Camden Property Trust

NYSE:CPT

Earnings Call Analysis

Camden Property Trust Experiences Steady Growth Amid Challenges

In the third quarter, Camden Property Trust achieved a core FFO of $1.71 per share, beating guidance thanks to lower expenses and increased fee income. The full-year same-store revenue growth is now projected between 1.1% to 1.5%, with the midpoint at 1.3%. The company is starting $375 million in new developments in early 2025 and plans an additional $300 million by late 2025 or early 2026. Despite slight declines in rental rates, occupancy remains high at 95.5%. The goal for Q4 core FFO is projected between $1.68 and $1.72 per share, reflecting seasonally adjusted expectations.

Navigating Uncertain Waters: The Impact of Hurricane Season

The recent hurricanes in the Southeast presented challenges; however, Camden Property Trust managed to weather the storm with minimal damage. The company attributes this resilience to their commitment to quality construction and proactive measures. Such preparedness not only protects current assets but also reinforces resident satisfaction, indicating strong operational stability.

A Steady Financial Performance Amid Market Fluctuations

In the third quarter, Camden reported a core FFO of $1.71 per share, exceeding prior guidance by $0.03. This success was largely fueled by lower operating expenses and increased fee income, resulting in sound financial health. The company's ability to maintain revenue growth despite challenging conditions is commendable, with a full-year same-store revenue growth guidance set between 1.1% and 1.5% and consistent expense growth expected within 2.1% to 2.5%.

Future Developments: Significant Growth on the Horizon

Camden's development activities are set to ramp up, with $320 million worth of new projects initiated in 2024 and an additional $375 million planned for early 2025. This shows confidence in long-term growth trends, despite a cautious approach to current projects. The anticipated $300 million development slated for late 2025 or early 2026 further underscores Camden's strategic positioning for future growth.

Adapting to Market Dynamics: Changes in Development Strategy

Management has pivoted from ambitious urban projects to suburban developments, shifting focus to areas with stronger demand. This transition comes in light of high construction costs and changing consumer preferences, as suburban markets are beginning to outperform urban areas, driven by demographic trends. This strategic realignment might enhance long-term revenue streams, adapting to current market demands.

Short-Term Challenges: Rental and Occupancy Trends

Despite strong apartment absorption rates, Camden faced a slight decline in new lease rates by 2.8% and moderated renewal rates. Overall occupancy averaged 95.5%, anticipating a slight drop in Q4 expectations. While overall bad debt remains stable, management sees conditions in urban markets like LA and Atlanta as potential areas of concern, meaning monitoring these markets closely is key for investors.

Optimistic Projections for 2025: An Eye on Future Opportunities

The company expects a positive earnings trajectory, with a core FFO for Q4 projected between $1.68 and $1.72 per share. With continued job growth forecasted at approximately 440,000 across Camden's markets in 2025 and reduced supply expected, the positive outlook suggests potential for increased revenue growth. Furthermore, bad debt is anticipated to decline to around 50 basis points, reflecting management’s strategic efforts to stabilize these metrics.

Capital Allocation Strategy: Focused and Disciplined

As it stands, Camden currently shows strength in its balance sheet with a net debt-to-EBITDA ratio at 3.9x and less than $200 million outstanding on its $1.2 billion credit facility. The disciplined approach towards capital allocation includes maintaining flexibility in navigating acquisitions and developments that align with market conditions, positioning Camden well for potential future opportunities.

Looking Ahead: The Landscape of Multifamily Investments

The multifamily real estate sector remains appealing to institutional investors, with Camden gearing up for increased acquisition activities due to anticipated transaction volume in 2025 as merchant developers may face pressures from approximately $650 billion of multifamily debt coming due. Successfully capitalizing on these potential opportunities could position Camden for significant growth in the coming years.

Earnings Call Transcript 2024-Q3

[Kimberly Callahan, executive]

Good morning, and welcome to Camden Property Trust Third Quarter 2024 Earnings Conference Call. I'm Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Rick Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman; and Alex Jessett, President and Chief Financial Officer.

Today's event is being webcast through the Investors section of our website at camdenliving.com, and a replay will be available shortly after the call ends. And please note, this event is being recorded.

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 third quarter 2024 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. We would like to respect everyone's time and complete our call within 1 hour. [Operator Instructions]

At this time, I'll turn the call over to Rick Campo.

[Richard Campo, executive]

Thanks, Kim. The theme for on-hold music today is coming together and getting along. With our national election just 4 days away and what looks like an even split among voters, a message of unity seems appropriate. To all of our Camden associates, if you have not already done so, please use the time off Camden allows for you to get out and vote. And whether your preferred candidate wins or loses on Tuesday, please remember Tim McGraw's advice.

When the dreams you've been dreaming come to you. When the work you put in is realized. Let yourself feel the pride, but always stay humble in kind. We had a good third quarter with earnings ahead of expectations and the rest of the year is playing out as we anticipated.

Apartment absorption in our markets has been the best in 20 years, excluding 2021. Strong multifamily demand continues to be driven by strong job growth. Camden markets are growing faster than the U.S. in migration to Camden markets and fewer consumers choosing homeownership and are renting well-managed apartments from Camden. Apartment rents continue to be more affordable than buying a home. High prices for homes, mortgage rates, property taxes and insurance continue to support rental demand, and this is not changing anytime soon.

A recent Wall Street Journal article on October 27 titled, This Year's Housing Turnaround Ended Before It Started, reports that 2024 sales of existing homes is on track to be the worst year for housing since 1995. New apartment supply is at an all-time high, 50-year peak, as we all know. And while absorption has been great, filling these apartments has limited meaningful rent growth in most of our markets.

