Camden Property Trust (CPT) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Camden Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this call is being recorded.

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

Good morning, and thank you for joining Camden's Third Quarter 2018 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 third quarter 2018 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.

Thanks, Kim, and good morning. I'd like to start with to give a shout out to John Kim of BMO Capital Markets for providing this quarter's on hold music. John got the honor by winning our Name That Music contest last quarter. John's theme for the song -- John's theme for the call were songs from 2009, the year the great recession ended. Some of you, the songs may have sounded recent. To others, they may have sounded ancient. Probably depends on how you're personally impacted by the recession. John didn't say this, but I'd be willing to bet there are few more -- there are more than a few of you on the call today who were still in school in 2009. Time flies when you're having fun.

And speaking of fun, Camden's third quarter results would qualify as fun. Our on-site teams and our support teams performed better than we had expected with solid revenue growth and great expense control, driven by our attack the run rate initiative.

Apartment fundamentals remained strong despite high levels of supply in most of our markets. Strong job growth and migration from high cost and high regulatory states has continued to support high apartment demand in Camden's markets. For the year, we have completed $600 million of combined acquisitions and development starts, which is in line with our original guidance. The mix has changed however. Our development starts were $100 million more than our guidance, and our acquisitions are $100 million less than our guidance. We effectively traded lower yielding acquisitions for higher-yielding developments, albeit the timing will be different on those -- on producing those yields.

With that said, I'd like to turn the call over to Keith Oden.

Thanks, Ric. Last quarter was Camden's 100th quarterly earnings call, so this quarter begins the next 100. Honestly, I gladly take another 99 just like this one as our results were solid and slightly better than we expected for both the quarter and year-to-date.

Same-store revenue growth was 3.1% for the third quarter, 3.2% year-to-date, and up 1.1% sequentially. Our top markets for revenue growth for the quarter were Denver at 4.3%; Orlando at 4.1%; Houston and Phoenix, both at 3.8% and San Diego/Inland Empire at 3.6%.

Our weakest 3 markets again this quarter with less than 2.5% growth were Dallas, Austin and Charlotte, the most heavily supply-challenged markets in our portfolio. Overall rents on new leases and renewals are slightly better than planned year-to-date and look encouraging relative to our fourth quarter plan.

In the third quarter, new leases were up 3.1%; renewals, up 5.5% providing a blended growth rate of 4.2% versus 2.8% in the third quarter of last year. So far in October, new leases are basically flat with renewals up 5% for a blended increase of 1.8%. October occupancy is running at 95.8% versus 96% last October. However, just a reminder that last year's occupancy -- October occupancy rate was influenced by the Hurricane Harvey occupancy effect, which drove Houston's occupancy rate up to 97.5%. The Harvey effect will have a measurable impact on our Q4 comparisons to last year.

Our third quarter net turnover rate fell again to 54% from 55% last year and remains below last year's 49% turnover rate at 47% through the first 3 quarters. In the quarter, move-outs to purchased homes dipped to 14.3% versus 14.6% last year, leaving us at 14.7% year-to-date, and that compares to 15.2% last year. It appears that the gradual upward trend over the last several years in this metric may have stalled in 2018 at a level well below the historical norm and bears watching in coming quarters. I'd like to thank all of our Camden associates for an outstanding quarter. Let's finish strong with the closeout of 2018.

I would like to turn the call now over to Alex Jessett, Camden's CFO.

Thanks, Keith. And before I move on to our financial results and guidance, a brief update on our recent real estate and financing activities. At the end of the third quarter, we purchased Camden Thornton Park, a recently constructed 299-unit 9-story community in the Thornton Park neighborhood of Orlando for approximately $90 million. This community is directly adjacent to our existing Camden Lake Eola development, providing the opportunity for further operating efficiencies. Also, at the end of the quarter, we sold a 14-acre out parcel adjacent to our development sites in Phoenix for $11.5 million.

During the third quarter of 2018, we began construction on Camden Buckhead in Atlanta. This $160 million, 365-unit development will be the second phase of our existing Camden Paces community and will consist of one 8- and one 9-story concrete building. Subsequent to quarter-end, lease-up was completed at Camden NoMa Phase II in Washington, D.C. This $108 million development is expected to deliver a stabilized yield of approximately 8.25%, creating over $80 million of value for our shareholders. For 2018, we have now completed $300 million of acquisitions and started $280 million of new development. We are not anticipating any additional acquisitions or dispositions in 2018.

Turning to our recent financing activities. On October 1, we repaid at par $380 million of secured debt consisting of $175 million at 2.86% floating rate debt and $205 million of 5.77% fixed rate debt for a blended average interest rate of approximately 4.4%. The repayment of this secure debt unencumbered 17 communities valued at approximately $1.1 billion. We repaid the secured debt using proceeds from a $400 million 10-year unsecured bond offering, which we completed on October 4. The effective interest rate on this new unsecured issuance is approximately 3.74% after giving effect to the settlement of in-place interest rate swaps and deducting underwriters discounts and other estimated expenses of the offering. After taking into effect these transactions, 79% of our debt is now unsecured and 90% of our assets are now unencumbered.

Turning to financial results. Last night, we reported funds from operations for the third quarter of 2018 of $117.1 million or $1.20 per share, exceeding the midpoint of our guidance range by $0.01. This $0.01 outperformance resulted primarily from approximately $0.005 in lower same-store operating expenses due to lower turnover costs, lower amounts of self-insured health care costs and continued cost control measures, and $0.005 in higher non-same-store net operating income resulting from better-than-expected results from both our previously completed acquisitions and our current development communities.

