Camden Property Trust Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 13 speakers on the call.

Operator

Good morning, and welcome to Camden Property Trust's Second Quarter 2024 Earnings Conference Call. I'm Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Rick Campo, Camden's Chairman and Chief Executive Officer Keith Oden, Executive Vice Chairman and Alex Jessett, President and Chief Financial Officer. Today's event is being webcast through the Investors section of our website at camdenliving.com, and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks, and those slides will also be available on our website later today or by email upon request.

Operator

All participants will be in listen only mode during the presentation with an opportunity to ask questions afterward. And please note this event is being recorded. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them.

Operator

Any forward looking statements made on today's call represent management's current opinions, and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete Q2 2024 earnings release is available in the Investors section of our website at camdenlivingdot com, and it includes reconciliations to non GAAP financial measures, which will be discussed on this call. We would like to respect everyone's time and complete our call within one hour, so please limit your initial question to 1, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes. At this time, I'll turn the call over to Rick Campo.

Speaker 1

Thanks, Kim. The theme of our on hold music today is waiting. During our meetings with multifamily stakeholders in recent months, the consensus view seemed to be that everyone in multifamily is waiting for something. Operations teams are waiting for the pace of multifamily completions to reach a peak and begin to come down and for bad debts to return to pre pandemic levels. CFOs are waiting for the long anticipated first interest rate cut by the Fed as well as a relief in property insurance and property tax expenses.

Speaker 1

Transaction teams are waiting for the standoff between buyers and sellers to end. Sellers are waiting for buyers to throw in the towel and start buying, while buyers are waiting for the towels to go on sale. While we are certain that the waiting will end eventually, the timing is the debate. In the meantime, as the late, great Tom Petty reminds us, the waiting is the hardest part. With the Q2 behind us, I'm going to reprise most of my comments from last quarter since the markets are playing out as we have expected.

Speaker 1

We spent most of our time talking about supply in our markets. Yes, we are at a 30 year high for apartment deliveries and yes, this is limiting rent growth in most of our markets now. The good news is that our markets are adjusting quickly to the post pandemic low interest rate development frenzy. Starts are still projected to fall to just over 200,000 apartments in 2025. New deliveries should peak in 2024, falling 21% in 2025 and another 54% in 2026, which would be a 13 year supply low point.

Speaker 1

Apartment demand continues to be strong. During the first half of the year, net apartment demand was over 200,000 apartments matching 2018 2019. Whitney Advisors projects 2024 apartment demand to be in the $400,000 range. The main driver of apartment demand is household formation, driven by population and employment growth, apartment affordability and positive demographic trends. The most recent 20222023 census data reported that the top 10 cities increased their population by 710,000.

Speaker 1

Nine Camden markets are in the top 10. The bottom ten cities reported a loss of 200,000 people. These were major cities on the West and East Coast where Camden has limited exposure. Employment growth has been robust in all of our markets except Los Angeles, which continues to struggle. 10 of our markets have had job growth greater than 10% compared to the pre pandemic levels.

Speaker 1

Apartment affordability continues to improve as resident wage growth has been over 5%, while rents have been relatively flat. Consumers are spending less of their take home pay for apartments. New Camden residents pay 19% of their income towards rents. Mortgage rates and rising home prices have kept move outs to buy homes near historic lows. 10.3 percent of Camden residents moved out to buy a home in the 2nd quarter.

Speaker 1

The monthly cost of owning a home today is about 60% more than leasing an apartment. This is not going to change anytime soon. Demographic trends continue to be a tailwind supporting demand for high propensity to rent groups, including young adults aged 35 and under. Apartments should take a larger share of household formations given these demand drivers. 2024 demand should be sufficient despite supply concerns to set up accelerating rent growth in 20252026, assuming that the overall economy continues the current trajectory.

Speaker 1

To take advantage of what we believe will be a robust multifamily leasing environment beginning in 2025 and beyond, We are starting construction on Camden South Charlotte and Camden Blakeney, 769 suburban apartment Homes Located in the Ballantyne Submarket of Charlotte, North Carolina. I want to give a big shout out to our Camden team members for their hard work and their commitment to providing living excellence to our residents, which they never wait to do. Keith Oden is up next. Thanks.

