Camden Property Trust Q3 2009 Earnings Call Transcript

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Camden Property Trust (NYSE:CPT) Q3 2009 Earnings Call October 30, 2009 12:00 PM ET


Kim Callahan – Vice President, Investor Relations

Rick Campo – Chairman and Chief Executive Officer

Keith Oden – President and Trust Manager

Dennis Steen – Chief Financial Officer and Vice President of Finance


David Bragg – ISI Group

Robert Stevenson – Fox-Pitt Kelton

Jonathan Habermann – Goldman Sachs

Alexander Goldfarb – Sandler O'Neill and Partners

David Toti – Citigroup

Rich Anderson – BMO Capital Markets

Michelle Ko – UBS

Michael Salinsky – RBC Capital Markets


Good Morning and welcome to the Camden Property Trust Third Quarter 2009 Earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Kim Callahan. Ms. Callahan, please go ahead.

Kim Callahan

Good morning and thank you for joining Camden's Third Quarter 2009 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 Third Quarter 2009 Earnings Release is available in the Investor Relations section of our Web site at 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 Dennis Steen, chief financial officer.

Because there are several earnings calls being hosted today, including another multi-family company at 1:00 pm Eastern, we will limit the time for this call to one hour. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions offline after the call concludes. At this time, I'll turn the call over to Rick Campo.

Rick Campo

Thanks, Kim, and good morning. As Billy Joel points out on our conference music, if that's moving up, then I'm moving out. Well clearly, he was talking about the housing bust based on failed government policies at moving the national home ownership rate up.

Over two million people have taken his advice and moved out of home ownership and into apartments, taking the home ownership rate down from 69% to 67.4%.

Our operating results for the quarter were in line with our expectations, with same property net operating income declining 7% for the third quarter over last year. Year-to-date, same property net operating income declined 6.2% over last year.

If someone had told me that we would have lost nearly eight million jobs and had an unemployment rate pushing 10% and that our properties and our industry in general would have performed as well as it has, I would have thought they were crazy.

Clearly, multi-family demand has been reduced by the employment losses but there are three countervailing trends that helped our industry. First, the reduction of the home ownership rate by 1.8 percentage points has created two million new renters.

Some believe that the home ownership rate will fall to pre-government programs, to around 64% to 65%, potentially creating another 3.1 million renters. In the last cycle, we had people moving out to buy homes who really couldn't afford their apartment rents. That number peaked at 24%. Now we're about 13%, 14%.

The second biggest difference in this cycle versus the last one is that multi-family supply peaked at the beginning of the downturn. In this cycle, multi-family supply was moderate going into the downturn. Multi-family developers were crowded out by home builders who could pay more for land. Construction costs increased faster than rental rates, so getting development yields to work was very difficult.

New supply will likely hit World War II levels or post World War II levels, in term of low supply as a result of lack of equity and debt in the market and I'll talk about a little bit more in a minute. Eighty five percent of the new apartment starts historically has been produced by merchant builders. That model is dead for the foreseeable future.

The third biggest difference in this cycle is that demographics are better. They're on our side. The baby boom echo is in full swing. The 18 to 24-year-old age cohort grows annually for the next six years, peaking at more than 60 million people. Eighty five percent of these folks rent.

These major influences on our business will set up a strong recovery in rents and occupancy when job growth resumes, the key is when does job growth resume, obviously.

Let us talk a little bit about WISO, since it's a big topic these days. For those of you who haven't got into the WISO discussion yet, WISO is weakest in, strongest out. The idea of WISO is about job growth, which markets get job growth first.

Our portfolio has been built on the premise that apartment demand is driven by job growth. The growth markets, before this recession, will be the job generators post-recession. Job growth markets will grow again because they are pro-business. They have a low cost of doing business. They have young, educated workforces.

They have affordable housing. Clearly the housing bust has given them even a more competitive advantage in that regard at this point and they have good weather. One of the things that we've have always enjoyed debating is this concept between barrier and non-barrier markets. Some of our analysts call these supply constrained versus non-constrained markets.

Well, I've got to tell you, in the next five years plus, all markets are going to be supply constrained. So I think the idea of being in the growth markets where jobs are going to come back first and the idea that all markets are going to be supply constrained is a pretty good position to be.

So let me talk a little bit about, just give you an example of sort of what's happened in the markets and use Houston as an example. In the ten years after the big Houston bust in the early 80s, there were nine properties built per year between 1985 and 1995 or a total of 2,600 units a year.

Between 2000, the last ten years, there's been 40 properties built a year or an average of 12,000 units.

The projections going forward is somewhere back to the 80s through 90s number of about 10 to 11 properties a year. I actually think that's going to be lower than that.

In the next five years, Houston's supposed to add 500,000 new people. In the next ten years, 1,000,000 people. So you have a very interesting situation setting up where you have supply constraints because of the financial markets and the equity markets.

The merchant builder market is basically dead and will be dead for a long time. And what's going to happen is that when growth comes back to these markets, you're going to have a housing shortage. Now the key ultimate issue is when does that happen. What's going to happen in 2010, 2011?

