Good morning, and welcome to the Camden third quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this call is being recorded. Now I'd like to turn the conference over to Kim Callahan, Senior Vice President of Investor Relations. Please go ahead, ma'am.
Good morning, thank you for joining Camden's third quarter 2018 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. We encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions. The company assumes no obligation to update or supplement these statements because of subsequent events. As a reminder, Camden's complete third quarter 2018 earnings release is available in the investor section of our website at camdenliving.com. It includes reconciliations to non-GAAP financial measures, which will be discussed on this call.
Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President; and Alex Jessett, Chief Financial Officer. We will be brief in our prepared remarks and try to complete the call within one hour. We ask that you limit your questions to two. 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 Ric Campo.
Thanks, Kim, good morning. I'd like to start with to give a shout-out to John Kim of BMO Capital Markets for providing this quarter's on-hold music. John got the honor by winning our Name That Music contest last quarter. John's theme for the call were songs from 2009, the year the Great Recession ended. Some of you, the songs may have sounded recent. To others, they may have sounded ancient. Probably depends on how you were personally impacted by the recession. John didn't say this, but I'd be willing to bet there are more than a few of you on the call today who were still in school in 2009. Time flies when you're having fun. Speaking of fun, Camden's third quarter results would qualify as fun.
Our on-site teams and our support teams performed better than we had expected with solid revenue growth and great expense control driven by our Attack the Run Rate initiative. Apartment fundamentals remained strong despite high levels of supply in most of our markets. Strong job growth and in-migration from high-cost and high-regulatory states has continued to support high apartment demand in Camden's markets. For the year, we have completed $600 million of combined acquisitions and development starts, which is in line with our original guidance. The mix has changed, however. Our development starts were $100 million more than our guidance, and our acquisitions $100 million less than our guidance. We effectively traded lower-yielding acquisitions for higher-yielding developments, albeit the timing will be different on producing those yields. With that said, I'd like to turn the call over to Keith Oden.
Thanks, Ric. Last quarter was Camden's 100th quarterly earnings call. This quarter begins the next 100. Honestly, I'd gladly take another 99 just like this one, as our results were solid and slightly better than we expected for both the quarter and year-to-date. Same-store revenue growth was 3.1% for the third quarter, 3.2% year-to-date, and up 1.1% sequentially. Our top markets for revenue growth for the quarter were Denver at 4.3%, Orlando at 4.1%, Houston and Phoenix both at 3.8%, and San Diego Inland Empire at 3.6%. Our weakest three markets again this quarter, with less than 2.5% growth, were Dallas, Austin, and Charlotte, the most heavily supply-challenged markets in our portfolio. Overall rents on new leases and renewals are slightly better than planned year-to-date and look encouraging relative to our fourth quarter plan.
In the third quarter, new leases were up 3.1%, renewals up 5.5%, providing a blended growth rate of 4.2% versus 2.8% in the third quarter of last year. Far in October, new leases are basically flat, with renewals up 5% for a blended increase of 1.8%. October occupancy is running at 95.8% versus 96% last October. However, just a reminder that last year's October occupancy rate was influenced by the Hurricane Harvey occupancy effect, which drove Houston's occupancy rate up to 97.5%. The Harvey effect will have a measurable impact on our Q4 comparisons to last year. Our third quarter net turnover rate fell again to 54% from 55% last year and remains below last year's 49% turnover rate at 47% through the first three quarters.
In the quarter, move-outs to purchase homes dipped to 14.3% versus 14.6% last year, leaving us at 14.7% year-to-date, and that compares to 15.2% last year. It appears that the gradual upward trend over the last several years in this metric may have stalled in 2018 at a level well below the historical norm and bears watching in coming quarters. I'd like to thank all of our Camden associates for an outstanding quarter. Let's finish strong to close out 2018. I'd like to turn the call now over to Alex Jessett, Camden CFO.
Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate and financing activities. At the end of the third quarter, we purchased Camden Thornton Park, a recently constructed 299-unit, 9-story community in the Thornton Park neighborhood of Orlando for approximately $90 million. This community is directly adjacent to our existing Camden Lake Eola development, providing the opportunity for further operating efficiencies. Also, at the end of the quarter, we sold a 14-acre out parcel adjacent to our development sites in Phoenix for $11.5 million. During the third quarter 2018, we began construction on Camden Buckhead in Atlanta. This $160 million, 365-unit development will be the second phase of our existing Camden Paces community and will consist of one eight and one nine-story concrete building. Subsequent to quarter end, lease-up was completed at Camden NoMa Phase Two in Washington, D.C.
This $108 million development is expected to deliver a stabilized yield of approximately 8.25%, creating over $80 million of value for our shareholders. For 2018, we have now completed $300 million of acquisitions and started $280 million of new development. We are not anticipating any additional acquisitions or dispositions in 2018. Turning to our recent financing activities. On October 1st, we repaid at par $380 million of secured debt, consisting of $175 million of 2.86% floating rate debt, and $205 million of 5.77% fixed rate debt, for a blended average interest rate of approximately 4.4%. The repayment of this secured debt unencumbered 17 communities valued at approximately $1.1 billion. We repaid the secured debt using proceeds from a $400 million, 10-year unsecured bond offering, which we completed on October 4th.
