Camden Property Trust (CPT) — Q3 2023 Earnings Call Transcript

Good morning and welcome to Camden Property Trust third 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 email upon request. All participants will be in listen-only mode during the presentation with an opportunity to ask questions afterward. 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 third 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, as there are other multifamily companies hosting calls later today. 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’d be happy to respond to additional questions by phone or email after the call concludes. At this time, I’ll turn the call over to Ric Campo.

Thanks, Kim, and good morning. Our on-hold music was in honor of and memory of Jimmy Buffett. One of Jimmy’s recurring themes in his songs was how to navigate through life’s storms, including actual hurricanes. Ironically, this is the first year in memory that we did not have any hurricanes in any of our markets. On the other hand, the hurricane in the capital markets is blowing hard. As a result of the turmoil, we’re encouraging our teams to heed Jimmy’s advice from one of his songs that he wrote for New Orleans after the devastation of Hurricane Katrina. This is from the song: 'If a hurricane doesn’t leave you dead, it’ll make you strong. Don’t try to explain it, just nod your head, breathe in, breathe out, move on,' which is exactly what we plan to do. Our business is strong. We’ve been through many cycles. This cycle has been different in that we’re coming off the best year we ever had, driven by the COVID reopening consumer highs. 2023 has been a year of getting back to a more normal multifamily business. I say more normal because we’re still not back to normal customer behavior where they actually pay their rent and if they don’t, they move out. We have high cancellations due to identity theft and fraud, elevated skips and lease breaks. Seasonality is back, but it started earlier this year and was stronger than pre-COVID levels. We had planned for a more normal fourth quarter, but that didn’t happen. As a result, we have revised our fourth quarter full-year guidance to reflect weaker new lease growth, lower occupancy, and higher bad debts than we expected even in the summer. In a normal growth year, however, we would cheer for revenue growth of 5%. Fundamentals for our business are good overall, taking the challenges and opportunities together. On the demand side, job growth remains robust, U.S. consumer demographics continue to be supportive for apartment demand. The share of 25 to 34-year-olds is stable, the share of 34 to 48-year-olds is growing and they have a high propensity to rent given the record high cost of buying a home. The buy-to-rent premium today is at 30-year highs, with homeownership out of reach for many people. This should increase the apartment business share of the housing market at least through 2026. The U.S. share of households living alone continues to grow to nearly 30% over the next few years. The long-term trend of in-migration to our markets continues. On the supply side, starts have peaked, and the capital markets hurricane has begun to reduce new starts. Annualized August starts fell 42%. Witten Advisors projects starts will fall to 250,000 units in 2024 and just above 200,000 units in 2025. Completions will be elevated through the end of 2024 but demand drivers should allow for an orderly lease absorption in our markets. I want to give a big thanks and shout-out to team Camden for improving the lives of our teammates, customers, and stakeholders one experience at a time. Keith Oden is up next.

Thanks, Ric. Overall, our third quarter 2023 operating results were in line with expectations. Year-over-year same property revenue growth was positive for the quarter in 14 of our 15 markets and positive on both a sequential and year-to-date basis in all of our markets. Occupancy for the third quarter averaged 95.6%, ending September at 95.3%, as we shifted more to a defensive strategy entering our slower leasing season in the fourth and first quarters. October occupancy is currently trending at 94.9% and should continue to moderate slightly over the remainder of the year. Rents are also moderating given our focus on maintaining occupancy versus raising rental rates. During the third quarter, our effective growth rates were eight-tenths of a percent for new leases, 5.9% for renewals, and 3.4% for blended rate growth. Effective new lease growth for October is currently negative 2.5% and is expected to trend down a bit further between now and the end of the year. Effective renewal rate growth for October to date is 4.7% and should average around 4% for the full fourth quarter. Effective blended lease rates for October remain positive at 1.4%. Gross turnover rates for the third quarter were up 200 basis points compared to last year due to higher levels of skips and lease breaks, but our net turnover was down 200 basis points due to high levels of resident retention by our onsite teams. Move-outs to purchase homes accounted for just over 10% of our total move-outs during the quarter, which is near the lowest level we’ve seen in over the past 30 years. Supply will remain a factor in many of our markets for the next several quarters, and as expected, we are seeing elevated competition for our Camden communities, located in those submarkets where new deliveries exceed long-term historical averages. 16% of Camden’s communities are being impacted by new supply, but the vast majority are not. We are seeing some encouraging news regarding the future as the level of new starts has begun to fall, which bodes well for the supply environment in 2025 and 2026. I’ll now turn it over to Alex Jessett, Camden’s Chief Financial Officer.

