Camden Property Trust (NYSE:CPT) Q2 2020 Earnings Conference Call July 31, 2020 11:00 AM ET

Company Participants

Kim Callahan – Senior Vice President of Investor Relations

Ric Campo – Chairman and Chief Executive Officer

Keith Oden – Executive Vice Chairman

Alex Jessett – Executive Vice President, Chief Financial Officer and Treasurer

Conference Call Participants

Jeff Spector – Bank of America

Nick Yulico – Scotiabank

Austin Wurschmidt – KeyBanc

Alexander Goldfarb – Piper Sandler

Nick Joseph – Citi

Neil Malkin – Capital One

John Pawlowski – Green Street Advisors

Rich Anderson – SMBC

Rich Hightower – Evercore

John Kim – BMO Capital Markets

Zach Silverberg – Mizuho

Alex Kalmus – Zelman and Associates

Operator

Good morning, welcome to the Camden Property’s Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Kim Callahan, Senior VP of Investor Relations. Go ahead.

Kim Callahan

Good morning and thank you for joining Camden’s Second Quarter 2020 Earnings Conference Call. Before we begin our prepared remarks, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC and we encourage you to review them. Any forward-looking statements made on today’s call represent management’s current opinions and the company assumes no obligation to update or supplement these statements because of subsequent events.

As a reminder, Camden’s complete second quarter 2020 earnings release is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call.

Joining me today are Ric Campo, Camden’s Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman; and Alex Jessett, Chief Financial Officer.

We will attempt to complete our call within one hour, so we ask that you limit your questions to two, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we’d be happy to respond to additional questions by phone or e-mail after the call concludes. At this time, I’ll turn the call over to Ric Campo.

Ric Campo

Thanks, Kim. The theme for our on-hold music today was strange days. It’s one of the most common ways I’ve heard people life during this pandemic, strange days indeed. It’s common for some to refer to current state of affairs are unprecedented. I’ve concluded that while almost all agreed that these are strange days whether or not people believe these days are unprecedented is definitely age related. Younger people are more likely to view our current situation as unprecedented. People of my age are older and a far less likely to see these current strange days as unprecedented.

In 1967, when I was 13 years old and a rock bank named The Doors released the song titled Strange Days. Clearly, I’ve a background from that. This is the first verse of the song. Strange days have found us. Strange days have tracked us down. They’re going to destroy, our casual joys. We shall go on playing or find a new town. The Doors were way ahead of their time both musically and culturally and indeed the next few years after 1967 will bring an extended period of strange days and civil unrest that were orders magnitude stranger than we’ve seen thus far during a COVID storm.

I’m naturally optimistic and I promise you, this too shall pass since we’re all in this together. We’ll continue to encourage our Camden team to stay true to Camden’s Why. Our purpose for being, that is to improve the lives of our team members, residents and shareholders. One experience at a time. Apartment demand is strong in a market than we’ve expected given the nearly 40 million Americans that have filed for unemployment benefits with an official unemployment rate of 11.1%.

Camden’s geographic and product diversification has continued to lower the volatility of our rents and occupancy. Camden’s Sunbelt market have fewer job losses than close to markets in the US overall. Our product mix that offers varying price points in urban and suburban locations continues to work for us. Camden was prepared to the pandemic, we have a great culture and flexible workplace and amazing employees that have adapted very, very well to the current work environment.

Our investments in technology moving to the cloud based operating systems and our Chirp access systems have allowed us to not miss a beat when it comes to leasing or operating our portfolio or making payroll and some basic things like that. We have the best balance sheet in the sector and one of the best in replanned overall. We were prepared and continue to be prepared to do as well as we can in this environment. I think we’ll do well long-term. I want to give a shout out to our amazing Camden’s teammates for all that they do for our residents and taking care of each other every single day.

I’ll turn the call over to Keith Oden now for couple comments from him. Thanks.

Keith Oden

Thanks Rick. Strange days indeed. My prepared remarks today will be brief as we want to allow as much time as possible for Q&A. we want to make sure that we’re providing you with the information that you find most useful to your ability to understand the current state of affairs in Camden’s market.

At the outfit of the COVID storm, we held an all Camden conference call during which we told our Camden team that our highest priorities were number one, taking care of our Camden family and two, taking care of our residents. During the second quarter, we made good on that promise. We undertook various initiatives including a frontline bonus paid to our 1,400 onsite team members and we provided grants to almost 400 associates from our long-established Camden Employee Emergency Relief Fund.

We also established Camden resident relief fund from which we were able to provide grants to 8,200 residents at a time of maximum financial uncertainty in their lives. We were pleased to be able to provide this level of assistance to the people who were financially impacted during the early stages of the COVID crisis. On our first quarter conference call, we were asked when we thought we could reintroduce guidance and we said that when we felt like we had reasonable visibility into the next quarter we would do so.

At that time based on the confidence level that we had from our operations and finance teams regarding our projected May and June results. On a scale of one to 10, it was probably a two, not good. As we sit here today, while our confidence level is less than it would be in normal times. We do feel it is sufficiently to provide guidance for the third quarter and we’ve done so. I want to acknowledge the amazing job the team Camden has done in continuing to provide living expenses to our residents despite the radical changes we’ve made to our policies, procedures and protocols. It’s been incredible to the whole [ph]. Keep up the great work. And with a little good fortune, for which we were long overdue, we’ll see you soon.

I’ll now turn the call over to Alex Jessett, Camden’s CFO.

Alex Jessett

Thanks Keith. For the second quarter of 2020 effective new leases were down 2.1% and effective renewals were up 2.3% for a blended growth rate of 0.3%. Our July effective lease results indicate a 2% decline for new leases and a 0.2% growth for renewal for a blended decrease of 0.9%. Occupancy averaged 95.2% during the second quarter of 2020 compared to 96.1% in the second quarter of 2019. Today our occupancy has improved to 95.5%.

We continue to have great success in conducting alternative method property tours for perspective residents and retaining many of our existing residents with only a slight deceleration in total leasing activity year-over-year. In the second quarter, we averaged 3,855 signed leases monthly in our same property portfolio as compared to the second quarter of 2019 when we averaged 4,016 signed leases. July 2020 total signed leasing activity is in line with July 2019.

