Camden Property Trust

Good morning and welcome to Camden Property Trust Second Quarter 2022 Earnings Conference Call. I'm Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Rick Campo, Camden's Chairman and Chief Executive Officer, Keith Oden, Executive Vice Chairman and President, and Alex Jesset, Chief Financial Officer. Today's event is being webcast through the Investors section of our website at camdenliving.com and a replay will be available this afternoon. We will have a slide presentation in conjunction with our prepared remarks, and those slides will also be available on our website later today or by email upon request. If you are joining us by phone and need assistance during the call, please signal a conference specialist by pressing the star key followed by zero. All participants will be in listen-only mode during the presentation with an opportunity to ask questions afterward. And please note this event is being recorded. 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 risk 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 2022 earnings release is available in the investor section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call. We hope to complete our call within one hour, and we ask that you limit your questions to two, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes. At this time, I'll turn the call over to Rick Campo.

The theme for today's on hold music was together, which will resonate with Team Camden. After two years of virtual meetings, This year, Camden was able to be together for most of our important cultural events. In May, we held our annual Leadership Conference, which brings together 400-plus Camden leaders for three days of learning, reconnecting, and fun. A lot has changed in the world since May, which serves as a good reminder that real estate and financial markets will rise and fall, but companies with a great culture will thrive in all conditions. The following highlight reel from our Leadership Conference is an inside baseball view of a culture that has earned a place on Fortune's 100 Best Companies list for 15 consecutive years.

I'm clumsy and my head's a mess Cause you got me growing taller every day We're giants in a little man's world My heart is pumping up so big that it can burst I'm trying so hard not to let it show I'm stepping on buildings, cars and boats. I swear I could touch the sky. Oh, I'm ten feet tall. Oh, I'm ten feet tall. Be careful, so don't be afraid. You're safe here, you know. These odds won't let you break. I've put up a sign in the clouds. They all know that we ain't ever coming down. I'm trying so hard not to let it show. But you got me feeling like I'm stepping on buildings, cars, and boats. I swear I am. Make me what I never was. You build me up from nothing into something. Yeah, something from the dark. Been trying so hard not to let it show. But you got me feeling like I'm stepping on buildings, cars and boats.

Thanks to Team Camden and the great culture that you've created and continue to build, Camden will always thrive. The last year and a half has been the best NOI growth and FFO growth that we have had in our almost 30-year history, with NOI growing 19.6% and FFO growing a whopping 47%. These gains are built into our run rate and are likely to remain in place driven by strong consumer demand for housing in our markets. Consumer strength is driven by strong employment growth, large wage increases, and high savings levels. Our apartments are affordable despite the double-digit rental increases. Our residents spend roughly 20% of their incomes for their rent. Domestic migration has led to more than 700,000 Americans moving to our markets in the last year. They are not moving back. Department supply is not cut up with demand. We expect growth to moderate over the next couple of years, but believe that we'll exceed our long-term growth rate. With a strong balance sheet, a great team, with an amazing culture, we are ready for more successes. Up next is Keith Oden.