We have updated and revised our 2018 full year same-store expense, net operating income and FFO guidance based upon our year-to-date operating performance and our expectations for the fourth quarter. As a result of actual and anticipated future expense savings, we have reduced the midpoint of our same-store expense guidance by 45 basis points from 3.5% to 3.05% and increased the midpoint of our same-store net operating income guidance from 3% to 3.2%.

Last night, we also increased the midpoint of our full year 2018 FFO guidance by $0.02 from $4.74 to $4.76 per share. This $0.02 per share increase is the result of our anticipated 20 basis points or $0.01 per share increase in 2018 same-store operating results, approximately $.005 of this increase incurred in the third quarter with the remainder anticipated in the fourth quarter, and $0.01 of additional non-same-store outperformance from our previously completed acquisitions and our current development communities. Approximately $0.005 of this increase also occurred in the third quarter with the remainder anticipated in the fourth quarter.

Last night, we also provided earnings guidance for the fourth quarter of 2018. We expect FFO per share for the fourth quarter to be within the range of $1.20 to $1.24. The midpoint of $1.22 represents a $0.02 per share increase from our $1.20 reported in the third quarter of 2018. This increase is primarily the result of: a $0.01 per share or approximately 1% expected sequential increase in same-store NOI, driven primarily by a normal third to fourth quarter seasonal declines in utility, repair and maintenance, unit turnover and personnel expenses; a $0.01 per share increase in NOI from our development communities and lease-up; and a $0.01 per share increase in NOI from our recent acquisition of Camden Thornton Park.

This $0.03 per share cumulative net increase in FFO will be partially offset by a $0.01 per share decrease in FFO, resulting from a combination of higher overhead costs due to timing of certain corporate-related expenditures, and slightly higher interest expense as the fourth quarter interest savings from our recent debt refinancing will be offset by higher amounts of debt outstanding and lower amounts of capitalized interest as several of our developments near construction completion.

Our balance sheet is strong with net debt-to-EBITDA of 4.1x and a total fixed charge coverage ratio at 5.5x. We have $793 million of development currently under construction with $380 million remaining to fund over the next 3 years. As of October 25, we had no amounts outstanding on our unsecured lines of credit, and $30 million of cash on hand.

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

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

Just on Houston. You are facing a difficult occupancy comp in 4Q, so how are things trending from a new and renewal lease perspective? And then as you face more normalized occupancy comps next year, and I know it's before formal guidance, but how is Houston looking in 2019?

Well, it's -- we're in the process of putting together our bottom up budgets. We look at all kinds of different data providers. And if you look at what Ron Witten has in his outlook for 2019 in Houston, he's got revenues going up somewhere in the 4% to 5% range. We'll see where ours come out. Clearly, the comp is a tough one because of occupancy in the fourth quarter, but that normalizes pretty quickly in the first part of next year on occupancy. We trended back down to about 95% as we expected we would by the second quarter. So I don't think there will be much of that noise in the numbers. Houston continues to do -- to recover nicely. I think last month, we got a report that showed that the trailing 12-month job growth in Houston, Texas was 128,000 jobs. So that's enough to move the needle even in a metropolitan area like Houston. So things continue to recover very nicely.

The nice thing is that up until recently, the job growth had been coming pretty much without participation by the integrated oil companies, and within the last 2 quarters, that's -- we've really seen a shift in that. They've begun to hire again. They're at full capacity. So I think that bodes well for Houston job growth in 2019. Obviously, we have a very constructive supply scenario for Houston next year, around 8,000 apartments that are going to be delivered into the Houston metropolitan area, which is sort of a rounding error in terms of total supply. So if we get another really good job growth year in 2019, which is kind of what's projected in most people's numbers, 8,000 new apartments. That's really good math for our business.

And just on the balance sheet, after repaying the secured debt earlier this month, it looks like the only remaining secured debt is coming due next year. How do you think about the use of secured debt as part of the overall capital stack going forward?

Yes. We fundamentally believe that we should be an unsecured borrower. So we've got $439 million of secured debt that's coming due in the first quarter of 2019, and our intention is to not take that out with additional secured debt.

And the next question comes from Juan Sanabria with Bank of America.

This is Shirley Wu calling in with Juan Sanabria. Congrats on a great quarter. So as we move into '19, outside of Houston, which markets do you believe are set to reaccelerate or decelerate from '18, especially in your highest buy market, like Dallas or Charlotte?

Yes. So again, we're in the process of putting together our game plan in all of our markets. And obviously, we can look at aggregated data from data providers. I think the one that we rely most on is Ron Witten's numbers. And if you look at what Ron Witten has modeled for Camden's markets into 2018 to 2019, he's got total revenue growth for '18 at somewhere around a little over 3.2%. And if you look out into '19, that number goes up to about 3.7% in his high level aggregated number. So clearly, Ron is looking for an improvement across the board, a slight improvement of about 50 basis points in our entire portfolio. What that means for every -- each of our individual markets, we'll have to wait and see until we get our -- get the final results and review process for our 2019 revenues that we'll give you some guidance on in the first part of 2019.

