Good morning, and welcome to the Camden Property Trust Third Quarter 2019 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Ken Callahan, Senior VP of Investor Relations, please go ahead.
Good morning, and thank you for joining Camden's Q3 2019 earnings conference call. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them. Any forward looking statements made on today's call represent management's As a reminder, Camden's complete Q3 2019 earnings release is available in the Investors section of our website at camdenliving.com and it includes reconciliations to non GAAP financial measures, which will be discussed on this call.
Joining me today are Rick Campo, Camden's Chairman and Chief Executive Officer Keith Oden, Executive Vice Chairman and Alex Jessett, Chief Financial Officer. I know that several of the multifamily calls this week have gone over 90 minutes in length, so we will attempt to be brief in our prepared remarks and try to complete our call within 1 hour. We ask that you limit your questions to 2, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond At this time, I'll turn the call over to Rick Campo.
Thanks, Kim, and good morning. Today's On Hold music was provided by the Talking Heads. In their hit titled Once in a Lifetime, they say that life is same as it ever was, which It seems to describe the strength in the multifamily space. Camden's 3rd quarter earnings and same property net operating income growth was better than we expected, leading to another guidance increase making that 3 for the year. Apartment demand continues to exceed new supply in our markets, driven by higher job growth than the national average.
Household formations continue to be strong through the Q3 to nearly 1,400,000 increase in household formations this year so far, The highest in the last 10 years. Apartment capture rate has remained high. Apartments continue to be the home of choice for millennials and many others. The record high employment has finally started to bring some of the 1,000,000 millennials that are still living With their parents since the Great Recession back in the apartment markets. This puts smiles on the faces of the parents, their grown children and the apartment owners.
We continue to improve the quality of our property portfolio through development, acquisitions, repositioning and selected property dispositions, while maintaining one of the strongest balance sheets in REIT land.
I
want to give a big shout out to our Canvent teams for their focused vision and hard work, making sure that They are improving our team members, our customers and our stakeholders' lives one experience at a time. Thanks, and I will let Keith take the call from here. Thanks, Rick. Our 3rd quarter results marked the 3rd straight quarterly beat in the
same store raise, which leaves us well positioned for a strong closeout 2019. We'll be providing 2020 guidance next quarter along with our customary report card and letter grades for each of Camden's markets. Our most recent third party economic forecasts are indicating supply will peak in Camden's markets in the aggregate in 2020 With a slight decline in 2021, most of our markets will see flat to declining supply next year. However, we do expect Seeing increases in Houston, Orlando, Atlanta, Dallas and Austin. Some highlights from our same store results include the fact that same store revenue grew at 3.6% in the 3rd quarter and 1.4% sequentially.
Our top markets for the quarter were Phoenix at 6.9% Raleigh up 5.3% San Diego, Inland Empire up 4.5% Denver and D. C. Metro, both up 4.1 percent and Atlanta, up 4%. Our weaker markets remain South Florida and Houston below 2%. Regarding occupancy, our focus remains on maintaining occupancy above 96%.
We averaged 96.3% in the 3rd quarter of 2019, up from 96.1 percent in the prior quarter and 95.9% in the Q3 of 2018. Year to date, occupancy was 96.1% versus 95.7% last year, and October occupancy remained slightly above 90 6% at 96.1%. Turning to leasing activity. 3rd quarter 2019 new leases were up 2.4%. Renewals were up 5.1 percent for a blend of 3.6%.
This compares to a Q3 'eighteen blended rate of 4.1%. This 50 basis point decrease in rents was mostly offset by our 40 basis point increase in occupancy compared to last year. October prelims for new leases were flat as expected and up 5% on renewals for a 1.9% blend, Roughly the same as October of 2018. November December renewals are being sent out at an average 5% increase. Our net turnover continues to set new record lows.
For the Q3 of 2019, it was down to 51% versus 54% last year. Move outs to purchased homes for the quarter was 14.3%, which was the same as last quarter and the Q3 of 2018. For this metric, 14% to 15% is beginning to feel like the new normal for move outs to purchase homes versus the 18% to 20% rate prior to the Great Recession. Regarding technology initiatives, Camden is evaluating numerous initiatives to increase revenues, reduce expenses and provide an overall better living experience for our residents. We have completed the rollout of mobile maintenance and an enhanced self-service online functionality for our residents.
We are currently piloting Chirp, our proprietary mobile access solution, and we will update you periodically on our technology and innovation initiatives. At this point, I'll turn the call over to Alex Jessett, Camden's Chief Financial Officer.
Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate and capital markets activities. During the Q3 2019, we began construction on Camden Hillcrest, a 132 Unit, dollars 95,000,000 new development The Hillcrest neighborhood of San Diego, California. Subsequent to quarter end, we stabilized our Camden McGowan Station development in Houston, Texas, generating a yield in the low 5% range. As a result of the elevated supply in the Midtown submarket, this yield is Slightly below our original pro form a, but within the range of our expected returns for similar mid and high rise urban development.
As the supply dynamic in Midtown continues to improve, there will be further upside for Camden McGowan Station, resulting from its irreplaceable location adjacent to public transportation And a vibrant city park. Later in the Q4, we will begin construction on Camden Atlantic, a 269 Unit, $100,000,000 New Development in Plantation, Florida. For 2019, we have now completed $218,000,000 of acquisitions and $185,000,000 in new development starts. We are actively working on several additional real estate transactions, which, If successful, we close around year end and are therefore not included in our Q4 guidance as the impact to the quarter would be immaterial. On the financing side, subsequent to quarter end, we completed a $300,000,000 30 year senior unsecured bond offering with an all in interest rate of 3 point 1% after giving effect to underwriters discounts and other expenses of the offering.
