Camden Property Trust (CPT) 2020 Q3 法說會逐字稿

Good morning, and thank you, and welcome to the Camden Property Trust Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Kim Callahan. Please go ahead.

Good morning, and thank you for joining Camden's Third Quarter 2020 Earnings Conference Call. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the 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 2020 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 the call.

Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman; and Alex Jessett, Chief Financial Officer. We will attempt to complete our call within 1 hour, as we know another multifamily company is holding their call right after us. (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. Our on-hold music today was a tribute to Team Camden. We wanted to celebrate the incredible results of our on-site team, supported by our regional and corporate staffs that they have achieved throughout the COVID storm. Despite all the turmoil, team Camden never stopped taking care of business. That's what you can expect from a team of all stars. Instead of 1,000-yard stare, team Camden showed up every day with the eye of the tiger, reminding us of what we know is true, you're simply the best. So this evening, we will join you in spirit as you all raise your glass to celebrate your remarkable performance. Cheers.

Our performance for the third quarter was driven by our team, but was also aided by our Camden brand equity and our capital allocation and market selection. We've always believed that geographic and product diversification would lower the volatility of our earnings. We are in markets that are pro business, have an educated workforce, low cost of housing and high quality of life scores. These attributes drive population and employment growth, which drives housing demand. The only exception to this market generalization for us is Southern California. Compared to most other parts of California, however, our properties are in the most business-friendly cities and areas in the state. Our markets have lost fewer high-paying jobs than other markets in the U.S. As a matter of fact, it's 5% losses for Camden markets versus 15% for the U.S. Overall year-over-year employment losses through September have been less in our markets. Job losses in most of our markets have been in the range of down 2.5% to down 5%, the best being Austin, Dallas, Phoenix, Tampa, Atlanta and Houston. The toughest markets have been Orlando, Los Angeles and Orange County, with job losses between 9.5% and 9.7%.

Another key employment trend -- or other key employment trends that are supporting our residents' ability to stay in their apartments and pay rent is that when you think about the job losses that we lost at the beginning of the pandemic, there were 22 million jobs lost, 11 million have been added back. Of the jobs that have not been added back, 5.8 million are low-income workers making less than $46,000 a year and another group, 4.1 million of folks have not been added back that make between $46,000 and $71,000 a year. So the lion's share of the 11 million jobs that haven't been -- that have not been added back are really not our residents. They're lower-income workers that do not live at Camden. Most of our residents have higher income than that. And it's unfortunate that we have that many job losses, and we obviously need to add those jobs back as soon as possible, but they aren't negatively impacting Camden's resident base.

Again, I want to thank our Team Camden for delivering living excellence to all of our residents. And I'll turn the call over to Keith Oden, our Executive Vice Chairman.

Thanks, Ric. I'll keep my remarks brief today, so that we can get to as many of your questions as possible. Obviously, we're more than pleased with our results for the quarter. This is certainly the kind of performance that is worthy of celebration by Team Camden. Overall, things seem like they're getting back to something closer to normal, and that's quite a contrast to where we were in April and May of this year.

A few signs that conditions have stabilized in our markets. Occupancy for the third quarter was 95.6%, up from 95.2% in the second quarter. Several of our communities are actually exceeding their original budget for occupancy.

Turnover continues to be a tailwind at 48% for the third quarter and only 42% year-to-date. There continues to be a lot of anecdotal evidence that home sales are spiking. In our portfolio, we had 13.8% move-outs to purchase homes in the first quarter of this year. That moved up to 14.7% in the second quarter. And in the third quarter, it moved up again to 15.8%. But if you take the average year-to-date move-outs to purchase homes, it was 14.8% versus a full year 2019 of 14.6%. So really very little change year-over-year. We did see a little uptick in October to 18%, but Q4 is always a little bit elevated. Clearly, this is a stat that bears some watching to see if the anecdotal evidence starts showing up in the stats.

Thanks to all of Camden for a remarkable year so far. Everybody keep your rally caps on for the rest of the year, and I'll turn the call over to Alex Jessett.

Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activities. During the third quarter of 2020, we stabilized Camden North End I, a 441 unit, $99 million new development in Phoenix, Arizona, generating over a 7% stabilized yield. We completed construction on Camden Downtown, a 271 unit, $131 million new development in Houston. We recommenced construction on Camden Atlantic, a 269 unit, $100 million new development in Plantation, Florida. And we began construction on both Camden Tempe II, a 397 unit, $115 million new development in Tempe, Arizona; and Camden NoDA, a 387 unit, $105 million new development in Charlotte.

For the third quarter of 2020, effective new leases were down 2.4% and effective renewals were up 0.6% for a blended decline of 0.9%. Our October effective lease results indicate a 3.5% decline for new leases and a 2.1% growth for renewals, for a blended decrease of 1%.

Occupancy averaged 95.6% during the third quarter of 2020, and this was up from the 95.2% we both experienced in the second quarter of 2020 and that we anticipated for the third quarter of 2020, leading in part to our third quarter operating outperformance, which I will discuss later.

