Camden Property Trust

NYSE:CPT

Earnings Call Transcript 2019-Q2

[Operator]

Good morning and welcome to the Camden Property Trust Second Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question [Operator Instructions] Please also note today's event is being recorded.

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

[Kim Callahan, Senior Vice President of Investor Relations]

Good morning, and thank you for joining Camden's Second Quarter 2019 Earnings Conference Call. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations.

Further information about these risks can be found in our filings with the SEC and we encourage you to review them. Any forward-looking statements made on today's call represent management's current opinions and the Company assumes no obligation to update or supplement these statements because of subsequent events.

As a reminder, Camden's complete Second Quarter 2019 Earnings release is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures which will be discussed on this call. Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman; 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 it over to Ric Campo.

[Ric Campo, Chairman & Chief Executive Officer]

Thanks Kim, and good morning. Our on-hold music today was courtesy of Dire Straits, and although our cost of capital has decreased over the years, we still don't get our money for nothing. However, our unique culture allows our associates to experience that ain't work, and that's the way you do it. Thanks to our Camden team members for improving the lives of our employees, our customers, and our stake holders one experience at a time. Our multifamily business continues to be strong, market fundamentals remain good as supply gets absorbed in all of our markets.

During the first half of 2019, we completed over $1 billion of debt and equity transactions designed to strengthen our balance sheet and give us maximum financial flexibility in this part of the real estate cycle. We accomplished these fundings and have been able to increase FFO guidance, in spite of having more cash earning lower rates than we originally anticipated. FFO growth per share for the quarter and the year increased 7.6% and 6.8%, respectively. We added to our development pipeline and completed the acquisition of Camden Rainey Street in Austin in the quarter. We are on track to meet or exceed our original acquisition targets of $300 million for 2019, in spite of a very difficult acquisition environment.

I'd like to take this opportunity to congratulate Malcolm Stewart on his promotion to President of Camden. Malcolm will continue in his role as Chief Operating Officer. Keith will continue his responsibilities as Executive Vice Chairman. These moves are part of our long-term succession planning initiative, creates position space for other senior executives in the future. I will now turn the call over to our new Executive Vice President, Keith Oden.

[Keith Oden, President]

Thanks, Ric. Regarding my new title, I'd like to address the biggest concern that's been expressed so far. Yes, I will continue to co-host Camden's annual Happy Hour at the summer NAREIT meeting. Now back to business.

Our second quarter revenue results were in line with our increased guidance, which sets us up for continued strong results for the balance of the year. Overall, same-store revenues were up 3.4% for the quarter and up 1.5% sequentially. Second quarter growth in our top four markets were Phoenix at 5.7%, Denver 5.1%, LA-Orange County 4.8% up, and Atlanta at 4.6%, up. As expected, our weakest markets for the quarter were South Florida, Charlotte, and Houston with revenue growth in the 1% to 2% range.

Regarding rents on new leases and renewals, second quarter new leases were up 4.1% and renewals were up 5.6%, for a blended increase of 4.9%. The second quarter 2019 blended rate of 4.9% was a 30-basis point improvement from the second quarter last year of 4.6%. July preliminaries are at 4.1% increase on new leases, 5.3% on renewals, for a blended growth rate of 4.7%. As expected, we've seen steady improvement in our new lease rates from January through June, and as is normal, the new lease pricing will begin to taper off as we approach the end of our spring-summer peak leasing season. Our August and September renewal offers continue to reflect a healthy rental environment and are being sent out at an average increase of 5.7%.

Our qualified traffic remains strong and supportive of our above trend occupancy levels across all of our markets. We averaged a strong 96.1% occupancy in the second quarter versus 95.8% occupancy in the first quarter of 2019, and 95.7% in the second quarter of last year. July occupancy is trending to 96.3% versus 96% last year. Our turnover rates continue to run at historically low rates with the net turnover in the second quarter at 46% versus 49% last year. During the quarter, our move-outs to home purchase remain low at 14.3% versus 14% in the first quarter, with both quarters well below the 14.8% for the full year of 2018.

It appears that the rising price of starter homes will continue to put a damper on home ownership.

At this point, 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 second quarter of 2019, we purchased for $120 million Camden Rainey Street, a newly constructed, 326-unit, 8-story building located in downtown Austin. We began construction on Camden Cypress Creek II, a 234-unit joint venture in Houston, Texas, and we stabilized ahead of schedule our Camden Washingtonian development in Gaithersburg, Maryland, generating a 6.5% stabilized yield. We also purchased approximately four acres of land in the NoDa neighbourhood of Charlotte for the future development of approximately 400 apartment homes, and purchased approximately 12 acres of land in Tempe, Arizona, also for the future development of approximately 400 apartment homes.

On the financing side, in mid-June we completed a $600 million dollar 10-year senior unsecured bond offering with an effective average interest rate of approximately 3.67% after giving effect to the settlement of in-place interest rate swaps and deducting the underwriter's discounts and other estimated expenses of the offering. As a result of these in-place interest rate swaps, we will recognize interest expense at 3.84% for the first 7 years of the note, and will recognize interest expense at 3.28% thereafter.