We used the proceeds for the early redemption of our existing $250,000,000 4.78 percent bonds due June of 2021 and the prepayment of our $45,000,000 4.38 percent Secured mortgage due 2,045. These transactions locked in 30 year debt at near all time low yields and extended the average duration of our debt by approximately 3 years. After taking into effect these transactions, 100% of our debt is now unsecured and all of our assets are now unencumbered. In conjunction with the redemption and prepayment, we incurred a one time charge to FFO of approximately $0.12 per share. This charge represents the combined amount for our make whole payment on the previously outstanding $250,000,000 bond, the prepayment penalty on the $45,000,000 mortgage and the write off of remaining related loan costs.
Again, this $0.12 charge was recorded in October and is included in 4th quarter and Full year FFO guidance. Turning to financial results. Last night, we reported funds from operations for the Q3 2019 of $130,500,000 or $1.29 per share, exceeding the midpoint of our prior guidance range by 0 point 0 $1 This $0.01 per share outperformance resulted primarily from higher same store NOI, resulting from a combination of higher than anticipated levels of occupancy and lower than anticipated real estate taxes. We have updated and revised our 2019 full year same store revenue, Expense, net operating income and FFO guidance based upon our year to date operating performance and our expectations for the Q4. As a result of our better than expected 3rd quarter same store occupancy, which we believe will carry over to the 4th quarter In our anticipation of continued lower property taxes in the 4th quarter, we increased the midpoint of our full year revenue growth guidance From 3.4 percent to 3.5 percent, and we decreased the midpoint of our full year expense growth guidance from 2.75 percent to 2.2%.
The anticipated property tax savings are primarily being driven by lower Texas property tax rates as a result of the passage of Texas House Bill 3, which reduces school district tax rates by approximately $0.07 in 20 19 and an additional $0.06 in 2020. As a result, we are now anticipating full year property taxes for our same store portfolio to increase at just under 1%, approximately 200 basis points inside our prior guidance. The result of this higher revenue guidance and lower expense guidance It's a 50 basis point increase to the midpoint of our 2019 same store NOI guidance from 3.75% to 4.25%. Last night, we also revised the midpoint of our full year 2019 FFO guidance from $5.09 to $5.02 per share. This $0.07 per share decrease includes the impact of the 4th quarter $0.12 per share charge related to the early debt repayment.
Excluding this charge, our full year FFO per share guidance midpoint increased by $0.05 per share As the result of our anticipated 50 basis points or $0.025 per share increase in 2019 same store operating results, Approximately $0.01 of this increase incurred during the Q3, with the remainder anticipated in the Q4, dollars 0.015 of higher interest and other income, resulting primarily from higher cash balances and other miscellaneous corporate income and $0.01 from anticipated 4th quarter business interruption insurance recovery Last night, we also provided earnings guidance for the Q4 of 2019. We expect FFO per share for the Q4 to be within the range of $1.21 to 1 $0.25 The midpoint of 1 $0.23
This represents a $0.06 per share
decrease from $1.29 reported in the Q3 of 2019 and includes the impact of The 4th quarter $0.12 per share FFO charge related to the early debt repayment. Excluding this $0.12 charge, Our 4th quarter FFO per share guidance midpoint increased by $0.06 per share as compared to the 3rd quarter As a result of a $0.02 per share or just over 1% expected sequential increase in same store NOI, Driven primarily by our normal third to fourth quarter seasonal declines in utility, repair and maintenance, unit turnover and personnel expenses. A $0.02 per share increase in NOI from our development communities and lease up, our other non same store communities and the incremental contribution from our joint venture communities A $0.01 per share increase in FFO associated with the previously mentioned 4th quarter business interruption insurance recovery from one of our non same store communities and a $0.01 per share decrease in overhead expense due to the timing of various corporate initiatives and expenditures. Our balance sheet remains strong with net debt to EBITDA at 3.9 times and a total fixed charge coverage ratio at 6 times. We ended the quarter with no balances outstanding on our $900,000,000 unsecured line of credit and $157,000,000 of cash on hand.
After closing our $300,000,000 bond offering on October 7th, redeeming the $250,000,000 bond on October 23rd And repaying the $45,000,000 mortgage on October 31st, we now have approximately $73,000,000 of cash on hand. At quarter end, we had $672,000,000 of on balance sheet developments under construction with $337,000,000 remaining to fund over the next two and a half years. At this time, we will open the call to questions.
Thank you. We will now begin the question and answer session. Our first question today will come from Trent Trujillo with Scotiabank. Please go ahead.
Hi, good morning. So I appreciate the prepared comments about the potential for some acquisitions around year end. But just For some context, can you give an indication of how many deals you're looking at and the approximate value of that pipeline?
We are probably evaluating $1,000,000,000 of transactions, and that's kind of an ongoing basis. It's likely we'll close 1 or 2 of those by the end of the year, and we're talking probably Hitting our original guidance are being slightly ahead of the original guidance, which would be $100,000,000 to $200,000,000 by the end of the year.
Okay. And a quick follow-up on that same topic. So earlier this year, you removed dispo guidance dispositions from your guidance Capital and the potential to issue more equity to take advantage of some of these opportunities that you're seeing.
Well, clearly, our cost of capital Has gone down this year by virtue of when you think about the 30 year bond, we did it at an all in rate of 3.41%, Including fees, but and clearly, the high the stock price at this level lowers our costs as well. Ultimately, in order to grow, you either have to issue equity or issue debt. And we have said For a long time that we're going to manage our balance sheet to be one of the best balance sheets in the entire REIT sector. So to the extent that we can match fund Acquisition opportunities or fund our development, ultimately, we do need to be in the capital markets. So We want to be opportunistic in that area.
