Camden Property Trust (CPT) — Q1 2021 Earnings Call Transcript

Thanks Kim. The theme for our earnings call music was 'Have Fun'. We've always believed that our Camden teammates do their best work when they're having fun. That's why, 25 years ago, we chose 'Have Fun' as one of our nine core values. Having fun is essential for maintaining a great workplace. When your team is enjoying themselves, they smile, which puts smiles on our residents' faces, ultimately making our shareholders happy. This has helped us earn a spot on Fortune magazine's 100 Best Places to Work for 14 consecutive years, with seven top 10 finishes. Recently, we are proud to announce that Camden placed number eight on this year's list. Creating a culture that encourages fun requires a consistent and intentional focus, especially during the pandemic. Over the years, we have established traditions that support fun, including skits, lip-sync contests, and entertaining videos that convey important messages to our teams. The pandemic pushed us to find new ways to sustain our culture in this new work environment. Camden’s culture is our superpower that enables us to consistently perform at a high level. As Peter Drucker famously stated, culture eats strategy for breakfast. Our earnings call platform allows us to share videos and enhance our messaging. Here’s an inside view of one of the many cultural messages we have shared with all of our Camden teammates this year and now with you. During the first quarter, we observed operating strength growing in most of our markets. Clearly, the reopening of the economy, thanks to the rapid distribution of COVID-19 vaccinations, has improved our results for the first quarter and our outlook for the rest of the year. This has prompted us to increase our net operating income and our FFO guidance. Despite the challenges and oddities of the pandemic last year, we have made progress on initiatives that will boost revenues, reduce expenses, and enhance performance in key areas. For example, our investments in Chirp funnel and other AI opportunities will expedite self-guided tours, virtual leasing, and apartment package deliveries, along with keyless communities, all of which improve customer experiences while increasing revenues and lowering expenses. Our cloud-based ERP systems have enabled seamless remote work, improved data mining, and advanced our journey towards the Internet of Things. This creates a more robust ESG analysis and reporting on our ultimate carbon footprint reductions, which we will publish later this year. We will be releasing a more detailed ESG report in the fall. I began the call discussing culture and sharing a video. We remain committed to doing the right thing at Camden as we progress on our journey towards a more diverse, equitable, and inclusive workplace. Last summer, during a time of significant uncertainty, we encouraged our teams to focus on what they could control, strive for the best health of their lives, and embrace their friends and family as true partners, while adhering to safe practices. We also urged our team members to care for our residents and each other, and to ignore the noise around them. We reassured them that the pandemic would eventually pass and that the years following would be promising for our teams, their families, and our business. We see progress ahead and it’s not a train. I want to thank our Camden team and your families for helping us reach this point. Thank you. Now I’ll turn the call over to Keith.

So we’re very proud of the fact that Camden has been included on Fortune magazine's list of 100 Best Companies to Work For, for 14 years. It's an incredible accomplishment that reflects the fact that each of you takes pride in the workplace and continues to work hard to make Camden a great place to work. A lot of people think about the Fortune list and Camden's culture and all the things that we do to support being a great workplace. A lot of people look at that and they say they see expense and cost. What we see is investment. We're investing in our brand, we're investing in our people, we're investing in our culture. Ultimately, we think those things are far more important than the small amount of impact that the expenses we have around maintaining Camden as a great workplace actually matter. One of the ways to look at that is that we track Camden's 20-year investment return against the S&P 500. It's proof positive that creating a great workplace also creates great results for your shareholders. Over the last 20 years, Camden Property Trust has produced an annual return for our shareholders of over 11%, while the S&P 500 was about 7.5%. So almost 4% per year better than the S&P 500 for a 20-year period, that's pretty incredible. We think it's directly attributable to the investments we make in our culture and our people, making Camden a great place to work. Thank you for all you do. And thank you for being a part of this great company during all this time. Now, a few details on our first quarter 2021 operating results: Same property revenue growth was down 0.4% for the quarter, as expected from our top performers located in our Sunbelt markets. With Phoenix at 5.8%, Tampa up 4.0%, Atlanta at 2.2%, Raleigh at 1.9%, and Denver rounding out the top five list at 1.3% up. Rental rate trends for the first quarter were slightly ahead of plan with sign leases down 0.8% and renewals up 3.4% for a blended rate of 1.2%. For effective leases, which were generally signed in the fourth quarter or early first quarter, the blended rate was 100 basis points lower at 0.2%. Our preliminary April results indicated improvements across the board for sign new leases, renewals, and blended growth, averaging 4.5%, 4.7%, and 4.6% respectively. Future renewal offers are being sent out on average at over 5%. Thus, our blended rental rates moved up from 1.2% in the first quarter to 4.6% in April, representing a 340 basis point improvement that exceeded our budget and was the primary reason for raising our full-year revenue guidance. It's worth noting that Houston showed the fifth-best improvement in revenue reforecast among all of Camden's markets, and we now expect Houston revenues to be only about 1.5% down from last year. Occupancy averaged 96% during the first quarter of 2021, matching our performance in Q1 2020 and was the highest quarterly occupancy level achieved since the pandemic began. April 2021 occupancy accelerated to 96.6%, exceeding our original budget and expectation, as we prepare for our peak leasing season, which generally runs through early September. Net turnover for Q1 2021 was 200 basis points lower than 2020 at 35% versus 37% last year, marking yet another quarter of high resident retention and fewer residents choosing to move. Move-outs to purchase homes dropped to 16.9% for the quarter versus 19% last quarter, which is in line with our seasonal patterns we usually see from the fourth quarter to the first quarter of each year. Next up is Alex Jessett, Camden's Chief Financial Officer.