Trailing 12-month starts are off 35% with monthly starts off 49% from the highs. This backdrop should put new multifamily starts in the mid-200,000 range next year. Witten Advisers projects rents bottoming out in 2024 and through the first half of '25 and then starting to accelerate to '26 and '27. We look forward to sharing additional details on our strategic plan and future market concentration goals along with our 2025 guidance when we report fourth quarter and full results next year.

I want to give a big shout out to our Camden teams. Thank you for a great quarter and knowing that they are ready for a strong finish to the year. And thank you for improving the lives of our teammates, our residents and our shareholders, one experience at a time. Keith Oden is up next.

[D. Keith Oden, executive]

Thanks, Rick. Our third quarter same-property results had revenues in line with expectations, with slightly lower-than-anticipated operating expenses. Our top markets for same-property revenue growth this quarter were the same as last quarter and included Southern California, Washington, D.C. Metro, Southeast Florida, Denver and Houston, all with revenue growth above the portfolio average of 0.6% and ranging from up 1% to up 5% for the quarter.

Rental rates for the third quarter showed signed new leases down 2.8% and renewals up 3.6% for a blended rate of up 0.1%, with an average occupancy of 95.5%. Preliminary results for October reflect moderation in both new lease and renewal pricing and in overall occupancy levels. Renewal offers for November and December were sent out with an average increase of 3.5%.

Resident retention remains high and turnover remains low with less than 10% of our third quarter move-outs attributed to home purchases. Net turnover for the third quarter of 2024 was 46% compared to 51% in the third quarter of '23. Year-to-date net turnover was 41% compared to 44% in 2023. I would also like to encourage all of Team Camden to do three things: number one, get out there and vote. Number two, finish the year strong and number three, always stay humble and kind.

I'll now turn the call over to Alex Jessett, Camden's President and Chief Financial Officer.

[Alexander Jessett, executive]

Thanks, Keith. Recently, the Southeast United States experienced two hurricanes, Helene and Milton. And although our thoughts and prayers are with those affected, we are very thankful that our team members and residents were safe, and that we have only minor property damages reported. We issued a press release shortly after Hurricane Milton with a preliminary assessment leading one of our analysts to ask if Camden communities are built like Fort Knox, to which we replied that we attribute our minimal damage to quality construction, great preparation and a healthy serving of luck.

Quality construction really does matter. And we built over 60% of our Southeast portfolio and great preparation matters, including making sure trees are appropriately trimmed, drains are clear, pools are drained and roots are strong. Solid vendor and supplier relationships to ensure mitigation is prepositioned and great communication with our residents and staff to ensure that communities are storm-ready.

So thank you, Camden team members for doing such an amazing job to enable us to fare so well through the storms, allowing us to continue to provide quality housing in the incredibly high demand, high-growth Southeast markets.

Moving on to our development activities. In the second half of 2024, we commenced construction on approximately $320 million worth of new developments. We anticipate starting an additional $375 million of new developments in the early part of 2025, and we plan on starting our remaining owned land parcel, which is a $300 million development in either late 2025 or early 2026.

And finally, we have additional land parcels under contract, which may lead to future starts in either 2025 or 2026. Turning to our financial results. For the third quarter, we reported core FFO of $1.71 per share, $0.03 ahead of the midpoint of our prior quarterly guidance. This outperformance was driven in large part by $0.015 per share and lower-than-anticipated operating expenses, resulting primarily from continued lower core insurance claims.

Additionally, during the third quarter, we had $0.015 per share of favorability, resulting primarily from higher fee income, lower interest expense and lower income tax expense. These favorable line items were driven by the combination of cost savings and additional fee income from our third-party construction business, higher interest income from our cash balances, lower line of credit interest expense, and lower franchise taxes in Tennessee resulting from recently enacted legislative changes to the applicable calculation.

Property revenues for the quarter were in line with our expectations. Last night, we maintained the midpoint of our full year same-store NOI guidance at 0.75%, but narrowed the ranges and slightly adjusted the components. We now anticipate full year same-store revenue growth will be within the range of 1.1% to 1.5% with a midpoint of 1.3%.

And full year same-store expense growth will be within the range of 2.1% to 2.5% with a midpoint of 2.3%. Our 20 basis point reduction in full year revenue guidance by slightly lower blended lease trade-out in line with typical seasonality. We are assuming fourth quarter occupancy will be in the range of 95.2% to 95.4%. Blended lease outs will be slightly negative and bad debt will be within the range of 75 to 85 basis points, in line with the full year. Our 55 basis point reduction in full year expense guidance is driven primarily by the assumption of continued lower-than-anticipated insurance and property taxes.

We are increasing the midpoint of our full year core FFO from $6.79 to $6.81, which results entirely from the nonproperty component of our third quarter outperformance. We also provided earnings guidance for the fourth quarter of 2024. We expect core FFO per share for the fourth quarter to be within the range of $1.68 to $1.72, representing a $0.01 per share sequential decline at the midpoint, primarily resulting from an approximate $0.01 in higher property NOI, resulting from $0.025 in decreased revenue, driven primarily by the typical seasonality of occupancy, offset entirely by $0.035 in lower property expenses resulting from typical seasonal declines.

This $0.01 per share increase in sequential property NOI is entirely offset by a combined $0.015 per share decrease in interest and other income, as we are no longer in a net cash position and fee and asset management income due to the timing of our third-party construction activity. And an approximate $0.005 per share increase in net interest expense driven by an approximate $0.01 per share impact of no longer capitalizing interest on development sites that we have decided to not move forward with at the present time, offset by 0.5% in lower interest rates on our floating rate debt.

