Camden Property Trust (CPT) 2014 Q3 法說會逐字稿

Good day, and welcome to the Camden Property Trust third-quarter 2014 earnings 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 2014 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 2014 earnings release is available in the Investor Relations 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. As you all know, our call is the third of five back-to-back apartment calls today, so we will try to be brief in our prepared remarks and complete the call within an hour.

(Caller instructions)

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

Good morning. Our team has produced another quarter that was all treats and no tricks. Strong employment growth across our markets continue to outpace the spooky multifamily supply. Dispositions are on track to deliver devilishly low AFFO cap rates, and our development pipeline is producing frighteningly high value creation.

Apartment demand continues to exceed new deliveries, keeping rental rate growth above long-term trends and occupancy high. Over the last three years, we have taken advantage of the historically tight spreads between newer and lower cap rate properties and -- CapEx properties and older high CapEx properties.

We have sold nearly $1 billion in assets, average age 26 years old, and we have acquired about $1.3 billion of properties with an average age of 12 years. These transactions were completed at a positive spread to AFFO of 15 basis points. I'm not sure I've seen that kind of spread in my business career. This environment is pretty amazing when you can do that.

We have quietly turned over one-third of our portfolio, improving the quality, the age, lowering CapEx, and improving rent per door. The rent per door at the beginning of our capital recycling program in 2010 was $950 per door, and now it is nearly $1,300 per door. Two-thirds of the increase came from market improvements and one-third from capital recycling. We will continue our capital recycling to improve the quality of our portfolio going forward. Our portfolio is well positioned for continued above-trend growth for the foreseeable future.

I will turn the call over to Keith Oden, our president.

Thanks Rick. Our third-quarter results were solid and they were in line with expectations.

Comparing revenue growth to the third quarter to our original market-by-market rankings that we provided earlier this year shows a high degree of correlation, and we expect to see more of the same through the end of the year. After three incredibly strong years of NOI growth, our operating teams are on track to deliver 4.9% same-store NOI growth, which represents a 65-basis point beat to our original NOI guidance for full year.

Our same-store revenue growth remains strong at 4.6%, up slightly from 4.5% last quarter. Sequentially revenues rose by 1.8% versus 1.6% in the second quarter. And our top performers for the quarter were Atlanta up 8.7%, Austin up 7.9%, Phoenix up 7.6%, Denver up 6.8%, and Houston up 6.4%. DC metro managed to remain in positive territory at 1.2% revenue for the quarter versus 0.9% revenue growth year-to-date.

During the third quarter, new leases were up 3.6% and renewals were up 6.8% as compared to 1.3% and 6.6% for the third quarter of last year. October new leases were up 2% and renewals are up 7%, and that compares very favorably to last October which had new leases up 0.2% and renewals up 5.5%. November and December renewals are being sent out between 5.5% and 6%.

Our occupancy rate averaged 96.1% for the third quarter, up from 95.7% in the second quarter and 95.3% last year. We currently stand at 95.8% occupied, up slightly over fourth quarter average of last year's 95.7%. Our net turnover percentage for the third quarter was 62.3%, which was well below the 69.5% rate from the prior-year quarter.

Fewer of our residents purchased homes during the quarter, as move-outs to purchase homes fell to 13.9% versus 14.6% in the second quarter. And we continue to see move-outs to home purchases well below our historical average of 18%. Recent talk of loosening lending standards has caused concern of an increase of in move-outs to purchase homes. It's something we'll continue to monitor closely. Our view is that non-financial reasons are a larger influence on the home purchase decision.

Our residents' financial condition is as strong as it's ever been. Despite the average rental rate increases Ric described, the percentage of rent to household income declined again this quarter to 17.1%, which is as low as it has ever been in our portfolio. There's plenty of evidence that our key rental demographic of 25- to 34-year-olds are delaying their decision to get married and start families, a historically dominant reason to purchase a home. In year five of this recovery, the increased propensity to rent is feeling more secular than cyclical in nature.

