Q3 2020 Camden Property Trust Earnings Call
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Good morning, and thank you and welcome to the Camden Property Trust third quarter 2020 earnings Conference call. All participants will be in Watson only mode should you need assistance. Please signal a call specialists are pressing the star key followed by zero after.
After todays presentation, there will be an opportunity to ask questions to ask a question about press Star and then one on your Touchtone phone.
So what's driving your question. Please press Star then two please.
No at this event is being recorded I would now like to turn the conference over to Kim Callahan. Please go ahead.
Good morning, and thank you for joining Camdens third quarter 2020 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 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 FCC and we encourage you to review them any forward looking statements made on today's call represent management's current opinions and the company assumes no obligation to update or supplement these statements because of subsequent events.
As a reminder, Kevin's complete third quarter 2020 earnings release is available in the investors section of our website at Camden living Dot Com and it includes reconciliations to non-GAAP financial measures, which will be discussed on the 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.
We will attempt to complete our call within one hour as we know another multifamily company is holding their call right. After us we already have 15 analysts in the queue right now so please limit your questions to two if we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email. After the call concludes at this time all.
I'll turn the call over to Ric Campo. Thanks.
Thanks Kim.
Our own hold music today was a tribute to team Camden, We wanted to celebrate the incredible results of our on site teams supported by regional and corporate staff that they have achieved throughout the cobot storm. Despite all the turmoil turmoil team Camden never stopped taking care of business. That's when you connect.
Back from a team of all stars instead of 1000 1000 yards stair team Camden showed up every day with the eye of the Tiger reminding us of what we know is true you are simply the best. So this evening, we will join you in that spirit as you all raise your glass.
To celebrate your remarkable performance shares.
Our performance for the third quarter was driven by our team, but was also aided by our Camden brand equity and our capital allocation and market selection.
We've always believed that geographic and product diversification with lower the volatility of our earnings.
We are in markets that are pro business have an educated workforce low cost of housing and high quality of life scores. These are attributes drive population and employment growth, which drives housing demand the.
The only exception to this market general relation generalization for us the southern California compared to most other parts of California. However, our properties are in the most business friendly cities and areas in the state.
Our markets have have lost fewer high paying jobs than than other markets in the U.S. as a matter of fact, it's 5% losses for Camden markets versus 15% for the U.S. over.
The overall year over year employment losses through September have been less in our markets job losses and in most of our markets had been in the range of down 2.5% to down 5%.
The best being Austin, Dallas Phoenix Tampa.
Atlanta, and Houston toughest markets have been Orlando, Los Angeles, and Orange County, with job losses between 9.5% and 9.7%.
Another key employment trend.
Or other key in employment trends are that are supporting our our residents' ability to stay in their apartments and pay rent is that when you. When you think about the job losses that that we lost at the beginning of the pandemic. There were 22 million jobs lost 11 million had been added back of the jobs that have not been added back $5.8 million.
Our low income workers, making less than $46000 a year.
And another group $4.1 million.
Folks have not been added back that make between 46000 $71000 a year. So the lion's share of the 11 million jobs that havent been that have not been added back are really not our residents are lower income workers that do not live at Camden most.
Most of our residents have higher income than that and it's unfortunate that we have that many job losses, and we obviously need to add those jobs back as soon as possible, but they aren't negatively impacting camden's.
Canvas resident base.
Again, I want to thank our team Camden for delivering living excellence to all of our residents and I'll turn the call over to Keith Our executive Vice Chairman.
Thanks, Rick I'll keep my remarks brief today, so that we can get to as many of your questions as possible. Obviously, we are more than pleased with our results for the quarter. This is certainly the kind of performance that is worthy of celebration by team Camden.
Overall things seem like they are getting back to something closer to normal and that's quite a contrast to where we were in April and may of this year.
Signs that conditions have stabilized in our markets occupancy for the third quarter was 95.6% up from 95.2% in the second quarter. Several of our communities are actually exceeding their original budget for occupancy turn.
Turnover continues to be a tailwind at 48% for the third quarter and only 42% year to date.
It continues to be a lot of anecdotal evidence that home sales are spiking and our portfolio, we had 13.8% move outs to purchase homes in the first quarter of this year that moved up to 14.7% of the second quarter and in the third quarter. It moved up again to 15.8%, but if you take the average.
The average year to date.
Move outs to purchase homes. It was 14 point, it's 14.8% versus full year 2019, a 14.6% so really very little change year over year, we did see a.
A little uptick in October to 18%, but Q4 is always a little bit elevated clearly this is a stat that bears watching to see if the an anecdotal evidence start showing up in the stats.
Thanks to all Camden for a remarkable year, so far everybody keep your rally caps on for the rest of the year and I will turn the call over to Alex Jessett. Thanks, Keith before I move onto our financial results and guidance a brief update on our recent real estate activities.
During the third quarter 2020, we stabilized Camden, North and one a 441 unit $99 million in new development in Phoenix, Arizona generating over a 7% stabilized yield.
We completed construction on Camden downtown a 271 unit $131 million in new development in Houston we've.
We re commence construction on Camden Atlantic, a 269 unit $100 million, New development and plantation, Florida, and we began construction on both Camden Tempe to a 397 unit $115 million new development in Tempe, Arizona, and Camden Nota a 380.
Seven unit $105 million or new development in Charlotte.
For the third quarter of 2020 effective new leases were down 2.4% and effective renewals were up 8.6% for blended decline a 0.9%.
