Camden Property Trust (CPT) — Q3 2022 Earnings Call Transcript

Good morning and welcome to Camden Property Trust's Third Quarter 2022 Earnings Conference Call. I'm Kim Callahan, Senior Vice President of Investor Relations. With 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. This event is being webcast through the Investors section of our website at camdenliving.com, and a replay will be available this afternoon. We will have a slide presentation alongside our prepared remarks, and those slides will also be accessible on our website later today or can be requested via email. Please note that this event is being recorded. Before we start our prepared remarks, I want 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 lead actual results to differ significantly from our expectations. Additional 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 this call reflect management’s current opinions, and the company has no obligation to update these statements due to subsequent events. As a reminder, Camden's complete third 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 that we will discuss today. We aim to conclude our call within one hour, and we ask that you limit your questions to two before rejoining the queue for any additional topics. If we cannot speak with everyone in the queue today, we will be happy to answer further questions by phone or email after the call ends. Now, I'll turn the call over to Ric Campo.

Good morning. The theme of our on-hold music today was 'Thank You.' Earlier this year our Board of Trust managers wanted to send a message of thanks to Team Camden for their unwavering commitment to our customers, each other, and our shareholders throughout the pandemic and beyond. The idea resulted in this video that was shared with all Camden teammates during our annual 15 City Award Ceremony Tour. Operating fundamentals continue to be strong and above long-term trends. Rents are following their normal seasonal slowdown as customers prepare for the holidays. Even as seasonality comes into play, new and renewal rents are much higher than historical pre-pandemic levels setting this up for a strong start in 2023. Demand continues to outstrip supply. And given the rise in interest rates and home price appreciation, apartment affordability is at an all-time high relative to home ownership in all of our markets. Our development pipeline continues to be a source of external growth. As we discussed on our last earnings call, we will not be selling or buying properties for the balance of the year. Apartment transactions remain quiet as participants' cost of capital continues to rise and price discovery continues. Our balance sheet is one of the strongest in REIT land and positions us to take advantage of opportunities as they unfold. I would like to thank all of our Camden teammates for all they do to improve the lives of our teammates, our customers, and our shareholders one experience at a time. Next up on the call is Keith Oden.