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 2021, we commenced construction on Camden Durham, a 354 unit, $120 million new development in Durham, North Carolina, and we began leasing at both Camden Lake Eola, a 360 unit, $125 million new development in Orlando, and Camden Buckhead, a 366 unit, $160 million new development in Atlanta. Subsequent to the quarter end, we began leasing at Camden Hillcrest, a 132 unit, $95 million new development in San Diego. In the quarter, we collected 98.4% of our scheduled rents, with only 1.6% delinquent. This compares favorably to Q1 2020, when we collected 97.9% of our scheduled rents with a higher 2.1% delinquency. Turning to bad debt: In accordance with GAAP, we recognize certain uncollected revenue as income in the current month. We then evaluate this uncollectible revenue to establish what we believe to be appropriate reserves. This reserve serves as a corresponding offset to property revenues for the same period. When a resident moves owing us money, we typically have previously reserved all amounts past due, so there will be no future impact to the income statement. We reevaluate our reserves monthly for collectability. For multifamily residents, we have currently reserved $9.2 million as uncollectible revenue against a receivable of $10.2 million. For retail, we are fully reserved against a $2.3 million receivable. In mid-February, Texas experienced a significant winter storm resulting in widespread power outages, which led to other issues, including substantial water damage from broken pipes. Less than 5% of our Texas units experienced any type of damage, with only 0.25% requiring the resident to temporarily vacate their home. Today, the vast majority of the damage has been fully repaired and operations have returned to normal. We are extremely proud of the efforts of team Camden in responding to this unprecedented event. Last night, we reported funds from operations for Q1 2021 of $125.8 million or $1.24 per share, $0.01 above the midpoint of our prior guidance range of $1.20 to $1.26. The $0.01 per share variance to the midpoint of our prior quarterly FFO guidance was primarily due to higher occupancy and higher rental rates in our same-store and non-same-store portfolio, partially offset by the timing of certain property tax refunds in Washington, D.C. and Los Angeles, which we expected in the first quarter but will likely not receive until the second half of the year. Contained within our first quarter results is approximately $900,000 of expenses directly associated with the Texas winter storm. Two-thirds of this amount is property-level insurance over time and repair, while the remainder is corporate level and tied to relief efforts, including meals provided to our residents. The additional property-level expenses were entirely offset by greater than anticipated amounts of unrelated insurance subrogation proceeds. Last night, based upon our year-to-date operating performance, our April 2021 new lease and renewal rates, and our expectations for the remainder of the year, we have increased the midpoint of our full-year revenue growth from 0.75% to 1.6%. Additionally, we have increased the midpoint of our same-store expense growth from 3.5% to 3.9%. This increase accounts entirely for additional property-level salary expenses now anticipated from our reforecasted full-year revenue outperformance. As a result, we've increased the midpoint of our 2021 same-store NOI guidance from negative 0.85% to positive 0.25%. Our revised expense growth of 3.9% at the midpoint assumes insurance expense will increase by approximately 22% due to the continued unfavorable insurance market. Property insurance comprises approximately 4% of our total operating expenses. Our revised expense growth also assumes that salaries and benefits will increase by 3.5% as a result of additional compensation tied directly to now reforecasted revenue outperformance. The remainder of our property-level expense categories is anticipated to grow at approximately 3% in the aggregate. Last night, we also increased the midpoint of our full-year 2021 FFO guidance by $0.09 per share. $0.07 of this increase results from our revised same-store NOI guidance, with the remaining $0.02 per share increase expected to be generated by our non-same-store portfolio. Our new 2021 FFO guidance is $4.94 to $5.24, with a midpoint of $5.09 per share. We also provided earnings guidance for Q2 2021. We expect FFO per share for Q2 to be within the range of $1.22 to $1.28. The midpoint of $1.25 represents a $0.01 per share increase from our Q1 2021 figure of $1.24. This increase is primarily due to an approximately $0.01 per share sequential increase in same-store NOI, resulting from higher expected revenues during our peak leasing period, partially offset by related compensation expenses, the seasonality of certain repair and maintenance expenses, and increases from our May insurance renewal. As of today, we have just over $1.1 billion of liquidity, comprised of approximately $260 million in cash and cash equivalents and no amounts outstanding under our $900 million unsecured credit facility. At quarter end, we have $358 million left to spend over the next three years under our existing development pipeline, and we have no scheduled debt maturities until 2022. Our current excess cash is invested with various banks, earning approximately 25 basis points. As discussed on prior calls, in 2019 and 2020 we set in play important technological advancements. 2021 will be the transition year that will lead us to realize efficiencies in 2022, 2023 and beyond. From cloud-based financial systems to virtual leasing, to mobile access to AI technologies that allow us to meet residents on their schedule, we are poised very well for the future. At this time, we will open the call to questions.

