Good morning, and welcome to Camden Property Trust Fourth Quarter 2021 Earnings Conference Call. I'm Kim Callahan, Senior Vice President of Investor Relations. Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, Executive Vice Chairman and President; and Alex Jessett, Chief Financial Officer. If you haven't logged in yet, you can do so now through the Investors section of our website at camdenliving.com. And please note, this event is being recorded. Today's webcast will be available for replay this afternoon, and we are happy to share copies of our slides upon request. 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 fourth quarter 2021 earnings release is available in the Investors section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which will be discussed on this call. We hope to complete our call within one hour. At this time, I'll turn the call over to Ric Campo.

Good morning. The opening ceremony for the 2022 Winter Olympics is today. And as you could tell from our on-hold music and slide show, team Camden has embraced the Olympic Spirit. The Olympic theme set me down memory lane and into Camden's archive for the video I'm going to show you today. During the 2012 Summer Olympics, the U.S. women's swim team made a video using a very popular song titled Call Me Maybe. At Camden, we are proud to be a friendly and welcoming workplace. One unique way we showed this is by greeting teammates with a hug instead of a handshake. Camden employees probably give and receive more hugs per day than any other workplace in America. So if you combine our hugging culture with the Olympic spirit, a Call Me Maybe video becomes a Hug Me Maybe video. And following the 2012 Olympics this happened at our corporate office. One of the many adjustments in Camden's world caused by social distancing during the pandemic was replacing actual hugs with virtual hugs. Since Camden is a fully vaccinated workplace, we have recently seen an uptick in breakthrough cases of actual hugging in our workplace. We all look forward to the day when all virtual hugs at Camden will become actual hugs. 2021 turned out to be a remarkable year, and we clearly exceeded our original guidance that we provided at this time last year. Our 2021 budget called for FFO of $5.00 per share, with same property revenues up slightly and net operating income down approximately 1%. As reported last night, we closed 2021 with FFO of $5.39 per share and same-property growth of 4.3% and 4.8% for revenues and net operating income, respectively. We expect 2022 to be our best year on record for earnings and same-property growth. The midpoint of our 2022 guidance calls for FFO per share of $6.24, with same-property revenue growth of 8.75% and net operating income growth of 12%. Our geographically and product-diverse portfolio in the Sunbelt markets continues to outperform. I want to thank each of our Camden team members for their hard work and commitment to our values and for improving the lives of our team members and our customers one experience at a time. 2021 was a great year, but the best is yet to come. Thank you, and I will now turn the call over to Keith Oden.

