Camden Property Trust (CPT) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2004 Camden Property Trust earnings conference call. My name is Lenny and I'll be your coordinator for today. At this time all participants are in a listen-only mode. However, we will be facilitating a question and answer towards the end of this conference.

If at any time during the call you require assistance 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 now like to turn the presentation over to your host for today's call Mr. Rick Campo, Chief Executive Officer of Camden Property. Please proceed sir.

Thank you Lenny. Good morning and thank you for joining Camden's first quarter 2004 earnings call.

Before we begin I'd like to mind everyone that we will making forward-looking statement 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 filed in our filings with the FCC and we encourage you to review them.

We had a solid first quarter operating performance which continues to position Camden well for the long awaited recovery in the multi-family rental market. First quarter run rate FFO was 78 cents per share which was slightly higher than our plan. Transaction income relating to lost rents from insurance proceeds total 4 cents a share, and the sale of our credit scoring e-commerce investment add an additional 2 cent per share for the quarter. These items were not included in our originally quarterly guidance but were included in our 2004 full year guidance but were expected to come in in the third quarter and fourth quarter of the year.

Same property NOI increased 3.3% over the first quarter of 2003, which was the first increase in nine quarters a long awaited increase. Sequential revenues for the last four quarters has either increased or remained flat but has not declined. While one quarter does not make the year we are encouraged by our team's performance and the way the market sort of feels today.

Our 2004 "Make the Right Moves" plan is on track. The four tactical elements of the plan, as most of you will recall, involve $400 million of refinancing opportunities at lower rates. We've completed $300 million of the refinancing and expect another $100 million in the next few months. The second part of the plan was to increase our occupancy 200 basis points from the low paint in 2003 we've achieved that.

The third part of the plan was to reduce concessions. Concessions continue to be the [inaudible] of our industry. We are clearly focused on lowering concessions. We do believe with the increased job report or the better than expected job report that we had this morning and clearly the, I think most people felt that the first quarter jobs and the current job number will will lead to stronger demand in the multi-family markets positioning Camden and our managers to [inaudible] concession sometime during this year.

The fourth tactical area of our "Make the Right Moves" plan is development. Our development projects are leasing up generally within our plan. First quarter leasing into Harbor View was a little slower than we would have liked but has picked up in the months subsequent to the quarter end.

Based on improving outlook for 2005 and 2006, we have ramped up our development starts. During the quarter we started farmer's market two, phase II in Dallas, and [inaudible] phase II in Orlando. We expect to start several other developments in the later part of the year in California and Washington, D.C. We'll continue to provide living residence to our residents and investing excellence to our share holders during a period of recovering operating fundamentals for our business. I will turn the call over at this point to Keith Oden, our President and Chief Operating Officer.

Thanks, Rick.

The most appropriate headline for my comments today would have to be more of the same as our operating environment didn't change perceptibly since last quarter. In fact it's been basically flat for the last year and I still see no reason to expect a material change in the upcoming quarters. Those of you on the call who do this professionally are probably as tired of hearing about the head wins in the multi-family sector as we are living with them. But it is what it is and we're doing our best to manage with the challenges and continue outperforming the competition.

One area of concern regarding occupancy rates in upcoming months that we watch very closely is the percentage of moveout from our communities do purchase homes. The percentage hit an all-time high of 22.5% in the fourth quarter of 2003, but was down to 20.7% in the first quarter. It will be very interesting to see how the recent run up in interest rates will impact this percentage going forward.

In a previous conference call we stated that while a relatively sharp increase in mortgage rates would be a positive for our operations over the long term it could be a short term negative as the fence sitters all rush for the doors at once. It was recently reported that the number of mortgage applications for April sent a new record which would mean that the worse is not yet behind us for competition from home sales. This is something we will continue to watch carefully.

Traffic for our communities for the quarter did increase by 10% over the prior year. Some of which can be attributed to a national marketing campaign which we just completed. However a slightly lower closing ratio left our average occupancy flat with the prior quarter.

In terms of current and projected conditions in our individual markets, I provided a market by market update on our last conference call and I'm still comfortable with the ratings that we provided at that time. That in itself is good news because at this time last year we were revising our outlook for the balance of the year downward for the majority of our markets. Clearly we've done a better job of anticipating market conditions for 2004 than we did in 2003.

The result is that we've performed slightly ahead of plan on a consolidated basis for onsite operations for the first quarter. More importantly almost 90% of our communities met or exceeded their budgets for net operating income for the first quarter. I think it's fair to say that while landscape for multi-family fundamentals is still fairly ugly our visibility of the landscape has as improved considerably. Our first quarter results have set the stage for us to achieve our operating budgets for 2004.

From an operations perspective we had a good quarter. Our occupancy rate held above 94% and on a sequential basis our revenues were essentially flat as a slight increase in rental rate offset a 3/10th decline in occupancy. The increase in operating expense was primarily caused by an increase in property insurance claims, otherwise our operate expenses and our same store NOI would have been relatively flat over the fourth quarter of 2003.

Concessions increased over the prior quarter by $36 per unit analyzed to approximately $900 per unit. But the increase was much less than previous quarter-over-quarter increases. On a year-over-year basis the first quarter results showed an improvement of 3.3% in same property NOI reflecting a 2.9% increase in occupancy and 3.4% increase in rental rates which was largely offset by an increase in concessions of $180 per unit annualized.

Rick mentioned the nonrecurring items in our FFO for the quarter and Dennis will provide you with additional details on those items. After the appropriate adjustments our FFO run rate for the quarter is 78 cent. Preliminary April revenue estimates support our second guidance 77 cents to 80 cents per share for the quarter. At this time I'd like to turn the call over to our Senior Vice President and Chief Financial Officer CFO, Dennis Steen.