The effective interest rate on this new unsecured issuance is approximately 3.74% after giving effect to the settlement of in-place interest rate swaps and deducting underwriters' discounts and other estimated expenses of the offering. After taking into effect these transactions, 79% of our debt is now unsecured, and 90% of our assets are now unencumbered. Turning to financial results. Last night, we reported funds from operations for the third quarter of 2018 of $117.1 million, or $1.20 per share, exceeding the midpoint of our guidance range by $0.01. This $0.01 outperformance resulted primarily from approximately $0.005 in lower same-store operating expenses due to lower turnover costs, lower amounts of self-insured healthcare costs, and continued cost control measures, and $0.005 in higher non-same-store net operating income resulting from better than expected results from both our previously completed acquisitions and our current development communities.
We have updated and revised our 2018 full-year same-store expense, net operating income, and FFO guidance based upon our year-to-date operating performance and our expectations for the fourth quarter. As a result of actual and anticipated future expense savings, we have reduced the midpoint of our same-store expense guidance by 45 basis points from 3.5%-3.05%, and increased the midpoint of our same-store net operating income guidance from 3%-3.2%. Last night, we also increased the midpoint of our full-year 2018 FFO guidance by $0.02, from $4.74-$4.76 per share. This $0.02 per share increase is the result of our anticipated 20 basis point, or $0.01 per share increase in 2018 same-store operating results.
Approximately half a cent of this increase incurred in the third quarter, with the remainder anticipated in the fourth quarter, and $0.01 of additional non-same-store outperformance from our previously completed acquisitions and our current development communities. Approximately half cent of this increase also occurred in the third quarter, with the remainder anticipated in the fourth quarter. Last night, we also provided earnings guidance for the fourth quarter of 2018. We expect FFO per share for the fourth quarter to be within the range of $1.20-$1.24. The midpoint of $1.22 represents a $0.02 per share increase from our $1.20 reported in the third quarter of 2018. This increase is primarily the result of a $0.01 per share, or approximately 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 $0.01 per share increase in NOI from our development communities and lease-up, and a $0.01 per share increase in NOI from our recent acquisition of Camden Thornton Park. This $0.03 per share cumulative net increase in FFO will be partially offset by a $0.01 per share decrease in FFO resulting from a combination of higher overhead costs due to the timing of certain corporate-related expenditures and slightly higher interest expense, as the fourth quarter interest savings from our recent debt refinancing will be offset by higher amounts of debt outstanding and lower amounts of capitalized interest as several of our developments near construction completion. Our balance sheet is strong, with net debt-to-EBITDA at 4.1 times and a total fixed charge coverage ratio at 5.5 times.
We have $793 million of development currently under construction, with $380 million remaining to fund over the next three years. As of October 25th, we have no amounts outstanding on our unsecured lines of credit and $30 million of cash on hand. At this time, we'll open the call up to questions.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. The first question comes from Nick Joseph with Citi.
Thanks. Just on Houston, you're facing a difficult occupancy comp in 4Q, how are things trending from a new and renewal lease perspective? As you face more normalized occupancy comps next year, I know it's before formal guidance, how's Houston looking in 2019?
Well, we're in the process of putting together our bottom-up budgets, we look at all kinds of different data providers. If you look at what Ron Witten has in his outlook for 2019 in Houston, he's got revenues going up somewhere in the 4%-5% range. We'll see where ours come out. Clearly, the comp is a tough one because of occupancy in the fourth quarter, that normalizes pretty quickly in the first part of next year on occupancy. We trended back down to about 95% as we expected we would by the second quarter. I don't think there'll be much of that noise in the numbers. Houston continues to recover nicely. I think last month we got a report that showed that the trailing 12-month job growth in Houston, Texas, was 128,000 jobs.
That's enough to move the needle even in a metropolitan area like Houston. Things continue to recover very nicely. The nice thing is that up until recently, the job growth had been coming pretty much without participation by the integrated oil companies. Within the last two quarters, we've really seen a shift in that. They've begun to hire again. They're at full capacity. I think that bodes well for Houston job growth in 2019. Obviously, we have a very constructive supply scenario for Houston next year, around 8,000 apartments that are going to be delivered into the Houston metropolitan area, which is sort of a rounding error in terms of total supply. If we get another really good job growth year in 2019, which is kind of what's projected in most people's numbers, 8,000 new apartments, that's really good math for our business.
Thanks. Just on the balance sheet, after repaying the secured debt earlier this month, it looks like the only remaining secured debt is coming due next year. How do you think about the use of secured debt as part of the overall capital stack going forward?
Yeah, we fundamentally believe that we should be an unsecured borrower. We've got $439 million of secured debt that's coming due in the first quarter of 2019, and our intention is to not take that out with additional secured debt.
Thanks.
Thank you. The next question comes from Juan Sanabria with Bank of America.
Hi, guys, this is Shirley Wu calling in with Juan Sanabria. Congrats on a great quarter. As we move into 2019, outside of Houston, which markets do you believe are set to re-accelerate or decelerate from 2018, especially in your higher supply markets like Dallas or Charlotte?
Yeah. Again, we're in the process of putting together our game plan in all of our markets, and obviously, we can look at aggregated data from data providers. I think the one that we rely most on is Ron Witten's numbers. If you look at what Ron Witten has modeled for Camden's markets into 2018 to 2019, he's got total revenue growth for 2018 at somewhere around a little over 3.2%. If you look out into 2019, that number goes up to about 3.7% in his high-level aggregated numbers. Clearly, Ron is looking for an improvement across the board, a slight improvement, about 50 basis points in our entire portfolio.
