Camden Property Trust (CPT) 2002 Q3 法說會逐字稿

Good morning. My name is Anthony, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Camden Property Trust, third quarter 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number one on your telephone keypad. If you would like to withdraw your question, press star and the number two on your telephone keypad. Thank you. I will now turn the call over to Richard J. Campo, Chairman of Camden Property Trust. Mr. Campo, you may begin your conference.

Thank you. I guess we are ready to start. Thank you for joining us the third quarter conference call. Before we get started, I would like to remind everyone that we'll be making forward-looking statements based on our current beliefs and expectations. These statements are not guaranteed of future performance and involve risk and uncertainties that can cause actual risks to differ materially from expectations. We hope they don't, but you never know. Further information about these risks can be found in our filings to the SEC and we encourage you to review them. Camden's customer focus living excellence brand promise promises to add value in spite of very difficult marketing conditions that we're experiencing at this time. Our brand promise of providing exemplar levels of customer service and good management which can only from an organization that listens and understands the needs of each customers -- each customer continues to support our people in the field with our goal of continuing to outperform despite market conditions. FFO for the quarter was 83 cents per share which was in line with our previous guidance. Same property NOI declined 4.8% for the quarter with revenues declining 2.8% and expenses up .5%. Sequential same property NOI increased from the previous quarter as a result of focused expense control. Our property operations team have done an excellent job of managing expenses without sacrificing quality to our customers. Year to date our same store NOI has declined 4%. We have had wide variations and results in our various markets with double digit declines in NOI in Charlotte, Austin, Phoenix,.and Dallas. These declines have been offset by relative better performance in southern California, Houston, Corpus Christi, Tampa and Las Vegas. Our strategy of product and geographic diversification is clearly working in these dismal market conditions with we expect the difficult conditions to continue during 2003 and adjusted our guidance to reflect this. We expect FFO to be between 315 and 335 per share next year. Our 2003 business plan assumptions can be found on page 18 of our supplement. We are projecting same store NOI to be flat to down 2% with occupancy levels unchanged for next year. The plan does not reflect any acquisitions dispositions or stock buy backs or any incremental property transactions. Therefore, any incremental transaction value will affect ultimate results one way or another, depending on dilution scenarios. An integral part of the 2003 strategy is to make sure that in the worst case scenario we can continue to generate positive cash flow after paying positive operating cash flow, that is, after paying fixed obligations and dividends. Our conservative dividend policies in the past of increased in our dividend at a much lower rate than our overall cash flow growth rate has allowed us to continue to keep a strong balance sheet and positioned us for a secure dividend going forward. Clearly, not with the same coverage we have had in the past, but we expect in the worst case scenario to have a positive operating cash flow after our dividends. Camden is positioned very well for future growth when market conditions improve. We will continue to take advantage of market opportunities as they're presented to improve the quality and diversity of our portfolio and the stability and quality of our earnings. At this point, I'd like to turn the call over to Keith Oden.

Thanks, Rick. I want to provide you with additional color of the results and upgraded guidance. The headline for my remarks would probably read still fishing for a bottom. Although, some of our metrics did improve in the third quarter on a sequential basis, I believe that any sustainable improvement in the same store operations is still several quarters away. Our occupancy rate improved slightly from 92.4% to 93% during the quarter, but this increase was partially offset by an increase in concessions of roughly half a million dollars or $36 dollars per unit per month which was up from $31 per unit per month in the second quarter. Our operating expenses increased by only 0.3 of a percent despite a significant increase in our turnover ratio from roughly 61% in the second quarter to 67% in the third quarter. This modest increase in operating cost, despite turning an additional 1,000 apartment units is directly attributable to the outstanding efforts of our on-site professionals whose performance has allowed us to meet our third quarter guidance and will allow us to meet the fourth quarter guidance. Thank you, keep up the good work. Single family sales set all-time records again in September as the percentage of rental house fell to 32%. The lowest in the generation. However in the portfolio the percentage of move outs attributable to home sales actually dropped from 22.2% year to date to 19.5% in the third quarter. It remains to be seen whether this is the first sign of improvement in the key measure of competitive pressure. Looking ahead to the fourth quarter, we have seen a slight improvement quarter over quarter in market conditions in several markets since our last call. Most notably in Las Vegas, Phoenix, Houston and Orlando. These improvements were offset by further deterioration in Dallas, Tampa and Charlotte. Our average occupancy for October indicates that we will probably experience at best the average seasonal decline for our portfolio from the third to fourth quarter which is roughly 0.7 of 1%. This would indicate an average occupancy rate for the fourth quarter in the 92 to 93% range. Our ability to achieve our fourth quarter estimate will again rest largely on the diligence of our on-site personnel and affecting controlling operating costs without affecting our excellent customer service levels. We are confident that they will deliver once again. With regard to 2003 guidance, we are not projecting any meaningful improvement in market conditions next year. While we do anticipate a slight increase in our average occupancy rates, over the 2002 levels, these gains will likely be off set by concessions or outright rental rate reductions. Obviously, we will have to continue to aggressively manage our expenses to adhere to our targeted same-store NOI results for 2003. At this time, I will turn the call over to Steve Dawson, Camden Chief Financial Officer.