Speaker 2

Thanks, Rick. Operating conditions across our portfolio are generally playing out as we expected. Our Q2 2024 same property performance exceeded our forecast, primarily due to continued lower insurance costs and property taxes, which we discussed a bit on last quarter's call. Our top markets for same property revenue growth were San Diego Inland Empire, Washington D. C.

Speaker 2

Metro, L. A. Orange County, Southeast Florida, Houston and Denver, all posting revenue growth above our portfolio average of 1.4% and ranging from 1.7% to 6.1% for the quarter. Austin and Nashville remain our most challenged markets with revenue declines of approximately 2% and 4%, respectively, for the quarter. Rental rates for the 2nd quarter showed signed leases down 1.8% and renewals up 3.7% for a blended rate of positive 0.8 percent with an average occupancy of 95.3%.

Speaker 2

Preliminary results for July indicate slightly better levels of rate growth with occupancy averaging 95.6 percent. Renewal offers for August September were sent out with an average increase of 4.6%. And finally, turnover rates across our portfolio remained very low, driven by fewer residents moving out to buy homes. Net turnover for the Q2 of 2024 was 42% compared to 45% in the second quarter of 2023. I'll now turn the call over to Alex Jessett, Camden's President and Chief Financial Officer.

Speaker 3

Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activity. During the Q2 of 2024, we completed construction on Camden Wood Mill Creek, a 189 Unit, $71,000,000 single family rental community located in The Woodlands, Texas. And we began construction on Camden South Charlotte, a 420 Unit, dollars 163,000,000 4 story garden style new development and Camden Blakeney, a 349 Unit, $154,000,000 3 story garden style new development, both located in the Ballantyne submarket of Charlotte. Turning to our financial results.

Speaker 3

For the Q2, we reported core FFO of $1.71 per share, dollars 0.04 ahead of the midpoint of our prior quarterly guidance. This outperformance was driven in large part by $0.02 per share and lower than anticipated operating expenses resulting from lower core insurance expense and lower property taxes. Approximately half of this expense outperformance was timing related as property tax refunds we expected in the Q3 were actually received in the Q2. Additionally, during the Q2, we had $0.02 per share in higher fee and asset management and interest and other income driven by the combination of cost savings and additional fee income from our 3rd party construction business and higher interest income from our cash balances. Property revenues for the quarter, including bad debt expense, were in line with our expectations.

Speaker 3

Last night, we maintained the midpoint of our full year revenue guidance at 1.5%. We also lowered our full year expense guidance from 3.25% to 2.85%, driven primarily by the assumption of continued lower than anticipated insurance and property taxes. Insurance represents 7.5% of our operating expenses and was previously anticipated to be flat year over year. We now anticipate it to be down approximately 3% or $0.01 per share favorable to our prior guidance, with the entire amount of the savings occurring in the Q2. Although we hope the 2nd quarter trend of lower core insurance claims continues, we are not assuming it will in our forecasts.

Speaker 3

Property taxes, which represent approximately 36% of our total operating expenses, were previously projected to increase 1.5% year over year. Based on lower Texas property assessments and higher refunds, we are now anticipating that property taxes will be up approximately 1%, a favorability of approximately $0.01 per share. After taking into effect the decreases in expenses, we have increased the midpoint of our 2024 same store NOI growth guidance from 50 basis points to 75 basis points. We are also increasing the midpoint of our full year core FFO from $6.74 to $6.79 a $0.05 per share increase. $0.02 is from the increase to our same store NOI, of which $0.01 was non timing related in the Q2 from lower core insurance costs and $0.01 is spread throughout the latter part of the year from anticipated lower taxes.

Speaker 3

Dollars 0.02 is from the higher fee and asset management and interest and other income in the 2nd quarter, which is not anticipated to be repeated and $0.01 is from lower anticipated property taxes on our development and non same store communities. At the midpoint of our guidance range, we are still assuming $250,000,000 of acquisitions offset by an additional $250,000,000 of dispositions with no net accretion or dilution from these matching transactions. Our development starts for the year totaled $317,000,000 in line with the top end of our initial full year guidance and we are not anticipating any further 2024 starts. We have approximately $55,000,000 of remaining 2024 development spend. We also provided earnings guidance for the Q3 of 2024.

