Camden Property Trust (CPT) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2003 Camden Property Trust earnings conference call. My name is David and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. If at any time during the call you require assistance, please key star zero and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I'd like to now turn the presentation over to your host for today's call, Mr. Richard J Campo, Chairman of the Board. Please proceed, sir.

Thank you, David. Good morning and thank you for joining Camden's fourth quarter earnings conference call. Before we begin, I would like to remind everyone that we will be making forward-looking statements based on our current expectations and beliefs. 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. We're happy to have 2003 behind us.

Market conditions for 2003 proved to be the most challenging that our management team has faced in the last 10 years. Our management team kept their chins up and continue to provide living excellence to our customers, which has positioned Camden well for the recovery markets in the future. Current market conditions have stabilized, and we're looking for the inflection point sometime during 2004 where we'll begin to see pricing power returns on our markets. As we've discussed on past calls and meetings, we are focussed on driving Camden's share price and total return for our shareholders by focusing on four key tactical areas. The first is to take advantage of $400 million of refinancing opportunities to increase cash flow by reducing borrowing cost, during 2004.

During the fourth quarter, we completed $300 million of these financing activities at attractive rates. Second key area, is to increase occupancy by 200 basis points. Mission accomplished. We've gone from 91.4% in the second quartet 2003 to 94.5% this quarter. Now our team has to hold these important levels to achieve this tactical situation in 2004. The third area was complete leasing of our development properties located primarily in Southern California. We've made significant progress so far and we'll continue to do that in 2004. The fourth key area is to lower concessions.

Concessions have increased $30 million or 67 cents a share since the recession began. While we have been able to increase revenues on a sequential basis for the last straight three-quarters, it has been primarily from occupancy gains. We have get to be able to make significant progress on lowering concessions, but we're positioned very well with high occupancy and growing revenues going into 2004. As market conditions slowly improve throughout the year, we should start to see concessions coming down. The good news is that we don't have to have rental growth in order to increase cash flow, we just have to lower concessions.

Camden Properties are located in growth markets that should benefit from early and sustained job growth as the economy picks up steam during 2004. Our development properties continue to lease up as expected. You'll note in our supplemental information that we've increased the budgeted costs for Camden Harbor View in southern California by $7 million. The increased cost is a combination of three things: first, higher interest cost due to earlier project delays; infrastructure cost that was originally planned to be allocated to residual land was allocated to the buildings; and additional local government project requirements that were not settled in our favor.

In spite of these cost increases the returns continue to be acceptable for Harbor View and we're real excited about completing the lease up this year at the project. During the quarter we closed a joint venture and started construction on Camden West Wind, a 464 apartment home community in the Washington, D.C. area, which is our first move into the Washington, D.C. market. Our 2004 plan is simple. It's achievable. I'm confident we have the best team on the field. Our people are motivated and ready for the challenges that 2004 will bring. Guided by our values we are committed to being the best multifamily company by providing living excellence to our residence.

Keith, I'd like you to take over the call, now.

Thanks, Rick I want to spend my time on the call today in two areas. First I'll address our view of market conditions for 2004 in our largest markets. The format I'll follow is the same as in previous years. I'll give you our view of current market conditions expressed as a letter grade, A through F, and also provide our view of the outlook for each market through year-end 2004 as either improving, stable or declining. Secondly I'll discuss our current operations and provide some additional details of our same-store NOI guidance for 2004. First the markets.

Beginning out west with San Diego, current conditions we rate as an A with an outlook that's stable. Projected job growth of 20,000 is more than sufficient to maintain equilibrium with new completions estimated to be about 3300 units. In Orange County, current conditions we rate as a B plus with an outlook that's stable. 24,000 new jobs will be sufficient to absorb the remaining 2003 completions, new completions in 2004 should be below 3,000 units. This scenario should allow operators to reduce the concessions which have become prevalent despite relatively high occupancy rates.

In Phoenix, current conditions we rate as a B minus with an outlook that's improving. The ratio of job growth to multifamily completions looks very promising for the first time in six years. This should allow return to modest same-store NOI growth for our Phoenix portfolio in 2004. Next, in Las Vegas, current conditions we rate as a B with an outlook that is stable. The Las Vegas economy continues to crank out new job growth that will be sufficient to absorb the overhang of new supply from 2003 starts as well as the projected 2004 completions. Concessions will remain at relatively high levels as owners fight to maintain market share, completions from affordable single family home sales as well as an increase in the propensity to own versus rent prevent the return of any significant pricing power in 2004.

Denver, current conditions we rate as a D with an outlook that's declining. With a market wide occupancy rate of 88%, modest job growth, and another year of 7,000-plus completions it's really hard to find a silver lining in this cloud. Our same-store results will likely decline again in 2004, but by roughly 4% or about half of the 8.5% decline in 2003. In Houston, current conditions we rate as a C-plus with an outlook that's stable. The market will continue to be under pressure during 2004 from record single family homes sales and another 7,000 apartment completions.