We continue to have great success in conducting alternative method property tours for prospective residents and retaining many of our existing residents with actually a slight acceleration in total leasing activity year-over-year. In the third quarter, we averaged 3,227 signed leases monthly in our same property portfolio, slightly ahead of the third quarter of 2019 when we averaged 3,104 signed leases. To date, October 2020 total signed leasing activity is on pace with October 2019.

Our third quarter collections far exceeded our expectations as we collected 99.4% of our scheduled rents with only 0.6% delinquent. This compares favorably to both the third quarter of 2019 when we collected 98.3% of our scheduled rents with a higher 1.7% delinquency and the second quarter of 2020 when we collected 97.7% of our scheduled rents with 1.1% of our residents in a deferred rent arrangement and 1.2% delinquent. The fourth quarter is off to a good start with 98.1% of our October 2020 scheduled rents collected.

Turning to bad debt. In accordance with GAAP, certain uncollected rent is recognized by us as income in the current month. We then evaluate this uncollected rent and establish what we believe to be an appropriate bad debt reserve, which serves as a corresponding offset to property revenues in the same period. When a resident moves out owing us money, we typically have previously reserved 100% of the amount owed as bad debt, and there will be no future impact to the income statement. We reevaluate our bad debt reserves monthly for collectibility.

Turning to financial results. Last night, we reported funds from operations for the third quarter of 2020 of $126.6 million or $1.25 per share, exceeding the midpoint of our prior guidance range by $0.08 per share. This $0.08 per share outperformance for the third quarter resulted primarily from approximately $0.055 in higher same-store revenue, comprised of $0.025 from lower-than-anticipated net bad debt due to the previously mentioned higher-than-anticipated collection levels and higher net reletting income; $0.01 from the higher-than-anticipated levels of occupancy and $0.02 from higher-than-anticipated other income, driven primarily from our higher-than-anticipated levels of leasing activity; approximately $0.005 in better-than-anticipated revenue results from our non-same-store and development communities; approximately $0.005 in lower overhead due to general cost control measures; and an approximate $0.015 gain related to the sale of our Chirp technology investment to a third party. This gain is recorded in Other Income.

We have updated our 2020 full year same-store revenue, expense and net operating income guidance based upon our year-to-date operating performance and our expectations for the fourth quarter. At the midpoint, we now anticipate full year 2020 same-store revenue to increase 1% and expenses to increase 3.4%, resulting in an anticipated 2020 same-store net operating income decline of 0.3%. The difference between our anticipated 3.4% full year total expense growth and our year-to-date total expense growth of 2.4% is primarily driven by the timing of current and prior year tax refunds and accruals. The increase to our original full year expense growth assumption of 3% is almost entirely driven by higher-than-anticipated property tax valuations in Houston. We now anticipate total same-store property taxes will increase by 4.7% in 2020 as compared to our original budget of 3%.

Last night, we also provided earnings guidance for the fourth quarter of 2020. We expect FFO per share for the fourth quarter to be within the range of $1.21 to $1.27. The midpoint of $1.24 is in line with our third quarter results after excluding the previously mentioned third quarter gain on sale of technology. Our normal third to fourth quarter seasonal declines in utility, repair and maintenance, unit turnover and personnel expenses are anticipated to be entirely offset by the timing of property tax refunds, lower net market rents and our normal seasonal reduction in occupancy and corresponding other income.

As of today, we have just under $1.4 billion of liquidity, comprised of approximately $450 million in cash and cash equivalents and no amounts outstanding underneath our $900 million unsecured credit facility.

At quarter end, we had $384 million left to spend over the next 3 years under our existing development pipeline, and we have no scheduled debt maturities until 2022.

Our current excess cash is invested with various banks, earning approximately 30 basis points.

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

(Operator Instructions) Our first question comes from Nick Yulico with Scotiabank.

This is Sumit Sharma here in for Nick. So the last quarter, you guys played the Doors and 2 quarters go it was a Led Zeppelin cover, so based on [tech sposes they match] And today's hold music, as you mentioned earlier, was the Eye of the Tiger. So I'm thinking you guys are feeling better. So it's kind of my obligation to ask you but what factors or risks could actually change your optimism looking ahead in terms of collections and market dynamics?

I think it's all about reopening the economy. And obviously, what would worry us today is 33 states spiking with coronavirus and certain -- we heard this morning on the news that El Paso was thinking about a shutdown. Ultimately, I don't think anything works in the economy, whether it's apartments or any other business, if you don't have employment and you don't have the economy working going forward. And so what would concern me would clearly be a, go back to a March, middle of March shutdown. And if that happens in America, then you know all bets are off again on everything, I think.

Yes. I would just add to that, that policy-driven mandates regarding the ability of landlords to control the destiny of their real estate similar to the CDC mandate, if you start seeing those types of mandates at the national level that continue to push out the ability for landlords to get control of their real estate through the eviction process. That needs to come to a positive ending in terms of allowing landlords to get control of their destiny and their real estate. So I would add that to Ric's point about getting the economy open again. So those 2 things will probably -- would be at the top of my list.