Our October effective lease results indicate a 3.5% decline for new leases and a 2.1% growth for renewals for a blended decrease of 1%.
Occupancy averaged 95.6% during the third quarter of 2020, and this was up from the 95.2% we both experienced in the second quarter 2020, and that we anticipated for the third quarter of 2020, leading in part to our third quarter operating outperformance, which I will discuss later.
We continue to have great success in conducting an alternative method property tours for prospective residents and retaining many of our existing residents with actually a slight acceleration in total leasing activity year over year.
In the third quarter, we averaged 3227 signed leases monthly and our same property portfolio slightly ahead of the third quarter of 2019. When we average 3104 signed leases to date October 2020, total signed leasing activity is on pace.
With October 2019.
Our third quarter collections far exceeded our expectations as we collected 99.4% of our scheduled rent with only 8.6% delinquent.
This compares favorably to both the third quarter of 2019, when we collected 98.3% of our schedule rent with a higher 1.7% delinquency and the second quarter 2020, when we collected 97.7% of our scheduled rent with 1.1% of our residents and a deferred rent arrangement.
And 1.2% delinquent.
The fourth quarter is off to a good start with 98.1% of our October 2020 scheduled rents collected.
Turning to bad debt.
Accordance with GAAP certain uncollected rent is recognized by US as income in the current month. We then evaluate this uncollected rent and establish what we believe to be an appropriate bad debt reserve, which serves as a corresponding offset to property revenues in the same period.
When a resident moves out, allowing us money, we typically have previously reserved 100% of the amount owed as bad debt and there will be no future impact to the income statement.
We reevaluate our bad debt reserves monthly for Collectability.
Turning to financial results.
Last night, we reported funds from operations for the third quarter of 2020 of $126.6 million or $1.25 per share exceeding the midpoint of our prior guidance range by eight cents per share.
This eight cents per share outperformance for the third quarter resulted primarily from.
Approximately five and a half cents and higher same store revenue comprised of two and a half cents from lower than anticipated net bad debt due to the previously mentioned higher than anticipated collection levels.
And higher net re letting income.
One said from the higher than anticipated levels of occupancy and two cents from higher than anticipated other income driven primarily from a higher than anticipated levels of leasing activity.
Approximately half a cent and better than anticipated revenue results from our non same store and development communities.
Approximately half a cent and lower overhead due to general cost control measures and an approximate a one and a half cent gain related to the sale of our chirp technology investment to a third party.
This gain is recorded in other income.
We have updated our 2020 full year same store revenue expense and net operating income guidance based upon our year to date operating performance and our expectations for the fourth quarter.
At the midpoint.
We now anticipate full year 2020, same store revenue to increase 1% and expenses to increase 3.4%.
Resulting in an anticipated 2020 same store net operating income decline of 0.3%.
The difference between our anticipated, 3.4% full year total expense growth and our year to date total expense growth of 2.4% is primarily driven by the timing of current and prior year tax refunds and accruals.
The increase to our original full year expense growth assumption of 3% is almost entirely driven by higher than anticipated property tax valuations in Houston.
We now anticipate total same store property taxes will increase by 4.7% in 2020 as compared to our original budget of 3%.
Last night, we also provided earnings guidance for the fourth quarter of 2020, we.
We expect FFO per share for the fourth quarter to be within the range of $1.21 to $1.27.
The midpoint of $1.24 is in line with our third quarter results. After excluding the previously mentioned third quarter gain on sale of technology.
Our normal third to fourth quarter seasonal declines in utility repair and maintenance unit turnover and personnel expenses are anticipated to be entirely offset by the timing of property tax refunds lower net market rents and our normal seasonal reduction in occupancy and corresponding other income.
As of today, we have just under $1.4 billion of liquidity comprised of approximately $450 million in cash and cash equivalents and no amounts outstanding underneath our $900 million unsecured credit facility.
At quarter end, we had $384 million left to spend over the next three years under our existing development pipeline and we have no scheduled debt maturities until 2022.
Our current excess cash is invested with various banks, earning approximately 30 basis points.
At this time, we will open the call up to questions.
We will now begin the question and answer session.
Yes. Good question you May Press Star then one on your Touchtone phone if.
If you are using a speakerphone please pick up your handset before pressing machines.
We'll start your question. Please press Star then too.
At this time, we will pause momentarily to assemble roster.
Our first question comes from Nick Yulico with Scotiabank. Please go ahead.
Hi, Good morning, guys. This is Matt Sharma here in for Nick.
Thank you for taking my question.
So the last question you guys played the doors.
And two quarters ago. It wasn't led Zeppelin cover so very strong takes both of them match rate.
And today's hold music as you mentioned earlier the eye of the Tiger. So I'm thinking you guys are feeling better.
So it's kind of my obligation document what factors are rich good good actually change your.
Our optimism looking ahead in terms of connections and market dynamics.
I think it's it's it's all about you know reopening the economy, and obviously were what would worry us today is.
33 states spiking with current of Iris and.
And certain Mark when we heard heard this morning on the news that El Paso was thinking about about a shutdown.
Ultimately.
The I don't think anything works and the economy, whether its apartments or any other business. If you don't have.
Unemployment and you don't have the economy working going forward and so what would concern me would clearly be.
A go back to a March.
Middle of March shutdown in.
If that happens in America, then all bets are off again on their everything I think.
Yes, I would just add to that that.
Policy.
Driven mandates regarding the ability of landlords to control the destiny of their real estate.
