Camden Property Trust (CPT) 2005 Q2 法說會逐字稿

Good day, and welcome to the 2005 Camden Property Trust earnings conference call. My name is Steven, and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will facilitate a question and answer session toward the end of this conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would like to turn the presentation over to Miss Kim Callahan. Please proceed ma'am.

Thank you. Good afternoon and thank you for joining Camden's second quarter 2005 earnings conference call. Before we begin I'd like to advise 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, and we encourage to you review them. As a reminder, Camden's complete second quarter 2005 earnings release package is available in the investor relations section of our web site at www.camdenliving.com and includes reconciliations to non-gap financial measures, which may be discussed on this call. On the call today are Rick Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President and Chief Operating Officer; and Dennis Steen, Chief Financial Officer. At this time I would like to turn the call over to Rick Campo.

Good afternoon. Camden had a solid second quarter. Our team has been working hard to complete the transformation of Camden following the Summit merger. We have completed the successful integration of Camden and Summit operating systems, processes and people. Property level Camden branding will be completed by the end of the year, which will be the final step in the completion of the merger. I want to thank the many dedicated, hard working people at Camden and Summit who made the integration process so successful.

Camden's transformation began last fall when we announced the merger with Summit. Since the announcement we have successfully completed all capital transactions totaling nearly $4 billion, which all on schedule and in accordance with our merger plan, which included $876 million of asset sales from both companies that were complete at an average cap rate of 5.32%. The unleveraged IRR on the Camden side of the sales was 12.68% on the sales that were made. These sales reduced leverage and funded the cash portion of the merger consideration. These activities have transformed Camden's property portfolio, improving our portfolio quality, reducing average age, and most importantly, improving NOI balance across markets. Our NOI contribution from Texas has been reduced from 31.7% in the fourth quarter to 20.7% in the second quarter. While our NOI concentration from Washington DC and Southeast Florida has increased from 0 in the fourth quarter to 16.6% in the second quarter. NOI balancing will continue going forward as we build out our billion dollar plus development pipeline.

The rational for the merger with Summit was based on the simple premise that Summit's high quality properties and markets would grow faster than Camden's existing portfolio. Same property revenue growth for Summit increased 4.7%, compared to Camden's revenue growth of 3% for the second quarter over last year. Both solid numbers, but clearly Summit out performed, just as we expected. Same property NOI quarter over quarter was solid at 3.9% for the combined companies. Same property NOI increased 3.3% sequentially from last quarter with Summit markets leading in revenue growth.

While the merger has transformed Camden, our transformation is far from complete. We will continue to improve our property portfolio through select dispositions, acquisitions, and the expansion of our development pipeline. We still expect to close 200 to 300 million of acquisitions to match the dispositions by the end of the year. The acquisitions environment continues to be very competitive. We will match dispositions with acquisitions in order to complete tax efficient transactions and reduce dilution. We continue to expand our development pipeline with 558 million under construction, 434 million or 78% of the construction -- under construction is located in Washington, D.C., Florida and Southern California. Projected stabilized development yields on the current under construction pipeline averaged 7.5%. Projected stabilized development yields for our predevelopment pipeline, those projects that haven't been announced or are not under construction at this point averages 7.4%.

The Summit merger provided Camden with a highly skilled and professional development team on the East Coast along with a $650 million pipeline. The combined development teams and pipeline will be significant drivers supporting improving -- improved NOI balance in our markets, and future FFO and and NAV growth. Subsequent to the end of the quarter, most of you know Keith and I sold 11.5% of the Camden shares that we hold in order to pay down debt incurred acquiring those shares. The original debt has been guaranteed by Camden. Under Sarbanes Oxley the debt was required to be repaid with no future company involvement. We continue to maintain the significant Camden investment and currently have no plans to sell additional shares. The sales were specifically sold as result of Sarbanes Oxley. With improving market conditions and the completion of our merger and the integration process, it is the beginning of a new and exciting time for our team. At this point I will turn the call over to Keith Oden.

Thanks Rick. My comments today will be brief and cover two areas, second quarter operations and our technology initiatives. Overall, our portfolio continues to perform slightly better than planned for our year to date NOI. There's no question that in several of our key markets, that the long anticipated turn around in operating fundamentals has occurred. We are currently ahead of plan in 12 of our 17 core markets with the greatest outperformance coming in Tampa, Orlando, South Florida and Las Vegas. The 5 markets where we are below plan for the year are Huston, Atlanta, Raleigh, San Diego and Los Angeles. We are keenly aware of the 2 markets that don't belong on this list. In Southern California we are under performing the market and our plan. Rest assured that these 2 markets are receiving all of the attention that they deserve. Camden's stated goal is to out perform our markets regardless of market conditions, and we have considerable work to do to achieve this goal in California, but we will get it done.