Thanks, Ric. Now a few details on our third quarter 2022 operating results and October 2022 trends. Same-property revenue growth was 11.7% for the quarter and 11.6% year-to-date. Our performance was in line with our expectations, so we've maintained our outlook for 2022 full year revenue growth of 11.25% at the midpoint of our guidance range. Rental rates for the third quarter have had signed new leases up 11.8% and renewals up 11.5% for a blended rate of 11.6%. To date, leases signed during October are trending at 6.9% blended growth with new leases at 5.2% and renewals at 9.4%. For leases that became effective in October, the blended rate was approximately 10%. Occupancy averaged 96.6% during the third quarter, down slightly from 96.9% last quarter and 97.2% in the third quarter of 2021. October 2022 occupancy is currently trending at 96.1%. Net turnover for the third quarter was 51% versus 47% last year and move-outs to purchase homes dropped to 13.2% versus 15.1% last quarter. We would expect to see a continued decline in move-outs to purchase homes through the remainder of the year, given the recent increase in mortgage rates. 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 and finance activities. During the third quarter of 2022, we stabilized both Camden Buckhead, a 366-unit, $164 million new development in Atlanta and Camden Hillcrest, a 132-unit, $92 million new development in San Diego. We began leasing at Camden Atlantic, a 269-unit, $100 million new development in Plantation Florida. And we began construction on Camden Woodmill Creek and Camden Long Meadow Farms, two single-family rental communities, both in the Houston metro area with a combined 377 units and the combined cost of $155 million. During the quarter, we increased our existing unsecured line of credit capacity from $900 million to $1.2 billion and extended the maturity to August 2026, with two further six-month extension options. We also added a $300 million delayed draw term loan with an August 2024 maturity with a further one-year extension option. Currently, we have approximately $30 million drawn under our line of credit and no amount is outstanding under our term loan. We will likely use our term loan and line of credit to pay off our $350 million, 3.2% unsecured bond, which matures on December 15 of this year. Our Board recently increased our share repurchase authorization from $269 million to $500 million. We did not repurchase any shares during or after quarter-end. Our balance sheet remains strong, with net debt to EBITDA for the third quarter at 4.2 times. And at quarter-end, we had $348 million left to spend over the next three years under our existing development pipeline. Last night we reported funds from operations for the third quarter of $187.6 million or $1.70 per share. Included in our results are approximately $1 million or $0.01 per share of property expenses associated with Hurricane Ian, which are excluded from our same-store results. Excluding the impact from Ian, our third quarter results would have been $0.01 above the midpoint of our prior guidance range. This $0.01 per share positive variance resulted primarily from the combination of slightly higher other property income and slightly lower corporate overhead expenses. During the quarter, we experienced higher-than-anticipated repair and maintenance and utility expenses as a result of inflationary pressures. However, these increased amounts were entirely offset by lower levels of employee health insurance expense due to lower claims amounts. Last night, we reconfirmed the midpoint of our previous full year same-store growth guidance at 11.25% for revenue, 5% for expenses, and 14.75% for net operating income. Our 11.25% same-store revenue growth assumption is based upon occupancy averaging 95.8% for the remainder of the year, with the blend of new lease and renewals averaging approximately 8.5%. These expected increases compared to achieved blended increases of approximately 15.5% in the fourth quarter of 2021. Last night, we also increased the midpoint of our full year 2022 FFO guidance by $0.01 per share for a new midpoint of $6.59. This $0.01 per share increase results primarily from lower than previously anticipated corporate overhead costs. We also provided earnings guidance for the fourth quarter of 2022. We expect FFO per share for the fourth quarter to be within the range of $1.72 to $1.76. The midpoint of $1.74 represents a $0.04 per share increase from the $1.70 recorded in the third quarter. This increase is primarily the result of the previously mentioned $0.01 per share third quarter impact from Hurricane Ian, approximately $0.06 sequential increase in same-store NOI resulting from $0.03 in increased revenue, driven by higher net market rents, partially offset by lower occupancy and $0.03 in lower property expenses resulting from our typical seasonal decrease in utility, repair and maintenance, and unit turnover expenses, combined with the timing of property tax refunds and approximately $0.03 sequential increase in NOI from our development communities in lease-up and our other non-same-store communities. This $0.10 aggregate increase is partially offset by a $0.03 decrease in the amortization of net low market leases related to our second quarter acquisition of the fund assets. As we discussed on our first quarter earnings call, purchase price accounting required us to identify either below or above market leases in place at the time of the acquisition and amortize the differential over the average remaining lease term, which is approximately seven months. Therefore, in 2022, we will recognize $0.07 of FFO from the noncash amortization of net below-market leases assumed in the acquisition. We recognized $0.035 of FFO in the third quarter of 2022 from this amortization and we will recognize the final $0.005 in the fourth quarter. If leases were above market, the amortization would have resulted in an FFO reduction over the remaining lease term. A $0.015 decrease in FFO related to higher interest expense, primarily attributable to higher variable interest rates, and $0.015 in higher other corporate costs related to anticipated higher health insurance expenses and the timing of certain year-end accruals. At this time, we'll open the call up to questions.

Good morning. My first question is a follow-up to Ric's comment about demand continuing to outpace supply. I know there are different forecasts regarding supply for next year. Ric, is this variability something typical for now, or do you expect it to persist in 2023? How are you all planning for supply in your markets this year?

Sure, supply in 2023 is certainly expected to be available. We estimate around 180,000 new units will enter our markets based on Ron Witten's projections. Coupled with solid job growth and migration trends, we believe this will persist. Consequently, we should be able to continue increasing rents during this time, unless a significant economic challenge arises. Overall, we feel optimistic about the number of units we noted in 2022, and anticipate that 2023 will be a positive year despite the incoming supply.

Thank you. And then, my second is on the development pipeline. How are you thinking about that as we head into '23? I mean, there do seem to be some clear signposts of the consumer pulling back weakening? How are you thinking about that as we head into '23?

We are carefully evaluating each of our developments and determining when to start or proceed with these projects in 2023. The positive aspect is that many of them are scheduled for mid to late in the year. We will need to monitor how the market evolves in this regard. One of the trends we are noticing is that construction costs are beginning to stabilize, which is encouraging. Therefore, it might be prudent to wait and see how costs adjust further and how the economy performs next year.

Thank you.

Thank you. Recognize you've been mostly out of the transaction market, but hoping you can provide some color on where cap rates have trended more recently across your markets also recognize that probably not a lot is traded, but any kind of recent data points or thoughts around that would be appreciated.

Sure. The market is very quiet regarding transactions right now, and we're experiencing a minor technical issue. If you consider today's market, people are not entering price discovery unless they have a compelling reason to do so. The key point is that there's little incentive to transact in this uncertain environment. The cost of capital has increased for everyone, and buyers reliant on debt, particularly floating rate debt, are reassessing their strategies. People seem to be waiting for the first quarter to gauge developments. On a positive note, cap rates have risen significantly alongside property values. Depending on who you ask, values could be down anywhere from 10% to 20%. However, our performance and that of our competitors show that we are still generating net operating income much higher than usual, which is helping to mitigate some of the rise in cap rates. Ultimately, transactions will take place because there is still substantial capital eager to invest in multifamily. I believe 2023 will be a strong year; even with a slowing market, we can expect decent rent growth. Starting the year with solid cash flow growth will likely be better than average, though slower than 2022, which should help prevent values from declining more sharply than they have.

