Camden Property Trust (CPT) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Camden Property Trust Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn conference over to Kim Callahan, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining Camden's Fourth Quarter 2017 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 fourth quarter 2017 earnings release is available in the Investors section of our website at camdenliving.com. And it includes reconciliations to non-GAAP financial measures, which will be discussed on this call.

Joining me today are: Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President; and Alex Jessett, Chief Financial Officer. We will be brief in our prepared remarks and try to complete the call within 1 hour. (Operator Instructions) If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or e-mail after the call concludes.

At this time, I'll turn the call over to Ric Campo.

Good morning. By now you understand today is Groundhog Day. And this day always reminds me of the classic Bill Murray movie in which he relives Groundhog Day over and over and over again. For the thousands of our Houston area neighbors, whose homes were flooded by Harvey and not yet -- and have not yet moved back into their homes, every day feels like Groundhog Day.

So much progress has been made and yet is so much work remains to be done in the Houston area. Fortunately, for 98% of the people that live in the area that were not the flooded, life has returned to normal within a few days of the flood. All of Camden's communities are as good as new, including Camden Spring Creek, which had homes flooded.

The recent uptick in oil prices and the Astros' great win in the World Series have lifted Houston's spirits and economic activity. Harvey's initial positive impact on the multifamily business has carried over into 2018, as Keith will share with you in his market-by-market report card.

Houston's rating improved from last year's D and declining to this year's B and improving. Amazing what a year will do to a market rating sometimes. I want to thank our Camden team members that stepped up and really showed what neighbors helping neighbors really meant for the Hurricane Harvey and Irma relief efforts that we did as a company.

During 2018, we'll mark Camden's 25th year as public company. A few high points of where we have come from, I think, are in order. We started in 3 Texas cities and now are in 15 diversified, growing markets throughout the country and providing 6,000 homes to customers and now provide 56,000 homes to customers, improving the lives of our customers one experience at a time.

We began with $194 million market cap and have grown to over $11 billion, providing shareholders with solid returns, growing dividends and increasing stock prices from the beginning. In the beginning, the multifamily industry was really a slow adapter to technology. Today, we embrace cutting-edge technologies to help our employees perform better and take care of our customers better and also have provided customers with cutting-edge technologies that they really appreciate.

And more importantly, we started a workforce that started out at about 250 people and provided jobs -- and now provide jobs to nearly 2,000 full-time employees and 5,000 construction workers, creating an amazing customer- and shareholder-focused culture that has been recognized for 10 consecutive years on the FORTUNE 100 Best Companies to Work For list with 6 top 10 finishes. We look forward to the next 25 years and really embrace the opportunity to continue improving the lives of our employees, our customers and our shareholders one experience at a time.

I'll turn the call over to Keith for his market-to-market update now. Thanks.

Thanks, Ric. And consistent with our prior years, I'm going to use my time on today's call to review the market conditions that we expect to encounter in Camden's markets during 2018. I'll address the markets in the order of best to worst by assigning a letter grade to each one as well as our view on whether we believe the market is likely to be improving, stable or declining in the year ahead. Following the market overview, I'll provide additional details on our fourth quarter operations and our 2018 same property guidance.

We anticipate same property revenue growth will be between 2% and 5% this year in the majority of our markets with a weighted average growth rate of 3% at the midpoint of our guidance range. The markets budgeted in the 2% to 5% growth range represent nearly 90% of our same property pool. And 11 of our 13 markets received a letter grade of B or higher this year.

Our top ranking for 2018 goes to Southern California, which we rate as an A with a stable outlook. Our Southern California portfolio has been a strong performer, averaging 5.5% annual same property revenue growth over the last 3 years. Approximately 25,000 new apartments are expected to open this year with 120,000 new jobs created, putting the jobs-to-completions ratio at a manageable 4.8x.

Denver also earned an A rating but with a declining outlook. Denver has been one of our top markets for the past several years. And we expect another strong year there in 2018. Approximately 40,000 new jobs are expected during 2018. But supply will remain elevated with 13,000 new units scheduled for delivery this year likely tempering the pace of revenue growth from the 5.3% level we achieved last year.

Raleigh, Orlando and Phoenix each get an A- rating with stable outlooks. All of these markets stays healthy operating conditions with balanced supply and demand metrics. In Raleigh, new developments have been coming online steadily over the past few years with 5,000 to 6,000 new units delivered each year. Job growth has been stable and 22,000 new jobs are projected for 2018. Orlando is expected to have over 40,000 new jobs in 2018 with only 7,000 completions. And estimates in Phoenix call for 50,000 jobs with 9,500 new units coming online this year.

Up next are Atlanta and Tampa, both receiving B+ ratings with stable outlooks. Job growth has been strong in Atlanta and 55,000 new jobs are projected in 2018. Completions also remained steady with another 11,000 to 12,000 new apartments scheduled for delivery this year. In Tampa, supply and demand metrics for 2018 look very similar to last year with 30,000 new jobs versus 5,500 or so new apartments being completed.

Jumping up 5 spots in the rankings this year is Houston, which improved from a rating of D and declining in 2017 to a B and improving this year. After back-to-back years with negative same property results, our Houston portfolio is expected to achieve 3% revenue growth for 2018. Job growth went from under 20,000 in 2016 to around 50,000 last year and is currently projected to be at 80,000 for 2018. New supplies has been heavy the last couple of years with an average of 20,000 new units delivered. 2018 should bring a significant dropoff in supply with less than 3,000 completions expected this year.

Washington, D.C. receives a B rating again this year with a stable outlook. Revenue growth for our D.C. portfolio averaged less than 1% from 2014 to '16, then rebounded to 3.2% last year. We expect 2018 to look a lot like 2017 in the D.C. area with regards to same property growth. Supply and demand metrics should also remain consistent with another 10,000 to 12,000 completions this year and 40,000 new jobs projected.

Dallas earns a B as well but with a declining outlook, given the continued wave of new supply being delivered in that market. Job growth has been solid with nearly 70,000 jobs created last year and a similar amount expected to be created in 2018. But with over 20,000 completions last year and another 20,000 units coming online this year, the Dallas apartment market will remain challenging in 2018 and our pricing power may be limited.