Thanks, Rick. Now for a few details on our second quarter 2022 operating results and July 2022 trends. Same property revenue growth was 12.1% for the quarter, once again exceeding our expectations with 12 of our 14 markets boasting double-digit revenue growth. Given this outperformance and an improved outlook for the remainder of the year, we have increased our 2022 full-year revenue growth projection from 10.25% to 11.25% at the midpoint of our guidance range. Rental rates for the second quarter had signed new leases up 16.3%, renewals up 14.4%, or a blended rate of 15.3%. Our preliminary July results are trending at 13.1% for blended growth, with new leases at 13.5% and renewals at 12.7%. Occupancy averaged 96.9% during the second quarter, which matched our performance during the second quarter 2021 and compared to 97.1% last quarter. July 2022 occupancy is currently trending at 96.7%. Net turnover for the second quarter 2022 was 46% versus 45% last year, and move-outs to purchase homes were 15.1% for the quarter versus 17.7% during the second quarter of 2021. The year-over-year decline in move-outs to purchase homes is not surprising. Since last year, home mortgage rates have nearly doubled, and the median existing home sales price is now above $400,000. So, despite the recent increases in rental rates, many would-be homebuyers will likely remain renters. Next up is Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate and finance activities. During the second quarter of 2022, we completed construction on Camden Buckhead, a 366 unit, $162 million new development in Atlanta. We began leasing at Camden Tempe II, a 397 unit, $115 million new development in Tempe, Arizona. We began construction on Camden Village District, a 369-unit, $138 million new development in Raleigh, and we acquired for future development 43 acres of land comprised of two undeveloped parcels in Charlotte and four acres of undeveloped land in Nashville. As previously reported, at the beginning of the second quarter, we purchased the remaining 68.7% ownership interest in our two joint venture funds, for approximately $1.5 billion inclusive of the assumption of debt. The assets involved in this fund transaction included 22 multifamily communities with 7,247 apartment homes with an average age of 12 years, primarily located in the Sunbelt markets across Camden's portfolio. In conjunction with this acquisition, we recognize a non-cash, non-FFO gain of $474 million which represented a step up to fair value on our previously held 31.3% equity interest in the funds. Also, as previously reported, early in the quarter we issued 2.9 million common shares and received $490.3 million of net proceeds. As of today, we have approximately $80 million outstanding under our $900 million line of credit. At quarter end, We had $248 million left to spend over the next three years under our existing development pipeline. Our balance sheet remains strong with net debt to EBITDA for the second quarter at 4.4 times. Last night, we reported funds from operations for the second quarter of $179.9 million, or $1.64 per share, two cents above the midpoint of our prior guidance range of $1.60 to $1.64. This $0.02 per share variance resulted primarily from approximately $0.03 in lower bad debt and higher rental rates and occupancy for our same store and non-same store portfolio, partially offset by $0.01 in higher property tax expense resulting from higher initial valuations in Atlanta and higher than expected final valuations after appeals in Austin and Houston. Last night, based upon our year-to-date operating performance, our July 2022 new lease and renewal rates, and our expectations for the remainder of the year, we have increased the midpoint of our full-year revenue growth from 10.25% to 11.25%. Our revised revenue growth midpoint of 11.25% is based upon an anticipated 12.5% average increase in new leases and an 8.5% average increase in renewals for the remainder of the year. we are anticipating that our occupancy for the remainder of the year will average 96.6%. Additionally, we have increased the midpoint of our same-store expense growth from 4.2% to 5%. This increase results from inflationary pressures on repair and maintenance costs and the previously mentioned higher-than-anticipated tax valuations in Houston, Austin, and Atlanta, partially offset by lower-than-anticipated insurance expense tied to our successful May policy renewal. Property taxes make up approximately 35% of our total expenses and are now anticipated to increase by 5.6% year over year, an approximate 200 basis point increase from our prior estimates. Repair and maintenance makes up approximately 13% of our total expenses and is now anticipated to increase by 7% year over year, and insurance makes up approximately 5% of our total expenses and is now anticipated to increase 13% year-over-year. As a result of our revenue and expense adjustments, the midpoint of our 2022 same-store NOI guidance has been increased from 13.75% to 14.75%. Last night, we also increased the midpoint of our full-year 2022 FFO guidance by 7 cents per share for a new midpoint of $6.58 per share. This $0.07 per share increase resulted primarily from an approximate $0.06 increase from our revised same-store NOI guidance and a $0.01 increase from additional NOI from our non-same-store and development portfolio. We also provided earnings guidance for the third quarter of 2022. We expect FFO per share for the third quarter to be within the range of $1.68 to $1.72. The midpoint of $1.70 represents a six-cent per share increase from the $1.64 recorded in the second quarter. This increase is primarily the result of an approximate six-cent sequential increase in same-store NOI, resulting from higher expected revenues during our peak leasing periods, partially offset by the seasonality of utility expenses and leasing incentives, and a one-cent sequential increase related to additional NOI from our non-same-store and development portfolio. These increases are partially offset by a combined one cent decrease in FFO related to higher variable rate interest expense and the incremental impact of the additional shares outstanding from our early second quarter equity offering. At this time, we'll open the call to questions.

One on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Austin Worshman with KeyBank. Please go ahead.

Hey, good morning, everybody. I was curious if you could give us an update on the disposition that you had previously planned half the year and just some general color on what you're seeing in the transaction market.

