Camden Property Trust (CPT) 2002 Q2 法說會逐字稿

Good morning. My name is Sandra and I will be your conference facilitator today. At this time I would like to welcome everyone to the Camden Property Trust second quarter 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press star and number two on your key pad.

Mr. Campo, you may begin your conference.

Thank you for joining Camden second quarter earnings conference call. I would like to remind the participants on the call that we will be making forward-looking statements based on current beliefs and expectations. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations.

For further information about these risks, we encourage you to review our filings with the SEC.

Camden's customer focus brand promise continues to add value to customers, employees, and shareholders in spite of lousy market conditions we face today.

FFO for the quarter was 83 cents per share which was under the street estimates and our own estimates prior to our revised guidance. We were clearly too optimistic in the last quarter conference call and our expectation of the recovery in our markets.

During the first of two weeks of July we completed a property by property reforecast for the year, using a three and a half to 4 percent decline in, a substantially more conservative outlook for our business.

Sequential revenues, if I can say that word, showed improvement through the first quarter and through the beginning of the second quarter. Midway through the second quarter, revenues started an uncharacteristic decline in June, the beginning of our prime leasing season. These results prompted our reforecast for the year and our revised guidance of $3.40 a share to $3.48 of FFO for 2002.

While we are not happy about the result, our revised guidance we wanted to get the new information out to all parties as soon as possible. We therefore issued the July 17 pre-announcement and revised guidance press release.

We believe our current assumptions are conservative and targets are achievable.

Property declined six and a half percent for the quarter with revenues declining 2 percent and expenses increasing 5.2 percent over the same quarter. We same the same property NOI to decline to only three and a half from 4 percent. Camden's position is very well to come out of this current lousy market condition and be stronger for the test. Our promise of providing excellenence everywhere you look is a sound strategy. We will improve the stability of our earnings.

Our strategy is simple. We have the best people in the business taking care of our customers and have great properties. We will continue the portfolio management which includes product and market diversification. We will increase our NOI in California and Florida while lowering the NOI concentration in Houston, Dallas and Las Vegas at the same time.

At the same time we will be lowering the average age of our properties through our disposition program.

Our business strategy will lead to stable growing cash flow and net asset values.

Our development program is the centerpiece of our expansion into California. The program is nearly $320 million of properties, 1764 apartment homes are included in the program and are very, in various stages of lease up. Southern California remains one of the strongest markets in the country. On completion of the projects in the next several years, southern California will represent more than 12 percent of our net operating income.

Our other development projects that we currently have underway are in stronger markets as well. Houston and Tampa. We are not developing any other properties in any other markets at this point and have no other lease ups in the more difficult markets.

During the quarter we acquired three properties with 1130 apartment homes and yields upon stabilization of approximately 8 percent.

I would like to discuss at this point how we are addressing the corporate governance, corporate ethics and accounting transparency issues that are clearly on the front burner of most investors' minds

Our board is committed to the highest levels of business ethics. We form two new committees on the board recently. One the governance committee and a nominating committee. The governance commit will will ensure that all committees are functioning to best practices and following applicable rules and regulations, including the new ones that came out recently

In addition the committee will review and manage the code of conduct and ethics policy that all of our people are expected to adhere to.

The nominating committee will deal with director performance and replacement and recruiting new directors. These committees function along with our comp committee and audit committee. All are staffed by independent directors under the revised definition of directors that has recently come out.

Relating to reporting transparency, we will continue to improve our reporting. In the second quarter supplement, you will notice that we provided expanded disclosure on, relating to same store revenues and sequential information. We have based this additional disclosure based on conversations we have had with many of you on the call. We will continue this effort in quarters to come and plan to expand disclosure as we evolve through the year.

We will be reviewing our expensing of stock options with our board in the next several weeks. Management will recommend that stock options be expensed beginning in 2003.

The impact to earnings is fairly minimal relating to the stock options, about a penny per share in 2001. We believe that number is a good number going forward as well.

At this point I would turn the call over to Keith Oden. Keith?

Thanks, Rick. Happy birthday! If it's okay with you we will spare the audience the same. I don't see much singing talent around the table today.

I would spends a few minutes highlighting some of the operating challenges that we will be facing for the balance of 2002. As we look ahead to 2003.

Last quarter I outlined the head winds that Camden was facing in core markets including job losses, competition from single family home purchases and additional multi family supply.

One analyst recently noted this combination of events in the multi family industry had created the perfect storm. I don't know if it's perfect or not, but it's a darn good one. I won't belabor these points as I'm sure you will hear similar reports from every company in our industry. I would provide you with some sense of scale. Starting with job growth, the highly correlated metric with multi family demand, in Camden's markets for the full year of 2001, combined total job growth in those markets came in at 435,000. Despite the impact of 9/11. For the full year in 2002 for the same markets we are currently forecasting an aggregate job loss of 36,000, or a net loss of 471,000 jobs from 2001 levels.

Using the historical relationship that every five jobs created or lost creates a one unit change in demand relative to the housing stock in the core markets of 2.5 million multi family units, the 471,000 job loss alone would imply market wide vacancy increase of roughly 3 percent.

The markets with the largest year over year job losses are Dallas, 64,000 net jobs lost. Denver, 63,000 lost. Phoenix, 53,000 lost.

These happen to be three of our most challenged markets.

Single family home purchases by residents continue to push our turn over rates above historical norms. Turn over rate hit 61 percent, up from 54 percent in the first quarter and well above the 56 percent average turn over rate for the past two years.

