Camden Property Trust (CPT) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the Summit Properties Third Quarter 2004 Earnings Release Conference Call. This call is being recorded.

At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Steve LeBlanc. Please go ahead sir.

Thank you Jimmy.

Good morning everyone and welcome to our Summit's Third Quarter 2004 Earnings Call. I've got Mike Schwarz, our Chief Operating Officer, Gregg Adzema, our Chief Financial Officer, and Mike Malone, our Chief Legal Counsel here with us today.

We will be making some forward-looking statements. We might be wrong, and we encourage you to make your own opinion. Now that I've gotten that out of the way, let's get started. I've got a very short opening remarks so we can move real quick to your questions.

Six years ago, this team began a journey. It started with a strategic planning session we had in the fall of 1998 and the spring of 1999. There were really 3 parts to that strategic plan we developed. The first was capital allocation and concentration, an idea that we came up with based upon our belief that we're running a fully-integrated operating Company. The second part of that strategic plan was market selection, and the third, and maybe the most important was execution.

With regard to capital allocation and concentration, we believe that we do run a fully-integrated operating Company that this is a local business, and it's the best business that is best served by having local entrepreneurs and experts in every market. And we do. We do centralize risk management, strategic planning, and back office and technology and de-centralize everything else. We embarked on a plan at that time to limit our markets to 5 of the best markets in the country, and more importantly 5 of the best neighborhoods within those markets.

The first step was to pick the best markets. At that time, we picked D.C. and Southeast Florida. And keep in mind at that time that Raleigh and Charlotte were our biggest markets, along with 20 other markets like Hickory, North Carolina, Goldsboro, Sarasota, Florida, Cincinnati, Ohio, Indianapolis, Richmond, Virginia, etc. We have executed on that plan now with D.C. and Southeast Florida soon to represent 50 percent of our NOI.

How did we do it? Well, we did it by capital recycling. We were one of the first companies in the industry to start capital recycling, and we did it big. We did a complete portfolio turnover. We sold our old poor performers with big CapEx that were melting every day for new market-leading, bullet-proof communities. Think of it as our ability to sell our old 1986 Cadillac for a brand new BMW. And we made money while we did it. This quarter alone, we'll sell $212 million worth of communities, with a gain of $128 million and an unlevered cash IRR of over 15 percent. In fact, over the last 3 years, we've sold over half the Company with an unlevered cash IRR of 15 percent and nearly $250 million in cash gains.

Finally people -- I'm really proud of the fact that I get to work with Mike Schwarz, our COO who is a tremendous leader and a great human being. I learned a lot from Mike, especially about how to see the best in people.

Gregg Adzema, our CFO, he's got a brilliant financial mind, and he taught me how to set goals and stay focused.

And Randy Ell, who is the Chief of our Management Office and Company, he's a compassionate and demanding leader who taught me how to love and care for our people, and if you do they'll love you back.

Keith Downey, who is the Chief of our Construction Team, SABI, Summit Apartment Builders, Inc., he was an MVP middle-linebacker in college, and he's never stopped doing that. I learned about loyalty from Keith, that if you give it you'll receive it from your people.

And Todd Ferrell, who is Chief of our Investment Team, he's the newest addition to the team, and he's got a great real estate mind. And I learned from him how to be a catalyst and how to motivate your team to get the best performance you can out of each individual.

And then Mike Malone, who is Chief of our Legal Department, he combines a great combination of business and legal expertise. And I learned about tenacity and creativity in solving problems from Mike.

So I'm really proud of the team and what we've accomplished. And that brings us up to the day. We had a terrific quarter. Revenue was up 1.1 percent, NOI was up 1.1 percent. This is the second year in a row that NOI is up. And our average rent per occupied home also increased. FFO was up 5 percent, and also during the quarter we sold 7 communities for $212 million. These communities average age was 15 years. We sold them at a 5 cap rate, $128 million gain, and an unlevered cash IRR of 15 percent.

Now, let me remind you that a year ago, we called this turn, and since then our sequential revenues have been up 4 of the last 5 quarters. And again this is the second year in a row that our NOI is up year-over-year.

We also told you a year ago that it was time to ramp up our development pipeline and we did. We now have one of the largest development pipelines in the industry, especially when you consider it as a percentage of the size of our Company.

We told you a year ago about cap rate compression and how it was time to unload the old poor performers with high CapEx, and we did. Now we tell you it's the time to merge with Camden. They are a terrific company with great leaders. We've been real impressed with Rick Campo and Keith Oden who I consider friends, and I've known for a number of years, but it's been great also to meet Dennis Steen, their CFO, Malcolm Stewart, their Chief Investment Officer, and Steve Eddington who runs their management team. These truly are some of the best guys in the industry, and I'm proud that we'll have the opportunity for our great performers to merge with them and turn it into one of the best multi-family platforms in the universe, the fifth-largest multi-family REIT in some of the best markets in the country.