As of today, approximately 80% of our debt is fixed rate. We have less than $200 million outstanding on our $1.2 billion credit facility. Only $65 million of maturities over the next 24 months and less than $270 million left to fund under our existing development pipeline. Our balance sheet remains incredibly strong with net debt-to-EBITDA at 3.9x.

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

[Operator]

[Operator Instructions] Today's first question comes from Eric Wolff with Citi.

[Eric Wolfe, analyst]

If you think about the four predevelopment projects that you paused, and how much would rents have needed to be up from current levels before those projects made sense? And then more generally, how much do you think rents need to rise relative to construction costs for development to be more economic?

[Richard Campo, executive]

Well, let me just start off broadly first, and then I'll answer the question about what rents need to do because clearly, what's happened in the development market today is that construction costs have not come down and rents have come down. And clearly, the supply that is coming into the market has had a muting effect on rents in all markets, right? And so we as part of our planning process for 2025 and 2026 capital deployment, we review all of our properties and decide what we're going to start, what we're not going to start.

And we've operated over the years with the -- and maybe this is the old CPA and me and Keith, and that is that we employ conservative financial policies. And when we reviewed those projects, the 4 projects that we wrote down and moved on, it was about making sure that we focused on proper capital allocation These properties today do not meet our investment criteria.

And then more than that, the -- when you think about 4 properties specifically, there are sort of 3 categories. One is California, and we have been reducing our exposure in California, and there's lots of California issues that we all talked about. The second issue would be Houston. And Houston, we talked for a long time about wanting to lower our exposure in Houston and also wanting to have less urban and more suburban exposure in Houston. And the 2 projects in Houston are both urban projects, and we would much rather deploy capital in the suburbs rather than the urban core.

And then the Atlanta project, we have 2 projects that we did. We bought this land in the financial crisis. And the interesting thing is the land that we're holding on our books today, when you look at the total purchase price for the land in the Atlanta is substantially less than what we have this on our balance sheet for, which is pretty amazing.

In Atlanta, we just have a concentration issue in Buckhead, and we have 700-plus units that are really high-end units with 2 high rises or 3 high rises in a mid-rise and a stick construction build. So we just don't want more exposure in Buckhead like that. And the highest and best use could be a condo or hotel or something which would actually benefit the neighborhood, including our properties as well. So it's really about capital allocation and we're disciplined in our capital allocation.

We think 2025 and '26 is going to be a really interesting year, a couple of years. You have $650 billion worth of multifamily debt coming due. You have merchant builders who have prefs that are eating into their profits. Banks who want their loans paid down. And so there will be, I think, a very robust transaction market between -- over the next couple of years. And we're going to take advantage of that to increase our market balance, try to move the portfolio from a more be less urban and more suburban. And we just think that capital allocation makes sense rather than starting developments today.

You could raise rents maybe when you look at long-term growth, when we do underwriting, it's about -- we look at a 7-year untrended IRR. And most of the time we use anywhere from 3%, 3.5% compounded growth rates in our rents to make those numbers. We don't want to have to take that number up much more than the long-term average rent growth. To get these four development to work in today's market, you probably have to have 100 basis points growth of growth, wide of that.

And I guess if you look at the wide of average, so call it 4.5%, maybe plus or minus. When you look out at the projections out there, I mean, Wit associates has markets like most of our markets growing at 4% to 6% in '26 and '27. So theoretically, if you had to build, you could do a pro forma that showed outsized rent growth in the second, third, fourth, fifth years that could get those IRRs to work.

The challenge that we have is we just don't want to push the edge of the envelope that hard today. We don't have to build and we would rather deploy the capital in markets we want to grow in, and buy existing properties at below replacement cost that don't have the lease-up risk. That doesn't mean we're not going to be in the development business. Alex mentioned, we're going to start two properties in 2025, and we still have additional development pipeline coming.

And I'll just put this big caveat on this. If you look at the last write-down that we did, we did a write-down of multiple properties right after the financial crisis because nothing underwrote right after the financial crisis, right? And so interestingly enough, we never sold one of those land parcels, and we developed all of them. And today, if you take the written down value for land at the time plus the land -- the booked value we had on the books, those properties are all probably worth 50% to 70% more today than the cost plus the write-offs that we did before. So at the end of the day, it's really just about capital allocation, and we want to allocate capital to some of our smaller markets and build up that net operating income from there.

[Operator]

The next question is from Alexander Goldfarb with Piper Sandler.

[Alexander Goldfarb, analyst]

Rick, maybe just keeping with that merchant developer theme, you guys for the past number of years and the industry overall has been waiting to capitalize on developers that have to sell, the financial clock is ticking, they need to pay back, et cetera. And yet all these developers seem to get lifelines, the banks don't pressure them, the rents come back or something happens. So do you have confidence -- or like what gives you confidence that in the next few years, you'll see more opportunity from these sort of forced sales or your comments more just in general that, hey, it's one area that we think that's going to provide opportunity rather than we think there's a huge opportunity from these merchant guys?

[Richard Campo, executive]

Yes. I don't know. I think it's the huge opportunity is just there's going to be more transaction volume. I don't think you're going to find distressed transactions. I mean you could find distressed transactions at they're properties that we don't want. I mean, a lot of the syndicators that bought really, really substandard properties or C&D properties are definitely having serious trouble. You can go buy those at a discount, but I wouldn't want to take you on a tour of those properties and you don't want to tour as well.