But overall, if you just kind of think about the drivers in our business and if you look at employment growth and supply, there is really not a huge difference between the outlook of -- or what's happening in 2018 and what the outlook is for 2019. Job growth comes down a little bit across our platform, new completions stay relatively flat, but the change in the ratio of new jobs to completions doesn't really move that much. We're a little bit above 5x for 2018. That drops to a little bit below 5x for 2019. So overall, just looking at the macro data and not drilling down to each individual market which is the whole purpose of our budget process, you would look at the macro data and say, "You know, 2019, this should look a lot like 2018, maybe some slight improvement." So we'll have to see how it plays out.

That's great. Are there any markets in particular that you might be concerned about in terms of like maybe supply and rent just not being there?

Well, the supply-challenged markets that we have right now, the 3 weakest markets that we operate in are Austin, Dallas and Charlotte. And if you look out at the supply numbers for 2019, there is very little relief coming in any of those 3 markets. Dallas gets a little bit better, Austin actually gets a little bit worse on supply, and Charlotte is about the same. So I think you can look for us to continue to be swimming upstream on those 3 markets just because of the headwinds of supply.

And the next question comes from John Kim with BMO Capital.

On your turnover rate of 47%, can you comment on any markets that are meaningfully higher or lower than your portfolio average?

There's -- from an historical standpoint, when you look at them, and I don't have the details of each one, but when you look at them year-over-year, you'll always have markets that have higher versus lower turnover rates. But if you look at them by comparison, there's nothing that stands out in our portfolio. So we've had a 2% difference in the turnover rate from last year, and that would be consistent across the platform. But within that set of data, you've got turnover rates that vary by as much as 7% or 8%, up and down from the average in our portfolio. We can give you that data off-line if you like.

And one of the things I think is interesting when you think about turnover is sort of just the migration patterns of sort of Americans and what's happened over the years and how that's changed. There has really been a secular change in sort of people sort of making moves and wanting to make moves. And it's primarily I think because of, number one, the millennials are just kind of a different breed of cat compared to the sort of the baby boomers. And they were always willing to move to new city to get a job, get a better job and what have you. But today, with unemployment rate as low as it is in the competition in the job market, it's a lot more difficult to relocate people from their market when they have a home and kids and things like that than it has been.

Now you clearly still have out-migration from California and some of the other East Coast cities that's been going on for a long time. But generally speaking, people are staying put longer in their homes and in their apartments, and they are not moving as fast as they did in the past. And I think it's that sort of secular change in just the way people kind of do everything, including taking -- getting married a lot later in life or maybe not getting married at all and then also having children later. It sort of moved into the system and now our traditional turnover rates are just not what they were in the past because of that.

Alex, on the senior notes, it looks like a prescient move to lock in the 10-year early to reduce the effective interest rate. But can I ask how long are the swap agreements duration for?

Yes. So they are 10 years, and so we first start entering into them at the end of 2017, and we finished them sort of early part of 2018. And so it's for a 10-year period. So the way it works is there was a net settlement, and the net settlement was clearly in our favor. And then we'll amortize that net settlement against interest expense over the full 10 years.

So that -- the 3.7% is for the full?

That's correct. Yes. So 3.74% for the full 10 years.

And the next question comes from Austin Wurschmidt of KeyBanc Capital.

First question, so at the outset of the year, you were projecting D.C. to be a 3% revenue growth market I believe, and you're tracking a little bit below that up into this point. And there's been some recent comments from one of your peers, I guess, concerning CBD fundamentals in particular. So I was curious, without giving 2019 guidance, what's sort of your outlook or optimism for your suburban markets, Northern Virginia and Maryland over the next 6 to 12 months?

Yes, so D.C. Metro at the beginning of the year, we rated it as a B market and stable, which is pretty consistent with where we think we're operating. For the -- if you think about the third quarter this year, our average revenue growth in our portfolio was 3.1%, D.C. Metro was 3.1%. So this is the first time in a while that D.C. Metro has been in the top half of our revenue numbers. So that's a good sign. For the third quarter, Houston was 3.8%. So you think about our 2 largest markets, D.C. Metro and Houston are both in the top half of our portfolio. And again, that hasn't happened in some time. So we're reasonably optimistic about our D.C. portfolio, not only through the end of the year but into 2019.

As you all know, we have very different footprint than a lot of our other competitors have in the D.C. market with a lot of suburban exposure. And I think that's served us well for the last couple of years relative to the comp set. Obviously, we're in a -- we're sort of in a transition in a lot of these markets, where a ton of the supply has been more in the urban core and where we have more exposure in urban areas, that's been a negative, and our suburban markets have been a positive. My guess is that at some point, there -- but just based on the decline in new supply that's inevitable and starts that are inevitable in the next couple of years, that, that will benefit the urban areas more so than the suburban areas. So overall, we're pretty optimistic about where we're situated in D.C. in 2019, and I look forward to seeing some of that reflected in our D.C. budgets when we roll them out.

And then as far as development, you mentioned the pipeline is around $700 million at this point, and you've got some projects that will wrap up here in early part of 2019. What's the appetite to backfill these projects, the right level of development we should be thinking about for you moving forward?

We're very comfortable in the $200 million to $300 million development start annually going forward into '19 and '20. We have that pipeline of land or transactions that are in progress right now to be able to start those projects between now and/or '19 and '20.

And then can you quickly just give the yield on the Buckhead development?

On the development that we started?

Yes. Correct.

