Camden Property Trust

NYSE:CPT

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to the Camden Property Trust First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn conference over to Kim Callahan, Senior Vice President of Investor Relations. Please go ahead.

[Kim Callahan, Senior Vice President-Investor Relations]

Good morning, and 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 [e-mail]. 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, and we encourage you to review them. Any forward-looking statements made on today’s call represent management’s current opinions. And the company assumes no obligation to update or supplement these statements because of subsequent events.

As a reminder, Camden’s complete 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 1 hour. [Operator Instructions] If we are unable to speak with everyone in the queue today, we’d be happy to respond to additional questions by phone or e-mail after the call concludes.

At this time, I’ll turn the call over to Ric Campo.

[Ric Campo, Chairman and Chief Executive Officer]

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 more normal apartment market in Houston, with an expanding economy and limited new supply coming online over the next couple of years. I am 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 help communities can come together when their help is needed.

We acquired two 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 to $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% – I’m sorry, 25 basis points in our markets, driven by significant buyer interest and strong multifamily fundamentals.

Our development business is continue to create significant long-term value. We plan to start the $100 million to $300 million 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 costs 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 brought 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.

And we have a strong Camden team that delivers an amazing customer service to our residents at create 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.

[Keith Oden, President]

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 0.3%, 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, we 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 we’ll 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 1.5% 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 are seeing steady improvement from January through April on new lease pricing, and 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 of 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 purchased 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, and that’s consistent with 2017 levels.

Finally, we recently received notice that to the 11th consecutive year, Camden was included in FORTUNE Magazine’s list of 100 Best Places to Work. We plan this on our own 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.

[Alex Jessett, 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 first quarter of 2018, we purchased Camden Pier District, a newly constructed 358-unit 18-storey building in St. Petersburg, Florida, for approximately $127 million and Camden North Quarter, a newly constructed 333-unit, 9-storey building in Orlando, Florida, for approximately $81 million. At the time of acquisition both communities were in the process of completing lease-up, and 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 Yale of submarket of Orlando, Florida for $11.4 million for the future development of a wholly-owned $120 million, 360-unit, 13-storey building. We anticipate starting construction this summer. Including this developing, we are anticipating $100 million to $300 million of on-balance sheet development starts spread throughout 2018.

Turning to financial results. Last night, we reported funds from operations for the first quarter of 2018 of $111.4 million or $0.15 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 the combination of lower than anticipated repair and maintenance expense and lower than anticipated levels of self-insured employee health care costs.

Of these lower operating expenses, approximately $0.005 of repair and maintenance expense savings is timing-related, with the expenses now expected to occur later in the year. And approximately $0.005 in higher acquisition net operating income 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% to 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 to $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 $0.005 decrease in NOI from 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 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 the second quarter of 2018. We expect FFO per share for the second quarter to be within the range of $1.16 to $1.20. The midpoint of $1.18 represents a $0.03 per share increase from our $1.15 in the first quarter 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 a 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 timing of certain corporate expenses.

Our balance sheet is strong, with net debt-to-EBITDA at four times, a total fixed charge coverage ratio at 5.4 times, 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 development currently under construction, with $229 million remaining to fund over the next two years.

Late in 2018, we anticipate repaying that 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%.

And finally, some of you may have noticed in the footnotes to our income statement that we haveadopted the new revenue recognition standard effective January 1, 2018. As a result, we are now presenting those rental revenues, certain revenue items totaling approximately $5.6 million, which would have 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.

[Ric Campo, Chairman and Chief Executive Officer]

Thanks, Alex. While we have a winner for the hold music contest, and that would be Austin Wurschmidt from KeyBanc, and Austin identified that the on-hold music was the most popular songs released in 1993, and that 2018 was Camden’s 25th anniversary as a public company. Clearly, 1993 wasn’t the best year for new music, but 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. And it’s interesting to note that the only 25% of public companies make it to their 25th anniversary. So thanks, Austin, and we appreciate you getting that right.

So we’ll now turn the call over to questions and answers from the folks on the call.

