Camden Property Trust (CPT) — Q1 2023 Earnings Call Transcript

Good morning, and welcome to Camden Property Trust's First Quarter 2023 Earnings Conference Call. I'm 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 Investors section of our website at camdenliving.com, and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks, and those slides will also be available on our website later today or by e-mail upon request. Please note, this event is being recorded. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions, and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete first quarter 2023 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 would like to respect everyone’s time and complete our call within one hour. So please limit your initial question to one, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we would be happy to respond to additional questions by phone or e-mail after the call concludes. At this time, I'll turn the call over to Ric Campo.

Good morning. Culture matters. This year, we are celebrating Camden's 30th anniversary as a public company. Last week, we wrapped up a 12-city celebration tour that included all 1,600 Camden team members. The tour is an annual Camden event, but we usually split up our executive team to cover the events. This year, Alex and Laurie Baker joined Keith and me at all 12 stops to celebrate our team's 2022 accomplishments and Camden's 30th birthday. Each celebration featured our teams in vintage 1990s attire and demonstrating one of Camden's nine core values: to have fun. I'm going to share an inside look at Camden's unique culture set to a 1990s classic, All Star. While we were on tour, we received news that for the 16th straight year, Camden was included on Fortune's list of the 100 Best Companies to Work For. We claim this honor on behalf of our Camden team and the entire REIT world. It is a testament to just how much progress we have made over the last three decades, and that culture really does matter. Operating fundamentals continue to be good. We are on track to meet or exceed our 2023 plan. Multifamily transactions have slowed dramatically. Activity for the first quarter was down 74% from last year as buyers and sellers try to recalibrate the increase in their cost of capital and what the future market dynamics may look like. New starts continue to be elevated with only legacy projects with committed capital starting. We expect the lag in Federal Reserve policy will start to have its desired effect with a significant reduction in new starts beginning in the second quarter and throughout the next year or two. I’m betting on a 60% reduction in starts once monetary policy and the banking crisis make their way through the system. I want to thank and congratulate Team Camden for their hard work and staying true to our commitment to improving the lives of our team members, our customers and our stakeholders, one experience at a time. Next up is Keith Oden.

