Camden Property Trust (CPT) 2003 Q2 法說會逐字稿

The Camden Property Trust Q2 2003 quarter conference call will commence shortly. Good morning. My name is Len and I will be your conference facilitator. At this time, I would like to welcome everyone to the Camden Property Trust second quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After this 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, 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. I would now like to turn the conference over to Mr. Richard Campo, Chairman and CEO. Please go ahead, sir.

Thank you for joining our second quarter conference call. Before we get started, I would like to remind everyone that we will be making forward-looking statements based on our current beliefs and expectations. These statements are not guaranties of future performance, involve risk and uncertainties that could cause actual results to differ materially from expectations.

Further information about these risks can be found on our filings with the SEC and we encourage you to review them. FFO for the quarter totaled $.74 cents per share and $1.49 per share for the year. Difficult operating conditions continue to persist in most of our markets. The same property declined three percent for the quarter which was an improvement from the first quarter. Houston and Dallas continue to be our most challenged markets. Both markets continue to suffer occupancy declines and concessions as a result of excess supply and low demand resulting from limited job growth, continued competition from home purchases. This lowering occupancy is quarter-over-quarter comparisons. We are, however, encouraged by possitive NOI performance in Phoenix, Louisville, Charlotte, Greensburro, Corpus Christi, Kansas City, and Southern California. A bright spot in the quarter was the same -- NOI increase of 1.5 percent over the first quarter on a sequential basis.

While we're not calling a bottom to the department cycle we are very encouraged by these results. We made significant progress in our lease up of our $260 million dollar development investment during the quarter. Completed a lease up of -- in Tampa. We opened our leasing office in Harbourview and Long Beach and continue to make good leasing progress there. Before opening the leasing office, we leased out an apartment in less than ideal conditions and were able to lease substantially all of the available inventory even though it was very difficult to find the office and -- for our customers to -- to get to the office. The development properties primarily located in Southern California will provide a consistent cash flow growth over the next four quarters through stabilization. And Southern California continues to be one of the best markets in the country so we're real excited about the progress we're making in Southern California with our development. We refined our earnings guidance for the balance of the year to $3.07, $3.07 to $3.13 per share. We believe that midpoint of $3.10 per share is an achievable target. We have tightened the range and lowered the bottom of the range, as you can see.

The lower end of the range is based on operating plans for our portfolio that assumes current conditions persist to the end of the year, no better, no worse. We have projected a seasonal reduction in operating expenses in the fourth quarter which is tradition -- traditionally the case. Which will increase the run rate from third quarter without any improvements in the -- in the market conditions or top-line revenue. The high end of the range includes the potential contribution to earnings from fees generated from various transactions -- transaction-based business opportunities, including financing, third-party construction services and other activities. We expect the third quarter FFO to be in the range of $.74 to $.78 cents per share. Camden has been and continues to be committed to best-practice corporate governance. During the quarter all of our board committees adopted new charters that are based on -- on industry best practices and regulatory compliance requirements. Our board composition includes six independent trustees as defined by the various regulatory agencies and two inside directors including Keith and me.

In the spirit of best practices Keith and I paid off the $1.8 million dollars in loans that the company made to us that were -- that were used to facilitate our purchase of Camden stock. We did not sell any shares to fund these payoffs. You will see the loan payoffs as a reduction of notes receivable affiliates on page 7 of the supplement. We believe we have the right team, the board level and the company, to merge from these difficult times, positioned very well to produce excellent earnings, show their value going forward into the future. I'd like now to turn the call over to Keith.

Thanks, Rick. Last quarter I provided an overview of the operating environment in Camden's largest markets and rated our outlook for each of them. There have been no material changes to our market by market outlooks, which are available in last quarter's conference call transcript on our website, www.camdenliving.com.

My conclusion at that time based on our assessment of market condition was any improvement in same-store results was still several quarters away. Despite posting our first increase in sequential same-store results in five quarters we remain cautious about the outlook for the next several quarters. After detailed discussions with our front-line personnel I think the conclusion that can be reached is that for our portfolio as a whole, conditions have stopped getting worse. And while that is a precondition to things getting better, my sense is is that we may find ourselves bumping along a rocky and uneven bottom for the next several quarters. We just have not yet seen evidence of the catalyst necessary to provide pricing power in our markets. Job growth continues to be anaemic. Home sales continue setting new highs and despite a decline in multi-family permitting activity, completions of communities that were begun 18 to 24 months ago continue to exacerbate the supply overhang. We continue to suffer from the effects of the Merchant Builder's Creed, namely that anything worth doing is worth doing to excess. I'm beginning to worry that 98 percent of the merchant builders are giving the rest of them a bad name. Turning to some specifics in Camden's portfolio, our average occupancy rate for the quarter rose to 92.4 percent from 91.4 percent in the first quarter. The increase is due to a seasonal pickup in traffic supplemented by our company-wide outreach marketing programs that we initiated last year. We expect to see our occupancy level increase again in the third quarter, based on an average physical occupancy for the month of July at 93.4 percent.