Thanks. That was very helpful. And then as you think about kind of uses of capital, obviously, we've touched on development a bit. You mentioned the share repurchase program. How do you think about executing there your stocks in the mid to high 5% implied cap rate today? At what point does that become a more attractive use of capital?

We have increased our buyback program authorized by the Board by $500 million. Historically, we've been significant buyers of our stock, though not recently. Stock buybacks are appealing because, while it's challenging to determine today's value, considering FFO yield and its implied cap rate, the price appears attractive. The challenge in the REIT sector is that repurchasing shares in large quantities is difficult, and we want to maintain a strong balance sheet. Therefore, we will not borrow money to buy back stock. However, in the past, when we've sold assets in the private market for their full value and repurchased our stock at a discount, it has been a good investment. We will pursue buybacks through asset sales instead of debt while taking our time. Our approach remains that the stock price should be around 25% below its value and must consistently remain low, allowing us to enter the market gradually. This philosophy continues to guide our decisions.

Thank you.

Good morning, team. This is a follow-up question about the development front. How conservative are you being with underwriting, and how have your development hurdles changed on your deals due to the shift in cost of capital? Thank you.

We have definitely adjusted our development hurdles due to the increase in our cost of capital, which has significantly risen like it has for many others. We will only pursue developments that offer at least a 100 to 150 basis point spread above our weighted average cost of capital, which has increased from just over five to just over seven. This new hurdle will apply to all future development pipelines, as well as to every existing project we haven't yet started. On a positive note, rental rates have increased considerably, leading to better-than-expected results in terms of rents. Traditionally, we accounted for a 1% monthly rise in construction costs, equating to about 12% annually. We expect that figure to slow or possibly decrease as the number of project starts declines, as many builders are indicating a significant decrease in starts for 2023 and 2024 due to the cost of capital and limited bank financing. We are indeed raising our hurdles and reevaluating all projects in line with the new rate.

Okay. That's really helpful. My second question there with $0.07 contraction from the previous top end of guidance. So kind of indicating a more conservative outlook, could you provide some color on the operating trends you've seen so far? And what may be limiting the upside?

Yes, although there is a $0.07 decrease in the upper end of our guidance, there was also a $0.07 increase in the lower end. This mainly reflects that we are now a month into the last quarter, which gives us better visibility over the next 60 days compared to 120 days or a full year. We are essentially narrowing our guidance because we anticipate less variability. The wider range we had going into the third quarter was mainly due to uncertainties related to collections and ERAP payments, which are not directly controllable by us, particularly in California and Washington DC. Our guidance for the third quarter took these factors into account, and now we have slightly improved visibility. We have kept the midpoint the same and even raised the full-year guidance by $0.01. This adjustment is primarily due to having less time in the forecast period, allowing us to provide investors with clearer expectations on where we believe we will land at the midpoint.

Okay. Thank you. That’s it for me.

Great. Thanks and good morning, guys. First, you guys still expect to commence the Camden Nations deal this year? And then secondly, going back to development. Last quarter, I think you had discussed yields on future starts ranging from the low 5s to low 6s. And Ric you just mentioned rents have gone up some, which has helped but how much the costs need to go down from here for you to achieve that new 7% hurdle rate?

To answer the first part, we will not be starting Nations this year. It will begin next year depending on how the first and second quarters unfold. However, concerning construction costs decreasing, we do not expect them to drop significantly anytime soon. Usually, it requires a major economic downturn to reduce costs, like what we experienced during the financial crisis, and we are not anticipating that next year unless we face a similar financial crisis. What we will likely see is that as the pipeline slows, there will be fewer developments taking place, which will at least keep costs stable or possibly lower them slightly. We have already observed some commodity prices, such as lumber, returning to pre-pandemic levels after tripling during the pandemic. Therefore, I believe there will be reduced pressure on costs, and I think we will also be able to shorten our development timelines, which will help lower expenses with fewer projects being executed. Ultimately, the key will be where rental levels stand. The good news is that given the current situation, rents are expected to remain strong in 2023, which should support those yields as well.

So looking at the backlog of future starts that you have today, based on some of those assumptions maybe today's rents and sort of current cost, how many projects? And what sort of volume would that represent that meet the 7% hurdle?