Job growth, however, rebounds to 21,000, which should be sufficient to prevent further deterioration. Same-store results are projected as flat year-over-year as occupancy gains are offset by increased concessions. In Dallas, current conditions we rate as a C with an outlook that's improving. Employment growth picks up as completions fall to one half of the 2003 levels, offering hope that the worse may be behind us in this important Camden market. Austin, current conditions we rate as a C minus with an outlook that's stable. A projected 15,000 new jobs, fewer than 3,000 completions in 2004, will provide more of the same outlook in Austin versus 2003. Concession levels have declined from 2003 levels but will continue to be a major impediment to growing net effective rent. Another year of declining same-store NOI, albeit nothing like the 12.3% decline we saw in 2003.

Tampa, current conditions we rate as a B with an outlook that's stable. No change from our 2003 forecast as job growth of 15,000 offsets 3300 completions leading to a flat year-over-year same-store forecast. In Orlando, current conditions we rate as a B minus with an outlook that's improving. A reasonably healthy market wide occupancy rate of 92% gets a boost from 22,000 new jobs with less than 3,000 completions, and this will allow us to increase our gross income and result in a 2 to 3% same-store NOI growth. North Carolina, current conditions we rate as a C-plus with an outlook that's stable. Our return to positive employment growth of 8,000 and ,finally, some relief on new supplies should allow for a relatively stable market condition throughout 2004. And finally in St. Louis, current conditions we rate as a B minus with an outlook that's stable, the same as the last two years No reason for much change in St Louis whose 7,000 new jobs keep pace with 1500 completions maintaining a market wide occupancy rate at 92%.

If you calculate a weighted average for our letter grades and outlook, it indicates an overall current condition in Camden's markets of somewhere between a B-minus and a C-plus with a stable outlook. That strikes me as about right and supports our same-store guidance for 2004 as flat compared to 2003. During the fourth quarter, we were able to maintain our occupancy rates in the 94 to 95% range, which is more in line with our historical performance. For the quarter-over-quarter comparison, our occupancy increased by 2.7% from 2002. The increase is attributable to our aggressive outreach marketing efforts supported by the higher use of concessions which did increase in the quarter from approximately 750 per unit to roughly 850 per unit on an annualized basis.

Concessions continue to be our biggest challenge in moving net effective rents higher. Having stabilized our occupancy in the 95% range, managing concessions has become the myopic focus of our on-site teams. We continue to believe that some relief from the boom in single family home sales is overdue. Several recent studies indicate the index of cost of home ownership to the cost of renting is at it's most favorable level for renting in the last 7 years.. However, we saw no letup in the number of move outs to purchase homes in the fourth quarter. In fact, at 22.5%, it was the highest quarterly percentage that we've ever experienced.

As Rick mentioned we're confirming our 2004 same-store NOI guidance to be flat year over last year, included in our forecast is an increase in our portfolio-wide occupancy rate from 93% in 2003, to 94.3% in 2004. This increase will be partially offset by an increase in concessions. Our forecast for expenses is an increase of roughly 4% which includes increases of 8.3% in utility costs, and 10% in marketing costs. Total non controllable costs including taxes and insurance are projected to rise by roughly 4%. We know that 2004 will again be a very challenging year for our on-site personnel. We also know that we have the people, the programs and the product to ensure that regardless of market conditions, we will continue to outperform the competition to the benefit of our stakeholders. Now I'd like to turn the call over to our CFO, Dennis Steen.

Thanks, Keith. Good morning and thank you all for joining us. My remarks this morning will focus on the financial highlights of the fourth quarter, a review of Camden's capital structure and refinance opportunities, and a summary of our 2004 guidance. I'll begin with the fourth quarter financial highlights. We reported FFO for the fourth quarter of 36.3 million or 83 cents per share, up 10.7% from the 32.8 million reported for the third quarter of 2003, and in line with analyst estimates.

Our increase in FFO was primarily the result of a $1.9 million increase in property revenues, a $1.4 million increase in other revenues, a $2.2 million decrease in property expenses, all partially offset by a $1.4 million increase in interest expense and $400,000 increase in G&A expenses. Taking a closer look at each of those variances individually, the $1.9 million increase in property revenues was the result of the continuing lease-up of our development communities and the third straight quarter of slight increases in same-store revenues as Keith discussed earlier. The $1.4 million increase in other revenues can be attributed to interest income earned on our mezzanine financing portfolio and other miscellaneous nonrecurring items. During the quarter, we funded 26 million in new mezzanine loans including a $9 million loan funded in conjunction with our investment in the Westwind joint venture.