One encouraging sign is that we were able to make a one percent occupancy gain over the prior quarter, without significant -- significantly raising concessions. Concessions increased from an analyzed rate of $600 per unit in the first quarter to $607 per unit this quarter. I believe our patience regarding our pricing strategy will serve us well as conditions improve and even modest levels of pricing power return. Historically, rental rates have proven to be very slippery on th downside as wholesale rate reductions are the path of least resistance to maintaining physical occupancy rates. Unfortunately, rental rates tend to be very sticky on the upside of a recovery. The trick is to remain competitive during the downturn through the use of targeted rental concessions, which can be recovered upon lease renewals by merely eliminating the concession, in an improving market rather than making wholesale rate reductions which are much harder to recover. For the quarter we had a 1.5 percent sequential increase in same-store NOI as 10 of our 16 reporting markets posted sequential increases. Revenues were up 2.5 percent over the prior quarter, expenses up 4.2 percent, resulting in a slight NOI increase of the 1.5 percent. Year to date, our NOI was down 5.9 percent, which is at the upper end of our minus four to minus six percent estimate of same-store decline in NOI for the year.

As noted, competition from home sales continues to present a challenge as the percentage of move-outs due to homes purchased for the quarter rose to 21.4 percent, the highest level in the last two years. The percentage of move-outs due to evictions and skips in the past year is up about 1.7 percent over the prior year, which primarily reflects the increase in layoffs among our residents rather than a lowering of credit standards. We use the credit retriever scoring model to evaluate all of our potential residents which has resulted in bad debts which are approximately one tenth to one percent of rental income. We are seeing some encouraging signs in our portfolio regarding traffic in our communities. For the first two quarters of this year traffic is up by six percent, compared to the same two quarters last year. The increase in traffic and closing percentage has allowed us to make steady progress towards our five percent vacancy goal. In our last weekly report we stood at 94.4 percent occupied, which is the highest occupancy we've seen since 9/11. I believe this is largely attributable to our 2045 Outreach Marketing Initiative. The 2045 program involves a thorough systematic commitment by our on-site staff to supplement traditional passive marketing methods with one-on-one outreach marketing to businesses and their submarket. All of this to ensure monthly traffic will exceed 20 percent of the community's unit count and that at least 40 percent of that traffic will be converted to a lease. We know that historically, if we can consistently achieve these results, we will maintain a five percent or less vacancy rate.

This is not just a response to the current market conditions, but a fundamental philosophy that will maximize NOI in good markets or bad. I applaud the efforts of our on-site staff and embracing the philosophy in doing the hard work of making it work on each of your communities. Keep up the great work, and I'll see you soon. At this time I'll turn the call over to Steve Dawson, Camden's CFO.

Thanks Keith good morning and thank you all for joining us.

Most of the variance in revenues and operating expenses relate to the number of communities in operation from period to period, or the non-same-store components. Some of these assets being sold, others being brought on line from development. G & A expense increased $1.2 million over the second quarter of last year and $800,000 sequentially from the first quarter. The G & A's budgeted to run around $3.9 million per quarter. The second quarter last year was unusually low while this quarter is unusually high.

Most of the variations sequentially is the result of the write-off of costs associated with unsuccessful transactions expenses associated with corporate governance, and amortization of long-term compensation. We expect the third and fourth quarter to be more in line with the budgeted run rate. The $659,000 dollar gain on sale of properties during the second quarter resulting -- resulted from the disposition of the 29.3 acre Steeple Chase Track in Northwest Houston for a total of $4.5 million dollars. Under the caption gain on sale of properties held in joint ventures we recorded an additional $451,000 from the sale of two Las Vegas properties for $21 million out of the Sierra -- Sierra Nevada portfolio. Our 20 percent share of the net distributable cash was almost a million dollars. As we discussed on the last call, there were three non-apartment tracks remaining in the inventory at Royal Oaks, also known as Anndrel. We expected to close another Royal Oaks land sale during the second quarter. That transaction has now been scheduled to close by mid-Q3. Upon the sale of this 7.9 acre track, Camden will receive $2.7 million in cash, and take back a note for $1.7 million. The other two tracks, which will likely sell during the next two years, have a value of approximately $3.7 million. Not a bad transaction, 70 acres of prime development land for free, plus $2 million to boot.

Camden Oak Crest, our 364-unit home apartment community at the Royal Oaks development should stabilize by the second quarter next year at a yield of 11.5 percent, or almost 13 percent on a true economic basis considering the land was actually free. Our mezinine loan program is gaining momentum. During the second quarter we funded a $3.6 million dollar loan on an asset in San Jose California, bringing the total to $22.5 million as of June 30. These loans are generally secured by second liens and/or pledges of ownership interests. They currently bear interest at rates ranging from 12 to 18 percent. Though we don't necessarily expect to be able to achieve those rates on all future transactions as the market for this product is becoming more competitive. While this portfolio is still rather small, it is becoming -- it's beginning to show a positive impact on earnings, with minimum projected income of around $3 million annually from just what we have on the books today. We have several additional opportunities in our sites and expect to have more to report by year-end. EBITDA for the second quarter was 2.9 times interest expense, the same as the prior quarter.

The total interest coverage ratio, which includes capitalized interest, rose to 2.4 percent -- 2.4 times. The fixed-charge coverage ratio also strengthened to 2.4 times for the quarter. As predicted, we're beginning to see improvement in these metrics as the development assets in lease-up progress towards stabilization. The trend that we expect to continue. We easily satisfy all debt covenants as noted on page 16 your supplement with leverage levels and ratios that are well within the range of a mid-triple B credit. During the quarter, we retired one secured note for $6.6 million, at a rate of 7.7 percent. On July 1, we retired another $6.6 million mortgage at 7.5 percent. No additional financings were funded during the quarter. Looking at the capital structure, not a whole lot has changed. Flowing rate debt increased slightly to 15.8 percent of Camden's outstanding debt, at an average rate of 2.0 percent. The overall weighted average borrowing rate is 6.1 percent and almost 84 percent of the debt is unsecured. Therefore we have plenty of unencumbered assets and only nominal debt maturities during the remainder of 2003. Looking at 2004, we see opportunity.