For the second quarter of 2020, we collected 97.7% of our scheduled rents with 1.1% of our rents in the current deferred rent arrangement and 1.2% delinquent. This compares to the second quarter of 2019 when we collected 98.6% of our scheduled rent but with a slightly higher 1.4% delinquency. The third quarter is off to a strong start with 98.7% of our July 2020 scheduled rents collected ahead of our collections of 98.4% in July of 2019.

Last night we reported funds from operations for the second quarter of 2020 of $110.4 million or $1.09 per share representing a $0.26 per share sequential decrease in FFO from the first quarter of 2020. As outlined in last night’s release included in this $0.26 sequential quarterly decrease is $14.02 of direct COVID related charges incurred during the quarter. After excluding the impact of this aggregate $14.02 per share sequential FFO decreased $0.12 in the second quarter resulting primarily from approximately $0.05 per share in lower same store net operating income resulting from a $0.02 per share decrease in revenue from our 90 basis points sequential occupancy decline, a $2.50 per share decrease in re venue resulting from an increase in bad debt reserves from approximately 45 basis points in the first quarter to approximately 180 basis points in the second quarter and an approximate $0.50 per share sequential increase in expenses. Approximately $2.50 in lower non same store development and retail NOI also resulting from a combination of lower occupancy and high bad debt reserves and approximately $0.04 per share in higher interest expense resulting from our April 20th, $750 million bond issuance.

Turning to bad debt, in accordance with GAAP certain uncollected rent is recognized by us as income in the current month. We then evaluate this uncollected rent and establish what we believe to be an appropriate bad debt reserve which serves as a corresponding offset to property revenues in the same period. As previously mentioned, for same store our bad debt as a percentage of rental income increased from approximately 45 basis points in the first quarter to approximately 180 basis points in the second quarter.

During the second quarter, we reserved effectively all of the 1.2% of delinquent rents as bad debt. Also in the second quarter, we reserved effectively half of 1.1% of deferred rent arrangements as bad debt. When a resident moves out owing us money, we have already reserved 100% of the amounts owed as bad debt and there will be no future impact to the income statement. We reevaluate our bad debt reserves monthly for collectability.

In the second quarter for retail which is not part of same store. We reserved 100% of all amounts uncollected and not deferred which totaled approximately $800,000. Last night based upon our recent trends, we issued FFO and same store guidance for the third quarter. However, given the continued uncertainty surrounding the social and economic impacts from COVID-19 at this time we will not provide an update to our financial outlook for the full year.

For the third quarter of 2020, as compared to the third quarter of 2019 at the midpoint. We expect same store revenues to decline by 1.6% driven primarily by lower occupancy, higher bad debt and lower miscellaneous fee income. We expect expenses to increase by 4.5% driven primarily by higher property insurance, higher property tax assessments and large property tax refunds receive in Atlanta and Houston in the third quarter of 2019.

As a result, we expect NOI at the midpoint to decline by 5%. We expect FFO per share for the third quarter to be within the range of $1.14 to $1.20. The midpoint of $1.17 is $0.08 per share better than the $1.09 we reported in the second quarter. However, after adjusting our second quarter results for the previously discussed $0.14 of COVID related charges. Our $1.17 midpoint for the third quarter is a $0.06 per share sequential decrease resulting primarily from a $4.50 per share sequential decline in same store NOI as a result of $0.50 per share decrease in revenue resulting primarily from lower net market rents and a $0.04 per share increase in sequential expenses resulting primarily from the typical seasonality of our operating expenses, the timing of certain R&M cost and the timing of certain property tax refunds and assessment. And approximate $0.50 per share decline in non same store NOI resulting primarily from the same reasons and an approximately $0.50 per share increase in sequential interest expense resulting from our April 20 bond issuance.

As of today, we have approximately $1.4 billion of liquidity comprised of just over $500 million in cash and cash equivalents and no amount outstanding on our $900 million unsecured credit facility. At quarter end, we had $185 million left to spend over the next 2.5 years under our existing development pipeline and we have no scheduled debt maturities until 2022. Our current excess cash is invested with various bank earning approximately 30 basis points.

And finally, a quick update on technology. As I discussed our on-site teams are having great success with virtual leasing and we just completed our second virtual quarterly close, a task that would been so much harder if not nearly impossible without our investment in a cloud based financial systems. As mentioned yesterday in the Wall Street Journal, we’re continuing our pilot of Chirp our smart access solution with great success and we’re finding even more ways to utilize as the Chirp technology.

At our pilot communities for self-guided tours, our leasing teams can use the Chirp access applications to grant a prospect limited access to tour both the community and specific available apartment homes in a completely touch less exchange. There is no need for the prospect to pick up physical keys or fobs or ever even enter the leasing office. Our leasing teams create the prospect a Chirp account, grant them access to the best apartments. Chose and [indiscernible] their unique wants and needs and then determine when the prospects access will expire.

Additionally, we can utilize Chirp to quickly and automatically control the number of residents who have access to an amenity space such as a fitness center at any given time. Amenity spaces deemed as reservation only. Will require residents to use the Chirp access application to reserve a specific timeslot. Only those residents with confirmed reservations will have access to open the door of the amenity space for the allotted time. When the reservation expires, so does access to the amenity. Clearly, in this COVID environment our Chirp initiative takes on even more importance.

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

Question-and-Answer Session

Operator

[Operator Instructions] our first question comes from Jeff Spector from Bank of America. Go ahead.

Jeff Spector

Thanks for the initial comments. I thought it might be most helpful to talk about the markets in particular your 3Q guidance. Alex, I think you talked about lower occupancy, higher bad debt. I guess can you talk a little bit more specifically on Houston and maybe even Phoenix. We were surprised to see the 2% occupancy drop in Phoenix. Thank you.

Ric Campo

Jeff, Houston continues to be one of our weaker markets. We have two challenges headwinds and separate from the COVID in Houston. The energy business is obviously still continuing to be under pressure. But also, we were scheduled and continue to be scheduled to deliver roughly 19,000 apartments in 2020 according to Vitans [ph] numbers so those are in the process of being brought online.