[Operator]

[Operator Instructions] And the first question comes from Austin Wurschmidt from KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt, KeyBanc Capital Markets]

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.

[Keith Oden, President]

Yes. So 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 the 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. But the big uncertainty for us, as we look at 2018 plan, was how fast does that unwind happen? And 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 floods?

So we had – we’ve 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. So it looks like we’re there. And you saw our results for the first quarter. We’re about 1.9% revenue growth. And 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 said, “You’re going to do 3% revenue growth in Houston in 2018,” I would’ve kind of looked at it him real funny. But life is funny, and it looks like we’re on track to do that. So things are returning to normal in Houston, and it looks like we’re going to end up having a pretty decent year here.

[Austin Wurschmidt, KeyBanc Capital Markets]

And how has new and renewal lease rates trended from the first quarter and into the second quarter? And is there a disproportionate impact being driven by short-term lease renewals that’s driving that number? Or are these just kind of your typical 12-month leases that are renewing?

[Keith Oden, President]

Yes. We’re down – we think we’re down to less than 1% of residents who have any connection to delays resulting from – or the flood. I mean, it’s just a very small number. So if you look at our short-term leases versus kind of long-term trends, then you wouldn’t see any difference today in our rent role from where we have been. So it’s business as usual, 12- and 15-month leases across our entire platform, which is what – again, that’s what we wanted to get back to as quickly as we could.

[Austin Wurschmidt, KeyBanc Capital Markets]

And then as far as new and renewal lease rates?

[Keith Oden, President]

Yes. So new lease rates were running about 0%; renewals, about 5%.

[Austin Wurschmidt, KeyBanc Capital Markets]

Great, thanks for that. And then as it relates to the timing of acquisitions, you mentioned that 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? And would you consider allocating a larger portion of those proceeds tagged to acquisitions towards development?

[Ric Campo, Chairman and Chief Executive Officer]

Well, the key – yes, the key issue there is that there’s plenty of properties in the marketplace, but there are more buyers than our properties for sure. And there’s – as I said on the – beginning of the call that the pressure on pricing, given everything where we are in the market, right, most people think we’re late cycle. You’ve got – 10-year treasury rose. REIT stock price is 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 sort of thread the needle in the type of properties we want.

The issue on – the challenge you have on both sides of the equation, which is acquisitions and development, is that on the development side, new developments that haven’t – where we haven’t locked in our cost 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. So it’s a complicated place in the market, given the competitive ends on both acquisition and development.

[Austin Wurschmidt, KeyBanc Capital Markets]

And can you remind us what the – 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?

[Keith Oden, President]

So the best way to think about it is just what would happen if we weren’t – if we didn’t do any future acquisitions. And that would probably reduce our midpoint by about $0.02 a share.

[Operator]

And the next question comes from Juan Sanabria from Bank of America. Please go ahead.

[Juan Sanabria, Bank of America]

I just wanted to stick on the acquisition side. You talked about a 25 basis point contraction in cap rates. Could you just conceptualize the time frame for that decrease? And what markets, in particular, if any, are driving that? Is it more on the homes? Or is it more Sunbelt?

[Ric Campo, Chairman and Chief Executive Officer]

It’s interesting because the $208 million that we acquired in the first quarter were all – those transactions were all done in the latter part of 2017. And during that time frame, you had folks just sort of – that the last quarter was an interesting quarter because there wasn’t as much pressure on the buy side. So buyers were sort of kind of hanging back and waiting to see what was going to happen in the first quarter. And when we were at National Multi 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.

And so every person we talk to had $100 million here or $200 million there or $500 million there of equity that they wanted to put into apartments. And so, generally, what happens in the cycle is that properties come – sellers sort of started NMHC in January, and then they started 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. And so 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. And that’s driven – so when we talk about 25 basis points 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 time frame between the beginning of the year and where we are today. And 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 are saying, “Well, gee if the tenure goes up, then private real estate values have to drop.” And 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 with – even with headwinds from new development across the country is still a very, very high sought-after asset class that has a lot of positive attributes from an investment perspective.

