Good morning. Welcome to the Camden Property Trust first quarter 2018 earnings 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 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 telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Kim Callahan, Senior Vice President of Investor Relations. Please go ahead.
Good morning. Thank you for joining Camden's first quarter 2018 earnings conference call. We played six songs today on our on-hold music, and these songs have one thing in common. If you know what that thing is and why it is significant for Camden, please send me an email now at kcallahan@camdenliving.com. The first person with the correct answer gets a shout-out on the call and the opportunity to help select music for next quarter's 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 first 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, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes.
At this time, I'll turn the call over to Ric Campo.
Thanks, Kim, and good morning. Our operating results for the first quarter were slightly better than expected. Apartment demand continues to be driven by solid job growth in our markets that exceed the national average. Supply pressure in many markets continues to be a headwind. Houston is our most improved market. Revenues are accelerating with occupancy normalizing as a result of Hurricane Harvey residents moving out and returning to their homes as expected. We're happy to be able to have helped our neighbors in this difficult time for their families after the hurricane. We are now back to a more normal apartment market in Houston, with an expanding economy and limited new supply coming online over the next couple of years. I'm proud of our teams from all over the country that came to help get apartments ready at record speeds for people in need of housing after Harvey.
Our team displayed the true spirit of Houston Strong and how communities can come together when their help is needed. We acquired 2 properties during the quarter that Alex will give you more detail on in his remarks. Our guidance for the rest of the year is another $200 million-$400 million in acquisitions. The acquisition environment, however, has become a lot more competitive since the beginning of the year, with cap rates dropping at least 25 basis points in our markets, driven by significant buyer interest and strong multifamily fundamentals. Our development businesses continue to create significant long-term value. We plan to start $100 million-$300 million of new projects through the rest of this year. After the end of the quarter, we acquired a shovel-ready high-rise development site in downtown Orlando from a developer that couldn't get their financing completed.
We plan to start construction on this project this summer. Construction cost increases continue to exceed rental rate increases in all of our markets and continue to put pressure on future development returns. All of our current projects under development are substantially bought out and are not subject to the major risk of cost increases. We maintain the strongest balance sheet in the sector, which gives us maximum financial flexibility in this part of the real estate cycle. We have a strong Camden team that delivers amazing customer service to our residents that creates long-term shareholder value. I appreciate what our teams do every single day with our residents, and I want to thank them on this call. I'll now turn the call over to Keith Oden.
Thanks, Ric. Our first quarter revenue results were right in line with our plan, and that bodes well for the balance of 2018. Overall, same-store revenues were up 3.3% and three-tenths of a percent sequentially. Most of our markets performed as expected with 50 basis points or less variance from our first quarter budgets. Two exceptions would be Orlando and South Florida, which had a positive variance of greater than 50 basis points to the original budget, and that was good news, particularly in South Florida, to see some improvement there. The outperformance in Orlando placed it at the top of the revenue growth in the quarter at 6.2%. Tampa, Raleigh, and San Diego Inland Empire each had 5.2% growth, followed by Atlanta at 4.8% and Phoenix at 4.5%.
As we expected, revenue growth was slightly below 2% in three markets, with Houston at 1.9% and Washington D.C. and D.C. Metro and Austin both at 1.6% growth. We expect better results in Houston and D.C. over the next few quarters and anticipate getting to our full-year outlook of roughly 3% growth in each market. The supply pressure in Austin will continue to be a big headwind throughout 2018 and will likely limit our full-year growth to roughly the same as the 1.6% we achieved this quarter. Regarding rents on new leases and renewals in the first quarter, new leases were up one-half percent, and renewals were up 5.5% for a blended growth rate of 2.7% versus 1.9% in the first quarter of 2017, and 2.3% last quarter. For April, prelims look to be up 2% on new leases, 5.5% on renewals for a blended 3.5% growth.
As we expected, we've seen steady improvement from January through April on new lease pricing. We expect this trend to continue through our peak leasing season. A good indicator of continued improvement is that our May, June renewals were sent out at an average 6% increase. Our qualified traffic continues to support above-trend occupancy levels across our platform. We averaged 95.4% occupancy in the first quarter versus 94.7% in the first quarter of 2017, and 95.7% in the fourth quarter of last year. April 2018 occupancy is trending upward to 95.7% versus 95% last year. Net turnover for the quarter continued at historically low levels of 39% versus 40% last year. Move-outs to purchase homes fell to 14.1% versus 14.9% for all of last year. That bears watching to see if it's an outlier or a reversal of the modest upward trend that we've seen lately.
