Camden Property Trust (CPT) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2003 Camden Property Trust earnings conference call.

My name is Brian and I will be the coordinator for today. At this time, all participants are in listen-only mode, and we will be facilitating a question-and-answer session towards the end of the conference. If you require assistance at any time during the call, please press star followed by zero and a coordinator will be happy to assist you.

As a reminder this conference is being recorded for replay purposes.

I would like to now turn the presentation over to your host for today's call, Mr. Richard Campo. Please proceed, sir.

Thank you, Brian.

Good morning and thank you for joining Camden's third quarter 2003 conference call.

Before we begin, I'd like to remind everyone that we'll be making forward-looking statements, based on our current expectations and beliefs, and these statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC. We encourage you to review them.

Current market conditions could be described as bouncing along the bottom, I think we talked about that on the last call. While market conditions are stabilizing in most of our markets, much of our occupancy gains have come at the expense of rent concessions. And we really haven't yet seen any significant signs that pricing power as moving back into favor of the owners.

Camden's management team continues to focus on our four-point recovery business plan to design - designed to drive earnings and shareholder value. The plan's key strategies take advantage of business opportunities that are unique to Camden, refinancing a $400 million of debt at least a 100 basis point savings next year; completion of our development pipelines primarily based in Southern California; and as market conditions improve, the plan emphasizes reducing concessions that have grown to nearly $25 million during the recession, and increasing occupancy by 200 basis points, which in a stabilized scenario, would produce $10 million of income for Camden. We're confident that Camden has the right product, and is in the right markets and will experience the past job growth as the economy continues to improve.

We are encouraged during the quarter by the 200 basis-point increase in occupancy, bringing our occupancy levels to the highest they've been in the past two years. While concessions continue to be persistent, we did experience sequential revenue gains of .6% quarter-over-quarter and 8 out of the top 10 markets had positive sequential revenue growth.

We made progress in the leaseup of our development properties during the quarter, we leased 235 apartments while completing the leaseup of Camden Tuscany in downtown San Diego. We continue to expect FFO for the fourth quarter to be in the 82 cent to 88 cent range with the high end of the range driven by transaction and financing activities.

We have put out guidance for the year, we expect 2004 FFO to be in the range of $3.10 to $3.30 per share during -- driven by our four-point recovery plan. We expect a range of NOI growth of negative 2% to up 2%, and every one percent change in NOI growth is worth 5 cents a share share. The 2004 plan includes the refinancing of the debt that I described earlier, and also a continuing leaseup of our development program out in Southern California.

Our recovery plan is focussed, it's simple and achievable with execution at our properties being the key. I'm confident we have the best team in place to rise to the challenge.

At this point I'll turn the call over to Keith Oden, our President and Chief Operating Officer.

Thanks, Rick.

Last quarter my assessment of Camden's portfolio was that conditions had stopped getting worse. And that we were likely to find ourselves bumping along a rough, uneven bottom for several quarters. That still sounds about right to me.

During the third quarter, our aggressive outreach marketing efforts were instrumental in achieving a 2% increase in our occupancy rate to 94.4%. The higher occupancy was offset by an increase in concessions and unit turn costs which resulted in a same-property sequential decrease in NOI of 2.4%. We expect the higher occupancy rates to support a reduction in concessions and combined with seasonally lower operating expenses to produce a sequential increase in NOI in the fourth quarter. Representing one more bounce on the uneven bottom.

We still expect our same store NOI decline to be within the range of minus 4% to minus 6% for the full year even though we stood at minus 6.1% for the first three-quarters. Concessions increased during the quarter to approximately $750 per unit annualized, an increase from the previous quarter of $143 per unit. The more aggressive concessions were instrumental to our ability to increase the portfolio-wide occupancy rate by the 2%.

High occupancy rates are always the condition precedent to increasing rents, or in today's environment, reducing concessions. However, of the $143 per unit increase in concessions, approximately $100 per unit resulted from increasing market rents in communities where we were experimenting with discounting market rents versus maintaining very high levels of concessions.

In today's environment, our customers are so attuned to specials and concessions that where we trialed the use of reduced market rents the customer still started the conversation with " Yes, but what is your special"? Therefore, we made the decision to return to the higher market rates and continue giving the customers what they want, in this case, it's higher concessions.

Our portfolio continues to be pressured by residents moving out to purchase homes. Last month, the percentage of move-outs for home purchases hit 22%, the highest level for Camden since the housing boom began, and a full 6% above our historical norm. I do believe we're getting close to the tipping point, where the cost of renting is so much less than the cost of home ownership, the total cost of home ownership, that some relief for multifamily housing is inevitable.

Housing affordability indices typically focus on mortgage payments versus rental rates. However, the skyrocketing sales prices of single-family homes combined with double-digit increases in taxes, insurance and utilities that homeowners are incurring, coupled with the 10% to 15% decline in real rental rates in Camden's markets, have combined to make the renting versus owning decision more attractive than anytime in the last 13 years.

Turning next to our 2004 guidance, Rick indicated our same-store results are estimated to be in the plus to minus 2% range for 2004. Our estimates assume that operating expenses increase 3% to 4%, with the 1% range explained by the variances in non controllable cost, specifically insurance, property taxes, and utilities. Revenues are projected to be flat, to up 2%. With that range explained by the level of rental concessions required to maintain our occupancies at 94% to 95%.

Our forecast assumes that supply and demand fundamentals in 2004 will be roughly the same as we experienced in 2003. Although we expect job growth will pick up across Camden's core markets, multifamily completions will absorb the incremental demand leaving conditions unchanged and still favoring residents versus owners.

