Camden Property Trust (CPT) 2003 Q1 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference facilitator today. At this time I would like to welcome everyone to the Camden Property Trust first quarter 2003 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 that time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad. Thank you. Mr. Campo you may begin your conference.

Thank you. And good morning. I would like to remind everyone that we will be looking forward-looking statements based on our current beliefs and expectations. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results from materially from expectations. Further information about these risks can be found in our filings with the SEC. We encourage you to review them.

FFO for the quarter was 75 cents per share, which was down 16.7% from the first quarter of 2002. These dismal quarter over quarter results reflects the continuing difficult market conditions that the multifamily industry is experiencing. Our on site teams are focused and motivated to outperform our competitors in spite of market conditions. Aggressive outreach marketing has been implemented in all regions and is beginning to deliver positive initial results. Our 20-45 marketing campaign reinforces the benefits of increasing property traffic through cold calling local trade areas and improving closing techniques through focused direct and web-based training.

Same property NOI declined 8.8% for the quarter and was down 5% roughly for the fourth quarter. Revenue declined 3.6% for the quarter, expenses up 5.7% for the quarter. We expect expenses to increase 2.5 to 3% for the year. Houston, Dallas, Austin, St. Louis Tampa, Charlotte, all had declines in double digits. Southern California, Las Vegas, Orlando and Phoenix ranged from flat to slightly down. Leasing began during the quarter at Camden Harbor View in Long Beach and Camden Tuscany in San Diego. You'll note on the supplement that we increased the project cost to complete Camden Harbor View to $137.5 million, an increase from the last report of $10.5 million. Upgrades that we decided to make to enhance the rental value of the project. For example, we upgraded the two nine-story buildings to condo quality finishes including granite countertops, upgraded cabinets, carpeting and marble bath vanities in the baths. After conducting numerous focus groups and merchandising pricing research we believe that the rents and potential for condo conversion in the future makes this decision a good, solid economic decision. The other additional costs are result of final buyout of a complex construction job general condition cost.

We have leased 50 apartments at cam den harbor view to date at rents of $2.02 per square foot which are 7 cents higher than original pro forma. We are projecting stabilized yields in the 8% to 8.5% range which is essentially our original analysis on the project. Leasing continues to be strong at our three other Southern California projects. 80% of our lease-up properties are in Southern California so we are fortunate to be in one of the strongest markets in the country leasing our development projects. Camden Oak Crest in Houston, is 48% leased this quarter compared to 21% leased last quarter. The lease-up properties represent an opportunity to increase cash flow and bring earning assets into the company at attractive returns at the at a time when same store gains are so difficult to come by.

We have updated our guidance for the second quarter and the year. FFO for the second quarter should be in the range of 73 to 75 cents per share. For the year, we are narrowing and lowering the earnings range to $3.10 per share to $3.20 per share. With a bias towards the low end of the range. We expect same-store NOI to decline in the range of 4% to 6% for the year, with a 6% NOI decline at the lower end of the range. We have yet to see a meaningful turn in most of our markets. While traffic is up, and some of our markets -- in some of our markets, we are going into the traditionally stronger leasing season, we don't expect any meaningful turn around until job growth accelerates.

We are focused on running our business in a manor that will ensure the maximum upside when the market does improve. This point I'd like to turn the conversation over to Keith Oden.

Thanks Rick. I'd like to do two things this morning to provide some context for our first quarter operating results. First I'll provide an overview of the current operating environments for our largest markets, and an outlook through year end, and second I'll provide you with some additional color on Camden's operating results for quarter.

Please note that the perspective on market conditions I'll be providing is somewhat unique to Camden's portfolio since it represents a bottom outlook from our community and district managers and regional vice presidents. Their views which are certainly influenced by the broader trends in each market are primarily driven by individual sub-markets and property specific trends. Our take on these markets is based on a review of our operations to date relative to plan and our assessment of future conditions is primarily based on our analysis of supply and demand factors through year-end. As I've previously done the ratings scale I will use for describing the current market conditions will be a letter grade from A to F and our outlook for market conditions through year-end will be indicated as improving, stable, or declining.

Starting out west, San Diego, current conditions, we rate an A. With an outlook that is stable. 12,000 new jobs this year will be sufficient to absorb 2,700 completions to maintain a healthy multifamily sector and allow us to continue with good results in our lease-up communities. Orange County current conditions A, with an outlook that is declining albeit from very healthy levels. 95% occupancy rate will be pressured by 5300 units being completed and modest employment growth. Concessions will inevitably rise, as management companies fight to maintain the high occupancy rates, which they have grown, accustom.

Phoenix, current conditions, B minus, outlook that is stable. The best ratio of employment growth to new supply in five years will provide support for current conditions. Nevada, current conditions B with an outlook that is stable. A rebound in job growth to 28,000 will maintain stable occupancy rates as completions are estimated at only 5,300 units for 2003. Concessions should moderate somewhat leading to a slight pickup in NOI by year end.

