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Edited Transcript of CPT earnings conference call or presentation 26-Jul-19 3:00pm GMT

Q2 2019 Camden Property Trust Earnings Call

HOUSTON Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Camden Property Trust earnings conference call or presentation Friday, July 26, 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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* Andrew T. Babin

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

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Daniel Santos

Sandler O'Neill + Partners, L.P., Research Division - VP

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* Hardik Goel

Zelman & Associates LLC - VP of Research

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* Karin Ann Ford

MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Charles Anderson

SMBC Nikko Securities Inc., Research Division - Research Analyst

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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

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

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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 Second 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 second 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.

We will be brief in our prepared remarks and try to complete the call within 1 hour. (Operator Instructions) If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or e-mail after the call concludes.

At this time, I'll turn it 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. Our on-hold music today was courtesy of Dire Straits. And although our cost of capital has decreased over the years, we don't -- we still don't get our money for nothing. However, our unique culture allows our associates to experience "That ain't working that's the way you do it." Thanks to our Camden team members for improving the lives of our employees, our customers and our stakeholders, one experience at a time.

Our multifamily business continues to be strong. Market fundamentals remain good as supply gets absorbed in all of our markets. During the first half of 2019, we completed over $1 billion of debt and equity transactions designed to strengthen our balance sheet and give us maximum financial flexibility in this part of the real estate cycle. We accomplished these fundings and have been able to increase FFO guidance in spite of having more cash earning lower rates than we originally anticipated.

FFO growth per share for the quarter and the year increased 7.6% and 6.8%, respectively. We added to our development pipeline and completed the acquisition of Camden Rainey Street in Austin in the quarter. We are on track to meet or exceed our original acquisition targets of $300 million for 2019 in spite of a very difficult acquisition environment.

I'd like to take this opportunity to congratulate Malcolm Stewart on his promotion to President of Camden. Malcolm will continue in his role of Chief Operating Officer. Keith will continue his responsibilities as Executive Vice Chairman. These moves are part of our long-term succession planning initiative, creates position space for other senior executives in the future.

I'll now turn the call over to our new Executive Vice President, Keith Oden.

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

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Thanks, Ric. Regarding my new title, I'd like to address the biggest concern that's been expressed so far. Yes, I will continue to cohost Camden's annual happy hour at the summer NAREIT meeting.

Now back to business. Our second quarter revenue results were in line with our increased guidance, which sets us up for continued strong results for the balance of the year. Overall, same-store revenues were up 3.4% for the quarter and up 1.5% sequentially. Second quarter growth in our top 4 markets were Phoenix at 5.7%; Denver, 5.1%; L.A./Orange County, 4.8%, up; and Atlanta at 4.6%, up. As expected, our weakest markets for the quarter were South Florida, Charlotte and Houston with revenue growth in the 1% to 2% range.

Regarding rents on new leases and renewals. Second quarter new leases were up 4.1% and renewals were up 5.6% for a blended increase of 4.9%. The second quarter 2019 blended rate of 4.9% was a 30 basis point improvement from the second quarter last year of 4.6%. July preliminaries are at 4.1% increase on new leases, 5.3% on renewals for a blended growth rate of 4.7%.

As expected, we've seen steady improvement in our new lease rates from January through June. And as is normal, the new lease pricing will begin to taper off as we approach the end of our spring/summer peak leasing season. Our August and September renewal offers continue to reflect a healthy rental environment that are being sent out at an average increase of 5.7%.

Our qualified traffic remains strong and supportive of our above-trend occupancy levels across all of our markets. We averaged a strong 96.1% occupancy in the second quarter versus 95.8% occupancy in the first quarter of 2019 and 95.7% in the second quarter of last year. July occupancy is trending to 96.3% versus 96% last year. Our turnover rates continue to run at historically low rates, with a net turnover in the second quarter at 46% versus 49% last year.

During the quarter, our move-outs to home purchase remained low at 14.3% versus 14% in the first quarter with both quarters well below the 14.8% for the full year of 2018. It appears that the rising price of starter homes will continue to put a damper on homeownership.

At this point, I'll turn the call over to Alex Jessett.

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

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Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activities. During the second quarter of 2019, we purchased for $120 million Camden Rainey Street, a newly constructed, 326-unit, 8-story building located in Downtown Austin. We began construction on Camden Cypress Creek II, a 234-unit joint venture in Houston, Texas. And we stabilized ahead of schedule our Camden Washingtonian development in Gaithersburg, Maryland, generating a 6.5% stabilized yield.

We also purchased approximately 4 acres of land in the NoDa neighborhood of Charlotte for the future development of approximately 400 apartment homes and purchased approximately 12 acres of land in Tempe, Arizona, also for the future development of approximately 400 apartment homes.

On the financing side, in mid-June, we completed a $600 million, 10-year senior unsecured bond offering with an effective average interest rate of approximately 3.67% after giving effect to the settlement of in-place interest rate swaps and deducting underwriter's discounts and other estimated expenses of the offering. As a result of these in-place interest rate swaps, we will recognize interest expense at 3.84% for the first 7 years of the note, and we'll recognize interest expense at 3.28% thereafter.