At this point, I'd like to turn the all over to Dennis Steen, Camden's Chief Financial Officer.

Thanks, Keith and good morning to all.

My comments this morning are going to focus on; the impact of new accounting pronouncements, the financial highlights of the third quarter, a reconciliation of third quarter results to our fourth quarter guidance, and a review of Camden's debt structure and refinance opportunities. Beginning with the rash of new accounting pronouncements effective for 2003, which are aimed at complex capital structure, I just wanted to communicate that Camden has not been impacted due to our simple capital structure, and lack of complicated off balance sheet arrangements.

Moving on to the third quarter financial highlights, as Rick mentioned we report the FFO of $32.8 million or 76 cents per share. Right in the middle of our expected range of 74 to 78 cents and up from 74 cents in the prior quarter.

The increase in FFO was the result of; a $2 million increase in property revenues driven by slight increase in same-store revenues and the continuing leaseup of our development communities, a $700,000 increase in net profits related to our third-party construction and development activities, and a reduction in G&A expenses of approximately $560,000. This decline was primarily due to the write-off in the second quarter of costs associated with unsuccessful transactions.

The $3.9 million in G&A expense for the quarter was in line with our budgeted rate. These positives were offset by an expected increase in property expenses of $2 million or 5%. This increase is mainly due to higher utility and maintenance cost in our summertime months. Utilities and maintenance expenses were up 13% and 7% respectively, over the prior quarter.

Property expenses for the first nine months continue to track with budgeted levels. Year-to-date same property expenses are up 4.6% over the prior year. Excluding the impact of higher insurance costs, the year-to-date increase is 3.5%.

The only acquisition / disposition activity for the quarter was the sale of a 7.9-acre non-apartment track out of our inventory at Royal Oaks in Houston. We recorded a gain of $591,000 on the sale, of which $502,000 is being deferred as this transaction is being accounted for in the accordance with the installment method.

EBITDA for the third quarter was 3.0 times interest expense, up from 2.9 times in the prior quarter. The fixed charge coverage ratio also strengthened to 2.1 times for the quarter. As predicted we're seeing a consistent improvement in these metrics as the development assets in leaseup progress towards stabilization.

As Rick mentioned, we are still comfortable with our previous full-year FFO guidance of $3.07 to $3.13 per share, which implies a range of 82 cents to 88 cents for the fourth quarter. This represents an increase of 6 to 12 cents over the third quarter. This increase will be achieved by the following: a 3 to 4 cents improvement in property revenues; a seasonal decline in property expenses worth three to 4 cents; with the remainder dependent upon transaction-based fee income.

Assuming we achieve the bottom of the range at $3.07 per share, our FFO will be sufficient to cover dividends of $2.54 per share and forecasted capital expenditures of $22 million or 51 cents per share. Adding proceeds from the sales of land parcels of $12.8 million or 30 cents per share, Camden should have $14.8 million or 32 cents per share in free cash flow for 2003.

Moving on to Camden's capital structure. Our balance sheet remains strong, with 85% of our real estate assets unencumbered, 83% of our debt is fixed at an average rate of 6.9%, we have $333 million available under our unsecured line of credit, we also have $1.1 billion available under our universal shelf registration and we have manageable debt maturities over the next five years.

Over the next 12 months, we have unsecured note maturities of $280 million, at an average rate of 7.1%, and additionally, we have opportunities to refinance or redeem $130 million of perpetual per(ph) units which are currently at an average rate of 8.4%. We're evaluating all our potential refinancing opportunities with the goal of latering maturities and maintaining a reasonable level of floating rate debt. We expect to achieve at least a 100 basis-point reduction from existing rates and will maintain the floating rate exposure in the 15% to 20% range.

In summary, our balance sheet is strong and flexible, our cash flows even at its lowest estimated levels is positive and we have upside potential in our upcoming refinancing opportunities. With this I'll turn -- I'll open up the call to questions.

Ladies and gentlemen, at this time, if you wish to ask a question, please key star then 1 from your touch-tone phone. If your question has been answered or you wish to remove yourself from the queue, please key star 2. Again, for questions, key star 1.

And your first question comes from Jonathan Litt of Smith Barney. Please proceed, sir.

Good morning. It's Jordan here with John.

A lot of your competitors are obviously selling a lot of properties this year and expect to sell additional properties next year, and some are looking to buy next year. Can you talk a little bit about your investment strategy going forward and your expectations? And maybe talk about how the market may have changed a little bit in the last quarter?

Sure, Jordan.

Fundamentally, the acquisition market and the disposition market has been an interesting market the last couple years. The -- we have not done a lot of dispositions, and primarily because we believe that in a recovery scenario cash flows will go up, and cash flows will go up enough to offset any rise in cap rates that go up as well. And so presumably, with cap rates going up and interest rates going up and operating fundamentals improving, the property values are not going to go down, they're going to either stay the same or go up.

So the issue from our perspective is why sell assets today when it's difficult to replace them on a positive spread basis, and create additional dilution to shareholders who have already suffered significant dilution from the erosion of cash flow as a result of the recession and lowering rental income dynamics for multifamily? So when our cash flow starts going up and we see an opportunity to continue our diversification program and improve the quality of our assets, but not at a cost to our shareholders from a dilution perspective, that's when we'll be active in the market.

We are looking next year at doing some potential dispositions, but they would be matched with acquisitions and we would minimize the dilution from any negative spread investing through some of our other programs like our mezzanine program where we create additional earnings from that program.