Thanks, Ric. We have a tradition of assigning letter grades to forecast conditions in our markets at the beginning of every year. I'll start with a review of the supply and demand conditions we expect to encounter in Camden's markets during 2022 and rank the markets in the order of best to worst. For the first time in 10 years, Camden's overall portfolio earned an A with a stable outlook and no market received a grade below A-minus. In addition, we are now providing this report card to you as part of our earnings call slide deck which is showing now and will be posted on our website after today's call. We anticipate overall same-property revenue growth this year in the range of 7.75% to 9.75% for our entire portfolio, with most of our markets falling within that range. The outliers on the positive side would be Phoenix and our Florida markets, which should produce double-digit revenue growth, then Houston and D.C., which will likely lag the overall portfolio average but still show significant improvement versus 2021. Our outlook for supply and demand in 2022 is based on multiple third-party economic forecasts that generally reflect strong job growth in Camden's markets, coupled with a steady amount of new supply. Estimates range from 1 million to 1.2 million new jobs created in our 15 major markets in 2022, along with 150,000 to 200,000 new completions. So our outlook reflects somewhere around the midpoint of both projections. It is likely no surprise that for 2022, our top ranking once again goes to Phoenix, which has averaged 7% revenue growth over the past three years and has an expected revenue growth well above 10% this year. We give this market an A+ rating with a stable outlook. Supply and demand metrics for 2022 look well balanced with estimates calling for 80,000 new jobs in Phoenix and 18,000 new units coming online this year. Up next are our three Florida markets: Southeast Florida, Tampa and Orlando. Each also earned A+ ratings with stable outlooks. These three markets should achieve revenue growth of over 10% in 2022 and are projected to have strong job growth to offset new supply coming online. Current estimates for job growth were approximately 50,000 in both Southeast Florida and Tampa and 60,000 in Orlando. Completions are expected to be 10,000, 6,000 and 9,000 units, respectively. Our next eight markets all earned an A rating with a stable outlook and should produce revenue growth generally within our guidance range of 3.75% to 9.75% in 2022. Atlanta, Austin and Raleigh should achieve revenue growth toward the high end of our guidance range in 2022. In Atlanta, job growth is expected to be 90,000 with around 10,000 new apartment completions. In Austin, projections call for 50,000 additional jobs with completions of roughly 18,000 units. And in Raleigh, the jobs-to-completions ratio should be 5x with 35,000 new jobs versus 7,000 new apartment completions. San Diego, Inland Empire and Charlotte are next falling around the middle of the pack in Camden's portfolio. For the San Diego/Inland Empire market, we expect to see over 100,000 new jobs in 2022 with new supply around 8,000 units. Charlotte should also deliver 8,000 units with 40,000 new jobs created, providing a good balance of supply and demand in that market. Nashville is Camden's newest market as we acquired two communities there last summer. While Nashville will not be included in our 2022 same-property pool, we would rate the city as an A with a stable outlook. There has been a significant amount of construction in Nashville, and that will continue in 2022, with approximately 10,000 new units expected to deliver this year. However, demand for apartment homes has remained strong in Nashville with positive net migration trends and projections for over 40,000 new jobs. Dallas and Denver are both solid markets, and we expect market conditions to be favorable again in 2022. Supply-demand ratios in Dallas and Denver remained steady with 95,000 and 55,000 new jobs anticipated, respectively, during 2022, with supply at 15,000 and 10,000 new units, respectively, scheduled for delivery this year. L.A., Orange County and Houston are the last two markets earning an A rating, but both have improving outlooks. Our portfolio in L.A. County saw higher delinquencies and bad debt in 2021 than our other markets, but we are hopeful that conditions will improve in 2022 as COVID restrictions begin to ease and regulatory issues around evictions are reduced. L.A., Orange County faces healthy operating conditions with favorable supply and demand metrics. Job growth should be around 150,000 with completions of 16,000 expected in 2022. In Houston, conditions began to improve in 2021 after the market struggled with many new lease-ups giving high levels of concessions. New supply is expected to ease in 2022 to around 17,000 units and job growth should remain strong with around 75,000 new jobs expected. Our final market is D.C. Metro, which we gave an A-minus but with an improving outlook. Supply remains steady with over 13,000 new units coming on this year, but job growth should be healthy as well with 80,000 new jobs expected. Similar to L.A./Orange County, Washington, D.C. has been a challenging market given the COVID environment and the many restrictions that were put in place as a result of the pandemic. While we are optimistic that 2022 will reflect an improved operating environment there, we have budgeted low to mid-single-digit revenue growth for D.C. Metro this year. Now a few details on our fourth quarter '21 operating results and January 2022 trends. Same-property revenue growth was 8.5% for the fourth quarter and 4.3% for full year 2021. Our top performers for the fourth quarter all had over 10% revenue growth and included Tampa, Phoenix, Southern California, Raleigh and Southeast Florida. Rental rates for the fourth quarter had signed new leases up 16.7% and renewals up 14.1% for a blended rate of 15.5%. Our preliminary January results indicate similar trends with blended growth of over 15% on signed leases. February and March renewal offers were sent out with an average increase in the mid-14% range. Occupancy averaged 97.1% during the fourth quarter compared to 97.3% last quarter and 95.5% in the fourth quarter of 2020. January 2022 occupancy has averaged 97.2% compared to 95.7% in January of last year, and is slightly up from our fourth quarter '21 levels. Annual net turnover for 2021 was in line with 2020 at 41%. Move-outs