Colorado, current conditions C, with an outlook that is declining. 88% market wide occupancy rates, may get slightly worse as Denver experiences further job losses while adding an additional 5,000 new units to the existing oversupplied conditions. Houston, current conditions B minus with an outlook that is declining. 8,600 new apartment units and record single-family home sales overwhelm a moderate employment growth of 14,000. Concessions will continue to increase as communities fight for market share. Dallas current conditions C minus. With an outlook that is stable. Market wide occupancy rates of 90%, only 5,000 new jobs and a supply picture similar to Houston's make any near-term improvement improbable. We hope we've seen the worst on the employment situation in Dallas. Austin current conditions D, with an outlook stable, 88% market wide occupancy rate has led to concessions of two to three months free rent on a 12-month rent. The worse is probably over but 7800 new jobs in 2003 is not enough to make any meaningful improvement this year.

Tampa, current conditions B, with an outlook that is stable. 11,000 new jobs plus net inflow at McDill (ph) Air Force base is sufficient 4,000 units maintaining the status quo. Orlando current conditions B minus, with an outlook that is stable. A 91% occupancy rate is market wide is unlikely to improve by year end with 8,000 new jobs, more than off set by 6,400 new apartments. North Carolina, current conditions, C with an outlook that is improving. The best job growth in four years with minimal new completions provides an opportunity to increase the 87% market wide occupancy rate. St. Louis current conditions B minus with an outlook that is stable. Little reason for optimism in St. Louis as employment declines which 7,000, and 2,700 new units are completed. 92% market wide occupancy rate may provide an opportunity for upside in Camden's portfolio.

With all this in mind I'd like to provide you with additional details on how the current and projected market conditions affected our first quarter results and our outlook for the balance of the year. Taken as a whole our market condition assessments support our view stated last quarter that any sustainable improvement in our same store results are still several quarters away. Our average occupancy rate for the quarter fell to 91.4% from 92% in the prior quarter and down .3%. At the same time, our same concession rose from an annualized $479 per unit to approximately $600 per unit over the prior quarter.

The decline in occupancy and increase in concessions led to a further decline in economic occupancy to 83.5%, which is the lowest level in our ten years as a public company. This compares to 86.9% in the prior quarter, 87.1% in the prior year. Our resident turnover rate dropped to 51.9% versus the prior quarter of 55%, and 53.8% in the prior year quarter, and the percentage of move-outs to buy homes increased again to 20.5% representing a 1% increase over the prior quarter.

We are continuing to seek the proper balance among rental rates concessions and occupancy levels at each of our communities. Obviously we've had to rely on heavier concessions than we anticipated in response to market conditions. We are constantly fine-tuning our pricing on a unit by unit basis as opposed to offering across the board concession to maximize our revenues.

Rick mentioned our 20-45 initiative emphasizing aggressive outreach marketing which is beginning to show positive results. Our traffic increased 13.2% over the fourth quarter of 2002 and was down by only 4% when compared to the first quarter of 2002, which is the smallest decrease over the prior year quarter than we've seen in over a year. Our portfolio wide occupancy rate is currently at 92.4% the highest weekly average since November of 2002, with six markets and 64 communities reporting 95% occupancy or higher for the week.

We also had 14 triple crown winners for the week meaning that those 14 communities met our minimum criteria for traffic, closing percentage, and occupancy, pursuant to our 20-45 initiative. We appreciate the diligence and commitment of our onsite staff in achieving these positive results. At this time I would like to turn the call over to Steven Dawson our Chief Financial Officer.

Thanks Keith. Good morning to you all thank you for joining us. I suppose I could do my impersonation of Baghdad Bob and tell you that everything is fine. There are no concessions, in our markets, we are posting no vacancy signs, back to our apartments has begun. Clearly that is not the case. We have always told it to you like it is and we will continue to tell you like it really is like it or not.

As you've heard already there is not a lot to cheer about in the apartment fundamentals and those are impacting our operating results. The good news is that we have been preparing for this part of the cycle for a long time and as a result our balance sheet is still healthy and flexible and our cash flow is still positive. Even after capital expenditures we still cover the dividend out of operating cash flow.

First let's look at that time income statement. Revenues are flat to the first quarter of last year and down sequentially from the fourth quarter, due to a decline in same-property revenues, and fewer units in operations following the fourth quarter property sales. These were offset by increases from development lease-ups. Other income declined primarily due to lower interest income from fewer dollars invested in notes receivable. Sequentially property operating and maintenance expenses rose 2.8% and property tax expense went up another 10.3% from the fourth quarter. Both less than budgeted. The increase in property operating was comprised of maintenance expense increases on same-property communities, and additional expenses from developments in lease up. The sequential tax increase is due largely to credits received in the fourth quarter, combined with anticipated increases in rates and values on both existing and new development communities.

G&A expense increased $526,000 over the first quarter of last year but declined sequentially from the fourth quarter by $638,000 to $3.6 million due to one-time charges and write-offs in the fourth quarter. G&A is budgeted to run around $3.9 million per quarter for the year.

