Camden Property Trust
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Good day, and welcome to the Camden Property Trust Third Quarter 2013 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Kim Callahan, Senior Vice President, Investor Relations. Please go ahead.

[Kimberly A. Callahan:]

Good morning, and thank you for joining Camden's Third Quarter 2013 Earnings Conference Call. As you may recall, Rod Petrik of Stifel, Nicolaus was the first person to correctly guess the theme of last quarter's hold music, earning him the opportunity to select the music for today's call. The theme he chose for us was Texas legends. Well done, Rod, and we hope you enjoyed all of those songs. 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. As a reminder, Camden's complete third quarter 2013 earnings release is available in the Investor Relations section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures which will be discussed on this call. Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President; and Alex Jessett, Chief Financial Officer. Our call today is scheduled for 1 hour [Operator Instructions] If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes. At this time, I'll turn the call over to Ric Campo.

[Richard J. Campo:]

Good morning. To quote that legendary Texas songwriter George Strait, I don't have any exes but, "Texas is the place I'd dearly love to be." That definitely describes our Texas markets today. Camden had another solid operating quarter, with 12 of our 16 markets exceeding 5% net operating income growth and 9% with revenue growth higher than 5%. The apartment business continues to exceed long-term trends and we expect that to continue. We continue to be active at recycling capital, selling older, slower growing properties and buying and developing new generation properties. We completed property sales of $174 million so far this year, with an average age of 26 years. We held these properties for 16 years and realized an 11% unleveraged IRR in these property sales. We expect to close sales of an additional $175 million in the fourth quarter. We have acquired $225 million of new generation properties during the year, with an average age of 6 years. We do not expect to acquire any additional properties this year. Sales prices and cap rates have held reasonably stable for our disposition properties. We will likely be a net seller of assets going forward and using the proceeds to fund development. During the quarter, we started 3 new development properties with a total cost of $156 million. We expect to start 2 additional properties by the end of the year, with a total cost of around $200 million. While there's a lot of concern about new supply, we think that job growth will create enough demand to absorb new completions during 2014 and '15. I would like to give a big shout-out to our Camden teams in the field and our support teams, who continue to outperform their markets and continue due to make Camden a great company and a great place to work. I'll turn the call over now to Keith Oden.

[D. Keith Oden:]

Thanks, Ric. I'm mindful of the fact that we're one of the last apartment companies to report for the quarter, and many of the themes have been beaten to death, so I'll keep my comments brief. Our third quarter results were solid and in line with our expectations. Our team is focused on finishing the year strong. After last year's sector-leading same-store NOI growth of 9.2%, we're determined to achieve our original guidance of 6.5% same-store NOI growth for this year, which would be the second-highest in the sector this year, giving us a 2-year total of 15.7% growth in NOI. Can I get a "why so" [ph] anyone? And our same-property portfolio rental rates were up 4.9% year-over-year for the third quarter, with a slight dip in occupancy of 20 basis points. We are still getting strong growth in Texas and Charlotte, both with 6.4% revenue growth, followed by Atlanta at 6.2% and Denver at 5.9%. Perhaps surprisingly, Raleigh was up 5.2% despite being closely watched for the impact of new supply. Our weakest 3 markets were D.C., Vegas and San Diego, all with less than 3% revenue growth. Sequentially, our revenue was up 1.7% following the 1.8% increase in the previous quarter. Sequential NOI growth was up 2.2% versus the 2% that we discussed on our last call. In mid-August, we made the decision to push up occupancy in our portfolio for 2 reasons

[Alexander J. K. Jessett:]

Thanks, Keith. Last night, we reported funds from operations for the third quarter of $93.3 million or $1.04 per share, representing an approximate $2.5 million or $0.03 per share outperformance to the midpoint of our prior guidance range. This outperformance resulted primarily from

[Operator:]

[Operator Instructions] The first question is from Rob Stevenson with Macquarie.

[Robert Stevenson:]

When you're looking at the D.C. market, is there any reason, given what you're seeing on the ground there, to believe that revenue growth isn't going to turn negative in the fourth quarter and early '14 and then stay there for a while?