[Keith Oden, President]

Yes. Juan, just to follow up on that, with regard to acquisitions and the opportunity set, as Ric mentioned, it was – there wasn’t a ton of stuff that was being traded in the fourth quarter of last year, and that’s changed pretty dramatically. And across our – our acquisition folks right now are in various stages of kind of preliminary underwriting of about 19 transactions that represent, if you total them all up, that at asking price would be about $1.8 billion. And these are just across Camden’s relevant markets and high-quality brand, relatively new assets and locations that we would want to own. So 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.

So 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. And in all of the 19 that we’re currently looking at, maybe we’ll get one. But on the other hand, maybe we won’t. But the good news is, 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 costs and some – on an asset that we think Camden’s platform can add value to and get us to a first year or a stabilized return that makes sense for our allocation of capital. So that’s where we are.

[Juan Sanabria, Bank of America]

Thanks for that color. Just on Washington, D.C. within first quarter was almost soft, but you were confident in your prepared remarks of any – up, I think, around 3%. What gives you that confidence? And can you share with us kind of maybe the new lease trends on – and I guess, the anticipated or the acceleration you’re seeing there just underlying that confidence?

[Keith Oden, President]

Yes. I mean, 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. And on our all management call last week, our Washington, D.C. folks, our IROC group, continue to be very comfortable with our full year forecast for D.C. And that rolls up to around 3%. So yes, it’s going to get better. There’s probably not going to be much in occupancy. It’s going to be rental rate game from– gain from this point forward. The key in D.C. is that you’ve got – 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 it’s substantially D.C. Metro.

And so my guess is that when you look at our results or forecast relative to some of our peers, it’s going to look a little stronger, but it’s primarily the mix of assets. And when you get into the suburban scenario, your – the results are pretty much dictated by whether or not you have new supply that’s directly competitive with our offerings. And in most cases, we don’t have much new supply that’s directly competitive. So I think we’re comfortable that we’re going to get to the 3% by the end of the year.

[Juan Sanabria, Bank of America]

Great. Thank you.

[Operator]

And our next question comes from Rich Anderson from Mizuho Securities. Please go ahead.

[Rich Anderson, Mizuho Securities]

I’ll ask prerequisite two questions. So first is if you kind of knew that things are trending better, as you kind of alluded to, would you – as kind of still maintaining the expectations of The Street perhaps looking to get through leasing fees and before you kind of…

[Keith Oden, President]

Rich, the last – I got nothing for the last 20 seconds of your question. It’s real garbled.

[Rich Anderson, Mizuho Securities]

Is that better?

[Keith Oden, President]

That is better. Let’s start over completely.

[Rich Anderson, Mizuho Securities]

Okay, good, because it was a really bad question.

[Ric Campo, Chairman and Chief Executive Officer]

It’s never a bad question, come on.

[Rich Anderson, Mizuho Securities]

So if you guys had the expectation that things were getting better, and you kind of alluded to that in this quarter, as the – of maintaining expectations for The Streets would you be inclined to wait to get through some of the leasing fees in first before allowing yourself to get in front of yourself a little bit from your guidance?

[Ric Campo, Chairman and Chief Executive Officer]

I would say that we would – if we were – it’s hard – it’s definitely hard to predict the next three quarters, right? I mean, so 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. But at the end of the day, you don’t want to get ahead of your skis either, right? And so, yes, I would say that that’s probably a rationale thing to think about.

[Rich Anderson, Mizuho Securities]

Okay. That’s all I need for that. And then second, Ric, you, or Keith or anyone really. Given what you just described about cap rate going down and Wall Street maybe perhaps valuing you guys, and everyone else in that facility agree you should be valued, is that a recipe for recognizing so many – seven of you, guys, in terms of the mainstream multifamily REIT. The clearest path outside of value creation is maybe through a full on sale. I’m not saying it’s you, but doesn’t that – wouldn’t you agree that, that is a reasonable recipe for M&A, considering all the inputs?