The financial health of our residents continues to be strong, as our average rent as a percentage of household income was 18.4% for the quarter. That's consistent with 2017 levels. Finally, we recently received notice that for the 11th consecutive year, Camden was included in Fortune Magazine's list of 100 Best Companies to Work For. We claim this honor on behalf of the entire REIT industry as a benchmark of just how far we collectively have come in the last 25 years. I'd like to thank every Camden team member for making this possible. Your commitment to improving lives one experience at a time is why this is possible. Now I'll turn the call over to Alex Jessett.
Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activities. During the first quarter of 2018, we purchased Camden Pier District, a newly constructed 358-unit, 18-story building in St. Petersburg, Florida, for approximately $127 million. Camden North Quarter, a newly constructed 333-unit, nine-story building in Orlando, Florida for approximately $81 million. At the time of acquisition, both communities were in the process of completing lease up. Today, Camden Pier District is 93% occupied, and Camden North Quarter is 88% occupied. Subsequent to quarter end, we purchased an approximate two-acre land parcel in the Lake Eola sub-market of Orlando, Florida for $11.4 million for the future development of a wholly-owned $120 million, 360-unit, 13-story building. We anticipate starting construction this summer.
Including this development, we are anticipating $100 million-$300 million of on-balance sheet development starts spread throughout 2018. Turning to financial results, last night we reported FFO for Q1 2018 of $111.4 million, or $1.15 per share, exceeding the midpoint of our guidance range by $0.02 per share. Our $0.02 per share outperformance for the first quarter was primarily due to approximately $0.015 in lower same-store operating expenses, resulting from a combination of lower than anticipated repair and maintenance expense, and lower than anticipated levels of self-insured employee healthcare costs. Of these lower operating expenses, approximately $0.005 of repair and maintenance expense savings is timing related, where the expense is now expected to occur later in the year.
Approximately $0.005 in higher acquisition NOI resulting primarily from the timing of our Camden North Quarter acquisition. We completed this acquisition in mid-February as compared to our budget of mid-March. As a result of the non-timing related same-store expense savings of approximately $0.01, we have reduced the midpoint of our full-year same-store expense guidance from 4%-3.5%, and increased our 2018 same-store NOI guidance by 20 basis points at the midpoint to 2.7%. We also reaffirmed our prior 2018 FFO guidance of $4.62-$4.82, with a midpoint of $4.72.
We anticipate that the $0.015 first quarter outperformance, which is not associated with the timing of certain property-level expenses, will be entirely offset by a $0.005 decrease in NOI from our communities in lease up due to a delay in opening our Camden McGowen Station development in Houston, and a $0.01 per share decrease in NOI due to the forecasted timing of future pro forma acquisitions. Our current guidance anticipates $300 million of additional acquisitions in the second half of 2018. Last night, we also provided earnings guidance for Q2 2018. We expect FFO per share for the second quarter to be within the range of $1.16-$1.20. The midpoint of $1.18 represents a $0.03 per share increase from our $1.15 in Q1 2018.
This increase is primarily the result of an approximate 2% or $0.03 per share expected sequential increase in same-store NOI as we both move into our peak leasing periods and receive anticipated property tax refunds, and an approximate $0.01 per share increase in NOI from our recent acquisitions and our communities in lease up. This $0.04 per share aggregate improvement in FFO is partially offset by an approximate $0.01 per share decrease in FFO resulting from lower interest income due to lower cash balances, lower fee and asset management income due to lower amounts of third-party construction income, and higher overhead due to the timing of certain corporate expenses.
Our balance sheet is strong, with net debt to EBITDA at 4x, a total fixed charge coverage ratio at 5.4x, secured debt to gross real estate assets at 11%, 81% of our assets unencumbered, and 92% of our debt at fixed rates. We ended the quarter with no balances outstanding on our unsecured line of credit and $100 million of cash on hand. We have $513 million of developments currently under construction, with $229 million remaining to fund over the next two years. Late in 2018, we anticipate repaying at maturity $175 million of secured floating rate debt with an anticipated interest rate of 2.5% and repaying at par $205 million of secured fixed rate debt with an interest rate of approximately 5.8%. Our current guidance does not anticipate any early debt prepayments and any resulting penalties.
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 2.65%. Finally, some of you may have noticed in the footnotes to our income statement that we have adopted the new revenue recognition standard effective January 1st, 2018. As a result, we are now presenting as rental revenues, certain revenue items totaling approximately $5.6 million, which would've historically been included as a component of other property revenues. The major components of this reclassification include rental revenues associated with reletting, parking, storage, and pets. This adoption does not change the sum of our total property revenues. This new presentation has been applied prospectively, and therefore adjustments would need to be made to prior year periods for comparison purposes.
At this time, we'll open the call up to questions and first turn the call over to Ric Campo.