Thanks, Keith. For the third quarter, we reported core FFO of $1.73 per share, in line with the midpoint of our prior quarterly guidance. Although our net results met expectations, we experienced $0.015 of lower-than-anticipated revenue for the quarter, which was entirely offset by $0.015 of lower-than-anticipated expenses. The lower revenue resulted primarily from an unexpected rise in bad debt. Our lower-than-anticipated operating expenses resulted almost entirely from lower property taxes in Texas. As previously discussed, the Texas State legislature passed a tax reform bill, subject to voter approval in November. Upon approval, which we believe is likely, Senate Bill 2 will reduce independent school district tax rates by $0.107 per $100 of assessed value. Average independent school district tax rates in our Texas markets are approximately 1% of assessed value or 45% of the total Texas tax rate. Therefore, excluding valuation increases and other tax rate increases, this anticipated reduction equates to an approximate 4.8% reduction in Texas taxes. We had previously assumed these independent school district tax rate rollbacks in Texas would be partially offset by other Texas rate increases. However, these other increases have not occurred. We now expect total property taxes to increase by 2.9% as compared to our prior expectations of 4.5%, for a total savings of $0.025 per share from our prior guidance. $0.015 of this savings occurred in the third quarter, and the remaining $0.01 will be recognized in the fourth quarter. Turning back to revenue, we had expected same-store bad debt would be 100 basis points for the third quarter, 90 basis points for the fourth quarter, and 120 basis points for the full year. Instead, bad debt was 40 basis points higher or 140 basis points in total for the third quarter, with the increase happening primarily in September. And we are now anticipating 150 basis points of bad debt for both the fourth quarter and full year 2023. This 40 basis point increase in bad debt for the third quarter equates to approximately $0.01 per share, and the 60 basis point increase in the fourth quarter equates to approximately $0.015 per share. In conjunction with the increase in bad debt on rental revenues, we also experienced higher bad debt on administrative and other fees of another $0.005 per share for the third quarter, and we are anticipating the same additional $0.005 for fees in the fourth quarter. We believe this higher bad debt is primarily consumer behavior driven and not tied to financial stress of our residents. Our prior guidance called for 95.6% same-store average occupancy in the third and fourth quarters with fairly consistent occupancy levels throughout the back half of the year. We actually had higher than anticipated occupancy in both July and August, entirely offset by lower occupancy of 95.3% in September. In combination with higher than anticipated skips and evictions, we believe that historic seasonality, which has been unpredictable since the pandemic has returned. We now anticipate occupancy will average 94.8% in the fourth quarter, and the impact of this 80 basis point adjustment from prior estimates is approximately $0.02 per share. As a result of the decline in occupancy, we lowered asking rents more than anticipated in September. We had expected a 1.5% average increase in new leases and a 5% average increase in renewals for a blend of approximately 3.25% in the back half of the year. Our effective blended rates were higher than this at 3.4% for the third quarter. However, lower occupancy caused a reduction in signed rates, which is flowing through our fourth quarter guidance. We are now anticipating fourth quarter new leases of negative 4.5% and a 4% average increase in renewals for a blend of approximately negative 0.7%, resulting in a decline of approximately $0.015 per share for the fourth quarter. The cumulative same-store impact of the greater than anticipated third and fourth quarter bad debt and lower fourth quarter occupancy and rents is approximately $0.07 per share, of which $0.055 per share is in the fourth quarter. As a result, we have decreased the midpoint of our full-year same-store revenue guidance from 5.65% to 5%, effectively in line with our original revenue guidance midpoint at the beginning of this year. Turning to expenses, as previously mentioned, we had $0.015 of favorability, primarily in taxes, in the third quarter. We are also anticipating favorability in taxes of $0.01 per share in the fourth quarter. This $0.025 of tax favorability is anticipated to be partially offset by $0.015 of higher fourth quarter repair and maintenance and marketing expenses associated with higher skips and evictions and lower occupancy. As a result, we have adjusted the midpoint of our full-year same-store expense guidance from 6.85% to 6.5% or a net $0.01 per share. Our resulting full-year same-store NOI midpoint has been reduced from 5% to 4.2%. Last night, we also lowered the midpoint of our full-year 2023 core FFO guidance by $0.07 per share to a new midpoint of $6.81 per share. This $0.07 per share decline resulted primarily from the previously mentioned $0.035 per share increase in same-store bad debt, the $0.02 per share decrease in same-store occupancy, and the $0.015 per share decline in same-store rents, partially offset by the $0.01 per share in lower property expenses resulting from lower taxes. In addition to this net $0.06 per share decline in same-store NOI, we are also anticipating an additional $0.01 in lower non-same-store NOI for similar reasons. We also provided earnings guidance for the fourth quarter of 2023. We expect core FFO per share for the fourth quarter to be within the range of $1.70 to $1.74. The midpoint of $1.72 represents a $0.01 per share decline from the $1.73 recorded in the third quarter. This is primarily the result of approximately $0.01 in lower same-store NOI, resulting from $0.035 in decreased revenue, driven by 80 basis points of lower occupancy and 10 basis points of higher bad debt, partially offset by $0.025 in lower property expenses resulting from typical seasonal declines. Our balance sheet remains strong with net-debt-to-EBITDA at 4.1 times, and at quarter end we had $181 million left to spend over the next two years under our existing development pipeline. At this time, we will open the call up to questions.

