Jul 28, 2017
Executives
Kim Callahan - SVP, IR Ric Campo - Chairman and CEO Keith Oden - President Alex Jessett - CFO
Analysts
Nick Joseph - Citigroup Austin Wurschmidt - KeyBanc Capital Juan Sanabria - Bank of America Merrill Lynch Rob Stevenson - Janney John Kim - BMO Capital Markets Alexander Goldfarb - Sandler O’Neil Jeffrey Pehl - Goldman Sachs Drew Babin - Robert W. Baird Rich Hightower - Evercore John Pawlowski - Green Street Advisors Wes Golladay - RBC Karin Ford - MUFJ Securities Dennis McGill - Zelman & Associates
Operator
Good morning, everyone and welcome to the Camden Property Trust Second Quarter 2017 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 also note that today’s event is being recorded.
At this time, I would now like to turn the conference call over to Ms. Kim Callahan.
Ma’am, please go ahead.
Kim Callahan
Good morning and thank you for joining Camden’s second quarter 2017 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 2017 earnings release is available in the Investor 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. We will try to be brief in our prepared remarks and try to complete the call within one hour, as we are the first of three back-to-back multifamily calls today.
We ask that you limit your questions to two, then rejoin the queue if you have additional items to discuss. If we are unable to speak with everyone in the queue today, we’d be happy to respond to additional questions by phone or email after the call concludes.
At this time, I’ll turn the call over to Ric Campo.
Ric Campo
Thank you, Kim, and good morning. Our music today was provided by recording star Ed Sheeran.
As recently as 2013, Sheeran was best known in the U.S. as an opening act for Taylor Swift’s North American tour.
This year, Sheeran became the first recording artist to have two songs debut in the top 10 in the U.S. charts in the same week and had notable guest appearance on Game of Thrones.
Sheeran’s story is a reminder of both how quickly things can accelerate, if you’re talented and are working in the right environment and that the pace of change in all areas of our residents’ life is faster than ever and will likely continue to accelerate. Our residents are increasingly choosing to live in communities that understand and adapt to their evolving life style choices.
As Malcolm Stewart, Camden’s Chief Operating Officer often reminds us, you don’t have to be young, you just have to think young. Our operations teams continued to produce solid results for Camden during the second quarter and for the year.
I appreciate their dedication to improving the lives of our customers one experience at that time. Apartment demand continues to be strong, driven by positive demographics and a secular shift to rental housing as part of the sharing economy.
Millennials are driving the sharing economy and are more interested in experiential activities as opposed to acquiring things including single family homes. On the other end of the spectrum, from a demographic perspective, empty nesters are leaving their suburban homes for rentals in urban locations to take advantage of left commute time and more robust entertainment options.
New supply competition is currently a factor in many of our markets. However, delivery should peak this year.
We continued our capital recycling program this quarter with the acquisition of Camden Buckhead Square in Atlanta. This is our first acquisition in nearly three years.
Last year, we sold $1.2 billion of non-core older properties. The proceeds we used to fund our development pipeline, pay down debt, pay a special dividend and now to fund Camden Buckhead Square.
Camden Buckhead Square was acquired at below replacement cost with a 5% FFO yield. Given the inventory of merchant builder product in the market combined with rising land costs and construction costs, we believe that other acquisition opportunities will be available going forward.
Subsequent to quarter-end, we entered into an agreement to sell Camden Miramar, our only student housing property. the Houston apartment market is still challenging with new deliveries exceeding demand.
We expect the market to stabilize next year. New construction starts peaked in 2014 at 24,000 and have steadily declined with 8,000 in 2016 and 6,000 starts expected each year in 2017 and 2018.
While new deliveries have been delayed in some cases due to labor shortages. Excess inventory should clear during 2018 and set Houston up for rent growth again.
Houston has had a long history of strong recoveries following market weakness. Based on our view that there will be limited completions and competition from new developments in 2019 and 2020, we’ve decided to go forward with the construction of our Downtown Houston project, Camden Downtown.
Construction will begin in the fourth quarter of this year with lease-up beginning in the fourth quarter of 2019 and stabilization expected in 2020. Camden Downtown represents a counter-cyclical opportunity to lock in construction costs at a time when it’s difficult for developers to get equity or construction financing.
We’re looking forward to finishing the year strong and our management team and our operations teams are focused on that. And at this point, I’ll turn the call over to Keith Oden.
Keith Oden
Thanks Ric. We’re very pleased with our results which were in line with our expectations for both the quarter and year-to-date.
Overall conditions remained healthy across our platform. Sequential revenue growth was 1.8% with every market posting a positive sequential increase, yes, even Houston.
Other than the transactions which Ric’s covered, from our prospective, this was a very return quarter. So, I’ll be brief with my remarks to allow more time for what’s on our mind.
Turning to same-store results, revenue growth, which was 3.1% for the quarter and is up 3% year-to-date. Most of our markets had revenue growth between 3% and 6% for the quarter, led by San Diego/Inland Empire at 6.1%; Denver at 5.8%; LA/Orange County, 5.6%; Dallas at 4.9%; Atlanta at 4.8%.
Expenses fell sequentially by 0.5% in the second quarter with a number of puts and takes, which Alex address, leaving us with same-store NOI of up 3.2% sequentially and up 4.1% for the second quarter. Houston revenues fell 3.7% compared to second quarter of 2016.
Year-to-date revenues were down 3.5%, which keeps us on the track to meet our full year forecast of roughly 4% revenue decline for the year. We expect continuously weak conditions in Houston as new supply continues to pressure merchant built communities who continue to offer two to three months free rent as a lease-up concession.
In D.C. Metro, our revenue growth out performed our overall portfolio with results up 4.2% for the second quarter and 4.0% growth year-to-date.
We continue to be encouraged by the trends in our D.C. Metro portfolio.
As we look at our markets and how we expect them to perform in the second half of the year versus our original plan, we see relatively minor variances. The top four outperforming markets relative to plan are projected to be Denver, Southern California, Dallas and Orlando.