Finally new supply in Camden's markets continues to come on line as projects begun in better times wind up lease ups. Developers with trigger dates are most aggressive in using concessions setting the overall tone for the communities in that sub market

Specific to Camden's core markets there were roughly 70,000 new units completed in 2001. We are projecting an additional 60,000 for 2002 and while the year over year decline is welcome, 60,000 new units in our markets where we have no net demand will keep our vacancy rates and concessions under pressure for the foreseeable future.

All these factors have combined to produce a market wide occupancy rate of roughly 91 percent across Camden's markets.

Despite these challenges we remain focused on achieving a stabilized occupancy of 94 to 95 percent in our portfolio.

We did see an increase in average occupancy rate for the quarter from 91.7 to 92.1 percent. However, this was offset by an increase in rental concessions of roughly a million dollars over the prior quarter.

Turning now to specific markets, the three markets we identified on our last quarterly call as our best performers for the year, southern California, Houston and Tampa continue to hold on to positive same store growth year-over-year.

We still believe these three markets will lead the portfolio as the markets gain equilibrium. Based on job losses to completions, the job markets that are the weakest are Charlotte, Denver and Orlando. Regarding the forecast for the balance of 2002, we are not expecting significant improvement in the same property results.

We do expect to see some improvement in our occupancy rate from current levels, although this will likely be offset by higher concessions.

We expect to see additional expense savings which should keep the property level expenses below plan for the year, with controlled expenses up less than 3 percent and a total expense increase in the 4 percent range.

All of which supports our 2002 revised guidance of 340 to 348 per share. Despite this challenging operating environment, on site teams focus on providing excellence in customer service for which Camden is known. As a management team we take serious our goal of out performing the competition. We are tested on the regardless of market conditions part of that commitment but are confident we can continue to achieve our goals.

I would like to turn the call over to Steve Dawson, our Chief Financial Officer.

Good morning, all. Thank you for joining us. Hopefully you have all received our quarterly supplement via e-mail or fax. If you are not already on our list, you can access the supplement from our website. While you are there sign up for automatic notifications of future press releases.

As Rick pointed out we made a few changes to our supplement this quarter in an effort to improve trans patterns of our reporting. I would like to highlight those. We provided enhanced information about same property results. You will find both a year-over-year and sequentially period of time analysis for actual revenue and expense amounts by city for each period. There is a reconciliation page which shows the components of revenues and expenses broken down into same property, non-same property and development operations to help you understand where the growth or declines are coming from.

You will note that we are separately reporting property supervision expense on the face of the income statement so that you can see and compare the cost of managing our assets each period with that of our peers relative to revenues and NOI. This number includes all property accounting, supervision, and administrative costs at both corporate and regional levels. It is not allocated to the specific districts or the properties themselves.

With that as a table, showing the weighted average rental rates by market for the relevant period and the percentage change from the averages for the appropriate comparative period.

This will allow you to see where the revenue changes are coming from and hopefully compare results with those of our peers in the industry as well.

On page 17, we summarize the assumptions factoring into our internal earnings outlook. We decided that more is more when it comes to putting out our estimates for the future. Our crystal ball may be no better than it was in the last quarter, but we want to tell what you we are seeing from here. Of course are free to agree or disagree and interpret the tea leaves differently, but at least you will know what we are thinking

We are providing you ways of looking at repair and maintenance activities versus capital expenditures. Look for analyst to be provided in the next few quarters. We hope these enhancements are beneficial and welcome your further comments and criticisms as we seek to provide you with the maximum feasible transparency into our results and operations.

Turning to those results for the quarter, as Keith discussed, flat revenues from 1Q to 2Q combined with seasonal increasing revenue expenses, 64 percent marriages last quarter to 61 percent this quarter in NOI. Operating expenses typically increase in the second and third quarters in most of our markets as utilities, turn over, landscaping, general repair an maintenance costs are naturally higher during the long summer months in the south.

Despite a sequential decline in FFO per share and lower guidance for the year, our coverage ratios remain healthy. Interest expense coverage for the second quarter was 3.3 times compared to 3.5 times in the first quarter of this year and the second quarter of last year.

The fixed charge coverage ratio only declined .1 times to the 2.7 times for the second quarter from a 2.8 times level for the first quarter of this year and the second quarter of last year.

Looking forward, the interest coverage ratios should remain in the mid to low threes and the fixed charge coverage should remain in the mid to high twos.

Including capitalized interest in these figures and giving no credit for additional income to be derived from development assets to be completed these ratios declined by .3 to .4 times. But they increased to near the previous levels as those assets are stabilized.

Even with our operations at the most challenging levels, the leverage and coverage ratios are well within the mid-triple B, BAA2 range. During the quarter we purchased Camden Ybor City and Camden [inaudible] in Tampa and Camden Pamplona [phonetic] in Phoenix for a total of 100 million for 1130 homes. You will find more detail on page 15 of your supplement.

We have disposed of no assets during the quarter, although we do anticipate selling another 150 million late in the year.

As expected, in early June we issued 150 million of our five year senior unsecured notes at a coupon of five and seven eighths percent.

The proceeds were used to reduce the outstanding balance on our line of credit. The bonds were issued at a spread of 155 basis points over the five year treasury rate well inside what had been expected. The rating agencies reaffirmed our BA2, triple B flat ratings for these notes. The issue was three times over subscribed in a matter of 15 minutes and continued to trade at levels closer to the high triple B than the mid triple B.

During the quarter we also set out to expand and extend our senior unsecured line of credit. Today we have in hand commitments to extend the maturity to August 2006 and to expands that facility from 420 million to 500 million.