We hope to refinance $230 million dollars of debt at rates below the current 7.1 percent, and -- and may choose to call in $100 million dollars of 8.5 percent operating preferred partnership units in February. The remaining $53 million of 8.25 percent operating partnership prefered securities can be redeemed at various points in the second half of '04. We look -- we will be looking to lower our cost of capital as those opportunities materialize. Camden's FFO expectation of 307 to 313 per share for the full year, assumes that the third quarter is slightly better than the second quarter, with a range of $.74 to $.78 cents per share. Depending on transaction volumes, as Rick discussed earlier. This would imply a range of $.80 to $.90 cents for the fourth quarter. To achieve the lower end of the range, we expect to see seasonally lower operating expenses and continued success in development lease-up. To achieve the upper end, we must complete several new mezinine investments, third-party construction and development deals. The FFO payout ratio for the second quarter was 86.5 percent, and assuming we only achieve the bottom of the range, at 307, the FFO payout ratio should be around 82.7 percent for the full year.

Subtracting budgeted capital expenditures of $.51 cents per share or $22 million, Camden should have $.02 cents per share of free cash flow even at the low end of the range. At the top of the range, we would have $.08 cents per share of free cash flow. It's important to note here that in addition to the fact this is a positive number, it's calculated using all capital expenditures at the property level. See page 17 of your supplement for the details there. We do not differentiate between recurring and nonrecurring capital expenditures as we believe it is -- it doesn't really matter if we spend it, it can't be distributed. Our payout ratio whether using the FFO or funds from -- funds available for distribution, translates into positive cash flow any way you cut it. We have the financial flexibility and cash flow to continue our goals of diversification and portfolio improvement. We have upside potential in next year's refinancing opportunities, we still need to see job creation and household formationes in most of our markets to achieve meaningful recovery, but we are seeing some positive signs, such as the numbers of multi-family starts in many areas. Whether or not the fundamentals return quickly, we are well positioned to continue doing the right things and doing them well. 2004 and 2005 hold great potential for those who are well prepared, and we believe that Camden is just that, well prepared.

Let me close with a thank you to our outstanding professionals in the field, in development, in construction and in all of the various corporate and regional support roles. You are the ones who make Camden a great place to work, live, and invest. At this point, we'll open the call for -- up to questions, and thank you.

At this time I would like to remind everyone if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Our first question comes from Brian Legg of Merrill Lynch.

Hi. Rick, you talked about your -- your pleased with what's going on in Southern California. One of your competitors said that Southern California showed some weakness, are you seeing the same thing and can you -- can you comment on that?

Well, I think Southern California has -- we have not seen weakness in the sense of weakness as defined by other markets, but Southern California clearly has been -- has -- is not growing the way it was in the past, but -- but weakness, you know, we still have positive same-store NOI growth in our portfolio, albeit lower than it has been historically. But generally our development projects are leasing up in accordance with our -- our proformas and our -- and our lease-up schedules.

Yeah. And then, Brian -- this is Keith. I think that all things are relative in terms of -- of describing or talking about weakness in the multi-family sector, and our -- in our outlook, that we talked about in the first-quarter conference call, uh, we -- we rated Orange County current conditions with an "A", but with a declining outlook.

And the reason for the declining outlook was that even though we were in that market currently, it -- 95 percent occupied, uh, there were about -- we knew there were about 5,300 units that are going to be brought on line in that market throughout the year, which is a historically pretty high number. And also that was against a job growth that's projected of only about 3,700. So we -- we knew that concessions were definitely going to rise as management companies started to fight to maintain that 95 percent, and clearly that's happened, even though we still have positive same-store results here today. We certainly are feeling some of that pressure as well, but, again, you've got to put that in the context of what we're seeing throughout the rest of the country, which -- which is why we described Orange County as an "A" market with a declining outlook.

Okay. And looking at your sequential numbers, what went on in Austin and -- and your Missouri markets? Austin just seems strange. Your revenues shot up 21 percent, but it looks like occupancy declined and rental rates declined, how did that happen?

Well, in -- in Austin it was really just the burnoff of a huge amount of concessions that were taken in the first quarter, and then secondly, an adjustment for real estate taxes that happened in that quarter.

Okay. And Missouri, is there just strength there, or is it just -- well, a lot of marketing going on that you were able to -- to create the increase in occupancy in both St. Lewis and Kansas City?

Really just a nice increase in occupancy in St. Lewis over the prior quarter. It's been one of the markets that we've already seen some of the best results from our Outreach Marketing Program.

Okay. And your capex per unit. It's for the first half of the year, uh, it's -- you annualize it to about 436 per unit versus 588 per unit. Uh, are we going to have -- are you going to have to catch up on capex in '04 and '05 as conditions improve?

Brian, we consciously in our capex this year, uh, took a really, really hard look and without -- without making any choices that would affect our ability to market or our ability to maintain the integrity of the -- physical integrity of the assets, we did look at deferring some things that were sort of -- you know, things that you always have at the margin.