The place where we see the most impact to that is in Downtown, Midtown area where a lot of the new deliveries are coming online. So that would have been an issue irrespective of trying to absorb 20,000 apartment, 19,000 apartments in an environment where the job growth was already going to be a little bit under pressure from the energy business and yet on top of that, the job losses that are not related to the energy business at all.

Yes, I mean it’s more of a challenging environment. We think that in terms of renewal leases or renewals that are going out in Houston, one out in July those are going out at basically flat. It’s one of the – so our renewal overall across our markets for the July renewals that went out is about 1.8% across the platform. It’s as high as 4% renewals in Austin and then at the low end of that would be Houston at basically flat. So it certainly feels like from a renewal standpoint more getting back closer to regular order in terms of every market that we are operating in, we’re sending out renewals with increases.

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Specifically in Phoenix, at the seasonal weakness that we always have in the middle of the summer. The 2% occupancy drop is a little bit more than what we would normally see but it’s not unusual to have that kind of weakness. We still have pretty decent rental growth in Phoenix and it continues to be on a projection going forward. It continues to be one of our bright spot markets for us. It’s been incredibly strong for the last two years and we think that market is going to continue perform well for us.

Jeff Spector

Thank you.

Keith Oden

And Jeff, when we talk about lower occupancy and higher bad debt, we’re comparing the third quarter of 2019 to the third quarter of 2020. We actually expect third quarter 2020 occupancy to be relatively flat to the second quarter 2020 in the aggregate.

Jeff Spector

Okay, that’s good to know. Thank you. My second question, if I can ask. Your peers talked about an Exodus [ph] to single family rentals this past quarter. Are you seeing the same thing in your markets?

Keith Oden

The single-family market or move out to apply single family homes went up slightly at the beginning of the quarter, but it flattened out and it’s still in 14%, 15% range. Obviously with low interest rate and the marginal folks that were going to go buy houses, are buying houses right now. But generally speaking when you look at our demographic profile with a lot of single folks that are living in our apartments even with low interest rate. They’re just not buying houses and so with that said we haven’t really seen any increase in moving out to rent houses or buy houses.

Jeff Spector

Thank you. I wish everyone well.

Operator

Our next question is from Nick Yulico from Scotiabank. Go ahead.

Nick Yulico

First question is just on your new leasing renewal pricing. It did actually get a little bit better, it looks like in July versus the second quarter. And I just want to be clear here on the renewals because it sounds like some of the renewals that you’re doing now are also improving versus the second quarter so, just trying to understand how we should think about rental pricing dynamics in the third quarter and the rest of the year. I mean, are things getting better or worse you think?

Keith Oden

Well on the renewal side, there’s no question they’re getting better. Part of that though if you’ll recall for the first 90 days after the COVID storm hit, we went to shut down mode. We actually from a policy perspective just so we’re not going to take any renewal increases for the next 60 to 90 days and then as it turned out it was a little right at 90 days that we just did not process. We offered everybody renewal at flat.

Now, could we have as it turns out in 2020 in hindsight, could you’ve gotten 1% or 2% increases? Probably. But from the standpoint of two thoughts on that. One was we just had no idea how to measure the collapsing demand from 30 or 40 million evaporating. So there was a great concern on our part that you need to keep every resident that you have in place, that it’s possible. So that was one part of it. The second part was really more of a – it was just more. In terms of resident who have been kind of shut in to their apartments most of them working from home. And at the time, we had been mandated in almost every case to close all amenity spaces.

So you have people who are in the midst of pandemic, 40 million job losses and then they can’t even use the amenities. It just seemed like a terrible idea to be pushing through rental increases to our residents at a time where they couldn’t even full value of the proposition that they’ve felt they bargained for, so part of it was just to protect the relationship that we have with our residents and not create that kind of tension that would come from leasing consultants trying to get what would amount to $20 or $30 rental increase from residents in that timeframe.

So the net of all that is, our renewals were probably under what could have been achieved in the first half of the year and obviously it’s back to regular order now and we’re just in a really different place. We’re in different place. Our residents are in a different place. For the most part our amenity spaces are all open, some with restrictions. But they’re open again. So we expect much better results on renewals. But new leases in July were just tiny bit better than a tick up from where we in the first half of the year.

I think more importantly for us. Is that we were able to maintain and above 95% occupancy rate with between the new lease activity and the renewals. So to me that was more important to see the stability there and it gives us something to grow on, going forward.

Ric Campo

Let me just add that. Early on in the pandemic, we along with the leadership of the NMHC Group, Doug Bibby and his team. We hosted an industry conference call and then we came up with as a team the best practices for the way the industry ought to face the pandemic and the industry was all about, even before late fees were banned by governments or evictions and things like that. We came out with a set of principles that were just bind to help residents in a very uncertain time.

And one of the principles was, flat renewals, no late fees, work with people in terms of payment plans and things like that. I think the industry did a great job of showing it that they really care about their customers and so to Keith’s point. Sure we could have renewed leases during the first part of the pandemic at decent rates. But we just chose not to now. There are some folks in our industry that just didn’t do that and they did raise rents and you know that’s just not our culture.

And I think most of the industry followed those principles of trying to help their customers in a very, very uncertain and complicated time. The thing it’s really interesting about this is that, we’re four months into it right, which is like nothing compared to the financial crisis and all that. And so, so uncertain and I think that people — when you think about how you treat your customers. It’s all about building your brand long-term and making sure that customers understand that you actually care about them.

Nick Yulico

Okay, thanks. That’s helpful. Just second question would be, if you have any stats you can provide on the nature of your total portfolio in terms of which buildings you think are high rise product versus not. I mean, I think you definitely have some in Hollywood, Washington DC. I think you have at least one in Houston. And whether you’re seeing as well any difference in leasing demand for what would be more high-rise concrete steel type product versus lower rise stick and brick product? Thanks.