Good morning. Thanks a lot for taking my question. How have concessions on the Merchantville products trended over the last two months? Are there any other notable drivers on the consumer side? And then alongside this, are you seeing supply impact properties that you previously thought would compete directly with new supply due to either submarket or price point? Thank you.

Let me take the first part and I’ll let Keith do the last part. So from a merchant builder perspective, there is an old joke in the merchant builder world that you don’t want to be the last one on the street to get to three months free. So depending on the market you’re in, like if you’re in a market like Nashville, for example, there is three months free in the market with merchant builder products. There is no question about that. In other markets, though, that don’t have the same level of competition, Nashville and Austin, Texas are the number one supply markets in America right now with maybe 6% new supply coming in. And so you definitely are seeing peak merchant builder concessions there. And then when you look at other markets like Charlotte, for example, there’s a month, maybe six weeks free or something like that. Most merchant builders in any market are going to have discounts or free rent to incentivize people to come in. So I think that part of the equation is happening pretty normally. The markets with a higher concentration are going to have closer to the three-month free number. In terms of consumer behavior, when we think about our outlook for the fourth quarter, consumer behavior is affected by the new supply for sure. But because of the nature of our portfolio that Keith will talk about in a minute, it’s not a huge issue and supply isn’t significantly changing consumer behavior. The thing that surprised us, and perhaps we were just overly optimistic, was that the post-COVID consumer behavior would return to normal behavior sooner than it has. Let me describe what I mean. When someone moves into an apartment and they aren’t paying rent, consumers know that if you’re in Atlanta, for example, that you can stay in your apartment for seven or eight months before you actually have to leave. So that consumer behavior has changed; they understand that, and you can just go online and find ways to prolong the process. If you look at Atlanta, for example, our bad debts are like 3%. Normally, Atlanta would be at 80 basis points. So this part of consumer behavior is definitely shifting. I think that will change because what’s happening is every market is getting tighter in terms of the ability to move people out. Governments are backlogged, but they are starting to improve, and over the next six or eight months, I think you’ll see a return to normal in this regard. Keith, why don’t you address the issue on supplying our portfolio?

