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Edited Transcript of CPT earnings conference call or presentation 1-Nov-19 3:00pm GMT

Q3 2019 Camden Property Trust Earnings Call

HOUSTON Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Camden Property Trust earnings conference call or presentation Friday, November 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander J. K. Jessett

Camden Property Trust - Executive VP of Finance, CFO & Treasurer

* D. Keith Oden

Camden Property Trust - Executive Vice Chairman of the Board

* Kimberly A. Callahan

Camden Property Trust - SVP of IR

* Richard J. Campo

Camden Property Trust - Chairman of the Board of Trust Managers & CEO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Alexander J. Kubicek

Robert W. Baird & Co. Incorporated, Research Division - Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Hardik Goel

Zelman & Associates LLC - VP of Research

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Neil Lawrence Malkin

Capital One Securities, Inc., Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

* Wesley Keith Golladay

RBC Capital Markets, Research Division - VP & Equity Research Analyst

* Zachary D. Silverberg

Mizuho Securities USA LLC, Research Division - Research Associate of Americas Research

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Presentation

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Operator [1]

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Good morning, and welcome to the Camden Property Trust Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kim Callahan, Senior VP of Investor Relations. Please go ahead.

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Kimberly A. Callahan, Camden Property Trust - SVP of IR [2]

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Good morning, and thank you for joining Camden's Third Quarter 2019 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 2019 earnings release is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures which will be discussed on this call.

Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman; and Alex Jessett, Chief Financial Officer.

I know that several of the multifamily calls this week have gone over 90 minutes in length. So we will attempt to be brief in our prepared remarks and try to complete our call within 1 hour. We ask that you limit your questions to 2, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or e-mail after the call concludes.

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

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [3]

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Thanks, Kim, and good morning. Today's on-hold music was provided by the Talking Heads. In their hit titled, Once In A Lifetime, they say that life is the same as it ever was, which seems to describe the strength in the multifamily space.

Camden's third quarter earnings and same-property net operating income growth was better than we expected, leading to another guidance increase, making that 3 for the year.

Apartment demand continues to exceed new supply in our markets driven by higher job growth than the national average. Household formations continue to be strong through the third quarter to nearly 1.4 million increase in household formations this year so far, the highest in the last 10 years. Apartment capture rate has remained high. Apartments continue to be the home of choice for millennials and many others. The record high employment has finally started to bring some of the 1 million millennials that are still living with their parents since the great recession back into the apartment markets. This puts smiles on the faces of the parents, their grown children and the apartment owners.

We continue to improve the quality of our property portfolio through development, acquisitions, repositioning and selected property dispositions, while maintaining one of the strongest balance sheets in REIT land. I want to give a big shout out to our Camden teams for their focused vision and hard work making sure that they are improving our team members, our customers and our stakeholders' lives one experience at a time.

Thanks, and I will let Keith take the call from here.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [4]

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Thanks, Ric. Our third quarter results marked the third straight quarterly beat in same-store raise, which leaves us well positioned for a strong closeout to 2019. We'll be providing 2020 guidance next quarter along with our customary report card and letter grades for each of Camden's markets.

Our most recent third-party economic forecasts are indicating supply will peak in Camden's markets in the aggregate in 2020, with a slight decline in 2021.

Most of our markets will see flat to declining supply next year. However, we do expect to see increases in Houston, Orlando, Atlanta, Dallas and Austin. Some highlights from our same-store results include the fact that same-store revenue grew at 3.6% in the third quarter and 1.4% sequentially. Our top markets for the quarter were Phoenix at 6.9%; Raleigh, up 5.3%; San Diego/Inland Empire, up 4.5%. Denver and DC Metro, both up 4.1%; and Atlanta, up 4%. Our weaker markets remain South Florida and Houston, below 2%.

Regarding occupancy, our focus remains on maintaining occupancy above 96%. We averaged 96.3% in the third quarter of 2019, up from 96.1% in the prior quarter and 95.9% in the third quarter of 2018.

Year-to-date, occupancy was 96.1% versus 95.7% last year, and October occupancy remained slightly above 96% at 96.1%.

Turning to leasing activity. Third quarter 2019 new leases were up 2.4%. Renewals were up 5.1%, for a blend of 3.6%. This compares to a third quarter '18 blended rate of 4.1%. This 50 basis point decrease in rents was mostly offset by our 40 basis point increase in occupancy compared to last year. October prelims for new leases were flat as expected and up 5% on renewals for a 1.9% blend, roughly the same as October of 2018.

November, December renewals are being sent out at an average 5% increase. Our net turnover continues to set new record lows for the third quarter of 2019, it was down to 51% versus 54% last year.

Move-outs to purchased homes for the quarter was 14.3%, which was the same as last quarter and the third quarter of 2018.

For this metric, 14% to 15% is beginning to feel like the new normal for move-outs to purchased homes versus the 18% to 20% rate prior to the Great Recession. Regarding technology initiatives, Camden is evaluating numerous initiatives to increase revenues, reduce expenses and provide an overall better living experience for our residents.

We have completed the rollout of mobile maintenance and an enhanced self-service online functionality for our residents. We are currently piloting Chirp, our proprietary mobile access solution, and we will update you periodically on our technology and innovation initiatives.

At this point, I'll turn the call over to Alex Jessett, Camden's Chief Financial Officer.

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [5]

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Thanks, Keith. And before I move on to our financial results and guidance, a brief update on our recent real estate and capital markets activities. During the third quarter of 2019, we began construction on Camden Hillcrest, a 132-unit, $95 million new development in the Hillcrest neighborhood of San Diego, California.

Subsequent to quarter-end, we stabilized our Camden McGowen station development in Houston, Texas generating a yield in the low 5% range. As a result of the elevated supply in the Midtown submarket, this yield is slightly below our original pro forma but within the range of our expected returns for similar mid- and high-rise urban development.

As the supply dynamic in Midtown continues to improve, there will be further upside for Camden McGowen Station resulting from its irreplaceable location adjacent to public transportation and a vibrant city park.