Similar to the CDC mandate, if we start seeing those those types of mandates at the national level that continue to push out the ability for landlords to get control their real estate through the through the eviction processes.
Thats that needs to come to that.
That needs to come to.
Positive ending in terms of allowing landlords to get get control of their destiny in the real estate. So I would add that to Ricks Rick's point about.
About the getting the economy opened again so.
Those two things were probably would be at the top of my list.
Great and if you guys could sort of comment on and then downtown one in Houston, I know its 39 and lease but.
But it's in a market that you saw the largest year over year and sequential occupancy drop so im just trying to understand whether new on apartments are easier to lease as we've heard from other markets or is there some of the factors that could drive optimism for the project I think you have downtown due in the pipeline I know, it's probably sort of perspective start just wondering.
What do you.
What what could sort of change the equation on on that particular asset.
Sure.
Houston I think in general M&A talking about Houston, but I think most markets in America, maybe maybe ex California.
Our our most of our markets are are experiencing supply and demand fundamentals. The way. They were pre pandemic now there's definitely a pandemic kind of overlay, but but Houston was a soft market going into the pandemic. If you think about the energy business in 2019, the energy business was not that great I mean at the beginning of 2000 and sort of.
Third quarter, 2018, oil and $70 ish apparel to to under $40 a barrel at the beginning of 19, and so energy wasn't really record recovering and then what what was going on as you had Houston was kind of the only market in America in 2017 that had actually decline in supply so of course what.
Productive merchant builders do as they build their pipelines up in Houston now has a lot of it.
It has a lot of new developments coming online so what's driving the Houston market today is definitely some weakness because of krona virus, but but generally speaking we're in houston's actually fared pretty well.
Were down year over year, 5% in terms of job growth, we lost 300000 jobs and that about half of those back just pretty amazing. So we're at about 150000 jobs lost so I'm actually very encouraged by the downtown lease up because we are leasing in about seven to 10 units a month there normally sub.
Lease 30 units a month, but.
But given that downtown office occupancy is about 15% right now.
It's actually doing really well and I think there are a couple of pieces that to that equation.
And I think a lot of people forget that that urban properties or downtown properties like in Houston, or Atlanta, or Dallas or Charlotte are not the same as downtown New York or or San Francisco or the.
More mostly the southern comfort cities and cities that are less dense than than some of the challenges that are happening in San Francisco New York. There is just not the same and so there.
Our urban is very different than than urban in some of the other markets that people think about and so.
Ultimately our second phase is definitely there, but we're not going to started anytime soon given the supply and demand.
Pick up I think that I think downtown will continue to be really good over a long period of time.
We're definitely going.
Going to be challenged in terms of achieving our original pro forma on this project during the pandemic as we would be with any property today.
In lease up.
With that said I think it's.
The fact that its 39% leased is really good we did have a why hotel in there to start with and of course, given the pandemic why hotel.
Why hotel doesn't make sense in a in a.
In a.
Hospitality.
Side of the equation today.
Thank you so much.
Our next question will come from a low.
Oscar back with Bank of America. Please go ahead.
Hi, everyone. Thank you for taking my questions today, and congrats on a great quarter.
So to start off just thinking more about the leasing activity as well.
Big Picture you are you starting to see a slowdown in any particular markets are across the board in your sunbelt markets as we head into requirements or do you still see a lot of demand, especially a lot more demand of movement from out of state and out of the area that night.
Just.
Yes, we definitely are seeing in migration, but thats been going on for for the last decade from northern Northern markets in California to some of our markets.
Clearly, it's gotten it's ramped up during the during the pandemic, but that's a trend that's been in place for a long time in terms of the overall traffic our traffic numbers are down year over year.
Low double digits like 12% down in total traffic, but the interesting thing is that the.
The traffic that we do get is much more motivated our closing rates are higher we we've intentionally dial back on some of our internet spend because we just don't we're 96, almost 96% occupied now and the traffic that we do get us very motivated so.
Traffic is down overall, we werent, we still see.
More than enough traffic to maintain our occupancy where it is right now it's always going to slow down in the fourth quarter, we'll start seeing that in as we get into particularly into the holiday season traffic.
Falls off but that's that's okay with where our portfolio is structured with our.
Lack of leases that come.
Rollover during that period of time, we don't need that much traffic. So overall I would say that.
The traffic feels pretty normal across our entire portfolio.
The chat, where we do have challenges.
Or where as Rick mentioned, we've got you just got a ton of new supply that's coming on so outside of so I would say outside of Houston, and and maybe South Florida.
All of the places where we experience some weakness are related to supply that's coming on in most of the last cycle. The heaviest dose of supply was in the urban markets in urban infill.
And where we have.
Communities that are directly affected by other merchant builder lease ups, that's where our challenges.
Got it and then just thinking about the renewal rates.
See that rates are going up in October do you.
I come to keep going up.
And kind of like what are you guys coming out in November and December for the renewal.
Yes so.
We said when we.
Voluntarily put renewal increases on hold for about three months.
We felt like at some point when we when we got back to.
Normal traffic levels normal operating conditions in terms of being able to take care of our residents and take care of our new customers.
We we think will trend back to where we were pre co that we were free coven and across the portfolio. We were in the 3.5% to 4.5% range on renewals we.
We think we're headed back there and maybe it's in the first quarter of next year.
But we think that we're headed back to more that more normal looking what level of renewals, where it were a little better than 2% now I would expect to see that continue to tick up is we just started back sending out renewals and all of our markets and the.