Thank you, Keith. Thank you for all for joining us. We have attempted to further enhance the quarterly supplement in order to provide greater transparency to our reporting this quarter. In addition to the expanded, about same property result, forecasting assumptions, occupancy data and property supervision expense, we are now providing information about our capital expenditures, repairs and maintenance costs an debt covenant compliance. On page 18, we have presented third quarter and year to date information about capital expenditures and maintenance expense items. After much internal review and analysis, we decided that full exposure of what is capitalized versus what is expensed would be the most meaningful information. We show you the average useful lives used to depreciate the capitalized items and provide capex and expense amounts on per home basis. In our opinion, when determining the amount of operating results, which are truly available for distribution, it really doesn't matter whether the property --whether property capex is revenue enhancing or not and whether it is recurring or not. Whether expense or capitalized, the money is till spent and must be deducted from collections to see what is available for distribution to shareholders. However, hopefully, this will be useful information to you as you evaluate the quality of our earnings and cash flow streams. In response to suggestions from the fixed income side of the house, we have added page 17, which is select information about our debt covenant compliance. You will see that in our covenant packages are comparable to those of our peers in similar ratings and that Camden has sufficient room under the covenants both for the line of credit to continue the long-term objections, even through the current economic environment. These address the property operations, at the consolidated level, fee income declined by $1.4 million compared to last year due to fluctuations in third party construction and development fees. Third party development fees will likely to continue to decline as those projects in California get closer to completion in the Florida work is totally done, while construction fees should continue -- should return to their normal level of about $2 million per year going forward. G & A expense increased $500,000 for the quarter, primarily due to one-time branding expenses, costs associated with our new property management software system, and legal fees and other transaction costs related to transactions which were abandoned. The largest change over the third quarter of the prior year was the fact that last year's earnings included $5.4 million of gains from the sale of properties held in a joint venture. There are only $35,000 in gains this year, this quarter. Our coverage ratios remained about the same on a year to date basis as compared to last year with interest coverage in the mid three times and fixed charge at 2.7 times. Sequentially the third quarter coverage ratios went down by only 0.1% times across the board reflecting a 60 million dollar increase in overall debt levels due to development under way and repurchase of shares for the quarter for a total of 32 million. These ratios are well within the zone for mid triple B, BAA 2 company and should improve as the development is complete and enters the income stream. A portion of the assets later in the fourth quarter will be used to reduce debt related to the share repurchase and should result in slight improvement in the coverage ratios. Shortly after our quarterly call we completed the expansion and extension of our senior unsecured line of credit as discussed in the call. Comments under the line of line -- I'm sorry, commitments under the line of credit now stand at $500,000,000 with a stated interest rate of liable or plus 75 basis points and a bid feature that allows us to competitively place our outstanding balances at rates ranging as low as 55 basis points over liable. The line now ultimately matures in August 2006. We place our net asset value in the $36 to $37 dollars per share range. This assume answer average cap rate of 8.25% on stabilized NOI with a 10% premium over cost for the value of assets under development and a five multiple on fee income. We still see properties trading at cap rates ranging from sub-six to the low eights. And this low interest rate environment and believe this is a conservative yet realistic NAV (ph) level. Common shares are trading in the $30 to 32 dollar range representing a 13 to 17% discount from NAV and a 10.5% yield on the mid point of next year's FFO range. Real prices on the multifamily assets do not reflect this kind of discount and cannot produce this kind of yield today. As a result, we have been purchasing shares. During the quarter we purchased 954,000 shares, including purchases subsequent to the end of the quarter, we have purchased 1.9 million shares this year for a total investment of $62.7 million. We currently have about 5 million remaining authorization from the board. As we consider our reinvestment alternatives for cash generated by asset sales we will continue to consider share purchase --repurchases on a net leverage neutral basis as one of the weapons in the arsenal. Based on that NAV range, the leverage stands at approximately 44%. Floating rate debt compromises 21% of total amount on average rate of 2.7% and the total weighted average borrowing rate is 6.2% and over 80% of the debt is unsecured. Leaving 83% of our assets at cost fully unencumbered. We have no debt maturities for the balance of 2002, $83 million scheduled to mature in 2003 and $230 million in 2004. Thus, we are well positioned to ride out the current economic environment. As Rick stated, we are reaffirming our revised FFO guidance of approximately $3.40 per share for the full year of 2002, and 83 to 85 cents per share for the fourth quarter. The assumptions for this guidance shown on page 19 of your supplement indicates that we anticipate the sale of approximately $125 million dollars of assets late in the fourth quarter this year. While these properties are not currently under contract, and we cannot be certain that they will sell, we are very optimistic that we'll have something to report on our next call. The proceeds from these sales if they occur, are assumed in our model to be used to reduce outstanding debt and find ongoing development activities. We also expect to purchase two properties from the third party development investments portfolio O-Tie Ranch (ph) and Little Italy. These will have little impact on the FFO as the amount currently being earned on the mezzanine notes receivable is comparable to the net FFO to be realized from the real estate. However these assets together with possible dispositions should enhance our portfolio long-term and continue the progress we've made towards our diversification goals. The projected FFO range for 2003 at $3.15 to $3.35 per share assumes that we, in fact, do sell the $125 million of assets due by this year -- due this year, no more next year and that we refinance $200 million line of credit debt using long-term unsecured line of credit early in this year. First quarter 2003 FFO should be 8 to 10 cents per share lower than the fourth quarter figure of this year. Future quarters improving as new development stabilizes in southern California. Assuming $3.40 of FFO this year for a total of $151 million in total capex for the year of $32 million, now, that includes $6 million of one-time branding costs, we would expect this year to produce approximately $8 million of cash flow from operations, in excess of our $2.54 per share dividend. Using next year's FFO estimate of $3.15 to $3.35 and capex of $22 million including all items, recurring and non-recurring, we project positive cash flow after dividends of $4.5 million at the bottom of the range to $13 million at the top of the range. We have a long history of maintaining a conservative dividend policy which has allowed us to be in the strong position we're in now. We will continue to make decisions about acquisition, development, disposition, share repurchases and financing in the same way that ensures that we have cash flow in excess of our dividend payments. We will not allow Camden to be in a position of having to borrow or sell assets in order to fund or dividends. Through prudent financial and operating policies we expect to be able to continue the course of diversifying and building value for the long-term for our shareholders and fixed income investors. Difficult times are never easy, but our experience tells us that they always lead to opportunity for those who are prepared. Our team of professionals in the field are seasoned and fit for the fight. They understand how to operate through difficult cycles and are firmly focused on the future as they manage through the difficulties of today. We say thank you for their dedication and competitive spirit as we all press ahead for better days. At this point, we open the call for questions. Thank you.

+++ q-and-a

At this time, I would like to remind everyone if you would like to ask a question please press the star and number one on your telephone keypad. Your first question comes from Brian leg (ph) from Merrill Lynch.

Hi, guys. I wanted to make sure that the delta between your run rate of the fourth quarter, the 84 cents and the low end of your range which would imply 79 cents on average, that's mainly because of the $125 million of asset sales late in the fourth quarter and also 2% NOI growth. That gets you to the $315?