Thanks, Alex. Well, we have a winner for the hold music contest, that would be Austin Wurschmidt from KeyBanc. Austin identified that the on-hold music was the most popular songs released in 1993, that 2018 was Camden's 25th anniversary as a public company. Clearly, 1993 wasn't the best year for new music, 1993 turned out to be a great year for multifamily companies to go public. Collectively, we have been at the forefront of innovation and operational excellence in the multifamily business for the past 25 years. It's interesting to note that only 25% of public companies make it to their 25th anniversary. Thanks, Austin, we appreciate you getting that right. We'll now turn the call over to questions and answers from the folks on the call.
Thank you. We will 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 our roster. The first question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead.
Hi, good morning. Just wanted to touch on Houston a bit and get an update there as it relates to operating trends you're seeing in the market, and where occupancy sits today.
Yeah. We're currently running in the 95% range occupancy wise, just above that. As we indicated in our original guidance meeting, I think we really started talking about this in the third quarter call last year, which is the spike that we saw in occupancy as a result of Hurricane Harvey. We knew that at one point, we got almost to 98% occupied in our entire portfolio, which is never sustainable over a long period of time. The big uncertainty for us as we looked at 2018 plan was how fast does that unwind happen, there was a lot of uncertainty regarding how long is it going to take people to get their homes back together, and those that were moved in as a result of the flood.
We laid out a plan where we felt comfortable that over some period of time, we would get back to kind of a more normal operating environment, which for us is around the 95% occupancy level. It looks like we're there. You saw our results for the first quarter. We're at about 1.9% revenue growth, our plan for the year indicates that we'll end the year somewhere around 3% revenue growth in Houston, which will be great. Given where we were at this point last year, if somebody had said, "You're going to do 3% revenue growth in Houston in 2018," I would've kind of looked at them real funny. Life is funny, it looks like we're on track to do that.
Things are returning to normal in Houston, and it looks like we're going to end up having a pretty decent year here.
How have new and renewal lease rates trended from the first quarter and into the second quarter? Is there a disproportionate impact being driven by short-term lease renewals that's driving that number? Are these just kind of your typical 12-month leases that are renewing?
Yeah. We think we're down to less than 1% of residents who have any connection to delays resulting from the flood. It's just a very small number. If you looked at our short-term leases versus kind of long-term trends, you wouldn't see any difference today in our rent roll from where we have been. It's business as usual, 12- and 15-month leases across our entire platform. Again, that's what we wanted to get back to as quickly as we could.
As far as new and renewal lease rates?
Yeah. New lease rates are running about 0%, renewals about 5%.
Great. Thanks for that. Then as it relates to the timing of acquisitions, you mentioned it negatively impacted guidance. What exactly are you seeing in the market? Is there a lack of deals, or is it just the number of bidders out there today? Would you consider allocating a larger portion of those proceeds to acquisitions towards development?
Well, the key issue there is that there's plenty of properties in the marketplace, but there are more buyers than there are properties for sure. As I said in the beginning of the call, the pressure on pricing, given everything where we are in the market, right? Most people think we're late cycle. You've got the 10-year Treasury rose, REIT stock prices adjusted, but the private market hasn't adjusted at all. As a matter of fact, the private market has gotten more competitive, and it's harder for us to thread the needle in the type of properties we want.
The challenge you have on both sides of the equation, which is acquisitions and development, is that on the development side, new developments where we haven't locked in our costs at this point, are hard to underwrite as well, because you have sort of rising construction costs in an environment where rental rates are not rising as fast as the construction costs. It's a complicated place in the market, given the competitive ends on both acquisition and development.
Can you remind us how much accretion you had assumed in the numbers? I know you assumed a lot of non-stabilized deals, but how much accretion is left in the guide from acquisitions?
The best way to think about it is what would happen if we didn't do any future acquisitions, that would probably reduce our midpoint by about $0.02 a share.
Great. Thanks, guys.
The next question comes from Juan Sanabria from Bank of America. Please go ahead.
Hi. I just wanted to stick on the acquisition side. You talked about a 25-basis point contraction in cap rates. Could you just contextualize a timeframe for that decrease and what markets in particular, if any, are driving that? Is it more on the coast or is it more Sun Belt?
It's interesting because the $208 million that we acquired in the first quarter, those transactions were all done in the latter part of 2017. During that timeframe, the last quarter was an interesting quarter because there wasn't as much pressure on the buy side. Buyers were sort of hanging back and waiting to see what was going to happen in the first quarter. When we were at National Multifamily Housing Council, for example, in January, it was like a flood of folks entering the market. The NMHC had, I think, a record attendance of over 5,000 people, I believe, and they used to have something like 2,000 or 3,000 people. Every person we talked to had $100 million here, $200 million there, $500 million there of equity that they wanted to put into apartments.
