Camden Property Trust (CPT) — Q2 2022 Earnings Call Transcript

Good morning, and welcome to Camden Property Trust's Second Quarter 2022 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 President; and Alex Jessett, Chief Financial Officer. Today's event is being webcast through the Investor section of our website at camdenliving.com, and a replay will be available this afternoon. We will have a slide presentation along with our prepared remarks, and those slides will also be available on our website later today or via email upon request. All participants will be in listen-only mode during the presentation, and there will be an opportunity to ask questions afterward. Please note this event is being recorded. Before we begin our prepared remarks, I would like to inform 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 our 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 during 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 2022 earnings release is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call. We hope to complete our call within one hour, and we ask that you limit your questions to two, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we will be happy to respond to additional questions by phone or email after the call concludes. At this time, I will turn the call over to Ric Campo.

The theme for today’s on-hold music was Together, which will resonate with team Camden. After two years of virtual meetings, this year Camden was able to be together for most of our important cultural events. In May, we held our Annual Leadership Conference, which brings together over 400 Camden leaders for three days of learning, reconnecting, and fun. A lot has changed in the world since May, which serves as a good reminder that real estate and financial markets will rise and fall, but companies with a great culture will thrive in all conditions. The following highlight reel from our leadership conference provides an inside look at a culture that has earned a spot on Fortune’s 100 Best Companies list for 15 consecutive years. Thanks to team Camden for the amazing culture that you have created and continue to build. Camden will always thrive. For the last year and a half, we have experienced the best NOI growth and FFO growth in our nearly 30-year history, with NOI growing 19.6% and FFO growing a remarkable 47%. These gains are built into our run rate and are likely to persist, driven by strong consumer demand for housing in our markets. Consumer strength is supported by robust employment growth, significant wage increases, and high savings levels. Our apartments remain affordable, even with double-digit rental increases, as our residents spend approximately 20% of their incomes on rent. Domestic migration has resulted in more than 700,000 Americans moving to our markets in the past year, and they are not moving back. Apartment supply has not kept pace with demand. We anticipate growth to moderate over the next couple of years but believe we will surpass our long-term growth rate. With a strong balance sheet and a fantastic team with an incredible culture, we are poised for more successes. Up next is Keith Oden.

Thanks, Ric. Now for a few details on our second quarter 2022 operating results and July 2022 trends. Same property revenue growth was 12.1% for the quarter, once again exceeding our expectations with 12 of our 14 markets posting double-digit revenue growth. Given this outperformance and an improved outlook for the remainder of the year, we have increased our 2022 full-year revenue growth projection from 10.25% to 11.25% at the midpoint of our guidance range. Rental rates for the second quarter include signed new leases up 16.3%, renewals up 14.4% for a blended rate of 15.3%. Our preliminary July results are trending at 13.1% for blended growth, with new leases at 13.5% and renewals at 12.7%. Occupancy averaged 96.9% during the second quarter, matching our performance during the second quarter of 2021 and compared to 97.1% last quarter. July 2022 occupancy is currently trending at 96.7%. Net turnover for the second quarter 2022 was 46% versus 45% last year, and move-outs to purchase homes were 15.1% for the quarter versus 17.7% during the second quarter of 2021. The year-over-year decline in move-outs to purchase homes is not surprising. Since last year, home mortgage rates have nearly doubled and the median existing home sales price is now above $400,000. So despite the recent increases in rental rates, many would-be homebuyers will likely remain renters. Next up is Alex Jessett, Camden’s Chief Financial Officer.

