Camden Property Trust (CPT) 2015 Q2 法說會逐字稿

Good day and welcome to the Camden Property Trust second quarter 2015 earnings conference call.

(Operator Instructions)

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

Good morning to you for joining Camden second quarter 2015 earnings conference call. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC and we encourage you to review them.

Any forward looking statements made on today's call represent management's current opinions and the Company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete second-quarter 2015 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 Rick Campo, Camden's Chairman and Chief Executive Officer, Keith Oden, President and Alex Jessett Chief Financial Officer. As there are several multifamily calls today, we will try to be brief in our prepared remarks and complete the call within one hour. We ask that you limit your questions to two then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we would be happy to respond to additional questions by phone or email after the call concludes.

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

Thanks, Kim. A few weeks ago, our team met to discuss topics for this quarter's conference call. And as always we started with the most important item, picking the pre-call music.

It has been a really hot summer here in Houston, summer is in full swing, so we decided to use songs about summer as a theme. We sorted through dozens of summery songs and settled on five, one of which was, all summer long by Kid Rock.

A few days later, I got a research report from a REIT analyst group whose name I will not mention, except to say that the name [frinings beat]. The report was an update on the residential REITs titled All Summer Long, an obvious reference to the song by Kid Rock, honestly what are the odds that we would both reference a somewhat obscure Kid Rock song in the same week? I'm guessing the odds are very low and certainly less than 20%.

I would like to thank our operating teams in the field and our corporate team supporting our field teams for their contribution to our strong quarterly results. I know that some of you were surprised that we produced a strong quarter and raised guidance for the second time this year. We however were not surprised.

We have built our portfolio based on a philosophy that geographic and product diversifications in markets where population growth and job growth lead the nation, [PERT] will produce long-term net operating income growth with lower volatility. Houston has been on everyone's questions list, and it is a great example of about how geographic and product diversification has served us well over the years.

For the last three years, Houston has led our NOI growth and our revenue growth. And as Houston moderates, we now have Atlanta, Denver and Austin leading the way for our revenue and NOI growth producing very good numbers.

During the quarter, we acquired two development sites that I think that deserve a discussion. They illustrate our discipline and our strategy in this part of the apartment business cycle. It's really difficult to compete for acquisitions given the low yields generated by the incredible wall of capital that continues to invest in the multifamily business.

We've taken our objectives towards development and value creation to development. And we've created a fair amount of value in our $1.3 billion of completed and under construction developments. They will add $400 million of value to Camden's NAV or nearly $4.50 a share.

Development is also becoming more difficult as land prices continue to accelerate. And construction costs and labor shortages are the order of the day.

We acquired the two sites on a very attractive basis. The first, I will talk about is the Arts District in Los Angeles.

We've been working on this project for three years, there have been a multitude of zoning and entitlement issues, and everything you can imagine that goes on in Southern California. But we have stayed with it. We focused, since we've been working on this job for three years, we acquired the land for $86 a square foot in a market, that is $250 to $400 a square foot today and we are ahead of most of our competition there.

The land in Arizona is an interesting story. We bought the land from the State of Arizona adjacent to the Mayo Clinic, which is an incredible site that has never been on the market that we've been working on for five years. Complicated transaction buying from the State in an open auction, not always a thing you want to do however, since we were the only bidder we bought the property for the lowest possible price.

The fact that we were the only bidder was a result of the complexities and the timing the State required for bidders to put up dollars and also to do due diligence. Being the only bidder in an incredibly attractive site is how we create value long term. These two transactions I really think typify how you have to focus on part of the market you are in.

And if you cannot do acquisitions and you can't do things that you are used to doing it is really about discipline and focusing on trying to create value in wherever you can in this kind of a cycle. And that is where we are with these kinds of transactions.

With that said, we're very excited about what is going on with Camden. We appreciate our teams in the field, and I will turn the call over to Keith Oden.

Thanks Rick. As Rick mentioned the operating conditions across our portfolio remain very strong.

The same-store revenue growth for the second quarter was up 5.2% and 2.2% sequentially. The quarterly revenue growth of 5.2% represents our best growth rate in eight quarters. And 12 of our 16 markets had revenue growth of better than 5%.

Our top four markets for revenue growth were Atlanta at 9.2%, Austin 8.4%, Denver 7.9%, and Phoenix at 7.2%. Houston and DC Metro continue to perform in line with expectations, hosting revenue growth year-to-date of 3.7% for Houston and 0.06% of a percent for DC Metro. As a reminder, in my market by market outlook for 2015, I assigned DC Metro a letter grade of C with a stable outlook. And I rated Houston as a B market with a declining market. Both of these markets are performing slightly better than original budget, and it is certainly in line with our expectations for the first half of the year.

Regarding Houston's performance year-to-date, it's perhaps a little surprising that our original revenue guidance is holding up in light of the substantial downward revisions to the employment growth outlook. Our original budget for Houston was based on an employment growth estimate of 60,000 new jobs for the year. Despite adding 4,000 jobs in June, Houston's job growth rate year-to-date rounds to zero. Based on the weak job growth in the first half of the year, the employment growth estimates for Houston have been revised downward by Whitman and Associates to 23,000 the full year end by greater Houston partnership to 25,000.

Although there are certainly more bearish estimates out there, we believe it is still possible that Houston ends the year with 20,000 or so net new jobs. Based on historical data from the greater Houston Partnership, Houston typically adds 50% to 60% of its annual job growth in the months from September to December. Houston's job growth is will below our original estimates yet our revenues year-to-date are slightly ahead of budget which seems like a conundrum.