Concessions fell slightly for the quarter, with most of our top line growth comming from an increase in our average occupancy rate from the first quarter of 93.9% to the second quarter at 95. 2%. This included two weekly reporting periods where our portfolio wide occupancy rates exceeded 96%, a first for Camden. In markets where concessions have been virtually eliminated, such as Los Angeles, Tampa, Orlando and South Florida; our focus is increasingly on raising rents. Once again the percentage of move outs to home purchases fell for the quarter, from 18.5% from last quarter, which as you may recall I reported that that was the lowest level in Camden's portfolio since 1999, to 17.4% in the second quarter. And in the month of June the percentage was only 14.3%. There is no doubt that this trend is contributing to our record levels of occupancy throughout the portfolio. Traffic remains strong across the board indicating both improving conditions and success from our aggressive outreach marketing efforts.

Camden's portfolio produced the same property revenue gain for the quarter of 3% with operating expenses up just 0.6%, resulting in same property NOI growth of 4.7. Year to date, net operating income is up 1.6% on revenue growth of 1.7% and expense growth of 1.9%. The Summit portfolio produced a 4.7% revenue gain and operating expenses increased 10.5% compared to the year ago quarter, resulting in a 2% NOI increase. The increase in expenses for the quarter reflects an unusually low expense level in Summit's second quarter of 2004, as well as some merger related accounting differences. However, year to date, Summit's expenses are actually below plan, and we expect the full year to be below plan as well. For combined portfolio we still expect full year expense to be within our original guidance of 2 to 3 % for the year. Summit's year to date NOI increased 2.8% with revenues up 3.7 and expenses up 5.5%. COmbined same property NOI was up 1.9% year to date right at the midpoint of our 1 to 3% guidance for the full year.

Turning next to our important technology initiatives, I am pleased to announce that last week we completed the rollout of OneSite a web based property management system that we co-developed with RealPage. Today all of Camden's communities, which include the 45 Summit communities, are operating on the same operating platform across a high speed network capable of supporting Camden's current and future technology initiatives. With regard to OneSite, we can now turn our attention to realizing the productivity and customer service enhancements for which we designed the system. I would like to briefly acknowledge the amazing efforts that were required to conceive, design and implement the OneSite system across Camden's portfolio. The collaborative efforts of the OneSite design team, our technology and education services teams and our operations group have been remarkable. The list of the significant contributors to the successful implementation is too long to mention individually. But you know who you are, and we thank you for all your hard work that you put in on this project.

The implementation of OneSite holds great promise for Camden's operations. One of the most immediate impacts will be our ability to proceed with YieldStar, the revenue management module that we jointly developed with RealPage. Last quarter I indicated we were piloting YieldStar on five of our communities. I'm pleased to announce that based on the results of these pilots, which have been extremely positive, we are moving forward with the rollout to all Camden communities, and expect the implementation to be complete by year end. The competitive advantage that this new tool creates for our on site professionals is considerable, and we are extremely optimistic about the revenue gains that are possible in our portfolio. Next up is our CFO Dennis Steen.

Thanks Keith. My comments today will include additional color on our second quarter results, a review of our balance sheet and capital structure, and I will close with comments on our financial outlook for the third quarter and the remainder of the year.

Beginning with second quarter results, we reported FFO of $47 million or $0.80 per diluted share, in line with the first call mean estimate and at the midpoint of our previous guidance of $0.78 to $0.82 per share. These results reflect slightly better that anticipated performance from our operating communities, as Keith just discussed, offset by higher than anticipated general and administrative expense and interest expense. G&A expenses totaled just over 6.5 million, or approximately $900,000 over plan. This unfavorable variance to the plan was primarily due to the following non-recurring items. Higher incentive stock option expense, higher than anticipated training and marketing materials costs for our new Summit communities, and miscellaneous legal -fees. G&A expenses for the third and fourth quarters are expected to run approximately $5.8 million per quarter. Interest expense for the second quarter was $300,000 higher than anticipated, entirely due to our decision to take advantage of a decline in rates in early June and to further reduce our exposure to floating rate debt. We issued 250 million in 10-year unsecured notes at an all in yield of 5.16% using the proceeds to pay down balances under our line of credit. This issuance will be neutral to our original forecast for the remainder of 2005 as we had planned to issue 150 million in unsecured notes at 6% in early third quarter.

Second quarter was relatively quiet on the transaction front. There were no changes in outstandings under our Mezzanine Loan program, and the only acquisition disposition activity was the sale of Camden Ybor City in Tampa, Florida for $61.5 million, resulting in a gain of $21.7 million. Summit Lenox in Atlanta, Georgia was the only community designated as held for sale at the end of the second quarter and was sold in early July.