Yes. I think the question Michael asked was, has the pool of impacted communities shifted. The short answer is no, but I do want to give you more color on how we look at the supply challenge and how we quantify it. We make sure to stratify our portfolio because it’s really important to do so in times of elevated supply between those markets that are likely to be impacted by new lease-ups and those that are not. That’s filter one, and the second filter is if it’s in a submarket where we have existing assets, does the price point get affected by the new lease-ups? Our proxy for that is to use age, with a line drawn at 15 years. It's not completely scientific, but useful over the years. So when we stratify Camden’s portfolio, about 16% of Camden’s total apartment units are in markets that have a supply challenge. Interestingly, among everything we forecast at the beginning of the year, new supply impact is one of the most reliable because communities are either under construction or not. You may miss the delivery time by a quarter or two, but if it gets started, it’s going to be there. In the second quarter of this year, for the 16% of our communities that we believe are being impacted directly by supply, those impacted communities had a lower new lease rate than the 84% non-impacted communities by 260 basis points. It matters, but it’s only 16% of our portfolio. Yes, supply matters, and it matters more directly to those communities where it’s happening. So if you roll that forward to the third quarter, there’s still a lot of anxiety about supply and what the impact is going to be. That 16% was still impacted, and the differential between the impacted and non-impacted community moved to 310 basis points. So that’s 50 basis points on 16% of our communities and this is impacting new leases. So if you do the math, the challenge from Q2 to Q3 that was directly attributable to increased supply was about 15 basis points. Compared to the stat Alex gave you on delinquency or bad debts, that number alone is 50 basis points of impact in the quarter. Yes, it matters, and it’s something we pay attention to because our operations team has to consider that when making pricing decisions. We’ve been managing supply for almost nine months now, and it’s going to continue for at least through the end of 2024, and that’s something we’ll have to deal with.

Thank you very much for the thorough answer. Good luck in the fourth quarter.

Hey, thanks, everybody. Do you think Camden is being negatively impacted in this time of high supply because you have the policy of not offering concessions? And is there any chance that you might change that policy at least on a near-term basis?

Yes. We do offer concessions on our new lease-ups because that’s traditional and expected by the consumer. However, we find that our consumers prefer transparency in pricing. I don’t see us going back to offering a month free rent and prorating that over the balance of the lease term. To me, that’s confusing to consumers. It also increases the pressure to manage expectations of tenants being good actors by paying their rent. We’ll continue to offer them on new development lease-ups because that’s baked into our pro forma, but not on established communities.

Okay. Got it. And then thinking about 2024, not asking for guidance or anything like that, but I’m curious how you guys are thinking about market rent growth at this point. Do you think there’s a chance that we won’t see it next year based on what we’ve seen recently? Or how have your thoughts on that evolved?

Well, when you look at the data from Ron Witten and Witten Advisors, it’s interesting because development falls off pretty dramatically, or at least starts to in 2024, leading to the absorption of that real estate. You have countervailing factors like the homeownership rate declining, with fewer people moving out to buy homes down to 10%. The prospect for people buying homes next year looks pretty dismal relative to the current environment. You have cross currents here where you don’t need significant job growth to drive demand for apartments because fewer people are moving out to buy homes, and more people are renting instead. For example, close to a third of adults living alone don’t buy houses; they rent apartments. This demographic becomes a higher propensity to rent, stabilizing the system. Ron thinks you’re going to have occupancy levels that stay where they are now and expect some modest rent growth in markets. So while 5% rent growth in 2023 may not repeat in 2024, a slower year with some reasonable occupancy and rental growth is certainly a possibility.