Ric Campo

For us the good news. I don’t know if it’s good news or bad news. So we don’t have as many high rises as we have mid and low rises. We balanced the portfolio pretty well to – like just take Houston as an example. We have two high rises in Houston that are actually high rises, 22 storey, 30 storey. We’ve seen really no change in demand for high rises and some in those markets and same at DC. Because DC is actually a stand-up market for us right now, which is great? But when you think about our portfolio in Houston. We then go to a midrise where you might have a H3 building and then six H3 building and then we go to down as low as two or three storey lots. Actually we have some older property we built, older properties we built and then 20 years ago, that are two storey.

So we tend to be more suburban, more lower density but we really haven’t seen a lot of differentiation between high rise or low rise given though we don’t have many high rises. And then I think the other part of that equation is sort of geographic mix and product mix that we have and generally speaking we’re sort of skewed towards suburban and more B than A. right now, we don’t really see a lot of variation in collections or in demand for any of that product. It’s all about the same.

Nick Yulico

Thanks, appreciated.

Operator

Our next question is from Austin Wurschmidt from KeyBanc. Go ahead.

Austin Wurschmidt

It relates to the bad debt. I was curious, how much of an impact that had on your same store revenue growth in the second quarter and then what did you assume for bad debt in 3Q same store revenue guidance because from the July collections data. It looks like they were actually better than both the first quarter and 2Q of last year?

Alex Jessett

Yes, absolutely so. As I said our bad debt went from approximately 45 basis points in the first quarter to approximately 180 basis points in the second quarter. So you can look at that, 140 basis points and that’s a direct reduction in revenue on a sequential same store basis. So you can do the math on that. When we look at what we’ve got in our model on a go forward basis. We’re anticipating that the third quarter bad debt drops down to somewhere right around 125 basis points so it goes from 180 to 125 and so hopefully we’ll get some pickup on that. Now that pickup is going to be offset by slightly lower net market rents and will also be offset by slightly lower re-letting income. We did get a fair amount of re-letting income in the second quarter as we did have folks break their leases.

Austin Wurschmidt

Understood. And then as it relates to Chirp. Just curious what’s kind of timeline for rolling that out across the portfolio and then can you remind us, how we should think about the returns there and how you guys are measuring that?

Alex Jessett

Yes, absolutely. So you have to think about Chirp and two components. The first one is the gateway and that’s the Chirp that controls the access gateways also controls the amenities space etc. we’ve rolled out right around 12,000 units and we expect to have gateway rolled out across our entire portfolio really by the end of the year. The second component is, what we call the [indiscernible] curb-to-couch solution which includes gateway but also goes to the individual locks of the unit and we’ve rolled out about 1,500 doors with that solution and we expect that probably by about this point next year, we will have total sales. So it’s gateway plus lock rolled out across our entire portfolio.

It’s really interesting when we originally looked at what the value proposition was for this, we looked at a lot of things around not having to re-key locks, time that are on folks, people spent, letting vendors etc. in. and then we also knew that there was some embedded value proposition to a resident to be able to push a button and let the pizza delivery guy in the gate and go straight to their front door rather than having to get out of their jammies and walk down to the front gate and open it up.

We never would have thought of COVID-19 and all of the additional benefits that we’ve not gotten from this. And so we’re still at the point of trying to quantifying all of the benefits. But I will tell you when we look at orders that we see that say, gyms must be a 25% capacity or 50% capacity. This is nearly impossible for a typical apartment operator to enforce. However with our Chirp access application, we can do that and we can do it very easily.

When we think about virtual leasing which is undoubtedly the future of our industry. You can’t have virtual leasing unless you have an access application that opens gate, close doors. So there are a lot of additional benefits that we’re still in the process of quantifying. But ultimately, we think this is a huge differentiator for Camden and ultimately, we’ll be huge differentiator for the industry.

Austin Wurschmidt

So you’re attempting the measure and all what you think the returns are, is it just an additional offering across the entire portfolio that you think will generate value just overtime from a demand perspective and just resident satisfaction perspective?

Alex Jessett

That’s exactly right. I think ultimately a resident of Camden who has Chirp, when they got look at an additional or at another community and they realize that they will have to take time off work to let their dog walker into their apartment when they realize that they will have to meet all of their guests at the front gate. I think they will ultimately pay us to have the flexibility and to have the convenience of the Chirp application that will provide.

Keith Oden

I think the other issue is cost savings because when you think about the number of keys we have and lost keys and emotion that goes on with having to help people open their doors and things like that. It ought to be a relieve us some cost and allow our on-site people to in fact serve the customer better.

Austin Wurschmidt

Got it. Okay. Thanks guys.

Operator

Our next question is from Alexander Goldfarb from Piper Sandler. Go ahead.

Alexander Goldfarb

The Chirp feature sounds pretty interesting, just given I’m guessing all the different uses of that can be. So just two questions here. The first is, in California maybe I missed it. What percent of your residents are basically free loading? Are in there not paying rent and off those that aren’t paying rent, how many do you think will not pay rent versus are just saving the money and once the eviction moratoriums go over, they’ll pay you the back rent? Along with some hopefully there’s interest that accrues, but I’m not sure.

Alex Jessett

So when you look at July delinquency California has improved tremendously. It’s still our highest delinquent market. But it’s at about 3.6% today. Obviously, time will tell as we’re able to start enforcing contracts what percentage of those folks actually pay. But as I said, it is a significant improvement from where it was four months ago.

Alexander Goldfarb

And where was it four months ago?

Ric Campo

I kind of stopped because there’s no late fees. They’re banned by the government. I think it’s really instructive though when you look at in Houston for example. Our Houston numbers are not even single digits. They’re in the point 3% or 4% range and California is 3% change. It shows you sort of mentality and that gets to the whole sort of Government Issue. I mean if you’re a resident in California and you listen to the Mayor of LA, the Governor. Their messaging is, don’t worry you don’t have to pay and the limitation of late fees. The limitation of being able to evict somebody creates, what we call ghosting. Which is they just don’t show up and they don’t have the ability. They know they don’t have any negative recourse, you’re not charging them interest or late fees and they know they can’t be evicted and so you just have, you have this ghosting scenario that happens out there and it is a – I think a serious morale hazard issue and it’s just – in most of our Sun Belt markets people just think, they should pay their rent on time, if they have the money and California, it’s just a little different animal.