The gain on sale of $1.4 million during the quarter arose from the sale of two parcels at Royal Oaks, in Houston Texas. There are three non-apartment tracts remaining in inventory. One of those is under contract to close in the second quarter. The other two, which should sell during the next year, have a value of approximately $3.7 million. Cost on the books reflects $2.1 million allocated to Camden Oak Crest and $8.5 million for the remaining 52.5 acres of future apartment sites or $10.6 million for the whole 70 acres of apartment land.

Now, upon the sale of the remaining non-apartment tracks, total gains on all land sold will exceed the cost of the remaining apartment land, by around $2 million, including all carry costs and infrastructure. We expect to achieve a yield of around 11.5% on the 364-unit Camden Oak Crest apartments excluding the land. Assuming the development of another 1400 apartment homes on the remaining 52.5 acres at a cost roughly equivalent to that of Oak Crest, an additional investment of $94 million at a similar yield would produce net operating income of close to $11 million. After debt service that would equate to around 11 cents per share of FFO. Equity and income of joint ventures includes income of $2.6 million from the operation and sale of a joint venture asset, Park Catalina, in the LA area. Camden was purely an equity investor in this project and earned a 16% internal rate of return on its investment.

EBITDA for the first quarter was 2.9 times interest expense and 2.3 times total interest, including interest capitalized to development. The fixed charge coverage ratio was 2.3 times for the quarter. All of these metrics should improve by year end and into next year as we complete and stabilize the assets on the development pipeline shown on page 12 of your supplement, even without a meaningful recovery in the apartment market. While these numbers are weaker we do not anticipate further deterioration or meaningful deterioration from this level. Our leverage levels and coverage ratios continue to be well within the range of a mid triple B credit and we continue to satisfy all of our debt covenants again even without a meaningful recovery we expect to meet all debt covenants.

We made no second lien investments during the quarter but we are finding more opportunities in this business now and expect to add a few more investments in the coming quarters. The board has authorized as much as 100 million of these investments though it may be difficult to complete more than 25 million this year. However, we are very encouraged that the program is beginning to build momentum.

These investments are underwritten very conservatively and expected to achieving a minimum return of 12% on dollars invested. 14% of Camden's outstanding debt is floating rate at an average of 2.2%. Interestingly the line of credit costs less than tax exempt floaters today due to the fix costs associated with tax-exempt bonds. The total weighted average borrowing rate is 6.2% and almost 83% of the debt is unsecured. 84% of assets as cost are fully unencumbered and we have only $63 million of debt maturing in 2003, and $230 million in '04. For a total of $100 million of 8.5% operating partnership preferred units which become redeemable in February of next year. The remaining $53 million at 8.25 can be redeemed at various points in the second half of 2004. So most of the debt maturing over the next four years is at rates hire than rates currently available on new debt and we will be looking to lower our cost of capital as these opportunities materialize.

Our FFO expectation as Rick said is $3.10 to $3.20 per share for the full year and this assumes that second quarter is flat, slightly down relative to the first quarter with virtually all of the remaining increase coming from development lease up and other income. The FFO payout ratio for the first quarter was 85% and assuming the bottom end of the range at $3.10 the FFO payout ratio should be 82% for the full year. Subtracting budgeted CAPEX of 51 cents per share, or 22 million, Camden should have 5 cents per share of free cash flow, even at the low end of the range. The important thing to note here in addition to the fact that it is a positive number is that we are including all property CAPEX in our 51 cents per share. For details, see page 16 of your supplement. We give you the components of amounts, capitalized and expensed, together with the weighted average useful lives of those items capitalized. We are not using, all CAPEX. Our payout ratio using FFO or funds available for distribution is still less than 100%.

In summary our balance sheet is flexible. Our cash flow even at its lowest estimated levels is positive and we have a development pipeline nearing completion in one of the best markets in the country. Yes, we face a difficult economy and the storm troopers are clearly among us but we have faith in the business cycle and hope for better times. The hardest part of hope is always the waiting, but we are not waiting for the economy to recover and we are not reacting with a short-term view either. Our vision, mission and strategies remain as always, we are adapting our tactics to fit the battle, and our troops continue to do a good job providing excellence everywhere you look. We are convinced that Camden is well positioned to capitalize early when the recovery begins. In the meantime we patiently and diligently attend to the business at hand. At this time I will return the call to Rick and we will open it up for questions.

Thank you. Go ahead and take questions now, Kimberly.

At this time I would like to remind everyone, please press star and number 1 on your telephone keypad to ask a question. We'll pause to compile the Q&A roster.

Your first question comes from Craig Leupold with Green Street Advisors.

Rick, I'm trying to reconcile. It looks like you've brought down your guidance for same store NOI by basis points from the fourth quarter which would equate to 20 some-odd cents a share. Yet your guidance range is only coming down by 5 cents a share. What makes up the difference there?

The difference is made up in a couple areas. One is, in our original -- original guidance, we had interest costs going up throughout the year. So we save money on the interest side of the equation. The second piece is that the development pipeline is adding a few more cents per share as well. So it's primarily the -- I think we had talked on the fourth quarter call when we gave original guidance that we had conservative expense numbers, conservative interest numbers and development numbers and we were able to offset the decline in NOI guidance by tightening up some of those other assumptions.