[Ric Campo, Chairman and Chief Executive Officer]

Well, I guess, the – since we’ve been around for 25 years, we’ve heard that a few times, right? And what would happen – what generally happens is – so is that the – when you think about when valuations are out of favor, if you want to call it that on Wall Street, then the first thing – some folks say as well, “You all maximize value by monetizing, by selling to a private company and unlocking that value.” So – and 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? So 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 that a – is it – is disconnect because the company is doing something wrong or is management not trusted or they’re making bad capital allocation to their decisions or things like that.

And if we saw, that’s why the valuation was – there was a disconnect, then we would sell the company. Because we wouldn’t create a long-term value trap for shareholders, given that we’re all big shareholders. But 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 when I could – 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? And so 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, yes, sell it and move on. But if it’s just a market dislocation, then we’re just going to create value for our shareholders

[Rich Anderson, Mizuho Securities]

Fair enough. Thanks for the color.

[Operator]

And the next question comes from Rich Hightower from Evercore ISI. Please go ahead.

[Rich Hightower, Evercore ISI]

Hi, good morning everyone.

[Ric Campo, Chairman and Chief Executive Officer]

Good morning.

[Keith Oden, President]

Good morning.

[Rich Hightower, Evercore ISI]

I wanted to ask about your – 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. And the forecast that you guys are using, have they changed at all since the beginning of the year? And then how has that been factored in the guidance, if at all, at this point?

[Keith Oden, President]

Yes. So the answer is they haven’t changed materially to – from our – what we were using when we put out our guidance in the first quarter. I think the wild card, and it’s probably not of this year item, but it’s probably over the next several years, is the impact of the tax reform on and the acceleration of migration patterns that have been going on for a long time. There were 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 tax, of this state and local tax deductions being limited, would come from the states of just California and New York.

So 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. So the biggest beneficiary states that were listed for the 800,000 migration were Texas, Florida, Colorado and Phoenix. And so – and that list were probably a net beneficiary. Obviously, we’ve got some California exposure, but not in New York. And we had exposure in all of the other markets, where these people, I think, are – or at least the study indicates they’re going to end up. So I think there probably is a thesis that’s a little bit longer term around the impact of tax reform. But I think from an unemployment standpoint, I don’t think we’ve seen – in the migration standpoint, we haven’t seen that yet. But it’s – there’s probably some of that out there that needs to be looked at over the next couple of years.

[Rich Hightower, Evercore ISI]

Okay. That’s helpful color, Keith. And then 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 submarkets, 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 it up the market we’re in?

[Ric Campo, Chairman and Chief Executive Officer]

Sure. When you look at our – at the last couple of years, we sold over $1.3 billion of assets and into very strong markets, right? And so I think the – 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?” And oftentimes, I’d 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? And so we can buy stock back. And we’ll see how the hand plays through the rest of the year. But 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.

[Rich Hightower, Evercore ISI]

All right. Great, thanks, Ric.

[Operator]

And our next question comes from Nick Yulico from UBS. Please go ahead.

[Nick Yulico, UBS]

Good morning, everyone. So I wanted 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 look at the AXIOMetrics data that’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 here, you’re going to be getting closer to 4% in the spring here? And so that would be an improvement for you guys? Can you just maybe reconcile that for me?

[Keith Oden, President]

Yes. So our guidance for the year, for the full year on revenue growth in Houston is 3%, right? And we’re running 5%, plus or minus, on renewals as we speak. So in order to close that gap, to get to our 3%, we need roughly contribution of 0.5% from new leases. We’re flat year-to-date, but we do believe that, that will trend up. And as far as where – what AXIO has in their numbers, I think at this time or maybe in the fourth quarter of last year, I’m not sure if it was AXIO, but one of the data providers, I think, Wheaton had Houston penciled as revenue growth or rent growth in 2018 at 8% at one point. So I mean, it just – some of it’s just a misunderstanding of how rent rolls, how the changes have rolled through the rent roll over time. But 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 leases, I would have been thrilled with that. And I think…

[Ric Campo, Chairman and Chief Executive Officer]

Right. And 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 submarkets. And we are exceeding the submarket numbers both on occupancy and new renewal rates. So we’re monitoring that. I think the problem with broader numbers like AXIO or Wheaton is that it’s – Houston’s big market, so you can’t just say it’s on average this, right? And so we’re making sure that we are capturing every dollar we can through our revenue management teams, and we feel pretty good about it.