Alexander Goldfarb

So Ric, your view is that most people will pay when they have to or are these all the people Alex that you said you wrote off as delinquents and you wrote them all off and you’re not expecting any of them to pay.

Ric Campo

We’re writing them off based on our policy. But I think that folks that care about their credit and care about – if you care about your credit you’re going to pay. A lot of the people that aren’t paying today actually have the ability to pay. They’re just not paying. So we have clearly modified our bad debt policy and increase the accrual for bad debts. But we might be surprised that people actually do pay when the government tells them they should pay. I think one of the things that it is really interesting and this is I think sort of system wide but it’s probably more important in California is that, the Apartment Associations are trying to educate people because when the Governors and Mayors say that there’ll be no evictions. A lot of folks think that means, that get free. Right. And like okay, we’re not going to evict or foreclose on anybody and they think that during that period it’s free.

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And we’re educating people saying, rule number one it’s not free. Number two, if you do run up a debt and you don’t pay the debt then you’re going to ruin your credit and the next apartment you’re going to try to lease is going to have a real problem with you and you’ll not be able to lease an apartment or get credit and so I think that education process is really important for the industry because people don’t get it. That actually it is a debt and you do have to pay it.

Alexander Goldfarb

Okay. And then the second question is, you guys I mean to your comment it sounds like everything is stabilized and while you’re expecting lower occupancy, that’s year-over-year. So basically, you’re flat from the second quarter and the impact in the third quarter is really from just continued bad debt and some lower fees. So I guess, why do you guys think that your markets, your portfolio is holding up better than the coastal urban guys who are continuing to unfortunately experience accelerating weakness. I mean you guys have had increased COVID recently. But that doesn’t seem to fade a factor. So what do you think is it, is it just less social unrest, less of the protest or what is going on your market for you guys seem to stabilize where in the coastal areas it seems to be accelerating?

Ric Campo

Yes, I think it’s exactly that. I think number one as I said in my earlier comments. There have been fewer job losses. When you look at job losses. I mean they’re significantly higher in the coast and the Sun Belt markets have not lost as many jobs and when you look at social unrest there’s an issue too. There are some markets where you can’t even get to your property because of the urban nature and the sort of takeover block in certain cities. So I think it’s all about the things that been driving our markets before when you think about recoveries, the Sun Belt recovers quicker and has more jobs generally. And so I think it’s really a jobs issue more than anything.

Alexander Goldfarb

Okay, thanks.

Operator

Our next question is from Nick Joseph from Citi. Go ahead.

Nick Joseph

You mentioned not only four months into this and given the continued macroeconomic uncertainty and elevated unemployment. Do you currently expect any more tenants or employee relief or frontline bonuses to incur?

Keith Oden

Yes, we don’t have any plans currently Nick to do anything along the lines of what we did in the second quarter. The impetus for that was I’ve laid out some of the rationale earlier in my comments. But in addition to that, it was just the timeliness of it. It was such a jolt to so many people in the way it happened unlike in previous downturn. Where there was sort of this rolling layoff scenario, people had time to adjust and make preparations. This is was you think you were good on a Friday and on Monday, your job is gone and so people were, there was an urgency to getting some financial relief to both residents and our Camden employees who got affected.

The impact to that was really always to bridge a gap in time to get to a scenario where there was a more permanent relief available to both residents and to Camden employees and that’s happened. And it happened through the stimulus, it happened through the plus up on employment benefits. Now there’s – there’s lot of wrangling now about – are they going to extend that into what extent. But even in the scenarios where they talk about not including the plus up, the provision the most conservative provision that I’ve seen is 70% of your previous income in unemployment payments and honestly for most Camden residents where we have an average household income of about $105,000 our average rental payment is about 18% of that. So if you’re paying 18% of your rent, you’re getting 70% in unemployment. Most people can figure out a way to make that work. So now that’s the long answer to saying, we don’t anticipate it.

Nick Joseph

That’s helpful. I reckon that it’s only been probably two- or three-months max. But have you seen any differences in terms of delinquency or turnover for those residents who received any of the relief?

Keith Oden

No we haven’t. Although I think the thing is very encouraging for us is the collections number that we’ve seen year-to-date or month-to-date in July, 98%. We actually have collected have collections higher in the month of July at this point in the month than we had in 2019 which is fairly remarkable and my guess is, is that there is some component of that people have – some associated goodwill. But it’s hard to know, what people’s motivations are.

Nick Joseph

Thanks.

Operator

Our next question is from Neil Malkin from Capital One. Go ahead.

Neil Malkin

Are you seeing an increase in migration into your beautiful Sun Belt market from the coast which like Alex is alluding to are getting pretty dicey, more dangerous? So I’m just curious is that trend is exacerbated or any comments you’re getting, anecdotally on the ground from your managers?

Ric Campo

Sure, so clearly the in migration out of coastal markets has continued. It’s been going on for long time and we start looking at U Haul rates. It’s cheap to leave. It’s cheap to go to California and to Seattle that’s very expensive to move out of it. I think it’s like four, five times more expensive to lease one of those U Haul to go out of California to Texas or Arizona than it is to go into California because there’s too many of them coming out and not going in.

The other thing that we’ve been watching is, is postal forwarding. Where you forward your mail and there’s been a tick up mail being forwarded. It’s hard to tell whether people are just sheltering in place out of their markets. But I think it’s just a continuation of really a long-term trend. If you look at – if you take immigration out of the equation there’s been out migration in California and New York and for the last 10 years and the only thing that is increasing – gets to be positive, is immigration. So I think that’s going to continue.

I don’t think – I guess if you – if the issue is, do all the coastal markets, do they rebound as New York City rebound. I think we have to think about like after 9/11. After 9/11 Downtown New York was like people talked about how it will never come back, right. Well, it did. I think that Americans have short memories and when it comes down. How do I feel about where I am? I think the fundamental challenges and highly regulated very experience markets where people are paying 40% to 50% of their income for rent or housing, that just is unsustainable and that’s why I think a lot of them out migration has happened for a long time and I don’t think that’s going to change. And will people put up with it and deal with it in the future, yes. I don’t think big cities are going to empty out. But I just think it’s just the pressure on people to want to have a decent place to live without having to pay after income. It is going to continue to drive out migration into these more affordable markets and I think that’s going to continue.