to home purchases were 15.8% for the quarter and 16.4% for the full year of 2021, relatively in line with our reported 15.8% for full year 2020. I'll now turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thank you, Keith. Before I move on to our financial results and guidance, a brief update on our recent real estate activities. During the fourth quarter of 2021, we purchased Camden Greenville, a recently constructed 558-unit mid-rise community in Dallas. And we purchased five acres of land in Denver and two acres of land in Nashville for future development purposes. For the full year of 2021, we have completed acquisitions of four communities with 1,684 apartment homes for a total cost of approximately $633 million, ahead of our original 2021 acquisition guidance of $450 million, and we acquired four undeveloped land parcels for a total cost of approximately $72 million. Additionally, during the quarter, we disposed of two operating communities in Houston and one operating community in Laurel, Maryland for total proceeds of approximately $260 million. These three dispositions were on average 21 years old, with average monthly rents of $1,350 per door and annual CapEx of approximately $2,300 per door. Using actual CapEx, these dispositions were completed at a 3.9% AFFO yield, generating a 10.5% unleveraged IRR over a 20-year hold period. Based on a broker cap rate, which assumes $350 per door in CapEx and a 3% management fee on trailing 12-month NOI, the cap rate would have been 4.3%. And finally, during the quarter, we stabilized ahead of schedule Camden North End 2, a 343-unit, $79 million new development in Phoenix, generating an approximate 8.75% yield. We also completed construction on Camden Hillcrest, an $89 million new development in San Diego. On the financing side, during the quarter, we issued approximately $180 million of shares under our existing ATM program. Moving on to financial results. Last night, we reported funds from operations for the fourth quarter of 2021 of $160.2 million or $1.51 per share, exceeding the midpoint of our prior guidance range by $0.02 per share. This outperformance resulted primarily from higher levels of occupancy and rental rates at our non-same-store acquisition and development communities and lower taxes and utilities at our same-store communities. For 2021, we delivered full year same-store revenue growth of 4.3%, expense growth of 3.5% and NOI growth of 4.8% as compared to our original 2021 same-store guidance of 0.75% for revenue, 3.5% for expenses and negative 0.85% for NOI. You can refer to Page 27 of our fourth quarter supplemental package for details on the key assumptions driving our 2022 financial outlook. We expect our 2022 FFO per share to be in the range of $6.09 to $6.39 with a midpoint of $6.24, representing a $0.85 per share increase from our 2021 results. This increase is anticipated to result primarily from an approximate $0.79 per share increase in FFO related to the performance of our same-store portfolio. At the midpoint, we are expecting same-store net operating income growth of 12%, driven by revenue growth of 8.75% and expense growth of 3%. Each 1% increase in same-store NOI is approximately $0.065 per share in FFO. An approximate $0.35 per share increase in FFO related to the growth in operating income from our non-same-store joint venture and retail communities, resulting primarily from higher rental rates, lower bad debt and the incremental contribution of our 4 acquisitions completed in 2021 and our 9 development communities in lease-up during either 2021 and/or 2022. And an approximate $0.07 per share increase in FFO due to an assumed $600 million of pro forma acquisitions spread throughout the year at an initial yield of 3.5%. This $1.21 cumulative increase in anticipated FFO per share is partially offset by an approximate $0.11 per share decrease in FFO from our completed 2021 dispositions, an approximate $0.04 per share decrease in FFO from an assumed $250 million of pro forma dispositions anticipated to primarily occur late 2022, an approximate $0.03 per share decrease in FFO resulting primarily from the combination of lower interest income from lower cash balances, higher franchise and margin taxes and higher corporate depreciation and amortization. Our combined general and administrative, property management and fee and asset management expenses are anticipated to be effectively flat year-over-year and there is an approximate $0.18 per share decrease in FFO due to the additional shares outstanding for full year 2022, following our 2021 ATM activity. Our revenue growth midpoint of 8.75% is based upon an anticipated 11% average increase in new leases and a 7% average increase in renewals. We are also anticipating that occupancy will moderate slightly to 96.5%. Page 27 of our supplemental package also details other assumptions for 2022, including the plan for $400 million to $600 million of on-balance sheet development starts spread throughout the year with approximately $315 million of annual development spend. We expect FFO per share for the first quarter of 2022 to be within the range of $1.45 to $1.49. The midpoint of $1.47 represents a $0.04 per share decrease from the fourth quarter of 2021, which is primarily the result of an approximate $0.02 per share decrease in FFO resulting from our fourth quarter 2021 dispositions; an approximate $0.01 per share decrease in sequential same-store net operating income, resulting primarily from the reset of our annual property tax accrual on January 1 of each year and other expense increases, primarily attributable to typical seasonal trends, including the timing of on-site salary increases; and an approximate $0.01 per share decrease in FFO due to the additional shares outstanding from our fourth quarter 2021 ATM activity. Our balance sheet remains strong, with net debt-to-EBITDA at 3.8x and a total fixed charge coverage ratio at 6.4x. As of today, we have approximately $1.4 billion of liquidity, comprised of approximately $500 million in cash and cash equivalents and no amounts outstanding under our $900 million unsecured credit facility. At quarter end, we had $199 million left to spend over the next two years under our existing development pipeline, and we have no scheduled debt maturities until late 2022. Our current excess cash is invested with various banks, earning approximately 15 basis points. At this time, we'll open the call up to questions.