Yes. That's correct.

Okay. Can you guys go over the average concessions per unit in your portfolio and compare that to what they were last quarter and the year-ago period?

Yeah. Brian, the concessions in our portfolio are up over the second quarter to about $36 per unit per month on average. And that's an increase from about $31 per unit, per month on average. Again that's a concession that's applied to all units in the portfolio. If you annualize that number you end up at $400 dollars a unit off an average unit rental rate in our portfolio right now. About $750 dollars a unit. So we're still somewhere in the roughly 2 1/2 to 3 weeks free average on all leases including renewals. And obviously, the renewals carry, typically carry much smaller concessions even in the concessionary markets. Typically in the $50 to $100 dollar range and then obviously on where we've got new leases, the concessions range from low --very low levels in Houston and southern California, and then at the top end in some of our most competitive markets like a Charlotte, Tampa or a Denver, we certainly do see concessions as high as 1 1/2 to 2 months free.

And the 31 dollars per month, that was a year ago, what was it in the second quarter?

That was the second quarter.

Oh, what was it a year ago?

I don't have the year over year number but I can get it to you.

Okay. Do you break out your economic occupancy just compared to spread between the physical and occupancy and what that compares a year ago and where you are historically?

Brian, back to your previous question on the concessions.

Okay.

We're up over the third quarter of the prior year, concessions were $3.3 million in total in the portfolio. And in the third quarter of this year we were at $5.2 million in total concessions. So we're up about 50% in total concessions, but one -- you know one of the things that also enters into that, when you're looking at concessions, you also have to consider the fact that in many cases we've actually outright reduced rental rates. Some people -- so which affects our gross effective rent and gross potential. Depending on how you choose to structure that, someone may be showing substantially more concessions because they leave their "market rent" at a very high level and take concessions as opposed to trying to adapt their market rents. It depends -- it's literally done market to market as to which strategy we think makes the most sense, given what consumers seem to be demanding.

Your question to economic occupancy, we do look at that. In the third quarter of 2001, economic occupancy was about 90% 89.8, actually. The current quarter is 86.4, so there's a gap building between economic and gross potential. And that number has stayed fairly constant from the second quarter, it was 86.7 in the second quarter and 86.4 today in the third quarter.

Thanks. On the developments you expect the yields to be 8.25. Did I hear that correctly? Is that a pre-capex yield?

No. I think that -- Steve was talking NAV, I think, in that scenario.

Okay.

The developments I think you asked the question last quarter about what affected -- how have they been affected by the economy and I think we said they have been yields that come in 40 to 50 basis points as a result of the market conditions we have out there in California, you know, the yields are still in the 8.25, 8.5 range in some of the stabilized properties like farmer's market in Dallas, that's still a nine. Probably most effective development deal we have had has been the Ybor City as a result of the extended lease up as a result of -- you know, there was a fire at the project a couple of years ago that extended its lease up into the soft market.

Right. Just looking at the price per unit, $995,000 you looked at your averages in Tampa of Like $703 dollars per unit, is there -- because newer project is there a big spread between what you're getting on the existing properties and this?

Absolutely.

Yeah, Brian, our average rental rate runs about for the entire portfolio runs about 88 cents. The Ybor City is in excess of $1.

There's a big spread between the new development and the older assets. We have the solid B Tampa assets and a decent spread between new development and the B assets.

Okay. And I appreciate your new capex disclosure. Just to double -- just to double check, you're not -- you're not excluding any revenue enhancing capital expenditures from that table? In other words, it's sort of all dumped into that number?

The only things -- nothing is excluded from that number with the exception of the one-time branding costs.

Okay.

Which really ought to be excluded.

But it's also footnoted. In first footnote you see the total of $19 million for the year to date, you would include 6.1 million for the branding into that $19. And then that would be total capex that we've spent in the entire portfolio. Revenue enhancing, non-revenue enhancing, whatever you want to call it.

So the only thing that you're not included in the number is development. So it's tied to the cash flow statement?

That's correct.

Okay. Very good. And last couple of questions. Do you straight line your concessions?

We take -- we booked them on a cash basis, so when the cash is collected the revenues is recognized. In some cases, on very limited number of cases we actually will spread the concession out over the lease term. That's not our preference. We only do that where we believe that we'll lose a lease if we don't do that. We strongly prefer to take them up front and we book them when the cash is -- is received. So in either case, it's a cash-based revenue number.

Does your '03 guidance include expenses options?

Yes.

And how much is that?

It's minimal. A penny or two a share.

Okay. And last question. Did you talk about the cap rate expected on the $125 million of positions?

Oh of disposition?

Yeah. The $125 Million in the fourth quarter.

The dispositions are somewhere south of 8%.

Is that pre capex or post capex?

I'll give you two numbers. If you use the traditional underwriting capex number which is 250 (inaudible), the cap rate is a little bit less than 8%. If you use -- if you use a total capex based on our budgets and what we're selling is -- average age of these assets we are selling is 22 years, and they're much higher capex than our average portfolio, and I would say that the sort of -- if you're really looking for the cash on cash cap rate, it would -- with all capex included it's about -- a little over 7%. That's why we're selling into the market.

What would it be on a pre-capex basis?

Pre-capex is probably -- I would say just a little over --a little under 8%. A little under eight.

Thank you, guys.

Your next question comes from Jim Bracken from Green Street Advisers.

Good morning. It's actually Craig. A couple of questions, Rick. Just on the capex reduction that Steve alluded to going from '02 to '03 I think he indicated you were at $32 million dollar this year, less $6 million for branding, gets you to $26 million, versus next year down to $22 million. Is that I guess a reflection of what's going on in the market and maybe not putting as much money back into your properties or major items that you had this year that you won't have next year? Can you talk about the reduction?

Yeah. A couple of things, Craig. One it reflects the dispositions and these are some of our older assets that we're selling that have had historically pretty high capex amounts, so that needs to come out of the number. The other is that we are, you know, obviously in a year with where we're managing cash flow, and we managed total cash flow including capex, things that in the past we might have done as niceties, there are things that can be put off a year and we will put them off a year. But in no case will we do anything that ever impairs the asset value or the long-term value of our assets. Nor will we do anything that impairs or ability to compete in the marketplace.