The syndication effort was led by Bank of America as lead arranger and JP Morgan Chase as book runners. The line was well over subscribed and will include a total of 19 banks. Many of them are new to the Camden credit. This extension and modification which should close in the next couple of weeks improves our covenant package and lowers the pricing from 100 basis points over LIBOR to a level of 75 basis points over LIBOR, and results in a 25 percent reduction in the annual fee rate, making our line very competitive with the market.

This line assures adequate liquidity for new development, acquisitions and debt maturities for the next four years and demonstrates the confidence that the lending community has in Camden's operations, markets and management.

Weapon want to express our thanks to the entire lending group for their support, but especially JP Morgan Chase and Bank of America who led the transaction and Commerce Bank, Wachovia and Wells Fargo who comprised the rest of our tier one lead bank.

Revised FFO guidance to 348 per share is conservative an based on outlook for apartment fundamentals for the duration of 2002 that is more in line with the outlooks of others in the industry. It is important to note, assuming full year FFO at the consensus level of 341, we still have 87 cents per share left over after the dividend. That equates to over 39 million or an FFO pay out ratio of just under 75 percent.

Even after $26 million of capital expenditures, we still expect to have over 13 million, almost 9 percent of FFO or over 29 cents per share of free cash flow for reinvestment or dividend - or debt reduction.

We place our net asset value at around $38 a share. This assumes average cap rates of eight and a quarter to eight and a half on stabilized NOI trended forward at a moderate level and 10 percent premium over cost for the assets under development and a five multiple on C N ten (inaudible).

Considering we are still seeing properties trading at cap rates of sub six to low eights in this low interest environment, we believe this is a conservative NAV level.

Based on that NAV, our overall leverage stands at approximately 41 and a half percent. Floating rate debt comprises 17 percent of the total debt at an average rate of 2.8 percent.

Our total weighted average borrowing rate is 6.4 percent and almost 79 percent of the debt is unsecured, leaving 81 and a half percent of our assets at cost as unencumbered. We have no maturities for the balance of 2002. However we do intend to retire 28 million of high rate mortgage debt as they become pre-payable in the fourth quarter.

Approximately 83 million of debt is scheduled to mature in '03. 230 million in '04.

Upon completion of the new line there will be 336 million available under the new credit facility. Our current plans call for an unsecured note offering of around 150 million early next year to keep our line balances low and availability high.

Despite our revised economic view we remain steadfast in the execution of our business plan. We have the financial and operating resources to be able to continue to diversify, develop, acquire, dispose of assets and finance our operations in the most prudent and productive fashion long-term.

We have, continue to work on new trend of actions which we believe will lead to growth in cash flow, better diversification of the asset base and income stream and, most importantly, should increase value for our shareholders and fixed income investors. We remain focused on the basic blocking and tackling and committed to finding technology solutions and operating techniques to set us apart from the pack. Better operations in the field and better allocation solutions provide better results.

Our outstanding professionals in development, acquisition and property management still are focused on doing the right things to provide excellence every day for residents and shareholders.

We would like to now open the call up for questions. Thank you. 08:21:31

At this time I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone key pad. We will pause for just a moment to compile the Q and A roster.

Your first question comes from Lee Schalop.

A couple questions. First, on quarterly guidance, you put up numbers of third quarter and then fourth quarter improving. So 82 to 85 and 85 to 90, which suggests that things are bottoming.

Given your comment, that seems sort of die cot must. Could you talk about that?

The improvement in the fourth quarter comes from two areas. First of all, we will see a seasonal decline in expenses that we will see. There's probably a penny or two in just expense differential that we think will add to fourth quarter results.

The other is our student housing project which is in Corpus Christi in conjunction with Texas A and M university. That comes back in line in September of this year. So we end up getting four months worth of revenue that is at relatively low levels throughout the summer period when the students aren't there. That alone, the differential in the fourth quarter over the second quarter run rate is roughly $300,000 a month or a million two, which is about 3 cents

Between expense savings that we think and plan to be there in the fourth quarter and the Miramar contribution, it's not in the Q2 run rate. We still think that those, even notwithstanding any improvement in the underlying markets, we think we are okay with the guidance or we know we are okay with the guidance for Q4.

The other thick, on the last call you talked a little bit about internal debate on small market versus larger markets, places where you have a single asset sort of hanging on to see if it makes money. Any updated thoughts on that?

Lee, I think the question clearly is when you have just a small market concentration, depending on where it is located, small market concentrations are okay if you can service it from a larger market with close proximity.

But ultimately we want to have our assets concentrated in broader markets so we can put the manpower and brain power that we have in the field on those properties. Over the long-term we will clean out the portfolio from that perspective.

Dan has a follow up question.

I wanted to ask your thoughts on the issue of the high bear entry markets and the downturn. I think the low bearer entry markets have been hit much harder with the exception of Houston. I wonder on your thoughts on why Houston is so different and if there are changes in the coming years so other markets will get smarter or if it's anomalous for Houston.

Is good because of timing of when the markets brought supply on. If you recall our Houston numbers were ugly in 1999 and 2000 with the declines in NRIs (inaudible) in those periods because the market got ahead of itself in 98 and '99 in terms of deliveries.

The Houston market absorbed the properties, but that market also shows how quickly the market responds to over building in any market. Houston clearly was over built in 1999. The market responded very quickly and supply was shut down from peak in 1998 of 29,000 permits. The permits were cut by 50 percent the next year and 50 percent again the next year.

We had a very limited supply going into this recession.

At the same time Houston's job growth didn't decline as precipitously as the rest of the country. Houston, because of the energy base that it has and in spite of all the big head lines about our energy companies there, the job loss related to those was minimal relative to the telecom and the dot com job losses that were out there.