We think there are two factors which would help soften the impact of lower job growth. First, the skill labor shortage has most likely pushed back the schedule multifamily deliveries by at least a quarter. This is an issue in every market where we are building, and it is particularly acute here in Houston. Whitman is estimating 22,000 completions for the year in Houston, however we believe some of these deliveries will be pushed into 2016.

Secondly, we believe there's a much higher level of pent up demand for new apartment homes than we anticipated at the beginning of the year. In the four years leading into 2015, Houston added 400,000 new jobs. And completed only 40,000 new apartment homes.

Using the 5 to 1 ratio of jobs to apartments as a measure of equilibrium, an estimated excess demand of 10,000 apartment homes was created. Some of the current absorption is undoubtedly coming from this pool of excess demand. Despite the downward revisions to job growth our original budget for Houston revenue still looks achievable at roughly 3.5% for the year. And obviously Houston's job growth in the second half of the year will greatly influence our outlook for 2016 results when we get to that.

Back to our overall portfolio results. New leases for the second quarter were up 4.5%, renewals were up 6.7%, both better than the second quarter of 2014 which were 3.6% and 6.3% respectively. July new leases were up 5.2%, and renewals up 6.8%. Again both ahead of last year's results of 3% and 6.6%.

August and September renewals were sent out at averaging at 8.3% increase. And we're currently renewing leases in the 7% range. Our same store occupancy averaged 96% in the quarter, up from 95.5% last quarter and up from 95.6% in the second quarter of 2014. July occupancy averaged 96% and we currently stand at 95.8%.

Our net turnover rate year-to-date was 48%, down 500 basis points from the 2014 levels. And finally our move outs to purchase new homes remains historically low across our portfolio at 14.8% versus 14.6% in the second quarter of last year.

To all of our associates we greatly appreciate your dedication to providing living excellence to our residents. Especially during the dog days of summer.

Hang in there, the long hot summer will be over before you know it. And as Kid Rock sings in All Summer Long, now nothing seems a strange as when the leaves begin to change or how we thought those days would never end. We will see you soon.

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

Thanks Keith. Before I move on to our financial results, a brief update on our second-quarter development activities.

During the quarter, we reach stabilization at three communities. Camden Lamar Heights and Camden La Frontera, both located in Austin, Texas and Camden Boca Raton in Florida. These three communities had a combined cost of approximately $135 million, delivered a 7% plus yield, and created approximately $50 million of value to our shareholders based on current market Cap rates.

Additionally, during the quarter we completed construction at Camden Hayden a $44 million development in Tempe, Arizona. Began leasing at Camden Glendale, a $115 million development in Glendale, California. And began construction at Camden Shady Grove, a $116 million development in Rockford, Maryland.

Also during the quarter, we purchased two land parcels for future development in Los Angeles, California and Phoenix, Arizona. Subsequent to quarter end, we completed construction at Camden Flatirons, a $79 million development in Denver, Colorado.

As we do each quarter, on page 17 of our quarterly supplemental package, we have adjusted our cost and timing for our developments to reflect our current estimates. The only significant change relates to our Camden Paces development in Atlanta, Georgia. We have increased our cost estimate by approximately 6%. Half of this increase is associate with owner-enhancements and the remainder relates to previous whether to delays. These communities currently 57% leased and should deliver a 7% yield.

Moving onto financial results, last night we reported funds from operations for the second quarter of 2015 of a $102 million or $1.12 per share. These results were $0.02 per share better than $1.10 midpoint of our prior guidance range. This positive variance resulted almost entirely from better-than-expected operating performance from our consolidated and non-consolidated communities as both rental and fee-income continue their favorability to plan, driven primarily by higher occupancy and additional pricing power which enabled us to collect higher net fees at move-in.

Our turnover for the quarter was 400 basis points better than this point last year. While our occupancy for our same-store portfolio averaged 96% for the second quarter of 2015. 40 basis points higher than the second quarter of 2014. Each of our markets registered positive sequential revenue growth in the second quarter.

Our new Camden Technology Package with Internet service, is rolling out as scheduled and for the second quarter contributed approximately 45 basis points to our same store revenue growth, 100 basis points to our expense growth, and 20 basis points to our NOI growth. All in line with expectations.

Regarding property taxes, the majority of our assessments are now in. And although all the many of our initial Texas assessments were higher than we had originally anticipated, we have had some degree of success with our protest and appeals. Last quarter, we told you that we expect property taxes to increased 7% on a year-over-year basis. At this time remain comfortable with that estimate.

Based upon our strong year-to-date operating performance, and our expectation of continued out-performance for the remainder of the year, we revised upwards and tightened our 2015 full year revenue and NOI guidance. We now anticipate 2015 full-year same-store revenue growth to be between 4.75% and 5.25%, expense growth to remain between 4.75% and 5.25% and NOI growth to be between 4.75% and 5.25%.

As compared to our prior guidance ranges, our revised revenue midpoint of 5% represents a 50 basis point improvement. And our revised NOI midpoint of 5% represents a 75 basis point improvement.

For the second time this year, we have also revised upwards of full year 2015 FFO per share outlook. We now anticipate 2015 FFO per share, to be in the range of $4.47 to $4.57 versus our prior range of $4.40 to $4.56. Representing a $0.04 per share increase to the prior midpoint. This increase is anticipated to result entirely from same store out-performance.