Okay.

Obviously, in a $26 million dollar budget every year which is basically what we spent for the last three years, there's always room to tighten down when you need to and that's what we're doing.

Given what you guys are looking to sell these, you know, 22-year-old assets and given the capex for those things I'm surprised that what you use for NAV of 8.25 sounds extremely conservative based on the cap rates in the market today.

That's exactly right, Craig. When you look at the cap rates in the markets find we use a cap rate on our overall portfolio, I mean, you're talking about $2 or $3 dollars more a share in NAV, at least. And I think that using an 8.25 is definitatly a very conservative number. That's when we sort of look at -- Steve mentioned a $36 to $37 dollar range, you know if you put a real -- the actual current market conditions today, you know that number is, you know, more likely $40 a share. And I think from that perspective though we didn't want to sort of get into an argument with the street given that there's a lot of, you know, folks out there that have capex -- or have NAVs anywhere from $35 to $38 dollars a share. So clearly it's conservative, and then I think there's another piece that's pretty interesting, too, because one of the things that inherent in the way that the street calculates NAV is that the street basically takes a current run rate and then adjusts for certain items. One of the things they don't adjust for is occupancy levels and economic occupancy because what's happening in the cap rates and the reason they're so low to a certain extent is that the market adjusts for occupancy levels being under what they expect them to be for the future so they trend the rents and add value to what they expect the market conditions to be in the next 12 to 18 months. So you're not just capping existing cash flow streams. You're capping future cash flow streams and that number we've done some analysis on that can be as high as $3 or $4 dollars a share as well. So I think the $37 dollar number that Steve threw out a conservative number and I would agree with you that 8.25 is conservative

Doesn't the low cap in the markets understand that people are underwriting the lower occupancy levels?

I think that's part of it. If you take the numbers that I threw out bout -- a little over 7.25 say on cash on cash yield, when you can put an 80% loan on a property at a 5.5% fixed rate and create 175 basis point positive spread on 80% of the --of the cost of the asset and then add that that to your equity turn of 1.25%, you have a cash on cash yield. So what's happening out there is that you have private investors that are using these incredibly low interest rates to leverage up and create great, you know, returns on equity. The question is, you know, we're at 40-year lows in interest rates, so, you know, is that an aberration in the market or a change in cap rates? That's one of the reasons we're conservative on the 8.25 because as rates rise, I think that private capital gain will be reduced and you'll have, you know, cap rates will have to rise, I would think. The other thing that's out there in the market today is that sellers are putting a lot of product on the market as opposed to, you know, four or five months ago. There was less product on the market and you're seeing a lot more product on the markets, so I think it's going to be more competitive going forward for sellers in this low interest rate environment because there's more product. Now, whether or not the private side and the capital side that's you know, the low cap rates today will just double down and triple down and buy more and more remains to be seen.

Craig, this is Steve. We kept the cap rate -- cap rate consistent for consistency purposes just comparability type consistency. But I think as we look forward, we will need to make some other adjustments as our concentration in California continues to grow. Lower cap rates in California blending in to some of the other markets that we have, I think it would justify some changes to that. But we haven't taken that posture just yet.

I guess given that --I know you talk about doing $120 million of sales at the end of the fourth quarter. Why would you not be necessarily more aggressive then in terms of dispositions as you look in '03, you have nothing being in there for dispositions. You know, when you can buy back your own stock at a significant discount, NAV, especially if you use real cap rates?

Well, I think the answer to that is we probably will. What we try to do for the guidance though is say is -- is give people a sort of a benchmark and say, here's the operating side of the equation and then to the extent that we can add value through selling, you know, 20-year-old assets and buying stock and creating an accretive transaction, it will just be better in the sense. It's really hard when you start going through permutations let's buy 50 in stock and buy some additional assets for diversification purposes and then pay down debt, what price do you put in? There's a lot of variables that go there and I just think it's hard to model that given where stock prices are. You never know when you'll be able to buy the stock either. At this point, I think we're more comfortable putting out numbers without those transactions and then saying, okay, if you want to, you know, model some in, you know, the range will change one way or the other depending on whether you think you can do it dilutive or accretive.

What's your expectations in terms of development? I notice that that's not in your assumptions for guidance. What's your assumptions for '03 starts?

Well, the projects we have in the pipeline total around 1500 apartment units, plus or minus, and we are watching the market very carefully. The -- at this point, I would hope that the -- that we see some improvement in the markets towards midyear, and then see some sort of visibility towards better market conditions in the future and then we would likely -- in if that, in fact, happens we would likely start a few projects in the third to fourth quarter of next year for '04, sort of '05 deliveries. We have -- we have LeeVista (ph) in Orlando. A second phase, Farmer's Market II in Dallas. We have a couple of Houston projects downtown. We have another California project in north San Diego county. So those projects, especially the Dallas and Orlando projects will just sort of watch the market and see how we feel about it. But at this point, unless market conditions, you know, improve and we can see some visability towards '04 and '05 I'm not going to start the projects just yet.

One last question, I promise. You guys have a good sampling of As very us is Bs throughout your various markets. Are you seeing any difference in the impact on As versus Bs more recently? Obviously the As got hit harder initially. Are you starting to see any trickle down effects on the Bs?

Craig, the thing that has been really interesting in the last two quarters in particular, the biggest single area that we have noticed a difference in the Bs versus As is that the As were getting hit much harder from the home sales, the percentage of residence. But I've got to tell you, we've got assets in some of the markets that historically you would not have expected any meaningful percentage of the people to be moving out directly into -- and purchasing a home and we've seen a significant increase. So I mean, in terms of the ability to backfill those residents, we have the same at sets in the B assets that we have been fighting in the A assets. I would say that's probably the biggest single swing in our portfolio in the last six to nine months.