What that means for each of our individual markets, we'll have to wait and see until we get the final results and review process for our 2019 revenues that we'll give you some guidance on in the first part of 2019. Overall, if you just kind of think about the drivers in our business, if you look at employment growth and supply, there's really not a huge difference between the outlook of what's happening in 2018 and what the outlook is for 2019. Job growth comes down a little bit across our platform. New completions stay relatively flat, but the change in the ratio of new jobs to completions doesn't really move that much. We're a little bit above five times for 2018. That drops to a little bit below five times for 2019.
Overall, just looking at the macro data and not drilling down to each individual market, which is the whole purpose of our budget process, you would look at the macro data and say, 2019, this should look a lot like 2018, maybe some slight improvement. We'll have to see how it plays out.
That's great. Are there any markets in particular that you might be concerned about in terms of maybe supply and rent just not being there?
Well, the supply-challenged markets that we have right now are the three weakest markets that we operate in are Austin, Dallas, and Charlotte. If you look out at the supply numbers for 2019, there's very little relief coming in any of those three markets. Dallas gets a little bit better. Austin actually gets a little bit worse on supply. Charlotte's about the same. I think you can look for us to continue to be swimming upstream on those three markets just because of the headwinds of supply.
Cool. Thank you, guys.
You bet.
Thank you. The next question comes from John Kim with BMO Capital.
Thanks again for allowing me to be your hold music DJ.
Absolutely. Well done.
On your turnover rate of 47%, can you comment on any markets that are meaningfully higher or lower than your portfolio average?
From a historical standpoint, when you look at them, I don't have the details of each one, but when you look at them year-over-year, you always have markets that have higher versus lower turnover rates. If you look at them by comparison, there's nothing that stands out in our portfolio. We've had a 2% difference in the turnover rate from last year, and that would be consistent across the platform, but within that set of data, you've got turnover rates that vary by as much as 7% or 8% up and down from the average in our portfolio. We can give you that data offline if you'd like.
One of the things I think is interesting when you think about turnover is sort of just the migration patterns of sort of Americans and what's happened over the years and how that's changed. There's really been a secular change in.
Yeah
people sort of making moves and wanting to make moves. It's primarily, I think, because of, number one, the millennials are just kind of a different breed of cat compared to sort of the baby boomers, and they were always willing to move to a new city to get a better job and what have you. Today, with the unemployment rate as low as it is and the competition in the job market, it's a lot more difficult to relocate people from their market when they have a home and kids and things like that than it has been. You clearly still have out-migration from California and some of the other East Coast cities that's been going on for a long time.
Generally speaking, people are staying put longer, in their homes and in their apartments, and they're not moving as fast as they did in the past. I think it's that sort of secular change in just the way people kind of do everything, including getting married a lot later in life or maybe not getting married at all, and then also having children later, and it sort of moved into the system, and now our traditional turnover rates are just not what they were in the past because of that.
Thanks for that. Alex, on the senior notes, looks like a prescient move moved to lock in the 10-year early to reduce the effective interest rate. Can I ask how long are the swap agreements, duration for?
Yeah. They're 10 years. We first started entering into them at the end of 2017. We finished them in sort of early part of 2018. It's for a 10-year period. The way it works is there's a net settlement, and the net settlement was clearly in our favor, and then we'll amortize that net settlement against interest expense over the full 10 years.
The 3.7% is for the full swap.
That's correct. Yeah. 3.74% for the full 10 years.
Got it. Thank you.
You're welcome.
Thank you. The next question comes from Austin Wurschmidt , KeyBanc Capital.
Hi, good morning. First question, at the outset of the year, you were projecting D.C. to be a 3% revenue growth market, I believe, you're tracking a little bit below that up into this point. There's been some recent comments from one of your peers, I guess, concerning CBD fundamentals in particular. I was curious, without giving 2019 guidance, what's sort of your outlook or optimism for your suburban markets, Northern Virginia and Maryland, over the next 6-12 months?
Yeah. D.C. Metro, at the beginning of the year, we rated it as a B market and stable, which is pretty consistent with where we think we're operating. If you think about the third quarter this year, our average revenue growth in our portfolio was 3.1. D.C. Metro was 3.1, this is the first time in a while that D.C. Metro has been in the top half of our revenue numbers, that's a good sign. For the third quarter, Houston was 3.8%, you think about our two largest markets, D.C. Metro and Houston, are both in the top half of our portfolio, and again, that hasn't happened in some time. We're reasonably optimistic about our D.C. portfolio, not only through the end of the year but into 2019.
As you all know, we have a very different footprint than a lot of our other competitors have in the D.C. market, with a lot of suburban exposure, and I think that's served us well for the last couple of years relative to the comp set. Obviously, we're sort of in a transition in a lot of these markets where a ton of the supply has been more in the urban core, and where we have more exposure in urban areas, that's been a negative, and our suburban markets have been a positive. My guess is that at some point, just based on the decline in new supply that's inevitable, and starts that are inevitable in the next couple of years, that that will benefit the urban areas more so than the suburban areas.
Overall, we're pretty optimistic about where we're situated in D.C. in 2019, and I look forward to seeing some of that reflected in our D.C. budgets when we roll them up.
Great. Thanks for that. As far as development, you mentioned the pipeline's around $700 million at this point, and you've got some projects that'll wrap up here in the early part of 2019. What's the appetite to backfill these projects or the right level of development we should be thinking about for you moving forward?