Our first question comes from Haendel St. Juste with Mizuho. Please go ahead.

Hey, good morning. Appreciate all the market color and all the detail. I had a question more on the divergence we're starting to see in new lease rates and renewals. New lease rates continue to accelerate while renewals are slowing a bit. How do you think about that relationship near term? I expect new lease rates to come under more pressure as we face tougher comps, but I'm curious also which markets are you seeing the best and weakest pricing power on renewals? What's causing the drag? Thanks.

Yes. So Haendel, the gap between new leases and renewal rates is something that moves around quite a bit, primarily because of what we do on renewal rates. From time to time, depending on what's going on in our market or a submarket, we might put in place renewal caps, which is not something we would ever do on new lease rates in this environment. So it's going to move around a little bit depending on our pricing team looking at the trends day to day and making recommendations. I think in the first quarter, we had a couple of markets where we had renewal caps in place. But you're talking about renewal caps on what might have done as much as a 20-plus percent renewal being capped at 18%, and that would have been in some places like Tampa, St. Petersburg. But it's not unusual for that to move around. I would expect to see over the course of the year a narrowing in that gap. Our guidance has new leases at 11% over the course of the year and renewals at 7%, so not too far off where we are right now. But it's clearly part of the art and science of revenue management—it's just our revenue team looking at current trends and making recommendations.

Got it. So no particular market of note on the renewal side that you're seeing a more meaningful difference in form?

No. And I would say when we talk about less strength, that's the overriding message of all the data sets we sent out last night. You're talking about uncertain levels of both new lease and renewal rates across all of our markets. We had 12 of our 14 markets with double-digit NOI growth in the fourth quarter, and that trend continued into the first quarter. Somebody always has to be at the bottom, and right now Washington D.C. is at the bottom. Some of that is just the drag from the D.C. Metro properties where we are really precluded from finding a market-clearing rate for the apartments that we have there. Overall, the lowest grade we gave was an A-minus and that was Washington D.C. This is the first time we've ever had that happen in our portfolio. There's obviously a lot of strength out there.

Yes, very well noted. Actually, your comments lead me to my second question, which is your longer-term views on your Houston and D.C. portfolio exposures. Both markets haven't exactly been the strongest although they're improving at least in outlook for this year. I'm curious on your exposures here; you're increasing exposure to other smaller Sunbelt markets. You sold a few assets in Houston this past quarter. How do we think about your exposure over the next few years and your appetite for expansion into some of these other smaller, higher-growth Sunbelt markets?

Well, Haendel, that's exactly what our strategy has been. We talked about it on the last call, which was we were going to use this environment to sell down Houston and D.C. and then expand our portfolio and increase exposure in some markets where we're underweighted. Ultimately, that's our strategy. It's going to take us a few years to get there, but it makes a lot of sense. Geographic diversification primarily being in the Sunbelt has helped us a lot. As we do that portfolio redistribution over the next couple of years, it will help us become more geographically diversified. If you look at the last cycle in terms of how much we bought and sold, we really transformed the portfolio from 2010 through the pandemic. We sold on average 26-year-old assets and redistributed cash flow. We redistributed 44% of our NOI around the country as a result of those transactions, where we sold assets, nearly $3 billion that bought properties and then we also developed properties. We'll continue that. This environment gives us the opportunity to do it on a very low spread basis where we're not giving up a lot of cash flow given how much capital wants to buy properties. Those are properties that are in high demand today.

Got it. That's helpful. Is there any pricing difference or noticeable demand difference in selling, say, Houston assets versus D.C. given some of the challenges you noted earlier?