Hi everyone. Congratulations on a great quarter. So I just wanted to start off a little bit big picture, asking more about the transactions in the market. I know you guys were guiding to about $400 million to $500 million. So how are you guys thinking about that now that we are about four or five months into the year and what opportunities are you seeing out there in the market?

Well, definitely we are seeing opportunities. The challenge, however, is the pricing is way, way beyond what we expected. The good news is, since we have a balanced disposition and acquisition program, we expect to get higher prices for the properties we are going to sell. So we're going to try to make that trade. If you go back to our last big acquisition and disposition programs in the last cycle, we sold a lot of properties and bought a lot of properties and we were able to upgrade the quality of the portfolio over time. That said, I've never seen cap rates this low in my business career. I'll give you an example of a real-time property that we’re working on this week in Tampa. The original price talk for this reasonable property in Tampa—a middle of the road new development, a decent property we’ll call it an A minus—was $77 million plus or minus, which would have been a low 4 cap rate, kind of right at 4-ish. The property was awarded at a little over $90 million, which corresponds to a going in cap rate of 3.2%. With a 3% growth in revenue over a seven-year period, the only way you get to a 6% IRR is to have a 3.75% exit cap rate. This is what properties are trading for in every major market in America today. I think we'll be able to sell properties and buy properties, but the spread between older and newer is definitely going to be really tight. It's a good trade for us, and we'll continue to do that. But pure acquisitions are pretty tough if you don't have a disposition behind it to capture the newer property and capture the lower CapEx part of the equation, that's why we would be doing it in the first place.

Got it. Thank you. And then I think you guys commented a lot on how you wanted to enter Nashville. So what are you guys seeing there in terms of cap rates on the transaction market?

Same. The cap rates are pretty tight in Nashville, too. Nashville is an interesting market because when you look at its supply side, it has probably the second-most supply coming into the market. I think that of any other city in the country, so we're still looking really hard in Nashville and we're actually—our teams are going to be out there next week, and we're actually going to live in a few properties next week as well. We think we'll be able to move into Nashville this year. And again, you can acquire properties, and we can acquire properties, you just have to pay up today. As long as we're selling properties at really high prices and buying properties at really high prices, I'm okay with that. I think we'll be able to execute in Nashville.

Okay, great. Thank you. Good luck with that.

