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Camden Property Trust (NYSE:CPT)

Q1 2008 Earnings Call

May 2, 2008 11:00 am ET

Executives

Kim Callahan - IR

Rick Campo - Chairman and CEO

Keith Oden - President and COO

Dennis Steen - CFO

Analysts

Michael Bilerman - Citigroup

Alex Goldfarb - UBS

Jeff Donnelly - Wachovia

Karin Ford - KeyBanc Capital Markets

Christine Kim - Deutsche Bank

Dustin Pizzo - Banc of America Securities

Rich Anderson - BMO Capital Markets

Michael Salinsky - RBC Capital Markets

J. Habermann - Goldman Sachs

Steve Swett - KBW

Haendel St. Juste - Green Street

Ben Lentz - LaSalle Investment

Operator

Hello and welcome to the Camden Property Trust first quarter 2008 Earnings Call. (Operator Instructions).

Now I would like to turn the conference over to Kim Callahan.

Kim Callahan

Good morning and thank you for joining Camden's first quarter 2008 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.

As a reminder, Camden's complete first quarter 2008 earnings release is available in the Investor Relations section of our website at camdenliving.com, and it includes reconciliations to non-GAAP financial measures, which may be discussed on this call.

Joining me today are Rick Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President and Chief Operating Officer; and Dennis Steen, Chief Financial Officer.

At this time, I will turn the call over to Rick Campo.

Rick Campo

Thanks Kim and good morning. While reviewing our results for the first quarter, I was reminded by the opening words from the Charles Dickens' book, 'A Tale of Two Cities'. You remember those they start out as -- it was the best of times, it was the worst of times. So Camden's market performance for the first quarter can be described as 'A Tale of Two Markets.'

First, strong markets with positive operating fundamentals that have avoided the housing debacle, these markets include Houston, Dallas, Austin, Charlotte, Raleigh, Denver and Coastal California. Then our markets that are at the epicenter of the housing bust, Florida, Arizona, Nevada, Suburban Washington D.C. and Inland California. These markets are experiencing job loses related to the continued unwinding of the housing-related employment and an increased shadow supply of rental condominium and housing. Operating fundamentals remain challenging in these markets.

First quarter same-property net operating income was 1.4% in 2007. Revenue growth was up 1.5% in the same period. It's interesting to contrast revenue and NOI growth in strongest versus the most challenged markets. Revenue growth for the strongest markets increased 4.1%, compared to a 1.6% decline in the challenged markets. Net operating income increased 4.8% in the strongest markets, versus a 2.4% decline in the weakest markets.

We think that the underperformance in these challenge markets will continue through next year until the housing markets and the overall economy improves. Our management teams on-site continue to be focused on providing living excellence to our residents and are up to the task in our almost challenged markets.

Camden continues to enjoy a strong balance sheet and strong liquidity. During the quarter, we closed an additional $150 of capital commitments for our value-added fund, bringing the total capital commitments to-date of $300 million. With Camden's capital and the use of 70% leverage in the fund that should give us capital in excess of $1.2 billion to fund our acquisition program and our development.

We continue to make progress on the completion of lease-up of our development pipeline, cost budgets are intact and leasing is generally on plan. We continue to evaluate our pipeline in light of market conditions that delayed the start of several projects. The credit crunch and negative investors' sentiment should lead to a substantial slowdown in multi-family constructions starts this year, while we expect the rest of 2008 to be challenging. Lower supply and moderating construction starts should foster excellent market conditions for development deliveries in 2009 and in the 2011 for developers who can't access capital today.

At this point, I'll turn the call over to Keith Oden.

Keith Oden

Thanks, Rick. Overall, our operations came in slightly better than planned for the first quarter, although as Rick mentioned there was more variability to plan in our individual markets than we would normally expected to see in the first quarter of a forecast period. This variability just highlights the uncertainty that the well-documented cross-currents affecting our markets have created. It also reflects the impact of the reduced job growth for cash across our markets. We know the job growth is the metric most highly correlated with NOI growth and that was evident in our results for the quarter.

Overall, occupancy for the quarter rose slightly from last quarter to an average of 93.8% and has continued to trend upward. Our most recent occupancy rate was 94.3%.

Rental rates were down slightly from last quarter, but the slight decrease was more than offset by an increase in other income, primarily the continued ramp-up in cable television and Valet Waste discount.

Overall, traffic in our portfolio was flat versus the prior year quarter, but the distribution of plusses and minuses mirrors our NOI performance by market, with Houston, Dallas and Denver, showing big gains in traffic, offset by weakness in Florida, Las Vegas, Phoenix and charlotte.

Our turnover rate for the quarter was 53% in line with the first quarter of 2007 and down slightly from last quarter. The most interesting data point for the quarter was the percentage of residents moving out to purchase a home which fell to 14% for the quarter.

This is the most concrete evidence we have to indicate that the single family housing mess is causing our residents to delay or cancel the home purchase option. The current environment has significant challenges for our residents, slowing job growth, falling consumer confidence, rising cost of food and energy have taken their toll, and actually there is a concern that bad debts may rise. But for 2007, our bad debt expense was about $6 per unit per month or roughly one-half of 1%. And for the first quarter of 2008, bad debt was $5 per unit per month which is consistent with our long-term trends. So far, so good on that front.

The cost trends associated with the oversupplied housing markets have been well chronicled over the past three quarters. Subprime mortgage defaults or closures following home sales, reduced job growth, but a greater propensity to rents and moderate and declining multi-family deliveries just to name a few.

We continue to believe that the net-net of all of these factors will be a slight positive for multi-family performance as 2008 unfolds. Our same-store NOI growth came in at 1.4 for the quarter, which was slightly better than our plan and against our full-year guidance of 2.75% growth at the full-year midpoint.

You should not interpret this to mean that we are projecting a strong recovery in fundamentals in the second half of the year. Last year, our first quarter and second quarter results were quite strong, at a 6% same-store NOI growth and the second quarter was up 2.1% sequentially over the first quarter.