Generally, what happens in the cycle is that sellers sort of start at NMHC in January, and then they start bringing product to the market in the first quarter and through the second quarter and try to get their deals done in the summer or in the third quarter. There's a lot of properties that are out there and that came out, but they were met with a major wall of equity capital that wanted to get placed. When we talk about 25-basis point reduction in cap rates, it's in all of our markets, and there's not a lot of differentiation in markets today.
It's just that if there's a high-quality multifamily development deal that is being sold, it has multiple bidders, and the prices have definitely been driven up and cap rates down in about a 60- to 90-day timeframe between the beginning of the year and where we are today. I think the interesting part of it is that's in the backdrop of the 10-year going up 60 basis points, and most people saying, "Well, gee, if the 10-year goes up, then private real estate values have to drop." We've been saying all along that that's just not the case. The situation is that people look at relative returns to other assets, and multifamily, even with headwinds from new development across the country, is still a very high sought-after asset class that has a lot of positive attributes from an investment perspective.
Yeah, Juan.
Just to.
Just to follow up on that with regard to acquisitions and the opportunity set, as Ric mentioned, there wasn't a ton of stuff that was being traded in the fourth quarter of last year, and that's changed pretty dramatically. Across our acquisition folks right now are in various stages of preliminary underwriting of about 19 transactions that represent, if you total them all up at asking price, would be about $1.8 billion. These are just across Camden's relevant markets and high-quality brand, relatively new assets and locations that we would want to own. The ability to get to another $200 million to $400 million in acquisitions, the good news is there's tons of product out there. The bad news is it's all incredibly priced to perfection from our perspective.
We just have to be very patient, and as we did with the Tampa and the Orlando assets, we think we made incredible, great value for those acquisitions, and it's hard to find. Of the 19 that we're currently looking at, maybe we'll get one. On the other hand, maybe we won't. The good news is that it looks like there's going to be a ton of product in the market to choose from. We just have to find our spots. We are looking for discount to replacement cost on an asset that we think Camden's platform can add value to and get us to a first-year or stabilized return that makes sense for our allocation of capital. That's where we are.
Thanks for that color. On Washington, D.C., the first quarter was a little soft, but you're confident you're prepared to mark to trending up, I think, around 3%. What gives you that confidence? Can you share with us kind of maybe the new lease trends and, I guess, the anticipated or the acceleration you're seeing there, just that underlines that confidence?
If you look at where we are in the first quarter from an occupancy standpoint, we're in really good shape. The post end of the quarter momentum has continued to be really good in our Washington, D.C. portfolio. On our All Management call last week, our Washington, D.C. folks, our AROC group, continue to be very comfortable with our full-year forecast for D.C., and that rolls up to around 3%. Yeah, it's going to get better. It's probably not going to be much in occupancy. It's going to be rental rate gain from this point forward. The key in D.C. is that you really have two sets of factors. One is the D.C. proper, and those communities are continuing to be under pressure from new supply. Fortunately for Camden, our footprint has some D.C. proper, but is substantially D.C. metro.
My guess is that when you look at our results or our forecast relative to some of our peers, it's going to look a little stronger, but it's primarily the mix of assets. When you get into the suburban scenario, the results are pretty much dictated by whether or not you have new supply that's directly competitive with our offerings. In most cases, we don't have much new supply that's directly competitive. I think we're comfortable that we're going to get to the 3% by the end of the year.
Great. Thank you.
Our next question comes from Rich Anderson from Mizuho Securities. Please go ahead.
Thanks. Good morning, I'll ask the requisite two questions. First is, if you kind of knew that things were trending better as you kind of alluded to, would you, as kind of stewards of maintaining the expectations of the street, perhaps wait until you get through leasing season before
Hey, Rich
take that step? Yeah.
Rich, I got nothing for the last 20 seconds of your question. It was real garbled.
Is that better?
That is better. Let's start over completely.
Okay, good, because it was a really bad question.
But you-
It's never a bad question. Come on.
If you guys had the expectation that things were getting better, and you kind of alluded to that in this quarter, as of maintaining expectations for the street, would you be inclined to wait to get through some of the leasing season first, before allowing yourself to get in front of yourself a little bit in terms of guidance?
I would say that it's definitely hard to predict the next three quarters, right? When you get through a good first quarter, you tend to feel really good about it. Our teams feel really good about entering a strong leasing season. At the end of the day, you don't want to get ahead of your skis either, right? Yeah, I would say that that's probably a rational thing to think about.
Okay. That's all I need for that. Second, Ric, you or Keith or anyone, really. Given what you just described about cap rates going down and Wall Street maybe perhaps valuing you guys and everyone else, not to agree you should be valued, is that a recipe for M&A, recognizing there's only seven of you guys in terms of the mainstream multifamily. The clearest path to outsized value creation is maybe through a full-on sale. I'm not saying it's you, but wouldn't you agree that that is a reasonable recipe for M&A, considering all the inputs?