Later in the fourth quarter, we will begin construction on Camden Atlantic, a 269-unit, $100 million new development in Plantation, Florida.

For 2019, we have now completed $218 million of acquisitions and $185 million in new development starts.

We are actively working on several additional real estate transactions, which, if successful, would closed around year-end and are therefore not included in our fourth quarter guidance as the impact to the quarter would be immaterial.

On the financing side, subsequent to quarter-end, we completed a $300 million, 30-year senior unsecured bond offering with an all-in interest rate of 3.41% after given effect to underwriter sitdowns and other expenses of the offering.

We used the proceeds for the early redemption of our existing $250 million 4.78% bonds due June of 2021 and the prepayment of our $45 million 4.38% secured mortgage due 2045.

These transactions locked in 30-year debt at near all-time low yields and extended the average duration of our debt by approximately 3 years.

After taking into effect these transactions, 100% of our debt is now unsecured and all of our assets are now unencumbered.

In conjunction with the redemption and prepayment, we incurred a onetime charge to FFO of approximately $0.12 per share. This charge represents the combined amounts for a make-whole payment on the previously outstanding $250 million bond, the prepayment penalty on the $45 million mortgage and the write-off of remaining related loan costs.

Again, this $0.12 charge was recorded in October and is included in fourth quarter and full year FFO guidance.

Turning to financial results. Last night, we reported funds from operations for the third quarter of 2019 of $130.5 million or $1.29 per share, exceeding the midpoint of our prior guidance range by $0.01.

This $0.01 per share outperformance resulted primarily from higher same-store NOI, resulting from a combination of higher-than-anticipated levels of occupancy and lower-than-anticipated real estate taxes. We have updated and revised our 2019 full year same-store revenue, expense, net operating income and FFO guidance based upon our year-to-date operating performance and our expectations for the fourth quarter.

As a result of our better-than-expected third quarter same-store occupancy, which we believe will carry over to the fourth quarter, and our anticipation of continued lower property taxes in the first quarter, we increased the midpoint of our full year revenue growth guidance from 3.4% to 3.5%, and we decreased the midpoint of our full year expense growth guidance from 2.75% to 2.2%.

The anticipated property tax savings are primarily being driven by lower Texas property tax rates as a result of the passage of Texas House Bill 3, which reduces school district tax rates by approximately $0.07 in 2019 and an additional $0.06 in 2020.

As a result, we are now anticipating full year property taxes for our same-store portfolio to increase at just under 1%, approximately 200 basis points inside our prior guidance. The result of this higher revenue guidance and lower expense guidance is a 50 basis point increase to the midpoint of our 2019 same-store NOI guidance from 3.75% to 4.25%.

Last night, we also revised the midpoint of our full year 2019 FFO guidance from $5.09 to $5.02 per share. This $0.07 per share decrease includes the impact of the fourth quarter $0.12 per share charge related to the early debt repayment.

Excluding this charge, our full year FFO per share guidance midpoint increased by $0.05 per share as the result of our anticipated 50 basis point or $0.025 per share increase in 2019 same-store operating results, approximately $0.01 of this increase incurred during the third quarter with the remainder anticipated in the fourth quarter; $0.015 of higher interest and other income, resulting primarily from higher cash balances and other miscellaneous corporate income; and $0.01 from anticipated fourth quarter business interruption insurance recovery from a prior period for one of our nonsame-store communities.

Last night, we also provided earnings guidance for the fourth quarter of 2019. We expect FFO per share for the fourth quarter to be within the range of $1.21 to $1.25. The midpoint of $1.23 represents a $0.06 per share decrease from $1.29 reported in the third quarter of 2019 and includes the impact of the fourth quarter $0.12 per share FFO charge related to the early debt repayment. Excluding this $0.12 charge, our fourth quarter FFO per share guidance midpoint increased by $0.06 per share as compared to the third quarter as a result of a $0.02 per share or just over 1% expected sequential increase in same-store NOI driven primarily by our normal third to fourth quarter seasonal declines in utility, repair and maintenance, unit turnover and personnel expenses. A $0.02 per share increase in NOI from our development communities in lease-up, our other nonsame-store communities and the incremental contribution from our joint venture communities. A $0.01 per share increase in FFO associated with the previously mentioned fourth quarter business interruption insurance recovery from one of our nonsame-store communities and a $0.01 per share decrease in overhead expense due to the timing of various corporate initiatives and expenditures.

Our balance sheet remains strong, with net debt to EBITDA at 3.9x and a total fixed charge coverage ratio at 6x. We ended the quarter with no balances outstanding on our $900 million unsecured line of credit and $157 million of cash on hand. After closing our $300 million bond offering on October 7, redeeming the $250 million bond on October 23, and repaying the $45 million mortgage on October 31, we now have approximately $73 million of cash on hand. At quarter-end, we had $672 million of on-balance sheet developments under construction, with $337 million remaining to fund over the next 2.5 years.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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So I appreciate the prepared comments about the potential for some acquisitions around year-end. But just for some context, can you give an indication of how many deals you're looking at and the approximate value of that pipeline?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [3]

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We are probably evaluating $1 billion of transactions and that's kind of an ongoing basis. It's likely we'll close 1 or 2 of those by the end of the year, and we're talking probably hitting our original guidance or being slightly ahead of the original guidance, which would be $100 million to $200 million by the end of the year.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. And a quick follow-up on that same topic. So earlier this year, you removed dispo guidance -- dispositions from your guidance because you had other sources of funding, which included equity issuance. And your stock is now at an all-time high. So how are you thinking about your cost of capital and the potential to issue more equity to take advantage of some of these opportunities that you're seeing?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [5]

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Well, clearly, our cost of capital has gone down this year by virtue of -- when you think about the 30-year bond we did at an all-in rate of 3.41% including fees. But -- and clearly, the high -- the stock price at this level lowers our costs as well. Ultimately, in order to grow, you either have to issue equity or issue debt, and we have said for a long time that we're going to manage our balance sheet to be one of the best balance sheets in the entire REIT sector. So to the extent we can match fund acquisition opportunities or fund our development. Ultimately, we do need to be in the capital markets. So we want to be opportunistic in that area. We -- this year, we've issued over $1 billion worth of bonds, and if you -- at really good rates, and we did an equity issuance in February. So we will continue to try to be prudent in our capital management and make sure that we have a use of funds before we load up the balance sheet. Right now, we have cash on our balance sheet, and we need to spend it.