Our -- so we would expect that in future years that our capex would trend back towards our -- our long-term capex requirements. You know, some of this stuff you can defer a year and have -- have no impact, either visibly or from a marketing standpoint, or from a physical integrity standpoint, but eventually, uh, we would expect to get back closer to our run rate of the prior years.

Okay. And what's your forecast for the -- the second half of '03 in regards to acquisitions and dispositions?

We -- we basically have a flat forecast, if we sell an asset we'll replace it. But at this point, we -- we are not going to sell anything. If we do, it'll be towards the end of the year and won't affect this year.

The last question. What were concessions per unit per year in the second quarter of last year?

Hang on just a second, Brian. In the second quarter, the concessions, uh, of '02, they were running at -- per unit, per year, $382 per unit and, uh, the second quarter this year they were at $607.

Okay. All right. Thank you.

Our next question comes from Craig Leupold of Green Street Advisors.

Good morning. Rick, can you,I guess, expand a little bit on the -- this transaction-based fees and the - and such in terms of, you know, getting to your upper end of your range in the second half of the year? I'm trying to understand, you know, what -- what exactly that means and sort of how, um, confident you are that -- that you might be able to do some of that?

Sure. The -- the -- the mezzanine business, you know, we've been in the market for a while, in the mezzanine business. I think we've done -- you know, in the 20 -- $23 million range at this point. We've been real selective in how we've done it and what we're putting out. We have a pipeline of mezzanine business that looks pretty good and we think that we'll be able to close some of that business between now and the -- and the end of the year.

We also have been working on various sort of structure transactions, be they development, third-party development and third-party construction transactions that would generate the income, both from development fee income, uh, management-fee income, loan and structuring income and those kinds of -- of incomes. And, you know, we've been working, you know, for the last six or eight months on -- on -- on those -- those projects and we think that we'll close -- at the high end of the range we'll close sort of everything we're working on, at the midpoint of the range we'll sort of close half of them, but --

That's -- provide fees -- in other words, the third-party construction stuff, do you get fees upfront for that? I mean, does it really hit this year?

You get -- you get some fees upfront and then some fees are amortized over the -- over the life of the project.

For example, in a development project, if -- if we do a development joint venture with a third party, we get part of our development fee upfront, we get some structuring fees for putting the loans in place, and then we earn the fee income. It's not a one-time, you know, hit, but there are some fees that get -- that get paid upfront that are sort of one-time fees, or that are upfront fees that -- that, uh, you know, provide earnings -- earnings help in the fourth quarter. But then you would continue to earn -- earn fees throughout the -- the duration of the project, be it the third-party construction or third-party development.

Okay. And on the mez loans, are these on existing properties or are these development deals?

The mez loans are primarily on existing properties and they're sort of restructurings of existing properties where -- where our first mortgage lender has required to pay off the loan and the either existing mez or the equity component, you know, has a reason to want out and we come in and -- and have put the mezzanine piece in between the first mortgage and the current equity to facilitate a restructuring of the financial transaction.

And -- and typically, what kind of first would be a loan to value say on the first in front of you on these mez deals?

Generally not more than 80 percent.

Okay.

First, they're very traditional first mortgages from either banks or conduits.

And -- and market rates at this point for your -- the mez deals that you're doing?

Oh, yeah. Market rates are -- depending on the leverage, you know, we have a risk matrix that we -- that we follow that -- that -- as you get up into the leverage, anywhere from -- you know, if there's 10 percent real equity in the deal, it's going to be a low -- a low pay -- or a low rate relatively speaking, in the 12 percent range. And if it's higher leverage you start ratcheting up the rate as you ratchet it up the leverage.

Okay. Also, have you started to see or are you feeling any changes or getting any feedback -- excuse me, from your people in the field of -- excuse me, in terms of changes in cap rates with interest rates having increased so dramatically in the last month or so?

You know, the interesting thing is is that I don't -- I think that there's definitely a lag in that. What you're seeing right now are structure transactions that were, you know, highly leveraged deals that are having -- having stress now with the -- with the increase in interest rates.

And there's a lot of -- what I hear out there, there's a fair amount of renegotiation going on in values and so forth. But I think that there's definitely a gap between the time that cap rates rise -- or cap rates rise as a result of interest rate rise, and you haven't seen a direct affect of that at this point and there are deals still closing at -- that haven't been renegotiated, but I would expect that if rates continue to rise, that cap rates will rise along with them.

Thank you.

Uh-huh.

Our next question comes from Rod Petrik of Legg Mason.

Rick, what do you anticipate the state cap rate to be on your Long Beach property?

Uh, Long Beach property, uh, I think it's going to be in the eight to 8.5 percent range when it's stabilized.

So given the current market, some -- some comps -- I mean, that theoretically could be 170, $180 million dollar asset?

Uh, absolutely.

The 323 development pipeline, million dollar development pipeline where you show $1.7 million NOI contribution during the quarter.

Right.

What do you think the stabilized cap rate will be on that?

Are you talking about the -- the --

Page 13.

It's going to be in the -- ultimately, when the -- when they're all -- that -- that includes the -- that would include --

Recently completed properties.

Yeah. That includes recent -- recently completed and also the Long Beach and everything else in there. You know,, I'd say that it's going to be in the 8 percent range.