Great. And if you guys could sort of comment on Camden Downtown I in Houston. I know it's 39% leased. But it's in the market that you saw the largest year-over-year and sequential occupancy drop. So I'm just trying to understand whether newer apartments are easier to lease as we've heard from other markets? Or is there some other factors that could drive optimism for the project? I think you have Downtown II in the pipeline, so I know it's probably for a prospective start. But just wondering what could sort of change the equation on that particular asset.

Sure. Houston, I think, in general, I'm not going to talk about Houston, but I think most markets in America, maybe ex California, are -- most of our markets are experiencing supply and demand fundamentals the way they were pre pandemic. Now there's definitely a pandemic kind of overlay, but Houston was a soft market going into the pandemic. If you think about the energy business, in 2019, the energy business was not that great. I mean at the beginning of sort of third quarter of 2018, oil went from $70 a barrel to under $40 a barrel at the beginning of '19. And so energy wasn't really recovering. And then what was going on is you had -- Houston was kind of the only market in America in 2017 that had actually a decline in supply. So of course, what productive merchant builders do is they build their pipelines up, and Houston now has a lot of new development that's coming online. So what's driving the Houston market today is definitely some weakness because of coronavirus, but generally speaking, Houston has actually fared pretty well. We're down year-over-year, 5% in terms of job growth. We've lost 300,000 jobs and added about half of those back, which is pretty amazing. So we're at about 150,000 jobs lost. So I'm actually very encouraged by the Downtown lease-up because we're leasing about 7 to 10 units a month there, in a normal lease-up, you'd lease 30 units a month. But given that downtown office occupancy is about 15% right now, it's actually doing really well.

And I think there are a couple of pieces to that equation. And I think a lot of people forget that urban properties or downtown properties like in Houston or Atlanta or Dallas or Charlotte are not the same as downtown New York or San Francisco or mostly the Southern cities that are less dense than some of the challenges that are happening in San Francisco and New York, they're just not the same. And so the -- our urban is very different than urban in some of the other markets that people think about.

And so ultimately, our second phase is definitely there, but we're not going to start it anytime soon given the supply and demand pickup. I think Downtown will continue to be really good over a long period of time. We're definitely going to be challenged in terms of achieving our original pro forma on this project during the pandemic, as we would be with any property today that's in lease-up. With that said, I think it's -- the fact that it's 39% leased is really good. We did have a WhyHotel in there to start with and of course, given the pandemic, the WhyHotel doesn't make sense in a hospitality side of the equation today.

The next question will come from Alua Askarbek with Bank of America.

Congrats on a great quarter. So to start off, just thinking more about the leasing activity as well. Big picture, do you -- are you starting to see a slowdown in any particular markets or across the board in your Sunbelt markets as we head into the quieter months? Or do you still see a lot of demand, especially a lot more demand of movements from out of state and out of the area like the Northeast and West Coast?

Yes. We definitely are seeing in migration, but that's been going on for the last decade from Northern markets and from California to some of our markets. We're -- clearly, it's gotten -- it's ramped up during the pandemic. But that's a trend that's been in place for a long time.

In terms of overall traffic, our traffic numbers are down year-over-year low double digits, like 12% down, in total traffic. But the interesting thing is, is that the traffic that we do get is much more motivated. Our closing rates are higher. We've intentionally dialed back on some of our Internet spend because we just don't -- we're at 96 -- almost 96% occupied now. And the traffic that we do get is very motivated. So while traffic is down overall, we still see more than enough traffic to maintain our occupancy where it is right now. It's always going to slow down in the fourth quarter. We'll start seeing that as we get into -- particularly into the holiday season, traffic falls off. But that's okay with the way our portfolio is structured with our lack of leases that come -- that roll over during that period of time, we don't need that much traffic. So overall, I would say that the traffic feels pretty normal across our entire portfolio. The -- where we do have challenges are where, as Ric mentioned, we've got -- you just got a ton of new supply that's coming on. And so outside of -- so I would say, outside of Houston and maybe South Florida, all of the places where we experienced some weakness are related to supply that's coming on, in most of the last cycle the heaviest dose of supply was in the urban markets, in urban infill, and where we have communities that are directly affected by other merchant builder lease ups, that's where our challenge is.

Got it. And then just thinking about the renewal rates. So I see that rates are going up in October. Do you expect them to keep going up? And kind of like what are you guys thinking out in November and December for the renewals?

Yes. So we said when we voluntarily put renewal increases on hold for about 3 months, we felt like at some point, when we got back to normal traffic levels, normal operating conditions in terms of being able to take care of our residents and take care of our new customers, that we think we'll trend back to where we were pre COVID. We were -- pre COVID across the portfolio, we were in the 3.5% to 4.5% range on renewals. We think we're headed back there. And maybe it's in the first quarter of next year. But we think that we're headed back to more -- that more normal looking level of renewals. We're at a little better than 2% now. I would expect to see that continue to tick up as we just started back -- sending out renewals in all of our markets. And I think we had everyone back to kind of normal order in September. So I think that will continue to tick up, and we should get back to roughly where we were pre COVID.

Our next question will come from Nick Joseph with Citi.

I appreciate all the operating comments and it being close to normal. But just for those markets that do remain a little weak, what are you seeing in terms of concessions, either in your portfolio or the market on stabilized properties, so not on development but on stabilized properties?