The subprime meltdown began in the summer and our portfolio got slammed. Occupancy rates dropped in the fourth quarter to 93.6% and we are just now seeing our occupancy stabilized at higher levels. Our forecast assumes that we maintained our occupancy rates in the 94.5% to 95% range for the second half of the year.

In addition to the first four months of the year, our other income is running roughly $250,000 per month ahead of plan. Most of the increases from cable television, Valley Waste and fewer waived fees. We expect this positive variance to be maintained, which is equal to about 75 basis points of same-store NOI pickup. The combination of the occupancy increase and the other income pickup on top of the favorable comparables in third and fourth quarter provides the basis for our forecast to maintain our full year same-store NOI range.

The most serious risk to our 2008 results is a further reduction in job growth in our markets. Our original guidance was based on aggregate job growth estimate in Camden's markets of roughly 290,000 jobs. Our updated forecast cut that estimate in half to roughly 140,000 jobs. If the job outlook worsens, or if we fail to see any positive impact from the unraveling of the housing mess, we will have to revisit our guidance.

The key leasing period of May and June will likely give us much better visibility of what the full-year 2008 should be and should our May and June results disappoint and cause us to revise our thinking about our full-year guidance, you will be the first to hear about it.

At this point, I would like to turn the call over to our CFO, Mr. Dennis Steen.

Dennis Steen

Thanks, Keith. Camden reported FFO for the first quarter of 2008 of $52.3 million or $0.89 per diluted share, at the midpoint of our prior guidance of $0.87 to $0.91 per share and equal to the first call mean estimate for the first quarter. Our performance at the midpoint of our guidance range is reflective of same-store and total property net operating income results for the quarter, in line with our expectations, in the absence of any significant non-recurring or unusual items in all other categories of non-property income and expenses.

On the transaction front, during the first quarter we sold Camden Ridgeview, a 24-year-old asset in Austin, Texas recording a gain on sale of $6.1 million, which is included in discontinued operations. Additionally, we sold 4100 square feet of retail space adjacent to our regional office in Las Vegas and recorded a gain on sale of $1.1 million, which is included in continuing operations. Neither of these gains are included in our quarterly FFO.

We are continuing to pursue our strategy of selling over assets in our portfolio. We have begun marketing our next round of dispositions and we have substantial interest in this portfolio. We still forecast 2008 total disposition volume in the range of a $175 million to $380 million.

Moving to our development activities. We currently have 15 development communities underway with a total projected costs of $920 million in our on balance sheet and joint venture pipelines. Four of the communities are completed and should stabilize over the next two quarters. Of the remaining 11 under construction, eight have initiated leasing activities. Projected costs are continuing to come in slightly below budget and leasing absorption and rental rates are generally in line with our expectations.

We are still projecting up to a $100 million in on balance sheet starts and $200 million to $400 million in joint ventures starts for 2008.

Taking a look at our capital structure. As volatility in the debt and equity markets continues, we continue to be rewarded by the strength and flexibility of our balance sheet. As of March 31, we had just over $400 million available under our $600 million line of credit. Additionally, we have very manageable debt maturities over the next several years. For the remainder of 2008, we have a $189 million of scheduled maturities, consistent entirely of maturing mortgage debt. The vast majority of which matures in the fourth quarter.

We currently do not anticipate tapping the capital markets for the remainder of 2008. Although spreads on unsecured debt have been declining recently, they still remain high. Due to our current low level of secured debt, which totals only 10% of our gross asset value at March 31, we do have the ability to add significant new secured debt to our balance sheet if it continues to be a more attractive alternative to unsecured debt.

During the first quarter, we repurchased 690,400 common shares at an average price per share of $43.41 for a total of $30 million. Over the past four quarters, we have completed the total of $230 million in common share repurchases under our prior $250 million authorization. Also during the quarter, our Board approved an additional share repurchase authorization of $250 million.

Moving on to 2008 guidance. We are maintaining the full-year FFO guidance we issued in early February of $3.60 to $3.80 per diluted share. We have made no changes to the key 2008 financial outlook assumptions we laid out in our prior quarter supplemental package.

For the second quarter of 2008, we expect projected FFO per diluted share within the range of $0.87 to $0.91. The midpoint of $0.89 per share represents flat performance as compared to the first quarter 2008 results, primarily resulting from; number one, a projected $0.02 per share increase in property net operating income as revenue growth from our stabilized portfolio and communities under lease-up is projected to more than offset our seasonal increase in property expenses we experienced in the second and third quarters of each year.

This positive increase is entirely offset by a projected $0.02 per share increase in interest expense, due primarily to a reduction in the capitalization of interest on our development pipeline. This is due to the significant number of apartment units completed during the first quarter of 2008 and the units to be completed in the second quarter of 2008 for the communities under construction and currently in lease-up in our development pipeline.

Development dilution will begin to decline in the third and fourth quarters of 2008, as we make progress towards stabilization of a significant portion of the development pipeline which is currently in lease-up.

At this time, I would like to open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Bilerman of Citigroup.

Michael Bilerman - Citigroup

Keith, I hope you can expand first on the, what we should expect as we go through the quarters this year for the same-store revenue growth, given the (inaudible) ramp, just to hit that 3.5 point seems like better ramp. I know you talked about it some. But if you could just talk about may be the level of revenue growth we should see as the quarters go on?

Keith Oden

Well, the revenue growth is going to, the pick-up will be primarily in the third and fourth quarter. And a big piece of it is attributable to the occupancy rates that we had in our third and fourth quarter of '07. And I mentioned the fourth quarter was actually 93.6%. We were a little bit better than that in the third quarter, but we were trending down for the whole quarter.

So, I think you can expect to see the revenue pick up in the third and fourth. We do have some pretty modest rental increases there that are modeled, but again they were very modest given our original guidance of NOI range in two in a quarter to three in a quarter. So, I think you will see a little bit more impact in the third and fourth.