Well, I guess, since we've been around for 25 years, we've heard that a few times, right? What generally happens is that when you think about when valuations are out of favor, if you want to call it that, on Wall Street, the first thing some folks say is, well, you ought to maximize value by monetizing, by selling to a private company and unlocking that value. If you think about a private buyer, a private buyer is not going to buy Camden or anybody else without having a return expectation that is pretty robust, right? The question becomes, is the disconnect between the value of the stock and the NAV today, is that a permanent issue? Is that a value trap?
Is the disconnect because the company is doing something wrong, or is management not trusted, or are they making bad capital allocation decisions or things like that? If we thought that that's why the valuation was there was a disconnect, then we would sell the company.
We wouldn't create a long-term value trap for shareholders, given that we're all big shareholders. If it's just a dislocation in the marketplace like we've had many times over the last 25 years, then the question is, why would I want to sell to a private company, and they're going to make their returns on those assets, when I can ultimately create those returns for the shareholders that own the company today? That's kind of my view of the dislocation today is, if it's a value trap and people don't have confidence in the companies that are trying to create those values, then yeah, sell it and move on. If it's just a market dislocation, then we're just going to create the value for our shareholders.
Okay. Fair enough. Thanks for the color.
The next question comes from Richard Hightower from Evercore ISI. Please go ahead.
Good morning, everyone.
Morning.
Morning.
I want to ask about any changes to your job forecast across markets since the beginning of the year, now that we've had a little bit of time for tax reform to season. We've gotten some good data on net migration patterns recently. It's been in the headlines. Have the forecasts that you guys are using, have they changed at all since the beginning of the year? How has that been factored into guidance, if at all, at this point?
Yeah. The answer is they haven't changed materially from what we were using when we put out our guidance in the first quarter. I think the wild card, and it's probably not a this year item, but it's probably over the next several years, is the impact of tax reform and the acceleration of migration patterns that have been going on for a long time. There was some good research that was reported in The Wall Street Journal, I think about a week ago, that indicated that over the next couple of years, as many as 800,000 people incrementally, as a result of the state and local tax deductions being limited, would come from the states of just California and New York.
In addition to the out-migration that has been going on for almost a decade in both of those states, the forecast was that an additional 800,000 people would leave due to the tax policy. The biggest beneficiary states that were listed for the 800,000 migration were Texas, Florida, Colorado, and Phoenix. In that list, we're probably a net beneficiary. Obviously, we've got some California exposure, but none in New York. We have exposure in all of the other markets where these people, I think, or at least the study indicates they're going to end up. I think there probably is a thesis that's a little bit longer term around the impact of tax reform. I think from an employment standpoint, I don't think we've seen, in the migration standpoint, we haven't seen that yet.
There's probably some of that out there that needs to be looked at over the next couple of years.
Okay. That's helpful color, Keith. Just to follow up on sort of the cap rate question, capital allocation, et cetera. When you look at the convergence of cap rates, it sounds like it's reaching across markets, across sub-markets, across asset types, vis-a-vis relative quality and all of those different metrics. How do those changes since the beginning of the year make you think about selling additional assets that maybe weren't penciled as such in the original guidance or whatever? Just to take advantage of the market we're in.
Sure. When you look at the last couple of years, we've sold over $1.3 billion of assets into very strong markets, right? I think whenever you have major changes in the market, you have to think about it and say, "Okay, if I can't buy, what do I do?" Oftentimes, I tell our people, when we have a strategy and you say, "Okay, here's what we're supposed to be doing, but let's make sure we look at the market and say, 'Okay, we can do anything. We can buy, we can sell, we can build, we can do nothing.'" Right? You can buy stock back. We'll see how the hand plays through the rest of the year. Those kinds of discussions are happening every day, given the current environment we're in. We have a board meeting next week.
We're going to talk a lot about where we are and where the cycle is, and where the best place to put capital is.
All right, great. Thanks, Ric.
The next question comes from Nick Yulico from UBS. Please go ahead.
Oh, hi. Good morning, everyone. I want to turn back to Houston, and I'm trying to reconcile the 0% new lease growth that you cited for Houston for your portfolio, versus if we were to look at the Axiometrics data, it's showing over 4% market rent growth for all of Houston in the first quarter. What is the gap there? Is it that your portfolio is still facing some supply pressure in some pockets, or is there a lag effect here, where even if you're at flat rent growth now on a new lease basis, you're going to be getting closer to 4% in the spring here, and that would be an improvement for you guys? Can you just maybe reconcile that for me?