Turning to financial results. Last night, we reported funds from operations for the second quarter of 2019 of $128.6 million or $1.28 per share, exceeding the midpoint of our guidance range by $0.02. Our $0.02 per share outperformance for the second quarter resulted primarily from approximately $0.01 in higher same-store net operating income resulting from lower levels of self-insured employee health care costs, lower property taxes and lower other property expenses that resulted from general cost control measures, approximately $0.005 in better-than-anticipated results from non-same-store and development communities and approximately $0.005 in a combination of lower overhead expenses and higher fee and joint-venture income.

Last night, based upon our year-to-date operating performance and our expectations for the remainder of the year, we also updated and revised our 2019 full year same-store guidance. Because of our better-than-expected second quarter same-store expense performance and our anticipation of lower property taxes in the back half of the year, we decreased the midpoint of our full year expense growth from 3.35% to 2.75%. These anticipated property tax savings in the back half of the year are primarily being driven by Atlanta and Houston, where we have both received favorable current year tax valuations and had success with prior year appeals. As a result, we are now anticipating full year property taxes for our same-store portfolio to increase it just under 3%, approximately 100 basis points inside of our original budget. The result of this decreased expense guidance is a 35 basis point increase to the midpoint of our 2019 same-store NOI guidance from 3.4% to 3.75%.

Last night, we also increased the midpoint of our full year 2019 FFO guidance by $0.02 per share from $5.07 to $5.09. This $0.02 per share increase results from our anticipated 35 basis point or $0.02 increase in 2019 same-store operating results, $0.01 of this increase occurred in the second quarter, with the remainder anticipated over the third and fourth quarters and an approximate $0.01 from our second quarter outperformance not associated with same-store results. This $0.03 aggregate increase in FFO is partially offset by the approximate $0.01 combined impact of our $200 million larger-than-anticipated June bond issuance and the timing of various real estate transactions.

Last night, we also provided earnings guidance for the third quarter of 2019. We expect FFO per share for the third quarter to be within the range of $1.26 to $1.30. The midpoint of $1.28 is in line with our second quarter results as expected sequential increases in revenue are offset by the typical seasonality of our operating expenses and the incremental contribution from our development and acquisition communities are offset by additional interest expense resulting from our June bond offering.

Our balance sheet remains strong with net debt-to-EBITDA at 3.9x and a total fixed charge coverage ratio at 6.4x. We ended the quarter with no balances outstanding on our $900 million unsecured line of credit and $150 million of cash on hand. 98% of our debt is unsecured, and 99% of our assets are unencumbered. We have $577 million of on-balance sheet developments currently under construction, with $311 million remaining to fund over the next 2.5 years.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Nick Joseph of Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Just looking at your weighted average monthly revenue per occupied home, it looks like it is about 40 basis points below the rental rate growth. I'm wondering what's the drag from other revenue that's causing that? And then how do you expect it to trend for the remainder of the year?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [3]

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Yes. Absolutely. Because we have higher occupancy and because we're having lower turnover, what we're starting to see is the incremental impact from damage and cleaning fees and bad debt is coming down on a year-over-year basis. That's the impact of what you get when people just aren't moving out.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [4]

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Would you expect that to kind of -- that spread between the 2 to continue for the rest of the year? Or do you expect turnover to pick up?

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

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At this point, we're anticipating that although we're having exceptionally low levels of turnover, we think generally, it's going to stay fairly low for the rest of the year.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [6]

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And then just on the land purchase, as you brought more in the quarter, what do you see in the terms of pricing there? And maybe tie it to what you saw earlier in the cycle for land pricing.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [7]

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Land prices definitely have increased along with everything else, up with cost and what have you. And so while land prices have increased, the idea that land price -- that construction costs along with land prices have driven yields to the point where some of the projects are making sense. So I think sellers are adjusting and making sure that they can sell it at some level. So I don't think that land prices are continuing to rise as fast as they were given the difficulty of underwriting today -- in today's environment.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [8]

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And also, Nick, just to add to that. The Phoenix site that we bought is something that we've been working on for the last several years. So that's reflective of pricing. It was 2 or 3 years ago. And the site in Charlotte is -- it's an emerging market for sure, and we have had great success in kind of getting ahead of where the growth is coming. So we felt like we've got really an attractive price for that site as well.

