Good day, welcome to the Camden Property Trust second quarter 2018 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kimberly Callahan, Senior Vice President of Investor Relations. Please go ahead.
Good morning, thank you for joining Camden's second 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 second quarter 2018 earnings release is available in the investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call.
Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer, Keith Oden, 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. Today's on-hold music was selected by Austin Wurschmidt, and his team at KeyBanc, who won our contest on last quarter's call. Austin picked up on the accelerated pace of M&A activity in the REIT industry in 2018, with eight deals totaling $56 billion in equity valuation, either closed or pending. That's a lot of collaboration, which led to his theme of famous collaborations of musical variety. Thank you, Austin and your team. For this quarter's contest, be the first to email Kim Callahan four artists and/or bands featured on today's on-hold music. You will have the honor of selecting our music for our next earnings call. Camden team members delivered solid earning results this quarter. We continue to create value through our development business and will be at the high end of our 2018 starts guidance.
The acquisition environment is challenging, with high demand driving higher prices and lower cap rates more than we anticipated at the beginning of the year. Rising interest rates and modest growth rates have not had any effect on buyer demand in the multifamily business. We've held our acquisition guidance at $500 million for the year but have moved $300 million into the fourth quarter. We still believe we'll hit our acquisition targets while maintaining our discipline by the end of the year. I'll now turn the call over to Keith Oden.
Thanks, Ric. Today marks Camden's 100th quarterly earnings call, Ric and I have had the privilege to be on every one of them. One thing that has always been true is that good numbers make for good earnings calls. I'd like to acknowledge and thank our Camden team members for producing another quarter of good numbers for us to discuss on our call today. We are indeed pleased with the results this quarter, which were better than our expectations for both the quarter and year-to-date. Overall conditions remain healthy across our entire portfolio. Sequential revenue growth was up 1.8%, led by Corpus Christi at 6.4%, Importantly, in second place was D.C. Metro, up 2.6%. Every other market posted a positive sequential result.
This was a very routine quarter for Camden. With this in mind and the fact that we're at the end of earnings season, I'll keep my remarks brief to allow for more time to discuss what interests you all about the quarter. Starting with same-store results, revenue growth was 3.2% for the quarter and 3.3% year-to-date. Second quarter revenue growth was led by Corpus at 4.4%, Orlando 5.2%, Phoenix 4.7%, Tampa at 4.5%, Raleigh at 4.3%, Houston at 3.7%. As we expected, our two largest markets posted better revenue growth compared to the first quarter, with Houston up 3.7%, D.C. Metro up 2.5%. Rents on new leases and renewals continue to look encouraging versus our original guidance. In the second quarter, new leases were up 3.3%, Renewals were up 5.9%.
That produced a blended growth rate of 4.5% versus 3.3% in second quarter of 2017 2.7% for last quarter. July prelims are running at 4.8% for new leases, 5.6% for renewals, for a blended rate of 5.2%. As we expected, new lease pricing has seen good improvement during our peak leasing season. August, September renewal offers are going out at about a 6.1% increase. Our occupancy rate averaged 95.8% in the second quarter versus 95.4% in the first quarter and was above the 95.3% from the second quarter of last year. Our July occupancy rate actually reached 96%, slightly better than our 95.7% last July. Our net turnover rate continues to see an all-time lows at 49% for the second quarter and 44% year-to-date.
The lower turnover rate in tandem with a historically low number of move-outs to purchase homes continues to contribute to our strong and somewhat better than expected operating results. I'll turn the call now 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 activities. During the second quarter of 2018, we began construction on Camden Lake Eola, a $120 million, 360-unit, 13-story building in the Lake Eola submarket of Orlando, Florida. During the second quarter, we also began leasing at our Camden McGowen Station development in Houston, our Camden North End development in Phoenix, and our Camden Washingtonian development in Gaithersburg, Maryland. In the third quarter, we began construction on Camden Buckhead in Atlanta. This $160 million, 365-unit development will be the phase 2 of our existing Camden Paces community and will consist of one eight and one nine-story concrete building. Previous cost estimates in our supplement for this development were based upon the construction of one four-story wood frame wrap building.