I think we had everyone back to kind of normal order in September. So I think that will continue to tick up and we should get back to roughly where we were pre covance.
Got it. Thank you you bet.
Our next question will come from Nick Joseph with Citi. Please go ahead.
Thanks, I appreciate all the operating comment.
That being close to normal, but just for those markets that you remain a little weak what are you seeing in terms of concessions either in your portfolio or the market on stabilized properties and not on development on stabilized properties.
Nick we don't really other than in our development communities, which is that's just more of a historical norm for that where you where you offer a month free rent of the concession we don't really do concessions in our portfolio. We're all net net pricing and we're we're driven completely by our yieldstar.
Revenue management system, we have very few overrides to the recommendations within the Yieldstar system. So I know it's become a.
The term effective rent has become.
Much more prevalent because we do see our competitors going back to the use of concessions I I suspect even the competitors that are using.
Yieldstar as their primary pricing mechanism, if you've got a if you're sort of in a panic mode.
In the Yieldstar is telling you to gradually toggle back.
Back around us, but you're at 85% occupancy.
A lot of people just don't have the tolerance and then in the patient's dilip yieldstar or any other revenue management system make those decisions. So you end up with people who take the Yieldstar recommendation and then do a month free rent and that but we definitely see that there's no question about it but it's just not something that we do and it's not something that we are that we intend to do.
Thanks.
Hi, guys.
So you're not going to see us start talking about the effective rents what you what we see what we show you as pricing is what our leases are being signed up.
And there is no disadvantage from a marketing perspective.
The property next door, even if on a net effective basis, you're at the same point if someone sees.
A month free rent or two months free rent you don't see any difference from a marketing perspective, we don't and the reason we don't instead, our our marketing teams are are trained to sell features and benefits and customers.
No what the net rent is right so.
If the market is down two months free right. So that that's a huge discount in the rent at the end of the day Youre just doing your screening a financing mechanism for the resident right. They know what their effective rent is during their lease term and you're just creating.
Mechanism for them to get upfront free rent so.
So if the overall market is two months free than our effective rents are going to come down, but they are not and so and it's and it's kind of one off so we don't think of it as a negative negative competitive situation for us at all of our people.
How to sell through it.
And it's just a fundamentally better it's just a fundamentally bad business practice in a in a world where people can move in and then sort of follow CDC Declaration, and then sort of get their rent deferred if you start off with two months free and offering them that incentive to move into your community. We you may end up with two months free and then a CDC declaration b.
On that it just it just it just a bad business practice and it and honestly, it's mostly merchant builders, who are they are trying to get you know that we've opened.
Opened a community and their 30% occupied and they're trying to get to the finish line and they do what they have to do.
Thank you Beth.
Our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning morning down there.
Hey, just following up on Nick's question, just so I'm clear because a lot of your peers talked about you know it at the extreme two months free.
And then sort of going from there so across all your markets, including southern Cal in DC. It sounds like you guys really aren't either you're not seeing much free rent competition or whatever free rent is in the market just really isn't material or impactful to you is that is that the takeaway.
Yeah, I wouldn't say, it's not impactful I would just say that that it's factored into our yieldstar net pricing like Rick said, if you've got six communities in lease up there.
Directly competitive with you and they're all given two months free rent the market clearing price for our community. Our our rents is going to go down and obviously thats reflected that you see in some of these markets in southern California market.
We've had our.
Had to reduce our rental rates are yieldstar is recommended reducing rental rates across the board, but it's not a I would say it's not.
A meaningful.
In terms of the overall experience in our portfolio. If you think about Alex if you think about the third quarter.
We had of our 14 markets, we had 10 of those markets that actually had higher.
Higher revenues than than in the third quarter of last year, what Orlando was basically flat and we had two that were down so it's a.
The overall picture in our portfolio is one of yes, it's not back to where it would have been had we not had coated which you got 11 of our markets of our 14 markets Theyre actually have positive revenue year over year.
And that that's that's pretty good.
Okay and then the second question is for Rick Odd, we'll ask you the will make you the.
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Chairman of the Sunbelt Chairman to Texas, and certainly does I think with your.
Quarter to quarter of Houston chairmanship.
This morning.
CBR, you announced that they're going to move from LSD to Dallas, where I guess, the CEO is from anyway, but just given the discrepancy in employment rebound between your markets versus the continued lock down some restrictions on the economies in the in the coastal Blue States are you are you guys hearing more business.
Its leaders talk increased chatter about relocating their companies to the Sun belt or the trends that were already in place that we're driving the business to move down there are the same they have been accelerated or or because of what's happened with cobot fallout.
I think it's definitely accelerated the trends have been in place for a long time, but there is definitely more chatter and more discussion about about.
Sort of these pro business markets and and when you look at Pat.
You know a market like Houston.
You lost all these jobs and then weve added half of them back and an L.A. they've got a zero back I mean, you look at Houston, even with energy were down 5% year over year in September in employment in Houston, which is big right, but lays down 9.7% and has that added back.
Rooftops and so I think that I think that the the.
Migration from some of these markets will continue in the long term trends are in place, but but I think people call cope with the great accelerator right because what it's done is it's accelerated the notion of.
Of work from home and the notion of less commutes the notion of virtual leasing and we were talking about all that and then all of a sudden we had to like put in place in a week and and and I think that that migration trends are going to continue and the great hope.
Cobot accelerations, probably going to accelerate.
Thank you.
Our next question will come from Austin Wurschmidt with Keybanc. Please go ahead.