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Operator [9]

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Our next question comes from John Kim of BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [10]

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Can you remind us what percentage of your same-store revenue come from multifamily rents versus fees, retail rents and other income item?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [11]

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I would say it's probably pretty close to about 95%, but we'll have to get back to you on that.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [12]

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Okay. And Alex, in an answer to a prior question, so the lower other income, is that all turnover-related fees? Or were there -- was there an impact on like technology?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [13]

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Yes. The largest component of it, as I said, is turnover related. So it's -- if you think about damage fees, cleaning fees and bad debt. Now there is a slight component that's associated with the tech package. Because obviously, we finished rolling out the tech package last year, and so we're not really getting that much of an incremental impact in 2019. But that's a slight component of it.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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And you don't expect turnover to go up with new lease growth being so strong?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [15]

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I would tell you if you had asked us this question last year, we expected turnover to go up, and it continues to stay at record low levels.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [16]

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Yes. Part of it is this whole idea that when you think about in-migration to different markets and about the way people move around in the country today, they just don't move as much. And that's been a trend for the last 2 or 3 years. And a lot of it has to do with the unemployment rate being so low everywhere. So people sort of think they don't have to move to another hot city to get a better job because their -- the jobs in the cities they're in are doing well given the low unemployment rate. So you're starting to see migration rates slow in a lot of different markets, and that just keeps people kind of in their apartments longer because they aren't moving around.

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Operator [17]

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Our next question comes from Lee Wu of Bank of America.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [18]

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So could you guys talk about some of the markets that you've seen outperformance or markets that have lagged your initial expectations? And any extra color on what's driving that outperformance versus underperformance would be great.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [19]

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Lee, if you would have lined up our results halfway through the year with our initial letter grades that we issue at the beginning of each year with our guidance, I would tell you that there's not a single one that I would change other than maybe a plus to a minus here and there. So we're really tracking about as we expected we would across our entire platform. In our -- in the second quarter, obviously, we do a reforecast from our original guidance. We do a reforecast every quarter. On $250 million worth of revenue forecasted for the second quarter, we were within $100,000. So pluses and minus here and there, but nothing that would even be worth calling out to your question. The markets that we expected to be at the top of the charts are there. And then obviously, the weaker markets, the Houston, Charlotte and South Florida are most impacted by new supply relative to job growth. And that's -- again, that's pretty predictable and was predicted.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [20]

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Great. So could you guys maybe talk about maybe the Houston market a little bit more and also your development in lease-up, your McGowen Station, how that's been doing versus initial expectations?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [21]

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Yes. So Houston is -- again, we -- at the beginning of the year, we projected it to be one of our weaker markets and primarily because just the geography of the competitive set and the units that have gotten -- that were delivered in 2018, they're still in the process of trying to get absorbed. There were so many apartments that were delivered in the midtown and downtown area that all of the new developments and -- as well as existing assets have suffered by the competitive nature of merchant builders trying to get to the finish line. The challenge has been that the merchant builders are not getting to the finish line. They -- most of them thought their downtown and midtown assets would have been stabilized by the end of 2018, and it just hasn't happened. There's a -- so one of the things -- even though Houston created almost 80,000 jobs or is on track to create 80,000 jobs this year, the nature of those jobs is a little bit of a mismatch with the high-end product that got built in midtown and downtown. The jobs that had been created, by and large, are hospitality, retail, construction to a certain extent. But the sector that has not participated in job growth is the energy sector. So all of the large integrated oil companies, which are still primarily the preponderance are located in the downtown area for their office space, they are just not in a hiring mood. And it remains to be seen when that's going to happen. You don't have to go back to really -- a little over 3 years ago, the energy companies were just finishing their downsizing and the recency effect of having to lay people off. And then fast-forward 3 years later, there's a great deal of reluctance to start increasing head count. So I think the energy companies are kind of doing more with less. And at some point, that will reach a breaking point, and they'll start hiring again. But in the meantime, the jobs that are being created, even though they look good in terms of aggregate numbers, they're not jobs that necessarily support the kind of rents that you need to live in the midtown and downtown area.

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Operator [22]

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Our next question comes from Trent Trujillo of Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [23]

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Just wanted to go back to revenue. So the operational update you provided earlier this quarter at NAREIT, it was showing a blended rate growth of 4.7% through May. And there were some overtures that they could accelerate further in June based on historical trends, which would possibly lead to raising same-store guidance. So it sounded like it had picked up. So how much thought did you give to raising same-store revenue guidance given where first half came in?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [24]

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Yes. So if you'll -- as I mentioned, we did the reforecast for our second quarter, and we ended up almost exactly on top of where our reforecast was. So based on that, we feel like we have really good visibility for third and fourth quarter. And obviously, we've gone through the reforecast for that. So we still feel very comfortable with our guidance that we've reiterated. We did raise revenue guidance last quarter, and we've maintained it for this quarter. And so we're comfortable with where we are in terms of where we think the end of the year will shake out at a 3.4% total revenue increase.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [25]

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Okay. That's helpful. And then shifting -- I guess going back to acquisitions. You've alluded to achieving or even exceeding the high end of your range. Could you give us some indication as to what's in your pipeline and the confidence that you can put to work all the capital that you have raised so far?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [26]

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Sure. We have -- the last chart I looked at had like 14 properties that were in excess of $1 billion that we had at various states -- stages of due diligence in terms of whether we were going to try to be the ultimate winner. The interesting thing about acquisition guidance is you can always hit your guidance if you're just the highest bidder. And we try to be as disciplined as possible in this very, very aggressive acquisition environment. And so I think we have better confidence today in that the properties that we're looking at now are -- we think there's several that are in the sort of sweet spot of what we're looking for. What we're looking for is newer properties that haven't stabilized or have management issues. And we think there's -- there are going to be some opportunities for us to at least meet our guidance and hopefully exceed it.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [27]

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Okay. And one -- sorry, one quick follow-up, maybe for modeling purposes. On recurring CapEx, you've spent about $31 million year-to-date. And realized -- fully realized that this spending can be lumpy. But are you still comfortable with the original guidance of $68 million to $72 million for the year?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [28]

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Yes. We're still comfortable with that.