Due to this project's irreplaceable location in the heart of Buckhead and the success of our phase 1 Camden Paces high-rise, we've made the decision to significantly enhance this development, including moving to two type 1 concrete high-rise structures. Turning to financial results. Last night, we reported funds from operations for the second quarter of 2018 of $116.1 million, or $1.19 per share, exceeding the midpoint of our guidance range by $0.01 per share. Our $0.01 per share outperformance for the second quarter resulted primarily from approximately half a cent in higher same-store revenue and half a cent in higher non-same-store net operating income, which was primarily driven by better than expected results from both our recent acquisitions and our development communities. In the aggregate, our same-store operating expenses were in line with expectations.
Property taxes were $1 million higher than anticipated, entirely due to Atlanta property tax valuations. This negative tax variance was entirely offset by lower than anticipated expenses in almost all other categories, particularly lower repair and maintenance expense and lower levels of self-insured employee healthcare costs. Turning to property taxes. Fulton County, Georgia, which includes Atlanta, significantly raised their valuations for residential assets. The valuation increase for our entire Atlanta metro portfolio was approximately 28%, with a 41% increase for our Fulton County communities. This Atlanta valuation increase was not anticipated and will result in $2 million of additional property tax expense in 2018. As is our policy, we accrued six months of this increase, or $1 million, in the second quarter as a catch-up. The remaining $1 million will be booked over the rest of 2018. We have already filed appeals on these valuation increases.
However, due to the amount of property owners in Atlanta that will be contesting their valuations this year, it is unlikely we will get any settlements before the end of 2018. If we are successful with our appeals, we will book the refunds as an offset to property tax expense at the time in which the refund is received. We are now anticipating full-year property taxes for our same-store portfolio to increase approximately 6%. We believe that this unexpected property tax increase in Atlanta will be entirely offset by actual and future anticipated cost savings in our other operating expense categories and have therefore left the midpoint of our same-store expense guidance unchanged at 3.5%. We've updated and revised our 2018 full-year same-store revenue and FFO guidance based upon our year-to-date operating performance and our expectations for the remainder of the year.
Our same-store revenue performance has been better than expected for the first six months of the year, driven primarily by higher levels of occupancy. Based upon our trends and our expectations for the remainder of the year, we are increasing the midpoint of our full-year revenue growth from 3% to 3.15%. This increased revenue guidance and the maintenance of our expense guidance results in an increase to our 2018 same-store NOI guidance from 2.7% to 3%. Last night, we also increased the midpoint of our full-year 2018 FFO guidance by $0.02, from $4.72 to $4.74 per share. This $0.02 per share increase is the result of our anticipated 30 basis points or $0.015 increase in 2018 same-store operating results. Half a cent of this increase occurred in the second quarter, with the remainder anticipated over the third and fourth quarters, and $0.015 of additional non-same-store outperformance.
Half a cent of this increase also occurred in the second quarter, with the remainder anticipated over the third and fourth quarters. This $0.03 aggregate increase is partially offset by $0.01 from delayed acquisition timing. Our current guidance now assumes approximately $300 million of additional acquisitions, all in the fourth quarter. If we do not complete any future acquisitions in 2018, the net result would be a further $0.01 per share reduction. Last night, we also provided earnings guidance for the third quarter of 2018. We expect FFO per share for the third quarter to be within the range of $1.17 to $1.21. The midpoint of $1.19 is in line with our second quarter results, as expected sequential increases in revenue are offset by the typical seasonality of our operating expenses.
Our balance sheet is strong, with net debt to EBITDA at four times, a total fixed charge coverage ratio at five and a half times, secured debt to gross real estate assets of 10%, 81% of our assets unencumbered, and 92% of our debt at fixed rates. We ended the quarter with no balances outstanding on our unsecured lines of credit and $64 million of cash on hand. We have $633 million of developments currently under construction, with $283 million remaining to fund over the next two years. Later in 2018, we will repay at maturity $175 million of secured floating rate debt with a current interest rate of 2.9%, and we'll repay at par $205 million of secured fixed rate debt with an interest rate of approximately 5.8%. We currently anticipate issuing $400 million of unsecured debt late in 2018 at a rate of approximately 3.8%.