We give Austin a B rating with a declining outlook this year. The level of new supply in the Austin market should finally start to come down in 2018 but only slightly with 8,000 new units anticipated this year versus 9,000 last year. Job growth was mediocre in 2017 with around 30,000 new jobs created. And estimates call for a slightly weaker year in 2018 with employment growth of 22,000. Given the current supply and demand metrics, our 2018 outlook for Austin is below average with revenue growth of 1% to 2% expected for our portfolio this year.

Conditions in Charlotte seemed to have firmed up a bit and are currently at -- were at a B- with an improving outlook. New supply has been persistent in Charlotte with 6,000 to 7,000 units delivered in both '16 and '17 and a similar amount anticipated this year. Job growth should accelerate in 2018 with over 30,000 new jobs projected. So we expect our portfolio's revenue growth will be slightly higher than the 1.9% we achieved last year.

And our last market, South Florida, ranks as a C+ with a stable outlook. We began to see weakness in our South Florida portfolio during 2017. And the economic outlook for 2018 calls for deceleration in job growth this year. Deliveries of new apartments should remain steady, but our communities will continue to compete with additional supply from for sale and rental condominiums. As a result, we expect limited revenue growth for our South Florida portfolio this year with the range of 1% to 2%.

Overall, our portfolio rating is a B+ this year, up slightly from last year's B rating primarily due to the improvement we've seen recently in Houston after Hurricane Harvey. As I mentioned earlier, the majority of our markets should achieve 2% to 5% revenue growth this year with the outliers being South Florida and Austin, both in the 1% to 2% range. As a result, we expect our 2018 total portfolio same property revenue growth to be 3% at the midpoint of our guidance range. And this compares to our actual revenue growth last year of 2.9% with again most of the year-over-year improvement driven by Houston.

Now a few details on our 2017 operating results. Same property revenue growth was 3% for the fourth quarter and 2.9% for full year 2017. We saw strong performance during the fourth quarter '17 with most of our markets recording 3% to 6% revenue growth. Our top performers for the quarter were: Tampa at 5.6%, Orlando at 5.4%, Raleigh at 4.6% and Atlanta, Phoenix, San Diego -- and the San Diego/Inland Empire each at 4.4%. Rental rate trends for the fourth quarter were as expected with new leases down 0.1% and renewals up 4.9% for a blended rate of 2.3% growth. And our preliminary January results are in a similar range. February and March renewals are being sent out at just over 5%.

Occupancy averaged 95.7% during the fourth quarter compared to 94.8% last year. January occupancy has averaged 95.4% compared to 94.7% in January of 2017. Annual net turnover for 2017 was 200 basis points lower than 2016 at 46% versus 48%. And that's always good to see. Move-outs to purchased homes were at 15.8% for the fourth quarter of 2017 and 15.2% for the year, down slightly from 2016 levels.

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

Thanks, Keith. And before I move on to our financial results and guidance, I will provide a brief update on our recent real estate activities.

During the fourth quarter, we reached stabilization at Camden Lincoln Station, a $56 million development in Denver, and began construction on Camden Downtown Phase I, a $132 million development in downtown Houston. Additionally, late in the quarter, we completed the $78 million disposition of our only student housing community, Camden Miramar, which is located in Corpus Christi, Texas. We built and owned Camden Miramar since 1994. And over the past 23 years, this was a very successful investment for Camden and our shareholders, generating a 16.5% unleveraged internal rate of return.

We made the strategic decision to sell of this asset, given its age, use and its location on the ground lease with just over 20 years remaining. At the sales price, this disposition represents an AFFO yield of 8.5% and an FFO yield of 10.5%. This disposition FFO yield was driven in large part by the short remaining duration of the ground lease and the capital-intensive nature of this asset due to its age, use and location directly on the Gulf Coast.

Subsequent to quarter-end, we purchased Camden Pier District in St. Petersburg, Florida for approximately $127 million. This newly constructed 358-unit, 18-story concrete building was purchased at a year 1 yield of just under 5%. We ended the quarter with no balances outstanding on our unsecured line of credit, $370 million of cash on hand and no debt maturing until October of 2018. Our current cash balance after purchasing Camden Pier District, the January 2018 payment of our fourth quarter dividend and the payment of property taxes, which are disproportionately due in January, is approximately $160 million.

Moving on to financial results. Last night, we reported funds from operations for the fourth quarter of 2017 of $114.6 million or $1.18 per share, in line with the midpoint of our prior guidance range of $1.16 to $1.20 per share. Contained within the $1.18 per share of FFO was approximately $0.005 in higher same-store insurance expense as a result of estimated freeze damages at our Georgia, North Carolina and D.C. area communities, offset by approximately $0.005 in higher non-same-store net operating income, driven by the slightly delayed sale of our Camden Miramar student housing community. This sale occurred on December 12 as compared to our forecast for December 1.

Moving on to 2018 earnings guidance. You can refer to Page 26 of our fourth quarter supplemental package for details on the key assumptions driving our 2018 financial outlook. We expect our 2018 FFO per diluted share to be within the range of $4.62 to $4.82 with the midpoint of $4.72 representing a $0.19 per share increase from our 2017 results.

The major assumptions and components of this $0.19 per share increase in FFO at the midpoint of our guidance range are as follows: an approximate $0.13 per share increase in FFO related to the performance of a 41,968-unit same-store portfolio, we are expecting same-store net operating income growth of 1.5% to 3.5%, driven by revenue growth of 2.5% to 3.5% and expense growth of 3.5% to 4.5%. Each 1% increase in same-store NOI is approximately $0.05 per share in FFO; an approximate $0.15 per share increase in FFO related to net operating income from our non-same-store properties resulting primarily from the incremental contribution from our development communities in lease-up during 2017 and 2018, the 4 development communities which stabilized in 2017 and our 1 stabilized acquisition completed in June of 2017; an approximate $0.06 per share increase in FFO related to the net operating income from our January 2018 acquisition of Camden Pier District; an approximate $0.08 per share increase in FFO due to an assumed additional $380 million of pro forma acquisitions spread throughout the year and an assumed year 1 yield of 4.5%; and an approximate $0.05 per share increase in FFO due to the nonrecurring nature of our 2017 hurricane-related charges.