We achieved a great price for our shareholders. We got a 29 percent premium over the average price year-to-date before we announced the merger, and our shareholders will benefit from a 26 percent increase in the dividend. It's one of the highest multiples on 2004 consensus. And I'm also proud of the fact that our shareholders have benefited from a 70 percent increase in the average stock price and 120 percent total return if you include the dividend since we began to execute the strategic plan we started 6 years ago.

With that, let me open it up to questions. Operator.

(OPERATOR INSTRUCTIONS).

Rob Stevenson, Morgan Stanley.

Steve when do you guys expect to file a document? Is there any sort of update on when you expect the shareholder votes?

If you listened to Camden's call, they're really driving the train on the next round of documents. And they've said that they would do it I believe before the end of the month. So I imagine we'll do it as soon as we can and hopefully by the end of the month.

And what does that sort of telegraph in terms of timing for our shareholder vote?

We expect to close the merger in the first quarter of next year.

Okay so nothing more specific than just that at this point.

Yes, it's all dependent upon SEC review or not.

Okay, thanks guys.

(OPERATOR INSTRUCTIONS).

Rich Bailey, ABP Investments.

I just have a question on the -- Steve you know I ask this question every quarter on the revenue number, but it actually looks like that on a year-over-year basis, things have flip-flopped and it looks like your rent and occupancy combined generates a little bit more than you had on total revenues. And I guess this is -- you tell me to be patient. Is this it? I mean, are you starting to see your revenue growth now take off and the ancillary income items just being more comparable the last year as you've been really getting them for the year now?

Yes, it's now the time to start seeing rents take off and ancillary income grow slow, although ancillary income will continue to grow. The growth in the rate of ancillary income will slow. Now, we are moving into the fourth quarter Rich, and you know this is a seasonal business.

Right, and then could you touch on the operating expenses in the D.C. area in particular? They seem to be a little out of step with the rest of the markets that you operate in.

That's a terrific question. We're real excited about our operating expenses. If you look at the year-to-date number, which is much more accurate of what's going on, operating expenses are only up .6 percent, well below the initial guidance we gave you at the beginning of the year. We expect it being within the 1 to 2 percent range by the end of the year, which is terrific. It's a great attribute to our onsite personnel in controlling expenses. It's also attributable to our back-office purchase-to-pay Oracle system, turning units in-house, etc.

So the 13-month sequential, is this a seasonal blip?

Yes, it looks, the 9 months of the year is a much more important number to look at.

Okay, I just wanted to make sure it wasn't the beginning of something. And then what are you seeing on the revenue side also in D.C.? That seems to be one of the slower markets where traditionally that's been kind of burning things up.

Rich this is Mike Schwarz. Really all it is, we had a burn-up second quarter where we were up 3.4 percent from the first, and we gave a little bit of that back in the third. Washington is still a very strong market. We've got pricing power throughout that portfolio. Our customers expect rent increases on renewal. And it's still a very strong market.

And if you look Rich, we lost some occupancy this quarter. That's due to pushing rents, and we're going to continue to push rents. That market is solid, so it'll be a little bumpy as we reprice our product with our customers and they get to accept this new pricing.

Great, thank you.

You're welcome.

Steven Blume, European Investors.

Just following up on that last question and the knowledge that as you begin to push rents, you may see a little bit of a give. Could you just give a little more color as to how comfortable you are with the rent increases that are coming? At what point do you see the occupancy falling too much and recognize the market isn't ready for the market increases? Or do you have room to be even more aggressive? In Washington D.C. it looks like it was off 1.5 points on occupancy on a year-over-year basis.

We have said for a long time that pricing power comes when you have occupancy market-wide above 95 percent. When you're in the 92, 93 to 95 percent range, you're really at equilibrium and really below 92 percent you don't have pricing power. Two of our markets, Washington and South Florida market-wide occupancies are above 95 percent, and we have tremendous pricing power in those 2 markets. And we will continue to execute pushing rents and raising revenues and making sure we're putting in the bank as much as we can and increasing that every month, month-to-month sequentially. So those 2 markets we've got pricing power.

As we said about a year ago, we anticipated having pricing power in Charlotte, Raleigh, and Atlanta in the second quarter of '05, and that still feels good. We think that in '05 we'll start to see pricing power in those 3 markets so that by this time next year, our goal and our hope is that we'll have pricing power in all 5 of our markets. We were especially bullied by the job report that came out Friday. Our 5 markets have continued to create jobs, and they will, and they'll lead this country out of this recession.