As indicated by a 75 basis point increase to the midpoint of our full year 2015 same store net operating income guidance. Part of this out-performance occurred in the second quarter, and we anticipate this out-performance to continue throughout the remainder of the year. Our revised full year 2015 FFO guidance assumed $100 million in wholly owned dispositions, and $100 million in wholly owned acquisitions. Both occurring in the fourth quarter, with acquisition yields in the high 4% range and disposition yields in the high 5% range.

Last night we also provided earnings guidance for third quarter of 2015. We expect FFO per share for the third quarter to be within the range of $1.12 to $1.16.

The midpoint of $1.14 represents a $0.02 increase from the second quarter of 2015. This $0.02 per share increase is primarily due to higher property net operating income as a result of an approximate 1% or $0.01 per share expected sequential increase in same-store NOI. As revenue growth from the combination of higher rental and net-fee income as we continue to our peak leasing periods, more than offset our expected increase in other property expenses. Due to timing of second-quarter property tax refunds and normal seasonal summer increases in utilities and repair maintenance costs.

And, an approximate $0.01 per share increase from our non same-store communities, as the additional NOI contribution from our six communities in lease up, will be partially offset by the lost NOI from our student housing community in Corpus Christi, Texas. Occupancy declined significantly from June through August in this community.

Turning to the capital markets, we anticipate completing the re-financing of our existing $500 million line of credit in the next few weeks. This will increase our borrowing capacity by $100 million to $600 million in total, extend the maturity date by four years, and decrease our borrowing spread by 20 basis points. Our balance sheet remains one the strongest in the REIT world with debt to EBITDA in the low five times. A fixed charge expense coverage ratio at five times, secure debt to gross assets of 12%. 80% of our assets unencumbered, and 85% of our debt of fixed rates.

At this time will open up the call to questions.

(Operator Instructions)

Nick Joseph, Citigroup.

For same-store revenue growth, at the beginning of the year you expected a 25 to 50 bps benefit from the bulk internet initiative, what does the updated guidance assume for that?

Right now it is rolling out exactly as we had anticipated, so we're still in line with that estimate. Might be a little bit towards the high end of that range.

Looking into 2016 is there going to be a continued benefit from that? Or will it lead, [absent] anything else, to deceleration in the other revenue line?

2015 and 2016 are both roll-out years, obviously more of the roll outs in 2015 than 2016. Then ultimately this will become a meaningful number for us probably around $5 million.

That is true on the expense side as well, right?

That is correct. Generally what happens is you will see more of the expenses up front.

So the actual NOI benefit will be more focused in 2016 in terms of the growth rates?

That is correct.

Alexander Goldfarb, Sandler O'Neill.

Just quickly on the development, you guys, obviously you walk through the background on each of these deals, but at the same time, a common theme on this quarter has been, which has been for some time now, has been the difficulty in finding attractive acquisitions and development sites. Should we anticipate more developments from you guys? Or were these two sites one-offs that you guys have been working for some time? And therefore, we shouldn't expect a pickup in new development starts from you guys?

Definitely these projects have been worked on for quite a while. And we continue -- our teams continue to try to find those needles in the haystack, like we have found in these two transactions. We think the development business is definitely more difficult today, and it is harder to pencil deals and we definitely pass on more then we buy.

We have been consistent in our discussion about where we are in the development cycle, and where we are in the apartment cycle overall. And as we finish developments, we will start others. But we definitely have peaked in terms of the total under construction that we have now, and we will be adding anywhere from $200 million to $400 million annually going forward on the development, assuming we can find the right deals.

The second question, is of course, Houston. Oil has taken another leg down. Clearly, it seems that the initial oil decline didn't translate to the massive job loss that was some concern over Houston apartments.

Now, with the latest job loss, the headlines talk about more job cuts, and it seems like more are coming to the office rather than out in the field. Can you give us what you are hearing from your oil neighbors, and what has been going on recently with this oil decline and the layoff announcements?

You definitely have seen some more announcements, especially from some of the big integrated oils. And we're not sure what to expect there. There have been some big numbers, but when you -- when I talked to the people that are actually running these companies here locally, they tell me that they're definitely tightening their belts. But they are not doing any massive type of scenarios.

Because, the challenge they have is they have, in terms of being able to replace those employees in the future, they have some real issues with that. They're trying to hold on to all of their talented tech people, and the geologists and those kinds. And then there is more support people that are probably being let go that were not otherwise. We have not felt that, and even though they talk about it, it is still a really big employment market here. So we really haven't seen much of that.

I will tell you that in some of the conversations with some of the big oil, for example, there is a 50-story building that has been planned to house one of the big oil companies downtown, and they already have two 50-story buildings. What they were telling me in their office, I will not name them but you might figure them out. They have an office in California where they are headquartered, and they said the downturn is actually supporting their thesis to their management that they need to go to a lower-cost market, including Houston. So that building, given construction costs falling, is likely to be started and those people moved here in the next couple of years.

Also Alex, we're going to continue to see net job losses in the oil industry in Houston, but I think June was interesting because we got 4,000 net new jobs which got us to basically flat for the year. But within that 4,000 net new jobs, there were 6,000 total jobs created and about 2,000 lost in oil-related jobs. The net of 4,000 is not that bad a number if we can continue to see that.