In anticipation of this offering, we have entered into $400 million of forward starting swaps, effectively locking in the 10-year treasury at approximately 2.6%. At this time, we will open the call up to questions.
Yeah, before we take our first question, we do have a winner in the contest. John Kim of BMO Capital Markets was the first to get four correct artists. We look forward to working with you, John, on next quarter's music. Now we'll open it up for questions. Thank you.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Nick Joseph of Citi. Please go ahead.
Hi there. This is Michael Griffin in for Nick. First question, on Houston, for the merchant build product, are you still seeing concessions or has vacancy dissipated and the leasing environment meaningfully improved?
On the merchant build product, we continue to see concessions. It's just very typical in this kind of environment. It's interesting because the market is very bifurcated from that perspective. Just to give you an example, on our Camden McGowen Station project, we are 30% leased after opening up in the first quarter. Our velocity is very good. The concession environment is basically two months free in that product. When you think about the operating portfolio overall, 9,000 apartments that we have plus or minus in Houston, our operating portfolio is doing really well from a revenue growth perspective.
Merchant builders are very typical in when they start out with an empty building, they focus on pushing the occupancy as fast and as hard as they can. Their view is that free rent gets you there. It's a very typical thing that is used in the marketplace. It hasn't negatively impacted the overall market, just the development market. Once the projects are leased up, obviously the concessions are hoped to burn off. Given the supply situation, the fact that there's only 7,000 units being delivered this year and then less next year, we expect that the free rent will basically dissipate by the probably end of this year, maybe middle of next year in the new development properties.
Great. Thanks. One other question. I see here that the estimated cost of the Buckhead deal on the development pipeline increased by $55 million. What's driving that? How does it impact the expected stabilized yield? When would you expect that to start?
As I mentioned in my prepared remarks, the previous cost estimates for that development was based upon a four-story wood frame wrap building. Due to its location in Buckhead and the success of our adjacent Camden Paces high-rise, we made the decision to significantly enhance that development, including moving to two type 1 concrete high-rise structures.
Got you. Great. That is it for me. Thanks.
Our next question comes from Juan Sanabria of Bank of America Merrill Lynch. Please go ahead.
Hi, this is actually Shirley Wu with Juan Sanabria. I wanted to touch on Houston a little bit more. For the back half of 2018, what do you think will be the trajectory for the top four occupancy comps this year? Also, what is the range of your occupancy losses built into the guidance for the second half?
I did not get the second part of that question, Shirley. Let me address the first part first, which is on Houston and sort of the trajectory. We will have some very difficult occupancy comps in Houston in the fourth quarter. As some of you may recall, we actually at one point last year, as a result of the aftermath of Hurricane Harvey, we actually hit 99% occupied in the fourth quarter, obviously we will be nowhere close to that. While we continue to make good gains, our new leases have ticked up since the beginning of the year, and we are basically up about 1% in the second quarter. Our renewals, we are running 5%-6% on renewals in Houston.
We do expect to see that new lease rate continue to tick up from now through the end of the year, offsetting that will be the fact that we'll be nowhere near 99% occupied. I think we closed out July at about 95.5% occupied in Houston, which is a more typical occupancy rate. We're likely to see something more akin to that as we roll out through the end of the year, then we'll continue to get better results on the new leases and renewals. I didn't hear the I'm sorry, I didn't hear the second part of your question.
I was just wondering, in terms of occupancy losses, is that built into your guidance? Is that mostly focused on 4Q, like you were saying, or is it updated in 3Q as well?