Turning to financial results. Last night we reported funds from operations for the second quarter of 2019 of $128.6 million, or $1.28 per share, exceeding the midpoint of our guidance range by $0.02. Our $0.02 per share outperformance for the second quarter resulted primarily from approximately $0.01 in higher same-store net operating income resulting from lower levels of self-insured employee healthcare costs, lower property taxes, and lower other property expenses that resulted from general cost-control measures, approximately $0.5 in better than anticipated results from our non-same-store and development communities, and approximately $0.5 in a combination of lower overhead expenses and higher fee and joint venture income.

Last night, based upon our year-to-date operating performance and our expectations for the remainder of the year, we also updated and revised our 2019 full-year same-store guidance. Because of our better-than-expected second quarter same-store expense performance, and our anticipation of lower property taxes in the back half of the year, we decreased the midpoint of our full-year expense growth from 3.35% to 2.75%.

These anticipated property tax savings in the back half of the year are primarily being driven by Atlanta and Houston, where we have both received favourable current year tax valuations and had success with prior year appeals. As a result, we are now anticipating full year property taxes for our same-store portfolio to increase it just under 3%, approximately 100 basis points inside of our original budget. The result of this decreased expense guidance is a 35 basis point increase to the midpoint of our 2019 same-store NOI guidance, from 3.4% to 3.75%.

Last night, we also increased the midpoint of our full year 2019 FFO guidance by $0.02 per share, from $5.07 to $5.09. This $0.02 per share increase results from our anticipated 35 basis point, or $0.02 increase in 2019 same-store operating results -- $0.01 of this increase incurred in the second quarter, with the remainder anticipated over the third and fourth quarters, and an approximate $0.01 from our second quarter outperformance not associated with same-store results. This $0.03 aggregate increase in FFO is partially offset by the approximately $0.01 combined impact of our $200 million larger than anticipated June bond issuance and the timing of various real-estate transactions.

Last night, we also provided earnings guidance for the third quarter of 2019. We expect FFO per share for the third quarter to be within the range of $1.26 to $1.30. The midpoint of $1.28 is in line with our second quarter results. As expected, sequential increases in revenue are offset by the typical seasonality of our operating expenses and the incremental contribution from our development and acquisition communities are offset by additional interest expense resulting from our June bond offering.

Our balance sheet remains strong with net debt to EBITDA at 3.9 times, and a total fixed charge coverage ratio at 6.4 times. We ended the quarter with no balances outstanding on our $900 million unsecured line of credit, and $150 million of cash on hand. 98% of our debt is unsecured, and 99% of our assets are unencumbered. We have $577 million of on-balance sheet developments currently under construction, with $311 million remaining to fund over the next 2.5 years.

At this time, we'll open the call up to questions.

[Operator]

[Operator Instructions] And our first question comes from Nick Joseph of Citi. Please go ahead.

[Nick Joseph, Citi]

Thanks. Just looking at your weighted average monthly revenue per occupied home, it looks like it's about 40 basis points below the rental rate growth. I'm wondering, what's the drag from other revenue that's causing that? And then how do you expect that to trend for the remainder of the year?

[Alex Jessett, Chief Financial Officer]

Yes, absolutely, because we have higher occupancy, and because we're having lower turnover, what we're starting to see is the incremental impact from damage and cleaning fees and bad debt is coming down on a year-over-year basis. That's the impact of what you get when people just aren't moving out.

[Nick Joseph, Citi]

Would you expect that, kind of that spread between the two to continue for the rest of the year? Are you expecting turnover to pick up?

[Alex Jessett, Chief Financial Officer]

At this point, we're anticipating that although we're having exceptionally low levels of turnover, we think generally it's going to stay fairly low for the rest of the year.

[Nick Joseph, Citi]

Thanks. And then just on the land purchases, you bought more in the quarter, what are you seeing in terms of pricing there? And maybe tie it to what you saw earlier in the cycle for land pricing.

[Ric Campo, Chairman & Chief Executive Officer]

Land prices definitely have increased, along with everything else with costs and what have you. And so while land prices have increased, the idea that land price -- that construction costs, along with land prices, have driven yields to the point where it's not -- some of the projects aren't making sense. So, I think sellers are adjusting and making sure that they can sell at some level. So, I don't think that land prices are continuing to rise as fast as they were given the difficulty of underwriting today, in today's environment.

[Keith Oden, President]

And also, Nick, just to add to that, the Phoenix site that we bought is something that we've been working on for the last several years. So that's reflective of pricing that was two or three years ago. And the site in Charlotte is an emerging market for sure, and we have had great success in kind of getting ahead of where the growth is coming. So, we felt like we got a really, an attractive price for that site as well.

[Operator]

Our next question comes from John Kim of BMO Capital Markets. Please go ahead.

[John Kim, BMO Capital Markets]

Thank you. Can you remind us what percentage of your same-store revenue comes from multifamily rents versus fees retail rents and other income items?

[Alex Jessett, Chief Financial Officer]

I would say it's probably pretty close to about 95%, but we'll have to get back to you on that.

[John Kim, BMO Capital Markets]

Okay. And Alex, and the answer to the prior question, so the lower other income, is that all turnover-related fees or were there, was there an impact on like technology [Speech Overlap]?

[Alex Jessett, Chief Financial Officer]

Yes, the largest component of it, as I said, is turnover related. So it's, if you think about damage fees, cleaning fees, and bad debt. Now there is a slight component that's associated with the tech package because obviously we finished rolling out the tech package last year, and so we're not really getting that much of an incremental impact in 2019. But that's a slight component of it.