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Operator [6]

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Our next question will come from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [7]

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You mentioned that you expect supply to peak in 2020. Can you provide some more color on that in terms of expected deliveries in 2020 versus this year and then maybe specifically for D.C. and Houston?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [8]

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Yes. So Nick, in our -- this is using Ron Witten's numbers. In 2019, across Camden's footprint, this year, in 2019, we're going to get roughly 137,000 deliveries. That ticks up in 2020 to about 150,000, and then that comes back down, as we mentioned, it will come down slightly in 2021 to about 147,000. So the progression is 137,000, 151,000 and then back down to 147,000 with a peak in 2020.

In D.C., the numbers are basically flat, 12,000 this year expected, 12,000 next year and another 12,000 in 2021. Houston is the big change. We go from roughly 8,000 apartments this year to about 15,000, which is -- percentage-wise is a big jump, but 15,000 is closer to the long-term average for deliveries in Houston. So we'll -- it looks like we're trending back to kind of what the long-term average has been, but it's a pretty big jump over 2019.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [9]

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And so when you think about how that plays into Houston? Obviously, it's been a little bit of a drag this year in terms of same-store revenue growth versus the portfolio overall. How do you think about operating that portfolio going into heightened supply next year?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [10]

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Sure. The Houston market is an interesting market because you would have -- we expected Houston to be better this year than it has been. And what's going on here is that we continue to have strong job growth, 75,000, 80,000 jobs. The unemployment rate dropped dramatically here over the last couple years. And what we thought would be higher apartment demand didn't materialize the way it usually does. And what happened was -- and I think this is sort of indicative of migration rates around the country. They've gone down primarily from historical numbers. And that generally -- that's a function of the unemployment rate being low everywhere. So there's a -- not as much incentive for somebody to leave their city, if they can get a job and they can create a situation for the family there, to go to another city. So we -- that's one of the issues. The other issue in Houston, which is pretty interesting is that when our employment rate went down, the new jobs that were created, they were taken by existing people who lived here, who already had a housing solution. So they either lived in a house or an apartment already, and we didn't create new demand as a result of that. And when you start looking at the numbers going forward into 2020 and 2021, we think that flips. Usually, apartments are getting maybe 40% to 50% of the demand in household formations driven by jobs.

And last year, they got about 15% of the capture rate in Houston. So we think that's going to turn next year and started turning already, and we're going to see it turn in 2020, 2021, which should be more constructive for being able to lease those apartments that are coming online during that period.

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Operator [11]

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Our next question will come from Shirley Wu with Bank of America.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [12]

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So you guys talked about Houston a little bit. So could you also talk about Southeast Florida, where you're also seeing a little bit of a softer market? And what could potentially happen in the near term to make that market better or worse than expected?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [13]

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Yes. Shirley, Southeast Florida has 2 primary issues. There's been a moderation in job growth for sure. And we're running between, Fort Lauderdale, down from about 15,000 jobs in 2019. It looks like it's trending to about 13,000 jobs in 2020, both of which are on the low end of their historical rates. About the same thing in Miami, 18,000 jobs this year or trending to 15,000 next year.

You still have a pretty big overhang of condominium -- shadow inventory of condominiums. They're soaking up some of the demand at the higher end of the market. So that's a little bit of an issue on the supply side.

In 2019, in Fort Lauderdale, we had about 3,000 apartments. It looks like that's going to be less than 2,000 in 2020, which should help some. And then Miami, you've got this -- a total supply this year, completions, about 7,700, and it looks like that drops down to about 7,000 next year.

So while we think that, that scenario looks like it's in equilibrium. It certainly doesn't feel like a scenario where you're going to see a great return to pricing power in South Florida in 2020. We'll see -- we're in the process right now of putting together our bottom-up budgets, and we'll provide you with a lot -- hopefully, a lot more clarity and guidance on our view for South Florida on our next conference call.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [14]

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Got it. That's helpful. And so as we're talking about this topic on supply. As you anticipate higher supply into 2020. Could you talk a little bit about your strategy going forward? And that focus on occupancy versus rate?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [15]

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Yes. So if you look at Camden's total footprint, you've got -- the supply is going up in our -- across our markets from 137,000 to about 151,000, so it's 14,000 apartments over Camden's entire footprint, roughly 8,000 of that is in Houston. And again, the 8,000 gets us back, in Houston, to kind of a normal run rate for absorption. So the anomaly of that 14,000, about 8,000 of it is in Houston. And it's not -- it's coming off such a low base that, that doesn't seem terribly troublesome to us, and the rest of it is sort of a rounding error across our markets. I think, from our perspective, 2020, in the aggregate, is going to be a lot like 2019, but you're going to see some movement around the markets. I think I mentioned the markets where we've got supply increases, including Orlando, Dallas, Austin and Houston. And then pretty much everywhere else in our portfolio, we should see moderate declines in supply. So our -- we are going to maintain our strategy of trying to maximize occupancy. And at this part of the cycle, we just think that, that's probably the better trade-off. So again, when we put together our plan for next year. My guess is that we'll be planning for something that's a little higher in average occupancy than what you would have seen in our portfolio over the last 5 years. But maybe not materially, but maybe 95.5% to 96%.

We've been fortunate this year to be able to outperform occupancy every quarter so far. And it looks like that will carry over in the fourth quarter this year.

