Camden Property Trust (CPT) — Q2 2024 Earnings Call Transcript

Good morning, and welcome to Camden Property Trust's Second Quarter 2024 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 Alex Jessett, President and 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 along with our prepared remarks, and those slides will also be available on our website later today or by e-mail upon request. Please note that this event is being recorded. Before we begin our prepared remarks, I want to inform everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could 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 reflect management's current opinions, and the company has no obligation to update or supplement these statements due to subsequent events. Camden's complete second quarter 2024 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 aim to complete our call within one hour, so please limit your initial question to one and rejoin the queue for additional discussions. If we can speak with everyone in the queue today, we will respond to further questions by phone or e-mail after the call concludes. At this time, I'll turn the call over to Ric Campo.

Thanks, Kim. The theme of our on-hold music today is waiting. During our meetings with multifamily stakeholders in recent months, the consensus view seems to be that everyone in multifamily is waiting for something. Operations teams are waiting for the pace of multifamily completions to reach a peak and begin to come down and for bad debts to return to pre-pandemic levels. CFR are waiting for the long anticipated first interest rate cut by the Fed as well as a relief in property insurance and property tax expenses. Transaction teams are waiting for the standoff between buyers and sellers to end. Sellers are waiting for buyers to throw in the towel and start buying while buyers are waiting for the towers to go on sale. While we are certain that the waiting will end eventually, the timing is the debate. In the meantime, as the late great Tom Petty reminds us, the waiting is the hardest part. With the second quarter behind us, I'm going to reprise most of my comments from last quarter since the markets are playing out as we have expected. We spent most of our time talking about supply in our markets. Yes, we are at a 30-year high for apartment deliveries. And yes, this is limiting rent growth in most of our markets now. The good news is that our markets are adjusting quickly to the post-pandemic low interest rate development frenzy. Starts are still projected to fall to just over 200,000 apartments in 2025. New deliveries should peak in 2024, falling 21% in 2025 and another 54% in 2026, which would be a 13-year supply low point. Apartment demand continues to be strong during the first half of the year, net apartment demand was over 200,000 apartments matching 2018 and 2019. The main driver of apartment demand is household formation driven by population and employment growth, apartment affordability and positive demographic trends. The most recent 2022-2023 census data reported that the top 10 cities increased their population by 710,000. Nine Camden markets are in the top 10. The bottom 10 cities reported a loss of 200,000 people. These were major cities on the West and East Coast where Camden has limited exposure. Employment growth has been robust in all of our markets except Los Angeles, which continues to struggle. Ten of our markets have had job growth greater than 10% compared to the pre-pandemic levels. Apartment affordability continues to improve as resident wage growth has been over 5%, while rents have been relatively flat. Consumers are spending less of their take-home pay on apartments, with new Camden residents paying 19% of their income towards rent. Mortgage rates and rising home prices have kept move-outs to buy homes near historic lows. The monthly cost of owning a home today is about 60% more than leasing an apartment. This is not going to change anytime soon. Demographic trends continue to be a tailwind, supporting demand for high propensity to rent groups, including young adults age 35 and under. Apartments should take a larger share of household formations given these demand drivers. 2024 demand should be sufficient despite supply concerns to set up accelerating rent growth in 2025 and 2026, assuming that the overall economy continues its current trajectory. To take advantage of what we believe will be a robust multifamily leasing environment beginning in 2025 and beyond, we are starting construction on Camden South Charlotte and Camden Blakeney, 769 suburban apartment homes located in the Ballantyne submarket of Charlotte, North Carolina. I want to give a big shout-out to our Camden team members for their hard work and their commitment to providing living excellence to our residents, which they never wait to do. Keith Oden is up next. Thanks.

Thanks, Ric. Operating conditions across our portfolio are generally playing out as we expected. Our second quarter 2024 same-property performance exceeded our forecast primarily due to continued lower insurance costs and property taxes, which we discussed a bit on last quarter's call. Our top markets for same-property revenue growth were San Diego, Inland Empire, Washington, D.C. Metro, Los Angeles, Orange County, Southeast Florida, Houston, and Denver, all posting revenue growth above our portfolio average of 1.4% and ranging from 1.7% to 6.1% for the quarter. Austin and Nashville remain our most challenged markets with revenue declines of approximately 2% and 4%, respectively, for the quarter. Rental rates for the second quarter showed signed leases down 1.8% and renewals up 3.7%, for a blended rate of positive 0.8%, with an average occupancy of 95.3%. Preliminary results for July indicate slightly better levels of rate growth with occupancy averaging 95.6%. Renewal offers for August and September were sent out with an average increase of 4.6%. And finally, turnover rates across our portfolio remained very low, driven by fewer residents moving out to buy homes. Net turnover for the second quarter of 24% was 42% compared to 45% in the second quarter of 2023. I'll now turn the call over to Alex Jessett, Camden's President and Chief Financial Officer.

Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activity. During the second quarter of 2024, we completed construction on Camden Wood Mill Creek, a 189-unit, $71 million single-family rental community located in the Woodlands, Texas, and we began construction on Camden South Charlotte, a 420-unit, $163 million, 4-storey garden-style new development and Camden Blakeney, a 349-unit, $154 million, 3-storey garden style new development, both located in the Ballantyne submarket of Charlotte. Turning to our financial results. For the second quarter, we reported core FFO of $1.71 per share, $0.04 ahead of the midpoint of our prior quarterly guidance. This outperformance was driven in large part by $0.02 per share in lower-than-anticipated operating expenses resulting from lower core insurance expense and lower property taxes. Approximately half of this expense outperformance was timing-related as property tax refunds we expected in the third quarter were actually received in the second quarter. Additionally, during the second quarter, we had $0.02 per share in higher fee and asset management and interest and other income driven by the combination of cost savings and additional fee income from our third-party construction business and higher interest income from our cash balances. Property revenues for the quarter, including bad debt expense, were in line with our expectations. Last night, we maintained the midpoint of our full year revenue guidance at 1.5%. We also lowered our full year expense guidance from 3.25% to 2.85%, driven primarily by the assumption of continued lower-than-anticipated insurance and property taxes. Insurance represents 7.5% of our operating expenses and was previously anticipated to be flat year-over-year. We now anticipate it to be down approximately 3%, or $0.01 per share favorable to our prior guidance, with the entire amount of the savings occurring in the second quarter. Although we hope the second quarter trend of lower core insurance claims continues, we are not assuming it will in our forecast. Property taxes, which represent approximately 36% of our total operating expenses, were previously projected to increase 1.5% year-over-year. Based on lower Texas property assessments and higher refunds, we are now anticipating that property taxes will be up approximately 1%, a favorability of approximately $0.01 per share. After taking into account the decreases in expenses, we have increased the midpoint of our 2024 same-store NOI growth guidance from 50 basis points to 75 basis points. We are also increasing the midpoint of our full year core FFO from $6.74 to $6.79, a $0.05 per share increase. $0.02 is from the increase to our same-store NOI, of which $0.01 was non-time-related in the second quarter from lower core insurance costs and $0.01 is spread throughout the latter part of the year from anticipated lower taxes. $0.02 is from higher fee and asset management and interest and other income in the second quarter, which is not anticipated to be repeated and $0.01 is from the lower anticipated property taxes on our development and non-same-store communities. At the midpoint of our guidance range, we are still assuming $250 million of acquisitions, offset by an additional $250 million of dispositions with no net accretion or dilution from these matching transactions. Our development starts for the year totaled $317 million, which is in line with the top end of our initial full year guidance, and we are not anticipating any further 2024 starts. We have approximately $55 million of remaining 2024 development spend. We also provided earnings guidance for the third quarter of 2024. We expect core FFO per share for the third quarter to be within the range of $1.66 to $1.70, representing a $0.03 per share sequential decline at the midpoint, primarily resulting from an approximate $0.03 sequential increase in same-store operating expenses resulting from the second quarter lower interest expenses and the seasonality of utility and repair and maintenance expenses, partially offset by a sequential reduction in property taxes due to additional property tax refunds in the third quarter and a $0.02 decrease in fee and asset management and interest and other income due to the nonrecurring components of the second quarter outperformance. This $0.05 per share cumulative decrease in sequential core FFO per share is partially offset by a $0.01 per share increase in same-store revenue as we continue through our peak leasing season, and a $0.01 decline in net overhead expenses primarily associated with the timing of certain public company and compensation costs. As of today, approximately 85% of our debt is fixed rate. We have no amounts outstanding on our $1.2 billion credit facility, only $300 million of maturities over the next 24 months, and less than $300 million left to fund under our existing development pipeline. Our balance sheet remains incredibly strong with net debt to EBITDA at 3.9x. At this time, we'll open the call up to questions.