As a matter of fact, Houston continues to add jobs in the consolidation of the energy business with mergers like Exxon Mobil, BP-Amoco, Conoco-Phillips, where they are moving personnel to Houston and closing offices in other markets

I think the Houston story is a good story going forward. Supply is still unchecked. We still have good market dynamics going forward the next 18 months in Houston. It should be pretty good from an apartment perspective.

I think that the problem with other markets, you can argue barrier markets can have problems as well as evidenced by the San Jose northern California markets. It's a function of job growth. And if you have significant job losses in any major markets you are going to have, you know, bad multi family numbers.

I think that the markets are, though, reacting very quickly. The, I think, problem that we have today in a lot of markets is that they were at their peak of the delivery cycle when the recession hit. You have a double whammy, call it the per expect storm or whatever. You see Dallas and Atlanta, other markets have been really horrible markets.

Thanks very much.

Sure.

Your next question comes from Andrew Rosivach.

Only one question. Given where the share price is, do you have any comments on a buy back?

Well, we have clearly been an aggressive buyer of our stock. We will continue to be an aggressive buyer of the stock at levels where we think there is opportunity. I think the biggest issue that we have had, there hasn't been a lot of volume in the stock. We believe our NAV is in the 38 to 39-dollar range and with stock, with the stock at the current levels it looks pretty attractive to us.

Are any buy backs contemplated in your guidance range?

No.

Thanks, okay.

Next question comes from Brian Legg.

I have a question, guys, looking at the operation expenses, the growth sequentially of 9 percent and just looking at the year-over-year comparisons, were there some operating expenses that fell into this quarter that might be unusual? And what do you think is sort of a good annualized average operating margin?

Brian, good question. The sequentially 8.8 percent, almost 9 percent increase really was in three areas. We had about a million dollars increase in R and M. That's strictly related to the spike in turn over that we experienced in the quarter in making all those units ready. It was about three to 4 percent above what we normally see and all hit in the second quarter.

The secondary is our insurance, our new policy which took effect in the second quarter. It caused about a $700,000 increase in our run rate on expenses.

The third area would be in the marketing and leasing which is just our community is trying to respond to the marketing challenge that they have and that each of them is facing.

If you take those three combined, it's about a $2 million differential over the first quarter. That explains the bulk of the run rate increase.

I think it's always a little bit looking looking at the quarter over quarter number on expenses. We do have expenses that are relatively large in nature. Yet they hit one time, for example in the landscaping area. Muscle much is an area that is relatively large but it all happens at one time. If you look at, we still expect for the full year of 2002 our controlable cost will come in less than 3 percent increase. This will be below our plan for the year. Add to that the non-controlables, even including the substantial increase in the insurance. We think we will probably be in the 4 percent range for the entire year.

So those numbers are a little bit skewed in the second quarter.

Trying to think this of this on an operating margin. It fell to 61 percent from 64 percent a year ago. What do you think the average for the year will be?

Operating margin for the year? If you were, if you take our first two quarters of actuals, and then sort of our, consistent with our forecast for the next four quarters, we ought to be around 62 percent.

Okay. Can you just talk about in general trends and concessions and traffic? You talked about turn over. But can you also give what concessions are per unit? I guess define it on a, on an annual basis?

Sure. I'll give you monthly numbers on the concessions. Our concessions actually went up in the, from between first quarter and second quarter, went up from $25 per unit per month or 300 per year to $30 per unit per month or 360.

That was, you know, we expect to see that number continue to climb in the third quarter and maybe level out into the fourth quarter. If you look at that on an annual basis at the second quarter number - let me give you the about gross dollar, from three-.4 million to about 4.1 million in the second quarter.

If you think of that representing $360 per unit in the second quarter, our average rental rate runs $768 a unit. You do the math on that, it works out to somewhere around on average in our entire portfolio two weeks free. That's a little bit misleading. You have to break that down between what we are doing on renewals market to market and what we are having to do on new leases.

If you look at it in that context, on the renewals we average around $100 per unit in concession across the portfolio. And on new leases we are running about $620 of a concession, which is somewhere between three and four weeks.

That tells you on new leases we are slightly less than a month free. Throughout the portfolio and on to renewals we are still able to hold those at around the $100 per unit level.

Trend is that those will continue to increase. We did increase our occupancy for the quarter. We continued to increase our occupancy on our latest report as of yesterday. We were at a physical occupancy of 93.6 percent. That's an end of the month number.

You have to dial that back a little bit to get where we would be on an average. On a run rate basis clearly we are making headway on occupancy. But it's expensive and in terms of what we are having to do with marketing costs and concessions.

And the concessions you, you don't straight line those, right? The concessions -

We expense all the concessions as incurred. In our case we strongly stress up front concessions as of (inaudible) -

Hello?

Hello?

Is this conference cut off?

Sorry, I got cut off there.

Where is Keith? Go ahead, Brian.

Okay. I just wanted - the developments, have you he can changed your expectation for development yields?

Development yields have come in 40, 50 basis points as a result of the recession. Our development yields will be somewhere between eight and three quarters and nine and a half.

Looking at the, I know it's just a partial period, but looking at the two that stabilized in the quarter and looking at the 1.7 million, if you annual lies that, that's a five and a half percent yield. At the beginning of the quarter they were 85 percent occupied. What does - does this give any information about -

I don't think so. I think there's probably variations in the month, Brian. When they get up, twelve months stabilization on the Farmers Market ought to be a solid 9 percent. The California property is like eight and a quarter, plus or minus.

But you probably have some lease up issues and concessions in those numbers. Once they stabilize, they will be in those zones, we think.

Last question. What are your forecasts in the development and construction fee line?