Okay. Thank you.

Hey, guys. Good morning. I was hoping to talk a bit more about the decision to let occupancy trend down in October. I would have expected occupancy to pick back up here, certainly heading into seasonally slower demand, higher supply, and it sounds like you expect that to continue into year-end and maybe even mid-next year. So I’m curious if, in hindsight, that might have been a tactical misstep and perhaps where occupancy in the portfolio has fallen the most and when we might be able to get back to 95%. Thank you.

Well, remember, occupancy and rent are correlated. We could be at 95-97% occupancy if we wanted to go out and buy occupancy by lowering rents dramatically. We think it’s better to maintain our current rates for revenue. Our revenue team debates our optimal settings on an ongoing basis, and we feel comfortable with where we are. We’d prefer higher rent and higher occupancy, but in this environment, we believe our current stance sets us up well for a reasonable start to 2024.

So Haendel, just to follow-up on that, the idea that we let occupancy drop to 94.9% indicates that was a conscious decision, and it wasn’t. Our occupancy guidance for the back half of the year was at 95.6% going into October. To connect the dots a little, Alex discussed our delinquency and our elevated levels of skips and lease breaks. We initially anticipated getting back to typical metrics around delinquency and skips and lease breaks by the end of 2023. We made progress in the first two quarters, with expectations set for improving metrics by year-end. Unexpectedly, we ended the third quarter at 140 basis points instead. This situation compounded our seasonal challenges. It wasn’t something we anticipated and we didn't want to see occupancy at 94%. It was simply a result of those factors.

Got it. Got it. Certainly understand the complexity involved and appreciate your thoughts on this. Maybe can you provide us with an update on where the portfolio lost lease is overall today and where it’s highest and lowest? I think you previously mentioned the earn-in for the full year 2024 was around 1.8%. If you were to hit your budget for the rest of the year, could you provide an update on that number?

Yes, absolutely. Our loss to lease is just under 1% and we’re actually showing our embedded growth. Assuming we make our reforecast for the fourth quarter, our embedded growth should be right around 0.9% for 2024.

As for where we face the most challenges in maintaining occupancy, it’s in the markets where we anticipated difficulty in the fourth quarter due to supply impact. These markets include Atlanta, Austin, and Charlotte, which are the big three in terms of a combination of anticipated supply and elevated lease breaks.

Great, guys. Thank you so much.

Good morning. Thank you. You referenced a couple of times that only 16% of the communities are being impacted by new supply, but clearly new lease rate growth has dropped dramatically, and occupancy has fallen as well. Is it your belief that Q4 is as bad as lease rate growth and occupancy could get and that we will see both rate growth and occupancy reaccelerate into 2024? What would change that view?

I think the issue will depend on what happens in 2024 with the economy overall. If we continue to have robust job growth like we have had so far, and with seasonality expected in early 2024, we anticipate a similar pattern to previous years where you have slowdowns starting in September and bottoming in January, with a rebound beginning in February, March, and April. If economic strength persists and the consumer continues to demonstrate resilience, we can expect a pickup in leasing and occupancy levels, similar to years before the pandemic.

So Austin, I would say that, of the three issues we’ve discussed—supply, bad debts, skips, and evictions—supply will present similar challenges in 2024 to what we’ve faced in 2023. While the number of new deliveries remains high, we have already been living with that environment for nine months. It’s now factored into our run rate. If you look at bad debts and skips and evictions, we anticipate those will begin to improve. Historically, we averaged 50 basis points of bad debt prior to the pandemic and should return closer to that level as we unwind behaviors established during COVID. It’s possible skips and evictions may remain elevated, but I do anticipate a general decrease from the levels we’ve seen. Overall, supply challenges will remain, but we should see improvement in the bad debt and skips evictions.

Got it. Thanks for the thoughts. That’s my one question.