And so the merchant builder model, when you think about it, it's merchant builder, right? You build, you lease up, you sell. You build, you lease up, you sell and it's a cycle. And that's their profit motivation is to build and lease up and sell. And so in order to reload their pipeline in the future, and we know that with development starts going below 200,000 that -- and I think the reason multifamily is so desirable day on the private side of the ledger is because people can look at -- maybe end of '25 and into '26 and '27 and see above-average rent growth. And so they're willing to buy today.

So the merchant builders don't have a gun at their head to sell. But when you have an 8% pref eating into your profit, and every month you stay and you haven't sold and paid those investors back plus their pref, the developer profit goes down. So the developers are incented to maximize their profits and they can't do that if they don't sell. Banks on the other hand, if you look at 2023 and 2024, there was a lot of multifamily debt that came due and banks kicked can down the road. Banks let people -- if you had a maturing loan, they renewed the loan and moved it into the future under the theory that the Feds are going to cut rates and rates will come down, and therefore, you won't have to put as much equity in the project.

So the $650 billion worth of debt that's coming due. A lot of that is from '23 and '24 where lenders move the maturities into '25 and '26. And so the market is just a natural market that needs to move. Now on the acquisition side, people have been -- got tons of dry powder. People have been holding their powder waiting for the signs, right? That 50-year supply is going to start going down and there will be an inflection point where rents will have a positive second derivative and start rising again. And that -- I guess, in the first -- if you look at sales in multifamily assets in our markets, they're pretty much the same, at the same level they were in 2022.

They're still below 2021, but the market is starting to thaw and people are starting to come to the market. So I think there's a reason you're going to have -- you won't have a real distressed scenario is there's just a massive wall of capital that needs to get deployed, and it's going to deploy into multifamily.

[Operator]

The next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

I haven't really come up for a while about Houston. So just kind of revisiting the comment about reducing exposure to this market. I think it's around 13% of NOI today. I guess how much of a decrease makes sense to you today when you kind of revisit strategically taking a look at the portfolio? And could dispositions from this market be a source of funds to redeploy into some of the investment opportunities you just spoke about to the earlier questions?

[Richard Campo, executive]

Absolutely. We talked about wanting to lower our exposure in D.C. and Houston. And Houston right now and D.C. are actually two of the best markets and -- which is kind of good for us. On the other hand, we've been painted with Houston. When oil prices fall, people think they can -- or investors either buy or sell Camden based on Texas and oil prices, and that's been a challenge over the years. And so clearly, we can grow in other markets, and we have a very low levered balance sheet.

So we don't necessarily have to sell or lot to grow or to lower the exposure. But we've continued to look to trim our portfolio in Houston over a period of time, and we'll continue to do that. We'll sell assets that are growing slower than the rest of the portfolio. And I think when you think about market balance, anywhere from 6% to 8%, 9% of assets in a certain market is probably the right place to be.

One of the things we also do is wait the -- we're weighting of where we want our markets, our balance to be based on population and inventory in that market because you don't want to be too overexposed to that market. Houston be given that it's an 800,000 unit market and the fourth largest city in the country. You can have a little bit overexposure relative to, say, maybe a Tampa, which is much smaller.

[Operator]

The next question is from Brad Heffern with RBC Capital Markets.

[Brad Heffern, analyst]

You maintained leasing spreads higher through September than your Sunbelt peers, but then it seems like there was a significant falloff for the October, both effective leases and the signed leases. Was there a strategy change there moving towards occupancy? Was that more of an impact from supply? Or what would you attribute that to?

[Alexander Jessett, executive]

Yes. What you saw in the third quarter was absolutely a drive more towards occupancy, and you're seeing that impact roll over into the fourth quarter. So that's exactly what it is.

[Operator]

The next question comes from Steve Sakwa with Evercore ISI.

[Steve Sakwa, analyst]

I guess I wanted to go back on the development. A couple of things. I noticed that the projects that are currently in lease-up didn't seem to have a huge movement in percent lease from kind of the mid-July to mid-October. So I was just wondering if you could comment on that. And then for the projects that it looks like you're going to start in the near future, the cost went up quite a bit. I realize the Nashville project got more units, but I think the cost went up considerably versus the number of units. So can you maybe just talk about the cost creep and whether those yields really still hit your return thresholds?

[Alexander Jessett, executive]

Yes, absolutely. So we'll talk about leasing first. So we've got the three developments that we have in lease-up. If you look at the two that are single-family rental communities, we've said all along those generally lease up slower than a typical multifamily and somewhere in the range of call it, 10 to 15 units a month, whereas with a typical multi, we'd see somewhere between 20 to 30 units a month.

If you look at our Durham development, that one is actually leasing up 25 units a month. So that one is doing in line with what we would expect, if not even a little bit better. So we feel good with all of the leasing trends. And as I said, they're really pretty much in line with what we had expected. When you think about the overall construction cost of our pipeline, as Rick said in the very beginning, we did a full analysis of all of our developments as we do on a periodic basis.

We got the most up-to-date pricing that we've seen, and that is what's represented on the development pipeline page. I will tell you that at this point in time, we think that all of these yields work, and that's why we said that we anticipate starting one of the Nashville deals and the Denver deal in the first part of '25 and why we anticipate starting, the remaining Nashville deal in either late '25 or early '26. So we think all of those returns still work for us.

[Operator]

The next question comes from Rich Anderson with Wedbush.