Obviously, none of us know that. We're positioned well for the future and we like where we are and we're going to continue to be in these markets. I want to take this opportunity to thank all the Camden people in the field and at the corporate office who have been doing a great job managing expenses and managing through this complicated time. They provide living excellence to our residents and our customers.

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

Keith Oden

Thanks, Rick. My one-word description for this quarter would be uneventful, which in this environment is probably a good thing. We hit the midpoint of our FFO guidance of $0.70 per share for the quarter and we are reconfirming that we still expect to achieve the midpoint of our original same store NOI guidance of down 6% as we wrap up 2009.

There were no material unknown pluses or minuses for the quarter, so in a word, uneventful. As you would expect from our quarterly results and reconfirmed guidance, little has happened since our last call that would change our view of the multi-family operating environments. As such, my prepared remarks today will be brief to allow more time for Q&A to address your specific questions.

At the end of the third quarter, we were right in line with the plan for our overall portfolio. Four of our six operating regions were actually above plan and two were below plan. Our Texas markets, D.C. Metro, Florida, Denver and Atlanta are holding on to better than planned results and those are being offset by worst than planned results in Las Vegas, Phoenix and California.

Traffic levels actually improved relative to the second quarter, with a quarter-over-quarter decline of 5% in the third quarter versus a 10% decline in the second quarter. Our in-place rents continue to trend downward. Year-to-date we are down roughly 3%, reflecting the continued pressure on new lease rates, which are roughly 7% below in-place rents.

Renewals continue to be a relative bright spot. Our renewal leases remain higher than in-place rents by 3% and higher than new leases by roughly 9%. In this respect, our aggressive lease renewal program has certainly paid off. Not only are we renewing leases at higher rates than new leases, we are renewing a higher percentage than in previous years.

Year-to-date our turnover rate is down six percentage points from last year. Our occupancy rate fell .5% from the second quarter to 93.7%. We continue to adjust our revenue management system's occupancy targets to balance occupancy and rate tradeoffs in these most volatile markets.

Going into the downturn, our occupancy targets had been set at 96%, roughly 1% above our desired occupancy level. As we discussed last quarter, we had adjusted the target downward to combat market pressures.

At the beginning of the third quarter, the targets were actually set at about 94% on average, so it's not surprising that our occupancy rates dropped in the quarter. Since quarter end we've tweaked the occupancy targets back up closer to the 95% on average range.

Obviously, we'd prefer to operate closer to our optimal level of 95%, but with many of our private market competitors in a lease at any cost mode, there's a point beyond which chasing occupancy through rate reductions is counterproductive.

Bank store results for the quarter were basically in line with our expectations. Revenues fell 4.5% on average, with the weakest results in Las Vegas, Charlotte and Phoenix. D.C. Metro and Houston showed relative strength with very slight decreases.

Offsetting the revenue decline, expenses fell by 0.6% in the quarter. The savings were primarily from lower property taxes, utility costs and across the board expense control discipline by our onsite teams. We expect the expense savings to continue into the fourth quarter, which is reflected in our lower expense guidance for the full year.

It looks as if the first time home purchase credit may have bitten us a little bit in the third quarter as move outs to buy homes moved up to 13.8% from our all-time low of 10.9% in the first quarter. This level is still well below the long term average of 17%, but it's certainly something that bears watching.

Our resident's financial condition appears to have improved slightly in the quarter as a percentage of skips and evictions declined again and remain well below their peak that we saw in the fourth quarter of last year. Also, our bad debt expense remains below plan for the year at less than 0.8%.

Before I turn the call over to Dennis, I want to acknowledge the incredible job our onsite teams are doing. Although the operating environment in most of our markets is far tougher than anything we modeled in developing the budgets for this year. The goal of achieving our original same-store budgets for the year is still well within reach.

We've certainly done a great job of coping with the chaos. The marathon that has been 2009 is almost over. Let finish strong and we'll see you soon. At this time, I'll turn the call over to Dennis Steen, our chief financial officer.

Dennis Steen

Thanks Keith. My comments this morning on our quarter results will be brief as our third quarter of 2009 operating performance was in line with our expectations and we had no unusual or nonrecurring transactions in the quarter.

We reported funds from operations for the third quarter of 2009 of $48.1 million, or $0.70 per diluted share, in line with the midpoint of our prior quarterly guidance range of $0.67 to $0.73 per share and $0.01 per share above first call consensus of $0.59 per share.

All components of income and expense for the third quarter were generally in line with our expectations. We continue to make significant progress towards the completion and stabilization of our current development pipeline.

For our on balance sheet development pipeline, we reached stabilization at three communities during the quarter, Camden Potomac Yard and Camden Summerfield in Metro D.C. and Camden Whispering Oaks in Houston, Texas.

This leaves only three communities in our remaining on balance sheet pipeline, all of which are currently in lease-up. And in Orange Court, in Orlando, and Camden Dulles Station in Oak Hill Virginia, have completed construction and are 93% and 81% leased, respectively. And the third community, Camden Travis Street in Houston opened in October and is expected to stabilize in the third quarter of 2010.

For our nonconsolidated joint venture development pipeline, we reached stabilization at Camden College Park in College Park, Maryland in the third quarter. This leaves only three joint venture communities under development.