[D. Keith Oden:]

Yes, Rob, I think that it's likely, that based on where our portfolio is currently, even though we were able to eke out a small positive number in the third quarter, early results in the fourth quarter look like it's certainly likely that they could be flat to slightly negative in the fourth quarter. So I think, as you look forward to next year, it would certainly be reasonable to forecast that you may get some slight negative in our portfolio. We've got a different aggregation -- or different geography of assets than some of the other companies do that, I think, have taken an earlier and bigger hit. But I think that the overall story in D.C. continues to be one of slowing down and fighting our way through some additional supply. So, yes, I think that's fair to say, but we'll give you specific guidance on that after we do our property level budgets and get them all rolled up for you in the first quarter.

[Robert Stevenson:]

Okay. And then the other question is you talked about 2 fourth quarter starts, roughly $200 million or so. I mean, how are you guys feeling about new developments, sticking shovels in the ground today, in general? And are there any of your sort of pipeline communities where you've gotten more pessimistic on over the last quarter or so about starting those?

[Richard J. Campo:]

I would say that our development pipeline -- we feel good about what we started and we feel good about our near-term starts. But I would say that we are definitely tapering off in terms of adding a lot to the pipeline in certain markets. Clearly, we're far enough into the cycle now where some properties are being impacted by construction costs and just availability of labor to get projects done. So I think that the whole industry is starting to taper off. We started seeing permits start falling in August and I think you're going to see sort of the flattening of starts, and we're going to be included in that group.

[Operator:]

Next question is from Al Goldfarb of Sandler O'Neill.

[Alexander David Goldfarb:]

Just going to the capital markets, as you guys think about -- I think you said, Alex, you have about $170 million of dispositions. You have the $200 million bond coming due. Are you thinking about just doing like an index eligible or would you do more than that or would you look to maybe, as you said, be net sellers of assets, so you'd rely more on disposition proceeds in the coming year to help fund things? Just trying to figure out -- because, obviously, apartment prices are still pretty healthy. The debt markets have settled down. So just trying to see where you see better pricing for funding your activities.

[Alexander J. K. Jessett:]

Yes, absolutely. So, to be index eligible, you have to do a $250 million bond size, and likely, we'll be closer towards that than doing a larger transaction. Obviously, we continue to evaluate it, but we'll probably -- more towards the index-eligible size.

[Richard J. Campo:]

And as far as net selling, the market is really holding up well for these older assets. People look at them as value-add, and so the bid for them is still very strong, the cap rates are still very solid and it makes a lot of sense to sell those assets in combination with some bond proceeds to fund our business going forward.

[Alexander David Goldfarb:]

Okay. And then as far as property taxes, now that we're almost towards the end of the year. Year-to-date they're up 12%. Do you think that most of the communities have marked your properties to market so that next year that property tax reassessment should moderate or you think, next year, there's still going to be some pain in there?

[Alexander J. K. Jessett:]

No, I think you're right. I think it should moderate. We anticipate we'll probably finish the year close to 12%, which is where we had been year-to-date. And if you think about -- most of that increase came from large increases in Houston and Dallas, which were really a catch-up for the prior 3 years. So we're certainly not anticipating that either municipality will hit us again for a large number next year.

[Operator:]

Next question is from Nicholas Joseph with Citi.

[Nicholas Joseph:]

Going back to the development pipeline. What are the expected yields on the new starts and how does that compare to transaction cap rates today?

[Richard J. Campo:]

The yields on our new starts are 6.5% to 7%, continue to be in that zone, 6.5% for the coastal properties and 7% is in the interior. And when you look at cap rates for like properties, they're in the 5% zone, so we still are having a 150-basis-point to a 200-basis-point positive spread to the development yield. On the coast, it's actually better because you have -- cap rates are still very, very low in Southern California. And so in those markets, the spread is still pretty wide.

[Nicholas Joseph:]

And then just looking at the Texas markets, can you talk about what you're expecting going forward, in terms of supply and demand?

[D. Keith Oden:]

Yes. Actually, the only market of the 3 Texas markets that is screened, if you look at 2014 job growth to deliveries, it screens less than the 5

[Operator:]

The next question is from Nic Yulico of UBS.

[Nicholas Yulico:]

If I look at your year-over-year revenue growth in the quarter, I mean, it dropped off pretty substantially from where it was in the first half of the year. How should we think about that? I mean, is this -- are you now starting to finally see more of a supply impact in markets, and even putting aside D.C. for a second?