Well, the transaction market has slowed down substantially, obviously with an increase in the tenure and just the sort of dislocation that the markets have experienced given you know, everything that's going on with the Fed. And so what we've decided to do with our dispositions rather than being the early price discovery, uh, folks, uh, we, we basically taken them off the table and, uh, and are just sort of waiting for more market clarity. Uh, when you, when you think about, excuse me, when you think about what's, what's, uh, happened here, the cost of capital has gone up for pretty much everyone. Uh, and, uh, the, the, uh, Leverage buyers that were using 60 to 80 percent leverage have, you know, the game has changed and their return on equities have gone down. And so we think that values have probably gone down anywhere from 10 to 15 percent. It really depends on the market and also the product type. Probably the most, you know, impacted properties are the value add space, you know, that 10 to 20 year old that really needs a lot of work kind of thing. And so with that said, you know, we will continue to monitor the market. And we for a long time have been selling, you know, buying and selling at the margins to be able to improve the quality of our portfolio and improve the geographic diversity of that portfolio. And we'll continue to do that. But right now we're sort of on a pause to see to kind of figure out where the market is. We think that that after Labor Day, there'll be a lot more clarity there. When you think about the wall of capital that still exists is there, and ultimately I think buyers and sellers will come together probably starting after Labor Day and through the end of the year.

And the second question, you mentioned in your prepared remarks that you expect growth to slow and supply to catch up in sort of the years ahead, but growth should still exceed sort of that long-term historical average. So I guess first could you kind of give us a sense of what that average is, you know, presumably 3% to 4%, but if you could put a point on that. And then I guess just what gives you the confidence that you can continue to exceed that long-term average given the level of, you know, projects that are under construction today? Keith, you want to take that?

Yeah, sure. Yeah, so if you look at the deliveries that are planned for 2023 relative to this year, Ron Whitten's got completions going up from about 130,000 across Camden's markets to about 190,000. It's meaningful, but if you look at it as a percentage of the stock, it's not really out of line with where we've been for the last couple of years. And then in years beyond that, the starts stay fairly flat. So if you roll forward, I mean, the easy part at this point is kind of thinking about 2023 and where we start out as we come out of this really, really strong 2022 where we continue to get really strong renewals as well as new leases. I mean, we'll start somewhere in the 5% range on embedded growth in 2023 and long-term average on NOI growth across Canada's portfolio over the last 30 years is in the 3.1% range. So you kind of, you know, sort of a layup to think about 2023 being higher than normal. And I think as long as we continue to have the affordability issues that consumers are dealing with right now in terms of their alternative to renting, which is buying a home, I think we're likely to see a pretty dramatic decline in the number of single-family home starts. So you're just going to continue to have a shortage in housing of virtually all types, and I think that it will continue to benefit the multifamily space.

Thanks for the time.

The next question will come from Nicholas Joseph with Citi. Please go ahead.

Thanks. Maybe following up on that, but more focusing on the demand side, obviously the July numbers remain strong, but a more challenging comp there. Are you seeing any signs of consumer demand changing as you look out 30 or 60 days or any kind of pushback on pricing?

No, we're really not. I mean, we continue to be almost 97, nearly 97% occupied. I think we're 96.7 currently. And as you look out on our pre-lease numbers, we're still in really good shape 60 and 90 days out. So, you know, turnover continues to be low. Renewal rates and new lease rates are are definitely going to come down. And we've been, you know, we've been obviously trying to, been talking about that for the last couple of quarters. But in our case, it's just because we're running into a period of time where last year, We were rolling out 18%, 20% renewal and new lease increases across most of our portfolio. And so as you run into those comps, it's just not sustainable to stay at the levels that we've been at for the last year. couple of quarters. So we know it's going to come down, but it's still going to be, if we maintain the kind of occupancy that we have, the model will continue to push rents, you know, up to the level of kind of the market clearing price. Everybody's in our markets and in our sub markets, people are continuing to, you know, see great strength and continuing to increase rents. As long as that happens, I think we'll be fine. But the reality is, is that those numbers are going to come down in the fourth quarter for sure.

You know, one of the things I think is important to think about our consumer, and that is that our consumers are doing really well. They all have jobs. When you look at year-over-year increase in income for Camden residents, it's gone up almost 10%. So, you know, we worry, you know, I guess on Wall Street and, you know, the financial folks worry about interest rates and inflation and all this stuff, but And that's important. And I think the consumers are worried about that, too. But but they also are doing pretty darn good when it comes down to income growth and savings rates. And I think that folks that are probably going to be the most impacted are at the lower end. And our our customers, you know, on average make, you know. six figures. And so they're not the low end of six figures. And those are ones that are not as pressured on the, on the inflation side. And especially when you think about, you know, 20% of their income going to rent, it's the folks that are paying 30 to 50% of their income for rent that are getting sort of really pressured. So our residents are doing well, they're stressed, but then we can feel that in the marketplace, but, but they're not financially stressed. They're more worried about what's going to happen in the future than they are about making ends meet with their incomes.

Thanks. That's helpful. And then you touched on the broad strength really across all the markets, but the two that lag on a relative basis, I guess, are D.C. and Houston. How are you thinking about those markets back after this year and probably more importantly into 2023?