A big thank you to our entire Camden team for another excellent quarter. Now let's finish the year strong. Here's wishing everyone a happy, fun, and most of all safe Halloween.

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

Thanks, Keith. Last night we reported funds from operation for the third quarter of 2014 of $98.7 million, or $1.09 per share, representing approximately $3 million, or $0.03 per share out-performance to the midpoint of prior guidance range. This out-performance resulted primarily from $1.8 million of gain on sale of land, $750,000 in less than anticipated interest expense, and $450,000 in higher than anticipated property net operating income.

The $750,000 positive variance for interest expense resulted primarily from the timing and interest rate of our $250 million 3.5% 10-year senior unsecured note that we closed on September 10, approximately one month later than we had anticipated. The $450,000 in higher than anticipated property net operating income resulted from higher rental revenues at both our same-store communities and our stabilized 2013 and 2014 acquisitions and development communities which are not yet included in same-store results.

Regarding our development pipeline, during the quarter we reached stabilization at two joint venture communities. Camden South Capital, a $78 million development in Washington, DC and Camden Waterford Lakes, a $38 million development in Orlando, Florida. Also during the quarter we began leasing at two wholly owned communities, Camden Boca Raton in Boca Raton, Florida and Camden Foothills in Scottsdale, Arizona. And finally, during the third quarter we completed and stabilized a 75-unit subsequent phase at our Camden Miramar student housing community in Corpus Christi, Texas.

We are continuing the marketing process for approximately $300 million of wholly owned dispositions that we anticipate closing late this quarter. The pool is made up of seven communities located in North Carolina, Florida, Georgia, and Texas with just under 3,000 total units. The average age of the portfolio is 29 years, and our hold period will be just over 17 years. Our anticipated disposition yield is in the high 5% range, but due to the capital-intensive nature of these older communities, their AFFO disposition yield should be just under 5%.

This week we completed the acquisition of Camden Fourth Ward, a $63 million 276-unit community located in the old Fourth Ward neighborhood of Atlanta's midtown downtown sub-market. This community was completed in October of 2014 and was purchased at approximately a 5% yield.

Portfolio operating performance continues to be strong, as same-store revenues increased 4.6% in both the third quarter and year-to-date. These increases were driven primarily by increased rental rates and improved occupancy. Each of our markets registered positive sequential revenue growth in the third quarter. Occupancy for our same-store portfolio averaged 96.1% for the third quarter of 2014, 80 basis points higher than the third quarter of 2013.

As we had anticipated, this improved occupancy created additional pricing power in our peak leasing season. We are currently 95.1% occupied, which should result in higher than anticipated revenue in the fourth quarter. As a result, we have revised upwards and tightened our 2014 full-year revenue and NOI guidance.

We now anticipate full-year 2014 same-store revenue growth to be between 4.4% and 4.6%, expense growth to be between 3.6 and 4%, and NOI growth to be between 4.75% and 5.05%. As compared to our prior guidance ranges, our revised revenue midpoint of 4.5% represents a 20-basis-point improvement, and our revised NOI midpoint of 4.9% represents a 15-basis-point improvement.

We are increasing our expense midpoint by 10 basis points as a result of higher than anticipated levels of self-insured employee healthcare charges. As a reminder, our expense growth comparisons continue to be challenging in the fourth quarter.

We have also revised our full-year 2014 FFO per share outlook. We now anticipate 2014 FFO per share to be in the range of $4.27 to $4.31 versus our prior range of $4.20 to $4.30, representing a $0.04 per share increase to the midpoint.

The primary components of this $0.04 per share increase are as follows. First, the $0.03 in out-performance recognized in the third quarter. And second, $0.01 in higher same-store NOI growth in the fourth quarter related to our increase in same-store guidance.

Our revised full-year 2014 FFO guidance is based on the following transactional assumptions for the fourth quarter. Approximately $150 million in new on-balance sheet development starts, and approximately $300 million in additional dispositions with no additional acquisitions.