Hi, good morning, everybody so.
So.
Fair to say that even though I think you mentioned occupancy is at 96% you feel comfortable continuing to trend higher on renewals.
Over time, you expect new lease pricing could remain under pressure because.
In order to remain competitive versus some of these lease ups and stimulate traffic.
You need to continue to offer a kind of that negative roll down on the new leases is that is that fair or could we actually see it improve as well with the renewal rates.
Awesome, that's fair in the markets, where we have the most new construction that's being delivered in two this year and then bleeding over into 2021 so.
Our our challenges are almost entirely either we've got the fundamentals are good the employments coming back there.
Theres plenty of traffic there is a lot of demand for the type of communities that we operate in the locations that we operate.
However.
Miss in some of those markets Houston would be an example, Dallas as an example, Charlotte as an example.
Our communities are located in places that are the most desirable places for merchant builders to build new products. So they get impacted.
Directly by all the new constructions, that's going on and then unfortunately.
And those three markets that I just mentioned the construction levels that are the deliveries of multifamily apartments. In 2021 are roughly the same as they were this year, we're going to get another 20000 apartments in Houston, we're going to get another 20000 apartments in Dallas and get another 13000 apartments in Charlotte. So the places that are impact.
Good by new supplies are going to continue to be under pressure. However, when you go to the Phoenix is of the World Raleigh Denver.
The Tampa these are not markets that have been the subject of a lot of new supply and they're going to continue to outperform for that reason they get a good job growth. They have good fundamentals there great places to do business they've got good in in migration patterns and they just don't have a lot of new supply. So I think.
That's going to continue to be the bifurcation in our portfolio is the supply markets. That's probably going to continue into 2021, I think I think it's likely that we will get a decent amount decent amount of relief in 2022, but we've got to get from here to there first.
No. That's helpful detail. Thank you and then I wanted to hit on the development starts.
Can you just provide some of the economics underlying the deals on the new starts what you're assuming in terms of trended rents et cetera.
Sure.
Our new starts at their urban there the the.
The projected yields stabilized yields are between five and 5.5% or suburbans are 6% to 6.5% we.
We generally what we do is we do Untrended untrue.
Untrended rents.
Two as our hurdle to start with and then we put in.
What we think the rents might do over a period of time and in our stabilized shares do use a trended rent.
And today, it's interesting to pay on the market.
We have rents going down and then going back up.
And if if you look at depending on the market and this gets to keys point on on where the supply side of the equation is the the markets. Some markets. We think are going to be back to 2019.
Rent levels by second quarter first to second quarter of 2022, or 2021, and other markets are going to take longer and so.
So our trending definitely we have been more conservative in how we think rents are going to grow over the future.
But those are the yields and sort of the way we.
Model these.
These developments.
Got it thank you very much.
Our next question comes from Rich Hightower with Evercore. Please go ahead.
Hi, Good morning, guys wondering.
I guess to follow up on the idea that cobot is accelerating trends that were.
Underway already just to dig into this.
Uptick in move outs for home purchase statistic I know that you said the year to date average is pretty stable year over year, but maybe more recently you are seeing an uptick there so.
Well.
As best you can tell what would you attribute it to is it covance per se, causing those moves or is it.
Sort of the demographic tailwind that should help homeownership over the next five.
510 years and covered just accelerating that it's been a long time since we've seen home sales. This strong in this country to have to go back to the I think early to mid 2000, so the template that they were operating from probably.
Doesn't help much so what do you guys think about that and what what should we expect I do think its cove. It accelerating absolutely. So if you think about the oldest of the millennials right. The oldest millennials are in their mid thirtys and and what they're doing now as they're starting to form households.
I have my two daughters are.
30, 36, and 38 and they're having their third children right now, okay, and so their classic millennials and and if they were living in apartments, they would be buying houses right and so I think that we always expected the older oldest of the millennials to buy houses at some point and actually it's a really.
The good thing for America, because when you have good housing housing demand.
Moving out to buy.
Buy a house doesn't.
All right.
Ultimately hurt apartments, because what happens is you have a better economy people are building houses and there is lots of products being put in those houses and it's good for the economy overall and a lot of the workers that actually build the houses live in apartments, and so with that said I think it's definitely accelerated by by Cove. It I think the historically.
Low interest rates are part of the equation as well and and one of the things I think is actually really fascinating to if you look at the savings rate between the start of Cove, and where it is today people aren't spending money on stuff in there and they are saving their money and so you have people, who didnt have enough money for down payments and what have you now.
Now that actually do because of Cove and because they they saved a lot of a lot of money by not going out to restaurants and to football games and.
Vacations and things like that I don't think it's that you're going to go to a 25% move out rate like we had you know during the you could talk a mirror get alone days, but but it is a rational thing to happen at this 0.1 of the challenges that you have enough Theres I've had some questions you know when we we have.
After after labor day, we've had lots and lots of calls with with shareholders and potential shareholders and a lot of the discussion is are you going to have massive move outs from the urban this to the suburbans and from millennials buying houses and the interesting thing is that is that.
The answer is no because there is no place for them to go and if you look at at housing inventory in Houston, Texas right. One of the softest markets. We haven't given energy never building, we have a two month supply of housing in Houston.
And and so even if we if you had a 20% move out rate for apartments, you can't because there's no place for them to go there so inventory and and there is no place for an urban whether to go to the suburbs because the suburbs are awful too.