Yeah. Our guidance for the year, for the full year on revenue growth in Houston is 3%, right? We're running 5% plus or minus on renewals as we speak. In order to close that gap to get to our 3%, we need roughly contribution of half a percent from new leases. We're flat year to date, but we do believe that will trend up. As far as what Axio has in their numbers, I think at this time, or maybe in the fourth quarter of last year, I'm not sure it was Axio, but one of the data providers, I think Witten had Houston penciled as revenue growth or rent growth in 2018 at 8% at one point. Some of it's just a misunderstanding of how the changes roll through the rent roll over time.
Again, I would say that if you go back to where we were last year and kind of roll forward and say we'll be flat year-over-year on new leases, I would've been thrilled with that. I think that.
Right. The other thing I would add to that is that we are constantly monitoring, via performance analytics, what our properties are doing relative to their sub-markets. We're exceeding the sub-market numbers, both on occupancy and new renewal rates. We're monitoring that. I think the problem with broad numbers like Axio or Witten is that Houston's a big market, you can't just say it's on average this, right? We're making sure that we are capturing every dollar we can through our revenue management teams, and we feel pretty good about it.
Okay. No, that's helpful. I guess the point here was that it feels like Houston as a market is really improving and the supply outlook is also improving. The job growth outlook is improving. You have some acceleration in new rent growth baked into your Houston guidance for the year, but-
For sure
To some degree, it feels like it's maybe a little bit conservative. That's what I was just trying to figure out, in terms of how much better Houston could actually improve this year, or if it's just you're still facing maybe some lingering supply pocket pressure that's going to actually just keep you at the 3% revenue growth.
Nick, also, if you'll recall, in 2017, in a year that we had pretty muted job growth, there were 21,000 apartments delivered in Houston, Texas, and many of those are still going through their lease-up process. It's very competitive. A lot of it's dependent on the geographical footprint of where your assets are located, and a lot of that new supply that was built is, in fact, competitive with some of Camden's larger assets. I think it's all of the above, but the good news is that, if you would roll back again to middle of last year and all of the data forecasters that we use, including Witten, they would've been calling for total rent growth in Houston 2018 to be down another 4%. 4% negative versus what we think we're going to end up is 3% positive. It's a pretty remarkable turnaround.
Some of what you're saying is true. Houston has gotten dramatically better in the last, call it nine months. Dramatically better from a minus four kind of scenario to a plus three.
Right. I guess the trends hold up. It feels like 2019, perhaps, is a better year than 2018. Is that fair at this point, you think?
Yeah. I think just based on supply numbers. We delivered 21,000 apartments last year. We're kind of working our way through that. My guess is that by the end of this year, we'll be through the worst of that. Good news is we only have about 6,000 of completion slated for this year. In a market the size of Houston, again, that's a blip and very manageable in the scheme of things. I would expect that all things being equal, Houston, another decent year of job growth this year. Looking out to 2019, yeah, I think so. Certainly more constructive.
Okay. Appreciate it. Thank you, everyone.
You bet.
The next question comes from John Kim from BMO Capital Markets. Please go ahead.
Thank you. It seems like everyone wants to be in Denver, and it's now your sixth largest market. Do you have an internal goal of making Denver a top five market for Camden? Can you just talk about the acquisition environments in the market?
Yeah, I think that the Denver story has been one that we've been a big fan of for many years, going back all the way to our entry into that market in 1998. It's caught a lot of other people's attention and some of our peers also in recent months and years. As far as internal targets on percentage of assets in any individual market, we look at that, we think about it, and we think about it as, are we overweight a position or underweight? I would say that we continue to believe that our Denver exposure is underweight relative to where we'd like it to be. The challenge is, as you say, that everybody, it seems, kind of wants to be there at one time, which does bad things to pricing, which affects greatly our appetite for expanding at this part of the cycle.
Yeah, long term, We're certainly underweight where we would like to be, but it's just not something that we're going to force given where we think we are in the cycle.
There are a couple of Denver properties that are in the number that Keith threw out the $1.8 billion of acquisitions that we're looking at this point. I think Denver is a little more competitive than most places because it is sort of the hotspot right now.
Okay. Can I clarify on your statement of the 25 basis point cap rate compression? I understand that's across all of your markets, but is that specifically for newly built projects that you're targeting, or is that also including B and core plus assets?
I think it's B and core plus assets as well. The thing that's interesting about the sort of value add market, it is still as white hot, and the value add continues to compress as well. It's across the board. It's not just for specific types of assets.
Thank you.
The next question comes from Alexander Goldfarb from Sandler O'Neill. Please go ahead.
Oh, sure. Hey, morning. Morning down there. Two questions from me. First, you guys seem to be more bullish on the development activity, but it seems like, especially from recent, speaking to private developers, including some large ones that, having subs, keeping subs on the job without them walking off is getting to be a harder and harder issue. I appreciate the scale of your platform, but still, how do you guys keep people on the job site versus walking off to better paying jobs?