Early on, there was a pricing differential in Houston relative to other markets and D.C. a bit, but that has vanished because of the wall of capital. In 2021 there was roughly $350 billion in multifamily transactions. In gateway markets, sales were up 8% from the prior year, and in non-gateway markets, they were up 96%. So capital flowed to non-gateway markets. When we started talking last year about selling down and redistributing assets, we thought perhaps having a 100 to 125 basis point negative spread on the cap rate, and that's narrowed to under 50 basis points given the massive bids for those properties. There is no discount today in Houston or D.C. The other part of the equation is that Houston added 154,000 jobs this year and is expected to add 75,000 jobs next year. 2022 is a year where energy companies are hiring. While Houston has not added all of its jobs back to the pre-pandemic level like some other Texas cities, it still has gas in the tank. D.C., as Keith mentioned, has some significant assets where we cannot raise renewal rates due to regulatory constraints, and that's driving D.C. to be at the bottom of our growth. But on a fundamental basis, Houston is still strong and we expect more growth there when other markets perhaps start slowing in the future.

Our next question comes from Derek Johnston with Deutsche Bank. Please go ahead.

Hi, everybody. Thank you. Can you touch on the 2022 expense environment baked into guidance, particularly regarding taxes and payroll pressures? It generally seems to be a favorable setup but any additional color on possible tax rate increases or expectations given that the expenses seem to remain largely in check?

Absolutely. We are anticipating that property taxes are going to be up about 3.3% in 2022. A large component of that is some significant property tax refunds that we've already settled the cases for and so it's just a matter of receiving the check. To give you an idea, our total property tax refunds in 2021 were about $2.2 million, and we're expecting about $3.1 million of refunds in 2022. So that's one of the primary drivers of the property tax number being relatively mild at 3.3%. Rates in Texas—Houston, Austin and Dallas—came in much lower than we had originally expected for 2021, and I think that bodes very well for 2022. On other expense categories, we continue to do a really good job of controlling and being more efficient with our marketing spend. A lot of that is driven by technological advancements we've discussed in prior quarters. We're seeing the same thing on the salary side. The technological advancements include installation of smart access for all entryways, which not only improves the customer experience, it also provides efficiencies for our maintenance teams and facilitates self-guided tours. We're also improving our sales process through our funnel implementation, a sophisticated customer relationship management tool, and a marketing automation platform. When you put all of that in place and then work on AI, that helps counter inflationary expense pressures in 2022 and beyond. That's the primary driver and why we feel pretty good about the 3% expense number.

That's helpful. On development: rising rents are encouraging. Are you going to further ramp development now? What yields would you expect on any new starts? Development yields versus acquisition cap rates are tight; what development yield makes a project go?

Ric, you are on mute.

Development deals we look at by unlevered IRR over a seven-year period. Rental rates have risen faster than construction costs this cycle, which is notable. For the $600 million we have under construction plus roughly $200 million we've already finalized, our initial yields on stabilization have gone up to roughly the 6% range. For the pipeline we have, which is roughly another $1 billion to $1.5 billion, most of the average yields we expect are going to be in the low 5% range. We haven't updated every pro forma with current cost or rents yet. When you look at cap rates in the low 3s and existing yields in the mid-5s, development becomes a preferred option in terms of risk and reward. We've pressed to expand our development pipeline. Our midpoint for 2022 starts is $400 million to $600 million, which will take our construction pipeline up to a little over $1 billion. Development is a very good business right now. One challenge is the forward-looking start numbers and the time it takes to get a development done. We generally do around $300 million a year; we expect to do around $500 million this year, and hope to be in that sort of range going forward. Incremental increases are possible but hard to double quickly.

Thank you.

Our next question comes from Nick Joseph with Citi. Please go ahead.

Thanks. What's the current loss to lease for the portfolio? And for the 11% increase assumed on new leases, how does that look in the first half of the year versus the back half of the year?

If you look at loss to lease, because of dynamic pricing there are different ways to slice the number. If you look at all the new leases we signed in December and compare those to the effective rents in place, that would put loss to lease in the 10% to 11% range right now. That's where we are. For 2022, we anticipate continued very strong numbers in the first and second quarters and into the third quarter peak periods. We are expecting seasonality to start kicking in towards the latter part of the third quarter and the fourth quarter, so you'll start to see that come down.

Thanks. And then on rental assistance, I think you had $5.3 million in the third quarter. What was that number in the fourth quarter? And what is assumed in 2022 guidance?

The $5.3 million you referenced was total in the third quarter; on a same-store basis it was $4.2 million for the third quarter. That did increase to $5.1 million in the fourth quarter of 2021. That gave us, on a same-store basis, about $12.5 million for 2021. In our assumptions today we expect to recognize about half of that amount in 2022.

