Camden Property Trust (CPT) — Q4 2023 Earnings Call Transcript

Good morning and welcome to Camden Property Trust Fourth 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 fourth 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’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.

The theme for our on-hold music today was friends and teammates helping each other. The verse from the theme song of the popular TV show 'Friends' sums it up nicely. I'll be there for you when the rain starts to pour. I'll be there for you like I've been there before. I'll be there for you because you've been there for me, too. One of Camden's 9 core values is team players. We recognize our employees who live Camden's values through our annual ACE Awards program. Each year, Camden employees nominate their peers and co-workers for an ACE award. From our 1,700 employees, 14 are selected to be national ACE winners. Those individuals are recognized and celebrated at our national leadership meeting. Being selected as a national ACE Award winner is the highest honor that Camden associates can achieve and represents the best of the best from Team Camden. I want to introduce you to one of our national ACE Award winners for 2023, Santos Castelo. It's folks like Santos who make it certain that no matter what's going on in the world, Camden will always honor our 9 values to ensure that we improve the lives of our teammates, our residents, and our stakeholders, one experience at a time. Our finance, accounting, legal, and real estate investment teams have had a busy year-end and beginning of 2024, closing over $1.2 billion in refinancing and sales transactions. We began 2024 with a strong balance sheet and are prepared for the growth opportunities as they may develop this year. Our operations and support teams finished the year strong and are positioned to outperform our local submarket competitors again in 2024. 2024 should be a transition year from peak new apartment deliveries to a more constructive market after supply is absorbed. 2025 starts are projected to plummet to a low in the $200,000 range due to difficult market conditions. 2024 apartment absorption is projected to be a little over 400,000 units nationwide with over 200,000 units absorbed in Camden's markets. 2024 apartment demand will be driven more by demographics and migration dynamics than traditional job growth. Apartments will take market share from the single-family market. Beginning in 2011 and through 2019, apartments had an average market share of 20% of household formations. Apartments are projected to double that market share to 40% between 2024 and 2026. This is because home affordability is at a 20-year low with rising home prices and current interest rates and no signs of the pressure easing anytime soon, even with rates continuing to fall. Migration to Camden markets continues to grow. More young adults are in the workforce with solid job growth and wage growth; 30% of the households choose to live alone, which is at an all-time high. Camden's markets continue to lead the nation in job growth. We look forward to what looks to be a very interesting year. I know that our Camden team is equipped and ready to excel in 2024 by being great friends and great teammates. Thank you, Team Camden, for all that you do for Camden and our residents. Keith Oden is up next.