Two of these communities, Camden Amber Oaks in Austin and Braeswood Place in Houston have completed construction and are 74% and 52% leased respectively. The third community, Belle Meade in Houston, opened in September and is currently 20% leased and expected to stabilize in the third quarter of 2010.

With only Camden Travis Street and Belle Meade still under construction, we have less than $10 million in anticipated funding requirements for our active development projects, all of which will be funded with existing construction loans.

Moving on to capital activities and our liquidity position, during the first half of 2009, we made significant progress in strengthening our balance sheet by raising $692 million in new debt and equity capital, using the proceeds to pay down all balances outstanding on or $600 million line of credit and to repurchase near term debt maturates.

We began the third quarter of 2009 with $158 million in cash and short-term investments on our balance sheet. In July, we used $82 million of this cash to retire our 4.7% senior unsecured notes, which matured on July 15. We had no other maturities or no new financing transactions during the third quarter.

As a result, at September 30, we had approximately $82 million in cash and short term investments on our balance sheet, no remaining debt maturities for the balance of 2009, no significant funding requirements for development activities and full availability under our $600 million line of credit.

Additionally, debt maturities for 2010 totaled approximately $137 million, all of which can be funded with our existing liquidity. One other item of note, in October we exercised our option to extend the maturity date of our line of credit for one additional year. Our $600 million line of credit now matures in January of 2011.

We are currently in dialogue with our lenders regarding a new line of credit and will likely commence a formal process in early 2010. Based on our discussions, we believe that if we were to negotiate a new line of credit today, our borrowing rates would be approximately 225 to 275 basis points over LIBOR.

We are encouraged to hear from our lenders that the credit environment continues to improve every day. As we move close to a formal process, we will provide more details. Moving on to earnings guidance, we expect fourth quarter 2009 FFO of $0.69 to $0.73 per diluted share, resulting in a full year 2009 FFO of $2.97 to $3.01 per share, with a midpoint of $2.99 per share.

The midpoint of our full year guidance represents a $0.01 per share improvement from the midpoint of our prior full year guidance of $2.98 per share. The $0.01 per share improvement is due to a reduction in property operating expenses due to lower than anticipated real estate tax expense resulting primarily from successful process of real estate values and lower than anticipated tax rates for our Florida and Texas communities.

We have also updated our full year same property guidance. We have narrowed our projected 2009 full year same property NOI declined range to 5.5% to 6.5% down, keeping the midpoint at a decline of 6%, which was the midpoint of our original guidance we issued in the first quarter of 2009.

Our revised NOI guidance range is based upon full year 2009 same property revenue decline between 2.75% and 3.25% and same property expense growth now between 1.75% and 2.25%. At the midpoint of 2.0%, our expected same property expense growth for 2009 is 3.6% below our original guidance we issued in the first quarter of 2009.

This decline is primarily due to lower than anticipated real estate tax expense, resulting from successful process or real estate values and lower than anticipated tax rates for our Florida and Texas communities, favorable variances in utility expense, due to lower natural gas and electricity rates and our communities continued focus on controlling costs and reducing discretionary spending.

As I previously mentioned, for the fourth quarter of 2009, we expect projected FFO per diluted share within the range of $0.69 to $0.73 per diluted share. The midpoint of $0.71 per share represents a $0.01 per share improvement from the third quarter 2009.

The $0.01 per share improvement is primarily due to two items. First a $0.07 per share projected increase in FFO due to lower property operating expenses, resulting from our expected seasonal decline in utility and repair and maintenance expense in the cooler months of the fourth quarter, the lower real estate tax expense related to our Texas and Florida communities and lower incentive compensation costs due to the expected seasonal decline in leasing activity in the fourth quarter.

The $0.07 increase is being offset by a $0.06 per share projected decrease in FFO due to lower property revenues due to our expected seasonal decline in occupancy in the fourth quarter and the continued re-pricing of new rents to market rates across our portfolio. Projected non-property income and all categories of other expenses including interest expense for the fourth quarter will be comparable to third quarter amounts.

At this time, I'll open the call up to questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Dave Bragg – ISI.

David Bragg – ISI Group

Just wanted to get your thoughts on cap rates. I believe last quarter, Keith, you spoke about a potential to see a market clearing price especially in the Phoenix's and Vegas' of the world over the next few quarters. Since then we've seen some data points out of some stronger markets like DC that have been, perhaps, lower than expected. Is there a widening of the spread that's occurring between the stressed and non-stressed markets?

Rick Campo

Dave, it's Rick. You know, I don't think so. I think what's happening is over the last 60 days cap rates have tightened and there are two things driving that. One is there's a lack of product in the market. In the average multi-family, and this is in our markets, the average multi-family transaction volume over the last four years before the recession was about $95 billion and this year so far it's been about $6 billion of transactions, so very limited supply of product.

That has been sort of offset by a fairly robust demand for product that is coming out of what we call country club money and maybe private REITs and those sort of groups, and those people have been driven by yield.

And what's happened is, is that most sort of decent properties have had anywhere from 20 to 30 bids and when you look at the economics of buying between say a 6 and a 7 cap rate and financing it at 5.25% to 5.50% Freddie or Fannie rate, the equity return is pretty robust.