The next question comes from Brad Heffern with RBC. Please go ahead.

Hey everyone. Alex, on the new lease growth. You have the 15% plus number in January, and it seems like you can probably sustain double digits through the second quarter before comps get really tough. But to hit the averages you talk about, it seems like it will be some sort of low to mid-single-digit number in the second half of the year. Is that the right way to think about it? And is that what we should think about as your expectation for market rent growth from where we are right now?

Yes, that's a fair way to think about it. If you look at December 2021 to December 2022 market rent growth, we think it's in the 4% to 5% range, and then you have the loss to lease that we'll recognize partially throughout the rest of the year.

Got it. And then on the balance sheet, you ticked below the bottom end of your typical 4x to 5x net debt-to-EBITDA range this quarter. For funding needs beyond dispositions in '22, should we expect those to come from debt? Or do you want to keep the balance sheet cleaner given the place in the cycle?

We have a stated view to target debt-to-EBITDA in the 4x to 5x range. We're below that today as a result of equity issuance and net investment activity, but we'll execute acquisitions, dispositions and development to bring debt-to-EBITDA back into our target band. Today it's an interesting time with the ability to put permanent capital on the books and deploy into a frothy acquisition market. We've generally seen strong AFFO yields on our stock historically. We will use every source of capital opportunistically—equity when appropriate and debt when appropriate—but we'll stay in that band generally.

Great. Thank you.

Our next question comes from Neil Malkin with Capital One Securities. Please go ahead.

Thanks. Good morning everyone. You have a unique insight into the divergence between Sunbelt and coastal markets. Over the next three years, what do you see in terms of job growth, population migration in the Sunbelt versus California? Do you think California may be somewhat impaired given outflows of businesses and people?

We do have a unique perspective because we've operated in these Sunbelt markets for many years. The migration from coastal markets—particularly California and the Northeast—into the Sunbelt was in place pre-COVID and accelerated during COVID. Our view is that once things settle into a more normal pattern, the pre-COVID trend of migration to the Sunbelt will remain because the drivers are structural, not just COVID-related. In California for 2022, based on our plan, California is not going to be a drag on the portfolio. Job growth in L.A. County versus new starts puts that market in a good place. There are still regulatory issues in California, but we anticipate some relief in 2022. In D.C., our issue relative to the balance of the portfolio is more the D.C. proper experience; a couple of suburban markets have regulatory constructs but they're minor overall. We expect those markets to go through a reset in timing that differs from other markets, but fundamentally the investment thesis for why we're in Southern California and D.C. hasn't changed. D.C. metro is due for a recovery post-COVID.

Appreciate the color. On acquisitions: have your underwriting standards or unlevered IRR targets changed? Given low cap rates, are you more bullish on year 1–3 rent growth assumptions that make buying at low-to-mid 3% caps acceptable?

Our cost of capital has changed, and we adjust underwriting accordingly. Exit cap rate is tricky; we generally move it up from the initial acquisition cap by 25 to 50 basis points in our seven-year model, but that's an assumption. When underwriting today, we're recognizing faster rent growth in the first 12 months of acquisitions than we might have previously, and then we typically back off in 2023 toward long-term averages. We model long-term terminal growth around 3% to 3.5% depending on the situation. The numbers generally still work at these low cap rates because of the outsized growth we expect in 2022 and 2023. We're comfortable with the spreads over our long-term weighted average cost of capital and we are not underwriting in a way that requires unrealistic cash flow improvements to make deals work.

Okay, great. Thank you and nice quarter.

Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning. A few questions. First, how much of this year's rent growth is coming from burn off of free rent from last year? I imagine few of your markets had material free rent but maybe D.C. or Southern Cal. Second, the 4% to 5% market rent growth you expect—does that measure market rents on face value, on top of mark-to-market?

We don't offer concessions, so free rent burn-off is not a factor for us.

Okay. And the 4% to 5% market rent growth is on face value rents, not including mark-to-market?

Correct.

Second, you just entered Nashville but other markets like Salt Lake and San Antonio seem like natural additions. As you recycle capital from Houston and D.C., what's the appetite for entering additional new markets?