Neil Malkin

Okay, great. Appreciate that I agree. Second one, in terms of the development. It seems like and the acquisition side is going to be less fruitful just given the available and low-cost debt right now. So it seems that development deals, land deals are probably going to be your best bet particularly with your balance sheet. So I’m just wondering if you can talk about how you see that. What are the opportunities in front of you? Are you seeing like land deals coming – falling to or coming to market? And also if you take a look at ever doing preferred or mezz lending with some sort of equity at the end participation. Thanks.

Ric Campo

So we have started to see some shove already development deals that where the merchant builder couldn’t get their financing or the equity pulled out or they underwrite. It’s hard to underwrite anything today, right. Given the uncertainty about where the markets going to be in two years. And so even though in longer term I think people feel like development is definitely going to be a good option.

We already started to see some price softness in the construction market which is good. So we were seeing 3% to 5% increases. Now we’re seeing flat to 2% to 3% down which is really good. So we’re sorry to see some of those opportunities. It might be you know – I think it’s a little early still because the market just hasn’t, we haven’t had a shakeout yet and that will take maybe through the end of the year to have that happen.

In terms of getting involved in mezz or pre-sales and things like that. We have stayed out of those kind of products over the years. Primarily if you think about it, in the financial crisis we had about $3 billion worth of joint ventures and other types of structures and we thought it lowered our risk and what it really did is, increase our risk because our partners and having to work through the issues that the financial crisis created took a lot of time and effort and so we decided after that, that we would not do things that wouldn’t move the needle for Camden. I assure you can do go $500 million worth of mezz and move the needle a little. But at the end of the day what moves our business long-term is our cash flow that we grow from our properties and so we want to have the cleanest balance sheet in a simplest structure and not have any distractions having to deal with small equity positions or mezz positions and then have to go deal with people in that, that’s just in our forte.

We might do pre-sale or something like that. But we’re definitely not going to do mezz or anything like that. It just doesn’t move the needle enough and it’s too much of a distraction for our teams and we want them focusing on the big picture where shareholders have 100% of the exposure in the property.

Neil Malkin

All right. Makes a lot of sense, thank you guys for the time.

Operator

Our next question is from John Pawlowski from Green Street Advisors. Go ahead.

John Pawlowski

I’m curious as some of the Sun Belt economies [indiscernible] kind of walk back reopening plans in recent weeks and months. As you’ve noticed in July any meaningful inflection point in terms of leasing velocity or notices of move out in any of your larger market maybe excluding Houston?

Keith Oden

Yes, I’ll even include Houston and say that we have not seen any meaningful pullback. I mean it’s the – if you think about what we went through in terms of converting our approach to be basically 100% virtual leasing for a period of time. So we got that tradecraft down to an art and so, prior to the kind of most recent spiking in cases in Texas and particular but also in Florida. We had gone back to sort of hybrid model where we would allow access to our leasing offices for someone that wanted to do an in-person tour as long as they have both our folks and the prospect worse mask and socially distance. So we did that and then with the spiking, the feedback we got from our folks is they just were not as comfortable with that approach. So we went back to basically an appointment only virtual tour.

And so most of what you see in July activity which is really good for us was activity of that variety. I think it was in first week in July we went back to a kind of a virtual only model and we’re fine with that. And our folks are proficient at it. They’re comfortable with it. The prospect interestingly enough, when we ask our prospects what their preference is about 30% to 40% of our prospects tell us that they would prefer this permanently as a way to lease apartments. So I think it’s going to be a part of the mix for the future and we’re really good at it. So I think we’re good.

John Pawlowski

Okay, but on the move-out side any interesting shifts across markets or your 60-day exposure coming up here?

Keith Oden

No we’re in good shape. Our pre-lease numbers are really healthy. Which is why we got the comfort level that we got to give guidance for the third quarter? July is basically over, so you’re looking at August, September. We have pretty good visibility and to the free lease numbers traffic is good, our closing percentages are where they need to be and like I said earlier John. The key for us was being able to maintain a 95% plus occupancy while we reinitiated renewal increases and we were getting back to something closer to flat on new leases.

John Pawlowski

Okay, last one from me. In some of your harder hit economies like in Orlando or Houston. If you’re a buyer in those markets today on a stabilized deal. What kind of discount on asset value basis would you be looking for versus kind of pre-COVID levels?

Alex Jessett

It’s a complicated question because there’s just no trades going on. And the trades that are going on, I think people are buying by the pound and not by the cap rate or the discount. So often times, I think fundamentally pricing hasn’t changed in the private market and cap rates have declined and compressed in the market because people are – if you look at the cash flows people thinking that underwriting them, going down over the next call it, six months or eight months or however long the pandemic lasts.

And then they, if you look at [indiscernible] numbers. There’s a pretty big snapback in 2022, sort of end of 2021, 2022, 2023. So if you’re underwriting a project in Houston or anywhere today there is no discount and you have to take a lower cap rate and then I think the belief that is that, is that the cash flow will grow faster than before the pandemic and you’ll get back to a total return that is rationale total return with that increase in cash flow.

So the real question is going to be to me, is how fast will investors get to that level? And then I guess there’s just a wall of capital out there and with the treasury at 0.5% something financing on existing assets is incredibly cheap and when you look at leveraged buyers. You’re going to look at their equity returns with incredibly low cost of debt. I think there’s going to be a lot of activity and interest in multi-family. The question will be how long does it take to get those investors to a point where they can feel like they can do some underwriting in the next couple of years.

The development side is a little more complicated because constructions loans are really hard to get today. Lenders have lots of others issues in real estate, be it retail and office [ph] and others. And so increase in exposure for them in a construction side and multi-family is hard for them to do today and I think that’s where the opportunity might be from an acquisition perspective, but we’ll just have to see.

John Pawlowski

Okay, thanks so much for the thoughts.

Operator

Our next question is from Rich Anderson from SMBC. Go ahead.

Rich Anderson

So I guess it was Chirp because Tweet was taken.

Ric Campo

It’s an homage to a hummingbird.