Currently, we haven't focused extensively on each development in the pipeline, as we are not at that stage yet. However, we have approximately 3,000 to 3,300 units in our pipeline, and each one will be assessed individually using a new hurdle rate. The positive aspect is that considering today's capital markets and debt prices, it’s advisable to avoid the net market unless absolutely necessary, and entering the equity market is not preferred. Therefore, we are likely to utilize dispositions to finance future development. This brings us to the idea of trading; we will be trading an existing asset with a specific growth rate at a set price for a new development with a different profile. We will evaluate the incremental accretion or dilution from this model. Instead of strictly adhering to a set hurdle rate for development, if we can sell assets and create a limited dilution scenario through selling, funding development, and acquiring other properties, we will pursue that strategy. This will slightly alter the hurdle rate dynamics for new developments next year. Ultimately, we will need to determine whether the market can support funding development and other activities through stock buybacks and disposals, and we will have to see how things unfold next year.

Understood. Thanks for the comment.

Thanks everyone. Good morning. First question, it seems like you've been raising guidance every quarter. Obviously, Sunbelt very strong. That's great. But then the maintaining it looked like it had to do with potentially D.C., L.A. either elevated vacancies from long-term delinquent move-outs or some sort of bad debt issue as the California are running out of reimbursement funds. I noticed that occupancy in October dipped 50 basis points to like 96.1%. And previously, I think Alex mentioned you guys were assumed to average 96.6% in the back half of this year. So, it seems like you took that down by 80 basis points. So, maybe can you just talk about what you're seeing and what's leading to that the drop and all the things I just mentioned.

Alex do you want to take that?

Yes, absolutely. So, the first thing I would touch on is occupancy. So, occupancy is certainly a little bit lower than we had expected, but by the same token, our asking rents or our net market rents are higher than we thought. So, it was really sort of a trade between occupancy and rental rates. The second thing I will point out and you are correct, especially in California, we did have less ERAP proceeds from the second quarter to the third quarter and that was primarily the driver of what you saw in the growth differential on a sequential basis for San Diego and L.A. So, to give you an idea San Diego had about $225,000 less ERAP received in the third quarter as compared to the second quarter. If you normalize both of those that our sequential revenue in San Diego would have been up 2.5%. If you look at L.A. and in particular the Camden in Hollywood, we had about $220,000 less in ERAP in the third quarter as compared to the second quarter. So, obviously, that would have a significant impact. And then in Phoenix we also had higher bad debt and less re-letting income in the third quarter as compared to the second quarter. If you would normalize that, that would have been up 2.7%. So, that really is sort of the drivers of what you saw.

Okay. Just to clarify, are the potentially increased move-outs for long-term delinquents, especially in your California portfolio, not contributing to any of this? It seems that it could all be laid out there.

We have experienced more skips and evictions than usual, with the third quarter showing a higher number than the second quarter. This increase is clearly influenced by people moving out. It's interesting to note that in the second quarter, our collection rate was higher, around 97%, whereas it dropped to about 94% in the third quarter. This decline was mainly observed in California, where many residents believed they would be required to pay their rent. However, California extended the eviction moratorium until January 2023, leading people to take advantage of the situation by not paying their rent. We hope that starting in January, with the end of eviction moratoriums, we won't see behaviors that negatively affect consumers, which could lead to improvements in 2023.

Okay. Thanks. Other one for me is maybe in-migration you talk about that a little bit. It seems like that continues to be very strong. Certainly, commentary we've heard from brokers across the Sunbelt seems like job growth and attraction from employers continues to ramp. But there's been some conversation of potential reversal of that as some companies implement return to office. So I was hoping you could maybe give us some data points or bigger picture thoughts on, in-migration your confidence in that? And then, any anecdotal or early signs that there may be some sort of reversion of the in-migration or to be very strong in one way?

Ron Witten's data on net migration into Camden's markets shows that in 2022, there was a net increase of 153,000 people. For 2023, his figures indicate a net in-migration of 179,000. This suggests that not only is the trend not reversing, but his analysis also points to an increase in net in-migration for 2023. Expectations are that this trend will remain strong in 2024. While the forecast numbers are subject to change, it appears that in-migration will continue to positively impact Camden's overall geography.

And then, I'd add to that, in our particular market, so 21.5% of our move-ins in the third quarter came from non-Sunbelt markets and that's actually up 100 basis points sequentially. And if you compare that to the third quarter of 2020, it's up 400 basis points. So we continue to see sequential increases in migration to our markets.

Okay. Thank you everyone.

Good morning, everyone. I have a bigger picture question. Looking back at history, are there any clues about what might happen next? Some of the changes we're observing are typical seasonal patterns, as Ric mentioned, but with a potential recession looming, could this be the beginning of a significant slowdown that goes beyond normal seasonal variations? In previous instances where multifamily has experienced negative same-store growth, what aspects of the current market conditions do you believe will help us avoid that outcome this time? Is there a possibility that such a scenario could occur, and what confidence do you have that the firm and the industry will steer clear of a severe downturn a year from now?