Speaker 3

We expect core FFO per share for the Q3 to be within the range of $1.66 to 1 point 7 dollars representing a $0.03 per share sequential decline at the midpoint, primarily resulting from an approximate $0.03 sequential increase in same store operating expenses resulting from the Q2 lower insurance expenses and the seasonality of utility and repair and maintenance expenses, partially offset by sequential reduction in property taxes due to additional property tax refunds in the 3rd quarter and a $0.02 decrease in fee and asset management and interest and other income due to the non recurring components of the 2nd quarter outperformance. This $0.05 per share cumulative decrease in sequential core FFO per share is partially offset by a $0.01 per share increase in same store revenue as we continue through our peak leasing season and a $0.01 decline in net overhead expenses primarily associated with the timing of certain public company and compensation costs. As of today, approximately 85 percent of our debt is fixed rate. We have no amounts outstanding on our $1,200,000,000 credit facility, only $300,000,000 in maturities over the next 24 months and less than $300,000,000 left to fund under our existing development pipeline.

Speaker 3

Our balance sheet remains incredibly strong with net debt to EBITDA at 3.9x. At this time, we'll open the call up to questions.

Speaker 4

And our

Speaker 5

first question today comes from Brad Heffern from RBC Capital Markets. Please go ahead with your question.

Speaker 6

Yes, thanks. Hi, everybody. It seems like July was a really strong month for you in a way that it wasn't for your peers. Can you talk about what you would attribute that to? Did you get more aggressive just based on the demand that you were seeing?

Speaker 6

Was there some sort of comps impact or anything else that you'd like to call out?

Speaker 7

Yes, July was a good month and the only thing that we have done, just from this at sort of at the 10,000 foot level is that we have increased our marketing support to make sure that our traffic counts remained kind of where we need them to be. And so we had a little bit of additional spend in marketing. But overall, if you think about where the our strength in our portfolio has been really impactful for us has been Washington D. C. Metro in Houston And that there are 2 largest markets and all the way in the last year or so they've lagged the portfolio.

Speaker 7

Right now they're leading the portfolio. So the strength in those two markets, some of which we anticipated a good year. We certainly didn't anticipate as good a year as what we're having in D. C. Metro this year.

Speaker 7

And it's enough to move the needle on our portfolio.

Speaker 1

I mean the other part of the equation is that July, if you think about last year July August, we saw seasonality earlier in the year last year. It was and the seasonality I think was caused by sort of consumers running out of their pandemic, you know, money. And they moved out quicker and so we had more apartments to fill in July August. And if you think about sort of that setup for the 3rd Q4 of the prior year, it was probably one of the weakest that we've had in a long time and it was primarily driven by that. This year, the COVID money has been gone for a while probably and people are not just moving out because they don't have their COVID money anymore.

Speaker 1

So and with strong job growth, even though the weak print today was expected, but continues to be really robust in our markets. And we continue to take market share from single family the single family home market because the cost associated with interest rates and home prices going up. So it just sets up for a pretty good high demand market. And I think our teams did a great job building occupancy through the peak leasing season and just gave us a little bit more pricing power.

Speaker 6

Okay. I'll stick to the one question request. Thanks.

Speaker 5

Our next question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead with your question.

Speaker 8

Hi, thanks. So Rick, you touched on employment growth as a driver of household formation in your prepared remarks and we've seen some slowdown in the employment reports of late. And just curious what your thoughts are on that slowdown versus the strong gains we saw last year, early this year and how that's coincided with near record absorption. And just curious if we do see a continued slowdown in the employment market, how that kind of impacts the acceleration in pricing power and getting back to maybe a more historic market rent growth environment? Thanks.

Speaker 1

Sure. I think the slowdown is clearly a good thing and a good thing because if you think about the dynamics that affect our business, high interest rates and are one part of the equation. So I think the Fed's sort of sticking the landing, so to speak, with a maybe an Olympic comment. They seem to be going for the gold and I'm good with a slower economy or slower job growth market. You saw the unemployment rate went up from up to 4.3% with the print this morning.

Speaker 1

And the good news about from our perspective is that our markets are where the jobs are. And even when they're slowing, there's still enough job growth and still enough in migration to continue to take market share from the household formation from single family. And so with that said, the key is having reasonable job growth and not crashing the economy. Obviously, if you have if the Fed doesn't stick the landing and we end up with a recession in 2025, then all bets are off on what happens then. We think what's going to happen is the Fed is going to stick the landing, you're going to have moderate employment growth and that employment growth is going to be in the markets where employment growth happens the best, which is in our market.

