Camden Property Trust (CPT) 2016 Q2 法說會逐字稿

Good day, and welcome to the Camden Property Trust second-quarter earnings conference call.

(Operator Instructions)

Please also note: today's event is being recorded. I would now like to turn the conference over to Kim Callahan, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining Camden's second-quarter 2016 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 SEC, and we encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions, and the Company assumes no obligation to update or supplement these statements because of subsequent events.

As a reminder, Camden's complete second-quarter 2016 earnings release is available in the investor section of our website at Camdenliving.com, and it includes reconciliations to non-GAAP financial measures which will be discussed on this call.

Joining me today are Rick Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President; and Alex Jessett, Chief Financial Officer. We will try to be brief in our prepared remarks and complete the call within one hour as there are other multifamily calls scheduled after us.

We ask that you limit your questions to two then rejoin the queue if you have additional items to discuss. If we are unable to speak everyone in the queue today, we will 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.

Thanks, Kim, and good morning. Today's on hold music was brought to you by the one and only Prince, unquestionably one of my generation's greatest musical talents. In addition to being a musical genius, we consider him to be a kindred spirit of sorts. In 1993, Prince changed his musical identity to The Artist Formerly Known as Prince. That same year in conjunction with our IPO, we changed our name to Camden, the company formerly known as Centeq, and the rest as they say is history.

Camden's strategy of operating in high growth markets, improving the quality of our portfolio through capital recycling, and maintaining a strong financial position continues to create value for our shareholders. Permanent fundamentals remain strong with above average growth expected for the next few years, revenue growth has slowed from the high growth levels over the last few years but remains above the long-term average. 2016 results are in line with expectations and all our markets are performing exactly as we expect. We are maintaining our 2016 guidance ranges for both FFO and same store growth.

Our developments are creating significant long-term value for our shareholders. We currently have $850 million of properties currently under construction or in lease-up. 77% of the cost is funded, a little less than $200 million left to fund. We expect to start one to two projects up to $200 million in the second half of 2016. As we have discussed, we are reducing the size of our development pipeline at this point in the cycle.

I do want to give a shout out to our teams for another great quarter and to our real estate investments group for their adept management and execution of the nearly $1.2 billion in dispositions that we will complete this year. We all know it is much harder to buy than it is to sell, and at the offset of what we did at the beginning of the year in terms of our disposition activity, I'm really excited that our teams have done a great job.

Thanks, Rick. We're pleased with our second-quarter results. Aside from the elevated transaction volume in the quarter, this was a relatively routine quarter as operating results were right in line with expectations.

Overall conditions remain above trend, and sequential revenue growth was up 1.6% with all markets positive. This seasonal improvement was also in line with our expectations. With that in mind, I'll keep my prepared remarks brief today to allow more time for what's on your minds.

A few highlights on our same store results. Q2 revenue growth was 4.3%, our top five markets all grew more than 8% again this quarter. Tampa up 9.6%, Orlando up 9.3%, Dallas up 8.6%, San Diego Inland Empire up 8.1%, and Phoenix up right at 8%. As expected, our two weakest markets were Houston at down 1% and DC down 2/10 of 1%. Houston's revenue decline of 1% was in line with our expectations as well as our commentary from last quarter's call. We still expect full-year revenue in Houston to be flat to slightly negative for the full year of 2016.

DC revenue growth was slightly negative primarily as a result of a construction related issue at one of our large Maryland communities. Excluding that community, DC revenue growth would have been approximately 50 basis points higher year to date or right at 7/10 growth. We're expecting better performance in the second half of the year, and we still forecast full-year revenue growth in the DC metro area in the 1% to 2% range.

Rents on new leases and renewals continue to support our outlook for the full year's results. Q2 new leases were up 2.7% and renewals were up 5.9%. July new leases are running 3.1% up with renewals up 5.6%. And we're sending out our August and September renewal offers at an average increase of 6.3%. Additional operating stats for the quarter continue to support our full-year outlook.

Same store occupancy in the second quarter averaged 95.5% versus 95.4% in the first quarter and 96% in the second quarter last year. July occupancy ticked up to 95.7% versus 96% for the same quarter last year. Net turnover rate for the quarter was down slightly versus last year at 47% year to date. Moveouts to home purchases were 15.9% for the quarter with an as expected seasonal increase from 14.3% in the first quarter. Overall 2016 moveouts to purchase homes are running 1% above 2015 levels but still well below the long-term trend. Finally, our rent to income for the quarter was 18% consistent with the 17% to 18% levels we've seen post recession.