So I think that, you know, and just to put into perspective on a – you said on a relative basis, and I think it's important to think about that. And, you know, Houston and Washington, D.C. in the second quarter were roughly 7% up in revenues. And if it weren't for the fact that the rest of our portfolio was up, you know, 13%, 14%, that you'd be turning backflips about those numbers in Houston and D.C. But obviously on a relative basis, it has lagged the – the other 13 markets in our portfolio. I think one of the things that one of the implications for that is, is that as we roll into these periods, into the renewal stack for the previous year, where we had in these markets where we had 20% increases last year, obviously that gets much, much more difficult to push rents, you know, to anything close to those levels on this renewal. And yet, The comparable numbers for D.C. and Houston would probably be in the 2 to 3 percent year-over-year comp. I think we have probably going to have more opportunity to raise, be a little bit more aggressive in raising rents in D.C. and Houston just because of what happened to our consumers in those two markets last year. And they didn't get outsized rental increases. And there's probably one coming in 2023 in the renewal period. I think those two markets have a pretty decent upside on a relative basis in 2023, and obviously we'll be able to give you a lot clearer picture of that hopefully by the end of the next call. But I think there's really pretty good upside in those two markets just because of the comp set.

Also, when you think about the economy, so D.C. has – D.C. and D.C. proper was probably more like California in terms of COVID opening and being able to evict people who were just sort of not paying because they didn't want to. And then in Houston, you have a whole different animal. Houston didn't add the jobs back as fast as Dallas and Austin. But when Exxon and Chevron make combined $30 billion, like they just reported in the last week, the job picture looks better in Houston because of that. And it's interesting because the energy complex, you know, people are complaining about high gas prices, and yet the companies are not expanding big time because of just the nature ESG issues, and investors are wanting, you know, dividends from them rather than, you know, putting those dollars back into exploration. And if ultimately, if energy continues to do what it's doing now, they need to add jobs. They're running very thin. And last month, they added, I think, 2,000 jobs in the Houston region for energy-related folks. And so there is a tailwind, I think, on the Houston market because of that. So there are very different markets in D.C. and Houston. But But I kind of look at them as no pun intended maybe or maybe intended with gas in the tank for 2023. Thank you.

The next question will come from Derek Johnston with Deutsche Bank. Please go ahead.

Hi, everyone. Can you provide an update on your portfolio loss to lease and thus the opportunities for further rent growth next year?

Yeah, absolutely. So loss to lease for us right now is about 8.5%.

Excellent. Thank you. And then on new development, you know, supply seems benign in some of your markets. And where rent growth has actually really been strong, seemingly outpacing cost increases. So how would you view development starts, you know, given this backdrop, you own a construction company, and what really do you need to see to ramp new projects? Thanks.

Well, if you saw in our, you know, in our earnings release that we added land positions, and we're continuing this quarter and we're continuing to work on on development. You know, so you have good news, bad news, right? The good news is that revenues are up and the bad news is costs are up, but we think costs are starting to moderate. We think that, I don't think costs are going to go down, but I think that the increase in costs is starting to slow. So ultimately, development has been a great business for us and we'll continue to do that, continue to build. I think right now, We're focusing on sort of the existing portfolio that has legacy land costs, and we'll be ramping that up next year. And I think that once the market settles down in terms of so what is the cost of capital long term and not just this sort of up and down scenario that we've had for the last couple of months, I think that we'll still be able to make reasonable spreads. on our weighted average long-term cost of capital in the development business. And we will probably, you know, sort of wait, you know, and see, you know, between now and sort of the middle of the fourth quarter to kind of where things settle out. But I think it's still a really good business. If you look at our, our pipeline. I mean, we have average yields, you know, with big cost contingencies in those construction numbers that are anywhere from low fives to, you know, sort of low sixes. And, you know, that's still pretty good business even in this environment.

Thank you.

The next question will come from Neil Malkin with Capital One. Please go ahead.

Hey, everyone, good morning. Excuse me. I guess maybe just following on the development side. We talked about maybe, well, I wanted to see You're seeing delays. It seems like you guys probably won't make the development start numbers you initially forecasted. You know, we're hoping you could talk about that and if it's a function of, you know, cost or is it a function of regulatory delays, et cetera. Can you maybe just talk about like where you see the starts kind of shaping up over the next several quarters and that'd be great.