Speaker 1

So I feel pretty good about where we are and I like the idea that the slower employment growth gives the Fed some headroom to be able to start cutting rates, which is which would be really good for our long term business.

Speaker 8

Understood. Let's hope they take home gold. Thanks for the time.

Speaker 7

For sure.

Speaker 5

Our next question comes from Jamie Feldman from Wells Fargo. Please go ahead with your question.

Speaker 9

Great. Thanks for taking the question. So your comment about not starting any more new developments for the rest of the year, Can you just talk more about that? I mean, it seems like there's going to be a really good window in 'twenty six, 'twenty seven to be delivering. So how are you thinking about, A, how talk more about that comment and then maybe as we think ahead to 'twenty five, do you think it could be a bigger development year?

Speaker 9

Thank you.

Speaker 1

Sure. So our development starts, we were prepared. These are really shovel readies and we had delayed them. And so we went ahead and started the 2 in Charlotte that we announced. And we have a decent pipeline that we can start.

Speaker 1

It's just hard to get positioned and to start those other properties that we have between now and the end of the year, they'll likely be 2025 starts. And I also think we'll be able to expand the pipeline by helping other developers out who can't get financing, who have shovel ready land deals that they're willing to part with. If you look at our history in cycles like this, we've always been able to ramp up our development pipeline. Even though the 2026, 2027 looks pretty amazing from an apartment perspective, You still private developers still can't get capital. I mean, we were chatting with the largest provider of debt and equity capital to the multifamily industry and their business for new development, equity and debt is down 85% this year and it's not moving up.

Speaker 1

At the same time, the same group said that their interest in acquisitions or in the sellers out there who are merchant builders who have who really need to recapitalize their VOBs and listings are up 60% year over year and it looks like it will be a pretty robust transaction market coming up in the fall and early next year. So, when the sort of clouds clear a little bit more, we will be more active in development for sure.

Speaker 9

Okay, thank you.

Speaker 5

Our next question comes from John Kim from BMO Capital Markets.

Speaker 9

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

Speaker 7

Yes. So our renewals are generally within 50 basis points of the average of what we send out. So the 4.6% probably turns into something a little just above 4%. Alex, on the new lease numbers?

Speaker 1

Yes, absolutely.

Speaker 10

Yes, John, so for the Q3, we're assuming blended about 1.6% and the 4th quarter blended about 1.3%. And by the way, that's exactly what we thought last quarter as well.

Speaker 9

Great. Thank you.

Speaker 8

You bet.

Speaker 5

Next question comes from Connor Mitchell from Piper Sandler.

Speaker 6

So you guys saw a pretty nice improvement of bad debt in the Q2 year over year. Just wondering if you could provide some insights to how this might be trending in July and what you guys are thinking about for the rest of the year? And then maybe what markets are causing the improvements and if you're seeing anything on the other side with any slipping in bad debt in certain markets?

Speaker 10

Yes, absolutely. So bad debt is really getting under control now. What we had in the Q2 was about 80 basis points.

Speaker 8

We

Speaker 10

just closed out July, so it's a little bit early for us to have our July numbers, but we think that they're going to be in line with our expectations for the rest of the year, which is right at 75 basis points. And where we're seeing the biggest improvements is where we needed to see them. So for instance, California in the 2nd quarter was 2.1% bad debt. In the Q1, it was 2.6% bad debt. So those that market was obviously one that we're focused on quite a bit as was Atlanta, which in the Q1 was 1.8% and is now 1.4%.

Speaker 10

So the markets that were being a little bit problematic for us are starting to get under control. And we do think that we're getting pretty close to getting back to a normal level, which for us is about 50 basis points.

Speaker 11

Thank you.

Speaker 5

Our next question comes from Josh Bederlein from BOA. Please go ahead with your question.

Speaker 6

Hi. This is Steven Song on for Josh. Thanks for the time. So my question is on the turnover. So if I look at the number correctly, it looks like there's a little bit pickup from July from 2Q to July.

Speaker 6

So I wonder if you have any color on that on the turnover?

Speaker 10

So we'll always see an increase in turnover in the Q3. So that's very typical. I think the thing that I'd be focusing on more is that our July 2023 turnover number was 53% and our July 2024 turnover number is 47%. That's a 600 basis point improvement year over year. So although we typically do see higher turnover in the 3rd quarter, it's trending a lot better than typical right now.

