Camden Property Trust (CPT) — Q2 2021 Earnings Call Transcript

Good morning and welcome to Camden Property Trust's Second Quarter 2021 Earnings Conference Call. I am Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman; and Alex Jessett, Chief Financial Officer. If you haven't logged in yet, you can do so now through the Investors section of our website at camdenliving.com. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions, and please note that this event is being recorded. Today's webcast will be available for replay this afternoon, and we are happy to share copies of our slides upon request. Before we start 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 due to subsequent events. As a reminder, Camden's complete second quarter 2021 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 the call. We hope to complete our call within one hour as we know that today is another very busy day for earnings calls, and other multifamily companies are holding their calls right after us. We ask that you limit your questions to two and rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes. At this time, I'll turn the call over to Ric Campo.

Good morning. The on-hold music today was 'Coping With The Chaos.' When the pandemic began last year, we had a company-wide conference call to discuss lessons learned from the financial crisis. I opened that call with a line from a famous Rudyard Kipling poem about maintaining composure when chaos surrounds you. We provided a series of suggestions to help navigate the impending chaos. Some of these suggestions were reflected in our on-hold music today. We understood that our teams would face pressure, and we advised them to take it easy, as the Eagles suggest. We encouraged innovation, quick failures, and as Boston said, to not dwell on the past. We emphasized our commitment to Camden's values and our unique approach, reminiscent of Bon Jovi's sentiment about not conforming. Lastly, we urged our teams to embrace change and adapt. We concluded the call with a video produced by our Dallas Operations Group during the financial crisis, which felt relevant for the start of the pandemic. We hope you find it interesting. Now, let’s roll the video. When we held our first quarter earnings call, we noticed an uptick in occupancy and pricing power in our markets. The actual acceleration since that call has surpassed our expectations, leading to better earnings guidance announced last night. We are observing strong overall performance and improvements in our operating fundamentals. In nearly all instances, current rental rates are above pandemic levels. The forecasts from our economists and data sources are also encouraging, suggesting that the apartment sector will continue to prosper in the latter half of 2021 and into 2022. Despite high supply in many areas, demand has exceeded expectations, resulting in positive absorption of new apartments. Our current occupancy is 97%, leasing activity is robust, and turnover is low. Overall, our outlook for Camden and the multifamily sector looks promising. We are thrilled to enter the national market with the acquisition of two high-quality apartment properties. Our acquisition and development teams are diligently seeking opportunities in this competitive landscape. I want to commend our incredible Camden team members for their hard work and for seizing this strong market. Excellent customer service and sales skills are essential in such a market. We need to deliver outstanding service while supporting the Camden value proposition, especially when negotiating double-digit rental increases. Thank you, team Camden, for your daily efforts to enhance the lives of our teammates, customers, and stakeholders. Next, I’ll turn the call over to our Co-Founder Keith Oden.