This outperformance relative to plan is being offset by lower than planned revenues in Austin, Charlotte and Southeast Florida due to direct competition from pockets of new supply. Rents on new leases and renewals continue to look good for achieving our outlook for the full year’s results.
Second quarter new leases were up 1.6% and renewals were up 4.9% for a blended rate of 3%. July new leases and renewals are in line with the second quarter numbers.
We’re sending out August and September renewal offers at an average increase of 5.5%. Additional operating stats for the quarter continue to support our full year outlook.
Same-store occupancy in the second quarter averaged 95.4% versus 94.8% in the first quarter and 95.4% in the second quarter of last year. July occupancy was 95.6%, 95.7% for the same period last year.
Net turnover rate for the quarter was basically flat at 52% versus 51% for the prior year and 46% versus 47% year-to-date. Move-outs to home purchases were 15.6% for the quarter, with an as expected seasonal increase from the 14.9% we saw in the first quarter.
2017 move-outs to purchase homes are in line with 2016 levels but still well below the long-term trend. At this point, I’ll turn the call over to Alex Jessett, Camden’s Chief Financial Officer.
Alex Jessett
Thanks, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activities.
During the second quarter, we reached stabilization at Camden Gallery, a $59 million development in Charlotte, which is currently 97% occupied and is expected to achieve a 7.75% stabilized yield. Also during the quarter, we completed construction at Camden NoMa phase II in Washington D.C.
and began construction at Camden Grandview phase II in Charlotte. Additionally, during the quarter we acquired for $20 million, an 8.2-acre land site in San Diego for future development and acquired on June the 1st, for $58 million, Camden Buckhead Square, a 250-unit stabilized operating community in the Buckhead submarket of Atlanta.
We purchased this 2015 built community at an approximate 12% discount to replacement cost and expected to generate an approximate 5% yield. And finally, subsequent to quarter-end, we entered into a contract to sell Camden Miramar, our only student housing community, which is located in Corpus Christi, Texas, for approximately $78 million.
Closing of this sale is not guaranteed and is subject to among other items, the satisfactory due-diligence and financing by the purchaser. However, as I will discuss later, we have included the impact of this sale in the midpoint of our revised earnings guidance.
We have $670 million of developments currently under construction or in lease-up with a $170 million left of funds over the next two years. We anticipate upto $300 million of additional on-balance sheet development starts, later in 2017.
Our balance sheet remains one of the best in REIT world with net debt to EBITDA at 4.5 times, a fixed charge expense coverage ratio at 5.7 times, secured debt to gross real estate assets at 11%, 80% of our assets unencumbered and 88% of our debt at fixed rate. Turning to financial results.
Last night, we reported funds from operations for the second quarter of 2017 of $106 million or $1.15 per share, exceeding the midpoint of our guidance range by $0.02 per share. Our $0.02 per share outperformance for the second quarter was primarily due to $0.01 per share and higher same-store NOI, resulting from a combination of higher than anticipated occupancy and both lower than anticipated repair and maintenance costs due to general cost control measures and lower employee benefit costs as we continue to experience better than anticipated levels of health insurance and workers’ compensation claims, 0.5% in higher net operating income from our development and non-same-store communities, resulting primarily from each of our development communities leasing ahead of schedule, a quarter of a cent from the previously mentioned Atlanta acquisition and a quarter of a cent from a combination of higher interest income and lower overhead costs.
We have updated and revised our 2017 full year same-store and FFO guidance based upon our year-to-date operating performance and our expectations for the remainder of the year. Our same-store revenue performance has been slightly better than expected for the first six months of the year, driven primarily by higher levels of occupancy.
We are encouraged by this trend. However, it is still too early to tell how pockets of supply will affect the few of our markets for the remainder of 2017.
And therefore, we are maintaining the midpoint of our same-store revenue growth guidance at 2.8%, but are tightening the range to 2.55% to 3.05%. We have reduced the midpoint of our same-store expense guidance from 4.5% to 4.1% and tightened the range to 3.85% to 4.35%.
As a result of actual and anticipated lower expenses related to health insurance and workers’ compensation and successful property tax appeals, primarily in Houston. We now expect our full year 2017 property tax increase to be 4.75%, as compared to our original budget of 5.5%.
As a result of reducing our full year expense guidance, we have increased our 2017 same-store NOI guidance by 20 basis points at the midpoint to 2% and tightened the range to 1.5% to 2.5%. Last night, we also reaffirmed and tighten the range for our full year 2017 FFO per share.
Our new range is $4.51 to $4.63 with the midpoint of $4.57. Although, the midpoint is unchanged, there have been some changes to the underlying assumptions.
As compared to our prior guidance, our new guidance assumes an additional $0.01 per share from our 20 basis-point increase in same-store NOI, $0.015 per share from the acquisition of Camden Buckhead Square late in the second quarter and $0.005 per share in additional contributions from the accelerated leasing of our development communities, partially offset by lower levels of interest capitalization. This $0.03 of aggregate improvement is entirely offset by the anticipated disposition of our Camden Miramar student housing community in the beginning of the fourth quarter.
W built and have owned Camden Miramar since 1994. Over the past 23 years, this has been a very successful investment for Camden and our shareholders.
Upon disposition, we anticipate this investment will have generated a 16.5% unleveraged internal rate of return over its 23-year hold period. We believe this is an appropriate time to make the strategic disposition, given this asset is located on the ground lease with just over 20 years remaining.
At the contract price, this disposition represents an AFFO yield of 8.75%. This disposition will have a meaningful impact to our fourth quarter NOI as the community will be occupied for the full semester.
As a reminder, occupancy and NOI at this community are strong during the school term but decline significantly during summer months. Last night, we also provided earnings guidance for the third quarter of 2017.
We expect FFO per share for the third quarter to be within the range of a $1.14 to a $1.18. The midpoint of $1.16 represents a $0.01 per share increase from a $1.15 reported in the second quarter of 2017.
This increase is primarily the result of an approximate three quarters of a cent per share increase in NOI from our development and non-same-store communities, an approximate $0.005 per share increase in FFO related to our completed Atlanta acquisition, and an approximate $0.005 per share increase in FFO due to lower interest expense as the interest savings from repaying our 5.83% to $247 million unsecured bond and maturity on May 15th is partially offset by borrowings on our line of credit, higher rates on our secured floating rate debt and lower levels of capitalized interest. As a reminder, we still anticipate issuing a $300 million unsecured bond later this year.