Moving on to the balance sheet total debt at June 30th 2005 declined just over $43 million from the prior quarter as proceeds from the sale of Camden Ybor City more than offset the development of pipeline fundings for the quarter. Additionally, we reduced our exposure to floating rate debt from $463 million or 18% of total debt at the end of the first quarter, to 174 million or 6.9% of total debt as of June 30th, as we used the proceeds from our 250 million 10 year note offering to pay down our line of credit. At the end of the quarter we had only 77 million outstanding on our 600 million dollar unsecured line of credit. Post the completion of the Summit merger, our balance sheet remains strong and flexible with 76% of our assets unencumbered, 73% of our debt unsecured, 93% of our debt at fixed rates, very manageable debt maturities over the next several years, and significant capacity available under our unsecured credit facility. Recognizing the continued strength of our balance sheet and the improved quality and diversity of our portfolio post the merger with Summit, both Standard and Poors and Fitch revised Camden's rating outlook from triple B stable to triple B positive during the second quarter.

We have updated our 2005 earnings guidance narrowing the expected range and incorporating a one-time charge anticipated in the third quarter of 2005. It is expected that Camden will incur a $0.04 charge in the third quarter as a result of the early pre payment and subsequent refinancing of the mortgage debt associated with our Sierra Nevada joint venture, which is comprised of 16 multi-family communities in Las Vegas, Nevada. The one-time charge represents a combination of prepayment penalties, and acceleration of loan cost amortization associated with the original financing in 1998. The new loans will be at rates approximately 150 basis points lower than the existing loans while extending the maturities from 2008 to 2012. Additionally, Camden will receive a cash net inflow of approximately $12 million from the increased leverage on the joint venture. This was a strategic refinancing for Camden designed to extend our successful joint venture in one of our most solid markets. On a go forward basis, the positive impact to FFO from this transaction will be approximately $400,000 per year. Our prior guidance for 2005 FFO was between $3.39 and $3.59 per diluted share, with a midpoint of 3.49. Our revised guidance for 2005 FFO of $3.40 to $3.50 per diluted share was derived by tightening the previous range by $0.05 on the high and low ends, then applying the $0.04 charge for early retirement of joint venture debt. Our guidance range is still based upon our prior assumptions of same property NOI growth of 1 to 3%, derived from revenue growth of 1.5 to 3% and expense growth of 2 to 3%, new development starts of approximately 2 to 300 million during the latter part 2005, G&A and property management expenses of approximately 9.5 million per quarter for the remainder of of 2005, a 30 day LIBOR rate estimated at 4% by December averaging approximately 3.7% during the last half of 2005. Once again the only new assumptions relating to our guidance involves the $0.04 per share charge anticipated in the third quarter for the Sierra Nevada debt refinancing. FFO guidance for the third quarter of 2005 is $0.74 to $0.78 per diluted share, again reflecting the one time non-recurring charge of $0.04 expected from the refinancing of our Sierra Nevada joint venture debt. excluding that charge the range would be $0.78 to $0.82 per diluted share, relatively flat from the second quarter of 2005 as the expected seasonal increase in property operating expenses and increases in interest expense resulting from our reduction of floating rate debt exposure offset the expected growth in property revenues. Property operating expenses should increase $0.02 to $0.03 per share on a sequential basis from second to third quarter, and then decline $0.02 to $0.04 per share in the fourth quarter due to seasonality in our portfolio. At this time I would like to open up the call for questions.

[Operator Instructions] Our first question comes from Jordan Sadler of Smith Barney.

Good afternoon. Maybe, Keith, could you give a little bit of color on concessions during the quarter? How they trended sequentially in year over year.

They were basically flat, they were down slightly, but not enough to make a determination one way or the other. The concessions -- since most of our concessions in this cycle were prorated over the term of the lease, it's going to a long grind until we get the concessions a meaningful quarter over quarter difference in our concessions, but the trend has been down. The last three quarters have been lower than the prior quarter, but the difference in this quarter was a couple hundred thousand bucks on a 16 million plus or minus number. So its not anything huge in terms of that itself. I think the -- in terms of thinking about where we are in the cycle the fact that our portfolio averaged over 96% two different times in our reporting period is real good news for what the upcoming trend is going to be in concessions, but the reality is that in many of our markets concessions continue to be fairly prevalent. Again our concession number is always going to look -- look higher than many people's because we have maintained throughout the downturn and held much more to a market rent approach with concessions that many of our competitors have. So its always going to be a little bit more in concessions. I think the number that's really actually a little bit better to focus on is net effective rent. There's some other reasons in our portfolio that have to do with why that number is going to be more important to focus on, particularly as we roll out our YieldStar product which really uses a net rent concept. So as we roll out one site, you're going to see some very different reporting metrics in our portfolio with regard to what used to be gross potential and concessions. So I think the thing that would be important for you and for us to keep an eye on as we go forward is more what's happening to net effective rents.

So we should expect that the weighted average rent that you guys report will switch over a net effective number instead of a -- the number before vacancy and concessions?