The other thing that it running through our numbers that you will see in the total revenues not necessarily in the rental revenues is the outperformance on other income. The run rate through the first four months of the year is in the $250,000 range and we believe that most of that is sustainable as run rate recurring.

Michael Bilerman - Citigroup

Okay. And on the move out to buy a home, how is that looking in some of these most challenging markets? And how is that impacting when you said net-net housing prices are helping apartment, how does it playing on those markets from the move out?

Keith Oden

It's interesting because we look at it market-by-market, it's all over the map. Actually there is some, for example, in Tampa. It was quite low, which a little bit countering to the view that world saw on the part on housing prices and there might actually be more of a demand, because the price structure is shifted down and also you had more of an impact from the lower price point communities. But it's really all over the map and again the quarterly number like that can be pretty volatile.

So, I think the takeaway is really the difference between where we were last year at this time which was roughly 20% move out to home purchases and where we are today which is 14% for the quarter and it doesn't sound like a big deal. But 6% differential on your backdoor turn rate turns out to be a big deal on our portfolio. So I think the takeaway is more the fourteen and people see where that goes for the second quarter and throughout the year.

Michael Bilerman - Citigroup

Okay. My last question is on the maturing debt this year, what's the plan to refinance that?

Keith Oden

Right now, we have enough liquidity in our balance sheet that we don't need to refinance it. So right now, we're going to actually paid it off with balances outstanding under our line of credit.

Michael Bilerman - Citigroup

Okay. Would you consider tapping either the unsecured market or what looks better that versus some of the agency financing today?

Rick Campo

Well, the markets are changing dramatically and over the last month or so, the actual spreads in the unsecured markets have actually come back in, somewhere between 150 basis point to 200 basis points, So, we're just going to stay tuned to the markets. And if the unsecured market is still expensive, we have the ability to go out and get some debts from the agency. So, we'll just stay tuned to it, but the good thing is we don't have to go out into the markets anytime soon.

Rick Campo

And fundamentally, we're an unsecured borrower. It's just much more flexible financing to use with our model. But at the end of the day, if there is a substantial differential between the cost with unsecured versus the secured trending of Freddie type of facility, we'll look at that and we have a lot of capacity to be able to reduce secure debt, but we will rather stay in the unsecured market. But if there is a 200 basis points differential, we'll explore the agency debt.

Michael Bilerman - Citigroup

Thank you.

Operator

Next question comes from Alex Goldfarb at UBS

Alex Goldfarb - UBS

Good morning.

Keith Oden

Good morning, Alex

Alex Goldfarb - UBS

Just going back to clarify on the revenue. In the first quarter, the 1.5% revenue growth, that includes or excludes the ancillary income the cable and trash and all that stuff?

Rick Campo

That includes.

Alex Goldfarb - UBS

The 1.5% includes that, okay. And then, you said that the ancillary income is running $250,000 a month ahead of schedule?

Rick Campo

It is $250 ahead of plan.

Alex Goldfarb - UBS

Okay. So then if I interpret your comments about the back half of the year, it sounds like you're just expecting that occupancy will get back to where it was in that $94.50 to $95, so that's where the both the pick-up will come from?

Rick Campo

That is correct. But it's also – Alex, it's not like we are having to make a huge lease from where we are today. We closed out last week at 94.3% occupied. But more importantly, we were at 92.8 lease and given in our portfolio is as if you'll trend forward 30 days from the lease percentage that's going to be add 200 basis points to it, that's your occupancy percentage. So trending forward of that number, we're looking at 94.8% about within the next two to three weeks.

Alex Goldfarb - UBS

Okay.

Rick Campo

So coming off 93.8 number for the quarter, that's a pretty good pickup and our forecast is that we can get to that and maintain it even though our rental increases have necessarily been extremely moderate across the portfolio and it's really kind of as Rick mentioned we've got some pretty decent rental increases in the market that are not getting slammed and we've got less than planned increases than the others. But the YieldStar model is calibrated to the 95%. We think we're pretty closed to getting back to that level and our expectation is that we can maintain it through our stronger leasing periods.

Alex Goldfarb - UBS

Okay. And then just want to go back on the difference between the secured and the unsecured spreads. If you can just comment, I didn't no if you were commenting that unsecured is now a 150 to 200 over or that's how much they've come in. So if you could just clarify that and also comment on what the spread would have to be where the unsecured would start to look attractive to you guys again?

Rick Campo

Yeah. The comment I made earlier is how much that come in. Our unsecured spread is we sit here today is probably somewhere in the 275 to 300 basis points over range. And on the agency side, we are probably looking at somewhere around 2 to 2 in the quarter.

So, sitting at 50 to 75 over, it's still might make sense to use more secured debt. But we'll just have to once again wait and see after the job report today settles down exactly what the spreads are going to be going forward.

Keith Oden

And I think the issue on how, how wide the spread has to be to start focusing on a little bit on secured debt. You do have to remember though on secured debt, you have a lot of other costs associated with it, not only cost associated with the environmental and titles and all that that you don't have in the unsecured world. And you also have a lot of flexibility issues.

So they don't have to right on top of each other to make a decision to stay in the unsecured market. And as I said before, we are an unsecured borrower. We will continue to an unsecured borrower and that the margins doesn't make sensible, we'll be some of that. But clearly month ago the spreads on unsecured bonds were like 425 over plus or minus versus agency debt of 200 and we have a spread that wide. We got to look hard at agency debt.

Alex Goldfarb - UBS

Okay. And then just my final question is, are you seeing any difference between the pay patterns of folks in your housing affected markets first, the non-housing affected markets?

Keith Oden

No, we really haven't. It's the bad debt expense that I gave you earlier. You would look at it across the markets, there is not a nickel's worth of difference in them.

Alex Goldfarb - UBS

And delinquencies?

Keith Oden

Delinquencies are in good shape.