So if this is a long term trend maybe over the next 15 years that it could happen, but but I don't think so I think that once covances over you'll have people still want to go to bars and that's one of the challenges we have right now in the in the spikes right people are getting kobin.
Tired of Cove, it and they're just put it in.
They are going out and doing things and social in and I think that will continue in the future. So I'm not too worried about homeownership, the homeownership rate ticking up I actually think it is a good thing overall.
Okay. Thanks for the comments.
Our next question will come from Neil Malkin with capital One Securities. Please go ahead.
Hi, everyone. Good morning Lauren.
I know.
Our.
Los Angeles, Orange County, or in some of your tougher market, but don't worry I'm sure.
Miraculously they will all open up November for us.
[laughter].
Yes.
First question.
With technology that you guys have employed.
Just with with.
The mobile apps and and lean down more heavily.
Because cobot in terms of how people are our leasing and viewing your apartment homes are.
Are there things that maybe you can talk about today that you think that you can.
Bring forward with you.
Yeah.
When when coded behind us.
To sort of gain more efficiency, maybe increase the long term margin.
That isn't maybe like onetime in nature.
Yeah, absolutely as we as we talked about covered is really has been the great accelerator and ultimately when we look at.
When we look at our ability to open up blocks now on a remote basis. When we look at our mobile applications that we're using for.
For maintenance type work et cetera, when we're looking at virtual leases I think all of these things are going to ultimately end up making us so much more efficient than we ever would have been if it wasn't for cove and to the point that was made earlier a lot of these things we have talked about for <unk>.
For a year or two we probably thought it was three years on the horizon and miraculously it.
All of a sudden it became one month on the horizon. So I think I think we've had some really really great efficiencies and I will tell you that I do think the the mobile application to open a door locks in common area space is going to be it's going to be an absolutely a game changer for not just camden, but for the industry.
Yes, I appreciate that.
And maybe just going back to Austin's question on on development or.
Or maybe the whole I guess transaction marketing that in that context, you obviously started three projects.
I don't know coffee and what your completion schedule looks like for your current pipeline, but what's your comfort in accelerating that.
The development, just given what looks like to be a favorable 2022.
For for deliveries.
And then how does that I guess.
What is the transaction market look like from a from a disposition standpoint.
Just given given very favorable.
Pricing with high demand and low interest rates.
So for development, we would like to we think the development markets can be very good in 2023, 2023, and we're going to try to do as much as we can its not easy to get the right numbers in the right you still hit when you. When you have construction costs continue to rise maybe at a lower rate because of Covance.
But its still construction costs have not come down and so it's still difficult to get the right the numbers to work well, but but we definitely have a pipeline and we will continue to try to add to that pipeline because I think that's that's one of the if you're going to deploy capital develop.
Development is definitely the the the number one place for us at this point.
In terms of the the acquisition and disposition market. So the transactions are about a third of what they were last year at this if through the through the.
Through the end of October and and so clearly.
It's actually volumes down big time, but what is trading is trading at all time.
Hi prices and low cap rates, so cap rates have come in dramatically since coated and.
I will tell you that we have not seen a of a.
An acquisition opportunity that has a a four in the cap rate, they're all threes and some change.
And and were talking Houston, Dallas, Austin, Denver, Tampa, Orlando everywhere, and so with that said you have you have so we're not acquisitions really tough when you start start with a three and so people have obviously lowered their their IR hurdles and then with interest rates. This low.
As they are most leveraged buyers or even with a say a three to three quarters cap rates are still able with positive leverage to get very nice cash on cash returns realm.
Relative to alternatives out there so so from a disposition perspective, clearly, it's an interesting environment.
I still think that we need a little more market clearing a little more.
Sort of what's going to happen between now and sort of first quarter.
If you if you look at Camden did in the last Big cycle, we sold $3 billion worth of assets were 23 years old or more and then we bought.
Assets that were four years old and and the the the a unique situation then was weak as we sold that cap rates are very close to the cap rates. If we bought it and you could if that continues to if that opportunity continues we may do some of that.
In the future as well, but it's definitely a tough acquisition market, probably very positive disposition market, but developments, where we're focused on right now.
Appreciate the color. Thank you.
Okay.
Okay.
Our next question will come from Rob Stevenson with Janney. Please go ahead.
Good morning, guys. Rick can you just expand on your comments there about construction cost me there's been the spike in lumber costs. What are you seeing in labor and other materials cost and how much higher.
Was your construction costs on the project you started in the quarter relative to if you'd started them pretty pent up.
If at all.
So I think that clearly the coat covert has increased cost because of time and general conditions.
For example in a we have a property in.
That we're building in downtown Orlando and the challenge you have with Cove. It is you have to do all the proper.
PE and the proper distancing, we have one way.
Stairwells, and we have to keep our employees and our construction worker safe and we're all about that but.
But it just makes the project go slower.
And and that the challenges you know you sort of a manufacturing process and as you slow it down your general conditions go up and we haven't had big cost spikes up mostly it's just been delays and increases in.
In general conditions, and those kinds of things.
I think that.
That labor is a little more difficult today into.
In terms of because of the timing of projects getting completed.
And costs are not depth are definitely not going down.
One of the challenges I think that everyone's having today is and I think this is.
An interesting situation is the most supplies for example, getting getting the right equipment and supplies to the property is starting to be an issue and primarily because people.
Sure.
Their inventories are way down and they're having to restock inventories today and and that that inventory restock has been a real has been a challenge.
So I would say that you know.
Prices today are 2% to 3% higher than we than we.