So the development we started, it's trending at around 6% plus or minus. The interesting thing is, when you think about the development cycle, when we first started building, we were doing 10%s, 10% cash-on-cash, you can imagine that in Houston, in Tampa back in 2010, '11, '12. And over time, as a result of increased construction cost and just the time it takes to build and the pressure in the market, the yields have compressed. But when you look at building to a 6%, when the market today on an acquisition basis is still a 4%, 4.25%, you're still making a very nice spread over what we could get on an acquisition for the development risk. And we get to build what we want as opposed to buying somebody else's building that wasn't necessarily built by us, for us.

And the next question comes from Rich Hightower with Evercore ISI.

So I guess just to quickly follow-up on the development question there. Do you see that spread between market cap rates and yields compressing, given the increase in the base rates combined with just this unabated cost escalation on the construction side?

Well, I think the issue becomes -- I think, yes, absolutely spreads have tightened compared to where they were in the past, right? They were really, really wide and people are making wider spreads than they've ever made in my business career. And so that has gotten to the point where it's more normal -- normalized. 150, 200 basis points positive spread between acquisition and development on the development side. But I think that -- and I think part of the issue is that it's really hard to get -- find transactions like that, that's why we're at $200 million to $300 million and not $500 million. And so it is more difficult to get deals done and to make the numbers work from that perspective.

The thing that's interesting when you think about the 10-year treasuries, obviously, has gone up from the beginning of the year and people think about why haven't cap rates gone up as fast as the 10-year. And -- or therefore, you -- or thinking that prices have to come down and cap rates have to go up. But there's a massive wall of capital today that continues to flow into real estate and multifamily, specifically, sort of the darlings are multifamily and industrial with Amazon effect with industrial. We had a board meeting this week, and we had HFF come in and update our board on current market conditions. And they had a slide that showed $182 billion of unfunded real estate capital that needed to find a home, and when you start thinking about apartments, when you think about cap rates, the 10-year is probably the last thing that influences cap rates. The first thing is liquidity, and that's how much money is in the market chasing deals. Second is market fundamentals or operating fundamentals, supply and demand. The third is inflation expectations. And the fourth is 10 years.

And when you look at the relationship of cap rates today, we have massive liquidity. We have pretty decent supply fundamentals and demand fundamentals, and you know, if the Fed is raising rates because they're worried about the economy getting overheated and inflation coming back, or multifamily is an expensive asset from that perspective, was even -- we mark pretty much 8% to 10% of our leases to market every single month. So it's a very sought-after asset class. Unless there is going to be a massive change in liquidity or operating fundamentals or expectations on inflation, I don't see cap rates doing anything but staying really sticky, and prices doing nothing but going up because cash flows are increasing.

Okay. That's helpful. And I think the wall of capital argument is -- it's an interesting one. And if we -- let me ask this question, if we apply that to Houston, clearly, supply is going down next year and that's a very favorable setup. But just given the quickness of the supply response in a market like Houston, and given Camden's longstanding experience, I mean, how do you sort of expect that picture to evolve as we get further into '19? I mean, do you see permits accelerating again given that wall of capital that would presumably still be interested in multifamily in a market that's generating 80,000, 90,000 jobs a year or something like that, and just given the fundamental dynamics there?

Yes, Houston clearly has the best story in America right now. Lowering supply, increased job growth, a very dynamic market. And so we do absolutely expect starts to increase and permits to increase in '19 and '20. The good news is that, that you can't build your project fast enough to really negatively impact probably '19 and part of '20. When you get down to it, the market is very transparent, and I think that's really an interesting thought when you start thinking about supply and how you can turn it on and turn it off. In the past, people thought of these markets, like the sort of non-barrier to entry markets, as always vulnerable to overbuilding.

Well, because of the transparency today in the marketplace, people who are making capital decisions on the equity and debt side of this business are -- they see everything that's out there, and they know what's coming, they know what the supply and demand dynamics are, when the supply and demand dynamics get out of whack, they stop. Just like Houston, we went from 20,000 units to 7,000 or 8,000 units this year. So I think that Houston will ramp up because it's -- it has a story, but the question is, how many can get done given the cost environment and given the return requirement issues.

Yes. Just to put some numbers around that, that's all correct. And Witten's got completions in Houston at 6,000 this year, and I think that's going to be correct as it turns out. His projection for next year is 7,000 completions and then he has that ramping up to 13,000 completions in 2020. So yes, absolutely, it's going to go up. But 13,000 completions in a metropolitan area like Houston is, as long as we get okay job growth, it's not going to be disruptive at all. That's below the long-term trend. So yes, there is no question that Houston is the best story out there right now, and there's certainly a lot of activity right now -- predevelopment activity going on in Houston.

And the next question comes from Alexander Goldfarb with Sandler O'Neill.

Echoing John's comment, Alex, congrats on your timing on that debt issuance. So 2 questions here. The first, just going back to D.C., the common market sentiment is that Amazon's going to pick Crystal City for H Q2. So just curious, your thoughts on, one, the impact to your portfolio? And then two, just longer term, D.C. seems to be a great developers market, not a great operators market. So your view is that Amazon announces it and suddenly all the developers do is ramp up and therefore the landlords really don't get the benefit? Or do you think there may be some longer term benefit for the landlords?