[John Kim, BMO Capital Markets]

And you don't expect turnover to go up with new lease growth being so strong?

[Alex Jessett, Chief Financial Officer]

I would tell you if you would have asked us this question last year, we expected turnover to go up, and it continues to stay at record low levels.

[Ric Campo, Chairman & Chief Executive Officer]

Part of it is this whole idea that when you think about in-migration to different markets and about the way people move around in the country today. They just don't move as much. And that's been a trend for the last two or three years, and a lot of it has to do with the unemployment rate being so low everywhere. So people sort of think they don't have to move to another hot city to get a better job because their job, the jobs in the cities they're in are doing well, given the low unemployment rates. So you started to see migration rates slow and a lot of different markets, and that just keeps people kind of in their apartments longer because they're not moving around.

[Operator]

Our next question comes from [Leigh Wu] of Bank of America. Please go ahead.

[Unidentified Analyst]

Hey guys, good morning and thanks for taking the question. So could you guys talk about some of the markets that you've seen outperformance or markets that have lagged your initial expectations? And any extra color on what's driving that outperformance versus underperformance would be great.

[Keith Oden, President]

Leigh, if you were to line up our results halfway through the year with our initial letter grades that with it, we issue at the beginning of each year with our guidance, I would tell you that there is not, there is not a single one that I would change other than maybe a plus to a minus here and there. So we're really tracking about as we expected we would across our entire platform. I mean, in the second quarter, obviously, we do a reforecast from our original for our regional guidance.

We do a reforecast every quarter. On our -- on $250 million worth of revenue forecasted for the second quarter, we were within $100,000. So pluses and minuses here and there, but nothing that would even be worth calling out to your question. The markets that we expected to be at the top of the charts are there and then obviously the weaker markets -- the Houston, Charlotte, and South Florida -- are the most impacted by new supply relative to job growth and that's, again, that's pretty predictable, and was predicted.

[Unidentified Analyst]

Great, so could you guys maybe talk about maybe the Houston market a little bit more? And also your development in lease-up, your McGowen Station, how that's been doing versus initial expectations.

[Keith Oden, President]

Yes. So, Houston is, again we, at the beginning of the year we projected it to be one of our weaker markets and primarily because just the geography of the competitive set, and the units that have gotten, that were delivered in 2018, they are still in the process trying to get absorbed. There were so many apartments that were delivered in the midtown and downtown area that all of the new developments, and as well as existing assets have suffered by the competitive nature of merchant builders trying to get to the finish line.

The challenge has been that the merchant builders are not getting to the finish line. Most of them thought their downtown and midtown assets would be -- would have been stabilized by the end of 2018 and it just hasn't happened. There is a -- so one of the things, even though Houston created almost 80,000 jobs, or is on track to create 80,000 jobs this year, the nature of those jobs is a little bit of a mismatch with the high-end product that got built in midtown and downtown.

The jobs that have been created, by and large, are hospitality, retail, construction to a certain extent, but the sector that has not participated in job growth is the energy sector. So all of the large integrated oil companies, which are still primarily the preponderance, are located in the downtown area for their office space, they're just not on a hiring mood and it remains to be seen when that's going to happen. You don't have to go back to really a little over three years ago.

The energy companies were just finishing their downsizing, and the recency effect of having to lay people off and then fast forward three years later, there is a great deal of reluctance to start increasing head counts. So I think the energy companies are kind of doing more with less, and at some point that will reach a breaking point and they'll start hiring again. But in the meantime, the jobs that are being created even though they, it looks good in terms of aggregate numbers. They're not jobs it necessarily support the kind of rents that you need to live in the midtown and downtown area.

[Operator]

Our next question comes from Trent Trujillo of Scotiabank. Please go ahead.

[Trent Trujillo, Scotiabank]

Hi, good morning. I just wanted to go back to revenue. So the operational update you provided earlier this quarter at NAREIT that was showing a blended rate growth of 4, 7 through May, and there some overtures that it could accelerate further in June based on historical trends, which would possibly lead to raising same-store guidance. So it sounded like it had picked up. So how much thought did you give to raising same-store revenue guidance, given where first half came in?

[Ric Campo, Chairman & Chief Executive Officer]

Yes. So, if I -- as I mentioned, we did the reforecast for our second quarter and we ended up almost exactly on top of where our reforecast was, so based on that we have -- we feel like we have really good visibility for third and fourth quarter and obviously we've gone through the reforecast for that. So we still feel very comfortable with our guidance that we've reiterated. We did raise revenue guidance last quarter, and we've maintained it for this quarter. And so we're comfortable with where we are in terms of where we think the end of the year will shake out in a 3.4% total revenue increase.

[Trent Trujillo, Scotiabank]

Okay, that's helpful. And then shifting, I guess going back to acquisitions. You've alluded to achieving or even exceeding the high end of your range. Could you give some indication as to what's in your pipeline and the confidence that you can put to work all the capital that you have raised so far?

[Keith Oden, President]

Sure. We have -- the last chart I looked at had like 14 properties that were in excess of $1 billion that we had in various states stages of due diligence, in terms of whether we were going to going to try to be the ultimate winner. The interesting thing about acquisition guidance is you can always hit your guidance if you're just the highest bidder. And we try to be as disciplined as possible in this very, very aggressive acquisition environment.