Nick, we don't really -- other than in our development communities, which is that's just more of a historical norm for that where you offer a month free rent of a concession. We don't really do concessions in our portfolio. We're on net pricing, and we're driven completely by our YieldStar revenue management system. We have very few overrides to the recommendations within the YieldStar system. So I know it's become a -- the term effective rent has become much more prevalent because we do see our competitors going back to the use of concessions. I suspect even the competitors that are using YieldStar as their primary pricing mechanism, if you've got a -- if you're sort of in a panic mode and YieldStar is telling you to gradually toggle back rents, but you're at 85% occupancy, a lot of people just don't have the tolerance and the patience to let YieldStar, or any other revenue management system, make those decisions. So you end up with people who take the YieldStar recommendation and then do a month free rent. And that -- we definitely see that. There's no question about it, but it's just not something that we do, and it's not something that we are -- that we intend to do. So you're not going to see us start talking about effective rents. What we see -- what we show you as pricing is what our leases are being signed at.

And there is no disadvantage from a marketing perspective, if the property next door, even if on a net effective basis, you're at the same point, if someone sees kind of a month free rent or 2 months' free rent, you don't see any difference from a marketing perspective?

We don't. And the reason we don't is that our marketing teams are trained to sell features and benefits, and customers know what the net rent is, right? So if the market is down 2 months free, right, so that's a huge discount in the rent. And at the end of the day, you're just doing -- you're just creating a financing mechanism for the resident, right? They know what their effective rent is during their lease term, and you're just creating a mechanism for them to get upfront free rent. So if the overall market is 2 months free, then our effective rents are going to come down, but they're not. And so -- and it's kind of one-off. So we don't think of it as a negative competitive situation for us at all, and our people know how to sell through it.

It's just a fundamentally bad business practice in a world where people can move in and then sort of file a CDC declaration and then sort of get their rent deferred. If you start off with 2 months free and offering them that incentive to move into your community, you may end up with 2 months free and then a CDC declaration beyond that. It's just a bad business practice. And honestly, it's mostly merchant builders who are -- they're trying to get -- they open a community, and they're 30% occupied, and they're trying to get to the finish line, and they do what they have to do.

Our next question will come from Alexander Goldfarb with Piper Sandler.

Just following up on Nick's question, just so I'm clear, because a lot of your peers talked about at the extreme 2 months free and then sort of going from there. So across all your markets, including Southern Cal and D.C., it sounds like you guys really aren't -- either you're not seeing much free rent competition or whatever free rent is in the market just really isn't material or impactful to you. Is that the takeaway?

Yes. I wouldn't say it's not impactful. I would just say that it's factored into our YieldStar net pricing. Like Ric said, if you've got 6 communities in lease-ups that are directly competitive with you, and they're all giving 2 months' free rent, the market clearing price for our community, our rents is going to go down. And obviously, that's reflected, you see in some of these markets, in Southern California market. We've had our -- we've had to reduce our rental rates or YieldStar has recommended reducing rental rates across the board. But it's not -- I would say it's not meaningful in terms of the overall experience in our portfolio. If you think about -- Alex, if you think about the third quarter, we had -- of our 14 markets, we had 10 of those markets that actually had higher revenues than the third quarter of last year. Orlando was basically flat, and we had 2 that were down. So it's -- the overall picture in our portfolio is one of -- yes, it's not back to where it would have been had we not had COVID, but you got 11 of our markets, of our 14 markets, that actually have positive revenue year-over-year. And that's pretty good.

Okay. And then the second question is for Ric. We'll ask you the -- we'll make you the Chairman of the Sunbelt, Chairman of Texas and certainly goes, I think, with your Port of Houston Chairmanship. But this morning, CBRE announced that they're going to move from L.A. to Dallas, where, I guess, the CEO is from anyway. But just given the discrepancy in employment rebound between your markets versus the continued lockdowns and restrictions on the economies in the coastal blue states, are you guys hearing more business leaders talk increased chatter about relocating their companies to the Sunbelt, or are the trends that were already in place that were driving the businesses to move down there are the same, they haven't accelerated or -- because of what's happened with COVID fallout?

I think it's definitely accelerated. The trends have been in place for a long time. But there's definitely more chatter and more discussion about sort of these pro business markets. And when you look at a market like Houston, you've lost all these jobs, and then we've added half of them back. And in L.A., they've added 0 back. I mean, you look at Houston, even with energy, we're down 5% year-over-year in September in employment in Houston, which is big, right? But L.A. is down 9.7% and has added back 0 jobs. And so I think that the migration from some of these markets will continue. The long-term trends are in place, but I think people call COVID the great accelerator, right? Because what it's done is it's accelerated the notion of work from home, the notion of less commutes, the notion of virtual leasing. And we were talking about all that, and then all of a sudden, we had to like put it in place in a week. And I think that migration trends are going to continue and the great COVID acceleration is probably going to accelerate it.

Our next question will come from Austin Wurschmidt with KeyBanc.

