Q3 2019 Earnings Call
Good morning, and welcome to be Camden property Trust third quarter 2019 earnings Conference call.
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This event is being recorded I would now like to turn the conference over to Kim Callahan Senior VP of Investor Relations. Please go ahead.
Good morning, and thank you for joining Camden's third quarter 2019 earnings conference call 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 believes 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 FCC and we encourage you to review them.
Any forward looking statements made on today's call represent management's.
And opinions and the company assumes no obligation to update or supplement these statements because of subsequent events.
As a reminder, Kim is complete third quarter 2019 earnings release is available in the Investor section of our web site at Camden living Dotcom and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call.
Joining me today are Ric Campo Camden's, Chairman and Chief Executive Officer, Keith Oden, Executive Vice Chairman and Alex Jessett Chief Financial Officer.
I know that several of the multifamily called this week have gone over 90 minutes in line. So we will attempt to be brief in our prepared remarks and try to complete our call within one hour we ask that you.
Limit your questions and to then rejoin the queue with 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 some of it or email. After the call concludes at this time I'll turn the call over to Ric Campo.
Thanks, Kim and good morning, today's on hold music was provided by the talking.
Heads.
In their hit titles once in a lifetime. They say that life is same as it ever was which seems to describe the strength in the multifamily space.
Cabins third quarter earnings and same property net operating income growth was better than we expected leading to another guidance increase making that three for the year.
Demand continues to exceed new supply in our markets driven by higher job growth in the national average.
Household formations continue to be strong through the third quarter to nearly nearly 1.4 million increase in household formations. This year. So far the highest in the last 10 years permit capture rate has remained high.
Permits continue be the home of choice for millennials and many others a record high unemployment at record high employment has finally started to bring some of them million millennials that are still living or with their parents assets to great recession back in the apartment markets. This but smiles on the faces in the parents their grown children and the apartment owners.
We continue to.
And the quality of our port property portfolio through development acquisitions repositioning and selected property dispositions, while maintaining what are the strongest balance sheets and re land I want to give a big shout out to our kamin teams for their focus vision and hard work, making sure that they are improving our team members our.
Ours, and our stakeholders lives one experience at a time.
Thanks, and I will let Keith take call from here. Thanks, Rick our third quarter results marked the third straight quarterly beat in the same store raise which leaves us well positions for for a strong close out to 2019 will be providing 2020 guidance next quarter.
Along with our customary report card and letter grades for each of Camden's markets. Our most recent third party economic forecasts are indicating supply will peak in camden's markets in the aggregate in 2020 with a slight decline in 2021, most of our markets, we'll see flat to declining supply next year. However, we.
Do expect to seeing increases in Houston, Orlando, Atlanta, Dallas and Austin.
Some highlights from our same store results include the fact that same store revenue grew at three 3.6% and the third quarter and 1.4% sequentially our top markets for the quarter were Phoenix at 6.9% Raleigh up five.
0.3, San Diego Inland Empire up 4.5% Denver in DC Metro, both up 4.1% and Atlanta for our weaker markets remain South, Florida, and Houston below 2%.
Regarding occupancy our focus remains on maintaining occupancy above 96%, we averaged 96 point.
0.3% in the third quarter of 2019 up from 96.1% in the prior quarter and 95.9% in three in the third quarter of 2018.
Year to date occupancy was 96, one versus 95, seven last year and OCC October occupancy remained slightly about 96%.
96.1.
Turning to leasing activity third quarter 2019, new leases were up 2.4% renewals were up 5.1% for a blend of 3.6%. This compares to a third quarter 18 blended rate of 4.1%. This 50 basis point decrease and.
Rents was mostly offset by a 40 basis point increase and occupancy compared to last year.
October free lives for new leases or flat as expected and and up 5% all renewals for a 1.9% blend roughly the same as October 2018.
November December renewals are being sent out at an average 5%.
Increase.
Our net net turnover continues to set new record lows for the third quarter of 2019, it was down to 51% versus 54% last year move outs to purchase homes for the quarter was 14.3%, which was the same as last quarter and the third quarter of 2018.
For this metric.
14% to 15% is beginning to feel like the new normal for move outs to purchase homes versus the 18% to 20% rate prior to the great recession.
Regarding technology initiatives Camden is evaluating numerous initiatives to increase rep revenues reduced expenses and provide an overall better living experience for our.
Residents.
We've completed the rollout of mobile maintenance and enhance self service online functionality for our residents.
We're currently piloting shirt, our proprietary mobile access solution and we will update you periodically on our technology and innovation initiatives at this point I'll turn the call over to Alex Jessett candidates Chief financial.
Thanks, Kate and before I move onto our financial results and guidance a brief update on our recent real estate and capital markets activities. During the third quarter 2019, we began construction on Camden Hillcrest, a 132 unit 95 million dollar new development in the Hillcrest neighborhood of San Diego, California.
Subsequent to quarter end, we stabilize our Canada Mcgowen station development in Houston, Texas, generating a yield in the low 5% range.
As a result of the elevated supply and the Midtown Submarket. This yield is slightly below our original pro forma but within the range of our expected returns for similar mid and high rise.
Element.
As a supply dynamic in Midtown continues to improve there will be further upside for came to mcgowen station, resulting from its irreplaceable location adjacent to public transportation and a vibrant city park.
Later in the fourth quarter, we will begin construction on Canada Atlantic a 269 unit 100 million.
Our new development implantation, Florida.
For 2019, we've now completed $218 million of acquisitions and $185 million a new development starts.
We are actively working on several additional real estate transactions, which if successful we close around year end and are therefore not.
It is in our fourth quarter guidance as the impact to the quarter would be immaterial.
On the financing side subsequent to quarter end, we completed a 300 million dollar 30 year senior unsecured bond offering when all in interest rate of 3.41% after giving effect to underwriters discounts and other expenses of the offerings.
We.