Speaker 6

Okay. Thank you.

Speaker 5

Our next question comes from Rob Stevenson from Janney.

Speaker 6

What's the current expected stabilized yield on the development pipeline? And what have you been seeing in terms of material labor costs as you start those 2 Charlotte projects?

Speaker 1

Sure. So the Charlotte projects are in the 6 going in yields with IRs in the 8s. And the development pipelines our general development pipeline, if you look at the last couple of years have been suburban deals in the 6% maybe and actually in Phoenix are like in the 7% range. And then the more urban deals are in the mid fives to high fives. And in terms of cost, costs are coming down in some areas, but very, very slowly.

Speaker 1

Lumber costs have come down, for example. But you know what, the good news is we're not having 1% a month inflation like we were a year and a half ago. But I don't think that we've seen much cost compression. It will be really interesting to see as starts fall and we will peak in construction this year and next year falls substantially in the year after that. And generally when you see construction starts fall like that, what happens is that the subcontractor margins compress.

Speaker 1

And if you go back to the financial crisis, people were prices go up dramatically because people were just working for food at the time and there was no margin. I don't know that that's going to happen this time because there's a there is a lot of other development going on. And when you think about commodity prices, those are driven by the global market, not just multifamily. And so with the bipartisan infrastructure bill and the government spend that's going on in infrastructure, concrete and steel, some of those other products likely aren't going to come down. So as labor market tightens, I think you will see labor prices come down and margins come down.

Speaker 1

And how much that is, really it's hard to say today. It's not going to crater the way it did during the financial crisis because that was a whole different animal compared to what we have today. And if we have a if the Fed does hit the landing, it'll be a decent economy still for builders and labor.

Speaker 6

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

Speaker 1

Land is an interesting thing because it doesn't move as fast as you would think because sellers just like the sellers of existing multifamily are unwilling to drop their prices, land people tend to be the same. What I think the where the opportunity can be and we've generally seen this in past cycles is that you have developers who own land who have been positioning to start the development and they can't start the development because the debt equity markets won't allow it today. And so they end up taking, you know, they write off their sort of soft costs and then they sell the land for, you know, what it was worth beginning perhaps. And that's generally where the opportunity is. But I think sellers are definitely understanding that the market is different today because of the cost of capital rise and construction costs not coming down.

Speaker 1

So land prices tend to be stickier than you would think. But I do think there will be opportunities in making deals both on the land side and the buying from developers that can't get their deals financed.

Speaker 6

Okay. Thanks guys. Have a great weekend. Sure.

Speaker 5

Our next question comes from Steve Aqa from Evercore ISI. Please go ahead with your question.

Speaker 8

Thanks. Good morning. Rick, I guess I just wanted to get a little bit more color around the pre development starts. What kind of yields are you penciling? I assume on trended rents and then you do you look out on a stabilized basis, where do you see those heading?

Speaker 1

Sure. We do both. We look at untrended yields and then we also look at trended yields and we are generally pretty conservative in our trendeds. And when you when we look at the untrended yields, they're in the sort of mid to high fives and then when you look at trendeds, they're in the 6s. I think that the and that's a those are going in yields or stabilized yields and we look mainly at IRRs because the long term, we're in this business for the long term.

Speaker 1

You want accretion as you go, but you also want long term capital placement that has a positive spread to your weighted average long term cost of capital. So with that said, we're in high or mid low eights and one of them is a low 8 and the other one is a higher 8 from an IRR perspective. So that's the way we look at it. But I think there's substantial upside in those yields just because of what the market looks like in 20262027. If you have a reasonable economy and no new supply come into the market, you should get better than normal rent growth.

Speaker 1

If you look at long term rent growth for our business is roughly a little over 3%. And if you went but the site during the cycles today, we're what is our revenue growth today is like 0.7 and to get to a long term average of 3 from today, you have to have a whole lot better than 3 in those uptick market years, which would be in 'twenty six and 'twenty seven. So I think there's a fair amount of upside in those developments that you start today. Sure.

Speaker 11

And our

Speaker 5

next question comes from Eric Wolf from Citi. Please go ahead with your question.

Speaker 4

You mentioned where you're sending renewals out today. So I was curious based on what you're seeing with YieldStar and the other forward indicators, do you think occupancy will stay at this high level because it looks like it came up in both June July or would you expect it to start coming down seasonally?