This $0.47 cumulative increase in FFO per share is partially offset by: an approximate $0.16 per share reduction in FFO resulting from the additional shares outstanding as a result of our September 2017, equity offering; an approximate $0.08 per share decrease in FFO relates to loss NOI from the disposition of our Camden Miramar community; an approximate $0.04 per share decrease in FFO resulting from the combination of lower third-party construction fees, lower interest income resulting from lower cash balances and higher corporate depreciation and amortization through the implementation of a new back-office system expected to come online in the third quarter of 2018.

We're anticipating overhead expenses to be flat in 2018 resulting from a combination of general cost control measures and the impact of a construction-related settlement in which we will receive a reimbursement of legal fees expensed in prior periods. We are also anticipating interest expense to be flat in 2018 as the repayment of debt in 2017 is offset by 2018 higher borrowings under our unsecured line of credit, combined with lower amounts of capitalized interest resulting from the completion of construction of 3 developments in 2017 and 3 developments in 2018.

The interest rate for our line of credit floats at LIBOR plus 85 basis points. And we anticipate draws under our line of credit beginning in June. Additionally, we anticipate repaying at maturity $175 million of secured floating rate debt with an anticipated interest rate of 2.3% in the second half of the year. And we anticipate repaying at par $205 million of secured fixed rate debt with an interest rate of approximately 5.7% late in 2018.

Our current guidance does not anticipate any early debt prepayments and any resulting penalties. We currently anticipate issuing $400 million of unsecured debt late in 2018 at an all-in rate of approximately 3.75%. In anticipation of this offering, we have entered into $200 million of forward-starting swaps, partially locking in the 10-year treasury at 2.34%.

On the same-store -- our same-store expense growth range of 3.5% to 4.5% for 2018 is primarily due to increases in salaries and benefits and taxes. Salaries and benefits represent 20% of our total operating expenses and are anticipated to increase by 6.5%. This increase is a result of 2 factors. First, our benefit-related expenses in 2017 were unusually low, trading at tough comparison. In 2017, we experienced unusually low amounts of self-insured health care expenses, resulting in our 2017 increase in salaries and benefits to be less than 1%. I have discussed this trend on past calls and said at the time that I did not believe this trend could continue.

And second, we are being responsive to the effects of general labor tightening and are making market-driven wage adjustments, where appropriate. The 2-year average increase in salaries and benefits, averaging 2017 and 2018, is 3.7%. Property taxes represent 1/3 of our total operating expenses and are projected to be up just over 4% in 2018. 3.5% of the expected growth is core, the result of anticipated increases in assessments for our properties. The remaining increase is due to a year-over-year reduction in anticipated refunds from prior year tax protests.

We had success in 2017 with our prior year tax protest and current year appeals. As a result, 2017's full year property tax expense increased by 4.1% as compared to our original budget of 5.5%. Although we do anticipate further tax refunds in 2018, we do not anticipate reaching the levels received in 2017. Excluding salaries and benefits and taxes, the remainder of our property level expenses are anticipated to increase at less than 3% in the aggregate.

Page 26 of our supplemental package also details other assumptions I have not previously mentioned. We are anticipating at the midpoint $100 million in dispositions late in the year with no significant impact to our guidance. And we are anticipating $100 million to $300 million of on-balance sheet development starts spread throughout the year.

Last night, we also provided earnings guidance for the first quarter of 2018. We expect FFO per share for the first quarter to be within the range of $1.11 to $1.15. The midpoint of $1.13 represents a $0.05 per share decrease from the fourth quarter of 2017, which is primarily the result of an approximate $0.035 decrease in sequential same-store net operating income. Of this amount, $0.02 is due to sequential increases in property taxes resulting from both higher fourth quarter 2017 tax refunds and the reset of our annual property tax accrual on January 1 of each year. The remaining $0.015 of sequential decrease in same-store NOI is due to other expense increases, primarily attributable to typical seasonal trends, including the timing of on-site salary increases. These increases in same-store operating expenses are partially offset by a slight increase in same-store operating revenues.

An approximate $0.025 per share decrease in FFO due to the disposition of our previously mentioned student housing community. As a reminder, occupancy and NOI at this community was strong during the school term but declined significantly during the summer months. And an approximate $0.01 per share decrease in FFO due to a combination of lower third-party construction fees and lower interest income resulting from lower cash balances. This $0.07 aggregate decrease in FFO is anticipated to be partially offset by: an approximate $0.015 share increasing acquisition NOI and an approximate $0.005 decrease in combined overhead expenses resulting from the previously mentioned reimbursement of legal fees expensed in prior periods, partially offset by the abnormal beginning of the year compensation increases and the timing of certain corporate events.

And finally, our balance sheet is strong with net debt-to-EBITDA at 3.5x, a fixed charge expense coverage ratio at 5.5x, secured debt to gross real estate assets at 11%, 80% of our assets unencumbered and 92% of our debt at fixed rates. We have $736 million of developments coming under construction or on lease-up with $280 million left to fund.

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

(Operator Instructions) And our first question comes from Nick Joseph with Citi.

Maybe just starting with Houston. Could you give us the underlying assumptions for that 3% revenue growth in terms of new and renewal pricing in occupancy? And then just generally, how dependent are you on kind of that 80,000 job growth assumption number, just given that you're coming into the year with such high occupancy?

