Camden Property Trust

Good morning and welcome to Camden Property Trust Third 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 investor sections 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 risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions, and the company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete third quarter 2022 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. 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.

good morning the theme of our on hold music today was thank you earlier this year our board of trust managers wanted to send a message of thanks to team camden for their unwavering commitment to our customers each other and our shareholders throughout the pandemic and beyond the idea resulted in this video that was shared with all camden teammates during our annual 15 city awards ceremony tour

Hi, Camden. Happy Ace Award Day. Oh, Ace Award Day is the most fabulous day of the year for us Camdenites. I am here live in Houston, Texas at the Camden Corporate Offices. And not only is it Ace Award Day, today is another special day. For the first time in two years, our Board of Trust Managers are meeting in person for their regular meeting, not virtually, in person. And guess what else? Camden has added another board member, and today is their first day on the job. Rick and Keith are on a Teams call, and they're going to be joining us shortly. But while we wait, why don't we go into the boardroom and say hello to our biggest fans. Come on, follow me.

Hello, Camden team. I want to congratulate the Camden's operations leadership team and district managers. for reimagining Camden's workplace. I am absolutely certain these changes will improve lives for both employees and our residents. I am so proud of you. Keep dreaming, keep improving, and keep learning.

Hello, I'm Javier Benito, the new kid on the block, my first board meeting, and I'm so proud to be part of this company that for the last 14 years you have made it part of the fortunes list of the best places to work. So bravo for all of you, and thank you.

Hello, Team Camden. I'm Steve Webster. I've had the privilege of serving on the board since the company's inception in 1993. Over all this time, I've seen Team Camden do so many amazing things. However, the team's performance during last year's great Texas freeze was truly remarkable. Your selfless care for so many residents without water and power for more than a week was incredible. Well done.

Hello Team Camden. I'm Frances Aldridge Sevilla-Sacasa and I've been with Camden for 11 years. I would like to commend our Denver teams for the amazing job y'all did with the very scary fires on New Year's Eve. The personal sacrifices you made to ensure that all of our residents were safe and comfortable were incredible and we are very proud of you. Thank you for all you do.

Hello everyone. I'm Mark Gibson. I've been on the Camden board for two years and it is a great privilege to serve. I want to give a special shout out to our investment and construction teams for the amazing value they're creating for our shareholders and residents and with all those acquisitions and new builds through giving our ops teams. some amazing homes to offer our residents and even further exceed their expectations. Great job.

Hi, Team Camden. Howdy. I'm Heather Bruner, and I have been proudly serving Camden for the last five years, and it has been fantastic to see how Camden is leading our industry with technology innovations like Chirp and Funnel. It's just absolutely amazing. Keep leading the way. Keep leading by example, Camden.

Greetings, Camden. Kelvin Westbrook here. I'm the lead outside director. I've had the pleasure of serving on the board for 14 years. I am extremely proud of Camden for having made the commitment to dedicate the resources necessary to put in place top tier diversity, equity, and inclusion program. Camden is indeed a great place to work. Thank you so much for all you do for Camden.

Greetings, Camden team. I'm Scott Ingram. I've been on the Camden board since Camden and Oasis merged almost 24 years ago in 1998. I want to give a virtual high five to all of Camden's maintenance teams. Despite two years of working through the pandemic with short staffing and constantly changing rules and regulations, y'all have managed to deliver living excellence to our wonderful residents. They love you, and so do we.

Excuse me, it's NASA. Oh, Rick and Keith, they're on their way.

Dude, you told me our board meeting was going to be a team's call.

I thought it was also.

Operating fundamentals continue to be strong and above long-term trends. Rents are following their normal seasonal slowdown as customers prepare for the holidays. Even as seasonality comes into play, new and renewal rents are much higher than historical pre-pandemic levels, setting up for a strong start in 2023. Demand continues to outstrip supply, and given the rise in interest rates and home price appreciation, apartment affordability is at an all-time high relative to homeownership in all of our markets. Our development pipeline continues to be a source of external growth. As we discussed on our last earnings call, we will not be selling or buying properties for the balance of the year. Apartment transactions remain quiet as participants' cost of capital continues to rise and price discovery continues. Our balance sheet is one of the strongest in REIT land and positions us to take advantage of opportunities as they unfold. I would like to thank all of our Camden teammates for all they do to improve the lives of our teammates, our customers, and our shareholders one experience at a time. Next up on the call is Keith Odom.