Well, first you have to be a best in class developer and owner. The way you do that is, they say fast pay makes fast friends, right? You make sure that you have very well-organized jobs, so that when a sub comes on the job, the sub gets their work done, and they don't have to wait for somebody to get something else done, or they have to go back and redo it. A lot of it has to do with the platform and just the way that our construction teams operate, that you want to be the company that the sub wants to go work for because they can get their work done, and they get paid quickly.
I think that relationship that has developed over a period of time with subs creates this sort of team effect, where they just don't walk off the job to get another 2% or 3%. I think we've been doing that for a long time, and our construction departments and our development people understand that you've got to take care of your subs. From time to time, a sub will get upside down, and you'll have to take him out and hire another sub, and that's where you have risk. Generally speaking, because we've been in this business for so long, we don't have a lot of that that happens.
The delay in that one Houston project, we shouldn't take that as a read-through that we should expect more of those for you.
No. I think the delays, if you look at Even with the best subs, we still have labor issues. The subs, instead of bringing 200 people on a job, they're bringing 150 or 100, it's just taking longer. Getting to the finish line, the last sort of 3% or 4% of a job is the hardest to get done because you're sort of getting those fine-tuning things done. In the case of our Houston project, McGowen Station, the big issue was really about sidewalks in the front and ability to get people in the front door. Unfortunately, there was some weather and other kind of random things that happened that caused that.
I think every project that we've developed, and I think this is just universal to all companies, not just Camden, is that you've had to add three to six months to every job because of just labor shortages.
Okay
so much.
Okay, that's helpful. The second question is, on the lending side, was talking to Freddie Mac recently, and they said they're being outbid by banks. Fannie Mae activity in the first quarter was down dramatically. What's your take on what's going on in the commercial lending, and are you seeing an impact in property transactions? It's just that the banks and Life Cos are stepping up so that the property market isn't impacted, the transaction volume isn't impacted, it's just more a shift in lenders?
Well, there's definitely been a shift in lenders because Fannie and Freddie were getting, as you point out, priced out of the market with Life Cos and banks. I don't think there's any real shortage of capital or anything like that. That's what's driving cap rate compression. Last year, you did have banks, this is primarily construction financing, where banks had increased their spreads pretty dramatically and were cutting back proceeds, and that's sort of what happened to the developer in Orlando. What was happening then was, their cost of capital was going up. The additional capital requirements on banks for being volatile commercial real estate construction loans was putting pressure on banks. Today, however, with the kind of new, lower regulation administration, construction lenders are actually back in the market, and their spreads have contracted some.
Instead of 300 over, now it's 225 to 250 over the curve. They're getting more constructive about making construction loans today than they were in the past. I think that's sort of the regulatory tilt that you're seeing from the Trump administration. There is no shortage of capital. The challenge people are having is on the development side, as I said earlier, was making their numbers work on the construction side and the cost side. Freddie and Fannie have actually dropped their spreads and are more aggressive in the market trying to take back market share.
Okay. Thank you.
The next question comes from Vincent Chao from Deutsche Bank. Please go ahead.
Hey. Good morning, everyone. Just on the pipeline, the $1.8 billion, just the overall capital plan, it sounds like both sides, the development and acquisitions, are somewhat challenging. I was just curious, someone asked if you'd be interested in stepping up the development side. I guess if neither of those two avenues proves to be particularly attractive from a return perspective, I guess, what's the next best option for deployment?
Well, that's a complicated issue, right? If you can't build and can't buy, then what do you do? I think Keith hit the nail on the head earlier when he said you just have to be patient. Sometimes you just have to say, "Look, I'm not going to play at this price." What you do then is you just keep your powder dry until you see something that makes sense or something changes in the marketplace. We're ready, willing, and able to be patient. I think that's the key, is making sure that we don't have a gun at our head to go out and buy properties. Now, yeah, we have $0.02, as Alex pointed out earlier, $0.02 of embedded accretion from that in our guidance.
That doesn't mean that we're going to go out and do a transaction that we, in our gut, think is wrong just to make $0.02 of accretion. We'll just sit on cash and we'll see what happens. If you think about where we are in the cycle, we're in, and I think what most people believe is the latter parts of a really long cycle. How long does this cycle continue? I don't know. It's the second longest economic expansion that we've had in my business career. Yeah, it's been slow growth, and you haven't had rocket job growth and all that. You sort of have to be careful at this point in the market, so we'll make transactions work if they work, but we're not going to press the edge of the envelope if they don't.
Okay. That sounds rational. I guess, just a question on Dallas. You talked about a lot of markets. Dallas, still doing okay, but it seems like it saw some pretty big deceleration on the same-store revenue growth side this quarter. I know it was like a B-plus market, I think, when you gave your initial outlook. I'm just curious how that market is trending versus your expectations, and if you could remind us where you think Dallas will end up for the year.