Thanks, Ric. For 2023, same-property revenue grew by 5.1%, consistent with our original projections. Six of our markets achieved results within 50 basis points of their original budget and another 6 outperformed their budgets. Of the remaining 3, L.A., Orange County, and Atlanta, both underperformed mainly for reasons related to bad debt, skips, evictions, and fraud. In Phoenix, the underperformance resulted from market conditions moderating more quickly than we anticipated over the course of 2023. For 2024, we anticipate same-property revenue to be in the range of 0.5% to 2.5%, with the majority of our markets falling within that range. The outliers on the positive side are expected to be Southern California markets along with Southeast Florida, while Orlando, Nashville and Austin will likely underperform given outsized competition from new supply this year. Our top 6 markets should achieve 2024 revenue growth between 2% and 4% and includes San Diego, Inland Empire, Southeast Florida, Washington, D.C. Metro, L.A., Orange County, Houston, and Charlotte. Our next 5 markets are budgeted for revenue growth between 1% and 2% and include Denver, Tampa, Atlanta, Raleigh, and Phoenix. Our remaining 4 markets of Dallas, Orlando, Nashville, and Austin are expected to have revenue growth of plus or minus 1%. As many of you know, we have a tradition of assigning letter grades to forecast conditions in our markets at the beginning of each year and ranking our markets generally in order of their expected performance during 2024. We currently grade our overall portfolio as a B with a moderating outlook as compared to an A- with a moderating outlook last year. Our full report card is included as part of our earnings call slide deck which is incorporated into this webcast and will be available on our website after today's call. While job growth is expected to moderate over the course of 2024, the overall economy remains healthy and we expect our Sunbelt-focused market footprint will allow us to outperform the U.S. outlook. We expect to see continued in-migration into Camden's markets and strong demand for apartments in 2024, given the relative unaffordability of buying a single-family home. We reviewed 2024 supply forecasts from several third-party data providers and their projections range from 230,000 to 330,000 completions across our 15 markets over the course of the year. After analyzing the submarket locations and price points for these new deliveries, we expect that roughly 20% of those deliveries, between 50,000 and 70,000 new units, may be competitive to our existing portfolio. Our top 3 markets for 2024 were the same as our top 3 markets for revenue growth in the fourth quarter of 2023 and they remain strong entering 2024. Their growth rates are expected to slow from the 5% to 8% range they achieved in 2023 and thus have moderating outlooks. Therefore, we’ve ranked San Diego, Inland Empire as an A, Southeast Florida as an A-, and Washington, D.C. Metro as a B+. L.A., Orange County, Houston, and Charlotte round out the top 6 with L.A., Orange County receiving a B with an improving outlook and the other 2 ranking as a B with moderating outlooks. We anticipate the improvement in L.A. Orange County will come primarily from a reduction in bad debt as we repopulate many of our vacant units with residents who actually pay their rent. L.A. Orange County will also see a manageable level of supply this year which should also serve as a benefit. Our Houston portfolio had steady growth during 2023 and should continue to perform well in 2024. Supply remains in check and the number of competitive deliveries in our submarkets should decline over the course of the year. Charlotte ranks as our number 6 projected market this year versus number 5 in 2023, so it is still an above-average performer but with revenue growth likely closer to 2% than the almost 7% we reported in 2023. The aggregate level of supply coming into the Charlotte MSA will be elevated this year and we expect our main competition will fall in the uptown South End submarket, which is slated to receive 3,000 units this year. Similar to Houston and Charlotte, Denver and Tampa also earned B ratings with moderating outlooks. Denver's revenue growth has been above average in our portfolio for the past 3 years and to continue that trend in 2024. Deliveries will tick up slightly this year primarily in 1 or 2 of our submarkets but should be met with solid demand. Tampa has been our number 1 market over the last 3 years, averaging over 11% annual revenue growth. The growth will slow to the low single-digit range this year. New supply looks to be manageable in most of our submarkets there, but we are actively monitoring our 2 recently built high-rise assets in the St. Petersburg submarket for competition with the new product being delivered there. In Atlanta, our current assessment of market conditions rates as B- with an improving outlook. Similar to L.A., Orange County, we expect to see a reduction in bad debt during 2024, which should boost our revenue growth from the less than 1% achieved in 2023. On the new supply front, the Atlanta MSA will continue to add new units in 2024 and we anticipate the most competition from deliveries in our Midtown submarket. Next up are Raleigh and Phoenix, both receiving grades of B- but with stable outlooks. In the aggregate, these markets performed just under our portfolio average in 2023 for revenue growth and they should remain in that area for 2024 with 1% to 2% growth. And once again, while both of these markets face elevated levels of supply versus historical averages, we expect that only a handful of assets in each market will face head-to-head competition from 2024 deliveries. Dallas would also rate as a B- with a stable outlook but its revenue growth may fall just under the 1% mark this year. While Dallas still ranks as one of the nation's top metros for job growth and in migration, the outsized level of supply set to deliver this year will keep pricing power and rent growth muted there. Orlando delivered outsized levels of revenue growth for the past few years but it has dropped from above average to below average in recent quarters, thus earning a C+ grade with a moderating outlook. The economy in Orlando remains strong but above average completions slated for 2024, will likely result in minimal revenue growth for the market this year. Our last two markets, Nashville and Austin, consistently ranked as top markets for multifamily construction and scheduled delivery of new apartments in recent quarters, while they also rank as two of the top U.S. markets for job growth and migration quality of life, et cetera. The sheer amount of new supply coming in 2024 will likely result in flat to slightly negative revenue growth for both of those markets. And we believe 30% to 40% of the new supply in those markets may compete directly with Camden's assets. We have signed both markets a stable outlook for the remainder of 2024 with ratings of C and C-, respectively, given current market conditions. Now a few more details on our 2023 operating results in January 2024 trends. Rental rates for the fourth quarter had signed new leases down 4.3% and renewals up 3.9% for a blended rate of negative 0.6%. Our preliminary January results indicate a slight improvement in signed new leases and moderation in renewals for a slightly better blended rate on our January signed leases to date. February and March renewal offers were sent out with an average increase of 4.1%. Occupancy averaged 94.9% during the fourth quarter of '23. In January 2024, occupancy is trending in the same range. And as expected, move-outs to purchase homes remained very low at 10.4% for the fourth quarter of '23, 10.7% for the full year of '23. January move-outs will likely remain in the same range.