Thanks, Keith. Before I move on to our financial results and guidance, I want to provide a brief update on our recent real estate and finance activities. During the second quarter of 2022, we completed construction on Camden Buckhead, a 366-unit, $162 million new development in Atlanta. We began leasing at Camden Tempe II, a 397 unit, $115 million new development in Tempe, Arizona. We began construction on Camden Village District, a 369 unit, $138 million new development in Raleigh. Additionally, we acquired for future development 43 acres of land comprised of two undeveloped parcels in Charlotte and 4 acres of undeveloped land in Nashville. As previously reported, at the beginning of the second quarter, we purchased the remaining 68.7% ownership interest in our two joint venture funds for approximately $1.5 billion, inclusive of the assumption of debt. The assets involved in this fund transaction included 22 multifamily communities with 7,247 apartment homes, with an average age of 12 years, primarily located in the Sunbelt markets across Camden’s portfolio. In conjunction with this acquisition, we recognized a non-cash non-FFO gain of $474 million, which represented a step-up to fair value on our previously held 31.3% equity interest in the funds. Also as previously reported, early in the quarter, we issued 2.9 million common shares and received $490.3 million of net proceeds. As of today, we have approximately $80 million outstanding under our $900 million line of credit. At quarter-end, we had $248 million left to spend over the next three years under our existing development pipeline. Our balance sheet remains strong with net debt to EBITDA for the second quarter at 4.4 times. Last night, we reported funds from operations for the second quarter of $179.9 million or $1.64 per share, $0.02 above the midpoint of our prior guidance range of $1.60 to $1.64. This $0.02 per share variance resulted primarily from approximately $0.03 in lower bad debt and higher rental rates and occupancy for our same-store and non-same-store portfolio, partially offset by $0.01 in higher property tax expense, resulting from higher initial valuations in Atlanta and higher than expected final valuations after appeals in Austin and Houston. Last night, based upon our year-to-date operating performance, our July 2022 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 10.25% to 11.25%. Our revised revenue growth midpoint of 11.25% is based upon an anticipated 12.5% average increase in new leases and an 8.5% average increase in renewals for the remainder of the year. We are anticipating that our occupancy for the remainder of the year will average 96.6%. Additionally, we have increased the midpoint of our same-store expense growth from 4.2% to 5%. This increase results from inflationary pressures on repair and maintenance costs and the previously mentioned higher than anticipated tax valuations in Houston, Austin and Atlanta, partially offset by lower-than-anticipated insurance expense tied to our successful May policy renewal. Property taxes make up approximately 35% of our total expenses and are now anticipated to increase by 5.6% year-over-year, which is an approximate 200 basis point increase from our prior estimates. Repair and maintenance makes up approximately 13% of our total expenses and is now anticipated to increase by 7% year-over-year, and insurance makes up approximately 5% of our total expenses and is now anticipated to increase by 13% year-over-year. As a result of our revenue and expense adjustments, the midpoint of our 2022 same-store NOI guidance has been increased from 13.75% to 14.75%. Last night, we also increased the midpoint of our full year 2022 FFO guidance by $0.07 per share for a new midpoint of $6.58 per share. This $0.07 per share increase resulted primarily from an approximate $0.06 increase from our revised same-store NOI guidance and a $0.01 increase from additional NOI from our non-same-store and development portfolio. We also provided earnings guidance for the third quarter of 2022. We expect FFO per share for the third quarter to be within the range of $1.68 to $1.72. The midpoint of $1.70 represents a $0.06 per share increase from the $1.64 recorded in the second quarter. This increase is primarily the result of an approximate $0.06 sequential increase in same-store NOI, resulting from higher expected revenues during our peak leasing periods, partially offset by the seasonality of utility expenses and lease incentives, and a $0.01 sequential increase related to additional NOI from our non-same-store and development portfolio. These increases are partially offset by a combined $0.01 decrease in FFO related to higher variable rate interest expense and the incremental impact of the additional shares outstanding from our early second quarter equity offering. At this time, we will open the call up to questions.

Hey. Good morning, everybody. I was curious if you could give us an update on the disposition that you had previously planned half the year and just some general color on what you are seeing in the transaction market?

The transaction market has significantly slowed down due to an increase in tenure and the dislocation caused by current market conditions, especially with the Federal Reserve's actions. As a result, we have decided to pause our dispositions instead of trying to determine early prices. Instead, we are waiting for more clarity in the market. The cost of capital has increased for almost everyone, and leveraged buyers who were using 60% to 80% leverage are seeing changes that have reduced their return on equity. We estimate that values have likely decreased by about 10% to 15%, depending on the market and product type, with properties needing substantial work being the most affected. We will continue to monitor the market, and while we have been actively buying and selling to enhance our portfolio's quality and geographic diversity, we are currently taking a pause to assess the market. We anticipate that after Labor Day, we will see more clarity. There is still a significant amount of capital available, and we believe that buyers and sellers will begin to re-engage after Labor Day and continue through the end of the year.