We're very comfortable in the $200 million-$300 million development start annually going forward into 2019 and 2020. We have that pipeline of land or transactions that are in progress right now to be able to start those projects between now and 2019 and 2020.
Could you quickly just give the yield on the Buckhead development?
On the development that we started?
Yes, correct.
The development we started, it's trending at around a six ±. The interesting thing is when you think about the development cycle, when we first started building, we were doing 10s, 10 cash-on-cash. You can imagine that in Houston and Tampa back in 2010, 2011, 2012. Over time, as a result of increased construction cost and just the time it takes to build and the pressure in the market, the yields have compressed. When you look at building to a six, when the market today on an acquisition basis is still a four and a quarter, you're still making a very nice spread over what we could get on an acquisition for the development risk. We get to build what we want as opposed to buying somebody else's building that wasn't necessarily built by us, for us.
Great. Thanks for taking the questions.
Mm-hmm. Yeah.
Thank you. The next question comes from Rich Hightower with Evercore ISI.
Hey, good morning, guys.
Morning, Rich.
I guess just to quickly follow up on the development question there, do you see that spread between market cap rates and yields compressing, given the increase in the base rates, combined with just this unabated cost escalation on the construction side?
I think the issue becomes, I think yes, absolutely, spreads have tightened compared to where they were in the past, right? They were really wide, and people were making wider spreads than they'd ever made in my business career. That has gotten to the point where it's more normalized, 150, 200 basis points of positive spread between acquisition and development or on the development side. I think part of the issue is that it's really hard to find transactions like that. That's why we're at $200 million-$300 million and not $500 million. It is more difficult to get deals done and to make the numbers work from that perspective.
The thing that's interesting when you think about the 10-year Treasuries, obviously, has gone up from the beginning of the year, and people think about why haven't cap rates gone up as fast as the 10-year. Therefore, you are thinking that prices have to come down and cap rates have to go up. There is a massive wall of capital today that continues to flow into real estate and multifamily specifically, sort of the darlings or multifamily and industrial, with the Amazon effect with industrial. We had a board meeting this week, and we had HFF come in and update our board on current market conditions, and they had a slide that showed $182 billion of unfunded real estate capital that needed to find a home.
When you start thinking about apartments, when you think about cap rates, the 10-year is probably the last thing that influences cap rates. The first thing is liquidity, and that's how much money's in the market chasing deals. The second is market fundamentals or operating fundamentals, supply and demand. The third is inflation expectations, and the fourth is 10-years. When you look at the relationship of cap rates today, we have massive liquidity. We have pretty decent supply fundamentals and demand fundamentals. If the Fed is raising rates because they're worried about the economy getting overheated and inflation coming back, well, multifamily is just a defensive asset from that perspective because we mark pretty much 8%-10% of our leases to market every single month.
It's a very sought-after asset class, unless there's going to be a massive change in liquidity or operating fundamentals or expectations of inflation. I don't see cap rates doing anything but staying really sticky and prices doing nothing but going up because cash flows are increasing.
Okay. Yeah, that's a tough one. I think the wall of capital argument, it's an interesting one. Let me ask this question. If we apply that to Houston, clearly, supply is going down next year, and that's a very favorable setup. Just given the quickness of the supply response in a market like Houston and given Camden's long-standing experience, how do you sort of expect that picture to evolve as we get further into 2019? Do you see permits accelerating again, given that wall of capital that would presumably still be interested in multifamily in a market that's generating 80,000, 90,000 jobs a year or something like that, and just given the fundamental dynamics there?
Yeah, Houston clearly has the best story in America right now. Lowering supply, increased job growth, a very dynamic market. We do absolutely expect starts to increase and permits to increase in 2019 and 2020. The good news is that you can't build your project fast enough to really natively impact probably 2019 and part of 2020. When you get down to it, the market is very transparent. I think that's really interesting thought when you start thinking about supply and how you can turn it on and turn it off. In the past, people have thought of these markets, like the sort of non-barrier to entry markets as always vulnerable to overbuilding.
Well, because of the transparency today in the marketplace, people who are making capital decisions on the equity and debt side of this business, they see everything that's out there, and they know what's coming, they know what the supply and demand dynamics are, and when the supply and demand dynamics get out of whack, they stop. Just like Houston. We went from 20,000 units to seven or 8,000 units this year. I think that Houston will ramp up because it has the story. The question is how many can get done given the cost environment and given the return requirement issues.
Just to put some numbers around that's all correct. Witten's got completions in Houston at 6,000 this year, and I think that's going to be correct, as it turns out. His projection for next year is 7,000 completions, and then he has that ramping up to 13,000 completions in 2020. Yeah, absolutely, it's going to go up, but 13,000 completions in a metropolitan area like Houston, as long as we get okay job growth, is not going to be disruptive at all. That's below the long-term trend. Yeah, there's no question that Houston is the best story out there right now, and there's certainly a lot of activity right now, pre-development activity going on in Houston.
Got it. Thanks, guys.
Thank you. The next question comes from Alexander Goldfarb with Sandler O'Neill.
Good morning down there, and echoing John's comment, Alex, congrats on your timing on that debt issuance.
Thanks.
Two questions here. The first, going back to D.C. The common market sentiment is that Amazon's going to pick Crystal City for HQ2. Just curious, your thought on, one, the impact to your portfolio, and two, longer-term, D.C. seems to be a great developer's market, not a great operator's market. Your view is that Amazon announces it, and suddenly all the developers do is ramp up, and therefore the landlords really don't get the benefit? Or you think there may be some longer-term benefit for the landlords?