The proceeds for the early redemption of our existing 250 million dollar 4.78% bonds. Due June 2021, and the prepayment of our 45 million dollar 4.38% secured mortgage due 2045.
These transactions locked in 30 year debt at near all time low yields and.
Extended the average duration of our debt by approximately three years.
After taking into effect these transactions, 100% of our debt is now unsecured and all of our assets are now unencumbered.
In conjunction with the redemption and prepayment we incurred at one time charge to AFFO of approximately 12 cents per share. This.
This represents the combine amounts for a make whole payment on the previously outstanding $250 million bond there prepayment penalty on the $45 million mortgage and the write off of remaining related loan costs. Again. This 12 cents charge was recorded in October and is included in fourth quarter and full year FFO guidance.
Turning to financial results last night, we reported funds from operations for the third quarter 2019 of $130.5 million or $1.29 per share exceeding the midpoint of our prior guidance range by one cents.
This one cents per share outperformance resulted primarily from higher same store NOI.
Resulting from a combination of higher than anticipated levels of occupancy and lower than anticipated real estate taxes.
We have updated and revise our 2019 full year same store revenue expense net operating income and AFFO guidance based upon our year to date operating performance and our expectations for the fourth quarter.
As a result of are better than expected third quarter same store occupancy, which we believe will carry over to the fourth quarter and our anticipation of continued lower property taxes in the fourth quarter, we increase the midpoint of our full year revenue growth guidance from 3.4% to 3.5% and we decreased the midpoint of our full year.
Vince growth guidance from 2.75% to 2.2%.
The anticipated property tax savings are primarily being driven by lower Texas property tax rates as a result of the passage of Texas House, Bill three which reduces school district tax rates by approximately seven cents in 2019 and an additional six cents.
In 2020.
As a result, we're now anticipating full year property taxes for our same store portfolio to increase at just under 1% approximately 200 basis points inside our prior guidance.
The result of this higher revenue guidance and lower expense guidance is a 50 basis point increase to the midpoint of our 2000.
19, same store NOI guidance from 3.75% to 4.25%.
Last night, we also revised the midpoint of our full year 2019, AFFO guidance from $5, a nine cents to $5 in two cents per share.
This seven cents per share decrease includes the impact of.
The fourth quarter 12 cents per share charge related to the early debt repayment. Excluding this charge our full year FFO per share guidance midpoint increased by five cents per share as the result of our anticipated 50 basis points or two and half cent per share increase in 2019 same store.
The end result, approximately one set of this increase incurred during the third quarter with the remainder anticipated in the fourth quarter.
One of the have sense of higher interest and other income, resulting primarily from higher cash balances and other miscellaneous corporate income and one cents from anticipated fourth quarter business interruption insurance recovery.
From a prior period for one of our non same store communities.
Last night, we also provided earnings guidance for the fourth quarter 2019, we expect FFO per share for the fourth quarter to be within the range of $1.21 to $1.25.
The midpoint of $1.23 represents a six cents per share.
Craze from $1.29 reported in the third quarter 2019, and includes the impact of the fourth quarter 12 cents per share FFO charge related to the early debt repayment. Excluding this 12 cents charge, our fourth quarter FFO per share guidance midpoint increased by six cents per share.
As compared to third quarter as the result of a two cents per share or just over 1% expected sequential increase in same store NOI driven primarily by our normal third to fourth quarter seasonal declines in utility repair and maintenance unit turnover and personnel expenses.
You said per share increase and analyze from our development communities and lease up our other non same store communities and the incremental contribution from our joint venture communities.
A one cents per share increase in AFFO associated with the previously mentioned fourth quarter business interruption insurance recovery from one of our non same store communities.
And one cent per share decrease in overhead expense due the timing of various corporate initiatives and expenditures.
Our balance sheet remains strong with net debt to EBITDA at 3.9 times and a total fixed charge coverage ratio at six times.
We ended the quarter with no balances outstanding on our 900 million dollar.
Line of credit and $157 million and cash on hand.
After closing our $300 million bond offering on October seven redeeming the $250 million bond on October the 23rd and repay in the $45 million mortgage on October 30, Onest, we now have approximately $73 million of cash on hand.
At quarter end, we had $672 million of on balance sheet developments under construction with 337 million remaining to fund over the next two and a half years at this time, we'll open the call for questions.
Thank you we will now begin the question and answer session to ask your question you May Press Star then one on your.
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You are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
Our first question today will come from trying to Trujillo with Scotia Bank. Please go ahead.
Hi, good morning, So appreciate the prepared comments about.
The potential for some acquisitions around year end, but just for some context can you give an indication of how many deals you're looking at and the approximate value of that pipeline.
We are probably evaluating a $1 billion of transactions.
And thats kind of an ongoing basis.
It is likely will close.
One or two of those by the end of the year and we're talking probably hitting our original guidance are being slightly ahead of the original guidance, which would be 100 million to 200 million.
By the end of the year.
Okay and quick follow up on that same topic. So earlier this year you remove dispo guidance.
Dispositions from your guidance because you had to other sources of funding, which included equity issuance and your stock is now at an all time highs. So how are you thinking about your cost of capital and the potential to issue more equity to take advantage of some big opportunity that you're seeing.
Clearly our our cost of capital has gone down this year by virtue of.
When you think about the 30 year bond we did it at an all in rate of 3.41%, including fees, but but clearly the high the stock price at this at this level.
Lowers our cost as well.
Ultimately.
In order to grow you either have to issue equity or issue debt.
And we have said.
For a long time that we're going to manage our balance sheet to be one of the best balance sheets and the entire reach sector.
So to the extent that we can match fund.
The acquisition opportunities or fund our development ultimately, we do need to be in the capital markets. So we want to be opportunity.
Stick in that area Weve. This year, we've issued over $1 billion for them or the bonds and if you.
Really good rates and we did an equity issuance in February so we will continue to try to try to.
The prudent in our capital management and make sure that we have a use of funds before we.