Overall, we continue to be pleased with our portfolio's performance. We operate a national platform in 15 markets, and while macroeconomic influences are strong, each market is subject to its own set of factors that can overshadow the big picture. These market specific factors explain why our two weakest markets, Houston and DC, are underperforming our overall portfolio while five of our markets grew revenues at better than 8% this quarter. This reminds us that our diversified national footprint has similarities to a balanced stock portfolio where diversification is the only free lunch.

Now I'll turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. Before I move on to our financial results, a brief update on our disposition activities.

On last quarter's call, we discussed the sale of our Las Vegas portfolio for $630 million and the planned disposition of an additional $400 million to $600 million of operating assets during the third quarter. We have since completed $210 million of these additional dispositions and the midpoint of our third-quarter and full-year earnings guidance assumes another $310 million to sales closing during the third quarter bringing our total expected disposition volume to nearly $1.2 billion for 2016.

To date, including Las Vegas, we have sold $840 million of assets at an average AFFO yield of 5% based on trailing 12 month NOI and actual CapEx equating to a nominal NOI cap rate, which excludes management fees and CapEx, of 6%. Most of these communities were 20 to 30 years in age with lower rents and higher CapEx than the rest of our portfolio; however, our most recent sales did include two assets in suburban Maryland which were less than 10 years old. We elected to dispose these relatively younger assets to both reduce our exposure to their respective submarkets and to mitigate the additional DC Metro NOI exposure that will result from the new development communities which begin leasing in 2017. The additional $310 million of dispositions expected in the third quarter consists of older assets, similar in kind to majority of properties we have sold over the past few years.

Since our last call, we have refined our 2016 disposition pool and associated tax planning. We now anticipate a special dividend in the range of $4 to $4.50 per share as compared to our prior guidance range of $4.25 to $5.25 per share. We expect to pay the full dividend amount during the third quarter. Our balance sheet remains strong. We ended the quarter with no balances outstanding on our unsecured line of credit, $342 million of cash on hand, and no debt maturing until May of 2017.

After completing the sale of our two Maryland assets earlier this month, our cash balances have grown to approximately $450 million. We do not anticipate prepaying any portion of our current debt. Instead, we plan to use our cash balances and future sale proceeds to fund our development pipeline and return capital to shareholders later this year through the previously mentioned special dividend. Our current development pipeline has approximately $200 million remaining to be spent over the next two years, and we are projecting another $100 million to $200 million of development to begin later this year.

Moving on to operating results. For the second quarter, we reported FFO of $105.6 million or $1.15 per share, in line with the midpoint of our prior guidance range for the second quarter of $1.13 to $1.17 per share. Based upon our year-to-date operating performance, we have tightened the ranges for our 2016 full-year FFO and same store guidance leaving the midpoints of guidance unchanged. We currently anticipate 2016 full-year FFO to be between $4.50 and $4.60, same store revenue growth between 3.85% and 4.35%, expense growth between 3.5% and 4%, and NOI growth between 4% and 4.5%.

Last night, we also provided earnings guidance for the third quarter of 2016. We expect FFO per share for the third quarter to be within the range of $1.07 to $1.11. The midpoint of $1.09 represents a $0.06 decrease from the second quarter of 2016, which is primarily the result of an approximate $0.01 per share increase in same store NOI resulting from an estimated 50 basis point increase in sequential NOI as revenue growth from higher rental and fee income in our peak leasing periods more than offsets our expected increase in property expenses due to normal seasonal summer increases in utilities and repair and maintenance costs.

An approximate $0.01 per share increase in NOI from our five communities in lease up, and an approximate $0.02 per share increase in FFO resulting from lower overhead costs. This $0.04 per share aggregate improvement in FFO is more than offset by an approximate $0.03 per share decrease in FFO resulting from the April 26 disposition of our Las Vegas portfolio, an approximate $0.03 per share decrease in FFO resulting from the $210 million of additional completed dispositions, an approximate $0.03 per share decrease in FFO resulting from the $310 million of anticipated additional third-quarter dispositions, and an approximate $0.01 per share decrease in FFO resulting from lower occupancy at our non-same-store student housing community in Corpus Christi, Texas. Occupancy declined significantly from May through August at this community.

At this time, we will open the call up to questions.

(Operator Instructions)

Today's first question comes from Nick Joseph of Citigroup.

Thanks, wondering if you can talk more about what you're seeing in Houston right now. You mentioned that it's still in line with your expectations of generally flat same-store revenue growth. So what are you seeing there? And then also, how do you see that trending going forward and when do you think we'll actually reach a bottom for Houston?