Thanks, Ric. Now for a few details on our second quarter operating results. Same property revenue growth was 4.1% for the quarter and was positive in all markets both year-over-year and sequentially. We have remarkable growth in Phoenix and Tampa, both at 9.1%, Southeast Florida at 8.6%, Atlanta at 5.7% and Raleigh at 4.6%. We thought the April new lease and renewal numbers we reported on last quarter's call were pretty good at nearly 5%, but as Ric mentioned, pricing power continues to accelerate. For the second quarter of '21, signed new leases were 9.3% and renewals were 6.7% for a blended rate of 8%. For leases that were signed earlier and became effective during the second quarter, new lease growth was 5.4% with renewals at 4% for a blended rate of 4.7%. July 2021 looks to be one of the best months we've ever had with new signed leases trending at 18.7% renewal at 10.5% and a blended rate of 14.6%. Renewal offers for August and September were sent out with an average increase of around 11%. Occupancy has also continued to improve, going from 96% in the first quarter of this year to 96.9% in the second quarter, and is currently at 97.1% for July. Net turnover ticked up slightly in the second quarter to 45% versus 41% last year due to aggressive pricing increases we instituted, but it remains well below long-term historical levels. Move-outs to home purchases also ticked up slightly from 16.9% in the first quarter of this year to 17.7% in the second quarter, reflecting normal seasonal patterns in our markets. So despite the constant headlines regarding the increased number of single-family home sales, it really has not had an effect on our portfolio performance as the move-outs to purchase homes are still slightly below our long-term average of about 18%. Ric mentioned Camden's purpose in his opening remarks. It's something we discuss internally often. Our purpose is to improve the lives of our teammates, customers, and shareholders one experience at a time. In our company-wide meeting at the beginning of the pandemic, we shared the Star Wars video and emphasized that the chaotic months ahead will provide an extraordinary number of opportunities to improve lives one experience at a time. We focused our efforts on improving our teammates' lives, who likewise focus their attention on improving our residents' lives. The results have been truly amazing, and we could not be more proud of how team Camden has performed throughout the COVID months. Improving the lives of our team and customers has in turn improved the lives of shareholders, including the approximately 500 Camden employees who participated in the employee share purchase plan this year. I'll now turn the call over to 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 second quarter of 2021, as previously mentioned, we entered the Nashville market with a $186 million purchase of Camden Music Row, a recently constructed 430-unit 18-storey community, and the $105 million purchase of Camden Franklin Park, a recently constructed 328-unit five-storey community. Both assets were purchased at just under a 4% yield. Also, during the quarter we stabilized both Camden RiNo, a 233-unit $79 million new development in Denver, generating an approximate 6% yield, and Camden Cypress Creek II, a 234-unit joint venture in Houston, Texas, generating an approximate 7.75% yield. Clearly, our development program continues to create significant value for our shareholders. Additionally, during the quarter, we began leasing at Camden Hillcrest, a 132-unit $95 million new development in San Diego. On the financing side, during the quarter we issued approximately $360 million of shares under our existing ATM program. We used the proceeds of the issuance to fund our entrance into Nashville. Our existing ATM program is now fully utilized and in line with best corporate practices, we will file a new ATM program next week. In the quarter we collected 98.7% of our scheduled rents with only 1.3% delinquent. Turning to bad debt, in accordance with GAAP, certain uncollected revenue is recognized by us as income in the current month. We then evaluate this uncollected revenue and establish what we believe to be an appropriate reserve, which serves as a corresponding offset to property revenues in the same period. When a resident moves out owing us money, we typically have previously reserved all pass-through amounts, and there will be no future impact to the income statement. We reevaluate our reserves monthly for collectability. For multi-family residents, we have currently reserved $11 million as uncollectible revenue against a receivable of $12 million. Turning to financial results, what a difference a year or quarter can make? Last night we reported funds from operations for the second quarter of 2021 of $131.2 million, or $1.28 per share, exceeding the midpoint of our guidance range by $0.03 per share. This $0.03 per share outperformance for the second quarter resulted primarily from approximately $0.03 in higher same-store NOI, driven by higher rental rates, higher occupancy, and lower bad debt, along with $0.005 in lower operating expenses driven by a combination of lower water expense and lower salaries due to open positions on-site, and approximately $0.02 in better-than-anticipated results from our non-same store and development communities. This $0.05 aggregate outperformance was partially offset by $0.01 in higher overhead costs primarily associated with our employee stock purchase plan, combined with a $0.01 impact from our higher share count resulting from our recent ATM activity. Last night, based upon our year-to-date operating performance and our expectations for the remainder of the year, we also updated and revised our 2021 full-year same-store guidance. Taking into consideration the previously mentioned significant improvements in new leases, renewals, and occupancy, and our resulting expectations for the remainder of the year, we have increased the midpoint of our full-year revenue growth from 1.6% to 3.75%. Additionally, as a result of slightly better-than-expected second-quarter same-store expense performance and our anticipation of the trend continuing throughout the year, we decreased the midpoint of our full-year expense growth from 3.9% to 3.75%. The result of both of these changes is a 350-basis point increase to the midpoint of our 2021 same-store NOI guidance from 0.25% to 3.75%. Our 3.75% same-store revenue growth assumptions are based upon occupancy averaging approximately 97% for the remainder of the year, with the blend of new lease and renewals averaging approximately 11%. Last night, we also increased the midpoint of our full-year 2021 FFO guidance by $0.18 per share. Our new 2021 FFO guidance is $5.17 to $5.37 with a midpoint of $5.27 per share. This $0.18 per share increase results from our anticipated 350-basis point or $0.21 increase in 2021 same-store operating results. $0.03 of this increase occurred in the second quarter, with the remainder anticipated over the third and fourth quarters, and an approximate $0.06 increase from our non-same store and development communities. This $0.27 aggregate increase in FFO is partially offset by an approximate $0.09 impact from our second-quarter ATM activity. We have made no changes to our full-year guidance of $450 million of acquisitions and $450 million of dispositions. Last night, we also provided earnings guidance for the third quarter of 2021. We expect FFO per share for the third quarter to be within the range of $1.30 to $1.36. The midpoint of $1.33 represents a $0.05 per share improvement from the second quarter, which is anticipated to result from a $0.04 per share or approximate 2.5% expected sequential increase in same-store NOI driven primarily by higher rental rates, partially offset by our normal second to third-quarter seasonal increase in utility, repair maintenance, unit turnover, and personnel expenses. A $0.015 per share increase in NOI from our development communities and lease-up, our other non-same store communities, and incremental contributions from our joint venture communities, and a $0.002 per share increase in FFO resulting from the full-quarter contributions of our recent acquisitions. This aggregate $0.075 increase is partially offset by a $0.025 incremental impact from our second-quarter ATM activity. Our balance sheet remains strong with net debt to EBITDA at 4.6 times and a total fixed charge coverage ratio at 5.4 times. As of today, we have approximately $1.2 billion of liquidity comprised of approximately $300 million in cash and cash equivalents and no amounts outstanding under a $900 million unsecured facility. At quarter-end, we had $302 million left to spend over the next three years in our existing development pipeline. We have no scheduled debt maturities until 2022. Our current excess cash is invested with various banks earning approximately 25 basis points. At this time, we'll open the call to questions.