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Operator [16]

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Our next question will come from Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [17]

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Just 2 questions. First, on the transaction market, you guys have been pretty clear, in the past few years, that it's obviously tough to acquire. And just sort of curious, as cap rates and rent growth across the country almost converged just sort of the same levels regardless of market. Are you guys finding that your IRRs are the same as you underwrite? Or are you seeing more competition from maybe some of the coastal markets or rent control markets coming your way, where the IRRs that you're underwriting this year may actually be lower than what you would have had last year just given the competition?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [18]

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Well, I think the -- generally speaking, reason we haven't been as aggressive from acquiring properties is because of that issue, right? I mean when you get down to the issue, we want to have a decent spread over our long-term cost of capital on our terminal IRRs. And so the going-in yields are pretty much the same across the country. And for the type of property we're looking at it. We're now at sub 4s in most markets, including Houston. And so the idea of the growth that you have to have from that starting point to get a terminal IRR that is a decent spread over your long-term cost of capital is tough. Now that's why we haven't bought as many properties. So bottom line is, we're looking for kind of a needle in the haystack, where it's under managed, it's under what we could build it for, so under restoration cost. And so it's a challenge getting those units in that regard.

So with that said, there is a hope that, in the next year or 2, there will be a sort of convergence of sellers that will have to adjust maybe going in yields or pricing, if you will, to match what the buyers really want because there is sort of a -- there is this big bid-ask spread and there's a massive wall of capital out there that needs to be placed, and the sellers need to recharge their own balance sheets so they can continue to develop. So on the second part of your question, which was kind of the -- is there a migration of capital flows from the -- to Sunbelt markets from other lower cap rate markets. There's some pretty decent indications recently that some of the big players that have historically wanted to play only in the gateway cities and the coastal markets are migrating into the Sunbelt for all the reasons that we like our footprint where it is right now. The job growth, it continues to outperform the rest of the U.S. in our markets and the cost of doing business and the regulatory environment is certainly more friendly in most of our states. So I think that is -- there is some evidence that, that's going on. And it does put additional pressure on cap rates. On the question of your -- on the question of kind of IRRs, the flip side of the cap rates that we're chasing is that, as you underwrite an IRR, you've got to be realistic about what an exit cap rate is. And if you're looking at acquisition cap rates at 3.75%, whereas before, we would have been hard-pressed to even think about a 4.25% exit cap rate, but that's the price of poker. And so when you do the underwriting with what we think are realistic exit cap rates based on the current environment, your IRR is not that far off of where it would have been a year ago. The challenge, as Ric pointed out is, if you're starting from a 3.75%, it doesn't -- it almost doesn't matter what your math is on the exit cap rate. First of all, we're going to hold these assets, when we buy them, for probably 20 years. Secondly, to get from 3.75% to a sort of a run rate that's above our weighted average cost of capital, it just seems like forever. So we're reluctant in the same way that you think about lenders who, at some point in time, quit lending it over a spread and say, I am -- it's the floor. I don't really care what the spread is, I'm not willing to lend money below x. And in our world, we're just not willing to invest money below x.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [19]

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It's certainly amazing to talk about 3.75s in Sunbelt markets, I'm sure you've never mentioned those together. The second question is for Alex on the property tax. You said that there's an impact this year's savings but that you also expect another savings next year. So just from a qualitative standpoint, I know you're not giving guidance, but still, if we think about next year, is there -- how would we gauge the amount of savings that we should anticipate or is it -- or is that sort of savings already in the third quarter run rate?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [20]

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Without giving guidance, what we will see is further decreases in tax rates in Texas in 2020. It's $0.07 in 2019, it's an additional $0.06 in 2020. And then, obviously, the offset to that is we were very successful in 2019 with the amount of refunds that we've gotten in. And so we'll see how our budgets play out for the refunds we anticipate in 2020.

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Operator [21]

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Our next question will come from Derek Johnston with Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [22]

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Your starts under construction and shadow pipeline continues to remain robust. How are you viewing the development platform given the compressing development yields in this environment? And has the low end of yield expectation range comfortably declined to, let's say, around 5%?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [23]

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I think the answer is absolutely. We are continuing to be in the development business, and we like where we sit in that regard. We've generally started between $200 million and $300 million annually, and we have a pipeline to continue that process. The yields on the -- yields have definitely come down, returns have come down on development as a result of rising construction costs going up faster than rental rate increases have gone. In our last book of business that we completed, our average return was in the -- around 7%. Now our average return is around 6%. And the -- when you think about the blended rate of the different types of assets that we're building. We're building suburban wood-frame assets that are trending in the -- at the higher level at higher returns than the urban concrete, higher densities, and those are going to be in the low 5s and the stick built suburban properties are going to be 6% and some change. And so our blended rates are going to be probably 100 basis points less than we got on our last cycle.

On the other hand, when you look at the spread that you're getting for the risk of developing. The spreads have actually stayed the same because cap rates have compressed, and people are paying sub-4 cap rates for assets of these kind of quality, so our -- the spread in terms of risk reward that we're getting from developing continues to be robust. We need at least 150 basis point positive spread on a development project versus an acquisition, and we're continuing to get that because of the compression in cap rates and the wall of capital that continues to bid up existing properties.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [24]

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Got it. Understood. And then just switching to D.C., just quickly. So D.C. does contribute an outsized amount of NOI versus other Metros in the portfolio, and yet the rest of the portfolio is in the Sunbelt, which we, of course, view makes sense. So how do you see D.C. fitting into the mix going forward. Considering you don't really have any ongoing development or communities planned in the pipeline, I believe, at this point, I do understand that there is one redevelopment project going on. So how do you view the D.C. market going forward?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [25]

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Well, we still think long term, the D.C. market is -- we're about appropriately allocated to the D.C. Metro. You've got to keep in mind that we have D.C. proper assets, and then we've got Northern Virginia and all the way into Maryland. So it's -- yes, there's sort of a -- there's probably a wave that they all -- all those markets are affected by, but they all have their own individual drivers. We just finished 2 pretty sizable developments in D.C. We finished NoMa last year, our lease-up there in D.C. proper. So we're -- we continue to be very constructive on D.C. It's certainly outperformed our expectations this year. We're at 4.1%. NOI growth in D.C. and relative to our overall portfolio, that's accretive to the average, and that's the first time that's happened in a number of years. So we continue to like that area. We'll continue to invest. And as I said, we just wrapped up about $425 million of new development in the D.C. Metro area in the last 2 years. So it continues to be an important part of our portfolio. And I gave it a -- D.C. Metro, a letter grade of B with a stable outlook that probably was wrong. It probably was more like a B or B+ stable or maybe B with an improving outlook based on the performance of our portfolio so far.