You should note that on page 14 of our supplemental package we have added details on the diversity of our mezzanine portfolio and the weighted average accrual rate for the portfolio. Property expenses declined 2.2 million or 5.1% from the third quarter as anticipated due to seasonal declines and repair and maintenance and utilities expenses and a decline in real estate taxes resulting from favorable variances in final tax assessments and rates. Moving onto the unfavorable variances for the quarter. Interest expense was up 1.4 million in the fourth quarter, primarily due to less interest being capitalized due to the completion of construction on assets in our development pipeline, and the impact of our issuance of 200 million, 10-year 5.375 unsecured notes as we took advantage of the favorable interest rate environment to lock in capital for 10 years, thus reducing our lower-priced floating rate debt for the quarter.

Lastly, G&A expenses increased 400,000 from the third quarter due to the write-off of costs associated with unsuccessful transactions and higher benefits expense and public company cost. As a result of our improving operating results of the past several quarter, EBITDA for the fourth quarter was 3.0 times interest expense, and 2.2 times total fixed charges. Still all quite healthy measures and well within the range of a BBB credit. Additionally, Camden continues to easily satisfy all of its debt covenants and expects to continue to do so in the future. Moving on to Camden's capital structure. As I noted in our prior quarter call, Camden had a total of 280 million in unsecured notes at an average rate of 7.1% maturing between the fourth quarter of 2003 and the end of 2004, and we also had opportunities to refinance or redeem 130 million of Perpetual Preferred Units with an average rate of 8.4%.

As we stated then, our goal was to obtain at least 100 basis points reduction in rates on these instruments and to maintain our floating rate exposure in the 15 to 20% range. During the fourth quarter, we went a long way to fulfilling this goal. We completed the modification to 100 million in Perpetual Preferred Units whereby we reduced the accrual rate from 8.5% to 7% per annum, an annual savings of 1.5 million. Additionally, we issued 200 million in 10-year unsecured notes at an all-in yield of 5.5% effectively replacing 50 million in 7% notes which matured during the fourth quarter, in anticipation of the 200 million in 7.1% notes maturing in April 2004. Although this transaction reduced our floating rate exposure to only 8% at year-end, we felt it prudent to lock in 10-year capital at very attractive rates.

We will use the upcoming April maturity to increase our floating rate exposure back to the 15 to 20% range. Additionally, the remaining 30 million in unsecured notes maturing in 2004, and the 30 million in Perpetual Preferred Units callable in the latter part of this year, should be able to be replaced at lower rates. Our balance sheet remains strong, with 80% of our assets at cost being unencumbered, 85% of our debt unsecured, a conservative level of floating rate debt and manageable debt maturities over the next couple years.

Moving on to 2004 guidance, we have reconfirmed our 2004 full-year guidance of $3.10 to $3.30 per share and have provided guidance for the first quarter of 76 cents to 79 cents per share, down 4 to 7 cents from the fourth quarter as we expect same-store revenues to be relatively flat, continued revenue growth related to our development communities moving towards stabilization in Southern California and Houston, offset by our normal increase in property operating expenses from the fourth to first quarter and a higher interest expense due to less floating rate exposure as I discussed earlier. Future quarters should improve as we continue to benefit from the stabilization of the development pipeline and as we realize the benefit of the maturity of higher priced debt and the increase in our floating rate exposure back to the 15 to 20% range. Assuming FFO for 2004 at the midpoint of our range, or $3.20, and assuming property capex of around 26.5 million, we expect to end the year with 5 cents per share in cash flow in excess of our $2.54 per share dividend.

At this time we are not anticipating a change to our dividend, however, we are pleased to say that we have the ability and remain committed to funding our dividend from current operations without borrowing or selling assets to do so. At this point, we'll open the call up for questions.

Thank you, sir. Ladies and gentlemen, if you have a question or comment at this time, please key star 1 on your touchtone phone. To withdraw your question or if your question has been answered, please key star 2. Once again, that's star 1 for questions. We'll pause for a moment for questions to queue up. Our first question comes from Jordan Sadler from Smith Barney. Please go ahead.

Good morning. I guess my first question would be regarding the increasing concession activities that sort of continued again to increase in the fourth quarter. What are your expectations as the year progresses in terms of concessions and occupancies, balanced by occupancies? If you're flat in occupancies in 1Q, you'll be up almost 300 basis points over 1Q '03 and I'm just curious what will happen to concessions in your expectations.