And there is a lot of information from the greater Houston Partnership that indicates that even in recessions Houston has historically created jobs. The back-end loaded jobs between September and December. We need to see whether that pans out again this year. And if it does, that bodes pretty well for 2016. Kind of what we would be looking at for 2016. Clearly those job losses in the oil patch are going to continue, the question is how much and then how much is the offset from all other sectors of the economy which continue to grow.

The other thing I didn't mention was the downstream operations. Because, when you have the big oil with oil prices down and natural gas prices still very low as well, there is still a big boom going on from a construction perspective around the Gulf Coast. And on the east side of Houston for all of our petrochemical factories and what have you.

As long as the US economy continues to do well and manufacturing continues to do well, those basic products have to be made, and there is something like $30 billion under construction and a $50 billion backlog of new primary chemical activities and plants going on in the Gulf Coast. That part of the equation should add jobs on the construction side and on the product manufacturing side of the equation. That hopefully offsets some of the layoffs in the G&A side of the energy business.

Rich Anderson, Mizuho Securities.

One more on Houston, wouldn't it be expected that this would not be the year that you would see any meaningful impact to your performance in Houston? That it would be a second- or third-year impact? If I am somebody who has lost my job, the last thing I am going to do is double down and leave my apartment. I would probably want to give that some time and then reconsider a year later or something like that. Isn't the real litmus test here going to be 2016?

I think clearly the 2016, the jury is out on 2016. There are still 20,000 apartments units going to be delivered in 2016, and the question will be whether there is enough jobs to support that. Keith mentioned a couple of things being the pent up demand that we have had because of the job growth that we had prior to this downturn.

And then the other thing, what he did not mention though, was the inversion that is happening here. Which is the people moving from the suburbs into the urban core. And a lot of the development is in the urban core, and the traffic is not really great here, and people continue to do that. Anecdotally, just to give you a sense among the high-rise for example that is being developed in Houston today. Which high-rise product, you really did not have a lot of high-rise product in Houston. Maybe 5 or 6 buildings max from a rental perspective, now we have something like 10 that are in lease up.

What is happening is there that the whole new product that is opening up into Houston. And it is high-end, urban high-rise. So one of the lease ups that is going on right now with one of our competitors for example, we went through the data on that, and the average income for this project, and by the way this is $3 a square foot, average units of 1,500 square feet. So that's a $3,000 average, or actually more than that. It is $4,500 average apartment rent. They're giving zero concessions in Houston today, zero now, not some, but zero.

The project is 80% leased, it is a 30-story building in the Galleria. The average age of the person leasing this property is 55 years old, and their average income is $385,000 a year. Those folks are not energy accountants getting laid off. Those folks are people making decisions that they want to move in from their house in the suburbs and live in the urban core. There is a fair amount of that going on as well.

But at the end of the day, 2016 will be determined based on what the overall economy does for Houston. Do we have more pent up demand? Do we have some of this inversion going on that is actually helping the market more than we thought? You are right on the issue of people hunker down. When people have a tough situation and they are laid off, if they have the funds to stay in their apartment, they do tend to hunker down.

Your turnover rates go down, which means we do not have to lease as many apartments because our people are staying longer in those apartments, so it will definitely depend on what happens job wise in 2016. And then how the supply plays out. At least we know that the supply is going to play out in 2017 and 2018 because it is hard to get a new deal financed in Houston today.

A bigger picture, how do you get to the top end of your FFO guidance range? It seems like something very special would have to happen in the third and fourth quarter. More like the fourth quarter.

Obviously, a lot of it comes down to whether we end up being at the very high end of our NOI range. If we're at the very end of our NOI range, that will get us most of the way there. Then obviously there is also timing on acquisitions and dispositions can have an impact too.

Nothing one time-ish land gain, anything like that in fourth quarter that gets you to the top end?

No.

Ian Weissman, Credit Suisse.

Just a question on the balance sheet. You paid off your $250 million June maturity with your credit facility. And I want to get your thoughts on long-term financing with the rates coming down here, how are you guys thinking about continuing to use the balance sheet or going a little bit longer out on the lending curve?

Although treasuries have been moving around quite a bit, the 10 year's at 220 today, and if you assume we can borrow say 160 on top of that, I think 3.8% for 10-year money is a great rate, and we will do that all day long. We obviously do look at longer, we've looked at 30's before, we're not quite sure whether that is something we want to do quite yet. But certainly we think in this type of interest rate environment it is still very attractive to go long when you can.

We are old-school real estate people that match long-term assets with long-term liabilities. We hate short-term debt, floating-rate debt, we have a certain amount that we will keep. But bottom line is, is that real estate, if you look at the real estate train wrecks over the history of time, it is all about financing short on long-term assets.

And then all of a sudden you have a hiccup in the capital markets and somebody needs to fund and they cannot fund. That is why we are trying to take our maturities out. If look at our maturities, we have one of the longest maturities in the apartment sector and it is not long enough for us, but it is the longest.

The other thing is, when you think about financial flexibility long term, as Alex said at the beginning of the call, we have 80% of our assets that are unencumbered. Meaning they have no mortgages on them. So if we do have a financial hiccup like we had, maybe you don't call 2008 and 2009 as a hiccup, maybe it is a retching, then we have the ability to put mortgages on those assets. We are real old-school, long-term fixed-rate kind of shop here.

I appreciate that color. Lastly, want to get your thoughts on where you see margins moving over time. Do think Camden is able to maintain the same-store revenue growth in the mid- to high-4%s? And also on the expense side, it has been running high over the last several quarters. Is there much more tax assessment catch up left that would cause you to keep expense growth in the 4% to 5% range?