Yes, we're still running at 97%, a little bit better than that occupancy in Houston. And obviously, in our plan, we do expect that to moderate over the course of the year. So we would expect to end the year at something closer to what would look like normal in Houston, 94% to 95%. So definitely, we do believe that it will come down over time as the people who were displaced from their homes, who still are in a rental apartment, kind of slog through the long process of getting their primary residence back in order. One of things that we talked about in our last call, and we were very cautious in terms of giving people guidance that were coming in and inquiring about 3-month lease terms, very short-term lease terms, is that we felt like the magnitude of this event was going to be such that 3 months was just -- it was really not doable in most cases. And that's turned out to be true. Because I think what's actually -- what we're going to actually see is that what we thought was not 3 but probably 6, in many cases, is going to turn into as many as 9 months to a year, unfortunately, for the lot of folks. So we've tried to anticipate when that shift will happen. But we're pretty -- in pretty uncharted waters here in terms of a market the size of Houston with the degree of impact that -- and displacement that we've seen. But we did our best to try and put a fence around it. So we think we'll trend back down closer to 94.5% to 95%. In terms of the overall lease and renewals, right now, we're doing new leases at basically flat and we're doing renewals at somewhere around 4% for Houston. So that's 2%. We think we'll stay somewhere in that range throughout the year. I think our guesstimate for Houston same-store revenue growth next year is in the 3% range for the full year. So that's where we think we're going to end up. But I will tell you it was one of the more challenging revenue forecasting tasks that our teams have ever been faced with, is just trying to anticipate all the moving parts. As far as dependency on the 80,000 jobs, I mean, clearly we're probably less exposed to a little bit -- to the variability in that number than we have been in the past primarily because we've got a lot of the overhang and supply has been taken care of currently. We think again some of that's going to unwind over time. But the good news for Houston is that in 2018, we expect to see only about 7,000 apartments completed and delivered. And that compares to roughly 20,000, 22,000 we've had for each of the last 3 years. So a lot of relief on the supply front, a lot more optimism about the 80,000 jobs. Those forecasts that we've seen were before even the most recent uptick in the price of oil. And there just seems to be a lot more vibrancy and optimism in the overall Houston economy. So I think overall, we've got a good plan for Houston for 2018.

And then just what was the final impact of the tax package rollout on 2017 same-store revenue expense and NOI? And what's assumed the impact in 2018?

Sure. So for 2017, numbers came in, revenue was about 65 basis points. Expenses was right around 130 and NOI was right around 20. For 2018, revenue is right around 10 basis points. Expenses is actually is a positive 20 basis points because we've redone some of our contracts. And that gets us to an NOI positive about 20 basis points.

Our next question is from Juan Sanabria with Bank of America Merrill Lynch.

Just hoping you could talk a little bit about the acquisition environment, kind of the pipeline you have today. I think you said you expect the acquisition to be evenly spread out. But any color on kind of what you're seeing? You guys raised equity in the fall and it's been slow to kind of allocate that. But just what you're seeing in the pricing and what markets you're looking at.

Sure. The acquisition market is very competitive, continues to be very competitive. We just got back from the National Multi Housing Council meeting in Orlando. And it was the biggest meeting they'd ever had. When I was Chairman of NMHC, we, I think, peaked at like 2,600 people. And there were 5,800 people in Orlando in the multifamily space. So I mean, there is -- it's a very interesting time because you have -- there's still a wall of capital that is investing in multifamily that's significant. The real interesting part of it, however, is that the capital, because of slowing rent growth around the country and slowing NOIs in most markets, the capital has, in the last sort of year or so, have been focused on value add and the idea of buying an older property and fixing it up, and then creating that value-add proposition. And it's been value add-driven primarily because of the lower cap rates on core. And then slowing growth rates on core has been tough for people to hit their sort of unlevered IRR numbers. I think that you're going to have continued competitive environment this year. We have looked at lots and lots of properties. The challenge that we have is that we are not just going to go out and acquire properties because we have capital. We want to make sure that they fit into our strategy. And our strategy has been buying below replacement cost in lease-up scenarios, like on the St. Pete property we bought and the one we bought last year in Atlanta, where we could buy it below replacement cost, come in at a lower yield because there are generally embedded concessions not fully leased up yet. And then once we go in and finish lease-up, start burning the concessions off, and then put in some Camden sort of customer focus, we move those lower cap rates up to where we're more comfortable. I think what's happening now is that people are positioning in terms of sale assets and sort of investors are all kind of queuing up to see what happens to the sale market. We think there's going to be probably 15% to 20% more assets in the market this year to sell than there was last year, given where we are in the cycle. So we'll get our fair share. The markets we want to be in are markets where we're underrepresented, where we think long term, the growth prospects for the regions are good. And most of our markets fit that category. And so we're really agnostic about where we buy within our markets as long as we can hit that sort of sweet spot of below replacement cost, lease-up, and then driving the yields up higher over the next 12 to 24 months.

And then just on Dallas and Atlanta, I was hoping you could talk about kind of the trajectory you expect for same-store revenues across those markets and what you're seeing on the new leases kind of recently in those 2 markets as well.

So I'm sorry, Juan, was it Dallas and Atlanta?

Yes, sir.

Okay. So we have Dallas on our rating as a B and declining. And that's just strictly a result of the new supply that's going to be delivered this year. It's going to see another really strong year of employment growth, but there's just too many apartments that need to be absorbed. So we ended last year, revenue growth in Dallas at about 4.4%. And we'll be around 3% this year, so still, overall, a good year for Dallas. Just certainly, we think it's decelerating from the strength that we've seen in the last 2 years. Atlanta, we have as a B+ and a stable market. And again, if just comparing to last year, Atlanta was -- revenue almost 5% for the full year. And we've got that a little bit over between 3% and 3.5% for 2018. So again, good year, solid, a little bit of bias towards too many apartments relative to the 5:1 ratio long term, but still okay in terms of the overall results in both those markets.

Our next question is from Austin Wurschmidt with KeyBanc Capital Markets.

Just curious in terms of how you're thinking about returns today, given the recent movement of base rate. And then you also mentioned you're focused on markets you're underrepresented. Can you share what markets those are? I'm not sure if I missed anything there.

Sure. If you look at our biggest markets, we have -- we're high concentrations in Washington, D.C. and in Houston. But if you look at markets like Tampa, Orlando, where we have like 4%, 5% of our NOI comes out of those markets. Phoenix, we're underrepresented in. If you just look at the supplement and you see the percentage of NOIs, it's just -- we just try to kind of fill in where we have a little less market exposure. And the first part of your question was?

Just how you're thinking about returns today with the recent movement of base rate.

Sure. So the thing that's really interesting is that people, I think, make a mistake when they think that the 10-year treasury is what drives cap rates. The 10-year treasury is probably the fourth most important thing that drives cap rates, it's not the #1. And I guess, a lot of people are funding with floating rate debt anyway, so they don't even think about the 10-year, even though that certainly the curve is flattening, which is increasing the cost of floating rate debt as well. But when you think about cap rates. Cap rates remain very sticky. And the reason would they do is because the #1 driver of a price of any asset is the liquidity in the marketplace that is there to be able to fund that asset, that acquisition.