Just to give you some other information anecdote ally. You know, we have sort --depending on the market conditions, too, because in Dallas, for example, in our A portfolio in Dallas is very challenged market, continuing job loss in Telecom and airlines. The A portfolio has declined 9.2% over -- for the year. In NOI. The B portfolio has declined 14.3%. So actually As have beat Bs in Dallas, primarily I think because of some of the locational aspects of the As versus the Bs. We have a fair amount of Bs that are around DFW (ph) and they have gotten hammered with layoffs from American airlines and other workers at the airport. Now in Houston, this is sort of an interest dichotomy ou have in Houston, the Bs are actually up 1.4% and the As are down like .2%. So the Bs are outperforming the As in Houston where you have better market conditions, and the Bs in Houston I think are less vulnerable to new development pressure because of the spread between the B asset and the A asset. So it really depends on market conditions in the area and where the properties are.

Right. Thank you.

Sure.

Your next question comes from Rod Petrik from Legg Mason.

Good morning, all. Hey, Keith, next year, 2003, what kind of increase are you budgeting for when you expense side and where are you feeling pressure and what can you control?

Rob, we're in the middle of our property by property budget reviews. We've got preliminary roll-ups, and in terms of total expense increase for next year, I think we'll still be able to come in at around the 2% level. I mean, controllable costs I think we are -- our plan is to be no more than about 1.4% on controllables. We still had significant issues with the non-controllables, and particularly the insurance. You know, even we had a huge increase last year and we're looking at a 28% increase again this year. We continue to have issues on taxes. We budgeted 3% -- 3.5% increases for '02. We've going to be slightly better from that, but from a planning standpoint we're looking at another 3% year next year. So you roll it in with 1.5% --1.5% on controllables and we will be around 2 which is less than where we're going to end up this year. And -- but sort of reflects the discipline that we need to have, given that we're going to have little or no net rental rate increases in our plan.

Rick, can you give us an update (inaudible) how you allocating your land costs to this development and how are you setting your rents now that you're beginning initial occupancy?

Are you talking specifically about the Oak Crest development or the overall land in the project?

Both.

Well, in the Oak Crest development from a pure accounting perspective, we allocate cost to the project --or to the Oak Crest based on what we think the market value of the land is. Okay well? So the market value of that land is around $10,000 per unit, plus or minus. So the asset on our books will have a cost associated with that land of like $10,000 a door. Now, overall if you take the holistically the overall project from an accounting perspective, what happens is as question sell off land that we don't --residual land we're not using, we take -- we have basically a relative sales value allocation that's required under accounting under GAAP to allocate cost to the specific tracts. So as we sell tracts, we recognize gains on those tracts and those gains flow through, you know, our income statement like normal gains do. Get excluded from FFO. So what in essence happens if you put it all together on the balance sheet, if you ultimately will -- as we sell off residual land, we'll end up with net zero value in about 70 acres. Now, on the balance sheet though you'll have land allocated to the actual developments that we do ourselves. So, you know, so you have overall zero value, but we have to for accounting purposes allocate land costs to that development. The rents are being set based on market conditions. Rents are set at $1.05 a square foot. The project actually opened a little bit early. It's getting good reviews in the marketplace. We have our traditional, you know, predevelopment or construction discounts that are going on which generally are two weeks free on a six-month lease and one month free on a 13-month lease. The product has been well received in the marketplace. Like I said they just opened this week but they have a list of -- a waiting list of people to get into first buildings and so forth, so we're looking forward to that. I think if your question is how we set rent, rents are again market condition rents. If you take the holistic view of the (inaudible) tract, this project will generate 150-200 basis points better yield than it -- than if we actually had to go out and buy the land, and, you know, contribute it to that property.

I'm looking where --you only had gain on sale of $3 million in the third quarter. Yet, you sold an acre and half.

Right.

But year to date, you know, it was like 287. What's coming from ore other land sales other than (inaudible).

Right. And what happen there is we allocate costs based on relative sales values. And so we in essence have -- we had a small gain on the sale of 1.4 acres because we allocated a lot of cost there and the key is you know, to be in accordance with GAAP and also tax accounting, you allocate your cost based on what you think the relative sales value of that property is. And, you know, obviously, it's better for us not to have gains than it is to have gains, because ultimately you have tax issues associated with those gains because the land we're selling in residual -- the residual land is sitting in a tax rate sub that has to pay tax. So we try to within the accounting rules and the tax rules make sure we don't have as many gains as we can.

How many acres do you have left to sell? Or that you will be selling?

About 50 acres, I think. Or 15 acres, I'm sorry. And the 15 acres are high value sites. The sites right as -- the entrance to royal oaks boulevard there's an eight acre site that's four or five million tract there and then corners various corners throughout the property.

Caller: Thanks.

Your next question comes from Jonathan Litt from Salomon Smith Barney.

Good morning. Jordan Sadler (ph) here with John. If you guys could just -- what was the total amount of concessions actually in the quarter? I know you said it was up $500,000, I think?

No -- yeah, $500,000.

It was up about half a million.

That's the total amount?

Total concessions were $5,195,000, and the concessions in the previous quarter were $4,549,000.

And just to touchback on capex real quick. $The 26 million dollars number, is that sort of a good run rate number long term, as a recurring sort of number for you guys?

Well, actually, it's something slightly less than the $26 million long term. But that's -- that's an okay number. I mean, obviously, we're going to be less next year, but it's a different set of conditions that we're managing to next year. But I think the per unit cost would probably be a better way to look at it at $567 a unit which works out to the $26 million dollars. That's probably a decent run rate per unit.

Also, when we sell these assets that are 22 years old the differential between buying assets or replacing assets that are either five years old, plus or minus, and we are -- and then if you buy stock, of course, don't have any capex and the capex -- average capex on the ones we're selling somewhere around $750 to $800 a door. So you end up with a $700 or 800,000 reduction assuming that we reinvest the capital into newer assets that have lower capex. Flip side is if you just buy stock, you end up with, you know $800 dollars on 1350 units which is $1 million. So the $26 million -- probably a good number minus the $122 million -- or the minus the sales that we're doing.

Okay. I guess just clarification on the categories you have. That you have laid out for us on page 18. Where would a bathroom refinishing be categorized? I assume kitchens would be in appliances?

Well, they would be broken down by their components. We don't keep track of it by, you know, whether we were working in the bathroom or the kitchen. We keep track of it whether we replace the floor, that would show up in floor coverings. If we had to do the interior paint that shows up in the R&M on painting. If you replace the fixtures, then that would show up in the mechanical electrical and plumbing lines.