What was the capitalized interest for the quarter, like a little over $3 million?

It's on the front page of the supplement. Capitalized interest was $4.1 million.

4.1?

Right.

Great. That's all I need, thanks.

Great.

Our next question comes from Johnathan Litt of Smith Barney.

Good morning it's Jordan Sadler here with John. The first question regarding moveouts related to home sales. First question regarding moveout related to home sales, you recorded I guess 21.4 percent this quarter as a result of those moveouts. What was it last year in the last couple of quarters, what's sort of a more normal price range?

Well, actually, in the last two years it's been running between 19.5 and the 21.4 that we were at this quarter, but the 21.4 was the highest level that we've seen in our portfolio in the last eight quarters. But they've all been in the high 19s, low 20s.

Okay.

You go back to more normalized before -- you know, the big boom in home ownership. It was in the 15 to 18 percent range.

Have you seen any -- or do you have any data yet on what's happened since the quarter ended with the back up in rates?

Well, the last -- the number I gave you would have been for the -- the last month on our moveout report, for the quarter we were 21.4 percent, for the last month that -- that we have results for, it was 21.2 percent.

What about -- so you don't have any sense of what's happening in July because that's probably when most of the impact would have been felt?

No. And really and truly Jordan, the stuff that people that are in the process of closing and moving out, their deals are already done. I -- I would guess that if you're going to see an impact, it's rate related. We might start seeing some of that in -- in October. September, October. I mean, there's always going to be a lag to that. I mean, our -- our hope and expectation has been all along that if we get -- you get some kind of a back-up in interest rates, that you would get a little bit of relief on home sales.

There's always -- I think there's always sort of a tendency as people get -- they start getting the inclination that rates may rise, there's almost a flurry of activity of the one -- last people trying to get on the boat. So it wouldn't completely shock me to see -- see those rates actually -- actually come up a little bit in the next 60 days before we started seeing any results.

The National Association of Home Builders Statistics and Mortgage Banker's Association Statistics show that for every basis points rise in interest rates you take $2 million out of the ability to -- to buy a house.

So -- you know, based on the last -- the last -- you know, hundred basis points obviously we've had a fair number of people that are definitely closed out of the marketplace and -- but I do agree with Keith, that you probably will see a pent-up demand at this point for people trying to jump out the window before it gets any worse.

Do you develop -- or are you planning to develop any kind of marketing strategies to target those people who were maybe on the bubble buying a home and rates went against them?

We've -- we've done regional approaches. We have not employed a national strategy. It's very hard to administer with the -- with the brokerage community. But we've done regional programs where we allow people to credit a certain amount of their rent to -- to home purchase and -- in -- for people who have been longer term residents, etcetera. But, you know, our -- our results from that have never really proven up the need to do that or the impetus to do that on a national scale. We've had better luck doing it with local one-off -- or home builders who happen to be in the submarkets where we operate.

John, are you asking -- is your question --

That was the question. No, if you were thinking about buying a home and rates have scuttled your plans, you know, here's a great -- you know, two-bedroom --?

You know, I think that based -- from -- through our -- our outreach marketing programs that we have, we're scouring the business community within the -- within our trade area, we're doing that by virtue of the Outreach Marketing Programs that we're doing anyway. But we don't -- we haven't, you know, done any print media or anything specific related to, gee, now that you can't buy a house, you should, you know, live in a Camden property, no.

I think, Keith, you had said traffic was up six percent in the quarter, do you have a sense of -- of the credit quality of the traffic, did it maintain -- did it fall?

Well, if you look at our portfolio, it -- by the way, six percent for the first six months over the prior quarter -- or prior six months last year, if you look at the amount of cancelations and rejections, it is up slightly from where we were, even 12 months ago.

Our percentage of cancel rejects on our -- on our leased traffic is -- is up about ten percent on -- on the cancel rejects. So, yeah, you know, there's probably some indication there that may be a little bit different credit quality of people in the last, uh, two years. But -- but, again, our -- our approach to qualifications involves a credit scoring model that -- you know, that's very rigid in terms of how we apply it. So --

Right. But I mean if the traffic's up, if you take it with a grain of salt, you know, the -- if -- you could take being some portion of that out because it's a quality tenant that wouldn't qualify.

Yeah, you could, except that our closing ratio's up also. Our closing ratio's that -- for the past -- for the past reporting period was at 46 percent and it's been running over 40 -- over 42 percent for the -- for the entirety of this year, which is -- which is relatively high to historical standards. We've historically run something less than 40 and the 38 percent range. So we're actually capturing a better percentage of the traffic that -- even though some of it -- you know, there is an issue with -- with qualified traffic.

Your skips and evictions are up 1.2 percent. What were they as a percentage of revenues?

Skips and evictions as a percentage of revenues?

Yeah, I think you said your bad debt but I wasn't -- as a percentage of revenues?

Our bad debt is -- runs about one tenth -- is running about one tenth of one per cent of our total revenues.

And that would cover your skips and evictions?

It would.

Clearly rates are -- are -- have been on the rise and I don't know if it's clear which way they're going to go from here. But you do have some rebuy opportunities that you outlined, uh, to occur in the next six to nine months, is there anything you could do today to try to lock in rates, if you thought rates were going to continue to go up, um, in anticipation of refinancing some of those things?

Jordan, this is Steve. You know, the -- John -- is this John?

Yeah.