Thanks, Keith. Before discussing our financial results and guidance, I want to provide a brief update on our recent real estate and capital markets activity. In the fourth quarter of 2023, we finished constructing Camden NoDA, a 387-unit, $108 million community in Charlotte, which is now around 90% leased. We started leasing at Camden Wood Mill Creek, a 189-unit, $75 million single-family rental community in The Woodlands, Texas, and continued leasing at Camden Durham, a 420-unit, $145 million new development in Durham, North Carolina. Additionally, we sold Camden Martinique, a 714-unit community in Costa Mesa, California, for $232 million at an approximate yield of 5.5% after management fees and actual CapEx, yielding a 10.6% unleveraged return over nearly 26 years. During the quarter, we also issued $500 million in 3-year senior unsecured notes with a fixed coupon of 5.85%, which we swapped to a floating rate at SOFR plus 112 basis points. After the quarter ended, we issued $400 million in 10-year senior unsecured notes with a fixed coupon of 4.9% and a yield of 4.94%. Additionally, we prepaid our $300 million floating-rate term loan and repaid a $250 million 4.4% senior unsecured note at maturity on January 16. With the term loan prepayment, we will incur a noncore charge of about $900,000 for unamortized loan costs. Currently, approximately 85% of our debt is fixed rate. We have nearly full availability under our $1.2 billion credit facility and less than $300 million in maturities over the next two years, with only $138 million left to fund under our existing development pipeline. Our balance sheet is strong with a net debt-to-EBITDA ratio at 4x. Turning to our financial results, we reported core funds from operations for the fourth quarter of 2023 of $190.5 million or $1.73 per share, which is $0.01 above the midpoint of our earlier guidance. This strong performance was largely due to lower-than-expected bad debt levels. In September, we faced a surprising spike in bad debt, which we anticipated would carry into the fourth quarter. Fortunately, September seems to have been an isolated incident, and bad debt for the fourth quarter averaged 1.1%, compared to our forecast of 1.5%. Our same-store occupancy for the fourth quarter was 94.9%, slightly better than our forecast. For 2023, we achieved same-store revenue growth of 5.1%, expense growth of 6.7%, and NOI growth of 4.3%. For details on our key assumptions driving the 2024 financial outlook, please refer to Page 24 of our fourth quarter supplemental package. We expect our 2024 core FFO per share to be between $6.59 and $6.89, with a midpoint of $6.74, marking an $0.08 decrease from our 2023 results. This drop is mainly attributed to an expected $0.07 increase in core FFO due to growth in operating income from our development, non-same-store, and retail communities, mainly from our 7 leasing development projects in 2023 and/or 2024. The anticipated $0.07 decrease in interest expense reflects approximately $185 million of lower average anticipated debt outstanding in 2024 compared to 2023, partially offset by reduced levels of capitalized interest as certain developments are completed. The reduced debt levels result from the sale of Camden Martinique and an additional $115 million sale of a community in Atlanta scheduled for next week. For 2024, we project an average of $41 million outstanding under our line of credit at an average rate of approximately 5.5%, and we do not foresee any further unsecured bond offerings in 2024. Furthermore, we expect a $0.035 increase in fees and asset management income due to higher third-party general contracting fees and interest on cash holdings. Anticipating average cash balances of $60 million in 2024, earning around 4.6%, this cumulative increase of $0.175 in core FFO per share is entirely negated by a decrease of approximately $0.155 per share resulting from the $293 million of completed dispositions in 2023, and an expected $0.06 decrease from the upcoming disposition next week, plus about $0.04 from the combined rise in general and administrative and property management expenses. At the midpoint, we foresee flat same-store net operating income, with revenue growth of 1.5% and expense growth of 4.5%. Each 1% rise in same-store NOI equates to roughly $0.085 per share in core FFO. Our 2024 revenue growth midpoint of 1.5% is based on about a 0.5% earning at the end of 2023 and effectively flat loss to lease. We predict a 1.4% rise in market rental rates from December 31, 2023, to December 31, 2024, acknowledging half of this annual market rental increase along with our embedded growth results in a planned 1.2% rise in 2024 net market rents. We anticipate that bad debt will continue to normalize throughout the year, reaching 1% by the fourth quarter and averaging 1.1% for the year, marking a 30 basis point improvement over 2023. Combining our 1.2% net market rent increase with the 30 basis point reduction in bad debt, we estimate 2024 rental income growth of 1.5%. Rental income constitutes 89% of our total rental revenues. The remaining 11%, mainly utility rebilling and other fees, is expected to grow at a similar pace as rental income due to reduced pricing power and heightened regulatory demands. The midpoint of our 2024 same-store expense growth is 4.5%, largely driven by increases in insurance costs. Insurance, which accounts for 7.5% of our total operating expenses, is projected to rise by 18% as insurers confront significant global losses and resulting financial pressures. Other operating expenses are anticipated to rise by about 3.4% on average, including property taxes, which make up about 36% of our total operating expenses and are expected to increase by roughly 3% in 2024. Excluding next week’s planned sale, the midpoint of our guidance assumes $250 million in acquisitions against another $250 million in sales, resulting in no net accretion or dilution from these matched transactions. Our supplemental package also outlines other 2024 assumptions, including plans for up to $300 million in development starts in the latter half of the year with an estimated total development spend of around $175 million in 2024. For the first quarter of 2024, we expect core FFO per share to be between $1.65 and $1.69. The midpoint of $1.67 signifies a $0.06 decrease from the fourth quarter of 2023, mainly due to a sequential decline of about $0.035 per share in same-store NOI, driven by a roughly $0.04 per share rise in sequential same-store expenses because of the timing of quarterly tax refunds, the annual property tax accrual reset on January 1, and other expense increases tied to seasonal trends, including on-site salary increments. This is somewhat countered by a $0.005 per share rise in sequential same-store revenue, largely from increased fees and other income. We project occupancy to remain relatively unchanged from quarter to quarter. The anticipated $0.035 per share decline is attributed to the December 28, 2023, sale of Camden Martinique for $232 million, a $0.01 decrease from the planned $115 million sale next week, and a $0.05 decline primarily due to timing discrepancies in various corporate accruals. This total drop of $0.085 in quarterly sequential core FFO is partially offset by a decrease of about $0.015 in interest expense as a result of reduced debt levels from disposition proceeds and an approximate $0.01 increase in core FFO linked to added interest income on cash balances. Expected noncore adjustments for the first quarter encompass a combined $0.03 from winter storm damage, the previous charge for unamortized loan costs related to our term loan, and costs tied to litigation matters. We will now open the floor to questions.