And then, second question, you mentioned in your prepared remarks that you expect growth to slow and supply to catch up in sort of the years ahead, but growth should still exceed sort of that long-term historical average. So, I guess, first, could you kind of give us a sense of what that average is presumably 3% to 4%, but you could put a point on that? And then, I guess, just what gives you the confidence that you can continue to exceed that long-term average given the level of projects that are on production today?

Keith, you want to take that?

Yeah. So if you look at the deliveries that are planned for 2023 relative to this year, Ron Witten has got completions going up from about 130,000 across Camden’s markets to about 190,000. So it’s meaningful. But if you look at it as a percentage of the stock, it’s not really out of line with where we have been for the last couple of years and then in years beyond that, the starts stay fairly flat. So if you roll forward, I mean, the easy part at this point is kind of thinking about 2023 and where we start out as we come out of this really, really strong 2022, where we continue to get really strong renewals, as well as new leases. I mean, we will start somewhere in the 5% range on embedded growth in 2023 and the long-term average on NOI growth across Camden's portfolio over the last 30 years is in the 3.1% range. So, you kind of tend to think about 2023 being higher than normal. And I think as long as we continue to have the affordability issues that consumers are dealing with right now in terms of their alternatives to renting, which is buying a home, I think you are going to see a pretty dramatic decline in the number of single-family home starts. So you are just going to continue to have a shortage in housing of virtually all types and I think that it will continue to benefit the multifamily space.

Thanks for that.

Thanks. Maybe following up on that, but more focusing on the demand side, obviously, the July numbers remain strong, but a more challenging comp there. Are you seeing any signs of consumer demand changing, as you look out 30 days or 60 days or any kind of push back on pricing?

No, we are not seeing that. We remain almost 97% occupied; currently, we are at 96% to 97%. Our pre-lease numbers look solid for the next 60 to 90 days. Turnover is low, and while we anticipate that renewal rates and new lease rates will decrease, we've discussed this over the past few quarters. Last year, we implemented 18% to 20% increases for most of our portfolio, which is not sustainable for the current period. We expect these numbers to decline, but if we maintain our occupancy levels, our model should continue to drive rents up to the market clearing price. In our areas, operators are experiencing strong demand and are still able to increase rents. However, we acknowledge that these numbers will definitely come down in the fourth quarter.

One of the things I think…

Thanks. And then…

… is important to think about our consumer and that is that our consumers are doing really well. They all have jobs. When you look at year-over-year increases in income for Camden residents, it’s gone up almost 10%. So we worry, I guess, on Wall Street and the financial folks worry about interest rates and inflation and all the stuff and that’s important. And I think the consumers are worried about that too, but they also are doing pretty well when it comes down to income growth and savings rates. And I think that folks that are probably going to be most impacted are at the lower end and our customers on average make six figures. And so they are not on the low end of six figures and those are the ones that are not as pressured on the inflation side and especially when you think about 20% of their income going to rent. It’s the folks that are paying 30% to 50% of their income for rent and they are getting kind of really pressured. So our residents are doing well. They are stressed, but we can feel that in the marketplace. But they are not financially stressed; they are more worried about what’s going to happen in the future than they are about making ends meet with their incomes.

Thanks. That’s helpful. And then you touched on the broad strength really across all the markets, but the two that lag on a relative basis, I guess, are DC and Houston. How are you thinking about those markets back half of this year and probably more importantly into 2023?

I think it's important to consider that in the second quarter, revenues in Houston and Washington, DC were approximately 7% higher. However, since the rest of our portfolio increased by 13% to 14%, those figures in Houston and DC would usually be viewed as impressive, but they are lagging compared to the other 13 markets. One implication of this is that as we enter the renewal period, where we previously saw 20% increases in these markets, it will be much more challenging to achieve similar rent increases now. The expected year-over-year comparison for DC and Houston could be around 2% to 3%. Therefore, we may actually have the opportunity to be more aggressive in raising rents in these two markets, as last year did not see substantial increases for consumers and there might be a rise during the 2023 renewal period. I believe these markets present promising potential for growth in 2023, and we should have a clearer picture by the end of the next call. Overall, there is significant potential in these two markets based on the current competitive landscape.