Last night we also provided earnings guidance for the fourth quarter of 2014. We expect FFO per share for the fourth quarter to be within the range of $1.08 to $1.12. The midpoint of $1.10 represents a $0.03 per share core increase from the third quarter of 2014, after excluding the third-quarter gain on sale of land.

This $0.03 per share core increase is primarily the result of the following. A $0.05 per share increase in FFO due to growth in property net operating income comprised of a $0.03 per share increase resulting from an approximate 2% expected sequential increase in same-store NOI, driven primarily by our normal third- to fourth-quarter seasonal decline in utility, repair and maintenance, unit turnover, and personnel expenses.

A $0.02 per share increase resulting from NOI contribution from our eight developments and lease-up. A $0.02 per share increase resulting from the normal third- to fourth-quarter seasonal increase in revenue from our Camden Miramar student housing community. And a $0.02 per share decrease due to our net acquisition and disposition activities, as the contribution from our $63 million recently completed acquisition will be more than offset by the impact of the approximately $300 million of dispositions in the fourth quarter.

This $0.05 per share increase in FFO resulting from growth in property net operating income is being partially offset by a $0.02 per share decrease in FFO as a result of our third quarter capital markets activity. Regarding the capital markets, based on our 2014 estimated development spend plus debt maturities, we required approximately $535 million of new capital for the year.

Net disposition activity is now anticipated to provide $235 million. Of the remaining $300 million needed, $250 million came from our third-quarter 3.5% coupon bond transaction, and the remaining $50 million came from third-quarter ATM activity. Of our 2014 capital needs, less than 10% has been funded year to date through ATM activity.

Our current ATM program has $31 million in remaining availability, and was filed under a shelf which will expire on November 9. As a matter of corporate practice, we intend to keep an active ATM program on file. Therefore, we plan to add the remaining $31 million to a new ATM which we will file next week.

At the end of the third quarter, we had no outstanding balances under our $500 million line of credit, and we had approximately $66 million of cash on hand. Our balance sheet remains one of the strongest in the REIT sector, with debt-to-EBITDA in the mid 5 times, a fixed charge expense coverage ratio of 5 times, approximately 75% of our assets unencumbered, and 92% of our debt at fixed rates.

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

Thank you.

(Operator Instructions)

Our first question comes today from Nick Joseph with Citigroup.

Thanks. Wondering if you can touch on Houston and expectations going forward, especially if the price of oil remains below where we've seen it in the past?

Absolutely. We've definitely been getting a lot of questions about that. I think it's interesting, the energy executives that I talk to, and I talk to them a lot, their view is that it is actually a good thing for now because what was happening was the industry was just white hot and people were getting out of control, sort of a bubble, if you will, in the shale plays and what have you.

You think about Houston specifically, beginning of the year 2014 most folks thought we would have 70,000, 75,000 jobs. And that would be a -- that was a decline from the previous year, which was over 100,000.

Just to put it in perspective, Houston has added 100,000 jobs a year for the last four years running. The year-over-year numbers for September were 119,000 jobs created in Houston.

In Texas in general, over 50% of all the jobs created since the downturn had been created in Texas. Not necessarily because of high oil prices, but just because of great business environment, all the things that create jobs. Low taxes, great work environment, that kind of thing.

So when you think about oil prices today, what it will do is it will shake out the highly leveraged smaller companies, but the big companies like Chevron and Exxon and others are sort of rethinking their development plans, but -- for 2015, but it's not a big sort of a knee-jerk reaction. So on the one hand, the white hot oil business will probably slow.

On the other hand, that's good. What we have going on in Texas is a shortage of workers, massive traffic issues, and so that's putting pressure on all of the workforce from a construction perspective, and even within our corporate ranks.