Okay. Also, if I just kind of looking at your guidance for the second quarter, you know, given what you did in the first quarter, it looks like, you know, you'd be at a pace or you do $1.50 or little less than that. Obviously it looks like you're all for a pretty strong recovery or something to happen in the second quarter to get you to your range. Is it -- is it a sequential growth in NOI or is there something else related to developments or something else that helps get through?

It's a combination of three major areas. First is development. Development in the second half will add seven to 10 cents a share to FFO to the bottom line. That's number one. Number two is, that in the second half if you -- if you've watched sequentially what happens to our operating expenses, assuming, you know, no rent -- no revenue line increases, expenses tend to peak in the summer and then fall in the winter. For example, last year, if you look at our same-store expenses, they were down $3.8 million from the third quarter to the fourth quarter, which is 9 cents a share.

Now, we aren't counting on the full 9 cents this year but we're definitely counting on a sequential drop in operating expenses. That's just natural because especially when you look at the lion's share of our portfolio are in southern markets that tend to be where you do most of your outside sort of repair and maintenance work, you have higher air conditioning cost and air conditioning repairs in Houston, Dallas, Las Vegas, Phoenix so you have a precipitous drop in the fourth quarter generally because it is cooler and you're not dealing with those issues. We have built into our model some modest increases in revenues as a result of our outreach marketing programs but not significant. Really the lion's share of our pickup in the second half on a run rate basis relates to development and then the natural reduction of operating costs in the second half compared to the first half.

Okay. And you talked about the sequential expense decline going from the third to fourth quarter. Is there much of a pickup from the first quarter going into the second and third quarter?

There's some pickup but you know, the numbers that we have, we're not expecting -- what we've done is we've offset some of that pickup with the slow down in the second half or the reduction in the second half. They do go up somewhat between the second and third quarter. And we are projecting some additional occupancy increases and I'll let Keith sort of talk about that.

Craig, the other piece, our guidance we gave an average occupancy of 93%, and obviously we ran 91.5%. We are at 92% currently so we are expecting a pickup in occupancy of roughly 1% on the $400 million run rate of revenues, which gets you another 10 cents a share. But we think that is doable in light of the fact that we are currently operating at 92.4%. Obviously if we were currently at 95% or 96% there wouldn't be any room for occupancy gains. We're not projecting any growth in rental revenues. We're projecting basically the same level of concessions that we're currently experiencing. But it's -- we don't think it's a stretch to believe that we'll get a net 1% additional increase in occupancy that doesn't get eroded by concessions or further rental rate reductions.

Okay. And one last question. You guys obviously have no acquisitions or dispositions built into your guidance at this point. Can you comment on that? I mean from a strategic standpoint, you know, a few years back you were talking about kind of being a little more aggressive in reallocating your portfolio out of Texas. Is this a reflection of current market cap rates, or your apprehension to experience dilution in doing that? Can you talk a little bit about kind of cap rates and values and strategy?

Sure. I think there are two things. One is, we definitely are very dilution, anti-dilution focused. Okay. We -- given where our cash flow is today, and dividend coverage levels, we don't believe that it makes a lot of sense to do real dilutive transactions. Second issue is that while cap rates are low, so is cash flow. And we believe that cash flow, for example in Dallas as a good example, that you can sell properties in Dallas at very low cap rates. But the cash flow on those properties are very low as well. So what investors are doing is, they may be paying a low cap rate but they're anticipating a run up in the cash flow in order to adjust the low cap rates that they're buying these markets. While it may be a great sellers market from a cap rate perspective, it is not a great sellers market from a cash flow perspective because the investors are underwriting the cash flows and much lower amounts than they were previously. And if you expect any kind of turn around in the next 18 months, those cash flows ought to be going up.

Now if cap rates go up, you know, perhaps the cap rates increase versus the cash flow increase will offset, you know, value, you know value lost if you will. But I think fundamentally we still are committed to reallocating capital, and we are long-term committed to it. You have seen us over the last ten years as a public company allocate a lot of capital and you know we started out at 73% in Houston and we're now 14%. We will do it but we'll do it sort of on our pace, and on the least amount of dilution possible.

And Craig, just to follow on, the capital that we are deploying right now, via our development pipeline, is consistent with our diversification strategy, since the preponderance of it is in California.

Okay, thank you.

Our next question comes from Andrew Rosivach.

Good morning, guys. I'm going to keep plugging away on the second half numbers and getting meticulous. Ebor and vineyards are they off the capped interest clock?

Yes.

They only kicked off 700 grand in the first quarter. What do you think they can do on a combined bases in the third?

I don't have those numbers in front of me. We'll probably have to go -- let's see here, may I do.

The good news is at this point that's like a 4 yield. That seems like a lot of room for pickup there.

We had lot of adjustments there in the first quarter that won't happen in the second and third quarter. It looks like the pickup could be at least a couple of cents. The 7 to 10 cents that I've talked about here coming in we're going to get probably 3 to 4 cents from those properties.

Okay. Next, for the properties that are in lease up, what do you think the yields -- I'm guessing that they are -- there is pretty much capped interest at this point. What's the yield spread over your cost to debt as you deliver this stuff?