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Operator [29]

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Our next question comes from Daniel Santos of Sandler O'Neill.

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Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [30]

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Just 2 quick ones for me. The first one is on the management shuffle. Should we expect any G&A impacts from any internal promotions? And then other than maybe who's going to host the NAREIT Happy Hour, are there any changes in role responsibilities?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [31]

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The answer is no to both.

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

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Unfortunately, the answer is no. Yes, especially NAREIT.

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Daniel Santos, Sandler O'Neill + Partners, L.P., Research Division - VP [33]

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Fair enough, fair enough. And then second, are there any submarkets where you're starting to get maybe a little nervous about supply that's coming on the pike, if that's making you maybe consider your -- reconsider your exposure in the future?

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

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No. The thing I think has been very interesting and positive about this cycle is that -- this real estate cycle is that all markets have been able to absorb their supply even -- and the supplies are at peak levels. We think next year, we start seeing some moderation in the peak in some markets. But the good news is we've had enough job growth and had enough stickiness of the existing customer base. The fact that we have lower turnover means we don't have to find as many new residents. And so that in combination with a decent job growth market and great situations in each city, you've been able to absorb the supply without having a major negative impact. Now clearly, markets like Charlotte and Southeast Florida, maybe Charlotte is a great example where you have had a lot of supply, but you've had great job growth to back it up. And while it's moderated, it's put a damper on big rent increases for existing properties, you're still positive maybe 1% or 2%. And in light of how much supply is coming on, I think that's a very good backdrop. So ultimately, the real question for us longer term is where are we in this cycle? And then when you look at projections out further, the question of with an unemployment rate in the 3s, how you get -- where do you find the people to add the jobs? There's jobs available and the economy is doing well, but there's a lot of concern about job growth, the ability of -- job growth slowing as a result of the inability of people to find people to actually take those jobs. Heretofore, we've had, at least the last year, there's been people coming out of the back into the workforce and what have you to fill those jobs. But generally, supplies, it's been really good and well absorbed.

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Operator [35]

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Our next question comes from Austin Wurschmidt of KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [36]

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So I want to go back to last quarter's call as we were discussing new lease rates and the expectation that new lease rates wouldn't push much higher than the 2.8% you achieved in April. But in fact, you did see significant improvement in May and June also seems strong. So I guess I'm also curious what may have offset the benefit from the higher new lease rates as it seems like renewals are pretty much in line with expectation and that you're tracking above the 3% to 3.5% blended lease rates that I believe you assumed in your initial outlook.

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [37]

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Yes. So where our guidance assumes total revenue growth of 3.4%, we were 3.7% in the first quarter. So clearly we -- and when we do our reforecast and looking out, it's just the fact is that some of our markets in particular, Houston, Charlotte, a little bit of -- a little bit in South Florida and also beginning to see signs in Austin that there's just a constant backdrop of too many apartments being delivered in markets -- in some markets where we're competitive with that new supply is at some point it takes a toll. And obviously, I think you're seeing some of that in those 4 markets and we expect that to continue throughout the balance of 2019. Now the good news is we still have markets that are doing 5% plus on blended growth rates and those are going to continue to help. But clearly when you're modeling you're 3.7% in the first quarter, we maintain guidance and raised it to 3.4%, but maintained it at 3.4%. The math is pretty simple that you're going to see some deceleration in blended average rental rates through our total revenues through the third and fourth quarter and that's what we expect. And we think it's moderate in terms of the deceleration that we could see in the third and fourth quarter. And if we get to the end of this year, and we have another print of 3.4% total revenue growth on top of what we had in the last couple of years, we'll probably shake our heads and say, "job well done."

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [38]

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Appreciate the thoughts there and that kind of leads a little bit into my next question. You gave a little bit of a glimpse into 2020 supply and as well as how '18 and '19 were shaking out. But as we sit here today, I'm curious how is '19 playing out heretofore versus your expectation? And are you just assuming what wasn't delivered in the first half gets delivered in the second half? And then how was Ron Witten's forecast for '18 from initial projection perspective and then what ultimately played out in '18?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [39]