Thanks, Ric. Now some details on our first quarter 2023 operating results and April trends. Same-property revenue growth for the quarter was ahead of our expectations at 8%, and we've raised the midpoint of our 2023 revenue guidance as a result. Once again, we saw the highest growth rates in our three Florida markets: Tampa, Orlando and Southeast Florida, with Nashville also posting strong results. First quarter signed leases grew by a blended rate of 4% with new leases up 1.8% and renewals up 6.7%. Our preliminary April results are trending at a similar level for blended rate growth with slightly higher new lease rate growth and moderating renewal rate growth. Renewal offers from May and June were sent out in the mid-6% range. While these growth rates were down from the record levels seen in the first four months of 2022, our 2023 year-to-date performance is actually stronger than what we would historically expect to achieve during the first four months of the year. Occupancy averaged 95.3% during the first quarter of 2023 and is trending slightly better to date in April. Net turnover for the first quarter of 2023 was 36%, in line with the first quarter of 2022. And move-outs to purchase homes dropped to 10.1% for the first quarter, one of the lowest levels on record in our 30-year history. I'll now turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. Our new development lease-ups remain stronger than usual as we average approximately 45 leases per month at Camden Atlantic, a 269-unit, $101 million community in Plantation, Florida, which stabilized during the quarter; approximately 40 leases per month at Camden NoDa, a 387-unit, $108 million community in Charlotte, which began leasing during the quarter and is now over 35% leased; and approximately 30 units per month at Camden Tempe II, a 397-unit, $115 million community in Phoenix, which continued leasing during the quarter and is now over 70% leased. Turning to our financial results. Over the years, Camden has fully supported the NAREIT definition for funds from operations or FFO, and we will continue to report that metric going forward. However, in an effort to improve comparability and alignment with the current reporting practices of our peers in the multifamily REIT sector, we will now also report core FFO to adjust for items not considered to be part of our core business operations. We presented both metrics in our earnings release last night for our actual performance during the first quarter and have included both metrics in our guidance for the second quarter 2023 and full year 2023. Any property level adjustments we make to drive core FFO, which primarily are unusual or large casualty events, severance charges in 2022 related to changes to our on-site staffing model and the amortization, if any, of below or above market leases associated with acquisitions will also be adjusted from our same-store results. These property level adjustments will be located in the other section of our components of NOI in our supplement. For the first quarter, we reported both NAREIT FFO and core FFO of $1.66 per share, $0.01 ahead of the midpoint of our prior quarterly guidance, resulting primarily from better results from our same-store communities. These results represent a 12% per share core increase from the first quarter of 2022. Our first quarter outperformance was primarily driven by $0.02 per share and lower-than-anticipated levels of bad debt as we experienced a higher-than-anticipated level of move-outs by non-paying residents during the quarter. All the municipalities in which we operate have now lifted their restrictions on our ability to enforce rental contracts. The resulting move-outs of non-paying residents happened earlier than we anticipated, with twice the amount of move-outs in the first quarter of this year as compared to the first quarter of last year. Although these early move-outs of delinquent residents do put some pressure on physical occupancy, we reserve for effectively 100% of delinquent balances. Therefore, there is no net negative impact when non-paying residents leave. Rather, we receive the benefit of having our real estate back, the opportunity to commence a lease with a resident who abides by their rental contract, and lower bad debt from having a new resident who actually pays. Our outperformance was also driven by $0.005 in slightly higher-than-anticipated net market rents and $0.01 in higher other property income, primarily driven by elevated levels of utility rebilling, which was entirely offset by higher utility expenses. Our $0.035 per share of positive same-store revenue results was partially offset by $0.025 of higher same-store property expenses, primarily driven by much higher-than-anticipated levels of property insurance claims resulting from an unusual spike in smaller claims, generally under $25,000 per occurrence, which did not count towards our aggregate $3 million exposure. To illustrate the spike, in the first quarter of this year, we experienced the same number of claims that we experienced cumulatively in the first quarter of the prior three years. At this time, we believe the volume of claims is an anomaly, but we have made a resulting partial increase to our insurance forecast for the rest of the year, which I'll discuss later. Our original 2023 same-store guidance called for revenue growth of 5.1%, expense growth of 5.5% and NOI growth of 5%. Included within our 2022 results which drove this original guidance was approximately $900,000 of first quarter 2022 revenue associated with the amortization of below-market leases from previously acquired communities and approximately $900,000 of first quarter 2022 severance costs associated with changes to our on-site staffing model. These offsetting amounts are now considered non-core and have been removed from our 2022 same-store for 2023 comparison purposes. Additionally, our full year 2022 results included a net $1 million of noncore casualty losses primarily in the back half of 2022, which will also be removed from our 2022 same-store results for 2023 comparison purposes. The effect solely from these adjustments would be to increase our original 2023 same-store revenue guidance from 5.1% to 5.2% and increase our original same-store expense guidance from 5.5% to 5.9%. Last night, we further increased the midpoint of our full year revenue growth to 5.65%. This additional increase is based upon our first quarter revenue outperformance, which primarily resulted from the previously mentioned acceleration in move-outs of non-paying residents and our slightly higher net market rents and other property income. Additionally, we further increased the midpoint of our same-store expense growth to 6.85%, almost entirely driven by actual and anticipated higher insurance costs. Insurance represents approximately 6% of our total operating expenses, and after taking into account the adjustments for 2022 noncore casualty events, was originally anticipated to increase by 18% in 2023. After considering the higher first quarter claims, we have increased our anticipated monthly losses in our forecast. We have also updated our May 1 anticipated premium increase from 15% to 20% as insurance providers continue to face large global losses. We now anticipate our total insurance expense will increase by approximately 35% in 2023. These insurance increases for the remainder of the year are partially offset by anticipated slightly lower salaries and property taxes. After taking into effect the increases in both revenue and expenses and the adjustments for noncore property level events in 2022, the midpoint of our 2023 same-store NOI guidance is 5%, and the midpoint of our full year 2023 core FFO is $6.86. At the midpoint of our guidance range, we are still assuming $250 million of acquisitions, offset by $250 million of dispositions with no net accretion or dilution, and $250 million to $600 million of development starts spread throughout the year with approximately $290 million of annual development spend. We also provided earnings guidance for the second quarter of 2023. We expect core FFO per share for the second quarter to be within the range of $1.66 to $1.70, representing a $0.02 per share sequential increase at the midpoint, primarily resulting from an approximate $0.03 sequential increase in same-store NOI resulting from higher expected revenues during our peak leasing periods, partially offset by the seasonality of certain repair and maintenance expenses and the timing of our annual merit increases and a $0.005 sequential increase related to additional NOI from our development and non-same-store communities. This $0.035 cumulative increase in core FFO is partially offset by a $0.005 decrease from higher second quarter G&A resulting from the timing of various public company fees and a $0.01 decrease from higher floating rate interest expense. Our balance sheet remains strong with net debt to EBITDA for the first quarter at 4.3x. And at quarter end, we had $268 million left to spend over the next three years under our existing development pipeline. At this time, we will open the call up to questions.