[Richard Anderson, analyst]

So a question on cap rates. And Rick, you mentioned the opportunity set with debt coming due and merchant developers being stretched in a few years. If there's sort of a lack of transaction activity, but when we do see something it's a 5% or lower perhaps, is that just a function of the moment something does hit, there's a wave of capital. And I use the example of senior housing, which the opportunity set in front of it right now is very positive, yet cap rates are 7.5%, 8%.

The opportunity set in front of multifamily and at least in your markets may get positive soon, but for the time being, is a little bit of a question and yet cap rates are still in the 5s. Is it just there's just so many people that want so few deals, if that's kind of question number one. And then corollary to that is, do cap rates need to adjust for you to be active on that opportunity that I described earlier? Or are you willing to sort of take a little bit of a hit upfront to get a deal that will make sense for you 2 or 3 years later?

[Richard Campo, executive]

Sure. So I think you -- I think that multifamily has come to the forefront again of investment choice for institutional investors. At the beginning of the year, there are a lot of, sort of surveys of what properties you want to invest in and multifamily was down on the list at the beginning of the year. And people wanted retail and they wanted industrial more multifamily now if you take third quarter numbers, whether it be from Axiometrics or a lot of different groups that look at investor preference.

Multifamily is now #1 in terms of commercial real estate that people want to buy. It's multifamily, industrial, retail and then office is a way distant fourth. And what's happened is that we've gotten closer to what people think is going to be an inflection point in the supply and demand equation. And when you think about -- we're at a 50-year high in terms of deliveries. And yet when you look at our markets, only two of our markets on a year-to-date basis have negative rent growth, and that's Austin and Nashville. And the reason Austin and Nashville are definitely the two most overbuilt cities in America and double the supply of all the rest of the markets.

And all the rest of our markets are either flat or up, even in spite of massive supply relative to historical norms, right? And so I think what's happened is investors are now -- private investors are pivoting towards multifamily. And you're exactly right, the developers out there who still have -- they don't have a gun at their head to sell. And so they believe also that as the supply picture continues to improve and continue -- when you get that first sort of positive second derivative on revenues, that there's going to be a flood of buyers in the market. And the thing that's really interesting, too, is over the last 60 days, cap rates were in the 5s, then it went into the 4s.

The last few deals that we've looked at, you've had multiple buyers and the cap rates are mid-4s today, not 5% or 5.5%. And the reason for that is there's more buyers than sellers. And ultimately, the only way that you make a 7% unlevered IRR, which is what people are trying to get, I think, generally, is you have to have outsized growth 2, 3 years, 4 years out, which most people are pretty comfortable in underwriting.

Now the last 30 days has been a different element, right? You've had the tenure go up 50 basis points or more in the last 30 days. And that's kind of change -- that changes the calculus a little bit. And so the question will be in order to get your -- because you're back to negative leverage when you start with 10-year the way it is today. So the question will be, will the 10-year or will the treasury stabilize and then how will people underwrite and will that drive cap rates back to 5%.

But from our perspective is, as long as we can buy below replacement cost in that 4.5% to 5% zone, and we believe that we can improve operations, we believe that we can catch that above average long-term rental rate growth in '26, '27, '28, we'll transact in that environment. And we'll also sell properties to fund it and continue to sort of try to rebalance our portfolio where we want it. And we'll spend a lot of time on that in the first quarter call because we're going to lay out kind of where we want our markets to be, but we haven't done that yet exactly. So we'll get that to you all in the first quarter.

[Operator]

The next question comes from Haendel St. Juste from Mizuho.

[Richard Campo, executive]

Maybe comeback to him.

[Operator]

The next question comes from Jamie Feldman with Wells Fargo.

[James Feldman, analyst]

So maybe one for Alex. As you think about -- I think you and several of your peers, the course of this year has been reducing your top line outlook, but getting nice cost savings to keep your NOI outlook. So I guess two questions. Number one, Can you talk about where you probably were most conservative to start the year and where you got the benefit throughout the year?

And then secondly, as we think about 2025, I mean, do you think there's still enough juice in expense savings to have a similar outcome given there is a lot so much uncertainty around top line revenue where you could start the year on a conservative basis and get some upside?

[Alexander Jessett, executive]

Yes. So clearly, where we were the most conservative, although I didn't think we were at the time, was insurance and taxes. Those have been the two really bright spots for us. We think that taxes for us for the full year for '24 are going to be basically flat. And keep in mind that taxes make up about 36% of our total expenses. And when we started the year, I thought they were going to be up 3%. So obviously, that was an incredibly pleasant surprise.

And then on the insurance side, Keep in mind, insurance last year was up something like 40%. And this year, it's going to be down something like 10%. So you really have a couple of factors that drive that. Number one, we had a flat renewal, which was fantastic. But then #2 is we were very, very proactive in addressing. So the root causes of some of our insurance claims and making sure that we were putting the appropriate R&M and CapEx in to make sure that we can minimize those risks on a go-forward basis. And we're absolutely getting the sort of the positive results from those actions in our insurance numbers today.

If you're looking at 2025, it's a little early. We're still in our budgeting process. What I would tell you is getting another year of property taxes flat is probably unlikely. Over a long period time, property taxes are generally up about 3%. Now the good news is, is that if you go back and you look at real values today and you compare them to 2 to 3 years ago, there's no doubt that real values are down. And so hopefully, we still have a little more juice that we can squeeze out of that, and we'll fight as best we can against the taxing authorities.