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Yes. So Witten, which is -- who we primarily use for completions on across our platform, the actuals for 2018 were about 137,000 deliveries across our platform, which was a little bit less than what he had at his original -- if you go back 12 months prior, he was off by about 8,000 apartments. He had 145,000, plus or minus being delivered in 2018. And the consequence of that is, as you just mentioned, that ends up rolling into 2019. 2019 currently, he has almost spot on with 2018 at 137,000 again. So there's movement around in our platform, but the aggregate deliveries across our platform are almost identical from actuals of 2018 to what he's projecting in 2019. Where it shows up is that now, whereas for 2 years, we were sort of pointing to and everyone was pointing to 2019 being the peak deliveries nationally, and we thought that would play out in Camden's portfolio as well. But based on Witten's new numbers for 2020, which he has going up from 137,000 to 151,000, clearly some of that 6,000 has rolled -- 8,000 from '19 rolled to '19 and another 8,000 or 9,000 from '19 has now rolled to 2020, and it looks like 2020 is going to be the peak. I hope that we're finally reaching the actual peak for deliveries across our platform. He's got them coming -- starts coming back down in 2021, but not a huge amount. So I think it's very likely that the rollover from '18 to '19 continued and will continue throughout 2019. And I hope that we have -- we're going to see the peak deliveries of something around -- somewhere around the 150,000 completions in 2020.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [40]

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And what percent of the 137,000 in 2019 is expected to be delivered in the second half of the year or absolute numbers?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [41]

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Yes. I don't have that in front of me, but I'd be surprised if it wasn't pretty equal across our platform, there's not a whole a lot of seasonality in how and what we build with the exception of Denver.

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Operator [42]

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Our next question comes from Haendel St. Juste of Mizuho.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [43]

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I wanted to follow up on an earlier question. Can you actually talk a little bit about the timing of the development starts for the new land purchases in Charlotte and Tempe? And what type of yields ballpark are you currently projecting there?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [44]

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Sure. The starts for those units will be towards the end of this year, beginning of next year. And the -- mostly 2020 starts when you get down to it. In terms of development yields, the yields -- our yields in our pipeline are anywhere from 5% roughly on the high rise urban and about 6.5% on our suburban. And just to give you some color, there's been a lot of discussion about yields, yield compression because of cost increases going up faster than rental rates. In our last book of business, our ranges were 5% to 7.5%, and now they're about 5% to 6.5%.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [45]

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Okay. That's helpful. But maybe you could tell me what type of -- I'm assuming the stabilized yields you're projecting there, so maybe some color on the projected rents and expense increases you're projecting as part of that?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [46]

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Are you talking about rent increases in the development portfolio?

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [47]

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The yields, the yields. Yes. I'm assuming the stabilized yields you quoted. Just curious what's embedded within them.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [48]

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Yes. So it depends on the market. But generally, we're not inflating our rents much more than 2% or 3% given where we are in the current market. And generally, what we do is we do 2 methods of analysis. One is untrended returns and the other is what we expect the returns to be. And those are the returns I just gave you. And I think the rent increases are like I said anywhere between 2% and 3% max. And operating costs were inflating them at pretty much 2% to 3% as well.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [49]

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Okay. I'm curious about the Charlotte development, in particular, given the relative revenue weakness and the supply commentary you mentioned earlier on that market. I guess I'm curious, what about that project specifically gives you the confidence to start that in light of your earlier commentary?

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

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Well, as Keith said earlier, the NoDa -- it's Charlotte NoDa, which is on the rail line, and it's basically north of Downtown Charlotte. And the -- we're going to start construction on that project in January of '20. And so it's not going to deliver really effectively until end of '21 or middle of '21, end of '22. And the Charlotte market, while it's having some issues now with absorption, over time, it's one of our best markets. And we think that fundamentally that this project will -- given where it is and on the rail line, that it will absorb into the market the way the other ones are absorbing in the market today, which would be a very positive, reasonable yield and another great asset for us at Charlotte.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [51]

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It's helpful. And one last one, if I may. I don't know if I missed early, but maybe you could share some color on the initial yield for the Austin acquisition and maybe some of the longer-term operating upside, if there's any there.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [52]

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Yes. So we're trying to buy our model. Our acquisition program today is to buy assets that are either -- that have not been stabilized from a lease-up perspective, and they're also an asset we definitely categorize as that; and then at a below replacement cost, somewhere between 10% and 20% below replacement cost and then having upside to be where we can bring our management team in, bring our technology packages in and then drive cash flows up. So generally, the theme of that is going to buy properties that are in the low 4s, 4.25-ish kind of existing cap rates. And we're going to try within a -- we think fundamentally within a couple of years, we'll be able to get it up to 5 cap rate in terms of by implementing Camden revenue management systems and technology packages and what have you. That would be the model we're looking for, and that's pretty much where Austin is.

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Operator [53]

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Our next question comes from Drew Babin of Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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Question on maintenance CapEx. It ran a little high relative to our estimates kind of on a per-unit basis in the second quarter. And I guess it's a sign of trends, the same factors influencing development cost, influencing CapEx and maybe there is kind of a per unit number you think is kind of budgeted for this year, if you could remind us what that is?