Great. I guess I was hoping to focus on rent growth in April versus the first quarter. It looks like it moderated down to 3.9% from 4.5% on a blended basis. Can you just talk about if that seems to be a trend heading into spring leasing, if there's anything else to read into there? And then maybe across the different markets, what drove the decline?

Yes. We noticed a slight decrease, but overall, the transition from March to April resembles what we saw in years before COVID. We anticipate a return of seasonality in our leasing activity, which is certainly different from the past two years' transitions into the spring leasing season. Therefore, I expect a normal seasonal pattern. We are on track to exceed our initial plan. By the end of the first quarter, we were ahead of budgeted revenues in every market except one out of the 15. From our viewpoint, things appear to be more normal and slightly better than we initially expected as we move into the second quarter.

And Jamie, I think I'd focus more on the signed leases rather than the effective because the signed is more an indication of the direction we're going. Signed leases went from 4% in the first quarter to 4.2% in April. So it actually increased.

Maybe just one follow-up on your comment there. You said one market is underperforming your budget. What market is that and on the flipside, what markets are performing the best?

Yes. So Atlanta was actually below on revenues but below our original budget in the first quarter, primarily due to skips and evictions being elevated. We also had some challenges with an elevated level of fraud, which pops up from time to time in several of our markets. And it was just Atlanta's turn for that to happen. Across the board, other than Atlanta, every single market outperformed our original plan. We had continued strength in the Tampa, Orlando, South Florida markets. Nashville had a great quarter relative to plan. So I think overall, at the footprint, it performed very well in the first quarter, and I think we're off to a really good start of the second quarter as well.

You mentioned in your opening remarks a possible 60% drop in new development given the macro. But I'd ask, what are you seeing in input cost for development? And given it takes a couple of years to complete, does the second half of '23 become interesting to Camden given the balance sheet from a starts perspective and the land banks so that you really have new product as deliveries decline exiting the downturn?

Absolutely. When you think about what's going on, the only deals that are getting done are our legacy deals that either have debt and equity already sort of committed to. Any new development or sort of second- and third-tier developers are not getting their deals done. So there will be a significant decline in starts beginning in the second quarter and probably all the way through into the first part, maybe second half of 2024, which definitely sets up a pretty interesting environment in '25 and '26 because, as you point out, development takes a long time to bring to the market. Given our strength in our balance sheet and our pipeline, we will look at delivering new projects when others can't and delivering into what could be a really good market in 2025, 2026. The good news is that input costs are flat. We haven't started to see major decreases in cost. Lumber is at a very low level today. And that's good news. So rather than in our pro formas, we would usually put a 1% per month inflation, let's say, if we were doing it last year at this time, and now we're at least flat. Potentially, once the subcontractors start working through the inventory they have today and they start looking out on the horizon, they're going to have to squeeze their margins to get new business because there's going to be more competition for fewer projects getting built. Therefore, there will be a more competitive set with the subcontractors, which should constrain their margins and perhaps have costs decrease from here. The big input that hasn't gone down yet are salaries. At the end of the day, you just haven't had a lot of pressure on construction workers or folks in that side of the business. But that could change depending on how fast the starts come down.

So Ric and Keith, I have to ask you, you guys have been a standout in NAREIT discipline on FFO and pretty upfront in taking all of your lumps positive or negative over the years. I'm curious why you chose to move when core FFO is not an official metric and there's no standardized definition. So everyone sort of picks and chooses. We just did a study of it. Most of the items that people back out are actually recurring business: legal expense, storms, debt prepay. I'm just curious why you chose to go down this route.