Well, it's not occupancy losses, but occupancy relative to our same store results last year. It's obviously going to be much less, probably about 350 basis points, plus or minus, less than what our occupancy was at this time or than the fourth quarter of last year. We're not projecting occupancy losses from where we are today throughout the end of the year. It's just that we're going to have a really tough comp in the fourth quarter, late third and into the fourth quarter of 2018.
Got it. Thanks for the color.
You bet.
One more question.
Sure.
For new and renewals, can I get the 2Q numbers for your portfolio across your different markets?
For second quarter, new leases, 3.3%, renewals, 5.9%, and the blended rate's 4.5%.
Our next
So-
Sorry, go ahead.
Oh, okay. Do you have the market breakout?
Yeah, we operate in 15 markets. We'll give you that offline, going through those, We don't need to get in that level of detail on the call, they're available, and you can get them offline.
Cool. Thank you.
Thank you.
Our next question comes from Austin Wurschmidt of KeyBanc Capital Markets. Please go ahead.
Hi, good morning. I was just curious if you could give a sense on how 2019 supply outlook is shaping up, as one of your peers had indicated supply growth to be down in the high teens next year, and was curious if you were seeing a similar decline.
Our two data providers are Witten Advisors and RealPage that we have. We look at completions for 2018-2019, and honestly, there's not a nickel's worth of difference in their forecast between not 2018 and 2019. Witten Advisors is basically at 138,000 deliveries, and I'm talking only in Camden's markets. Not nationally, but only in Camden's markets, and he's got that dropping to 136 in 2019. RealPage number is a little bit less than that at 142 in 2018, and drops to 140. You're less than 1% difference between the two data providers that we have on what we think completions will be between 2018 and 2019.
I think that both of them, at least in our conversations with them, they have attempted to capture what has been a phenomenon that's been going on for two years now, which is the delay in getting completions to the finish line. They think they've made their best guess at things that may shift between projected 2018 completions that roll over into 2019. We'll see how good they were able to forecast that, but it's certainly been a trend for the last two years. My guess is it's going to continue, and they tell us that they've made their best guess at factoring in delays of 2018 and 2019. I think for our purposes, from a standpoint of our planning, we're assuming 2018 and 2019 are roughly equivalent across our platform.
With the exception of Houston, obviously.
That's just a different animal, given the nature of Houston, when supply has just fallen off the edge of the Earth in 2018 and 2019.
Yeah. We've got Witten Advisors, and he's got 2018 at 7,000 apartments, and that drops to about 6,000 in 2019 for Houston.
historically, those are crazy low numbers for Houston.
Yeah. Appreciate the detail there. Separately, you talked about the competitiveness in the acquisition and the transaction market. That sounds like you're pretty comfortable with your acquisition guidance, was just curious, what gives you that level of confidence, and do you have anything under contract today?
Well, what gives us the confidence is that we're working on lots of transactions, while we don't really talk about what we have under contract or not at this point level in the game, we feel that we'll be able to hit that target by the end of the year. It was somewhat surprising to us that with the 10-year hitting 3% and markets prices being where they are, that there wasn't a little less sort of frothiness in the market. Like I said in my comments, that hasn't been the case. People are either lowering their terminal IRR numbers or to get to where they're going. Our specific The box that we're looking for is newer construction with below replacement cost, with some embedded concessions so that we can grow those cash flows going forward, and it's just harder to find.
There's still a massive bid for value add, good news for us is that we're not really looking at value add. We're looking for sort of a different product, there's still a huge bid out there for any multifamily. I think part of it stems from the whole issue of the 10-year's at 3% or 3.5% because we have great growth going on in the country, and you have inflation sort of ticking up some. The idea that multifamily reprices pretty much every day their product and the leases
rollover on average of 8%-10% of the whole portfolio rolls every month. Some investors are banking on higher inflation, and therefore, cash flow is growing faster than cap rates rising if you do have longer-term interest rates rise. That's just getting them over the hump on multifamily-size hotels is the best inflation hedge as long as you're growing the economy and not having sort of stagflation, which doesn't look like that's on the horizon.
Great. Thanks for the time.