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Operator [26]

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Our next question will come from Haendel St. Juste with Mizuho. The sound is coming through very poorly on that line. So we will move on to the next questioner, which is Austin Wurschmidt with KeyBanc Capital.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [27]

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Alex, you referenced in your prepared remarks numerous initiatives that you were working on to improve revenue and expenses. Can you expound on that? And do you expect it to be more of a contributor, I guess, to revenue growth in the $50 million of revenue-enhancing CapEx that you guys have completed this year?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [28]

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Are you talking about the technology initiatives that we're working on?

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [29]

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Just technology initiatives or, I guess, other items that will contribute to top line growth.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [30]

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Yes. We're always looking for new areas of enhanced service where we can drive value to our residents. And certainly, one of the areas that we're -- that we've spent a lot of time exploring in the last year is creating opportunities for parking options for our residents, where people might be willing to pay for reserve parking for an additional space, et cetera. So that's an area that probably has gotten more focus of our attention in the last 12 months. In terms of technology, there are a number of things that we're looking at. I mentioned that we had already rolled out the mobile maintenance, which has been a real game changer for us. The other thing that we're working on right now is a smart lock solution. And we have a proprietary product that we're piloting right now. There are a lot of -- there are a number of "smart lock solutions" out there, but the economics of them just don't work for the multifamily industry. The game changer will be some -- when someone comes up, and we hope that we will be that entity, comes up with a solution that is cost-effective for the multifamily business as opposed to the high-end condo business. And we are pretty well down the trail on a proprietary solution that we're piloting in Houston right now. We're already rolling out the perimeter access piece of it. And in the first quarter of next year, we'll be rolling out the smart lock component. So we just -- always keep your head up and keep looking and be aware of any opportunities that we have to better serve our residents.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [31]

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Can you give us a sense of what the spend is on that? And what the returns are you expect from those items?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [32]

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We don't have that nailed down yet because, since it's a proprietary product, it's something that, at a point in time, we'll make available to anybody else who wants a smart lock solution with economics that work in the multifamily business, but we haven't nailed that down yet.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [33]

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Okay. And then just last question for me. To the extent you successfully close on the $100 million to $200 million of deals you referenced in the acquisition pipeline and you kind of utilized that available cash on the balance sheet, as future opportunities arise, I guess, what's your willingness to utilize the ATM versus an overnight?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [34]

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Well, the balance between ATM and overnights, interestingly enough, it's about the same in terms of cost to the company. It obviously is more efficient and quicker to do an overnight versus an ATM because you can only sell a limited amount of volume each day. But really, the determining factor for our capital allocation is really trying to match fund the investments that we're making. And so we'll use the most efficient platform to do that and use the combination of debt and equity as we have in the past.

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Operator [35]

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Our next question will come from Drew Babin with Baird.

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Alexander J. Kubicek, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [36]

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This is Alex on for Drew. First off, looking at McGowen Station. Curious how aggressive you guys had to get on concessions there to get it fully leased? And then also, with that yield coming in a little lower than you initially expected, have you reevaluated your underwriting expectations for the downtown development right down the road?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [37]

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So on the first question, McGowen Station. The McGowen Station market kind of ranged, depending upon what time of year and what was going on, anywhere from a month free to 2 months free, sometimes 2.5. The -- when you look at the Downtown, Midtown and Greenway markets in Houston, that's probably where the most -- the highest percentage of properties that are very high end. So it's definitely been a slugfest there from that perspective. Now that we're stabilized, we're feeling pretty good about McGowen Station. It's definitely a lower yield than originally projected. The Downtown project, we are definitely going to open up and do a -- the same concessionary market. The good news is there's not a lot of new properties opening their doors in Downtown. But the Midtown and the Greenway does have an effect on that. So we expect that to be a concessionary market for at least the next 12 to 18 months, but we're confident that Downtown continues to be a very positive place for people to live. In the last 5 years, you've gone from 4,000 people living Downtown to 10,000 people living Downtown. And there's been about $3 billion worth of investments to improve walkability and parks and transit and what have you. So we think long term and even in the near term, Downtown will continue to be a great place for people to -- an alternative for people to live. You've seen much more densification in Houston and the folks that are living Downtown are sort of surprising me because they're tending to be an older demographic rather than a younger demographic primarily because of the price point that the Downtown buildings are offering. But we feel good about it. We will open into a concessionary market, though, for sure. And we are taking some of the units out of the Downtown market -- downtown building by doing a Y hotel, and we'll have 100 units out of the building that will be a hotel, which will be an interesting test. Because, on the one hand, we'll have cash flow generating from the hotel, they tend to get occupied very quickly, and that cash flow will offset what we would otherwise have in vacant units. And we'll be able then to sort of lease-up a smaller property as opposed to the whole property, and then we'll be able to sort of close down the Y hotel over a period of time while we continue to lease-up.