[D. Keith Oden:]

Yes, I think if you're thinking about the slowdown and what the root cause of it is -- I mean, clearly in D.C., there's a supply consideration there. If you look at the other 2 markets that screen on our 2014 numbers at below a 5

[Richard J. Campo:]

Yes. If you look at a 20-year average for apartments, you get about a 3.1%, 3.2% revenue growth over a long period of time. And so this is sort of an inflation plus a little bit growth business. So when you have the kind of growth that we've had, post recession, obviously it has to come down some. And it's coming down now, but it's still way above trend and it should be above trend for the next couple of years.

[Nicholas Yulico:]

Okay, that's helpful. Just one other question on the guidance. You didn't change your same-store guidance for the year, yet year-to-date you're essentially tracking sort of right between the bottom to midpoint on NOI and revenue. I mean, is there any chance, at this point, to still get at the top end of the ranges?

[D. Keith Oden:]

There's always a chance or it wouldn't be in the range.

[Nicholas Yulico:]

And what gets you there?

[D. Keith Oden:]

Here's what I would say. We didn't tighten the range. You can do that, but at the end of the day, it probably doesn't make much difference. People take the midpoint. We still see a path to get to the midpoint of our range or we wouldn't have it there. If you think about what's not -- so what's different and what's unknown, in terms of modeling the fourth quarter, would have been -- I would guess, for most people is -- we have roughly 100-basis-point positive variance on occupancy, relative to both our plan and probably most people's model. And that's a meaningful piece of revenue that we think we're going to be able to sustain throughout the fourth quarter. So if you think about the delta to where we are in the third quarter, we actually -- it looks like our revenues will be up for the fourth quarter over the third, which is very unusual for us.

[Operator:]

Next question is from Rich Anderson of BMO Capital Markets.

[Richard C. Anderson:]

"Why so?" [ph], a broken clock is right twice a day, just FYI. So the occupancy push that you talked about, it contradicts back -- I think it was 2009, Rick, when you mentioned -- when you undertook a strategy to let occupancy slip. I'm wondering what changed or what's different about the 2 timelines and strategies that are causing you to look at occupancy with a little bit more of a defensive mindset.

[D. Keith Oden:]

Rich, I'm just glad that there's somebody that's survived long enough to remember what "why so?" [ph] was. So the difference is 2 things

[Richard J. Campo:]

What I would say, just to add to that is that different times require different operating methods. And that's the great thing about having a flexible system is you can say, here's what I want to do today and here's what I want to do tomorrow, and it's just all about trying to get the best fit you can to maximize the revenue that you're trying to produce.

[Richard C. Anderson:]

Okay. And then, secondly, on the talk of a capital raise. I'm wondering how much of that has changed over the past 6 to 12 months, in terms of how you're financing the development pipeline? I mean, you obviously are less inclined to use equity now, but do you think, 12 months ago, when you were thinking about financing in the period ahead, that you would've been using more equity than you're willing to do now. Is that a fair statement?

[Richard J. Campo:]

I think that's a very fair statement. You have to respond to the market, right? And we are nimble enough to respond to the market. So we have a strategic plan that we put forth to our board, that's a 3-year plan, and we toggle that plan depending upon where the most efficient source of capital is, in terms of when we need capital. So bottom line is when the stock price volatility, obviously, has changed the metrics on whether it makes a lot of sense to issue equity versus making sense to sell assets as opposed to issuing equity. And so bottom line is we're being responsive to the capital markets and it doesn't make a lot of sense to me to sell equity at $62 a share, which is below most people's NAV, to go out and build NAV and have it be discounted by the market. So it makes a lot of sense to sell assets for $1 on Main Street and reinvest that $1 into assets for our balance sheet.

[Richard C. Anderson:]

Okay, the question was really -- that was the easy part of the question. But I mean I was thinking in terms of balance sheet capacity to go this route for how much more do you think you have, and also layer into that balance sheet question stock buyback. Is that an option, too, for you?

[D. Keith Oden:]

Rich, one of the things that is very different, for us, in this part of the cycle, from where we were in the last go around, is the fact that we have the lowest leverage in the entire sector. So it creates a lot of flexibility for us to do things that make sense at the time. Obviously, we don't want to be selling equity at these kinds of prices, and we don't have to. We have great capacity on our balance sheet because of where our leverage is, and if we have to supplement our disposition proceeds by tickling our leverage in order to fund our development pipeline and not have to sell equity to do that, then that's obviously an option that we have. As far as repurchasing shares, again, I think it gets back to the flexibility. We have more flexibility than anybody in our sector, to be able to make those decisions when, and if, we think it makes sense. So, yes, that's something that at some point you have to consider when you have the disconnect that is continuing to persist between what our assets that we're selling, then we know the valuation of those are, versus our stock price and NAV. So it's all part of the mix but we're fortunate to be able to have the flexibility to look at all those options.