We'll probably still continue to report both because there's certain metrics that it's actually better to look at the gross potential to see what's happening in your market rents. But, in terms of our -- the mix of getting from gross potential down to the net effective, it's going to be a very different mix than what you're used to seeing in our portfolio as we make that transition. Now the transition is going to happen beginning in the third quarter and should be complete by the end of the fourth quarter. But in the third and fourth quarter you are going to see some really funny looking numbers with regard to our gross potential that you have been seeing. And we'll give you some guidance as we go quarter by quarter on what's related to the change over and the presentation methodology versus giving you guidance on what we see happening in the markets.

I guess the reason I asked about concessions is sequentially you obviously saw a pretty strong pickup in occupancies, how did you get that pickup? Was it just -- was there more concessioning in the some of those weaker markets and less in some of the stronger markets? Was it a balance?

In well in the stronger markets we really have seen current run rate concessions drop to virtually nothing. In the markets that I mentioned where we are significantly out performing our plan, which would be Tampa, Orlando, South Florida and Las Vegas, the current levels of concessoins that are being granted are minimal. You're down to $50 off looking lease type concessions. But the embedded -- since the concessions from the prior quarters were already embedded in that run rate you're just not going to see the immediate falloff in the concession levels that we report, although on a run rate basis those markets are virtually without concessions. On the other -- but what it tells you is that we're also continuing to see significant levels of concessions in the markets where we're struggling. Houston continues to see very significant concessions. Dallas, Denver.

My question is more are you guys doing anything differently that drove big sequential increases in places like Atlanta, Denver, and Raleigh where other people are still seeing weakness? And Huston.

Not not really. e have always tried to manage or portfolio to 95%. It's not unusual to see it at 94, it's a little unusual to see it at 96, but I think that you'll see here very quickly by adjusting our rents and pushing rents and lowering concessions it will trim back to 95%. Because that's where we think the -- where we maximize our revenue.

Okay. And then just switching over to development yields. What is the -- how are those calculated? I think it was a said stabilized development yields? Project stabilized development yields. Are though trended or are those sort of the same numbers you guys have always used?

They have always --These are the development yields we have always used. We haven't changed our calculation. Basically the calculation is going to the first stabilized year of a development and calculating what that yelled is on that basis. When you say trended, we trend all of our numbers including operating costs, development costs and what have you as well. So for example, a development that would be started say this year and stabilized in say '07 or '08 that's the year we use as stabilization. And we do embed various growth rates depending on what market it is. I think our -- the highest growth rate we use is maybe 4% for for a big market and 3% generally if the market is just a normal market.

I guess my question is last quarter on the call we were talking about the development yields, and you were expecting yields in the ranges of 6.5 to 6.75 for the pipeline, and I thought you said this time that you are now expecting 7.5. So are costs down a little bit or rents a little bit stronger?

I think there was a confusion on the last call. I think there was a question that was specific to a market. And I was talking about a range of cap rates in certain markets. if you go into the lowest cap rate in our band that averages out, the overall average is 7.5, but the lowest cap rate is probably a 6.25 and that would be in California, and then the highest is probably -- I think our highest one might be in Florida somewhere. And it's an 8.25 or 8.5, something like that. So you have a blend that gets us to 7.5 overall. Last quarter we were -- in the Q&A there was some confusion and that's why I was very specific this time about the average development yield. Nothing has changed in terms of cost or market or how we calculate it or anything like that. I'm providing more clarity, and I probably didn't have as much clarity last call so I apologize for that.

My last question is just your outlook for land sales and maybe potential gains from land sales?

We don't have any land sales baked into any of our guidance. We do have land that we could sale at significant profits. The real question there is whether we can make a reasonable development work on that land. You know in the current environment, because of the competition from condo for sale folks they have driven land prices up pretty dramatically, so to the extent that we can get a rental deal to work on land that we have had -- either owned for a long time or under contract or whatever where there's a significant value proposition built up in that land, we would rather build it. If we can't build it ourselves for whatever reason, cost or what have you, then we could in fact sell the land. But we at this point don't have -- we haven't put it in our guidance. We a lot of value in the land but I'll leave it at that.

Okay. Thank you.

Our next question comes from Steve Swett of Wachovia.

Good evening. The comments on Southern California and how the operations were weaker than you guys had anticipated. Is there any specific reason that you can point to? Was there some turnover in personnel or was it from local sub market perhaps condo impact, anything like that, or was it just you guys mispriced the units and now you have got to play a little catch up?

We have had some management turnover. We had one situation on our largest community where we had a manager out on medical leave that we were in effect holding a position for and our district manager was trying to play district manager slash onsite manager for a period of time. As it turned out we are gong to have to replace that position. So there was clearly some impact from that. And there have been a couple of other changes, but I -- there's really nothing about the markets or the submarkets that we're operating in that should prevent us from participating in what really is one of the better rental markets. The best evidence of that is not necessarily looking at same store year over year, but it's looking at relative to plan. And in both of those markets we're below plan. It's one of -- those are two of the five markets out of 17 that we're below plan. There's not market explanation for it. So you have to look elsewhere. We've done that and we'll continue to do what we have to do to get back on track.