Thanks Keith. Good morning to all and thanks for joining us.

I'll begin with a summary of Camden's first quarter 2004 financial highlights followed by a review of our capitol structure and we'll close with a little color on our second quarter and full year 2004 guidance.

As Rick mentioned earlier we reported FFO for the first quarter of $36.8 million or 84 cent as share. Included in this amount is $2.6 million or 6 cents per share related to an insurance settlement for lost rents related to a fire at one of our Florida communities in 2000 and proceeds we received on the sale of an e-commerce investment that had been previously written off. Both of these items are included in other income in our statement of operations.

Excluding these nonrecurring items our FFO for the quarter would have been 78 cents per share just above the mid-point of our previous guidance of 76 to 79 cents per share and down as expect from the 83 cents per share we reported in the fourth quarter of 2003.

Taking a closer look at our first quarter results compared to the fourth quarter of 2003 total property revenues increased just over $500,000 due to the continuing lease up of our developing community in southern California and Houston partially offset by a slight decline in our same store revenues as Keith discussed earlier. Revenues related to fees and interest in our mezzanine loan program increased only slightly from the fourth quarter as we did not originate any new mezzanine loans during the quarter. Page 13 of our supplemental package contains a summary of our mezzanine portfolio.

Sequentially property operating and maintenance expenses rose 1.3% and property tax expense increased 7.8%. Both came in slightly under budget for quarter. Excluding the impact of property insurance claims, property operating expenses were essentially flat compared to the prior quarter. The sequential tax increase is largely due to credits received in the fourth quarter combined with anticipated increase in rates and values for 2004.

G & A expenses for the quarter totalled $4.2 million equal to budget and up $575,000 from the prior year. The year-over-year increase was primarily due to hire salaries and benefit expenses, including expense related to stock options and additional funding for information technology initiatives and increases in public company related costs such as legal and audit related fees.

Interest expense was up $1.2 million from the fourth quarter due to less interest being capitalized due to the completion of construction on assets in our develop pipeline and the impact of our issuance of $200 million in ten-year, 5 3/8th unsecured notes in early December as we took advantage of the favorable interest rate environment which resulted in lower levels of lower priced floating rate debt in the first quarter.

Moving onto the gain on sale of land of $1,255,000 during the quarter which resulted from 9.9 acres of undeveloped land sold adjacent to our Camden Oakcrest development formerly known as [Andow] Airport in Houston. Of the original 200 acres purchased just over 60 acres remain to be developed into additional apartment communities or sold to third parties.

Additionally during the quarter we abandoned our efforts to build additional for sale townhomes, our 2.4 acres of undeveloped in land in Dallas. We have initiated a plan to dispose of this acreage and we incurred impairment charge of $1.1 million to write down the carrying value of this land to fair value.

Based on recent SEC and [inaudible] guidance on the treatment of impairment losses we have included the impairment loss on this undeveloped land in our calculation of FFO. Additionally, we have changed our policy of excluding gain on the sale of undeveloped land from FFO as we believed it would be inconsistent to include impairment losses on pending sales and to exclude gains on completed sales of undeveloped land. The result of impact to the first quarter FFO was only $112,000. We also adjusted prior year's FFO to include $1.4 million in gains on land sales.

Moving to Camden's capitol structure our balance sheet remains strong with debt to market capitalization at 42%. 85% of our real estate assets are encumbered. Two times coverage, I'm sorry, 2.9 times coverage. 91% of our debt fixed and over $400 million available under our unsecured line of credit and manageable debt maturities over the next several years. In April $200 million in 71% note matured and we'll use this maturity to increase our floating rate exposure back to the 15 to 20% range through advances under our unsecured line of credit. We also anticipate $100 million 5 or 10 year debt offering during the quarter.

Our strong balance sheet and financial flexibility should allow us to pursue new accretive growth opportunities if the economic expansion unfolds in future quarters.

Our FFO guidance for the second quarter of 2004 is 77 to 80 cent per share essentially flat to the first quarter as we expect a slight improve in revenues driven by mainly the lease up of our development communities, interest expense savings due to the majority of the $200 million and 7.1% unsecured notes, and the related increase in our floating rate debt back to our normal range of 15 to 20% offset by seasonally higher operating expenses. We have reconfirmed or full year guidance of $3.10 to $3.30 per share which assumes same property NOI growth between a negative 2 and a positive 2%. Although we're beginning to see positive economic indicators and improvements in traffic we're still cautious in that any sustained job growth will not impact it until late 2004 or 2005.

At this point we'll open the call up for questions.

Thank you, sir. Ladies and gentlemen, at this time if you wish to ask a question, please press star followed by 1 on usual touch tone phone. If your question has been answered or you wish to withdraw your question, press star followed by 2. Questions will be taken in the order received. Please press star 1 to begin, and your first question comes from Jordan Sadler with Smith Barney.

Good morning. First question just on your guidance, I mean have you 84 cent in the first quarter. 77 at the low end for Q2. If you look at the low end of your range at $3.10 that assumes you're going to do 74 cent or 75 cent in 3Q and 4Q. Just split ting out evenly. Is there anything I'm missing here in terms of higher expenses that would drive earnings down a few cents or why were you hesitant to I guess narrow the range or raise the low end?

Well, I think Jordan, the expenses trend up in the second, third -- third quarter and down in the fourth quarter that's just a seasonal nature of our business. So you do in fact have expenses going up. Now the low end of the range you would have to have a minus 2% you know a negative 2% decline in same store NOI for the whole year and when you layer on a 3.3% gain in the first year or in the first quarter and then put on a minus 2 for the whole year, obviously you'd have to have a pretty precipitous decline in rent as well as increases in expenses under that scenario. And that's how you get to the low end of the range.