And so I think we have better confidence today in that, in that the properties that we're looking at now are -- we think there are several that are in the sort sweet spot of what we're looking for. What we're looking for is newer properties that haven't stabilized or have management issues and we think there are going to be some opportunities for us to to at least meet our guidance, and hopefully exceed it.

[Trent Trujillo, Scotiabank]

Okay, and one -- sorry. One quick follow-up, maybe for modeling purposes, on recurring CapEx, you spent about $31 million year-to-date and I realize, fully realize, that this spending can be lumpy. But are you still comfortable with the original guidance of $68 to $72 million for the year?

[Alex Jessett, Chief Financial Officer]

Yes, we're still comfortable with that.

[Trent Trujillo, Scotiabank]

Okay, thank you.

[Operator]

Our next question comes from Daniel Santos of Sandler O'Neill. Please go ahead.

[Daniel Santos, Sandler O’Neill]

Hey, good morning. Thanks for taking my questions. Just two quick ones from me. The first one is on the management shuffle, should we expect any G&A impacts from any internal promotions? And then other than maybe who is going to host NAREIT Happy Hour, are there any changes in role responsibilities?

[Ric Campo, Chairman & Chief Executive Officer]

The answer is no to both.

[Keith Oden, President]

Unfortunately, the answer is no, especially NAREIT.

[Daniel Santos, Sandler O’Neill]

Fair enough, fair enough. And then second, are there any sub-markets where you're starting to get maybe a little nervous about supply that's coming down the pike, that's making you maybe consider your -- reconsider your exposure in the future?

[Ric Campo, Chairman & Chief Executive Officer]

No. The thing I think that's been a very interesting and positive about this cycle, is that, this real estate cycle, is that, is that all markets have been able to absorb their supply even in the supplies that are at peak levels. We think next year we start seeing some moderation in the peak at some, in some markets. But the good news is we've had enough job growth and had enough, enough stickiness of the existing customer base, is that the fact that we have lower turnover means we don't have to find as many new residents.

And so that, in combination with a decent job growth market and great situations in each city, you've been able to absorb the supply without having a major negative impact. Now clearly markets like Charlotte and Southeast Florida -- maybe Charlotte is a great example where you've had a lot of supply, but you've had great job growth to back it up. And while it's moderated, it's put a damper on big rent increases for existing properties. You're still positive, maybe 1% or 2%, and in light of how much supply is coming on, I think that's a very good backdrop. So ultimately the real question for us, longer term, is where are we in the cycle?

And then when you look at projections out further, the question of with an unemployment rate in the threes, and how do you get -- where do you find the people to add the jobs? There's jobs available and the economy is doing well, but there is a lot of concern about job growth, the ability of job growth slowing as a result of the inability of people to find people to actually take those jobs. Heretofore we've had, at least the last year, there has been people coming out of the -- back into the workforce, and what have you, to fill those jobs. But generally supply is, it's been really good and well-absorbed.

[Daniel Santos, Sandler O’Neill]

Awesome, that's it for me. Thank you.

[Operator]

Our next question comes from Austin Wurschmidt of KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt, KeyBanc Capital Markets]

Hi, good morning. Thanks for the time. So I want to go back to last quarter's call. As we were discussing new lease rates and the expectation that new lease rates wouldn't push much higher than the 2.8% you achieved in April, but in fact you did see significant improvement in May, and June also seemed strong. So I guess I'm also curious what may have offset the benefit from the higher new lease rates, as it seems like renewals are pretty much in line with expectation, and that you're tracking above the 3% to 3.5% blended lease rates that I believe you assumed in your initial outlook.

[Keith Oden, President]

Yes. So we're, our guidance assumes total revenue growth of growth of 3.4%. We were 3.7% in the first quarter. So clearly we -- and when we do our reforecast and looking out. It's just the fact is that some of our markets, in particular Houston, Charlotte, a little bit of, a little bit in South Florida, and also beginning to see signs in Austin that just the constant backdrop of too many apartments being delivered in markets and sub-markets where we're competitive with that new supply, is at some point it takes a toll. And obviously I think you're seeing some of that in those, in those four markets, and we expect that to continue throughout the balance of 2019.

Now the good news is we still have markets that are doing 5% plus on blended growth rates, and those are going to continue to help. But clearly when you're modeling, you're 3.7 in the first quarter you we maintain guidance it raised it to 3.4, but maintained at 3.4. The math is pretty simple that you're going to see some deceleration and in blended average rental rates through our total revenues through the third and fourth quarter. And that's what we expect. But, and we think it's moderate in terms of the deceleration that we could see in the third and fourth quarter. And if we get to the end of this year and we have another print of 3.4% total revenue growth on top of what we had in the last couple of years, we will probably all shake our heads and say job well done.

[Austin Wurschmidt, KeyBanc Capital Markets]

Yes. I appreciate the thoughts there. And that kind of leads a little bit into my next question. You gave a little bit of a glimpse into 2020 supply and as well as how '18 and '19 were shaken out, but as we sit here today, I am curious -- how '19 playing out heretofore, versus your expectation? And are you just assuming what wasn't delivered in the first half gets delivered in the second half? And then how was Ron Witten's forecast for '18 from initial projection perspective? And then what ultimately played out in '18?

[Keith Oden, President]

Yes. So Witten, which is who we primarily used for completions on, across our platform, right. The actuals for 2018 were about 137,000 deliveries across our platform, which was a little bit less than what we had it at his original -- if you go back 12 months prior he was off by about, about 8,000 apartments. He had a 145,000 plus or minus being delivered in 2018 and the consequence of that, as you just mentioned, that ends up rolling into 2019. 2019 currently he has almost spot on with 2018, at a 137,000 again.