It seems like July was a really strong month for you in a way that it wasn't for your peers. Can you talk about what you would attribute that to? Did you get more aggressive just based on the demand that you were seeing? Was there some sort of comp impact or anything else that you'd like to call out?

Yes, July was a good month. And the only thing that we have done just from the sort of the 10,000-foot level is that we have increased our marketing support to make sure that our traffic counts remain where we need them to be. So we had a little bit more spending in marketing. But overall, if you think about where our strength in our portfolio has been really impactful for us, it has been Washington, D.C. Metro and Houston, and they are our two largest markets. Although in the last year or so, they've lagged the portfolio. Right now, they're leading the portfolio. So the strength in those two markets, some of which we anticipated a good year, we certainly didn't anticipate as good a year as what we're having in D.C. Metro this year, and it's enough to move the needle on our portfolio.

I mean the other part of the equation is that in July, if you think about last year, July and August, we saw seasonality earlier in the year last year. The seasonality, I think, was caused by sort of consumers running out of their pandemic money, and they moved out quicker. And so we had more partners to fill in July and August. If you think about the setup for the third and fourth quarter of the prior year, it was probably one of the weakest we've had in a long time, primarily driven by that. This year, the COVID money has been gone for a while now, and people are not just moving out because they don't have their COVID money anymore. So with strong job growth, even though the weak print today was expected, it continues to be really robust in our markets. We continue to take market share from the single-family home market because of the rising interest rates and home prices. So it just sets up for a pretty good high-demand market. And I think our team did a great job building occupancy through the peak leasing season. It just gave us a little bit more pricing power.

So Ric, you touched on employment growth as a driver of household formation in your prepared remarks. We've seen some slowdown in the employment reports of late. Just curious about your thoughts on that slowdown versus the strong gains we saw last year and early this year, and how that's coincided with near-record absorption. Also, if we see a continued slowdown in the employment market, how that might impact the acceleration in pricing power and getting back to a more historic market rent growth environment?

Sure. I think the slowdown is clearly a good thing because when you think about the dynamics that affect our business, high interest rates are one part of the equation. So I think the Fed is sort of sticking the landing with maybe an Olympic comment; they seem to be going for the gold. I'm good with a slower economy or slower job growth market. You saw the unemployment rate went up from up to 4.3% with the print this morning. The good news from our perspective is that our markets are where the jobs are. Even when they're slowing, there's still enough job growth and low enough in-migration to continue to take market share from the household formation from single-family. With that said, the key is having reasonable job growth and not cracking the economy. Obviously, if the Fed doesn't stick the landing and we end up with a recession in 2025, then all bets are off on what happens then. We think what's going to happen is a strict landing: moderate employment growth in the markets where employment growth happens the best, which is in our market. So I feel pretty good about where we are. I like the idea that the slower employment growth gives us headroom to start cutting rates, which would be really good for our long-term business.

Great. So your comment about not starting any more new developments for the rest of the year. Can you just talk more about that? I mean, it seems like there's going to be a really good window in '26, '27 to be delivering. So how are you thinking about it? Talk more about that comment? And then maybe as we think ahead to '25, do you think it could be a bigger development year?

Sure. So our development starts, we were prepared. These are really shovel-ready, and we had delayed them. We went ahead and started the two in Charlotte that we announced. We have a decent pipeline that we can start; it's just hard to get positioned and to start those other properties that we have between now and the end of the year. There will likely be 2025 starts. I also think we'll be able to expand the pipeline by helping other developers who can't get financing and have several ready land deals that they're willing to part with. If you look at our history in cycles like this, we've always been able to ramp up our development pipeline. Even though the 2026 and 2027 outlook looks pretty amazing from an apartment perspective, private developers still can't get capital. We were chatting with the largest provider of debt and equity capital to the multifamily industry, and their business for new development, equity, and debt is down 85% this year, and it's not moving up. At the same time, the same group said that their interest in acquisitions or sellers out there who are merchant developers who really need to recapitalize their BOBs and listings are up 60% year-over-year, and it looks like it will be a pretty robust transaction market coming up in the fall and early next year. When the clouds clear a little bit more, we will be more active in development for sure.

I wanted to ask about your views on blended lease growth in the second half of the year. Keith, I know you mentioned that you're sending out renewals at 4.6%. If you could just remind us where you think you typically would sign those at, and also for the new leases, where you think new lease rates go.