This one and three quarter cent per share aggregate improvement in FFO is partially offset by an approximate $0.005 per share increase in income tax expense due to a non-recurring Texas margin tax refund resulting from a prior year reduction in rates which we recognized in the second quarter. Our sequential NOI is anticipated to be relatively flat as revenue growth from higher rental and fee income in our peak leasing periods is offset by our expected increase in property expenses due to normal seasonal summer increases in utilities and repair and maintenance costs, and the timing of certain property tax refunds recognized in the second quarter.
At this time, we’ll open the call up to questions.
Operator
Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instruction] Our first question today comes from Nick Joseph from Citigroup.
Please go ahead with your question.
Nick Joseph
Thanks. I just want to start on Houston.
You mentioned a potential stabilization next year, just curious if that’s more of a flat unit rental rate growth at least year-over-year or if you think there could be actually a slight acceleration or if it’s just less of a fall than what you’ve seen this year?
Ric Campo
Yes. So, without getting into forward-looking NOI growth projections for Houston, when we think about stabilization, we’re thinking in terms of absorbing the excess -- the hangover of supply that’s got to get through the system and find a resident.
Once that happens, then I think you can start to think in terms of getting back to more of a normalized full-occupancy rate. And then beyond that you start thinking about rental increases.
So, if you think -- if you roll forward to our numbers that we have for Houston for 2018, we know we’ve got excess inventory now; it’s in the process of being aggressively, maybe very aggressively marketed by the merchant builders who put it in place. Lease concessions of two to three months are common in the leased up communities.
So, they’re trying to find the market and they will, and they’re making good progress. And I think we’re going to continue to see good absorption.
But if you roll forward to 2018, we think if things stay as they are currently projected, we think we’re only going to see another 6,000 or so apartments drop to the market. And if you take a sort of the midpoint between the Wheaton and Axiometrics job growth for Houston for next year, it’s somewhere in the 45,000 range, which is -- that’s more than sufficient to not only put stabilization in place but to repair occupancy rates and then beyond that look for rental rate increases.
But, we’ve said previously Nick that we thought that 2017 at our minus 4 down topline revenues would be the bottom in the cycle and we still believe that.
Nick Joseph
And then just in terms of development, you mentioned starting a new projects in Charlotte and buying the land in San Diego and starting in Houston later this year. So, what are the expected yields on those developments and how do those compare to the developments currently in progress?
Ric Campo
Current development yield’s around 7, depending on average and really higher ones versus the lower ones in California. So in California, the San Diego type transactions, those are going to be in the 5.5 to 6 kind of stabilized range.
The Houston transactions need to be higher than that because they’re Houston. So, generally, in the sort of center of the country, we’re looking at stabilized yields of 6.5 plus or minus today.
And yields are definitely down from some of the ones that we’re able to get. For example our Camden NoMa is an 8% yield and that’s hard to do today.
We just happen to hit, a, we bought the land at a good price a while and b, we were able to hit the market properly, really well with a dip in the construction environment there and lease-up is going really well. Today with land cost where it is and with construction cost rising in every market with labor shortage, it’s just tougher to make those -- to get to those numbers.
So, we’re probably 50 basis points down on our development yields than we were a year ago if we were to start it probably.
Nick Joseph
Thanks. Just to clarify, those on in place rents or on trended rents?
Ric Campo
Those are generally -- in Houston, it would be trended rents because you really can’t take three months free in a new development and then apply that to your development model make it work. Generally, they tend to be on trended rents.
Operator
Our next question comes from Austin Wurschmidt from KeyBanc Capital. Please go ahead with your question.
Austin Wurschmidt
Just curious, you guys saw some good acceleration in Houston’s occupancy this quarter. I’m wondering if you think that that’s no longer going to be a drag on same-store revenue growth going forward and if that first quarter number 92.3 could end up being a bottom in occupancy in that market?
Ric Campo
Yes. So, we were pleased that we were able to make some progress in the second quarter.
We ended the -- averaged for the quarter at about 93.1%. And relative to our overall portfolio, that’s almost 2.5% below where we are on a average throughout the rest of our platform.
So, clearly, it’s a laggard. In terms of is 92.3 is a low watermark.
Based on prelease right now, if you look at -- we’re looking out 60, 90 days on where we are with our preleased occupancy. I think we are in pretty good shape to make some additional progress on occupancy in the third quarter.
And consistent with our views, 2017’s probably the low watermark in terms of the 4% rental decline, or top line revenue decline. I would say that it’s a decent proposition that the 92.3% is a low watermark.
But we’re not -- we’re in no way satisfied with the 93.1% and we’re working our tails off to get that back to a more normalized looking rate because until you get that number back to the 95% range, you’re not going to make any revenue -- headway on the leases.
Austin Wurschmidt
Thanks for the detail there. And then, there has been some strength in the Houston housing market here more recently.
I’m just curious about your thoughts on what the impact that can have to the rental market and whether or not you think that that will take share from rentals?
Ric Campo
The interesting thing about Houston is of course in the last 24 months or 36 months, we’ve spent a lot of time talking about energy and what was going to happen to the Houston market overall. If you look at certain segments of the market, if you’re in the office building business, it’s kind of a tough market obviously.
Multi-family is tough but not like office. When you look at industrial, retail and single family, the market hasn’t missed a beat.
Houston has a shortage of quality single family homes and the markets have been very, very good and robust. I think we -- last month or last quarter, Houston had a record number of sales at the high prices of homes.
So, on one hand, Houston has done really well with single family homes and it hasn’t been a real issue for the economy overall. But, when you get down to the whole issue of rental versus own or people losing market share to homes, we really don’t see a massive change in that scenario.
Because when you think about it, people make a decision to either rent or buy not based on money generally, it’s based on the lifestyle and their sort of what age group they’re in. And so, we haven’t seen a tremendous amount.