Our yield spread over cost of debt? Well, our average cost of des is about 6.2% plus or minus. And our yield on the California properties is somewhere in the 8%, 8.25% or 8.5% range. So we're talking about 200 basis points at least. And then for Oak Crest in Houston we're projecting much better yield in the spread. Oak Crest in Houston is more like probably 400 basis point.

By the way how did you get such a high yield in Oak Crest, is that because it is an initial phase?

Steven talked about that in his initial comments. In the Andrew (ph) airport tracks where we have very little land basis. And when you -- because of the accounting treatment of how you have to deal with the gains on sale from a non-core land parcels, the -- while we still do have a basis in the -- or land basis on our balance sheet and land basis allocated to the property, when you net all the gains that we've taken of course which, A are not included in FFO and no one really looks at very much, they are sort of interesting you take them away and throw them away.

You don't put them in FFO.

No we do not.

Not necessarily the case for everyone.

That's true. If you take the base we have on our books now less the gains we've taken and also the additional land that we have under contract and will be sold in the next few quarters, we in essence have a zero basis or a $2 million profit in the land, and we ended up -- end up having land for 1,700 units which includes Oak Crest. So what happens then is that the land component if you have zero cost for land in a development pro forma, it's roughly a 200 basis point to 300 basis point lift in yield without land.

Now, the Oak Crest happens to have hit the market at the right time. Where construction costs were down. We saved $400,000 or $500,000 on the cost in that project at a lower land basis so we're able to get a very nice yield on the project. And that was the whole point of the Andrew (ph) airport purchase and the subsequent sale of the retail tracks was to get better yields. And we have you know 1,400 additional units that will come on stream over the next, you know, five or six years that will produce really good returns.

Got you. And then just to continue on the second half of '03, do you have a target for the quantity and yield of mezzanine that you may do for this year?

Well, we would like to do at least $25 million through the end of the year which means we do another $20 million or another 15m to $20m. We'd have sort of a sliding pricing scale, where anywhere from $14m on the low end to $18m on the high end in terms of yields on that paper. And what we're trying to accomplish is, we're trying to find a space in the market where we can play and given the current acquisition market with low cap rates. So what's happening out there is that cap rates are so low that we just don't see attractive acquisition opportunities. And sellers are -- and developers are really not being squeezed financially. They don't have to sell their properties, or -- but they do have to refinance their property.

So what we're doing is, we're underwriting these mezzanine loans, if you will, as if we were buying the properties at the total of the first mortgage plus our Mez, and then there's an equity layer on top of that and the 14% rates are coming in the 10% equity range, 10 to 12%. The higher leveraged deals are at the higher end of the scale. But from our perspective if we end up owning the property we're happy to own it at those prices and we are in essence getting an acquisition at a discounted price today if we end up owning the properties through Mez. We think we'll get nice high yields during the recovery period in the cycle and then get paid off three to five years out.

Got you. And then, and last, for the debt that you do at the end of the year as well as the remaining construction cost, does that all get done on your line or does some of it need to be termed out?

Right now it gets done own on our line. Our line is at a low level, we are on $127 million on a $500 million line. We will+ opportunistically tap the bond market. We did $200 million in the fourth quarter. And in terms -- in ten years, we fundamentally believe that you should match your balance sheet with your assets. So we have long term assets, we need long-term capital structure. So we will judiciously use the line and then tap the capital markets as we see opportunities there.

Steven mentioned that we have a number of opportunities coming up next year, and at the end of this year, to lower the cost of capital. We have debt out there that's maturing at higher rates than the current markets. We'll do balance sheet additions that will be additive to '04 at this point. We are not planning to get in the bond market any time soon because we don't really need the capital.

After all that if you flat lined revenues rather than showing an increase do you make the bottom of your range still beyond that?

We make the bottom of the range because we have operating development, mezzanine transactions with the income.

Okay. And I'm sorry, the complete non sequitur. You have $130 million of land on your balance sheet, the stuff that you're developing right now is getting close to the end. You didn't mention starts. I don't think too much in starts in your commentary. How much do you plan to do and kind of how much do you have to do before you run into interest capitalization and overhead capitalization issues?

The -- when you look at the land holdings we have right now, the $128 million plus or minus, two properties are large pieces there. University Commons is roughly $20 million of that number. West Wind, crossing is $20 million. So $40 million of the total number relate to two properties. One is the University Commons is San Diego, north county San Diego by Aviary country club. We are going to start that this year. The West Went crossings is Washington, D.C. Northern Virginia deal. That will probably be started by the end of the year. We have a number of other land parcels in there that we're focusing on and considering. We may do some joint ventures to get some of those properties started. The -- by and large, we don't have any real pressure on starting these. But -- because we are in the active development process.

But the question is, you know, when do we see the inflection point and can we project reasonably out into 2005 and 2006. Because when you start talking about starting developments, by the end of this year you're talking about market -- delivering in marketing conditions in 2005 and 2006. And given we're sort of waiting to see what happens to the, you know, second and third quarter before we start say a Dallas project or something like that. But we're definitely in the process of working on all these deals. Now, at the end of the day, if we believe that the market is, you know, not suitable, we'll sell the land or do something like that, you know. That's what you have to do. And I think the bottom line is, through -- there's a lot of interest in doing joint ventures.