This year, we've issued over $1,000,000,000 worth of bonds and a few Really good rates and we did an equity issuance in February. So we will continue to try to be prudent in our capital management and make sure that we have a use of funds before we Load up the balance sheet. Right now, we have cash on our balance sheet, and we need to spend it.
Our next question will come from Nick Joseph with Citi. Please go ahead.
Thanks. You mentioned that you expect supply to peak in 2020, can you provide some more color on that in terms of expected deliveries in 2020 versus this year? And then maybe specifically for DC and Houston?
Yes. So Nick, in our this is using Ron Witten's numbers. In 2019, across Camden's footprint, This year in 2019, we're going to get roughly 137,000 deliveries that ticks up in 2020 to about 150, and then that comes back down as we mentioned, it will come down slightly in 2021 to about 100 47,000. So the progression is 137, 151 and then back down to 147 with a peak in 2020. In D.
C, the numbers are basically flat 12,000 this year expected, 12,000 next year and another 12,000 in 2021. Houston is the big change. We go from roughly 8 1,000 apartments this year to about 15,000, which is, percentagewise, is a big jump, but 15,000 is Closer to the long term average for deliveries in Houston, so we'll looks like we're trending back to kind of what the long term average has been, but it's a pretty big
Thanks. And so when you think about how that plays into Houston, obviously, it's been a little bit of a drag this year in terms of same store revenue growth versus How do you think about operating that portfolio going into heightened supply next year?
Sure. The Houston market is an interesting market because you would we expected Houston to be better this year than it has been. And What's going on here is that we continue to have strong job growth, 75,000, 80,000 jobs. The unemployment rate dropped Dramatically here over the last couple of years. And what we thought would be higher apartment demand didn't materialize The way we the way it usually does and what happened was and I think this is sort of indicative of migration rates around the country.
They've gone down primarily from historical numbers, and that generally that's a function of The unemployment rate being low everywhere, so there's not as much incentive for somebody to leave Their city, if they can get a job and they can create a situation for their family there to go to another city. So that's one of the issues. The other issue in Houston, which is pretty interesting is that when our unemployment rate went down, the new jobs that were Created they were taken by existing people who lived here who already had a housing solution. So they either lived in a house or an apartment already, And we didn't create new demand as a result of that. When you start looking at the numbers going forward into 2020, 2021, we think that flips.
Usually apartments are getting maybe 40% to 50% of the demand in household formations driven by jobs. And Last year, they got about 15% of the capture rate in Houston. So we think that's going to turn next This year, it started turning already, and we're going to see it turn in 2020, 2021, which should be more constructive for being able to lease those Apartments that are coming online during that period.
Thanks.
Our next question will come from Shirley Wu With Bank of America, please go ahead.
Hey, good morning guys and thanks for taking the question. So you guys talked about So could you also talk about Southeast Florida, where you're also seeing a little bit of a softer market? And what Could potentially happen in the near term to make that market better or worse than expected.
Yes. Shirley, Southeast Florida has two Primary issues, there's been a moderation in job growth for sure. And we're running between Fort Lauderdale, Down from about 15,000 jobs in 2019. Looks like it's trending to about 13,000 jobs in 2020, both of which are on the Low end of their historical rates. About the same thing in Miami, 18,000 jobs this year, trending to 15,000 next year.
You still have a pretty big overhang of condominiums, shadow inventory of condominiums that are soaking up some of the demand At the higher end of the market, so that's a little bit of an issue on the supply side. In 2019, In Fort Lauderdale, we had about 3,000 apartments. It looks like that's going to be less than 2000 in 2020, which should help some. And then in Miami, You've got a total supply this year completion is about 7,700, and it looks like that drops down to about 7,000 next year. So While we think that, that scenario looks like it's in equilibrium, it certainly doesn't Feel like a scenario where you're going to see a great return to pricing power in South Florida in 2020.
We'll see. We're in the process right now of putting together Our bottom up budgets, and we'll provide you with a lot hopefully, a lot more clarity and guidance on Our view for South Florida on our next conference call.
Got it. That's helpful. And so As we're talking about this topic on supply, as you anticipate higher supply into 2020, could you talk a little bit about your strategy going forward and
Yes. So if you look at Camden's total footprint, you've got The supply is going up in our across our markets from 137 to about 151. So it's 14,000 apartments over Camden's entire Footprint, roughly 8,000 of that is in Houston. And again, the 8,000 gets us back in Houston to kind of a normal run rate for absorption. So The anomaly of that 14,000, about 8,000 of it is in Houston, and it's not it's coming off such a low base That doesn't seem terribly troublesome to us and the rest of it is sort of a rounding error across our markets.
I think from our perspective, 2020 In the aggregate, it's going to be a lot like 2019, but you're going to see some movement around the markets. I think I mentioned the markets where we've got Supply increases, including Orlando, Dallas, Austin and Houston. And then pretty much everywhere else in our portfolio, we should see Moderate declines in supply. So our we are going to maintain our strategy of trying to maximize occupancy at this part of the cycle. We just think that that's probably the better trade off.
So again, when we put together our plan for next year, my guess is that we'll be planning for That's a little higher in average occupancy than what you would have seen in our portfolio over the last 5 years, but maybe not materially, but maybe 95.5% to 96%. We've been fortunate this year to be able to outperform occupancy every quarter so far and it looks like that will carry over in the Q4 this year.
Great. Thanks for the color.