Low oil prices aren't necessarily bad for Texas, and especially Houston and the Gulf Coast, primarily because of the petrochemical business, because obviously lower oil prices mean lower feedstock prices for the petrochemical business. There's over $10 billion of petrochemical plants under construction along the Gulf Coast right now, and a lower feedstock means that their profit margins expand. When you look at lower energy costs overall for the country, and for Texas included, I read a report this week that said there was $129 billion of excess cash for people to spend at Christmas this year because of gas prices being under $3 a gallon.

So on the one hand they may not drill as much, but on the other hand, the benefits from low energy costs, both in the manufacturing area and in the petrochemical business is a boom for those businesses. So we don't think it is going to be a major hit or anything like that. And the oil pricing, it is very different than it was in the past.

Probably in the 1980s they used to talk about oil, the price of oil being a huge contributor to employment. Here it's just a different animal today because of all the sort of benefits that low oil prices create for consumers and for the petrochemical business.

I think Chevron actually announced their earnings this morning, and they beat the Street. Most people thought they were going to be below because oil prices, and they -- and I believe ExxonMobil also reported this morning, had the same beat.

And they beat because of their downstream businesses and their refining and their petrochemical businesses. While their sale of crude went down, it was more than offset by the increase in their downstream production.

Thanks for all that detail. And then I guess, I recognize it was a modest amount, but what are your thoughts around issuing ATM equity below consensus NAV versus using other capital sources?

Well, the -- so we announced at the beginning of the year that we had $500 million worth of -- plus or minus, of capital requirements. And when you look at the components of that capital, it was $0.25 billion in bonds, $200 million of dispositions net, and then $50 million of ATM. And when you look at the component of the capital, we look at our weighted average cost of capital based on our sort of model balance sheet.

And when you look at the weighted average cost of capital and you include a small portion of common stock into that weighted average cost of capital, it doesn't change it very much, as long as you're using a small portion of it. When we're making investments that have 200 to 300 basis point positive spreads to our weighted average cost of capital, we look at it as a reasonable thing to do, as long as it is not a huge portion of the capital pie.

Thanks.

The next question comes from Jana Galan with Bank of America.

Hi, thank you. Alex, I just wanted to clarify on the FFO guidance, did that already include the land sale gain?

The FFO guidance for the fourth quarter or the third quarter?

The third quarter and year end.

Yes. So the year-end guidance that I just gave includes the land sale gain that occurred in the third quarter.

Was that anticipated?

No, it was not anticipated. No, it was not. And so when we -- when I walk through the components of the beat, that was the first component, which was the $1.8 million positive from the gain on sale of land, which was not in the original third-quarter guidance.

Okay, great. And then just, I was wondering if you can comment on Washington, DC? It looks like it's showing a bit of improvement, maybe for your properties specifically?

Yes, I think most people have continued to report negative revenue growth in DC, and we've been able to kind of hang on to this very modest amount of growth, 1.2% for the quarter. We were up right at 1% for the year.

We were basically up a tiny amount last year. I think most other people's numbers have been quite a bit more negative than that. A lot of it has to do with the composition of our portfolio.

We have a good mix of assets, both in the District and then in the outlying suburban areas that have held up a little better. They're exposed to a little bit less of the new supply competition. The bottom line is, it continues to be the worst performing market in our portfolio for 2014, which it also was in 2013.

We hope that that shifts in 2015, but we're in the middle of doing our sort of bottom-up budget roll-ups, and we'll see where that comes out. But yes, I think it's our teams have done a great job of managing to maintain some positive revenue growth in what has been a very difficult environment.

Thank you.

You bet.

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

Good morning. Two questions. First, on occupancy. I think historically you guys have been sort of in the 94% to 95% range, and now you're just over 96%. So is this sort of the new Camden, and going forward we should expect that you guys are going to try to do the 96% to 97%, the way Essex does? Or do you think that it will go back to the 94% to 95%?