Than we saw in the on our last starts but thats actually good because used to be.
Seven that or maybe 4% to 8% higher so.
So the good news is that the rate of growth has come down but it hasn't hasn't.
But it hasn't come down enough to improve.
Your yields and what have you. That's why numbers are still hard to make and Rob I would just add that.
You mentioned it in your question. The one area that we have had definitely definite challenges and my guess is that everything we look at it indicates it's going to continue to be a problems lumber and we definitely had a spike in lumber costs.
The and as the single family home construction market ramps up which is in the process of doing right now big time.
Just in response to the demand what is out there and demand for new housing as that ramps up it's a it's a wood product in there is going to be a lot a lot more pressure on lumber as we go forward. So thats. The one area is probably.
As a as opposed to ricks overall commentary on costs that we are really looking at hard for trying to figure out ways to me.
Manage our lumber lumber package costs.
Okay, and then Keith.
Any markets that you see is showing incremental weakness in September October this more than just seasonally and then also how many residents would be on your Vic list today that you can't do given the pandemic restrictions.
Well we have.
It's not it's not a big number the.
For the CDC man.
Mandate, we think we have about 110 residents throughout our entire 60000 apartments.
That that are have given us.
CDC.
Mandate.
Evictions pending it's.
Less than less than two to 300 in the.
System wide and some of those actually predated coated and we're working through those because most jurisdictions have not had allowed us to go back to the people who were already in.
In default status prior to Cove, it and work that through the process. So in most of our markets with the exception of California, which has its own set of rules and restrictions most or other markets are back to.
Regular order in terms of processing evictions, it's it's just not a huge deal in our in our world outside of California, Obviously in California got a different set of factors there that.
That kind of frustrate our ability to to work through the process and.
You know I don't it's been a rolling Ics.
The extension of all those protections for the residents and who knows when there when theyre going to when we're going to see the end of that but.
Big picture, it's a small very small component of our overall challenges, we but we probably haven't a noncore cobot environment 50 to 70 eviction system wide month late so if you just do an average for the year, it's maybe six 700.
People being evicted out of 56000 apartments, and so it's a really minuscule number.
The biggest issue is are these high palace delinquencies in California, and its not that they that that they can't pay us they won't pay and that that's the moral hazard you have there. It's it's fascinating to me to see that we have an eight today, we have an 8.6% delinquency rate in la and we have a pay.
Right, 4% delinquency rate in Houston, and the difference between the two is moral hazard.
Period.
Okay, and then any markets showing incremental weakness in September October more than just seasonal no no.
Okay. Thanks, guys you bet.
Our next question will come from Amanda Us slightly with their please go ahead.
Great. Good morning can you guys talk about what you're seeing today in terms of construction financing have you seen any other lenders our debt funds kind of come and fill the gap from national lenders pulling back and then just.
Development, let winters changed from pre count made both in terms of interest rate spreads and then LPV.
Sure. So there definitely have been pullbacks from money center banks on development.
And the the debt funds are not coming into to fill the gap, but whats happened is.
Smaller.
Regional banks are definitely coming into.
To fill some of the gap the biggest issues that.
Early on I think Ron Whitten had construction starts falling by 50%.
In his original projections and and that was driven by by the debt capital Mark the debt markets being being under pressure because of of Covance and then now I think you, saying, but.
Believes that its going to be down by by instead of 50% maybe 30%.
And.
And is definitely driven by debt the biggest challenge that that the that merchant builders are having is that banks do not want to syndicate and so so getting loans over $50 million is troublesome and getting alone over $100 million is very difficult. So.
So properties in California, and other big urban developments are definitely having a real hard time getting getting financing I think that spreads have have stayed reasonably tight and with interest rates falling the way. They have I think theres been I've seen some folks talk about floors.
In in their construction loans, because just because rates are at all time lows.
The the lenders need that need a reasonable.
Minimum interest rate or minimum spread I guess so there are there are are those getting put in place, but the biggest issue is the loan amount.
And and I think thats, where the challenges because this requires a whole lot more equity.
And there are there are some debt funds that are coming in and in bridging that equity with Mezz mezz financing.
That's that's generally the construction market as I see it.
Helpful. Thanks.
Our next question will come from John Kim with BMO capital. Please go ahead.
Thanks, Good morning.
Wondering if you could provide some more color on cap rates you are seeing in the threes are.
Are these more stabilized assets and then the two cap rates or are the assets with potentially some lease up potential and the stabilized yields would be higher.
They're stabilized cap rates and oftentimes the and the challenge we have when we start underwriting those is that is that is that they're they're stabilized full there 90.
Three 4% occupied but but they are there.
Theres, a tremendous number of new developments around them leasing up and so the question that I have one when we look at a three and three quarter, 94% occupied project with 2000 units leasing up around it is how can you actually hold that that that cap rate is likely to be to go down before before.
Yeah.
It goes up given the competition and so.
These cap rates are are very sticky today because of the just the wall of capital and the very very very cheap financing you can get a Freddie Fannie alone.
Sorry.
Decent leverage it to and some change for 10 seven to 10 years and if you're a floater you can get a floating rate debt for under two right and so it's a that's going to keep the private market very very buoyant and and when you think about fundamentals post covance the multifamily markets.
Going to come back and most most people believe that that will be back to 2019.
Early 2020 rents by 20 to 22.
Okay, and then Alex you mentioned that you sold the trip technology to a third party.