Jordan, on the concessions, going forward, if you look at it from where we are currently in the fourth quarter compared to our plan for next year, we actually should see a slight decrease from the fourth quarter run rate. Year-over-year we're going to see a pretty substantial increase because our concession levels, as you know, increased throughout the year on a quarter-over-quarter basis. So, from the plan standpoint we are going to see concessions increase reasonably substantially over '03 levels but on a run rate basis from the fourth quarter we should see a slight decline. We think that from a run rate basis we hope that we're near the peak of the cycle for concessions. As you note, though, with regard to our plan for next year the uptick in occupancy that we saw throughout the year, that we have maintained going into the first quarter of '04 is largely going to be eaten away by that increase in concessions that we know we're going to have on a year-over-year basis.

How do you get to flat NOI if the concession activity went up so much in the second half of the year? If you just used your fourth quarter run rate you would think year-over-year your NOI would be down.

We actually have on a gross income basis, we have about just less than a 2% increase in gross income for the year. So if you take the 2% increase in gross income for the year and back out the roughly 4% increase in expenses it puts you roughly flat on a year-over-year basis.

The gross income excludes the concession activity?

The gross income does include the concession activity, but we also have rental rate increases in some of the markets where we've anticipated improving conditions that get to an increase in gross income minus the concessions that we know we're going to have, versus the pickup in occupancy.

When you say flat NOI growth year-over-year is that after the effective concessions or before?

It's after the effective concessions.

And I guess you expect that you're going to try to dial back concessions, but it's unclear how successful that will be?

It's certainly our focus right now and it really just depends on if we see the kind of job growth in the markets that we're anticipating, and it's not like we're anticipating any huge increase in job growth but on a year-over-year basis in virtually every market, we are anticipating some increase in job growth. If that happens then we should be able to begin to make some progress on whittling away at the concessions. Our forecast for next year is in terms of overall market conditions, we laid out our plan with an expectation with our on-site staff that things would be roughly the same in 2003 as they were in 2004. The difference in our portfolio, in our results for next year, is primarily in the fact that we have been able, through aggressive marketing and also pricing and concessions at a higher level, we've been able to get back to that 94.5% occupied condition versus where we spent most of last year, on a year-over-year basis, we're up almost a little over 2% from occupancy stand point.

You gave job growth expectations and completions expected for Houston, do you have that same information for Dallas?

I do. Job growth expectations for Dallas for '04 are roughly 16,000 jobs, completions at 3100.

The 3100 is down?

Down from the prior year at total completions, actual completions were about 5,000.

And Las Vegas you said stable, do you have similar numbers for Las Vegas?

We rated that as a B with a stable outlook. Total job growth for Las Vegas we have in our forecast at about 24,000, total completions at about 3,000. And the 3,000 is down from the prior year.

Just going to hit two more of your next two largest markets, Tampa and Orlando, if you give me the same information.

You bet. Tampa, job growth projected at 24,000 jobs with completions of 3300.

Yep. And Orlando?

Yes. Orlando, job growth of 22,000 with completions of 2800.

That's great, I'm sorry, I think I interrupted Jordan. Jordan?

Just lastly, obviously, you've initiated a joint venture during the quarter. Could you identify the partner and the arrangement there, your interest and management fees and things of that nature?

Sure. The partner is the Delta Group, they're a private equity group out of New York. The arrangement is an 80/20 joint venture where Delta has 80% of the equity, Camden has 20. Camden provides construction management services and development services to the joint venture for market fees. The project is being developed, or being built by Clark Construction under a general contracting fixed price contract basis. Camden also provided in the capital structure a mezzanine loan as part of the capital structure, it's roughly 10% equity, 15% mezzanine and then a 75% construction loan. And the 80/20 is basically perrypasue(ph) up to certain hurdle rates of return and then Camden gets a disproportionate share of profits after, I think, a 12% hurdle.

Okay. Any other planned developments with these guys in the near term?

Right at the present time, we don't have anything we're working on. But they're definitely a good group, good capital source and the structure is a very clean, reasonable structure for us to use. I wouldn't be surprised if we didn't do more with them in the future but we haven't identified any at this point.

Okay, thanks.

Thank you. Our next question comes from Chris Capalongo from Deutsche Bank. Please go ahead.

Good morning. I wanted to touch on the expense savings, in particular the real estate tax, the favorable judgments. Did that appear as say like a one-time item during the quarter? That needs to be smoothed out going forward? Or how was that accounted for?

Yes, ultimately the expensed tax savings were right at $500,000 in the fourth quarter. So it's a favorable variance in the fourth quarter. Our 2004 numbers will assume budgeted increases in rates as we normally do. But the tax savings is in the fourth quarter.

Okay. And then in terms of Long Beach and its lease-up, how long do you anticipate that taking out to the completion date in the second quarter?