My take, first of all, I would perfectly hope they're right, and the prognosticators are right on Amazon. That would be a great benefit to us and a lot of other people. We have a decent-sized footprint that would be impacted by that location decision, no question about it. As to the point on D.C. Metro, it really hasn't been as much a supply challenge in D.C. Metro over the last couple of years, as it just has been weaker job growth. If you look at what's coming this year, we got about 10,000 completions in D.C. Metro in 2018. That looks like that ramps up a little bit to around 12,000 next year and back down to 2,000 in 2020. 10,000, 13, 10 in the entire D.C. Metro area, historically, that wouldn't be real troublesome on the supply side.
The challenge has been that if you look at job growth, it looks like 2019 is on Witten's numbers is about 39,000, and he has that dropping to 22,000 in 2020. Obviously, Amazon's a game changer for all of that, but unlike many of our other markets, it's really not hyper supply in D.C. that's been limiting the ability to push rents there at the pace of the rest of our portfolio. It's primarily been on the job side.
Okay. The second question is, your comments on preference for development versus acquisition seem to be sort of consistent with what's been going on in practicality. You guys went, raised money over a year ago to go out and buy a bunch of stuff. That's proven more difficult. Do you think that the jump in rates will spur some of these merchant guys to want to sell quicker, given how rising rates could impact their IRRs, and maybe it's made their decision advance the decision? Or your sense is that the rise in interest rates will not change the pace that the merchant guys sell their product?
Last year, we thought that would happen in 2018, obviously didn't. If you look at the stats on sales, in 2017, the number of multifamily sales was down from 2016, and we thought it was going to be down again for 2018, and it turned out to be way up for 2018. That could happen. I think there is definitely more merchant builder stress out there just from the standpoint of they've got product they need to sell to be able to reload their balance sheet. Because in the past, if you go back to sort of pre-Great Recession, most of the merchant builders just keep building no matter what because they could guarantee debt with no tangible assets on their balance sheet, and the banks would let them do it.
Today, the banks won't let them do it, so they do have to clear the asset in order to be able to reload their pipelines. That is one difference that could impact and have the ability to get merchant builders at least more constructive on selling at prices that we want to buy at. On the other hand, we thought that was going to happen in 2018, and it didn't. What we're also seeing, though, is sort of instead of selling, people are refinancing, and you could refinance a merchant builder deal with a high margin, basically take all of your cash out, including your equity, and be sitting with a sort of more higher leverage transaction without any equity in it. A fair number of them are doing that as well, is just holding the assets and putting them in a sort of longer holding pattern.
I think that ultimately the merchant builders do have to sell. The question is, are there going to be enough buyers to take up that inventory? I think right now there are. That's why we decided to lower our acquisitions guidance and increase our development. When you think about when we raised that capital, we talked about $500 million of acquisitions. We just changed the mix a bit, even though that does change the timing of when we are able to enjoy those yields. I think that might be the case in 2019 as well, just given the wall of capital issue.
Okay. Thank you, Ric.
Thank you. The next question comes from Rob Stevenson with Janney.
Good morning, guys. Alex, how much of the same-store expense savings of moving down from your 3.5 down to about a 3% guidance for the year is a timing issue versus stuff that you expect to be sustainable into 2019 and beyond?
Yeah, none of it's timing at all. As I've said on a couple of past calls, you've got a couple of things that are occurring. Number one, people are just not getting sick as often, which is really good news for all of us. The second thing is that we're becoming very efficient on our R&M and our unit turnover costs. There's no reason to believe that that should not be easily replicated in future years.
Okay. None of the savings here is from property taxes that could wind up spiking back up in 2019?
No. In fact, if you think about where we are, we started the year with a 4% same-store expense growth, and we had assumed that property taxes would be 4.2%. We now assume property tax is going to be 6%, and yet we're at a 3.05% same-store growth. Property taxes were worse than we expected, but all other categories were far better than we expected, overcoming this unexpected increase in Atlanta property taxes.
Okay. Keith, of your better performing markets, which have the smallest gap between new lease and renewal growth rates? What are the ones that are closest to an inflection point there of meeting or possibly crossing in the future?
Of our better performing markets, the gap on new leases and renewals, every one of them falls in favor of renewals versus new leases. It's been that way for a number of quarters. If you look out to at our 2018 numbers, I think I gave you in our opening commentary, we're at 5.5 on renewals and 3.1 on new leases. I'm looking at the detail, and I don't see a single one where we're upside down one way or the other on renewals versus there may be one or two markets, but the preponderance of our markets continue to have renewals above new leases. My guess is that probably tightens in 2019, but I'd be surprised to see if you had a shift in many of our markets between new leases and renewals.
Okay. Thanks, guys.
Thank you. The next question comes from Trent Theriot with Scotiabank.
Hi, good morning. Thanks for taking the questions. First, one of your peers indicated that some of its markets haven't yet started the normal seasonal decline in rent growth that usually comes with the fourth quarter. Are you seeing this in a noticeable way across any of your markets in your portfolio? If so, what would you attribute that to?
Yeah. I think ours looks like it has historically. In fact, I think if you look at the data that we have so far in October, we're basically flat on new leases and 5% on renewals. I think that's typical, and that's what we would expect. If you look at our budget, how we would've budgeted for the fourth quarter, that's pretty much in line with where we would expect to be. No big revisions from our original forecast in our portfolio. I'm not sure who that is. Maybe they have a very different footprint than we do, but we're seeing what we historically see in the fourth quarter.