So there is movement around in our platform, but the aggregate deliveries across our platform almost identical from actuals of 2018 to what he's projected in 2019. Where it shows up is that now, whereas for two years, we were sort of pointing to, and everyone was pointing to 2019 being in the peak deliveries nationally, and we thought that would play out in Camden's portfolio as well.

But based on Witten's new numbers for 2020, which he has going up from 137,000 to 151,000, clearly some of that 6,000 has rolled -- 8,000 from '19 rolled to '19, and another 8,000 or 9,000 from '19 is now rolled to 2020, and it looks like 2020 is going to be the peak. I hope that we're finally reaching the actual peak for deliveries across, across our platform. He's got them coming, starts coming back down in 2021, but not a huge amount.

So, I think it's very likely that the rollover from '18 to '19 continued, and will continue throughout 2019. And I hope that we have -- we're going to see the peak deliveries of something around -- somewhere around 150,000 completions in 2020.

[Austin Wurschmidt, KeyBanc Capital Markets]

And what percent of the 137,000 in 2019 is expected to be delivered in the second half of the year or absolute numbers?

[Keith Oden, President]

Yes, I don't have that in front of me, but I mean it's -- I'd be surprised if it wasn't pretty equal across our platform where there's not a whole lot of seasonality in how and what we build, with the exception of Denver.

[Operator]

Our next question comes from Haendel St. Juste of Mizuho. Please go ahead.

[Haendel St. Juste, Mizuho]

I wanted to follow-up on an earlier question. Can you actually talk a little bit about the timing of the development starts for the new land purchases in Charlotte in Tempe, and what type of yield ballpark are you currently projecting there?

[Ric Campo, Chairman & Chief Executive Officer]

Sure, the starts for those units will be toward the end of this year and beginning of next year and the, mostly 2020 starts, when you get down to it. In terms of development yields, the yields were -- our yields in our pipeline are anywhere from 5% roughly on the high-rise urban and about 6.5% on our suburban. And just to give you some color, there's been a lot of discussion about yields, yield compression because of cost increases going up faster than rental rates. In our last book of business, our ranges were 5 to 7.5, and now they're about 5 to 6.5.

[Haendel St. Juste, Mizuho]

Okay, that's helpful. But maybe you could tell me what type of -- I'm assuming the stabilized yield you're protecting there, so maybe some color on the projected rents and expense increases you're projecting as part of that?

[Ric Campo, Chairman & Chief Executive Officer]

Yes, you're talking about rent increases in the development?

[Haendel St. Juste, Mizuho]

Yields, I'm assuming stabilized yields you quoted, just curious what embedded within them.

[Ric Campo, Chairman & Chief Executive Officer]

Yes. So that, it depends on the market, but generally we're not inflating our rents much more than 2% or 3%, given where we are in the current market. And generally what we do is -- we do two methods of analysis. One is un-trended returns and the other is what we expect the returns to be, and those are the returns I just gave you. And I think the rent increases are, like I said, anywhere between 2% and 3% max, and operating costs, we're inflating them at pretty much at 2% to 3% as well.

[Haendel St. Juste, Mizuho]

Okay. I'm curious about the Charlotte development in particular. Given the relative revenue weakness and the supply commentary you mentioned earlier on that market, I guess I'm curious what about that project specifically gives you the confidence to start that in light of your earlier commentary?

[Ric Campo, Chairman & Chief Executive Officer]

Well, as Keith said earlier, the noted -- it's Charlotte NoDa, which is a on the rail line and it's basically north of downtown Charlotte. And we're going to start construction on that project and in January of '20. And so it's not going to deliver really effectively until end of '21, or middle of '21, into '22. And the Charlotte market while, while it's having some issues now with absorption, over time it's one of our best markets and we think that fundamentally that this project will, given where it is and on the rail line, that it will absorb into the market the way the other ones are absorbing in the market today, which would be a very positive reasonable yield and another great asset for us in Charlotte.

[Haendel St. Juste, Mizuho]

That's helpful, thanks. And one last one if I may. I don't know if I missed it earlier, but maybe you could share some color on the initial yield for the Austin acquisition and maybe some of the longer-term operating upside, if there is any there? Thanks.

[Ric Campo, Chairman & Chief Executive Officer]

So, we were trying to buy our models. Our acquisition program today is to buy assets that are, that are either -- that have not been stabilized from a lease-up perspective and this, and the Austin asset, we would definitely categorize it that. And then at a below replacement cost, somewhere between 10% and 20% below replacement cost, and then having upside to be where we can bring our management team in, bring our technology packages in, and then drive, drive cash flows up.

So generally the theme of that is you're going to buy properties that are in the low fours, four-and-a-quarter-ish, kind of, kind of existing cap rates and we're going to try. Within -- we think fundamentally within a couple of years, we'll be able to get it up to a five cap rate in terms of by implementing Camden revenue management systems and technology packages and what have you. That would be the model we're looking for, and that's pretty much where Austin is.

[Operator]

Our next question comes from Drew Babin of Baird. Please go ahead.