As far as what we're seeing out in the marketplace, because we are active out there in the marketplace, we've seen, because of the rise in interest rates here of late, slight increases in cap rates on perhaps B assets, but in the A asset category interest rates have really not affected cap rates in the A categories and you're still seeing very, very strong pricing at low cap rates for A assets, especially in the Southern California and Washington, D.C., South Florida markets.

So you could sell some next year, but you're not really giving a guidance range? Is that --

Well, you know, I think if we give a guidance range, we sell 100 million we'll buy 100 million and we'll minimize the dilution through an additional transactional volume. But you can -- we'll not be a net seller for sure and we're likely to be sort of a flat seller and buyer, if we believe we can find the right deals.

Did you guys complete any mezzanine investments during the quarter or do you expect to close any in 4Q?

We closed one mezzanine transaction in the Dallas/Fort Worth area, there was a 7 1/2 million dollars mezzanine, and we believe we have a pipeline that should allow us to close anywhere from $10 to $20 million in the next quarter or two.

What are the rates on what you completed and you expect to complete?

The -- generally, the rates ranged from a -- the structures of the mezz transactions are general pay rate and accrual rate, and our mezz rates on the $7.5 million, I believe was 14% - 10% pay rate and accrual to 14, as cash flow improves, the pay rate goes up.

Okay. And then --

It would be in the 10% to 12% range. We might get some higher, you know, 14 to 16's, some of the previous ones we've actually got as high as 18.

Okay. And just.

The mezzanine business is very competitive and we're very selective as to which transactions we'll do.

But switching gears to your operating portfolio, obviously you picked up occupancy significantly through the use of concessions during the quarter. What sort of happening in the first half of the fourth quarter? Are you continuing to see occupancy improvements or -- and concessioning a lot?

Yeah.

We've been able to maintain our occupancies at about the level that we ended the last quarter, 94.4% on our most recent report which was a beginning of the month number, which is always the cyclical low in our portfolio, the first week of the month. We were at 94.3% for the beginning of November which is a very good number for us given the seasonal trends. So it looks like the occupancy is going to stick throughout the fourth quarter. Obviously, the concessions have continued as well.

If you go through the math on the concessions where we were in the previous quarter, we were at roughly $607 per unit annualized, and if you normalize the effect of our increasing market rents, quote unquote, back to where they were before we had discounted some of those rents, it adds about $43 per unit on a run rate basis over the quarter-over-quarter. So from about $607 a unit to about $650 a unit in the third quarter.

And it looks like on the -- if you look at our fourth quarter forecast, that number may kick up slightly in the fourth quarter on a run rate basis. But I don't see anything significant there. Obviously, the advantage and the significance of being at a 94% to 95% condition is that you can start fine-tuning and bringing some of those concession levels back down which is something we're focussed on currently.

Okay. Last question, just curious about the $50 million in notes coming due this quarter. You taking them down with the line?

Yes, our fourth quarter forecast would assume we take the $50 million down with the line.

Thanks, guys.

And your next question comes from David Romko (phonetic) of Royal Bank of Canada. Please proceed.

Hi guys, good morning. Here with Jay Leupp. Couple of questions about your Southern California first developments, I guess.

I was wondering with the stabilization of Tuscany, where rents came in versus pro forma, and then wanted to ask the same question about Otay Ranch.

The Tuscany rents came in pretty much at pro forma. The project stabilized sort of right on time.

The only, I guess concern we have in the marketplace is we have 1500 new apartments that are in the pipeline in downtown, they're going to come online. While San Diego has, you know, decent job growth, the question is, you know, how well will those be absorbed into the marketplace. And so we're a little nervous about stabilization and potentially concessions creeping into the market when owners are trying to get their initial leaseups going. Because we have started to see concessions creep into the Southern California market.

Otay Ranch, the project started out from a leasing perspective right on pro forma, we actually raised rent during the process. Then as a result of the deployment of the troops for the Iraqi war situation in San Diego, we had sort of a dip, and then a number of competitive projects came online about the same time.

Rents -- we had to soften rents a bit and they're slightly under pro forma at this point. What we're experiencing in Otay Ranch now is we're about 82 or 3% leased and occupied. But in projects that have more than 300 apartment homes, you start having turnover. We had very good absorption and now there are a lot of troops coming back so we've seen, you know, some strength from that perspective.

But where we're experiencing in Otay Ranch now is turnover in the existing property which tends to slow your absorption rate down generally 50% from where you were -- where you started. So instead of 30 a month, you're going to lease 15 because you have to backfill people that are moving out. So generally, they're within pro forma but we are a little concerned about concessions in the market as a result of new product coming online.

Great.

I guess a follow-up to that, Rick, can you talk about maybe the nature of consessions, the amount of concessions in Southern California versus some of your other major markets like Las Vegas, Dallas and Houston?

Overall the concessions in Southern California are in much lower levels. What we're seeing in our existing product in Southern California is anywhere from a week to two weeks free rent. Many of our competitors are prorating that. Our portfolio in Southern California we're doing up-front concessions because they're not that problematic.

And again, that would compare, if you take the run rate for our concessions annualized at about $650, that would indicate that somewhere between 3 1/2 to four weeks free is the average in our entire portfolio.

We're not seeing anything like that in Southern California. Although we are beginning to see concessions creeping in, which is, you know, which is a little unusual because the overall market is still maintains a 94 to 95% occupancy rate.