Thanks. I just wanted to follow-up on that last answer. I’m trying to understand what you think would need to happen internally or externally to get bad debt under control since it feels like we’re far removed from COVID. Is there potentially a common factor in the recent skips and evictions? What do you think will help bring that number down from the 150 basis points or 140 basis points you’re currently seeing, especially as you think about guidance for next year?

Go ahead, Keith.

There’s no question it’s going to be a challenge. We were optimistic this year—that looks like—more than we should have about bad debts. What will solve it is making sure we do everything possible to get people who aren’t paying rent out. Fortunately, in almost all of our markets, the regulatory barriers to moving forward to evict non-paying tenants have lapsed. However, municipalities are backlogged, and while some cities have better processes, others have not improved as much. Ultimately, we need to get bad actors out, which takes time. In instances where we suspect fraud, we’ve begun implementing stronger income verification processes to deter bad actors and assure better tenant behavior going forward. We’re testing these measures in numerous submarkets, balancing the need for speedy tenant onboarding with securing our communities.

Yes, that makes sense. I guess what is concerning for me is there appears to have been a shift in tone recently. Can you speak to what’s driving that perception? There was good performance up until August or September, followed by some shifts affecting guidance for 2024. Are these concerns driven by supply, shifts in consumer behavior, or both? Additionally, regarding the 16% of your properties impacted by supply, how do you anticipate that number changing in the upcoming year?

Yes, I think that number may tick up slightly, but I would be surprised if it exceeds 18% of impacted communities. The bulk of construction is occurring in familiar areas, so a major shift in that number is unlikely. Although there’s elevated concern surrounding supply and occupancy results, it’s important to note the impacts match the metrics we’re seeing. Through our analysis, we believe the supply risk we’re managing is mostly accounted for in our current run rate. We monitor these factors closely and remain proactive in our approach to maintaining occupancy and minimizing the impact of new developments.

Okay. Thank you. I appreciate it.

Yes, hey guys. I just wanted to explore a comment I thought I heard from you earlier about how supply will need to be managed into the end of 2024. Was that implying that the softness we’re seeing in new lease rate growth will continue through then, or just a general comment on supply? What are your expectations for next year?

Yes. It’s a general comment on supply. Keith shared insights on the 16% of our portfolio impacted by supply, as well as the differential performance between those impacted and the remainder of the portfolio. New supply will remain a challenge, but the overall effect of Q4 is a mix of supply, consumer behavior and ongoing evictions. Supply is a pressing issue for part of our portfolio, whereas consumer behavior has been the larger driver in the downturn of recent metrics. We’re hopeful that as regulations normalize, we’ll start to see improvements that will help manage these issues moving forward. Yes, I would add that the biggest issue is both economic resilience and the nature of the communities we operate. While supply pressures are evident, managing expectations and performance will require continuous improvement as consumer behavior responds to market conditions. Ultimately, the balance of those two areas will dictate how we fare through challenges in 2024 and beyond.

Okay. I appreciate that color. And then regarding your floating-rate debt exposure, are there any plans to change your approach or maintain the status quo?

So when you look at floating rate debt in the long run, floating-rate debt has typically been cheaper than long-term debt. Today, we’re in a unique situation with a flat yield curve. Although it has steepened somewhat, the fundamental aspect of our portfolio is that we maintain very low debt levels. This allows us to manage our floating-rate risk efficiently. Higher floating rates are already factored into our operational cost, and we see no immediate need to adjust our strategy unless market conditions dictate otherwise.

Got it. Thank you.

Yes, thanks. Just one question. I know capital deployment is probably not high priority right now. You mention your stock is trading at an implied cap rate north of 7.5%. How do you think about share repurchases, especially if there’s a disposition market? Are you considering shrinking the company by buying back stock?