Yes. So my take -- first of all, I hope, I would be perfectly hope you're right on -- hope they're right, and the prognosticators are right on Amazon, that would be a great benefit to us and a lot of other people. We have a decent-sized footprint that would be impacted by that location decision, no question about it. And as to the point on D.C. Metro, it really hasn't been as much a supply challenge in D.C. Metro over the last couple of years, it's just has been weaker job growth. I mean, if you look at what's coming this year, we've got about 10,000 completions in D.C. Metro in 2018. That looks like that ramps up a little bit to around 12,000 next year and then back down in 2020. So 10,000 -- 13,000, 10,000 in the entire D.C. Metro area, that's not -- historically, that wouldn't be real troublesome on the supply side. The challenge has been that if you look at job growth, it looks like 2019 is -- on Witten's numbers is about 39,000 and he has that dropping to 22,000 in 2020. Now obviously, Amazon is a game changer for all of that. But unlike many of our other markets, it's really not hyper supply in D.C. that's been limiting the ability to push rents there at the pace of the rest of our portfolio. It's primarily been on the job side.

Okay. And the second question is, your comments on preference for development versus acquisition seem to be sort of consistent with what's been going on in practicality. But you guys went and raised money over a year ago to go out and buy a bunch of stuff, that's proven more difficult. Do you think that the jump in rates will spur some of these merchant guys to want to sell quicker, just given how rising rates could impact their IRRs? And maybe it's made their decision advance the decision? Or your sense is that the rise in interest rate will not change the pace that the merchant guys sell their product?

Well, last year, we thought that might -- that would happen in 2018, and obviously, it didn't. If you look at the stats on sales, in 2017, there was -- the number of multifamily sales was down from '16. And we thought it was going to be down again for '18 and turned out to be way up for '18. So that could happen. I think there is definitely more merchant builder stress out there just from the standpoint of they've got product they need to sell to be able to reload their balance sheet. Because in the past, like if you go back to sort of pre-great recession, I mean, most of merchant builders just keep building no matter what because they could guarantee debt with no tangible assets on their balance sheet and the banks will let them do it. Today, the banks won't let them do it, so they do have to clear the asset in order to be able to reload their pipelines. So that is one difference that could impact and have the ability to get merchant builders at least more constructive on selling at prices that we want to buy at.

On the other hand, we thought that was going to happen '18, and didn't. What's happening -- what we're also seeing though is sort of instead of selling, people are refinancing, and you could refinance a merchant builder deal with a high margin, basically take all of your cash out, including your equity, and be sitting with a sort of more higher leveraged transaction without any equity in it. So a fair number of them were doing that as well, is just holding the assets and putting them in a sort of longer holding pattern. So I think that ultimately the merchant builders do have to sell. The question is, are there going to be enough buyers to take up that inventory? And I think right now there are. So that's why we decided to lower our acquisitions guidance and increase our development. And when you think about our -- when we raised that capital, we talked about $500 million of acquisitions, so we just changed the mix a bit, even though that does change the timing of when we are able to enjoy those yields. But I think that might be the case in '19 as well, just given the capital -- the lower capital issue.

And the next question comes from Rob Stevenson with Janney.

Alex, how much of the same-store expense savings are moving down from your 3.5% down to about 3% guidance for the year? Is it timing issue versus tougher to expect to be sustainable into '19 and beyond?

Yes. I mean, none of it's timing at all. It's -- as I've said on a couple of past calls, you've got a couple of things that are occurring. Number one, people are just not getting sick as often, which is really good news for all of us. But the second thing is, is that we're becoming very efficient on our R&M and our unit turnover cost. And there is no reason to believe that, that should not be easily replicated in future years.

Okay. So like none of the savings here is from property taxes that could wind up spiking back up in '19?

No. And in fact if you think about where we are, we started the year with a 4% same-store expense growth. And we had assumed that property taxes would be 4.2%. We now assume property tax is going to be 6%, and yet we're at 3.05% same-store growth. So property taxes were worse than we expected, but all other categories were far better than we expected overcoming this unexpected increase in Atlanta property taxes.

Okay. And then Keith, of your better performing markets, which have the smallest gap between new lease and renewal growth rates? I mean, what are the ones that are closest to an inflection point there of meeting or possibly crossing in the future?

So I would -- of our better performing markets the gap on new leases and renewals is falls -- every one of them falls in for favor of renewals versus new leases. So -- and it's been that way for a number of quarters. If you kind of look out to -- at our 2018 numbers, I think I gave you in my opening commentary, we're at 5.5% on renewals and 3.1% on new leases. So -- and I'm looking at the detail and I don't see a single one where we're upside-down one way or the other on renewals versus there may be 1 or 2 markets. But the preponderance of our markets continue to have renewals above new leases. And my guess is, is that probably tightens in 2019, but I'd be surprised to see if you had a shift in many of our markets between new leases and renewals.

And the next question comes from Trent Trujillo with Scotiabank.

First, one of your peers indicated that some of its markets haven't yet started the normal seasonal decline in rent growth that usually comes in the fourth quarter. So are you seeing this in a noticeable way across any of your markets in your portfolio? And if so, what would you attribute that to?

Yes. I think ours looks like it has historically. In fact, I think you -- just if you look at the data that we have so far in October, we're basically flat on new leases and 5% on renewals. So I think that, that's typical and that's what we would expect. And if you look at our -- you kind of look at our budget, how we would have budgeted for the fourth quarter, that's pretty much in line with where we would expect to be. So no big revisions from our original forecast on our portfolio. So I am not sure who that is, maybe they have a very different footprint than we do, but we're seeing what we historically see in the fourth quarter.

Okay. That's fair. And turning back to Houston, just specific to the McGowen development. Can you remind us where concessions stand on that asset? And what merchant builders are offering competitively in that area?