And today, the market is very deep in liquidity. There's still -- you've got still lots of financial institutions who want to make loans on apartments, Freddie Mac and Fannie Mae, including the life companies, and life companies now are actually cheaper on a financing side than Freddie and Fannie. And you have a wall of equity capital that continues to need to make investments. So it's liquidity in the marketplace. Then the next thing -- that drives cap rates. The next thing is supply and demand fundamentals. And we know that even though we're in a -- in the latter part of the cycle since that we've been going now 8 years into the recovery cycle, you still have reasonable supply and demand economics that you don't have markets that are all trending negative and you're not in a recessionary environment. So supply and demand looks reasonably well. And if you look out into '19 and '20, lots of folks believe that you're going to have a reduction in new develop because of the pressure on land prices and costs and what have you. So that -- there's that hope that -- and I think view that the -- that supply is going to be going down over the next few years. And demand continues to look really good with millennials, with -- when you look at every cohort of group, whether it be millennials or Baby Boomers or -- we have an increase in propensity to rent apartments across the board. As a matter of fact, between -- since -- in 2014 to today, there -- the increase in demand for people 55 and older for market-rate apartments is about the same in terms of market share as for millennials. And you have this really interesting thing going on which is, millennials have very high propensity to rent, the 55 and olders have a lower propensity, but there's a whole lot of those. So if you have an uptick in capture rate for those, which we've been having for the last 10 or 15 years, having an increase in propensity to rent for those people, you have this really nice increase in demand model that you can really look forward to for the next 3 or 4 years, so supply and demand are good. The next big issue is inflation, inflation that drives cap rates. And what's driving the 10-year today is incredibly low unemployment and wage pressure, which we're feeling and all of our competitors are feeling. And so I think people are not thinking it's deflationary. I think they're thinking that we're maybe getting back to an inflationary environment, which supports short-term leases and ability to raise rents on those short-term leases. So then you've hit the 10-year, right, and that -- which is the last piece of the equation. And the 10-year, even at what it is today, is still very low relative to long-term interest rates. So I don't think pricing is going to change at all. I -- if anything, it's going to be more competitive because when you start putting the inflation equation on the table for investors, they're like, well, maybe I should go to an inflation-protected asset like a multifamily asset. So all that said, I don't see price -- I don't see cap rates moving much given the 10-year, and it's going to be a competitive environment unless something dramatically changes on the supply and demand side or something that we don't know is out there from an economic shock perspective.

Appreciate the detailed response there. And to the first point, as a follow-up, given the depths, I guess, in the liquidity market -- or the liquidity in the market today, the fact that we're through the wall of CMBS maturities, do you think there's a potential we see more portfolio deals this year? And is that something that you'd be interested in?

I think that we're interested in portfolio deals and one-offs. The challenge you have with portfolio deals generally is that there's always a -- you have to sort of take the whole thing, and oftentimes you're -- you have to choose whether you want everything, and that -- sometimes that's not ideal. But on the other hand, we're looking at all these different activities. I think that -- I think there is definitely going to be an increase in sales this year because when you think about the merchant builder model, which is how properties get built, the merchant builders are having trouble reloading their balance sheets because they're holding assets longer than they usually do, and primarily because it took longer to build and you've had a -- you've had the sort of feathering in of the inventory, which has sort of been good on the market side because you haven't flooded the market as fast as it could have been given the delay in construction that everybody has had across the country because of lack of labor. So with that said, though, the merchant builders are full. In order for them to reload to do their next few deals, they do have to sell. And you also have the equity side of that equation that is in play, which they've had the equity in there and they have funds and the funds are unwinding with other properties and what have you, and so they don't want to hold assets too long, too, because their sort of levered IRRs start going down the longer they hold, assuming that prices are sort of not going dramatically up. And so I think that that's driving the market to more sales, probably more portfolio sales, and we're going to look at it all.

Our next question is from John Kim with BMO capital markets.

Your average monthly rental rate increased this quarter sequentially, and it goes against the grain of pretty much all of your peers. Can you just explain this dynamic? Did you purposely focus on pushing rates versus occupancy?

So John, the biggest change in our portfolio was just the flip-flopping, what was going on in Houston from third to fourth quarter. I mean, we were -- even as late as the second quarter call, we were still thinking Houston -- that Houston could be in the -- down 4% for the year on rental revenues. And obviously, we had a reversal of that in the third quarter and a pretty decent sequential increase in Houston, and it's 12% of our footprint. So it's always enough to move the needle when we get that kind of a shift. That's the only market that I can point to where other than sort of what's -- normal things that happen seasonally in our portfolio in some of our markets, Phoenix, et cetera, that do benefit from the fourth quarter generally over the third. But everything else looks kind of what you would typically see in our portfolio with the exception of Houston, and that was a big shift.

It seems like it was pretty strong across the board. But you're basically saying it didn't change anything as far as the rate versus occupancy trade this quarter.

No, we did not -- again, look at the occupancy rates across the board in our platform, and we normally try to operate somewhere around 95% occupied, and we've got a -- most of our markets are operating north of that. And so you -- and that -- and in that environment, you still -- from a revenue management standpoint, the model is still going to want to push rents.

Okay. And the second question is on your redevelopment guidance, which seemed like it was new this year of about $30 million. Can you just remind us how this compares to 2017 because it's not on your CapEx schedule?

Yes. So I said our redevelopments are new. So in the past, we've been doing repositions. Redevelopment is a new concept introduced in 2018. What we're going to do is combine a traditional reposition program with extensive exterior upgrades. And we are taking assets that will be redeveloped out of same-store, and we currently have 3 assets that are in that bucket, 2 in South Florida and 1 in Arlington. And total spend for those for 2018 is going to be somewhere around $25 million to $30 million.

So redevelopments are taken out of the same-store pool? Repositions and revenue enhancing are kept in the same-store?

That's correct.

Our next question is from Alexander Goldfarb with Sandler O'Neill.