Sure. I would say that definitely regulatory issues are a big issue. I mean, you know, the challenge you have is sort of interesting. You think about this, people are worried about recession and job losses, yet cities and municipalities that issue permits and issue and inspect buildings and things like that are absolutely understaffed beyond belief. And even markets that used to be very friendly to permits and building like Houston are I mean, everyone is talking about how it just takes forever to get this stuff done. And so we're experiencing that just like everybody else is. So a lot of the starts that we had or several of the starts this year are going to fold into next year. Next year should be a pretty, pretty buoyant start year. Alex, you might want to go through those numbers.

yeah absolutely so so neil what i'll tell you is that we still think that we're going to make make the low end of our of our total start number um we're anticipating starting uh so 400 to 600 million was our range and we're anticipating starting woodmill creek Long Meadow Farms and Camden Nations, which is on page 18. We always put that in order of our starts. So we will anticipate starting those three this year. And keep in mind that we just started Village District last quarter. So we should make the low end of our range.

Okay, great. Other question is on, you know, Houston. I know that several quarters ago you talked about, you know, Houston and DC Metro being the two markets that you would, you know, focus on trim the exposure just given the, you know, elevated, you know, contribution to your portfolio. It's actually gone up, obviously, with the JV takedown and the two, you know, SFRs that you're doing right now. Question is, you know, there's been some speculation that, you know, the Biden administration is going to do some sort of climate executive order, and his administration's endless assault on, you know, energy, fossil fuels, you know, what is the likelihood of these sorts of things having an impact or is it already having an impact on Houston? You know, because the idea that somehow like these unknown green jobs are going to replace even close to the numbers of jobs that will be lost, I mean, or could be lost, it's laughable. So maybe if you can, you know, you guys are like the kings of Houston. So if you could kind of give your 30-foot view on that, that'd be helpful.

Sure. So I think you hit the nail on the head, you know, which is that, you know, people talk about green and replacing, you know, fossil fuels, but there's just no way that that happens anytime soon, right? I mean, sure, we need to move in that direction. And ESG is important. And climate change, I think, is critical for us to focus on and think about it. But the challenge is, it's not so much the energy companies that are being forced to do things. It's really the the federal government and their issues. Because if you think about what has to happen in an energy transition from fossil fuels to clean energy, you have to have major infrastructure investments made in the grid and in the system of how we provide energy to the world. And just take electric cars as an example. So in our ESG committee, We had a robust debate a couple of weeks ago about how many charging stations do we have in our car, in our apartments. And then in our new developments, we're wiring and making sure that we're positioned to have EVs in our garages and what have you. But the challenge is, is that if I wanted to, I'll give you just a small example. If we wanted to have an EV station for every car that we think might be in our garages in the future, We can't put that infrastructure in today. We can't get the power companies to agree to give us more power to utilize those. So there's so many issues that have to be developed to really get us to climate change and get us to transition. So Houston, the interesting part of Houston, you've seen, I think you have seen a negative effect in Houston, and it's really the job growth. that we didn't have that we should have had. And that's been driven by really investors, the ESG push on energy companies, but also investors that say, we're not giving the industry capital unless you give us cash flow back. Over the last 10 or 15 years, there have been a lot of investments in energy and the energy industry hasn't given back capital. And so the market is pushing energy companies to invest less in infrastructure and less in exploration, which has driven up the cost of oil and limited supply. So I think long-term, Houston is going to be the clean energy capital of the world. Ultimately, you have you have a bunch of big projects. There's a hundred billion dollar project, for example, that Exxon is doing in Houston. And it's going to be subsidized by the federal government. And it is a carbon capture in the Houston ship channel. And so I think the energy companies know ultimately they have to transition. I don't think it's going to happen in one year, two year or five years. I mean, we're like 10 to 20. And I think they're smart enough to know that they have to be in a position where they're not dinosaurs and they don't become, and Houston doesn't become a Detroit. And I don't think that, I think that there's a long enough transition period where that pivot is being made and will be made. And so Houston will do long, do well long-term. But, but it's definitely a complicated issue for sure.

Thank you.

The next question will come from John Kim with BMO. Please go ahead.

Thank you. I was wondering if you could provide an update on your yields on the development pipeline overall and on the project you started this quarter in Raleigh.

Sure. So the pipeline that is under construction or in lease-up is low fives to – we have some in Phoenix that are actually almost a seven-and-a-half, cash-on-cash, and those are – classic development deals underwritten at very low, a lot lower rates. And you've had, you know, 30% increase in rents there. So our yields are better. And by and large, our existing and under construction and lease up yields are better than we originally underwrote because of the rental increases. And then the pipeline behind that that hasn't started is anywhere from, you know, low fives to six to low six.