Sure. The developments today in downtown and midtown and probably the Galleria are still offering 1 to 2 months free, plus or minus. It depends on-unit type and what have you, but that's very typical in the market still. And it's interesting because sometimes people will say, "Well, wait a minute, how are you growing your same-store portfolio revenue when there is too much free in the development market?" And it's interesting because on the one hand, people would expect that to translate into the marketplace. But when you think about the number of units you have to actually lease and maintain your 95% or 95%-plus or minus occupancy, it's not that many units. So you don't have a big pressure to give concessions in an existing portfolio when a development is say, 50% occupied. And every day, it goes by without increasing the occupancy, that -- revenue from that unit is lost, sort of like an airplane seat when it takes off. So merchant builders are very quick to the trigger on giving concessions and filling them up as soon as they can.

And the next question comes from Alan Wai with Goldman Sachs.

When we look at your lease spreads, it seem to imply that the same-store should be accelerating. But guidance implies that 4Q is slowing. I'm am not asking for a '19 guide, but are leasing spreads telling us the right thing? Or is it possible that occupancy or other factors at same-store can flow in '19 while leasing spread accelerate?

Yes, again, I'm going to refer back to the overall guidance that Witten has in his numbers. If you look at overall U.S., he has rates going up about 50 basis points. You look at Camden's portfolio specific in our 15 markets, the same 50 basis point acceleration into 2019. So I think at the aggregate level and, obviously, you're going to have ups and downs and variances among based on the supply conditions in each of those -- each of our markets. But overall, his judgment is, is that rents will be up -- or revenues are going to be up about 50 basis points in 2019 over 2018. We'll know -- I'll know better in a month or 2 how well our numbers are correlated with or not correlated with Ron's, but that's kind of his forecasting and he is -- we do back testing on all the stuff that he does, and he's been pretty good over the years in terms his forecast for revenue growth. So as we sit here today, that's kind of the best evidence that we have that looks like our -- in the Camden portfolio, we should see -- we could in fact see a reacceleration in revenues in 2019.

And the next question comes from Karin Ford with MUFG.

Ric, I think you mentioned in your opening comments in-migration into your markets from higher cost and tax regions. Have you seen any evidence of that? And can you just talk about how you think that could contribute to demand?

Sure. The evidence is clear. If you look at just pull the last census numbers for the last 10 years, you'll see that domestic in-migration -- domestic out-migration of California is negative. I mean, it's just -- that the whole -- you have people leaving California going to Phoenix, going to Austin, Texas, and other places. And even though population has not declined in California, for example -- I'll just use California, it's a good example because it's so big and it's easy to talk about. You've had increases in population in California, primarily driven by immigration and births and taken down by out-migration. And so those numbers are readily available via the Census Bureau. And then when we -- just anecdotally, when we talk to our Phoenix folks, for example, that will be a good example, we have a lot of folks that are renting apartments that are from California. And if you look at -- I have another one -- another interesting stat would be the cost of U-Hauls, it's cheap to rent a U-Haul from Phoenix to go to California, but more expensive from California to Phoenix because they end up with all these excess U-Haul trucks in these markets. And so it's definitely something that's going on and supporting demand in our markets.

Have you seen -- sorry, go ahead.

Yes. And just some numbers around the migration because it is something that we track pretty carefully, because it's been -- it has been a huge part of our story in terms of the 15 markets we operate in. So for 2019, across Camden's 15 markets, it's projected that we're going to get an overall in-migration of 447,000 people into Camden's 15 markets. Now within that, the thing that's interesting is, we have 2 cities where it's projected to be negative, and one is L.A. at an out-migration of 54,000. The other is Orange County, with an out-migration of about 7,000. So those are -- so that's included in the 447 positive. So we have 2 markets without migration, both in California. The other one is other one is -- just to Ric's point about Phoenix, so in 2019, it's projected -- L.A. is projected to have 54,000 out-migration. Phoenix is projected to have 54,000 in-migration in 2019. So this is really an important part of the overall movement of people and to -- in large part to lower cost areas and less regulation. And then I think that these numbers probably don't get to the impact of the overall the SALT limitations on these high property and state tax states. So it'll be interesting to see.

That's great color. And then just my last question, you mentioned that you improved your efficiency on turnover, that's reflected in expenses. But if you return back to more normalized and average turnover levels, do you have any sense for how much that could impact expense growth?

So we've been at this level of turnover now for a couple of years. We'd have to do some math around if there was some sort of a dramatic increase in move-outs and what the impact would be. But I will tell you at this point, if you're sort of looking at trends, the trend seemed to be that we're going to have lower turnover for longer, based that we've seen last couple of years.

And part of our expense control has been, as I mentioned in my -- beginning of my comments was our attack the run rate initiative. And what that's about is, it's about focusing on small ticket items on site and in our corporate office that sort of just get done because we've been doing them for a long time. And it's really focusing in on and making decisions on a lot of small stuff that adds up to actually a pretty nice, nice number. And that focus, even though we are focused on our operating expenses all the time, this is sort of an intense focus on making sure that every dollar that's going out the door is either a revenue-enhancing dollar or a marketing dollar or one that can be justified from a business perspective. And that's had a really big impact, and our teams have done a great job sort of embracing that concept. I think often times, when times are good, you get a little bit easier to have expenses that kind of creep on you. And we're now at the point where our teams have really embraced this attack the run rate. And the idea is, it's the run rate, right? It's not, let's just save money this quarter, or let's just save money this year. Let's make sure that it's permanent and that it's in the run rate so that 2019 benefits from it as well.