Hello everybody. First question, can you just talk about what you're seeing in terms of in-migration in some of your markets, your kind of larger Sunbelt markets? Obviously, COVID has kind of been the great accelerator for that. I'm just wondering if people on the ground are telling you that they continue to see that in earnest, if it's accelerating, if it's steady? Any commentary on kind of where that's coming from, what markets are the biggest beneficiaries?

Yes. So Neil, we continue to see elevated levels across our platform, but it's not new. I mean, we've had in-migration going on, and that has been exiting the Northeast and parts of California, mainly Northern California, for the last decade. But clearly, it's accelerated. I would say the markets that we have that are most impacted and most visible right now are in Atlanta and everywhere in Florida. Again, that's mostly a Northeastern phenomenon. In Austin, Texas, I would say that's the place where anecdotal evidence of out-of-state license plates, in particular from California, is pretty incredible. The trends in some of our markets around home prices exhibit characteristics of people coming in and being willing to pay up; in Austin, Texas, as an example, it has the highest spread between asking price for a single-family home and selling price. In the last 12 months, the average sales price in Austin, Texas for a single-family home is 7% above what the asking price was. These are kind of crazy numbers historically that we've never seen before, but I think they're indicative of people finding incredible housing value in our markets relative to the markets they're exiting. I think it's just a continuation of what's been going on. Clearly, it's accelerated. I'm not sure that this is strictly a COVID-related increase. I think the trend that's been in place for a long time will continue, probably at elevated levels. Neil, if you look at the census numbers that came out, Texas gained two congressional seats, while California lost one and New York lost one. You go up into the rust belt and a lot of those states lost, while Florida gained. We have seen an uptick in Phoenix and Florida for sure. But I think this was just a continuation. I agree with you totally that the pandemic has been a great accelerator. It'll be interesting to see what happens over the next couple of years as people have the ability to work from home and just use their laptop as their office. So I think we're in a good position and we've always wanted to be in these markets because they are pro-growth markets with great weather and low housing prices that drive migration.

I would add to that, if you look at most of our new residents, they come from Sunbelt markets, but if you think about non-Sunbelt markets, New York is our number one non-Sunbelt provider of new Camden residents.

Okay. Thanks for that. Another one for me is maybe bigger picture, talking about cap rates coming down. We talked to brokers in pretty much all of your markets and sub-4 is like the name of the game. When you think about your portfolio—it's a great aggregated, diversified portfolio, ridiculously low leverage compared to anything private, a lot of growth avenues there. Is there, I mean, do you think there should be a rerating, or is it fair to say that cap rates on the public side need to come down or they're justified being lower? If nothing else, the spread between coastal and Sunbelt should be compressed at least over the next several years and not the cycle.

If you calculate Camden's NAV based on the current cap rate environment, we have a spreadsheet that shows various cap rates and what we think our NAV is. If you use the Tampa number, we don't have that number on our spreadsheet. I mean, we go to like 3.5 cap rates and we stop. And so clearly, the question will ultimately be, who is right? Is it the private market that's right or the public markets? We've had this debate forever. The public markets sometimes act as real estate and sometimes as stocks. When the stocks get hammered, it's not because somebody is thinking about their NAV relationship to the private market; they're just selling the stock. I think we're trading more like stocks today for sure, and less like real estate. When you think about why somebody's paying a low 3 cap rate in Tampa, I think it's pretty basic. Number one, the 10-year is at a very, very low rate, and you still have positive leverage when you finance using a 10-year mortgage at 2.5% compared to a 3.25% cap rate. You have 90 to 100 basis points of positive leverage on that trade. Then you think about the worry about the trajectory of a trillion dollars in government stimulus. You hear the word inflation, and you hear the question of what happens, long-term inflation-wise. Well, multifamily pricing occurs every single night, and our leases roll over; we roll over 8% of our leases every month. So it's a great inflation hedge if you're worried about that. Private capital looking for yield has led many investors into multifamily. The supply and demand sides are balanced, with great job growth in most of these markets. And once the markets are opened up, I think the coastal markets will do fine, but it will take more time for them to recover than for markets that have opened up. So I think that's why cap rates are really low, and I wouldn’t say that the private side is crazy right now. There's a wider gap between real cap rates in the private sector versus the public sector than I’ve probably ever seen in my business career.

Yes. Well, obviously could you just – and what does the 3.5 cap translate to?