Let me take it a different way. It's purely an execution issue. We think we have stabilized the personnel situation and it should be fixed the next quarter.

Okay, thanks. On the acquisitions that you guys are looking at given the pricing that's existing in the market, would you anticipate doing transactions where you have to buy in front of a stabilization, so even if you've matched the timing well on the acquisition versus the disposition you might have a period of time where you're not collecting a stabilized income stream from the acquisition?

That could happen. I think today with the acquisition market as competitive as it is you are having to definitely do some creative things to try to get acquisition yields that make sense, and we have looked at acquiring developments, for example, that aren't completely stabilized where either development of risk is off the table, but the lease up risk is still on the table and you're able to get a more wholesale yelled as opposed to a retail yelled if it was completed. That could happen. What we have tried to do because of the tax aspects of our current situation whereby we have to do 1031 exchanges on dispositions into acquisitions as a direct result of this $876 million that we've sold, any gains that are realized without doing a 1031 exchange would be subject to a special dividend. So to the extent we saw a very attractive property that we could acquire in a tax efficient transaction if it provided some dilution as a result of not being fully leased up and it was a good deal then we'd probably do it.

Last question for Dennis. In the second half of the year what do you anticipate to be the capitalized interest cost?

One second I can get you that.

I can't believe he doesn't know it off the top of his head.

Capitalized interest should average right about $4.8 million for the next two quarters.

Okay thanks a lot.

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

Dennis, it appears to me that the FAS141 adjustments are included in your same-store results, is that correct?

No that's not correct. If you go to our supplement on page -- components of NOI on page 11.

Yes.

And you look under dispositions, other, and you can see under 2005 for the quarter there's a million 102.

Okay.

About 900,000 of that number relates to the amortization of below market leases. You can see that that is not -- that that is separate from the same-store components that we list above.

Okay good. I saw your NOI tied to your income statement, but I doidn't realize it was hidden in disposition.

We didn't think it would be appropriate to put it into at same-store operations.

All right great.

You would really have mumbo jumbo then.

Never going to let me live that down Rick.

I thought it was great.

Question on your page 17 the predevelopment pipeline and the land costs to date, do you have any -- can you give us any color or guidance in terms of where you think that land value is today versus cost?

You know that's a good question. I know it's a lot higher than cost. It's really hard to put a number on that. The -- I would say it's somewhere in the -- if you had -- if you sold it for multi-family use, it's probably anywhere from a -- probably a 25% premium plus or minus, if we've owned it and had it under contract for a long time, and Summit owned a lot of their's as well. From a condo perspective it's probably a 75% premium. Because condo players can pay a lot more than rental players. So I would say at least a 25 for a multi-family and 75 for condo, just off the top of my head. And we have analyzed this by deal with our development folks and those are the numbers we think are out there.

Even given that I'm assuming when you bought Summit that you bought that market to land you're saying you still thinking there's incremental value above and beyond that?

Absolutely. We marked to land and marked it to market it in a very conservative way based on underwriting the development as a multi-family development and using our construction cost numbers, and it was interesting what Summit acquired it for and we probably gave them some premium for that land, but not the actual market premium that we could have gotten -- that we could achieve it we sold the land.

Do you think about taking advantage of the condo mania and selling some of that land that to condo converters with -- given that premium?

Every single day. The key issue is whether we can make a rental deal work on it, and then ultimately how do we -- if we are going to make a sale like that how do we do it tax efficiently because we have this special dividend issue. A great scenario would be a project for example that doesn't make sense rental that we sell as a condo to a condo developer in 1031 exchange into an operating asset that's a very accretive and good transaction to do. So we are -- there could be some of those out there in the future and we look at them and analyze them on an ongoing basis.

Any reason why you're so -- sounds like you're apprehensive to pay a special dividend even if it means harvesting value in a portfolio that might not be there years from now..

If I thought this was a fleeting moment and if it was an opportunity to make an increditable sale then I would do that and pay a special dividend. I guess most of the shareholders that I talk to -- the large shareholders don't want a special dividend because they have to reinvest the money. So I haven't got a lot of support in that in that discussion when I have discussions with the major shareholders we have.

Okay. Thank you.

Our next question comes from Rich Anderson of Harris Nesbitt.

Thank you and good afternoon.

Hello Rich.

You mentioned at the very outset, Rick,Summit out performed as expected. I thought the whole spin here was that you guys were out performing and you were going to be able to bring better operations to the table for the Summit portfolio.

Well it out performed and I expected it to based on our ability to get more out of the portfolio and the markets to grow faster than the Camden markets. So we expected the out performance based on everything we were doing to create it.

Okay. So it's happened that fast?

Exactly it's happened. The quarter was a little bit better than expected but we knew that we would be able to enhance Summit's growth going forward and that Summit's markets would grow better than Houston and Dallas right now.