Thank you, Ric and Keith. I know you mentioned that July is on track to be one of the best months you've ever seen. And I thought it would have been clearly the best. But I'm wondering what period the most comparable to this is to? And what may concern you, whether it's affordability, rents, income ratios, or suppliers or something else?

I would say that we've never seen this kind of demand released into the market in our business careers. I mean, you can go to the financial crisis; you can go to the big bust in the '80s. We've never seen this kind of snapback in demand in the history of our business, I think. So it really is unprecedented. I guess what could sort of slow it all down or stop it or whatever is what's going on with the pandemic today, that uncertainty in the market about how the massive fiscal and monetary stimulus is going to unwind over time is probably the biggest thing that concerns me. Supply has always been the issue that people worry about. The demand is so high today that supply—we're not building enough apartments today, if you can imagine saying that to take up this demand. So it's definitely unprecedented. We're going to enjoy it while it's here. And hopefully, it looks like 2021 is going to be a really, really strong year. And when you look at the backdrop, it looks like next year is going to be the same. Keith, you might want to add a little bit there.

Yeah. So just the last question that John asked was about concerns and mentioned affordability. And in our portfolio, we're still running about 19% of household income that goes to rent payments. So it's been in the 18% for the last couple of years, so maybe ticked up a little bit. But the reality is that our residents who have jobs that are not directly impacted by COVID are seeing their wages increase as everyone else's are. So yeah, the rents are going to go up, but my guess is that we're going to see some pretty significant increases in household income as well. And we start from a place of great affordability.

Okay, my second question is on developments. You quoted the yields are trending higher and some of the projects completed. But I was wondering where the development yield stands today on your current $907 million pipeline? And how much bigger you'd envision developments going forward as far as the overall pipeline?

Sure, in the $900 million pipeline, our yields range from five to six and three-quarters. And so it's pushing up on an average of roughly five and three-quarters to six in total. And that's initial yields. All the IRRs are in the 7.5% to 8.5% range. And that's really instructive when you think about what's been going on in the capital markets. Our weighted average cost of capital, given everything that's going on, has been driven down to the mid-fours. And we're delivering development yields in the mid-eights. So we're creating the spread between our weighted average cost of capital and our development today. It's been the widest that I've ever seen it. And maybe after the financial crisis, we did some transactions right after the financial crisis, where we were making 10%. And today, our weighted average cost of capital is obviously much higher in 2011 and 2012. We have roughly $720 million in our pipeline today, and those yields—we're not protecting mid-sixes or high-sixes like we have now. But you never know, given the current revenue line that we have going up high into the right. So the other challenge to those yields will be just cost and getting the right workers. We do have a worker shortage and instruction and supply chain disruptions that are still a big issue out there. So most of our developments in that $720 million pipeline are in the middle five to five and a half, with IRRs in the seven and a half to eight range. In terms of—we also are adding to the pipeline. We would like to—development is a great business right now. Obviously, margins have been widened dramatically by the low interest rates and low cost of capital. So we are trying to add to that pipeline as we speak as well.

Great, thank you.

Hey everyone. Good morning, and congratulations on the $150 share price. Unbelievable. First question, can you talk about really—I think the thing that's driving some of this is in-migration trends. Clearly people are voting with their feet. Can you just discuss if you've seen any changes or acceleration in terms of the percentage of new leases that are from out-of-state or from higher-cost states, etc.? We heard that this earnings season that you're seeing an uptick from already elevated levels to sort of new highs in terms of incremental demand from out of state. So any color will be great.

So if you look at a year ago, about 15.6% of our new leases came from folks moving to the Sunbelt from other areas. Today, that number is about 19%. So that's a 350-basis point increase in folks moving from non-Sunbelt markets to the Sunbelt markets and renting with Camden. So really a fairly dramatic increase on that side.

Another thing I would add is, when you look at Houston as an example. Houston was our slowest market and our most difficult market because during the pandemic, and after the pandemic, because of the oil and gas influence of Houston. When you look at the number of jobs that have been added back in Houston relative to Austin or Dallas or Atlanta or some of these other markets, it was at the bottom. And in spite of those jobs, a lot of jobs aren't being added back at the same rate as other markets, the Houston market is bouncing back in an amazing way. And part of it is this in-migration. People believe fundamentally that markets that have pro-business governments, decent weather, and job growth opportunities are attractive for moving there. Even if the jobs aren't as buoyant today, they're still moving to those markets. And I think that's one of the things that's really pushed up all the demand side of the equation in all of our markets, including Houston.