I think one of the challenges in Southern California is that many owners have operated their portfolios and their communities at abnormally high occupancy rates for such a period of time, that 95 feels like softness, whereas everywhere else in our portfolio we think that 95 is kind of the right number that maximizes total revenue, but if you operate at 96 or 97 for a couple years, all of a sudden 95 feels like a level at which you need to be giving concessions. So it's a little bit strange behavior but we obviously have to be competitive and that's what we're seeing.

Okay, great. Thank you very much.

You bet.

And your next question is from Andrew Rosivach of Piper Jaffray. Please proceed.

Good morning, guys. Rick, I wanted to touch on '04, I apologize, I got pulled off the call. Did you go over development starts or what you plan to do with your large land bank?

We did not, Andrew so you didn't miss anything.

Okay.

The development starts, we have a number of projects that we will start next year in the land bank will be for the -- or the land position will be going down.

We will -- we have a project in north San Diego county, in San Marcus, that's called University Commons, that will start in the first quarter and we will provide guidance on those numbers, we're working on all our construction budgets now,(INAUDIBLE) on the fourth quarter conference call.

We have a couple of other projects that will start, most likely in a joint venture structure in the first quarter as well. And that would be Farmer's Market 2 in Dallas, and West Winds Crossing in Lauden County, Virginia. Both those will start in the first quarter, most likely and we'll get everyone updated on those structures in the next call as well.

We are considering a number of other properties given the starts in '04 would bring product on in at the end of '05 and into '06, and we think that given the economy, likely to be much better in '06 versus '04 and '05, it might be a good time to do that. We're evaluating a number of other projects including our Revista Phase II in Orlando and a couple of Houston inner city projects as well.

Then switching over to Keith, there was one market where I was very surprised at how good the revenue growth was, Phoenix. Is there a story there? It didn't look like the same store was that terrible the prior year.

In our portfolio, the story there is a pickup in occupancy, primarily related to our downtown Phoenix asset. We had a very significant increase in overall occupancy in that particular asset, but there's a -- you know, it was pretty -- it's been pretty weak in Phoenix in our portfolio, I think it's really a sequential pickup, and nothing out of the ordinarily.

I will tell you this, we went through our plans for 2004 market-by-market, Phoenix did come out as one of the better -- as one of the better growth markets for our portfolio in '04. It's -- we've certainly seen a significant decline, although there's still new construction coming on, it's not anything like we faced in 2001/2002, and just a better overall fundamentals.

And then just a couple quick questions for Dennis. Dennis, when you went over the reFI consumptions, I couldn't tell, does that include the preferreds? And if it does, are there any of those one-time charges that you're going to have to run through FFO?

As it stands right now, our plan is to try and refinance these and it would not be a charge with the refinancing of these items. We're still working with our accountants if there would be a charge if we do redeem. But it wouldn't be something at this time that we're anticipating because of the refinance opportunity.

Got it. And one more Dennis.

On your development pipeline, you guys do a good job listing the third quarter contribution of what's leasing up. Do you know what kind of the nugget is that's left to be stabilized, especially off of the assets that are no longer capping interest?

Are you talking about the additional revenue potential from --

Yeah, like Oak Crest, I guess your not capping any interest against?

No.

What's that going to be when it's stabilized, what would be the incremental pickup?

We don't have those numbers right off the top of our head, Andrew I'll have to circle back with you on that.

Sure, you bet. Thanks guys.

And your next question is from Lou Taylor of Deutsche Banc. Please proceed.

Yes, thanks. Following up with Dennis or staying with Dennis for a minute on the reFI. Dennis, when did the loan mature within '04?

You want the specifics?

First quarter, second quarter, third quarter, that kind of stuff.

I can go through them in detail.

Once again we talked about the $50 million that's going to mature in November, going into 2004, we have $5 million that's going to mature in January of 2004; $200 million that's going to mature in April of 2004; and $25 million in June of 2004.

Great. Okay.

And then also staying with you for a second, when you had gone through your dividend coverage you mentioned some proceeds from land sales for the year. What was that figure again?

It was $12.8 million related to land parcels that are adjacent to some development activities that we've sold during the year.

Okay.

Can you talk a little bit about the other income line, and currently what's left in there?

The other income line for the most part right now is mezzanine interest from our mezzanine program.

Okay.

And then Rick, you had mentioned there's some transactions that acquisition-related or fee-related activity in Q4 to kind of make the numbers. A, what are the activities? And kind of where do they stand?

The activities relate to joint ventures for new developments that I talked about a minute ago. And we are in continuing negotiations and we expect them to close in December. And fee income associated with the closing of those joint ventures. We have a couple of other sort of fee related transactions, primarily the bulk is the joint ventures.

Okay. Now, earlier you guys were talking about dispositions and acquisitions. On the acquisition front, do any of the assets that are on the market from owned by other REITs appeal to you at any price?

I think that's an interesting question.

I think at the right price, you know, any asset appeals to me, whether it's owned by a REIT or non-REIT. I think the issue is, what is the asset, why are they selling it? And then does it fit into our strategy of improving the age of our portfolio, the growth rate in our portfolio, and the geographic diversification of our portfolio?

All right. Maybe I'll rephrase it.

How about stuff that's on the market from other REITs, is there anything there that you find interesting at other close to the asking price?

Not at this point. I haven't seen anything from other REITs that was very -- I was very interested in now.

The last question is with regards to Austin, what happened there sequentially? I know the students clear out of the market. Is there much more than that in there?