Yes, so Nick, we said last quarter that we thought this will be the first negative revenue print in the second quarter, and so it's consistent with what we were expecting for this quarter. In our stabilized portfolio, our occupancies have held up fairly well. We continue to be very aggressive on renewals. We did some things in the middle of last year to stabilize the embedded base on our portfolio, lengthening lease terms, getting a lot more aggressive on renewing, and its paid off for us.

We've seen less turnover in our portfolio, and the longer lease terms have certainly helped us in terms of extending the rolldown of the rent roll. But the reality is, is that we know and gave guidance to the fact that this would be a year where if we could get out of the woods with sort of slightly down on revenues and that would be a good day's work, and as we sit here and almost in August now, it looks like that's still achievable.

Now so it's in the stabilized portfolio. That's one part of the world. Obviously there's a lot more stress in the merchant build arena where people are -- it's a very different game when you're trying to get from 0% occupied to 90% versus trying to sort of hold on to your 95% in the range of 94%, 95% occupied. I think typical in the market right now in merchant build, it's routine to see six to eight months free rent in the most impacted area, which is out in the energy corridor. We had a lot of new supply and obviously very weak demand. I think we've seen and heard anecdotal evidence of as much as three months free rent, but I would say what's typical in the merchant build world is six to eight weeks free.

In our world, we don't really deal with concessions. It's all net effective rents, and so if you just kind of look at where we are year to date, we're about where we thought we would be, and we do expect that things will continue to get more pressure as the merchant build stuff comes online. In terms of kind of saying where is the bottom, until we do our bottom-up budgets for 2017, we won't really have a better handle on that. But as we get closer to year end and we get our budgets rolled out for what we think is going to happen in our stabilized portfolio, we'll give you more color on that.

I think the other thing that I would just add is that supply has basically shut down in Houston. If you don't have a development loan now, you're not getting a project completed. The equity requirements and the increase in costs associated with lenders as a result of Basel III and also other technical things that the banks are being required to do now and so construction financing basically is dried up and unless you're putting 60% equity in a deal, you're not going to get construction financing. So when you look at the supply side, the supply coming into the Houston this year is 24,000 or 25,000 units. Next year, it's going to be at least half of that, or maybe less than half of that. And then in 2018, you don't see any kind of pipeline at all.

So if you have a thesis on recovery in the energy business or at least we think the energy business is sort of stopped hemorrhaging jobs, and Houston has actually had flat job growth so we've been able to add jobs in other sectors while the energy sector is contracting. So with that said, if 2017 is sort of a better year job wise without as many energy layoffs, and then 2018 looks depending upon the national economy, obviously, both the national economy in 2017 and 2018 along with energy is going to really dictate what happens. But the good news is, is that we know that there's no supply coming in 2018, so you can kind of look at it and say well, maybe it's middle of 2017, end of 2017, or early 2018 where you don't have the supply pressure anymore.

Thanks, and then just on I guess the difference between your weighted average monthly rental rate and your weighted average monthly revenue was about 100 bps this quarter. I'm wondering what is driving that, if it's still the bulk cable and Internet package and how you expect that spread to trend for the remainder of the year?

Yes, absolutely. So the main driver is exactly right is our tech package. What you're seeing year to date for the incremental impact, which is in line with what the guidance we gave at the beginning of the year and is in line with what we expect for the full year, so approximately 100 basis points.

So you'd expect 100 basis points to hold quarterly through the end of the year?

Correct.

Thanks.

Our next question today comes from Jordan Sadler of KeyBanc Capital Markets.

Hi, guys. It's Austin Wurschmidt for Jordan. I was just wondering if you could give some operating stats for Houston into July just in terms of how things are trending post-quarter end.

Yes, so we'll have to grab that for you, and I'll have those in front of me. I can tell you that it was pretty consistent as I recall from last quarter. We were down about 2% on new leases. Renewals were flat to up 1%, and you do that math and you end up about down 1% which is where we were for the quarter. I think that's still consistent with what we're seeing.

Thanks for that. And then what are you guys assuming in terms of occupancy guidance in the back half of the year? It seems like occupancy is tracking a little bit ahead at this time. Do you expect to hold that level through the rest of the year?

Yes, I think our rolled up budget for the entire year was about 95.4%, about where we are right now so, yes, you would expect to see just the math of that would mean that we should still see in the mid-95%s. We have never tried to operate our portfolio at 95.5% or above. It occasionally happens but our long-term target is really 95% to 95.5% which is consistent with where we have been this year.