Yeah, that's great. Maybe just talking about the acquisitions or recycling. Obviously, cap rates are very low, below 4%. But your AFFO cost of equity is also in the mid-to-high threes. Your leverage is the lowest in the industry. Just wondering, given the expectations for outsized growth in Sunbelt markets, and I'm sure your conviction in that thesis as well. Would you look to dive a little bit more into the acquisition market using your currency, picking up some leverage, which you have clearly the capacity to do? And just kind of increase your growth?

The answer is yes. We sort of showed that in the second quarter when we issued $360 million out of the ATM and brought $300 million in properties in Nashville. As sort of the best match funding we can see with the numbers you just put out, that you just discussed. When we look at the incremental sort of dilution rate if you issue equity or bring up debt towards acquisitions and development, that's not the ultimate arbiter. What we really do is we look at the most important measure from my perspective, and our management team's perspective, is our weighted average cost of capital relative to our terminal unlevered IRRs. And those are unlevered IRRs, today, when you look at our weighted average cost of capital, it's been driven down obviously through the rally of the stock price with the tenure treasury being at 1.24% today, and bond yields being where they are. So when you look at a mid-fours weighted average cost of capital and we can acquire properties like in Nashville, and even though they're lower going-in cap rates, when you look at it on an unlevered IRR over a seven to 10 year period, it's 6.5% unlevered IRR when you put in these kinds of rent growth that we're having. I would tell you that a 150-basis point positive spread on acquisitions is rare in REIT land, and so that shows—it's a green light for growth both on the acquisition side and the development side as long as we manage our balance sheet appropriately. You've heard me and our management team, Keith and Alex, talk about this. Our targeted range from debt to EBITDA is five to four times. During—sort of during good times and strong capital markets, you drive your debt-to-EBITDA down and you get closer to the four during tougher times or bad times, recessions, pandemics, and capital market hiccups, it rises. And today we're in good times, strong capital markets, and very strong operating fundamentals. This is a strong spread between our weighted average cost of capital and our unlevered IRRs. So we're going to methodically grow our company in this way. We've already done $300 million of acquisitions, with way more to come. Our $720 million development is something we hope to ramp up significantly starting next year. This is a good time; we want to make hay while the sun shines.

Yeah, that's great. Congrats on a good quarter and keep up the great work.

Thanks.

Thanks, Neil.

Hey, good morning. So I guess a 15% increase in rent is improving the lives of people. But I am curious—is that market or is that Camden plus market because of all the bells and whistles that you can offer people that your competition can't? I just wonder—and I'm referring to the July renewal activity or leasing activity.

Hey, Rich. That's total revenue. So that includes our technology package and all the other amenities that we provide our residents. So yes, it's all in revenue. And you're looking back to the beginning of the year and then looking at asking rents currently. As for whether it's improving their lives or not, we have—it's a three-legged stool; we are going to improve the lives of our residents, our shareholders, and employees. So clearly, we're improving the lives of our shareholders. We've done so much over the last two years to improve the lives of our residents with our resident relief program and all the other things we did. Obviously, some of that growth reflects the fact that early on in the pandemic, we were the first company to freeze rents across the board on renewals and leases. So obviously, there's some take-back of what could have occurred had we not made that conscious decision to allow our residents some slack in the early days of the pandemic. So yes, these are real numbers. And they're strong. If you look out, as you look out, YieldStar—all these recommendations are being driven by our revenue management systems. YieldStar is forward-looking after 90 to 120 days. So I think that this trend is likely to continue.

Yeah, I would just add. Ric, you made the comment about improving their lives. I mean, we are. There's a candidate advantage, no question. You don’t get people to increase their rents that substantially and smile at the same time, without providing value proposition to that customer. You have to have clean grounds, well-maintained properties, and you have to be well-located. All those value propositions support driving rents the way we're driving them today. Because our customers understand that we're a business and we need to improve our top line and our bottom line for them to create value for themselves. If you look at the apartment industry, go down the scale of sort of more affordable housing where you have, I say, more affordable meaning less cost. But the quality of the housing as you go down with owners that don't understand these should reinvest in their properties, and you should make sure that they're clean and they're safe. That does really improve the lives of those customers. The good news is our customers are all doing quite well. Our average income is about 100 grand, but the challenge with that number is we don't update it when somebody renews their leases. When you think about the wages for people that are growing over 100 grand, they are actually growing pretty substantially. Those folks all got stimulus money, so they have money in their pockets. They understand that the price of things goes up. As long as the value proposition is there and you took care of them during the pandemic and you can take care of them on an ongoing basis and you do well with that, they’re willing to pay a higher price. It’s like anything else—the brand proposition is about is this price worth this brand? You can always buy something cheaper. You can go to a lower-quality apartment and get a lower rent, but you don't get the Camden experience.