Can you discuss the macro assumptions included in your guidance today, particularly with the addition of 353,000 jobs? How does the job market influence the elasticity of your guidance? Also, could you provide an update on the migration trends to the Sunbelt?

Sure. The job numbers released today and the revision for December definitely suggest that the market expected a significant increase. While it is indeed positive, our assessment of the overall economic environment and anticipated demand in our markets doesn't solely rely on these impressive figures. We believe, and I think most in the market agree, that job growth has significantly slowed in 2024. More job growth would certainly benefit us. The areas experiencing job growth are within our markets, particularly Texas and Florida, which have led the nation in job growth since COVID and are likely to continue doing so. This is advantageous for us, and such growth isn't fully reflected in our projections. When we consider the forces shaping demand in 2024 and 2025, we don’t attribute it primarily to increased job growth. Rather, multifamily housing has gained market share from single-family homes; as I mentioned earlier, multifamily demand in new household formations has risen from a historic average of 20% to 40%. This shift is influenced by the current challenges in the single-family housing market. In 2023, only about 10.7% of people at Camden moved out to purchase homes. There are broader factors at play as well; for instance, 30% of Americans are currently living alone, which benefits apartment demand, and this percentage has increased significantly compared to previous years. The strong job numbers certainly support our outlook, and if this trend continues, it could lead to interesting developments. Regarding in-migration, we anticipate over 200,000 units of demand in 2024, which is close to a supply of approximately 220,000 units. This balance reflects a healthy market situation. Looking further ahead, projections indicate a total demand of 380,000 units in the U.S. for 2024, down from 400,000, and 380,000 again in 2025. Demand is now influenced by various factors rather than simply the traditional ratio of one apartment for every five jobs, particularly due to in-migration. Additionally, we are seeing not only movement from other cities but also a resurgence of overall immigration, which had decreased during COVID but is now returning to normal levels. This legal immigration trend has also been beneficial to our situation. Alex, you may want to elaborate on in-migration further.