Keith Oden
Yes. Just to put some stats around that, Ric’s right.
Even in the second quarter, which I believe I saw report that June was possibly the highest level of single family home sales in the history of Houston, which is pretty remarkable in itself, but move-out to purchase homes in our portfolio was about 16% in Houston and that compares to 15% to the whole platform. So yes, there is a lot of people buying homes but they’re not -- not in large numbers coming out of our apartments.
Austin Wurschmidt
And then, just as a quick follow-up, how does that 16% compare versus either this time last year or last quarter?
Keith Oden
So, 16.5 in the first quarter of 2017, but if you go back to the fourth quarter, it was 15.9, so in that range.
Operator
Our next question comes from Juan Sanabria from Bank of America Merrill Lynch. Please go ahead with your question.
Juan Sanabria
Thanks for the time. I was hoping you could just give a little bit more commentary on Washington D.C.
You guys seem to be a little bit more upbeat to some of the other REITs that have commented. I was hoping could you talk about supply generally and kind of where you’re seeing pressures or not relative to the broader MSA?
Ric Campo
Yes, it’s interesting because there has been a fair amount of I think people trying to reconcile where we are and where some of our competitors have announced in the commentary. And we said last quarter that we felt pretty constructive about where we were in Washington D.C.
in our portfolio but we also mentioned that we really have a fairly different footprint in the D.C. Metro area than some of our competitors.
So, we guessed it. So, I want to put some numbers around that.
And we look at it and have kind of dug into our footprint and where the performance is coming from and other people can reconcile this and try to figure out whether it’s in the footprint or something else. But, in our Northern Virginia portfolio for the second quarter, we actually had right at 5% revenue growth, which is better than -- way better than the average of all of our other markets combined.
And if you go into our Maryland portfolio, it was about 3.5% revenue growth. The area where I think the differential occurs is in -- what we think that was the D.C.
proper sub-market, our growth for the quarter was 2.2%. And that’s a divergence, because up until probably middle of last year, the D.C.
proper portfolio that consistently outperformed our Northern Virginia and Maryland portfolios, but obviously that’s flipped and we have a much higher NOI contribution from Northern Virginia [ph] D.C. proper.
So, I think a fair amount of it is, just the distribution of our assets versus some of our competitors. In terms of overall supply versus job growth, if you look at the [inaudible] equilibrium for 2017 and then they actually get better in 2018.
So, we continue to be pretty constructive on D.C. And my guess is, is that it’s more footprint than anything else.
Juan Sanabria
And then, you kind of hit on it in some of your prepared remarks, but just at this point, could you give us a sense of, particularly at the top-line same-store revenues? Where you feel the most comfortable within the range and points of variability to kind of hit the top or the bottom at this point?
Ric Campo
Yes. I think the range that we have set, I mean, we’ve tightened the range quite a bit, and as to get into the top or the bottom, I think it really turns down to how much of an impact the new supply actually shows up in the second half and how much of an impact we see from that.
I mean, there is a fair amount of anecdotal evidence and not only in our own portfolio but just folks that we talk to and conversations and some of our other competitors who reported that there is a lot of slippage in delivery of multi-family units. And so to the extent that that phenomenon is happened to any meaningful degree in Camden’s markets, the apartments that we thought were going to be delivered in the first half that end up rolling over to the second half.
So, I think the range from our perspective is more about how much of that supply has slipped, how much of it didn’t show up in the first half and how much of it is going to sort of comeback in the second half of the year. But I mean, I think our range is very appropriate for where we are halfway through the year.
Juan Sanabria
And just if I could, what’s your expected split between the supply deliveries in 2017 first half versus second half and any thoughts on the percentage decline in 2018?
Ric Campo
So, if you -- I’m speaking just to Camden’s market. I can give you national stats, but it’s not something that we spend a lot of time on.
But within Camden’s markets for the -- if you look at the full -- take the full year first, completions in 2017 versus completions in 2018. If you take the average of Wheaton and Axiometric numbers and there is a fair amount of difference between the two of those, their two forecasts.
So, if we take the average of their two forecasts, we show in Camden’s markets completions of about 150,000 apartments in 2017 drop into about 125,000 in 2018. So a 25,000, 30,000 drop across Camden’s portfolio.
So, if you look at just a second half of 2017 versus the first half of -- over into the first half of 2018, we see a drop of roughly 14,000 apartments in Camden’s portfolio. So, there is a fair amount of consistency and the data that we look at that would indicate that what we’ve said all along is 2017 is going to be the high watermark for completions in Camden’s portfolio.
Now, obviously, we’ll have to roll it forward and see. There is certainly the possibility that some of that currently projected for the second half of 2017 deliveries bleeds over to 2018.
But, I’d be surprised if bled over enough to flip total completions in 2018 to be higher than 2017.
Operator
Our next question comes from Rob Stevenson from Janney. Please go ahead with your questions.
Rob Stevenson
Thanks. Good morning, afternoon here.
Keith, you talked about the D.C. market little bit and you also talked about Dallas being outperformer.
Is there any material differences pursuing the various sub markets in Dallas that you guys are operating in?
Keith Oden
Yes. Dallas is having the same experience that Houston is having in the supply-driven submarkets.
The Uptown area of Dallas is kind of a wash right now in inventory and we’re certainly feeling that, we’re feeling it in the completion of our lease-up at Victory Park where there is a fair amount of new product that we’re directly competitive with. Our suburban assets in Dallas, they had more of a Houston-like experience, they are outperforming the urban core assets anywhere from a 100 to 200 basis points.
So, there is differential, it’s primarily supply driven but the reality is the supply has been the -- preponderance of the supply on a percentage basis has been in the more in the urban core area that’s true in Dallas; it’s also true in Houston. Now, obviously Dallas has not had anything like the experience in Houston.
We continue to grow top line rents in our Dallas portfolio and our urban assets are contributing to the growth, they are just not at the top of the market anymore in terms of relative to our suburban assets. But yes, it’s a similar experience.
Then the big difference has been that Houston delivered 10,000 or 11,000 jobs in 2016 and Dallas delivered 8,000. So, it’s just a still a real dynamic economy that so far has been able to absorb the new inventory that’s been brought on.