[Drew Babin, Baird]

Question on maintenance CapEx, it ran a little high relative to our estimates, kind of on a per-unit basis in the second quarter, and I guess it's a sign of trends. The same factors influencing development costs, influencing CapEx, and maybe there is kind of a per-unit number that you think is kind of budgeted for this year, if you could remind us what that is?

[Keith Oden, President]

Yes. So what I would tell you is it's entirely timing based. So, if you looked at our original guidance, it was $68 million of $72 million, and we anticipate being right in that range. So, what you saw in the second quarter, as compared to your model, is probably just a little bit of a timing issue.

[Drew Babin, Baird]

Okay, that's helpful. And a question on Southeast Florida -- obviously that's the market that maybe the job growth has been as hot as the rest of the sun belt. Obviously there is some supply there. Can you talk about who is adding jobs there and what types of factors might get that market going again? And could a currency fluctuation or something like that possibly maybe bring more activity in? Just based on your experience in the market I was hoping you can maybe give some color there.

[Keith Oden, President]

Yes. So I think if you take Witten's numbers for projected job growth in Fort Lauderdale, 12,000 jobs -- or excuse me 27,000 jobs end of this year, and that drops a little bit into 2020. Same thing for Miami -- Miami, Witten has got 2019 jobs at 20,000, going to 14,000 in 2020.

Given, the amount of new supply that's been delivered in both Miami and, and Fort Lauderdale, not just in rental apartments, which is what you think of is our direct competitors, but the number of for-sale condos that have been delivered across those two CBD's is just kind of crazy. So it doesn't show up -- it doesn't necessarily show up in the stats on employment growth compared to completions. But it is a really significant factor in both of those markets.

Job growth hospitality continues to be construction jobs, continues to be a big piece of the equation, just because of all the construction activity, and not just residential, but also commercial construction activity. But I don't, I don't think it's the character of the jobs in the Miami, Fort Lauderdale markets. I just think it's the amount of supply of both for-sale and for-rent product that we've had to try to absorb there.

[Ric Campo, Chairman & Chief Executive Officer]

To your point of currency valuation changes and what have you, I think there is definitely an impact on Southeast Florida, given it's sort of the capital of South America, if you want to call it that, or Central America. And you have seen when there are times of volatile currencies issues down, there is, there has been flight capital and folks that have come into the market.

And a lot of the condos that Keith is talking about that are competing with apartments are actually people generating hard currency that are South American owners that are just trying lease a very expensive apartment or condo cheap, in order just get some hard currency. So it's an interesting market. Long term, it's a great market, but it is just has a few headwinds right now.

[Drew Babin, Baird]

Okay. That's all helpful. And just one last quick question on Southern California, obviously your performance in that market looks better than peers, kind of as a product of what you own and where you own it. The last couple of quarters, it seems like the revenue growth has been more occupancy gains and decent rental rate growth and maybe not performing rental rate growth, but still kind of in the upper two's. I guess, have you seen anything so far in the third quarter that would indicate any kind of marginal softening in Orange County, or near San Diego, or have trends, the kind of trends in the first part of the year kind of continued? So you still expect to do pretty well in those markets?

[Keith Oden, President]

I think that that LA-Orange County and in our San Diego platform, as you mentioned, were -- we have a little bit different geography than most of our comps do. I think that the strength that we've seen for the last two quarters was we modeled that strength. And so I think when you look out on our reforecast, it looks like it's going to continue. Yes, we've had the occupancy gains in both, both those markets but that's been true across our entire platform.

I think I gave in the prepared remarks a preliminary number of of it looks like we're trending in July toward the 96% occupancy, which is, as you all know from long years of doing this with us, that's really unusual in our portfolio. And where we've operated in the 95% to 95.5% range for so many years that it feels a little bit unusual to be in the 96, is much less 96.3, so that -- the occupancy pickup is not just a Southern California phenomenon, but it's really pretty much across our entire platform.

[Drew Babin, Baird]

So I take that I mean rental growth trends, as far as leasing activity, so far into the third quarter are pretty much on target with budget?

[Keith Oden, President]

They are.

[Drew Babin, Baird]

Okay, that's very helpful. Thank you.

[Operator]

Our next question comes from John Pawlowski of Green Street Advisors. Please go ahead.

[John Pawlowski, Green Street Advisors]

Thanks. On the acquisition front, would the Pure multifamily portfolio have met your quality criteria?

[Ric Campo, Chairman & Chief Executive Officer]

It would not have met our existing quality criteria at this point. It was definitely an interesting portfolio and an interest print, pricing wise. We evaluated the portfolio and it was -- the challenge for us with it was number one, it wasn't in that kind of sweet spot that we're looking at today. And number two, it was highly concentrated in Dallas with some suburban properties that we are really excited about. So there -- and there were a lot of sort of other issues around it and we would not ever been as aggressive pricing wise that it ultimately traded at.

[John Pawlowski, Green Street Advisors]

And then just a broader question on portfolio acquisitions, what is the appetite? I know pricing matters and markets matter. What is the appetite to do just larger portfolio deals right now?

[Ric Campo, Chairman & Chief Executive Officer]

For the right product in the right portfolio, it would be, we'd be fine, doing a large transaction. I think the challenge you have with large transactions, and not Pure is probably a good example of it, I think if Keith was asking this -- answering this question on Pure, he would say there are three properties in the whole portfolio that we would, that we would have wanted to buy. Now on the other hand, you might change your strategy from an acquisition perspective. If the pricing was where you wanted it to be, and you could change your criteria too, if you thought there was value to be had in it.