Where are we.
Load up the balance sheet right now we have we have a cash on our balance sheet when you spend.
Appreciate the thoughts thanks.
Our next question will come from Nick Joseph with Citi. Please go ahead.
Thanks.
You expect supply to peak in 2020 keep abroad.
Some more color on that in terms of expected deliveries in 2020 versus this year and then maybe specifically for DC in Houston.
Yes, so Nick and our.
This is this is using Ron witness numbers in 2019 in across Camden's footprint. This year in 2019 were going to get.
Roughly 137000 deliveries that picks up.
In 2020 to about 150, and then that comes back down as we mentioned that will come down slightly in 2021 to about 147000. So the progression has won 30 751, and then back down to 147 with the peak in 2020.
In DC.
The numbers are basically last 12000 this year expected.
12000 next year and another 12000 2021.
Usten is the is the big change we go from roughly 8000 apartments this year.
To about 15.
1000, which is.
Percentage wise is a big jump at 15000 is closer to the long term average for deliveries in Houston. So we'll.
Looks like we're trending back to kind of what the with the long term averages band, but it's a pretty big big jump over 2019.
Thanks, and so when you think about how that plays into Houston, obviously, it's been.
Little bit of the drag this year in terms of same store revenue growth versus the portfolio overall, how do you think about operating that portfolio going.
Hi supply next year.
Sure the Houston markets, an interesting market because.
You would you would have we expect to Houston to be better this year than than it has been.
And what's going on here is that we continue to have strong job for a 75000 80000 jobs.
Unemployment rate dropped.
Dramatically here over the last couple of years and whats what what we thought would be higher apartment demand didnt materialize. The way, we the way it usually does and what.
But it was was it I think this this is sort of indic indicative of.
Migration rates around the country they have gone down primarily.
From historical numbers and that generally that's.
Function of.
The unemployment rate being low everywhere, so so theres a.
A not as much incentive for somebody to leave their city, if they can get a job and they and they can create.
Situation for the family there to get another city. So weve, that's one of the issues. The other issue in Houston, which is pretty interesting is that is that aren't what our unemployment rate went down the new jobs that were created.
They were taken by existing people, who lived here who already had a housing solution. So they either lived in a house or apartment already and we didn't create new demand as a result of that when you start looking at the at the numbers going forward into 2020 2021, we think that slips usually apartments are getting.
Yes, there may be 40% to 50% of the demand in household formations driven by jobs and last year. They got about 15% of the of the capture rate in Houston. So we think thats going to turn next year and started turning already and we're going to see a turn in 2020, 2021, which should be more constructive.
For being able to lease those apartments that are coming online during that period.
Thanks.
Our next question will come from surely with Bank of America. Please go ahead.
Hey, good morning, guys and thanks for taking my question.
Talked about.
Could you also talk about southeast, Florida, where you're also seeing a little bit softer market.
And what could that potentially happen in the near term to meet that market better or worse than expected.
Yes, shortly southeast Florida is it was to two primary issues, there's been a moderation in job growth for.
Sure and the.
And we're running between Fort Lauderdale.
And from about 15000 jobs in 2019 looks like is trending about 13000 jobs in 2020, both of which are on the low end of of their historical rates about the same thing in Miami.
Team thousand jobs. This year are trending to 15000 next year.
We still have a pretty big overhang of condominium.
Shadow inventory of condominiums there.
Soaking up some of the demand at the at the higher end of the market. So that that's a little bit of an issue on the supply side.
In 2019.
In Fort Lauderdale, we had about 3000 apartments, it looks like that's going to be less than 2000 in 2020, which should help some and then in Miami you've got it.
Total supply this year completions about 7700, and it looks like that drops down to about.
7000 next year, so while we think that that.
Scenario looks like it's an equilibrium it certainly doesn't feel like a scenario, we're going to see a great return to pricing power in South Florida in 2020.
We'll see where in the process right now putting together, our our bottom up.
Budgets and we'll we'll provide you with a lot hopefully a lot more clarity in guidance on our view for South Florida on our next conference call.
Got it that's helpful and.
As we talking with.
Hi, I would you anticipate higher supply into 2020 could you talk a little bit about.
Strategy going forward and focus on occupancy versus rate.
Yes, so the if you will get Camden's total footprint, you've got the supply is going up in our across our markets from 137 to about 151 cents 14000 apartments over Cameron's avatar.
Brent roughly 8000.
No that is in Houston and again, the 8000 gets us back in Houston to kind of a normal run rate for a for absorption. So the the anomaly of that.
Well that 14000 about 8000 Leverages in Houston, and it's not it's coming off such a low base that that doesn't seem terribly troublesome to us and the rest of it is sort of a rounding error across our markets.
I think from our perspective 2020 is in the aggregate is going to be a lot like 2019, but you're going to see some movement around the markets I think I mentioned the markets, where we've got some supply increases and including Orlando, Dallas, Austin, and Houston and pretty much everywhere else in our portfolio.
We should see moderate declines in supply so.
Are we are going to maintain our strategy of trying to maximize occupancy and if this part of the cycle. We just think that thats, probably the better the better trade also.
Again, when we put together a plan for next year. My guess is as it will be planning for something.
Thats, a little higher in average occupancy than what you would have seen on our portfolio over the last five years, but maybe not materially, but maybe 95 and a half to 96, we've been fortunate this year to be able to outperform occupancy every quarter, so far and it looks like that will carry over to the fourth quarter. This year.
Great Thanks to the color.
Our next question will come from Alexander Goldfarb with Sandler O'neil. Please go ahead.
Hey, good morning down there.
Just two questions first on the on the transaction market you guys have been pretty clear the past few years that it's obviously tough to add to acquire and just.
Sort of curious as cap rates and rent growth across the country almost converged just sort of.
The same levels, regardless of market are you guys finding that youre IR ours are the same as you underwrite or are you seeing more competition from maybe some of the coastal markets or rent control markets coming your way where.