The prepayment penalties on most of the fixed-rate debt is pr pretty stiff and trying to get out of that stuff is -- we have not been able to find a feasible way to do that. We have looked -- we are looking at various types of -- of swaps that would encompass both the credit spread and the treasury component, but the yield curve is so steep that when you go out to next April, it is a pretty expensive proposition to go into something like that. So it -- it -- we are looking at them, we haven't found a good solution yet.

You know,, we -- again, we -- we think that -- you know, even with the -- the average cost of that, the $400 million we have coming up is about seven and a quarter per cent and even with rates moving up where they are, we still have a big, wide spread between, well, we can refinance those -- those -- those maturities at at this point. So the real question is, you know, do you bet and spend a lot of money today, you know, worrying that rates move really hard against you, or do you -- are you patient and -- and -- and then just take advantage of whatever spread is left by the time we get there? And since we're only talking about a few months, we're not too worried about it and we don't really want to, you know, spend a lot of money upfront and do some exotic swap that's expensive to -- and then end up being in a situation where we ended up losing money on that.

What about taking just a short-term diluted term of raising the debt now and then using the proceeds to pay off the debt when it comes due in a few months?

Having cash on my balance sheet, it really hurts my head.

Um, I sort of switched gears to your mez product. Is there some targeted maximum that you want to see this, or are you just going to be opportunistic in whatever size it gets to, it gets to?

Well, we -- we think that it's an appropriate level of 50 to $100 million, but we didn't go over that too much in the balance sheet and we don't want to have -- we sort of look at that as 2 to 3-year money and you don't know if you can renew those contracts in the future so we don't want to have too much in our run rate relative to, you know, having to reinvest those dollars at -- at high rates.

In thinking through the loan-to values that you're talking about of 80 percent or higher for some of the more expensive mez money you're putting out, 90 percent or higher.

Right.

What's your thought process in terms of why you would get into this business? I mean, are you looking to own the real estate, or are you looking to just make the return, or is there a combination of both? And if part of it's looking to own the real estate, how -- how do you figure out the value?

Well --

-- Of the real estate?

Well, the objective's not to own the real estate. The objective is to make a -- a high rate of return with the reasonable amount of risk and -- and get repaid. But -- but from an underwriting perspective, we're in a very good position, vis-a-vis our ability to underwrite the value of the real estate going in.

We -- when we do our underwriting we underwrite it with our acquisitions group that -- that underwrites the property as if we were going to buy the property. And the problem that we've had -- or the fundamental challenge we've had today, is as you well know, with cap rates as low as they are, and cap lists as of -- as abundant as it is, uh, sellers and owners of properties, you know, want premium pricing for their assets and it's -- and a lot of them just don't believe that they're getting value today from a -- from a sales perspective, so they're not really willing to sell. So there's really not a lot of market that we can play in there. So what we do is we underwrite the asset as if we're going to buy it, and then we price our mez within a -- within the risk matrix structure that we've come up with, depending upon the leverage, and then if worst case scenario happens, that the -- the borrower defaults and we have to foreclose and own the real estate we have underwritten it as if it was an acquisition and are ready, willing, and able to operate the property and own it in our portfolio.

And so from that perspective, you know, we're a better mez lender, I think, than -- than just say a Wall Street lender who never wants to own the real estate and -- and doesn't want to -- and doesn't have the capabilities of managing it and dealing with those issues. So from that perspective, no, we don't want to own the real estate, but if we have to, we're happy to own the real estate.

I guess -- I guess the part that would worry me in that equation is what cap rate you're using and, you know, -- some people believe I think we're in the current cap rate environment is not sustainable so if you're doing a 90 percent LTB, 95 percent or 99 percent, you know, the V is really the key. How you get to the value is really the question?

Absolutely and we don't underwrite to the value that the market is today. We underwrite to the value we would be comfortable buying today and putting our balance sheet at that price. And I can tell you that given the number of acquisitions we made in the last, you know, two years you can tell that that's pretty low. Right.

And the cap rate's pretty high. Steve, you have something to add?

Yeah. We -- our purpose is not to own the real estate, it is to make a loan. So we do extend the underwriting beyond purely just the real estate. We also look at the character of the borrower, the cash flow of the property, and the borrower, their abilities to repay in the event something goes wrong, their ability -- their track records.

Just like any other lender would do. We take all of those things into account, as a part of that risk rating, uh, with the idea that we're not intending to buy the asset, we are intending to make a loan. But as Rick said, our fall-back is if we have to take it back, we are better prepared to take it back than a bank would be.

Right. Okay. I appreciate the answers. Thanks guys.

Our next question comes from Lou Taylor of Deutsche Banc.

Hi, thanks, good morning guys. Steve, maybe I missed it, but are your debt maturities next year, when do they occur within the year?

There is about $230 million that occurs right around April of next year, it's basically three pieces, a couple of $15 million MTMs and a $200 million underwritten offering. And -- let's see. That's just about all of it.

Okay.

That is all of it. For next year's maturities. And then the perpetuate preferred operating partnership units are not maturities, they are just windows if we can begin redeeming if we choose to. We like the features there, no maturities and essentially no default provisions, but it's relatively more expensive than other alternatives at this point. So we may look at those and take them out with either some form of debt or other preferred securities.

Okay. The second question is with regards to the land sales. Are -- how are you creating that from an accounting perspective? Is that a reduction in basis, or are those flowing through under the income statement as gains? How did you treat those during the quarter?