Thanks, Rick. Now a few details on our third quarter 2022 operating results and October 2022 trends. Same property revenue growth was 11.7% for the quarter and 11.6% year-to-date. Our performance was in line with our expectations, so we've maintained our outlook for 2022 full-year revenue growth of 11.25% at the midpoint of our guidance range. Rental rates for the third quarter had signed new leases up 11.8% and renewals up 11.5% for a blended rate of 11.6%. To date, leases signed during October are trending at 6.9% blended growth, with new leases at 5.2% and renewals at 9.4%. For leases that became effective in October, the blended rate was approximately 10%. Occupancy averaged 96.6% during the third quarter, down slightly from 96.9% last quarter and 97.2% in the third quarter of 2021. October 2022 occupancy is currently trending at 96.1%. Net turnover for the third quarter was 51% versus 47% last year. and move outs to purchase homes dropped to 13.2% versus 15.1% last quarter. We would expect to see a continued decline in move outs to purchase homes through the remainder of the year given the recent increase in mortgage rates. Next up is Alex Jesset, 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 third quarter of 2022, we stabilized both Camden Buckhead, a 366 unit, $164 million new development in Atlanta, and Camden Hillcrest, a 132 unit, $92 million new development in San Diego. We began leasing at Camden Atlantic, a 269 unit, $100 million new development in Plantation, Florida, And we began construction on Camden Wood at Mill Creek and Camden Longmeadow Farms, two single-family rental communities both in the Houston metro area with a combined 377 units and a combined cost of $155 million. During the quarter, we increased our existing unsecured line of credit capacity from $900 million to $1.2 billion and extended the maturity to August 2026 with two further six-month extension options. We also added a $300 million delayed draw term loan with an August 2024 maturity with a further one-year extension option. Currently, we have approximately $30 million drawn under our line of credit and no amounts outstanding under our term loan. We will likely use our term loan and line of credit to pay off our $350 million 3.2% unsecured bond which matures on December 15th of this year. Our board recently increased our share repurchase authorization from $269 million to $500 million. We did not repurchase any shares during or after quarter end. Our balance sheet remains strong. With net debt to EBITDA for the third quarter at 4.2 times and at quarter end, we had $348 million left to spend over the next three years under our existing development pipeline. Last night, we reported funds from operations for the third quarter of $187.6 million, or $1.70 per share. Included in our results are approximately $1 million, or one cent per share, of property expenses associated with Hurricane Ian, which are excluded from our same-store results. Excluding the impact from Ian, our third quarter results would have been one cent above the midpoint of our prior guidance range. This one cent per share positive variance resulted primarily from the combination of slightly higher other property income and slightly lower corporate overhead expenses. During the quarter, we experienced higher than anticipated repair and maintenance and utility expenses resulting from inflationary pressures. However, these increased amounts were entirely offset by lower levels of employee health insurance expense due to lower claims amounts. Last night, we reconfirmed the midpoint of our previous full-year same-store growth guidance at 11.25% for revenue, 5% for expenses, and 14.75% for net operating income. Our 11.25% same-store revenue growth assumption is based upon occupancy averaging 95.8% for the remainder of the year, with a blend of new lease and renewals averaging approximately 8.5%. These expected increases compare to achieved blended increases of approximately 15.5% in the fourth quarter of 2021. Last night, we also increased the midpoint of our full year 2022 FFO guidance by $0.01 per share for a new midpoint of $6.59. This $0.01 per share increase results primarily from lower than previously anticipated corporate overhead costs. We also provided earnings guidance for the fourth quarter of 2022. We expect FFO per share for the fourth quarter to be within the range of $1.72 to $1.76. The midpoint of $1.74 represents a $0.04 per share increase from the $1.70 recorded in the third quarter. This increase is primarily the result of the previously mentioned $0.01 per share third quarter impact from Hurricane Ian, an approximate $0.06 sequential increase in same store NOI resulting from $0.03 in increased revenue driven by higher net market rents partially offset by lower occupancy, And $0.03 in lower property expenses resulting from our typical seasonal decrease in utility, repair and maintenance, and unit turnover expenses combined with the time needed for property tax refunds. And an approximate $0.03 sequential increase in NOI from our development communities in lease up and our other non-same store communities. This $0.10 aggregate increase is partially offset by a $0.03 decrease in the amortization of net below market leases related to our second quarter acquisition of the fund assets. As we discussed on our first quarter earnings call, purchase price accounting required us to identify either below or above market leases in place at the time of the acquisition, and amortize the differential over the average remaining lease term, which is approximately 7 months. Therefore, in 2022 we will recognize 7 cents of FFO from the non-cash amortization of net below market leases assumed in the acquisition. We recognize 3.5 cents of FFO in the third quarter of 2022 from this amortization and we will recognize the final half cent in the fourth quarter. If leases were above market, the amortization would have resulted in an FFO reduction over the remaining lease term. A one and a half cent decrease in FFO related to higher interest expense, primarily attributable to higher variable interest rates, and one and a half cents in higher other corporate costs related to anticipated higher health insurance expenses and the timing of certain year-end accruals. At this time, we'll open the call up to questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star and two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Jeff Spector with Bank of America. Please go ahead. Great.

Good morning. Good morning. My first question is a follow-up to Rick's comment on demand continues to outstrip supply. And I know there's a various supply forecast for next year, different forecasts, I should say. You know, I guess, Rick, you know, is that common for now? Or do you feel that in 23 that will continue? How are you guys thinking about supply in 23 in your markets?

Sure. Supply in 23 is definitely going to be out there. I think we have a projected supply from Ron Whitten's number, about 180,000 new units coming into our markets. And with decent job growth and migration to our markets, we think that's going to continue. And so new supply, we should be able to continue to raise rents during that period, barring some big Economic issue obviously that could be out there on the horizon But you know, we feel pretty good about about the number of units that we absorbed, you know in 2022 and and think that That 2023 should be you know decent year even with supply coming on Thank you, and then my second is on the development pipeline and

You know, how are you thinking about that as we, you know, head into 23? I mean, there does seem to be some, you know, clear signposts of the consumer, you know, pulling back, weakening. You know, how are you thinking about that as we head into 23?

Clearly, development, we're looking at each one of our developments and making decisions on when we start or if we start in these deals in 2020, you know, in 2021. three. I think good news is there's a fair number of them that are middle of the year towards the end of the year. And so we'll just have to see how the market works out from that perspective. I think one of the things that we are starting to feel is that construction pricing is flattening out, which is good. And so maybe it makes sense to wait to see a few more cards on cost and also how the market, how the economy does next year.

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

Thank you. I recognize you've been mostly out of the transaction market, but hoping you can provide some color on where cap rates have trended more recently across your market. Also recognize that probably not a lot is traded, but any kind of recent data points or thoughts around that would be appreciated.