And then kind of my math is right. It seems like you'd have to do a little bit over 3.5% in the back half of the year to hit the midpoint of guidance. Is that fair?

Yes.

Great. Thanks for taking the questions.

You bet.

Our next question comes from Alexander Goldfarb of Sandler O'Neill.

Good morning down there.

Good morning.

Just a few quick questions here. And first, on DC, maybe you mentioned it on prior calls but DC down 110 basis points year over year in occupancy. If you could just provide a little bit more color on that and then expectations for the remainder of the year.

Yes, the occupancy decline is -- there's two levers that we have. It's what do you want -- where is occupancy rate and what's happened on rental rates, and obviously we're always toggling those two things to try to keep it in the range that we think maximizes revenues. The occupancy rate that we were running last year was clearly ahead of what our long-term average has been in DC so some of it just getting back to by using pricing getting back to what we think the optimal occupancy rate is. In terms of the overall rent structure and what we see going forward, we do think that the back half of the year in particular, the fourth quarter because the comp set is a much easier comparison, we do think that we're going to see in the 2% to 2.5% revenue growth range in the fourth quarter.

So we think from where we are today, which is the slight negative, the negative that was being compounded by the construction issues that we have at one of our very large Maryland communities. We've got some construction defects that we're having to resolve, and those will all be cleared up by November of this year. It certainly put some pressure on our first two quarter results in DC but we still think that we're on track to be in the 1% to 2% revenue growth range for DC this year.

So Keith, in other words, obviously the construction item isn't in same store but you're saying that you expect your DC to strengthen in the back half of the year.

No, it actually is in same store. We didn't pull it out of our same-store results so it is a -- in our DC results, it was roughly 50 basis points in the quarter hit to the overall DC results, and it's a relatively large community. It's 508 apartments and that community alone is 93% occupied, which obviously is a drag on the overall portfolio, but it is in our same-store results.

Okay, and then turning to Southern California, it shows up as sort of the top-four metro for permitting. What are your thoughts around Southern California? Do you guys anticipate that it's going to experience what we've seen in other oversupply markets or do you think that the supply coming online in Southern Cal, in LA specifically, is more manageable versus your portfolio?

So it does show up when you screen it on total starts. It shows as the fourth in our overall portfolio, but if you take that as a percentage of the embedded base, it falls back down to still one of the most constructive in terms of supply that's coming relative to job growth. So as a percentage of the embedded base, many of our markets right now are running in the 2.5% of embedded base and Southern California is still just slightly more than 1% of the embedded base.

So the absolute number looks like a high number relative to Southern California experience, but relative to the existing stock, it's really not that troublesome and is not something that we're particularly concerned about in Southern California.

And when you look at just the difficulty of building there, we were in Southern California this week with our Board meeting, and we were touring our Hollywood project which is leasing up at a much faster rate than our pro forma and a much higher rental rate than our pro forma. And the discussion that we had, we did a sort of deep dive into the supply issue there, and what we're seeing is that you could fill -- they basically have a 50,000 unit deficit in Southern California broadly just from a demand perspective, and you're not building enough to satisfy that demand today. So I'm not worried about the Southern California supply at all.

Okay, thank you.

Our next question comes from Jeff Spector of Bank of America.

Great, thank you. Just wanted to confirm your latest thoughts on dispositions for 2017, 2018. I believe you previously said that it could be zero in each year. Just wanted to confirm your latest thoughts.

Sure, when you look at dispositions that we've done over the last few years, it's been obviously significant, especially with the nearly $1.2 billion this year. The challenge we have with dispos is that if we sell properties next year and we don't buy ones and buy new ones or newer ones and do 10-31 exchanges, we would have to do more special dividends. We have basically very limited ability to sell and not do special dividends.

So on the one hand, we obviously believe that what we're doing in terms of dispositions is correct now and that a special dividend is something that's good to do. On the other hand, we've gone through a lot of our low hanging fruit in terms of older non-core assets, and what we've got is a portfolio today that is much different than the portfolio that it started out when we started this disposition program and development program in 2011.

So we don't really have a lot of properties we want to sell, but on the other hand if the market continues to have the bid that we see that's very strong in terms of ability to sell assets and it makes sense to continue to do what we did this year, then we might look at that. But just generally doing dispositions because you can when your portfolio is positioned very well is not necessarily our strategy long term.

Okay, thank you. And then just one question on the August/September renewals that are going [at]. I believe you said the average is 6.3%. Could you give a little bit more color on that like maybe higher end markets versus the lower end markets, what you're asking?