And then when it comes to insurance, our policy renews beginning of May. And so we'll have to see what the rest of this year and the early part of next year does in terms of global insurance claims because this is a global market. And if we have light claims, then we may have another productive year on the insurance side. When I think about the rest of our expenses, the rest of our expenses, it's a 3% business. And I think that's what you'd expect to see.

[Operator]

The next question comes from Haendel St. Juste with Mizuho.

The next question comes from John Kim with BMO Capital Markets.

[John Kim, analyst]

I'm afraid to talk.

[Richard Campo, executive]

Maybe it's the Halloween hang over.

[John Kim, analyst]

Very scary. I wanted to follow up on Austin's question on Houston. If you look on your presentation, Page 6, the migration trend for Houston seems like it's going to accelerate quite a bit over the next couple of years. I'm wondering what's driving that? And also, I mean, we do have a chance that we'll have another Trump presidency, who's been very supportive of the oil and gas industry. Can you remind us if that's a positive for the Houston economy? And if either of those items come into fruition, acceleration in migration or if Trump wins the presidency, will that impact your decision to reduce your exposure to the market?

[D Keith Oden, executive]

Yes. So Houston is continues to be very much impacted by what goes on in the oil and gas industry. And higher oil prices historically have been great for Houston, lower oil prices have not been great. So anything that is good for the oil and gas business ends up being good for Houston and ends up being good for Houston real estate.

So without prognosticating on outcomes of elections, our strategy to lower our exposure in Houston predated Trump's first election. So it's been out there for a long time. It's -- we've made some progress. Obviously, we had a fairly sizable acquisition that increased our exposure to Houston, but we're still committed to getting it more in line with our other markets.

And for a long time, when we had -- we were in 9 to 10 markets. We talked about having a market balance that would be no double digits in any single market. And I think you'll see that that's the direction that we're headed in markets that we have that are double-digit concentration. It's Houston and Washington, D.C. Metro, and we'll be -- those obviously will be part of the rebalancing effort that we do.

[Operator]

The next question is from Michael Goldsmith with UBS.

[Ami Probandt, analyst]

This is Ami on for Michael. I was just curious, was there anything that changed on the demand side that led to blended spread in the third quarter and fourth quarter coming in really well below your prior expectations in the mid-1% range? And how should we be thinking about the supply-demand balance as we head into '25?

[Alexander Jessett, executive]

Yes. I don't know if there's anything significantly different. Certainly, we made a decision, and we talked about it last quarter in the third quarter, we made a decision to push occupancy at the expense of rates. As we said several times, we don't really tell our teams, this is the rates you must get or this is the occupancy you must get. We're really trying to maximize revenue. And so we feel really good about what we did in terms of maximizing revenue in the third quarter, which is why our third quarter revenue results were in line with expectations.

When you look at what we're going to see in the fourth quarter, clearly, when you do push occupancy, rates are going to come down a little bit, and that's what you're seeing rolling through the fourth quarter numbers. But keep in mind, we started the year thinking that at the midpoint that revenue was going to be up 1.5%, and we're within 20 basis points of our initial guidance, despite record levels of supply. So we feel very good about the way that we've worked through this year.

[Richard Campo, executive]

And Ami, to your question on 2025, if you look at Witten's numbers for employment growth across Camden's markets in 2024, he's got us at about 460,000. I'm not sure what he modeled for the most recent report, but it probably wasn't 10,000. But in any case, he's got that number at about 440,000 in job growth across Camden's markets in 2025. On the supply side, '25 is going to look a lot like '24 across most of markets in terms of new deliveries. So supply-demand dynamics in 2025 are going to look fairly similar to what they've been in 2024.

[Operator]

The next question is from Haendel St. Juste with Mizuho.

[Haendel St. Juste, analyst]

So I wanted to ask, I know you're not giving guide at this point, but I was hoping you could perhaps give some color on some of the building blocks like the estimated earn-in for next year like some of your peers have provided. And maybe some thoughts on where you think you can get bad debt to overall by the end of next year and maybe some thoughts on Atlanta and L.A. specifically.

[Alexander Jessett, executive]

Yes, absolutely. So if our plan works out for the next 2 months of the year, our earn-in for 2025 should be, call it, flat to slightly positive. If you think about bad debt, I think it's very reasonable to anticipate that bad debt is going to be back down to about 50 basis points by the end of 2025. If you think about our portfolio in the whole, once you strip out Atlanta and you strip out California, that's pretty much where we are. We're pretty much back to the 50 basis points.

And the good news is that we can work through and we are working through Atlanta and L.A. County, in particular, because that's where most of the issues in California are. We've completely shut down the front door. So we know that we're not getting any bad actors in currently. And so we've got some folks that came in from fraud in the past. We're working them through the system, and we feel pretty good that we're going to get this problem solved by the end of 2025.

[Richard Campo, executive]

Keith, do you want to take Atlanta and L.A.?

[D Keith Oden, executive]

Yes. So L.A. is -- you got to kind of put it into the 3 communities that we have there in L.A. County, and they all have their challenges that started -- some of them started back in COVID and some of them continue today. But the biggest challenge that we continue to have in L.A. is just the time component between when somebody first becomes delinquent and when you can get it processed for them to move on. And it's still way too long. And so we do -- and we have seen improvement, and we hope to continue to see improvement both in L.A. and Atlanta.

In Atlanta, it's the same story. It's really a processing issue with regard to the -- just how long it takes to get someone from delinquency through to a new home address. Again, both of them have made progress. There's room to go. I think Alex is right that in 2025, we'll work through that, those -- both L.A. and Atlanta will be able to get back to more of a normal cadence for processing evictions. And so I'm certainly hopeful that we can make good progress. And as Alex mentioned, most of our other markets are back to regular order with regard to processing delinquencies.