So it sounds fair to say that even though, I think you mentioned occupancy is at 96%, you feel comfortable continuing to trend higher on renewals over time. You expect new lease pricing could remain under pressure because in order to remain competitive versus some of these lease-ups and stimulate traffic, you need to continue to offer kind of that negative roll down on the new leases. Is that fair? Or could we actually see it improve as well with the renewal rates?

Yes. Austin, that's fair in the markets where we have the most new construction that's being delivered this year and then bleeding over into 2021. So our challenges are almost entirely -- we've got -- the fundamentals are good, the employment is coming back, there's plenty of traffic, there's a lot of demand for the type of communities that we operate in the locations that we operate. However, in some of the markets, Houston would be an example, Dallas is an example, Charlotte is an example, our communities are located in places that are the most desirable places for merchant builders to build new product. So they get impacted directly by all the new construction that's going on. And unfortunately, in those 3 markets that I just mentioned, the construction levels -- or the deliveries of multifamily apartments in 2021 are roughly the same as they were this year. We're going to get another 20,000 apartments in Houston, we're going to get another 20,000 apartments in Dallas, we're going to get another 13,000 apartments in Charlotte. So the places that are impacted by new supply are going to continue to be under pressure. However, when you go to the Phoenixes of the world, Raleigh, Denver, Tampa, these are not markets that have been the subject of a lot of new supply, and they're going to continue to outperform for that reason. They've got good job growth, they have good fundamentals, they're great places to do business, they've got good in-migration patterns, and they just don't have a lot of new supply. So I think that's going to continue to be the bifurcation in our portfolio is the supply markets, that's probably going to continue into 2021. I think it's likely that we'll get a decent amount of relief in 2022, but we've got to get from here to there first.

That's helpful detail. And then I wanted to hit on the development starts. Can you just provide some of the economics underlying the deals on the new starts? What you're assuming in terms of trended rents, et cetera?

Sure. Our new starts, if they're urban, the projected yields, stabilized yields are between 5% and 5.5%, and our suburbans are 6% to 6.5%. We -- generally what we do is we do untrended rents to -- as a hurdle to start with, and then we put in what we think the rents might do over a period of time. And our stabilized [years] do use a trended rent. And today, it's interesting depending on the market, we have rents going down and then going back up. And if you look at depending on the market, and this gets to Keith's point on where the supply side of the equation is, the markets, some markets, we think, are going to be back to 2019 rent levels by second quarter -- first to second quarter of 2022 or 2021, and other markets are going to take longer. And so our trending, definitely, we have been more conservative in how we think rents are going to grow over the future. But those are the yields and sort of the way we model these developments.

Our next question comes from Rich Hightower with Evercore.

I guess to follow up on the idea that COVID is accelerating trends that were underway already. Just to dig into this uptick in move-outs for home purchase statistic. I know that you said the year-to-date average is pretty stable year-over-year, but maybe more recently, you're seeing an uptick there. So what -- as best you can tell, what would you attribute it to? Is it COVID per se causing those moves? Or is it sort of the demographic tailwind that should help home ownership over the next 5, 10 years and COVID's just accelerating that? It's been a long time since we've seen home sales this strong in this country. You'd have to go back to the, I think, early to mid-2000s. So the template that we're operating from probably doesn't help much. So what do you guys think about that? And what should we expect?

I do think it's COVID accelerating, absolutely. So if you think about the oldest of the millennials, right, the oldest millennials are in their mid-30s. And what they're doing now is they're starting to form households. I have -- my 2 daughters are 36 and 38, and they're having their third children right now, okay? And so they're classic millennials. And if they were living in apartments, they would be buying houses, right? And so I think that -- and we always expected the older -- oldest of the millennials to buy houses at some point. And actually, it's a really good thing for America because when you have good housing demand, moving out to buy a house doesn't ultimately hurt apartments because what happens is you have a better economy, people are building houses, and there's lots of products being put in those houses, and it's good for the economy overall. And a lot of the workers that actually build the houses live in apartments. And so with that said, I think it's definitely accelerated by COVID. I think the historically low interest rates are part of the equation as well. And one of the things, I think, is actually really fascinating, too, is, if you look at the savings rate between the start of COVID and where it is today, people aren't spending money on stuff, and they're saving their money. And so you have people who didn't have enough money for down payments and what have you, now that actually do because of COVID because they've saved a lot of money by not going out to restaurants and to football games and vacations and things like that. I don't think it's -- that you're going to go to a 25% move-out rate like we had during the -- you could "fog a mirror, get a loan" days, but it is a rational thing to happen at this point.

One of the challenges that you have, and there's -- I've had some questions when we have -- after Labor Day, we've had lots and lots of calls with shareholders and potential shareholders. And a lot of the discussion is, are you going to have massive move-outs from the urbans to the suburbans and from millennials buying houses. And the interesting thing is that the answer is no, because there's no place for them to go. If you look at housing inventory in Houston, Texas, right, one of the softest markets we have because of energy and overbuilding, we have a 2-month supply of housing in Houston. And so even if we -- if you had a 20% move-out rate for apartments, you can't because there's no place for them to go. There's no inventory. And there's no place for an urban dweller to go to the suburbs because the suburbs are all full, too. So if this is a long-term trend, maybe over the next 15 years it could happen, but I don't think so. I think that once COVID is over, you'll have -- people still want to go to bars. That's one of the challenges we have right now in the spikes, right? People are getting COVID -- tired of COVID, and they're just putting -- they're going out and doing things socially, and I think that will continue in the future. So I'm not too worried about the homeownership rate ticking up. I actually think it's a good thing overall.