Yes. So our renewals are generally within 50 basis points of the average of what we send out. So the 4.6% probably turns into something just above 4%.

Yes, absolutely. Yes, John. For the third quarter, we're assuming blended growth of about 1.6%, and the fourth quarter blended growth of about 1.3%. By the way, that's exactly what we thought last quarter as well.

You guys saw a pretty nice improvement in bad debt in the second quarter year-over-year. Just wondering if you could provide some insights on how this might be trending in July and what you guys are thinking about for the rest of the year. What markets are causing the improvements, or if you're seeing any slipping in bad debt in certain markets?

Yes, absolutely. Bad debt is really getting under control now. What we had in the second quarter was about 80 basis points just closed out July. It's a little early for us to have our July numbers, but we think that they're going to be in line with our expectations for the rest of the year, which is right at 75 basis points. Where we're seeing the biggest improvement is where we needed to see it the most. For instance, California in the second quarter was 2.1% bad debt, while in the first quarter, it was 2.6%. That market was obviously one that we're focused on quite a bit, as well as Atlanta, which in the first quarter was 1.8% and is now 1.4%. The markets that were a little problematic for us are starting to get under control. We do think that we're getting pretty close to a normal level, which for us is about 50 basis points.

This is Steven Su on for Josh. My question is on turnover. It looks like there was a pickup from 2Q to July. I just wonder if you have any color on that, on the turnover?

We always see an increase in turnover in the third quarter, which is very typical. I think the thing to focus on more is that our July 2023 turnover number was 53%, while our July 2024 turnover number is 47%. That's a 600 basis point improvement year-over-year. So although we typically do see higher turnover in the third quarter, it's trending a lot better than typical right now.

What's the current expected stabilized yield on the development pipeline? What have you been seeing in terms of material labor costs as you start those two Charlotte projects?

Sure. The Charlotte projects are going in at yields in the 6 range, with IRRs in the high range, and the general development pipeline, the suburban deals have been in the 6% range, and the more urban deals in the mid- to high 5s. In terms of costs, costs are coming down in some areas, but very slowly. Lumber costs have come down, for example. The good news is we're not having 1% a month inflation like we were a year and a half ago. I don't think we've seen much cost compression; it will be interesting to see as starts fall and we peak in construction this year. Generally, when you see construction starts fall like that, subcontractor margins compress. If you go back to the financial crisis, margins dropped dramatically because people were just working for food at that time; there was no margin. I don't know that that's going to happen this time because there's a lot of other development going on. When you think about commodity prices, those are driven by the global market, not just multifamily; with the bipartisan infrastructure bill and the government spend, concrete and steel prices likely won't come down. As the labor market tightens, I think you'll see labor prices come down and margins compress. It's hard to say today, but it's not going to crater like it did during the financial crisis because that was a whole different animal compared to what we have today. If the Fed does hit the landing, it will be a decent economy for builders and labor.

What about land costs? Are you starting to see any relief there in terms of being able to buy at a cheaper rate or any of these office sites that are going to get bulldozed and converted?

Land is interesting because it doesn't move as fast as you'd think; sellers, just like the sellers of existing multifamily, are unwilling to drop their prices. The opportunity generally comes from developers who own land and are positioning to start development. They can't because the debt and equity markets won't allow it today, and they end up taking a write-off on their soft costs and sell the land for what it was worth initially. However, I think sellers are understanding that the market is different today due to rising capital costs and construction costs not coming down. So land prices tend to be stickier than you'd think. There will be opportunities on both the land side and when buying from developers who can't get their deals financed.

Ric, I just wanted to get a little bit more color around the two development starts. What kind of yields are you penciling, assuming no rent trends, and if you do look out on a stabilized basis, where do you see those heading?

We do both. We look at untrended yields, and we also look at trended yields. We are generally pretty conservative in our trended assumptions. When we look at untrended yields, they're in the mid- to high 5s, and when you look at trended, they're in the 6s. Those are the going in yields or stabilized yields, and we mainly look at IRRs. In the long term, we’re in this business for the long term. You want accretion as you go, but you also want a long-term capital placement with a positive spread to your weighted average long-term cost of capital. That said, we look at IRRs, with one being in the low 8s and the other in the higher 8s. There is substantial upside in those yields, just because of what the market looks like in 2026 and 2027. If you have a reasonable economy and no new supply coming to the market, you should see better than normal rent growth. Long-term, our revenue growth is roughly a little over 3%. To get to a long-term average from today at a revenue growth of about 0.7% means we need significantly better growth in the uptick market years, which would be in '26 and '27. There’s a fair amount of upside in this development starting today.