So as I said a year ago, we called a turn. We're now in the middle of it, and we hope to see a lot of the benefits of that turn by this time next year.

Okay, so you're seeing signs I guess in Atlanta and Raleigh of some of that accumulating strength.

Yes.

Okay good. In the development table it looks like one of the properties in Raleigh was renting for less than $600 a month. That sounds a little bit low. Is that something with the property or is that just for the rent?

No, before we started the strategic plan we made an investment in a community in Raleigh thinking that we could do more of a B-type product. And that's the second phase of that community. That's just indicative of its location and product. Our plan is to build it and then sell it. So it's not indicative of our product quality in the whole portfolio in Raleigh. Look to our supplements that give you our average rent per occupied home for the whole portfolio, and those rents are much more indicative of the quality of our portfolio in Raleigh.

Okay, thank you.

Jordan Sadler, Smith Barney.

Just curious to catch up on the dispositions. I think when Camden announced the transaction, the acquisition they mentioned you guys would sell about $260 million in a couple of phases, and I'm just trying to bridge that with the work that was done during the quarter. You sold $212 million, so would there be $50 million remaining?

This is Mike. There are 3 assets that we have on the contract to sell that we expect to close by the end of the year. Total proceeds from those 3 dispositions are in the $150 million range.

Where are those located and what do they expect at cap rates on these?

They're located 2 in South Florida, 1 in Atlanta, and the cap rates will be similar to what we announced in the third quarter.

So five?

Yes, that's right.

Okay, now are there additional assets that are being marketed at this point for sale and that could slip over into '05? Or is that it?

That's it.

That's it that we're marketing.

Okay, and on the acquisition front, I was just curious to get the cap rate on the $140 million or so you did. I don't know if you want to break it up into the $85 and the $55 million.

We've not historically disclosed cap rates on acquisitions asset by asset. In total, to sum up our disposition/acquisition activity for the year, we've been selling at 5 16-year-old product and investing around a little north of 6 on a pro forma basis. We've actually been beating that 6 percent proforma number on the acquisitions that we've had some activity on.

On the sale side you said?

On the buy side.

On the buy side, okay. So you've been doing a little bit better than 6 you're saying.

What's amazing here is we've been selling older communities at 5s and buying new communities at north of six. It's been a terrific trade. We expected to actually take a little bit of a loss and would have thinking it's a great investment to do that to upgrade the portfolio. We've actually been able to do it accretively.

And what do you have under contract? I know your guidance is $75 to $125 for the fourth quarter. I assume that includes the $55 that's already done. So incrementally should we assume there will be another $25 to $75 million?

Jordan it's Gregg Adzema. Yes, the bottom end of the range $75 million has the subsequent acquisition, the Falls Grove acquisition in it and development spending that we kind of know was already in the hopper in the money that will go out the door. The delta between the $75 million and the $125 million is 1 acquisition of a stabilized community and 1 purchase of a large piece of land. If both of those happen this quarter, it'll be the top end of the range. If neither happens, it'll be the bottom end of the range.

Okay and those are under contract, the land and the acquisition?

Yes.

Subject to due diligence.

Exactly.

And where is the land located?

The land is located in Washington.

Okay, and lastly just because there are a couple of moving parts in terms of mortgages and investments subsequent to quarter end, could you give me a total debt number outstanding as of today?

You're asking subsequent to September 30 Jordan?

Yes.

We have not provided that information.

Okay, can you give me outstanding on your line?

I would rather stick with quarter-end audited data that we provide on these calls.

Okay, would it be a safe assumption just to assume that the $55 million acquisition, the Falls Grove, came off the line, or was there some debt assumed with that?

There was no debt assumed with that $55 million acquisition.

Okay, I guess that would be it for my questions. I appreciate the time.

Sure, thanks Jordan.

Craig Leopold, Green Street Advisors.

Steve I'm curious. How would you explain the difference in yields on acquisitions versus sales? As you said, you're buying newer stuff. You're selling older stuff. What allows you to get a higher yield on an acquisition versus where you're selling it?

Great question Craig. It's actually somewhat surprising to us, partly driven by a couple of condo sales that take that average down. So we're taking advantage of selling into a frothy condo market in the for sale business.

Is that true in the third quarter, just looking at the location of property?

Yes, the Restin was the primary driver there. A condo converter bought that. They'll build a new tower and I believe convert the second phase.

Okay, how different would be sort of your plain Jane apartment disposition cap rates versus the sale of the condo converter?