Yes, absolutely. So we continue to have really strong in-migration to our apartment. So if you look at those who have moved from non-Sunbelt to Sunbelt for us, in the fourth quarter, it was about 17.5% of our total move-ins. By the way, that's fairly consistent with what we've seen over the past couple of years. So that remains really strong. And one of the other things that we track is that we track Google searches from people in New York or people in California looking for apartments to rent in our markets. And just to give you a really - this is interesting to me, New York searches for Texas apartments were up 72% in the fourth quarter of '23 as compared to the fourth quarter of '22. California searches for Texas apartments were up 52% in the fourth quarter of '23 as compared to the fourth quarter of '22. So still very strong demand for folks coming out of New York and out of California to our markets.

But I guess I had a question on what you're implicit blended new and renewal kind of leasing spreads were and maybe how that tied into your occupancy assumptions. I guess what I'm really asking is are you guys really solving more for occupancy here and will give up on the new rate side? Or are you willing to let occupancy drift lower and sort of keep pricing firmer?

Yes. So we're assuming that occupancy is going to be flat in 2024 as compared to 2023, and that number is 95.3%. And we are driving towards that number. When we look at new lease and renewals and the trade-off for the full year. What we're anticipating is new leases to be down 0.6%, renewals up 3.6% for a blended increase of 1.2%. And that is going to sort of follow what you would think be typical seasonal patterns.

Can you discuss how your expectations for rent growth in 2024 differ compared to what you would typically forecast in a normal year without the current supply challenges? You mentioned a market rent growth of 1.4%, so where would you generally begin the year? Also, can you explain why that differential is appropriate given the supply situation?

Yes. Typically, every year is different with its own unique supply and demand factors. In a typical year, we see about 3% growth. Currently, we're at 1.4%, which is influenced by the existing supply challenges. As mentioned in our prepared remarks, demand remains very strong, but we are aware of the supply issues, which is why we are projecting 1.4% for the full year.

So Brad, to provide context on the demand issue and today's job numbers, we relied on two main data providers. They presented quite different perspectives on employment growth for 2024, so we decided to take the midpoint of their forecasts. The average from both forecasts for total employment growth across Camden's markets for 2024 was approximately $300,000, which we observed in January. We aimed to incorporate some realism into our projections, but it's clear that our estimate did not account for all the job growth expected for the year happening in just the first month.

I was just wondering, I know you guys don't offer concessions across the stabilized portfolio but just wondering what kind of has changed just on concessions as far as what you're seeing across those markets that are most exposed to some of the new supply?

It's very typical of what we've observed. The toughest markets include Austin, Texas, and Nashville, where concessions are significant, ranging from 2 to 3 months free. Generally, merchant builders do not exceed 3 months free, but that is seen in the most supply-constrained markets. In markets that are less pressured compared to those two, the concessions range from 1 month to 6 weeks to a maximum of 2 months. This is what we are observing in some of the other markets.

So I wonder if we could talk a little bit about the longer-term view. Your Avalon and EQR said, well, peak supply in '24 means peak revenue declines in 2025 or in theory, no one knows for sure. Do you feel like that is at least in the wheelhouse of a possibility in that what we're seeing today in terms of your outlook which I think most people think looks better than expectations going in could actually sort of see a downdraft next year as the full lot of the supply is absorbed into your portfolio?

Based on some of our providers, there is expected growth in 2025, while our market isn't declining. The main concern revolves around supply and demand. This year, demand projections are expected to exceed 400,000 units nationally. For the next year, even amid low job growth, we anticipate around 380,000 units in demand. Interestingly, the factors driving this demand aren't typical for the multifamily sector. Historically, job growth has been a major influence, but currently, it involves capturing market share from single-family homes due to inflated rent costs and a shortage in the resale market. Today, anyone looking to purchase a home generally has to consider new builds. Typically, when interest rates rise significantly, single-family builders face downturns, but after a brief pause, they returned to aggressive construction due to a lack of inventory for buyers. This trend is ongoing. The positive outlook for demand in 2024 is likely to continue into 2025, especially if job growth remains stronger than anticipated, which can aid absorption rates in 2025. Projections generally indicate that rents will not decrease in 2025; most forecasts suggest that rents will stabilize in 2024 and begin to rise again in 2025, following significant unit absorption in 2024.