[Nick Yulico, UBS]

Okay. No, that’s helpful. I guess the point here was that, it feels like Houston is the market is really improving and the supply outlook is also improving, the job growth outlook is improving. And so you have some acceleration in new rent growth baked into your Houston guidance for the year. But to some degree, it feels like it’s maybe a little bit conservative. And so that’s what I was just trying to figure out, I mean, in terms of like how much better Houston could actually improve this year, or if it’s just some – you’re still facing may be some lingering supply pocket pressure that’s going to actually just keep you at that 3% revenue growth.

[Ric Campo, Chairman and Chief Executive Officer]

Nick, also, we had – if you recall in 2017 and the 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. So it’s very competitive, a lot of its dependent on the geographical footprint or 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.

So it’s just 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 Wheaton, they would have been calling for total rent growth in Houston in 2018 to be down another 4%. It means 4% negative versus what we think we’re going to end up as 3% positive. So it’s a pretty remarkable turnaround. So some of what you’re saying is true, Houston has gotten dramatically better in the last, I will call it, nine months. But dramatically better from a minus 4% kind of scenario to the plus 3%.

[Nick Yulico, UBS]

Right. And I gets a trends hold up at this, I mean, it feels like in 2019 perhaps is a better year than 2018. Is that fair at this point do you think?

[Ric Campo, Chairman and Chief Executive Officer]

Yes. I think just based on supply numbers, I mean, 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 completions slated for this year, and the market besides the Houston, that’s – again, that’s a blip and very manageable in the scheme of things. So I would expect that all things being equal, Houston and other decent year job growth this year and looking out to 2019, yes, I think so. Certainly, more constructive.

[Nick Yulico, UBS]

Okay. Appreciate it. Thank you, everyone.

[Operator]

And the next question comes from John Kim from BMO Capital Markets. Please go ahead.

[John Kim, BMO Capital Markets]

Thank you. It seem like everyone wants to be Denver, and it’s now your sixth largest market. Do you have an internal goal of making Denver at top five-market for Camden? And could you just talk about the acquisition environment in the market?

[Keith Oden, President]

Yes, I think that Denver, 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. So it’s caught a lot of other people’s attention and some of our peers also in recent months and years. We don’t really, 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, or we overweight our position or underweight, and I would say that we continue to believe that our Denver exposure is underweight relatively 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 does – affects greatly our appetite for expanding at this part of the cycle. So yes, long term, Denver needs to be – we’re certainly underweight where we would like to be. But we’re not – it’s just not something that we’re going to force, given where we think we are in the cycle.

[Ric Campo, Chairman and Chief Executive Officer]

And 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, at this point. But because of the – I think Denver is a little more competitive than most places because it is sort of the hotspot right now.

[John Kim, BMO Capital Markets]

Okay. And 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?

[Ric Campo, Chairman and Chief Executive Officer]

I think it’s B and core plus assets as well. I mean, the thing that’s interesting about the sort of value-add market, it is – still is white hot. And the value-add continues to compress as well. And so it’s across the board. It’s not just for specific types of assets.

[John Kim, BMO Capital Markets]

Thank you.

[Operator]

And the next question comes from Alexander Goldfarb from Sandler O’Neill. Please go ahead.

[Alexander Goldfarb, Sandler O’Neill]

Sure. Good morning. Two questions for 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?

[Ric Campo, Chairman and Chief Executive Officer]

Well, first, you have to be sort of a best-in-class developer and owner. And the way you do that is you – they say fast pay makes fast friends, right? So you make sure that you continue to – 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 have to go back and redo it. So 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.