Our next question comes from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Hey, good morning down there. Just two questions. First, Ric or Keith, on California, just given it's about 8% of your portfolio, do you have any sense in your markets there, the municipalities, what their sense is for if Costa-Hawkins is repealed? If you think that any of your markets will face rent control measures, or you feel pretty good with where your communities are right now in understanding the issues, especially as it revolves around vacancy decontrol?
Yeah. Alex, 2 comments. One would be there's sort of the state-level initiative that there's a lot of attention on right now, and we certainly are participating in the fighting the good fight on the repeal effort at the state level. If you put a gun at my head, I'm probably thinking that the state-level initiative may actually get through, but that's not really where the game is won or lost on this issue. It's going to be at the municipal level, which you're correct to point out. Obviously, you got a different dynamic in San Diego, Orange County, Inland Empire, than you do in Northern California and in L.A. County.
There was a piece done by one of the good analyst firms, and I'm not going to mention the name, but it's pretty well done, and it stratifies all of the REIT holdings in California by municipality and sort of assigns a high-risk to low-risk value to those. And in our portfolio, only about 10% of Camden's assets fell into what would be called the high-risk bucket for municipal-level adoption of some kind of rent control measure. Now 11% of our NOI and roughly 10% of that's in the high-risk bucket. I think our specific exposure is pretty limited to the Costa-Hawkins thing. Obviously, it's a huge thing. There's a lot of attention.
We're participating with all the other REITs, Nareit, and NMHC, there's a lot of energy on both sides of this issue in California, and it'll be interesting to see how it plays out.
Okay. I guess it makes you happy that you're Texas-based. The 2nd question is Denver. Suddenly it's become everyone's popular market. You guys have been there a long time, you never left. Recently I haven't seen as much on the investment side there. What are your thoughts on Denver? Overall, I think your footprint is much broader than just Denver proper, you guys extend out. Are you thinking about the market any differently in how you invest there? Meaning maybe concentrated more infill, or do you like the market as a broad market to invest in?
We like the market as a broad market to invest in. If you look at what we've been doing with our developments, our developments have been transit-oriented development. We currently have a development underway in RiNo, which is the River North area, which is right adjacent to downtown. The challenge that we've seen in trying to get more urban in Denver is that it sort of hurts my head paying sub-4 cap rates for new development there, and that's what they're trading at today. We like where we are in Denver and our properties. We have a nice balance between new transit-oriented development, some urban, and then suburban, so that when you do have a correction in the Denver market someday, we have a balance between A and B properties and suburban and urban properties.
Generally, Denver is definitely on everybody's list of getting into, and we've liked it for a long time for lots of reasons, and continues to be a good market.
Okay. Thanks, Ric.
Our next question comes from Rob Stevenson of Janney. Please go ahead.
Hi, good morning, guys. Beyond the Buckhead development, how many of the other pipeline communities are you planning to start in the second half of this year? Where are, at this point, do you think stabilized returns are for the current pipeline, and then on stuff that you would start?
Sure. The starts that we have that we've announced, including the Buckhead, is we might start one more, but it would be right at the end of the year, maybe the beginning of next year. Our pipeline with the ones we've announced, we're at $280 million plus or minus, and just really close to our $300 million guidance. In terms of yields, clearly, development yields have come down from some pretty lofty levels that they were at. Our yields today, instead of sort of 7 and some change, they're 6 and some change. Construction costs continue to rise of 4%-8%, maybe 10% in some markets, and rents are going up 3%. That definitely has
compress those yields. On the other hand, we have still a 150-200 basis point positive spread between our going-in yields versus what we can buy going-in yields from an acquisition perspective. You still have a nice spread for taking the development risk.
Okay. Then Alex, given your comments about property taxes, can you talk about how successful Camden's been over the last three years or so in terms of winning property tax appeals? I mean, are you guys contesting everything, therefore your appeal win rate is low? Are you guys making just sort of conscious efforts to appeal the egregious ones and when you do appeal, what's your sort of winning percentage there?