Our next question will come from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Hey, good morning down there. Just two questions. First, on the transaction market, you guys have been pretty clear The past few years that it's obviously tough to acquire. And just sort of curious as cap rates and rent growth across the country Almost converged to sort of the same levels regardless of market. Are you guys finding that your IRRs are the same as you underwrite?
Or are you seeing more competition from maybe some of the coastal markets or rent control markets coming your way where The IRRs that you're underwriting this year may actually be lower than what you would have had last year just given the competition.
Well, I think the generally speaking, the reason we haven't been as aggressive from acquiring properties is I mean, when you get down to the issue, we want to have a decent spread over our long term cost of capital on our terminal IRRs. And so the going in yields are pretty much the same across the country and for the type of property we're looking at it, we're now at sub in most markets including Houston. And so the idea of the growth that you have to have from that starting point To get a terminal IRR that is a decent spread over your long term cost of capital is tough. Now that's why we haven't bought as many properties. So bottom line is we're looking for kind of a needle in the haystack where it's under managed, it's Under what we could build it for, so under restoration costs.
And so It's a challenge getting those units in that regard. So with that said, there is a hope That in the next year or 2, there will be a sort of convergence of sellers that will have to adjust Maybe going in yields or pricing, if you will, to match what the buyers really want because there is sort of a there is this big bid ask spread And there's a massive wall of capital out there that needs to be placed and the sellers need to recharge their own balance sheet so they can continue to develop.
On the second part of your question, which was kind of the is there a migration of capital flows from The to Sunbelt markets from other lower cap rate markets, There's some pretty decent indications recently that some of the big players that have historically wanted to Play only in the gateway cities and the coastal markets are migrating into the Sunbelt for all the reasons that We like our footprint where it is right now. The job growth continues to outperform the rest of the U. S. And our markets And cost of doing business and the regulatory environment is certainly more friendly in most of our states. So I think that is there is some evidence that, that's going on, and it does put Additional pressure on cap rates.
On the question of your on the question of kind of IRRs, The flip side of the cap rates that we're chasing is that as you underwrite an IRR, you got to be realistic About what an exit cap rate is, and if you're looking at acquisition cap rates at 3.75%, whereas before, we would have been hard pressed to even about a 4.25 exit cap rate, but that's the price of poker. And so when you do the underwriting with what we think are realistic exit cap Based on the current environment, your IRR is not that far off of where it would have been a year ago. The challenge, as Rick pointed out, is If you're starting from a 3.75%, it doesn't it almost doesn't matter what your math is on the exit cap rate. First of all, we're going to hold these assets when we buy them for probably 20 years. Secondly, to get from 3.75 to a It's sort of a run rate that's above our weighted average cost of capital just seems like forever.
So we're reluctant in the same way that You think about lenders who at some point in time quit lending it over a spread and say, I'm it's the floor. I don't really care what the spread is. I'm not
Certainly amazing to talk about 375s in Sunbelt markets. I'm sure you've never met those together. The second question is for Alex on the property tax. You said that there's an impact this year savings, but you also expect another savings next year. So just from a qualitative standpoint, I know you're not giving guidance, but still as we think about next year, is there How do we gauge the amount of savings that we should anticipate?
Or is it or is that sort of savings already in the Q3 run rate?
Without giving guidance, what we will see is further decreases in tax rates In Texas, in 2020, it's $0.07 in 2019, it's additional $0.06 in 2020. And then obviously, the offset to that We were very successful in 2019 with the amount of refunds that we've gotten in, and so we'll see how our budgets play out for the refunds we anticipate in 2020.
Okay. Thank you.
Thanks.
Our next question will come from Derek Johnston with Deutsche Bank. Please go ahead.
Hi, everyone. Thank you. Your starts under construction and shadow pipeline continues to remain robust. How are you viewing the development platform given the compressing development yields in this environment? And has the low end of yield expectation range comfortably declined to, let's say, around 5%?
I think the answer is absolutely we are continuing to be in the development business and we like where we Yes, Sid, in that regard, we've generally started between $200,000,000 $300,000,000 annually, and we have a pipeline to continue that process. The yields on the yields have definitely come down. Returns have come down on development as a result of rising construction costs Going up faster than rental rate increases have gone. In our last book of business that we completed, our average return was in this around 7%. Now our average return is around 6%.
And the when you think about the blended rate of The different types of assets that we're building, we're building suburban wood frame assets that are trending in the At the higher level, higher returns than the urban concrete higher densities and those are going to be in the low fives And the stick built suburban properties are going to be 6 and some change. And so our blended rates are going to be Probably 100 basis points less than we got on our last cycle. On the other hand, when you look at the spread That you're getting for the risk of developing, the spreads actually stayed the same because cap rates have compressed And people are paying sub-four cap rates for assets of these kind of qualities. So the spread in terms of risk reward that we're getting from Developing continues to be robust. We need at least 150 basis point positive spread on a development project versus an acquisition, and we're continuing to get that because Of the compression in cap rates and the wall of capital that continues to bid up existing properties.
Got it. Understood. And then just switching to DC just quickly. So DC does contribute an outsized amount of NOI versus other metros in the portfolio and yet the rest of the portfolio is in the Sunbelt, which we of course view makes sense. So how do you see DC fitting into the mix going forward?
Considering you don't really have any ongoing development Where communities planned in the pipeline, I believe, at this point, do understand that there is one redevelopment project going on. So how do you view the DC market going forward?
Well, we still think long term the D. C. Market is we're about appropriately allocated to the D. C. Metro.
You keep in mind that We have D. C. Proper assets and then we've got Northern Virginia and all the way into Maryland. So it's yes, there's sort of a There's probably a wave that they all all those markets are affected by, but they all have their own individual drivers. We just finished 2 pretty sizable developments in D.