Rich Anderson

Okay. Anybody in field here, how would you characterize the amount of what you call the ghosting or people taking advantage of regulations in states like California? How much did that supply view in terms of the number of people, was it lesser or more than you thought? And the reason why I ask is, do you think there’s a longer-term impact in your underwriting criteria in terms of looking at the individual credits of your tenants before signing a lease?

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Keith Oden

Yes, so in terms of the impact in our California portfolio so if you break it out between, where we’re total collections and LA, Orange County which is our lowest collection for the second quarter of 2020, we have collected 92.6% of our scheduled rents and that’s the lowest in our portfolio and it’s really not even close beyond that. Everything else in our portfolio, Southeast Florida is 94% and then everything else is above 95% and most are in the 98% range. So it’s clearly an outlier. But if you take the 92.6% collected and you break it out between deferred payment plan and truly delinquent, 2.3% is deferred payment and 5.1% is delinquent. So the 2.3%, we have had conversations with the people have said we have financial distress, we need a path forward and that means we have a written agreement with them on how they’re going to get whole on the rent from a standpoint of their delinquency.

So the 5.1%, so if we don’t for the most part they don’t communicate. Maybe they can’t pay and just choose not to communicate. But our guess is that, they’re a pretty large percentage of those folks, have just gone dark because they think they cannot pay their rent for some period of time and get away with it. And so the challenge is, that the policy prescriptions of no evictions, no late fees and by the way sort of wink and a nod among political leaders that we can’t give you direct rent relief. But we’re creating conditions on the ground that prevent you from being evicted from your apartment and in some way, that’s rent relief which it’s truly not from a liability standpoint. But from the standpoint of do I have to pay, it does create that.

So I think this is a unique circumstance relative to this pandemic and it’s hard for me to imagine. Even in the great financial crisis. We didn’t have policy prescriptions of that variety anywhere including in California. Now may the politics have changed that much in the last 10 years? But I think it’s probably ultimately, ends up being pretty unique to this particular pandemic and not some greater incidence of policy prescriptions around, you can’t evict people who don’t pay their rent, that’s my personal view.

Rich Anderson

All right. And then second question is, Ric you mentioned, you think there might be some permanency to this sort of move to the suburbs and B the versus A and so on. But I’m not sure I agree with it being a permanent condition and maybe I’m putting words in your mouth. But nonetheless, to what degree could this alter your strategy? I know you kind of already fits into your wheelhouse a bit already. If you believe in some systemic change to that conversation, do you see a systematic change in how you’re going to pursue the business longer term?

Ric Campo

If you heard that I thought there was a permanent shift from urban to suburban or high rise or major cities to smaller cities, I don’t believe that. I really don’t. Like I said earlier, we have – people have short-term memories and at the end of the day. Once the pandemic is over. Everybody gets back to work and they’re focusing on their lives. They’re going to do what they want to do and I think people do love urban environments. They love restaurants. They love going to the ballpark and when that comes back. They will engage that again.

I do think that there will be some. But I do think that continue out migration from coastal markets to Sun Belt markets is going to continue. But I don’t know that it’s not going to – those markets are still going to be fine markets long-term. They’re just going to have issues that they have today pre-pandemic. So from our perspective when we start thinking about where we want to be, it continues to be the same drivers longer term which is high job growth, low pro-business governments, good weather, young people, great workforce, that kind of stuff.

I think from a sort of product mix perspective. We definitely are going to continue to invest in urban and suburban properties. I think that from a development perspective. We are thinking really hard about our spaces and how we utilize the space inside the common areas and are thinking a lot about okay, maybe the work from home is going to be a bigger piece of the equation because I do think that, that the work from home is going to be massively more than it was pre-pandemic and primarily because if you think about Camden. We have 450 people plus or minus working from home and they’re doing really well.

And so the people that had hour commutes one way are going wow, I got two hours of my life back, plus I don’t have wear and tear my car and all those expenses. So we can get people their time back and raises in essence by letting them work from home. So from our perspective we’re going to spend a lot more time looking at our properties and creating a more user-friendly work from home environment.

Prior to once the pandemic hit, one of the things we did is amp up the bandwidth in all of our properties because if you had low bandwidth. I mean we were just getting people going nuts because they couldn’t do Zoom calls and things like that. So we amped our bandwidth up and I think we’re going to – so when we think about modifying our existing buildings and then building new buildings, you have to think about that work from home component. I think that’s going to be a big shift.

Rich Anderson

All right, great. Thanks for the color. Appreciated.

Operator

Our next question is from Rich Hightower from Evercore. Go ahead.

Rich Hightower

I’ll be quick. I just want to make sure I understand something here. As far as the collections raised in 2Q, where did the relief funds fit into that? Was that part of that calculation or separated, how do we understand that relationship?

Alex Jessett

Yes, it was separated.

Rich Hightower

Okay, so it’s not included in the 97% plus collected in 2Q.

Alex Jessett

That is correct.

Rich Hightower

Okay, thanks for that Alex and then I guess just to pile on to the anti-California sentiment. How do you think about the Southern California footprint longer term? It’s a tough market to build and it checks a lot of the boxes, Ric I think you described about the nature of the workforce and people want to be there and this and that. But how do you think about political risk and the impact to cap rates and values over the long-term? How do you think about that?

Alex Jessett

So I think California will always be a market that people want to be in. it’s one of the biggest economies in the world. If it was its own, country. It’s always going to have challenges that just like New York City has challenges but people love to live in New York City and I think they love California. California will continue to struggle with its issues. But I think that long-term California is a good market and I don’t think when we start talking about our portfolio and when you think about our Sun Belt mix.

California right now is dragging our performance down and have we not had California then we would definitely have better same store numbers and better everything, better collections and all that. So but ultimately when you think, the way I think about portfolio is geographically, diverse and product mix, diverse portfolio and over a long period of time. The volatility balances out and we lower volatility prior to the pandemic. Southern California was one of our better markets. We were growing 3.5%, 4% and the average is good. It was offsetting our slower growth in Houston.