When considering the economy, Washington, D.C. is somewhat similar to California regarding COVID reopening and the challenges with evictions. In contrast, Houston has a different situation; it hasn't regained jobs as quickly as Dallas and Austin. However, with Exxon and Chevron reporting a combined $30 billion in earnings recently, job prospects in Houston look more promising. It's noteworthy that despite complaints about high gas prices, energy companies are not significantly expanding due to ESG concerns and investors prioritizing dividends over exploration investments. If the energy sector continues its current trajectory, more jobs will be necessary, as they are operating with minimal staffing. Recently, they added around 2,000 energy-related jobs in the Houston region. This suggests a positive trend for the Houston market, highlighting the differences between D.C. and Houston. I see potential growth for both markets in 2023.

Thank you.

Hi, everyone. Can you provide an update on your portfolio loss to lease and thus the opportunities for further rent growth next year?

Yeah. Absolutely. So loss to lease for us right now is about 8.5%.

Excellent. Thank you. And then on new development, supply seems benign in some of your markets and where rent growth has actually really been strong, seemingly outpacing cost increases. So how would you view development starts given this backdrop beyond a construction company and what really you need to see to ramp new progress? Thanks.

In our earnings release, we mentioned that we have acquired new land positions and are continuing to focus on development this quarter. On one hand, development revenues have increased, but on the other hand, costs are also rising. However, we believe that cost increases are beginning to stabilize. While we don’t expect costs to decrease, the pace of the increase appears to be slowing. Overall, development remains a strong area for us, and we will keep pushing forward with our projects. Currently, we are concentrating on our existing portfolio that has legacy land costs, and we plan to ramp up activities next year. Once the market stabilizes in terms of long-term capital costs, rather than the fluctuations we've seen recently, we believe we can maintain reasonable margins. We will monitor the situation between now and the middle of the fourth quarter to see how it develops. Our pipeline shows that we have average yields with significant cost contingencies in our construction estimates, ranging from the low 5s to low 6s, which is still a solid performance even in the current environment.

Thank you.

Hi, everyone. Good morning. I guess maybe just following on the development side. You talked about maybe, well, I wanted to see if, you are seeing delays, it seems like you guys probably won’t make the development numbers you initially forecasted. We are hoping you could talk about that and if it’s a function of costs or is it a function of regulatory delays, etc.? Can you maybe just talk about like where you see the starts kind of shaping up over the next several quarters and that would be great?

Sure. I would say that definitely regulatory issues are a big issue. I mean the challenge you have is sort of interesting; you can think about this, people worried about recession and job losses yet cities and municipalities that issue permits and inspect buildings and things like that are absolutely understaffed beyond belief. And even markets that used to be very friendly to permits and building like Houston, I mean, everyone is talking about how it just takes forever to get this stuff done and so we are experiencing that just like everybody else is. So a lot of the starts that we had or several of the starts this year are going to fold into next year. Next year should be a pretty buoyant start year, Alex, you might want to go through those numbers.

Yeah. Absolutely. So, Neil, what I’d tell you is that we still think that we are going to make the low end of our total start number. We are anticipating starting with Mill Creek, Long Meadow Farms and Camden Nations, which is on page 18. We always put that in order of our starts. So we will anticipate starting those three this year. And keep in mind that we just started Village District last quarter. So we should make the low end of our range.

Okay. Other question is about Houston. I know you mentioned a while ago that you were focusing on reducing exposure in Houston and DC Metro due to their significant contributions to your portfolio. That contribution has obviously increased with the joint venture and the two single-family rentals you are currently undertaking. There is speculation regarding the Biden administration's recent climate executive order and its stance on energy and fossil fuels. What is the likelihood of these developments impacting Houston, or is there already an impact? The idea that unknown green jobs could compensate for the job losses seems unrealistic. If you could provide your perspective on this, it would be appreciated.

Sure. I believe you are correct in noting that while there is a focus on green energy and moving away from fossil fuels, a complete shift is not going to happen in the near future. We acknowledge the importance of progress in ESG and addressing climate change. The main challenge lies not with energy companies, but rather with the federal government and its policies. Transitioning from fossil fuels to clean energy requires significant infrastructure investments in the grid and our energy systems. For instance, in our ESG Committee, we recently discussed the number of charging stations available in our apartments. While we're planning for electric vehicles in our new developments, the reality is that we can't support an EV station for every car we envision in the future because we lack the necessary infrastructure and agreements with power companies. Many issues need to be resolved for us to effectively address climate change. In Houston, there has been a noticeable negative impact, particularly in job growth, which should have been stronger. This situation has been influenced by investors' ESG demands on energy companies, leading to a reluctance to invest in the industry without adequate returns. Consequently, energy companies are being pushed to invest less in infrastructure and exploration, which has resulted in rising oil costs and restricted supply. However, I believe Houston can emerge as the clean energy capital of the world in the long run. There are significant projects underway, like the $100 billion carbon capture initiative by Exxon in the Houston Ship Channel, which will receive federal support. Energy companies recognize that they must transition, but this won't happen overnight; it may take 10 to 20 years. They understand the importance of not becoming obsolete, like what happened in Detroit. I am optimistic about the transition process and believe Houston will ultimately thrive, even though the situation is certainly complex.