C. We finished Noma last year, our lease up there in D. C. Proper. So we continue to be very constructive on D.
C. It certainly outperformed our expectations this year. We're at 4.1% NOI growth in D. C. And relative to our overall portfolio, that's accretive to the average, and that's The first time that's happened in a number of years.
So we continue to like that area. We'll continue to invest. And as I said, we just wrapped up about $425,000,000 of new development in the D. C. Metro area in the last 2 years.
So It continues to be an important part of our portfolio. And I gave it a D. C. Metro Letter grade of B with a stable outlook that probably was wrong. It probably was more like a B or B plus Stable or maybe be with an improving outlook based on the performance of our portfolio so far.
Our next question will come from Haendel Singh Juste with Mizuho. Please go ahead.
How are you doing?
They sound it's coming through very poorly on that line. So we will move on to the next questioner, which is Austin Wurschmidt with KeyBanc Capital. Please go ahead.
Hi, good morning. Thank you. Alex, you referenced in your prepared remarks numerous initiatives that you were working on to improve revenue and expenses. Can you expound on that? And do you expect it to be more of a contributor, I guess, to revenue growth in the $50,000,000 of revenue enhancing CapEx that you guys have completed
Are you talking about the technology initiatives that we're working on?
Just technology initiatives or I guess other Items that will contribute to top line growth.
Yes. We're always looking for new areas Enhance service where we can drive value to our residents. And certainly, one of the areas that we're that we've Spent a lot of time exploring in the last year is creating opportunities for Parking options for our residents where people might be willing to pay for reserved parking for an additional space, etcetera. So that's an area that probably has gotten more focus of our attention in the last 12 months. In terms of technology, There are a number of things that we're looking at.
I mentioned that we had already rolled out the mobile maintenance, which has been a real game changer for us. The other thing that we're working on right now is a smart lock solution, and we have a proprietary product that we're Piloting right now, there are a lot of there are a number of smart lock solutions out there, but the economics of them just don't For the multifamily industry, the game changer will be when someone comes up, and we hope that we will be That entity comes up with a solution that is cost effective for the multifamily business as opposed to the high end condo business. And we are Pretty well down the trail on a proprietary solution that we're piloting in Houston right now. We're already rolling out the perimeter access piece of it. And in the Q1 of next year, we'll be rolling out the SmartWise component.
So we just always keep your head up and keep looking and be aware Of any opportunities that we have to better serve our residents?
Can you give us a sense of what the spend is on that and what the returns are you expect from
We don't have that nailed down yet because since it's a proprietary product, it's something that At a point in time, we'll make available to anybody else who wants a SmartLock solution with economics that work in the multifamily business, but we haven't nailed that down yet.
Okay. And then just last question for me. To the extent you successfully closed on the $100,000,000 to $200,000,000 of deals you referenced in the acquisition pipeline and you kind of utilize That available cash on the balance sheet, as future opportunities arise, I guess, what's your willingness to utilize the ATM versus an overnight?
Well, the balance between ATM and overnight, interestingly enough, it's about the same in terms of cost to the company. It obviously It's more efficient and quicker to do an overnight versus an ATM because you can only I sell a limited amount of volume each day. But really the determining factor for our capital allocation It's really what trying to match fund the investments that we are making and so we will use the most efficient platform to do that and use the Combination of debt and equity as we have in the past.
Our next Question will come from Drew Babin with Baird. Please go ahead.
Good morning. This is Alex on for Drew. First off, looking at McGowan Station, curious how aggressive you guys had to get on concessions there to get it fully leased? And then also with that yield coming in a little lower than you initially expected, have you reevaluated your underwriting expectations for the downtown development right down the road?
So on the first question, McGowan Station. McGowan Station market kind of ranged depending upon what time of year and What was going on, anywhere from a month free to 2 months free, sometimes 2.5. The When you look at the downtown, midtown and Greenway markets that probably in Houston, that's probably where the most the highest percentage of We're feeling pretty good about McGowan Station. It's definitely a lower yield than originally projected. The downtown project, We are definitely going to open up into the same concessionary market.
The good news is there's Not a lot of new properties opening their doors in downtown, but the Midtown and the Greenway does Have an effect on that. So we expect that to be a concessionary market for at least the next 12 to 18 months. But we're confident That downtown continues to be a very positive place for people to live. In the last 5 years, you've gone from 4,000 people living downtown to 10,000 people living downtown. There's been about $3,000,000,000 worth of investments to improve walkability and parks and transit and what have you.
So we think Long term and even in the near term, downtown will continue to be a great place for people to an alternative for people to live. You've seen Much more densification in Houston. And the folks that are living downtown are sort of surprising me because They're tending to be an older demographic rather than a younger demographic, primarily because of the price point That that the downtown buildings are offering, but we feel good about it. We will open into a concessionary market, though, for sure. And we are taking some of the units out of the downtown market downtown building by doing a Y Hotel.
And we'll have 100 units Out of the building, that will be a hotel, which will be an interesting Test because on the one hand, we'll have cash flow generating from the hotel. They tend to get occupied very quickly, and that cash flow will offset What we would otherwise have in vacant units, and we'll be able then to sort of lease up a smaller property as opposed To the whole property and then we'll be able to sort of close down the Y Hotel over a period of time while we continue to lease up.
That's a really helpful color. And then lastly, looking at LA and Orange County, how does that revenue growth result come in relative to your initial expectations year to date? Curious if supply has been the motivating factor that's looked like you guys have been pushing occupancy over rates. So just curious what you've seen in that market?