Well, I mean, you can look at the NAV from the consensus NAV right now; it's about $119 a share. For every 10 basis points in cap rate, it's about $2 a share. So you do the math. I'm not going to put a number out there, but it's about that $2 a share for every 10 basis points.

Hey, good morning. Good morning down there, and Keith, nice job deejaying this morning on the tunes. So two questions: First, obviously, there are a lot of articles about the impact of unemployment, the extended unemployment benefits. I was talking to a guy who does business across a lot of different states and there is feedback that people won't take a job because they're getting paid more to stay at home. In your portfolio, and I don't know how much of that was a driver of your need to increase the property level payroll, but are you seeing that sort of economic hold back across your markets? Should we read into it that the 4.5% rent increases you guys got in April are an indication that if the different groups, the impact of the extended unemployment benefits has really no real impact on your guys' ability to perform? Basically, what I'm asking is: as these benefits expire, would we see an acceleration of your portfolio or are the two not related?

I think the two are related, but not directly. The people that are unemployed today receiving government benefits are mostly those making under $50,000 a year, primarily in hospitality areas. They're making 30% more by staying home than they are going back to work. Restaurants, for example, I was driving yesterday afternoon and saw a restaurant that had help needed in every position, along with a $500 signing bonus if you come in. That is holding back some of the economy. But our average income is over $100,000, so most of our folks are working, they're continuing to do well. The biggest issue holding us back from higher revenue growth are restrictions on increasing rent in certain markets, like in California and Washington D.C. Our top-line number would be higher by at least 50 basis points if we didn’t have those restrictions in place. Once the economy opens more in these markets and we get past the CDC restriction and caps on renewals, I think the multifamily business should perform really well in the next six to eight months. Our increase in costs for salaries today is not driven by difficulty finding employees, but rather by outperforming their original budgets, requiring an increase in bonus accruals for them.

We definitely like hearing about bonus accruals going up, so that's a good thing. The second thing is on the development side: obviously you guys have pared back your program tremendously over the years. But as you look at new markets like Nashville or deal with rising construction costs, are you seeing more opportunities to deploy Camden capital, such as funding other developers’ third-party projects and then do it as a takeout? Does that mitigate risk or allow you to broaden your view, or do you really want to do development on your own because you feel that is a better risk proposition?

Doing anything that isn’t 100% Camden owned and under Camden control is actually more risk, not less. You can’t really move the needle on driving revenue and new development deals by doing joint ventures or equity programs. We still have the sting from a $3 billion joint venture program that occurred during 2008 and 2009, where our partners wanted us to default on debt and buy it back cheaper. When we did those joint ventures, the $3 billion didn’t really move the needle for Camden, but it created more risks when the market turned down. We’re going to keep our balance sheet pristine and won’t engage in deals like that. Other companies may have different views, but that’s not Camden.

And Alex, just on your point about the size of the development pipeline, if you take what's in lease-up currently, plus what's under construction, we're close to $1.2 billion in new development. We think we've been very opportunistic about taking advantage of these developments, delivering yields into a declining cap rate environment that's going to create significant value. I think $1.2 billion is about equivalent to our all-time high in terms of a development pipeline. We definitely see opportunities, and we believe everything we're working on right now based on the cap rates in play for acquisition assets looks really accretive.

Okay. Thank you.

Thanks. Maybe just sticking with construction. What are you seeing on the cost side, both for the in-place development pipeline, and also as you price out future starts?

So prices are up big time. If you look at two periods of time: April of this year versus April 2019, costs were up 2% or 3%, and some markets were actually flat. In the last 12 months, since April 2020 versus 2021, multifamily costs in total are up about 12.5%. The main drivers are commodity prices, soft lumber prices are up 83%, plywood up 53%, OSB board up 65%. Fuel prices, including diesel and gasoline, are also up 50% or 60%. Labor issues and supply delays are creating product shortages. The speed at which you can develop is slower, making for a tough cost environment. The good news for us is we locked in about 70% of our lumber package, so we don’t have a lot of exposure on lumber at this point. We did well in managing these tough waters. That said, it does affect how we underwrite new transactions. But I guess on one hand, with cap rates compressing as much as they are, the spread on what you can buy an asset for versus what you can build is still pretty wide. That's why you’ll continue to see new developments despite the increases in costs.