Yes. We chose this because our competitors are doing it. We’ve been sort of coached by other investors and shareholders that they were getting confused about numbers. I will give you an example of that. When we produced our initial guidance for 2023, probably half or two-thirds of analysts missed the mark-to-market on rents associated with our acquisition of the Texas Teachers portfolio. We wanted to codify it in a way where people could see it in specific financials without having to look through footnotes. We are trying to make it more simple for people to understand the variations in those numbers. We still have NAREIT FFO definition, and then we just give folks more information about adjustments to NAREIT so it makes it easier for people to model future earnings.

Yes. But I mean for 30 years, it worked. It’s our job as analysts to go through the financial statements, right? It doesn't create comparability only because you guys may have certain items that others do not. It arguably makes it more confusing, not easier, but appreciate the feedback.

Based on the conversations that we have had with people after they missed a really big item in 2022 relative to 2023, now all you have to do is look at the reconciliation between NAREIT and core, and you can see all the items there. You don’t have to dig through financial statements. I know analysts are pretty overworked when it comes to finding information. We just want to make it easier for those who don't have the time to read every footnote.

And the good news, Alex, is that for those who want to use the original NAREIT definition, it's there for anyone. So I think more information is generally better. So thanks.

I wanted to go back to the commentary on getting some of the long-term delinquents out of the portfolio. I think we assume you're primarily referring to SoCal. Can you remind us what's in the full year '23 same-store revenue guide from a net bad debt impact perspective? And what's your updated expectation?

Yes, absolutely. So originally, we anticipated about 140 basis points for the full year. Today, we've updated that to about 120 basis points.

Let me just give you a little color too on skips and evictions. Skips and evictions are basically double in the first quarter what they normally are. Approximately 80% of those skips and evictions were individuals who owed us significant amounts of money. The good news is, while our occupancy is not as high as it was and our skips and evictions have doubled, we’re getting people out who aren’t paying rent. From an economic occupancy perspective, it's beneficial to have this happen. We are hoping it accelerates in markets like Southern California because as soon as we can get the real estate back to paying customers, that's better for us.

Just as a reminder, for 27-plus years, our bad debt ran roughly 50 basis points. During COVID, we went up to about 150 basis points. We’ve clearly peaked and are coming back down that curve. I hope we do get back to 50 basis points of bad debt once we cycle through the bad actors.

That's helpful. A follow-up if I could. I guess, what's your plan to go after the 80% who skipped, and with the turnover picking up from these departures, are CapEx turnover and some of the OpEx costs going up?

The offset on the turnover is that we've had very low move-outs to purchase homes. That's been the benefit on that side. We are not really seeing a significant uptick on CapEx or repair and maintenance costs associated with turns, and we will do what we can legally to pursue the collection of what is owed to us by those who moved out with balances.

It sounds like a piece of the same-store revenue increase was due to higher rate growth in Q1 than expected. Could you just talk about how much higher it came in than what you were thinking, which markets drove the improvement, and whether you still expect overall market rent growth to be 3% this year?

Yes. We think overall market rent is going to be just slightly above 3%. We observed slightly higher market rent across all of our markets, which is a good trend. In one quarter, this makes us a bit optimistic, but we'll see how it continues as we go through our peak leasing periods.

I was just hoping to touch on Houston. It's been a bit of an underperforming market. I wondered if you thought that was more due to muted demand or if you're seeing good demand, but supply is just making conditions challenging, and what are your expectations for Houston going forward?

Houston is going to be, I think, a really good long-term market. It definitely has supply challenges. What's interesting is that Houston was slower to add back jobs, primarily because of energy. The energy companies have not added back all the jobs that were cut during COVID and have become much more efficient. Looking at the current census data, Houston had the fifth or second largest growth in population, with roughly 125,000 people moving to the city during that one-year period. Other top cities, like Dallas, gained even more residents. While we haven’t seen the same intense job growth in Houston compared to Dallas or Austin, it is showing steady growth. With the supply side expected to shut down significantly over the next year or two, Houston should be positioned well for growth.

So you would say it’s more of a supply impact?

Yes, I think it's more of a supply impact than it is. Because without the robust job growth seen in Dallas and Austin due to energy, it has been much more gradual. It's a little less job availability combined with supply that has toned down market intensity.