Development of construction fee line for what period? Going forward?

Yeah, just going forward. Good run rates?

Just about where it is today. Not going to expands. As a matter of fact, that item should be fairly stable for this year and next year.

Okay, thank you.

Sure.

Your next question comes from Craig Leupold.

Is Keith still on, too? Or were they cut off?

They are in California today and they may have been cut off.

My question was related to if you could give us a little color on Dallas sub markets and given the magnitude of the decline you saw in June, try to get a feel for what sub markets are seen to be most affected.

Sure. The sub markets in Dallas, probably the biggest issue we had in the second quarter in Dallas was WorldCom lay offs. WorldCom announced a 7,000 person layoff. There were a thousand people laid off in Dallas. In the Richmond, in the telecom corridor there. On the telecom quarter is where we have Buckingham and a couple of other projects there and also Attivan [phonetic].

The airport sub markets are weak even though we added, we've increased occupancies in some of the properties. The concessions are deep and the airport area, even though flights are increasing and body counts on planes are increasing, the airports are not hiring back their people as quickly. So we still have issues in the airport area.

I would say telecom and airport industry is weak for us.

How about up town and your Farmers Market market?

Farmers Market has been strong. Farmers Market, you know, originally, the original plan at Farmers Market was to come in substantially less than, from a relative perspective than the up town and we achieved that pretty effectively. The Farmers Market project has been a real hot spot for the SMU sort of upper class men graduate student, which we thought we had some of, but we have a lot more than we anticipated there.

The fact that the connector between Deep Ellum [phonetic], the sort of honky tonk bars and restaurants and what have you is very convenient for the residents of the Farmers Market to go back and forth on Thursday, Friday, Saturday nights.

It has been a real positive absorption there, really.

The $96 million of land you have held for additional development, could you give us a rough breakdown of what that is and maybe when it makes its way into the development, you know, projects under construction?

Sure. You have Boston on the line.

Craig, can you hear us?

Back, we're here.

Can you go through that, Steve? I'll go through it when they start, but you can go through the details.

We have Farmers Market Phase II and Phase III, which is about 27 million. We still have Steeplechase, we visited to - these are about three and a half and 6 million. We have Camden Square project, about 11 million. Then we have Oasis Bluffs and Oasis Harbour II. We have downtown land in Houston and some Long Beach land and about $16 million of airport land.

In terms of starts?

We can get you the actual detail on that off line. But the Farmers Market project, we have a phase II designed and ready to go. The question is, when do we go? It was originally planned to go in the, at the end of the first quarter, beginning of the second or middle of the second quarter. We have put that on hold. We will continue to have that on hold until we feel better about Dallas long-term.

The Steeplechase project which was sort of version of the bottom of the B market or lower income product in Houston is likely to be sold, not started.

Lee Vista is in Orlando. Again, Lee Vista is a phase II of an existing project. We have plans and are ready to go on that project. Again, we have delayed that and will not start construction on that until the market improves.

The Camden project, I guess Camden Square project is a Houston development that is about three blocks from our midtown project in Houston. That is likely to be, we are hoping, first quarter of 2003 start.

The Bluffs in Reno is, it has been there for awhile. That is going to be a difficult project to start for awhile. Harbor II is a Las Vegas second phase. Interestingly enough we will probably start that in the first quarter of next year as a joint venture where we will bring in a third-party capital source to build that. That is phase II of an existing project on Las Vegas Boulevard.

The Long Beach land, we talked about that a lot. We still have land on both sides of our development in Long Beach for hotel site and condo site or potentially more apartments.

And the, we will either sell that or develop that in the next couple of years depending on market conditions. I think that's about it.

The Endow [phonetic] airport?

Sorry, Endow [phonetic] airport we are continuing to sell sites. We have two or three sites under contract that will close in the next quarter or so. We believe that by the end of, we should have the $16 million of land sold in the next twelve months. And end up owning the 70 acres plus or minus free and clear for our future developments there. Endow [phonetic] airport is still on track in terms of getting our cost basis down to basically zero.

Given that you are delaying some of these projects, I don't know if you are capitalizing interest on some of these costs at this point. Any risk of having a stock capitalizing interest?

We are capitalizing interest, the only ones we capitalized interest on is where we have a specific development plan we believe will be implemented in the near future. The other ones we don't capitalize on. For example, Steeplechase since it is for sale, the Bluffs in Reno, Phoenix is being expensed. Harbour II is being expensed.

Did I miss any, Steve?

I don't believe so.

The other projects, we evaluate based on when we are going to develop it, what the land cost is, the viable development plan and if we, you know, have - if we are bumping up against what we think the market value of the land is, we would start expensing those.

Okay.

Like I said, we are expensing some of these as a result of not having a development plan or just not believing that we ought to capitalize on it going forward.

To that question, following up on Lee's question a little bit, that is, can you give us any sort of guidance in terms of what your outlook means from a sequential NOI standpoint, moving from the second quarter NOI through the fourth quarter? Then if you have any thoughts at all on '03 at this point.

Lee, we start our budget process in another 30 days. Given the fluctuation in the markets, we will defer that until we have gone through the side-by-side look at the budget. With regard to '02, with regard to the sequential numbers and the guidance we've given, we think that '02 and '03 and 04 operationally will look a lot like '02 and quarter two in terms of total revenues. We think that we will tick up on our occupancy slightly. We think that will be primarily offset or at the expense of additional concessions in those markets.

We are going to see and do expect to see income gains in quarter three and quarter four primarily due to, as I talked about earlier, the Miramar project. That is about a million two contributor for the months of September through December as that project comes back on line at 100 percent as the students move in.