Yeah, absolutely. We don't appeal every single thing, but we do appeal a lot. Actually, in getting some form of reduction, we're typically about 70% effective. It's a pretty good winning rate.
That 70%, what's the magnitude? I mean, is it just getting a little bit? Is it a lot? How significant is that negotiation or is that sort of movement between what you get assessed at and what you wind up paying on an annual basis?
Yeah. We set target rates for every single community that we own. When we say 70%, we're shooting to get to that target rate. Obviously, it's never perfect, but we get pretty close to it.
Okay. Thanks, guys.
Our next question comes from John Kim of BMO Capital Markets. Please go ahead.
I'm still riding the emotional high of winning your contest. Thank you so much.
Oh, you'll get over it.
It's made my week, for sure. The 4.5% blended rate you got in the second quarter is trending higher in July. Do you think that 5.2% is something that you can achieve the rest of the quarter? What are you assuming as far as blended lease growth to achieve the midpoint of your same store revenue guidance?
The July numbers probably end up being the high watermark for the year because you've got markets like Dallas, Austin, and South Florida that are trailing away as we go through the year. Then you've got Houston, which is going to be a real interesting comp into the third and fourth quarter. My guess is the 5.2% in July probably ends up being the high watermark. Our guidance right now for the year is 3.15% on revenues. We think the implication of that is that we're about 3%, plus or minus, in the back half of the year, and that still seems about right to me.
Okay. Alex mentioned the $400 million of unsecured debt that you expect to raise. It sounds like part of that is to repay the debt maturing next year. As far as the remaining $644 million expiring, how do you expect to refinance that?
Yeah, absolutely. We've got a lot of options to how we're going to do that. Obviously, we're looking at the unsecured market and looking at various tenures, and then we always have the ability to do dispositions if it's appropriate as well. We're still working through our strategy on exactly how we intend to refinance the rest of that debt.
Could you give pricing levels on secured debt versus the unsecured?
Yeah. Unsecured versus secured. The easiest way to think about it is, if you don't lock in your rates, which we already have, the spread for us on a 10-year unsecured is somewhere right around 110 basis points. If you went to Fannie Mae, for instance, Fannie Mae is going to be sort of in the 200 basis point spread. Life Cos today are actually your very best option out there. Life Cos are trying to build business, you can probably get a Life Co deal done about 120 over.
Great. Thank you.
One thing I will mention, though, is even though you can get some secured debt, we are an unsecured borrower. Generally, unless there's something really wacky going on in the unsecured market, we're going to stay an unsecured borrower. One of the things that happens with this refinance is that we get rid of a lot of secured debt that we put in place during the financial crisis. If you remember how we did that secured debt, we went out and borrowed money from Fannie and Freddie and bought our unsecured bonds back at a discount. Now where we are in the cycle, we're going to recycle that capital with new unsecured debt that will take our credit metrics even better by getting rid of a lot of secured debt that we have on our balance sheet at this point.
Thanks.
Our next question comes from Drew Babin of Baird. Please go ahead.
Hey, good morning.
Morning, Drew.
I wanted to touch on Southern California briefly. It looks like while revenue growth is still strong there, it looks like it decelerated a bit sequentially in both the L.A., Orange County, San Diego, Inland Empire markets. I was just curious, is that the result of pockets of supply? Is it a result of sort of the tangential effect of more urban supply? What are the dynamics driving that?
Yeah. In L.A., for example, and I'll give you L.A. and Orange County. In L.A., it looks like 2018, we're going to end up getting around 60,000 jobs this year, and that's against about 14,000 new apartments, relatively in line, a little bit of pressure implied. As you go out into 2019 in L.A., the jobs are forecast to drop to about 40,000. Unfortunately, the supply maintains pretty constant at about 14,000 additional apartments. It's just the ramp of supply that's finally getting to the marketplace in L.A. Similar story in Orange County. In 2018, it looks like we'll get about 30,000 jobs, and we will have to absorb about 7,000 apartments in 2018, and the math is pretty similar in 2019. From my perspective, our portfolio is actually doing pretty well, and we're pleased with the performance.
