions to enhance our residents' lifestyles, particularly concerning package deliveries. We believe there will soon be a mobile app that allows packages to be directly delivered into apartments. This innovation will not only create revenue opportunities but also reduce expenses by minimizing customer service issues related to package handling.

Great. Thank you.

Hey, good morning.

Morning.

Can you talk about D.C. where your revenue growth has significantly outperformed what peers are experiencing? Is that related to the market presence as well? Are you noticing any significant changes moving from the first quarter into April there?

Yes. It's a footprint issue. We have a higher percentage of our assets located in suburban areas, which are performing well. Our portfolio in D.C. is relatively new, and we've recently completed two construction projects there that have leased exceptionally well at rates exceeding our expectations. The difference in pricing is notable; in downtown NoMa, it’s $3 per square foot, while in NoDa and Shady Grove, it’s $2 per square foot. This highlights the primary challenges we face regarding price points and asset mix. In fact, we outperformed our revenue projections in D.C. by about $160,000 in the first quarter, and this positive trend seems to be continuing into April. The main distinction compared to our peer group is indeed related to the footprint.

I want to add one more comment about the team on the ground, the individuals who are working on these properties every day. When Keith highlights that Camden has been on the Great Place to Work list for 12 years, it truly makes a difference when employees are happy and achieving customer service ratings of 90%. Our team is exceptional and they are able to generate a bit more revenue. I believe they also manage expenses more effectively than our competitors, thanks to their positive attitude and strong culture.

Okay. Thanks for that. That's helpful. And then, just one more question from me on the pipeline. If you look at the five projects that are currently in bond and lease-up and under development. What are you looking at now in terms of stabilized yields on those? And, I guess, that comment probably could extend to the lease-ups as well. Are there any projects that are maybe falling short or meaningfully exceeding original expectations?

The projects currently in lease-up are performing as we anticipated, and they are mostly suburban rather than urban. The properties under construction, on the other hand, are primarily urban. For instance, the downtown projects such as Lake Eola and Buckhead are high-rise concrete constructions, which are expected to yield lower returns compared to the suburban wood-frame projects. Our yields for the development communities will likely be around 6%, give or take, while the completed communities in lease-up might achieve yields in the range of 6.5% to 7%.

Okay. Regarding the lease-up communities, McGowen Station is a bit different because it's more urban and vertical. Are you close to achieving your ultimate goals there? I understand there is some decent supply in Downtown Houston.

Yes, we are on track with the lease-up velocity and our budgets. We're optimistic about the project. In Houston, the supply has mainly been focused in the downtown and midtown areas, but it's beginning to expand into the suburbs. We believe this project will be a great long-term asset for Camden.

Good to hear. That’s all for me. Thank you.

Thanks. Good morning. And, Ric, very interesting, 2020 is coming. Could you say the same thing about 2021? I mean, that would be interesting to know.

I could, absolutely. It's coming too.

Thanks for the update.

You're obviously a Game of Thrones fan right?

Not at all, actually. I don't want to be. So I have a question about a topic that came up last quarter regarding D.C. and specifically the government shutdown. You mentioned that a few people reached out to you looking for rent relief or some assistance during that time. This made me consider that the credit behind these rents is very month-to-month specific, and missing a paycheck for 30 days could cause anxiety for people. First of all, please tell me I'm wrong about that. Secondly, why would it be so tight if you are underwriting your tenants so carefully, ensuring that it's not a paycheck-to-paycheck situation regarding your rents?

Our credit quality has remained strong. If there were issues, we would see an increase in bad debts, but those have been steady for a long time. However, many people face challenges when they don't receive their paycheck. Even if their credit remains good, most aren't able to save much, leading to a complex situation. Our 18.6% rent income indicates that people are spending their money on other obligations. Media reports suggest that some individuals might be looking for assistance due to unpaid government work, and while we did not waive rent, we did eliminate late fees and worked with tenants to ensure they could pay their rent. Ultimately, it has been more about timing. Notably, the situation affected government workers nationwide, not just in D.C., including places like California and Colorado. I believe that missing one paycheck wouldn't put most people in jeopardy, but several months without income could be damaging.

Yes. Fair enough. But I mean, maybe you're just kind of responding to a human nature response to the situation. Is that a fair way to put it?