Alex Goldfarb - UBS

Thank you.

Keith Oden

People pay their cell phones first and then the ramp.

Alex Goldfarb - UBS

Perfect. Thanks.

Operator

Our next question comes from Jeff Donnelly of Wachovia.

Jeff Donnelly - Wachovia

Good morning, guys. Just a couple of questions. I get jump around, have you guys been active repurchasing shares after the quarter end?

Rick Campo

No, we have not.

Jeff Donnelly - Wachovia

Okay. And then I am curious on the D.C. market. Likewise, how is D.C. fairing, I guess subsequent to quarter end, are you seeing any improvements in the leasing space or price and year-over-year revenue growth?

Rick Campo

The continuation of the same that our challenge in the D.C. market is really Northern Virginia. The D.C. Metro assets are doing great. The Maryland, more north of urban assets are doing fine. It's really just the Arlington, Northern Virginia area where we are just getting hammered with the single-family home competition and to some extent, condos. But there was a fair amount of new supply that was in the process that main delivered. We are part of that. We got a couple of comments of pretty good size lease-up. And it's actually going quite well right now, but that's because a couple of competitors that are in the area have finally gotten over their hurdle of like near way to their lease up. So, it's combination of all three those things, but it's clearly the -- our challenge is the Northern Virginia piece of that D.C. Metro.

Jeff Donnelly - Wachovia

I guess two follow-up on that, what has been your experience out of the Dallas market and are you able to may be give us indication of what the central revenue growth was inside the Beltway versus outside if you have that number?

Rick Campo

I don't know have that broken out in front of me, but we can get that for you. In the Dallas area it's actually better than the Arlington area. We've got a lease up that's underway there that's off to a good start and I think that we're going to be okay there. But it's definitely, our challenges are concentrated in the Arlington, Northern Virginia.

Jeff Donnelly - Wachovia

And just last question is in terms of the financing market today, half of the agency, I'm curious what do you find I call the next best comparable loan-to-value that's available to you and/or pricing, I am not sure (inaudible) from the same lender, I guess I am just curious that you have passed through Fannie or Freddie, what the next best alternative?

Rick Campo

The next best alternative would be life companies. You still have life companies out there that are active. They are active a little bit slower on the loan-to-value. You could still get Freddie and Fannie at 70% plus or minus loan-to-value depending on the product location and the sponsor. Life companies tend to be little more with a low leverage, so you are going to see some 50% to 60% of LPVs on those. And they are going to have a little bit wider spread as well.

Jeff Donnelly - Wachovia

Okay. That's helpful. Thank you.

Operator

Our next question comes from Karin Ford at KeyBanc Capital Markets.

Karin Ford - KeyBanc Capital Markets

Okay. Have you guys given us what the revenue growth would have been this quarter without the ancillaries?

Rick Campo

No, we did not that to you, but it would be 750, 000 for the quarter plus or minus.

Karin Ford - KeyBanc Capital Markets

Okay. Question on guidance, you assume the midpoint of our 2Q guidance, it looks like you need about $0.91 for each one of the last two quarters of the year to hit the low end. Given the flattish nature of top line growth from here, what do you expect it's going to drive sort to the sequential quarterly FFO growth in the back half?

Dennis Steen

Yeah. Karin, this is Dennis. As I look out to the next couple of quarters, one of the things you have to kind of model in is a development dilution is going to probably be less by $0.04 to $0.06 in the second half of the year. As Keith mentioned, we're going to have higher occupancy in the balance of the year. We also have lighter expenses in the fourth quarter compared to any other of our first week quarters and we'll have a slight pick up in the fee income relating to our fund activity. So we feel very comfortable with our guidance range and being able to be up in the midpoint of that range.

Karin Ford - KeyBanc Capital Markets

That's helpful. Final question is you mentioned delaying some development, did you expect any abandoned pursuit costs later on this year?

Dennis Steen

In the quarter, we actually had abandoned pursuit costs of about $350 I believe, but we are monitoring our spend on the projects that we are working on and we don't have a big amount of pursuit costs delays that delayed at this point. The delays are primarily projects that we already either own land on where we can sort of time the timings to make sure that we wanted to deliver into late '09 and early 2010 time frame. So the more projects already owned that we're going to delay, but that deal cost that we incurred in a quarter with projects that we clearly abandoned which would they were couple Phoenix and in Las Vegas I believe, so at the end of the day we don't have a lot of big pursuit costs issues that we have to worry about.

Karin Ford - KeyBanc Capital Markets

On the land that you owned if ultimately end up deciding to sell, do you think you have to take any write-down from value on that?

Dennis Steen

No.

Karin Ford - KeyBanc Capital Markets

Okay.

Dennis Steen

We evaluate our land positions on an ongoing basis and we are still in our land at good numbers.

Karin Ford - KeyBanc Capital Markets

Great. Thank you very much.

Operator

Our next question comes from Christine Kim of Deutsche Bank.

Christine Kim - Deutsche Bank

Hey, good morning. Keith, could you may be provide a little bit more color on what do you see in terms of traffic patterns, and also if you are seeing any material change in your closing rates?

Keith Oden

Actually our traffic even though it's moved around flat year-over-year with the prior year, prior year first quarter of '07, we were up about 20% from the fourth quarter of '07, but that's typical. The fourth quarter is always our lowest traffic point. So that's not unusual at all. And we were basically flat to the prior year -- the thing that is very interesting and it certainly higher than with the kind of results that Rick pointed out the haves and have-nots in the market.

If you drill down to the traffic patterns, it's very consistent where markets where we have the most challenges from the oversupply conditions. They had relative to what we would normally see in the first quarter, traffic was down across the board. Fortunately in those markets that we have not had those issues Dallas, Houston, Denver, Austin, Charlotte traffic actually was up pretty nicely.