As a note, we did add a phase five to that project this year which is 100 percent pre-leased as well as the phases one through four. So as the students return in Corpus Christi, we will be essentially 100 percent occupied that.'s about a million two increase in the NOI.

In terms of the operating environment that we see going forward or that we have forecast for '03 and quarter three and quarter four, essentially it is flat with the exception of some expense savings that we know we will get in the fourth quarter and some contribution from the Miramar project and small contributions from the other lease ups.

Thank you.

Your next question comes from Rod Petric.

Good morning. The property tables, you show average occupancy. Are there any markets that showed deceleration or deterioration at the end of the quarter?

Well, actually, Rod, our entire portfolio from the end of the quarter is up probably 50 basis points from an average occupancy run rate standpoint. Our occupancy, physical occupancy on the report that we got yesterday was at 93.6 percent, the highest physical occupancy we have seen this year. That's an end of the month number. There is always about a 1.2 percent swing from the end of the month to the beginning of the month.

You take 60 basis points off of that and right now I would call our average occupancy run rate about 93 percent, which is up from the run rate that we had or the average that we had of 92.4 percent in quarter two, which again was up from quarter one.

Sequentially our occupancy rate, we are making some headway. But a lot of it is coming at the expense of increased concessions. Concessions in Q2 over Q1 were up a million dollars. My guess that concessions in Q3 over Q2 will be up another million dollars.

But I think net net we are going to be flat with the second quarter on gross income, on the run rate basis. Then we've got, we know we will get some pickup in a couple of its properties that will be additive in Q3 and four and get expense savings and figure out how to get in the range on our guidance.

Do you believe you've stabilized occupancy? Will you have continued pressure from supply?

Well, I don't think we will see any more pressure in Q3 and Q4 and into '03 than we have seen this far. And the reason I say that, Rod, we've got 60,000 completions we know that have to get absorbed or they are coming on line in 2002, portfolio wide.

Those tend to come on throughout the year. So I know we still have some new lease ups that are still kind of flailing about trying to get stabilized. I don't see that changing materially well into 2003.

But what our hope and speakingtation is is that at some point with the, if the recovery continues, people will start adding jobs. Until that happens, it is hard to see us making a lot of headway against the supply/demand, the conditions that we are in right now. That's why we are not really projecting any real net gain in Q3 and Q4 from the standpoint of small rise in occupancy, probably offset by concessions.

Last question. What percentage of your turn over is moving into homes? How is that compared to say six or twelve months ago, and long-term trends?

Rod, for the last reporting month which was July, it was 20.4 percent move outs. In the month of March of this year, we had 24 percent of our residents move out to purchase homes, which was an all time high in our portfolio. For the last six months we averaged around 21 percent. From a historical perspective, go back, start the clock two years ago and go back seven years and our portfolio that number has typically run in the 17 percent range.

So the difference between 17 percent and 21 percent is just net back door exits that we are having to figure out what to replace on the front end.

Thanks.

You bet.

Next question comes from Jessica Tully. Ms. Tully? Your line is open.

Good morning.

Good morning.

Good morning.

No? Jessica?

Hello, I'm here. I'm ... sorry.

I'm showing Ms. Tully has problems with her phone. Should we go to the next question?

Sure.

Next question comes from Rich Moore.

Hi, guys. Happy birthday, Rick. You will have to start showing birthday insurance the 10-Q, Steve, the way things are going.

Thank you.

Other income is down in the quarter. I know you guys had some townhome sales at farmers in the first quarter. Where are you with those? What should we look for for other income from the quarters going forward this year?

Other income from townhomes should rise. We have an additional seven townhomes that will be sold and we have the other income next year will also increase because we have additional townhomes that will be built in the Farmers Market area and sold next year.

In terms of, so I think we can give you better guidance off line. I don't have those numbers right off the top of my head at this point.

The townhome contribution to FFO is fairly minimal in the sense that the total project, you know, is going to make a couple million dollars. But over the, you know, a two-year period. It is not a big contributor during, you know, a two and a half year period.

Okay. Was there anything else there in the second quarter? I noticed that was lower than most of the quarters last year. And also than the first quarter.

Some of the other income includes interest income on the L.L.C. programs or our third-party development programs.

Okay.

Those have been reduced. The interest income that was derived from those projects will be going down over time since we have not, we are not going to do any more of those projects given the fundamental cost of the program. So we will have a lowering of interest income going forward from that program.

Okay, okay. Thank you. Could you give us an update, too, on the yield management activities?

Yeah, we put out an announcement in the quarter, rich, as part of our entering into a relationship with real page, whereby we are assisting them in completing the development of their web based property management program which we expect to deploy in our entire portfolio management program next year. We transferred the rights to the yield management program which we had done some beta testing work on as far as the pricing engine and had gotten good results on a distributed basis.

But one of the things that we are particularly excited about is the ability to take that product in the state that it was in, which it required substantial additional development work to make it viable in an enterprise level software package. We transferred that to real page and we are working with them jointly to continue the development of the yield piece, which ultimately will be married and be part and parcel of their, our web based property management solution that we will roll out in our portfolio next year.

Okay, great, thanks. Last question, when I look at the last table that you guys have in the supplemental that shows the June market rents, market rates, it looks like every market is higher than the average same store rate that you show a few tables back.

Shall we look at that as a good sign, that rates are up in June? Is June typically the strongest month of the quarter? How do you look at that?

Rich, the primary difference is that that back table is market rents. The other tables are average rents for the quarter.

Okay. Those being higher, I would take that as a good sign.

It would, but you also have contract rents built in. So you have lost lease as part of that.

Okay.