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Alexander J. K. Jessett, Camden Property Trust - Executive VP of Finance, CFO & Treasurer [55]

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Yes. So what I would tell you is this is entirely timing based. So if you look at our original guidance, it was $68 million to $72 million, and we anticipate being right in that range. So what you saw in the second quarter as compared to your model is probably just a little bit of a timing issue.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [56]

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Okay. That's helpful. And a question on Southeast Florida. Obviously, that's a market that maybe the job growth hasn't been as hot as the rest of the Sunbelt. Obviously, there's some supply there. Can you talk about who is adding jobs there? And what types of factors might get that market going again? And could a currency fluctuation or something like that possibly maybe bring more activity in? Just based on your experience in the market, I was hoping you can maybe give some color there.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [57]

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Yes. So I think if you take Witten's numbers for projected job growth in Fort Lauderdale, 12,000 jobs -- or excuse me, 27,000 jobs this year, and that drops a little bit into 2020, same thing for Miami. Miami's -- Witten's got 2019 jobs at 20,000 going to 14,000 in 2020. Given the amount of new supply that's been delivered in both Miami and Fort Lauderdale, not just in rental apartments, which is you think of as our direct competitors, but the number of for-sale condos that have been delivered across those 2 CBDs is just kind of crazy. So it doesn't show up -- it doesn't necessarily show up in stats on employment growth compared to completions, but is a really significant factor in both of those markets. Job growth, hospitality continues to be -- construction jobs continue to be a big piece of the equation just because of all the construction activity, not just residential, but also commercial construction activity. But I don't think it's the character of the jobs in the Miami, Fort Lauderdale markets. I just think it's the amount of supply of both for-sale and for-rent product that we've had to try to absorb there.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [58]

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To your point of currency valuation changes and what have you, I think there is definitely an impact on Southeast Florida given its sort of the capital of South America, if you want to call it that or Central America. And you have seen when there are times of volatile currencies issues down there, there's been flight capital and folks that have come into the market. And a lot of that condos that Keith is talking about that are competing with the apartments are actually people generating hard currency that are South American owners that are just trying to build -- lease their very expensive apartment condo cheap in order to just get some hard currency. So it's an interesting market. Long term, it's great market, but it just has a few headwinds right now.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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Okay. That's really helpful. And just one last quick question on Southern California. Obviously, your performance in that market looks better than peers kind of as a product of what you own and where you own it. The last couple of quarters seems like the revenue growth has been more occupancy gains and decent rental rate growth, they're not performing rental rate growth, but still kind of in the upper 2s. I guess have you seen anything so far in the third quarter that would indicate any kind of marginal softening in Orange County or near San Diego or have trends -- kind of trends in the first part of the year kind of continued and you still expect to do pretty well in those markets?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [60]

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I think that L.A./Orange County and our San Diego platform, as you mentioned, we have a little bit different geography than most of our comp set do. I think that the strength that we've seen for the last 2 quarters was we modeled that strength. And so I think when you look out on our reforecast, it looks like it's going to continue. Yes, we've had occupancy gains in both those markets, but that's been true across our entire platform. I think I gave you in the prepared remarks a preliminary number of -- it looks like we're trending in July towards a 96.3% occupancy, which is, as you all know from long years of doing this with us, that's really unusual in our portfolio. And where we've operated in the 95% to 95.5% range for so many years that it feels a little bit unusual to be in the 96%, is much less 96.3%. So at that -- the occupancy pickup is not just a Southern California phenomenon, but it's really pretty much across our entire platform.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [61]

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So I take that to mean rental growth trends as far as leasing activity so far into the third quarter are pretty much on target with budget?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [62]

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They are.

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Operator [63]

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Our next question comes from John Pawlowski of Green Street Advisors.

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

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On the acquisition front, would the peer multifamily REIT portfolio have met your quality criteria?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [65]

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It would not have met our existing quality criteria at this point. It was definitely an interesting portfolio and an interesting trend pricing-wise. We evaluated the portfolio, and it was -- the challenge for us with it was number one, it wasn't in that kind of sweet spot that we're looking at today; and number two, it was highly concentrated in Dallas with some suburban properties that we weren't really excited about. So there -- and there were a lot of sort of other issues around it, and we would not have ever been as aggressive pricing-wise that it ultimately traded out.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [66]

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Okay. And then just broader question on portfolio acquisitions. What is the appetite? I know pricing matters and markets matter. What is the appetite to do just larger portfolio deals right now?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [67]

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For the right product and the right portfolio, it would be -- we'd be fine doing a large transaction. I think the challenge you have with large transactions and not Pure is probably a good example of it. I think if Keith was asking this -- answering this question on Pure, he would say there were 3 properties in the whole portfolio that we would have wanted to buy. Now on the other hand, you might change your strategy from an acquisition perspective if the pricing was where you wanted it to be and you could change your criteria too if you thought there was value to be had in it. I think the challenge you have with portfolio just fundamentally is that they tend to be -- have assets in them that you don't really want. And so you kind of have to take them to get what you want. And then the question is how much -- what percentage of the portfolio is something you really want to buy. And then what are you going to do with the -- and is the other -- the ones you don't want to buy that you have to buy, are you having to pay a price, whether you think you can either move out of them or trade them around in the future. So oftentimes we see these portfolios and go, let's -- if we wanted to buy $1 billion properties or $1.2 billion of properties like Pure had, we just would be the highest bidder on $1200 million-dollar projects that we want to buy. And so to me, unless there's something strategic around it or the pricing is so good that you kind of want to do that kind of business, then that's why we don't -- we haven't done a large transaction in a while. It just -- there's -- the pricing today is very robust for everything. And actually, you probably get a premium for it if you were a seller of a large portfolio today.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [68]