It sounds like when you say precipitous decline.

Well.

You're not really expecting that to happen?

Relative to going from 3.3 up in the first quarter to 2 minus 2 for the year, we're hoping that doesn't happen. But that's baked into the lower end of the equation.

Okay. So what are your expectations for revenue sequentially? Is really maybe that's my question.

Our expectations for revenues, Jordan, or basically flat or the second quarter and then we do have a very small increase in the third and fourth quarter in terms of primarily from the lease up of new developments but our expectation continues to be if you look at our guidance, we began the year with minus 2 to plus 2 on same store. The mid-point of that is basically flat and I think that's still a good number for us for the year.

You know, obviously the low end of that range reflects an abundance of caution on our part, although if you go back to -- and assuming that things continue to progress like they are then at the end of the second quarter then we certainly hope we would be in a position to give you a little bit better guidance and a tighter range. But as we sit here today in the first quarter with the unknown that's are still out there, we just still haven't seen enough evidence that there's any significant difference in the operating environment that we would want to change our same store guidance from the flat that we put out in November of last year.

I would add, though, also that of course in the first quarter we had the big jobs number in March and everybody of course did high fives on that from a demand perspective but the key issue there was we didn't see the April numbers until this morning and, you know, you had something like 880,000 jobs or 890,000 jobs in the first four months of this year which is pretty substantial relative to what your original plan is. And if you then fast forward that and say let's assume we're on a four-rate, extrapolate that to a 12 month rating you are talking about 2.8 million jobs.

With 2.8 million jobs the outlook is a lot different, I think. But at this point given where we were in the first quarter and not wanting to bet on March and extrapolate into March job's number we basically stayed you know very conservative in what we think is going to happen. I think the back drop or when does multi-family demand really pick up. We have supply issues I'm sorry? What was that?

Sorry about that.

No problem.

I think the issue I was trying to hit was, was if we do have 2.8 or 2.9 million jobs then clearly the recovery is going to come quicker than if the job market, you know, stops but at this point we we kept a very cautious note here.

Okay. And I understand your caution and can I appreciate that. I guess Keith, the one thing I might ask you was did you think did any of this job growth in the first quarter, did you see that anywhere? I mean your market expectations relative to three months ago are flat or the same. Was there anything on the margin in any of your market that's you saw better or worse than you did three months ago or these job numbers are just backward looking and what you were seeing all along.

Well I think that what we did see and I mentioned the year-over-year increase in traffic, but we also saw a sequential increase in traffic from the fourth to the first quarter of about 14%, some that is seasonal but that even adjusting for the seasonality it was a pretty decent increase in traffic. That's not -- the traffic component is -- we are getting sufficient traffic. Some of that is probably from increased activity, some of it probably related to the for job formation. But what we're not seeing yet is is getting any of that to the bottom line. Our occupancies are basically flat and our concession levels wracheted up again from you know what I considered to be ridiculously high levels. But they were up again sequentially not by a big number but they were still up.

So before I change my tone significantly I'm going to have to see a quarter or at least a couple of months where our occupancy stays in the 94 to 95% range, our traffic remains strong, and the rent that we get to the bottom line increases. And I -- you know, we haven't seen that yet. I'm hopeful that we will, as Rick said if that kind of job progression continues I think it's inevitable that we will but I think the probably the most useful way of thinking about our range is to consider the mid-point is the most likely outcome and that's $3.20. You know. There's probably some set of -- there is in fact some set of assumption that's would or circumstances or outcome that's will get you to $3.10 and there's some set of outcome that's will get to $3.30.

Fair enough.

Okay.

Just I guess going back to the refinance, maybe, Dennis, you said $100 million debt offering five to 10 year debt you'll do this quarter. Any indications on rates yet or?

I think based upon what we had come out today we're looking at a five year today right at 3.90 and a ten year at 4.75. I think we would be able to do either one of those around 100 to 115 basis points over those two indicators.

And lastly I know you guys started some new development during the quarter. Two questions.

One, just can you maybe give us some indication our Farmer's Market one and [Levista] One are performing on a yield basis, and then second will we see an increase in capitalized interest going forward?

The I don't have the specific numbers on what those properties are doing right now. They're both very well leased and doing well in their market place in the mid-90s leased and so forth, but I don't have the yield numbers. We'll have to get back to you on that, Jordan. And then your second question was what?

Just capitalized interest expectations. It's been trending down. Is it going to go up now?

Our capitalized interest going into the second quarter is going to continue to decline slightly, and then it will probably start to pick up in the fourth quarter. We will turn the last phase of our Harbor View development in the second quarter and then from that point as we fund our development pipeline you'll actually see the first pickup probably starting in the third and fourth quarter.

Okay. Thank you, guys.

Uh-huh.

And your next question comes from Brian Legg with Merrill Lynch.

Hey, Rick. Going back back to the development in Dallas. Is Dallas a healthy enough market to start developments all over again? And you do have in your in your supplemental in the last page you do you have a rent market rent for the Farmer's Market One of almost $1200. Is that a true net effective rent? In other words do you have the concessions baked into that number?

The answer to the last question is no, that is a that is stated market rent and then net concessions would be off of that rent.

So is it -- is Dallas still a month or month and a half two months concession market?

Brian, on Farmer's Market depending on various unit types we're still averaging slightly less than a month on free rent. But it varies. It's literally week to week as to floor plan types, et cetera but overall we're still averaging about just slightly less than a month's free rent on the Farmer's Market product.