So correct me if this is wrong but I assume that you had to gain the lease today. So I was just wondering based on your history, if there's a certain gain-to-lease level where you're no longer able to pass through like 3.5% to 4% type renewal increases. And then for that 4.1% renewals you sent out for February and March. I was wondering what the rate sort of achieved rate to think about would be on that?

First of all, we're not experiencing a gain to lease. We're essentially flat with neither losses nor gains. Looking ahead to renewals, we expect the first quarter rate to be around 3.9%, which is fairly consistent with our projections. Regarding the difference between new leases and renewals, our calculations indicate that over the full year, the percentage difference between a signed new lease and a renewal is approximately 1.5%. This is relatively minor and not something we see as a concern.

Good morning. Just hoping you could talk about development for a moment here. I see you have up to $300 million of new starts, including the guide. So curious when we could see those start, how they're penciling today from a yield or IRR perspective in which markets we can see those in?

The developments that we have in that model or in the model are in Charlotte and their suburban 3-story walk-up type product. And we would start those depending on how the year unfolds in the back half of the year, so that we could deliver into '26 and '27. And the yields are anywhere from in the mid-5s to low 6s in terms of stabilized yields. And when you look at IRRs, it's really kind of complicated to figure an IRR today given what are you going to expect cap rates to be. But ultimately, we think there's going to be a pretty constructive market in '26 and '27 when these properties deliver. We have a number of them in the pipeline as well in other markets. But these 2 because they're pretty simple and they come in at a price point that's very affordable relative to urban high-rise in the same market is pretty attractive.

Okay. And then maybe on the real estate tax guide. You also, I think you mentioned, Alex, 3.5%, I think it was embedded in your same-store expense guide there. A little bit lower than I think a lot of us were thinking and certainly given what we've seen recently I'm curious if we're kind of past the peak headwinds there for real estate taxes and selling into a new norm here or maybe you're perhaps benefiting from something else that's less obvious to us.

Yes, absolutely. So the property tax number that we have in our guidance is 3%. And if you think about it, it's really the same number that we experienced in 2023. And so it seems that we are reverting back to the long-term mean which is in that sort of 3% to 3.5% range. Really, the big driver that you have is Texas. And as we discussed in prior earnings calls, Texas is very favorable when it comes to property taxes, especially with a new bill that was passed last year. And so we're receiving the benefit of that for a second year in a row. And we actually think that our total property taxes in Texas are going to be up about 2.2%, which is really a pretty low number and that makes up about 40% of all of our property taxes. So that's the primary driver there.

I want to return to a point made at the start of the call regarding the expectation for a national absorption of 400,000 units this year, with 200,000 expected in the Camden markets. However, it seems there are close to 700,000 or 650,000 units anticipated to be delivered this year. I would like to clarify the comments regarding absorption. Additionally, are you indicating that the proportion of housing allocated to apartments as opposed to single-family homes will continue to grow? Historically, job growth was a significant factor, but is household formation now the more crucial element for next year?

It sounds like you've addressed the question. Yes, that's the situation. Despite the lack of significant job growth, we are still generating substantial demand, influenced by various demand factors and employment. Currently, if you examine the share that apartments are capturing from household formations, it is historically twice as high as it has been for a long time. Similarly, the single-family for sale market has also seen its market share at least double, and perhaps even triple, from the norm, primarily due to the limited inventory of homes available for purchase, often referred to as the lock-in effect. We find ourselves in an intriguing position where we are benefiting from the high costs associated with homeownership and from migration, both international and from other cities. While it is true there are many units under construction, the demand appears strong enough that if the demand figures are accurate, we could be looking at a soft landing for supply. This encapsulates the model we are proposing.

In Camden's markets, yes, the completions that we have that we're modeling are 230,000 apartments across Camden's platform in 2024. And that number drops to about 200 in 2025. So just to make sure we're talking apples and apples versus national numbers. It's 230 in Camden's markets.