We believe that our leasing rate is going to be about 30 units, 30 apartments through the month, we believe, it should be stabilized or at least completed in terms of leasing by the fourth quarter of the year. The real issue in Long Beach is we just delivered the first tower, and we're starting to lease the tower. The low-rise portion of the four-story portion is substantially leased. What you end up getting into in a project that's this large, 538 apartments, your momentum slows towards the 60, 70% occupancy level, primarily because you start having traditional move-outs. So as you maintain a 30 new leases per month, you start having to backfill people that are moving out. It will take us to till end of the year to finish leasing that up.

Great, thank you. That's it.

Sure.

Thank you. Our next question comes from Brian Legg from Merrill Lynch. Please go ahead.

Along the Harbor View, what does this take your yield down to?

The yield at Harbor View is going to be in the 7.5% range.

Is that after selling land parcels?

No.

And lowering your cost basis?

No, it's not. As a matter of fact, the whole issue with infrastructure into the land is we have substantial profits built into the land. And we're not increased the yield for any land profits because we don't have those at this point. And when we book them we'll give you a number. We do have one of the tracks under contract for, basically, what our cost is in the land leaving reasonably margin in land profit.

Okay. So that yield will go as you sell those parcels, that yield will go up?

Yes.

And can you just talk about the concessions, again? You gave out two numbers, the 850 per unit is in the fourth quarter, what was the 750 per unit, was that fourth quarter last year or was that the third quarter?

That was the third quarter. Sequential increase was about $100 per unit.

Okay. And is some of that driven just because you have lower traffic and you give higher concessions in seasonally slower periods or is that 850 a good number that you're probably going to stick with even going into the seasonal upturn in the second quarter?

Well, we certainly hope that as we get better volume and better velocity next year that we can bring that concession number down. If you'll recall from our last conference call, there's a lot of different approaches to how people manage their street rents versus their concessions. And our preference has and continues to be to maintain relatively high street rents and to allow concessions as long as we can get those concessions either up front or prorated over less than the term of the lease so that with the expectation that at some point, when we do get some relief and recovery in rental rates, that our residents and our embedded base are actually paying, at some point during the term of their lease, the higher stated rate on their lease. So we are probably going to continue to carry, relative to some other companies, higher level of concessions with higher relative street rates. So, at the end of the day, the push-pull between those two, we're trying to manage to an NOI level at the property level, but that's just been our preference, is to continue to try to maintain as high a possible street rate as we can so that in a recovery scenario we can take advantage of that.

Just looking at your page 11 in your supplemental, it shows that your weighted average, I guess your street rent, rental rate increased sequentially by 1.5%. What would be the change from the third quarter and net effective rents?

We don't have at that right at our finger tips, Brian. I can call you back on that separately.

Okay. Regarding your mezzanine investment assumptions, you're at 53 million at the end of this quarter. How much do you expect that to grow in '04, and does some of that start off in '04?

Yeah, we do expect to continue adding to that mezzanine pipeline. I think our internal sort of guidelines that we have discussed with our board would allow us to take that number up to somewhere in the hundred million dollar range before we sort of relook at it. Those numbers I gave you do not assume that anything is coming back out of that mezzanine portfolio in '04.

One of the problems or challenges in the Mezz program, is that there is a of competition in the Mezz, rates have compressed pretty dramatically from when we started the program, it's just really tough to get the right deals. We have been fortunate in being able to build the portfolio to 50 million. If we get to 100 million, I would be surprised but that's the goal. It's probably going to range in the 30 million dollars kind of zone.

I'm sorry, in the $30 million zone?

In terms of additional.

30 million, okay.

It's just hard to, unless we just happen to see better deals or there's less competition or something, but we're pretty tough on our underwriting criteria.

Are these loans really expected to be sort of a short burn-off period, though, because they're looking to flip the properties?

Well, we have in all of the loans we have lockout periods for at least two years, sometimes three and longer. And we obviously are cognizant of the fact that if these are high yielding instruments and we want to make sure that they burn off over a reasonable period of time so that we don't have big spikes in our income as a result of it. But most of the loans are locked for at least two years.

Last question, you said that your non-controllables you think it's going to be up 4%. But I'm hearing from other people that insurance rates are coming down 20, 30%. Do you expect insurance to come down but the property taxes to more than offset that?

Well, in terms of the conversations that we've had, Brian, it depends on when your renewal period is. We had a substantial decrease coming into this year's renewal. Our planning purposes are flat scenario for insurance. We hope to do better than that but from a planning standpoint we've looked at that as basically flat and the differential there is the taxes.

Okay. Thank you.

Thanks you. Our next question comes from Rich Anderson from Maxcor Financial. Please go ahead.

Thank you. Rick, in the past you've talked on the topic of dispositions that you guys were not inclined to do it and you cite a few reasons, one of them being lower NOIs as really what's driving cap rates down, and not necessarily the demand and the appetite for multifamily housing from private investors. But now it looks like you sort of switched gears and are assuming 100 million in dispositions. Can you explain why you've had a change of heart?