As far as is Dallas strong enough for this product. Two things going on in Farmer's Market one is that because the Farmer's Market is located in the downtown area and it's really literally the only sort of property new development that is downtown that's actually within the downtown and the sort of feel of the property is loft and there are loft buildings around it, and we get a tremendous amount of traffic that comes in the door in Farmer's Market asking for loft product. So we designed 284 apartment homes half of them are lofts.

They're four-story lofts where these are soft lofts with exposed ceilings and exposed duct work and concrete floors and that sort of thing so we think that there's a big demand for that as evidenced by people coming into our office going where's your lofts? Your lofts, right? And we don't have the ability to lease them a loft. So when you look at the components of the merchandising plan here. The loft product we think is going to do very well.

And the other sort of traditional product is more skued towards the higher demand smaller unit in Dallas in the Farmer's Market area which actually do very well in the current market and have the lowest levels concession. So based on the delivery schedule into 2005 and 2006 stabilization we think it's the right time to add to the position in Dallas and add product that we don't have there today from a competitive perspective.

Okay. And looking at your lease up developments. You mentioned that Harbor View was not leasing as well as you'd like. Just looking at the number it appears you were doing 16 units per month.

Why is the leasing slow there and also looking at the [Otaya] Ranch, the leasing percentage didn't change at all in the fourth quarter.

Two things going on there. First at Harbor View in the first quarter actually January and February we were sort of doing the final push from construction so there was a lot of a lot of sort of front door mess, if you will. Getting the Victory Park cleaned up and getting the art in and so forth so we had a loss of construction issues in the front door were people couldn't drive into the front they had to take a route around the back to get in.

We also had some management changes in the property in January and February which included about half the staff. So we had some issues management wise and construction wise that led to a very slow quarter for that property. We netted 34 leases in the month of April so we had the construction is out is done. The management team is in and the new management team is in and we're back on track. So we had a couple of months of you know sort of extraordinary issues that faced the project.

And then on Sierra -- Camden Sierra at [Otaya] Ranch while the numbers haven't changed much our occupancy has gone up clearly there. We go out 60 days from a -- from a notice perspective so the percent leased you see there the 90% Sierra [Otaya] is actually what the -- includes lease but also notice to vacates and so we had some -- some troop deployment issues related to the Iraqi situation that was affecting south San Diego but by enlarge the property I think with the current numbers they're up in the last week they had a good leasing week and they're up into 92 or 93% or something like that that.

Because it was 89% in the fourth quarter and 91% occupied this quarter. So even the occupancy didn't change. I was wondering if it troop deployment or something else.

200 basis increase on 420 unit project is pretty good. We feel real good about it it's doing fine and they did have some troop issue there's but I think that it will it will be finished in be in the mid-90s the next few months.

Okay. And just shifting to on concessions.

Are you playing around with now that you're occupancy is at 94% and you're going into the seasonally stronger period and traffic seems like it's growing are you playing around with reducing concessions and do you expect the concession per unit number to actually fall sequentially?

Well, it's it's -- really, actually, Brian, playing around wouldn't be a strong enough characterization for what we're doing. It has been a major focus of ours. We held our management which had our district managers boot camp meetings in December of this year or '03 and spent that entire meeting on strategizing on how and when and where to start whittling away at the concession number. Then we turned around and went out to our onsite staff and repeated that training class. Focused specifically on how to we sell in a concessionary environment and start whittling away at that.

Our stated objective for our management team for the year is that is that we want to decrease our concessions by 10 -- a minimum of 10% from the budgeted levels. Just to give you an idea of what that relates to in our entire portfolio, the plan concessions for 2004 we're approaching $40 million so a 10% decrease in those concessions would be over the course if we can manage that over the course of the year. If it happened alt mid-year it would be as much as $2 million.

It is the single focus from the standpoint of revenue management in our portfolio right now and part of the -- one of the most significant challenges is once this concession mentality gets embedded, it's not just our challenges with our consumers but it's also or challenge with all of our competitors to get people to start moving back towards a more normalized revenue management situation.

And given that you actually increased from the fourth quarter to the first quarter I assume you're probably above budget for that $40 million through the first quarter so you have a ways to go to get down to 10% for the full year.

Actually we were slightly below plan for concessions.

Okay.

But we've got we've got a long way to go to get to the 10% and it is I mean it's a daily endeavor on our part in terms of what we're doing with our onsites staffs to try to achieve that goal.

Rick, can you talk about the DC development where it's located.

The DC development that I said we're going to perhaps start in the future?

Yep.

The we aren't prepared to talk about costs for that at this point.

Okay.

It is we will probably be in a position some time this summer once we get everything organized on it.

How about location just generally.

Location it's about let's see probably I would say it's Fairfax.

The infield site.

Fairfax county. About 10 miles 10 or 15 miles from Dulles.

Okay. Great. Thank you.

And your next question comes from Rich Anderson with Maxcore Financial.

Thank you. I just to make sure the $3.10 and $3.30 guide also always included this 6 cents of nonrecurring stuff from the beginning this.

Yes. In you recall in our fourth quarter we talked about how we could exceed our fourth quarter if some of this came in, we had transaction volume and we've been dealing with this insurance issue for three years now and we've, we've had an idea that it would settle or that we'd get it done in the fourth quarter but then we had a setback and then we sort of projected it out into the year.

One of the things I think that's interesting about this it's not part of your question but I'll take the opportunity to talk about it. Is that is that the most of our competitors have always accrued lost rents from fires into their operating results and we do not do that just from a conservative perspective.

So even though this is a sort of one time charge, we could have accrued into our top line revenue growth and had it out there as a receivable but we've decided ton do that and take the conservative of if we didn't win which we thought we would but we didn't want to run the risk of having to write off something like that in the future. So even though it's a one time charge it's really rents we have should have gotten in the last few years.

On the topic of accrue how do you handle concessions when you're calculating same store results?