I believe that in the event of a financial crisis similar to what we experienced in 2008 and 2009, the situation would be quite different. In a typical recession, whether it's a hard or soft landing, the multifamily sector is likely to perform well. This is primarily because we are starting from a position of strength, with occupancy rates high across the country. Additionally, our consumers are in a strong financial position, with average incomes for new tenants around $117,000 to $118,000, which allows them to spend less than 20% of their income on rent. They have substantial savings and are well-employed. Furthermore, while we are seeing some new supply coming into the market, this has been a constant trend throughout our history as a public company, and it hasn’t adversely affected growth significantly. Instead, it may slightly slow down the growth rate. In terms of single-family home move-outs, we saw 15% in the summer, which has now dropped to 13%, and we expect this to reach single digits soon due to rising interest rates and home prices. The current pricing for multifamily housing is the most favorable it has ever been compared to those looking to purchase homes. As a board member of the largest privately held homebuilder in America, I can confirm that our sales have dropped by 50% since June and are not increasing. Given all these factors, multifamily should prove to be a strong investment even during an economic downturn.

So Rich, I would just add that if you start the year, and I believe we’ve provided guidance for 2023 with analysis of embedded rent growth, we’re starting the year with a 4.5% to 5% increase in rental revenue. It would take a normal type of recession, and even if the market is a bit challenging, as long as it doesn’t extend significantly into 2024, I think multifamily properties are going to be a safe investment. As Ric mentioned earlier, our residents are in good shape, and as long as they maintain their jobs, the scenario is different compared to severe financial crises. If they have jobs, they will continue to live in their residences and honor their lease terms, which indicates a potential 5% rental growth. There are many factors that help support where we are today. While losing two million or three million jobs would affect margins, it doesn’t directly impact our portfolio in the near term, say by the end of 2023.

Just to follow up on the rent to income ratio of 20%, how severe has it been historically for your company? How does this 20% figure compare to its worst and highest points in the past?

We have consistently remained in that zone. Our markets are characterized by high growth and low costs, which means the rent levels aren't significantly different across our regions. Over the years, we've likely been around 22%, driven by activity on the West Coast and East Coast. In California, it's possibly higher, at about 24% or 25%. The Sunbelt's success can be attributed to its affordability, which is why many people don't move back. When people relocate to Charlotte and discover they can rent a stylish apartment for half the cost of a New York City apartment, they tend to stay. Therefore, we've not experienced any pressure on our residents' income-to-rent ratios for the past 30 years.

Okay. Great. Thanks very much.

Sure.

Hey, good morning down there.

Hi.

So, two questions, hey. Two questions. Just going back to the analysts who asked about Southern Cal and D.C. And obviously, right now, it's not the time to be doing any large transactions just given the capital markets. But if you look at your portfolio and especially comparing it to your peer in America, it would seem like having D.C. and having Southern Cal are not helping the overall portfolio mix. I mean, especially, D.C. is an outsized weighting. So when the markets return, it would seem like these are markets to down weight and exit or severely sell down and fund elsewhere. Just sort of curious, because the Sunbelt has definitely proven a lot more resilient in its economic diversification and ability to push through supply whereas D.C. seems to be on a decade-plus supply issue in Southern Cal, while better than the other parts of Northern Cal right now still has the California cost of living and taxes et cetera. So just curious your thoughts as you look at your portfolio over the next two to three years?

I believe our California portfolio and significant portions of our D.C. Metro portfolio have yet to undergo the rental rate adjustments that have already occurred in our other markets. I am confident that the economic fundamentals will prevail, and ultimately, rents in California are likely to increase. It's possible that at some point, we will surpass the average of our portfolio in D.C. Metro as well. Regarding your question about whether the long-term figure for D.C. at 17% is appropriate, we have consistently mentioned that we would like to reduce that percentage over time. As for California at 12%, that could be a possibility. However, there are currently two significant factors at play: a substantial disconnect in valuations relative to the expected trading value of the underlying assets, and, more importantly, a long-term opportunity for rental adjustments in these three markets. Notably, California and D.C. Metro together account for nearly 30% of our portfolio. I am more focused on navigating this challenging period of pricing uncertainty and then addressing the underperformance and adjustments that need to take place in these two markets. After that, we can reassess the situation. This doesn’t mean we won’t pursue opportunities around the edges, as Ric mentioned, to support our development initiatives or potentially consider a share buyback program if it makes financial sense.

If you think about what we've done in trading assets in the last like 10 years, we sold $3 billion and developed and/or bought $3 billion and ultimately we have moved the market concentration around pretty substantially in the last 10 years. And so over a long period of time you'll see us do some of that.