Alex, this is certainly not a new -- any particular shift in our strategy to operate at a much higher occupancy. I think over the long term you can still expect to see us operate around the 95% mark, and maybe slightly above that. The one thing that we specifically did that has helped our occupancy rate in the third quarter, and it looks like it is going to continue into the fourth quarter, where it showed up in our metrics was in the turnover rate.

So in the turnover rate for the third quarter was actually down about 6% from where it was at this time last year. And that was a specific initiative that we undertook to take some of the pressure off the renewal increases.

We did things like capping the renewal increases at a 15% maximum and some other things. But all of that combined to lower out turnover rate for the quarter. And obviously that kind of flows through naturally to your occupancy rate.

No, it is not a shift in strategy. It is just more of a shift in tactics, given where we were last year at this time. We were operating at pretty high occupancies then as well. I think it's, from our perspective it sets us up pretty well going into the fourth quarter, which is historically our weakest traffic quarter. And we just wanted to maintain as much cushion as we could.

Second question, and maybe this fits with Halloween and scary, ghoulish thoughts. Ric, you're the sort of resident [reland] expert on Fannie/Freddie. Last time we had 3% down payments it didn't end well. Now for some reason they think it's going to work better this time.

One, your thoughts on, do Fannie/Freddie really believe, or does Watt really think that this is going to work differently? Two, given the torture that the banks have gone through in getting completely hosed this past go-around, why would banks participate in this next go-around?

I think that clearly they're trying to stimulate housing. I actually think that's a good thing for the economy overall. And I know people generally think that multifamily don't like single family and they don't want their people to move out.

But actually I would rather see a robust housing market that has 1 million single family houses built a year and go back to a more normalized housing market, because you don't have that today. We're not building the same kind of housing stock, and we actually have shortages of single-family homes in a lot of markets. And that's creating what some people worry about as a bubble in prices.

With that said, I don't think the 3% down was the real problem last time. The real problem was liar loans. It was people who didn't -- they didn't ask whether they had credit.

If you think about Fannie and Freddie, they had a fair amount of that, and they bought a lot of CMDS that was like that as well. And with that said, the banks today are, all they're doing when you think about single-family conforming loan, is they are doing exactly what Fannie and Freddie want.

They're checking all the boxes. They're not holding any of the mortgages on their balance sheet. They're just packaging them and selling them off to Fannie and Freddie.

I don't think it's going to have a material impact. I think we just need to get back to a more normalized housing market.

We don't think it is going to have a huge impact on move-out rates. And if it did, and we went from the low rates we have now to 18%, plus or minus, which is our historical average, we would have more job growth, we would have people buying furniture and things for the houses, and we would have more people walk in the door of our apartment projects looking to lease as opposed to walking out the door.

So I'm for helping the housing market get more stability in it and get back to its normal job creation, which is like 1 in 7 jobs are created because of housing. Right now, that leg of the stool for the economy has just not been working.

Okay. That's helpful. Listen, thank you.

Thanks, Alex.

The next question is from Dave Bragg of Green Street Advisors.

Thank you. Good morning. Keith, the assertion that you made earlier that move-out to buy is generally dictated by lifestyle rather than financial reasons makes a lot of sense. But how is your portfolio positioned? For example, what share of married couples make up your portfolio today relative to the long-term average?

We think it's less than one-third are married couples in our portfolio. We can get you the exact number, but it's certainly not anywhere close to even a majority.

Okay. We'll follow up on that. Thank you. And last quarter you suggested that you were under discussions with your joint venture partner, thinking about restructuring that relationship. Can you update us on that?

Sure. Those discussions are ongoing. It is taking longer than we thought it would, but our partner has -- they've been busy beavers for the last two quarters. And we've been mindful of that and respectful of that. But we are having ongoing discussions. And I hope to be able to update you by the end of the year.

Okay. Last question for Alex is just on the unsecured maturity coming up, I believe in the second quarter of next year. Where could you price 10-year money today?