We've had two things. One was the treatment of concessions and the second one was we had a large adjustment in property taxes.

Okay. Thank you.

You bet.

And your next question is from Rich Anderson of Maxcor Financial. Please proceed.

Thank you.

Could you just quickly repeat your concessions, average concessions, from the third quarter and the second quarter? I just missed those numbers.

Sure.

For the second quarter, the annualized concession was $607 per unit, and then the equivalent or comparative number for the third quarter would be $650 per unit. Even though if you were to go through the math, of the difference between our quote market rent or gross potential and that, you would see a higher number but it's because the adjustments we made in market rents. The comparative number would be up $43 a unit quarter-over-quarter.

Okay.

With regard to floating rate debt and the 15 to 20% target, looking to '04, I mean, how does a change in interest rate impact your '04? I assume that's a factor in the range. And could you sort of comment on how you look at that looking into next year?

Sure. We have projected rates going up to roughly, I think, 80 basis points on the short end by the end of year. That gets phased in quarter by quarter. If you take our existing line of credit and keep rates the same as they were in 2003 versus 2004, it's about 2-cent effect.

Okay.

Know what I'm saying?

Uhm-hmm.

So said another way, 2 cents, it's costing us 2 cents a share to raise the rate 80 basis points on the short end, periodically through the end of the year. So if you think rates are going to go up much higher on the short end, for every 80 basis-point spread over the year it's 2 cents a share.

Got it. For the mezzanine business, do you book the entire 14%?

As it stand right now we're booking what we receive in cash.

Just the cash component.

Just the cash component.

Regarding development, Rick, you mentioned you're looking at some starts during the first quarter of next year. But you're going to start to have a gap of deliveries in the development pipeline, say, '04 through middle of '05. Was that done by design or were you just unable to sort of source some good opportunities over the past year or so?

It was done absolutely by design. And you know, the bottom line is is that until we believe that the market conditions are going to improve, we're not going to put development in play.

We had projects, for example, in Houston that we could have built at the airport, where we have -- Andrew airport is a great example. We have Oak Crests that in the high 70s or mid-70s leased now. And we could easily have started another project there. We have about 1,500 to 2,000 units of land inventory there that we ultimately will built over the next four to five years.

And the -- we look at the dynamics of the market, and if we think that we can get a reasonable rate of return on the capital invested, given the risk and the overlay of the market conditions, we'll do it. If we don't, we won't do it. So if that means we have a hole in our portfolio, and if you look at market, let's take markets that have been very challenged, Denver, Dallas, Phoenix, Tampa, Orlando, we had project there is that we -- projects in every one of those cities that we had ready to go two years ago and we wrote off the costs associated with the projects where land positions that we didn't already own, and we didn't do them. And so we knew we were going to have a hole in our portfolio in 2004 and clearly 2005, but the bottom line is, is that I think those were smart decisions.

Now, if we're a little late to the recovery and we don't have the development growth built in in 2004, we'll have it in 2006. I would much rather be late in 2005 than early and ending up with lousy yields.

Okay.

With regard to the range for '03 and '04, can you comment on the swing factor, at least for this year, sound like the transaction-based fee income. What is at the low end of the range in terms of dollars, and what's at the high end of the range for this year? And what are you looking for in '04?

Well, the low end of the range being $3.07, and that basically just assumes that we make our current budgets, which we are pretty -- we know October already, so we only have two months of risk there. November and December. From a same-store perspective. And then the swing factor there is the fee and transaction income, if we don't close them, that will roll into 2004. The -- and did you ask about 2004 as well?

It seems like a pretty huge range with two months left to go. And I was just wondering how many -- I guess I could do the math, how likely is it that you're really going to get to the high end of the range at this point?

I would say the high end of the range -- we would guide to the low end of the range, just to be conservative, but, you know, every single thing happens that we know out there that could happen you can get to the high end of the range. But you're talking about volatile events which we don't control, and so at the low end of the range, we're very comfortable at the low end. We think that's very achievable, and in the bank.

And the high end, again, because of the wide range, and we talked about lowering the range but there's a possibility that if everything hit's the way it could possibly hit, we could be at the top end of that range. But I would say, yeah, it's a large range but we're guiding towards the end, the bottom of the range, and if the top of the range hit's, great.

And then my last question's on Harbor View. What were your thoughts going in in terms of the leaseup rate, like the per-month leases signed once you started going forward with the leasing process? I mean, the number of leases signed per month.

When we laid out the pro forma, the average velocity that we assumed was between 35 and 40 leases per month. Now, when you're building this kind of product it involves nine-story towers, you take deliveries of units in large chunks. So even though we still think we can average that kind of velocity, obviously you do a heck of a lot of preleasing, you open the building up and you have months where you do substantially better than that.

Because of the nature of the construction type that it is with the nine-story towers, the leaseup itself, the increments will be lumpier than you would get in the garden apartment project. But over the course of the leaseup, we still expect it will average about 35 units per month.

Okay.

Because I just did some rough math and it looked like first, second and third quarter it was 16 a month, then 21, then 27 a month.

Right.

Is that about right?

I think that's probably right. The real issue there, like Keith said, it's lumpy because a lot of those leases were all preleased buildings that were not available, once the building was leased, or building was ready, they leased -- signed all the leases up and moved them all in.