There is some of that, but primarily it is just the differences between -

It's better to have that number higher than lower, but you have the vague ryes of concessions and loss of lease built in.

Gotcha. Thanks, guys.

Next question comes from Stuart Seeley.

Good morning. On concessions, I don't want to beat that horse, but it sounds like in the fourth quarter the spread between the physical and economic occupancy was 215 to 250 basis points first quarter, jumped to 300 or 350 basis points the next quarter. And now it seems to be a hair over 400, expecting to go 450 in the next quarter.

On the call last time you indicated that you guys are being a lot less aggressive than the market was in terms of concessions. That still is the case. What does it take for you guys to get to your goal of 94/95? With the high concession levels in the market?

Well, Stuart, the issue of being, how aggressive you are on concessions, we are very aggressive on our concessions, but one of the things that we are also very mindful of is managing our rent roll as it relates to our embedded base of residents. It is - if you adopt the strategy that some of our competitors have of putting banners out on the front of your buildings that say two months free, that becomes the starting point for negotiations, not only with your walk-in traffic or new residents, but with existing residents on renewals.

Visibly we are not ever going to be and manage our communities to that level, if you are calling that aggressive. I consider that to be very short sighted.

We are not losing residents. We are not losing qualified traffic at our communities because someone else is offering a special, unless the special is to the point where we just don't think it's economically viable for us to take that lease. We are making progress on our physical occupancy, as I mentioned earlier. We are a little over 93 or 93.6 percent on yesterday's report. If you look at it sequentially, that's up over the prior two quarters.

We still have, in order to get to a 94 percent average condition, it means that we need to have another one improvement in the end of the month occupancy and we were up 400 basis points in Q1, Q2, 400 points from the end of Q2 to Q3. If we can do that another quarter and a half or two quarters, we will be up as an average occupancy rate. We think that's about the right place to be in this market.

I don't want you to confuse or misunderstand that we are aggressive in terms of not losing qualified traffic if what it means is within the bounds of decent property management, making an offer that will close the deal.

Thank you.

Your next question comes from Richard Pauli [phonetic].

Guys, I have a question about Las Vegas. Just looking at the numbers, I would have thought given the relative competitive pricing between single family and apartment living in that market that operating results would have been weaker, especially on the revenue side.

What is going on there? I know jobs have stayed positive, but I thought it would look more like Phoenix than it does.

Well, interestingly enough, we are projecting this year in 2,000 employment growth, almost 11,000 net new jobs in Las Vegas this year, despite everything that, the strong dip that they took down in the third and fourth quarter of last year. We are still projecting 10,000, 11,000 new jobs to be created there.

If you lay that on top of the completions, we are projecting about 5300 units to be completed this year, which is well down from what it has been in the last two years.

Overall occupancy rate in Las Vegas has been running in the 92-93 percent range. We have consistently been able to be above that. Our last report on occupancy in Las Vegas, physical occupancy, we were at 96 percent. So it's - Las Vegas has been a very, very pleasant, positive surprise in terms of how it has held up as a market relative to some of these others. Notwithstanding the fact that there is new construction and intense competition from relatively affordable single family home sales. It's been a bright spot for us on a relative basis. I think it's likely to continue.

How is your wholly owned portfolio performing compared to say the assets that are in Sierra Nevada joint venture? Is there a differential there? Is it asset location? Is it management?

Actually, both portfolios have out performed the market. Our portfolio has out performed the market by a little greater degree than the Sierra Nevada portfolio has. They are running right now, Sierra Nevada, around 93.4 percent physical occupancy against a - if you look at the sub markets where their assets are located, they are closer to the 91, 92 percent range. In both instances we have been able to out perform the market. But our communities have probably fared a little bit better in the downturn.

You don't expect things will weaken materially from here?

Not in Las Vegas.

Thank you.

Next question comes from Rich Enderson.

Regarding concessions one more time, you said they were up a million dollars versus the first quarter. What were the market concessions up during that same period?

What were the market concessions?

How did the increase in your concessions compare to what your markets have increased their concessions by?

Well, it really depends, I would say in most cases the concessions generally did increase. In the third quarter over the second quarter, in the markets where we got a real concession challenge going on.

Trying to see if you are ahead of the curve in terms of how the market is providing concessions or if you are still behind it as you said you were in the first quarter.

I think that we are about where we need to be in terms of the balance between concessions and just doing fundamental blocking and tackling. The path of least resistance is always putting a banner out that says two months free rent. I just don't think that's the right thing to do from the standpoint of managing assets for the long-term.

Regarding the committees you discussed early in your comments, who are on those committees?

The committees are made up of the outside directors that are independent directors. The governance committee is made up of gardener Parker, the lead outside director, Bill Cooper and Steve Webster. And then the nominating committee is, I believe, Bill Cooper and Lewis Levy. You want all the committees? The audit committee?

No. I wanted to get a sense of who is doing the oversight there.

We have a system with our independent directors, when you get into the definition of independent directors, the new guidance from the NYSE and SEC and folks, we have out of our eight board members we have five directors that are classified as independent. We have three that are not independent, which would be Keith, me, and Scott Ingram. Scott only because he is six months away from having not been an officer and director of a company we acquired within five years. That's part of the new definition.

We have a very strong board from a business perspective and from an industry perspective with Steve Webster, gardener Parker and the others bring various talents from legal to business and, you know, lots of SEC and Wall Street experience in that group.

Okay. Last question is on CAPEX and of course we are looking forward to the new disclosure hopefully next quarter. In the essence of this quarter, could you give us a sense of what your recurring and non-recurring CAPEX dollars are? Specifically beyond that, what you include in the non-recurring or the revenue enhancing portion of your capital expenditures?