And that 600 coming in the pipeline doesn't all get delivered in 2024. A part of that is into 2025 as well.

I would like to hear your thoughts on the timing of the fundamentals. Considering your guidance for new leases is slightly negative but was significantly worse in January for both effective and signed leases, how do you view the current occupancy compared to your projected occupancy? It appears there is an improvement. When comparing the first half of the year to the second half, do you anticipate better performance in the latter half, or do you see January as an anomaly, making the numbers appear to improve right away?

The first thing I want to share is that our signed blended leases in January are performing better than our effective leases, which suggests improvements ahead. We expect blended trade-outs in the first quarter to be around 0.2%, indicating a slight increase from our current position, while we anticipate occupancy will remain steady at 95% for the first quarter. Improvements are expected as the year progresses, primarily due to stronger comps and the transition into our seasonal peaks from the second to the third quarter.

Do you believe it will remain strong in the fourth quarter?

Yes, we've got a 4Q blended trade-out of 1.6% and occupancy of about 95.2. So I think that sort of follows the normal seasonal patterns that you would see.

I wanted to inquire about external growth and acquisitions, especially considering the current state of the balance sheet with EBITDA at 4x at the end of the quarter. What would need to occur for there to be an increase in the acquisition figure? How would we approach that underlevered balance sheet?

The main condition for pursuing acquisitions is the need for improved yields, even though transaction volumes are significantly down. There's a considerable gap between what buyers are willing to pay and what sellers want. Currently, we do not perceive value in the acquisition market compared to other capital opportunities. However, this could change over time. With the recent influx of new supply primarily from the merchant building community, they will eventually need to progress beyond their current development pipeline and rejuvenate their operations. These companies specialize in apartment construction and tend to have more projects than they typically prefer in their pipeline and holdings. Consequently, there will be a need for adjustments not only in the rental supply market regarding supply and demand but also in the transaction market where products need stable ownership outside the merchant building community and where capital providers are ready to step in. We fall into that latter category, but we believe it isn't the right moment yet, so being patient is the best strategy for acquisitions right now.

Analog just completed this week, and our large team was present. This marks the beginning of our acquisition and disposition activities. Compared to last year, which was marked by uncertainty, this year reflects cautious optimism as interest rates have decreased, alleviating some pressure on sellers. However, there remains a significant gap between buyers and sellers in terms of pricing. The key question moving forward will be the outlook on operating fundamentals and how sentiment regarding economic conditions and interest rates evolves. People seem more optimistic about entering the acquisition market now, as last year's fear of making wrong decisions due to the Federal Reserve's actions has shifted. With a potential trajectory toward lower rates in the future, it is becoming easier to develop financially viable models under a decreasing rate scenario in the next couple of years. That said, we have not yet reached that critical turning point.

I wanted to ask about dispositions. I guess, this month, you're going to be selling Camden Vantage in Atlanta. Why this particular asset is not old. It's in one of your core Sunbelt markets. We calculated the cap rate north of 7%, so I didn't see like pricing was that great. But going forward, where else do you see this decision activity, will it be in California or focused on more of your older products?

So I'll take the cap rate question first and then I think maybe Keith can opine on the disposition choice. But for Camden Vantage, we are showing this at using actual CapEx and a management fee at a 5.75% cap rate. Tax adjusted 5.65% cap rate and an AFFO yield before management fees of 6.09%. So definitely a lower yield than you're calculating.

Yes. And on the dispose side, I mean we keep a list of and have ongoing conversations with our operating groups about if there were to be a sale out of one of your markets or submarkets which assets would be in that conversation. And Vantage almost always came up as 1 that would be on the list of management's list of assets that they would rather someone else take care of. So I'll just leave it at that.

Can I just follow up what was the CapEx consumption on Vantage?

Yes, the CapEx on that one, I think it's probably around $1,800 a door but I'll have to get back to you the exact.

Just on the dispositions, given how low your leverage sizeable free cash flow and the minimal development spending remaining. How aggressive are you willing to be and sell more assets without corresponding acquisitions? Because it seems like given Keith's acquisition market commentary that acquisitions at best would be back half end loaded and may not come at all if the rest doesn't come.