The IRS that you're underwriting this year may actually be lower than what you would have had last year just given the competition.
Well I think the.
Generally speaking.
Reason, we haven't been as aggressive from acquiring properties as because of that issue right. I mean, when you get down to the issue we want to have a.
A decent spread over our long term cost of capital on our.
Terminal I ours and so.
The going in yields are pretty much the same across the country in the and for that type of property. We're looking at it we're now sub fours in most markets markets, including Houston and so.
So the idea.
<unk> of the growth that you have to have from that starting point to get a terminal IR that that is that that is a decent spread over the long term cash cost of capital is tough now that's why we haven't bought as many properties. So bottom line is we're looking for kind of a needle in the haystack, where it's under managed its under its under.
Sure.
Under what we could build at four so under risk restoration costs and and so.
As the is challenged getting those units in that regard so with that said there is a there is a hope that that in the next year or two they'll be a.
Sure a convergence of sellers that we'll have to just maybe going in yields are pricing. If you will to match what the buyers really want because there is sort of a there is as big bid ask spread and there's a massive wall of capital out there that that needs to needs to be placed and the sellers need to.
Charge their own balance sheet. So they can continue to develop.
On the second part of your question, which was kind of the is there a migration of capital flows from the two sunbelt markets from other.
Lower cap rate markets that Theres theres some pretty.
And indications recently that some of the big players that his have historically I wanted to play only in the gateway cities in the coastal markets are migrating migrating into the sunbelt for all those for all the reasons that that we like our.
Our footprint, where it is right now.
Job growth is continues to outperform.
The rest of the U.S. in our markets and cost of doing business and the regulatory environment is certainly more friendly and most of our state. So I think that is there is some evidenced that that's going on and it does put additional pressure on cap rates on the question of you're on the question of kind of.
Our ours.
The the flip side of the the of the cap rates that were chasing is that as Youve underwriter NRE you got to be realistic about what an exit cap rate is and if you're looking at acquisition cap rates at three and three quarters.
Whereas before we would have been hard pressed to even think about a fourth quarter.
That cap rate, but thats the price of poker and so when you do the underwriting with what we think are realistic exit cap rates based on the current environment you your cap.
Your ours not that far off of where it would've been a year ago. The challenges as Rick pointed out is if you are starting from a 375.
It.
Does it almost as a matter what your math is on the exit cap rate first of all we're going to hold these assets when we file for probably 20 years secondly to get from 375 to a.
It's sort of a run rate that's above our weighted average cost of capital. It just seems like forever.
So we're we're reluctant in the same way that you think.
About lenders, who at some point in time with lending it over a spread and say, it's before I don't really care, what the spread is I'm not willing to lend money below acts and are in our world. We're just not willing to invest money below acts.
Certainly amazing to talk about 370 fives and.
Markets I'm sure you've never met those together are the second question is for Alex on the property tax.
He said that there's an impact this year savings, but you also expect another savings next year.
So just from a qualitative standpoint, I know, you're not giving guidance, but still as we think about next year is there.
Yes, how how do we gauge the amount of savings that that we should anticipate or is it or is that sort of savings already in the third quarter run rate.
Without giving guidance.
What we will see is further decreases in tax rates in Texas in 2027 cents.
In 2019, its initial six cents in 2020.
And then obviously the offset to that is is we were very successful in 2019 with the amount of refunds that we've gotten then and so we'll we'll see how our budgets play out for the refunds, we anticipate in 2020.
Okay. Thank you thanks.
Our next question will come from Derrick Johnson with Deutsche Bank. Please go ahead.
Hi, everyone. Thank you.
Your starts under construction and Shadow pipeline continues to remain robust.
How are you viewing the development platform given the perfect the compressing development.
Sales.
In this environment and has the low end of yield expectation range comfortably decline to let's say around 5%.
I think the the answer is absolutely we are continuing to be in the development business and we like where we sit in that regard.
Guard we've generally.
Started between two and 300 million annually and we have a pipeline to continue that that process.
The yields on the yields have definitely come down returns have come down on development as result of rising construction costs.
Going up faster than.
As rate increases have gone.
Our last book of business.
That we completed our average return was in this around 7% now or average returns around 6% and the.
When you think about the blended rate of of the differ different types of assets were building or.
Building suburban would would frame assets that are trending in the.
At the higher level.
Higher returns than the urban concrete higher densities and those are going to be in the in the in the low fives and the and this the stick built suburban properties are going to be six and some change.
And so our blended rates are going to be probably 100 basis points less than we then we got on our last on our last cycle on the other hand, when you look at the spread.
That you're getting for the risk of developing the spreads actually stayed the same because cap rates have compressed and and people are paying sub for cap rates.
For.
Assets of these kind of qualities or the spread in terms of risk reward that we're getting from developing continues to be robust we need that Lisa hundred 50 basis point positive spread on a development project versus an acquisition and we're continuing to get that because of the of the compression in cap rates in the wall of capital there.
Continues to get up existing properties.
Got it understood and then just switching to do you see just quickly.
So do you see does contribute an outside is amount of ally versus other metro's in the portfolio and yet the rest of the portfolio is in the Sun belt, which which.
We of course, you make sense.
So how do you see do you see fitting into that mix going forward.
Sitting you considering you don't really have any ongoing development or communities planned in the pipeline I believe at this point do understand that there isn't one redevelopment project going on so so how do you view.
The DC market going forward.
Well, we still think long term the DC market is we're about appropriately allocated to the DC Metro yet you keep in mind that we have DC proper assets and then we've got northern Virginia, all the way into Maryland. So it's yeah, there theres sort of.
Probably a.
A wave that that they all kind of all those markets are affected by but they all have their own individual drivers. We just finished two pretty sizable developments in DC. We finished noma last year, our lease up there and DC proper so we.
Continue to be very constructive on on DC. It. It's certainly outperformed our expectations. This year, we're at 4.1% NOI growth in DC and.