At the high end of that range you're getting 9% return on equity or higher, and at the low end of the range you're getting probably 7%, 7.50%. So given that a lot of money markets are paying 0.4%, I know on our $82 million of cash we're getting a robust 0.4%.

So that has driven a lot of capital into the multi-family market and I think with the backdrop of very good fundamentals from a supply and demand perspective looking out into 11, 12 and 13. So with the limited supply in the economics I went through it doesn't surprise me the cap rates were compressed.

And I don't think that there's a wide gap between – I have heard that some sub 6 cap rates in really high quality properties in D.C. In Dallas we have sub 6 cap rates as well in uptown. If you go into the more secondary markets and into the hinterlands you can get 7, 7.50, 8.

You can also buy really, really horrible products that I don't think any of the public REITs ever want to buy or own at higher than that. So there is a differentiation in the product side and locational side, but high quality products in any major market are pretty tight and there's not a big differentiation between D.C. and Phoenix. For example, if it's a Scottsdale type, really first class product, it's probably going to trade close to 6.

David Bragg – ISI Group

Just one follow-up on that, given the lack of supply on the market now, are you seeing more products being brought to market currently to respond to that demand and can you just update us on potential opportunities that you see out there in the fund? Thanks.

Rick Campo

Well I think as the pension funds do mark to markets and get there asset values right on their books you're going to start seeing more properties come to market I would think. I think it just takes sort of time for the private market to wake up to the rationale that they had a margin call and they've got to pay it.

And that's going to take some time and it maybe middle of next year before you start getting a lot of that come out. I think part of the issue that keeps a lot of, sort of, let's say, new development product out of the market that is in short-term hands is that the banks are just not pushing borrowers to refinance deals that may be out of balance from their loan perspective.

They sort of have the installment plan, which is push it out as far as you can and why take a borrower down when there's no really good market today, so there's a lot of that going on. I suspect that in having lots of conversations with borrowers and with lenders, that as the recovery unfolds and as banking profits increase, it'll be a regulatory driven thing.

And as the regulators start pushing the banks to push some of this product out it'll start coming out. And I think it takes two or three or four quarters of strong bankerings to push them to the point where they will actually release inventory.

There's a lot of companies that need to be restructured and banks that need to move product off their books. I got to believe that the $600 billion of multi-family debt that comes due in the next three years, that there will be opportunity.

I think that the opportunity is not going to be fire sale opportunity. It's going to be solid cash flow, solid properties, a positive spread to your underlying debt costs and decent cash-on-cash returns to your equity in the 7.00% to 8.00%, but it's not going to be the market like it was in the RTC days where you could buy 10%, 11% cash-on-cash return. That's not going to happen.


The next question comes from Rob Stevenson – Fox-Pitt Kelton.

Rob Stevenson – Fox-Pitt Kelton

Keith, can you talk a little bit about the strategy that you guys have with respect to the second time a lease will renew during the downturn? I mean, you guys have been successful at sort of, renewing leases at sort of flattish rates.

But when you're going to do that the first time and it's a $50 to $70 a month gap that somebody might save by moving to another community, yes that's not a lot of money and it's the cost of moving and changing your cable and all that other stuff. It's too big of a hassle for that.

But once you get to the second time and that starts to snowball and you got two sort times to mark the market, what are you seeing on the early second time renewals and are you guys proactively taking leases down slightly rather than trying to renew them a second time at flat?

Keith Oden

Yes Rob, actually in five of our markets, which would be Phoenix, Las Vegas, Tampa, Orlando and Northern Virginia, we are in most cases in the third renewal. Keep in mind we started feeling the effects of the housing debacle really in the second quarter of '07 and so really in '07. We've now been through '08 and '09.

But the strategy is really no different. It's being incredibly proactive on renewals. Get out way ahead of it. We contact our residents 90 to 120 days before their lease expires. We have a very detail-specific program for handling our renewals. We've adjusted our commission rates to reflect the importance of renewals with our onsite staff, so there's a whole lot of things around that.

The question is really not the time or the number of rolls that you have. It's the absolute gap between what new leases are and what your renewals are.

And I said, on our last conference call that in our world, with average leases in the low 900s, if that number got to be greater than 10% it would cause a fair amount of concern, because we have, obviously in a revenue management world, there's great visibility from our embedded rental base and our customers as to what current market rents are on not just theoretical alternative apartments, but actual alternative apartments.

So it's something that we are concerned about but so far so good. Our renewal rates, if you look at where we're renewing leases, we're only down very slightly from the beginning of the year where as our new lease rates we're down 7% to 8% from where we were at the beginning of the year, so it is something that we are aware of but so far so good.

And the key is really in execution and knowing that within a certain band our residents are being incredibly well taken care of. They have a great customer experience and right now they're still minus [inaudible] the cost of all the moving and headaches associated with it. It still makes economic sense for them to renew their lease.

Rob Stevenson – Fox-Pitt Kelton

Okay. And then as a follow up, Rick is there anything on your books that you guys could see starting development-wise in the next six or so months? And what's the sort of key one or two things that you're sort of looking at to judge whether or not you'll starting anything in the early part of 2010?

Rick Campo

Well, I would say just generally that it's not going to be in the early part of 2010 or this quarter. You know what we do is we will continue to monitor our development deals, and when I say monitor, we're continuing to work on them, making sure that our entitlements continue to be in place.