Okay. That's fair. Turning back to Houston, just specific to the McGowen development, can you remind us where concessions stand on that asset, and what merchant builders are offering competitively in that area?
Sure. The developments today in Downtown and Midtown, probably the Galleria are still offering one to two months free, ±. It depends on the unit type and what have you, but that's very typical in the market still. It's interesting because sometimes people will say, "Well, wait a minute. How are you growing your same-store portfolio revenue when there's two months free in the development market?" It's interesting because on the one hand, people would expect that to translate into the marketplace, but when you think about the number of units you have to actually lease to maintain your 95% ± occupancy, it's not that many units. You don't have a big pressure to give concessions in an existing portfolio.
When a development is, say, 50% occupied and every day it goes by without increasing that occupancy, that revenue from that unit is lost. Sort of like an airplane seat when it takes off. Merchant builders are very quick to the trigger on giving concessions and filling them up as soon as they can.
All right. Well, thank you very much. Appreciate it.
Thank you. The next question comes from Allen Yi with Goldman Sachs.
Hey, good morning. When we look at your lease spreads, you seem to imply that same store should be accelerating, guidance implies that 4Q is slowing. I'm not asking for a 2019 guide, are leasing spreads telling us the right thing, or is it possible, due to occupancy or other factors, that same store can slow in 2019 while leasing spreads accelerate?
Yeah. Again, I'm going to refer back to the overall guidance that Witten has in his numbers. If you look at overall U.S., he has rates going up about 50 basis points. You look at Camden's portfolio specific in our 15 markets, the same 50 basis point acceleration into 2019. I think at the aggregate level, now obviously you're going to have ups and downs and variances based on the supply conditions in each of our markets. Overall, his judgment is that rents will be up, or revenues are going to be up about 50 basis points in 2019 over 2018.
I'll know better in a month or two how well our numbers are correlated with or not correlated with Ron's, that's kind of his forecasting we do back testing on all the stuff that he does, he's been pretty good over the years in terms of his forecast for revenue growth. As we sit here today, that's kind of the best evidence that we have that it looks like in the Camden portfolio, we could in fact see a re-acceleration in revenues in 2019.
That's helpful. Thanks a lot.
Thank you. The next question comes from Karin Ford with MUFG.
Hi, good morning. Ric, I think you mentioned in your opening comments in-migration into your markets from higher cost and tax regions. Have you seen any evidence of that? Can you just talk about how you think that could contribute to demand?
Sure. The evidence is clear. If you just pull the last census numbers for last 10 years, you'll see that domestic out-migration of California is negative. You have people leaving California, going to Phoenix, going to Austin, Texas, and other places. Even though population has not declined in California, for example, I'll just use California as a good example because it's so big and it's easy to talk about. You've had increases in population in California, primarily driven by immigration and births, and taken down by out-migration. Those numbers are readily available via the Census Bureau. Then just anecdotally, when we talk to our Phoenix folks, for example, that'd be a good example. We have a lot of folks that are renting apartments that are from California. You look at another interesting stat would be the cost of U-Hauls.
It's cheap to rent a U-Haul from Phoenix to go to California, but more expensive from California to Phoenix because they end up with all these excess U-Haul trucks in these markets. It's definitely something that's going on, and it's supporting our demand in our markets.
I'm sorry, go ahead.
Yeah. Some numbers around the migration, because it is something that we track pretty carefully because it has been a huge part of our story in terms of the 15 markets we operate in. For 2019, across Camden's 15 markets, it's projected that we're going to get an overall in-migration of 447,000 people into Camden's 15 markets. Within that, the thing that's interesting is we have two cities where it's projected to be negative, and one is L.A. at an out-migration of 54,000. The other is Orange County with an out-migration of about 7,000. That's included in the 447 positive. We have two markets without migration, both in California. The other one, just to Ric's point about Phoenix. In 2019, L.A. is projected to have 54,000 out-migration. Phoenix is projected to have 54,000 in-migration in 2019.
This is really an important part of the overall movement of people, in a large part to lower cost areas and less regulation. I think that these numbers probably don't get to the impact of the overall, the SALT limitations on these high property and state tax states. It'll be interesting to see.
That's great color. Just my last question. You mentioned that you improved your efficiency on turnover that's reflected in expenses, but if you returned back to more normalized and average turnover levels, do you have any sense for how much that could impact expense growth?
We've been at this level of turnover now for a couple of years. We'd have to do some math around if there was some sort of dramatic increase in move-outs and what the impact would be. I would tell you at this point, if you're sort of looking at trends, the trends seem to be that we're going to have lower turnover for longer based upon what we've seen the past couple of years.
Part of our expense con``trol has been, as I mentioned in beginning of my comments, was our Attack the Run Rate initiative. What that's about, it's about focusing on s mall ticket items on-site and in our corporate office that sort of just get done because we've been doing them for a long time, and it's really focusing in on, and making decisions on, a lot of small stuff that adds up to actually a pretty nice number. That focus, even though `we are focused on our operating expenses all the time, this is sort of an intense focus on making sure that every dollar that's going out the door is either a revenue-enhancing dollar or a` marketing dollar or one that can be justified from a business perspective.
That's had a really big impact, and our teams have done a great job sort of embracing that concept. I think oftentimes when times are good, it's just a little easier to have expenses that kind of creep on you. We're now at the point where our teams have really embraced this Attack the Run Rate. The idea is it's the run rate, right? It's not, let's just save money this quarter, or let's just save money this year. Let's make sure that it's permanent and that it's in the run rate so that 2019 benefits from it as well.