I didn't mean to put you on the defense; I was—

That's okay. It's not defensive; that's just selling the right way.

Of the 14.6%, how much of that is rent? And the reason I ask is when Alex mentioned 11% blended expected for the rest of this year. Is that also fully baked in with fees and everything else? Or is that just pure rent? I'm just trying to get a direction off of that 14.6% that you started with July.

Yeah. So the 11% that is pure rent and the 14.6% blended rate that we're talking about is on a rental rate basis. We do pick up other fees, and those other fees are growing slightly north of 3%.

Good morning, guys. Keith. I mean, it's hard to have underperformers when you're up 15% in July. But when you take a look at the markets, if you're forced to rank order them, what are the markets that are sort of towards the bottom on a relative basis, performance-wise? And what differentiates them from the guys that are sort of a step up from them these days?

Well, if you rank them only, just looking at the 14.6% blended rate. Just go down and scan down to the bottom, Houston is probably still at the bottom. But you're talking about instead of where it was in the first quarter or fourth quarter of last year, it was still basically flat to down maybe 2% from early 2020. Houston now has a substantial positive, and you're somewhere around 7% or 8% up in Houston. If it weren't for the fact that the rest of the portfolio is producing as high as 20% trade-out, everybody would be applauding the fact—or we would be applauding the fact that Houston is at 7% or 8%. If you force it to be relative, there's always going to be somebody at the bottom. These are extraordinary growth rates in every single market that we're in.

I guess I'd say that the worst market that was DC—where DC proper has a ban on any rental increase.

Okay. And then I mean, in terms of that, when you look at it. I mean, how much of the big jumps here are the removal of concessions versus so on its effective rate versus at the end of the day pushing rental rate? Like, where are the markets that you're pushing the market rate the most? And it's partly the removal of concessions or the jump in occupancy that's driving the market performance?

Rob, we don't use concessions. The only time we ever use any concessions is on new developments. It's part of the marketing process and the expectation of residents. But outside of our development pipeline, we don't have any concessions across Camden's portfolio. So it is pure rental increases.

Yeah, absolutely. It's entirely based upon tax refunds. To give you the numbers: In 2020, we had about $2.3 million of tax refunds. They entirely came in the first half of 2020. In 2021, we are anticipating the exact same number: $2.3 million of tax refunds entirely coming in the second half of the year. It's a timing issue around tax refunds.

Okay, thanks, guys. Appreciate the time.

You bet. Sure.

Thanks. Curious on the acquisition pipeline, how large you expect Nashville to be in the near term.

We'd like to get Nashville up to 3% or 4%. In the near term. When you start looking at economies of scale and efficiencies, we really need to have 1500-2000 apartments to actually get to that efficiency level. So we definitely are going to be aggressive in Nashville and continue to push there.

Thanks. And then are there any other new markets that you may be entering over the next year or two?

Right now we'd like our markets. The interest in Nashville has been good so far. So we're pretty satisfied with where we are today for now.

Thanks. Good morning. Can you provide a bit more of an update on your disposition timing? And where are you seeing buyer interest in pricing in a market like Houston relative to your prior expectations?

Alex, go ahead and talk about timing.

Absolutely. In our model, we are assuming the dispositions happen on November 1. We have two assets in Houston that just hit the market. We've got another two assets in PG County that are going to hit the market next week. It’s a little early to give any updates on pricing—although we certainly expect to do much better than the original strike prices we had when we first went out.

Our conversations with the brokerage community specifically around Houston in the last 60 to 90 days indicate that the word is out that Houston rents are really, really accelerating hard. What they're telling us is there’s a whole lot more interest just generally in Houston. As we start to see it play out, clearly the improvement in Houston overall is going to be a real positive for selling assets.

Yeah, that's helpful. And then apologies if I missed it, but where do you stand in terms of receiving payments under rent relief programs? Do you expect any payments, and how meaningful could potential evictions be in California for you once you're finally able to process them at this point?

So I'll sort of hit ERAP, which is just the payments that we're receiving. Grand total for us is we're right around $4.1 million year-to-date, and obviously, most of that came in the second quarter. So we're starting to get some reasonable traction, especially in California. Although California is making up about 20% of our ERAP payments and is about 70% of our delinquency, so we have a ways to go there. The second largest market, interestingly enough, which has the lowest delinquency levels is Houston, which is also right around 20% of our collections. We don't have any significant assumptions for ERAP payments coming throughout the rest of the year, but as we've discussed, we've got sort of an $11 million receivable. We'll keep working the process and hope to get some additional payments in.