Offline, we could give you market by market, but 6.3% is consistent with where we were last quarter and it's probably down about 50 basis points since the beginning of the year. The high/low on the renewals is not as big a gap as on the new leases. The highs are probably in the 7.5% range. The lows would be in the 5.5% range with the exception of the two outliers, Houston and Washington DC, which would both be in the 2% to 3% range.

Okay. Thank you. That's helpful.

Our next question comes from Drew Babin of Robert W. Baird.

Good morning. It looks like of your smaller Sun Belt markets, and I guess we'll call it the non-Houston Sun Belt, more of them showed a little bit of sequential deceleration than acceleration in 2Q versus 1Q. I'm just curious whether the level of new supply in some of those markets which is mostly CBDs as we all know, is that having somewhat of a trickle down effect or is there anything that you're seeing on the ground in terms of your ability to push rents?

I would say the most surprising result in any of our markets year to date has been the fact that our Charlotte portfolio has continued to perform as well as it has. Clearly, around the edges the new supply matters with regard to what markets you're in whether it's CBD or suburban, which if you just kind of take the big picture at 20,000 feet last year, our same store portfolio, we ended up at about 5.5% on revenues or 5.2% on revenues. This year, we gave guidance to at the beginning of the year somewhere around 4% to 4.25%.

Implicit in our guidance was the fact that we did expect deceleration and the primary reason for the deceleration that we are seeing I do believe is primarily supply driven with the exception of Houston, which has both supply issues and demand. We continue to see decent job growth in all of our markets. We're getting our share of that, and where the deceleration is happening, I do believe it is primarily where you've got assets that are directly competitive with new lease-ups and you've got merchant builders who are always a little bit more aggressive in their pricing than we are on our stabilized communities.

That's helpful, and secondly, the two assets you sold after quarter end in the metro DC area, what net impact do you believe that will have on your same-store pool in DC? Will the subtraction of those assets help or hurt same-store numbers in the near term?

So both of those assets were relatively in line with our DC portfolio, slightly more positive but relatively in line, so the removal of them is not going to really have incremental impact.

Okay, great, thank you.

(Operator Instructions)

Our next question comes from Wes Golladay of RBC Capital Markets.

Hi, everyone. It's Wes Golladay here. Looking at the Camden Chandler, it looks like leasing velocity slowed a bit. Is there anything special going on there?

Yes, it's just one of those relatively large unit counts where you sort of run into yourself on the lease-up where you have lease expirations that are happening while you're not yet stabilized. So overall, Phoenix was a great market for us. It has been year to date and we think it will continue to be, so we'll get there but it's just one of those phenomenons that happens when you run into yourself on lease expirations.

Okay, and now looking at the DC market. It looks like Pentagon City, Crystal City, and then downtown Logan Circle, the [actual metrics did] is starting to trend higher and you also have pretty good employment data on a relative basis coming out of the city. Are you getting more constructive to start pushing new lease rate in the second half or maybe early next year?

Yes, if you look at our progression throughout and our guidance for where we think we're going to be in DC, we're still pretty firm in our guidance that we are going to get between 1% to 2% revenue growth for the year, and obviously from where we are here at the end of the second quarter, that means we've got to see some pretty decent traction on both new leases and renewal, and we think we're going to get there. I think the fourth quarter actually sets up pretty well for us, and we still think that when it's all said and done, we'll be in the 1% to 2% range.

If you'll recall our original guidance for DC as a market, we had two C-rated markets, both Houston and DC were C-rated with the difference being DC had a C-plus rating but an improving outlook. And I think that where we are here almost in August, we still see it that way.

And then lastly on Houston, it looks like we're getting a little bit of a bottoming out in the rig count. Are any of your contacts on the E&P executive side getting more constructive or more of a bottoming out process going on?

Definitely, the CEOs are more constructive about the bottoming happening. One of the big suppliers after they announced their earnings talked about the bottoming, and at the same time he also said they were laying off another 5,000 people worldwide. So I think what's happening is, is that definitely the energy complex is feeling better about the world with oil prices up from their bottom at the beginning of the year, and part of the equation is that they don't want to do what they generally do during a big downturn like this which is cut so far to the bone that it really takes them a long time to get back.

I actually had a conversation a few weeks ago with the CEO of Shell, and he expressed that sort of fear to me which is that we don't want to over do it like we always do and all of a sudden, oil gets back to $60, $70 a barrel and they don't have any employees to get the job done. So I think there's a certain amount of expectation that oil has bottomed. I think people are sort of cautiously optimistic, and you have seen the rig count go up some. The question of what happens long term to oil is really the key but at least folks are a little more constructive today.

Great. Thanks for taking the question.