There's still interestingly enough a lot of capital out there doing development. We have been conservative in our starts, for obvious reasons. But we have -- we have the ability to continue to operate as a merchant builder or a joint venture partner in a lot of these tracks that we have and we are studying those issues at this point.

Terrific. Let me yield the floor. Thanks so much.

Your next question comes from Jonathan Litt with Smith Barney.

Jordan Sadler with John. Some of the things that changed in between the fourth quarter call and today, I know your same store NOI is expected to decline from 4 to 6% or so. I think your previous expectations were 2%. Was it increased, single-family home move outs increased. Maybe talk about you know you said you don't anticipate further deterioration beyond these levels. Can you talk about how maybe it's changed in April, what you expect for turnover, and what you're seeing in traffic today, occupancies.

Yeah, let me deal with that one first. I mean, we clearly -- as I've mentioned in my comments, we're at 92.4% occupied currently in our portfolio, that's this week's number. It's the highest occupancy, physical occupancy that we've seen since last November. Now, you know, that doesn't mean that we're ready to make a call that our portfolio if you look at it in total has seen the bottom or an inflection point. But it does reflect the fact that from a 91.4% occupancy level in the first quarter, we expect to be able to get occupancy gains, even in the current environment, even if concessions continue at the current level, which we have basically assumed that they will, and we have not assumed any incremental rental increases.

So our situation is a little different than some of our competitors in the sense that if we were already operating at a 95% physical occupied level, looking out for the next three quarters, obviously, we wouldn't -- I would say it's clear that we wouldn't be projecting any revenue improvement because you have to be, if you're 95%, you have to either be believing that your occupancy is going up from that level, which is a very difficult task, just in terms of the frictional turnover in these portfolios, or you have to are assuming revenue growth or concession to decrease. And in our case, we can assume and have assumed that revenues are basically, or rental rates are flat, concessions remain at these high levels. But we do get a pickup in occupancy.

So that's the primary difference between, you know, where we are today and what we're looking at as a run rate for the third and fourth quarter. And again it's a little different experience than other people might have in the sense that if you're at 95%, running at high 95% occupancy in this environment, I don't see where the growth would come from.

I think the other point I would make is we tightened the range and midpoint of the range is 315, which was the bottom of the range last time for us. Most of the street had us at 312 plus or minus or below that. The, you know, so we sort of felt like we weren't changing the range that much but we were sort of hedging a couple of markets.

And the markets that we were hedging was the biggest market is Houston. Houston was one of the strongest markets in the country last year, and the year before, and you had a situation where developers were looking around the country trying to find the right place to be, to continue to build. And Houston starts basically have doubled in the last year and the market has gotten hammered with occupancy issues, and we, even though we're here and we see it every single take, the -- you know, I think Houston's going to be tougher that than we had anticipated you know in the fourth quarter because of all the starts. We had 1,000 starts in the first quarter. So we're sort of hedging Houston. But fundamentally, we just felt that there's risk in the Houston numbers, there are risks in just overall getting to that minus 2% based on the experience we had in the first quarter.

And you know, the problem that you have right now in this whole market is that there's just no good visibility. It's hard to plan, when you -- when you're -- when there's just no real clear signs, either economically, job growth, you know, you had the obviously the Iraqi war situation, had everyone sort of watching TV and not out in the marketplace, either shopping for apartments or retail goods and what have you. So we took this opportunity to be a little more conservative. We probably should have been more conservative in the fourth quarter and weren't. But we are here today.

And in terms of the -- your new marketing program, your stepped-up marketing program, what are the expected costs associate Wednesday that?

Actually the costs of the outreach marketing are incremental cost are pretty minimal to support that. You're talking about collateral materials that we've prepared and put in people's hands to be able to go and do the outreach marketing. But it's basically a reallocation of the time of the on-site staff with the traffic being less than it has been in the past. We have available hours and staff time to go out and do that. So there's really -- the incremental cost are very minor.

We make sure you understand what this 20-45 program is about. It's really about getting our onsite people out of their office. Rather than having people wait for traffic to be generated through the Internet or through the print media or what have you, they're actually getting out and focusing on cold-calling, four to five, ten cold-calls per week to the trade area. You know, people in apartments generally don't cold-call. And we had a big seminar on how to do it, and what you ought to do, and so forth. And we actually had a day where about, I think it was 40 of our senior regional managers, including our senior corporate teams, actually went out and cold-called companies, including Keith and I and Steven Dawson and all of our senior management paired up with other regional people and cold-called companies. You walk into a company and don't know anybody and you talk about apartments.

And the amazing thing is, we got a bunch of leases for Greenway Properties that were located around our corporate offices when we did that. And what we're trying to do is think out of the box and be aggressive and not wait for people to come to our properties, but to go out there and be aggressive from the marketing perspective. And it's something that takes time. Because it's not the most fun thing in the world, you know, knocking on doors and trying to cold-call folks. But it is something that is actually working. We're seeing traffic and we actually have leases. We tracked, you know, how many cold calls people make on properties. Once you start seeing real results, people get excited on site and they understand that it works and it makes a lot of sense. So it is not really a costly program. It is more of a mind settle and refocusing as Keith talked about.