Our guidance indicates that we expect to balance our dispositions and acquisitions, aiming for a net zero position over the year. We will consider acquisitions when we identify valuable opportunities. We're willing to add newer assets to our portfolio and will also sell a corresponding number of assets to finance those acquisitions. Our current approach, reflected in the guidance, shows that we are prepared to act aggressively in pursuing acquisitions when we see value, but not before we identify those opportunities.

Okay, that's helpful. And then, just a point of clarity. The mid-5 to low 6s that you guys talked about on development yields on a stabilized basis. Was that for the 2 Charlotte ones that you might start this year? Or was that to stabilize yields on the 4 properties in the current development pipeline? Actually, the numbers are the same. The current development pipeline, we have some in the sort of the low to mid-6s and some in the sort of low 5s. The new developments in Charlotte, we're still working on what the model looks like but we wouldn't start them if they were in that zone.

Okay. And are you seeing any real relief on materials or labor on the development side, given the sort of pullback in other areas of development? Or is it still competitively priced versus the last couple of years?

Not yet. We haven't seen any significant drops in costs. What's happening is that costs haven't been increasing as much. A couple of years ago, we were experiencing monthly inflation rates of about 1% to 1.5%. Today, that aspect is no longer present, but there hasn't been a noticeable change in pricing. This presents a challenge for every merchant builder, including Camden, since if costs aren't decreasing but rents are stagnant in a highly competitive market, it's difficult to justify new construction. That's why projections indicate that starts will drop to the low 200,000s in 2025. The math just doesn't add up when rents are flat and construction costs haven't decreased.

Question on the development delivery forecast. Do you think this year is going to be more at risk to delays versus prior years? And are you seeing any of the developers going bust yet?

We haven't observed any bankruptcies so far. From what we've gathered, banks are currently collaborating effectively with their borrowers. They are well-capitalized, and it's widely understood that in the coming years, the economic environment, combined with improved operating fundamentals and lower interest rates, will facilitate the processing of deals. Therefore, we do not anticipate any significant bankruptcies or defaults among merchant builders. While they may face challenges in selling, many still retain equity in their projects. Regarding project delays, it remains challenging to deliver on schedule due to a reduced labor force. There isn't an excess supply of labor, which introduces risks in delivery timelines. This situation might actually benefit our supply and demand dynamics. If housing starts decline, which I expect they will, delaying some of the 2024 supply into 2025 and some of the 2025 supply into 2026 could lead to a smoother landing for those markets, given the existing demand.

Yes, thanks. So it sounds like the stress is in the system just isn't there to create a lot of opportunities right now. So wondering what it might take for you to use some capacity to buy back stock?

Yes, we continuously evaluate the potential for capital allocation. In the past, we haven't hesitated to repurchase shares when it was advantageous. However, it can be a bit tricky due to the regulations and restrictions around purchasing significant amounts and during the available periods. Nevertheless, it's a topic we've considered and will pursue when we feel the timing is right.

Yes. Just thoughts on bad debt expense. The forecast was $24 million, 1.1% of total revenues doesn't really change that much from where you were in 4Q. So just wondering why we're not seeing incremental improvement kind of post all the moratoriums and improvements on the fraud management side.

So I think we're sort of in unprecedented times right now where we're trying to figure out what is the new normal. And so at this point, what we're assuming is that the first and second quarter look a lot like the fourth quarter. And then we have some slight improvements as we go into the latter part of the year. Clearly, if we return to 50 basis points which is what our historic norm had been before all of this, then we got some potential upside sort of running through the math. But at this point, we're just being patient and seeing how it plays out.

Alex, just a question for you. There was a step up in CapEx budget for the year, particularly in nonrecurring CapEx. Can you provide more detail as to what's driving the high spend?

Yes, absolutely. So we've got a couple of things that are running through the nonrecurring side. And they're mainly focused around a couple of communities we have that have some large exterior projects and foundational projects that we need to do. So that's what you've got going through the math.

Do you expect that to extend to other properties in like '25 or '26 as well?

No, I don't think so. We review all of our communities thoroughly each year, as you would expect. There are a few communities that we've identified that had foundational and exterior issues we needed to address. Our plan is to resolve these in 2024, and I wouldn't anticipate seeing a number like this in 2025.

Great. Well, thank you for being on the call today. We appreciate the opportunity to go through what 2024 looks like to be an interesting year. So we'll see you in the conference circle in circuit here in the next month or two. So, take care and thank you.