Okay. also, with regard to '03, I know you guys -- I guess the assumption is zero acquisition disposition activity. Has your posture changed in terms of what you'll be doing next year less -- no selling or buying or is it just your basic guidance?

It's our baseline guidance. We will be buying and selling next year, and the key issue there is we're trying to do it on a flat basis or a slightly --if it's going to be slightly diluted fine. If it's slightly accretive fine. But we want to have a basically a balance sheet neutral sort of program, and we will take advantage of the opportunities out there. But we will try to do it on a non-dilutive basis.

Okay. In terms of the personnel that's devoted to buying and selling those assets, nothing has changed?

That's correct.

And then just with regard to expenses, I'm just wondering what were the expenses on the sequential basis that you guys were able to reduce or control.

Couple of areas that stand out were -- we had some significant utility cost savings in the quarter. The balance of it would be literally across the board on all unit turn types. We just, you know, just taking anything that was not directly related to a unit turn that was discretionary in nature and in any of these community budgets, there's always items that are nice to have, but not got to haves. We have eliminated all the nice to haves in the budget of the year. Our on-site staff understand that. They also understand that we will never compromise our commitment to customer service, and within the limits of those two competing objective that'll where we've been able to reduce the costs.

Okay. General belt tightening. And then just one last thing, back to concessions. Are you seeing more -- are you doing more concessions on a monthly rent lowering activity or more upfront sort of concessions?

We strongly prefer up-front concessions. Although I can tell you there are certain communities and certain sub-markets where literally the residents, if given the choice between up-front and spreading it out over the lease term they're insistent on spreading it over the lease term because they have to extend incomes that they're trying to manage to or it's a way of sort of self-imposing a cash flow discipline that they've got a month free upfront and the rate were higher. They just prefer to have a fixed known, constant rent payment. In that case, we are not going to lose the lease because we have to restructure the lease term to accommodate a residence, but having said that, it's not something that we push, advertise or prefer.

The other issue that I would point out is that we have lowered rates, because if you near a marketplace where you're just not competitive unless you're going to get three months free, we would rather adjust the rate to meet the market, and then get a slight concession as a result of that. So we have reduced rates in addition to concessions.

And even where we do spread a concession out, we would take, if it was a month and half free on 12-month lease and we would attempt to structure that as --allowing the concession over the first three to five months of the lease term. So that we get at the end of the day the resident gets up to what we consider to be street rents.

That's great. That's it for my questions.

Your next question comes from Lou Taylor from Deutsche Banc.

Caller: Thanks. Good morning, guys.

Hi, Lou.

In terms of your dispositions, how much will that change your geographic distribution?

The distribution -- the dispositions we're talking right now are primarily Houston and Corpus Christi. So it would lower Houston, the Houston concentration, if you look at overall the current same store distribution in Houston is about 18% of the -- of the portfolio cash flow, and I would expect that to be reduced, you know, probably by 2 or 3%. Percentage points down to 15, 14, 15.

Okay. How about just some of the markets, you know, like the Greensboro or Reno where you've only got maybe an asset or two? Any expectations on disposition in '03?

Our disposition are focused on where we think we can get the best value in the current market. So we're focused on trying to maximize the value in the current market through the dispositions. Overall, we think some of the smaller markets that are under pressure are not the best markets to sell in right now. And ultimately, we do have an objective of consolidating our markets and dealing with some of those issues, but it's going to be on sort of our time line and not necessarily because we want to do it, you know, tomorrow.

Okay. Keith, how about with regards to the occupancy improvement sequentially from tend of the second market, how much would you attribute that to just maybe normal seasonal pickups in a market like say Phoenix or Las Vegas?

Well if you look at our -- we always do see pickups in the third quarter in -- but it's the markets are actually better in Las Vegas and Phoenix in the fourth quarter on sequential basis. So I think we'll probably see some of the continued improvement there. But overall the pickup in occupancy just reflects our focus on outside marketing and making sure that we're not letting a live one get away. There are really two ways to do it. You either lower your turnover rate which obviously we were not able to do because of the continued pressure from the home sales, but the flip side is we were able to generate additional traffic throughout outside marketing and that's going to continue to be our focus. We have to go out and create traffic in the markets where there's clearly not enough to go around for everybody to hit their targeted occupancy levels and we just got to do more and do it more creatively to make sure that we get ours.

How much has your traffic changed from say last quarter or a year ago?

It was basically flat over the second -- second and third quarter last -- over this time last year, our traffic is still down 12 to 13%.

Okay. All right. And how about -- Rick, how about just property taxes and given the municipal short falls that appear to be pretty widespread for next year, are you starting to get more pressure either on valuations and mill rates?

Well, it's really a two-edged sword. There's obviously pressure on the municipalities, but the fact is there's pressure also on property values, and we are extremely aggressive. You know, we have in-house professionals that deal with our tax evaluations and protest. And obviously in these communications where we have suffered -- you look at our entire portfolio, we're down 4.8%, same store NOI and obviously at some level that matters to valuations and you just have to make sure that you plead your case and get it reflected in the valuations that they're putting on your property. Our budget next in ex-year, we budgeted 3.5% this year on tax increases. I think when it's all said and done, we're in the 2 3/4 to 3% range. We're budgeting 3% next year and we hope to do better than that.

Okay. How about just three markets in particular, Houston, and others. Versus the end of the third quarter, it looked like Phoenix and southern California -- I'm sorry, Houston and southern Cal were done, Houston is up. Did the comps change there or did the markets take a different turn in the last three to four months?

I think if you look at the sequential numbers, southern California, we had a blip in expenses in the quarter. Up 7.4%, but revenues were up 4%. So that decline really is a function of expenses in the quarter. Okay? Overall, year to date, you know, California is still up 4.8%, you know, expense growth of 3.2. A little higher than the portfolio on average, but probably manageable. On the Houston numbers, Houston did sort of flatten out in revenue growth sequentially. Expenses were actually lower in Houston, so I think the Houston market is not declining dramatically, but definitely sort of flattening out right now relative to the prior quarter. On Phoenix, the Phoenix market is -- you know, was actually pretty good sequentially as primarily occupancy.