Long-term same-store revenue growth, 4%, if you look backwards for the last 20 years, it has been in the 3% range, high-2%s, low-3%s. That's probably a more appropriate thought process for what the next 10 years look like. Obviously the last four years have been quite an anomaly relative to the long-term trend.

On the expense side, the challenge that we have had is been exclusively contained in property taxes. When will the pain end? We thought that there would be some relief this year. Obviously there wasn't, particularly in the Texas markets. That's is going to be something we are going to continue to have to probably have to deal with.

We have been very effective over the years in terms of being aggressive on property tax increases. We're continuing that trend this year. It looks like we will have a ton of lawsuits on our Texas valuations that we are going to have to work our way through. But that is part of the process and we know that is something we are going to have to deal with.

The interesting thing is about property taxes, and we've spent a fair amount of time studying this, because this obviously has been a big issue in our same-store expense numbers for the last two years. If you go back and do an analysis over 20 years in our portfolio, the average annual increase in property tax expense over that 20-year time frame has been 2.1%. Which is actually less than all other non-property tax components of our expenses combined.

Even though, right now, it is very painful, and it is very painful to our same-store results and certainly to all of our operations folks that are getting hammered with these property tax numbers. The reality is, it is over a long period of time, it's actually been pretty manageable.

You think about property taxes, they're one of the only two expense line items of all of our expenses that ever go down. We are -- it is something that we do, spend a lot of time on, over the long period of time we think it is manageable. But obviously it's painful right now.

Last question, I appreciate that color. Not to beat the dead horse, I should say, on Houston, but can you give us an update on where renewals are trending in the third quarter in Houston?

The horse is not dead. He is galloping and he has had a heck of a run for the last four years. At 100 degrees, he's sweating pretty bad today too. We set our renewals are going out right now at an average of roughly 8%. In Houston they're going out at about -- that's portfolio wide -- in Houston they're going out at about 4%. We think we will get them signed most of them in the 3.5% to 3.75% range.

That is consistent with where we think we will end up for the year. I think in my prepared remarks, I said I thought we'll end up revenue growth for Houston of about 3.5% for the full year. And we are still pretty comfortable with that. We just keep chopping away at it and the horse keeps running.

Nick Yulico, UBS.

Rick or Keith, I was hoping you could talk a little bit about supply and where you see deliveries? If you think they are peaking in markets this year and 2016 might be an easier number?

In Camden's entire portfolio, if you are looking at completions for 2015, our current working guesstimate looks like it is about 133,000 over the entire, all of Camden's markets combined. That number looks relatively flat to 2016. Obviously, there's a lot of movement in that number.

Houston, in particular, as Rick mentioned, I think we are at 21,000 estimated deliveries this year. Although that may, some of that may slip into 2016. And if that trend continues, then some of the 2016 is going to slip into 2017.

Based on current thinking, we are likely to get in this crop for the 2015 class of apartments somewhere around 21,000. And that number comes down, but not very much in 2016, to about 20,000. On the supply side, we're still going to have a fair amount of supply to work our way through in the next two years in Houston.

I think nationally one of the questions we get a lot of is, why if the apartment business is so good, which it is, obviously, based on all the numbers all of our competitors and public companies have put out there. Why wouldn't starts go from 300,000 to 500,000? I think a lot of investors are worried about that, right? Because there is a wall of capital trying to invest in multi-family.

I think one of the governors, there's actually two big governors on the system that I think today. One is, it is harder to make your numbers work. And from a land cost and a construction cost. And there is a limit of skilled labor. So everyone in the business is staying up at night thinking about, can I get my a project built and for how much?

The next big piece is that the financial crisis, when it happened, it really did change the multi-family finance as it relates to merchant builders. Which merchant builders create 85% of the entire market for new development. The merchant builder, prior to 2008, was able to guarantee debt from banks and the guarantees basically were infinite guarantees. There was no tangible capital behind their guarantees.

Today, however merchant builders have to have tangible capital, they have to have real cash or real liquid securities on their balance sheets to guarantee certain amounts of debt. That is being flexed now, today, because the market is so good, they are requiring less than they did two years ago. But the fact is they are requiring tangible net worth, which actual cash, not just real estate value, in order to guarantee debt.

You have a natural governor on the amount of deals that can be done because we do not have enough construction workers nationwide to do it. And second, there is financial discipline in the banking system so far. Do they get out of control in the future? Who knows. I think it is going to be tough for that to happen, for a while anyway.

One more thought on that. I think it is interesting, and I will give attribution to Ron Whitman, who did some interesting work on the -- there's a lot of conversation about the June starts number. Which looked like it spiked up to an annualized rate of about 450,000 multi-family starts. But when you dig into that, there was a tax incentive in New York that was expiring, or that it did expire at the end of June.

And there were roughly 8,000 starts, quote, starts, in the month of June. If you annualize that, it is about 100,000. If you back that out, you're back to about a 340,000 annual run rate on starts, which looks pretty rational with where demand is.

That is helpful. One other question. It looks like -- is your development pipeline going to be coming down in size? If I look at the pipeline communities versus what is underway right now, are you starting less incrementally now?

Yes, we are. We have $1.1 billion under construction, and when we finish, we will start. But we will start less than we are finishing over a period of time. We think it is prudent in this part of the cycle to do that.

Is it not only, though, that you think it's prudent, it's also just that you don't have as much land that you could really keep the pipeline as high?