Yes. So we had at the beginning of the year, I rated L. A. As an A- And improving in Orange County A- improving. So we were very constructive on L.
A, Orange County at the beginning of the year just sort of based on the way our It's all Southern California. And even within Southern California, it's not concentrated in L. A. So it's I think it's performed in line with our expectations. Obviously, the they've had a real a moderate increase In new apartments in L.
A. And Orange County, you got roughly 3,500 apartments in Orange County, Total of about 13,000 in all of Greater L. A. So those numbers look like they're trending down next year In both markets, decent job growth continues to continue to see in L. A.
And Orange County. So I don't I know that there's been a little bit of disparity between our results, a little bit better than some of our competitors, but It certainly wasn't unanticipated for us that we would have a good constructive year in both of those markets at the beginning of 2019.
Great. Thanks. Thanks for taking my questions.
You bet.
Our next question will come from Wes Golladay With RBC Capital Markets, please go ahead.
Hi, good morning, everyone. Going back to that supply forecast for this year versus next year, Does that take into account delays in construction time for next year?
So I would say yes because our data providers tell us They are doing a lot of work around trying to get refined in terms of delivery dates And do it kind of monthly as opposed to looking at quarterly or even just looking at aggregate numbers. Having said that, for the last three years, Every all three years, I would say, they both data providers have underestimated the amount of slippage. So I can't imagine maybe they got ahead of it for 2020, and we're really going to go from 137 to 151. Just Color me is skeptical based on the last 4 years of estimates versus what actually materialized. So I hope that There's a little bit better refinement in that data, but I guess I'll believe it when I see it.
Got it. And then looking at the balance sheet, I mean, everything looks really good there. The one thing that does stand out is you do have some 5% coupon debt Earn in,
it looks
like 2023. How soon can you get after that piece of debt?
Well, when the 2023 maturity definitely is one we'd like to take out, the challenge you have is the prepayment penalties are very Expensive. The closer you get to it, the lower it goes, obviously. And as we Took the $12,000,000 charge for the early extinguishment of those bonds that we replaced with 30 year bond. We'll look at those opportunities. We sort of looked at the $12,000,000 charge as we had a did a breakeven analysis That basically told us that if the rate went up 18 basis points or spreads gapped 18 basis points Between the time that we issued in October versus the maturity of these bonds and sort of like buying insurance on 18 basis points, Which is what we did.
And when we look at that if we that cost today would be a bigger Spread and a higher much more expensive insurance policy. And when you get down to 10 basis points or 15 basis points, when you think about how spreads move And how the treasuries move, that's a rational insurance policy to buy. But today, it would be much more expensive and that's why we wouldn't take that out today. But as we get closer and you look at what happens to rates and spreads, we could make that decision in the future.
Great. Thank you.
Yes. Sorry.
I was going to say, we look at this all the time and we're running math on it probably weekly. Right now, the prepayment penalty on that would be about $20,000,000 so as compared to the $12,000,000 that we just incurred. So we are looking at it On an ongoing basis.
Okay. Thanks a
lot, guys.
Our next question will come from Haendel Singh Justice with Mizuho. Please go ahead.
Hi, guys. This is Zack Silverberg here with Haendel. Just a few questions on the cost side. Can you talk about some of the big moves In some of the core markets that you saw in 3Q, specifically in Atlanta or the big jumps in Charlotte and Southeast Florida?
Yes, absolutely. So when you look at Atlanta, we got some very large property tax refunds in the 3rd quarter. I'll tell you those were in fact in our plan. So there was really not a surprise there for us. If you look at Charlotte, Keep in mind that Charlotte really has had very high property taxes.
We talked about that in the beginning of the year. If you'll remember that Charlotte actually does a reval every 2019, it's right around 35%. And if you're looking at Southeast Florida, that's also property tax driven. So really, they're all property tax driven, and it depends upon the timing Either when refunds come in or as I said with Charlotte, just the overall increase in that market due to the fact that they rebal every 8 years.
All right. Thanks. And you mentioned the benefit from Texas, but do you guys anticipate any other major Tailwinds or headwinds and reassessment of taxes or anything of that sort in 2020?
Yes. I mean, so the only thing that we're 2020 is that Raleigh also revalves every certain year. So, Raleigh is going to reval in 2020 That's going to be over 4 years. Obviously, it's a smaller market for us, so it shouldn't be as incremental as what we saw in Charlotte. And then just to clarify on Texas, when we talk about a $0.07 reduction or a $0.06 reduction In property tax rates in Texas, what we're talking about is not FFO per share, we're talking about as a percentage of the mill rate.
So if you think about a standard mill rate in Texas being, call it, dollars 2.22 per 1,000, if you have a $0.07 reduction, what that Works out to be about a 3.5% reduction in Texas due to the rates.
Thanks for the color. Absolutely.
Our next question will come from Neil Laughlin with Capital One Securities. Please go ahead.
Hey, guys. First question on Houston in general. First, sorry about the World Series.
Is there a game? No.
Yes. But Just given the fact that the market really is so heavily on energy, I know you've talked about medical being a big presence, but it really seems to ebb and flow with How the energy sector is doing, plus the fact that it's very easy to bring on supply quickly. I wonder, do you ever think about maybe paring down your exposure in that Market, just given the volatility and sort of one main demand driver of it?