It's actually outperforming what our original plan was. Some of that has to do with our location that's just not nearly as impacted by the high levels of deliveries that are going on across the Southern California platform.
Great. That helps. Then one more, maybe more conceptual question on the concept of replacement cost. I think a bull would say, you're buying assets at a discount to replacement cost. Replacement cost is probably only going to trend up with tariffs and just more inflation in materials, labor costs, things like that. A bear might say that replacement cost is sort of artificially elevated right now, kind of fluctuates over time, maybe even more volatile than rents over a long period of time. I guess, if you give both sides of the argument and why you look at that with regard to acquisition opportunities as a benchmark, since it is a bit of a moving target.
Sure. I agree with what you just said, for sure. The way we sort of look at it in this prism, that is, since we have a robust development business, if I can build it today at a cost that is higher than what I can buy it at today. We look at it that way, saying, okay, we know what it will cost us to build, if I can buy it at a lower price of what it can cost me to build, that makes a lot of sense to me. On the flip side, if you buy it at above replacement cost, I look at that and say, gee, in Atlanta, I know exactly what it's costing us to build our second phase of Buckhead.
Why would I buy a property across the street from one I can build, when I can build it at a cheaper price per door and per square foot than the one people are buying across the street? To me, it's more about our ability to develop and understand those costs. I get why, at some point, the argument on the bull or the bear side will rule the day. From our perspective, if we're going to commit capital, I want to commit capital, I'd rather develop my own properties than buy properties that are more costly than ones I can develop.
Our next question comes from Richard Anderson of Mizuho Securities. Please go ahead.
Thanks. Good morning. For over 20 years, and I haven't won squat, so I don't know what's going on here. One thing I do remember way back when, there was a signal of a healthy multifamily market was when new rent growth exceeded renewal rent growth. That hasn't really happened in a while, and I'm wondering if there's a systemic reason why it won't happen again, or do you think that there's a chance that you could see your new rent growth cross with your renewals at some point in the next couple of years?
Rich, I think it's certainly possible. Some of it has to do with when you look at new and renewal rents, a big part of it is what happened at the last 12 months ago when that person signed a lease. If you're in a market that's constantly increasing upwardly in rents, then it doesn't surprise me greatly that you would continue to see renewal rents above new leases. The weird part, the odd part about where we had been for the last seven or eight years, is you've been in a constantly increasing rent market, although, the second derivative has moved around a little bit on the rate of growth. The fact is, rents have been growing for eight or nine straight years, which is unusual.
When you think about what the experience that we had in Houston with the downturn in the oil markets and rents actually going negative, there's no question that we were renewing rents, in many cases, at below what we were offering new rents at. Part of that had to do with, at some point, you're just trying to maintain occupancy. It depends a little bit on where you are in the cycle. I would expect that as this cycle unfolds and moves into the next cycle, yeah, my guess is you'll see that happen again.
I am remembering correctly, right?
Yeah.
That is a fair way to look at it.
Yes.
Okay. Then secondly, on the topic of Denver, I heard what you said, Ric, but it's interesting that suddenly many of your peers are suddenly very optimistic about a market that's not currently maybe great today. Is there something incremental that is a common knit to all of these views that are coming from people like EQR and AvalonBay, taking a look at Denver? Or is it just the basic fundamental stuff that you described?
Well, I can't really get inside their investment thesis other than the broad one where the companies have been pounding the table forever that the coastal is where everything is, right, and rents never go down in San Francisco and New York. We've always argued that we want to be in high-growth markets, both population and job growth, and that, over the long term, will allow rents to grow and the market to grow. What happens as a byproduct of that growth is that the municipalities allow development, then the argument is that markets overshoot from a development perspective, and the supply-constrained markets don't, right? Well, we know that just isn't true anymore, or at least there's more evidence today that it's not as true as it has been.