Sort of a better -- the way we look at these leaseups, especially Harbor View, is we look at percentage leased of delivered units as opposed to the total project. For example, the two, nine-story buildings weren't delivered and they're going to be 100% vacant until they're delivered. We have a waiting list for people who want to be in the towers, who want the ground counter tops and want the ocean views and that sort of thing. Those numbers would not be-- any preleasing in towers, for example, are not in any of the numbers because we don't sign leases until we get within two weeks of the delivery. We don't want to have a lease that requires to us move somebody in and then miss the delivery date. In case the unit isn't ready.

When we had our last building to give you a sense, in the last building that we had delivered, we had to wait about three weeks for the next building. We were 99% leased of the available inventory before we got our last building. So the preleasing is going well and even though the -- you can take and divide the number of units per month, we think we'll get there ultimately, especially when the towers lease.

You're happy with the process?

We are happy with the process.

And my last, I just read the press release and it says construction should be completed in 2004. And is there a little wiggle room there, because you've always said the first quarter of 2004? Is there any chance it could be delayed?

No, we think it's in the first quarter of 2004 still.

Okay. Thank you.

And your next question is from Lee Schalop of Banc of America Securities. Please proceed.

Thanks. Keith, I was going to follow up on your comment about rents declining to the point where they're competitive with homes. Could you take us through the analysis? Do you look where the point where it crosses or how do you think about that?

Well, there's two things. One is you can just look at the, do the math on what the average rent in our portfolio is, it's in the high $700 per unit range. You can work from that and say in today's interest rate environment, that would support a $135,000 mortgage at roughly 6%, 6 1/2% interest rate.

So the average home price in the markets where we're seeing this most commonly is Las Vegas, Houston, Dallas, et cetera, average home prices in those markets are running in the $140 to $150,000 range. So that profile of individual , you can say well, as they do their analysis, for $780 rental payment, I could afford the average home. That's true if you're just talking about rental payment to mortgage payment.

The challenge that I think is coming, and it's already hitting people, is really the same set of challenges that we've been facing in the multi-family business for the last three years with regard to non controllable costs: property taxes, homeowners' insurance, and most recently, incredible increases in utility cost, specifically water and electricity. And when you -- and again, a lot of this is anecdotal evidence from the conversations that I had with our community managers throughout our budget process, but as you look at the credit profile of the people who, we know a lot about their history and their credit history and their ability to pay, when you look at that and start piling on top of an average home price and an average mortgage rate and then instead of a $15 a month water bill, which they would experience with us, they're all of a sudden being hit with $80 and $00 monthly water bills, they're being hit with substantial increases in electricity costs, and then obviously the property tax issue that they're going to face.

When you add it all up and look at what is the ability to pay for this average resident who we know a lot about their sources of income and their coverage ratios on their rent, it just starts to be a real stretch for how many more people, A; are going to be able to make that gap, and B; from the people who have already made that jump, what kind of stress they're going to be under with regard to income and total cost of ownership versus the cost to rent.

Now, in addition to all of that, Lee, in markets like Dallas and Houston, we have experienced in these markets when you really look at it, net of all concessions, in the last 2 1/2 years, our average rental rate is down somewhere between 12% and 15%. So you compound the affordability issue with the fact that rents, on a real basis, not nominal but real rents have declined almost 15% and you know, where does that point cross? I don't know. And again, in a lot of my conversations are relaying anecdotal evidence. I do know there's a tipping point with regard to the consumer viewing what is my total cost of ownership versus total cost of renting. We've got to be getting close.

Thanks.

A question on interest expense. There was a comment made that you expect your interest costs to go down in 2004. I just wanted to clarify, is that based on increasing the amount of floating rate debt or is that just based on current market rates and renewing expiring debt at lower costs?

Yeah, it's the latter. It's going through and fixing rates at lower average cost and with the maturing notes and preferred are currently at.

Okay. And that's based -- and based on the comment you made, that's looking at the supplemental on page 15, you have the weighted average interest rate on maturing debt is 7.1 in 2004?

Right.

What number are you assuming that you will refinance that at in '04?

Right now, we're looking at trial to get it sub 6, based on current rates, depending on what maturities we put out with those new issuances. But they'll be sub 6 rates as we currently stand.

Thanks very much.

You bet.

And the next question comes from Craig Leupold of Green Street Advisers. Please proceed.

Good morning.

Dennis, just one quick follow up on this refinance issue. I thought your answer on the preferred stock question earlier was that you would not expect a charge for redeeming preferred stock? But I'm curious, how do you refinance preferred stock without redeeming it?

You would actually try and refinance before we would try to actually redeem. So it's the issue of refinancing versus redeeming the preferred stock.

Right. But when you go to redeem it, will you not incur a charge?

Yes, you would incur a charge for the amount of issuance costs that are still on our balance sheet.

Okay. And roughly how much is that at this point?

The amount of maturing preferreds would have just over $2 million.

Okay.

In cost.

Thanks.

A couple other questions, just wanted to understand the change in your fee and asset management expense line going from the second to the third quarter. It looks like it dropped fairly significantly and I'm wondering what explains that?

Yeah, if you remember in the second quarter of last year, we talked about having fixed cost overruns on some third-party construction jobs?

I think I meant the second quarter of '03, the third quarter of '03.

Sequential, right, it went down from right at a million dollars to.

To about six hundred?

$600,000, and that entire is represented to a charge of fingered cost overruns on one of our third-party construction jobs.

This quarter you break out depreciation versus amortization. And it looks to me like amortization is down significantly from the second quarter level. Is there something there?

Specifically, I don't know of anything that would have created that but we could definitely look into it and get back with you.

Okay.

And then on following up on Andrew's question earlier on the development, the development projects you show that are actually completed but in leaseup, is the expected yield on those still roughly 8% or so?