Sure, I think that's exactly right, that the market's very quiet from a deal perspective. We have a little technical problem going here, so Keith Oden is going to join me on my side here. But yeah, so if you think about the market today, if you don't have a reason to get into price discovery, then you're probably not going to do it in this market. And so I think that's the key point is that there's just no reason to transact in this uncertain environment. Cost of capital has gone up for everyone. The buyers that were using debt, especially floating rate debt, are having to rethink their models. And I think ultimately as we get, this is the high-tech version of when you fix computer issues. So, yeah, so I think it's, you know, people are sort of waiting for the first quarter to see what happens. You know, the good news is cap rates definitely have risen, you know, substantially. And the property values, you know, depends on who you talk to are down anywhere from 10 to 20%. And the good news is you saw our numbers and all our competitors' numbers are we're still driving NOI way, way, way above what we normally get. And so that's kind of helping offset some of the cap rate rise. And so I think ultimately, there will be transactions done. There's still a wall of capital out there that wants to invest in multifamily. And 2023 is going to be a really good year. I think even in a slowing market, we're still going to have have a decent rent growth. And I think we have a great embedded start for the year. So when you start thinking about cash flow growth in 2023, it's going to be better than it is on average, but probably a lot slower than 2022. But that should have some benefit in terms of keeping values from falling dramatically more than we have already.

Thanks. That was very helpful. And then as you think about kind of uses of capital, obviously we've touched on development a bit. You mentioned the share repurchase program. How do you think about executing there, you know, your stocks in the mid to high 5% implied cap rate today? At what point does that become a more attractive use of capital?

Well, as you saw in our release that we increased our buyback program authorized by the board of $500 million. Historically, we've been a big buyer of the stock, not recently. But the stock buybacks are interesting on the one hand because clearly it's hard to tell what asset values are today. But the stock is, when you think about FFO yield and its implied cap rate, it's a pretty attractive stock. attractive price. The issue you have in REIT land is that it's hard to buy a lot of stock back. And we definitely want to keep our balance sheet strong. So we're not going to go out and borrow money to buy stock. But as we've done in the past, when you can sell assets in the private market at 100 cents on the dollar and buy your stock at 75 cents on the dollar, that's a pretty good investment. We'll do it through sales and not through debt. and we'll take our time. We've always said the stock price has to be, you know, 25%-ish at a discount, and it has to be persistent so we can get in the market on a moderate basis, and that continues to be our philosophy.

Thank you. The next question will come from Steve Sakwa with Evercore. Please go ahead.

Good morning, team. It's Flora with Dave from Evercore. I just have a follow-up question about development front. So how much more conservative are you being underwriting and how much have you changed your development hurdles on your deals given the changing cost of capital? Thank you.

Well, the development deals that we had under contract that we didn't have hard earnest money on, we definitely have changed our hurdles. Our cost of capital has gone up substantially, obviously, like everyone else's. And when you get down to it, we're not going to do a development that isn't a positive spread of at least 100 to 150 basis points wide of our weighted average cost of capital. And our weighted average cost of capital has gone from five and some change to seven and some change. And so we definitely have implemented that new hurdle into future development pipelines. And then each one of our existing developments that we haven't started today, we're putting that new hurdle on it. The good news is that rental rates have gone up substantially, as you've seen in our numbers. So we've been able to do better than we anticipated in terms of rents. We also think that usually we were putting a 1%. construction costs increase per month. So call it 12% a year. We think that number is going to slow or go negative when we start seeing starts fall. Because most merchant builders are telling me today that their starts are going to be down substantially in 2023 and 2024 given cost of capital and the lack of bank financing. So yes, in fact, we have increased our hurdles and we are reviewing all of our projects that fit into the new hurdle rate.

Okay, that's really helpful. My second question, there was a 7 cent contraction from the previous top end of guidance. So kind of indicating a more conservative outlook, could you provide some color on the operating trends you've seen so far and what may be limiting the upside?

Yeah, there's a 7 cent decline in the top end, but there was a 7 cent rise in the bottom end. And really just reflects the fact that we're a month into the last quarter of the year, and there's a lot better visibility in our world when you're looking out 60 days than when you are 120 days or a full year. So it's really more just narrowing the guidance because we think there is likely to be less variability. The amount of the width of the guidance that we took into the third quarter was primarily around the just the uncertainty on collections and ERAP payments. It's very hard to model those two items because in this environment, particularly in California and Washington, D.C., they're not things that we have direct control over. Our guidance was reflected that in the third quarter, and we've got a little bit better visibility. We kept the midpoint the same, actually raised the guidance one penny for the full year. But, yeah, it's really just less time over the forecast period and trying to give investors a little bit more clarity around where we think we're likely to end up at the midpoint.

Okay. Thank you. That's it for me.

You bet. The next question will come from Austin Warshmidt with KeyBank Capital Markets. Please go ahead.

Great. Thanks, and good morning, guys. First, do you guys still expect to commence the Camden Nation deal this year? And then secondly, going back to development, last quarter I think you had discussed yields on future starts ranging from the low fives to low sixes. And, Rick, you just mentioned rents have gone up some, which is health, but how much do costs need to go down from here for you to achieve that new 7% hurdle rate?

Well, to answer the first part, we're not going to start nations this year. It'll be a next year start, depending upon how the cards fall in the first and second quarter. But in terms of in terms of construction costs going down, we don't think they're going to go down substantially very soon. Usually it takes a really big economic situation to a bad situation to drive drive costs down. We have that in the financial crisis. uh, in a big way, but, but we're not really anticipating that, uh, you know, next year at this point, unless, unless you assume a financial crisis style, you know, problem. Uh, but what, what will happen though is as the pipelines do moderate, uh, there'll be fewer developments being done and then costs will just at least stay flat, maybe down a little, but we've already seen some commodity prices like lumber. We're at pre pandemic prices for lumber and, you know, tripled during the pandemic. So, uh, I think there will be some pressure, some less pressure on cost, which is and I also think that we'll be able to shorten our development timeframe, which will take cost out of it, out of the system with fewer developments getting done rather than having add time to the schedule. We might be able to take some time out of the schedule and compress that to save money as well. So ultimately it will be about where rental levels are. And the good news is, is that, you know, rents given where we are today are likely to be strong in 2023. And that should help those yields as well.