To provide context, in Houston during Q1, our average monthly rental rate grew by 6.4%. In terms of the overall portfolio, the performance grew much higher than that. If you were to compare trends today in Houston against the last 30 years, you would conclude it was a solid quarter for growth. We experienced a slight slip in occupancy that we anticipate will correct in Q2 due to one-off challenges around skips, evictions, and some fraud that’s becoming more prevalent compared to pre-COVID days. Overall, I believe Houston will perform well and is ahead of our initial expectations.

Robin Haneland here filling in for John. One of your peers acquired a lease-up in Atlanta at a 6.6% cap rate, 5.7 tax adjusted. Do you think you'll see more deals in lease transactions at these levels?

I do. As the market continues to evolve, cap rates have shifted due to low acquisition volume. There will come a time when merchant builders need to sell to pay off debts. I believe a fair amount of this will occur. If we maintain high rates, especially short-term rates, there doesn't appear to be any light at the end of that tunnel in light of the Fed’s position. This pressure will likely create more transactions as they approach a point where they will have to adjust pricing more toward the buyer's market, opening up opportunities.

Got it. How opportunistic would you like to be there?

We are positioned well with a strong balance sheet. The real question is when we get to that tipping point where cap rates become attractive. Purchasing properties below replacement cost at cash-on-cash returns in the mid-5s to 6% presents a very appealing opportunity, depending on the market. We anticipate some market softness moving forward given supply pressures, which could allow buyers, including Camden, to capitalize on such circumstances.

Could you talk about how concessions are tracking across your market, and where are the markets where the use of concessions has inched up a bit since the fourth quarter?

We don't use concessions except in the case of new lease-ups due to consumer expectations. Fortunately, lease-up rates have performed phenomenally. At our Atlantic product in South Florida, we averaged almost 45 leases per month during the lease-up, which is impressive. We are seeing great success in our other lease-ups as well. For our stabilized assets, we utilize a net pricing model and don't rely on concessions. Competitors in certain submarkets may utilize concessions, being reactive to softness in the market. However, that’s not part of our pricing discipline.

Great. In the past, you've talked about new supply in some markets being more pronounced than others. Perhaps you could provide a refresher on where you’re seeing more supply pressure, and what you’re observing from that standpoint?

Sure. Without running through all 15 markets, just to give a macro look, Camden's platform had approximately 127,000 apartment completions in 2022. We expect that to jump to about 188,000 in 2023, around a 50% increase, and this will scale to about 228,000 in 2024, the projected peak for this cycle. We anticipate continued supply pressure in our portfolio over the next two years. However, completions and new supply can be very location-dependent. For example, while a certain number of apartments are being delivered in Houston or Austin, they may not compete directly with Camden's existing portfolio. If we assess actual competition across our 15 markets, we find that only about 40% of upcoming new supply is location-competitive with Camden. And while on a price-point basis, considering our average asset age of 15 years compared to new builds, that further limits competitive challenges as we expect only 20% of new products to pose direct competition to Camden's portfolio. Based on our Q1 performance and projections for the remainder of the year, it's evident that increased completions may not significantly affect us since competitive pressures are less than anticipated.

Can you provide more color on the lower property tax expectations? Is this a result of more successful appeals? And how many more appeals do you expect to finalize in the coming quarters?

Yes, absolutely. Initially, we thought property taxes would be up 6.5%. Now we expect them to increase only 6.2%. This decrease is primarily due to preliminary valuations coming in lower than anticipated. We plan to contest almost all these valuations and will work through this as we progress through the year. However, a lot of the values we will contest this year won’t provide benefits until 2024. For estimated tax refunds in 2023, we’re anticipating around $4.8 million, which is a $600,000 year-over-year increase. The primary item we will need to monitor is rates, which we expect to receive more information about starting in August and running through October.

I'm curious, turnover increased in the first quarter, but we’ve noted that move-outs to purchase homes have decreased significantly. Can you provide insights on where residents are going? Are people trading down in price due to outsized rent increases? Are they moving to single-family rentals or potentially moving in with families?

You are correct, move-outs to purchase homes have decreased significantly, but we have doubled our early move-outs due to non-paying residents. So that's the trade-off. When we look at move-out reasons, the primary one remains relocation related, typically associated with job changes. This involves moving within the market or outside of it.