And we actually have been negotiating incentives from the cities who want to see these developments built and we've been able to negotiate tax incentives and other things to actually improve the yields during this sort of hiatus in development.

But what we will be doing and we do this generally every quarter but lately it's been pretty much every six months, we will be evaluating between now and the end of the year all of our development properties, looking at existing rents, re-doing the construction numbers and trying to decide when they make sense to build.

I think fundamentally we have great sites. The development world is going to be very, very difficult to get started again and the public rates are really the only game in town in terms of being able to put new supply into the market. And so it's going to – what's going to drive us to do development in the future is going to be number one, are the going in yields reasonable yields relative to what we can buy properties for?

We have to have a premium to that. There's no question about that. And then what in the economy is going to sort of give us more confidence that we do have a recovery and that when you project out into 2012 and '13, that we're going to have a robust, a multi-family business.

And I think that with that it's going to be just how – watching the economy unfold and seeing what happens to job growth and what happens to rental rates. And we'll monitor those situations before we start anything.


The next question comes from J.J. Habermann – Goldman Sachs.

Jonathan Habermann – Goldman Sachs

Going back to occupancy, I know you mentioned changing the target in your lease optimization model but some markets did see a dip, I guess quarter-over-quarter. So can you give us some sense, are you losing traction there? Do you think that as you look at to 2010 that rate is just going to become more of the – you're going to see more pressure on rates as competition intensifies as you mentioned?

Rick Campo

Well, Jay, in every market, it's a balancing act and clearly in a market like Las Vegas where we saw many of our competitors – you can drive around now and see two months free signs fairly commonly. Our private market third party-managed absentee ownership competitors which is still the preponderance of the people we compete with, have fairly nonexistent discipline when it comes to pricing relative to occupancy.

And we'll do almost anything to maintain – try to maintain a 94% or 95% occupied condition because that's the one thing that everyone, no matter where you sit and evaluate data, it's the one thing you can immediately understand and get your hands around.

So there's a great temptation by our private market competitors to use price as the only mechanism for balancing – for maintaining their occupancy. Well, there's a point at which it doesn't matter what revenue management system you're using, there's – or none at all. There is a point at which chasing market share if it means that you're absolutely embedding rental rates that you don't think make any sense 12 to 15 months out, it just doesn't make any sense to do.

And so in those markets, for example in Las Vegas where we in this quarter saw some really silly pricing strategies, at least from our perspective, from our competitors, we're just not going to do that. And part of it is is you have to adjust the targets in the model so that – the model hates vacancy, the number one weighted factor in the model.

But at the same time, you have use that model as a tool and it's a great guidepost for what's going on in the marketplace. But on top of all of that is just good operating discretion. And we are currently, I mean in markets like Las Vegas we overrode roughly 25% of all price recommendations in the quarter because the model, again, was reacting to competitor's occupancy and their pricing that is the most visible thing to get your hands on.

So going into next year, I think as we continue to see lease rates roll down which we have seen all this year, I think that we've been pretty clear about we think that 2010, at least the early part of it, is going to be – certainly going to be a continuation of the trajectory that we've been on to this point.

And we will continue to have to find that balance point. We're in the fourth quarter historically – between third and fourth quarter, we experience a 0.6% decline in occupancy just for seasonal factors. It's been that way for 15 years, so it certainly wouldn't be a surprise to see our occupancy tick down from current levels.

We certainly think that we'll be able to maintain, which 93.8 maybe it ticks down into the low 93s. We're in the low to mid 93s as we sit here today. So it wouldn't shock me to see that kind of a number for the fourth quarter of next year. And then going into 2010 as we put our plans together, we're going to be mindful of the fact that we're still in some really challenged markets and we're going to continue to try to find that balance point that maximizes our revenues.

Jonathan Habermann – Goldman Sachs

Can you give us a sense too – I know speaking of WISO can you give us a sense of which of your markets you expect to be strongest perhaps in job growth over the next 12 to 18 months? And also maybe some comments just on Dallas, this most recent quarter.

Rick Campo

In terms of job growth for 2010?

Jonathan Habermann – Goldman Sachs

Yes, in which markets do you think you're going to see the most job growth over the next 12 to 18 months?

Rick Campo

I think that we're still probably in – at least for the next nine months, we're talking about which – probably for the next six months into 2010 we're talking about which ones will have the least negative numbers. The last monthly number was what, 263 down? I think that there are a few braves souls out there that are saying that employment could be slightly positive in the first quarter but I think those are few and far between.

Most consensus views that I have looked at played it sometime in the second quarter possibly we get the first positive print upward on job growth. It takes a little while for that to work its way through into our metrics, so I mean I think the latter part of '10, you could start to see positive job growth.

And our point in WISO is really not – it doesn't presuppose a time certain for that to happen. Our point is simply that you're going to have to – everybody has to have their own view of when job growth occurs. Our point is simply that when it does occur, it is likely to occur disproportionately in our 15 markets.

Keith Oden

The way I would sort of put it is that when you look at some of the industry analysts out there like Ron Witten and others who project revenue growth and they based that based on employment growth in a moderate recovery and not a major V shape up, up and away kind of scenario.