So looking at the backlog of future start that you have today, you know, based on some of those assumptions, maybe, you know, today's rents and sort of current cost, you know, how many projects and what sort of volume would that represent that meet the 7% hurdle?

Well, right now we haven't really spent a bunch of time looking at each development in the pipeline and wondering what it's going to be at this point because we're not at that point yet, but we have around 3,000 units or 3,300 units in our pipeline, and each one's going to be evaluated on an independent basis with the new hurdle rate lens that we're going to put on it. Now, the good news too is that when you think about the capital markets that we have today, debt prices, you really don't want to go into the debt market if you don't have to. You really don't want to go from the equity market, obviously. What we will likely do is use dispositions to fund development in the future. And when you start looking at that, then you start thinking about trading, right? You're trading an existing asset with a certain growth rate at a certain price for a new development that has a different profile. So we'll look at what the incremental sort of accretion dilution is from that model. I think that rather than just saying, OK, I have to have a certain hurdle rate on the development, if we can sell assets and create a limited dilution scenario by selling and funding development and buying other properties, then we'll do that. And so that will change the dynamic a little bit on the hurdle rate for new developments for next year. And the bottom line is we'll have to figure out. or the market will have to show us whether there's an ability to fund development and other activities, stock buybacks and what have you, through dispositions. And we'll just have to see how that all plays out next year.

Understood.

Thanks for the comments. The next question will come from Neil Malkin with Capital One Securities. Please go ahead.

Thanks, everyone. Good morning. First question, it seemed like you've been raising guidance every quarter. Obviously, Sunbelt, very strong. That's great. But then the maintaining, it looked like it had to do with potentially DCLA, either elevated vacancies from long-term delinquent move-outs or some sort of bad debt issue as the California coffers are running out of reimbursement funds. I noticed that Occupancy in October dipped 50 basis points to like 96.1. And previously, I think Alex mentioned you guys assumed you would average 96.6 in the back half of this year. So it seems like you took that down about 80 basis points. So maybe can you just talk about what you're seeing and what's leading to that? the drop and all the things I just mentioned.

Alex, you want to take that? Yeah, absolutely. So the first thing I would touch on is occupancy. So occupancy is certainly a little bit lower than we had expected, but by the same token, our asking rents or our net market rents are higher than we thought. So it was really sort of a trade between occupancy and rental rates. The second thing I will point out, and you are correct, especially in California, is We did have less ERAP proceeds from the second quarter to the third quarter, and that was primarily the driver of what you saw in the growth differential on a sequential basis for San Diego and L.A. San Diego had about $225,000 less ERAP received in the third quarter as compared to the second quarter. If you normalize both of those, then our sequential revenue in San Diego would have been up 2.25%. If you look at LA and in particular the Camden in Hollywood, we had about 220,000 less in ERAP in the third quarter as compared to the second quarter. So obviously that would have a significant impact. And then in Phoenix, we also had, you know, higher bad debt and less re-letting income in the third quarter as compared to the second quarter. If you would normalize that, that would have been up 2.7%. So that really is sort of the drivers of what you saw.

Okay. And so nothing, just to be clear, nothing about the, you know, potentially elevated move-outs for long-term investors. long-term delinquents, particularly in your California portfolio, contributing to any of that. It's really essentially all you laid out there.

Well, if you have – so we did have more skips and evictions than normal than we did in the second – or third quarter – second quarter. We had more in the third quarter than the second quarter. And some of that is clearly driven by people who are moving out. One of the things that's really interesting when you look at the numbers is that – is that in the second quarter, we had a higher collection rate. I think, Alex, it was like 97 and some change. And then the third quarter was 94 and some change. And that was primarily driven by California. And you had a situation where most residents thought they would have to pay their rent And then California extended the eviction moratorium until January of 2023. And so when you give people runway and say, gee, you're not going to be able to be evicted and you don't have to pay your rent, they take an opportunity to do that. Hopefully, starting in January, we have no eviction moratoriums or things driving bad consumer behavior, and that will hopefully improve in 2023.

Okay, thanks. The other one for me is maybe in-migration. Talk about that a little bit. It seems like that continues to be very strong. Certainly, commentary we've heard from brokers across the Sun Belt seems like just job growth and attraction from employers continues to ramp. But there's been some conversation of potential reversal of that as some companies implement return to office. So I was hoping you could maybe give us some data points or, you know, bigger picture thoughts on in-migration, your confidence in that, and then, you know, any anecdotal or early signs that there may be some sort of reversion of the immigration order continues to be very strong one way.

Yeah, so Ron Whitten's numbers for net migration into Camden's markets for 2022 are at 153,000 net to Camden. Based on the same numbers for 2023, he has net in-migration of 179,000. So not only is it not reversing, but the work that he's done indicates that net in-migration will actually increase in 2023. And then it stays elevated in 2024. And obviously, these are forecast numbers and they're subject to a lot of variability. But I think directionally, in-migration is going to continue to be a pretty significant positive to Camden's overall geographies.

And then I'd add to that, in our particular markets, so 21.5% of our move-ins in the third quarter came from non-Sunbelt markets, and that's actually up 100 basis points sequentially. And if you compare that to the third quarter of 2020, it's up 400 basis points. So we continue to see sequential increases in migration to our markets. Okay, thank you, everyone.

The next question will come from Rich Anderson with SMBC. Please go ahead.