Good stuff. Thank you.
Thank you. The next question comes from Rich Anderson with Mizuho.
Hey, thanks. Good morning, everybody.
Morning, Rich.
Ric or anyone, when you think, people are trying to get a 2019, but I'm going to see if I can get 2020 guidance out of you.
At least that's novel.
When you think about supply, obviously millennials' demand at least changing as they get older, weak-ish single-family home market, and of course, interest rates. When you look further out, let's past 2019 and go into 2020 and 2021, do you see the business basically better three or four years from now than it is today? Or is it sort of sideways moving? Because it's our sense that the days of high single-digit growth for other multifamily REITs, even in the best of times, is probably over, and it's more like a CPI plus type of business. Wondering how you feel about kind of all these longer-term observations.
Yeah, I feel pretty good about our business long-term or midterm.
Right
20 or 21. If you think about the business, the fundamentals of the business, we're not getting disintermediated by Amazon. We don't have issues like that. Single-family homes still are hard to get. The average median price of home is up. Incomes are not as high, are not growing as much. You have interest rates popping up. It's made homeownership more difficult, even though from a demographic perspective, we know that it's not so much the money as it is the demographic position of people. They're waiting longer to have kids and get married and form households that would create demand for homes. With that said, I think our business is going to be reasonably good for the next two or three or four years, barring any major calamity or recession or whatever.
I think also the pressure on merchant builders and development continues to be there. I think that ultimately, you will see a peak in the supply. Then the supply sort of coming down in 2020, 2021, 2022, unless this 3.5% GDP continues and job growth continues, we have more legs up. I feel pretty good about our business.
2020 better than 2018?
It's a hard thing to say today. When people ask me about how I feel about our business over the next three to five years, I feel really good about it. Now, if we have a recession between now and then, all bets are off, if something changes dramatically there. If you told me that 2018, you'd have the same sort of supply and demand economics, the same job growth with interest rates maybe up a bit, I would say that those years are going to be good for multifamily.
Yeah. Okay.
Ric, I would just add to one of the points that you raised, which was the weakness in home sales, which continues to be really puzzling, or at least puzzling to a lot of the people on the home builder side of things. I think that it shows up in our numbers in the move-outs to purchase homes, and conventional wisdom six or seven years ago was that the Great Recession was a cyclical event, and that homeownership rate collapsed as a result of the housing bust in the Great Recession. That most people, prognosticators, I think at the time, really believed that the homeownership rate would drift back up, eventually would get back up to the 18% or 19% in our portfolio that we historically saw before 2007. It did. It bottomed.
The homeownership move-outs to purchase homes bottomed at about 9.7% in our portfolio, which was crazy low, and then it started to drift back up. If you look at the numbers in our portfolio over the last year, it looks like we're getting kind of toppish on the move-out number, and we're back down to 14.3%. We got as high as in the low 15s. We're still so far away from what you would think of a normal move-out to purchase homes rate in our portfolio that I think you just got to start-
Rethinking the cyclical versus secular argument in home ownership rate. If this is where we're going to be, then the metrics that we need going forward in terms of how much new supply could be dealt with, how many new jobs it's going to take to maintain the demand for multifamily in the traditional range, you just got to rethink all of those. I'm not telling you it's almost never different this time, it's been really different this time for a long time in home ownership of move-outs to purchase homes, and it looks like now in the data, it's starting to drift back down. It's supported by the fact that, I think, a week ago or so, they announced one of the lowest new home sales or home sale numbers in a decade.
It's an interesting time, and I think that Ric's right that, if you have to be on one side or other of that argument, I would prefer to be on our side of the argument.
Good stuff, guys. Thanks very much.
Thank you. The next question comes from John Pawlowski with Green Street Advisors.
Thanks for your comments on the reasonable cadence of development starts. Is $300 million in acquisition volume in next year a fair betting line?
We haven't really gotten to that point yet. We've sold a lot of properties and really turned the portfolio over big time in the last 3 to 5 years. We don't have a lot of low-hanging fruit in terms of dispositions. It really just depends on what kind of market we have next year, but I don't see it being a robust acquisition year given what we're hearing or what we're seeing right now. We haven't really zoned in on our guidance yet.
Okay. In some of the really competitive markets, think of the Phoenixes of the world, where cap rates, and I don't know if you agree, are perhaps irrationally low right now, would you ever do something tactical, and not a full market exit, but take another tranche of dispositions to sell into that competitive bid and perhaps reposition into a market outside of your current footprint that you think is less or more underappreciated?
Well, ultimately, we have exited markets in the past. We exited Las Vegas, kind of at a time where we thought, and we knew it was accelerating, but because of the portfolio quality, it was really important for us to move out of that market. We like the markets we're in for all the right reasons, and the issue with tactical, it sort of hurts my head a little. On the one hand, you can take advantage of low prices, but then what do you do with the capital and the risk associated with the transaction? Just reinvestment risk issues. If I really like the property long-term, it's hard for me to replace that property long-term, and I'm taking risk of execution risk between getting it done. We have lots of scenarios that go through, well, should we sell our lowest cap rate deals, our highest cap rate deals?
How does that affect us long-term? When it makes sense to do, we do, given that we've sold $3 billion of properties in the last 5 years and done $a couple of billion of development and $a billion of acquisitions. We look at that, and clearly, sometimes it's interesting, and sometimes it's not. I'm not sure what we're going to be doing over the next one or two years in that regard, though.