And the next question comes from Rich Anderson with Mizuho.

So Ric or anyone, when you think -- people are trying to get to 2019, but I'm going to see if I can get 2020 guidance out of you. So...

At least that's novel.

If when you think about supply, obviously, millennials demand at least changing as they get older, we just -- single-family-home market and, of course, interest rates. When you look further out, is '18, but past '19 and going to '20 and '21. Do you see the business basically better 3 or 4 years from now than it is today? Or is it sort of sideways moving? Because it's our sense that the days of high single-digit growth out of the multifamily REITs even in the best of times is probably over, and it's more like a CPI plus-type of business. Wondering how you feel about kind of all these longer-term observations?

Yes, I feel pretty good about our business long-term or midterm. You can't go out more than '20 or '21. But if you just -- if you think about the business, the fundamentals of the business, we're not getting disintermediated by Amazon. We're not -- we don't have issues like that. Single-family homes still are hard to get. The average median price of home is up. Incomes are not as high or not growing as much. And you have the interest rates popping up, so it's made homeownership more difficult. Even though from a demographic perspective, we know that it's not so much the money as it is the demographic position of people. They're waiting longer to have kids and get married and form households so that half that would create demand for homes. So with that said, I think our business is going to be reasonably good for the next 2 or 3 or 4 years. And barring any major calamity or recession or whatever, I think also that the pressure on merchant builders and development continues to be there. And I think that ultimately that you will see a peak in the supply, and then the supply sort of coming down in 2020, 2021, 2022 unless we have -- unless this 3.5% GDP continues and job growth continues, and we have more legs up. So I feel pretty good about our business.

So 2020 better than 2018?

It's a hard thing to say today, but I would -- when people ask me about how I feel about our business over the next 3 to 5 years, I feel really good about it. Now if we have a recession between now and then, you know, all bets are off. And if something changes dramatically there, but if you sort of have -- if you told me that 2018 you have the same sort of supply and demand economics, the same job growth with interest rates maybe up a bit, I would say that those years are going to be good for multifamily.

So Rich, I would just add to one of the points that you raised which the weakness in home sales, which continues to be really puzzling or at least puzzling to a lot of the people that -- on the homebuilders side of things. But I think that it shows up in our numbers in the move-outs to purchased homes and conventional wisdom, 6 or 7 years ago, was that the great recession was a cyclical event and that homeownership rate collapsed as a result of the housing burst in the great recession and that most people, prognosticators I think at the time really believed that the homeownership rate would drift back up. But eventually, would get back up to the 18% or 19%, and our portfolio that we historically saw before 2007. And it started -- it bottomed -- the homeownership move-outs to purchased homes bottomed at about 9.7% in our portfolio, which was crazy low and then it started to drift back up.

But in that -- just if you look at the numbers in our portfolio over the last year, it looks like we are getting kind of toppish on the move-out number, and we're back down 14.3%. We got as high as in the low 15s. But we're still so far away from what you wouldn't think of a normal move-out to purchased homes rate in our portfolio that I think you've just got to start rethinking the cyclical versus secular argument in homeownership rate. And if this is where we're going to be, then the metrics that we need going forward in terms of what the new supply -- how much new supply could be dealt with, how many new jobs it's going to take to maintain the demand for multifamily in the traditional range, you just got to rethink all of those. So I'm not telling you it's almost never different this time, but it's been really different this time for a long time in homeownership move-outs to purchased homes. And it looks like right now, in the data, it's starting to drift back down. And it's supported by the fact that I think a week ago or so they announced one of the lowest new-home sales -- or home sale numbers in a decade. So it's just -- it's an interesting time, and I think that Ric's right that if you have to be on one side or other of that argument, I would prefer to be on our side of the argument.

And the next question comes from John Pawlowski with Green Street Advisors.

Thanks for your comments on the reasonable cadence in development starts. Is $300 million in acquisition volume in next year a fair betting line?

We haven't really gotten to that point yet. We sold a lot of properties and really turned the portfolio big time in the last 3 to 5 years. So we don't have a lot of low-hanging fruit in terms of dispositions. So it really just depends on what kind of market we have next year, but I don't see it being a robust acquisition, you're -- given what we're hearing or what we're seeing right now, but we haven't really -- it's not done in our guidance yet.

Okay. Some of the really competitive markets, thinking the Phoenix's of world where cap rates and I don't know if you agree are perhaps irrationally low right now. Would you ever do something tactical, and not a full market exit, but take another tranche of dispositions to sell into that competitive bid and perhaps reposition into a market outside of your current footprint that you think is less or more underappreciated?

Well, ultimately, we have exited markets in the past, right? We exited Las Vegas kind of at a time where we thought, and we knew it was accelerating, but because of the portfolio quality, it was really important for us to move out of that market. We like the markets we're in for all the right reasons. And the issue with tactical sort of hurts my head a little. On the one hand, you can take advantage of low prices, but then what do you do with the capital and the risk associated with the transaction? Just reinvestment risk issues. If I really like the property long-term, it's hard for me to replace that property long-term and I'm taking risk of execution risk between getting it done. So we have lots of scenarios that go through. Well, should we sell our lowest cap rate deals or highest cap rate deals? And how does that affect us long term? And when it makes sense to do, we do given that we've sold $3 billion of properties in the last 5 years and done a couple of billion of development and a billion of acquisitions, but -- so we look at that and clearly it's -- sometimes it's interesting and sometimes it's not. I'm not sure what we're going to be doing over the next year or 2 in that regard though.