Speaker 7

Yes. So we're at 95.5 now and I think in the back half of the year I think we're we have that basically flat. Maybe it comes down a little bit in the Q4, but there's always a trade off between rate and occupancy and it's something that our professionals that and our revenue management department deal with literally daily making adjustments to make sure that we're maximizing revenues. But the key to being able to push rents and to have any pricing power at all is to maintain occupancy at or above 95%. So, you know, we started the year at 95.3%, we've actually ticked up a little bit during peak leasing season.

Speaker 7

Seasonality will probably cause it to drift a little bit below 95.5, but I'm pretty comfortable with our forecast between now and the end of the year with regard to our guidance.

Speaker 9

Thank you.

Speaker 7

You bet.

Speaker 5

Our next question comes from Adam Kramer from Morgan Stanley. Please go ahead with your question.

Speaker 6

Great. Thanks. Good morning, guys.

Speaker 11

Just wanted to

Speaker 6

know across the portfolio today, where does kind of the lost lease or gain to lease stand? And if you can even give maybe a few of the markets in particular, I'd be interested to hear.

Speaker 10

Yes. So right now, we are in a lost lease position. And so it's right around a 1%. And obviously, that is spread across the markets as you would imagine they would be based upon the revenue growth that we've had year to date. And so if you think about D.

Speaker 10

C. Or San Diego has got a much larger loss to lease. And obviously, we've got gained leases in markets like Nashville

Speaker 6

and Austin.

Speaker 5

Our next question comes from Michael Goldsmith from UBS. Please go ahead with your question.

Speaker 12

Hi. This is Amy Pearlband. Some of the higher supply markets seem like they might be reaching a bottom and maybe Phoenix is in this category. So, are you seeing any signs of this happening? Or are we potentially reaching the bottom in some of these markets?

Speaker 12

Thanks.

Speaker 7

Yes. So the markets that jump off the page to me still are Nashville and Austin in terms of oversupply and, you know, that I I still think we're in the middle of the of the, you know, I don't know whether it's the 4th inning or 5th inning of the baseball game, but I don't think we're anywhere near the end in either of those markets. It's it's probably gonna drift over into mid 2025 just based on if you look at the forward, the completions that are still we still got to grind through. The good news is, is that despite these historic levels of new supply, there's also been a pretty historic level of new absorption. Cities like Austin, where if you kind of do the math around jobs created and net absorption, the numbers don't seem to make a whole lot of sense.

Speaker 7

But when you look at it in the broader context of not just employment growth, but in migration, in domestic migration into markets like Nashville and Austin, that's been the game changer. And because I mean by historical standards, the amount of supply versus the kind of printed job growth would bode much worse for rental rate performance in both of those markets and it just hadn't happened. But in terms of being at the bottom, I don't know, we're probably kicking around the bottom because we're kicking around the peak monthly deliveries in those markets. But clearly, we're going to continue to fight the supply challenge into 2025. The good news is our markets have remained robust and we're still growing jobs and people are still moving here and we're still leasing lots of apartments.

Speaker 12

Okay. Thank you.

Speaker 9

You bet.

Speaker 5

And our next question comes from Rich Anderson from Wedbush. Please go ahead with your question.

Speaker 11

Thanks. Good morning out there. Good morning. So you bought

Speaker 6

can you hear me?

Speaker 1

Yes.

Speaker 11

Okay, sorry. So you bought back stock during the quarter in $96 range, your stock is now $119 or something like that. And consensus NAV is, I don't know if you believe it, $120 ish. I wonder what's under what scenario could you start thinking about reversing course from an equity standpoint, not that your balance sheet needs it, But would you are you at all having sort of a thought about raising equity at some point, particularly if something of significance comes along and you could deploy the capital and protect your balance sheet at the same time? Just curious what your thoughts are there.

Speaker 1

Well, we clearly are focused on where we can make the best returns and how do we fund that. And so I will tell you since the of course, the stock is at $119 today, but you know that in the last it was $110,000,000 just a little while ago and below that. And so, we don't think of it that way, but I would say that the way I think about capital allocation, if we could acquire a portfolio that improves the quality of our portfolio, is part of our strategic plan and it can be done on an accretive basis you know, and using equity and and our, you know, debt to fund that and keeping our balance sheet strong. Sure, that would be a interesting thing to do. We haven't found portfolios like that.