And so I think that’s – 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%. And that’s – 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. Now from time-to-time, a sub will get upside down, and you’ll have to take them out and hire another sub. And that’s where you have risk. But generally speaking, because we’ve been in this business for so long, we don’t have a lot of that, that happens.

[Alexander Goldfarb, Sandler O’Neill]

So the delay in that one Houston project, we shouldn’t take that as a read-through, that we should expect more of this for you?

[Ric Campo, Chairman and Chief Executive Officer]

No, the – I think the delays, if you look at every – 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. And so it’s just taking longer. And then getting to the finish line when you – 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. And in the case of our Houston project, McGowen Station, I mean, the big issue was really about sidewalks in the front and ability to get people in the front door. And unfortunately, there was some weather, and then other kind of random things that happened that caused that. But I think every project that we’ve developed, and I think this is just universal to all companies, not just Camden, is that you have to add three to six months every job because of just labor shortages, and not so much.

[Alexander Goldfarb, Sandler O’Neill]

Okay, that’s helpful. And then the second question is, on the lending side, I 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. So what’s your take on what’s going on in the commercial lending? And are you seeing an impact in property transactions? Or it’s just that the banks and LifeCos 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?

[Ric Campo, Chairman and Chief Executive Officer]

Well, there’s definitely been a shift in lenders because Fannie and Freddie were getting, as you’ve pointed out, price out of the markets with LifeCos and banks. And so 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. I mean, this is primarily construction financing, where banks – where it had increased your spreads pretty dramatically and were cutting back proceeds. And that’s sort of what happened to the developer in Orlando. And what was happening then was – so their cost of capital is going up. The additional capital requirements on banks were being volatile. Commercial real estate, construction loans was putting pressure on banks.

Today, however, with the sort of the kind of new lower regulation administration, construction lenders are actually back in the market. And their spreads have contracted some. Instead of 300 and over, now it’s 225 to 250 over the curve. And they’re getting more constructive about making construction loans today than they were in the past. And I think that’s sort of the regulatory tilt that you’re seeing from the Trump administration. And so there is no shortage of capital. But the challenge people were having is on the development side, as I said earlier, was making their numbers work on the construction side and the cost side. And Freddie and Fannie have actually dropped their spreads, and are more aggressive in the market trying to take back market share.

[Alexander Goldfarb, Sandler O’Neill]

Okay. Thank you.

[Operator]

And the next question comes from Vincent Chao from Deutsche Bank. Please go ahead.

[Vincent Chao, Deutsche Bank]

Good morning, everyone. Just on the pipeline, the $1.8 billion and just the overall capital plan, it sounds like both sides, development and acquisitions, are somewhat challenging. I was just curious, someone asked if you’d be interested in stepping up your 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.

[Ric Campo, Chairman and Chief Executive Officer]

Well, that’s a complicated issue, right? If you can’t build and you can’t buy, then what do you do? And I think Keith hit the nail in the head earlier when he said, “You just have to be patient.” And so at sometimes, you just have to say, “Look, I’m not going to play at this price.” And what you do then is you just keep your powder dry until you see something that makes sense or something changes in the marketplace. And we’re ready, willing and able to be patient. And I think that’s the key, is making sure that we aren’t just – we don’t have a gun at our head to go out and buy properties.

Now yes, we have $0.02, as Alex – Alex pointed out earlier $0.02 of embedded accretion from that in our guidance. But 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. So 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. Now how long does this cycle continue? I don’t know.

It’s the second largest – or the second longest expansion – economic expansion that we’ve had in my business career. And yes, it’s been slow growth, and you haven’t had rocket job growth and all that, but you sort of have to be careful at this point in the market. And so we’re happy to – it will make transactions work if they work, but we’re not going to press the edge of the envelope if they don’t.

[Vincent Chao, Deutsche Bank]

Okay. That sounds rational. I guess, just a question on Dallas. You don’t talk about a lot of markets. Dallas is still doing okay, but it seems like you saw some pretty big deceleration on the same-store revenue growth side this quarter. I know it’s likes a B+ market, I think, when you gave your initial outlook. I was just curious how that market is trending versus your expectations, and if you could remind us what you think Dallas will end up for the year?