Hey, thanks. Good morning, everybody. So I wanted to add sort of a big picture question and kind of looking back at history to see if we can have some clues about what might happen from all this. Because the changes that we're seeing, some of it are normal seasonal patterns, as you described, Rick. But then we have a recession potentially coming. And I'm wondering if this is chapter one of a pretty meaningful deceleration beyond what would be called normal seasonal patterns. And, you know, if you look back at last time, you know, multifamily, the last several times multifamily fell into a negative same-store growth scenario, what is it about the current fundamental setup today that you think protects against an outcome like that? Maybe that could happen in your mind and you leave that option or that scenario open to potentially happening. But I'm just curious what confidence you have that the firm and the industry will avoid something really draconian, call it a year from now.

Yeah. So I think, first of all, if you if you have a financial crisis, right, like we had in 2008 and nine, it's sort of a different world. So I'm not going to avoid that. Right. You know, a normal recession or a. hard landing recession or soft landing, whatever you want to call it, uh, the multifamily business is going to do well. So, and the reason is, is that number one, you're starting out from high numbers, right? Occupancy is at a high level across the country. That's number one. Number two, uh, the consumer, our consumers are doing really well. Our average income is, is, uh, you know, 117, $118,000 for our new people. They're paying less than 20% of their rent, uh, in, uh, in, uh, a percentage of their income in rent. They have a lot of cash in the bank still. They're well employed. So it's, you know, our consumers are doing great. And when you have this in migration coming in, yeah, we have supply coming, but you know, we've had supply coming to these markets for the last 30 years as we've been in in a public company and supply has never killed the golden goose. It might slow growth a little bit, but in some cases, but because of the diversified portfolio we have, it really doesn't impact the business that much. So when you think about, and let's take the single family home, move outs. We were at 15 in the summer. We're 13 now. And I think the trending numbers through October are down to 12. And we think that number is going to go to single digits when you start thinking about interest rates being tripled for a single family home. folks and the pricing model today for multifamily is as good as it's ever been in our history relative to people moving out to buy houses. I serve on the board of the largest privately held home builder in America. Our sales are down 50%. from June forward and they're not going up. And it's, it's so that I think that with all that, all those backdrops, this should be a multifamily should be a really good place to be in, in any economic slowdown.

So, so Rich, I would just add to that, that if you, if you start the year and I think we've given guidance to 2023 with sort of embedded rent growth and we start the year at four and a half to 5% up on, on rents, in rental revenue, it would take, as long as this is a sort of a normal type recession, even if the landing is a little bit on the hard side, as long as it doesn't persist far into 2024, I think multifamily is going to be a really protected place. Rick mentioned earlier, our residents are in really good shape. And as long as our residents don't lose their job, now it's obviously a different scenario as the great financial crisis. As long as they still have their job, they're going to live where they live. They're going to continue to live out their lease term. And it implies that we'll be up 5% on rental growth. So I think there's just a lot of mitigating factors to where we sit today. It doesn't mean that You know, at the margins, of course, it affects things if we lose two or three million jobs in the economy. But it's just not a direct impact to our portfolio over the near term, call it end of 2023.

Just a quick side to that. You mentioned rent to income of 20%. How bad has it gotten in history for you guys? And how does 20% compare to, you know, when it was at its worst, at its highest?

And we actually have stayed in that zone. We've never had. And I think it just has to do with our markets. We are we're in high growth, low cost markets. Right. So the rents aren't nosebleed rents anywhere in our markets. So I think we've probably been at twenty two maybe over the years and driven by West Coast and East Coast. You know, if you look at California is probably higher than that. It's in the twenty four, twenty five. But bottom line is, is that is that, you know, one of the reasons that the Sunbelt has done so well is because it's affordable and people. And that's why I think you don't have a lot of a lot of the move back. You know, once you move to Charlotte and see that you can get a really cool apartment for, you know, half the price of a New York City apartment, you know, people like it and they stay. And so I think that, yeah, the market we've never had pressure on. on our residents' income-to-rent ratios, you know, really for the last 30 years, really.

Okay, great. Thanks very much.

Sure.

The next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, morning down there. So two questions. Hey, two questions. Just, you know, going back to the analyst who asked about Southern Cal and D.C., and obviously right now is not the time to be doing any large transactions, just given the capital markets. But if you look at your portfolio, and especially comparing it to your peer, MidAmerica, it would seem like having D.C. and having Southern Cal are not helping the overall portfolio mix. I mean, especially D.C. is an outsized weighting. So when the markets return... it would seem like these are markets to downweight and exit or severely sell down and fund elsewhere. Just sort of curious because the Sun Belt has definitely proven a lot more resilient in its economic diversification and ability to push through supply, whereas D.C. seems to be on a decade-plus supply issue and Southern Cal, while better than the other parts of Northern Cal right now, still has the California cost of living and and taxes, et cetera. So just curious your thoughts as you look at your portfolio over the next two to three years.

Yeah. So the way I look at it, Alex, is that our California portfolio and big chunks of our DC Metro portfolio have still not experienced the rental rate reset that all of our other markets have. And I just think that the, you know, economics are pervasive. They, you know, ultimately the water will seek the proper level. I think ultimately rents are going up in California, probably at some point will exceed the average of our portfolio and the same in D.C. Metro. So your underlying question of, you know, long term is different. Is D.C. at 17% the right number? I mean, we've said consistently that we'd like to shrink that over time. California at 12%. you know, maybe. But the reality is, is that until there's two things going on right now, you have a really a huge disconnect in valuations to kind of what you think the underlying asset ought to trade at. And then more importantly, long term, you've got this this opportunity to get the rental reset in those three markets, which, by the way, between just between those two markets, all of California and D.C. Metro is almost 30 percent of our portfolio. So I'm more interested in, you know, let's get through this period of kind of turmoil and uncertainty in pricing, and then let's reap what we know, what I believe to be the underperformance and level setting that needs to happen in those two markets, and then we'll look at it at that point. And that doesn't mean that around the edges we still won't do something, as Rick talked about, opportunistically to support our development program or even possibly a share buyback program if the math works.