I think the challenge you have with portfolios just fundamentally is that they tend to be -- have assets in them that you don't really want. And you so you kind of have to take them to get what you want. And then the question is how much, what percentage of the portfolio is something you really want to want to buy? And then what are you going to do with the other ones that you don't want to buy, that you have to buy? Are you having to pay a price where that you think you can either move out of them are trading around in the future?

So, often times we see these portfolios and go, let's, if we wanted to buy a $1 billion of properties or $1.2 billion of that properties like Pure had, we're just going to be the highest bidder on, on 12 $100 million projects that we want to buy. And so, to me, unless there's something strategic around it, or the pricing is so good that you kind of want to do that kind of business, that's why we don't, we haven't done a large transaction in a while. It's just, there is the pricing today is very robust for everything and actually you probably get a premium for if you're a seller of a large portfolio today.

[John Pawlowski, Green Street Advisors]

Okay. Is the pricing getting irrational or too irrational in any market where you'd consider ramping dispositions right now?

[Ric Campo, Chairman & Chief Executive Officer]

You know what? I don't think it's irrational. I think, because when you look at the map on Pure or in the math that we're seeing on these other properties, people will just reduce their return requirements to a certain extent, and multifamily fundamentals continue to be reasonable even in, even in markets that are oversupplied or that have lower rent growth because they're oversupplied from that perspective. I haven't seen any like real head-scratchers.

When it comes to dispositions, we have sold a lot of properties over the last, in this last cycle. And we've traded out 20-plus year old assets for newer properties in the four to five year range and funded -- used dispositions to fund development as well. And so we don't have a lot of assets that we really want to part with right now. But-- so I don't, I don't think we felt like the market is so irrational pricing-wise that I got to get in there and sell into it.

Because when you sell into it, the question is, do you think prices are going to, going to go down or be able to, so we can redeploy that capital? And given the interest rate cycle we're in, given the length of the recovery, and given the fundamentals for the business, it's really hard to make a case for apartment cash flow and cap rates to change dramatically right now. So the answer would be no.

[Operator]

Our next question comes from Karin Ford of MUFG. Please go ahead.

[Karin Ford, MUFG]

I wanted to ask about the management transition. Should we be expecting more management changes near-term as part of the succession planning? And Ric, how should we be thinking about your tenure?

[Ric Campo, Chairman & Chief Executive Officer]

So I don't think you should anticipate something next quarter or the quarter after that. So this is a -- we've been in succession planning mode for quite a while. I do have my 65th birthday next week, and so I'm glad we didn't do the conference call right on that day. But Keith and I are -- and Keith's younger than me, by the way.

[Keith Oden, President]

And always will be.

[Ric Campo, Chairman & Chief Executive Officer]

So -- he will be. And really I know, Malcolm is probably going to hit me for saying this. He is actually slightly older than me. So when you think about, when I think about about succession planning, I think you have to, especially in a culture like Camden, we are going to internally grow our next tier of management. And they're all with Camden right now. So Keith and I have, and have had for a long time, a long-standing succession plan with our board. So, and I know some people on the call have asked this a specific question and we told them about it. So each year, at the beginning of the year we commit to a three-year term. And that it's basically a letter that we sent to the Board that says, Keith and Ric are going to stay for three years.

If there is a reason or they don't, we don't still fulfill that commitment, maybe a health issue or something like that, then the person who doesn't fill it -- so if I didn't make it through that 3-year, Keith agreed to stay. The person that doesn't make it agrees to stay at least 2 years for transition. So both of us are healthy, we love Camden, we love our structure, and and we plan on being here for a while. The question is, and now creating space in the organization, allows our most senior people to get more experience in areas that they, that they may not have as much experience in, which positions us ultimately for transition.

So, that transition is going to happen in the future. Is it next year, the year after, or the year after that? I don't know, but it's a well thought-out program, and we fundamentally believe that our next generation of leadership, we have them at Camden now, and we want to make sure that they stay at Camden. And so that's one of the reasons for the, sort of the opening up of the space in the titles.

[Karin Ford, MUFG]

Okay. That sounds good. And then my second question is at NAREIT you called out Washington D.C. as performing better than planned. It ended up decelerating 90 basis points in the second quarter and now you're saying everybody is in line with plan. So has D.C. fallen off at all? And are you starting to see any demand impact there from HQ2 yet?

[Keith Oden, President]

So for the second quarter, D.C. was at 3.8% revenue growth, which would place it as the fifth-highest in our in our portfolio. So I called out the top four, the next one would have been would have been D.C. Metro. So out of 15 markets, it would be fifth, which it's been a long time and our, in Camden's world since D.C. Metro have been in the top five. So, I'm not -- I don't know about the NAREIT, the comparison to the NAREIT. But in, in our world 3.8% in D.C. Metro for the quarter is a really good quarter.

And I would tell you that the commentary from our D.C. Metro operating staff on our, on the call that we do quarterly with our, to get an update on market conditions, is the most positive and constructive tone that I've heard out of our D.C. Metro operations team in probably three or four years. So all that to me bodes well for continued good performance in our DC Metro portfolio, which over the last two to three years has outperformed most of our peer group, and a lot of that just has to do with our geography in the D.C. Metro area versus a lot of our peers.

[Operator]

Our next question comes from Hardik Goel of Zelman. Please go ahead.