Wondering why you chose to sell to the platform and then I'm, assuming it doesn't impact the rollout across your portfolio, but just wanted to make sure. That's the case no. Yes. It does not in fact impact our rollout across the portfolio at all and we anticipate being fully rolled out by the end of 2021 ultimately.
We came up with short because there was a need that we needed to solve and there was nobody else in the industry that we're solving that and so we spun it up.
But we always knew that ultimately it needed to belong to somebody else that.
That that could run with it and can market it to third parties et cetera, and so we found a very natural buyer that we think is a great fit with us and so and so we consummated the transaction, but we are still very very much involved and.
And as I said right now, we probably got a little bit over 50% of our communities have the gateway aspect rolled out and that's that's what opens up the sort of the exterior doors and we've got about 5000 units.
Signed up with the locks.
Masks for the buyer was.
Yeah. It was I was realpage.
Great.
Thank you.
Our next question will come from Saks Silverberg with Mizuho. Please go ahead.
Hi, good morning, guys.
As you discuss Mcgrath, Mike migration trends have been certainly in your favor here for the past couple of years and co bid will certainly provide an easier year over comp in 2021, but with occupancy and retention near all time highs home sales and supply picking up in some quarters of your market.
Putting it altogether, which which cities are market do you feel best or most worried about it the 2021.
Yes, I think that the we're just starting the process of putting together our property level budgets for 2021.
And.
My guess is that the markets right now will we have the most momentum on.
New lease rates and renewal rates will probably continue.
And I think that some of the markets that have some continue to have supply challenges in 2021 are going to be under pressure.
And I mentioned those earlier in Houston, Dallas, Charlotte have got to continue to have supply pressure.
We are having great success in Phoenix Denver.
Raleigh Tampa.
And my guess is that that those will start out at that probably at the top of the deck in 2021.
One of the things I think is going to be really interesting is to see the unwinding of the of the 18 to 29 year old said have moved home with their parents and that should be a tailwind up close.
Post Cove it.
When you look at.
Prior to covert and this is a big number and it always hurts my head to think about this because I have I have some.
Yes kids moving home.
So a big pre covert we had 39% of 18 to 29 year olds or lived at home it spiked to 30% to 46%.
In the middle of Cove, and now start down to to 42% by the end of the third quarter. So one of the positives for US as we've had some of that demand released there's still over a million.
You know sort of missing millennials that are that are doubled up or at home and once covert breaks and job.
Job gains come back those high propensity renters will come back into the market I think more than offset people moving out to buy houses.
Got it appreciate the color and I guess, a follow up to an earlier comment or question. I was wondering if you could buy provide any more color isn't the product type or geography, where bad debt has run a little bit higher and has your.
Average credit profile tenants changes throughout the pandemic.
So bad debts.
Or delinquencies, if you want to call them that are highest in California for sure and.
And that's primarily desk, Keith mentioned driven by policy. There AB 30, 88, and what have you. It's just to policies. There. The other market would be South, Florida, South Florida is very tourist driven obviously in South America travel driven and and we have seen.
Maybe 100 to 200 basis points higher there than than the rest of the markets, but most of the markets are pretty much in the in a normal kind of state.
Including Orlando for matter given the situation in Orlando, where you have you have the same kind of 9% job losses there in.
In terms of credit quality, absolutely not the credit quality is one of the most important things that we keep high because you could we could easily increase our occupancy by 150 basis points, we dropped our credit quality, but what would happen is that you would you would end up with more bad debts, and more evictions and more skips and it would just be.
There's just no no upside ever in lowering your credit quality.
And we are seeing no difference in delinquency from class A's to class BS or urban to suburban Yep delinquencies the same across the board.
Awesome. Thank you guys.
Our next question will come from Alexander Calmness with Zelman Associates. Please go ahead.
Hi, Thank you for taking my question.
Just circling back on the point regarding demographics can you.
Think about your portfolio today in the mix of one to three bedrooms.
Thats you have you think you're accounting for the growing cohort or you are properly positioned for.
Those growing families or would you like to see more three bedrooms in the future.
If you look at our three bedroom components, we have about 6% of our portfolios three bedrooms and.
And I bet. If you took our three bedrooms compared to our one bedrooms or move out rate to buy houses would be substantially higher in our three bedrooms and our one bedrooms. So we have always.
Generally.
Catered to lab to single people or people with one one or two people in the apartment and and not to families. Because they have a higher propensity to move out to buy houses or to rent houses.
In addition families just require more stuff more amenities and things like that we have a property for example in Denver that that is all twos and three veterans and not very many one bedrooms and it's a great family property, but it has a higher turnover rate and higher.
Without rate to buy and rent a house than any of our other properties in Denver, So it's not a market that we.
That we are catering to or will cater to in the future.
Got it thank you makes sense and.
Just looking at utilities expenses, they weren't that inflationary from last year. So do you have a.
Since on.
Going back to work in your markets, how many retirements or are working from home versus going back some of your peers had much higher utility increases given the usage on the apartments.
Yes, what I will tell you if you look at utility expense there was not a significant increase but if you look at utility Rebilling, which is probably a better way of thinking of it.
There was a large large increase so we do believe that we've got a lot of our residents are at home utilizing a lot more water than they and trash and they typically would so we think we've got a great deal of our residents are in fact working from home.
Got it thank you for the color.
This will conclude our question and answer session I would like to turn the conference back over to Ric Campo for any closing remarks.
Thank you and thanks for being on the call today, we will I'm sure talk to a lot of you. It may read here coming up soon so thank you and we'll see you later have a great weekend and stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.