[Richard Campo, executive]

I think the issue in L.A. from a revenue perspective is L.A. has a demand problem, not a supply problem. And when you look at -- just to put a couple of points in this, Houston -- since February 2020, Houston added 268,000 jobs and L.A. is down 16,000 jobs from that point in time. Dallas added 467,000 jobs. San Francisco has lost nearly 50,000 jobs. And so even though you have low supply in those markets and their revenues are growing a bit better than the supply markets, they're basically just growing because they went down so much to start with, right? So they had a bigger hole to climb out of. And the demand is the real issue there. And long term, I don't see that changing dramatically.

[Operator]

The next question comes from Julien Blouin with Goldman Sachs.

[Julien Blouin, analyst]

Just wanted to ask, what do you expect for trajectory of new lease rates into November and December relative to the negative 4.8% you saw in October? It does seem like comps year-over-year seem to get a bit easier in November and December. And then on the renewal side, I guess, you said you sent out offers in sort of the mid-3s for November and December. Where do you think that actually shakes out? Like could it be like 100 basis points lower? Or any sort of guidepost you can give us on that side?

[Alexander Jessett, executive]

Yes. So I think the fourth quarter is going to look probably pretty similar to what you see effectively for October, right? So if you look at October, the effective new lease rates is down 4.4% that feels about right. Effective renewal rates up 3.4%. Once again, I think that's going to be right. The difference, and there's going to be a slight difference is that when you get to November and December, you start to have more renewals than new leases. And so the blend changes a little bit.

And so if you look at what we had for October of effective blended lease rate of down 0.8%, I think it's going to get a little bit better than that for November and December just because, as I said, just the weighting changes with more renewals versus leases.

[Operator]

The next question is from Michael Lewis with Truist Securities.

[Michael Lewis, analyst]

Rick, you mentioned keeping some land parcels that you have written down in past downturns and those eventually recovered in value or the development viability came back. The parcels that you're writing down now, do you intend to sell those? And then also related to land, I think Alex mentioned that you have some additional parcels under contract. So maybe where are you looking to buy land at?

[Richard Campo, executive]

If we -- if the development numbers don't work, don't pencil before we sell land, we'll sell land. The -- it's not a great time to sell land today. And so when you think about the transaction environment, we don't have to sell land. So we don't need to sell land. And so we'll just hold on our books until we think that it's the right time to sell it. And then we'll look at an analysis again and decide whether we should build it or sell it. And that's there is no pressure on us to sell.

And when you think about the merchant builder market today, the starts are going to be down significantly. And part of that is deals, a, don't pencil; and two, they're stuck in deals that they already have and they haven't sold them yet, so they don't have new capital to be able to put in new deals. So if you're selling land today, it's probably not a great land sale market. And that could create opportunities for us to buy shovel-ready deals. We've definitely bought a lot of shovel-ready deals over the years.

The transactions we have under contract right now are in Tampa, and we have a large land parcel that's a suburban 3-story, 4-story stick construction project, and we will continue -- you're going to see us move more from urban mid-rise to more suburban simple construction. That's just a direction that we have been moving. And that's why you have the 4 projects that we have identified, those were all urban projects. And if they were suburban walk-ups, we probably wouldn't have written them down. We probably started them by now.

[Operator]

The next question is from Adam Kramer with Morgan Stanley.

[Adam Kramer, analyst]

Just wondering, obviously, with the development kind of shift. I was wondering kind of where you would rank acquisitions versus development versus maybe other uses of capital, if you were to kind of rank the different capital allocation possibilities here? I noticed you guys haven't bought anything in some time. So maybe if you could also just kind of categorize the state of the acquisitions market and maybe early expectations for kind of deal flow in the coming quarter or 2?

[Richard Campo, executive]

Well, we think there's going to be a big deal flow in 2025 from an acquisition perspective for all the reasons that I've already gone through. And it gets down to, when you think about capital allocation, it's all about driving cash flow growth. And when we look at our weighted average cost of capital, and we're going to invest in new transactions that will give us a reasonable spread over weighted average cost of capital. Development makes sense, and that's why we've started $300-plus million this year. We'll start $375 million next year.

But the balance between how much development, how much acquisitions you'll do, will really be just a function of what the market allows. And so far this year, we just didn't see a great amount of opportunity in the acquisition side, and that's what we didn't really do anything. But you can expect us to be more active in '25 and '26 for sure.

And I guess one of the -- when you think about capital allocation, we -- if stock prices get to the point where they were when we bought $50 million of shares at $97, at today's stock price, it's pushing up on a 6% cap rate. And it's hard for me to find is going in 6% that's existing today or a development going in 6%. So if the public markets don't believe the private markets that cap rates are 4.5%, we can buy our stock at 6%, you can expect more of that.

[Operator]

The next question comes from Wess Golladay with Baird.

[Wesley Golladay, analyst]

I just want to go back to that comment about the construction costs increasing. Was that a market-specific labor thing? Or is that pretty broad-based? And then can you comment on how land pricing is versus the peak?

[Alexander Jessett, executive]

I'm sorry, the first question was...

[Richard Campo, executive]

Go ahead, Alex.

[Alexander Jessett, executive]

No, I was just trying to make sure I heard the first question.

[Richard Campo, executive]

Construction costs going up and, but they're really not going up, they're flat.

[Alexander Jessett, executive]

No, they're not going up.