[Richard J. Campo:]

The only thing I would add to that, on the stock buyback scenario, is that I believe we're the most aggressive buyers of our stock when the stock was persistently below NAV for a reasonable period of time. That would have been 1999 through 2001. And in those days, for people who weren't around then, everybody wanted click-throughs and so real companies that have real dividends and real earnings, no one wanted them. And our stock was trading at $0.75 on the dollar and we sold assets on Main Street for $1 and bought back those assets from Wall Street for $0.75 on the dollar to the tune of almost 16% of our total market cap. So we are definitely -- we know how to do it, we know when to do it, hopefully, and it's not something that we're afraid of. It's just trying to figure out what the opportune position is.

[Operator:]

The next question is from Dave Bragg of Green Street Advisors.

[David Bragg:]

Ric, in your opening comments, you characterized asset pricing on dispositions as reasonably stable. Can you elaborate a little bit on that, what you expect the dispositions in 4Q to come in at versus your initial expectations?

[Richard J. Campo:]

They're right on target of our original expectations, and as a matter of fact, they're maybe slightly higher, but not a lot. We had put this disposition program in place in the sort of -- figured the assets out right in the first quarter, put them in the market sort of at the end of the second quarter and then marketed through the summer, and then the fall has been picking buyers and doing the contracts and all that. And we are right on where we thought we would be in pricing, and the pricing was done before the May taper tantrum that was created in the market. So, with that said, we still have a number of bids on -- more bids than we thought we would get, and we were all nervous about cap rates and what would happen to these assets because they're 26 years old. But what we found is that the buyers are not using the 10-year, number one, they've never been using the 10-year. So, number one, when the 10-year was 1.6% and now it's 2.5%, that increase didn't really affect them because they didn't really use 10-year financing anyway, they used shorter-term financing. And what we found is that about half of the buyers are using floating-rate financing and they're doing floaters and all kinds of different ways to create, really, high cash-on-cash returns for their investors. Obviously, we would not do short-term financing and floating in this environment. But there are a lot of investors doing that. So they've either stayed short on the curve or they've used floating-rate debt, and the yields that they're getting are still very substantial, so there really hasn't been any material move in sort of the B+ asset base from a cap rate perspective.

[David Bragg:]

That's helpful. The next question is just on the full year revenue guidance. We're struggling to get to this 5.5% midpoint that you're expressing confidence in, given the fact that you're at 5.2% year-to-date. Can you just talk a little bit more about the fourth quarter? How much of a favorable occupancy comp do you expect to have?

[D. Keith Oden:]

Right now, we're just at a little bit over 100 basis points favorable to plan. So I think that is likely to hold. Because if you look at the pre-lease percentage that we're currently at and project that forward for 6 weeks, which gets you out in the middle of December, it implies that we're still going to be right in the 96% range. So that's probably a big piece, from a modeling standpoint, which you might not have in your numbers. But I would just say that we've reaffirmed our 6.5% midpoint and we think we've got a way to get there.

[David Bragg:]

And the last question is when you provided initial 2013 guidance, you suggested that revenue enhancing repositioning would have a 50-basis-point positive impact on same-store NOI. Where do you expect that to finish the year? Will it hit that target or will it be more impactful?

[Richard J. Campo:]

We think it's in that zone. The thing that has been interesting about these repositionings, and Keith alluded to it in his previous comments about how we have been managing the occupancy, is that we're getting the premium in rent. The challenge has been that the process of getting the premium rent has had some disruptions on-site with contractors moving in and out and people working above somebody's apartment or adjacent to somebody's apartment. And the logistics of getting it done expanded the days to get it done from 9 days to 14 days, so we had a little more vacancy than we anticipated, a little more disruption to the existing tenants. But we're actually getting a little bit more than we thought we would in premium. So, with that said, I think we're sort of in the original zone that we talked about.

[Operator:]

Next question is from Michael Salinsky of RBC Capital Markets.