The markets that would be on that list would be Phoenix, Orlando, Houston, Dallas, Austin. Tampa is probably behind a little bit on that but it's the sort of the usual suspects on growth. And it's all about what their economy is made up of.

There is a lot people who go well, yes, but all those markets grew because of the housing bubble. But if you take an Orlando for example, in Orlando, the total construction workforce in Orlando is 6.7% of the workforce. In Florida it's 6.6%.

When you look at Orlando's job losses, there – through the first half of the year they lost roughly 18% of their construction jobs but the construction jobs are not what's driving Orlando's market. Disney has 62,000 employees there. You got all the restaurants and Walmart and you've got – those are the largest employers.

And its leisure business and they've got Defense and they got health care and they've got a lot of other good things that ultimately when the economy comes back the people want to live in Orlando, and they have a low, low tax base. They have no sale income tax.

All these things that have driven these markets for the last 20 years are going to drive them in the future. It's not going to be new house construction or apartment construction. It's going to be just good old job growth as a result – as it relates to services and business expansion. Now if we all believe that's never going to happen in our lifetimes again, then we'd better do something real different than try to make investments obviously.

The second part of your question was, was Dallas in the quarter? Dallas on our projections is currently slated to see in 2009 about 57,000 employment loss and a lot of that is back-end loaded. The first two quarters actually weren't that bad in Dallas. So we know we're seeing the job loss bug really hit Dallas for the first time in any meaningful way.

And the second part of that is, is that we've got multi-family completions in Dallas of roughly 15,000 apartments in 2009, which is roughly the same number that completions in Houston, so, those were the two Dallas Houston probably the last two markets standing where merchant builders could get deals financed and get them into the pipeline. So we're working through supply in both of those markets at a time when the job loss bug is really finally caught up to the Texas markets.

Rick Campo

Just on the point quickly, I had lunch with the Trammel Crow Partner in Houston yesterday, and he started 22 projects in Houston and Dallas in the last 18 months and actually maybe 8 or 9 months ago from that and today he will start zero projects for the foreseeable future.

And he thinks maybe five years before they get back to building anything and they're in total asset management mode and sort of restructure mode. So that merchant builder, just one merchant builder accounted for 22 projects in these markets and they are totally out of the market and they won't be in the market any time soon.

Jonathan Habermann – Goldman Sachs

And just a strategy question for Rick, I mean just to that point, do you think that it makes sense to raise capital today in anticipation of that distress that you highlighted?

Rick Campo

We already did. We raised capital in May, sold common stocks to position. We also have pretty much an unfunded billion dollar acquisition fund with our institutional partners. So, I don't think you, with $82 million sitting on your balance sheet today, to raise more capital and put it in cash at such a huge negative spread to the cost of funds doesn't make a lot of sense to me.

But I will tell you that if an opportunity came along and we had the ability to raise funds for a specific deal, then we would absolutely be doing that.


The next question comes from Alexander Goldfarb – Sandler O'Neill.

Alexander Goldfarb – Sandler O'Neill & Partners

I just want to go to your condo background. What's your take on the Corus trade? What do you think the returns are like there?

Rick Campo

I guess the Corus trade when you think about returns first of all you have to think about a non-interest 50%, non-recourse, non-interest bearing loan from the government. That's pretty value added oriented, right?

If I could go to a bank and get a $2.5 billion non-recourse, non-interest bearing loan for seven years I might have a pretty good shot at making a good return. And then so I think, I thought the Corus deal was an awesome trade for Starwood. I think you're going to make a lot of money with it.

And I think the government is smart in what they're doing too because there of, I think, the 60% partner with Starwood. So Starwood only put in like 550 million and then the government put 60% more in which, I guess, equate to about a billion or maybe 600 million or 700 million.

And so they not in a dump mode at all, they're in a hold, let's do this rationally. Let's make sure that they don't to what the RTC did. I mean if you think about what the government did in the RTC days, there was no capital and they had a no reserve auction with very few people.

And what that leads to is massive price reductions and massive dislocation and there was billions of dollars made in that time frame as a result of the government action. Today I think the government's really smart doing that because you're not going to have a lot of Corus assets being sort of thrown into the market at really low prices.

What their total returns will be will clearly depend upon how the recovery comes out and how well they do in terms of managing that asset base. But I got to believe with no carrying costs to your debt and having basically 50% free money, they had to do really well.

Alexander Goldfarb – Sandler O'Neill & Partners

Well hopefully you guys can get similar financing on some of your future deals.

Rick Campo

That would be nice.

Alexander Goldfarb – Sandler O'Neill & Partners

Along those lines, Dennis what are your thoughts on where unsecured is for 10-year for you guys and then also where you think you would find that convert pricing?

Rick Campo

We haven't looked at converts pricing, so I can't give you an update on that one. But from a 10-year, we're getting indications from several of our bankers that we would price somewhere about 300 over. So for a 10-year all in it would be about 6.5 and for a five year, based upon the treasury at about 5.5.

Alexander Goldfarb – Sandler O'Neill & Partners


Rick Campo

Updated pricing on the converts, I don't want to give you that.


Your next question comes from David Toti – Citigroup.