Well, I think that is a misconception Energy drives Houston fundamentally because if you look at, let's just talk about middle of 2014 when energy prices were Over $100 a barrel and then they went to $20 some $20 and some change by 2015. Energy industry lost 80,000 jobs in Houston. And at that time, the Houston produced another 80,000 jobs in the petrochemical business, the medical business and other Ancillary businesses, so Houston had basically a flat job growth for a couple of years as a result of that. And then the market responded By starts dropping from the good news about the ability to add supplies, you can cut the supply as fast as you can add the supply. So we cut the supply pretty dramatically and the market didn't have a major dislocation Like it had maybe in the '80s.
So Houston is much more diversified economy than it was in the past. And part of the when you think about just the price of oil, What happens there is that relates to drilling and activity from that perspective, but the petrochemical part of The sort of downstream energy business is actually doing really well. A third of all gasoline, for example, is manufactured In the Houston Ship Channel, 60% of airline fuel is manufactured there. So there's a lot And a lot of primary chemicals are continuing to do really well as long as and those are more driven not by energy prices, but by Economic activity. So if you have clearly a recession on the horizon, then that's one of the reasons Houston is less Sort of less bulletproof from a recession.
If you go back into the '80s when the U. S. Had a recession, Houston never felt it because it was so energy dependent mostly on the upstream side. With that said, We definitely look at our allocations of our real estate and we want to make sure that we're balanced. Houston represents about 11% of our portfolio today.
It's been a great long term market for us, but we definitely look at Where we're buying and where we're selling, and you haven't you don't see a new development in Easton other than in our joint venture right now. But that doesn't necessarily mean The opportunity isn't here because to me, I think one of the misconceptions of Houston, Made a lot of money in our stock when we underperformed the market in 2014 by 2,000 basis points and because they So it threw the stock out the window because of the energy situation even though we didn't perform from a cash flow perspective that badly here. So we're going to make investments here and we're going to stay in Houston. We'll toggle it here and there, but we have never considered like leaving this market or anything like that. Maybe slowing the growth or perhaps paring back some of the assets that are maybe Needing more CapEx, but beyond that, you're long term players here.
And Neil, thank you for your condolences To our Houston Astros, but like I told everybody in Camden, D. C. Is our largest market. Houston is our 2nd largest market. Before they ever played a game, Camden was a winner and one of the teams was going to end up with the trophy.
Good way to look at it. Okay. Last one for me. A lot of companies have been talking about TAC and integration and how that feeds into various platforms on both revenue and expense management side. You're obviously not spending doing the smart home route, but I'm just curious how you're thinking about using technology To proactively help with things like CapEx, anything along those lines you're doing that could either be on the revenue or expense side That you're kind of leveraging big data or the Internet of things, I guess, to sort of enhance your platform with?
Well, I would 1st
of all, at the speed that we're not doing smart homes because we are. We're doing the smart homes that people want. People, for example, do not want systems that turn their lights on or not. They want they definitely want smart Thermostats and things like that and access, we do a lot of focus groups and spend a lot of time trying to understand what our customers want and what they are willing to pay for. And so on that side of the equation, we're pushing the edge of the envelope to Great value for customers and drive revenue for us.
The on the big data, we have just Completed and are in the process of putting additional modules on or modules on this System, but we just completed an Oracle cloud based system where our financial reporting and HR is now going to be in the cloud and that is all about big data. It's all about Having access to all of our data via smartphones and then being able to drive expenses lower in CapEx, I think the Internet of Things is a real thing. And so ultimately, when you have your data all in the same place and it's communicating across Platforms in the cloud will be able to leverage smart devices in our air conditioning units And in our maintenance facility, so that we can instead of fixing a broken one, we can that Inconveniences of tenant or a resident, we can actually do preventive maintenance, which would save us money over the long term. So I think that That is a that was a big investment and a massive amount of time and effort. It was nearly a 2 year project and everyone in our company was involved in it.
And the teams Did a great job even though it was definitely those kind of big ticket projects are very painful because you're doing your regular job plus trying to Implement a new system and our teams did a great job managing what is a tough thing and ultimately our big data And our ability to analyze and understand how things are working is definitely going to be enhanced dramatically as a result of that project.
Thank you.
Our next question will come from John Pawlowski with Green Street Advisors. Please go ahead.
Thanks. Just one quick one for me. Keith, I was hoping you could compare 2019 operating backdrop versus 2018 as it relates to Urban versus suburban properties and what you're seeing on the rent growth side? Are suburban properties coming down to earth versus urban? Are they Pulling ahead, any comments there would be great.
Yes, John, pretty consistently this year, our urban product has Performed or the suburban product has outperformed by about 50 basis points. A lot of it's primarily the result of where the last cycle of Product got built and it was overwhelmingly, the merchant build community was definitely had a bias Towards urban assets, that's where the buyers of that product wanted to That's where the demand was for their product on an exit basis. So yes, that we continue to see that. It hasn't changed. That's one of the things in our Houston portfolio that's actually helped us pretty dramatically is our suburban assets have held up really nicely.
And the real supply challenges, as Rick mentioned, have been in the Midtown, Downtown and Greenway Plaza area. So But absolutely, it is a trend. It's continued. My guess is that as they always do, the focus Because there's so much competition in the urban core areas that you're probably going to see a drift back
And just to be I was talking portfolio wide. So that comment holds in the supply laden markets of Dallas, Charlotte, other markets as well?
Yes. That's across the the 50 basis points Across Camden's entire portfolio. Okay. And that was
a similar margin this time last year?
Yes, it was.
Okay. Thank you.
You bet.
Our next question comes from Hardik Goel with Zelman and Associates. Please go ahead.
Hey guys, thanks for taking my question. Stepping back from just the company level stuff, you guys talked a little bit about the challenge of Capital today and some of your peers are really going outside issuing equity and expanding the size of the company. You guys have been more prudent. How do you see this play out longer term, 5, 10 years, this wall of capital issue? What could change?