[Wesley Golladay, analyst]

Looking at the Camden Baker and the Camden Gulch, the cost -- not for the active construction but the shadow pipeline, the Baker and the Gulch went up. I didn't know if that was the market-specific labor that went up or just construction costs overall? And then the follow-up question was, how is land pricing versus the peak?

[Alexander Jessett, executive]

Okay. absolutely. So if you look at what's in our pipeline, we have gone through and substantially redesigned those sites, and we've come up with -- most of what you're seeing on cost changes is really, you call it, enhancements. We're building a much better product than what we originally had laid out. And so that's what you're really seeing there. Land prices today, Rick, I don't know if you want to hit that one.

[Richard Campo, executive]

Yes. Land prices today are lower than they were at the peak, probably 15%, 20%, maybe more. But landholders are just like merchant builder holders. If you don't have to sell, why would you sell into a weak market? And most people don't have to sell. So there hasn't been a lot of major land transactions get done. And it's just a sit and wait kind of scenario. So it's hard to kind of put a pin in, is it down 15%, 20% or what because there really hasn't been a lot of land transactions out there.

[Operator]

The next question is from Linda Tsai with Jefferies.

[Linda Yu Tsai, analyst]

Given your comments about the quality of your construction, building a better product, and luck helping you avoid the worst of some of the recent hurricane impacts. The average age of your portfolio is also lower. Is there any way to quantify the resiliency of your portfolio versus the surrounding multifamily buildings in the regions in which your portfolio to operates?

[Alexander Jessett, executive]

I think it's very hard to quantify other than to say that clearly, when we were -- once Milton went through and our teams were out on our sites assessing, what they would report back is that our neighbors certainly looked a lot different than we do. And a lot of that is -- we talked about the quality of the real estate, but it's also the upkeep, right? It's very important that you put the money in and you make sure that the trees are appropriately trimmed, that you do the things to make sure that your drains are clear.

We go through and we'll drain all of our pools to make sure that we don't have overflow from that. There's just a lot of factors that we do because, quite frankly, we look after our real estate. And I will tell you that when you drive around, you look at the other -- look at the neighborhood, it's not always the same.

[Richard Campo, executive]

I'll just keep going. Can you talk about Harvey and the portfolio here and now how we fair...

[D Keith Oden, executive]

No, I mean we -- just to follow up on Alex's comment, we're -- our hometown is Houston, Texas. We've had a lot of experience with Dodge and hurricanes and making sure that we're prepared. And then in the aftermath of the hurricanes, making sure that our residents are taken care of. But in Harvey, which is the flood of record in Harris County, probably by most people's estimation, a 500-year flood, we had one building or one community that actually had flood water damage, and it was only 2 buildings within that community and all of our -- and we're spread all over Harris County.

So first of all, it starts with having your -- making sure that you buy communities that are out of the flood plane and out of the flood plane by some measure. And so that when the storm does happen, the things that we have to deal with most of the time are things that deal with the quality of the asset that you've built, and that's windstorm damage.

But it doesn't make any difference what kind of quality you built if you have rising water damage to your community. There's just no way to mitigate that either before or during a storm event. So it starts with knowing where to own real estate in the markets that we're in and then it runs all the way through the things that Alex talked about is great preparation in the event that you are going to have a windstorm event.

[Operator]

The next question is from David Segall with Green Street.

[David Segall, analyst]

I was curious what kind of difference in performance do you see between your urban and suburban assets in submarkets? Is it just driven by rent growth? Is there an element of CapEx differences? And I was also curious if you're thinking on the urban, suburban divide is consistent across markets? Or are there any exceptions?

[Alexander Jessett, executive]

Yes. I mean what I'll tell you is suburban continues to outperform. And when we look at revenue growth, our suburban assets in the aggregate are doing about 80 basis points better than our urban assets. And by the way, that's across our entire portfolio.

[Richard Campo, executive]

When you look at demographics, 2/3 of our sort of demographic target lives or more than like 75% of the demographic target that mid-30s, 21- to 32-year-old residents live in suburbs. So that's where the customers are. That's why suburbs tend to be better than urban. And if you think about the development mindset over the last 10 years, everybody want to do urban and urban -- and it was driven by institutional investor appetite. And so urban markets have more supply put in them, which created more downward pressure on rents from the urban core versus suburban and that's changed some. But because the last slug of supply, there is definitely more in the suburbs than -- but there's still plenty of urban. So I think suburban is going to continue to outperform urban over a long period of time.

[Operator]

Today's last question comes from Alex Kam with Zelman & Associates.

[Alex Kalmus, analyst]

I wanted to ask about turnover quickly, which was down 4% year-over-year in the third quarter. Could you talk about some of the drivers there and your expectations moving forward?

[D Keith Oden, executive]

Yes. So one of the biggest changes in the turnover rate goes straight back to move-outs to purchase homes. We were in the 9% range and have been for the entire year, which is historic for us. We had normally averaged somewhere between 15% to 20%, move-outs to home purchases depending on where you are in the cycle. So a 9% rate over an extended period of time makes a huge difference. That 5% to 8% differential in residents that are historically would have purchased a home who are not doing so because of the conditions in the housing market is a difference maker.

So we've seen results on retention, and that's been really for the last couple of years, and we certainly expect that, that will continue into 2025 because, as Rick said, there's really no short-term solution or change that's coming in the single-family and home market that's going to change that dynamic.

[Operator]

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

[Richard Campo, executive]

Well, thank you. I appreciate your being on the call today, and we will see you in NAREIT in Las Vegas here in a couple of weeks. Thanks and take care.

[Operator]

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.