But it’s clearly in the sub markets where you’ve got a lot of nice supply, you’re going to get impacted.
Rob Stevenson
Okay. And then one for Alex.
Given your comments about some of the benefit savings et cetera, when you’re looking forward at the same-store portfolio and the expense growth with what you’re continuing to see from property taxes and I imagine like everybody else seeing some inflation in payroll, some of the other line items, is there any reason to believe that same-store expenses aren’t going to grow at the 4% rate for the foreseeable future? Any signs of hope out there.
Alex Jessett
So, the signs of hope that I would point out, especially for our portfolio are two things, number one that although we’ve been successful in 2017 on the property tax side, we still do have property taxes increasing four and three quarters percent. That should revert back to the norm of about 3% very soon.
The second sign of hope is that the insurance market still continues to be very favorable for us. And hopefully when we go to our renewal next year, we’ll start to see some benefits from that.
Rob Stevenson
Okay. And is that offset by wage pressure or what are you guys seeing there?
Alex Jessett
Yes. So, what’s interesting for Camden specifically is that when you look at our full year salaries, we actually think it’s going to be relatively flat, 2017 as compared to 2016, and that’s driven by lower than expected benefits and lower than expected workers’ comp claims.
So, once you strip that out, we’re still working right around the 3% range.
Operator
Our next question comes from John Kim from BMO Capital Markets. Please go ahead with your question.
John Kim
Good morning. You talked about your first acquisition in nearly three years and some opportunities going forward.
I’m wondering how much cap rates have moved up for a; new products and also how much you expect to acquire over the next 12 months.
Ric Campo
I don’t think cap rates have moved up much at all for new products, there is still a big demand for product. It was certainly interesting in the first quarter we got a 17% decline in multifamily sales sort of nationwide and it was still down in the second quarter, maybe down 1% but that also included the acquisition of Monogram by Greystar.
And so, fundamentally, you know even though the bid is down a bit, cap rates are still very sticky, especially for high quality properties. And I think part of the issue get into with this merchant builder product that needs to clear the market over the next couple of years is that historically the merchant builder margins have been incredibly wide, meaning that instead of 10% to 15%, maybe 20% margin on their costs, which is a good base work for a merchant builder generally, the margins have been more like 50 to 60%.
And so, what’s happening now is that even though rents are -- so when you think about NOIs, they are depressed because of the free rent that’s going on in the marketplace. So, when you think about cap rate, the cap rates really haven’t gone up, what’s happened is that NOI has gone down and then you think the juxtaposition of what the asset value is relative to replacement cost.
And in the case of the Buckhead Square for example, we bought that the property at $230,000 or $230,000 a door plus or minus, and we think to replace is 260 something a door. So, on the one hand, the cap rate was low, but there is free rent embedded in the market.
And yet for us to replace that product in the same place today is 12% above what we bought it for. So, I think that is going to continue to have a dampening effect on cap rates.
Then if you move to Houston for example, there are deals trading in Houston -- I know this is going to hurt some people on this call’s head, at sub-4 cap rate. And there is a deal in Downtown for example that is going to trade at 3.6 current cash on cash return.
Now it’s brand new, it’s in Downtown, it has embedded 2.5 months free rent in it. And so, people are able to buy that at the low replacement cost, at a low cap rate because they’re buying by the pound and fundamentally people believe and know based on history that the rental rates will go up.
You look at Houston for example, I think it’s great example, you take 2002’s downturn. If you look at 2001, revenue growth was 8.2%, 2002 was 0.9 and 2003 was down 4.3.
When it stabilized, it took a couple of years to stabilize during that period, we had three years or four years of over 5% growth. Same thing happened in the last downturn.
So, people are not going to say well, I’ve to have a higher cap rate and I’m not going to take into account the idea that free rent burns off. So, they’re basically buying by the pound now and therefore cap rates really haven’t gone up.
John Kim
But given this unique dynamic of buying below replacement costs, how big can this acquisition program be?
Ric Campo
Well, in our guidance today, we have -- we generally have net acquisitions versus dispositions. And it’s an evolving market.
I think that this could be a big acquisition opportunity over the next 18 months. We’re nibbling at the edges right now.
And I think we need to sort of wait. There is going to be a whole lot more products coming out in the next two or three years than there is today.
And so, we could easily increase our acquisition appetite to 300 million plus or minus but at this point we’re just sort of wait and see. I mean, we obviously have an incredibly strong balance sheet; we have lots of capacity to acquire.
And these are the kinds of properties we’re going to acquire in the future. When you haven’t acquired a lot in the line of three years, we clearly have an appetite to grow.
We’re ultimately -- we’ve positioned our portfolio and our balance sheet to be able to grow through development and acquisition we plan on.
John Kim
Okay. I thought I’d ask the question since you’re going to be exiting the business.
But given your success in student housing, why have you not invested more historically, is it just too different of a business from multi-family?
Ric Campo
Absolutely. If you think about the food chain in multi-family, I mean you have student housing as a great business, you’re in student housing but the challenge is you have a volatility of cash flow.
Camden Miramar is 100% leased today and in the summer it was 40% leased. So, the volatility of the cash flow is one thing.
The other issue is a lot of -- for us anyway, the management of that business is just very different than managing market rate housing. You can make the same argument for senior housing.
We have a couple of 85 and older properties and it is just a whole different world. You have to have different mindset, different strategy, and it is just -- I think student housing companies do a great job.
I think senior housing companies do a great job. But when you mix them together, it becomes more complicated effort.
And I’d rather keep our management team’s focus on what they do best, which is market rate housing that they understand really well.
Operator
Our next question comes from Alexander Goldfarb from Sandler O’Neil. Please go ahead with your question.
Alexander Goldfarb
Yes, good afternoon or I guess good morning still down there. So, two questions.
First, just going back to the merchant build and the pricing opportunity that you’re seeing. As you guys look, I mean you bought a development site in San Diego but at the same time you’re talking about an increasing opportunity potentially to acquire some of these merchant build developments over the next few years.