Thank you.

Thank you. I am wondering if you could provide an update on your yields on the development pipeline overall and on the projects you started this quarter in Raleigh?

The pipeline currently under construction or in lease-up is yielding low 5s, with some projects in Phoenix reaching nearly 7.5 cash on cash. These are traditional development deals that were underwritten at significantly lower rates, along with a 30% increase in rents in that area. Consequently, our yields have improved. Overall, the yields for our existing projects that are under construction and in lease-up are surpassing our original projections due to these rental increases. The future pipeline that has yet to begin is expected to yield anywhere from low 5s to low 6.

Okay. Great. And then you talked about on your answers, a 5% earn-in for next year, 8.5% loss to lease. I just wanted to confirm that these are separate items; you are starting up with the 5% same-store revenue for next year and then 8.5% which can move based on market rents, but that’s all additive to the 5%?

Yeah. So the way to think about it and the way we calculate earn-in is we look at what we anticipate the rent roll is going to look like at the end of 2022 and if you just froze everything right then, and so, I mean, froze everything right then for 2023 and that’s how you get to the 5% number. Obviously, there is a component of that that is associated with loss to lease, right? Because you have some of those leases that are in place that you are freezing that are below market.

And so the loss to lease is what the effective rent growth you could achieve for next year assuming the market rent numbers?

Yeah. Assuming you could take everybody up to market and as you know, we don’t necessarily take our renewals up to market. But if you took everybody up to market, you would have an 8% increase right there, 8.5%.

Yeah. Great. Thank you.

Let me turn off my on-hold music here. So…

We have on.

Okay.

Go ahead.

So, no, I can’t do that. When you discuss the earn-in and compare the signed figures for July to the effective figures for July, there’s about a 200 basis point difference. Is it reasonable to assume that in considering this roll forward situation and your point about freezing at the end of 2022, the inflection point is now at the beginning of August or the end of July? Or is it possible that your leasing season could still extend, meaning the earn-in would potentially increase as we progress?

Well, so the earn-in will get bigger. Well, no, so what we are assuming is that the earn-in of 5% plus is based upon at the end of 2022. So that takes into consideration everything that we expect from now till then.

Okay.

If you are looking at inflection points, and I think the real important thing to look at is if you go back to last year in Q2, our blended lease growth was 4.7%; in Q3 it was 12.3% and in Q4 it was 15.7%. So we are really starting to have some really tough comps in the third quarter and fourth quarter of this year compared to what we saw last year.

Fair enough. The second related question is about how much of those tough comparisons will affect this unusual year, given the unique year-over-year comparisons due to last year's changes. Considering absolute rents, while I understand that lower percentage increases are expected in the latter half of the year, what will happen to the actual rent? For instance, if today's rent is $1,000, will the rent fall below $1,000 by the end of the year, or will it simply grow at a slower rate, potentially reaching or exceeding $1,000 by year-end?

No. It’s going to be above the $1,000. I mean, so when we look at our math, we continue to have asking rents that are going to be increasing throughout the rest of the year. It’s just the comp that you are looking at. You are looking at a much tougher comp period in the fourth quarter of this year, because rents escalated so quickly in the latter part of 2021.

You still have a positive rent growth but a negative second derivative, right?

Got it. Yeah. So that's interesting because you are saying positive rent growth, but your peers and gateway markets are saying that rent growth is actually negative in absolute terms. Would you hazard a guess why that might be?

Well, we are not paying it.

... why you are not.

You are right.

All right. Thank you very much.

I don’t want to understand given the strength of this market right now though, I don’t understand how anywhere in America you could have absolute rents be less at the end of the year than they are today.

I would be surprised if that were the case. It's difficult to conceive situations where absolute rents could decline, but those markets do have a different rhythm.