Sure. I think that the key is we believe that the markets are going to recover somewhat in 2004, and then be positioned to do well in 2005 and 2006. So with that in mind, we have assets that we have had on our list that we want to sell, that are older, slower-growing, high capex assets. And given the forecast for '05 and '06 we want a position with newer faster growing assets to take advantage of, hopefully, what's an uptick in the market in 05 and '06. I will say that we still have a very focussed discipline about protecting our dividend so you will not see dispositions in advance of acquisitions. We will be acquiring before we dispose of, and you're likely to see acquisitions a quarter or two before a disposition, so that if I have a negative spread, which I probably will, between the sale and the buy, that I can offset some of the dilution by having the acquisition on my books a little bit longer than, or a little bit before my disposition so I can offset that. So there has been a slight change by virtue of just believing the markets are going to be better in '05 and '06 but we're still very vigilant in making sure that we can pay our dividend and we don't want to dilute earnings in a year where we should be having a rebound in earnings going forward.

Okay. What are you guys thinking that sort of negative spread will be in cap rates?

It's a pretty interesting market out there today. Usually it's 150, 200 basis-point negative spread when you're selling old and buying new. I think that the negative spread with current markets could be as low as 100.

Okay. Could you talk about where you might be selling?

We continue to be focussed on lowering our exposure in Houston, Dallas and Las Vegas, and increasing our exposure on the coasts.

Okay. Next question is on Harbor View, you mentioned some of the factors that drove up the cost.

Right.

Are there any other sort of quirky things like that that could drive up the costs before you complete the project this year?

No, these are the sort of final negotiations with all the parties, the contractors, the city, and the coastal commission and so forth. And we're substantially complete at this point other than finishing the second tower, which are pretty basic things that, interior finishings and stuff like that. All the major cost components are fixed at this point and the issues with the local governments have been resolved, so there shouldn't be any other risk in that deal.

Okay. My last question is, for '04, do you have a bias one way or the other for the low or the high end of the range?

I'd rather be at the high end, and I'd rather not be at the low end, but I don't have a bias at this point. We're just going to be right in the middle at this point and sort of block and tackle to get there.

Okay. Thank you.

Thank you. Our next question comes from Karen Lamark from Merrill Lynch.

Good morning, going back to concessions. Maybe this is more philosophical than anything but do you assume concessions eventually go away as supply and demand tighten up? And what I'm wondering is has this happened in past cycles, and does Orange County indicate anything about the consumers being trained to look for a concession in order to get that rent? Thanks.

The last point first, Karen, there's no question that our consumers have been trained to seek concessions. It's across all markets, the conversation within the first 10 sentences almost always turns to some type of what is your special? Our challenge from an execution standpoint is to make sure that our professionals and sales people understand how to deal with customers who lead with, What is your special? And get back to selling features and benefits and talking about why they should prefer living at a Camden community versus where they may be giving a higher concession. The reality is that we were probably the least likely to want to go to higher concessions and we will probably be the people who have to lead, us and some of the other rates, who have to lead the charge out of this morass that we're in with regard to the consumer expectations. We've done it before, we've certainly lived through it in Austin in two cycles and Houston in two cycles, as a public company. We walked into it in Las Vegas in 1998 after the merger, and really led the way out of that downturn with regard to concessions. And to your first question, absolutely. You will recover those concessions, it depends on how quickly you recover them. But that is why, fundamentally and philosophically, we have always preferred to defend street rates and plug the gap to a market condition with concessions. Lowering street rates and having the consumer, in their mind, paying that lower street rate as their existing rate once they become part of your embedded base, when you go back to how they renewal conversations with that resident, if market conditions have substantially improved or improved even modestly, then their expectation and their experience is going to be that that is a rental increase. Whereas if you've structured it and sold it appropriately as a concession, and it burns off at some point during the lease, and at some point during the lease the resident is actually paying and writing you checks for what we considered to be, quote, the market rent at the time of entering into the lease, then that conversation is very different. You can have a conversation about no rental increase but renewing you at street rate which is a very different proposition than what I think you end up with by collapsing street rates to whatever the current, what we consider to be disequilibrium, market condition is. So that's a long-winded answer to your philosophical question, but I hope I covered it.

Yeah, did you. Thanks. You bet.

Thank you. And our next question comes from Lee Schalop from Banc of America Securities. Please go ahead,

Hi, it's Karen Ford. Thank you for the additional disclosure on the mezzanine loan program. The $30 million of additional activity you're expecting this quarter can you put what portion of that have is currently in the pipeline, so to speak, that you have identified.

First of all it's not during the quarter, it's during the year.