David Toti – Citigroup

Hi, everybody, Michael's here with me as well. Rick, a question from you relative to some of the comments you made earlier about move outs to housing and it looks like the government stimulus could be extended. What's your view on the impact of that program? It seems to be mounting across the board in terms of being a negative force in the multi-family space and what's your view in 2010 as to the momentum of that effort by the government?

Keith Oden

Yes, this is Keith. I think that the tick-up that we saw if you look at progression of move outs to buy houses from the first quarter it was 10.9, went to 12.6 in the second quarter. We were at 13.8 this quarter. And while that's an interesting tick-up, our long-term average move outs to buy homes is in the 17% range. At the peak it was 24%.

So if you put that in perspective over the last 15 years this is still really, we're still getting a lift at the margins from the current level of move outs to buy homes. Now there's a lot of other crosswinds out there that we all know about, but if you just isolate that one, it really is not a big part of the picture.

The other thing that's kind of interesting is when you look at it, if you look at it at the market level, three of the lowest move out to purchase home data points that we got in the third quarter were in Florida, Las Vegas and California. Those are the three lowest. It's 10.9% in Florida, 11.9% in Vegas, 8.4% in California.

So if you think about the – it just doesn't correlate very well with the anecdotal evidence of there's tons of all these houses in the foreclosure pipeline and that's what's driving people to move out and buy homes. The tick-up in the real big spikes that we saw in the move outs to buy homes were in markets that really have not, would be on no one's list of really trouble from a housing inventory standpoint.

Denver was at 24.7%, Raleigh, North Carolina was at 23%, so it's counterintuitive but it's consistent with what we've been saying all along is that the story in these markets of our performance and the rental declines is about employment and really not about this sort of shadow housing supply that everybody seems to fret so much about. I still think it's an employment question.

David Toti – Citigroup

Are you guys doing anything to combat aggressive homebuilders and brokers that are targeting your tenants specifically? There's been lots of reports about increasing efforts on some of the larger apartment complexes around the country.

Keith Oden

No, you really can't do that. And when you get down to it, I'll just add to the issue here into the discussion about home ownership. When you get down to it, people have to have a down payment now. They have to have credit. Even with the $8,000 first time credit they were giving people, they actually have to have some credit to get the debt.

And there's a lot of people that are over-leveraged and that shouldn't be buying homes, that aren't buying homes that bought homes last time. They're going to be renters. So we're not worried about all the sudden the people going out and saying, "Oh my God, I got to go buy a house because I'm going to make a gazillion dollars on houses again, because the market, consumer psychology just takes a long time to change. And I don't think if you did consumer studies on whether people thought it was great to buy a house now, they might think so, but it's going to take years to change that mentality again.

David Toti – Citigroup

And then my last question is just, could you provide a little color on what's happening in Phoenix? I'm not sure if you mentioned that. Just in terms of on the ground, that seems to be kind of chronically weak.

Keith Oden

Phoenix continues to be one of our most challenged markets. It's below plan. Year-over-year, it's still near the bottom of the pack in terms of NOI growth, down 13.4% for the year-to date. And it's still in our portfolio the worst performing market. So not only worst performing of all of our 15, it's the worst performing to plan. So any way you look at it, Phoenix is a real challenged scenario for us.

But again, if you go back to what's the underlying cause of what's going on in Phoenix. We have 2009 job losses forecast for this year alone at 116,000 jobs lost in Phoenix. In 2008, that number was, at the midpoint, was of our three data sources was 90,000. So you're talking about almost 200,000 jobs lost in Phoenix in a two-year timeframe.

And again, in our world, if I didn't know about anything else going on with housing or shadow supply or any of these other crosswinds, that kind of job loss in a market like Phoenix would be sufficient for me to say, "Yes, I get it."

I mean, we're going to be down 13%, 14% NOI growth over the course of, or if you go back to pick up last year, close to 20% NOI growth in the Phoenix market. So that's going to continue to be a challenge. and it will be until the job and the employment situation turns around nationally and in particular in our markets.

Rick Campo

The key thing though I would just add is that in Ron Witten's analysis for revenue growth in 2011, Phoenix is the number one market in America, with revenue growth of 10.2%, not our numbers, his numbers.


Your next question comes from Rich Anderson – BMO Capital Markets

Rich Anderson – BMO Capital Markets

Hey, Rich here with Ron Witten.

Rich Anderson – BMO Capital Markets

What are the chances and would you be willing to, you have this fund, to never fully put the entire buying power to work in this environment?

Rick Campo

Given that we're at 20% of the fund and it's our money, too, we'll invest the fund based on what we want to invest our money in, and if we don't think that the investment environment is reasonable, we won't invest the money.

Rich Anderson – BMO Capital Markets

So as you see it right now, what do you think? What are the prospects of putting the entire fund to work?

Rick Campo

I think they're very good. I think that based on the conversations that we're having with a lot of different folks, there's a lot of sort of constipation in the market right now, but I think they're going to get some religion next year and we're going to start having more transaction volume and be able to place our capital at reasonable returns.

Keith Oden

Rich, the good news for our institutional partner and this is part of our conversations when we were putting the fund together is that whether we put that capital to work or not today, tomorrow, a year from now, the fees associated with putting that capital to work are not a meaningful part of our world, whereas with most private market sponsors, it is their world., so just a little bit different perspective.