Our next question will come from Neil Malkin with Capital One Securities.

I know Los Angeles/Orange County are some of your tougher markets, but don't worry. I'm sure miraculously they will all open up November 4. First question, with technology that you guys have employed just with the mobile apps and leaned on more heavily because of COVID in terms of how people are leasing and viewing your apartment homes, are there things that maybe you can talk about today that you think that you can bring forward with you when COVID is behind us to sort of gain more efficiency, maybe increase a long-term margin that isn't maybe like onetime in nature?

Absolutely. As we talked about, COVID really has been the great accelerator. And ultimately, when we look at our ability to open up locks now on a remote basis, when we look at our mobile applications that we're using for maintenance-type work, et cetera, when we're looking at virtual leases, I think all of these things are going to ultimately end up making us so much more efficient than we ever would have been if it wasn't for COVID. To the point that was made earlier, a lot of these things we had talked about for a year or 2, and we probably thought it was 3 years on the horizon. And miraculously, all of a sudden, it became 1 month on the horizon. So I think we've had some really, really great efficiencies. And I will tell you that I do think the mobile application to open up door locks in common area space is going to be an absolute game changer for not just Camden, but for the industry.

I appreciate that. And maybe just going back to one of Austin's question on development or maybe as a whole, I guess, transaction markets in that context. You obviously started 3 projects. I don't want to call out the end what your completion schedule looks like for your current pipeline. But what's your comfort in accelerating the development, just given the -- what looks like to be a favorable 2022 for deliveries? And then how does that -- I guess what does the transaction market look like from a disposition standpoint just given very favorable pricing with high demand and low interest rates?

So for development, we would like to -- we think the development markets can be very good in 2022, 2023, and we're going to try to do as much as we can. It's not easy to get the right numbers and the right -- you still when you have construction costs continuing to rise, maybe at a lower rate because of COVID, but it's still -- construction costs have not come down. And so it's still difficult to get the right -- the numbers to work well, but we definitely have a pipeline, and we'll continue to try to add to that pipeline because I think that's one of the -- if you're going to deploy capital, development is definitely the #1 place for us at this point.

In terms of the acquisition and disposition market, so transactions are about 1/3 of what they were last year through the end of October. And so clearly, transaction volumes down big time. But what is trading is trading at all-time high prices and low cap rates. So cap rates have come in dramatically since COVID. And I will tell you that we have not seen an acquisition opportunity that has a 4 in the cap rate. They're all 3s and some change. And we're talking Houston, Dallas, Austin, Denver, Tampa, Orlando, everywhere. And so with that said, you have -- so we're not -- the acquisition is really tough when you start with a 3. And so people have obviously lowered their IRR hurdles and then with interest rates as low as they are, most leveraged buyers are even with a, say, a 3.75 cap rate, they're still able with positive leverage to get very nice cash-on-cash returns relative to alternatives out there.

So from a disposition perspective, clearly it's an interesting environment. I still think that we need a little more market clearing, a little more sort of what's going to happen between now and sort of first quarter. If you look at what Camden did in the last big cycle, we sold $3 billion worth of assets that were 23 years old or more. And then we bought assets that were 4 years old. And a unique situation then was we could -- we sold at cap rates that were very close to the cap rates that we bought at. And you could -- if that continues to -- if that opportunity continues, we may do some of that in the future as well. But it's definitely a tough acquisition market, probably a very positive disposition market, but development's where we're focused on right now.

Our next question will come from Rob Stevenson with Janney.

Ric, can you just expand on your comments there about construction costs? I mean there's been a spike in lumber cost. What are you seeing in labor and other materials cost? And how much higher was your construction cost on the projects you started in the quarter relative to if you had started them pre-pandemic, if at all?

So I think that clearly, the COVID has increased cost because of time and general conditions. For example, in a -- we have a property in -- that we're building in downtown Orlando. And the challenge you have with COVID is you have to do all the proper PPE and the proper distancing. We have 1-way stairwells, and we have to keep our employees and our construction workers safe, and we're all about that. But it just makes the project go slower. And the challenges, it's sort of a manufacturing process. And as you slow it down, your general conditions go up. And we haven't had big cost spikes. Mostly, it's just been delays and increases in general conditions and those kinds of things. I think that labor is a little more difficult today in terms of -- because of the timing of projects getting completed, and costs are not -- are definitely not going down. And one of the challenges, I think, that everyone is having today is -- and I think this is an interesting situation is that most supplies, for example, getting the right equipment and supplies to the properties is starting to be an issue and primarily because people sort of -- their inventories are way down, and they're having to restock inventories today. And that inventory restock has been a real -- has been a challenge. And so I would say that prices today are 2% to 3% higher than we saw on our last starts, but that's actually good because it used to be 7% or maybe 4% to 8% higher. So the good news is, is that the rate of growth has come down, but it hasn't come down enough to improve your yields and what have you. That's why numbers are still hard to make.