Of course, with that $11 million receivable, I think we've reserved about $10 million of the $11, right, Alex?

That's correct.

Your question about evictions in California—it's interesting to me. I was watching CNBC or CNN or someone last night talking about 12 million residents in America that are going to get evicted when the CDC moratorium comes off. I think there's a risk of mass evictions, but that risk is not in Camden's portfolio or any public company's portfolios. If you look at 70% of our receivables in California, those receivables are from rent strikers. Those receivables are people who know that there’s no penalty for not paying Camden or anyone else. There’s zero penalty—no late fees, no interest, nothing. I also saw Gavin Newsom on the news last night making the statement that if you haven't paid your rent for 12 months and you have a 'COVID reason,' the state of California is going to pay your rent. People hear that, it creates confusion, that people owe rent for more than 12 months in California and the government will pay it. The bottom line is that the $45 billion in U.S. government allocation money for renters has restrictions. It has means testing; it has a lot of restrictions. Those restrictions are why less than 10% of money has reached residents yet in America. So are our people driving Teslas, leasing $4000 a month apartments in Hollywood, who have $100,000 in cash in their bank accounts? They aren't going to get ERAP money. The question will be what happens to them? We've reserved against it. Ultimately, those people are going to destroy their credit. When they figure that out, maybe they'll take some of that money out of their bank account and pay their rent. This will be interesting to see, but at least for us, it's not going to move the needle one way or another. Maybe if everyone in California pays their rent, we'll have a $5 million, $6 million, or $7 million benefit. But it’s not enough to move the needle. We don’t think ERAP is going to be a big thing for us overall because our residents don’t need the money. The money needs to go to people making $50,000 or less who are paying $500 to $900 a month in apartments, not $1500 to $4000.

Amanda, I'd just add to that, because I think it's an interesting perspective. If you think about perspective in our portfolio, we have, out of our total 70,000 plus or minus apartments, we have 600 high delinquency residents. Our definition of that is three or more months behind on rent. That’s about 1%—a little bit less than 1% of our total resident base. It’s not huge in terms of numbers, but it’s kind of big in terms of irritation. Of that 600 high delinquency or high balance delinquencies, we’ve written it all off anyway. So we’re going to keep working the process. For the residents in our portfolio who are eligible, we’re going to make sure they get taken care of.

Thanks; that perspective was helpful. I appreciate all the commentary.

Hey, good morning out there, guys. I wanted to get your take on the fact that a lot of your competitors are starting to expand into markets that are new for them—not though new for Camden. What are the methods that you can employ to sort of maintain Camden's edge in owning, operating, or even developing in those markets?

The good news is these are vast markets. They are big markets—multi-billion dollar markets. For years and years, we had to go to conferences and talk about how we thought the flyover parts of America are really good places to be and that the coasts were not necessarily our cup of tea. Our experience in Southern California, which is the best part of California when it comes to pro-business and what have you, shows that during tough pandemic times, it was the right move from our perspective to stick with the flyover states. The markets are big, and we welcome competition. We'll be able to show just how good Camden's operating edge is against our other public company peers when they start reporting numbers in our markets. We welcome them to the market. It’s great, friendly competition.

I would just add that the public companies where we compete with them make the market better. I mean, they all use revenue management. They’re smart—they raise rents when they should. The lowest common denominator in our business is still third-party managed assets that aren’t managed very well. The more high-quality competition we have in a marketplace, the better we tend to do. The evidence of that has been the DC metro area where we have a significant presence, with a lot of competition—and the other is California. Steel sharpens steel, and bring it on.

Thanks for the thoughts.

Hey, everyone. The $450 million in dispositions—can you just talk through the use of proceeds there, just given obviously the Nashville acquisition, we're already funded with ATM?

Yeah, absolutely. So we'll use those proceeds for additional acquisitions. When you think about the midpoint of our acquisitions, it’s $450 million. We've done $296 million plus or minus. Additionally, we'll use those for our development pipeline. We're spending a couple of hundred million dollars a year to fund developments, as well as repositions, which we're funding another couple of $50 million a year. We have plenty of really sort of accretive uses of the capital.

Okay, got it. And then just thinking about these 14% to 15% rent increases in July. What do you think that looks like in 2022? Next year, if we still see the same supply-demand imbalance, are we going to see still significantly higher than normal rent increases? Are people going to go, 'You just raised my rent 15% last year; I can't do it again'?