Thanks, that's very helpful. Then just on the rental assistance plans: how do you think that impacts Los Angeles and Orange County specific to you?

So far, it hasn't affected us in a positive way at all. Part of it are all the various qualifying elements you have to go through. Our resident base has not qualified or has not qualified for meaningful amounts of rental assistance, particularly in California. We do have some markets where we've received a couple of hundred thousand in rental assistance, but overall, this event has been a pretty significant net negative for us around the margins. We’re now at about $9 million in receivables, about $8 million above what we would normally carry. We hope over time that a couple of things will happen. We hope that as the CDC mandate is not extended, which is currently out to June 30, we can better take control of our real estate. This will be very helpful in whittling down that $9 million in receivables. Overall, the ERAP has not been particularly helpful because of the average income of our resident base. We'll see if this next tranche has fewer restrictions on how it gets used, but I’m not terribly optimistic.

One of the challenges you have is that the federal government has allocated $46 billion in rent assistance across the last two stimulus packages, which is a huge number. To date, only a minute fraction of that money has gone out. The issue is the government's requirements to check the boxes; we have had to send out 10,000 pages of documents to our residents in California. So you think these people are picking that document up, reading it, and understanding it? When the requirements become that extensive, it largely results in people discarding it. Government requirements are tough. In Houston, for instance, we designed the first set of programs for apartment rent relief and quickly got $70 million out. By the end of the year, we had $10 million we couldn't allocate. This is due to these intricate government regulations that make it hard to get money to people who need it. The folks who truly need help aren't typically the $100,000 households; it's the $30,000, $40,000, and $50,000 households in C&D properties not able to get back to work and not receiving stimulus money. Therefore, the challenges faced by the multi-family sector are significant and continuing. We believe our industry has done a great job in trying to help the most vulnerable people, but those most in need of assistance do not typically reside in Camden.

Thank you.

Thank you. You guys look great on video.

Thanks.

I had a question on the occupancy pickup you had in April to 96.6%. Were there any particular markets that drove that figure higher? Do you expect it to remain at this level for the remainder of the year, or do you expect it to trend back down to 96%, which is where you operated back in 2019?

Yes. If you look at our pre-lease numbers and go out 30, 60 days, the indications are good that we'll stay above 96% for the next couple of months. Obviously, we're entering the best part of our leasing season. The strength was across the board; in fact, we did a complete reforecast to support our increase in guidance. Of our 14 markets, if you look across our portfolio, the bottom-up re-forecast projections went up in 12 of the 14. The only two markets where revenue did not increase were San Diego and Orange County, Los Angeles. The reason for that has nothing to do with the underlying strength of those markets, which are both really good right now, but rather due to bad debt levels. We're still slightly negative on reforecast in those locations because of the bad debt. Without the bad debt in California, our revenue projections would have increased across all 14 markets, which is quite an achievement. If you consider our top-level revenues in the reforecast, we now have 13 of our markets with positive revenue growth for the year, with Houston showing a slight negative revenue reforecast. Our Houston team is working hard to change that, as they are the only ones reporting a negative number.

John, we have seasonality in our occupancy, but our reforecast assumes that we are going to maintain 96% occupancy throughout the year. It is obviously higher during the second and third quarters and may come back down in the fourth quarter, but compared to our original budget, that’s a 70 basis point improvement.

That's helpful. Thank you. On the cap rate discussion, we saw some of that cap rate compression offsetting income; but at times, like that's not the case. On that exit cap rate that you quoted for the example in Tampa at three and three quarters, is the view that if cap rates remain low due to rising construction costs, is it also potential that the rental growth assumption you quoted, at 3% was a bit conservative?

I think cap rates are a function, not of construction costs going up. That project, at the price I stated, is 18% above replacement costs. So replacement cost is not what investors are looking at. They want to know about cash-on-cash return from this real estate. A 3.2 cap rate is now the competitive market. As for how you do an IRR, an unlevered IRR has three components: what you buy in at, what your cash flow grows at, and what you exit at. For years, the exit cap rate has been a subject of debate, much like the argument of what's real CapEx. Ultimately, what will drive the exit cap rate will be the environment at that time. What drives the price of an asset is liquidity, supply and demand dynamics, and inflation. Right now, multifamily investment looks good due to liquidity, supply and demand balance, and positive job growth in most of the markets. I believe that once the markets open up, the coastal markets will progress as well, but it will take more time.