So it really kind of is market driven and what's going on in that market. But net-net our traffic was no worse than it was first quarter of '07. But first quarter of '07 was a pretty good quarter for us both from traffic standpoint and through rents that NOI was up about 6% and we were up sequentially, first to second almost two, first and second quarter likes we were pretty good. So it's kind of encouraging to me that we've got the same traffic levels that overall in the portfolio that we had then.

Closing percentages in our portfolio are target for closing percentage is 40% and we are within 4, 5 percentage points of that on any given reporting period and that really hasn't changed.

Christine Kim - Deutsche Bank

Great. And my other question is, you have been tracking obviously move out to home purchases, but are you tracking move out to rent other product types like single family home or condos?

Keith Oden

We do. We track move out to rent and we also don't necessarily know what they rented, but we do track move out to rent other varieties and for the quarter that was 2.7% and that the delta in that from the prior quarter is about 1.7%, so you kind of want to think of it is combined those two together. We've always had some component to move out to rent. We just started tracking it last year as a separate line item. So, there is some piece of that that's going from our apartment to rent something else that it's not a big part of it. Not a big part of the incremental change.

Christine Kim - Deutsche Bank

Okay, great.

Keith Oden

The other thing I think you need to – that's kind of interesting to add on to that thought is that we have started seeing anecdotally people who are moving out of condos because they don't like the management and condo management and single-family home management is very different than a professionally managed property and we are starting to see people moving out of the condos and houses going back to apartments to some extent.

Also we have seen some move-ins that some demand has been created by people who have been renting condos, renting house and being for closed on with the investors who are running or keeping the rent and not paying their mortgages, so that when the foreclosure happens, the resident gets [mortgage gets] set up to rent. So, they basically just evict the people and then they have to go find another place. And we've seen a fair amount that going on in Las Vegas and in Florida.

Christine Kim - Deutsche Bank

Great. Thanks, guys.

Rick Campo

You bet.

Operator

Our next question comes from Dustin Pizzo of Banc of America Securities

Dustin Pizzo - Banc of America Securities

Hi. Good morning, guys. Keith, just a follow-up on that last one. Have you seen any anecdotal evidence of an increase in renters from the increased mark-in efforts you had towards those who actually foreclosed on their loans and not necessarily people who may have been renting those homes or condos?

Keith Oden

Yes, the two areas where we have done that more extensively are in Las Vegas and Orlando. Anecdotally, we've seen some evidence that that program has had results. I think that when you combine all of those things and factors together, whether it's outreach marketing to people who are having to go through a foreclosure from an owner's perspective or the two other categories that Rick just mentioned, which is kind of people coming back into the apartment rental pool from their bad experience in single-family home or condominium rentals.

And when you combine all that together, that is part of the explanation for why our traffic year-over-year is not down. And I mean there has to be some component of it. And so, I think that as you look at all the crosscurrents and try to do the handicapping on is our subprime foreclosures is more or less significant than the slowdown in the rate of home sales.

It's really hard to handicap those individually and get good metrics around them. But the one thing that is pretty consistent is the traffic levels across the portfolio of our size. And to see the first quarter traffic levels in '08 still at the first quarter '07 level in the aggregate is pretty encouraging.

So it's kind of hard to know where that additional traffic is coming from, but one of the things that is for sure we are seeing and experiencing is we're in a completely different market with regard to the consumers' attitude towards buying a home.

It seems like forever to go, but if you go back to the first and the second quarter of last year, the mindset and mentality was that housing was still the best investment option available to the individual investor, and people were still buying homes hand over fist in the first and second quarter, and it really wasn't until the subprime bust in June, July timeframe that that really started to change in earnest.

So, it's hard to handicap the individual components, but it's hard to argue where traffic levels at the same this quarter as they were in first quarter '07.

Dustin Pizzo - Banc of America Securities

Okay. And then, Dennis, you touched on the assets that you have out in the market right now. And I know you may not be far enough long in any of your sales right now to notice. But generally, in your marketplace, have you been seeing deals get over the finish line?

I know a number of your peers have mentioned that as it's gotten down to crunch time, the buyers have either come back to try and retrade the deal or have backed away entirely. And I was just trying to see if you've seen deals getting completed and also perhaps what you're seeing on a pricing level as well.

Dennis Steen

Well, I'll take that. There is lot of anecdotal evidence out there that some deals aren't getting done. There is a pressure around that. In the first quarter, there was a fair amount of retrading and uncertainty primarily as a result of the agencies starting to widen out their spreads. The spreads widened out bps and bps, some 75 bps in a 100, and that was going on in the first quarter.

And what happened then was you had people who had unwritten properties at much lower debt rates and they came back to try to retrade. Some retraded. Some didn't. And I think that sellers today are not pressured. Okay? So, if they don't like the price, they are not going to sell.

And so, I think there is definitely a bit outspread when it comes to the changes that were going on in the debt market. And we had a situation, for example, on Ridgecrest, which is the one asset we sold in the quarter. We started out have a retrade. We didn't retrade. The people who took their earnest money, and then they came back. Ultimately, the spreads came in on Fannie deal, and they ultimately did the deal.

But I think generally, that volatility in rates is pretty much over and the spreads have come in on Fannie and Freddie, because I think they thought they would have a big rush in a lot of deals. And they didn't have them. So, you had sort of a more reasonable spread situation and it's a little more stable today than it was then.

But again, I think it's a function of there is a bit outspread today. But when you can get Freddie and Fannie financing in low 5s to high 4s, you can still make positive leverage play with the cap rate in 5.75 to 6.5.

On our portfolio that we have out there now, we have properties in Houston that are getting 20 bps, properties in Dallas that are getting the same number. So, there is a lot of activity.

Cap rates definitely have gone up from the sort of lows in the last year when you had CMBS lenders willing to give 95% financing. And the nature of the buyers has changed a bit, because the high leverage buyer is basically out of business and anybody who is going to buy today is going to put 25% to 30% equity in the deal.

But by and large, I think the deals are starting to get done more than they were in the first quarter.