If you think about what we've done in trading assets in the last 10 years, we've sold $3 billion and developed and or bought $3 billion. And ultimately, we have moved the market concentration around pretty substantially in the last 10 years. And so over a long period of time, you'll see us do some of that.

Okay. And the second question is just going back to supply. Again, Sunbelt traditionally has actually done pretty well with managing supply you know, apart from like a Houston. But as you look at your markets over the next 12 months, are there any markets or any sub markets where you're saying, Hey, maybe, you know, next year, you know, you guys could be citing, you know, this sub market or that sub market that could have, you know, a supply, you know, a supply issue, or as you look at all of your properties across all the portfolio, your view is that there's not any area where supply is an outside concentration or risk.

So, Alex, I would tell you that the answer to that puzzle rests in tell me what the job growth is in these cities. Because if I look at 2022 completions in a market like Austin, where we had almost 17,000 apartments, and yet Austin has continued to outperform our overall portfolio, it just tells me that there continues to be real strength in two places, in employment growth, but also in migration. Same thing in Charlotte. Well, if you roll that forward to 2023, the supply market actually increases in almost all of Camden's markets. I think Whitten's got completions at about 130 this year, moving to about 180,000 completions next year across Camden's portfolio. That's meaningful, but it's not necessarily concerning to us in light of what's happened on job growth and in migration. I think the good news and all of Whitten's data for that we look at is if you roll forward into 2023, his data indicate that that starts across Camden's markets go from 210,000 down to less than 150. And then they fall further to about 115 in 2024. Now that, That's probably a lot of good news for the multifamily world in 25 and 26, and now we're way out on the horizon. But the reality is starts are coming way down. Completions we're going to have to slug through for the next year and a half or so because they're going to continue to be elevated by historical norms. But it's our view that we'll continue to be able to backfill that with our geography between new job growth and then migration. Thank you.

The next question will come from Chani Luthra with Goldman Sachs. Please go ahead.

Hi. Thank you for taking my question. So I wanted to talk about Hurricane Ian. Are you guys seeing any increase in short-term leases or any impact on rates in the aftermath of the hurricane?

No, we're not. Fortunately for us, We had very little damage. We had no complaints from residents, nor did we have any seriously impacted employees. So we got lucky. A different path of that storm, maybe where it was originally forecast over the top of Tampa Bay, would be having a different conversation with you. But no, it's just been very little disruption. We had minimal amount of damage. The estimate that we gave was a little less than a million dollars, which given the size and magnitude of that storm and the fact that it went right over the top of Orlando as a category one storm, we were very pleased with how it turned out. We've neither seen benefit from people moving from the really badly affected areas into our markets That wouldn't be a normal place where those people would seek short-term shelter while they try to rebuild their homes on the Gulf Coast of Florida. Overall, it's been not a big issue for us, either physically on our assets or financially.

And as a follow-up, any preliminary thoughts on expenses next year? How should we think about real estate taxes, insurance? all the other line items that go into that bucket. Thank you so much.

Yeah, absolutely. So real estate taxes, I'll address that one first. Obviously, that's our largest expense line item. And 2023 is going to be an interesting year because if you think about what assessors look at, they typically look at the preceding years sort of NOI growth, and obviously 2022 has been a fantastic growth year. But then they're also supposed to look at real values, and clearly real values have come down. And so I think we're going to have a lot of protests and probably a lot of lawsuits working through the through this process in 2023. But, you know, I think if I was obviously we're still working through our budgets, but At this point in time, I would believe that our property tax expenses are probably going to be towards the high end of our typical range. If you think about the rest of the expense categories, clearly R&M and utilities are going to be driven by the inflationary pressure, so it depends upon what inflation is doing at that point in time. On the salary side, as I talked about in our last earnings call, we rolled out this year our Work Reimagined program, which is a benefit to us on site in 2022 by about a million dollars, but should be a benefit to us on site in 2023, about four to five million dollars. So obviously that's a positive that should offset a lot of these expense pressures that are potentially out there. And then on the insurance side, although we did have a large storm in Florida, this has been a pretty light year in terms of sort of global events. So my hope is that insurance starts to normalize.

Thank you for that detail.

Absolutely. The next question will come from Rob Stevenson with Jannie. Please go ahead.

Good morning, guys. What's the current expected stabilized yield on the $758 million development pipeline, and what's the current market that you're seeing for land? Has pricing come off there, and are you seeing transactions, or is that on hold just like actual property transactions?

Yeah, the yield is in the – we have properties that are, you know, 5.5 to 6.5, so it's, you know, call it, you know, right at 6-ish. In terms of land, we have seen some land owners that we were negotiating with lower their price. But the challenge you have today is it's really hard to kind of peg what the price ought to be. So there is definitely some sort of movement on land sellers in terms of what should the price be in the future. I think, again, it's hard to underwrite today. And even with land prices going down some, we haven't executed. What we have been doing, though, are land positions that we already have that are under contract and hard earnest money, we are pushing those out. And so people are agreeing to push them out, understanding that if we had to make a decision today that we likely likely would either ask for a haircut or not close. And so I think that the land tends to be stickier during the early part of a repricing scenario. But once they start seeing contracts drop, because I know Most of my merchant builder friends, if they're not hard on a contract and have significant investments, they've dropped their contracts, and they know those land sellers are all getting dropped across the country, and it'll be interesting to see what happens in the first quarter.

Okay. And then the second question, given the strong rent growth, what's the earn-in today heading into 2023?

Yeah, absolutely. So the earn-in for us right now is about 5%.

Okay. All right. Thanks, guys. Appreciate the time. Have a good weekend.