Concessions are actually accounted for as the resident pays. The majority of our concessions, probably 2/3rds of them, are actually paid over the lease term the other 1/3 is paid up front. We account for it as the resident actually pays.

Okay. With regard to the MEZ business do you accrue any of that that's not your you're not receiving in cash right now?

No. Our MEZ portfolio we will accrue everything that we can based on the cash flow of the actual supporting properties. If if the property cannot support the accrual from a cash flow perspective, we do not accrue for it.

Now, that doesn't mean that we're getting paid cash for each one for example. For example even though they can pay let's say a 16. Some have a pay rate of say 12 but an accrual rate of 16. If the property can in fact pay a 16 even though they're not required to pay a 16 then then we will accrue the 16 and the 16 basically compounds and sort of the logic there is I'm getting 16% compounded of return on the money that I'm not getting and as long as the property is cash flowing enough to pay it ultimately then we'll accrue it. But if the property is not cash flowing, let's see say it's cash flowing only 12 and we have an accrual rate of 16 we will not accrue that differential until it can pay the 16.

Of the 13 how much are you getting in cash and how short of it is the total that you potentially get.

I'm not sure that I have that specifically here. I can probably provide that to you after the call.

Okay.

It's not a big number. Most of them are just accruing what we're paying. But there a couple that have that feature that I just discussed.

Okay. Was the first quarter same store results sort of a positive surprise to you even though you didn't change your views on any of the markets?

Not really. Because the -- you know, you got to look at the quarter that we were comparing to and Rich, if you look if you look back the components of that we had almost a 2.5% pickup in occupancy year over the -- '03 quarter, but we knew that even with concessions as they've increased we knew that we were going to have a pretty descent same store quarter-over-quarter number. Obviously as our occupancy in '03 ramped up in the second quarter and we got to the 94% level the comparisons going forward are going to be very different.

Okay.

I was surprised and happily surprised, Rich.

Okay. The how do you propose we time acquisitions and dispositions in our model?

The acquisitions we are going to try to do acquisitions before we do dispositions and so I would hope that that there's probably a least a quarter or two differential between when we'll sell versus when we buy so that we can we know that we're going to buy at lower cap rates than we're selling because we're going to sell the bottom portion of our asset base so we want to build up enough cash flow or some positive accretion from the acquisitions before we make the sales so I would say at least a quarter in between the two.

And what would you say the spread is? Cap rate spread?

Probably 100 to 150 basis points.

Okay. Last question is on the topic of moveouts. Do you look at where the moveouts happen in terms of the quality of your portfolio class A versus class B? Do you see any difference in either one of the products?

We actually get the moveout statistics by every individual community, Rich. The interesting thing is that up until about two years ago between 18 months and two years ago there would have been a bias towards our A communities but in the last literally in the last 18 months with the rates where they where they have been that phenomenon really carried over into our B communities as well. There still is a differential but it's not it's not anything like what it was two years ago.

Okay. Thank.

Uh-huh.

And your next question comes from David Runcoe with Royal Bank of Canada.

Good morning, guys. Keith, a couple specific questions with regard to concessions. I know you talked about them going up if I heard correctly $36 a unit. Can you talk about what that increase was in a percentage basis and how it compared to the fourth quarter number?

In terms of the total concessions, are you talking about from a gross dollar amount.

Right.

Concessions up about half million dollars in the first quarter over the fourth quarter on a percentage basis that was about a 4% increase in concession over the prior quarter. We were running about $8.50 a unit in the prior quarter and this puts us at about $8.86. I I think I estimated at $9.00 in my prepared remarks. About a 4% increase sequentially.

Do you remember what the sequential increase was during the fourth quarter?

Sequential increase in the fourth quarter on a per unit basis was about $8.00 per unit.

Okay.

$8 per unit per month annualized at $100, so we went from $7.50 no $8.50 roughly in third to fourth. And from fourth to first it went to about $8.86.

Okay.

It's still increasing but the delta and the velocity of the increase is definitely narrowed and there's some good news in that.

Absolutely. Another question I guess follow-up to that.

Is I know you guys would obviously prefer up front concessions, can you talk about whether that's become more difficult lately?

It's -- Yeah, it's become not only more difficult but in many of our submarkets, it's really not possible from a competitive standpoint. We currently are running on a if you take all of our concession that's are out there roughly 2/3rds are being deferred over some period of time as opposed to up front. Again, our preference is all up front. If you can't do that then we prefer it over the shortest time period and only where it's just absolutely not possible from a competitive standpoint will we spread it out over the entire lease term. In my view that's the worse of all possible scenarios for all the reasons that we've talked about previously.

But just gross dollar amounts roughly 2/3rds are being spread over some period of time and -- and I would guess probably at this point close to half of that is being spread over the lease term unfortunately. We've got a lot of work to do not only in our own portfolio but kind of a lot of missionary work to do with our competitors to try to reverse this trend. And ultimately the only way this tide is going to get turned is with much better operating performance not only by us but by the competitors in our submarket.

Okay. Last question Rick I know you talked about another development or two in southern California. Wondered if you could take about what market specifically in southern California whether that would be the greater San Diego area or Los Angeles.

It would be the north San Diego county market.

Okay. Great. Thanks a lot, guys.

And your next come question comes from Craig Leupold with Green Street Advisors.

Good morning. Keith and an answer you gave to I think Jordan's question a little bit earlier about what you expect for the second quarter in terms of same unit operating results I think you kind of threw in there some revenue pickup from development. I was wondering if you could kind of give us your sequentially assumptions going from the first to second quarter.

Actually our revenue I think the number I gave him was that we were looking for basically flat revenues. Second quarter over first and is your question what the what piece of that is from the development?