As it relates to Harbor View, you talked about increasing the yield and staying the same as the original pro forma. What is the yield without the original pro forma, the incremental gain?

The original pro forma was 8.5 to 9. Overall market issues have shaved yields down on pro formas. So the top end yield at Long Beach, part of the complication when I give a range, we know that people are going to pay a premium for a condo quality finish in the towers with ocean views and so forth. And we are very conservative in our premiums. We think people are going to pay $100 to $200, $150 to $250 more per unit. We've only baked in about a $100 premium. The yields were originally 8.5 to 9 and now it's 8 to 8.5.

Do you guys buy back any shares in the first quarter?

No.

That's it, thanks.

Your next question comes from Brian Legg with Merrill Lynch.

Hi guys. Looking at your trends in Houston it's obvious that the market is slipping. What does this mean for any new starts at Andrew?

It means that we will watch the market and time the market to start when we think it makes sense. We're not going to -- we don't have any imminent starts planned. We will let Oak Crest lease up and then start. We probably won't start an Andrew project for some time until what happens in the Houston market recovery wise.

What are your concessions on Oak Crest?

Construction special, depending on the term of the lease, two weeks free. In that case it is more an accommodation to residents, they're willing to move in while the community is still under construction. The lease up out there is going extremely well.

How many units per month are you leasing?

Last month we leased about 40 units in the month of April. And we're now at about 50% leased. So it's -- the response has been extremely good, and a lot of it has to do with the, you know, you got to be careful when real estate developers and real estate people start talking about unique. But truly, the environment that's been created around the Royal Oaks golf course with all the retail support in that location is fairly unique. And we now have one project that has met great acceptance and we've got another 1,400 behind that and we'll do it as it makes sense. But the flip side of it is as Rick kind of walked through the math earlier, the yields on these other 1,400 units, there is no reason to expect that they won't be ten pluses. And you know, it's hard to find ten plus returns on real estate these days.

Right. And you feel pretty good about your 11% yield now that you're 50% leased even though market conditions have clearly slipped?

Yes.

Looking at your sequential numbers, the down 2.4%, what historically has been the sequential decline in revenues from the fourth quarter to the first quarter?

Talking about revenues?

Yeah. Is it common at least in a directional sense to see a decline from fourth quarter to first quarter?

Yes, it is. From revenue perspective.

And I'm just trying to get a normalized magnitude.

I don't know if you could say normalized today.

Brian, let me answer it a different way. Our occupancy rate, the historical occupancy rate declined from fourth quarter to first quarter, is about .7%. So if you're running models, I think that's a fair place to start. But like Rick said I'm not sure what normal is when our overall portfolio is at 91.4. It is hard to handicap that.

Fourth quarter '01 to first quarter '02, property revenue was $101.5 million. And property revenue was $99.5 million. So we had a decline between '01 and '02. And generally, you have a, you know, it's not huge-huge, but it's definitely down.

Okay. And going back to the question of not making any acquisitions or dispositions, with cap rates so low, why wouldn't you just thinking long term sell out of a few of your markets, like the Greensboro or the Louisville at probably historically low cap rates, and reinvest the proceeds maybe back into your development or buy back stock or pay down debt?

Well, I think the key issue is dilution, and being able to cover your dividend from an ongoing cash flow. We believe that even if cap rates go up, cash flows will go up to offset any, quote- unquote, value lost that we lost as a result of not, you know, selling at a low cap rate.

On the other hand, we aren't just sitting on our hands. We are looking at opportunities, we are looking at some of these markets. And if and when we do some dispositions, they'll be closer to the end of the year. Because we're definitely focused on making sure that we pay our dividend, making sure that we have coverage to the dividend, albeit small, but we -- I don't believe that this is one of those, you know, incredible times with the alignment of interest rates and real estate is, on a private side, is very valuable. I don't think that this is one of those times that you just got to do deals because it's the most amazing market. Because when you talk about places like Greensboro and Charlotte and some of these other smaller markets, the cash flows have been hammered.

So if you believe in any kind of recovery in the next 18 to 24 months those cash flows are going to go up and they're going to go up substantially. And so to the extent that cap rates rise, I don't think cap rates are going to rise as much as cash flow is going to rise and we are not going to be leaving any money at the table and at the same time we are going to be paying our dividend. So I'm going to err on the conservative side. If we miss a market and not be able to sell properties in these smaller markets and I still continue to pay the dividend and not run the risk of dividend cut I'll pay that price.

You expect that values per unit may actually fall over the next or may actually rise over the next year, even in some of your secondary and tertiary markets?

I think so. If cash flows rise they will. Because if you look at the cap rates people are paying, they're not paying cap race rates based on sort of rational cash flow. The only way that deals get done in Dallas for example and there are deals being done in Denver for example that -- and we're getting to see a real interesting side of this through this mezzanine program.