[Michael J. Salinsky:]

Just as a follow-up to that last question. Can you just talk about what the spend is? I think you guided to $50 million to $60 million, but it sounds like there's some upside to that this year. And then as we think about '14 and '15, how big is this program going to get?

[D. Keith Oden:]

Yes, the total size of the program is $200 million, plus or minus. And we're about halfway through that, a little bit more than halfway through that program. So, in terms of spend for the balance of the year, we're at a run rate now of about 900 apartments turned per month and they're running $11,000 per door, something like that. So, call it $10 million a month. So, balance of the year, call it $20 million and then that leaves roughly $80 million for next year if my math's right.

[Michael J. Salinsky:]

Okay, that's helpful. And then second of all, just a bookkeeping issue, the 2 predevelopments, Hollywood and Victory Park. You saw a pretty substantial budget increase, but you didn't see a change in the unit counts. What was that related to?

[Richard J. Campo:]

Well, the Hollywood transaction was related to a lease that we did. Originally, we were planning on doing -- there was roughly 25,000 square feet of retail that was required by the city, and then there was also some live/work units. And we're able to make a lease that we think really enhances the value of the property with Equinox, which is a high-end fitness group. And so we had to reconfigure the retail space to accommodate Equinox, add some more parking. So the majority of the increase was -- or a large part of it was Equinox lease in Hollywood. We did have, both in Hollywood and in Victory Park, construction escalation costs. It was probably in the 6% to 7% range. And we did have to reconfigure the garage a bit in the Victory Park as a result of requirements from the city to get that there. But at the end of the day, there was some higher inflation in construction costs, and we also added a little bit higher-end interior finishes. One of the things that we're doing now, and this is costing more for some of these properties, is we're focusing in on a problem that's been inherent for stick-built apartments forever. And that is sound transmission, being able to hear people above you or to the side of you or what have you. And we have been adding dollars, from a premium perspective, to try to improve the sound issues in these projects. So when you combine all those things, we've increased those budgets. The good news is the rents in all those areas have increased above our original projections as well. So we're pretty intact on our yields.

[Operator:]

The next question is from Tom Lesnick of Robert W. Baird.

[Thomas J. Lesnick:]

Standing in for Paula today. I'm sorry if I missed this earlier, but could you discuss the expense growth, specifically in Houston, if there was one main item there?

[Alexander J. K. Jessett:]

Are you looking at the quarter-over-quarter?

[Thomas J. Lesnick:]

Yes.

[Alexander J. K. Jessett:]

Yes, it's all property tax-driven.

[Thomas J. Lesnick:]

All right, that's helpful. And are you guys seeing higher move-outs for home purchases in some markets than others?

[D. Keith Oden:]

Market-by-market, the range would be probably at the high-end, in the 18%, 19%. Some markets still as low as high-single digits. I think the better way to think about it is kind of where we are versus our long-term average. For the quarter, we were at about 13.3% move-outs to purchased homes, which was down from the previous quarter of 14.6%. And we actually predicted that last quarter, that we thought we were going to get some pull forward just based on the level of existing home sales that were happening. I think there's a lot of impetus for people to -- as they thought mortgage rates were going to get away from them, there was a lot of impetus to get off the fence and go ahead and make a trade for a house. So we did see that and then we did get the bump up in the second quarter at almost 15%. But as we thought, it's back down to 13.3%. Now, from the standpoint of where that puts us against the long-term average, our long-term average for move-outs to home purchases is about 18%. So we're -- at the very peak of the housing boom, we were 24%. At the very bottom of the trough, we were high 9s and we recovered to about 13%. But we're still well below the long-term average. And we've been saying for some time now that we don't think that there's a race to get back to that. It's probably still a couple of years away before we see -- I think, before we see 18% again.

[Thomas J. Lesnick:]

That's very helpful. What were some of the markets at the high-end of that range and what were some of the markets at the low-end?

[D. Keith Oden:]

So, at the high end of the range, Denver, 24%, and this is for third quarter; Charlotte, 17%; Raleigh, 16.8%. Those are the ones that jump out at me on the high-end. On the low-end, Las Vegas, 8.5%; Southern California, 8%; Phoenix at 11.7%; Florida at 9.5%, and that would be the roll-up of Tampa, Orlando and South Florida. So those would be the ones that jump out on the low-end.