Dustin Pizzo - Banc of America Securities

And just lastly on that, do you anticipate your sales being more portfolio type transactions or more one-off?

Dennis Steen

No, more one-off.

Dustin Pizzo - Banc of America Securities

Okay.

Dennis Steen

I think the problem that people have today is that there is more one-off buyers out there than portfolios, and it's more difficult for buyers to come up with bigger checks, if you will. We had some portfolio offers, but in the aggregate, the individual offers added together better than the portfolio offers.

Dustin Pizzo - Banc of America Securities

Okay. Thanks.

Operator

Our next question comes from Rich Anderson at BMO Capital Markets.

Rich Anderson - BMO Capital Markets

Thanks. Good morning, everybody.

Rick Campo

Good morning.

Rich Anderson - BMO Capital Markets

So, I guess the question, everyone is hanging their hats on Fannie and Freddie, do you have any sense that there is a feeling to amount of business that they ultimately want to do in multifamily where they can get sort of capped out or do you think this is going to go on perpetuity?

Keith Oden

There is always a feeling at some point, but when you look at what Freddie and Fannie are doing right now, it's a very profitable business for them. They have very, very minimal defaults or bad multifamily loans out there.

And when you think about what's going on in the housing market, whenever the government says that they are going to improve the liquidity of the housing market by improving the GSE's ability to provide liquidity, that's good for multifamily. And we have to remember that one-third of Americans live in rental housing.

Fannie and Freddie's charge is to provide liquidity and stability to the housing markets. And they define the housing markets as all of the housing markets, not just single family. So, when you hear about the bills in front of Congress today about expanding Freddie and Fannie's ability to help housing, they are also talking about multi-family.

So, when have a situation where you got companies that need earnings and have a great product and have sort of market to themselves, they are going to as much as they can. And if you look at what they did last year, it was huge. It was almost I think $100 billion and over $120 billion between them or something like that. It was a big number.

So, I don't think that the industry is worried too much about Freddie and Fannie having issues. And when you have a profitable product and they are sort of the only game in town and they have the need to put the money out.

Rich Anderson - BMO Capital Markets

Do you think that they were may be influenced or pressured by the declining spreads in the unsecured markets?

Keith Oden

Absolutely. And I think the other part of it was that they were influenced by deals not getting done, because what was happening as they were walking their rates up in the first quarter and then people were trying to retrade the sellers. Sellers said no, and their deals got blown up. So, they didn't have as much deal flow as I think they thought they were going to get because of the bid outspread issue. And that's why I think their spreads are a little more stable now.

Rich Anderson - BMO Capital Markets

Rick, part of your comments, prepared remarks, you said you expect the challenged markets to be so challenged through 2009 is the words you used. Do you mean all the way through till December of '09?

Rick Campo

Well, Rich, I think it's hard to predict the future. But I know that the challenged markets have had more employment hits, because obviously when the speculative housing bubble busted, you had a massive amount of dislocation of the jobs that were related to that. And so places like Las Vegas, I think we sort of estimated that we had something 12% of our residences were related to the housing industry, the construction workers or mortgage bankers or real estate brokers and people like that.

And so, I think that it's going to take longer in those markets to work through the inventory. So you have to work through the inventory number one, and then number two you have to be able -- you have to get back to more normal job growth. I just don't think that I am not going to Pollyanna [ph]. I don't think that's going to happen tomorrow and it's going to take time. Now how long it takes in the 2009, I don't know, but I know it's going to a challenge through the rest of 2008. And with all the economic stimulus that is gone on and the tax rebate checks that are coming back and the people here soon should have a positive effect on the economy, but it's going to take awhile for those markets to come, people to get back into thinking that there are good times.

I think we've seen while I was in Florida last week and talked to our people and was interesting because I started hearing some of our senior management, they were talking about whether they're going to get back into the housing market now and they certainly talk about well I am going to buy house probably in the third or fourth quarter and they're starting to feel like may be the market is going so turnaround because there is lot of value.

Rich Anderson - BMO Capital Markets

Okay. In light of those comments, Keith any D or F markets in your reference for right now?

Keith Oden

I don't know if we have any owned, still don't know if we've gotten to an average and F would have been Houston, Texas in 1984.

Rich Anderson - BMO Capital Markets

So you're not F?

Keith Oden

That would have been an F because the market occupancy rate was 77% and I believe that rental rates bottomed at about $0.48 per square foot, that's an F.

Rich Anderson - BMO Capital Markets

Okay.

Rick Campo

Rich, the interesting thing, we've had discussion at NMHC and I'm the Chairman this in National Multi-Housing Council. And we had a conference call here week or two ago and the research folks at NHMS are talking about potential multi-family housing shortages in 2010. And because of the credit crunch and the fact that we think that multi-family starts are going to be at 15 to 20 years lows going forward over the next 12 to 18 months given the credit crunch.

And so you have the situation where you have markets that are, their fundamentals are fine in the sense of their long-term demographics or long-term job growth or long-term population growth. And right now, we have this credit crunch/housing bust from have negatively impacted those markets, but long-term those markets are great markets and what should happen this year and going in the next year is that the difficulties will lead to lot better growth in the future because of lack of supply.

Rich Anderson - BMO Capital Markets

Okay, great. Thanks very much.

Operator

Our next question comes from Michael Salinsky at RBC Capital Markets.

Michael Salinsky - RBC Capital Markets

Hi, good morning, guys.

Rick Campo

Good morning.

Michael Salinsky - RBC Capital Markets

Keith, the rent rate numbers that you have shown to some, does that include the impact of Valet West and Perfect Connection?

Keith Oden

Yes, they do.

Michael Salinsky - RBC Capital Markets

Okay. If you excluded that, what was rent growth in the first quarter?

Keith Oden

It's roughly $750,000, probably works out to about 7 or 8 something like that.