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Okay. Is the pricing getting irrational or too irrational in any market where you'd consider ramping dispositions right now?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [69]

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No. I don't think it's irrational. I think -- because when you look at the math on Pure or the math that we're seeing on these other properties, people have just reduced their return requirements to a certain extent, and multifamily fundamentals continue to be reasonable even in markets that are oversupplied so -- or that have lower rent growth because they're oversupplied from that perspective. I haven't seen any like real head scratchers. When it comes to dispositions, we've sold a lot of properties over the -- in this last cycle. And we've traded out 20-plus-year-old assets for newer properties in the 4- to 5-year range and fund -- used dispositions to fund development as well. And so we don't have a lot of assets that we really want to part with right now. But -- so I don't think we -- felt like the market is so irrational pricing wise that I got to get in there and sell into it. Because when you sell into it, the question is do you think prices are going to go down or be able to, so we can redeploy that capital. And given the interest rate cycle we're in, given the length of the recovery and given the fundamentals for the business, it's really hard to make a case for apartment cash flow and cap rates that change dramatically right now. The answer would be no.

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Operator [70]

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Our next session comes from Karin Ford of MUFG.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [71]

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I wanted to ask about the management transition. Should we be expecting more management changes near term as part of the succession planning? And Ric, how should we be thinking about your tenure?

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [72]

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So I don't think you should anticipate something next quarter or quarter after that. So this is -- we've been in a succession planning mode for quite a while. I do have my 65th birthday next week, and so I'm glad we didn't do the conference call right on that day. But Keith and I -- Keith is younger than me, by the way.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [73]

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And always will be.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [74]

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He will be. And really, I know Malcolm is probably going to hit me for saying this. He actually is slightly older than me. So when you think about -- when I think about succession planning, I think you have to -- especially in a culture like Camden, we're going to internally grow our next tier of management, and they're all with Camden right now. So Keith and I have had for a long time a longstanding succession plan with our board. So I know some people on the call have asked us this specific question, and we've told them about it. So each year, beginning of the year, we commit to a 3-year term. And that's basically a letter that we send to the board that says Keith and Ric are going to stay for 3 years. If there's a reason or they don't -- we don't fulfill that commitment, maybe health issue or something like that, then the person who doesn't fill it, say if I didn't make it through that 3 year, Keith agrees to stay -- the person who doesn't make it agrees to stay at least 2 years for transition. So both of us are healthy. We love Camden. We love our structure. And we plan on being here for a while. The question is now creating space in the organization allows our most senior people to get more experience in areas that they may not have as much experience in, which positions us ultimately for transition. So that transition is going to happen in the future. Is it next year? The year after? The year after that? I don't know. But it's a well thought out program. And we fundamentally believe that our next generation of leadership, we have them at Camden now, and we want to make sure that they stay at Camden. And so that's one of the reasons for the sort of the opening up the space in the titles.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Senior Real Estate Analyst [75]

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Okay. That sounds good. And then my second question is at NAREIT, you called out Washington, D.C. as performing better than planned. It ended up decelerating 90 basis points in the second quarter, and now you're saying everybody is in line with plan. So is D.C. falling off at all? And are you starting to see any demand impact there from HQ2 yet?

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [76]

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So for the second quarter, D.C. was at 3.8% revenue growth, which would place it as the fifth highest in our portfolio. So I called out the top 4. The next one would have been D.C. Metro. So out of 15 markets, it would be fifth, which it's been a long time in Camden's world since D.C. Metro would have been in the top 5. So I'm not -- I don't know about the NAREIT -- the comparison to the NAREIT. But in our world, 3.8% in D.C. Metro for the quarter is a really good quarter. And I would tell you that the commentary from our D.C. Metro operating staff on our -- on the call that we do quarterly with our -- to get an update on market conditions is the most positive and constructive tone that I've heard out of our D.C. Metro operations team in probably 3 or 4 years. So all of that to me bodes well for continued good performance in our D.C. Metro portfolio, which over the last 2 or 3 years has outperformed most of our peer group. And a lot of that just has to do with our geography in the D.C. Metro area versus a lot of our peers.

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Operator [77]

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Our next question comes from Hardik Goel of Zelman.

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Hardik Goel, Zelman & Associates LLC - VP of Research [78]

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I just wanted to kind of wrap together a bunch of different questions, I guess, that were already asked and just talk about capital allocation and how you guys kind of think through it. You guys talked about the acquisition environment being really aggressive and hard to stay disciplined if you want to win deals. You're also filling in your predevelopment pipeline. Is the option here to build more? What does your starts out look like longer term, but specifically 2020? And how do you think about the incremental dollar invested today and what to do with it?