Okay, great. And then you talked about on your answers a 5% earn-in for next year, 8.5% loss to lease. I just wanted to confirm that these are separate items. So you're starting off with a 5% change to revenue for next year and then 8.5%, which can move based on market rents, but that's all additive to the 5%.

Yeah, so the way to think about it and the way we calculate earn in is we look at what we anticipate the rent roll is going to look like at the end of 2022. And if you just froze everything right then. And so he froze everything right then for 2023. And that's how you get to the 5% number. Obviously, there is a component of that that is associated with lost lease, right? Because you have some of those leases that are in place that you're freezing that are below market.

And so the loss to lease is what the effective rent growth you could achieve is next year, assuming the market rents don't move.

Yeah, assuming you could take everybody up to market. And as you know, we don't necessarily take our renewals up to market. But if you took everybody up to market, you would have an 8% increase right there, 8.5%. Yeah. Yep.

Great. Thank you.

Mm-hmm. The next question will come from Rich Anderson with SNBC. Please go ahead.

Oh, let me turn off my on hold music here. Okay. So, no, I can't do that. So when you talk about the earn in, you know, and looking at the July sign versus July effective, which is a difference of about 200 basis points, Is it fair to assume that, you know, when you think of this roll forward situation, and to your point, Alex, freezing at the end of 2022, that the inflection point is assumed to be now, start of August, July, end of July? Or is it possible that, you know, your leasing season could still extend and hence the earn-in would get bigger as we go?

Well, so the earn-in will get bigger. Well, no. So what we're assuming is that the earn-in of 5% plus is based upon at the end of 2022. So that takes into consideration everything that we expect from now till then. If you're looking at inflection points, I mean, I think the real important thing to look at is if you go back to last year, in Q2, our blended lease growth was 4.7%. In Q3, it was 12.3%. And in Q4, it was 15.7%. So we really are starting to have some really tough comps in the third and fourth quarter of this year as compared to what we saw last year.

Fair enough. And so then the second related question is, how much of those tough comps, you know, this is a weird year because you have these, you know, strange year-over-year comps because of how things moved last year. Normally not the case. But when you think about absolute rents, so I get it that you're going to have lower percentage increases in the back half of the year. But what happens to the actual rent from, let's say, today to, And I asked this question on someone else's call. Say today's rent, to make it easy, is $1,000. Is the rent something below $1,000 in the end of the year, or is the rent just growing at a slower pace, but maybe at or above $1,000 by the end of the year?

No, it's going to be above $1,000. I mean, so when we look at our math, we continue to have asking rents that are going to be increasing throughout the rest of the year. It's just the comp that you're looking at. You're looking at a much tougher comp period in the fourth quarter of this year because rents escalated so quickly in the latter part of 2021.

You still have a positive rent growth, but a negative second derivative, right?

Got it. Yeah. So that's interesting because you're saying positive rent growth, but your peers in gateway markets are saying the opposite, that rent growth is actually, in absolute terms, negative. Would you hazard a guess why that would be different? That's right.

That's why you're not here.

I don't understand, given the strength of this market right now, though, I don't understand how anywhere in America you could have absolute rents be less at the end of the year than they are today.

That's what I understood, but maybe I'll have to revisit that. That math doesn't work in my head, even in New York or San Francisco.

I'd be shocked if that were true, but it's hard to imagine a set of conditions right now that would have absolute rents falling But, you know, those markets have a different cadence to them as well.

Okay. All right, I'll check my notes on that. Thanks very much.

You bet. You sure? The next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, morning down there. Two questions for me. The first is you guys obviously talked about the slowdown in the Mortgage market, transaction market, you know, it sounds like, you know, your developments, you're going to start fewer. You're not spending as many acquisitions, dispositions based on what's happening. Is there anything that's on the merchant development side? Like, are you guys seeing any merchant deals that got started that suddenly are in a pickle? And maybe that's an opportunity for you guys to acquire on that front? Just curious.