Michael Salinsky - RBC Capital Markets

Okay. Second question for Rick. The fund closing you mentioned $300 million of commits, does that close in the second quarter and do you begin I think properties in the second quarter, or is that a second half of the year event?

Rick Campo

We've actually started I think properties already.

Michael Salinsky - RBC Capital Markets

Okay.

Rick Campo

And so it's closed and what we do now -- we haven't completed the fund rates and we are still going to raise some additional dollars. But as far as commitments closed, the $300 million is our commitment that are closed, so we can draw those down anytime.

Michael Salinsky - RBC Capital Markets

Okay. So, actual purchases are development in the fund, or do you anticipate anything in the second quarter?

Rick Campo

We put a development in the fund in the second quarter I believe. And we have a program to complete acquisitions and have developments through the second, third, and fourth quarter.

Michael Salinsky - RBC Capital Markets

Okay. Just given your comments previously about asset pricing, also about refinancing in terms of on balance sheet -- using on balance sheet capacity, how do you still thought there is a lot of opportunities for share repurchases this year?

Rick Campo

It's a total function of the share price and our ability to sell assets that we've been doing on the leverage neutral basis. But we still think that shares are undervalued and will be in purchase of the shares. We sort of rested a little bit in the buyback in the first quarter, primarily because of market sort of rallying pretty big and we had and we are in the process of selling, getting our next slug of dispositions to reload our ability to buy stock, but I haven't changed my view on the stock value relative to the net asset value and I think it's definitely from a capital allocation perspective one of the best things we can do.

Michael Salinsky - RBC Capital Markets

And finally, in terms of in this environment currently, where do you see mezzanine loan opportunities?

Rick Campo

That's an interesting question because we have seen mezzanine opportunities and we are working on few transactions. The mezzanine market got very overheated along with lot of other credit market obviously. We think we will be able to do some mezzanine financing going forward. We haven't done anything yet, but we are working on a lot of deals.

Michael Salinsky - RBC Capital Markets

Great. Thanks, guys.

Operator

Our next question comes from J. Habermann at Goldman Sachs.

J. Habermann - Goldman Sachs

Hey, guys, good morning.

Rick Campo

Good morning J.

J. Habermann - Goldman Sachs

Rich had a question on development. You did mention the couple of properties that did sort of fall out of the mix. But in your comments, you mentioned sort of evaluating the level of development. But at the same time, you sort of mentioned that 2010-2011 could be an interesting time period. So I am just wondering is any sort of pull back very temporary and do you think development really will remain the top priority?

Rick Campo

Well, development is not necessarily our top priority. I mean I think we believe that development creates a lot of value and we create a lot of value over the years and it's just balance part of our strategy. I think that as the year unfolds and we see what happens to some of these markets in the next six, eight months that could give us some light on perhaps moving development into productions modes.

We are likely to do lot of developments in our fund. And I think we have shown what if $100 million of starts plus or minus through $100 million on our balance for this year and the balance in our joint ventures or fund. But I think the development business is going to be a very good business going forward especially when you sort of look through the issues, challenges that merchant builders are having today with leverage levels and ability to get investor capital.

So we are going to be opportunistic and make sure that at same time make sure that we are managing our balance sheet, so that we don't have to go into the capital markets. I mean, had we been in a position where we have to fund in the first quarter and it would have been not a good time to come in the market. So it's all about balance and it's about trying to be cautious in an uncertain environment.

J. Habermann - Goldman Sachs

Okay. And just a push-up a bit more on the share repurchase, I mean the stock is trading roughly implied cap rate of about 6.5, you're taking about cap rates on assets sales perhaps in the five and three quarter to 6.5 range. So would that seems indicate that your preference is going to be just pay down debt?

Rick Campo

Not necessarily. I think the asset sales that we're talking about are the oldest slowest growing assets in our portfolio. And when you look at the implied cap rate and then look at our best assets, those assets aren't trading at 6.50 and they wouldn't ever. It would at least in this current market. I mean we could and if you look at Washington D.C., cap rates there is continued to be in the low 5s.

So I think there is still a pretty big spread between what we were selling our worst assets or our slowest experiencing assets at and the implied cap rate in our stocks. So it still makes sense to continue to from a capital allocation perspective to sell assets and buy stock as long as we're doing at net leverage neutral or not increasing debt to do it.

J. Habermann - Goldman Sachs

Okay. And just last question, what are you seeing broadly in terms of concessions, perhaps by market like trends and concessions?

Rick Campo

Well, lot of our competitors are kind of going down those trails particularly in the challenged market. It's common to see other people offering one month free, the crazies are on occasion you'll see something more than that. But in our world, we do with the YieldStar pricing, we really don't even have the word concession in our language any more. But yes, our competitors have tried to maintain higher base rates and do the one month. But when we're comping rents, we're always comping to the net effective.

J. Habermann - Goldman Sachs

Okay. How about end markets like Northern Virginia or even New Florida?

Rick Campo

Lot of concessions in both of those markets. Again concessions is more of a structuring matter for our competitors than it is for us. Again, we are pricing it net effective.

J. Habermann - Goldman Sachs

Okay, great. Thanks.

Rick Campo

You bet.

Operator

Our next question comes from Steve Swett of KBW.

Steve Swett - KBW

Thanks. Most of my questions have been asked. But, Keith, can I just ask you about Charlotte markets. It's been pretty solid for you guys, but seems to have really weakened considerably in the last quarter. Is that demand related, supply related and do you think that's heading down towards the level that some of your other weaker markets are at?

Keith Oden

Charlotte, it's definitely not supply related. There has been a very modest demand of new supply brought on in Charlotte. I think that we are seeing right now is uncertainty related. You got Wachovia, B of A. You got all the banks and the employment impact that financial institutions have in that market.

And I think you've just got a lot of people who are kind of antsy, sitting on their hands, afraid to make commitments. And I think they're kind of hunkering down, and I think the lack of activity is related more to that.