Relative to our overall portfolio. That's a that's that's accretive to the average and that's the first time that's happened in a number of years.
So we.
Tenured alike.
That area, we will continue to invest and as I said, we just wrapped up about.
$425 million of new development in DC.
DC Metro area in the last two years. So it's good continues to be an important part of our portfolio and.
I gave it a.
DC Metro.
Letter grade of the with a stable outlook that probably.
It probably was wrong it probably was more like a b or b plus stable or maybe be with an improving outlook based on the performance of our portfolio. So far.
Thank you.
Our next question will come.
From handle suggested with Mizuho. Please go ahead.
Hi, Great progress.
How are they found is coming through very poorly on that line. So we will move onto the next question, which is Austin Wurschmidt with Keybanc capital. Please go ahead.
Hi, Good morning, Thank you Alex you referenced in.
Prepared remarks, numerous initiatives that you're working on to improve revenue and expenses.
Can you expand on that and do you expect it to be more of a contributor I guess to revenue growth in the 50 million of revenue enhancing capex that you guys have completed this year.
Are you talking about.
Technology initiatives that we're working.
Non.
This technology initiatives or I guess other.
Adams that will contribute to topline growth.
When we were always looking for new areas of enhance service, where we can where we can drive value to our residents and certainly one of the areas that were that we spent a lot of time exploring in the in the.
Last year is.
Is creating.
Opportunities for parking options for our residents where people are what might be willing to pay for reserved parking for.
For for an additional space et cetera, So thats an area that.
Probably has got gotten more focus of our attention in the last 12 months in.
As a technology there there was a number of things that were that we're looking at I mentioned that we had already rolled out the mobile maintenance, which has been a real game changer for us.
The other thing that we're working on right now as a as a smart locks solution and we have a proprietary product that we're piloting right now.
There are lot US there there are a number of quote smart locks solutions out there, but the economics of them just don't work for the multifamily industry. The game changer will be some when someone comes up and we hope that we will be that that entity comes up with a solution that is cost effective for the for the multifamily business.
This as opposed to the high end condo business and we are pretty well down the trail on proprietary solution that we're piloting in Houston right now we're already rolling out the perimeter access piece of it and then the first quarter next year, we'll be rolling out the smartblock component. So.
We just always keep your head up and going to keep looking.
And be aware of of any opportunities that we have to better serve our residents.
Can you give us a sense of what the spend is on that and what the returns are you expect from from those from those items.
Which.
We don't have that nailed down yet because since it's a proprietary product is something that at a point in time.
Tom will will make available to anybody else, who wants us mortlock solution with economics that work into multifamily business, but we haven't nail that down yet.
Okay and then just last question for me.
To the extent you successfully closed on the $100 million to $200 million deals Ami referencing the acquisition pipeline and you kind of utilize that available cash on the balance.
Okay.
As future opportunity arise I guess, what's your willingness to utilize the ATM versus versus an overnight.
Well the balance.
Between ATM and overnights interestingly enough. It's about the same in terms of cost of the company. It obviously is.
It's more efficient and and.
Quicker to do to do a overnight versus an ATM because you can only only.
So limited amount of volume each day.
But really the.
Determining factor for our capital allocation is really what we're trying to match fund.
The investments that we're making and and so we'll we'll use the most efficient platform to do that and use the combination of of debt and equity as we have in the past.
Great Thanks to the thoughts.
Our next question will come from drew Babin with Baird. Please go ahead.
Good morning, this is Alan.
Alex on for true first off what kind of Mcgowen station curious how aggressive you guys had to get on concessions there to get it fully.
Leased and then also with that yield coming a little lower than you. Initially expected have you reevaluate it on your underwriting expectations for the downtown development right down the road.
So on the first question Mcgowen station.
Mcgowen station market kind of ran a range, depending upon what time of year and and what was going on anywhere from a month free to two months free sometimes two and a half.
The.
When you look at the downtown mid town and Greenway markets that probably in east and that's probably where the most.
Hyacinth percentage of.
Properties are very high end, so the it's definitely been a slug access there from that perspective.
Now that were stabilized we're feeling pretty good about mcgowen station is definitely a lower lower yields than originally.
Projected the downtown project, we are definitely going to open.
Open up into.
This has the same concessionary market. The good news is there there's not a lot of new properties opening their doors in downtown but but the mid town and the Greenway does have a how to have an effect on that so we expect that to be a concessionary market for at least the next 12.
18 months, but we're confident that that downtown continues to be.
Very positive placed for people to live in the last in the last.
Five years, you've gone from 4000 people living downtown to 10000 people living downtown.
And about 3 billion dollars' worth of investments.
To improve Walkability, and parks and and transit and what have you. So we think long term and even in the near term with downtown will continue be a great place for people to an alternative for people live you've seen much more densification in Houston and the folks that are.
We are living downtown or sort of surprising me because there are tending to be an older demographic rather than a younger demographic, primarily because of the price point that that.
That's the downtown buildings are offering but.
We feel good about it we will open into a concessionary market, though for sure.
We are taking some of the units out of the out of the downtown market downtime building by doing a why hotel.
We will have 100 units out of the out of the building that will be.
That will be a hotel, which which will be an interesting test because on the one hand, we'll have cash flow generating from the hotel they tend to.
Get occupied very quickly and that cash flow will offset what we would otherwise have and vacant units.
And we'll be able then to sort of lease up a smaller park property as opposed to the to the whole property and then we'll be able to to sort of close down the why hotel.
Over a period of time, while we continue to lease up.
That's that's real helpful color and then lastly, looking at La Orange County, how does that revenue growth results coming relative to your initial expectations year to date curious if supply has been the motivating factor that looks like you guys have been pushing occupancy over rates. So just curious what you've seen in that market.
Yes, so we had at the beginning of the year are rated.
He is an a minus and improving.