We're not going to get into 2022 guidance, obviously. But if you look at some of our data providers, like Ron Whitten, he shows very strong 2022 as well, just the backdrop of reopening and continuing demand in the multi-family sector. Trees don’t grow to the sky, obviously. If you look at the long-term history of multi-family, usually when you come out of a big downturn—either a recession or a pandemic—you have multi-year up legs. I think in 2010, we told the market that the next three years would be the best revenue growth and operating fundamentals that we'd had in our business history. And that was true: '11, '12, and '13 were the best operating fundamentals that we’d ever seen. Because it was a snapback from—not as big a snapback as the pandemic has been, but it was definitely a snapback. I would expect based on the history that, unless something dramatic happens, we have a black swan with the Delta variant or something like that, 2022 is going to be pretty good. Keith said earlier that residents are not rent poor—they're paying 19% of their income for rent. On average if you go back to the pre-financial crisis era, they were paying in the 20s. We are still in an affordable market.

Okay, thank you.

Hey, good morning. So two questions. First of all, if we hear you correctly, you didn't really have any concessions in the portfolio. So it's not like you're copying rents off of a really low base of last year. Yes, there's more population moving down to the Sunbelt, or the Free States—whichever terminology people want to use—but that continues. It seems like everything is great, but at the same time, the magnitude of that demand just seems incredible. So I'm just trying to understand. Because again, it's not coming off a really weak comp—it’s like you guys were going 80 miles an hour, and now you bumped up to 120 miles an hour, which is a pretty strong increase for a rate that was already going at a good rate down the highway.

The way I look at it is this: We've had this debate in-house and talked to data providers like Ron and others. What we've settled on is this: if you think about what happened pre-pandemic, we were having the best quarter that we've had in a long time. We had positive second derivatives in most of our markets, except Houston, in terms of revenue growth. We were looking at 2020 as a step-up growth year from sort of that also-ran years in '18-'19. That demand just shut down. It was really good demand coming in the door, then that shut down. During that period too, if you look at some of the demographic numbers, we still had a million people that were supposed to be in the rental market that were not in the rental market. When you look at the millennials that are either doubled up or living at home or whatever—that was at the beginning of 2020. All that demand shut down. Now in 2021, you have vaccines come into play, the masking goes away, and all these places open up. You now have 2019 demand coming to the market, 2020 demand is coming into the market in 2021 demand coming into the market—all at the same time when the light switch went off at the beginning of—the middle to the end of May. And so with that, you just have people that are probably potted up with people they didn’t necessarily want to be with, and they have plenty of money in their pockets through stimulus and job increases and all that coming in at the same time causing occupancy to spike and therefore rents to spike as well. I don't know if Keith has anything.

When you look at it, I wouldn’t think of it as trying to explain 16% and how that works in the first six months of 2021. You should look at it this way: In 2020, when COVID hit, we were going to blow our budgets away. We were budgeting up 5% or 6% on top-line revenue growth; we were going to kill those. When COVID hit, it goes to zero. We froze rents, we froze renewals. We missed an entire year of rental increases for our residents. I think we probably would have ended up 6% or 7% in 2020, ex-COVID. So some of this 16 is just a clawback of the rental increases that we didn’t achieve in 2020, specifically because of COVID. If you view it that way, you're trying to explain 9%-10%, which is still a crazy number, but we've seen that before. We've seen 9%-10% top-line rental growth coming out of the great financial crisis and going back to the tech wreck. So that level is not unprecedented in our world, but it’s probably a better way to look at it.

And so what you were saying earlier about this spilling into next year, it just means that with basically three years' worth of demand this year, it’s going to take until next year to at least satisfy that.

I think that’s what our data providers are saying.

It’s not a onetime shot. Usually, it’s a methodical process.

Okay. Listen, thank you, Ric.

Sure.

Great, thanks, guys. You've historically talked about jobs to completions as a barometer of strength and fundamentals. I'm curious what your revised outlook for this year is. Certainly, it sounds like jobs alone isn't really enough to explain some of the strength. But can you give us that figure? And then also, what ratio are the third-party forecasts projecting for next year?

Yeah, so in terms of total supply, deliveries in Camden's markets in 2021 is going to be about 160,000 apartments over the entire footprint. That's roughly in line with what it was last year. If you look at Ron Whitten’s work in 2022, we’ll still end up with something around the $165,000 unit range in terms of deliveries. If you look at the numbers this year, they make complete sense in terms of the ratio. In fact, it looks pretty bullish; you get numbers like seven to one on the 165 deliveries. But it doesn’t make a lot of sense to think of it that way, just for 2021. You almost have to go back and look at MATCH 2020, where the job losses occurred, and then add to it the recovery. In many of our markets, we’re still not back to the employment levels that we were going into the pandemic, and yet here we are with the kind of demand we’ve seen. I think it’s all the reasons that Rick talked about earlier in terms of releasing additional pent-up demand. Traditional numbers would look at 2021 and 2022 and say these numbers look really bullish overall. Still, you got to temper that by the losses in 2020.