We like the markets we're in; otherwise we wouldn't be there. Entering a new market requires significant consideration. Nashville was entered meaningfully and early relative to the pricing and rent run-up. San Antonio has been an unusual market; we generally stayed out because we didn't like the depth of the employment base there. Salt Lake and other smaller markets like Boise and Charleston have been looked at, but we have enough markets to allocate capital to within our existing footprint. We monitor other markets and will allocate if the opportunity fits, but for now we have enough attractive opportunities in markets where we already operate.

Our next question comes from John Kim with BMO Capital Markets. Please go ahead.

Good morning. I wanted to follow up on loss to lease. Alex mentioned it's 10% to 11% now versus 16% a few months ago, but only 20% to 25% of your leases rolled in the fourth quarter and all of those went directly to market. Shouldn't that figure be at least 12%, maybe as high as 12.8% versus the 10% to 11%?

Yes. There are different ways to look at dynamic pricing. If you take a snapshot at the end of the quarter comparing asking rents to effective rents you'll get a different number. What I said was if you actually look at the leases that we signed during the month of December and compare those to effective rents in place, that's where you come up with the 10% to 11% level. So it's two different ways of looking at it. If you look purely at asking rents, you might see about a 13% number. But with dynamic pricing, pricing ticks along, then drops, and we sign a portion of leases at that lower price point, then it goes back up. In an environment like this, the 10% to 11% is probably a better way to look at it.

Okay. At the same time, market rents in your markets probably didn't see that much seasonality, I'm guessing. So I would have thought that would support that number being higher?

The seasonality this year was unusual. Typically, you see a drop going from the summer into the fall, but this year we had only a slight decrease—a mild negative second derivative—but still very robust numbers. Over the past decade you wouldn't see the level of rental increases we got in the fourth quarter; the seasonality was very light because demand stayed high. More people were coming into the market, occupancy remained high, and we didn't need to drop rents or lower renewals dramatically to keep market share. We had much more demand than supply, which produced a muted seasonality relative to historical norms.

Right. And Ric, you mentioned development expectations and IRRs on development starts. You had one development at an 8.75% stabilized yield. What should we model for the existing pipeline given how rents have come up in the last 12 months?

The existing pipeline without remodeling was in the mid-5% yields, but it's likely to be better than that now. We haven't remodeled all pipeline deals with new rents and new costs. For the projects we've started, yields are north of 6% on average. We have another project that hit over 7% in Phoenix. Most are in the mid-6% to high-5% range. Urban properties, especially in California, tended to be in the low-5s originally and we expect to be better than that now. The development margins are very high given compressed cap rates compared to development yields.

Thank you.

Next question comes from Austin Wurschmidt with KeyBanc. Please go ahead.

Hey guys, thanks for the time. What are the rates on your renewal leases that are going out into February and March?

Mid-14%s.

Great, thanks. When you talked about technological advancements and savings you're getting, can you give a sense of the total amount or breakdown of what you have left to capture over the next few years?

We're on the forefront of this and expect efficiencies to continue through 2022 and really take hold in 2023 and beyond. The trend is toward self-guided tours, and our Smart Access solution is necessary for that. We believe wayfinding and our virtual leasing agent, which we're building out now, will create significant efficiencies. We're excited about where this will lead. As we flesh it out, we'll provide better information on dollar amounts, but we're already capturing meaningful efficiencies given the modest 3% expense growth assumption.

Thanks, Alex.

Next question comes from Joshua Dennerlein with Bank of America. Please go ahead.

Could you walk us through the assumptions that get us to the low end of your guidance? Particularly the rate assumptions?

If you think about factors that could cause us to be below the midpoint: one big one is bad debt and write-offs. We had about $12.5 million in 2021 and are anticipating about half of that in 2022; that's a very variable item and one we're focused on. We also reduced assumed occupancy to 96.5% from 96.9% in 2021, and we'll watch that closely. The third factor is how the third and fourth quarters shake out; macro factors could affect those periods. We feel very good about our business but monitor those risks closely.

I would add regulatory impediments in California and D.C. proper and a bit in suburban D.C. can affect results. We estimated a reasonable scenario for relief timing, maybe midyear, but it's uncertain and new variants or policy reactions could create headwinds. That's an additional risk to consider.

Got it. One follow-up: on the occupancy moderation you're factoring in, what's driving that? Conservatism or typical moderation when occupancy is this high?

We don't normally see occupancy this high. We're at record-type levels. As occupancy reaches these levels, we push rents through yield management, and the natural result is some moderation in occupancy. That's part of why we modeled a slight decline to 96.5%.