Yes, skips and evictions are the primary factor. We had almost double the skips and evictions in Q1 compared to the previous years. The 10% churn is indeed an all-time low for move-outs to purchase homes in our portfolio. I suspect this may trend back up in Q2 due to seasonality, but the rise in turnover year-over-year is largely attributable to increased skips and evictions.

Just to clarify, we have indicated that we are sending out renewal notices for May and June in the mid-6% range. In contrast, renewals signed in April were closer to the high 5% range. This difference reflects the take rate versus the asking rate, where we maintain flexibility in our renewal process to keep occupancy targets.

Just circling back on the insurance, a two-parter. You mentioned a 20% increase in your expectation for premiums, but also mentioned a 35% increase overall. I'm guessing the latter includes your claims in addition to the premiums. Do you anticipate that potentially competitors in Florida or Texas would be unable to secure insurance, forcing those properties to close, which could create additional demand for your properties? What is your perspective on properties unable to fill their insurance needs this year, particularly given the situation in Florida and Texas?

Yes, you are correct. The 35% overall increase encompasses our anticipated premium and a much higher amount of claims.

Regarding properties unable to secure insurance becoming unaffordable, I don't believe that will occur. Instead, I foresee this creating an opportunity for organizations like ours that insure a large portfolio. Our insurance costs will generally be lower than those for a standalone insurance policy in Florida. I don't believe properties will shut down, but this scenario may prompt more owners to sell, affecting pricing due to increased insurance costs.

We have heard of new developments in Florida not being able to start due to surging insurance costs. This is certainly a net positive for us.

I wanted to follow up on your comment about expecting a 60% reduction in starts. It seems a bold prediction. You mentioned expecting to see this change in the second quarter, which we’re currently in. Could you elaborate on why we haven't seen a larger drop-off so far and what the next 3 to 6 months might look like in relation to this expected decline?

First of all, the starts that are happening today are legacy starts or were legacy starts in the first quarter, meaning that the deals were set up, fully funded with equity. Developers are crafty enough to keep their legacy deals in place, which is why you haven't seen a dramatic drop-off in starts. However, this trend is starting to happen, particularly after the banking crisis affected lending by pulling loans. For instance, a developer in Florida told me a funded deal with 35% equity and 6% debt had its financing pulled following the Silicon Valley Bank events. The banks are not funding deals they initially planned to. So, both the heightened interest rates and rental rate moderation, coupled with construction costs and land prices failing to decrease enough, have created a tough environment. You'll likely begin seeing this shift in starts in the second quarter. We suspect that the activity will mirror March levels, around 49,000 units.

Yes. Why now versus five or six months ago, considering we've been in a volatile capital markets environment for some time?

Yes, the banking crisis is tightening lending significantly. Developers will always build if they can access capital. However, this environment has caused both equity and debt markets to rethink their projections. There's a math problem for developers right now: the cost of capital has increased by over 30%. They need to forecast significant rent increases to counterbalance the rising debt and capital costs while assuming construction expenses remain static. Until there is a significant shift that drives down starts, we maintain our projections.

Along those lines, you commented earlier about possibly ramping up starts to meet demand in a favorable market in '25 and '26. What magnitude could you consider, and when would you need to make that decision to increase your development pipeline? Also, what criteria do you see as essential in determining the right markets for new development?

We have a decent pipeline, generally between $300 million and $500 million in annual starts. The question hinges on how we perceive the market and construction costs. Our portfolio includes favorable sites in Nashville, the Carolinas, and Florida, all boasting positive dynamics like migration, population growth, and job growth. The challenge in Nashville is its construction volume, as it's one of the markets currently facing the highest under construction rates. Ultimately, if we believe the numbers work, we'll initiate projects. If not, we will wait it out.

We have excellent capacity under our balance sheet. If you think about acquisitions, we could essentially deploy about $1 billion into our balance sheet while maintaining rates. In terms of developments, they don’t contribute EBITDA upfront, but rating agencies recognize that they will over time. Should we wish, we can increase starts alongside elevated leverage temporarily.

Great. We appreciate you being on the call today and look forward to seeing you either in the next month or at NAREIT in June. Thank you very much. Take care.