Okay. My second question is about supply. Sunbelt has typically managed supply effectively, except for in Houston. Looking ahead at your markets over the next year, are there specific markets or submarkets where you anticipate potential supply issues? Or do you believe that across your entire portfolio, there are no areas with significant supply concentration or risk?

Alex, I believe the answer to that question depends on job growth in these cities. Looking back at 2022, Austin completed nearly 17,000 apartments and has consistently outperformed our overall portfolio. This indicates strong employment growth and migration in key areas. The same situation applies to Charlotte. Moving into 2023, we see an increase in supply in nearly all of Camden's markets. Witten has projected about 130,000 completions this year, rising to around 180,000 next year across Camden's portfolio. While significant, this isn't a concern for us given the job growth and migration trends. According to Witten's data, projected starts in Camden's markets are expected to decrease from 210,000 to under 150,000, with further declines to about 115,000 in 2024. This is encouraging news for the multifamily sector in 2025 and 2026, although it's still a ways off. The reality is that while starts are dropping significantly, completions will stay elevated above historical norms for the next year and a half. However, we believe we will continue to meet demand through job growth and migration in our regions.

Thank you.

Hi. Thank you for taking my question. So I wanted to talk about Hurricane Ian. Are you guys seeing any increase in short-term leases or any impact on rates in the aftermath of the hurricane?

No, we're not.

Fortunately for us we had very little damage. We had no quite residents, nor did we have any seriously impact. So – we got lucky a different path of that storm maybe where it was originally forecast over the top of Tampa Bay, would be having a different conversation with you. But no it's – we had been very little disruption. We had minimal amount of damage. The estimate that we gave was a little less than $1 million, which given the size and magnitude of that storm and the fact that it went right over the top of Orlando as a Category, one storm is we were very pleased with how it turned out. We have not – we've either seen benefit from people moving from the really badly affected areas into our market. Those are not – that wouldn't be a normal place where those people would kind of see short-term shelter while they try to rebuild their homes on the gulf coast of Florida. So overall, it's been not a big issue for us either physically on our assets or…

Got it. And as a follow-up, any preliminary thoughts on expenses next year? How should we think about real estate taxes, insurance, all the other line items that go into that bucket? Thank you so much.

Yes absolutely. So real estate taxes I'll address that one first. Obviously, that's our largest expense line item. And 2023 is going to be an interesting year because if you think about what assessors look at, they typically look at the preceding years sort of NOI growth and obviously 2022 has been a fantastic growth year. But then they're also supposed to look at real values and clearly real values have come down. And so I think we're going to have a lot of protests and probably a lot of lawsuits working through this process in 2023. But I think if I was – obviously, we're still working through our budgets. But at this point in time I would believe that our property tax expenses are probably going to be towards the high end of our typical range. If you think about the rest of the expense categories, Clearly R&M and utilities are going to be driven by the inflationary pressure. So it depends upon what inflation is doing at that point in time. On the salary side, as I talked about in our last earnings call we rolled out this year our work reimagine program, which is a benefit to us on site in 2022 by about $1 million but it should be a benefit to us on site in 2023 about $4 million to $5 million. So obviously, that's a positive that should offset a lot of these expense pressures that are potentially out there. And then on the insurance side, although we did have a large storm in Florida, this has been a pretty light year in terms of sort of global – global events. So my hope is that insurance starts to normalize.

Thank you for the detail.

Absolutely.

Good morning, guys. What's the current expected stabilized yield on the $758 million development pipeline? And what's the current market that you're seeing for land? Is pricing come off there? And are you seeing transactions, or is that on hold just like actual property transactions?

Yes. The yield is between 5.5% and 6.5%, so we estimate it to be around 6%. In terms of land, we have noticed some landowners we were negotiating with are lowering their prices. However, it is quite challenging to determine the appropriate price at this moment. There is definitely some movement among land sellers regarding future pricing. It's difficult to underwrite right now. Even with land prices decreasing, we haven't finalized any transactions. What we are doing is extending the timeframe on our existing land positions that are under contract with hard earnest money. Sellers are agreeing to these extensions, understanding that if a decision were to be made today, we would likely ask for a reduction in price or choose not to proceed. Generally, land tends to be more resistant to price changes at the beginning of a repricing scenario. However, as contracts begin to fall through—especially since many of my builder colleagues have dropped their contracts without significant investments—land sellers nationwide are experiencing similar issues. It will be interesting to see what unfolds in the first quarter.

Okay. And then the second question given the strong rent growth what's the earn-in today heading into 2023?

Yes absolutely. So the earn-in for us right now is about 5%.

All right. thanks guys. Appreciate the time, have a good weekend.