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

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Well, the incremental dollar, if we can -- given the spread between acquisition pricing and development, if we could make the development just -- wave a wand and make the development pipeline larger, we would be -- we would definitely err on the development side. So next year, we have -- between sort of late this year and next year, we have $210 million of that would be the Phoenix project and the Charlotte project, 2 of those $210 million; and then the late starts this year with our -- with 2 projects in -- 1 Atlanta, 1 in -- I'm sorry, 1 in Florida and 1 in California, $180 million. So when you add those 2 together, that's $370 million that could start or should start between the end of '19 and through '20. But again, we would definitely be a more development oriented than acquisition oriented, even though I think the challenge that we have with development is getting projects that actually cancel. So that's why we'll do a combination of the 2. And try to find those sort of diamonds in the rough that we can drive the earnings growth over a couple of years in this environment up pretty dramatically so we can get them up into 5s.

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Hardik Goel, Zelman & Associates LLC - VP of Research [80]

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Just a quick follow-up. When you think about development in the markets, is it very case-by-case and project specific? Or are there a few markets where construction costs are less of a burden or they're increasing less? We hear from your peers that construction is really difficult and in some markets where it can be easier than others, which are the markets that you're kind of focused on today whereas the...

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [81]

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I think that all markets are definitely the same in terms of construction cost and time -- it takes longer to build today because of lack of construction workers. And I think each market is definitely unique, and we're trying to find those sort of projects in the markets we operated in that we can make those numbers work. And I don't think there's any easy market or a market where you can't find something. It's probably more difficult in California because all of the California issues than it is in some of the other markets. The California project that I talked about for a start at the end of this year, early next year. We've been working on it for 3 or 4 years or longer. And so generally speaking, I think you've hit the nail on the head that it's hard to build everywhere. And if we could expand the pipeline, we would if we could get reasonable yields. And that's where we're constrained, is the discipline on making sure that we're not investing that incremental capital at a return that isn't in our guidelines.

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D. Keith Oden, Camden Property Trust - Executive Vice Chairman of the Board [82]

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I'm guessing that when you're hearing from our peers about hard and easy to build in, they're probably referring to the entitlement process, not the cost pressures. Because cost pressures are significant relative to what underwritten yields you're trying to achieve that makes sense. There is -- hard in Houston, Texas as it is in Southern California. On the other hand, the actual regulatory regime and the entitlement process is a different animal in California versus Houston. So it's that you would just have -- you would have to put them on an array, but the array of hard to easy or relatively easy entitlement process would start with California and probably end with some of our Texas markets. And then the others would be spread along the way. But the cost pressures are significant and real across all 15 markets that we're trying to operate in.

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Operator [83]

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Our next question comes from Rich Anderson of SMBC.

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [84]

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When I was reading Keith's bio, I have to say you guys are remarkably spry for the amount of time that you've been doing this, and so credit to you. And I was going to ask the question what's the endgame as you guys start to consider closing out your career, succession, go private or some sort of combination. It sounds like the answer, if I were to answer for you, would be succession, which is great. But when you -- are things like levering up and going private or some sort of reverse merger since you would ultimately financially have to be a buyer in a public-to-public type thing, but where -- your portfolio would prove another where the reverse would not be true in your eyes, I'm assuming. Are those 2 other alternatives completely off the table for Camden at this point? Or I'm just wondering if you could comment on that.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [85]

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I think they're totally unrelated to succession, right?

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Richard Charles Anderson, SMBC Nikko Securities Inc., Research Division - Research Analyst [86]

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That's fair. That's fair.

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [87]

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Because to me, the issue of what you do with Camden as an entity or assets or how you drive total shareholder return and how you compete in the marketplace is one issue. And then -- and I would never connect a succession issue to a financial transaction that is either good or bad or indifferent for a Camden shareholder. So I think that when I think about Camden as the CEO and Chairman and large shareholder, I think about maximizing the ability of the company to be -- to have longevity and to compete in the marketplace effectively in the top quartile of returns. And so if there was a private transaction or a public transaction or any transaction where we could drive that objective, then we would do it. I think each one -- each kind of -- each transaction you mentioned has their own issues and own risks and things. But they're definitely not related to Keith and my longevity or spryness or succession plans. And so ultimately I think a great long-term business -- this is a great long-term business. We've been doing it for 26 years, almost going on 27 now and have had great returns and created a lot of value for shareholders over the years. I think it will continue. How -- but ultimately, the question about what we do I think will be unrelated to what Camden does or what we do as a company from that perspective.

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Operator [88]

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

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Richard J. Campo, Camden Property Trust - Chairman of the Board of Trust Managers & CEO [89]

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Great. Well, I appreciate the time today and the consideration. Have a great rest of your summer, and we'll see you on the circuit in September. So take care. Thanks.

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Operator [90]

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