CAMDEN PROPERTY TRUST Q3 FY2024 earnings call

• Strong third quarter earnings with results ahead of expectations. Apartment absorption in markets was the best in twenty years (excluding 2021) due to strong job growth. Multifamily demand driven by in-migration and fewer consumers choosing homeownership. New apartment supply at all-time high, but absorption limited rent growth. - Hurricane resilience: Southeast portfolio built over sixty percent with quality construction, preparation, and communication led to minimal damage from hurricanes Helene and Milton. - Development activities: Commenced ~$320 million in new developments in 2024, anticipate starting ~$375 million in 2025, and have remaining owned land parcels and under-contract land parcels for future starts. - Financial results: Core FFO of $1.71 per share for Q3, three cents ahead of guidance. Adjusted full-year same-store NOI guidance, with changes in revenue and expense ranges, and provided fourth-quarter guidance.

Same property revenues were in line with expectations, with slightly lower than anticipated operating expenses. Top markets for same property revenue growth included Southern California, Washington DC metro, Southeast Florida, Denver, and Houston, all with revenue growth above the portfolio average. Rental rates for the third quarter showed signed new leases down 2.8% and renewals up 3.6%, with a blended rate up one-tenth of a percent and an average occupancy of 95.5%. Preliminary results for October reflected moderation in pricing and occupancy levels. Net turnover for the third quarter of 2024 was 46% compared to 51% in 2023, and year-to-date net turnover was 41% compared to 44% in 2023.

• Maintained midpoint of full-year same-store NOI guidance at 0.75% but adjusted ranges: same-store revenue growth midpoint 1.3% (range 1.1%-1.5%), same-store expense growth midpoint 2.3% (range 2.1%-2.5%). - Fourth-quarter occupancy expected to be 95.2%-95.4%, blended lease-outs slightly negative, bad debt 75-85 basis points. - Core FFO per share for Q4 expected to be $1.68-$1.72, representing a one-cent per share sequential decline at midpoint. - Balance sheet remains strong with net debt to EBITDA at 3.9 times.

• Hurricane impacts: While minimal damage was reported, future hurricanes could pose risks. - Market supply and demand: High new apartment supply limiting rent growth, and potential challenges in certain markets. - Interest rate changes: Impact on debt and underwriting. - Merchant builder risks: Potential for limited distressed transactions but massive capital deployment into multifamily. - Market-specific challenges: Issues in Atlanta and LA with processing delinquencies and demand/supply dynamics.

Q: If you think about the four pre-development projects that you paused, 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?

A: Ric Campo discussed capital allocation, stating the four projects didn't meet investment criteria, with considerations of California exposure reduction, Houston urban vs. suburban focus, and Atlanta concentration issues. Rents would need to have outsized growth, and development is about capital allocation to meet investment criteria.

Q: 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, you know, the financial clock is ticking, they need to pay back, etcetera. 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, you know, in the next few years, you'll see more opportunity from these sort of forced sales or are 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?

A: Ric Campo said there'll be more transaction volume, but not distressed transactions. Merchant builders have incentives to maximize profits, banks have kicked the can down the road, and massive capital needs to be deployed into multifamily.

Q: 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 thirteen percent of NOI today. I guess how much of a decrease makes sense to you today when you kind of revisit, you know, strategically, you know, take 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?

A: Ric Campo said they want to lower exposure in Houston and DC, can sell assets in Houston to redeploy capital, with a target of 6-9% exposure in markets.

Q: You maintain leasing spreads higher through September than your Sunbelt peers, but then it seems like there was 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? What would you attribute that to?

A: Alex Jessett said it was a drive towards occupancy, impacting the fourth quarter results.

Q: I guess I want to go back on the development. A couple of things. You know, I noticed that the projects that are currently on lease-up didn't seem to have a huge movement in percent lease from kind of 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. And I realized 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?

A: Alex Jessett said leasing trends for developments were in line with expectations, with some single-family rental communities leasing slower but others in line. Construction costs were due to enhancements, and yields still hit return thresholds.

Q: A question on cap rates and Rick, you mentioned the opportunity set with a debt coming due and merchant developers being stretched. In a few years. If there's a sort of a lack of transaction activity, but when we do see something, it's a five or lower perhaps, is that just a function of the moment something does hit, you know, there's a wave of capital and I use the example of senior housing, which, you know, the opportunity set in front of it right now is very positive, yet cap rates are seven and a half, eight percent. Your the opportunity set in front of multifamily and, at least, in your markets, may get positive soon, but, you know, for the time being is a bit you know, a little bit of a question. And yet cap rates are still in the five. 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 set I described earlier? Or are you willing to, you know, sort of take a little bit of a hit upfront get a deal that will make sense for you two or three years later?

A: Ric Campo discussed multifamily being a top investment choice, cap rates moving from fives to fours, and the impact of treasury rates, with confidence in buying below replacement cost and improving operations.

Q: Maybe one for Alex. You think about, you know, I think you and several of your peers the course of this year has been, you know, reducing your top-line outlook. By getting nice cost savings to keep your NOI outlook. So I guess two questions here. Number one, you know, 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 along around top-line revenue, you know, where you could start the year on a conservative basis and get some upside?

A: Alex Jessett said insurance and taxes were the most conservative areas, with insurance down and taxes flat, and while expenses may be harder to save in 2025, there's still potential in property taxes and insurance.

Q: I wanted to follow-up on Austin's question on Houston. If you look on your presentation, page six, the migration trends for Houston look 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. He's been very supportive of the oil and gas industry. Can you remind us if that's a positive for the Houston economy, and as either of those items come into fruition, the acceleration in migration or Trump winning the presidency, will that impact your decision to reduce your exposure to the market?

A: Keith Oden said Houston is impacted by oil and gas, and the strategy to reduce exposure predates Trump, with a goal to rebalance the portfolio.

Q: Just want to ask, what do you expect for the 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-threes for November and December. Where do you think that actually shakes out? Like, could it be, like, a hundred basis point lower or any sort of guidepost you can give us on that side?

A: Alex Jessett said fourth quarter new lease rates would be similar to October, and renewal rates would be around mid-threes.

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

A: Alex Jessett said construction cost changes were due to enhancements, and land prices are lower than peak but not much land transactions have occurred.

Q: 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 operates?

A: Alex Jessett and Ric Campo discussed the quality of construction and upkeep contributing to resilience, with examples from hurricanes showing better performance than neighbors.

Q: I was curious what kind of difference in performance do you see between your urban and suburban assets and submarkets? Is it just not driven by rent growth? Is there an element of CapEx differences? And I'm also curious if you're thinking on the urban-suburban divide is consistent across markets, or are there any exceptions?

A: Alex Jessett said suburban assets outperform urban, with suburban revenue growth about 80 basis points better, due to demographic trends and customer location.

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

A: Keith Oden said move-outs to purchase homes were a major driver, with a historic low rate, expected to continue in 2025.