And Rob, I would just add that -- and I think you mentioned it in your question. The 1 area that we have had definite challenges, and my guess is, is that everything we look at indicates it's going to continue to be a problem, is lumber. We've definitely had a spike in lumber costs. The -- and as the single-family home construction market ramps up, which it's in the process of doing right now, big time. Just in response to the -- what is out there in demand for new housing. As that ramps up, it's a wood product, and there's going to be a lot more pressure on lumber as we go forward. So that's the one area probably as opposed to Ric's overall commentary on costs that we are really looking at hard for trying to figure out ways to manage our lumber package costs.

Okay. And then, Keith, any markets that you see as showing incremental weakness in September, October, that's more than just seasonally? And then also, how many residents would be on your evict list today that you can't do given the pandemic restrictions?

Well, we have -- it's not a big number. The -- for the CDC mandate, we think we have about 110 residents throughout our entire 60,000 apartments that are -- have given us a CDC mandate. Evictions pending, it's less than 200 to 300 in the -- systemwide. And some of those actually predated COVID, and we're working through those because most jurisdictions have not had allowed us to go back to the people who were already in default status prior to COVID and work that through the process. So in most of our markets with the exception of California, which has its own set of rules and restrictions, most of our other markets are back to regular order in terms of processing evictions. It's just not a huge deal in our world outside of California. Obviously, in California, you've got a different set of factors there that kind of frustrate our ability to work through the process. And I don't -- it's been a rolling extension of all those protections for the residents and who knows when they're -- we're going to see the end of that. But big picture, it's a small, very small component of our overall challenges.

We probably have in a non-COVID environment, 50 to 70 evictions system-wide monthly. So if you just do an average for the year, it's maybe 600, 700 people being evicted out of 56,000 apartments. And so it's a really miniscule number. The biggest issue are these high-balance delinquencies in California. And it's not that they can't pay us, they won't pay. And that's the moral hazard you have there. It's fascinating to me to see that we have -- today, we have an 8.6% delinquency rate in L.A., and we have a 0.4% delinquency rate in Houston. And the difference between the 2 is moral hazard. Period.

Okay. And then any markets showing incremental weakness in September, October more than just seasonal?

No, no.

Our next question will come from Amanda Sweitzer with Baird.

Great. Good morning. Can you guys talk about what you're seeing today in terms of construction financing? Have you seen any other lenders or debt funds kind of come in and fill the gap from national lenders pulling back? And then just how have development loan terms changed from pre COVID both in terms of interest rate spreads and then LTVs?

Sure, yes. So there definitely have been pullbacks from money center banks on development. And the debt funds are not coming in to fill the gap. But what's happened is smaller regional banks are definitely coming in to fill some of the gap. The biggest issue is that early on, I think Ron Witten had construction starts falling by 50% in his original projections and that was driven by the debt capital -- the debt markets being under pressure because of COVID. And then now I think he's seeing -- believes that it's going to be down by instead of 50%, maybe 30%. And it is definitely driven by debt. The biggest challenge that merchant builders are having is that banks do not want to syndicate. And so getting loans over $50 million is troublesome and getting a loan over $100 million is very difficult. So properties in California and other big urban developments are definitely having a real hard time getting financing. I think that spreads have stayed reasonably tight. And with interest rates falling the way they have, I think there's been -- I've seen some folks talk about floors in their construction loans because -- just because rates are at all-time lows, the lenders need a reasonable minimum interest rate or minimum spread, I guess. So there are those getting put in place. But the biggest issue is the loan amount. And I think that's where the challenge is because it's requiring a whole lot more equity. And there are some debt funds that are coming in and bridging that equity with mezz financing, but that's generally the construction market as I see it.

Our next question will come from John Kim with BMO Capital.

I was wondering if you could provide some more color on cap rates you're seeing in the 3s. Are these more stabilized assets and the true cap rates? Or are they assets with potentially some lease-up potential and the stabilized yields [would] be higher?

They are stabilized cap rates. And oftentimes, the -- and the challenge we have when we start underwriting those is that they're stabilized full -- they're 93%, 94% occupied, but they are -- there's a tremendous number of new developments around them leasing up. And so the question that I have, when we look at a 3.75, 94% occupied project with 2,000 units leasing up around it, is how can you actually hold that cap rate. It's likely to be -- to go down before it goes up, given the competition. And so these cap rates are very sticky today because of the -- just the wall of capital and the very, very, very cheap financing. You can get a Freddie, Fannie loan, very decent leverage at 2 and some change for 7 to 10 years. And if you're a floater, you can get a floating rate debt for under 2, right? And so it's -- that's going to keep the private market very, very buoyant. And when you think about fundamentals, post COVID, the multifamily market is going to come back. And most people believe that we'll be back to 2019 or early 2020 rents by 2022.

Okay. And then, Alex, you mentioned that you sold the Chirp technology to a third party. Just wondering why you chose to sell this platform. And I'm assuming it doesn't impact the rollout across your portfolio, but just wanted to make sure that was the case.