Our next question comes from John Pawlowski of Green Street Advisors.

Thank you. Can you share the individual nominal cap rates on the Tampa and two suburban Maryland dispositions?

Sure. So on the FFO cap rate on the Tampa asset was just slightly north of 6% and it was the same for the two Maryland assets, slightly a little bit less but in that range. And that's on an FFO basis. If you go to an AFFO basis, they were -- the Tampa deal was right at 5% and then the other two Maryland deals obviously are newer assets with slightly lower CapEx, and so their AFFO yields were in the 5.5% range.

Great. Thanks, and that's on in-place or forward-NOI?

That's trailing.

That's trailing.

And that also doesn't include management fees or property tax increases or those things. Generally you'll take the -- so if you're talking in general, sort of broker CapEx or broker cap rate, you have to take 75 bps off those numbers.

Great, and then how do these cap rates and the cap rates on your incremental $300 million in dispositions compare to your initial expectations?

They're right in line. We had some ups, some downs, but not much and it was all marginally right in line with what we expected.

Okay, and last one for me. Do you anticipate purchasing any more land in 2016?

We do have a land site in Denver in the RiNo neighborhood that we will likely acquire between now and the end of the year. But when you look at our development pipeline, we have all of our development if you assume about a $200 million start per year, we're out of land in 2018. So if we're going to keep the development pipeline at least in a position where we can in fact start projects in the future, we will have to start looking at new land.

What one of the things I think is going to be really interesting is going to be with all of this pressure on the merchant builders from a financing perspective and construction-cost perspective we think that there may be some opportunities to pick up land transactions that developers have either already done plans on and what have you and aren't able to finance them, and we may end up picking up some bargains in that area in the future. And I think that's an area that could be really interesting.

Okay, thank you.

Our next question comes from Rich Anderson of Mizuho Securities.

Thanks, good morning, everyone. So Rick or Keith or anyone, wonder if you can kind of maybe wax poetic a little bit about M&A or privatizations in this environment. Seems to me with later in the real estate cycle, decelerating growth, capital available or debt available, and cheap-to-financially-worthy entities and still exceptionally low cap rates and high property values being attributed not just to your space but to a lot of spaces. Is this not like a perfect time to see more, an acceleration of re-privatizations as sellers of whoever that may be feel like they're getting full value?

So I think -- let me hit the M&A to start with. M&A is a social issue related to whether companies really want to sell or not, and it never has been a financial issue in my view. It's always been one of if they get pressure or if they are just ready to retire or don't think they can create value long term, which most management teams believe they can. So I think M&A is one of those kind of issues out there that continues to be out there even though there are fewer targets obviously, since there's been a lot of take-outs.

On the private side, the issue of going private is one of those classic sort of discussions, right? So if our objective is to maximize total return over a long period of time for our shareholders, we are going to be long real estate all the time. And so if we thought that we were a value track or that we couldn't continue to provide great returns to our shareholders over a long period of time, then we would go private and we would sell because at the end of the day it would be no fun for any of us to be sitting in the situation where we are just limping along and not able to maximize value for the people that own a lot of shares, including our management team but also just shareholders overall.

And if you think about it, I remembered during the downturn when I would talk to all of the big banks, and I would say why don't you sell me $1 billion of your construction loans that are obviously underwater and they would look at me and say well, what kind of rate of return are you trying to make on it. And I'd say, I'm trying to make a mid-teens return if I have to foreclose on some apartment project or what have you, and they threw it back to me and said guess what, we're going to make that 15% return rather than giving it to you.

So if you think about privatization today, those private investors have a return hurdle. They have a requirement to return money to their shareholders, and why should we give them upside when we can create that value for our shareholders over a long period of time. So that's kind of my view of the privatization just because you can sell at a high price doesn't mean that, that's going to create value long term.

Rich, I would add to that just that and you've been doing this and following us long enough to know that in our 23 years as a public Company, there have been four different cycles where at times, the fate is favoring the public companies, and at times, it favors the private companies. And the reality is for the last five or six years, the playing field has been tilted pretty steeply in favor of the private guys with sort of unlimited access to pretty cheap debt and high leverage and all that comes with that.

So ultimately, the playing field will flip, and it could very well be that we're seeing the beginning stages of that but clearly, the next level of sort of the next turn in the cycle is, is it would be in more in the favor of the public companies. So in my mind, just looking at it from a macro perspective, it wouldn't be a great time to be making the switch if the objective was how can you perform over the next five years or how the cycle unfolds. I think the public companies are going to be in favor relative to the private companies, and who knows what triggers that.