Yes.

Okay. So and it looks like they're only generating a yield in the quarter of a little over 3% or something, so there should be pretty significant pickup in NOI as you lease up the properties?

That's correct. That's built into our 2004 estimates.

Okay.

And then one last question on the '04 estimates. In terms of the management fees and development and construction fees, what kind of levels are you expecting in '04 now that you talk about development JV's? How much is that line item increasing as you go from '03 to '04 or those line items?

We have $2 million forecasted for our third-party construction activities, and the JV activities, that was described, I believe, as another $1 million to $1.5 million of fee income next year.

Okay. Great. Thank you.

Sure.

And your next question is from Peng Ying (ph) of Invesco. Please proceed.

I was just wondering how much of your lack of transition -- transaction activity was due to maybe some personnel changes?

I noticed earlier that Alison Malkhassian has been selling a lot of shares this year, and the last time I checked, a couple months ago she was listed on your website as the Senior VP of Acquisitions and Portfolio Management, I think. And this morning when I checked, her name is not there anymore. Is there anything, I mean, happening in the senior management in terms of lineup and what's going on there?

What's going on there is Alison Malkhassian is no longer with Camden. And when you look at our transaction volume, Alison was responsible for acquisitions and dispositions, and her department was reorganized throughout the year. We reorganized our acquisition function from a centralized position to a regionalized situation where we have regional acquisitions folks out there today, our disposition activity is still centralized and being managed by the same person that was managing it with Alison. And we did reorganize the acquisitions activity and the dispositions activity, and it was based on transaction volume.

Alison was very good, valuable employee for seven years, and bottom line is, we took an opportunity to lower our overhead cost and Alison wasn't ,sort of, reaching her potential in the industry by virtue of our view on the disposition and acquisition markets. And so yes, in fact, we have had a change there but we shouldn't impact our ability to have -- to do acquisitions. It actually should impact it positively, since it's handled regionally now with local folks in each region.

As far as her selling shares, Alison has been managing her own financial affairs to make sure that she has enough capital to pay off some loans that we used, and this is all disclosed clearly in our Q, but Camden, in '99, end of '99, beginning of 2000, senior executives at Camden purchased somewhere in the tune of $20 or $23 million of stock that was financed with bank debt. The company guaranteed the bank debt and as a result, the bank debt is due in December of 2004.

And as a result of Sarbanes-Oxley, the company's guaranty cannot be renewed as a result of the new law, and therefore, the 20-plus million dollars of debt associated with those shares has to be paid back. And I think Alison is being prudent in taking advantage of high stock prices and positioning herself to pay her debt back.

Okay.

I was just curious because the timing seemed to work out as the year progressed, she sold out -- down to I think, 20,000 shares by early October and then this morning her name was no longer there. So now the acquisitions will be reporting to James Hampden?

Yes, that's correct.

And those personnel -- so when you say head count reduction, it's not just Alison, right?

That's correct. The head count reduction was about six people in total, and included two acquisitions officers, Alison and a couple other support people.

Okay. So you are -- so the regional people would be the same development people that would be basically taking over additional responsibility at the regional level?

That's correct.

Okay. All right. Thank you.

Your next question is from Sod Khazi(phonetic) of Reese Securities. Please proceed.

Couple of questions.

First one you guys talked about, the mezz, you're booking it on the pay rate, the deals don't come out, is there a make hole on the back end for you to get to 14%?

And then second question, what point of the year do you guys are thinking about sharing some unsecured debt to refinance the debt that's coming due as well as bringing your line down, because you'll have it go up with the preferred redemption?

And lastly, in Austin, Dallas, Houston, you guys had a pretty big strides in occupancy gains. Is that a result of you guys going to the net effective? That is, in the market, are you really setting a new net effective rent by giving away more concessions?

On the first question, the mezz transactions, there's only one development deal, all the rest are existing assets that are restructurings basically of existing properties that are cash flowing. So there's only one development deal there.

And then to the question of, " is there a make hole", the answer is yes. The mezz structure is a second mortgage on the property and to the extent that the -- as the property cash flows, the cash flow goes to pay the current yield plus the ultimate total return that we're supposed to get, and that comes out in advance of any equity cash going to the equity or any equity returns.

So we're in a priority position to any equity. And clearly assuming that a development -- the development works out fine, then we'll get paid if, in fact, the development doesn't work out fine, and the equity is not sufficient -- the equity is sufficient to pay us, then we will, if it's not, and the equity is not worth anything, obviously, and we don't get paid, then we wouldn't recognize it.

Okay. Thanks, guys.

In terms of unsecured debt, we are -- we have given that we have in our line out about $250 million after we pay off the $50 million in November, we are anxiously watching the market and we will decide when we think it's an opportunity to get into the market and do these refinancings, probably sooner rather than later. But it's one of those things where the closer you get to the financing, the easier it is to do it.

But if you do it well in advance, obviously we would experience some dilution associated with paying down the line. So we know that most of the financing will be done probably in the -- before the end of the first and likely clearly into the -- before the end of the second quarter.

Great. And then on Austin, Dallas and Houston?

The level of concessions that were increased in Austin, Dallas and Houston were roughly equivalent to what happened in the overall portfolio. It was -- the concessions, the increase was fairly equivalently spread.

I guess my question was more, are you at -- with the concessions, is the net effective now at market or do you think that's below market and you're setting a new market rent with that? Do you see what I'm getting at?