In our forecast, we have a decent job growth scenario, had really nice job growth in '07, and it looks like '08 is going to be okay. But I think that it clearly does not have the characteristics of Tampa, Las Vegas, Phoenix where you had incredible run-up in home prices that was by and large driven by speculative demand.

It clearly didn't happen in Charlotte. I mean that a decent increase in house prices over the last three years, but nothing like in those other markets. So, it's hard for me to think about Charlotte given the market conditions in conjunction with those other housing challenged markets.

Steve Swett - KBW

Okay. And, Rick, you talked little bit about cap rates and investor interest in properties. You mentioned markets in Texas. And I was wondering if you could just comment on anything you have seen in the market in investor interest and properties in some of the weaker areas like Arizona, Nevada and Florida?

Rick Campo

Well, I think there are definitively investors looking in those markets, but that's where you have a much larger bid ask spread, and then the underwriting is very tough there too. So, I think that you are not seeing as much activity in terms of sales activity in those markets.

That being said, we are out looking for acquisitions for our fund. We like those markets because of the issues that is going on there right now. So, you have definitely fewer buyers and a bigger bid ask spread. But we like them from an acquisition perspective, but I am not sure as a seller I'd want to be trying to push sales in those markets when you have sort of the negative investor settlement that's out there.

Steve Swett - KBW

Okay. Thanks.

Operator

Our next question comes from Haendel St. Juste from Green Street.

Haendel St. Juste - Green Street

Good morning.

Rick Campo

Good morning.

Haendel St. Juste - Green Street

Guys, what was the cap rate on the asset sale in the first quarter?

Rick Campo

Cap rate was, if you use $250 a door and 3% management fees, it was like 5.2. And if you use the real CapEx, it was like 4.50.

Haendel St. Juste - Green Street

Okay. And how about the development that was sold to the JV?

Rick Campo

The development that was sold in the JV was sold at our cost.

Haendel St. Juste - Green Street

Cost, okay.

Rick Campo

Yes.

Haendel St. Juste - Green Street

If you just sense that there is a portfolio discount out there in the marketplace and that's factoring into your decision to sell asset on a one-off basis?

Rick Campo

That's good question. I think the answer is yes. There is a portfolio discount today. Any large buyer that has a lot of capital is definitely wanting to get a better price in a one-off. And that's why when we put our portfolio out there, we did both scenarios.

We said, "Fine. If you want to bid all, great." And then we had a lot of bids from one-off people. And then when you add the one-off bids up compared to the portfolio bids, there is probably 5% or 6% variance between the two in terms of price.

Haendel St. Juste - Green Street

Got you. And one last question, I guess a follow-up on the stock repurchases. And maybe I misreading this, but if I look at first quarter asset sales compared to the amount of stock you bought back, am I misreading it, because you used a little bit of debt to buy back stock in the first quarter? And if that's the case, can we see more of that going forward? I know you've spoken in the past of funding that activity exclusively via asset sales.

Rick Campo

Well, you try to match it perfectly, but you never can. And so the key is making sure we're doing on an overall basis, and we are not going get way ahead buying stock and using debt. But we had assets sales at the end of last year. We had some asset sales that include contributing assets to our fund. And we'll continue to fund it with asset sales.

You do have to pay down some debt. Well, you can't just sell assets and buy stock, because then your leverage still goes up. But at the end of the day, we are committed to a leverage neutral program. Whether the timing of it works out, you will have some variations on the timing now and then.

Haendel St. Juste - Green Street

All right. Thank you. Great.

Operator

Our final question comes from Ben Lentz at LaSalle Investment.

Ben Lentz - LaSalle Investment

Hi, guys. I'm curious about your expectations in guidance for the four markets that have negative revenue growth and have continued to decelerate. So, southeast Florida, Tampa, Vegas, Phoenix, do you see them hitting a bottom this year and starting to come back by the end of the year in your guidance?

Keith Oden

We do. The distinction that we see in the next two to three quarters is more on the occupancy rate in those markets. I still don't think we're going to looking at anything meaningful on the rental growth side, but I think that we will see an increase in the occupancy rate in those challenged markets.

Our original guidance for those markets would not have had a negative number for the full year, even though you see negative numbers for the quarter. Some of that is because of the way we laid out our plan with regard to the third and fourth quarter and occupancy rate increases, et cetera.

But I think that in our revised thinking and forecasting, we're going to have better than expected performance in four or five markets over the course of the year, and we're probably going to have worse than anticipated or originally anticipated performance over the course of the year. And those are the four markets that you mentioned are the most suspect.

Ben Lentz - LaSalle Investment

And in the revised guidance, are they negative for the full year number?

Keith Oden

Two of them are negative in the fully year number.

Ben Lentz - LaSalle Investment

Okay. But we don't see them decelerating throughout the year. They can hit bottom, and in 2009, they're going to be week, but they're going to recovering from a year-over-year revenue growth perspective.

Keith Oden

I think that's a fair assessment. I think we're going to see improved performance in the third and fourth quarter, even in the face of kind of sloppy, underlying housing conditions. Whether or not it lasts over into the first quarter '09, when does that recovery start, I think that's the open question right now.

But through the balance of the year, we think that we're kind of kicking along the bottom. We see decent metrics on traffic. We see decent closing percentages, and we see less turnover in the portfolio even in those markets primarily resulting from the reduction and losing residence to home sales.

So, the net-net of all that is I think we have an opportunity to kind of walk along the bottom, pick up a little occupancy, not drive rental rates. And we'll end up at the end of the year with a couple of those markets with a negative number, but we think that gets offset by the fact that Huston, Dallas often and Denver will continue to outperform.

Ben Lentz - LaSalle Investment

Okay. And then DC seems to decelerate to flat. Is that going to go negative as well?

Keith Oden

Not in our forecast.

Ben Lentz - LaSalle Investment

Okay. All right. Thank you.

Rick Campo

Very well. Thank you for being on the call today, and we look forward to update you next quarter. Thanks a lot.

Operator

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

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