Camden Property Trust (CPT) Q3 2014 Earnings Report, Transcript and Summary

Good day, and welcome to the Camden Property Trust Third Quarter 2014 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 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 5 back-to-back apartment calls today. So we will try to be brief in our prepared remarks and complete the call within an hour. [Operator Instructions] If we are unable to speak with everyone in the queue today, we'll 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 Ric Campo.

Good morning. Our teams produced another quarter that was all treats and no tricks. Strong employment growth across our markets continue to outpace the spooky multi-family 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 3 years, we have taken advantage of the historically tight spreads between lower -- 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 1,300,000,000 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 1/3 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's nearly $1,300 per door. 2/3 of the increase came from market improvements and 1/3 from capital recycling. We will continue our capital recycling to improve the quality of our portfolio going forward. Our portfolio is well positioned for continuing above trend growth for this foreseeable future. I'll turn the call over to Keith Oden, our President.

Thanks, Ric. Our third quarter results were solid, and they were in line with our expectations. Comparing revenue growth to the third quarter to our original market-by-market rankings that we provided earlier this year shows a very high degree of correlation, and we expect to see more of the same through the end of the year. After 3 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 the full year. Our same-store revenue growth remains strong, it's 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%. D.C. metro managed to remain in positive territory at plus 1.2% revenue growth for the quarter versus 9/10 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 2/10 of 1% and renewals up 5.5%. November, 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 our 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 in move-outs to purchase homes. It's something we'll continue to monitor closely. Our view is that nonfinancial 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 increase -- increases Ric described, the percentage of rent to household income declined again this quarter to 17.1%, which is as low as it's 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 5 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'll turn the call over to Alex Jessett, Camden's Chief Financial Officer

Thanks, Keith. Last night, we reported funds from operations for the third quarter of 2014 of $98.7 million or $1.09 per share, representing an approximate $3 million or $0.03 per share outperformance to the midpoint of our prior guidance range. This outperformance 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 1 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 2 joint venture communities: Camden South Capitol, a $78 million development in Washington, D.C.; and Camden Waterford Lakes, a $38 million development in Orlando, Florida. Also during the quarter, we began leasing at 2 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 7 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 whole 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 submarket. This community was completed in October 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 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 95.8% 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 health care 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 primarily components of this $0.04 per share increase are as follows: First, the $0.03 in outperformance 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 maintenance, unit turnover and personnel expenses; a $0.02 per share increase resulting from NOI contribution from our 8 developments in 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 and 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 in 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'll 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 5x, a fixed charge expense coverage ratio of 5x, approximately 75% of our assets unencumbered; and 92% of our debt at fixed rates. At this time we'll open the call up to questions.

[Operator Instructions] Our first question comes today from Nick Joseph with Citigroup.

I wonder 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 definitely get -- been getting a lot of questions about that. And I think it's interesting, the energy executives that I talked to, and I talk to them a lot, the -- their view is that it's 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. If 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 several hundred thousand. And just to put in perspective, Houston has had 100,000 jobs a year for the last 4 years running. The year-over-year numbers for September were 119,000 jobs created in Houston. And in Texas in general, over 50% of all the jobs created since the downturn have 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 for 2015, but they're not -- 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 in the Gulf Coast, primarily because of the petrochemical business. Because obviously, lower oil prices, or I 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 oil -- 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 cost both in the manufacturing area and in the petrochemical business is a boom for those businesses. So we don't think it's going to be a major hit or anything like that. And the oil pricing, it's very different than it was in the past, probably in the '80s 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 of oil prices. And they -- and I believe Exxon Mobil also reported this morning, have the same beat, and they beat because of their downstream businesses and they are refining in their petrochemical businesses while their sale of crude went down. There -- it was more than offset by the increase in their downstream production.

And then I guess, I recognized it was a modest amount. But what are your thoughts around issuing ATM equity below consensus NAV versus using the other capital sources?

Well, the -- so we announced at the beginning of the year that we had a $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 capital -- cost of capital, it doesn't change it very much as long as you're using a small portion of it. And 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's not a huge portion of the capital pie.

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

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.

But was that anticipated?