[Operator:]

The next question is from Steve Sakwa of ISI Group.

[Derek Bower:]

It's actually Derek here with Steve. Can you just talk about if there's any markets where it doesn't make economic sense any longer to continue to put renovation dollars into? Rehab dollars?

[D. Keith Oden:]

Yes, it's not market-specific as much as it is community-specific, Derek. Our underwriting, it kind of starts with what's the competitive set look like in terms of quality, age and interior finishes, and whether or not -- if we were to go through a renovation process and make our interiors, to the consumer's eye, essentially look like new construction, whether the rent premium that the new construction's getting is sufficient to justify that. So it's really more of a submarket consideration for us. So if you think about these assets, the average age of the assets that we're repositioning is about 10 years, 11 years. So it's not like we're taking 20-year-old assets and trying to turn them into something they're not. In many cases, these are assets that are incredibly well-located. But if you think about the interior finishes that were put in place 8, 10 years ago, to the consumers, to our customer's eye, it's a very different product offering than what new construction is offering today in terms of interior amenities and finishes. So if you have the opportunity to take what is an incredibly well-located asset, with a long useful life, maybe another 15 to 20 years in our portfolio, spend $11,000 per door and have the consumer, both on the exterior, because of our standard of care of how we maintain our communities, but also when they walk in as they're out shopping the new construction versus us, and we have a price point that's just below what the new construction is to the consumer's eye, it's an apple and an apple. So all of those considerations are done, really, at the submarket and the community level, rather than saying does it make sense to do it, not in Vegas but yes in Phoenix, et cetera. But, obviously, the markets where we're able to get those premiums also happen to be the markets that have had much higher growth rates and rental rates for new construction in the last couple of years.

[Derek Bower:]

Got it. And then just thinking about that 50 basis points or so of lift this year, do you expect that to be a similar amount going into next year of what's baked in from what you spent this year and most of that 200 spend over the next year? Could it be more than 50 basis points or would you experience a similar boost?

[D. Keith Oden:]

I think it's going to be on the same zone. We've gotten a lot more experience now, at how many days vacant, and we're I think better at turning them -- the challenge, again, is this issue of the negative impact that you do have on the existing product, and then how do you calculate what that value is and offset it against the income that you're getting from the rehab. So, we're going to do a lot more work on that and we'll provide better guidance in the first quarter.

[Derek Bower:]

Got it. And then just lastly, with the supply that everyone's sort of worried about in Raleigh right now. Are you doing anything proactive there to mitigate it? And then just thinking about what the next few quarters were like. You haven't seen the impact yet, but would you imagine it's sort of a slow decline like D.C. has been, or is it going to be a material drop off, say, from 5 one quarter to 2 or 3 the next or maybe even 1?

[D. Keith Oden:]

Well, point 1a is we're not building in Raleigh. So we're doing that part of it. But obviously, we're subject to -- if we get this big run-up in supply, we think it'll affect everyone. So, offsetting that, we increased our occupancy targets in Raleigh, just like we did everywhere else, and we had good results with that. So I think we're about as well-positioned as we can be. Fortunately, a lot of the new construction are in 2 submarkets, where we don't really have a lot of exposure. But that's not to say that when the whole -- if the whole market is getting turned upside down, it certainly will have an impact on us. But I think we're not as exposed as some of the other operators are to those particular submarkets.

[Derek Bower:]

Got it. And so would you expect it to be a pretty sharp drop during one quarter or, again, just sort of a slow seasonal unwind throughout the next year?

[D. Keith Oden:]

No, the way our leases roll, you just very rarely see anything that you would consider sharp. I mean, obviously, where that could occur would be if you had some material falloff in occupancy, and we just don't see that happening. And again, from a new construction standpoint, geographically, we're not as exposed as some folks. And then from a product standpoint, we're probably different price point than what the new developments are. So I think you're going to see, like anything else, you would see that rollout as we started to see impacts on new lease rates.

[Operator:]

Next question from Karin Ford of KeyBanc Capital Markets.

[Karin A. Ford:]

At least one of your peers mentioned seeing some renter fatigue this quarter. Just given your comments on trees not growing to the sky earlier, are you seeing any of that and is that sort of what's behind perhaps that view?