How could this wall of capital shift elsewhere? And what is it about the narrative that you think will keep it there or move it? Well,
I think the narrative will change when there is a when we have a recession, Right. And when we have the next cycle, the question about what happens and generally what happens In a business contraction is that people lose jobs, demand is reduced as a result Of that situation, and then what happens is you have landlords, especially new developments that are in lease ups that have to discount dramatically to buy market share. That generally has an effect on pricing and And you're able to cap rates rise and prices sort of go down. The thing that's kind of And I guess on the recession side, last year at this time when the market was going down and everybody was talking about recession, the Fed was rising. Now we're in an accommodative easing cycle.
We don't sort of bet on recessions or major upticks. We're trying to keep Be in a position where we sort of plan for the worst and hope for the best. That's why we're where our balance sheet is where it is today because you don't know what's going to happen In the future, I guess the real interesting part of multifamily, and I think the reason multifamily is one of the top Real estate classes, multifamily industrial have the hot hands and that's where investment capital wants to go. And in multifamily In the multifamily space, that's because people need a place to live. And when you look at the demographics and you look At the sort of where people live and how they operate today, especially the millennials, they Are doing everything later in life.
They're buying houses later in life, having kids later in life. They don't want they want the optionality of an apartment. So apartments Really good. And then if you think about, well, if interest rates go up because of inflation, we apartment leases roll over On average of 8% every month, and we're repricing our asset every day. So you have a good backdrop for inflation.
So That's why capital is coming this way. We are Our business as well, when you look at the development pipeline plus the acquisitions, dollars 400,000,000 or $500,000,000 a year of additional Capital that gets put out now is we could if we're very ultimately, we're at the If this is 2012 or 'thirteen, we might be more aggressive on all those the fronts. But because we're late in the cycle and there's a lot of Uncertainty out there, we're going to be more prudent.
Got it. Just a quick follow-up on that. You mentioned cap rates of 3.75%, 75, you maybe have an exit of 4, 4.5. Is it conceivable that in a recessionary scenario, not for you guys Because you guys have a strong balance sheet, but for private operators that are underwriting like that, is it possible that they see They significantly underperformed the underwritten returns because cap rates cap out more because they're starting from such a historically low base.
Well, that's definitely the risk, right?
I mean, because If you're wanting a 6% IRR and you start at 3.75% and you then have a growth expectation of the cash flow And as you said, cap rate, I mean, if cap rates gap 100 basis points, you need a 25% increase in revenue or NOI to be able to offset That kind of increase in cap rate in order to make a return. So I think that if you're interested, that's the inherent risk Of buying a cap rate at that level today, it's worked out for lots of folks Because the rents have grown and cap rates have continued to stay very low, but ultimately, People might be disappointed in their returns if you have a scenario where cap rates gap and rents don't grow as much. I think the issue of Whether somebody gets in trouble financially, I think that's probably a low risk because you just have There's a lot of equity in the system. Even in the development game, the merchant builders are all 30% to 40% equity today because of just the way banking the bank system is requiring the equity. So I don't think there's a
lot of there will be
a lot of financial stress In terms of people having to sell, but on the other hand, their expectation of their pricing and their margins, their profit margins, which have been Amazingly high and sticky for a long time. We'll probably revert to more normal levels or less than they originally anticipated.
Thank you. That's great color.
Our next question will come from John Guinee with Stifel. Please go
ahead. Thank you. John Guinee here. Two curiosity questions. It looks like San Diego is about $720,000 a unit for a pretty small project, 130 odd units.
Can you
talk about what you're building there and why it And then second, if I look at your redevelopment summary, Is it okay to just project out maybe 1,000 units a year, get this kind of major overhaul and people should think about that
So on San Diego, The short answer is it's the price of poker for an A plus location that's adjacent to the Hillcrest Neighborhood where single family homes, little bungalows sell for $1,500,000 to $2,000,000 You're 1.5 From Balboa Park, you're 2 miles from downtown. It's been and I don't I'm generally not a believer in Using the word unique for real estate, but this is a really unique site. It's literally up on top of a bluff with a view of Mission Bay. It almost requires that we build that scale and scope of project. And again, you're talking about Comparable rents in that neighborhood that are pushing $3.80 to $4 a square foot.
So The number the returns work because people are willing to pay a premium to be in that neighborhood. They're relatively small unit footprints. But It's expensive to build in California, for sure.
On the 1,000, it's annually. I think that is a rational thought process. We have moved through our portfolio, but we're we'll continue to make that investment. It's the best investment on the Board that we can make is redeveloping our existing properties.
So What do you think you decide to redevelop 1 property a year?
Yes. I think you have to split it Into 2 categories. So repositions, which is separate than redevelopment and repositions, we're doing about 2,300 units a year. And I think that's probably a pretty safe When you look at the redevelopments, there's 4 communities. They're all unique in that They're all high rises, and there are communities where there was extensive exterior renovations that were I would tell you that, that particular pool is a little bit shallower than the pool of reposition.
So We'll keep looking for redevelopments. I wouldn't expect to see a huge amount of these on an ongoing basis. But as I said, we'll continue to add the repositions, Think about $2,300, dollars 2,500 plus or minus a year.
And that's more of a $10,000 to $12,000 price tag?
It started that way. It's getting creeping up a little bit more closer to the, call it, the $15,000 to $20,000 price range just
This concludes our question and answer session. I would now like to turn the conference back over to Mr. Rick Campo for any closing remarks.
Well, thanks for being on the call today, and we will see a lot of you at NAREIT coming up. So thanks a lot.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.