Okay. I will check my notes on that. Thanks very much.

You bet.

Thank you.

Good morning. I have two questions. First, you've mentioned the slowdown in the mortgage and transaction markets. It seems like you are planning to start fewer projects and are not pursuing as many acquisitions or dispositions given the current situation. Are there any merchant development opportunities you are seeing? Have any merchant deals started that are now facing challenges, potentially creating acquisition opportunities for you? I'm just curious.

I would say that there isn't a significant amount of stress in the market today. Merchant builders were making three times their equity, and now, with price adjustments, it may be two times or one and a half times, which is still strong, but there is no distress. However, we have observed opportunities, such as our Nashville Nations project. This property was zoned and ready to go, but the developer struggled with costs and had a more complicated building design. As a result, the land value was nearly equal to their profit, which incentivized them to sell it to us instead of building. There are definitely opportunities like that, where merchant builders face rising costs of capital or nervous equity partners and are willing to sell shovel-ready deals at a profit to them and at market value to us. This type of transaction is definitely out there. I believe there is also a fair amount of mezzanine-type business that people are exploring, though it's not an area we engage in. I have received calls from people wanting us to help with recapitalization and similar matters, but we are leaving that to some of our competitors.

Okay. And then the second question is, on obviously the Sunbelt has been garnering headlines the past few years for the influx of folks coming from Coast or other areas moving down South. As you guys look in your portfolio, how much of a benefit have, I will say, out of region or if you will, into Camden versus to the market overall? And I ask the same question on Mid-American’s call; they went from 9% outside of Sunbelt to now 15% out of Sunbelt, but they opined that was more people coming into the market buying homes, etc. Given you are a bit higher income, a little bit more upscale, curious if you are seeing similar dynamics or if you are seeing much bigger impact from add away people coming down South?

It's interesting, Alex, because the trend of moving from the North or Coast to the South has been happening for quite some time. It's not a new phenomenon. The pandemic introduced the possibility of working from anywhere, and the challenges people faced living on the Coast due to COVID and its restrictions accelerated this shift that had already started. This acceleration has certainly been beneficial for us. Alex has some figures related to that. Please go ahead, Alex.

Yeah. Absolutely. So if you look at the second quarter, 20.3% of all of our move-ins to our Sunbelt markets came from non-Sunbelt markets. That’s a 100-basis-point sequential increase and if you compare this to the second quarter of 2020, it’s up 440 basis points. So we are absolutely the net beneficiaries as folks are moving out of New York, Illinois, Pennsylvania, New Jersey, etc. down to our markets.

And Alex, just take that number and put some aggregate numbers around that.

Thanks.

Total domestic in-migration net to Camden’s markets is about 140,000 this year, and that number is expected to drop to 130,000 in 2023. This reflects the turbocharged effect stemming from the complications related to COVID. However, this trend has been ongoing for a long time and is likely to remain at a very elevated level in 2023 as well.

It seems to align with Rich Anderson’s point about why you expect positive rent growth in the latter half of this year despite potential slowdowns elsewhere; you are experiencing ongoing inward migration.

Yeah. I think that’s clearly part of the story.

Yeah. Hi, everyone. Could you maybe talk about the differences across markets on the July rate growth front, kind of where you are seeing the strongest and then maybe just lease growth? I think you kind of alluded to DC and Houston Area, so just maybe into the other markets would be pretty interesting overall?

In our comparison of the same properties for the second quarter versus the prior year, we've already mentioned DC Metro and Houston, which are both around 7%. Beyond that, Phoenix is nearly at 18%, Southeast Florida is at 16.5%, Orlando is at 16%, and Tampa is at 18%. Twelve of our 14 markets are showing double-digit growth, which is quite impressive for this business.

And one more for me, on the tax side, you felt that the expenses part of that was, I think, driven by the same-store property taxes going up. Are there any specific markets where you are seeing kind of the higher than expected tax assessments or is it across the Board and then it is driven by just valuation or municipalities increasing rate?