We've been doing this for years; 96.5% doesn't feel conservative to me in this environment.

Our next question comes from John Pawlowski with Green Street. Please go ahead.

Keith, can you give details on how the team sets the boundaries of the bands for the letter grades and the outlook? There's disparity between job-to-completion ratios across markets like Atlanta and Austin yet the same grade. Any additional commentary would be great.

The primary driver is that we're only looking one year out. We're focused on forecasted revenue growth for the year. If I had to grade on a curve, I wouldn't; the lowest revenue growth in our forecast is D.C., and that still warrants an A-minus for the year in our view. Houston at 6.5% is a solid A. Disparities in job-to-completion ratios are important, but within a 12-month forecast period they don't swing the grades as much because the deliveries and submarket specifics are incorporated in our bottom-up budget process. So for this year, the entire class is an A student in aggregate.

That helps. One final: if regulation constraints were gone on January 1, what would D.C.'s revenue growth have looked like — trying to understand structural earnings power?

If you look at last year, D.C. affected our portfolio results by about 40 basis points. It's not a huge drag in the portfolio context. We expect some relief in 2022; maybe midyear you see the beginning of a return to normal. But there's always uncertainty with policy responses to variants, so while it's not a huge portfolio effect, it matters locally and we modeled conservatively.

Our next question comes from Chandni Luthra with Goldman Sachs. Please go ahead.

Hi, good afternoon, and thank you. Our peer yesterday talked about expecting more opportunities to acquire stabilized properties potentially later this year. Are you seeing similar situations developing? How would you approach acquisitions—would you be aggressive if opportunities present themselves?

Based on how we see the year progressing, I still expect a competitive acquisition market. It depends on what the Fed does; if the Fed tightens too fast and people forecast an economic slowdown, you might see softness. But today there's still a wall of capital and strong supply-demand dynamics. Liquidity is not going away, so I don't see a broad opportunity for rising cap rates or better pricing for multifamily assets this year. We will be opportunistic and will participate in the market where it makes sense, but it's going to remain competitive.

Understood. On migration, which has been a major tailwind for the Sunbelt, do you see any signs of reversal as we move into an endemic stage? Might those who moved from coastal regions consider moving back?

From 2017 to 2020, Florida and Texas had significant net domestic in-migration even before COVID. The pandemic accelerated these trends because some places were open and others were not. We don't expect a large reversal; most economists don't expect people to move back en masse to California or New York. Migration to the Sunbelt is driven by structural factors: lower regulation, lower housing costs and favorable weather. While California and New York remain large economies and attractive places to live, at the margins people and businesses relocate for cost reasons, and that's likely to continue.

In our portfolio in the fourth quarter of 2021, 20.4% of all new leases in our Sunbelt markets were from people outside the Sunbelt, which is a 430 basis point increase year-over-year. We're clearly seeing migration in our portfolio and it's continued to accelerate.

Our next question comes from Anthony Powell with Barclays. Please go ahead.

Hi, good afternoon. A question on housing affordability in your markets: how do you see rising mortgage rates impacting the rent versus buy decision? Also, we're seeing capital flow into rent-to-own startups—how might that development impact the decision over the long run?

Affordability remains good in our portfolio. Even with rapid rent increases, averaged over a three-year period rents have not risen to extreme levels, and wages have increased as well. Markets in our portfolio remain relatively affordable based on incomes. Regarding single-family rentals, they are an important segment: average square footage is much larger and they are more suburban. People often choose a house or single-family rental for social reasons—more space, children—rather than purely financial reasons. You can often buy or rent a house in the suburbs at a lower occupancy cost than urban apartments, but people choose urban apartments for lifestyle reasons. We have looked at adjacent sectors like independent living and single-family rental; while they're interesting, they have different cycles and operational models. We may dabble in related niches if they fit our operating model, but our focus remains on multifamily.

So you're not looking to get heavily into single-family rentals yourself over time, you're content focusing on multifamily—fair?

We think it's an interesting space and we've evaluated it a lot. It could be a nice growth area if we can operate it efficiently, but it's another niche with different operational demands. For now, our primary focus remains multifamily. I think we don't have any other questions in the queue. We appreciate your time and we'll see some of you in South Florida. Take care, and we'll talk to you next time. Thanks.

Thank you. Bye-bye.