Speaker 1

I think that today, you know, I think that the transaction market is going to be very robust over the next 18 months. And that should give us an opportunity to play in the acquisition game significantly. And if it works out where the math works, then sure you use all sorts of capital including equity.

Speaker 11

What do you think about the $120,000,000 as a NAV estimate? Any thoughts on that? Or the consensus number?

Speaker 1

Well, at $120,000,000 I think that's an implied cap rate at Camden of about 5.6 or 5.7. And let's see the Cattera transaction, the CFO for KKR came out and said it was a low 4%. So it's where cap rates today and most of the transactions that are going off today are in the low 5s. So I think you know, that the public markets are slow to bring cap rates down to where the real market is today. And ultimately, maybe the public markets are right and there's going to be a flood of properties that have to come to the market between now and the end of 20 25.

Speaker 1

And so there you could argue that cap rates could stay higher or go higher because of that. But on the other hand, there's a massive wall of capital out there as evidenced by Blackstone taking out Aimco and KKR acquiring a couple of $1,000,000,000 of the Cutera portfolio. So we'll see, right? It's the street tends to or at least the Wall Street tends to the pendulum moves way one way versus the other and is it going to get back to the middle to the where if it got back to the middle of where cap rates are trading today, 120 would be low.

Speaker 11

Okay. Sounds good. Thank you.

Speaker 8

Okay.

Speaker 5

Our next question comes from Mason Gual from Baird. Please go ahead with your question.

Speaker 6

Hey, good morning. Can you provide some insight on how you expect D. C. And Houston to perform in the second half of the year?

Speaker 7

Yes, I think D. C. And Houston are going to continue to be in the top. I think clearly D. C.

Speaker 7

Is going to end up the year either 1 or 2 in our portfolio and just from where we are today. Houston is, continues to be really robust in terms of growth. This morning, I think I saw an announcement that Chevron was finally going to move their real live corporate headquarters from California to Houston. They've been saying they weren't going to do it for 15 years and yet their Chairman and Vice Chairman are expected to move to Houston by the end of this year. So I think that's 2,000 jobs.

Speaker 7

That probably is not a huge thing in the scheme of Houston's overall employment view, but it sends a really important message about Houston as the energy capital of the world and it's not going away anytime soon. I think it's only going to continue to be to get stronger in the near term. So I'm really I'm very constructive on Houston with what's going on here and clearly DC Metro is having a year that is better than what we would have thought it would be. And they've got great occupancy right now and really good momentum and our teams are doing a great job of taking advantage of the opportunity. So I think both those markets I'm very positive on between now and the end of the year.

Speaker 1

I would add to Houston that Keith mentioned the energy capital of the world, but it's also the energy transition capital of the world. And if you look at the government spend on energy, I mean there was a roughly a $2,000,000,000 hydrogen hub that was granted to Houston And a lot and these energy companies are all investing major dollars in clean technology and into the transition. And ultimately, the thing that's really interesting about the whole debate about energy transition and global warming and going green, you know, you have to have a transition plan that works for people and a transition plan that includes, you know, include it has to include oil and gas, traditional oil and gas, but the oil and gas companies are the ones who understand how to change how to get transition into hydrogen and other fuels. But so I think long term Houston is going to continue to do well as a result of both traditional energy and transition.

Speaker 5

Our next question comes from David Segal from Green Street. Please go ahead with your question.

Speaker 6

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

Speaker 1

Sure. So we look at it from a long term cost of capital perspective and we want 150 basis points spread from our long term cost of capital for development. On acquisitions, we want 50 to 75 and we can get that with developments. The going in yields, if you use going in yields as your benchmark, then that always is dangerous in my opinion, because where you start is important, but where you finish is the key. And so long term value creation through development, we've created 1,000,000,000 of dollars of value at Camden through our development program over the years.

Speaker 1

And this part of the cycle is when there's going to be limited competition coming in, in 'twenty six and 'twenty seven. Building today, those developments will be create value long term for Camden. When you look at if we were if we only had $1 to invest, that'd be one thing, right? But we have one of the best balance sheets in the sector, we have an unfunded line of credit, if we could invest without doing any equity offerings and keeping our debt in the right level to keep our A rating, we can invest 1,300,000,000 and so the $300,000,000 in development, if great acquisitions come along, we'll play in that game as well, but it's a long term bet for a long term business and we think it makes sense to allocate that amount of capital to those transactions. They're great suburban, really simple and no offense to my construction folks, but they're stick construction in the suburbs and that's where we've made the most or created the most value in our development business over a long time, long period of time.