We have a project for example in Denver that we were trying to make a -- do a mezzanine financing on and the property -- the seller decided just to sell it. They sold this property and some brand-new property, urban infill, very desirable asset. They sold it on a 6 cap in Denver, okay? The 6 cap though is based on cash flow today, and that cash flow today I guarantee you, they're not estimating it to grow 1% or 2% a year for the next five years. Otherwise the investment returns don't work. They're anticipating a pickup in the market and getting to a more normalized cap rate in the next two or three years.

And so at the end of the day, whether you believe that a 6 cap rate today is a really great deal, you have to look at the cash flow side of the equation and say, gee, the investors are expecting a big increase in cash flow, and that's why you have a low cap rate. Now, if you just think the investors today that are buying are just stupid and there's not going to be an increase in cash flow, and that 6 cap rate is going to hold for the next three or four or five years on that property, then we are missing an opportunity, probably. But I think that most investors, and we feel this way, in the -- in our markets, is that once we have an economy that rights itself, we have job growth, that the multifamily cash flows will come back very quickly. And I just don't think that cap rates are -- that the fact you have low cap rates means you ought to sell when your cash flow is down substantially as well.

So you're saying that the high value -- the high -- the low cap rates are more a function of cash flow than interest-driven?

Well, I think that there are two pieces. Definitely, cap rates are low because historic low interest rates and also the ability for investors to leverage, and get positive leverage against their debt. But they're clearly low in Denver for example because no seller that doesn't have to sell and with low interest rates they really don't have to, they can refinance in a lot of different ways, is going to sell their property for a big loss, when they don't have to sell. So they're willing to -- a buyer has to then rationalize their cap rate, and they rationalize it in two ways. One is cash flow is going to rise substantially in the next 24 months. Therefore I can pay a low rate today. And I can, you know, put the low interest rate leverage on the property and create a positive spread sometime in the future. But you know, I don't think that that is a reason for us to jump into the market, and do a bump of dilutive deals because we think that market's going to move away from us. Because I don't think it is. I think that the sale market is going to be very liquid for the next few years and that cash flows are going to go up. Even if cap rates go up because interest rates go up we'll offset by cash flow increases.

Great. Thank you.

Your next question comes from Lee Schalop from Bank of America.

It is actually Dan Oppenheim (ph). As you were talking about Greensboro and how cash flow rebound as cash flow improves. Any markets in the country in the portfolio where you look at them differently after the experience of the past 18 months and think they won't be quite as strong going forward and won't see that bounce back and look to reduce exposure over the long term?

Well, when you talk about out over the long term, you know, we've sort of laid out about our strategy is with regard to portfolio balancing. And we've indicated that as time allows, and dilution hurdles allow, that we are going to exit some of these smaller markets. But it has to be common a time frame, and for example, the Greensboro you mentioned is a possibility at some point. But right now, it doesn't really make any sense for us from a cash flow standpoint in our portfolio to be exiting any of the markets either in total or on a property-by-property basis.

So -- but in terms of, you know, structural changes of where cash flows are going, I would tell you that in every market that we're in right now, because of where we are, and some of our occupancy rates, concession rates, and economic occupancy in our entire portfolio of 83.5% which is at a ten-year low, they're going up. And so you pick any market, and my bet would be that two years from now, cash flows are going to be, you know, substantially improved over where they are today.

Okay, thanks.

You bet.

Charles Fitzgerald with High Rise Capital.

Assets and where the market is in. Six caps the people paying in Denver what are the value of the assets relative to production cost?

The property was built for, let me get the numbers right. The sales are in excess of replacement cost and the developer, I don't remember the exact numbers right now but I know that they were making about $4,000 per door on the sale from their cost basis in the asset. So it wasn't a distressed sale in the sense of something selling below their cost. But what was happening then is that the developer was -- while there's a profit on the sale, from cost, there was a -- there is likely a mezzanine lender, or an equity partner, that gets a preferred return. And those preferred returns are far less than were originally projected. So the developer split after the preferred return to the equity or the Mez, most are those were projected in the 15% to 20% range. And they're likely to get, you know, 6% or 7% in a deal like that. And a developer who would share 50% of the profit, 40 or 50% of the profits above the hurdle or Mez and equity is basically getting no profit.

In a more uncomplicated transaction where just assets are sold in the market, do you have any idea are where they're selling versus replacement cost for sort of A-quality assets?

I think they're selling above replacement cost still but not huge.

In a normal world where cash flows are back up do assets in your experience penetrate at significant premiums to replacement cost?

Generally they do. Newer ones. I mean older assets clearly B assets in similar markets are not going to trade at replacement cost.

What would you guys put as the replacement cost of your portfolio? My math may be off but I have your company trading at about $60,000 a door.

Right.

What do you think the replacement costs of your are?

That is a really hard number. Because we have so many different markets. And replacement cost in Houston is different than replacement cost in California. We could help you with that offline but it is not one I can give off the top of my head.

Okay, thanks.

Okay.

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

We appreciate your attendance of the call and we look forward to talking again next quarter. Thank you very much.

At this time, this concludes the conference. You may now disconnect.