Good day.

I have a question on the supply. If we look out to midyear last year, we were tracking for about 165,000 forecast for 2022 supply and now it's looking at about 130,000. Do you think the same thing will play out next year with 180,000 forecast now?

Yes, the difference is mainly due to delays in the delivery timelines for completions, which we have observed across all our construction projects. I believe others are facing similar or even greater challenges because many lack the resources, experience, and relationships we have to bring these projects to completion, and it's still an ongoing struggle. Both Witten and RealPage have attempted to adjust for these delays, as we've consistently projected that completions would reach a certain level for three years, yet they have only achieved about 80% of that figure. I suspect they have not fully incorporated this in their 2023 projections, and it wouldn't surprise me to see some of the projected 180,000 shift into 2024. I think the most effective approach to assessing the completions figure is to consider it over a two to three-year duration, as all initiated projects will eventually finish. The timing of their completion—whether in 2023 or the first quarter of 2024—is minor. It might be more beneficial for most people to analyze three years’ worth of data for better forecasting, rather than focusing on any single year. However, I believe they still haven't accounted for everything, and it’s probable that the final figures will be below 180,000.

I’d like to discuss Houston. Initially, the plan was to decrease exposure, but you acquired a joint venture that has significant exposure and initiated two projects in Houston. This suggests a more optimistic outlook. Looking back a few years, you mentioned that Houston is more than just an energy city, incorporating aspects of the chemical and medical industries. Currently, we see a significant energy price difference between the US and other countries. I'm curious if your industry context indicates plans for larger expansions in the region, assuming this price difference continues.

Sure. We had a significant opportunity with the acquisition of the fund with Texas Teachers, allowing us to acquire properties with no execution risk. We recognized the need to act with the fund over the next couple of years due to its limited lifespan. Although this approach somewhat contradicted our strategy to reduce our exposure in Houston over time, it made sense for us. Additionally, we initiated two development projects focused on single-family rentals, which will help us understand the market better, as this aligns well with our multifamily business. Looking at Houston's current situation, it hasn't experienced the same rental reset as Dallas, Austin, or other major markets. This is largely due to the energy sector being hit hard in 2020, leading to fewer investments and a more cautious approach to capital allocation. Consequently, job growth in Houston has lagged compared to Austin and Dallas, which saw a quicker recovery to pre-pandemic employment levels. Although we have reached our pre-pandemic employment this summer, our recovery isn't as strong as in other markets. However, I believe Houston still has a lot of potential, particularly with energy cycles typically lasting five to ten years. Many experts think we are currently in a super cycle, driven by reduced domestic drilling and geopolitical factors like the conflict between Russia and Ukraine. The demand for energy remains strong, but the transition to renewables is slower than anticipated. Houston is well-positioned for the future, especially with the energy transition on the horizon. It's likely to become a hub for this transition, with substantial investments expected from initiatives like the Inflation Reduction Act, which could bring around $100 billion to the area for projects like carbon capture. Companies like Exxon are already taking steps in this direction by leasing depleted Gulf wells for carbon storage. Given Houston's status as a leading energy exporter, coupled with its industrial production capabilities, it is set to play a significant role in decarbonizing the industrial sector. With many headquarters stationed here, I believe Houston has a promising long-term outlook and will remain resilient during economic downturns, proving to have more stability than other markets. Despite these positive projections for Houston in the near term, we still aim to lower our concentration in heavily invested markets like DC, Houston, and California to achieve geographical diversification in our portfolio. We have been actively trading assets, moving over $3 billion recently, and plan to continue this strategy while ensuring we do it in a non-dilutive manner. Ultimately, I don't foresee a significant gap in cap rates between Houston and other markets like DC or California when prices reset. If we can sell assets to fund development or acquire new growth opportunities in markets where we are currently underrepresented, we will pursue that direction.

Great. Thanks for that answer and happy weekend, everyone.

Sure. You too.

You too.

Hey, thanks for keeping the call going. Alex, you mentioned bad debt in Phoenix is ticking up. What is bad debt as a percent of revenues in that market? And are there any other markets seeing upward pressure right now outside of just timing impacts in regulated markets?

Yeah, absolutely. So if you look at collections, so our collections right now for the quarter were right around 98.6% and that compares to the last quarter when it was right around 99.2%. So if you look at Phoenix, our collections there we're 99.2%. But to a point that Ric made earlier, if you look at California, our collections in the second quarter in California were 97.3%. That dropped off to 94.2% in the third quarter of 2022. That's the real collection story.

Okay. And then Keith, are your local team, seeing a slowdown in traffic in any markets outside of the normal seasonality right now?