You're talking about the land sales for Andrew Airport?

Yes.

They're treating -- from an accounting perspective they're treated as gains and they run through the income statement and then are eliminated from FFO.

Okay. All right. And then the last question is, Keith, you had mentioned just the closing rates were up, what were they up to during the quarter?

Our closing ratio for the quarter was -- ended up at about 43 percent, which is higher than -- than what we have historically run. On our last weekly report, it was 46 percent, which is a very good number.

All right. And what would was it, say, a year ago?

If you go back over the last five years, Lou, we've been -- we went historically run around 38 percent.

Right. Thank you.

Our next question comes from Andrew Rosivik Piper Jaffray.

I want to ask Keith a question. Your performance in a number of markets, such as, for example, Phoenix, was really terrific, despite, if you look at traditional supply and demand fundamentals, virtually no job growth, heavy new supply. I guess that leads to two questions. One, is your performance specific to Camden, or is that a market event? And, two, is it sustainable if we continue to see the kind of supply to metrics, demand metrics that we see today?

I think in the case of Phoenix, ours was a recovery from relatively low occupancy rates in the fourth quarter of last year. We've had two pretty good quarters in Phoenix. The fourth quarter and the first quarter are historically the stronger months in Phoenix.

But we were, in my view we were slightly underperforming the market from an occupancy standpoint and we really recovered that in the last six months in Phoenix. So I don't -- I think it's -- it is an outperformance condition at this point relative to the market, but I don't know that it's -- if you go back to where we were to two or three quarters ago, I think it's probably more just a catch up from some -- some really very low occupied conditions and a couple of communities that we've since resolved.

Gotch you. And I just had a quick question for Steve on the guidance. I was surprised that -- frankly, it looked like you had a great quarter in terms of same-store, but yet the guidance came down and I was curious to see what was the reason for the variance?

Well, the -- the variance is really a function of making the general assumption that the market doesn't get any -- any worse or any better, and when you -- when you look at the guidance range, it -- it came down $.03 cents from the bottom of the original range and then tightened the range up, but when we look at our midpoint of our range, from our perspective, our midpoint of our range of three ten was the bottom of the old range which was pretty much where we guided everyone in the last quarter call.

But we just felt that given the current market conditions, that, you know, as Keith said, you have a rocky bottom that we're sort of hitting here and we -- we -- we are -- want to err on the conservative side and make sure that we -- that we aren't, you know, missing numbers in the future, and we feel real comfortable with that bottom, but in the scheme of things, you know, we didn't think it was very far off the other bottom and given that the street, you know, has a set of bottom of three O-two, we just elected to be more conservative.

Gotch you. And one more on the accounting. Just a follow-up to Lou's question. Have you guys -- you guys are one of -- one of very few companies that backs out land sales out of FFO, and I would argue if you look at most of the other companies in the street, they're getting multiple credit for anything they run through FFO numbers. Have you ever thought of changing that policy?

You know,, I think about it all the time.

Don't blame you.

Yeah. But, you know, we sort of started doing that, you know, a couple years ago and that was sort of I think the -- the street viewed it as the cleanest way to go and under the -- under the white paper policies and we've just been consistent with that.

And, you know, I think that -- that it probably definitely hurts us from a pure FFO perspective, but, you know, that's just the way it is. I hadn't -- hadn't seriously thought about changing it, but, you know, maybe if next year the market still continues to be bad. It turns -- you know, the interesting thing about this is that originally the White Paper discussion, it talks about nonrecurring types of items, but if you look at our history now, we have been selling land, you know, periodically consistently over the last three or four years.

Sure.

And then, you know, creating earnings. And the other thing it's sort of interesting if you look at one of the sales that we made, Steeplechase, in the quarter. We had a 500 or 600 thousand dollar gain on that.

And that particular property was -- was a development project that we originally wanted to build in Houston and we -- we went from -- from wanting to build it -- looked at market conditions, decided that it didn't make sense to build, we -- we then put it on the market to sell, we made a half million bucks. After all costs, after all the plans, and -- and capitalized interest and everything on the deal. So while we -- while we -- we have a lot of land in our inventory, we do consistently sell land and make profits on land and so, you know, we may, you know, at the end of the year take a look at that policy. Because we did take a conservative approach with respect to the White Paper when we started excluding those gains because it wasn't consistent at the time and now it's becoming more consistent, so I think we will take a look at that probably at the end of the year and maybe begin the year next year with a new policy.

Great. Thanks.

We now have time for one final question. Your last question comes from Karen Ford with Banc of America Securities.

Hi, good morning. I know you're reluctant to call the bottom on your markets as a whole, but are there any of your -- any specific market within your markets that you're ready or close to being ready to call the bottom on?

Well, Karen, if you -- if you look across the entire portfolio and you -- you kind of look at where we -- where we started the -- on last quarter's call with regard to our outlook, um, just look at them real quickly here. The -- the -- we had -- we had basically either -- either declining or stable outlooks on all of our markets in the first quarter. I think the ones that are -- that are showing the best signs of potential for really being at the bottom and maybe -- maybe getting past it this year would be Las Vegas.

Uh-huh.

Primarily because of the unexpectedly strong job growth. It looks like they're going to add another 28,000 jobs in Las Vegas this year and it looks like the supply's pretty manageable. Our portfolio in Vegas has been running in 95, 96 percent occupancy range.