We’ve consistently conveyed our stock buyback appetite will depend on a 20% to 25% discount to NAV and needs to be paired with the sale of assets to fund it. This may be the time for persistency in that regard. Historically, we’ve been able to execute that strategy with success. We’ve sold one asset this year for $61 million, and with the implied cap rate we’re seeing today, it might be an opportunistic time to proceed. We’ve also observed a decline in acquisition activity, with the market down 60%-70% from prior years, which translates into available opportunities as we navigate this environment. If we see asset sales align with our strategy, a share buyback could certainly be on the table.

Great. Thanks. That’s it for me.

Thank you. I’d like to clarify two items discussed in this call with my one question. Alex, I think you said you’re expecting new lease growth to be at minus 4.5% while renewals at positive 4%. How sustainable do you think that is, especially with lost lease at around 1%? And then Ric and Keith, regarding your responses to Haendel, are you satisfied operating at or below 95% occupancy for the time being, with no immediate plans to improve it above that?

Yes, regarding the spread in the rates for the fourth quarter, 850 basis points is historically a little wide, but it’s within a range we have operated in before. I think we can maintain this going forward.

In reference to occupancy, our previous guidance included an expectation for occupancy rates to maintain around 95.6%. Our actual numbers show we’re currently at 94.9%. Thus, we are targeting improvements and don’t find operating below 95% acceptable.

Okay. Thank you.

Hey, thanks. Good morning. I wonder if all this noise in the system could create an opportunity for you. I imagine you guys are managing the skip and eviction process better than your neighbors. Ric, you said something earlier about how maybe consumer behavior will normalize in six months; while not tied to distress, you are a premier operator. Do you think this could present an opportunity to step in where others may be less equipped to handle these stresses, potentially leading to increased acquisitions as we get into next year?

It’s an interesting question, Rich, welcome back. When considering capital allocation, we analyze what represents the best opportunity. Today, the deals out there trade at five and a half or five and a quarter; there’s not much distress. The narrowing of the gap between the bid and ask primarily comes from the sellers. However, there remains a wall of capital waiting for clearer indications on the long-term tenure. Whether there will be distress remains uncertain; currently, the properties facing difficulties are those that are C-minus transactions—over-leveraged and not reflective of our style. The current market shows no significant distress for investment-grade properties.

Okay. And the 16% supply-impacted portfolio, how does that relate to skips and evictions? Are there shared markets or is this more of a widespread issue across your portfolio?

The skip and eviction challenge is heavily concentrated in regions where we had severe regulatory restrictions during COVID. This includes markets like California, DC Proper, Montgomery County, and Atlanta due to unique fraud issues. In California, our bad debts alone are contributing significantly to the overall percentage, while the 140 basis points reflect almost 30 from California. This problem isn't generalized—supply may be more widespread than skips and evictions, focusing mostly in specific markets.

Interestingly, fraudsters tend to target the highest-end properties. For example, in our downtown Houston building, which is a 22-story building and the most expensive in the area, we experience the highest fraud of any of our buildings. Similarly, properties in Atlanta, particularly those in Buckhead, had a high incidence of lease breaks associated with fraud.

Awesome. Thanks very much, everyone.

Hey, thanks for taking my question. With the updated guidance and outlook, could you discuss how this affects your investment appetite, development timing, and underwriting process under current assumptions?

Our current development pipeline is performing well, and we’re successfully completing lease-ups while keeping concessions minimal. We just finished Tempe, achieving solid returns. Regarding future starts, the current environment is unusual with a significant increase in capital costs. This compels us to delay development starts and be quiet on acquisitions. However, as we achieve stability, we should see significant shifts in development costs and contractor availability due to increased unemployment in construction. Should there be reductions in starts, we can expect a constructive environment for new properties in 2025 and 2026. If we identify attractive returns aligned with our cost of capital, it’s possible we would consider new developments as a counter-cyclical strategy compared to competitors.

Thanks. I appreciate all the clarity. That’s it for me.

Great! I appreciate everyone on the call today, and we will see you very soon at NAREIT in LA. So take care and thank you.