In Orange County, a minus improving so we we were very constructive on la Orange County at the beginning of the year just sort of based on the way our portfolio's position, we've got a pre a different.
Footprint than a lot of our other.
Public company brother, and do in California, It's all southern California, and even within southern California, It's not concentrated in la.
So it it's I think it's performed inline with our expectations.
Obviously, the the does had a real.
So a moderate increase in.
In new apartments in La and Orange County, yet roughly 3500 apartments in Orange County total of about 13000 in all of that all of greater LNG. So those numbers look like they're trending down next year.
In in.
Both markets.
Recent job growth continues to can continue to see in la and Orange County, So I don't.
I know that theres been a little bit of disparity between our results little bit better than some of the some of our competitors, but it certainly wasn't unanticipated for us that we would have a hip.
Good constructive year and both of those markets at the beginning of 2019.
Great. Thanks, Thanks for taking my questions you bet.
Our next question will come from Wes Golladay with RBC capital markets. Please go ahead.
Hi, good morning, everyone going back to that supply forecast for.
This year versus next year does that take into account delays and construction time for next year.
So I.
I would say, yes, because our data providers tell us that they are doing a lot of work around.
Trying to get get refined in terms of delivery dates and do it kind of monthly.
As opposed to looking at quarterly or even let just looking at aggregate numbers.
Having said that for the last three years.
Every all three years I would say they both data providers have underestimated the amount of slippage.
So I can't imagine you know maybe they got ahead of it for 2020, and we're really going to scope from one.
The seven to 151 Im just color me a skeptical based on the last four years of estimates versus what actually materialize. So.
I hope that Theres, there's about a little bit better.
Refinement in that data, but.
I guess I'll believe it when I see a.
Got it and then.
Looking at the balance sheet American looks really good there. The one thing that does stand out as you do have some 5% coupon debt maturing in 2023, how soon can you get after that piece of that.
Yes.
Well when the 2023 maturity definitely as one we'd.
Like to take out.
The challenge you have is the prepayment penalties are very expensive closer you get to it the lower it goes obviously and.
As we as we.
The $12 million charge for the early extinguishment of those bonds that we replaced.
30 year bond.
We'll look at those opportunities, we sort of looked at the $12 million charge as.
We had a did a breakeven analysis that basically told us that if they if the.
The rate went up 18 basis points or spreads gapped 18 basis points, we will.
Between the time that we issued in October versus the maturity of these bonds and sort of like buying insurance on 18 basis points is which is which is what we did and when we look at at.
That if we that cost today would be a bigger spread and a higher much more expensive insurance policy.
And when you get down to 10 basis points or 15 basis points. When you think about how spreads move and how the treasuries move that's a rational insurance policy to buy but today would be much more expensive and thats why wouldn't take that out today, but as we get closer look at what happens to rates as spreads we.
It could make that decision in the future.
Great. Thank you.
Okay SAP. So we look at this all the time when we're running math on it probably weekly right now the prepayment penalty on that would be about $20 million. So.
As compared to the 12 million that we just didn't card. So we are looking at it on an ongoing basis.
Okay. Thanks, a lot guys.
Our next question will come from handle seeing justice with Mizuho. Please go ahead.
Hi, guys Zillow very share with handle I am just few questions on the cost side can you talk about some of the big moves from same store expenses in some of the core markets that you saw on three Q specifically.
In Atlanta, or the big jumps in Charlotte and Southeast Florida.
Absolutely. So when you when you look in Atlanta.
We got some very large property tax refunds in the third quarter.
I'll tell you those were in fact in our plan.
So there was really not a surprise there for us.
If you look at at.
Charlie I keep in mind that Charlotte really has had very high property taxes, we talked about that in the beginning of the year, if you'll remember that Charlotte actually does the Reval every eight years and this this happened to be the revalue year. So as a matter of fact, our our total Charlotte property tax growth for 2019 is right around 30.
5%.
And if you're looking at that.
Southeast, Florida, that's also property tax driven so really they're all they're all property tax driven and it depends upon the timing of either when refunds come in or as I said with with Charlotte just the overall increase in that.
Market due to the fact that the Reval every eight years.
Alright, Thanks, and you mentioned the benefit from Texas, but do you guys anticipate any other major tailwinds or headwinds and reassessment of taxes.
Anything of that sort in 2020.
Yes, I mean, so the only thing that we're looking at in 20.
20 is that Raleigh also reval every certain years, so weve Raleigh is going to revalue in 2020, and thats going to be over four years, obviously as the smaller market for us so shouldn't be as incremental as what we saw in Charlotte.
And then just just to clarify on taxes, yes.
We talk about a 7% reduction or six cents reduction in property tax rates in Texas, what we're talking about is not an FFO per share we're talking about as a percentage of the mill rate. So if you think about a standard mill rate in Texas being call. It $2.22 per thousand if you have a seven cents reduction what.
Works out to be as about a 3.5% reduction in Texas.
Due to the rates.
Thanks for the color.
Absolutely.
Our next question will come from Neil Malkin with capital One Securities. Please go ahead.
Hey, guys first question on.
And in general.
First sorry about the World series.
[laughter] Zara game.
Hi.
Yes.
But.
Just given the fact that.
The market really is.
So heavily on energy I know you've talked about medical being a big.
But it really seems to have been flow with.
How the energy sectors doing much the fact that very easy to bring on supply quickly I Wonder if you ever think about maybe paring down your exposure in that market.
Given the volatility in sort of one main demand driver on it.
Well I think that is a misconception that energy drives Houston's fundamentally because if you look at let's just talk about 20 middle of 2014, when energy prices were 100 and.
Over $100 barrel and then they went to 20, some $20 and some change and by 2015 energy industry loss 80000 jobs.
In Houston and at that time.
The Houston produce another 80000 jobs in the Penner petrochemical business to medical business and other ancillary businesses. So Houston had had basically a flat job growth for a couple of years as result of that and then the market responded bye bye bye.