To me, I know that there’s a lot of people piling on to California, New York and Seattle and some of these other markets. They’re not going away, there will be good, long-term markets and hopefully the pandemic moves through fast and we’ll get back to good growth. They will continue to have the pressure from government trying to cap rents through rent control and other issues. But generally speaking, even if you put a rent control law and generally is better for the incumbents and harder to build means that you don’t have competition so the offset to maybe the tough government and out migration is you’re not going to rebuild those markets very often and they’ll still be good.

Rich Hightower

All right, thanks for the comments.

Operator

Our next question is from John Kim from BMO Capital Markets. Go ahead.

John Kim

You guys too popular for one-hour call. Had a couple questions on guidance. You mentioned a lower occupancy which is clear on a year-over-year basis. But I was wondering how you see it trending during the quarter because you already had a 30 basis points sequential increase in July and the second part is, are you seeing so expense guidance for 4.5%? How much of that was already contemplated when provided your original guidance was 3% for the year? I know that kindness isn’t cancelled [ph], just wanted to see how much of that was new versus already none?

Alex Jessett

Yes, I mean so if you think about it. Our second quarter 2020 occupancy was 95.2 and for July it is 95.3. I told you that it was 95.5 this morning. So obviously we’re getting some uptick. But effectively in our guidance we’re assuming that occupancy is flat in the third quarter as compared to the second quarter. When you look at expenses almost all of that was known. Really the largest driver that we typically have in expenses is the timing of property tax refunds and it’s just the way the timing works that the third quarter was going to have higher sequential property tax number and in fact, if you looked at it on a third quarter, 2020 to third quarter, 2019 as I mentioned in my prepared remarks. You also had the same impact where we got some very favorable refunds in Atlanta and in Houston in the third quarter of 2019. So that’s really the driver. The drivers are by in large property tax driven.

John Kim

Okay, that’s helpful and you guys talked about some of your changes in potential long-term strategy. But I had a question on shorter term strategy. It seems like a lot of people up here in Northeast are contemplating becoming snowbirds this winter. I was wondering if you anticipate that happening, if you see potentially higher demand if you’re willing to potentially provide some shorter-term leases to meet that demand.

Ric Campo

Well we definitely will provide short-term leases to meet that demand at a premium rate for sure. And that we are open to all comers when it – if that happens and we’re ready even though our occupancy levels are really high right now. We still have room to move those occupancy levels up.

John Kim

Great, thank you.

Operator

Our next question is from Zach Silverberg from Mizuho. Go ahead.

Zach Silverberg

My first one is just, some of your peers’ sort of spoke about migration of college students from city-to-city. Just curious if you guys see any potential headwinds as universities are more reluctant to open international students has been to travel and are there any sort of markets that are disproportionately impacted by this trend?

Keith Oden

Yes, we haven’t seen any impact of that nature. I think there’s still so much conversation around who’s going to open and how and when, that until we probably get into actually the month of September to see what we’re all that shook out, if the college level, we’re just not going to no. we don’t really have, Austin would be probably a market where it’s always been a big university town. But within the context of how much Austin has grown over the years that’s become less and less important. But outside of that, I think it just remains to be seen on, how many of the students actually are going to get called back to the university to an in-person experience around the margins, I guess it could matter. Our portfolio doesn’t tend to have a lot of student participation.

Ric Campo

Just anecdotally, one of our board members is the Chancellor and the President of University of Houston, her name is Renu Khator. And Renu on our board meeting on Wednesday told us that their enrollment is actually up at University of Houston and that the only part of the equation that they’re having trouble with is international students because of travel issues. But she was surprised that their number is actually up and they’re going to do a combination of in-person and virtual. But I think that people are continuing to enroll in colleges at pretty record numbers.

Zach Silverberg

Got you, that’s helpful and just a final one here. I understand that a few transactions on the market closed lately. Most were likely done or negotiated pre-COVID. But curios if you’re seeing anything in the shadow market and what buyers maybe underwriting right now and what IRR’s they’re sort of targeting?

Alex Jessett

So there have been some transactions done. Some were definitely under contracts and hard, earnest money that closed pre-COVID timeframes. But there have been a few transactions that have happened in this environment and as I said before the cap rates have compressed and we’re hearing numbers like cap rates are in the threes in Dallas and Houston and I think that people are sort of most investors are kind of wait and see attitude in terms of what they think underwriting is going to be like. When you think about the tenured treasury being where it is today and sort of interest rates lower for longer even more now than before the pandemic. I would think that underwriting IRRs have to come down some and I think that’s probably going to happen.

Zach Silverberg

Got you, appreciate all the color guys.

Operator

Our next question is from Alex Kalmus from Zelman and Associates. Go ahead.

Alex Kalmus

Looking into Southeast Florida performance, outside of expected pressure in LA continue to lag the rest of your portfolio on some key metrics. I’m just curios if you could give some more color on, what’s called the challenging recent environment there?

Keith Oden

Yes, so there’s two challenges in Southeast Florida right now. And one is, just traffic in general. There’s less of a propensity for people to want to engage in a virtual scenario in Southeast Florida. So we just have – we have a little bit less traffic there than what we would normally expect this time of year. The second part is on the operation side just collections. So Southeast Florida for the second quarter of 2020, our collections were 94% and that would make it the second most challenged market behind, LA, Orange County. So those dual challenges are definitely something that we’re dealing with in Southeast Florida.

Alex Kalmus

Got it, thank you and curious about the non-trade [ph] enabled properties. How is the leasing dynamic there? And how are you guys approaching those? Are those typical in-person showings or are you still using virtual to your advantage? Thank you.

Alex Jessett

Yes, we’re still using virtual. But it’s really if you think about it, it’s a little bit old school and it involves a lockbox with a key where you can pick up the key and you can pick up the fob and then you have a map. It certainly is an effective way of doing it, but clearly no way near as effective as using an application that has a definitive start and definitive end that can also open not just the access gates but the door units. And I think that’s the big benefit we’re getting from Chirp from the communities that have Chirp rolled out.

Alex Kalmus

Sounds good, thank you.

Operator

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

Ric Campo

Thank you. We appreciate you participate in the conference today and we will look forward to speaking to you in the future. So thanks a lot and take care. Have a great rest of the summer.

Operator

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



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