[D. Keith Oden:]

Well, I don't know if it's renter fatigue as much as it is just sort of the math catching up with you on 15% same-store NOI growth in 2 years. The good news in our portfolio is that even though our rental rates have moved -- and we've moved them pretty aggressively, the ability of our residents to pay, as measured by what percentage of their income the rent payment is taking, has continued to fall. Which is kind of interesting and it tells me that we're getting -- a, the folks who do have jobs are continuing to get increases in their disposable income. And overall, we probably got a little bit better demographic in our communities today than we did 4 or 5 years ago. So, look, I tend to look more at -- for sustainability of increases, at the income-to-rent ratio, which is right now in our portfolio running at about 17.2%, and it's been as high as 21% in our portfolio. So, by looking at that, I don't get that concerned about it. But I just think it's -- as you look forward and you start thinking about rental rate increases that we've seen over the last 2 years, yes, that's probably going to continue to moderate. But, as Ric mentioned, we're talking about moderation, but still well above long-term trends.

[Operator:]

[Operator Instructions] And the next question is from Ryan Bennett of Zelman & Associates.

[Ryan H. Bennett:]

I just want to follow up on your comments about development just real quick. You noted, I guess on the starts, that there's still a healthy spread between -- or you expect the development yields to kind of pencil out versus where cap rates today. And then you also spoke about how you expect to see a deceleration in permanent activity, which would suggest spreads are narrowing across other projects. Is it just a function of your projects that you're currently starting right now with the better land basis or in terms of the construction costs, particularly the markets where you're starting projects? I'm just trying to get some color around that.

[Richard J. Campo:]

Yes, absolutely. Properties that were in the pipeline, where we had -- half the plans done, we're buying jobs out today, are definitely better off and have better construction costs, better land basis. If we had to go out and get a brand-new piece of land today and at today's prices -- because prices are over peak prices in 2007 for land today, and construction costs are back to or higher than 2007 peaks as well. So in order to underwrite new transactions that aren't in your pipeline already, it's just more difficult, there's no question. The other challenge, I think, is that as you develop the pipeline further, and this is happening to merchant builders more than it is us, but if you think about 85% of the construction starts in America are done by merchant builders. And the merchant builder model is to build and sell, and they have to believe that, that spread, that spread that they're measuring today, which is the difference between, on an untrended basis, what you're going-in yield is versus what you're acquisition rate is, right? So the question is, if you think about what's going on the public markets, the partner REITs are selling at below NAV because people are worried about rising interest rates or worried about too much supply, they're worried about single-family homes taking share from apartments, and so the same investors that are investing in apartments stocks are also investing in merchant builder development deals. And when you start going forward and saying, "If I'm going to build a property today and it costs more for land, it cost more for construction," and even though the spread today is really good, what the public markets are telling people is, or at least inferring today is that, that's not going to last for a while. And, yet, to deliver that product into 2016, '17, I think that people are getting more nervous about '16 'and '17, not so much '14, '15, but further out. So, even though the spread today is reasonable, overall, you're seeing starts decline. That doesn't mean they're going to go down to $150,000, but they're going to stabilize probably into that $250,000 zone. I think a lot of folks have been thinking that the multifamily starts are going to go -- a progression of $150,000, $250,000, $350,000, $450,000, because people like to draw lines that fit well, right? I think, today, even though spreads are good it's not going to shut the business down, but it's definitely going to moderate the business.

[Ryan H. Bennett:]

Great. And then just one question. I know Phoenix is a small part of the portfolio, but I noticed that revenue growth declined sequentially in the third quarter for the first time in the third quarter since '09. Just curious what you're seeing in that market, given that you had 2 starts in the Arizona markets this quarter. If it's something specific going on that we might need to be concerned about or what might have caused the sequential decline?

[D. Keith Oden:]

Yes, I think you've just got such a small same-store pull that you're looking at that it gets jerked around by any -- you get 2 or 3 points of occupancy in a community and you're going to get that kind of a differential. It's hot in Phoenix in September. It's not a good time of year to be renting apartments. But overall, Phoenix, we really like. There's tremendous economic activity going on. The job growth, we think, will be there for 2014. And the reality is, is that there are -- because of where Phoenix has come from, there's so little under construction that we feel really, really good about our -- the 3 development communities that we have teed up in Phoenix.

[Operator:]

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

[Richard J. Campo:]

Well, we appreciate the call today and we will see a lot of you in NAREIT in the next couple of weeks. So thank you very much for being on the call.

[Operator:]

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