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Alexander J. Kubicek, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [38]

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That's really helpful color. And then lastly, looking at L.A. and Orange County, how has that revenue growth result come in relative to your initial expectations year-to-date? Curious if supply has been the motivating factor? That's looked like you guys have been pushing occupancy over rate. So just curious what you've seen in that market.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [39]

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Yes. So we had, at the beginning of the year, I rated L.A. as an A- and improving. In Orange County, A- improving. So we were very constructive on L.A./Orange County at the beginning of the year just sort of based on the way our portfolio is positioned. We've got a pretty -- a different footprint than a lot of our other public company brethren do in California. It's all Southern California, and even within Southern California, it's not concentrated in L.A. So it's -- I think it's performed in line with our expectations. Obviously, the -- they've had a real -- a moderate increase in new apartments in L.A. and Orange County. You've got roughly 3,500 apartments in Orange County, total of about 13,000 in all of greater L.A. So those numbers look like they're trending down next year in both markets, decent job growth continues to -- can continue to see in L.A. and Orange County. So I don't -- I know that there's been a little bit of disparity between our results, a little bit better than some of our competitors, but it certainly wasn't unanticipated for us that we would have a good constructive year in both of those markets at the beginning of 2019.

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Operator [40]

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Our next question will come from Wes Golladay with RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, Research Division - VP & Equity Research Analyst [41]

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Going back to that supply forecast for this year versus next year. Does that take into account delays in construction time for next year?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [42]

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I would say, yes, because our data providers tell us that they are doing a lot of work around trying to get refined in terms of delivery dates and do it kind of monthly as opposed to looking at quarterly or even just looking at aggregate numbers.

Having said that, for the last 3 years, every -- all 3 years, I would say they -- both data providers have underestimated the amount of slippage. So I can't imagine -- maybe they got ahead of it for 2020, and we're really going to scope from 137,000 to 151,000. Just color me as skeptical based on the last 4 years of estimates versus what actually materialized. So I hope that there's a little bit better refinement in that data, but I guess I'll believe it when I see it.

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Wesley Keith Golladay, RBC Capital Markets, Research Division - VP & Equity Research Analyst [43]

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Got it. And then looking at the balance sheet. I mean, everything looks really good there. The one thing that does stand out is, you do have some 5% coupon debt maturing in, it looks like, 2023. How soon can you get after that piece of debt?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [44]

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Well, when -- the 2023 maturity definitely is one we'd like to take out. The challenge you have is, the prepayment penalties are very expensive. The closer you get to it. The lower it goes, obviously. And as we took the $12 million charge for the early extinguishment of those bonds that we replaced with the 30-year bond, we'll look at those opportunities. We sort of looked at the $12 million charge, as we had a -- did a breakeven analysis that basically told us that, if the rate went up 18 basis points or spreads gapped 18 basis points, we -- between the time that we issued in October versus the maturity of these bonds, and sort of like buying insurance on 18 basis points, which is what we did. And when we look at that, if we -- that cost today would be a bigger spread and a higher -- much more expensive insurance policy. And when you get down to 10 basis points or 15 basis points, when you think about how spreads move and how the treasury has moved, that's a rational insurance policy to buy. But today, it'd be much more expensive, and that's why we wouldn't take that out today. But as we get closer, and you look at what happens to rates and spreads, we could make that decision in the future.

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [45]

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Let me say, we look at this all the time, and we're running math on it probably weekly. Right now, the prepayment penalty on that would be about $20 million, so, as compared to the $12 million that we just incurred. So we are looking at it on an ongoing basis.

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Operator [46]

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Our next question will come from Haendel St. Juste with Mizuho.

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Zachary D. Silverberg, Mizuho Securities USA LLC, Research Division - Research Associate of Americas Research [47]

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This is Zachary Silverberg here with Haendel. Just a few questions on the cost side. Can you talk about some of the big moves in same-store expenses in some of the core markets that you saw in 3Q, specifically in Atlanta, or the big jumps in Charlotte and Southeast Florida?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [48]

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Yes, absolutely. So when you look at Atlanta, we got some very large property tax refunds in the third quarter. I will tell you, those were, in fact, in our plan. So there was really not a surprise there for us. If you look at Charlotte, keep in mind that Charlotte really has had very high property taxes. We talked about that in the beginning of the year. If you'll remember that Charlotte actually does a reval every 8 years, and this happened to be the reval year. So as a matter of fact, our total Charlotte property tax growth for 2019 is right around 35%. And if you're looking at Southeast Florida, that's also property tax driven. So really, they're all property tax driven, and it depends upon the timing of either when refunds come in or, as I said, with Charlotte, just the overall increase in that market due to the fact that they reval every 8 years.

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Zachary D. Silverberg, Mizuho Securities USA LLC, Research Division - Research Associate of Americas Research [49]

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All right. And you mentioned the benefit from Texas, but do you guys anticipate any other major tailwinds or headwinds in reassessment of taxes or anything of that sort in 2020?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [50]

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Yes. I mean, so the only thing that we're looking at in 2020 is that Raleigh also revals every certain year. So Raleigh is going to reval in 2020, and that's going to be over 4 years. Obviously, it's a smaller market for us. So it shouldn't be as incremental as what we saw in Charlotte. And then just to clarify on Texas. When we talk about a $0.07 reduction or a $0.06 reduction in property tax rates in Texas, what we're talking about is not FFO per share, we're talking about as a percentage of the mill rate. So if you think about a standard mill rate in Texas being, call it, $2.22 per 1,000. If you have a $0.07 reduction, what that works out to be is about a 3.5% reduction in Texas due to the rates.

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Operator [51]

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

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [52]

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A first question on Houston in general. First, sorry about the World Series.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [53]

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Is there a game?