You too. You too. Thanks. The next question will come from Wes Galladay with Baird. Please go ahead.

Hey, everyone. I just have a question on the supply. If we look out to mid-year last year, we were tracking for about 165,000 forecasts for the 2022 supply, and now it's looking like about 130,000. Do you think the same thing will play out next year with 180,000 forecasts now?

Yeah, I think the difference is just the slippage in timeframes for the deliveries on the completions. We've seen it on all of our construction projects, and I assume that everyone else is experiencing either that or worse because there's lots of folks that don't have near the reach and the experience and relationships that we do to get these things brought to the finish line, and it's still a battle. So I know that Witten and RealPage both have tried to capture some of the delay because they had this persistent issue of saying we think completions will be X and for three straight years it's turned out that they were 80% of X. So I know they've tried to adjust their forecasting My guess is they still haven't captured it in the 2023 numbers. It wouldn't surprise me to see some of that 180 shift into 2024. I don't really, you know, I think the right way to look at the completions number is over maybe a two- to three-year period, just, you know, add them all up. Because if it started, it's going to complete. And the question is, you know, sort of not it's a rounding error if it completes in 2023 or first quarter of 2024 so I would I think it would be more useful for most folks to look at it and say you know give me three years worth of numbers and uh and over that period of time I'll give you my employment forecast and we'll see how that matches up versus trying to you know trying to handicap any individual year but my guess is they're probably still having to capture and it's likely to be less than the 180.

Okay, and then I'd like to talk about Houston. I believe the plan was to reduce exposure, but then you bought a JV, your JV that had high Houston exposure, and then you have two starts for Houston. So I'm detecting a little bit more bullish view, and then maybe zooming out maybe a few years. In the past, you had mentioned that Houston was more than an energy city, and you had at some point cited the chemical industry and medical. But right now, we have a big energy differential between the U.S. and everyone else around the world, it seems. And I just wonder if your industry contacts have indicated that they may have plans for bigger expansions in the area if this differential were to persist.

Sure. So we had a unique opportunity with the acquisition of the fund with Texas teachers to acquire properties that had zero zero execution risk. Right. And and so we knew we had to do something with that with the fund over the next two or three years because of the finite life of it. So it just made sense for us to do that. Yeah. Yeah. It kind of went against the grain of we want to reduce our exposure in Houston over time. And the other part of it is we started two development deals, which are single-family rental for rent properties. And so on that side, that's an opportunity for us to really understand the market and learn the market because I think it's a very compatible business with the regular multifamily business. Long-term, if you think about where Houston is right now, Houston has not had the same reset of rents that Dallas, Austin, or Florida or other major markets. And the reason being was because energy in 2020 got hammered, right, when oil prices were negative. And Wall Street has taken the energy companies to the woodshed multiple times and has required more dividends and stock buybacks. And so rather than drill, baby, drill, they're not doing that. What they're doing is they're being very methodical in their capital allocation. making sure they have dividends to pay their shareholders. So that has muted the job growth in Houston compared to these other markets. For example, Austin and Dallas recouped their pre-pandemic employment and went substantially higher than pre-pandemic employment about eight or nine months before Houston did. Now, we hit our pre-pandemic employment this summer. Now, we're still doing well in Houston, but on a relative basis, it's not as not as not as robust as the other markets. And so I think Houston, I've said in a couple of calls that Houston has gas in the tank. And it really does, because when you think about energy cycles, they tend to be anywhere from five to. you know 10-year cycles and most folks think we're in a super cycle right now because of the lack of drilling because of the domestically because of the uh the uh you know the government doesn't really want a lot of domestic oil and gas drilling there's a lot of a lot of pushback from the biden administration you have the saudis cutting you know uh cutting uh production two million barrels you got the russian ukraine situation and so you know we know we have to have energy and the world has to have energy and it's not going to renewables as fast as people think. So I think Houston is really well positioned over the next few years. And then when you add in the energy transition, which is ultimately we know we have to transition, but Houston is going to be likely the energy transition capital of the world as well. And primarily because When you think about the Inflation Reduction Act, there's about $100 billion of capital that we think is going to come to Houston, be it carbon capture. And if you look at what Exxon and some of these other big companies have done, they've gone out in the Gulf and started leasing shallow water wells that are spent so that they can store carbon in those fields that are all depleted. And so when you think about the fact that Houston is the number one exporter of energy in the country and in some categories in the world, and there's a lot of production with chemicals, and when you start thinking about decarbonizing that industrial complex, the carbon capture, the green hydrogen and ammonia and all those things that are going to propel us forward into an energy transition is happening here and the headquarter companies are here. So I think it's going to be, Houston's going to be a great market over the long term and it's going to, it'll have more gas in its tank than the rest of the markets in a recession because of that. Now, ultimately, we fundamentally want to lower our exposure in markets we're really concentrated in because it may be great over the next two or three years, but the way that our portfolio has been has really been constructed is to be diversified geographically. And when you have DC, Houston, and California being our three largest markets, we want to diversify ultimately. So we will do some trading in this environment. Like I said before, we've been over $3 billion of moving assets around into markets, and we'll continue to do that. And hopefully, We can do it in the last year or two. We've been able to do it on a non-diluted basis. And hopefully that will continue. Whatever the prices are when they reset, I don't think there's going to be a massive differential between cap rates in Houston or in D.C. or California versus the rest of the Sunbelt. And if we can sell assets and fund development or buy newer, higher growth assets in the other markets where we're underweighted, we will lean into that.

Great. Thanks for that answer, and have a good weekend, everyone.

Sure. You too. You too. The next question will come from John Pawlowski with Green Street. Please go ahead.

Hey, thanks for keeping the call going. Alex, you mentioned bad debt in Phoenix is ticking up. What is bad debt as a percent of revenues in that market, and are there any other markets seeing upward pressure right now outside of just timing impacts in regulated markets?