We just had a 3.2% pickup in occupancy there, but I can tell you that was at the cost of much higher concessions.

I don't think Phoenix --Phoenix is not flattening. It's still a very, very challenged market.

And then in terms of the expenses in southern California, what were they and are they recurring?

Well, overall for the --overall for the year, it's up 3% so we're pretty happy with that. Overall, the quarter spike was you got that quart spike number? Or just a quarter.

Property taxes.

Yeah.

All right, great.

Property taxes were the issue there.

Thank you.

Your next question comes from Lee Schalop from the Banc of America.

Hi, guys. A couple questions. First on expenses, you had a nice performance in the third quarter with same store just up half a percent. How realistic is that? Were there expenses that have been pushed off? What should we look in the future in terms of that number?

I think you should look for another fourth quarter that looks a lot like the third quarter based on the guidance that we've given our on-site personnel and what they're able to deliver in the third quarter. You should not expect in the operating expenses -- we should not really expect to see any kind of a pay back as we look to our budgets next year. Certainly its not been anything that I've seen in the first round roll-ups of the property budgets, any kind of give-back at all. Because we're looking at a controllable cost increase on our first-round roll-ups of 1.5%.

You know, I think when you look at overall, the last -- you know, the last four or five years we've kept expenses anywhere from zero increase to a maximum of 3% increase. And a lot of years we have come in at 1, 2% and, you know, because of the diligence of our on-site people this year, we're not just spending any additional sort of -- you know, wish I could type of items. I mean, we're not cutting them so deep that we're going to cut into customer service issues or product quality issues or anything like that. We have a real vigilant staff out there that is doing a great job managing those expenses.

And insurance hasn't been a big problem in terms of this issue?

Well, insurance is a huge problem in terms of controlling overall costs. We included in our results this year is roughly a 48% increase for '02 and our budget next year we certainly hope to do better than this on our renewal, but our consultants and underwriters are telling us to expect about 28% again next year. So it -- I mean, yes, it continues to be a huge challenge in terms of keeping our overall costs that -- operating costs at levels that we can eke out some growth next year with flat revenues.

Even though insurance is up 50% or whatever it was last year it's only 3.9% of total operating costs. So it's not -- you know, it's a big issue and a -- and something we're constantly battling, but it's 3.9% of total operating expenses. So when you have a large increase, it translates, you know, into a much lower percentage of operating costs growth.

And shifting gears at the conference this week there was a lot of talk about new apartments coming on to the for sale department. A lot of people looking to sell product and the expectation that cap rates would rise. Could you share with us whether you agree with that or disagree with that?

I do agree with that. I think there's definitely a lot more product on the market than we saw six months ago. And the -- you know, the sellers are trying to capitalize on the window of opportunity with this -- with the low interest rates and low cap rates. I think that, you know if you have any pressure on interest rates going forward and with the supply of product out there, really you have to question whether cap rates can stay at these lows.

Just a quick question. Following up on that a bit, wondering about the sales program. Talking of the $125 million that you'll use to reduce debt and fund development. Would you think of being more aggressive with the repurchase and possibly selling more assets?

I think the answer to that is yes. I mean, we will continue to dry, if we can sell 22-year-old assets at 8% cap rates or less, and re-deploy that capital on a balance sheet neutral basis, through buying stock and paying down debt, we'll do that. I think we have a long history of doing that. And I think if you -- I think if you look at the numbers, we have probably been one of the most aggressive companies overall on a percentage basis of buying stock back when we think it's cheap. And you can count on that in the future.

Thanks very much.

Your next question comes from Richard Paola (ph) from ABP Investment.

I just want to focus on some balance sheet management issues I guess. One, in your forecast you're going to be -- was that retiring some debt on a line of credit and going out long term?

That's correct.

Caller: And is that more likely to be like an unsecured type of thing or is it going to be mortgage type debt?

It would be unsecured. Our commitment to the unsecured market is unwavering. We believe it gives us tremendous flexibility with respect to moving assets around on the balance sheet and we will continue to focus on the unsecured market. We may be -- we may do secured debt on joint ventures and things like that. But as far as our own balance sheet goes, we would definitely focus on unsecured debt.

How much of a pricing arbitrage right now on the secured side though? I think, you know from what I have been hearing, some of the Fanny and Freddie stuff is, you know, quite low. You know, why aren't you just considering using a little bit more of that? It looks like your encumbered asset pool is very low, compared to similarly rated companies on the unsecured rating.

Rich, from time to type, there's a differential between the two that's relatively large. But by the time you factor in all of the costs and the time and effort involved in putting the secured debt in place versus the unsecured debt, cost differential narrows significantly. Then when you factor in the financial flexibility of being able to sell assets, move assets around and do the things that you need to do to manage your portfolio, it -- over the long haul, we just think it makes more sense to continue to use the unsecured on our balance sheet.

That's fair. One other question. Do you have a preferred offering that's callable and, you know, what are your thoughts on that? I know that's one of the things that several other reads out there are looking at in the upcoming year, that there's, you know, possible savings on that side.

We had $100 million convertible preferred debt that we called in last year. Or might have been two years ago. So we've been there, done that and we don't have any other callable preferred or we'd be doing it.

Okay. Thank you.

Your next question comes from Chris Brown from the Banc of America.

Actually, that last question answered one of my questions, but I'll just take a second to commend you on your fixed income disclosure. I thought those description of your covenants were very helpful. Thank you though.

Thank you, and hopefully we were responsive to your comments.

Caller: Absolutely.

Great.

Your next question comes from Kevin O'Shea from UBS Warburg.

Actually, it's Stewart Sealy with Kevin here at UBS Warburg. You've already made a fair number of comments with respect to your sequential increase in same-store occupancy. You know, same-store NOI was up a little, occupancy was up a little, turnover is up a lot, concessions were up some. But in terms of where we are on margins, should we expect effectively a quarterly run rate in the same store pool of about $55.7 million quarterly for '03? Does that correspond to the high end of your guidance range?

Let me think about that for a minute.