All right. Thank you.
Thank you. The next question comes from Hardik Gohil with Zelman & Associates.
Hey, guys. How are you?
Good.
Just wanted to get more detail on the expense side. When you look at taxes, has there been some sort of appeal success or something of that nature that's lowered the taxes as you would've expected them at the beginning of the year? What's kind of your sense of how that's going to trend?
Yeah. Once again, we started the year thinking that property taxes were going to be up 4.2%. We now think they're going to be up 6%. That delta is entirely driven by higher-than-expected tax values in Fulton County in Atlanta. That's sort of what we're having with property taxes. If you're looking at year-to-date property taxes and you're trying to understand how we get to the 6%, you can't forget that in the fourth quarter of 2017, we had about $1,000,005 of property tax refunds, almost entirely in Houston, and that is not going to be replicated. That's the delta, if you're looking at our year to date and you're comparing that to full year, which once again, we think is still 6%.
Got it. That makes a lot of sense. Just one more question on your comments regarding supply. You guys talked about better visibility and you have the ability to see further now than ever before. As you look out, where do you see supply really peaking, where you can say it's going to peak and then it'll decelerate steadily? Is it 2020? Is it 2021? Where does supply go down meaningfully from?
We have numbers out through 2020, and these are Witten numbers. He's got completions in 2020 across Camden's portfolio, basically flat with 2019, which is only slightly down from 2018. If you're thinking big picture, Camden's platform, 138,000, 136, 138 is the progression of Witten through 2020. I think 2021 and 2022 would be the first years where you could have a shot at meaningfully less deliveries. That all is a function of all the push and pull and pressures that Ric has described that the merchant builders are dealing with. They're persistent, and they're crafty, and if there's a deal that can get done, they'll figure out a way to do it.
I just think that the math is getting so difficult, as Ric mentioned, they're pretty stretched in terms of their total capacity to hold what they have and start a new round, even if they can get the numbers to pencil. I think it's possible that in 2021 and 2022, you could see a meaningful pullback in supply for the first time in years.
Thanks. That's all for me.
Thank you. The next question comes from Daniel Bernstein with Capital One.
Hi, good morning.
Good morning.
I don't want to get too academic, but I wanted to follow up on a conversation you had with Rich. Are you seeing any change in the average age of people living in your buildings and maybe the average age that people are moving out to homeownership?
Well, first of all, we are hearing, seeing anecdotally, more sort of baby boomers moving in. These are people that lived in the suburbs whose kids are gone. They live in a big house. Traffic is still pretty awful across America, so they are moving into the city and into the urban core. We have some properties, for example, in Houston, in The Galleria, where the average age is probably 10 years older than our average age in our portfolio, primarily because the rents are much higher, and you have to have somebody in their 50s who has more income to be able to pay for that higher-rent property. I think one of the things that's driving that to a certain extent, it's not just the traffic and the desire for people to be more walkable and closer to amenities like the arts and things like that.
One of the things over the last 10 years that's really happened in this cycle of development is that the properties are not your '80s, '90s versions of apartments. When those baby boomers walk in, it's like a hotel. All the amenities are just really high-end. The finishes are as high-end as any for-sale condo. The product is more appealing to folks like that today than it was in the past. It's definitely a migration. If you look at the statistics, too, on propensity to rent, propensity to rent is always very high up until the mid-30s, then it starts falling off, then you have a propensity to own. Over the last seven or eight years, the propensity to rent has increased for people over 50 and into their 60s, and that is a change.
Fannie Mae actually just did a study that you can find on the NMHC website or Fannie Mae website that shows the increased propensity to rent for older people. I think that's definitely a positive for our business. There's no question about that. In terms of average age, I think it pretty much hasn't really changed dramatically, maybe a year or so here and there. In terms of people moving out to buy houses, because it's so low today, the age has definitely increased for people to buy houses because they have student debt they have to pay off, and issues like that have limited their ability to buy a house.
I didn't know how much you track that specifically, relative to the current situation. Just asking about that. The other question I had. You had a conversation on the low cap rates, and I agree with everything you said, that interest rates are kind of the last thing that are going to move cap rates. Have you seen the increase in leverage that wall of private equity is using to get their IRRs? I mean, it's easy to track the GSEs. It's easy to track the banks. It's not as easy to track the actual LTVs that are in the non-bank financials out there. I didn't know if you had any thoughts on whether leverage is increasing, LTVs are increasing for those private equity buyers.
I think the answer is no. I think that the leverage is not increasing. People aren't using more leverage to get yields. As a matter of fact, there's a whole lot of very low leverage and no leverage buyers in the marketplace where they're not putting any debt on the property. I do think when they do leverage, more than half of all the loans that are getting done in multifamily are floating-rate loans. When you look at the forward curve on LIBOR, for example, you can buy really cheap caps, so people are on a relative basis. People are floating more than they're fixing, and their leverage levels are not as high as you would normally expect.
Yeah, no, I just think it would be going up at this point in the cycle and given where cap rates are. That's a good call. I appreciate it. I'll hop off.
Thank you. There are no more questions at the present time, I'd like to return the call to Ric Campo for any closing comments.
Great. We appreciate you being on the call today, and we will be at Nareit in the next couple of weeks, and I'm sure see a lot of you there. Thank you very much, and we'll see you at Nareit.
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.