Absolutely. We went through our legacy land that we kept during the down cycle, and we're pretty much out of our legacy land in 2016. So we have to add new land to it and the new land is harder to add. Also, we just think, given where we are in the economic cycle and funding issues, we think it is prudent to bring it down a little.

Just to put some big numbers around that concept, in 2016, we will have roughly $750 million that rolls out of our development pipeline into stabilized. Our guidance for this year $300 million in starts, and we have told people that is what it will look like on a run rate going forward, so the math is pretty easy from there. The development pipeline is coming down.

Rob Stevenson of Janney.

Keith, can you talk about what the monthly trends have been in the DC market? Have you seen more stability, more traction as we have gone from May to June to July? Or has it been back and forth, back and forth?

The big change for us, Rob, was the change in occupancy. We had a pickup in occupancy for the quarter. We had a negative revenue quarter-over-quarter print in the first quarter for the first time in this entire cycle. And most of our competitors have had numerous negative revenue prints. And it was 1/10% negative. We were pleased to see that jump back up. Obviously, a chunk of that was occupancy.

I would say that scraping along the bottom still feels about right. Our budget for our game plan for DC this year was a revenue growth of somewhere around 1%, maybe slightly better than that. And I think that is what we are on track to see. It is hard to see that as being a real positive scenario, and that is why we rated that market as C and stable. That is what we are looking at for the balance of the year.

If you look out into 2016, roughly on Whitman's numbers, you get 40,000 jobs. And we get about 8,000 new apartments, and that again sounds a lot like equilibrium to me on a 5 to 1 ratio. But I think things are improving. I think the worst is probably over for most operators in the DC market. Our geography is a fair bit different than many of our competitors. And I think the worst is probably over, but we are scraping along the bottom in DC.

Then, can you talk about the Atlanta market? This has been multiple quarters in a row that this has been very strong from a rental rate growth, you're seeing somewhere probably between 2% and 2.5% new supply still being ejected there.

Is it just job growth has come in and above everybody's expectations that has been driving this? Or has there been some other phenomena where people have been moving more toward the core, like Rick was saying in Houston? Can you talk about what the phenomenon is that has been driving the Atlanta results?

On 2015 forecast for jobs is still 75,000 in Atlanta. Multi-family completions look like they are going to be roughly 10,000 apartments and that is very healthy. If you think about Atlanta, it was a little bit late to the cycle, so that is why you've got 10,000 completions in Atlanta versus some of the other markets that are delivering more units. From the standpoint of new supply, it's been delayed, relative to some of the markets.

In terms of rent growth, in a market like Atlanta, where you're growing that kind of jobs and you're little bit out of balance on supply, I don't think it would be unusual to see Atlanta have another great year in 2016. If you look at the Houston experience, going back to 2011, 2012, 2013 and 2014, Houston was our top-performing market for four years straight.

When the conditions are right, and you don't have -- and the supply doesn't overwhelm the job growth, then you can have a pretty good run and I think that is where we are in Atlanta. The market seems very strong and no letup insight.

I do not know where you guys are with your supply numbers, but some of the data providers are actually showing less supply in 2016 than 2015. If that is the case, is there anything that really interrupts you guys being able to post 8%, 9% rental rate growth in that market for the foreseeable future?

If the job forecast is correct, that we have, which shows another 70,000 jobs, and roughly another 9,000 apartments is correct, then yes, you are going to have another year in 2016 that looks a lot like this year.

Drew Babin, Robert W Baird.

Given that most of the new supply that has been delivered over last couple years has been ubiquitously urban, high-rise, CBD-type developments, are there any markets where you're seeing your suburban asset significantly outperform urban? Among your markets are there any work bring up in that department? And what is keeping new supply from springing up in the suburbs relative to the city?

The best example of that would be in Houston. Right now, our suburban assets are clearly much less affected by, they're not catching near the competition that some of our closer-in assets are catching. There is construction going on in the suburbs. In markets that we operate in, we've built suburban assets in Orlando and in Tampa, and they have done incredibly well. There is construction going on, it is just not to the same scale as what you see in some of the urban core markets.

The flip side of that is, there is right now the natural demand seems to be where the job growth is happening in the cities, is closer to the urban core, and that is where people want to live. It is not completely irrational that developers have trended back toward the urban core. You have got tons of issues with mobility in these large employment growth markets like Houston, Atlanta, Phoenix, et cetera.

People want to live closer to where they work. They want to live closer to where their social life is. And by in large that is the urban core. So it is not completely irrational. It is probably going to be, when it is all said and done, there will probably be more competition and more pressure in the Houston's of the world in the close-in assets than in the suburban assets.

Vincent Chow, Deutsche Bank.

Most of my questions have been answered here. Just curious, I know you are not necessarily looking to enter new markets or the pipeline is coming down, but I was curious if there any markets that, even if you are not necessarily getting ready to jump in, that seem to be still offering good yields and also maybe have an improving longer-term outlook from your perspective?

We like the markets we're in. We always are looking at other markets and trying to decide whether it makes sense to enter those markets. The challenge is, most of those markets are very highly priced and the development aspects are really high priced too. You try to get some sort of -- we want to have a scale. You don't want to go to one-offs in markets you are not in. We keep our eye out, and we think about it a lot and we debate it a lot, but we haven't gone there yet. We will see what happens in the future.