If we look at your same-store pool the quarterly NOI was 55.7 and the two questions are, you know, number one, does that represent the annualized number for the high end of your guidance range, that is to say zero percent range or 223 and what NOI were you using for the same store pool for your NAV calculation? Was it about 223?

I think the answer is yes, that the run rate would be a zero run rate from there. That's correct. And I don't think that's the top end of the range that's sort of the middle end of the range. Middle to, you know, top third of the range. The -- as far as the NAV calculation, Steve's NAV calculation, use the current pool as well.

Yes. The only adjustments we really made were to adjust for seasonal operating expense variances.

In terms of the occupancy of 93% which is essentially flat on where you are today, is that flat through the end of '03 or are you going to expect the normal seasonal changes through '03?

We always have the seasonal fluctuations. Our portfolio is always highest occupied in the second and into the third quarter. We tend to be a little lower in first and the fourth. So we'll have those normal seasonal I mentioned earlier the differentiation between the third and the fourth quarter historically has been 0.7 of a percent higher in the third than in the fourth. I expect to see that again this year and next year.

Thank you.

Your next question comes from Rich Moore from McDonald Investment.

Good morning, guys. I just wanted to ask sort of a couple macro questions. When you look at the fact that the loss to single family homeownership seems to have improved, I mean, what do you think there? Is that -- prices in your markets for single family homes maybe reached the point where there's no longer interest or have we just got everybody into a house that's going to get into the house or is there a possibility of another wave of this? I mean, any feel for that?

You know, I mentioned earlier that I hoped that our sequential decline to 19.5% is the start of a better trend in that area. We're down from 21.2% year to date to 19.5. But I would be very cautious on that until I see another quarter in our portfolio where it continues to decline. I know anecdotal evidence in talking to our district managers and community level folks is that it's still continuing to be a pretty significant issue. The thing that's been most interesting as I mentioned earlier in the last six months has been our communities -- B communities that historically have been very -- a very small percentage of people that move out to buy homes, that seems to have increased markedly in the last six to nine months. At the higher end, it's remained about the same. So I -- you know, I think it depends probably more on what happens with interest rates in the next six to nine months than anything else. I have been quietly hoping and speculating that for the last three quarters that everybody in the world who ever imagined they would dream of owning a home by now owns one, but clearly that's not happened.

I think the other interesting thing, I mean, we talk of home sales because we clearly have a lot of people that people that move out the buy homes, but on a marginal basis, it's increased some, but not like 50 or 60 or 70%. The real problem that we have in this industry today is a lack of demand. And the lack of demand stems from the lack of confidence in the economy that in the fact that we have had a jobless recovery at this point. And in a jobless recovery, what you have is you have people doubled up in apartments that have roommates that they don't want to have but have to have because of economic conditions or they moved home to their parent's homes and they don't want to really live there, but until they have some job stability or new job or whatever they're not going to get back into the market. So ultimately we need demand to fix the economic situation we have today, not necessarily people stopping, you know, moving out to buy homes, even though I guess if you talked about say a double dip recession where you really have a situation where with uncertainty in the world, with the war situation and that sort of thing if you had a real lack of consumer confidence, that -- that made consumers act the way they do in normal recessions which is they don't buy homes, then, you know, that could help us on. On the other hand, I don't think in the economy you don't want to see that kind of scenario. I think we want to see an increase in jobs and an increase demand which would then offset the revolving back door for people buying homes.

One thing there I think will be interesting to keep our eyes on over the next six to nine months, very recently, there was a pretty good spike in home foreclosures, and, you know, tightening credit results from that. But I think if you continue to see foreclosures, certainly our experience in Houston in 1980s tell us that when people get foreclosed on their home and throw the keys back to the lender they rent apartments.

Great, thanks. You know, looking at the other side, you know it's certainly in your major markets. I mean, there's some new supply coming on line. What are your thoughts on say Houston, Vegas, Dallas, those markets, as far as supply in sub-markets? Are you seeing it as a threat?

Well, if you look at our entire portfolio for completion this year, for 2002, we're going to see about 60,000 new units added in the aggregate. That number is down from about 70,000 for 2001 and across all those markets. So in terms of supply, you know that doesn't strike me as great relief from the supply. It does vary a little bit market to market. Certainly we have had better experience here in Houston relative to the market size. We have completions this year of roughly 4700 units which is about flat with where it was last year. With this market size, that's manageable. In Las Vegas, we're projecting about 5300 units to be completed this year, but interestingly enough Las Vegas is the highest market in our portfolio with regard to job growth in '02. 15,300 new jobs have been created there. So really the 5,000 units in Las Vegas has been more manageable than most people would have expected it to be. But I think just broad brush and if larger view is if you look at completions that are out there in 2002 and then permits that are being pulled in 2002, if all that stuff gets completed, I just don't see any near term relief on the supply-side of the equation.

You mentioned Phoenix too. Phoenix which is probably one of the most difficult markets out there with very large concessions, you know, we have 5600 completions this year and 7500 permits. I just can't imagine the, you know, the mind set of people starting projects. You know, what's driving it obviously is the future expectation that the market's going to turn around in the next 18 months and then with low interest rates you lower your hurdle in terms of break even point dramatically with low interest rates. So it definitely -- Phoenix definitely will continue to be under pressure dramatically. Las Vegas and Houston are both manageable, I think.

Last thing for me, is when you look at the for sale situation like you have at Farmer's Market, you know, the Town Homes in the Farmer's Market, what's your thinking there in terms of building more of those at this point? Since there's interest in for sale housing.

Right. Well, the first phase that we built from a marketing perspective, or merchandising perspective, we probably missed the market on price point. We built a range of price points between $250,000 and $350,000, and the $250,000s to $275,000s just sold out immediately, people waiting in line to buy them. In the 350s, they sort of languished. We have an additional phase of the Town Homes and we've basically gone through and retooled that program to be able to provide $275,000 dollar average units which is pretty much in Dallas and Houston the market is very -- still, you know, doing pretty well for product under 250. When we think the market makes sense, we will build out the Town Houses in Dallas but at a lower price point.

Thanks very much.

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

We appreciate you being on the call today, and we will look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's Camden Property Trust, third quarter 2002 earnings conference call. We hope that you have a great day and you may now disconnect --- 0