No, the net effective -- it depends on when you think -- when and if a recovery happens and how soon with regard to, quote, market rents.

Our preference in our portfolio has been and will continue to be to keep a relatively, you know, relative to many of our competitors who reduce market rent and there by showing smaller concessions, to keep what we think are kind of recovered rents. As market rents, and then the balance will be concessions.

So the answer to your question is, is that if you believe that the -- that there's not going to be a recovery, then, you know, some would argue the quote net effective rent on any given transaction is the market rent. But I think our view of that is, is that seen if that is the correct argument, we would prefer to be having conversations with residents about reducing concessions rather than raising market rents six months from now.

Okay.

And finally, on -- what's going on in Austin? Is there a software glitch? The concession number is wrong in the second quarter, underbooked in the first quarter and now it's wrong again. Is there something that needs to be fixed there?

No.

Okay. Thanks.

And your next question comes from Chris Pike of UBS. Please proceed.

Good morning.

Quick question, following up on the last question. So if I understand things correctly when you pushed rents back up, and still concessed off of those rents you didn't go to higher rent levels; correct?

No, we did not. The market -- when you say rent levels, the stated or market rent would have increased and the concession would have increased in a like amount. So that the net effective rent remained unchanged.

It's just a different conversation with the resident than what we were having where we tried to just say heck with it and let's mark-to-market, which some of our competitors have done. The problem with that is that the conversation always begins with: "That's interesting, but what's your special"?

There was no cases where you maybe pushed rents up a little bit and maybe gave the potential tenant a little better deal so that when do you hit a recovery, your base point's a little higher?

No, but the increase in rents was not -- was not 100% explained by the reversal of the lower market rents. We did have some increased rents in the portfolio, primarily in California.

Okay.

And in talking about California, and Southern California, have you guys looked into the potential of another troop deployment in Southern California? And how that may impact the portfolio down there?

Well, the troop deployment where it could hurt is in Otay Ranch, down in southern San Diego County. But generally, the general troop deployments have been in like Oceanside, and some of the communities close to Camp Pendleton. And our properties are not close to Camp Pendleton. We saw some impact on Otay Ranch, but not in downtown, and we didn't see it in the Inland Empire at our development there, and we didn't see really much of an effect in Orange County where our existing assets are.

In terms of home purchases, move-outs to home purchases, was the increase kind of pro rata across all the market or was there one particular market that really drove that increase?

Well, the increase over the prior quarter was only about 6/10ths. We were at 21.4% in the prior quarter, we went to 22%. There's really -- the only thing that was worth noting being that is the 22% was really was highest level we've seen.

I know some other companies have talked in terms of actually experiencing a reduction in the percentage of move-outs but I think it's important for people to know that we did not experience that in the third quarter, although clearly, we anticipate that that number will come down in the next couple of quarters. We certainly are hopeful of that, but the increase itself was because was not a significant increase over what it was in the prior quarter. Still very high relative to historical levels.

By market you still see the same level of move-outs? You don't see one market having a substantial higher level of move-outs, offset by another market that has lower move-outs?

We haven't seen any significant change in the composition of the move-outs over the last three-quarters.

Okay. And just one last question.

In terms of the credit quality of the tenant, I think last quarter you talked about underwriting standards in terms of applicants. Did you lower or did you see a lower standard or credit quality with respect to applicants this quarter as well as or can you talk about that?

Yeah, I think I mentioned on the last call that we use a credit storing program. And we have not changed our criteria for accepting.

We have -- the level of rejected applications was consistent with the prior quarter, and the prior quarter was up over the -- over what we had -- our historical run rate has been. But I don't think it changed significantly in the third quarter, but we still are seeing a higher percentage of conditional accepts and rejects from our credit-scoring device.

Thank you very much.

You bet.

And your final question comes from David Rogers of McDonald Investments. Please proceed.

Hi guys.

Keith, first question was on, I didn't get the overall turnover number for the quarter related to last year and prior sequential.

Prior quarter net turnover was 62 1/2, this quarter was 67. Not unusual really from a seasonal trending. If you go back to the third quarter of '02, it was 67.1. So, but our turnover rate always picks up in the third quarter, but not anything significant from prior year.

Thank you.

What was other question?

In terms of bad debts did you give a percentage of that? Or is it changed? It sounds like your higher conditionals are maybe blocking some of that.

They are. On the higher conditionals, what that triggers is a higher security deposit. So we will accept the conditionals but it's only if they put up a higher security deposit. So our bad-debt experience net has been consistent at about a half percent.

In terms of recurring Cap Ex, in the portfolio, it's down pretty good year-to-date over last year. Is this year a better run rate than '02? Is that what we should expect going forward?

Well, it's probably a good run rate for -- it is down over '02, and we have -- in our first round budget roll-ups we had given guidance to Cap Ex numbers that would be consistent with '03 numbers.

So, you know, clearly we expect from a cash flow standpoint to have the same kind of challenges in '04 that we've had in '03, and we expect Cap Ex in '04 to be consistent or about the same levels as '03.

Great.

The last question for Rick, the only thing on the mezzanine that I didn't hear is the actual total investment you've made so far?

Total investment so far is I believe $31 million. In terms of total mezzanine.

At quarter end, we had $24.4 million, but subsequent to quarter end we funded a $7.5 million mezz note so it's right at $31 million.

Great this thanks guys.

Sure.

That was the final question from the audio queue.

Great. Well, we appreciate your time and attention today, and look forward to speaking to you at the next call. Thanks.

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect your lines and have a great day.