Interesting stuff. Thank you.

Thanks. Good morning. Following up on guidance, can you provide an update on the blended lease rates and bad debt assumptions that underlie your increased ranges?

Absolutely. To think about it, if you compare it to what we originally thought for blended rates in our original budget, we are increasing that by 50 basis points. Our occupancy is up 70 basis points, and our blended rental rates are up 50 basis points, which gives you about 120 basis points. However, we expect slightly higher bad debt, which is entirely driven by California. When we did our original budget, we thought AB-3088 would expire in early March, but now that looks like it may be extended into July, at the earliest. We think that our bad debt will be around 160 basis points for 2021, which is in line with what we had in 2020. But compared to 2019, that number would have been about 50 basis points.

That's really helpful. And on dispositions, are you still targeting sales in Houston and DC today, and given some of your cap rate comments, have you changed the assumed cap rate spread between acquisitions and dispositions in your guidance at all? I think you were previously assuming about a 150 basis points negative spread.

We are still targeting those two markets in terms of dispositions, yes. In our guidance, we're continuing to use that same spread. Hopefully, we'll do better than that based on what we're seeing and hearing today. We still use the 100 basis points negative spread in the model, but I believe there will be some timing differences given the current environment; however, we hope to do better than that negative spread.

That's absolutely correct.

I think the real variation in the model between the buyer and the seller will be timing. That will be an interesting trade-off in the future. There may be some timing differences based on opportunities available, but we hope to do better than that negative spread. Right now, it looks like we may.

Thanks. Appreciate the time.

Sure.

Hey, everyone. I know we're at the top of the hour, so I'll just keep it to one. I was wondering if you could just talk through Houston, it was a little surprising to see the sequential rent growth down almost 4%. I know, obviously, COVID didn't necessarily break that market, but COVID leaving isn't going to fix it. Is there anything that you're seeing there that gives you optimism as we go forward, whether it's energy recovery or supply chains or anything else?

Yes. The big challenge we have in Houston right now is not employment related. Jobs are coming back quicker than most people thought. The energy business is definitely improving; however, there’s a lag between improvement in price and employment prospects within that sector. The issue in Houston is supply. Last year, we dealt with about 20,000 new apartments being delivered in Houston. This year, we will face another 20,000 apartments delivered, and unfortunately, many are not distributed geographically well. They end up competing in the same areas, affecting our lease-up process. Despite this, the vibe of recovery in Houston is pretty robust overall. Restaurants are busier than ever. Rather than solely focusing on the past year's economic setbacks, we need to look ahead. We are optimistic about Houston’s recovery as we transition away from the pandemic. We expect new supply to ease next year, and with strong job growth driving market demand, we're cautiously positive about the year ahead.

I think that the winter storm had a larger effect on Houston than it did on the rest of the state, primarily because of what it did to petrochemicals and the plants in and around the ship channel. There are plants that are still offline, just starting to ramp back up following the winter storm. Houston could recover much faster had that storm not happened.

The energy transition topic and movement towards renewables have also taken on new fervor among energy companies. Houston is going to lead this transition. We’re seeing a major acceleration in discussions by large energy companies regarding how to adjust their practices to include more renewable energy options. ExxonMobil, for example, just announced a $100 billion carbon capture program that could be implemented around the ship channel. Maybe this becomes part of government stimulus or infrastructure efforts. Houston's going to be a really interesting place moving forward, as I've mentioned before. While the winter storm held us back, I believe revenues should pick up in the next few years, with Houston moving up to the top quartile of revenue performance compared to other markets in 2022, 2023, and onward.

In fact, if you look at sequential occupancy increases, the largest sequential increase we observed was in Houston from Q4 to Q1 when it increased 110 basis points.

Great. Thank you. Just sticking with the theme there on Houston, I was curious if the positive guidance revision there was more just around that sequential uptick that you just outlined for occupancy or are you also seeing a little bit better traction on lease rates as well? And then maybe, Ric, to your comment on when you think Houston starts to get better, is it probably mid-2022 by the time we've absorbed some of this peak supply?

I think that’s right. Peak supply does play a role in this effort, and we expect things to normalize from there. Additionally, look at the job growth as new business activity emerges. Houston is actively ramping back up the leisure and hospitality sector. There is definitely optimism here, and we’re seeing a confluence of various positive trends that can only improve the market.