It could be something as simple as or right now, that's on everyone's radar screens is the change in access to capital for the private players versus the public players and whether it's the Basel requirements or clamping down on construction lending for all real estate sources in the private world where they really only can compete where they're in a development mode and building, so if that flips and that becomes much more expensive and much more difficult, then the private guys are going to be on the short end of the stick again. It will happen, you just don't know when or what causes it to happen.

So related to that, Rick, at the very beginning, you said you think you'll have above average growth for at least the next few years. I think that's what you said. First of all, what gives you comfort that you're not kind of trending more quickly to more of a kind of CPI-based type of growth rate given all the moving parts? And second, what's the time horizon for you to be long the publicly traded model? In other words, if you saw that math being more like a year or this was it, would you be more inclined to be a seller today?

So I think that when you think about our above average, we're talking about above average growth and average growth would be defined as 3% NOI growth over a long period of time. That's when multifamily generally gets delivered, over a 20-year period. Obviously, peaks and valleys associated with that. The reason I think that we're going be above-trend growth top line and bottom line for the next couple of years is all of the macro things that are going on in multifamily are all good. You have the baby boom echo, that's still big, that are big renters. You've got the single-family homes have yet to take off, and really do well relative to historic measures.

It's still hard to get a loan for first-time home buyers. The home ownership rate continues to be very low and falling, so multifamily is still in the sweet spot. With the pressure you have on slowing rents today, I think it's generally supply driven in all of the markets. You had outsized growth over the years as a result of the shortage of multifamily, and now we've gotten to the point where we have built enough to take the white hot growth out of the market and now it's just above average growth. It's not as strong as it was, but I think that it's going to be higher than average because of all of these other factors.

And then when you start bringing in the more restricted financing situation for builders and construction cost increase, you're going to see a flattening to a falling of starts and so with that said, I think we have a few years ex a US recession or something like that, that could change the dynamics.

We're going to have a very constructive multifamily market over the next couple of years. In terms of if we thought that the world was coming to an end and we really believe that we were headed towards when we had perfect knowledge of a financial crisis or something like that, then maybe you would sell but I don't have that kind of knowledge. I just have the knowledge of knowing that every single day, I have a lot of Camden employees that are out there trying to create a lot of value for their shareholders, and we're in a constructed multifamily environment so I don't feel like we need to even think about that.

I will tell you if you go back in history, in our 23-year history, back in the mid-1990s to the late-1990s when everybody was buying tech stocks and multifamily was -- all of REITs were thrown to the wayside, we ended up buying 16% of the Company back threw stock buybacks. And I remember having this conversation then saying, look if the REIT model is broken and I'm always going to trade at a 20% discount to my net-asset value, then I'm going to buy the Company back and go private or sell it to somebody who will pay me a premium to get that NAV. And I think over time, you do have those points in time where you do have that disconnect, but generally speaking, it doesn't last forever and you get back to a more rational position. So it's kind of my view on the whole M&A private scenario.

Good stuff, thanks.

Our next question comes from Tom Lesnick of Capital One Securities.

Hi, guys. Thanks for taking my questions. First, I just observationally looking at your year-over-year occupancy comps, it looked like maybe more so than other quarters a larger number of them were slightly negative. I'm just wondering if that's really a function of you guys pushing rent perhaps a little bit harder than equilibrium or as you kind of look out towards the next couple of years, how do you guys really view the balance between occupancy and rent in your portfolio?

So the balance that we try to maintain is 95% to 95.5%, and it doesn't mean that we're always in that band. Last year, we were above that band which is a little unusual for us. There's two things that have happened to the portfolio-wide occupancy rate. One is Houston has had additional softness as we expected. I think we're at about 93% occupied in Houston, and the overall portfolio is still above 95% so that's 12% of your NOI comes from Houston and 2% matters around the edges.

The other thing is that in DC, we have continued to try to trade off between rental rates and occupancy rates, and last year we were definitely much higher than our normal trend on occupancy rates. We're back closer to what we view as more of a normal occupancy rate for DC in our overall portfolio, but it's never been an objective of ours to try to say let's operate at the highest possible occupancy that we can. Obviously, you can do that. The lever is pricing, and we use YieldStar. We have a group in Houston that five people that manage that process full time, and we have great -- what we think we have very good visibility into the push and pull of rental rates versus occupancy rates.

And we do a lot of toggling. We do a lot of tweaking. It's certainly not on auto pilot. There's a ton of judgment and experience that goes into pulling those levers, and we think that we're about where we need to be. Other than Houston and DC, I don't see anything in our occupancy rates across our portfolio that gives me any pause whatsoever that we're not maximizing pricing and occupancy.