On the starts coming down, I'm just curious with land cost and construction costs both going up and shortages of labor. Do you think the yields are going to continue to -- it doesn't sound like they've compressed necessarily near term, but over the next couple of years, do expect them to compress? Or do think rental rate growth will keep up with the construction inflation?

I think development yields have been compressing and will continue to compress. The challenge you have is that, as they compress, then the justification the developers use is that, well, yes, but if you do a five-trended transaction in California, you can sell it for $3.5. Because in California, for example, in LA, every deal we look at is a 3-something cap rate that's on an acquisition.

The challenge with that is as cap rates compress and development yields compress, the risk associated with rising cap rates, or what have you, is higher. And then the risk of actually delivering the five trended with construction costs and labor shortages is higher risk than it was. That is why our development pipeline is shrinking. It is much more difficult and at higher risk to deliver those kind of yields today.

So yields have definitely compressed from when the cycle began, and now they're getting -- I think they will compress in the future. The question will be, will developers take the risk of lower spreads and lower risk-return relationships because they have the capital? A lot of institutional investors are building to core now. And a lot of capital continues to come into the sector.

We, on the other hand, do not have the need or the stomach to take the risk on those kinds of low spreads. That is where discipline comes in, and I can tell you, our development teams don't like to hear this, but that is what you have got to do in the market is as heated as it is in our business.

Dave Bragg, Green Street Advisors.

We're pleased to hear that you're big Kid Rock fans too. Maybe you should get him for the Super Bowl halftime show, Rick.

Dave, you outed yourself.

We're proud fans. Anyway on the internet roll out, is that uniform across the country or are there some markets that are benefiting disproportionately relative to the 45 basis points of revenue growth upside seen this quarter?

It is across the whole platform, and it really is dependent on where the contracts, who the provider is, whether it is Comcast or whether it is Time Warner. As we get the contracts in place and get them renegotiated, then that is where the roll out occurs.

There is also a physical limit on how many of these things you can roll out at one time, based on personnel constraints and people constraints. But it is pretty uniform across the portfolio. Ultimately, we think we will have coverage of somewhere upwards of 85%, 90% of the communities that will have an high-speed internet solution bundle with cable.

As we think what your numbers relative to peers, we can be confident that there is no markets where you are getting a 75 to 100 basis point boost right now?

No.

The next question is, can you provide your latest thinking on dispositions?

Dispositions, we have sold about $1.8 billion of assets in the last four years. And we continue to think that it makes a lot of sense to sell assets into this market given the robust bid. On the other hand, we pretty much dealt with our low-hanging fruit, in terms of being able to recycle that capital. The challenge we have today, we have a couple of challenges in that given all the asset sales that we have done in the past, we have some tax considerations and tax constraints on how we sell and what we sell. It is still a decent environment to selling and we will be selling assets.

Dave, the other thing that we have talked about with folks is, we really want to match our dispositions with acquisitions. Obviously, we could always, from disposition perspective, you control that and you can sell assets whenever you want to. The flip side of that, which is matching it with acquisitions, is something that we have really struggled with in terms of the pricing of these assets and where the cap rates are.

I will give you the latest example. I know there's a lot of anecdotal evidence floating around, but I will give you one from the last two weeks. Without naming names, we were in the, got in the best and final for an asset in downtown Denver. It is a great location, but it is a 10-year-old product and a little bit tired and had a little bit of floor-plan challenges. So it is not a pristine physical asset, but it is a great location.

Having said that, we thought we could go in and do our renovation, our rehab program, do all of our ancillary programs. And we really pushed hard, from an underwriting standpoint, got in the best and final, were given guidance that I thought the asset would trade in the $83 million range. So we decided to go nuts, from our perspective, and raised our bid, even though we were given guidance of $83 million, we raised our bid to $83.75 million.

We finished dead last of the four companies that bid. The asset ended up going under contract at about $85 million plus, almost $2 million above what we thought was a crazy high number. On our numbers, it was a of 3.6% cap rate on trailing 12 months, on real-live underwriting.

That is the challenge that we have from the standpoint of Rick talked about being disciplined. We're going to be disciplined on acquisitions. And we are going to pick our spots. But when you are trying to match developments, dispositions with acquisitions, that is the world we are in today.

Last quarter, when asked about share buybacks, you explained that you need time. You need time to sell assets and then observe where the stock is trading. The stock's been very volatile since October, so the reason we ask is to understand why not sell some assets now and create that opportunity for yourself, should it present itself in the stock, rather than stabilized assets?

I think it gets to the same issue you just hit which is the volatility. That is an interesting scenario. The challenge we have with that is just on the side of, is there an opportunity to buy the stock? We talked about it being persistent. The challenge is, because of the volatility and because of blackout periods, it makes it difficult. In terms of selling assets, and putting cash on the balance sheet, and having tax considerations associated with it, that is what makes it more difficult.

Dave, just to be clear on the share buybacks, we don't have a philosophical hidebound mindset against share buybacks. In fact, over the last, as a public company we bought back almost $500 million of our shares in the open market. And we bought those shares at an average discount to NAV of about 20%.

It is not that we are philosophically opposed to it, it is just that sometimes when we talk about persistency and closing the gap to NAV. And given the volatility that we have had in our stock in the last nine months, it would have been a real challenge to put all those, that Rubik cube together to make it sense to buy the stock.

The other thing that goes in from a consideration standpoint is, obviously we have a development pipeline, where you have assets that are under construction that needs to be funded and there has to be a source of funding for that. It is balancing all of those things, but is certainly not something we are philosophically opposed to, and we have done a ton of it.