So, do you see that you may sort of dial back on the development front as more merchant build activity opportunity comes up or your view is that there is a balance between the two and that the IRRs that you’re seeing either on development or on the merchant -- or acquiring merchant assets is pretty similar?
Keith Oden
So, Alex, the opportunity on the merchant-built product is very submarket specific. If you think about our Buckhead acquisition, there was about 2,500 apartments that were delivered merchant-built product literally within about an 18-month window in that submarket.
Overall in Atlanta, that’s not a huge deal, the 2,500 new apartments in Buckhead is a huge deal. And so, you just had this supply bubble where merchant builders have to respond to that by meeting the market from a pricing standpoint, they compete, they embed free rent in their rent roll, they get to the end of their natural ownership period where their investors are looking for a repatriation of capital.
But they haven’t burned off all the embedded rent concession. So, you just -- you sort of have an impaired rent roll, because of the competition that was that all came on line at roughly the same time.
So, it’s a very submarket specific. Now, having said that, there are a number of submarkets that we play in that have this condition either currently or coming.
And we know, there is Charlotte, it’s going to have some opportunities; we know about the Houston story. So that side of it is more dependent on the current supply challenge that we have in a number of our markets.
Separately from that, the San Diego transaction, we announced the land purchase. The reality is, is that we probably don’t start construction on that product for another 18 months and then from there, you’ve got two years to deliver the final product, so you’re three years out.
And it’s in the market or in the submarket in San Diego where there’s been virtually no new construction. So just a different animal.
And the answer to your question is we would love to do both. I mean, I think to go back to the question Ric was answering and if we could and had delivered to us or have the opportunity to acquire $400 million, $500 million worth of Camden Buckhead that have exactly those economics and submarkets that we want to -- we’re either in or want to be in, within our existing footprint, we’d buy them.
It really [multiple speakers] the balance issue, because when you get down to it, we can make a rate of return, a risk adjustment rate of return on development, we’ll do it. If we can make a risk-adjusted rate of return on the merchant builder product, we’ll do as well.
Alexander Goldfarb
And then, Alex, going back to your real estate tax comments to prior question. You mentioned 4.75 now and hoping that goes back down to three.
Would you say that all of your properties have been mark-to-market or your view is that there is still some of your markets where the property taxes haven’t been fully mark to where the tax assessors think they should be?
Alex Jessett
So, the way we really operate on the property tax side is we focus a lot on equal and uniform, which is a concept that regardless of what we believe the value to be of that particular asset, it has to be valued in a similar fashion to other comparable assets. And so, when we’re really looking at our portfolio, what we’re really doing is looking at the value that the assessors have assigned to our assets as compared to similar assets and we’re making -- and we analyze it that way, rather than trying to go through and figure out exactly what the sort of “market value” of the real estate is.
Alexander Goldfarb
Okay. So, do you feel then, as you guys did that exercise that everything is valued where it should be on a peer related basis or there is still some areas where you think there are gaps and therefore that’s why you still think it’s elevated now and you’re not share when it could be down to the normal 3%?
Alex Jessett
No. We think as compared to the peers, we think we’re appropriately valued.
Operator
Our next question comes from Jeffrey Pehl from Goldman Sachs. Please go ahead with your question.
Jeffrey Pehl
I just have a couple of questions just on Houston and the revenue growth for the quarter. Thank for all the color so far on the supply and your expectations.
I was just wondering if you can break down the revenue growth for the quarter for Midtown assets versus maybe the energy corridor and suburbs?
Ric Campo
I don’t have the detail for those specific assets but I can give you generally. So, the closer you’re into urban core which is where a lot of development is being delivered, that’s the most sort of challenged -- some of the most challenged market.
If you take the juxtaposition then to the energy corridor, there is a lot of supply in the energy corridor, a lot of supply in the urban core. And so, both of those markets are getting the same kind of situation with more supply than demand.
You then go into the suburbs, so said another way, sort of the high quality urban core assets are getting hit harder than the sort of suburban sort of B plus assets, primarily because there is just not as much competition between the Bs and the As, if you will. Now, I will say also that now Bs -- some Bs are starting to get under pressure because of the A rents coming down to make it more affordable for somebody at the top end of the B markets moving into an A at a lower price than they would otherwise have.
Keith Oden
So, Jeffrey in terms of specific, the numbers around Ric’s commentary on the Downtown and Midtown assets, roughly down 10% and 11% on the Uptown product, suburban assets are flat to up 2%. So, the blend of that gets you to roughly to 3.5% that were down year-to-date in Houston.
So, there is a substantial difference of where the supply impact is happening, and if you got merchant-built product, it is given too much free rents, you’re going to have to respond to that from a pricing standpoint. But those are roughly the ranges and numbers that we’re dealing with.
Operator
Our next question comes from Drew Babin from Robert W. Baird.
Please go ahead with your question.
Drew Babin
Quick question on the Southern California that may sound like the D.C. question from earlier.
But speaking about Los Angeles and Orange County, it looks like Camden had a pretty big sequential acceleration in revenue growth there. And I was just wondering what sub markets are the strongest, which are the weakest and may be why Camden’s performance seems to look a little different than some of the other companies reporting?
Ric Campo
If you look at asset by asset across our Southern California portfolio, there is not a great variation between the Long Beach market, LA/Orange County that we see. They are all -- the strength is across the board.
We’ve got one or two assets that catch more competition from new product that’s coming on line in Irvine, and that’s always a little bit of a headwind for us and our two assets that are -- catch a little bit of the collateral damage from the supply that they bring online. But, outside of that, strength across the board and fact that two of our top five markets, San Diego and LA/Orange County.
So, just good strength, very, very limited supply relative to any other market that we operate in and clearly a robust economy that’s on the rebound.
Drew Babin
That’s helpful. And then going back to completions for next year again, obviously completions in Houston are going to be down quite a bit.
But in your other markets, are there any other markets in your portfolio where you’re seeing a drop off, not as extreme as Houston but something in that neighborhood?
Ric Campo
So, I’ll give you a couple of the highlights and the one that you mentioned on Houston is going to be the largest; we’ve got a real significant drop off there. But some other ones where we think we see supply coming down pretty meaningfully.