During the year.

Right now we're working on probably $10 million of different transactions, but they're all in the sort of due diligence, slash/working on scenario, nothing has been finalized. We don't have letters of intent or anything like that out on them. So we're sort of filling the pipeline for the rest of the year at this point.

Okay. And I know you said that the environment has gotten more challenging there. The new deals that you have just recently put on, or will be putting on, how much lower yield are they versus the average that you disclosed?

The accrual rate that we show there is not the -- that's the rate that we're accruing currently. But our rates are higher than that in the sense that we have look back IRs that we get when they pay the loans off and so forth that are higher, in the 14 to 18% range depending on the deal. It appears that with the current competition in the marketplace, that getting transactions done, depending on the equity levels and risk level of the deals, probably in the low end, 12, on the high end, 14 1/2, depending on leverage.

Okay. Finally, what is your expected development yield on Westwind?

Westwind development yield is -- I don't have it in front of me, but it's in the 8.25, 8.5 range, I think, plus or minus.

Okay, great. Thank you.

Thank you. Our next question comes from Jay Leupp from RBC Capital Markets. Please go ahead.

Hi, good morning. Could you talk a little bit about the prospects for expanded activity in Washington, D.C.? Your rationale for entering that market? And what kind of cap rates you could expect to earn on either new development or acquisitions there?

Sure. We decided to enter Washington, D.C. probably, we've been working on this particular Westwind transaction for a couple years, probably 18 months. And the reason we chose to develop rather than buy is that we can still generate 150 to 200 basis-point positive spreads to acquisitions, and the acquisition market there is still very, very difficult from a cash cap rate perspective, the private buyers are continuing with their higher leverage to outbid lower leverage entities like REITs. We felt it was better to enter through development than it was through acquisition. You can see that we did that in California as well, we have never bought a California deal other than through the merger with Oasis, and all the rest of the expansion there has been through development. We have a number of other projects that we're working on in the DC area at this point. We should hopefully be in a position to do another couple of deals there this year in terms of development. We think that just the stated strategy that we've had, which is lower our exposure in the center of the country, and increase our NOI exposure on both coasts, fits right into keeping our exposure in the 10 to 12% range of NOI contribution from any one market. The way we've structured the entry into Washington, D.C. limits risk in a couple of ways for us. Since it is our entry deal, we have set up a joint venture whereby we're taking 20% of the market risk. We have a partner taking 80% of the market risk. We're giving up value for that, and the partner's being paid well for their risk, taking part of that risk. The other piece of risk that you have entering a new market is construction risk. We mitigate that risk by entering into a guaranteed max contract with Clark Construction, which is a very stable general contractor that's developed a long time in the Washington, D.C. markets. We minimize our construction risk. We get to learn a new market and take limited market and construction risk in the process, while we are then expanding our people's view and knowledge of the market so that we can ultimately just do developments standalone on our own there. That's sort of our approach in view of the way we're entering that market.

Just one follow-up, Rick, I'm sorry I missed, you had given a revised expected yield on Harbor View. And then the last question was with the way cap rates have fallen in the apartment business nationwide over the past year or so, are you seeing any of the effects of this in the markets where property taxes are reassessed based upon value of upticks in your property taxes based upon increases in assessed values for your properties?

Is your question are we seeing increased property taxes because of higher or lower cap rates and higher prices?

Yes.

Generally, interestingly enough, generally not. The reason being, is that even though cap rates have gone down, so has cash flow. So when you look at it from an appraisal district perspective, they may argue that cap rates are historical lows, but so are cash flows. And so we haven't really experienced any big hits as a result of this new low cap rate environment, if you will. Mostly, we've had sort of the average 2 or 3% increase in property taxes with maybe some exceptions of a few markets but not overall.

Overall, actually, for this year, valuations were down, but rates were up. So they sort of get you coming or going.

Okay. Then the Harbor View yield, I think you mentioned it earlier and I missed.

We think it's going to be a 7.5 when it's stabilized.

Okay, thank you.

Thank you. Once again, ladies and gentlemen, if you have a question or comment, please key star 1 on your touchtone phone. Our next question comes from Scott Lashay from Deutsche Banc. Please go ahead.

Yes, good morning. Two questions, one regarding the mezzanine loan program, a number of these properties are stabilized. What would be the debt service coverage at these properties? Through the mezzanine layer.

Ultimately, our debt service coverage on our mezzanine portfolio is somewhere in the 1.2 to 1.3 range.

Okay. And just looking at the capex per unit for '03 of 481, do you think that changes going forward with asset sales or would that be good number to use for '04?

For '04?

Yes.

The only thing that would change to that number, that's a good number at the property level, but in '04, as we roll out our new property management system, I think we factored in a 4 to $5 million number for site readiness, equipment, et cetera. But on a run rate basis at the property level for '04, the 481 is a good number.