Two market questions for you. First, just going back to Houston. Keith, in your response to one of the earlier questions, I didn't know if you were saying that you expected Houston to end at 94% versus the 97% now. So I didn't know if I misunderstood that. And then second is, when do you think that we'll see a return of development in Houston just given the dramatic drop-off that we've had north of 60%? How long do you guys think before people start putting 2x4s in the ground again and we got supply coming back?

Alex, I think I said 94% to 95%, which what I -- the -- I was trying to be specific on that other than just say back to a more normal situation. Obviously, 97.5% occupied is just not normal. It's not normal for Houston. It's not normal for any of our markets. I did -- I'd expect to get back to normal, but in so doing, we're going to have to -- at some point, we'll be bleeding off 250 basis points of occupancy, which I expect to happen over the course of 2018. In terms of new construction, I think that you're -- you've got people right now that are just sort of got bailed out, in some cases, of their last round of new developments by the Harvey effect. There's discussion -- there's always conversations about potential new starts, but I think the reality of the world that we live in today with how long it takes to get through the planning and permitting process even in Houston is just restarting a development pipeline of a meaningful -- to have a meaningful impact in 2019 and '20, I just think, is not likely to happen. We obviously started a -- our Downtown community in the fourth quarter, right at the end of last year, but that's a community that we have -- that we had bought the land on years ago. It's been part of our legacy land portfolio. We just did that opportunistically because we look out on the horizon, we had 7,000 completions this year, and in 2018, I don't have -- well, let's see. In terms of completions for -- projected completions in Houston for 2019, about 5,000 apartments are projected to be completions in the entire Houston metropolitan area, which is an extraordinarily low number. Our building, Downtown, is a type 1 high-rise construction, and we won't even be delivering units there until probably the first part of -- or late in '19, early 2020. So I think...

Yes, I think the other thing that's really interesting that's going on when he talk about Harvey, I was at an urban land and -- event this week in Houston, and one of the engineers who's working on the city's new response to detention, mitigation and raising the elevations of new construction, there's a major move that could significantly negatively impact the ability of people to build as a result of these new rules. And these new rules actually are coming into play. Harris County put in new rules just recently, and it just makes it more expensive, takes up more land, takes -- requires more infill dirt and what have you. So the cost side of the equation is being driven up by new Harvey regulations. And it's classic government, though, when you think about it to a certain extent because they're pushing the new developers to spend a whole lot more money and creating -- making it more difficult, which is sort of good for the incumbents, right. But -- and the city, I think, in mid-February has a very restrictive program that actually takes -- that the -- requires developers to go above the 500-year floodplain by, I think, 12 inches or something like that. And that -- so that -- all those things are kind of impediments that heretofore were never really impediments in Houston. So you're having a little bit more regulatory constraint that's going to constrain people. The other thing is also, lenders are not rushing back into Houston when -- to make loans there at this point. They're sort of waiting and -- there's a lot of wait-and-see. So the equity capital and the debt capital are not like blasting in there and saying, let's go build. And you still have in markets like -- there -- in pockets that didn't get flooded, a fair amount of concessions that are still going on in those lease-ups.

Okay. And then the second one is on Orlando, which for AXIOMetrics seems be benefiting from the Caribbean influx. So can you just give a little more detail on what you expect for Orlando, both rent -- your occupancy there is at 97%. So obviously, what you expect there. And then as far as the supply picture as we look out into '18?

Yes. Sure, Alex. We have Orlando as an A- and stable. I mean, we expect it to be one of our best performers this year. And we're going to be probably in the 3% to 3.5% to 4% on top line revenue growth, which is down from last year. But last year, it was in the top 3 or 4 in our entire portfolio. So -- and yes, it is true that there has been a very significant influx of people from Puerto Rico that are -- we've done a lot of homework on this, and it is true that the port of entry or the place of destination of a lot of the people from Puerto Rico is Orlando. So they're going to get the normal job growth and -- that we would have seen in Orlando, but we're also going to see a big influx of other potential residents. So Orlando, we have it as the third or fourth best market in our portfolio this year, so looking for another really good strong year in Orlando.

Orlando -- just to give you a sense of this Puerto Rican connection, so #1 city in America with Puerto Rican heritage is New York City. #2 is Orlando. And so we're getting at least 5 to 10 Puerto Rico sort of effects in our properties there. It's -- right now, it's sort of anecdotal. But as long as Puerto Rico continues to be challenged, more people are flowing out.

Our next question is from Rob Stevenson with Janney.

What's the expected stabilized yield on the current development pipeline? And what have you guys been achieving on the stuff that's completed and/or stabilized in the last year or so?

So our overall portfolio yield is around 6 1/4% quarter, 6 1/5%, something like that. The highrises are lower and the mid-rises are higher. And the trend on development yields is down, unfortunately, obviously, because you're later in the cycle and costs are higher and it takes longer to build today. Our yields sort of on the last maybe batch of better -- fully stabilized were probably in the 7% range, and now we're down into the low 6% kind of zone at this point.

And for the stuff that you guys expect to start in '18, where are you on that? Are you basically cherrypicking the best returns? Or are you sort of targeting specific markets?

We're at -- obviously...

On...

-- We are absolutely driven by long-term unlevered IRRs that have a spread against our long-term weighted average cost of capital. And so we -- while we -- markets are important for -- in terms of driving the decision, the key is making sure that the numbers work going in. And a good example would be we've owned land in South Florida that we've been trying to figure it out how to build on for a long time, and we just haven't been able to make the numbers work. I remember our Boca deal. We -- I think we owned the land maybe 8 years before it started working. And then we -- and it made sense, and then -- and it's at the right yield now. But -- so it's more driven by return that we can -- long-term, unlevered IRRs that we can earn and not necessarily markets.

Okay. And then, Alex, what...

We do developments today because of land costs and construct costs. And you can't look at -- you look at a market like Charlotte, for example, and we built 3 properties in Charlotte. And the construction cost from those 3 properties is probably, on average, up 30%, a, for what we've booked them for in the last 3 years. And it just -- and the rents have -- are not up 30%, obviously. So you know what that does to yields.

Sure. Alex, what's the -- what do you guys renew on your insurance? And what are you expecting there? And do you guys plan to do more self-insurance if rates go up meaningfully?