Yeah. When you were saying flat is that total or is that flat same unit.

That's flat same store.

Okay.

That's flat same store.

All right and then from an from an expense or NOI standpoint, what might you expect for same store?

Really -- really I think on our in in our original plan, Craig, is that we had a -- we had a positive in the first quarter and basically flat in the second quarter on same store. I mean excuse me on NOI.

Okay. But you guys were actually counsel in the first quarter. You talking about year-over-year?

Yeah. I'm talking about year.

Okay. Okay. All right. How about -- but how not sequentially to the second quarter. I am trying to think of the seasonality of expenses.

Expenses definitely rise in the second quarter, Craig. If you look quarter-over-quarter we're up 2.6 on expenses not sequentially but year over year and our budget it for 3 .5% expense growth this year so you're going to have an increase in the second quarter, and then a further increase in the third quarter from an expense perspective and then a decrease in the forth quarter.

So you generally have you know the fourth quarter of lowest expense quarter you have and then it starts rising the first. Picks up momentum in the second and more momentum in the third. And it's primarily weather related and maintenance related and when you have clearly it's hotter in Phoenix in August than it is in January and you have utility costs going up. The other thing is you have a lot of lease activity that goes on in your prime leasing months which which tend to be in the summer and when you're leasing you're leasing more apartments you're clearly maintaining a more putting more carpets in and painting and that sort of thing.

Craig, if you take out the nonrecurring items for the quarter, our NOI for the NOI guidance for the second quarter is 77 to 80 cents. Our run rate you know we think our run rate for the first quarter was 78. So basically we're going to be flat on an NOI basis first quarter over second quarter assuming we hit our guidance.

In terms of the -- can you talk maybe a little bit about the condo market, it Dallas. You indicated I'm curious as to why you kind of abandoned the for sale condos there. And if you could also kind of contrast that with maybe what you're thinking in Long Beach today.

In terms of the condo market, the first set of condos we built 17 condos and in Farmer's Market and the they were built directly across the street from the project, which created a very nice street scape for the overall investment in the area but the bottom line is that we are not townhouse developers and it was clear to us through the execution of the first 17 that that we were slower and less adept at that business than we were at building multi-family and so it just makes sense for us to keep our people focused on what they do best and not try to dilute them in trying to get them to do something that's a small project that really isn't a isn't their core business, you know, the from a from a business perspective the town house and condo market is very good market, but you know it's a different business than building and renting apartments. So we don't -- it doesn't make sense to have our existing people do no that.

Now in the future maybe you have specific people that involved in that business at the margins or something like that as far as Long Beach your question about could not bow -- condo as about Long Beach was that we related to.

I'm thinking about the conversion potential of Long Beach.

Right. The conversion potential of Long Beach is significant. We've done market studies that show that you no the pent up demand for condos in that area is huge and that you know per square foot sales prices you know are in the $400 plus a square foot which clearly we have a huge spread possibility to make that spread. The real challenge, though, in a conversion in California are two-fold.

One, you have California challenge on the one hand and then you have the sort of financial -- financial issues on the other hand from our perspective. And that is I'll talk about the California issues. California issues you -- you go through a mapping process and the mapping process depending on the city and Long Beach is not too bad on this, but once you've get your condo map and convert, if the properties are occupied there's generally an issue of how do deal with the existing people. Another sort of big issue is an insurance issue with respect to the litigation about condo conversions and whether the architects and the contractors that built the property have product liability with respect to leaks and things like that going forward in the future. And the insurance piece is pretty expensive. It's a reasonably complicated thing to do. Not terribly but at the end of the day those are considerations.

The financial issues that we face and we sort of phase the project so that we could you know understand what these issues were, but the financial issues are, are if we took the second tower for example that is not complete yet but will be pretty much complete in the next few weeks and just held it off the market from a conversion perspective then we would experience pretty significant dilution from having to expense all the interest and taxes associated with that if we were going to do the conversion ourselves. And then we'd be in a position where where you didn't record any revenue until you started selling units.

On the other hand, the way we looked at it was well, we'll just lease them up and and the people that are living there are the very highly likely buyers and so our from a cash flow perspective and from a earnings perspective it -- we felt it's bet tor have them leased in full when you convert them, in fact you do convert them, so you have positive cash flow during that sales period. And so that's where we are.

Now, whether we convert them or not in the future is an open question. You just have to look at the economics then I think when you look at the cost aspect of what we have in cost-wise and the $400 plus market per square foot I mean there's a lot of value there obviously.

Right. Is there any potential to sell it without a condo map or won't a condo converter, per say, take that risk?

Absolutely a condo converter it's simply a pricing issue the condo converter will look at that time and say okay what are the risks of the condo map. It's not a high risk of getting condo map. The issue is simply what the costs associated with dealing with the residence that are there a that don't buy and what are the insurance issues are with respect to the product liability issue that's are huge issues in California. You get a slight premium in price if you have a condo map because the developer you know the converter doesn't really have to go through those hoops and he knows exactly what he has when it has it or what he closes so there is a benefit for having the condo map but it's not it's not huge. It's you know slight it's probably 5 or 10% or something like that.

Okay. Last question. You know you guys have indicated on your four year guidance you've always had this sixth sense of these items in your guidance. I guess that was what -- somewhat of a surprise to me because I'd never heard you specifically mention. Any other nonrecurring type items, positive or negative in your guidance for the balance of the year.

No.

Okay. Thank you.

And your next question comes from Andrew Rosivach with Credit Suisse First Boston.

Good morning. I'm just a couple quick questions. First on your same store, the positive 3% number on the revenue side was there any influence from that Austin concession booking that had you last year that might be working through the numbers?

I think there was.