And the next question comes from Hardik Goel with Zelman and Company.

Just wanted to get more detail on the expense side. So when you look at taxes, has there been some sort of appeal success or something of that nature that's lowered the taxes as you would have expected them at the beginning of the year? And what's kind of your sense of how that's going to trend?

Yes. Once again, we started the year thinking that property taxes are going to be up 4.2%. We now think they're going to be up 6%. That delta is entirely driven by higher-than-expected tax values in Fulton County in Atlanta. So that's sort of what we're having with property taxes. I think if you're looking at year-to-date property taxes, and you're trying to understand how we get to the 6%, you can't forget that in the fourth quarter of 2017 we had about $1.5 million of property tax refunds almost entirely in Houston, and that is not going to be replicated. So that's the delta, if you're looking at a year-to-date, and you're comparing that to full year, which once again we think is still 6%.

Got it. That makes a lot of sense. And just one more question on your comments regarding supply. You guys talked about better visibility and you have the ability to see further now than ever before. As you look out where do you see supply really peaking, where you can say it's going to peak in the near -- or to decelerate steadily. Is it 2020? Is it 2021? Where does supply go down meaningfully from?

So we have numbers out through 2020, and these are Witten numbers. He's got the completions in 2020 across Camden's portfolio basically flat with 2019, which is only slightly down from 2018. So if you're thinking big picture, Camden's platform, 138,000, 136,000, 138,000 is the progression of Witten through 2020. I think 2021 and 2022 would be the first years where you could have a shot at meaningfully less deliveries, and that all is a function of all the push and pull and pressures that Ric has described that the merchant builders are dealing with. But they're persistent and they're crafty. And if there is a deal that can get done, they'll figure out a way to do it. I just think that the math is getting so difficult. And as Ric mentioned, they're pretty stretched in terms of their total capacity to hold what they have and then start a new round even if they can get the numbers to pencil. So I think it's possible in 2021 and 2022 you could see a meaningful pullback in supply for the first time in years.

And the next question comes from Daniel Bernstein with Capital One.

Just don't want to get too academic, but wanted to follow-up on the conversation you had with Rich. Are you seeing any change in the average age of people living in your buildings and maybe the average age of people who are moving out to homeownership?

Well, first of all, we are hearing -- seeing anecdotally more sort of baby boomers moving in. And these are people that lived in suburbs, whose kids are gone, they live in a big house, traffic is still pretty awful across America. So they're moving into the city and into the urban core. And we have some properties, for example, in Houston, the Galleria, that where the average age is probably 10 years older than our average age in our portfolio, primarily because the rents are much higher and you have to have somebody in their 50s who has more income to be able to pay for that higher rent property.

I think one of the things that's driving that to a certain extent, not just the traffic and the desire for people to be in more walkable and more closer to amenities, like the arts and things like that, but one of the things over the last 10 years that's really happened in this cycle of development is that the properties are not your '80s, '90s versions of apartments. When those baby boomers walk in, it's like a hotel. All the amenities are just really high end. The finishes are as high-end as any for sale condo, and so the product is more appealing to folks like that today than it was in the past. So it's definitely a migration.

If you look at the statistics too on propensity to rent, propensity to rent is always very high up until the mid-'30s and then it starts falling off, and then you have the propensity to own, and over the last 7 or 8 years, the propensity to rent has increased for people over 50 and into their 60s, and that is a change. Fannie Mae actually just did a study that you can find on the NMHC website or Fannie Mae website that shows the increased propensity to rent for older people. And I think that's definitely a positive for our business, there's no question about that.

In terms of average age, I think it's pretty much hasn't really changed dramatically, maybe a year or so here and there. And then in terms of people moving out to buy houses, that -- because it's so low today, the age is definitely increased for people to buy houses because they have student debt they have to pay off and issues like that, that have limited their ability to buy a house.

I didn't know how much your track that specifically relative to the current situation. So just asking about that. The other question I had was -- it involves the -- you had a conversation on the, grow cap rates and I agree with everything you said that interest rates are kind of the last thing that are going to move cap rates. Have you seen the increase in leverage that buyers for that wall of private equity is using to get their IRRs? I mean, it's easy to track the GSEs, it's easy to track the banks, it's not easy to track the actual LTVs that are in the non-bank financials out there. I don't know if you had any thoughts on whether leverage is increasing, LTVs are increasing for those private equity buyers?

I think the answer is no. I think that the leverage is not increasing. People aren't using more leverage to get yields. And as a matter of fact, there's a whole lot of very low leverage and no leverage buyers in the marketplace where they're not putting any debt on any property. So I do think it's -- when they do leverage, more than half of all the loans that are getting done in multifamily are floating rate loans. And when you look at the forward curve on LIBOR, for example, you can buy really cheap caps. So people are -- on a relative basis, so people are floating more than they're fixing, and their leverage levels are not as high as you would normally expect.

I was just thinking, I would be going up at this point in the cycle and given where cap rates are. But that's good color. I appreciate it.

And there are no more questions at the present time. So I would like to return the call to Ric Campo for any closing comments.

Yes. We appreciate you being on the call today, and we will be at NAREIT in the next couple of weeks, and I am sure to see a lot of you there. So thank you very much, and see you at NAREIT.

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