Speaker 1

So that's the way we think about it.

Speaker 11

Great, thank you.

Speaker 5

Our next question is a follow-up from Steve Sakwa from Evercore ISI. Please go ahead with your follow-up.

Speaker 8

Yes, great. Thanks. Just thinking about the expense growth this year, it's obviously come in a lot better than you guys expected. Taxes are only up 0.2%. I know the Houston or the Texas refunds and property tax changes have helped.

Speaker 8

I'm just trying to think through maybe some of the one time benefits that you're getting this year as we think about expense growth into 2025?

Speaker 10

Yes. So I'll hit the items that seem to have the most variability first. So if you think about property taxes, obviously, we're having a fantastic year in 2024. My gut is, as we move on, we return to a more normal level, which is about 3%. If you think about insurance, insurance was really a case of a pendulum that swung.

Speaker 10

If you remember last year, our insurance was up 40%. And when we started this year, we thought insurance was going to be up 18%, and now we think it's going to be down 3%. Right now, this is still a great business for the insurance providers. And every insurance provider that we spoke to when we did our last renewal was trying to find out how they can have more of this business. And the simple way that they can get more of this business is to keep the rates low.

Speaker 10

And so what I would anticipate is that insurance follows the normal cycle of rates are low for a couple of years, and then all of a sudden, you have some accumulation of global losses that causes rates to rise, and then it's a rinse and repeat cycle. When I think about the rest of our line items, salaries is obviously something that is very closely tied to inflation and we think that's going to be typical, the same thing for utilities or repair and maintenance. Probably the one line item that I think there's some variability. The good news is that it's our smallest line item is marketing. And marketing really is a function of how much we want to spend to create the traffic that we want.

Speaker 10

And as we have more supply, we'll spend more on the marketing dollars. But all that being said, I think if you look at where we are today at 2.85%, you think about the long term average for our business is 3%. So, I think we're in pretty good shape.

Speaker 5

Our next question comes from Michael Goldsmith from UBS. Please go ahead with your question.

Speaker 12

Hi. Another quick one from me. Amy is on the line. How is the hurricane impact factored in to the guide? And how should we think about that as we are modeling out the 3rd quarter?

Speaker 10

Yes. So it's a non core expense for us. And if you'll notice that we increased our core FFO by $0.05 per share, but our non core FFO by $0.03 per share. The delta is the $0.02 that we are anticipating for the impact of barrel. And obviously, that's a net expense line after taking into effect insurance proceeds and additional dollars that may be capitalized.

Speaker 12

Okay. Thank you.

Speaker 5

And our next question comes from John Kim from BMO Capital Markets.

Speaker 9

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

Speaker 10

No, absolutely. So a component of that is easier comps, but you have to think about our effective. So our effective for July is up 1.2%. And so what I'm saying is that our effective for the 3rd quarter is up 1.6. So 1.2 to 1.6 is not that much of a jump.

Speaker 10

And then when you look at what was signed, ignore the blend, because in July, we sort of had a little bit of an unusual where a larger percentage of was from new leases versus renewals. If you look at that renewal number, which is up 4%, that's a really good renewal number for us. And if you think about turnover that's dropping, with renewal numbers staying that high, that should be a really good driver for us to get to the 1.6%.

Speaker 9

Can you confirm what you signed in June? I think May was at 1%.

Speaker 10

I do not have the June number right in front of me, but it yes, we'll get back to you in that.

Speaker 9

Okay. Yes, no problem. Thank you.

Speaker 5

And ladies and gentlemen, I'm showing no additional questions. I'd like to turn the floor back over to Rick Campo for any closing remarks.

Speaker 1

Great. Well, thank you for being on the call today. And this is probably one of the given that we're the last to report in the call, I know people will probably have their questions answered. I want to make sure everybody recognized that we have the red, white and blue shirts going to support the US and I want to give a great shout out to Simone Biles, a Houston native who made history yesterday by being the most decorated gymnasts in history. So with that, we'll let you enjoy the rest of your day and the rest of the Olympics.

Speaker 1

So take care. Thanks.

Speaker 6

Bye bye.

Speaker 5

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Camden Property Trust Q2 2024
00:00 / 00:00