No. I mean traffic is still strong due to the technology we've implemented, particularly the funnel. The most common feedback I receive is that we have more traffic than we can effectively manage, especially considering the very low vacancies across our entire portfolio. However, we're generating plenty of traffic. There are still many people interested in living in Camden apartments across all 15 cities. Even though our occupancy rate did fall from the second quarter, we are still above 96% in the fourth quarter, which are impressively high numbers from a historical perspective for Camden.

Okay. Just one follow-up there. Again, I don't want to be pedantic, but I thought it would assume that occupancy would slip into the high 95% over the balance of this year, but you're still seeing occupancy above 96% today?

So we're going to go ahead, Alex.

Yes. So we will average 95.8% for the full year. That is where our average is. And obviously that assumes that occupancy will follow a seasonal pattern as we get towards the end of the year.

All right. Thanks. Happy weekend, guys.

You too.

You too.

Hey. Thanks for taking my question. I just wanted to quickly ask if you guys disclosed the loss to lease.

Yes. So loss to lease to us is about 5.5%.

Okay. And is there any chance you see that loss lease go negative during this year?

No.

Thank you. Regarding expenses, can you discuss any tax efficiencies that could help alleviate labor pressures?

I'm sorry what's the question?

Just any tax efficiencies on mitigating like labor pressures for next year and tech initiatives?

Our tech initiatives are essential for the success of our reimagine program, particularly the implementations of chirping and funnel. As a result of these efforts, we anticipate realizing a benefit of approximately $4 million to $5 million in salary expenses in 2023.

Okay. Thank you.

Hi. Thank you. Just to start, I wanted to clarify the occupancy comment. I thought in the prepared remarks you said 95.8% for the rest of the year meaning the fourth quarter for guidance? And I think just a minute ago you said 95.8% in a different way. So can you just clarify that first?

95.8% in the fourth quarter.

Okay. That's what I thought. And then just generally, as we think about that number and that 80 basis points deceleration from the third quarter recognizing their healthy levels, that's a pretty stark change relative to what you've seen in the past seasonally. And at the same time, you're talking to still good traffic income growth and strong income metrics. You talked about in-migration being favorable. You've got for-sale affordability is going against the consumer. So the narrative is they're staying in apartments longer. I guess all of that collectively would suggest that you wouldn't have to make the trade-off of occupancy and rate right now. So what are some of the offsets you think that are filtering through that's causing that sequential deceleration?

Well, I think you've got a couple of factors. Number one, we are pushing rents. And as we follow normal seasonal patterns, if you push rent, you should see occupancy come down. Number two, as we've talked about, our turnover has picked up a little bit and that is driven by people, finally that have been long-term non-payers starting to move out. And as we have the ability to enforce contracts, we should expect to see that number tick up a little bit. That by the way is a good thing because those are folks who are not paying, and if we can move them out although our physical occupancy will come down it doesn't actually have any net impacts on our financial occupancy. So those are a couple of factors that are driving that.

Okay. And then when you think about that, I guess, now that that's come down a bit the 95.8% a valid point between physical and economic, but do you start to think about pricing power getting back to pre-pandemic levels here then pretty soon since that's a bit below occupancy where you were in the fourth quarter 2019. So is that the transition that we're seeing as you move into the first part of next year?

We continue to have numerous positive factors in our favor regarding migratory trends, and we've discussed job creation in our markets. What we need to observe is the long-term job creation in 2023. However, I believe we will maintain a strong position to increase rents. As we continue to raise rents, we should also be able to improve occupancy slightly. That said, our outlook depends on the economic conditions in 2023.

We could maintain 96% occupancy all the time if we chose to. It's important to remember that we have a dynamic revenue pricing system, and our decision is focused on increasing rental rates. As Alex mentioned, our average rental rate is over eight, and we expect our average revenue growth in leases to be similar through the end of the year, which is a positive figure. Historically, looking back to pre-pandemic levels, we often saw negative to zero revenue growth in the last two months of the year from new leases and renewals. This time, we're projecting to be 600 to 800 basis points above those pre-pandemic levels as we enter 2023. We believe this strategy is effective. Moreover, as Alex highlighted, we want to encourage tenants who are currently paying to move out, and we're helping them understand this by discussing potential incentives for them to do so. While a slight increase of 80 basis points may seem problematic, I view it as a means to keep upward pressure on rents and to ensure we start 2023 with a strong position regarding both earnings and loss to lease.

All right. I appreciate the color. Thank you, guys.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Ric Campo for any closing remarks. Please go ahead.

Great. Well we appreciate your time today on the call and we will see some of you at Nareit in San Francisco. So we'll have a lot of new stuff to talk about then probably since it will be about a week-and-a-half. So take care and have a great weekend and go Astros. Take care. Bye.

Bye.