You mentioned the renewal rates you're sending out today. Given what you're seeing with YieldStar and the other four indicators, do you think occupancy will stay at this high level? Because it looks like it came up in both June and July, or would you expect it to start coming down seasonally?

Yes. So we're at 95.5% now. I think in the back half of the year, we can expect that to basically remain flat. It might come down a little bit in the fourth quarter, but there's a trade-off between rate and occupancy. Our professionals in revenue management deal with that daily to maximize revenues. The key to being able to push rents and maintain pricing power is to keep occupancy at or above 95%. We started the year at 95.3%. We’ve actually ticked up a little during the peak leasing season. Seasonality will likely cause it to drop slightly below 95.5%, but I’m pretty comfortable with our forecast through the end of the year.

Great. Just wanted to know across the portfolio today, where does kind of the loss lease or gain to lease stand? If you can even give a view of a few markets, in particular; I'd be interested to hear.

Yes. So right now, we are in a loss lease position. So it's right around 1%. This is spread across the markets based on the revenue growth we've seen year-to-date. D.C. or San Diego has a much larger loss to lease, while we have gains to leases in markets like Nashville and Austin.

Some of the higher supply markets seem like they might be reaching a bottom, maybe Phoenix is in this category. Are you seeing any signs of this happening, or are we potentially reaching the bottom in some of these markets?

Yes. The markets that jump off the page to me are still Nashville and Austin in terms of oversupply. I think we're still in the middle of it; I don't know if it's the fourth or fifth inning of the baseball game, but I don't think we're anywhere near the end in either of those markets. It's probably going to drift over into mid-2025 just based on the forward completions that we still have to grind through. The good news is, despite historic levels of new supply, we've also seen a historic level of new absorption. In Austin, if you kind of do the math around jobs created and net absorption, the numbers don't seem to make a lot of sense. But when you look at it within the broader context of not just employment growth but in migration into markets like Nashville and Austin, that's been the game changer. Historically, the supply versus job growth would predict much worse rental rate performance in both of those markets, and it just hasn't happened. But in terms of being at the bottom, I don't know, we're probably kicking around the bottom because we're at the peak monthly deliveries in those markets. But clearly, we're going to continue to face the supply challenge into 2025. The good news is our markets have remained robust, we’re still seeing job growth, people are still moving here, and we’re still leasing lots of apartments.

You bought back stock during the quarter in the $96 range. Your stock is now $119 or something like that. And consensus NAV is, I don't know if you believe it, $120-ish. I wonder under what scenario could you start thinking about reversing course from an equity standpoint, not that your balance sheet needs it. Are you at all considering raising equity at some point, particularly if something significant comes along and you get to below the capital and protect your balance sheet at the same time? Just curious what your thoughts are.

Well, we are clearly focused on where we can make the best returns and how to fund that. Of course, the stock is $119 today, but it was $110 just a little while ago and below that. We don't think of it that way. The way I think about capital allocation is if we could acquire a portfolio that improves the quality of our portfolio as part of our strategic plan and can be done on an accretive basis, then using equity and our debt to fund that while keeping our balance sheet strong could be interesting. We haven't found portfolios like that yet. Today, I think the transaction market will be very robust over the next 18 months. This should give us opportunities to participate significantly in acquisitions. If it works out where the math works, then we would certainly consider all sources of capital, including equity. At $120, I think that implies a cap rate at Camden of about 6.7%. There was a comment by the CFO for a recent transaction that it was low 4s. The cap rates today for most of the transactions going off are in the low 5s. The public markets are slow to bring cap rates down to where the real market is today. Ultimately, the public markets may be right, and there’s going to be a flood of properties that come to the market between now and the end of 2025. You could argue that cap rates could stay higher or go higher because of that. On the other hand, there's a huge amount of capital out there, as evidenced by Blackstone and KKR acquiring large portfolios. We’ll see; the Street tends to move the pendulum one way versus the other. To get back to the middle of where cap rates are trading today, $120 may be low.

Can you provide some insight on how you expect D.C. and Houston to perform in the second half of the year?