No. Yes, it does not impact our rollout across the portfolio at all. And we anticipate being fully rolled out by the end of 2021. Ultimately, we came up with Chirp because there was a need that we needed to solve, and there was nobody else in the industry that was solving that. And so we spun it up, but we always knew that ultimately it needed to belong to somebody else that could run with it and could market it to third parties, et cetera. And so we found a very natural buyer that we think is a great fit with us. And so we consummated the transaction. But we are still very, very much involved. And as I said, right now, we've probably got a little bit over 50% of our communities have the gateway aspect rolled out, and that's what opens up the sort of the exterior doors, and we've got about 5,000 units signed up with the locks.

May I ask who the buyer was?

Yes, it was Real Page.

Our next question will come from Zach Silverberg with Mizuho.

As you've discussed, migration trends have been certainly in your favor here for the past couple of years, and COVID will certainly provide an easier year over comp in 2021. But with occupancy and retention, you're all-time highs, home sales and supply picking up in some corners of your market. Putting it all together, which cities or markets do you feel best or most worried about into 2021?

Yes. I think that the -- we're just starting the process of putting together our property level budgets for 2021. And my guess is, is that the markets right now where we have the most momentum on new lease rates and renewal rates will probably continue. And I think that some of the markets that have -- continue to have supply challenges in 2021 are going to be under pressure. And I mentioned those earlier, Houston, Dallas, Charlotte, have, going to continue to have supply pressure. We're having great success in Phoenix, Denver, Raleigh, Tampa. And my guess is, is that those will start out at the -- probably at the top of the deck in 2021.

One of the things I think is going to be really interesting is to see the unwinding of the 18- to 29-year olds that have moved home with their parents. And that should be a tailwind post COVID. When you look at -- prior to COVID, and this is a big number, and it always hurts my head to think about this because I have some kids moving home. So pre COVID, we had 39% of 18- to 29-year-olds who lived at home. It spiked to 30% to 46% in the middle of COVID, and now it's about down to 42% by the end of the third quarter. So one of the positives for us is we've had some of that demand released. There's still over 1 million sort of missing millennials that are doubled up or at home. And once COVID breaks and job gains come back, those high propensity renters will come back into the market, and I think more than offset people moving out to buy houses.

Got it. Appreciate the color. And I guess as a follow-up to an earlier comment or question. I was wondering if you could provide any more color as to the product type or geography where bad debt has run a little bit higher? And has your average credit profile tenants changed throughout the pandemic?

So bad debts or delinquencies, if you want to call them that, are highest in California, for sure. And that's primarily, as Keith mentioned, driven by policy there, AB 3088 and what have you, it's just a policy there. The other market would be South Florida. South Florida is very tourist-driven and obviously South America-travel driven. And we've seen maybe 100 to 200 basis points higher there than the rest of the markets. But most of the markets are pretty much in a normal kind of state, including Orlando for a -- given the situation in Orlando, where you have the same kind of 9% job losses there.

In terms of credit quality, absolutely not. The credit quality is one of the most important things that we keep high because you could -- we could easily increase our occupancy by 150 basis points if we dropped our credit quality. But what would happen is that you would end up with more bad debts and more evictions and more skips. And it would just be -- there's just no upside ever in lowering your credit quality.

And we are seeing no difference in delinquency from Class As to Class Bs or urban to suburban. Delinquency is the same across the board.

Our next question will come from Alexander Kalmus with Zelman associates.

Just circling back on the point regarding demographics. When you think about your portfolio today in the mix of 1, 2, 3 bedrooms that you have, do you think you're accounting for the growing cohort? Are you properly positioned for those growing families? Or would you like to see more 3 bedrooms in the future?

If you look at our 3-bedroom components, we have about 6% of our portfolio is 3 bedrooms. And I bet if you took our 3 bedrooms compared to our 1 bedrooms our move-out rate to buy houses would be substantially higher in our 3 bedrooms than our 1 bedrooms. So we have always generally catered to single people or people with 1 or 2 people in the apartment and not to families, because they have a higher propensity to move out to buy houses and/or to rent houses. In addition, families just require more stuff, more amenities and things like that. We have a property, for example, in Denver, that is all 2s and 3 bedrooms and not very many 1 bedrooms. And it's a great family property, but it has a higher turnover rate and higher move-out rate to buy and rent a house than any of our other properties in Denver. So it's not a market that we -- that we are catering to or will cater to in the future.

Got it. Makes sense. And just looking at utilities expenses, they weren't that inflationary from last year. So do you have a sense on going back to work in your markets? How many of your tenants are working from home versus going back? Some of your peers had much higher utility increases given the usage on the apartment.

Yes. What I will tell you, if you look at utility expense, there was not a significant increase. But if you look at utility rebilling, which is probably a better way of thinking of it, there was a large increase. So we do believe that we've got a lot of our residents are at home, utilizing a lot more water than they -- and trash than they typically would. So we think we've got a great deal of our residents are, in fact, working from home.

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

Thank you, and thanks for being on the call today. We will, I'm sure, talk to a lot of you at NAREIT here coming up soon. So thank you, and we'll see you later. Have a great weekend and stay safe.

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