Okay on the topic of branding or as I guess you called it Camdenizing. Have you seen any improvement in the rental picture at those properties or has it temporarily caused a disruption in the leasing process?

Well, Rich, the actual branding and what most people -- the visible part of that, which is changing signage and changing collaterals is still yet to kickoff. We are about to finish the process -- to change the signs in these communities and these markets requires that you go repermit the entire sign package. We are in the process of finishing the repermitting. The actual physical signage change, collateral material change will happen in the third and fourth quarters. We'll do it market by market. So there really hasn't been any disruption at the site level with regard to branding. Now with regard to the rollout of OneSite 30 days post, or two weeks post merger we started rolling out OneSite in the Summit portfolio and there's always disruption with regard to changing your operating platform, but that -- as I mentioned in my comments, we just completed the last conversion two weeks ago in the Summit portfolio. It takes about 30 to 60 days for the onsite staff to get completely comfortable because it's a complete change in business process from what we had been using with AMSI. But I would say that there's no more of that ion the Summit portfolio than what we experienced in our Camden portfolio. You know bottom line is year to date maybe the markets have helped us a little bit in some places but overall our rollup is better than planned so I think the distraction has been fairly minimal. People have been able to continue their focus on doing what they do best and the benefit of the OneSite rollout are really yet to be seen, not only in our portfolio but in the Summit portfolio.

The only thing I would say is we really didn't Camdennize Summit using your words, because what we did --.

That would be your word Rick just for the record.

Yeah I know. The key point I'm trying to make is this. What we did is we went through and did best practices analysis of what Summit was doing and what Camden was doing, because together that companies are better than they were apart.. An so the Summit folks and some of the processes and some of the activities that they're doing were rolling out on the Camden side of portfolio as well. So it's really, the Camdenization if you will, is really a combination of Summit practices and Camden practices, because the Summit team is really good in certain areas and we are really good in others, and together we're better as one. But it's gone really well and I think with all the distractions and all the things that come with the merger I'm really pleased with how the people in the field both on the old Camden and new Camden side have executed.

Okay last question. You mentioned, Keith, reduced home buying activity in your portfolio, that's the good stuff. But are you seeing any of the bad stuff such as condos converting back to rental or foreclosures or anything like that causes you some concern?

No not yet. The condo conversion scenario where you've got rentals going condo, I think we're sill a little early in the cycle to -- if those are going to come full cycle and end up being rental properties, we'll see. But even if that happens, Rich, I think that puts us back to where we were. I think you go through a period of time where they may be off the market, but if they come back into the market, I think we are probably no worse than we were 12 months ago or 18 months ago. I don't see that being a big factor. The markets where there has been a lot of that activity in our world is primarily in South Florida and in the DC area. But we're not -- Both of those markets for us are very strong right now and we anticipate they're going to stay that way.

Thanks, guys.

A[Operator Instructions] Our next question comes from Lou Taylor of Deutsche Bank.

Thanks good afternoon guys. Let's see, can you guys just talk about expenses in a little bit more detail? It looks like you had some improvement in some markets like Dallas and Huston and some pretty big jumps in Washington and Raleigh. Was there seasonal elements here, operational difference, change in accounting policy, what was causing the disparity among markets?

A little bit all of the above allow. If you look at the markets where the expense numbers look out of whack, virtually all of them are Summit markets. In fact, for the quarter, the Summit quarter over quarter expenses were up over 10%, which is obviously a strange situation to see in a Camden scenario. It's a combination of things. If you go back to the second quarter of '04, Summit's operating expenses for R&M were just off the chart low. On a run rate basis, if you look at the progression first, second, third, and fourth, second quarter just doesn't make any sense. You get various interpretations of what led to that. But the fact is on a year over year basis thir R&M numbers were growing off a base in Q2 '04 that just doesn't make any sense. The other thing is there are some accounting differences in how we treat certain expenses. We expense all of our carpets and their policy was a little bit different. They capitalized a higher percentage of their carpets than we do. All of that is being run through operations at this point. And then they had some property tax adjustments that hit -- or we had some property tax adjustments in this quarter that caused the Q2 '05 numbers to look a little strange. You add all of those three things up, you end up a really weird looking number on a quarter over quarter basis. If you at it year-to-date it's still high at about 5 or 5.5% year-to-date for '05 over '04, but still even that on a run rate basis would be a little bit odd in our portfolio. I think -- again, quarter to quarter numbers you are always going to get some noise and some moving around, particularly when we weren't really running the portfolio in the prior quarter. But I think the more important thing from a guidance standpoint and where we see expenses are two things to look at. Number one, from our merger model and the budgets that we participated in on the Summit side, we are below plan for expenses for the year. So these are things that we anticipated. And we expect to be below plan by the end of the year on the Summit side of the portfolio. If you take both portfolio's combined, even though we are going to have a higher expense number on the Summit side, which we were aware of when we put together our plans for '05, we still expect the combined total expense number to be less than 3% for the year. We're still very comfortable with where we are going to end up on expenses for the year, Q2 is a goofy looking number and the Summit side is going to be a little bit strange as we go through the year.