Rich Anderson – BMO Capital Markets

And last quick question so you can get another call or two in. What are you seeing in terms of IRRs on assets pricing today and what percentage of that value creation is cash flow and what percentage is terminal value?

Dennis Steen

Well, when we look at IRRs today, it's probably going to be 2/3 cash flow or maybe more and then the rest a price appreciation. When we're doing our analysis, if you look at, say you buy at a 6.5 cap rate and finance it with 5.5% Fannie Mae debt, you put in a growth rate probably pretty above trend in 2011, '12 and '13. Go back to a sort of 3% trend after that, seven-year hold with a 50 bit increase in the exit cap rate gets you about a 15 IRR, 15.5 IRR.

Rich Anderson – BMO Capital Markets

You said 50 basis points cap rate and terminal?

Dennis Steen

Yes, increase a terminal 50.


Your next question comes from Michelle Ko – Bank of America/Merrill Lynch.

Michelle Ko – Bank of America/Merrill Lynch

Hi, I was just wondering, some of your competitors are saying that they're seeing the rental rate decline or it's getting better in certain markets. Are you seeing that in any of your markets?

Rick Campo

Yes, basically D.C. metro was flat and they're outperforming plan. Houston and Dallas have kind of hung in there around flat. We had rental growth in those two markets up until this quarter, so I mean, there are signs out there that some of the markets are stabilizing.

But overall, in a portfolio like ours when you see the --for the quarter being down on revenues of 1.3% sequentially tells you that most of our rents are still rolling down. And I think, I don't know, that the folks that I have talked to or heard have conversations with, I think that's pretty consistent with their experience.

I think that some of the recent revisions in terms of guidance have actually guided to more rental rate declines in some of our competitors than what they would have seen at the beginning of the year, which tells me that they may be about to enter the worst part. But we've been dealing with this for really two and a half years.

Michelle Ko – Bank of America/Merrill Lynch

Okay, and in terms of the roll down, how long do you think it would take for those renewals to roll down to the new lease rents? Is that the next six to nine months or can you give us a sense for the timing of that?

Rick Campo

Well if you look at our in place rents, they have declined every month throughout this year. So through nine months, even though they were relatively small declines, we've had a decline in every month, which tells me that at least for the next nine months, if you stop the world today and rents were flat or up, you're going to still be dealing with not being able to significantly raise your NOI or your rental portion in the next nine months.

So I mean, I think there's a tail associated with these lower rents that we're going to live with for at least some part of or through the middle of 2010.

Keith Oden

But I would say also that if you take our strategy of letting our occupancies fall and keeping our rental rates up, when the market turns, we're not going to have to raise rent to increase revenues. We'll just have to keep the street rents at where they roll down to, make new leases at that level and increase our occupancy, which will drive our revenues before our competitors who are at 95% have to raise their rents.

So, that's I think a really interesting nuance when you people get all stressed out about lower occupancy, but we're driving our occupancy low to try to maintain our revenue. I would have much rather have higher revenue at lower occupancy levels than lower revenue at higher occupancy levels because it'll allow us to really increase our revenues quicker than our competitors without raising rent.

Michelle Ko – Bank of America/Merrill Lynch

Also can you give us a sense for what you anticipate in terms of are there going to be further expense cuts in 2010, or do you think you would have probably anniversaried some of the expense cuts by maybe mid-'10 or somewhere thereabouts?

Keith Oden

Yes, I think the biggest opportunity that we're going to have in 2010 is in property taxes for further downward revisions on valuations. We've gotten some benefit of that this year, but most of the bulk of our re-valuations happen in 2010.

Our markets happen to be very property tax dependent for the revenue source. Property taxes make up about 27% of our total expenses, which would my guess is at the very high end of the multi-family sector because of the markets in which we operate. So to the extent we get property tax relief that everybody's going to get some of, we'll probably benefit a little bit more from that. I think that's that the biggest single area for opportunity for us in 2010.

Rick Campo

We're going to take two more questions to make sure that we stay on our promised timeframe. And each question needs to be a one-part question because we have two more people in the queue, so no three part question, next?


Your next question comes from Michael Salinsky – RBC Capital Markets.

Michael Salinsky – RBC Capital Markets

I just had a quick question about development. Given that you stopped a lot of the – you're not expecting the delivery of new projects for some time and you've been working on a number of them in the pre-development, are there any ones where you're so far along that you either have to move forward or stop capitalizing interest at this point?

Rick Campo

Well, the valuation of stopping the capitalized interest really is a function of deciding whether we're going to continue to work on the development and also where the cost is relative to the land position. So we will evaluate all of those ongoing developments in the fourth quarter.

And to the extent that we abandon a development, we would have to mark that land to market and stop capitalizing. Last year, we of course did that in the fourth quarter. I think we had a write down of like $51 million plus or minus.

We haven't made those evaluations at this point. But each quarter, we look at it and make sure that we are analyzing whether the developments are reasonable to go forward with and if there are any impairments.


At this time we show no further questions.

Rick Campo

Great, well thanks a lot. We appreciate your time and get on the other call now and we will talk to you again at the end of the quarter.


Thank you for attending, you may now disconnect. This conference has concluded.

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