I think if I were a company that had those kind of market dynamics, I'd look for growth, and I'd look for markets that have really good long-term dynamics, and I think Denver has that. When you think about cities that are classified as really high propensity for millennials to go there, Denver has a lot of those really high value propositions. It's got recreation in the mountains. There's a lot of good things going on in Denver, and those things are not going to change given the sort of dynamic of our renter base.
It doesn't surprise me that they look at that market and say, if I'm going to buy a non-coastal market, it might be Denver, it might be South Florida, because it sort of holds to their They don't have to totally abandon the coastal low supply thesis with a couple of markets.
Not rolling the dice on HQ2, you're saying?
I don't think they're rolling the dice. HQ2 is a wild card.
Yeah
they're rolling the dice on that.
Yeah. I'm being facetious. Thanks very much.
Our next question comes from John Guinee of Stifel. Please go ahead.
Great. Thank you. Just a curiosity question. Camden Buckhead, you have the total development cost last quarter as a wrap product at about $277 a unit, and then going with type 1 vertical, you're up to about $438 a unit. Is there really a $160,000-a-unit increase when you go from wrap to concrete?
There's two pieces. The answer is yes, there's a big differential between a wrap and a concrete, no question about it. Second, when you do go to a concrete product and a high-rise product, you improve the interior quality of the property and amenity space as well.
Okay.
If you're trying to get a premium rent, you're going to have to put in premium finishes more than you would do in a wrap product. Part of it is just the differential between wrap and high-rise, then the amenity packages and the finishes. Third, between both of those, the wrap product was a placeholder, it's probably not a great comp because construction costs have continued to rise, and we have not tried to tweak our sort of future development numbers very much. That number that was put in for the wrap product was put in a couple of years ago, and you've definitely had some construction price creep in that number, that base number was probably low to start.
Second, do you control land via options, et cetera? Can you give people a sense for what you might have that doesn't show up on the supplemental?
We try to control land for a long period of time, but it's very hard to do in this current environment. At this point, we're working on transactions, but what you see is what you get in our supplemental information right now.
Great. Thank you.
Okay.
Our next question comes from Wes Golladay of RBC Capital Markets. Please go ahead.
Hey. Good morning, everyone. Can we go back to the Fulton County tax increase? Were you entering this year well below your target rate? Did they overshoot, or is it just a case where a municipality is trying to plug their budget using commercial real estate?
Wes, there's actually a lot of really interesting articles online where you can read about this. Effectively, what happened is the State of Georgia has sued Fulton County, alleging that their valuations are under market. This is Fulton County's way of responding to it. I will tell you, this is not a Camden-unique issue. In fact, at last count, there are over 40,000 appeals of property tax valuations in Fulton County. That's over 8% of all property owners. In fact, there's actually an 8% threshold where if you go over 8% of appeals, the county actually has to get the courts to certify their tax register. This is a sort of across-the-board Fulton County issue. I will tell you that we believe they've clearly overshot.
We've filed all of our appeals, once again, if you have 40,000 appeals that they have to work through, I think it's going to be highly unlikely that we're going to get any resolution until 2019.
Okay. Then looking at the acquisition guidance being pushed to the fourth quarter, is that just a function of developments taking longer to build, maybe getting a little bit of a delivery delay, pushing the timing of a lease-up acquisition later, or is it just trying to figure out which one you want to buy?
It's more trying to figure out which one we want to buy.
Okay. Thanks a lot.
There's too many. We're going through more and more transactions trying to find the right one, and it's not so much a delay in deliveries.
Okay. A real quick follow-up to that. How many people do you run into for competition when you're trying to buy lease-ups? I get that value add and core may have a lot of competition, but when you look at the lease-ups, is it just a bid-ask spread, or is it just a lot of people chasing these?
I think it's both. On a value add, you may have 20, 30 bidders. In a sort of core below replacement cost type of asset, we might have 10 or 12, 10 or 15. Trust me, there's still a lot of competition. It's just less competition in that space than there is in value add.
Okay. Thanks a lot.
This concludes our question-and-answer.