I would say that there's not a lot of – there's definitely not a lot of stress in the market today. I mean, merchant builders, you know, were making, you know, 3X on their equity. And now with price adjustments today, maybe it's 2X, you know, or 1.5X, which is still really good. But there really is no distress. Now, I will say there are – we have seen opportunities. And I think the example would be our – Nashville Nations project. It was a property that was zoned and ready to go, but the developer couldn't figure the cost out and they had a little bit more complicated building design. And what happened was the land value was almost equal to, or their profit in the land was enough to incent them to not to build it and to sell it to us. And so I think there are definitely opportunities like that where the merchant builder, their cost of capital has gone up or their equity partner is a little nervous and they have profits in their land. So they're willing to sell a shovel ready deal at a profit to them and at a sort of market value to us. I think that's the kind of transaction that's out there for sure. I do think that there's probably a fair amount of, of mezzanine type of business that's out there. That's probably, you know, that people are, are, are working on, you know, that's not a space that we trade in, but I've had a number of calls with people who want us to kind of help recap them and stuff like that. But that's not, not what we're, we're, we're, we're leaving that to some of our competitors.

Okay. And then the second question is on, you know, obviously the Sunbelt has been garnering headlines the past few years for the influx of, of folks coming from, you know, coast or other areas moving down south. As you guys look in your portfolio, how much of a benefit have, you know, I'll say out of regioners, if you will, been to Camden and versus to the market overall. And, you know, asked the same question on MidAmerica's call. They said they went from 9%, you know, outside of Sunbelt to now 15% out of Sunbelt. But they opined that it was more, you know, people coming into the market, buying homes, et cetera. Given you're a bit higher income, a little bit more upscale, curious if you're seeing similar dynamics or if you, you know, see a much bigger impact from away people coming down south?

Well, you know, it's interesting, Alice, because when you think about it, the migration from, you know, sort of north or coast to south or however you want to call it, has been going on for a long time. I mean, it's not new. What happened during the pandemic was the nuance of being able to work from anywhere and the difficulty that people have living on the coast given COVID and the restrictions. You accelerated what's been going on for a long time. And that acceleration has definitely helped us. Alex has some numbers on that. Go ahead, Alex.

Yeah, absolutely. So if you look at the second quarter, 20.3% of all of our move-ins to our Sunbelt markets came from non-Sunbelt markets. That's 100 basis points sequential increase. And if you compare this to the second quarter of 2020, it's up 440 basis points. So we are absolutely the net beneficiary of folks moving out of New York, Illinois, Pennsylvania, New Jersey, etc., down to our markets.

And Alex, just to look at some aggregate numbers around that, Witten's data has total domestic in-migration net to Camden's markets of about 140,000 this year, and that number goes to 130,000 in 2023. So it's, you know, to Rick's point, We got this turbocharged effect as a result of all the complications from COVID, but this trend has been in place for a long time, and it looks like it's going to continue at a very elevated level in 2023 as well.

Which then sounds like it plays into Rich Anderson's point on why you guys are looking at positive rent growth in the back half this year versus perhaps slowdown elsewhere. You're getting this continued inward migration.

Yeah, I think that's clearly part of the story. Right.

Okay, thank you.

The next question will come from Joshua Dinnerline with Bank of America. Please go ahead.

Yeah, hey, everyone. Can you maybe talk about the differences across markets on the July rate growth front? Kind of where are you seeing the strongest and then weakest, least growth? I think you kind of alluded to DC and UC already, so maybe the other markets would be pretty interesting for everyone.

So just looking at our same property second quarter comparisons over the prior year, we've already discussed DC Metro and Houston. Those are basically in the 7% range. And then beyond that, you've got Phoenix that's still at almost 18%. You've got Southeast Florida at 16.5%. You've got Orlando at 16, Tampa at 18. I mean, these are... You know, 12 of our 14 markets are in double digits. So those are pretty, for this business, those are pretty crazy numbers.

And one more from me. On the tax side, you bumped up the expenses. Part of that was, I think, driven by the same sort of property taxes going up. Are there any specific markets where you're seeing kind of a higher than expected task assessments or is it across the board? And then is it driven by just valuations or municipalities increasing rates?

Yeah, absolutely. And so the three markets that I called out, the first one is Atlanta. Atlanta in the aggregate is actually not that much of an increase, but we originally had actually expected for Atlanta taxes to be down in 2022 based upon some successful markets. protests that we had in 2021. And so we got some initial values there that were different than we had expected. And we'll go and contest those. The other two markets I pointed out were Houston and Austin. And we're looking at Austin having close to a 20% increase in property taxes. You know, we got initial valuations in that were in that vicinity. We challenge almost every valuation. We're usually incredibly successful and we had absolutely no success in Austin this year on valuation. So that sort of got us to this 20% number. And and then we had sort of in Houston was was a similar story, not not quite to the same level. But we had expected Houston to be sort of in the two to three percent range and ended up being in the five percent range. Once we got through once we got through all of our our final or all of our final rounds. So that's sort of where we're seeing it. I will tell you I'll also add to that that Southeast Florida, Orlando, and Tampa just in general continue to give us some pressure sort of in the 8% to 9% ranges.