Yeah. On our report card that we did last quarter, we had Dallas at a B and declining. I think that's still about right. We definitely took an occupancy hit in the quarter. Dallas is dealing right now, in terms of 2018 deliveries, with about what Houston dealt with last year. I think we're around 20,000 plus or minus 22,000 deliveries in 2000, and 13,000 deliveries coming on top of about 10,000 last year. It's going to be a challenge in Dallas just based on the amount of new supply that needs to be absorbed. The positive in Dallas is it's been a little bit better job growth story for the last couple of years than Houston has been.
Almost irrespective of your ratio of jobs to new deliveries, when you've got 22,000 apartments that need to be absorbed in some fashion, if you happen to be in those sub-markets or attendant to those sub-markets, you're going to get smacked. We laid out a plan for Dallas for 2018 that we think properly anticipated the new supply that's going to come online. As we sit here today, I think we're still on track with where we thought we would be in Dallas for 2018. Dallas and Austin and Charlotte are the three most supply-impacted markets for Camden, we think we've properly anticipated that for 2018.
Okay. Thanks a lot.
The next question comes from John Guinee from Stifel. Please go ahead.
Great. John Guinee here. More of a curiosity question. You bought the St. Petersburg deal from Granvil Tracy at American Land, who, by the way, was very impressed with the level of your due diligence. I think it was a little bit of a unique product in that maybe the average unit size was bigger to target a different, more older tenant, and I think you bought it for about $355,000 a unit . Can you talk about the uniqueness of that asset, and also, is $355,000 more or less than replacement cost these days?
It definitely is a unique product. It's a block and a half from the water. It is a larger average unit size that sort of caters to two different groups. You do have smaller unit sizes that cater to millennials, but also larger unit sizes that cater to sort of an older crowd. I think the average age there is like 46 years old, and our average age in our portfolio is like low 30s. It is a unique asset. We think the replacement cost, it's about 12% below replacement cost. It was in the sort of the final stages of lease-up, and we think it's a great buy given its location.
St. Pete, my initial reaction on St. Pete even though we've been close to it for a long time, was that it was sort of a sleepy kind of town, but it's really become a hotspot with downtown renovations and a lot of new hip restaurants and what have you. The big public investments in the Pier District that have been made and are coming. It's a real happening place in the Tampa-St. Pete area.
The second question, you paid about $32,000 a unit for a little less than two acres in Orlando.
Incredibly high density, 200 units per acre, by the way.
Yep.
What do you think the total project cost would be for an asset like that?
Our project cost is $120 million on that project. It is a high rise, so it's a block and plank construction, which is basically a concrete product. It's a block and a half or two blocks from Lake Eola, which is really great spot in Orlando and very walkable neighborhood, and we're really excited about that project.
Great. Thank you very much.
The next question comes from Ryan Lumb from Green Street Advisors. Please go ahead.
Great. Thank you. With regard to the property tax assessments, outside of just typical catch-up between the assessed values and market values, are you seeing any sort of change from municipalities or cities that kind of goes beyond just the changes in recent market values that is driven more so by fiscally strained local or state budgets?
What I would tell you is, when you look at our property tax valuations, what typically happens is there's a little bit of a lag. The increases that we saw last year, I don't think were really driven by sort of funding issues in municipalities. I think it was more an issue of they were trying to catch up with valuation increases that had happened in past years. At one point, there were some discussions around Houston and whether property taxes were going to be outsized based upon funding issues in Houston, but we seem to have moved past that.
Sure, that's helpful. Thanks. Just one last one. Just for kind of the outlook for redevelopment over the next, say, three to five years, do you think it stays somewhere in this $25 million range, or does it grow meaningfully from here?
Yeah, I think it shrinks from here, and the reason for that is that we're getting pretty close to the end of the group of assets that, on a catch-up basis, are suitable for redevelopment. You need to be able to get a substantial pickup in rent to make these things work. There's sort of a natural breakpoint for assets somewhere around the 10 to 12-year mark, where great location, but clearly last cycle product. If you can go in and make last cycle product look and feel to the consumer like current cycle product, and most people, to the untrained eye, they wouldn't even notice that it was a 10 to 12-year-old product, and then you can reprice that home that's basically pricing off of the new deliveries and new construction.
We're getting pretty close to the stuff that was kind of pimped up in our portfolio that had the right attributes. I think from going forward, it's going to be more of a, as things hit that magic mark in age, location, and quality, that we add redevelopments.
Great. That's all from me. Thanks.
All right. Thanks.
This concludes our question and answer session. I would like to turn the call back to Mr. Ric Campo for any closing remarks.
Great. Thanks. Appreciate your time today on the call, and we look forward to seeing you at Nareit in June. Thanks.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.