If you look at blended rates for signed leases moving from Q1 2021 to April 2021, Houston improved by 420 basis points. So the improvement is clear, even if the overall numbers aren't incredibly strong.

That's really helpful. Then Alex, just to clarify, on the 50 basis points increase in lease rate assumption for same-store revenue guidance, does that reflect simply leases signed at this point, or does it also assume higher lease rates through the balance of the year?

Yes, it does. The analysis takes into account what's effective for the first quarter, signed today and including future lease signings through the second and component third quarter, along with expectations for the remaining year.

So the lease rates in the back half of the year on both renewals and new leases are also higher than your original expectation?

Correct.

Thanks a lot for keeping the call going. I wanted to better understand how the internal share repurchase dialogue has evolved. Back in the second half of 2020 and even early this year, you entered the downturn with a really well-positioned balance sheet, yet the only significant dislocation you've seen has led to strong share prices, and the private market has remained robust. You still believe you're trading at a substantial discount to NAV, and you’ve gained better clarity since the summer on operating fundamentals. So just curious why you haven't taken advantage of this well-positioned balance sheet heading into the downturn on the share repurchase side?

The challenge that we face with share repurchases lies in the narrow windows we have to buy back shares. For example, when we began to look into picking up shares at around $62 a share, market fluctuations caused this to move up. When I consider share buybacks, I prefer the opportunity to buy a large number of shares. I'm not interested in simply buying a few million here and there. This requires the stock price to stay down for an extended period, and that's a persistent challenge. We haven’t felt that we should back up the truck unless we could see broader sustained opportunities. At the end of the day, we’re owners of multi-family properties and thus compelled to take the long view. There’s a lot of friction related to selling assets quickly. Even if I could sell something today at a great price, I would still only consider the best position for our company and stakeholders to keep our financial health intact.

I mean more from a relative decision. You put a dollar into a kitchen and bath or a dollar into your stock. It's just a relative decision. More talk about the second half of 2020. You see your NAV, whatever it is, that $130 or above, and you had that visibility in the private market side. There was a solid six or seven months where you could be selling assets and repurchasing shares. It’s just that the dollar is fungible, and there’s an opportunity cost when not acting.

I get your point. However, just as mentioned previously, there are many variables involved. Selling assets while doing buybacks requires both timing and execution acumen. We aim for transactions that match up favorably, and for that to happen consistently requires a high skill set and preparedness. The industry operates under various constraints, and we’ve remained proactive and strategic wherever possible.

Okay. Thank you for your time.

Thanks.

Hi, thank you for taking the question. Over the pandemic, we've seen the renewal and new lease spreads grow wide, but your April signings seem to reach some parity there. Can you talk about the dynamics on the leasing side and how you're approaching that? Obviously, the occupancy has climbed.

Yes. We use our revenue management system to strategically price both new leases and renewals. The inputs to the model are designed to yield the best outcomes on both sides. Additionally, we implemented a voluntary freeze on renewal increases early on in the pandemic, maintaining that freeze through mid-summer. As a result, some of the anticipated natural increases were postponed, and we expect to reclaim some of that ground as we emerge from the pandemic holding more robust leases this summer.

Got it, thank you. Just touching on the supply side for a second. We talked about Houston; do you have some updates on some of your other markets and how that's progressing? The start of the year has been pretty strong in terms of activity. Has that changed how you're thinking about certain markets?

No, if you take Witten's numbers for total deliveries in 2020, we were about 154,000 delivered apartments across Camden's platform, and his forecast for this year is about 151,000. There’s some movement around shifting among our markets, but at a high level, the supply picture for this year is not going to look much different than it did last year. Most of our markets are in an excellent position fundamentally, with the exception of Houston, which saw around 20,000 apartments delivered, and we are facing another 20,000 this year as well but that's unique to Houston.

Great. Thank you very much.

Well, thanks for being with us today. I understand the 'Have Fun' video was a little choppy for the group in the replay. You'll be able to see it without that interruption, so let us know how you like this new format. I think it’s interesting and it makes it a little more interactive. We look forward to hearing from you on this format, and we will see and talk to most of you in virtual form at NAREIT coming up in the next couple of months, so take care and thank you.

Yes. Take care.