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [54]

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Yes. But just given the fact that the market really is so heavily on energy, I know you've talked about medical being a big presence, but it really seems to ebb and flow with how the energy sector is doing, plus the fact that it's very easy to bring on supply quickly. I wonder, do you ever think about maybe paring down your exposure in that market, just given the volatility and sort of one main demand driver of it?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [55]

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Well, I think that is a misconception that energy drives Houston, fundamentally. Because if you look at -- let's just talk about middle of 2014 when energy prices were over $100 a barrel, and then they went to $20 -- some $20 and some change by 2015. Energy industry lost 80,000 jobs in Houston. And at that time, the -- Houston produced another 80,000 jobs in the petrochemical business, the medical business and other ancillary businesses. So Houston had basically a flat job growth for a couple of years as a result of that. And then the market responded by starts dropping from -- the good news about the ability to add supply is you can cut the supply as fast as you can add the supply. So we cut the supply pretty dramatically, and the market didn't have a major dislocation like it had maybe in the '80s. So Houston is a much more diversified economy than it was in the past. And part of the -- and when you think about just the price of oil, what your -- what happens there is that, that relates to drilling and activity from that perspective. But the petrochemical part of the sort of downstream energy business is actually doing really well. 1/3 of all gasoline, for example, is manufactured in the Houston ship channel. 60% of airline fuel is manufactured there. So there's a lot -- and a lot of primary chemicals are continuing to do really well as long as -- and those are more driven not by energy prices but by economic activity. So if you have clearly a recession on the horizon, then that's one of the reasons Houston is less -- sort of less bulletproof from a recession. Back -- if you go back into the '80s, when the U.S. had a recession, Houston never felt it because it was so energy dependent mostly on the upstream side. With that said, we definitely look at our allocations of our real estate, and we want to make sure that we're balanced. Houston represents about 11% of our portfolio today. It's been a great long-term market for us, but we definitely look at where we're buying and where we're selling, and you haven't -- you don't see a new development in Houston other than in our joint venture right now. But that doesn't necessarily mean the opportunity isn't here because, to me, I think one of the misconceptions of Houston -- and a lot of people made a lot of money in our stock when we underperformed the market in 2014 by 2,000 basis points and because they sort of threw the stock out the window because of the energy situation even though we didn't perform from a cash flow perspective that badly here. So we're going to make investments here, and we're going to stay in Houston. We'll toggle it here and there, but we have never considered like leaving this market or anything like that. Maybe slowing the growth or perhaps paring back some of the assets that are maybe needing more CapEx. But beyond that, we're long-term players here.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [56]

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And Neil, thank you for your condolences to our Houston Astros. But like I told everybody in Camden, D.C. is our largest market, Houston is our second largest market. Before they ever played a game, Camden was a winner. And one of the teams was going to end up with the trophy.

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [57]

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Good way to look at it. Okay. Last one from me. A lot of companies have been talking about tech and integration and how that feeds into the various platforms on both revenue and expense management side. You're obviously not spending -- doing the smart home route, but I'm just curious how you're thinking about using technology to proactively help with things like CapEx, anything along those lines you're doing that could either be on the revenue or expense side that you're kind of leveraging big data or the Internet of Things, I guess, to sort of enhance your platform with?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [58]

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Well, I would, first of all, dispute that we're not doing smart homes because we are. We're doing the smart homes that people want. People, for example, do not want systems that turn their lights on or not. They want -- they definitely want smart thermostats and things like that and access. We do a lot of focus groups and spend a lot of time trying to understand what our customers want and what they are willing to pay for. And so on that side of the equation, we're pushing the edge of the envelope to create value for customers and drive revenue for us. The -- on the big data, we have just completed and/or are in the process of putting additional nodules on or modules on this system. But we just completed an Oracle cloud-based system, where our financial reporting and HR and is now going to be in the cloud. And that is all about big data. It's all about having access to all of our data via smartphones and then being able to drive expenses lower in CapEx. I think the Internet of Things is a real thing. And so ultimately, when you have your data all in the same place and it's communicating across platforms in the cloud, we'll be able to leverage smart devices in our air conditioning units and in our maintenance facilities so that we can, instead of fixing a broken one, we can -- that inconveniences a tenant or a resident, we can actually do preventive maintenance, which would save us money over the long term. So I think that is a -- that was a big investment and a massive amount of time and effort. It was nearly a 2-year project. And everyone in our company was involved in it, and the teams did a great job even though it was -- definitely, those kind of big ticket projects are very painful because you're doing your regular job plus trying to implement a new system, and our teams did a great job of managing what is a tough thing. And ultimately, our big data and our ability to analyze and understand how things are working is definitely going to be enhanced dramatically as a result of that project.

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Operator [59]

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Our next question will come from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [60]

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Just one quick one for me. Keith, I was hoping you could compare 2019 operating backdrop versus 2018 as it relates to urban versus suburban properties. And what you're seeing on the rent growth side? Or are suburban properties coming down to earth versus urban or are they still pulling ahead? Or any comments there would be great.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [61]

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Yes. John, pretty consistently this year, our urban product has outperformed -- or the suburban product has outperformed by about 50 basis points. A lot of -- it's primarily the result of where the last cycle of product got built, and it was overwhelmingly the merchant build community was definitely -- had a bias towards urban assets. That's where the buyers of that product wanted to -- that's where the demand was for their product on an exit basis. So yes, that could -- we continue to see that hasn't changed. That's one of the things in our Houston portfolio that's actually helped us pretty dramatically as our Suburban assets have held up really nicely. And the real supply challenges, as Ric mentioned, have been in the Midtown, Downtown and the Greenway Plaza area. So -- but absolutely, it is a trend. It's continued. My guess is, is that, as they always do, the focus -- because there's so much competition in the urban core areas that you're probably going to see a drift back towards the suburban assets by the merchant community, and we'll deal with that when we have to.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [62]

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Yes. And just to be clear, I was talking portfolio-wide. So that comment holds in the supply- [related] markets of Dallas, Charlotte, other markets as well?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [63]

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Yes. That's across -- the 50 basis points is across Camden's entire portfolio.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [64]

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Okay. And that was a similar margin this time last year?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [65]

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Yes, it was.

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Operator [66]

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Our next question comes from Hardik Goel with Zelman & Associates.