Yeah, absolutely. So if you look at collections, so our collections right now through the quarter, we're right around 98.6%. And that compares to the last quarter when it was right around 99.2%. If you look at Phoenix, our collections there were 99.2%. But to a point that Rick made earlier, if you look at California, our collections in the second quarter in California were 97.3%. That dropped off to 94.2% in the third quarter, 22. That's the real collection story.

Okay. And then, Keith, are your locals local teams seen a slowdown in traffic in any markets outside of the normal seasonality right now?

No. I mean, traffic, we still continue to have, you know, by a lot of the technology that we put in place, in particular funnel, the complaint that I hear most commonly is that we have more traffic than we can reasonably handle given the or that we can effectively handle because of the very low vacancies across the entire portfolio. But we're generating plenty of traffic. There's still tons of people that want to live in Camden apartments across all 15 cities. Even though our occupancy rate did fall from the second quarter, you're still north of 96% in the fourth quarter, and those are crazy good numbers from a historical perspective for Camden.

Okay, just one follow-up there. Again, don't want to be pedantic, but I thought it was assumed that occupancy would slip into the high 95 over the balance of this year, but you're still seeing occupancy above 96% today?

Go ahead, Alex.

Yeah, so we will average 95.8% for the full year. That is where our average is. And obviously that assumes that occupancy will follow a seasonal pattern as we get towards the end of the year.

All right, thanks. Have a good week. You too.

You too.

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

Hey, thanks for taking my question. I just wanted to quickly ask if you guys disclosed the loss to lease.

Yeah, so loss to lease to us is about 5.5%.

Okay, and is there any chance you see that loss to lease go negative during this year? No. No. Okay. Thank you. And for just secondly on expenses, do you think any, can you talk about tech efficiencies in terms of mitigating labor pressures?

I'm sorry, what's the question?

Just any tech efficiencies on mitigating labor pressures for next year and tech initiatives.

Yeah, so absolutely. So if you recall, we talked about our Work Reimagined program, which could not happen without our tech initiatives that we have in place, mainly Chirp and Funnel. And so because of those factors, we should be able to pick up about a net $4 to $5 million benefit on the salary side in 2023. So absolutely.

Okay, thank you.

The next question will come from Dennis McGill with Zellman & Associates. Please go ahead.

Hi, thank you. Just to start, I wanted to clarify the occupancy comment. I thought in the prepared remarks you said 95.8% for the rest of the year, meaning the fourth quarter for guidance, and I think just a minute ago you said 95.8% in a different way. So can you just clarify that first?

95.8% in the fourth quarter.

Okay, that's what I thought. And then just generally, as we think about that number and that 80 basis points deceleration from the third quarter, recognizing their healthy levels, that's a pretty stark change relative to what you've seen in the past seasonally. And at the same time, you're talking to still good traffic, income growth, and strong income metrics. You talked about in-migration being favorable. You've got for-sale affordability is going against the consumer, so the narrative is they're staying in apartments longer. I guess all of that collectively would suggest that you wouldn't have to make the tradeoff of occupancy and rate right now. So what are some of the offsets you think that are filtering through that's causing that sequential deceleration?

Well, I think you've got a couple of factors. Number one, we are pushing rents. And as we follow normal seasonal patterns, if you push rent, you should see occupancy come down. Number two, as we've talked about, our turnover has picked up a little bit. And that is driven by people finally that have been long-term non-payers. starting to move out. And as we have the ability to enforce contracts, we should expect to see that number tick up a little bit. That, by the way, is a good thing because those are folks who are not paying. And if we can move them out, although our physical occupancy will come down, it doesn't actually have any net impact on our financial occupancy. So those are a couple of factors that are driving that.

Okay. And then when you think about that, I guess now that that's come down a bit, that 95.8, a valid point between physical and economic, but do you start to think about pricing power getting back to pre-pandemic levels here then pretty soon since that's a bit below occupancy where you were in the fourth quarter, 19? So is that the transition that we're seeing as you move into the first part of next year?

I think we continue to have a lot of very strong things going in our favor in terms of migratory patterns that we've talked about, job creation in our markets. I think what we have to see is what is the long-term job creation in 2023. But I think we are going to remain in a pretty good, strong position in terms of our ability to push rents. And then once we

keep pushing rent so we should be able to push some occupancy a little bit further but as i said it depends upon what do we see in the economy in 23. we could have 96 occupancy all the time if we wanted to remember we have a dynamic red revenue pricing system and we've made a choice and that choice is based on keeping our our our uh keeping rental rates going up and if you think about alex mentioned that our average rental rate is eight and some change our average revenue growth is going to be eight and some change in the leases through the end of the year. And that's a really good number. If you look at historical, go back to pre-pandemic levels, I mean, we're usually negative to zero in the last two months of the year on revenue in terms of new leases, renewals and new leases. And so We're going to be six or 800 basis points above pre-pandemic levels going into 2023. And we just think it's the right fit. And to Alex's point earlier, we want people to move out that aren't paying us. And we're trying to help them understand that. You know, we've had discussions about paying people to move out, right? I mean, because it's just, and it's primarily, you know, DC and California, but, you know, if we, so I don't look at the 80 basis points as a flaw in the system. I look at it as keeping pressure on the rent and making sure you're starting 2023 at a really good place with an earn in and a loss to lease that is pretty substantial.

I appreciate the, uh, the color. Thank you guys.

Thanks. Sure. 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. Well, we appreciate your time today on the call and we will see, uh, some of you at NARIT, uh, in San Francisco. So, um, we'll have a lot of new stuff to talk about then probably since it will be about a week and a half. So, uh, so take care and have a great weekend and, uh, Go Astros. Take care. Bye.

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