Yes. I think D.C. and Houston are going to continue to be at the top of our portfolio. D.C. is expected to end the year either first or second in our portfolio. Houston continues to be really robust in terms of growth. I recently saw an announcement that Chevron was moving their corporate headquarters from California to Houston. They’ve been saying they weren’t going to do it for 15 years, yet their chairman and vice-chairman are expected to move to Houston by the end of the year. That's 2,000 jobs. While that’s not huge in the scheme of Houston’s overall employment landscape, it sends a strong message that Houston is the energy capital of the world and isn't going away anytime soon. I think it will continue to become stronger in the near term. I’m positive on both those markets between now and the end of the year.

To add on Houston, as Keith mentioned, it's the energy capital of the world but it's also the energy transition capital. If you look at the government spend on energy, there was roughly a $2 billion hydrogen hub granted to Houston. These energy companies are investing major dollars in clean technology for the transition. Ultimately, the debate about energy transition and global warming has to include a transition plan that works for people. Oil and gas companies are the ones who understand how to transition into hydrogen and other fuels. Long term, Houston is going to continue to do well as a result of both traditional energy and the transition.

I was curious if you could talk about how comfortable you feel about the development spread on the recent Charlotte starts, considering that citing assets trading in the low 5 range and the untrended yields for those starts, if I heard correctly, are below 6 untrended.

Sure. We look at it from a long-term cost of capital perspective. For development, when we acquire, we want 150 basis points spread from our long-term cost of capital. We want 50 to 75 on development. The going in yields are kind of a dangerous benchmark in my opinion because the starting point is important, but where you finish is the key. Long-term, value creation comes from development. We created billions of dollars of value at Camden through our development program over the years. When there’s limited competition coming in at '26 and '27, building today will create long-term value for Camden. If we had only $1 to invest, that would be one thing, but we have one of the best balance sheets in the sector—unfunded line of credit—we could invest $1.3 billion without doing equity offerings while keeping our debt at the right levels to maintain our A rating. The $300 million for development is manageable. If great acquisitions come along, we will participate. But this is a long-term business and we think it makes sense to allocate capital to these transactions which are great suburban, straightforward developments; this is where we’ve made the most value over a long period.

Just thinking about the expense growth this year, it's come in a lot better than expected. Taxes are only up 0.2%. I know Texas refunds and changes have helped. I'm trying to think through some of the one-time benefits this year as we consider expense growth into '25.

Yes. I'll highlight the items that seem to have the most variability first. For property taxes, we're having a fantastic year in 2024. I anticipate, as we move forward, to return to a more normal level, which is about 3%. Regarding insurance, we swung significantly last year; insurance was up 40%. We anticipated an 18% increase at the start of this year, but now we think it will be down 3%. Insurance providers want this business; they want to keep rates low. So I anticipate a cyclical pattern for insurance rates—low for a couple of years followed by increases due to accumulative global losses. Salaries are tied to inflation, so expect more typical increases for that item. Utilities and repair and maintenance will similarly reflect inflation trends. The smallest line item is marketing, which is based on how much we want to spend for traffic. We will spend more on marketing as more supply comes in. With that in mind, I think we're safely under 2.85% total expenses, with that being in good shape compared to long-term averages.

How has the hurricane impact been factored into the guidance, and how should we think about that when modeling the third quarter?

Yes, it's a non-core expense for us. Notice we've increased core FFO by $0.05 per share, non-core FFO by $0.03 per share. The difference is the $0.02 we anticipate from the hurricane impact; this is a net expense line after accounting for insurance proceeds and capitalized costs.

I wanted to follow up on the planned lease assumptions for the back half of the year. In July, you signed blended at 90 basis points, yet you're expecting that to accelerate. Is that based on easier year-over-year comps? Or are there other factors?

No, absolutely. A component of that is easier comps, but also our effective for July is up 1.2%. What I'm saying is our effective for the third quarter is up 1.6%. So while there isn’t much of a jump, the renewal number is up 4%, which is a really good number for us. With decreasing turnover and renewals remaining high, we believe it should drive up our metrics to the predicted 1.6%.

Thank you for being on the call today. Given the context of the last report we had, I want to make sure everybody recognizes that we had on our red, white, and blue shirts to support the U.S. I also want to give a shout-out to Simone Biles, a Houston native who made history yesterday by becoming the most decorated gymnast in history. With that, we will let you enjoy the rest of your day and the rest of the Olympics. Take care and thanks. Bye-bye.