That's helpful. With everything you guys are talking about on the development side, the spreads, and attractive cost of capital, I mean, it seems like developers might be licking their lips a bit. Where are you seeing the most activity from a permitting perspective or shovels in the ground that could move that supply and demand more towards equilibrium as you look maybe two or three years out?

It's complicated looking two or three years out because for the last five years we’ve looked out a year or two and said, ‘Well, our supplies peaking,’ because of either cost pressure or banking pressure or whatever. It’s never peaked; it continues to make its way up. Supply numbers show starts coming down in 2023-2024. I think this is the time in the world where it's hard to figure out what’s going to happen in a year or two from now. I know that how the ultimate tapering and the great experiment of massive fiscal and monetary policy—when that turns, what’s going to happen? I don't think any of us know. That’s why we want to be conservative in our business going forward. But at least from now every market is at peak supply. It doesn’t seem to matter from an occupancy or revenue growth perspective. It will matter at some point when we go into other jobs, slow down, or there’s another recession, obviously, that’s when things change. We’ll just have to see. But right now at least, the next 18 months to 24 months look like supply isn't going to abate; it's going to continue to be pretty high in every market. Some markets are higher than others, like Nashville and Austin, but when you look at the rent trade-out in Austin and Nashville today, it’s some of the highest rent trade-outs we have in the market.

Austin, RealPage is our provider for permit data. The permit data is the least precise or reliable just because you're sort of forecasting behavior into the future. But on their numbers, they’ve got permitting activity of 170,000 apartments in our markets this year and 169,000 next year. So again, elevated activity, but I don’t think these numbers reflect the most recent compression in cap rates, and they probably don't reflect the real updated cost numbers. We’re still in a race between cap rate compression and cost to build.

Got it. Appreciate the thoughts, guys. Thank you.

Hey, thank you for keeping the call going. Just one quick question for me. A few months ago, obviously, your cost of capital was a little bit different. Just curious how you thought through issuing equity versus selling a building too?

Sure. When we think about our capital structure, we think about our debt to EBITDA being between five times and four times. It seemed opportune to issue equity when it was at an all-time high price. We made the decision to issue. The challenge with issuing equity is that often relates to blackout periods. We’re blacked out 42% of the time. We don’t have the flexibility that regular investors do in terms of buying and selling. We will continue to recycle capital; it’s not one choice either to issue stock or sell assets. It’s a combination of those three things that produce capital. It’s hard to grow the company with $100 million a year. The only way you can grow is through either equity or debt issuance. The question also becomes what is the weighted average cost of capital and what does that look like on a long-term basis? When your weighted average cost of capital is mid-fours, and you can put acquisitions on the books at six or better, you should do that. We will recycle capital through asset sales and acquiring other properties. When the capital markets are conducive to putting long-term accretive transactions on the books, like we've done in Nashville, that’s the time we issue equity.

Understood, thank you.

Hey, guys. Hope everyone’s doing well. I’m curious on how you're thinking about the leasing season as we head into the fall. It just seems like it's going to go on for longer than expected, and whether or not that influences your decision to kind of push rates a lot harder than you normally would at this time of year.

I think that if you think about our revenue management system, YieldStar is a forward-looking tool. It bases most of its calculations on the levers—primarily price—and looking at 90 to 120 days. The pricing that's being recommended by YieldStar, both on renewals and new leases, is something we take discipline around. 95% of the recommendations we take. It’s rare we have an exception to the recommended YieldStar rates. What that tells me is YieldStar thinks the market-clearing price that will maintain our occupancy levels north of 96% is 16% increases looking out 120 days. YieldStar will continue to push as long as the conditions on the ground permit it.

Got it. Thanks, guys.

Thank you for taking my question. I know it's been a long call. Just to follow up on the last question, I wanted to better understand the lease expiration schedule, I guess the next couple of quarters—how that's been impacted by all the leasing that's been done and the COVID disruption, and how that's playing into your thinking about the sustained strength of revenue growth near term?

There's always seasonality in our rent roll, but it's not dramatic. Fourth quarter and first quarter are always—we have fewer transactions and less occupancy. Vacancies come available, just because there's less traffic in most of our markets. But it's not dramatic. It’s a couple of percent flip flop between first and fourth and second and third quarters. Again, that’s within the YieldStar model that it calculates that and maintains those exposure levels at optimized rates.

I understand that. But I want to understand if there's anything about the number of units coming available that was meaningfully different in the next couple of quarters than say prior years during the same period.

I don't think so.

Okay, great. We appreciate you being on the call today. Sorry it went so long. We try to answer all questions. If we didn't get to something on your list, we're available. So please give us a call or email Kim or call Kim and we'll get back to you. Thank you very much. We'll talk to you next quarter or when the conference season starts after Labor Day. So take care. Thanks.

Take care. Bye.