What I would be glad to do is give you the total capital expenditures, a number that we think is far more important to understanding our business and that is the cash needs that have to be put back into these properties. That number for this year, our planned number was $567 per unit. The answer to your other questions is really, what we will be doing between now and when we put out that detailed characterization of those numbers, we want to make sure when we put that out it is the most meaningful it can be to analysts and our shareholders. That is what we will be working on. As you know, there's a great deal of discussion in approaches on recurring, non-recurring, revenue enhancing, non-revenue enhancing. Over the next quarter we will put together what we think is a meaningful distinction for those numbers or hope to be a meaningful distinction and we will provide the detail.

Not doing the math right now but you mentioned $26 million in CAPEX. Does that relate to the 567 number you just gave me?

Exactly.

On the expense side, what would the per unit expense on R and M costs are?

On our plan they are running about $600 per unit.

That does not include personnel costs associated with that. That's pure dollars, bricks and mortat, paint.

How much are the personnel costs in your mind, roughly?

150 is a guess. $150 per unit

Thank you very much

Next question comes from Scott O'Shay.

Good morning. I'm curious as to what percentage of your leases came up for renewal in the first quarter and what that percentage was also in the second quarter.

Our percentage of renewals over our portfolio is actually pretty constant because some of our markets offset in terms of their seasonality. There aren't really any spikes in terms of the distribution of the leases. We would be slightly skewed towards the second and third quarter.

I don't have the exact numbers. But if they were skewed at all, I would say probably you are looking at 23, something like that in the first quarter. Maybe it goes up to 27, 28 in Q2 and three and back to 23 in Q4.

Great, thank you.

You bet.

Your next question comes from John Perry.

Good morning. Could you give us a little more color on the $150 million in debt positions in your guidance and the proceeds?

We have been talking about the disposition program for awhile. We moved back our disposition timing to the end of the year so we wouldn't be dilutive. The proceeds from dispositions will do a number of things, hopefully acquisitions and generally our dispositions will probably have at least 100 basis points negative spread to our acquisitions. We hope to bridge that gap by doing additional programs in our mezzanine program where we are going into markets and providing mezzanine financing for developments and projects that haven't been stabilized yet.

We also hope to put the acquisitions in front of the dispositions so that we will develop some additional cash flow from acquisitions that will offset the debt, dispositions going forward into the future.

To the extent that that our stock looks attractive, we will buy stock. Basically our program will be to try to make the dispositions as, as FFO neutral as possible.

Thanks.

Sure.

Next question comes from Greg Eisen [phonetic].

Good morning. Another question about concessions, if I may. Specifically, if you look at your developments that are leasing up right now versus all the other properties that you have vacancies in, for new leases, you said new leases, the concessions ran around 620 per unit. Your developments are typically in markets that you had high hopes for being good markets in general, such as southern California.

Are you seeing a need for concessions in your new leases commensurate with your 620?

In Tampa, the 620 would be an average number across the whole portfolio. In Tampa that number right now would be running at least a month free, and dependingon market conditions it might go slightly over that. In southern California the concessions are minimal. I would not say we don't have any. In unit, certain unit types, there's the possibility of running a special. In general, southern California market is not one where concessions are widespread.

Although in Tampa it clearly is widespread and any time you are in a lease up, you are going to - even in a comparable market relative to the other stabilized assets in Tampa, you are going to have a higher level of concessions because you are trying to get from 60 percent occupied to 95 as opposed to trying to get from 92 to 95.

The other thing you have, and this is very, you know, normal in southern California as well, is in lease ups where you have, for example, in Rancho Murrieta, we have building living in buildings that have tremendous construction issues going on around them. In lease ups like that you give a concession of two weeks free on a seven month lease just because the conditions are construction conditions and the people sort of expect that.

But they are not the, the concessions are not like a normal market like Dallas or some of the other markets where you have big time concessions because developers are pushing hard to get their lease-ups done.

If I could ask one more question. You mentioned earlier some of the properties you would hope to start construction on in 2003. Can you give us an estimate for the number of units you would like to start construction on into '03?

We would like to start construction on, assuming market conditions improve, Farmers Market II, which is around 265 apartment units for Farmers Phase II.

We would like to start phase one of Camden Square, which is about 300 apartment units. We would like to - we will likely start Harbour's II, 250 or 260 units in Las Vegas in a joint venture.

What else? We have some additional California properties that are probably in the 350-unit range. Hopefully Orlando would start as well.

I think in total, somewhere around 1200, 1500 apartment units, maybe $150 million, assuming market conditions improve and we really have to see a turn for us to start some of these projects in Dallas and Orlando and elsewhere.

Right, I understand what you mean there. If I can ask one follow-up about Las Vegas? You mentioned that you see the number of new units coming on line there, coming down pretty dramatically versus prior years. Could you comment on or do you have available the number of single family housing starts that are taking place in that market?

I don't have that in front of me right now, but I'll get that back to you.

It continues to be a very competitive market on single family, for single family housing deliveries as well. There hasn't been, I would say there has not been any improvement in that equation.

And there probably won't be. Single family housing starts are going to continue to be very high in Las Vegas. You know, overall, Las Vegas is an interesting market because you have a lot of people moving in and out of the market on an ongoing basis. It's a good multi family market from that perspective, when you have a lot of people moving in and they decide whether they are going to stay or not, or buy a house.

Okay, thanks a lot.

Certainly.

At this time there are no further questions. Are there any closing remarks?

Certainly. Thank you for joining us on our call. We will speak with you, I'm sure, during the quarter and on the next call. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.