The condo delta is so hard to pinpoint because it has so much to do -- it has nothing to do with income and it has everything to do with sales price of the condos. So if they're low, and how low can they go I don't know, so there's no average to tell you that typically the delta between the purchase income buyer and the condo buyer is "x". It is all driven by the potential sales prices of the condos.

Okay and could you just provide a little color on the impairment charge and the post-employee payments?

Yes, the impairment charge was driven by Summit Lenox, which was bought before we started the strategic planning process. A great piece of real estate, older community build in 1962 I believe. So it had a lot of CapEx. We put a lot of money into it. We didn't get paid for that money. Ultimately, the land there is probably the best value of that site. It's not what we do. Simply what we thought we could get in before we did the strategic plan, we thought we could get into Wal-Mart business. We're really in the Nordstrom business, and we shouldn't have been in the Wal-Mart business in the first place.

I would point you, though to that 1 mistake. We've had a tremendous amount of success selling $212 million and $128 million gain selling half the Company with nearly $250 million in gain over the last 3 hears. So I'm proud of the fact, for the most part, 99 percent have great success in capital allocation.

The impairment charge relating to Bill Foss (ph) and Bill McGuire, when I became CEO in 2001 we entered into an agreement with Bill and Bill. And now what we're doing is just monetizing that agreement. We agreed to provide them secretarial services in support, etc. Instead of providing that, we're just monetizing it.

Okay, and then last question. You've provided kind of guidance on a year-over-year basis for the fourth quarter. Could you help me understand what that means sort of expectations sequentially third quarter to fourth quarter?

On a same-store basis?

Yes.

I'm not sure we've done that in the past Craig.

I could probably back into it. I just thought if you had it handy.

I have it actually handy, but I would just rather err on the side of caution on this one.

Okay, I figured since you'd already provided the guidance.

I will frame it this way. We started the year thinking that same-store would be -3 to +1, and second year in a row where we have been on the high side, if not beaten the high side of that range.

And as you can see from the guidance we have given you, fourth quarter we expect to be up 1.5 to 2.5.

Right, okay great. Thank you.

(OPERATOR INSTRUCTIONS).

Assad Kadim (ph), Reeves (ph).

Just wondering the transaction cap rate on sales was quoted at 5.9 percent. If you could just help me understand, you selling assets, if you could just exclude any of the condo sales and what the cap rates have been on the assets that you've sold thus far, and those are older assets, and help to reconcile that 5.9 percent cap rate to stuff that you sold, which is older stuff at lower cap rates?

Well Assad, this is Steve, I think you'll need to call Camden and ask them for the back-up on their 5.9. If I remember correctly, I think they said 5.9 and they had some assumptions for CapEx. It might have been 250 for some group of communities and 350 for others. Anyway, you need to check with them on how they're building up to their cap rate. We're happy to talk to you about the cap rates that we're having on our dispositions and how we're calculating those.

Sure, would you please.

Well, we look at, as we think we should, we look at what we would give up in cash flow over the next 12 months that we would own that community after CapEx. And that is the cap rate that we quote on our dispositions because we believe that you need to look at us as capital recyclers and investors of capital, and as we sell an older community and give up that cash flow and we buy or develop a new community and replace it with additional cash flow, have we done that and created value for our shareholders or not.

Okay, thank you Steve.

You're welcome.

(OPERATOR INSTRUCTIONS).

Jordan Sadler, Smith Barney.

Hi, Steve, did you want to hazard a guess on the cap rate of the Company on the sale of the Company as you calculate it?

No, I think it's best for Camden to talk about that. They're the buyer, we're the seller. They need to tell you what they're purchasing the Company for. We're proud of the metrics we gave you, 29 percent premium over the average stock price year-to-date before we announced the sale, 26 percent increase in the dividend and 120 percent total rate of return if you want to add the dividends since we began this journey of the strategic planning process we started 6 years ago.

I think those are great metrics to really look and judge this transaction by. And we're excited about their team. We think they're a great team. We think the combination of Summit and Camden really will lend itself to the best portfolio in the industry and best practices.

Okay, thank you.

And gentlemen, there appear to be no further questions at this time. I'll hand the conference back to you for any closing comments you may have.

Thank you Jimmy, and thanks everyone for joining us today. We're again excited about the third quarter performance we've had in spite of all the distractions we've had during this quarter from the merger. I want to thank all of our associates for the terrific job they are doing, how excited we are to join the Camden team. And we look forward to talking to you at the end of the fourth quarter.

Thanks a lot and have a great week.

That does conclude our conference. Again, we'd like to thank everyone for their participation. We hope you have a great day. You may now disconnect.