Sure. In the three markets I mentioned, starting with Atlanta, the overall increase isn't significant. Initially, we anticipated a drop in Atlanta's taxes for 2022 due to successful protests we had in 2021. We received some initial values that differed from our expectations, and we plan to contest those. The other two markets I highlighted were Houston and Austin. We expect Austin to see nearly a 20% rise in property taxes, with initial valuations aligning with that estimate. We challenged nearly every valuation and typically have a strong track record, but we were unsuccessful in Austin this year, leading to that 20% figure. Houston's situation is somewhat similar, though not as drastic. We initially projected a 2% to 3% increase for Houston, but after processing our final protests, it turned out to be around 5%. Overall, we're also experiencing pressure in Southeast Florida, including Orlando and Tampa, with increases in the 8% to 9% range.

Got it. Thank you.

Thanks. I am Barry. I am on the line for Haendel St. Juste. I was wondering if you could discuss the expense pressures you are facing in more detail. Maybe first off, if you could discuss the drivers and key pieces on the 80% or 80 bps upward revision in your expense guidance? Thanks.

Yeah. Absolutely. And so that the major driver that you are really seeing there once again is property taxes, so if you think about it, we are up to 5.6% of what we are anticipating for property taxes and that’s about a 200 basis point movement and property taxes represent 35% of our total expenses. So 200 basis points on 35% gets you 70 basis points, which is almost the entire delta between the 4.2% that we originally had for total expenses and the 5% we have now. So it’s almost entirely driven by property taxes. Now we do have a couple of other ins and outs. We are seeing some inflationary pressures on R&M and that’s causing us to have some increases on the earn over what we originally had anticipated to the tune of about 300 basis points. But the offset to that is we actually had a really good insurance renewal; and we originally thought that our total insurance for the year was going to be up about 22% and now it looks like it’s up 3%. So we have got a 900 basis point positive there. That sort of offsets the R&M inflationary issues and so that leads you really just the property taxes to be in the main driver.

Okay. Thanks. So it sounds like it was mostly non-controllable. So what about on the, looking at your supplemental, the 33% G&A increase, can you talk little bit about that?

Yeah. Absolutely. So as I talked about last year, excuse me, last quarter, we rolled out our work reimagined initiative and if you recall, this is where we took a look at all of our on-site positions and we effectively came up with Nest, where up to three communities are managed together. As part of that, we took our existing Assistant Manager position and we centralize that into a shared service. So the shared service is now part of property G&A and then you have the offset in fact more than an offset in lower salaries as we removed the assistant manager position.

Good morning all. Let me start off with a question on with, Keith, so have you seen any notable pickup in concession from developers in heavier supply markets?

In markets where we've experienced strong performance over the past year, concessions have been less prevalent. We typically offer about one month of free rent as part of our lease-up concessions. However, we do not provide concessions in our stabilized portfolio. Concessions are common among developers, but in our case, they have generally been lower than anticipated. The demand for new construction in our markets reflects the strength we see in our stabilized portfolio. Overall, we saw fewer concessions last year, but they remain a part of the pricing strategy for new developments.

So this is, I guess, my question was around what you see your peers or competitors doing not just your own book?

They have fewer concessions as well. In a situation where market rents are increasing by 16% to 17%, they are all significantly surpassing their previously projected rents. Therefore, there is little reason to continue raising rents only to reduce them back to the levels in their projections. Yes, they are all experiencing increases. I would assume they are all performing better concerning total rent or scheduled rents, but that doesn’t necessarily mean they have completely removed concessions. It likely indicates they are maintaining the one month of free rent that was included in their projections, while adjusting market rents to align with the going rates for non-concessional rent structures.

Got it. My second question is about the DC market. You've performed very well in the second quarter and July is still holding at 7%. Can we anticipate any supply pressures that might affect your pricing power for the second half of the year?

The supply pressure in DC has not been a significant issue for us. Most of our assets are in the DC Metro Area, and the total delivered units this year are around 13,000, which is not a large number for that entire metropolitan region. Looking ahead to 2023, Witten has approximately 12,000 apartments scheduled for delivery in the DC Metro Area, so I don’t anticipate much change next year. The difference, as Ric mentioned, is that many of our challenges were in markets with governmental restrictions, such as rent control or hurdles in the eviction process. While some of these restrictions still exist in the district, most have been lifted in the DC Metro Area. Therefore, I believe 2023 will likely return to a more normal state as we manage and have the ability to implement market clearing rents, which we were unable to do in much of DC last year.

Thank you.

You bet.

Great. Thanks. Thanks for being with us today and we will see you at the beginning of the conference season after Labor Day. So take care and have a great summer. Thanks a lot.