Okay. How about the Camden side? What helped you guys in Dallas and Houston in terms of having expenses flat or down year over year?

Lou, In Dallas it was some tax adjustments was the primary reason. You're looking at the quarter over quarter numbers?

More year over year, but 2Q over 2Q.

Those are two markets -- the answer is Dallas it was property taxes and the flip side of it is those are both markets where we're barely at plan in Dallas and below plan in Houston and they're fighting every nickel to try to make their operating budgets.

Okay. Can you discuss the single family moveouts a little bit in terms of your perspective on why the steady drop here? Its certainly pretty encouraging news. What do you think the reasons are for the decline?

It's like the old economist joke about give them a number or give them a date but don't ever give them both. We've been talking about the inevitability of a decline in that percentage for over two years now. So we were off on our timing, but I think we were right in the direction. The fact is that from an affordability standpoint if you take housing affordability, and I'm not just talking about interest rates or mortgage payments, I'm talking about the total package, utilities, insurance, taxes and mortgage payment combined. You put all of that on top of a entry level home, even in our most affordable markets in Houston and Dallas' of the world, you add all that up and then you compare that to the cost to rent, which literally in real terms has fallen in these markets over the last three years some 15 to 20%. If you take the combination of the decline in the real rental cost versus the escalation in the total ownership cost, you just reach a breaking point. Some people have speculated for a while the demographics are such that you're going to kind of run out of the natural demand. I'm not so sure that that's happening because the demographics are very much in our favor as far as household formation. The question is where are they going to go? Or where can they afford to go? We've been arguing for some time that at a point in time the affordability gap or the affordability index with regard to single family and multi-family had to reach a tipping point. And I just think that we're in, maybe at the beginning or leading edges of that.

Okay, super, thank you.

You bet. Thanks, Lou.

Our next question comes from Dave Rodgers of Key McDonald.

Hey Keith, one question for you on the Summit employee turnover. Have you seen any changes from the last update there?

Our employee turnover since the merger has been in line with our overall portfolio. You know its a little bit early to tell, Dave, because basically on the onsite level everyone came over in the merger. I could probably give you a little bit better feel for that at the end of next quarter. We prepare those statistics quarterly and we will break it out between Summit and Camden. The better way to get at your question though, would be this. We just completed our internal employee survey where we survey every one of our employees and we do that every other year. We do a customer service survey for our support groups and then we do what we think of or call a cultural piece, which gets more at what's your work experience like at Camden, what's your job satisfaction level, et cetera. We've been doing this for seven years with the same survey questions so we have a very good history to compare to. This year we received the highest employee satisfaction level that we've ever had as a Company. If you drill down to the one market where we can really make a heads up comparison is the Atlanta region and we do segregate the responses by region. The difference between the average Camden employee satisfaction, or if you want to think about it job satisfaction index versus the Atlanta region was only about 3 percentage points. Camden was at 88% and Atlanta was 85%. Both of those were extraordinarily high numbers. In fact the 85 in Atlanta was about on top of the last Camden only survey that we did two years ago. That's very encouraging. I can give you, I think, a little bit better evidence on the turnover number next quarter.

Fair enough. On the the YieldStar rollout, you said, I think, by year end five communities for a pilot seemed like a relatively small amount of communities. What was so encouraging, if you can answer that shortly, what was encouraging about that that causes you to want to get that out by year end across the entire portfolio?

I'll trying to be short. Number one, the 5 communities -- the pilot was really for more for functionality. We know that the metrics work because the metrics are what represent our best practices of our best community managers anyway in terms of the decision matrix that's embedded in the logic of this particular management program. We are really testing more functionality than the they are re. I don't need to be sold on the they are of -- it's is way past time for us to be doing something way more sophisticated. It was about functionality. We had minimal -- The RealPage people have been incredible in the responsiveness that they have provided us with in terms of making changes that we identified for them. What primarily encouraged us was the acceptance of our onsite teams to a real different -- entirely different sales practice with regard to selling a yield management price as opposed to the negotiated I've got to talk to my manager price. They have embraced it, they have been empowered by it, and at the end of the day when opposed the question if you're the benevolent dictator of Camden for a day would you recommend that we roll this out in our portfolio beginning tomorrow, knowing everything that you know today it was a unanimous vote from not only our onsite staff, but also the district managers and regional vice presidents that were involved in the pilot. That's all I needed to hear.

And then on some of the benefits related to the Summit acquisition, we talked previously about potentially real estate insurance benefits with the larger portfolio or health care benefits to the onsite employees. Did that hit immediately or will that phase in over the course of this year?

Well the increased benefits cost hit immediately because we definitely had a higher employee benefits cost for our package. The insurance costs Dennis? The insurance costs were the result of our insurance renewals, we actually got the Summit premium for free. So the combined premiums that we had in the prior period was actually reduced by the approximate amount of the Summit premium in the prior period.