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Hardik Goel, Zelman & Associates LLC - VP of Research [67]

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So stepping back from just the company-level stuff. You guys talked a little bit about the challenge of allocating capital today. And some of your peers are really going out there issuing equity and expanding the size of the company. You guys have been more prudent. How do you see this play out longer term, 5, 10 years, this wall of capital issue? What could change? How could this wall of capital shift elsewhere? And what is it about the narrative that you think will keep it there or move it?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [68]

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Well, I think the narrative will change when there's a -- when we have a recession, right, and when we have the next cycle. The question about what happens, and generally what happens in a business contraction is that people lose jobs, demand is reduced as a result of that situation. And then what happens is you have landlords, especially new developments that are in lease-ups, that have to discount dramatically to buy market share. That generally has an effect on pricing, and you're able to -- cap rates rise and prices sort of go down. The thing that's kind of -- and I guess on the recession side, last year at this time when the market was going down, and everybody was talking about a recession, the Fed was rising. Now we're an accommodative easing cycle. We don't sort of bet on recessions or major upticks. We're trying to keep -- be in a position where we sort of plan for the worst and hope for the best. That's why we're -- our balance sheet is where it is today because you don't know what's going to happen in the future. I guess, the real interesting part of multifamily and I think the reason multifamily is one of the top real estate classes -- this multifamily industrial have the hot hands, and that's where investment capital wants to go. In multi-families -- in the multifamily space, that's because people need a place to live. And when you look at the demographics and you look at the sort of where people live and how they operate today, especially the millennials, they are doing everything later in life. They're buying houses later in life, having kids later in life, they don't want -- they want the optionality of an apartment. So apartments are really good. And then if you think about, well, if interest rates go up because of inflation, we -- apartment leases roll over on average of 8% every month, and we're repricing our asset every day. So you have a good backdrop for inflation. So that's why the capital is coming this way. We are expanding our business as well. When you look at the development pipeline plus the acquisitions, $400 million or $500 million a year of additional capital that gets put out. Now if we could -- if we're very -- ultimately, we're at the beginning of a cycle, if this was 2012 or '13, we might be more aggressive on all those -- the fronts. But because we're late in the cycle and there's a lot of uncertainty out there, we're going to be more prudent.

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Hardik Goel, Zelman & Associates LLC - VP of Research [69]

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Got it. Just a quick follow-up on that. You mentioned cap rates of 3.75%. You maybe have an exit of 4%, 4.5%. Is it conceivable that in a recessionary scenario, not for you guys because you guys have a strong balance sheet. But for private operators that are underwriting like that, is it possible that they see -- they significantly underperform the unwritten returns because cap rates gap out more because they're starting from such a historically low base?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [70]

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Well, that's definitely the risk, right? I mean because if you're wanting a 6% IRR, and you start at 3.75% and you then have a growth expectation of the cash flow at an exit cap rate. I mean if cap rates gap 100 basis points, you need a 25% increase in revenue or NOI to be able to offset that kind of increase in cap rate in order to make your return. So I think that if you're in a -- that's the inherent risk of buying a cap rate at that level today. It's worked out for lots of folks because the rents have grown and cap rates have continued to stay very low. But ultimately, people might be disappointed in their returns if you have a scenario where cap rates gap and rents don't grow as much. I think the issue of whether somebody gets in trouble financially, I think that's probably a low risk because you just have -- there's a lot of equity in the system. Even in the development game, the merchant builders are all 30% to 40% equity today because of just the way banking -- the bank system is requiring the equity. So I don't think there's a lot of -- there will be a lot of financial stress in terms of people having to sell. But on the other hand, their expectation of their pricing and their margins, their profit margins, which have been amazingly high and sticky for a long time, will probably revert to more normal levels or less than they originally anticipated.

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Operator [71]

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Our next question will come from John Guinee with Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [72]

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John Guinee here. Two curiosity questions. It looks like San Diego is about $720,000 a unit for a pretty small project, 130-odd units. Can you talk about what you're building there and why it hits that price? And then second, if I look at your redevelopment summary, is it okay to just project out maybe 1,000 units a year get this kind of major overhaul and people should think about that as an ongoing CapEx?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [73]

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So on San Diego, the short answer is, it's the price of poker for an A+ location that's adjacent to the Hillcrest neighborhood where single-family homes, little bungalows, sell for $1.5 million to $2 million. You're 1.5 mile from Balboa Park, you're 2 miles from Downtown. It's in the -- and I don't -- I'm generally not a believer in using the word unique for real estate, but this is a really unique site. It's literally up on top of a bluff with a view of Mission Bay, it almost required that we build that scale and scope of project. And again, you're talking about comparable rents in that neighborhood that are pushing $3.80 to $4 a square foot. So the returns work because people are willing to pay a premium to be in that neighborhood. They're relatively small unit footprints. But yes, it's expensive to build in California for sure. On the 1,000 units annually, I think that is a rational thought process. We are -- we haven't moved through our portfolio, but we're -- we'll continue to make that investment. It is a -- it's the best investment on the board that we can make is redeveloping our existing properties.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [74]

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So what do you think, you have decided to redevelop one property a year?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [75]

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Yes. I think you have to split it into 2 categories. So repositions, which is separate than redevelopment. And repositions, we're doing about 2,300 units a year. And I think that's probably a pretty safe number to continue. When you look at the redevelopments, there's 4 communities. They're all unique in that they're all high rises and they are communities where there was extensive exterior renovations that were necessary. I would tell you that, that particular pool is a little bit shallower than the pool of repositions. So we'll keep looking for redevelopments, I wouldn't expect to see a huge amount of these on an ongoing basis. But as I said, we'll continue to add the repositions, think about 2,300, 2,500 plus or minus a year.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [76]

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And that's more of a $10,000 to $12,000 price tag?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [77]

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It started that way. It's getting -- creeping up a little bit more closer to the, call it, the $15,000 to $20,000 price range just for obvious reasons, but we're still getting fantastic returns on those repositions.

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Operator [78]

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

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [79]

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Well, thanks for being on the call today, and we will see a lot of you at NAREIT coming up. So thanks a lot.

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Operator [80]

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