Dan Oppenheim, Zelman Associates.

I was wondering about DC, just one other question there. DC occupancy now 40 basis points above the Company average after the 170 basis points sequential increase in the second quarter. You still seem somewhat cautious, and I understand the caution in the environment overall. But how is that impacting what you are doing in terms of renewals in the market given where you are on occupancy now?

We're not -- we're back to an occupancy level that we are comfortable with. But when you look at many of our competitors in the comp set that we deal with, they are struggling day in and day out to get to the 94%, 94.5% level. That gets reflected in their pricing, and we do not operate in a vacuum. Their challenges become our challenges.

I think that our guidance for the year, we think we will end up with revenue growth of 1% or slightly better than that, reflects the fact that you don't have a lot of pricing power. Obviously, you can get more aggressive, less aggressive on renewals, close the back door, get some occupancy, which is clearly what we needed to do. You can't even think about pushing prices when you are not above 95% occupied.

Job one is get the occupancy back, make sure that you have stability in your rent roll. And then you can start testing increases, which is what we're doing right now. I still don't think anyone should expect that by the time it is all said and done for 2015 that we are going to be far away from the 1% growth.

In terms of turnover, you talked about it being down 400 basis points year over year, and pushing rents significantly in some markets. How do you think about that in terms of any risk, in terms of affordability driven turnover with some of the rental rate increases?

Our portfolio and for this quarter, the average, the percentage of our household income that went to pay rent was 17.2%. And it has been in the 17% range for the last six quarters. Historically, that is a very low place for us. If we only have 1 market of all of our 15 markets where it is above 20%, it is 21% in Southern California. Most are in the 14%s, 15%s, 16%s, and a few in the 18%s.

There is absolutely no question from an affordability standpoint, our residents, their financial health is better than it has been in the last five years. They have the ability to pay higher rents, and we want to give them that opportunity.

Tom Lesnick, Capital One.

My first question, I just wanted to get clarification on your comments earlier about merchant builders. Obviously hugely contingent on financing from banks. I'm trying to get a sense, your 85% comment, was that nationally? Or was that with respect to Houston specifically? I'm trying to get a sense for how much of the supply in 2015 and 2016 could potentially be turned off or held or delayed?

It's nationally. Merchant builders, as defined by the Trammell Crows of the world, the Hannovers of the world, those folks are build-and-sell builders. And 85% of -- this data comes from National Multi-Housing Counsel, they do an analysis of who is building and what structure they are building under. So the REITs are building -- these vary little bit annually, but the REITs are generally around 15% of the market nationally, and merchant builders are 85% of the market.

With respect to Houston specifically?

Houston specifically it is about the same. Actually, it's probably less. In Houston, specifically, there is only one REIT that I know of that is building anything. It might be Camden, and we're building one project.

So we have a 300-unit component of the market, and the rest are being built by merchant builders. I would say is 100% in Houston and under construction we have is 300 units out of 40,000 or 20,000 units that are being delivered maybe in 2016.

My second question, obviously a huge factor in urbanization trends over the last several years has been lower crime rates in cities leading to development and emerging sub-markets. And there has been reports of the last couple of months or so an uptick in crime in NoMa, obviously your existing asset is doing well, and NoMa II has just announced in development last quarter. But a couple of your competitors recently announced new projects in NoMa. I'm trying to gauge how you guys are thinking about demand risk to emerging sub-markets like NoMa.

When we went into NoMa to start with, it was a very transitioning neighborhood. The local government really wanted to change the nature of NoMa. They put in a bunch of financial incentives for developers to build, office developers, multi-family developers. They got NPR to move there.

They committed to the management teams and investors that were investing those monies that they would improve the quality of life. They would improve policing and all of those things. And they actually have done a great job. NoMa has really turned into an incredible success story of a district that was a very transitionary and difficult neighborhood. I think with the additional investments that people are making, including Camden, and the additional office tenants that have come there, it is going to be a great long-term neighborhood.

Do urban neighborhoods have issues? Sure. You have homelessness, you have crime, and things like that. But the more people you get down there, the more new people that come in, and the more people that are being served in those areas, the better it gets. I don't think that we have any risk in NoMa or any other emerging market.

I could give you 10 emerging markets like that, Arts District in Downtown LA, as an example, that are all getting better, not worse. I think the municipalities really want this inversion to happen. Because when inversion happens, it solves a lot of other social issues that get to the mobility and being able to concentrate people in locations, is really a huge benefit for cities long term. I don't see it turning back.

Austin Wurschmidt of KeyBanc.

I was just curious. Your Florida markets saw some strong acceleration this quarter, and just curious about your thoughts about the acceleration and what your outlook is for these markets?

Our top four markets?

I'm sorry, for the Florida markets.

Florida markets, they had acceleration.

They did. A combination of pretty decent job growth in all three markets and very low supply. There is some stuff that is in the planning process right now, but both Tampa and Orlando have been very late to the supply party and that has served us well. I think we got good runway in Florida markets throughout 2016.

What kind of supply are you expecting next year?

For 2016, in Tampa, it looks like completions are going to be 5,000 apartments, which is very manageable for that sub-market. And in Orlando, it looks like 60 -- 4,400 apartments. Again, those are very historically low markets for this point in a recovery cycle for those two markets.

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

We appreciate your time on the call today, and we hope that you have a great rest of the all summer, and it is a nice all summer long for you. Thank you very much. Take care.

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