No, it was not anticipated. No, it was not. And so when we walk -- 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 I'm just -- I was wondering if you can comment on Washington, D.C. 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 D.C. And we've been able to kind of hang on to this very modest amount of growth, 1.2% for the quarter. We're up right at 1% for the year. And we were basically up a tiny amount last year. I think most of the people's numbers have been quite a bit more negative than that. And 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 bit better. They're exposed to a little bit less of the new supply competition. So while it's -- 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 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 our teams have done a great job of managing to maintain some positive revenue growth in what has been a very difficult environment.

The next question comes from Alexander Goldfarb of Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: 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 do like 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 shift -- particular shift in our strategy to operate at a much higher occupancy. I think over the long term, you can still expect us to see -- 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's going to continue into the fourth quarter, where it showed up in our metrics was in the turnover rate. So the turnover rate for the third quarter was actually down about 6% from what it had -- 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 the turnover -- our turnover rate for the quarter. And obviously, that kind of flows through naturally to your occupancy rate. But it's not a shift in strategy. It's 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. So I think it's -- from our perspective, it just sets us up pretty well going in to the fourth quarter, which is historically our weakest traffic quarter. And we want to -- just wanted to maintain as much cushion as we could. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then second question, and maybe this fits with Halloween and scary ghoulish thoughts. Ric, you're the sort of resident real land [ph] expert on Fannie Freddie. So last time we had 3% down payments, it didn't end well. Now, for some reason, I think that it's going to work better this time. So, one, your thoughts on -- do Fannie Freddie really believe or does Watt really think that this is going to work differently? And 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?

Well, I think that clearly, they're trying to stimulate housing. And I actually think that's a good thing for the economy overall. And I know people generally think that multi-family does -- 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. I mean, we're not building the same kind of housing stock, and we actually have shortages of single-family homes in a lot of markets. So -- 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. And a lot of those -- and if you think about Freddie and Fannie, they -- Freddie and Fannie had a fair amount of that, and they bought a lot of CMBS 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 Freddie and Fannie want, they're checking all of the boxes, they're not holding any of the mortgages on their own balance sheet. They're just packaging them and selling them off to Freddie and Fannie. So 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's 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. And right now, that leg of the stool for the economy has just not been working.

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

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, how -- what share of married couples make up your portfolio today relative to the long-term average?

We think it's less than 1/3 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. 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, we are -- those discussions are ongoing. It has taken longer than we thought it would. But the -- our partner has been -- they've been busy beavers for the last 2 quarters. And we've been mindful of that and respectful of that. But we are -- we start -- we are having ongoing discussions, and I hope to be able to update you by the end of the year.

Okay. And 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 tenure money today?

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

[Operator Instructions] Our next question comes from Rich Anderson with Mizuho Securities.

One market specific theme this earning season has been Southern California improvements. Wonder if you can comment on what you're seeing there?

Southern California is performing really right in line with our expectations, Rich. It was not -- it wasn't 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 online with revenues. Not gangbusters, but we are seeing improvement.

Okay. When you were talking about something -- 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 20s. And 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 capped 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.

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

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

We -- 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. I -- my guess is, it's the inverse of why we lose people, which is it's a job transfer or a -- or moving closer to work.

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

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

So our current development pipeline is yielding just over a 7% yield. And our pipeline, the foreseeable pipeline, we think, 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 types of returns are still sustainable on the 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 still 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. Can you just talk a little bit about supply. I mean, we've seen supply, it seems like it was pushed out a little bit more to '15 there. Just curious as to what your expectations are for supply in '15? 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 3 to 6 months. And that's strictly a function of the inability of people to get enough labor on their jobs to stay on budget. It certainly affected our -- 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've had in these markets that we've been building in. So yes, we're -- we are -- so if you think about -- we have said and still continue to believe that the peak for starts will -- you'll look back and say the peak was still in 2014. We believe that the peak for completions will be late in '15. So we're -- a lot of the wood to chop on the supply side is still in front of us. But it's uneven as it always is. Some markets are going to be more impacted than others, and we'll just have to slug our way through it in 2015.

[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.

Well, 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.