[Keith Oden, President]

Yes. So on our report card that we did last quarter, I had Dallas at – or we had Dallas at B and declining. And I think that’s still about right. I mean, we definitely have – 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.

So 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. But almost irrespective of your ratio of jobs to new deliveries, if – when you got 22,000 apartments that need to be absorbed in some fashion, if you happen to be in those submarkets or attended to those submarkets, you’re going to get smacked.

And so we laid out a plan for Dallas for 2018 that we think properly anticipated the new supply that’s going to come online. And I mean, I think as we sit here today, I think we’re still on track with where we thought we would be in Dallas for 2018. It’s going to be – Dallas and Austin and Charlotte are our three – the three most supply-impacted markets for Camden, and we think we’ve properly anticipated that for 2018.

[Vincent Chao, Deutsche Bank]

Thanks a lot.

[Operator]

And the next question comes from John Guinee from Stifel. Please go ahead.

[John Guinee, Stifel]

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, very impressed with the level of your due diligence. I think it was a little bit of a unique product, and that maybe the average unit size was bigger to target a different – the 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 costs these days?

[Ric Campo, Chairman and Chief Executive Officer]

It definitely is a unique product. So it’s 1.5 blocks from the water. It is a larger average unit size. It 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. And I think the average age there is like 46 years old. Our average age in our portfolio is like 30s – low 30s. So it is a unique asset. We think the replacement costs, it’s about 12% below replacement costs, and it was in the sort of the final stages of lease-up.

And we think it’s a great buy, given its location in St. Pete – or 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. So – and the big public investments in the Pier District that are – that have been made and are coming. So it’s a real happening place in the Tampa, St. Pete area.

[John Guinee, Stifel]

Then the second question, you’ve paid about 32,000 units for a little less than two acres in Orlando. Incredibly high density, 200 units per acre, by the way. But what do you think the total project cost would be for an asset like that?

[Ric Campo, Chairman and Chief Executive Officer]

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. And it’s 1.5 blocks or 2 blocks from like Eola, which is a really great spot in Orlando and very walkable neighborhood. And we’re really excited about that project.

[John Guinee, Stifel]

Great. Thank you very much.

[Operator]

The next question comes from Ryan Lumb from Green Street Advisors. Please go ahead.

[Ryan Lumb, Green Street Advisors]

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 physically strained local or state budgets?

[Alex Jessett, Chief Financial Officer]

So 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. So the increases that we saw last year, I don’t think, were really driven by sort of funding issues. I mean, it’s not – I think it was more an issue of they were trying to catch up with valuation increases that has happened in past years. So at one point, there were some discussions around Houston, and whether the property taxes were going to be outsized based upon funding issues in Houston, but we seem to have moved past that.

[Ryan Lumb, Green Street Advisors]

Sure. That’s helpful, thanks. And just one last one. The – 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?

[Keith Oden, President]

Yes. I don’t think that – I think it shrinks from here. And the reason for that is that we were getting pretty close to the end of the group of assets that on a catch-up basis are suitable for redevelopment. So it takes – you need to be able to get a substantial pickup in rent to make these things work. And so 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.

And if you can go in and make last-cycle product look and feel to the consumer like current-cycle product, and most people are – 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. So we’re getting pretty close to the stuff that was kind of pent-up in our portfolio that was – did have the right attributes. And so I think going forward, it’s going to be more of as things hit that magic mark in age, location and quality that we add redevelopments.

[Ryan Lumb, Green Street Advisors]

Great. That’s helpful for me. Thanks

[Operator]

And this concludes our question-and-answer session. I would like turn the call back to Mr. Ric Campo for any closing remarks.

[Ric Campo, Chairman and Chief Executive Officer]

Great. Thanks. I appreciate your time today on the call, and we look forward to seeing you at NAREIT in June. Thanks.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.