It's dropping from the good news about about the ability to add supplies you can cut the supply as fast as you can add the supply. So we cut the supply pretty dramatically and the market Didnt have a major dislocation.
Like like had maybe in the eighties, So Houston is much more diverse.
Provides economy than it was in the past and part of the when you think about just the price of oil what your what happens there is that.
That relates to drilling activity from from that perspective, but the petrochemical part of the short downstream energy business is actually doing really well a third of.
All gasoline for example, as is is manufactured in the Houston ship channel, 60% of airline fuel is manufactured there. So there's a lot and a lot of primary chemicals are continuing to do really well as long as and those are more driven not by energy prices, but by economic.
Back activity. So if you have a clearly a recession on the horizon than the and that's one of the reasons Houston is less.
Sort of.
Less bullet proof from a recession back if you go back end of the Eightys when the U.S. had a recession Houston never felt it because it was so energy dependent mostly on the ups.
Cream side.
That said.
We definitely look at our allocations of our real estate and and we want to make sure that were balanced Houston represents about 11% of our portfolio today, it's been a great long term market for us, but we definitely look.
Cat, where we're buying and where we're selling and you haven't see a new development in Houston and other than in our joint venture right now, but that doesn't necessarily mean the opportunity.
Isn't here because to me I think one of the misconceptions of Houston.
A lot of people made a lot of money in our stock when when we underperformed the market.
2014 by 2000 basis points, and and because they sort of through the stock out the window because of the energy situation, even though the we didnt perform from a cash flow perspective that badly here.
So we're going to make investments here, we're going to stay in Houston will toggle that here and there, but but we have never considered like.
In this market or anything like that maybe maybe slowing the growth or or perhaps Korean back some of the some of the assets that are that are maybe needing more capex, but beyond that or long term players here.
Neil Thank you for your condolences to our Houston Astros, but like I told everybody in Camden.
DC is our largest market Houston as our second largest market before they ever played a game Cameron was a winter and one of the standard and up one of the things was going to end up with a trophy.
The way to look at it.
Okay last one from me.
Lot of companies have been talking about tack and integration and.
And how that feeds into various platform.
With revenue and expense management side.
You're obviously not spending.
During the smart home router, but I'm, just curious how youre thinking about.
Technology to proactively help with things like like Capex.
Anything.
Along those lines, you're doing that either the on the revenue or expense side that that you're kind of leveraging big data or the internet.
Things I guess to sort of that enhance your platform, which.
Well I would first of all at the speed that we're not doing smart homes. Because we are we're doing we're doing the smart homes that people.
We'll want people for example, do not want.
Systems that turned their lights on or not they want they definitely want smart thermostats and things like that and access we do a lot of focus groups and spent a lot of time trying to understand what our customers want and what they are willing to pay for and so.
On that side of the equation, where we're.
Pushing the envelope to create value for customers and drive revenue for us the on the big data.
We have just.
Completed and are in the process of of.
Putting additional nodules on or modules on this.
System, but we just completed an oracle cloud based system, where are our financial reporting and HR.
Is now going to be in the cloud and and that is when that is all about big data. It's all about having access to all of our data via.
Smartphones, and and then being able to.
To drive expenses lowering Capex I think the internet of things is a real thing and so ultimately.
When you have your data all in the same place and its communicating across platforms in both in the cloud will be able to.
To leverage.
Smart devices in our air conditioning units and our maintenance facilities. So that we can.
And instead of fixing a broken one we can that that inconvenience that inconveniences, a tenant or resident we can we can actually do preventive maintenance which was.
Save us money over the long term, so I think that that that as a that was a big investment in a massive amount of time and effort as a nearly a two year project and and everyone. In our company was involved than in the teams did a great job, even though is there definitely those kind of big ticket projects are very painful because you're doing your.
Similar job plus trying to implement a new system and our teams did a great job.
Managing managing what is a tough thing and ultimately our big data and our ability to to analyze and understand how things are working is definitely going to be enhance dramatically as result of that project.
Thank you.
Our next question will come from John Palau skew with Green Street Advisors. Please go ahead.
Thanks, just one quick one for me Keith I was hoping you could compare 2019 operating backdrop versus 2018 as it relates to.
Urban versus suburban properties in what you're seeing.
On the on the rent growth side or.
Our suburban properties coming down to Earth versus urban or are they still pulling ahead any comments there would be great. Yes, John the pretty consistently this year, our urban product has outperformed our the suburban product has outperformed by about 50 basis points.
A lot of is primarily.
The result of where the last cycle of product got built it was.
The overwhelmingly the merchant build.
Community was definitely had a bias towards urban assets Thats, where the buyers of that product wanted to.
Two.
That's where the demand was for their product on an exit basis. So yes that that can we continue to see that hasn't changed.
One of that's one of the things in our Houston portfolio, that's actually helped us pretty dramatically is our suburban assets have held up really nicely.
In the real supply challenges.
As Rick mentioned that have been in the mid town downtown in the Greenway Plaza area, so, but but absolutely. It's it as a trend has continued my guess is that as they always do the the focus because there's so much.
Competition in the urban core areas that you probably going to see address back.
Towards the suburban assets by the merchant community and we'll deal with that when we have to.
And just to be clear I was talking portfolio wide. So that that comment holds in the supply late end markets of Dallas Charlotte other markets as well, yes, thats across the 50 basis points as of cross camden's entire portfolio.
As a similar margin this time last year.
Yes, it was.
Okay. Thank you you bet.
Our next question comes from Hardy could goal with Zelman and associates. Please go ahead.
Hey, guys. Thanks for taking my question.
Stepping back from just the company levels.
Style for you guys talk a little bit about challenge of allocating capital to and from your peers are really going out there issuing equity and.
Expanding side of the company you guys have been more prudent.
How do you see this play out longer term 510 years. This wall of capital issue what could change how could this wall of capital.
I will shift elsewhere.