Dallas comes down by 4,000 apartments in total supply, Atlanta down by 2,200, Austin down by 2,300, D.C. Metro down by 3,000 and San Diego down by 2,000.
So, those would be the top five or six in terms of the declines; that’s a year-over-year decline, completions in 2017 versus 2018.
Drew Babin
I guess following up on that, are there any markets where you do see a pick up next year?
Ric Campo
Not a single one. We got 14 red numbers.
I do want to -- I really wanted to mention that earlier when we talked about Houston on the supply side, but we did get a very interesting stat this morning from the U.S. Census Bureau that reported that the total permits issued in Houston, Texas for multifamily apartments for the entire month of June was 90 and that’s we’ve been in -- doing business in Houston for a long, long time, I don’t ever remember seeing a stat like that, even in some of the other really severe contractions, and where it was more job related contractions, we didn’t see numbers like that.
So, when we talk about, it’s kind of a theoretical concept, when you talk about new permitting activity and the development pipeline, just completely shutting down. It’s not just the concept, that’s an amazing stat that we got this morning, so like just a little bit color on that.
Operator
Our next question comes from Rich Hightower from Evercore. Please go ahead with your question.
Rich Hightower
Lot of questions answered already but I wanted to hit on a topic that I think has been addressed on calls past and it relates to this sort of jobs, required jobs to creating another unit of apartment demand that ratio that you’ve seen historically in your markets. And I am wondering if some of those ratios are changing, just given the composition of the workforce and other things going on, I’m thinking of markets such as Austin, such as Dallas, maybe some others.
If you have any sort of general comments on that, if you’ve noticed any changes?
Ric Campo
Sure. Historically, over the last 20 years, people would sort of take total jobs and it was -- the rule of thumb was five jobs creates one multifamily housing demand.
And so, there are lot of ratios, lot of groups still look at that ratio. And I think though that you’re on to something that that ratio is sort of broken now, and it’s broken because -- and I’ll give you a great example of it.
In 2016, Houston basically went from 120,000 jobs in 2014, some jobs in 2015 but in 2016, there were basically zero jobs, some people say 10,000, so very limited jobs. In 2016, we have served 15,500 apartment units in Houston.
People are like well, how’s that possible? Yet no jobs.
Well, what’s happening is two things. One is, there is this pent up demand because people -- we’ve had this housing shortage going on for quite a while, so it’s a pent up demand.
You still have over 1 million millennials that are living at home or roommate situations because they haven’t been able to save enough money to either get out of home or to break the roommate scenario. So, there is still a pent up demand from multifamily.
And because of this demographic sort of shift, this millennial that’s more experiential, and they don’t want to buy things, they don’t want to be tied down buying house. So, you delay marriages, you delay child’s birth and people having kids.
And so all that has really fundamentally changed the demand picture for multifamily vis-à-vis how many jobs you need. And then the other part of that equation is, and I’ll use Houston as an example for this as well.
So, the new product that’s being built today is more hotel-like, it’s more amenities, there is conference centers, there is art studios and golf simulation rooms and it’s just bars and all kinds of different things. And so that product did not exist five years ago at all.
And so, it’s happened and these empty nester groups are now saying, I can move into the urban corridor, I can lease an apartment at what I was paying for my big house in the suburbs, I don’t have to drive and I’m closer to amenities and closer to kind of the things I want to do. And so that’s driving demand as well.
So, I think that the confluence of millennials, the pent up demand and then the empty nesters moving from suburbs to a more urban -- and urban doesn’t mean downtown, urban like Houston means, Sugar Land downtown or Galleria or Woodlands or downtown. So, if there is multiple urban cores.
It’s not just a specific downtown. So I do think that it’s having -- those three factors are having change in this whole idea that you need five jobs to create one multi-family demand.
Operator
Our next question comes from John Pawlowski from Green Street Advisors. Please go ahead with your question.
John Pawlowski
Thanks. Alex, you alluded to the upside to occupancy you’re seeing year-to-date.
I think for July, you’re 50 bps ahead of original guidance of 94.9%. What’s the current expectations for full year average occupancy?
Alex Jessett
Yes. So, when we look at the second half of the year, we think that occupancy is going to be fairly consistent to what we saw in the second half of last year.
So, you’re looking at right around a sort of a 95.3 type range for the second half. So, you can blend that with what we have in the first half and you got a full year number.
John Pawlowski
Okay, great. And then, the Technology Package has been a pretty good success past couple of years.
I’m curious what additional revenue growth initiatives you have in the hopper and how it’s going to impact full year 2017 and 2018 revenue growth?
Alex Jessett
So, what we running through our numbers today is everything that you know about which is our Technology Package and we still think that that equates to 65 basis points of additional revenue in the full year 2017. Obviously, we have lots of talented folks and we’re always looking for new initiatives.
And when we have something that we’re ready to announce, we’ll certainly let everybody know about it.
Operator
Our next question comes from Wes Golladay from RBC. Please go ahead with your question.
Wes Golladay
Hello, everyone. Looking at the Buckhead acquisition, how are you looking at supply impact on results of the property next year?
It looks like Buckhead will have a decline in supply but Midtown and Downtown a bit of an uptick. Do you think that will impact the results there?
Ric Campo
Yes, obviously we continue to get new supply in Atlanta. The Buckhead submarket is reasonably well contained in a sense that if you’re -- if that’s your first choice, probably you might migrate over to Uptown but more than likely if you’re a Buckhead person, that’s where you’re going to want to lease.
So, most of the 2,500 apartments that got started, this was a very tail end of it. We think that the supply in Buckhead, the next thing to come on line in Buckhead is likely to be an extension of our Paces community.
But it’s very, very difficult to manufacture sites in the Buckhead area and the land costs are going to only continue to increase. So, I think we’re pretty well insulated in Buckhead.
Don’t see -- we feel pretty comfortable that when we get over into next year and there is really no new supply coming on line, we should see a pretty decent bounce back, not just of the 3% or 4% verity in Buckhead because you got depressed rents. And we know from history that when you have a supply issue in an otherwise healthy economy, the rents tend to go back to prior peak pretty quickly, once the supply problem goes away.