Okay. That's great, thank you.

You bet.

Thank you. And our next question comes from Dave Rogers from McDonald Investments.

Rick, do you guys have any put or call agreements on the DC Metro asset that you're under construction now?

We do not, no. We have buy/sell arrangements between the partners, but we don't have any put/call scenarios there at all. Just for information purposes, if we did, we would be under a variable interest entity issue from an accounting perspective and have to consolidate, which would be bad.

Great. Keith, you talked a little bit about this earlier, but do you have actual data on concessions on lease renewals and rent bumps that you might be taking on the renewals of leases?

The rent bumps on renewals?

Yeah, in terms of the scheduled rents that the underlying contract is written at, and the concessions per renewal?

It's really just, it's all over the board. Obviously, in our portfolio as a whole, the level of concessions on renewals is much less than the level of concessions on new leases. So in general, that is true, but I would tell you that in virtually all of our markets, with maybe two exceptions right now, there is some level of concessions attached to renewal leases as well new leases. And the number that I gave you for concessions is for all leases, whether that's a new lease or a renewal.

Okay. Final question, Keith, I think we talked previously about your thoughts that you might see some move back from single-family housing back into apartments based on the quality of the tenants that you saw moving out. And particularly, as I think about Houston, are you seeing any of those tenants or move back-ins from single-family housing?

At this point, still going the wrong way, Dave.

All right, great, thanks.

You bet.

Thank you. And we have a follow-up question from Rich Anderson from Maxcor Financial. Please go ahead.

Thank you. Back to Harbor View for a second, I'm just looking at the lease percentages this quarter versus third quarter, it was 42 this quarter, 36 last quarter. If you do the math, that's an increase of, unless I'm missing something, an increase of 33 units over a three-month period. You mentioned 30 units a month in leasing. Can you sort of reconcile that for me?

I guess the issue is we actually turned more units during the quarter, so --

The issue in the lease-up like this is that we, I'm trying to figure your math out here in a minute.

Well, okay, I did 42% of 538.

Right, versus.

Is 226 and 36% of 538 is 193, the difference being 33 units. So you had leased percentage --

No, that's correct. That's correct.

Okay? So you have 33 additional units leased.

Yeah, and part of the issue here is that the 42% leased, in all of our lease categories, it goes out, if we have any notices at all for move-outs it's included in that number. So that's not a net number, you see what I'm saying? That's one thing. The other thing is that Long Beach is delivering really lumpy units, meaning that we get big buildings at a time, so oftentimes we have preleasing where we have units that are leased but people aren't moved into. And those will not show up on the leased percentage either, they're basically priority reservations for when the units are delivered.

What would you say, then, would be what you're doing, once you get through all the noise, leases per month at this stage at Harbor View?

We should be doing 30 units a month.

You're doing that right now?

Yeah.

Okay. Thank you.

Sure.

Thank you. And our next question comes from Greg Eisen from Safeco Asset Management. Please go ahead. Thanks, good morning.

You talked before about your property management system and your expectations and hopes that it could serve to better manage your rent rates and your concessions. Could you give any quantification of how that's helped you in the markets you've rolled that out to already?

Actually we're still in pilot. We've got one community that has rolled out and the results there have been really terrific in terms of our ability to better track prospects and do followup. At the end of the day, we do expect to achieve significant efficiencies, not only in terms of our ability to provide better customer service and better information to our residents, but efficiencies with regard to how we operate all of our individual communities. But that won't start taking effect, the actual rollout right now, we're looking late summer as far as beginning the entire rollout to our portfolio, so the effects of the increase in productivity are really going to be an '05 event.

Okay. And one other question regarding concessions then. Did you drop your street rates in any of your markets down significantly in order to acknowledge the weakness of the markets? You mentioned Denver being, I think it was Denver, have you had to actually drop the street rates rather than increase concessions in any market?

No, we have not done that. Our concessions, that's why the quarter-over-quarter number went up almost another hundred dollars in the quarter. It was the fact that in the markets where we continue to see deterioration, Denver's a good example of that, our concessions went up in Denver quarter-over-quarter, but we have not at this point really pursued the strategy of reducing street rates. We just think we're at a point in the cycle now where we've sort of have ridden it to this point and we do expect that at some point in '04 to start seeing some improvement in market conditions and we'll stay pat.

Okay, thank you.

You bet.

Thank you. And that was our final question. I would like to now turn it back to Mr. Campo for some closing remarks. Please go ahead, sir.

Thank you for attending the call and we look forward to updating you next quarter. Thanks.

Thank you, sir. Thank you, ladies and gentlemen, today for your participation. This concludes your conference call and you may now disconnect. Good day.