Yes, absolutely. So we are actually in the market right now working on a renewal. It's a -- with a May 1 effective date. What we're being told on the property side is to expect premiums up 10% to 20%, and that's what we have rolling through. But when you actually take property and you combine it with general liability and all of our other insurance lines and then pull in our self-insured retention component, we've got property insurance for calendar year 2018 at about 5%. But there's no doubt this is going to be a very tough renewal process.

Our next question is from John Pawlowski with Green Street Advisors.

I just want to follow up on Rob's question there. So on the 2018 starts, what is the stabilized yield and spread to prevailing cap rate assumptions?

So the yields, assuming that we get these to these yields because we haven't started them, obviously, are going to be in the sort of low 6s. And the spread to cap rates in those markets today is probably 150 basis points.

Okay. So Ric or Keith, you were able to raise equity at what, in hindsight, is a pretty attractive price given the selloff here in REITs. And so 5 months later, you're left with a different opportunity set and deploying that capital, to your comments, acquisition and developments are only getting more competitive. So you can buy stabilized yields at mid to high 4% or you can build at a 6%, which carries some risk. But now suddenly, you can buy the stock back at a mid-5% implied yield with no risk. So has this discount caused you to reevaluate your plan at all? And if not, what discount will it take for you to change your plans?

So obviously, the stock price selloff for all the multifamily companies is all obviously new in the sense it's about a, what, a 3- or 4-week deal. And we put together our plans through the end of the year, and I think you always have to reevaluate where you are based on current market conditions. And we have been -- we haven't been in this period long enough to sort of abandon our program for this year and say, okay, let's go buy the stock back at this point. Just historically, we've always said that obviously, buying your stock back at a significant discount is an opportunity that doesn't happen that often. And when we bought back 16% of our company at roughly a 20% discount during the sort of tech days in 1998, '99 and 2000, we had a persistent discount, and we were able to then sell an asset and buy the stock back. And it was very methodical and perfunctory at the time to do it and was the right thing to do. And if the stock stays at a significant discount and we have a -- and it's persistent, we're able to get size in the buyback, then we do it. So we're evaluating that now and we'll continue to evaluate it. If you look at the last maybe 4 or 5 years, I mean, it's been really interesting. The volatility of these stocks has been huge. I mean, starting back when the -- I think we're trading at maybe a 15% to 16% discount at the beginning of 2014 or maybe 2013 and we had lots of conversations that -- around the -- our senior management table and our board table saying, you know what, this is silly, we've got to go buy the stock. And then the stock is up $20 a share in a month. And so we didn't have the opportunity to buy it at that point. So it has to be persistent and it has to be a significant discount for us to sort of change our long-term strategy of owning and operating apartments and driving cash flow.

At today's current levels, obviously nothing stays static. But at current levels, it doesn't make you -- if it persisted today, it wouldn't make you reconsider?

Well, I think the key is, and if you think about what we did the last time, it was a 20% discount and it was persistent. I mean, the challenge you have in terms of trying to buy the stock back is that to make a difference in your -- in getting size, it's hard to do, along -- and it takes a while to do it. And so we're going to evaluate it. And we're just going to put the capital allocation priorities on the table and say, all right, here's what you get from development, here's what you get from acquisitions, here's what you get from buying stock. How can you do this? And how can you do something that makes sense in the short term knowing that this is a long-term business?

Right.

So we're going to look at it obviously. And if we get an opportunity to create a lot of value that drives cash flow and drives cash flow per share growth and we can do that with little execution risk, then we're going to do it.

Our next question is from Drew Babin with R -- -- Robert W Baird.

Question on Washington, D.C., kind of your forgotten largest market. Going out to 2018, it seems like outside of maybe defense, government and government-related employment, should be pretty weak, combining that with new supply. I guess I'm just curious, how do you view your relative portfolio positioning in the market and whether -- is there any kind of new strategy for this year in terms of managing for occupancy versus rate or anything like that, that you're doing that's proactive?

Well, first, the thing to me that you -- what you -- that you -- your comment that it's driven by government workers, I would disagree with that. It's definitely government is a significant part of the economy. But if you think about the D.C. Metro area, one of the highest education profiles for MBAs and master degrees, one of the richest, highest-paid workforces, lots of technology, very economically driven by the overall economy. And I would say given the tax cuts and given the sort of kind of animal spirits perhaps that the administration is kind of creating on the business side, you could pick up additional economic growth that would help D.C. I don't -- I'm not worried so much about the government and what their workers are doing.

So just from the standpoint of where the numbers shake out, I mean, our D.C. portfolio, we have a very different footprint than a lot of our competitors do. It's not heavily oriented towards D.C. proper. But last year on total revenue, D.C. produced top line revenue growth of about 3.2%. I think we're looking at something closer to 3%, so a slight decline from the prior year. But 2018 to me, unless you get any external shocks and government shutdowns and other madness that comes and goes from time to time in D.C., it just seems like almost a repeat of 2017. We're going to get probably another 10,000 apartments delivered in 2018, but we should get about 40,000 new jobs. And that's okay. That's enough to keep us kind of in a steady state at about 3% top line revenue growth.

Would it be fair to say that on the supply side -- I mean, the vast majority of the supply that's going to impact the MSA is kind of located down maybe in the ballpark area of Southwest D.C., maybe a few other pockets. I guess are there any pockets in Camden's portfolio where there might just be kind of an outsized impact of anything delivering in '18?

So in 2018, it looks like -- I've mentioned 10,000 completions. I don't think -- I think the 2 -- the area down by the ballpark that you mentioned is definitely going to be -- there's a competitive set there that's going to impact us. Outside of that, we've been pretty fortunate with our footprint in the D.C. area to have missed a good portion of the -- this cycle of new development, and I think that probably -- and that certainly has been baked into our 3% growth plan for next year.

Our next question is from Dennis McGill with Zelman & Associates.

First question just has to do with the storm-impacted markets, which, I guess, we would consider to be Houston, Orlando and Tampa, all collectively. If we think about 2017, the final revenue number came in at 2.9%, I think, versus the 2.8% midpoint that you started the year. Any sense how much the storms benefited that number? And assuming it's material, where were the offsets relative to initial expectation?