Yeah. There would be a small amount of that in the numbers but it's if you look at the total contribution from Austin relative to the portfolio it's -- you're talking about a 10th of a% of impact.

Okay.

You have 3,000 units you know out of the whole portfolio.

Okay so not much. And then this probably ties to this probably ties to to Craig's question but when you're talking about one time items are there any development profit that's you're anticipating through the rest of the year above and beyond what you had this quarter?

When you talk about development projects, are you're talking about land sales.

Yeah land sales.

No.

Okay. Thank you very much.

You bet.

And your next question comes from Karen Ford with Bank of America Securities.

Hi. Good morning.

I just want to go to the MEZ debt portfolio it looked like the portfolio increased slightly from last quarter and yet if I'm looking at it correctly it looked like your other income line stripping out the 2.6 million one time revenue items went down by about $5,000. Am I looking at that correctly?

Yeah. Well, in the fourth quarter we had a couple of items. One was we had a $365,000 nonrecurring item relating to the final resolution of a merger accrual.

Okay.

And we did have about $200,000 of accrual catch ups on a couple of our MEZ notes.

Okay. Last quarter when you gave guidance, you talked about doing an additional $30 possibly of MEZ debt. Has your expectation from that changed at all?

We -- our expectations have -- have not changed in the aggregate. We have to reduce the rates we thought we were going to get. The MEZ debt market is very competitive right now. It's sort of perplexing to a certain extent because you have the treasury market backing up dramatically and yet the capitol flows into the MEZ business have increased dramatically and so there's been a squeeze on rates that you're able to charge on MEZ, and that's why we haven't done any deal this quarter.

So we have scaled that back some. So the contribution from that $30 million was sort of bled in over the back half of the year and it's not really significant to the overall you know numbers next year or this year anyway.

Okay. Thanks very much.

Thanks. Karen.

And your next question comes from Keith Mills from UBS.

Hi. Good morning, gentlemen how are you?

Great.

Keith, starting with you I had a question about the concessions and it's really a two-part question. The first is as I look at the concessions you indicated that ideally you want to have as much the concession kind of booked up front and not throughout the lease. Can you comment on if you believe that's kind of next lead indicator from an operating perspective that you're watching that will give you kind of greater confidence that in fact trends are improving?

Yeah. There's no question that I think it's two steps. First step is to see the conditions change sufficiently to where we can start compressing the concession back to the front end of the lease term in not spread it over the entire lease term. Which again to me is the worse of all possible worlds. So that's number one. That has to happen.

But really more importantly than that from the standpoint of our outlook going forward will be just to see that aggregate number or the gross amount of concessions you know start a trend down. You know, regardless of the structure of those concessions, the fact is that that he they increased again sequentially fourth quarter to the first quarter and I -- but in terms of things to look for for the health of the rental sector, I think if is the analyst continue and keep focusing on concessions that's where the trend is going to show up first. Because just like us, I mean, many much our better competitors have struggled very mightily in this downturn to maintain some sense of quote market rates and plug the difference to you know current market clearing rates with concessions and they're all as anxious as we are to start that trend in the other direction.

I think that you know when you have a quarter where -- the publicly traded group when you see 8 or 10 of that of our peer group report lower sequentially concessions then you're probably onto something.

Based on your experience, Keith, how quickly do you believe you get from the point where the concessions are spread out over the lease to the point where they get pushed up to the front of the lease and then secondly get to the point where you from an absolute perspective are move away from concessions? Is that a is that a one quarter kind of you know change or is that something that's going to be spread out over a couple of quarters.

I think it's spread out over a couple of quarters. Because it it all -- that answer to that question is really dependent on each individual submarket. You know, we've got some submarkets where we had to start down that trail as much as 15 months ago. We have other submarkets that we didn't have to start down that trail until six months ago. So I think it it really just depends on the individual submarkets.

But but I think that the the bigger question out there is if in fact this job growth number that we see in the last two months are the beginning this of a trend that puts us at 2, 2 1/2 million jobs for this year then I think it is inevitable that by year end we're going to get some relief on the aggregate number of concession which will be led by the restructure to the front end of the lease term.

Right. So when you report second quarter results I guess focal points should be on how the concessions are moving over the structure of the lease.

Absolutely and I think I think there's been in there's been a fair amount of focus on this and not only our only our company but the others and I think that that probably is the best bell weather for improving market conditions because that's got that's got to go away or those have to start reducing before anybody in this industry is going to start talking about or even considering rental rate increases.

Keith, could you comment on the markets that you're seeing kind of better concession trends at this point? Meaning they're more up front and then those markets where they've -- they're kind of pushed out over the lease and you're not able to have them be ideally up front?

I can tell you where the concessions -- I don't have market by market where the concessions have been spread out and where they have not but I certainly can give you some indication of where the concessions are the most problematic on a per unit basis.

On a per unit basis for concessions the areas where we are experiencing the worst concessions right now would be in Denver, Austin, Phoenix, those three jump off the page at me in terms of the concession amount per unit. Those are the one that's are have two of those have are in double you know triple digit and one of them is in the high 80 per unit per month.

How about the flip side of the coin looking at the best market.

On a concession -- looking at concessions on the low end that have scale it would be L.A., Orange County, Las Vegas, Houston, those would be the three on the low end of the scale.

Okay. Interestingly, Denver has in your numbers is actually trended better recently. What's happening there that you know would have triggered that given the poor concession environment?

Well, actually the difference in Denver was a decrease in concessions from the fourth quarter to the first quarter of almost $78 per unit per month. So while they still are at very high levels, the concessions in Denver actually came down.

Okay. Did you see that in April? That trend continue?

I don't have that. I'd have to call you back on that.