Concessions have come down on a sequential basis, so I think that there's probably some decent evidence in Las Vegas that maybe by the end of the year the worst really will be behind us. I think, also, in Tampa, in Orlando, even though Orlando's relatively weak this quarter, I think that if you look behind the numbers in Tampa and Orlando in terms of traffic, in terms of where we are on the progression of concessions, I think that those two are likely to -- to show some strength possibly by the end of the year. The -- the problem and the caution that we continue to have, if you look at it on a portfolio level basis, Karen, is that it's not that we don't have some -- some potential upsides out there in the -- you know, in the -- certainly in Las Vegas, Tampa, Orlando and certainly Southern California as well, Orange County. It's not that we don't have some positives. It's just that offsetting that, I still am relatively concerned about the direction of Houston, which we had as a declining market. We had Dallas as a stable market, but that was sort of a predicated on no further job loss and we have had further job losses, although relatively minor in the scheme of things in the last quarter. So it's -- and those are two fairly important markets to us. So it's not that we don't have some things that -- that individual markets where you could say, yeah, you know, there's probably some -- the worst is probably over and we've probably got some upside there.

But it's not clear to me that we don't have a couple other markets that are still struggling to the point where there may be enough of an offset to where -- you know, looking at it between now and the end of the year. We're saying sort of market neutral, no better, no worse, and we'll see what that brings us. There -- clearly there's some encouraging -- encouraging glimpses in these numbers, particularly with respect to the -- the occupancy rate in our portfolio, up another percentage point in this quarter and it looks like it's headed in the right direction for the third quarter and, you know, hitting a -- a high -- a two-year occupancy high, in 94.4 in the last week's report. I mean, that -- you know, that's encouraging, although this is -- this is historically our strongest leasing season. So there's some -- there's some glimpses of good news out there, Karen, but there's still enough uncertainties that I would still say here through the end of the year we're going to be pretty cautious in -- and kind of look at a -- a market-neutral scenario for our revenues.

Okay. And just one last thing. Your future development starts, you had mentioned San Diego property and a DC property last quarter. Are you ready to put a finer pencil to when those will start and when we can start to see some numbers on those?

We would expect to be able to give more definitive guidance on that next quarter.

Okay.

Because we are working on both those transactions. We're finalizing budgets and positioning, but we -- we -- we'll be able to have more discussion on that next quarter.

Okay. Great. Thank you.

Great, Karen, thanks. Good to have you back in the game.

We have time for one additional question, your last question comes from Rich Anderson of Maxcor Financial.

Okay.

Always for you, Rich.

Yeah. Thank you. Can you just talk about the Long Beach market as it relates to Southern California if you see it as a sort of -- a stand-out one way or the other relative to your comments in the -- on the Southern California market in general?

I -- I think the -- the interesting part of the Long Beach market is there's no new development competition. So from that perspective it's a stand-out. The -- we always thought that -- that Long Beach was going to be a very good market because of its location between sort of equal distance between the Orange County corridor and downtown LA and the -- you know, to the -- to the west. Very -- you know, good community time, good freeway access and so forth. The Long Beach market hasn't had any new development other than ours so we're pretty much, you know, alone in the competition rounds there.

The -- the product has been very well accepted in the marketplace. The interesting thing is we have about half of our traffic is for-sale traffic and the people are disappointed when they can't buy it and they have to -- have to lease it. But -- but the market overall in Long Beach, I think, has done reasonably well economically and they -- I don't think it's a quote unquote stand-out market, it's probably experiencing the same sort of things that, you know, LA County is and Orange County but the main difference is there's just no competition.

Anything to be taken from the sequential positive in Dallas this quarter?

I hope it's the start of several sequential positives, but I think that you -- if you went back to the sequential progression, it's -- my take on that is that, you know, if you reach a point where it can't get any worse.

Okay.

So I wouldn't -- I wouldn't attach any particular significance to it. Most of it is -- came in the form of an occupancy gain, obviously our portfolio in Dallas has been running in the -- the high 80s, low 90s now for almost -- for almost nine months and I think that -- that this -- we are hopeful that we have seen the worst and that our portfolio will continue to -- to make further occupancy gains, even though it's clear that the concessions are not going down and rental rates are -- are showing no improvement. Our improvement can and must come from an increase in occupancy in Dallas.

And the last question, is the preferred redemptions you spoke of, is that the whole $150 million of units that -- that are on your balance sheet right now?

There's $150 million of 8.5 percent that becomes redeemable starting in late February. Did I say a hundred?

150.

I'm sorry. $100 million becomes redeemable starting in February -- I think it's the 26th, next year. That's the 8.5 percent. Then there -- the $53 million of 8.25 is made up of a number of different pieces that start becoming redeemable in July and actually run to, like, January the 3rd or 4th of next year. So essentially all of it --.

Of'5 04?

Of '04, I'm sorry. Essentially all of it can be done in '04 if we choose to.

Okay. Thank you very much.

'03. '04. We have no other calls -- or questions at this point so I would like to take this opportunity to thank everybody for being on the call and I would like, also, to thank our people in the field who listen to this call. We do appreciate all your hard work and we know it's tough out there and we know that you'll be able to outperform the competition like you always do. So thank you very much, and we look forward to talking to you next quarter.

This concludes today's Camden Property Trust second--quarter 2003 earnings conference call. You may now disconnect.