That's very helpful. And then just a couple quick ones. Can you talk at all about the single-family rental market in Houston and maybe how much competition that is in Houston specifically relative to some of your other markets? I get the sense that the renter cohort in Houston is generally younger, in the first two to four years out of college as opposed to maybe late 20s or early 30s, especially relative to some of your other markets. Just wonder if you had any context or color you could shed on that.

Sure. I think you hit the nail on the head in terms of demographics. From a rental perspective, single-family rentals are really not major competition.

We have a small amount of people who move out to move into rental houses but it's really minor relative to the world. And part of it is, is the single-family rental market is out of the suburbs and the product is twice as large from a square footage perspective as an apartment. It has fewer amenities and all that, and in generally moving out to either buy a house or rent a house is a demographic issue. It's age, how many people do you have in your household, kids, that sort of thing.

We do have probably the bigger competition is not rental move-outs to rent houses, it's move-out to buy houses, and on average Keith has these numbers.

Yes, we're about 16% of our total move-outs in Houston were to purchase homes, which is a little bit higher than our portfolio average but that number two years ago in Houston would have been probably 17%, 18%. It is, as Rick said, we do lose more people at 16%. If you look at the percentage they give us as a reason that they moved out to rent a home, that number is in the 2% to 3% range versus to purchase a home at 16%. It's out there. It shows up on our reasons to move out in every market that we're in, but no where is it more than 2% or 3%.

I think I've said this a bunch of times, and people kind of look at me funny when I say it is, if our move-out rate for single-family homes, right now it's around 14% for the year. I think it was 15% and some change for the quarter. If it goes back to its normal average over a long period of time, which is 18%, I think we have another leg up in the multifamily business because what's happening right now is that there's not enough single-family homes being built.

The starter home market is pretty abysmal out there, and if you had starts in the 1.2 million, 1.3 million, 1.4 million, which some folks seem to think we should have, you would have better job growth, you would have better GDP growth, and we would then be in a position where we would have more people moving in the front door than moving out the back door to go buy a house. And so I think that the whole housing issue is an interesting one and ultimately, the housing market is still trying to recover from the debacle in 2008 and 2009.

That's real interesting. I appreciate that insight. Just one final one for me, and I'm curious on this both from the perspective of jobs and from the perspective of the renters' psyche. Which is more influential right now in Houston? The raw oil price or oil volatility?

You know what? I don't think either one, when you think about it. I think the -- ultimately, it is what the real price is but the volatility obviously gets people twisted up as well.

But you have to think about Houston is 6.5 million people. It's the fourth-largest city in the country. There are 3 million jobs that exist there today. And if you go back to 2014, there was 120,000 jobs. In 2015, there was 20,000. And in 2016, it's going to be flat or maybe up to 2,000 or 3,000.

So there's 3 million people working. 6.5 million people living their kind of doing what they do, and there's a certain amount of inertia that happens in that economy. So the bad news about oil and energy layoffs everybody gets but the 3 million people that are working are still working, getting paychecks, paying their rent, and doing things that they do.

So I think that when oil prices stabilize, the psyche of the senior executives that are going to hire people, I think it's more about what the real price of oil is and what their expectation is over a longer period of time.

If you're not directly in the oil business, it's sort of background noise. If you are directly in the oil business, it's more likely that your psyche is -- what determines it is not the day-to-day spot price of a barrel of crude oil. It's the question we got earlier on rig count because these executives that we talk to, they will tell you that whether oil is $45, $55 or $65 is not a game changer for the inputs to what drives their business.

Whether the rig count is falling 20 rigs a week or rising 20 rigs a week is a big deal, and there is a fair amount of evidence though about two months ago, we hit the low point on active rigs, and then the last I think for the last four weeks straight, there have been small additions to the rig count.

Now four weeks does not a trend make, but I think that most people view that as maybe the bottom is in, in terms of the ability to start adding new activity levels because the rig count drives it almost everything. It's not driven by the price of oil. It's driven by the activity level, and that's workers in the field. It's down-hole supplies. It's services. It's oil tools, and then ultimately it ends up in production.

So watch the rig count and the savvy folks at the oil company is probably what they tend to look at more than the price of crude is what the near term future holds for the oil business.

All right, guys. Really appreciate it.

Absolutely.

This concludes our question-and-answer session. I'd like to turn the conference back over to Rick Campo for any closing remarks.

Well, thank you. We appreciate your time today, and we will see you in the fall. Thank you.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.