[Hardik Goel, Zelman]

Hey, guys, thanks for taking my question. I just wanted to kind of wrap together a bunch of different questions, I guess, that were already asked and just talk about capital allocation and how you guys kind of think through it. You guys have talked about the acquisition environment being really aggressive and hard to stay disciplined if you want to win deals. You were also filling in your pre-development pipeline. Is the option here to build more? What is your starts outlook like longer term, but specifically in 2020? And how do you think about the incremental dollar invested today and what to do with it?

[Ric Campo, Chairman & Chief Executive Officer]

Well, the incremental dollar, if we can't -- if given the spread between acquisition pricing and development, if we could make the development, just wave a wand and make the development pipeline larger, we would, we would be -- we would definitely err on the development side. So next year, we have -- between sort of late this year and next year, we have $210 million of that would be the Phoenix project and the Charlotte project too, those are $210 million.

And then the late starts this year with our, with two projects in, one in Atlanta, one -- and I'm sorry, one in Florida, and one in California, it's $180 million. So when you add those two together, that's $370 million that could start or should start between the end of '19 and through '20.

But again, we would definitely be a -- more development-oriented than acquisition-oriented, even though I think the challenge that we have with development is getting projects that actually cancel. So that's why we'll do a combination of the two, and try to find those, those sort of diamonds in the rough that we can drive the earnings growth over a couple of years in this environment up pretty dramatically, so we can get them up into fives.

[Hardik Goel, Zelman]

Thanks so much for that detailed response. Just a quick follow-up, when do you think about development in the markets, is it very case-by-case and project-specific? Or are there a few markets where construction costs are less of a burden or they're increasing less? We hear from your peers that construction is really difficult in some markets, where that can be easier in others. Which are the markets that you're kind of focused on today?

[Ric Campo, Chairman & Chief Executive Officer]

I think that all markets are definitely the same in terms of construction cost and time. It takes longer to build today because of lack of construction workers. But I think each market is definitely unique, and we're trying to find those sort of projects in the markets we operate in that we can make those numbers work. And there, I don't think there's any easy market or, but, there -- or a market where you can't find something. That's probably more difficult in California, because all of the California issues, than it is in some of the other markets.

The California project that I talked about for a start at the end of this year or early next year, that we've been working on it for three or four years, or longer. And so generally speaking, I think you hit the nail on the head, that it's hard to build everywhere. And if we could expand the pipeline, we would if we could get reasonable yields and that's where we're constrained, is the discipline on making sure that we're not investing that, that incremental capital at a return that isn't in our core guidelines.

[Keith Oden, President]

I'm guessing that when you're hearing from our peers about hard and easy to build in, they're probably referring to the entitlement process, not the cost pressures. Because cost pressures are significant relative to what underwritten yield you're trying to achieve that makes sense. There's -- hard in Houston, Texas, as it is, and Southern California.

On the other hand, the actual regulatory regime and the entitlement process is a different animal in California versus Houston. So, it's, you would just have to -- you would have to put them on an array, but the array of hard to easy, or relatively easy entitlement process, would start with California and probably end with some of our Texas markets. And then the others would be spread along the way. But there the cost pressures are significant and real across all 15 markets that we're trying to operate in.

[Operator]

Our next question comes from Rich Anderson of SMBC. Please go ahead.

[Rich Anderson, SMBC]

Hey, thanks, hopefully I'm the last question. But when I was reading Keith's bio, I I have to say, you guys are remarkably spry for the amount of time that you've been doing this, and so credit to you. And I was going to ask the question, what's the end game as you guys start to consider closing out your career succession, go private, or some sort of combination? It sounds like the answer, if I were to answer for you, would be succession which is great. But when you -- are things like levering up, and going private, or some sort of reverse merger, since you would ultimately financially have to be a buyer in a public-to-public type thing, but where your portfolio would improve another, where the reverse would not be true in your eyes, I'm assuming? Are those two other alternatives completely off the table for Camden at this point? Or -- I just wondered if you could comment on that.

[Keith Oden, President]

I think they are totally unrelated to succession, right?

[Rich Anderson, SMBC]

Yes, that's fair.

[Keith Oden, President]

Yes, because to me the issue of what you do with Camden -- as an entity, or assets, or how you drive total shareholder return, and how you compete in the marketplace -- is one issue. And then I would never connect a succession issue to a financial transaction that is either good or bad or indifferent for Camden shareholders. So I think that -- and when I think about Camden as a, the CEO-Chairman and large shareholder, I think about maximizing the ability of the Company to be -- to have longevity, and to compete in the marketplace effectively in the top quartile of returns.

And so if there was a private transaction, or a public transaction, or any transaction where we could drive that objective, then we would do it. I think each kind of, each transaction that you mentioned has their own issues and own risks and things. But they're definitely not related to Keith and my longevity or spryness or succession plans. And so ultimately I think a great long-term business -- this is a great long-term business. We've been doing it for 26 years, almost, going on 27 now and have had great returns and created a lot of value for shareholders over the years. I think it will continue. How, but ultimately the the question about what we do I think be unrelated to what Camden does or what we do as a company, from that perspective.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Ric Campo for any closing remarks.

[Ric Campo, Chairman & Chief Executive Officer]

Great. Well, I appreciate the time today, and the consideration. Have a great rest of your summer and we'll see you on the circuit in September. So take care, thanks.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.