Yes. So in Houston, the impact would have -- would be meaningful. I mean, and they -- it's pretty easy to do the math. We had a top line revenue decline that was factored in for the year of 4% for the full year, and I think we ended up at about 2% for the full year. It's 12% of our income, so what is that, 48 basis points in over half a year. So it was a meaningful impact of -- from Houston on the overall portfolio. Orlando and Tampa, it's -- I would say it's approaching 0. I mean, literally, we got very fortunate on the path of the storm. And other than a few nicks and bruises and downed trees in those 2 markets, we really didn't see any impact either on the operating expense side of things outside of the -- just some normal cleanup or on the rental side of things. Just to put it in perspective, we had -- in Houston, we -- from Harvey, we had about 53 employees who were impacted to one degree -- to some degree from the storm, about 23 of which got literally displaced from their homes by the flood. We did not have a single employee in our Florida footprint, in Miami or South Florida, Tampa or in Orlando, who got displaced by the storm event in Florida. So I'd say it's 0 -- approaching 0 in Florida and was probably pretty meaningful in Houston.

I wasn't thinking of existing residents in Florida, but, as you talked about earlier, the inflow of demand from outside of Florida.

Yes. Again, that really didn't start until almost towards the end of the year where that -- where people sort of started throwing up their hands and saying, this is way longer of an event than anybody thought it was going to be in Puerto Rico. So maybe we have some impact in 2018, and that could be helping us with our occupancy rate in Orlando right now, but I -- we'll see -- we'll just have to see how that plays out.

Okay. And then second question. As you look at the guidance this year, the 3% revenue midpoint, can you break that down into rent and occupancy? And then beyond the modest benefit from the cable package that you still expect in '18, is there any other ancillary income that would impact that number?

I'd say no on the ancillary income. We're at 95.7% occupied right now. My -- our plan for the year would be at about 95% -- a little bit north of 95% for the full year. So very slight impact from occupancy decline, maybe, call it, 20, 30 basis points. And then on the rental side, there -- so that would be slightly more than what we -- what the 3 would imply. So maybe 20 basis points on rent versus the giveback on occupancy.

Okay. And last question, just bigger picture. You talked a lot about the wall of capital coming at the space and some of the demographic factors that you would look at as being very positive as you look out a couple of years, and a story that's very similar to what's driven a lot of the development in the space for the last couple of years. So trying to just kind of square that with why supply would pull back if those in the industry have those 2 pillars to stand on and have some optimism for the next couple of years, especially if the belief is other people are pulling back, then would now be a good time to start. And so it becomes a little bit self-fulfilling.

Sure. Well, if developers can get capital, they will start, period, right. It's -- and they -- because the -- and that's a merchant builder mantra. And so what's causing the developers not to start are that rising land costs, rising construction costs, labor shortages in every market have driven construction costs at -- or just total project cost up higher than rental rate growth. And therefore, the returns that the private equity wants to get on their equity and that -- and -- has just been really hard to get. And so those numbers are -- that's what's really driving the slowdown. It's not that they don't -- that people look at the market and say, yes, fine, demand looks good over the next couple of years. And that doesn't mean you're not going to have construction start on any units, but it's just not going to be at peak levels. It's going to drop dramatically because there are a lot of deals you just won't pencil today, and the capital -- if they -- if you can't convince the capital that you're going to make your numbers, then the capital is not going to play. If you look at banks and just the lending environment, that it continues to fall in terms of lenders' appetite to finance multifamily and finance real estate in general, they sort of think it's late in the cycle. And because of the Basel agreements, I think it's Basel III or IV that creates this, the category of highly volatile commercial real estate, the lenders have all pulled back. And so the capital stack for the merchant builders has changed pretty dramatically. In a early-cycle time frame, you're able to get 70% construction loan, the recourse burns off after you deliver, and then you do 30% equity and maybe even -- maybe you even get higher than 70%. Today, it's 50%, 55% underlying construction loan. Developers are having to go out and put mezz pieces in between the sort of 50%, 55%, 60% if you're the best case. And then they put a mezz piece on top of that and then equity on top of that. And so their cost of capital has gone up, in addition to the cost of everything else. And rent, rents have moderated and haven't gone up enough to make the numbers work. So that's why supply is going down. Not that they don't want to do it, they just aren't able to make the numbers work.

That's a helpful perspective. So maybe one way to think of it is it's a wall of capital that won't get placed?

Well, the wall of capital that I was talking about is acquisitions. Because when you look at acquisitions, that's a different animal, right, because what -- most of that acquisition is looking at it the same way, going, well, wait a minute now, if construction costs are going to go up, 5% to 10% -- 5% -- let's just say on average 5% a year for the next 5 years, and I'm an institutional investor and I look out there and say, rents are moderating, but they're still good, there's still positive NOI, you can get 2.5%, 3% NOI growth. And if I buy an asset today, no one's going to build against me in the future if it's going to cost 25% more to build that asset. So I'm going to buy my -- I'm going to buy today and -- knowing that I -- or having the belief that I'll have a growing cash flow that's inflation protected in theory and some sort of replacement cost protection, if you will, in the future as well. So I think that capital gets placed, and that's the sort of the toughest part of the equation is, is competing with that wall of capital. Now in terms of wall -- there is not a wall of capital for development because it's just not as easy of a sell, right. Oh, I have really high construction costs...

If the wall of capital -- sorry. If the wall of capital drives down -- or it goes after the acquisitions and drives down cap rate, doesn't that lower the required return necessary on the development side?

No, because the problem is that -- I don't think cap rates are going to be driven down. I actually think they're going to stay in the kind of low to mid-4s. And when you start looking at -- and the challenge you're having when we're looking at a project -- for example, we just priced in Charlotte. I mean, we're -- we can't get it out at the high 4s from a yield perspective when it's stabilized. And that's assuming that rents continue to rise in Charlotte at 2% or 3%. And it's because construction costs went up 30%. So if I can't even get my pro forma to get into a 5%, then how do I make that work even if the cap rates today are 4 1/2% or 4 1/4% in Charlotte and I'm building to a 4 3/4%, I don't have enough spread and a merchant builder is not going to get that deal financed. I'm not going to do it even though I don't have the same capital constraints that they do.

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

I appreciate your time today, and we look forward to having more detailed discussions when we start the meeting cycle in March. So take care, and thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.