Okay. That's fine. Okay. The next is maybe a question for Rick. And that is related to returns. What are the returns projected for the [inaudible] Vista Two, and the Farmer's Market Two properties?

The returns are in the 7 to 8% range. Let's see here. Actually just a nose under 8. 8% for [LEE] Vista and about 8.6 for Farmer's Market Two.

Sounds like those might be a little bit low. I think maybe they would have been a little bit higher given the fact that you have properties that adjacent and maybe have realized some synergies in those. Can you talk about why you're not seeing higher returns.

Well, we're being very conservative on the recovery. That's the biggest issue. We're bing in concessionary markets entering the markets in concessionary market with month through throughout the entire lease up period and a stabilization in 2006 that basically has very minor rent growth but concessions being reduced. That's why the numbers are what we are. If you assume sort of full recovery and concessions are all gone in 2006 and then the numbers would be much more robust in that but we're talking a very conservative approach to this.

Long term you do you do have operating efficiency that's come into play but I have yet in my life to see a lease up of a phase 2 that didn't negatively impact phase 1 to some extent and you're sort of internally completing with a new lease up so we've factored that into the equation.

Okay and just two final questions. The next is related to the Harbor View lease up. How is that going relative to your projection.

During the first two months we're behind projection about 30 units and that picked up in April and we expect to -- we're probably behind about a month in the lease up now. That was actually offset from a budgetary perspective by being so from an overall budget perspective we actually have a positive variance in our development communities from a production of NOI even though Harbor View is behind by about a month but we expect to pick that up with with the project basically being completed and looking very good with a solid management team there now.

Still expect to meet what you were expecting initially in terms of returns authorize project.

Yes.

And just finally I guess for Keith you know one of the other markets seems to be trending better in terms of the data points recently in the Charlotte market. Is it similar to Denver that maybe concessions are burning off there or are there other factors working in your favor?

Our concessions in Charlotte are actually still fairly high, but I do agree with you that the the overall feel of the Charlotte market is a little bit better. We're still we're down on concessions from fourth quarter of right at $100 per unit to about $70 per unit in the first quarter of '03. So we had about a $30 per unit decrease in concessions and we were able to while maintaining or occupancy rate in Charlotte, so you know my sense is that there is is a little bit better tone in the Charlotte market and you know it's got a chance probably to be a little bit better than we expected this year relative to plans.

Any other markets, Keith, like that that are trending better than what you thought originally and on the flip side of the coin any that are trending not as well.

You know, again, across the board if you you know almost 90% of our communities did you know most of them were right just barely better than planned. It's pretty early in the year to be making a call about whether you're we're going to be better than plan for the whole time frame or not but overall we think we've laid out game plans this year that are a lot more realistic with market conditions and our guidance to our folks on site was to assume that market conditions sort of persist at fourth quarter '03 levels throughout '04 and to the extent we have better experience than that we out to see that coming through in our operating results.

Okay. Gentlemen, thank you for your time.

Thank you.

And your next questions comes from David Rogers with MacDonald's Investment Keybank.

Hi, guys. First question, Rick, the management changes in the Harbor View asset was that an issue of a development team moving to a kind of an operational team or just poor performance.

It was the latter.

Okay. Did you guys quantify the MEZ impact of the quarter just ended?

As far as the actual absolute dollars of MEZ interest?

Or just the impact to FFO?

Okay. Yeah; I mean from a true interest income perspective.

Yeah.

It's the actual FFO per share that relates to MEZ interests is probably about 4 cents a share. You have to off set that with the [inaudible] associated with it.

It's about 2 cent as share probably. If you assume a cost of capitol of debt around 6%.

Okay.

And you're accruing 13. Have a 700 basis point spread above our cost of funds which is you know is half of the 4 cent so call it 2.

On the income side it's fair to take the 50 million or whatever the average outstanding is and use that accrual rate.

Yes.

Yes.

Also the budget for property tax increases Dennis you mentioned going up. Did you quantify that or I didn't hear it if you did.

No. It's a 3% increase.

Okay. And then Keith, property insurance claims. Can you give a little color on that. It seemed like you made a point to mention that.

Yeah. We actually in the quarter had for the first time in our insurance program history we hit the aggregate stop -- stop loss, because we had five reasonably significant claims in the last two were a fire and a flood which put us at the total of five for the year. And the last four or five years we have been running in the two to three claims of that magnitude and prior to that we had never hit the aggregate top at 3 million and we did this year for the first time. So we did have more claims this year in our property insurance than what we have typically seen. Someone at had asked on the last call with regard to insurance costs with the trend there and the good news is that our property insurance is looks like it is going to be down somewhere in the 10 to 15% range this year at our renewal. Notwithstanding these claims.

Okay. The bad debt expense in the quarter. Could you give that? Relative to 4Q and 1Q '03.

4Q on same for the same store per unit $1 per unit. Same as first Q '03. So flat bad debt expense.

All right. That's good to that and then final question, Keith, you said the closing rates were also down. Was that just a function of driving more traffic not seeing as much quality. Just if you could give a little color on that as well.

Yeah. Any time you're running we had a national campaign included some prize give aways, et cetera. Any time do you that, you're going to drive more traffic but you're also going to drive a fair amount of people who are coming in so sign up for the contest and get their you know you don't have to buy to win so.

Nothing you're concerned about?

No. All right. Thanks guys. You bet. Thanks Dave.

And once again ladies and gentlemen, that was star 1 for questions or comments. And it appears we have no further questions at this time. I would like to turn the presentation back to over inform Mr. Rick Campo for closing remarks.

Thank you for being on the call and we look forward to updating everyone next quarter. Thanks a lot.

Ladies and gentlemen, thank you very much for your participation in today's first quarter 2004 Camden Property Trust earnings conference call. This concludes your presentation.