And what does it about the narrative that you think will keep it there or move it.
Well I think the.
The the narrative will change when there is when we have a recession right and when.
The when we have the next cycle the question about what happens.
Generally what happens in a in a business contraction is that people lose jobs demand is is reduced as result of of that situation and then what happens is you have.
Landlords, especially new developments that are in lease up.
That have to discount dramatically to to by market share.
That generally has a an effect on pricing.
And your where you're able to cap rates rise and and prices sort of go to go down the thing that's kind of that and I guess on the recession side last year at this time.
When the market was going down and everybody was talking about recession. The federal is rising now or in a.
The economy accommodated good.
Come native.
Easing cycle.
We don't we don't.
Sort of bet on recessions or major upticks that we're trying to keep.
Beyond.
A position, where we we sort of.
Plan for the worse and hope for the best that's why we're we're our balance sheet is where it is today because you don't know what's going to happen in the future.
Yes, the the real interesting part of of multifamily I think the reason multifamily is.
Eight one of the top real estate classes.
This multifamily industrial or have the hot hands, and Thats, where investment capital wants to go in multifamily.
And the multifamily space, that's because people need a place to live and when you look at the demographics and you look at at at the sort of where people live and how they operate today.
Especially the millennials they are doing everything later in life, they're buying houses later in life, having kids later in life. They don't want they want the optionality of apartments, so apartments or are really good and then what do you think about well if interest rates go up because of inflation.
Apartment apartment.
Leases rollover.
On average of 8% every month and were repricing our asset every days. So you have a good backdrop for inflation. So that's why capitals coming this way.
We.
We are.
Expanding our.
Our business as well when you look at the.
Element pipeline, plus the acquisitions, four or $500 million a year of additional capital that gets gets put out now as we could we could.
We're very.
Ultimately we are at the beginning of a cycle of this is 2012 or 13, we might be more aggressive on on all those the fronts, but because we're late.
In the cycle and there's a lot of uncertainty out there we're going to be more prudent.
Got it just a quick follow up on that you mentioned cap rates of 3.75, maybe you have an exit a four four and a half.
Is it conceivable that in a recessionary scenario not enough for you guys because you guys.
Strong balance sheet, but.
But for private operators, but our underwriting like that as a possible that they see.
Significantly underperformed underwritten returns because cap rates cap out more because they're starting from such a historically low base well that's definitely the risk right I mean, because if you're if you're wanting a.
6% hierarchy started 375 and you then have a have a growth expectation of the cash flow and an exit cap rate I mean, if cap rates gap 100 basis points, you need at 25% increase in revenue or analytes to be able to offset that kind of increasing cap rate in order to make a return so.
I think that if you. If you are innocent that's the inherent risk of of buying buying a a a cap rate at that level today.
It's worked out for lots of folks because the rents have grown and cap rates have continued to stay very low.
But but ultimately.
People might be disappointed in their returns.
You have a scenario where cap rates gap and and rents still grow as much I.
I think that the issue of whether somebody gets in trouble.
Financially I think thats, probably a low risk because because you just have.
There's a lot of equity in.
The system, even in the development game the merchant builders are are all.
30% to 40% equity today because of just the way banking the bank system is requiring the equity. So I don't think Theres a lot there will be a lot of financial stress in terms of of people having to sell but on the other hand their expectation of.
Their pricing and their margins or profit margins, which have been amazingly high end sticky for a long time, we'll probably revert to more normal levels or less than they originally anticipated.
Thank you that's that's great color.
Our next question will come from John Guinee.
With Stifel. Please go ahead.
Thank you John Guinee here to curiosity questions.
It looks like at San Diego's about $720000 a unit four up pretty small project. A 130 odd units can you talk about what you're building there and why it.
That price and then second.
If I look at your redevelopment summary.
Is it is it okay and it gets project out maybe a thousand units a year I get this kind of major overhaul and people should think about that us and ongoing capex.
So on.
San Diego.
That is the short answer is it's the price of poker for an a plus location this adjacent to the Hillcrest.
Neighborhood, where single family homes little bungalows sell for a million half $2 million.
Remodel and a half from valuable apart your two miles from downtown.
It's in the and I don't I'm generally not a believer in using the word unique for real estate, but this is a really unique site. It's literally up on top of a blow up with a view of mission Bay. It's it almost required that we build that that scale and scope of project.
And again, you're talking about.
Comparable rents in that neighborhood that are pushing threeg 80 to $4 a square foot. So the number the returns work because people are willing to pay a premium to be in that neighborhood. They are relatively small unit footprints, but yes, it's a it's expensive to build in California.
For sure.
On the thousands of annually I think that is a rational thought process. We are we haven't moved through our portfolio, but but we're a will continue to make that investment. It is a it's the best investment on the board that we can make as RIN redeveloping or existing properties.
Yeah.
So what do you think you decide to redevelop develop one property up a year.
Yes, I think you have to split into two carrying into two categories, So repositions, which as separate the redevelopment and Repositions. We're doing about 2300 units a year, Anna and I think thats, probably a pretty safe number to.
So when you.
When you look at the redevelopment Theres Theres four communities.
They are all unique in that they are they're all high rises.
And they are communities, where there was extensive.
Exterior renovations that were necessary I would tell you that that particular pool is a little bit.
Lower than the pool of reposition so we'll keep looking for redevelopment I wouldn't expect to see a huge amount of these on an ongoing basis, but as I said, we'll continue to add the repositions.
Think about 2300, 2500, plus or minus here.
And thats more of a 10 to $12000 price tag.
It started that way, it's getting the creeping up a little more closer to the call. It 15 to 20000 price range just for for obvious reasons, but we're still getting a fantastic returns on those repositions.
Great. Thank you.
This concludes our question and answer session I would now like to.
The conference back over to Mr., Ric Campo for any closing remarks.
Well, thanks for being on the call today, and we will see a lot of view at navarrete coming up so I think slots.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.