Got it. Thank you.

The next question will come from Barry Wu with Mizuho. Please go ahead.

Thanks. I'm Barry. I'm on the line for Handel St. Drust. I was wondering if you could discuss the expense pressures you're facing in more detail. Maybe first off, if you could discuss the drivers and key pieces on the 80% or 80-bit upward revision in your expense guidance. Thanks.

Yeah, absolutely. And so the major driver that you're really seeing there, once again, is property taxes. So if you think about it, we're up to 5.6% of what we're anticipating for property taxes, and that's about a 200 basis point movement. And property taxes represent 35% of our total expenses. So 200 basis points on 35% gets you 70 basis points, which is almost the entire delta between the 4.2 that we originally had for total expenses and the 5% we have now. So it's almost entirely driven by property taxes. Now, we do have a couple of other ins and outs. We are seeing some inflationary pressures on R&M. And that's causing us to have some increases on the R&M over what we originally had anticipated to the tune of about 300 basis points. But the offset to that is we actually had a really good insurance renewal. We originally thought that our total insurance for the year was going to be up about 22%, and now it looks like it's up 13%. So we've got a 900 basis point positive there that sort of offsets the R&M inflationary issues. And so that's that leads you really to the property taxes to be in the main driver.

Okay. Thanks. So it sounds like a mostly non-controllable. So what about on the, looking at your supplemental, the 33% GNA increase? Can you talk a little bit about that?

Yeah, absolutely. So as I talked about last year, excuse me, last quarter, we rolled out our work reimagined initiative. And if you recall, this is this is where we took a look at all of our onsite positions and we effectively came up with nests where up to three communities are managed together. As part of that, we took our existing assistant manager position and we centralized that into a shared service. So the shared service is now part of property GNA. And then you have the offset, in fact, more than an offset in lower salaries as we remove the assistant manager position.

Thank you.

The next question will come from Robin Lou with Green Street. Please go ahead.

Morning, all. I just start off with a question with Keith. So has your team seen a notable pickup in concessions from developers in heavier supply markets?

So, yeah, absolutely. In markets where we've seen the kind of strength that we've had for the last year, concessions have been less. We always include roughly one month of free rent or concession for lease ups. We don't do concessions in any of our stabilized portfolio, but that's The game that's played among developers has always included some provision for concessions. But in our world, they've been, for the most part, less than what we would have expected them to be. They're just the same strength for developers. and new construction across our markets is typical, just like we have in our stabilized portfolio. So probably less overall in the last year in terms of concessions, but it's still a part of the overall pricing structure for all new developments.

So this is, I guess the question was around what you're seeing your peers or competitors doing, not just your own book.

Yeah, they have less concessions as well. So in an environment where market rents are going up 16%, 17%, from whatever their pro forma was, they're all far exceeding what the scheduled rents were. So there would be no real incentive to continue to push top line rents and then concess back down to the point where their pro forma was. So yeah, they're all... My guess is they're all doing better on total rent or total scheduled rents, but that doesn't mean that they would have eliminated concessions. It just means they probably are sticking to the one-month free rent that was in their pro forma and then adjusting market rents to whatever the clearing price is for non-concess rent structure.

Got it. And so my second question is, so if I look into the D.C. markets, obviously you've done really well in the second quarter and July is still holding pretty stable at 7%. Do you expect any supply pressure impacting your pricing power for the second half of the year?

You know, the supply pressure in D.C. has really not been a huge issue for us. Most of our assets are in the D.C. metro area. I think total delivered units this year are in the 13,000 range, which is not a huge number for that entire metropolitan area. If you roll forward to 2023, Witten has total scheduled deliveries in the D.C. metro area of about 12,000 apartments. So I don't expect it to change much next year. The difference, as Rick pointed out, a lot of our challenges have been, we're in markets where there are governmental restrictions on what you could do with either just flat out rent control or the inability to collect or to, you know, to get your real estate back through the eviction process. And those were, you know, it's still not completely over in the district, but in DC Metro, almost all of those restrictions have been lifted. So I think 2023 is probably going to look more normal and just with regard to how we manage and the ability to push through market clearing rents, which we really couldn't in a lot of D.C. last year.

Thank you.

You bet.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Rick Campo for any closing remarks. Please go ahead.

Great. Thanks. Thanks for being with us today. And we will see you at the beginning of the conference season after Labor Day. So take care and have a great summer. Thanks a lot.

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