Yes. So we probably could price a deal pretty close to what we just did. So call it 3.5% to 3.6%. What's happened is, is that treasuries have rallied, but spreads have actually gapped out at a comparable level.

Okay, thank you.

Thanks, Dave.

(Operator Instructions)

Our next question comes from Rich Anderson with Mizuho Securities.

Thanks. Good morning out there. One market specific seems this earning season has been Southern California improvements. Wonder if you can comment on what you are seeing there?

Southern California is performing really right in line with our expectations, Rich. It was not projected to be at the top, even in the top half of our markets for the year, but it's performing as expected. So relative to our budgets in Southern California, we're basically right on line with revenues. Not gangbusters, but we are seeing improvement.

Okay. When you were talking about some mention about a 10% cap on rent renewals to maintain, or to reduce turnover, is that what was said?

Yes, it was 15%. And then we just -- within our revenue management system, if you go back to last year we did not have that policy in place, and we literally were seeing renewals as high as the low 20%s. We did a lot of math and study around the behavior, and discovered that there's sort of a magic point at which people will, almost no matter where that increase puts them relative to market, above which they just move out.

And so we think that breakpoint is somewhere around 15%, and we cap renewals at that. And that's been the biggest single difference that we can identify to our renewal rate in the third quarter versus last year.

Boy, you're not going to get any Christmas cards for that (multiple speakers)

Rich, remember, it depends on what that -- what that tells me is their lease rate was way below market for the prior year.

And then a lot of talk about the reasons for move-out. An issue that I brought up a few quarters ago was reasons for move-in. Do you guys track that? If you do, is there anything interesting that's changing there?

To my knowledge, we've never asked, other than anecdotally with our -- as part of our sales process, asking people why are you moving -- why are you leaving your other place? But we don't -- we've got a lot of anecdotal evidence, but nothing that would be statistically provable as to why people move into our apartments. My guess is it's the inverse of why we lose people, which is it's a job transfer or moving closer to work.

Okay. All right. Thank you.

You bet.

Our next question comes from Michael Salinsky with RBC Capital Markets.

Good afternoon, guys. Talk a little bit about the yield on the current pipeline there, just given that you moved your revenue forecast up for the quarter. Also, as we think about the additional starts, where should we be expecting yields on new commencements there, particularly in the fourth quarter?

Our current development pipeline is yielding just over a 7% yield. And our pipeline, the foreseeable pipeline we think it is going to be somewhere in the $250 million to $350 million per year range. And we're still sort of hovering high 6%, low 7%.

So those type of returns, you are still sustainable on a development basis?

They are on our pipeline. I would say that anything new in the pipeline is less than that because of land price and construction costs. And we are seeing pressure on construction costs, but we have locked in some very attractive land prices in our portfolio that we have in the pipeline for the next couple of years.

And then just my follow-up question. Talk a little bit about supply. We've seen supply, seems like it was pushed out a little bit more to 2015 there. Just curious as to what your expectations are for supply in 2015, and what you think the impact could be just going forward here?

Yes, Michael. There's no question that the -- if you go back and look at where we thought deliveries and completions would be, we've probably moved the entire pipeline in our markets back probably three to six months. And that's strictly a function of the inability of people to get enough labor on their jobs to stay on budget.

It is certainly affected a couple of our direct communities. And I know it's affecting our competitors, probably much worse than it is us because they don't have the depth of relationships with their subcontractors that we have had in these markets that we've been building in.

So, yes, we are -- if you think about, we have said and still continue to believe that the peak for starts, you'll look back and say the peak was still in 2014. We believe that the peak for completions will be late in 2015. A lot of the wood to chop on the supply side is still in front of us, but it is uneven, as it always.

Some markets are going to be more impacted than others. And we'll just have to slug our way through it in 2015.

Thank you much.

You bet.

(Operator Instructions)

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

We appreciate you being on the call today. And have a happy and safe Halloween. We'll see you at NAREIT next week. Thank you.

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