So, you’re not restating rents from -- we’re going to grow rents at 3% from the bottom, which is a supply impaired number. You’re going to get back to what people -- what the average person is willing to pay to live in that submarket once the supply clears.
Wes Golladay
Okay. And then when you look at your supply number, you said it’s going to be down next year for your market.
Are you looking that at a submarket level or just a broader market?
Ric Campo
We look at it -- when we’re doing our revenue projections, we do a complete bottom up, which includes lot of new supply that would impact any of our communities in that submarket. So, we look at it in both ways.
It’s instructive though to be able to kind of think directionally about is a market produce -- is it going to produce more or fewer units. But ultimately, the game and the story is how many of those completion of those units that are of the completion drop is going to happen that’s adjacent to or impactful to the community that you have been operating.
Operator
And our next question comes from Karin Ford from MUFJ Securities. Please go ahead with your question.
Karin Ford
I wanted to ask about the downtown Houston development start. It’s fairly large deal at 125 million.
Can you give us your latest thoughts on where you’d like to have your capital allocation to Houston in light of that? Would you consider a JV in that deal or selling some assets in Houston?
Where do you want Houston to be as part of the portfolio?
Ric Campo
First of all, we would not consider joint venture. We are very anti-joint ventures.
We have one of the cleanest balance sheets in the multifamily sector and we have one big joint venture with Texas Teachers, but it’s blind pool unilateral decision making process with Camden only. So that’s number one.
In terms of where, we like Houston long-term. Houston is a dynamic market; it is going through its weak period right now because of supply.
It weathered the energy storm very, very well relative to historic energy downturns that we’ve had in the past. We’re at about 10.5%, I think of our net operating income in Houston right now.
And if we did nothing else, this would take it up about by 2020 to about 11.25 or something like that. It is a large project, it will be one of our premier assets, it’s high-rise 21 storeys.
And we’re moving more towards this kind of concrete constructions just because it holds up better long-term versus they can. I think when you think about where we want to be portfolio wise, I like where we are in Houston because I like the market long-term.
Will we continue to recycle capital the way we have in the past? Absolutely, we’ll continue to look at our portfolio on an ongoing basis and decide which assets are going to be slow grow, and then reinvest that capital into higher growth, higher quality assets.
So, when we think about this $125 million investment in context of Camden, it’s not that huge growth into our portfolio. But, will we sell other assets to fund it, perhaps.
And we will -- capital recycling is not something just do and stop, it’s something that you have to do all the time. If you go back to our history, I think we only own two or three of our original IPO assets, if you can imagine that and we’ve recycled billions and billions of dollars and we’ll continue to do that.
Operator
And our final question today comes from Dennis McGill from Zelman & Associates. Please go ahead with your question.
Dennis McGill
Hi. Thank you, guys.
I know we’re running over, so try to be quick here. First question, just has to do with the balance sheet.
If you were to underwrite a scenario similar to today for the next 18 months or so and see some opportunities to take advantage of the acquisitions as you said, where would you be comfortable taking leverage in that scenario to accomplish that?
Alex Jessett
So, if you think about where we’re today, we have the absolute strongest balance sheet in the multifamily space, debt to EBITDA 4.5 times. Would we be comfortable in that increasing a little bit?
The answer is yes, but probably not much more than sort of a 5-time type ratio.
Dennis McGill
Okay, perfect. And then on the ancillary income side, I think in the front half of the year, all the ancillary income was about a 100 basis points.
How much of that was the technology side?
Alex Jessett
Yes, it was almost entirely. So, if you look at the first half of the year, technology impact was basically 90 bps.
Dennis McGill
Okay. And so, that’s going to roughly 30 bps on the back half?
Alex Jessett
That’s correct.
Dennis McGill
Okay. And then, last one, I think you had talked about the supply -- I think you said 150,000 across the markets.
How much of that is still yet to come or let’s say second half of the year?
Ric Campo
So, we have -- of the total 150, it’s pretty evenly split in 2017, looks like about 76,000 in the first half and roughly 74,000 in the second half.
Operator
And we have a follow-up question from John Pawlowski from Green Street Advisors. Please go ahead with your question.
John Pawlowski
Thanks. Just one follow-up to the Houston development question.
Correct me if I am wrong, but didn’t the scope of that project increase $100 million this quarter? And just curious what increased it.
Ric Campo
Sorry, you said $100 million.
John Pawlowski
Yes, from looking at the development pipeline, Camden, what was Camden County last quarter $170 million and now Camden Downtown is the new name, split in two phases but the aggregate cost is $270 million.
Ric Campo
Right. So, that’s a good question.
I am not sure that the Camden County was sort of a holding pattern and we were deciding whether we were going to mid-rise stick or high rise. And so, the variation is we decided to do this 21 storey high-rise, which is roughly $125 million.
And it’s still -- the jury is still out to what we will do with the second phase. So, I think we’ve just put a holding pattern in and assumed it’d be a twin tower and that’s why the cost went up.
But I will tell you that from what we originally priced these projects, cost continues to go up in Houston. We were sort of expecting cost to come down with the energy situation and all the construction starts, that have been -- when you think about multifamily market has started to decline dramatically, but we have not seen cost come down at all.
Challenge in Houston is that there’s a lot of petrochemical construction, a lot of schools, medical center and we just haven’t seen any cost coming down. So it’s really been a combination of cost going up but also just a product type changing.
Alex Jessett
And we also added an escalation factor to the second phase for Camden Downtown. So that’s why you’re seeing a higher number for the second phase because they will be started several years later.
John Pawlowski
Okay. But, the best guess on aggregate outlay for these two sites is $270 million right now?
Alex Jessett
That’s correct.
Ric Campo
Assuming we build the second phase as a comparable tower 21 storey high-rise product at phase I is yes. But that decision is way down the road.
John Pawlowski
Thanks, guys.
Ric Campo
We appreciate the call and we will visit with you in the upcoming conference season after Labor Day. Thanks.
Operator
Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending today’s presentation.
You may now disconnect your lines.