Absolutely. We want to ensure that we support our residents, and customer service is a significant priority. If someone comes in and states that they can't pay their rent this week and requests to avoid a late fee because they are a government worker, we would accommodate that. We took proactive steps by sending out guidance to everyone across the platform, instructing our teams to assist anyone facing issues.

Okay. Second question is sort of big picture. Do you guys have sort of a vision into being included in the S&P 500? I know you're not going to guide your strategy around that. But is that something that is on your radar screen that you care about significantly?

Well, it'd be interesting and nice I guess. But we don't have any control over that. So I don't really worry about things I can't control.

Yeah. I think it's something that we would all love to be a part of the S&P, but it's not like you go audition for it. So we'd love to be. It would be an important thing and it's a positive. There's no question about it, particularly in this world of index funds. It would just be a good thing. So if anybody from S&P's on the line listening, we're available.

Outstanding. Thank you very much. That's all for me.

Good to have you back.

Hey, everyone. How are you doing? Are you still targeting around $300 million in annual development starts, and has that thinking shifted at all with the lower-for-longer rates, this stellar job and wage growth and the probability of this being more of a super cycle versus end of cycle?

We are continuing to target $300 million a year. The challenge that we have today is that construction costs continue to rise, land prices continue to rise and finding transactions that can – where we could ramp up that is real difficult. We are very, very focused on getting the right returns and disciplined in how we allocate the capital. I do think that even lower – sort of the economy going longer, and rents doing well and all that is great. But we are still in late cycle and we don't feel like it makes sense to ramp it up dramatically. We really can't because of the constraints that we put on our return requirements. I guess if we decided to lower our hurdle rates and just sort of put the pedal to metal we could, but that's just something that over the years we just don't do.

All right. Now that makes. And then just – I don't know, if someone asked this and I apologize if I missed it. But expense growth driven by property taxes and payroll did seem to continue this quarter. And we're just looking to get your thoughts on when you see this elevated trend on expenses softening?

Yeah. No, absolutely. So if you look at for the first quarter property taxes were up 7.7%. We think for the full year, it'll be up actually 4%. The big difference between the two is that we're expecting about $2 million of refunds to slip between the second quarter and the third quarter. If you look at salaries, salaries were up about 6%. That's actually sort of in line with what we're expecting for the full year. If you recall in 2018, we had a really good year for employee health care costs, which were very low. And when we started this year, I sort of guided to the fact that we didn't think that would continue, and so that's what you're seeing. The last item on there is property insurance, which we talked about in the first quarter was a little bit higher than we expect for the full year at about 24%. We actually think the full year is going to be closer to about 16%. But that's entirely driven by two factors. Number one, this is just a really tough renewal environment, when you look at all of the hurricanes that have happened in the last two years and you think about wildfires in California, you think about floods in the Midwest those all equally impact insurance providers. The second thing is that we did have some hailstorms in the first quarter in Dallas that sort of dragged on these numbers a little bit too. But when we look at our full year we feel really comfortable with our revised guidance for our full year expenses.

Okay. Thanks. See you in June.

Hello, good morning. I was wondering if the ramp on occupancy and new lease rent growth from the first quarter into April was better than seasonal trends or just in line with what you normally see.

It's slightly better than seasonal trends. We're at just over 1% for the quarter, which increased to 2.8%. I believe this will level off. For the full year, we expect renewals to be between 5% and 5.5%, and new leases to be around 2% or so. This would lead us to approximately 3.5% lease growth for the full year. However, I think the numbers from April might cool off a bit as we move forward.

Got it. Thanks.

You bet.

And then just to follow up on the parking question. Ric, any sense for how much value could be hidden in your parking structures and your land, if there does end up being a drastic reduction in parking needs in the future?

Well, it could be substantial for sure because today, while we're charging some parking, we're getting basically pretty much zero revenue from that investment other than normal rent, right? So if you're going to actually convert a property from say a 300-unit apartment to a 500-unit apartment by adapting those parking garages and you're going to make call it a 6% or 7% return on that investment, it's pretty substantial in the portfolio when you think about half of our real estate is probably parking.

Got it. Thanks.

Great. Well thanks so much. We'll see you at NAREIT coming up. Appreciate the opportunity to be with you today. Thank you.