So bottom line is we got some now and some will accrue later. The bottom line is we got all of the $10 million in savings that we thought we would get in synergies have, in fact, come to fruition. So in our merger model we knew we would get some -- we had a budget for synergies and we have gotten every dollar that we thought we would get.

And then last question for you Rick, you talked about disposition of procedures could you put those back into [Lagavista] and Farmer's Market too in terms of a 1031 or are those spoken for, so to speak?

No we couldn't on those. What we'll be doing is setting up some of our development program -- or development properties that are either under construction now or in the predevelopment pipeline as 1031 exchanges. And what that does, just from a tax perspective, it puts them in a 1031 exchange position, but they're still on our balance sheet.

But you don't have that with [Lagavista] and Farmer's Market?

That's right they're already too far down the trail.

All right, thank you very much.

We have a follow up from Lou Taylor.

Yes thanks. This is for Dennis. Dennis, when you gave that seasonal property expense up and down for the third and fourth quarter, is it up $0.02 and $0.03 from Q3 from the second quarter and down $0.02 to $0.04 in the fourth quarter from the third quarter or from the second quarter?

The way you originally said it was correct. Its up $0.02 to $0.03 from the second to the third, and then the fourth is down $0.02 to $0.04 from the third.

Great. Okay, thank you.

Sure.

Do we have more questions?

Our next question comes from Asad Kazim of RREEF Fund.

Hey guys. Couple quick questions. First one, on the Mez it seems like a bunch of stuff is in the stabilized pool sale. Is that still in the income stream starting next quarter? And then just like more of a bigger picture question, all the development starts, which look like they're pretty healthy and great development pipeline. Can you walk us through as to when that -- when that comes on line, or how that comes on line and how you guys plan on funding that development pipeline?

The first question Asad, what was your first question?

The first one was just on the -- on the Mez page a bunch of stuff looks like it's in the stabilized stage, I'm assuming that people probably pay it off when it's stabilized.

Yes, absolutely. The Mezzanine business definitely is stable. We do expect the Mezzanine portfolio to start trailing off and get paid off. We aren't able to originate new Mezzanine with the current environment because there's so much competition that the pricing for Mez, we think, is not worth the risk of making the loans. So over time, over the next few quarters that Mez business will move off some now. As part of the answer to the second part of the question about development starts. We of course have all of our on balance sheets starts at 558 million. That's on page 16, it shows the stages of construction and stabilized operations. The predevelopment pipeline that we have yet to announce the starts on, we will be doing, I think Dennis mentioned, 200 to 300 million of those will become under construction over -- between now and the end of the year. The plan is to -- some of those will go on balance sheets. Others will be funded through a series of joint ventures with institutional investors, and we are in the process of having discussions with various folks and setting those joint ventures up as we speak.

Just a quick follow-up. The stuff that's going to go into the institutional joint ventures its all in the predevelopment stage? Nothing on --.

That is correct.

Lastly do you plan on undertaking more asset sales maybe in Southeast Florida or some of the Summit assets to fund the increasing development pipeline?

The assets sales primarily will be selling older properties to improve the NOI balance and the overall quality of the portfolio, disposing of older and non-core assets, and then reinvesting those funds either through 1031 exchanges into development or into other acquisitions. We don't really plan on selling -- selling any of the Summit properties. You know we bought the Company because we really liked their properties and we want them in our core portfolio for a long period of time.

Great. Thanks so much guys.

Our next question comes from Chris Pike of UBS.

Good afternoon everybody. Big picture question, perhaps for Rick. Given the improving trend in fundamentals, the health of your balance sheet, and the successful completion of the Summit merger, can you add some color on your thoughts of the dividend. Can you remind of when the board reviews it, is it quarterly review? And to what capacity you think you have there into pushing your dividend going forward?

We --The board does review the dividend quarterly. We have stated in the past that we wanted to build the capital -- or cash reserves up from our -- to improve our coverage ratios -- our coverage on FFOs into dividend, or AFFO to dividend, and we've been doing that obviously through improving operations. I would expect that another quarter or two of positive NOI growth and the board would consider increasing the dividend.

At it's earliest it's still not for another 180 days down the road?

That's probably true.

Okay thanks a lot.

A follow you know from Jordan Sadler.

Jordan are you there?

Sorry about that. Any Mez prepayment penalties in the guidance for the second half?

No.

No.

The other number was -- I think you gave capitalized interest. Is there a capitalized overhead number you're expecting for the full year?

I don't have that in front of me, but we can probably give that to you if you like.

That would be great.

You are going to have to do that off line, he doesn't have it with him.

Okay thanks.

and there are no further questions sir.

Great we appreciate you're attention this afternoon and we will visit with you next quarter. Thank you very much. Ladies and gentlemen, this concludes the conference. You may now disconnect. Have a good day.