Camden Property Trust (CPT) 2005 Q3 法說會逐字稿

Good day ladies and gentlemen, thank you for stank welcome to the Camden Property Trust third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the presentation over to the host for today's conference, Kim Callahan, Vice President of Investor Relations. Please proceed ma'am.

Good morning and thank you for joining Camden's third quarter 2005 earnings conference call. Before we begin, I would like to advise everyone that we will be making forward-looking statements based on current expectations and beliefs. Statements are not guarantees of future performance, and involve risks and uncertainties that could cause actual developments to differ materially from expectations. Further information about the risks can be found in the filings with the SEC, and we encourage you to review them.

As reminder, Camden's complete 2005 earnings release package is available in the investor relations section of our website at www.camdenliving.com and includes reconciliations to non-GAAP financial measures that 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.

Thank you Kim and good morning. Camden had a solid third quarter. Our team continues to be guided by our values and are committed to be the best multi-family company by providing living excellence to our residents.

The dedication and hard work of our onsite property teams have kept Camden on plan for the quarter and the year for the same-store NOI growth of 4.4% for the quarter. Same-store NOI growth for the quarter was led by led by Jerry Hasara and our big dogs in the T Rock region of Florida. Tampa was boasting 20.5% same store NOI growth, followed closely by Las Vegas with 11.8% increase in same store NOI.

Apartment recovery is clear in place for all of our markets and should be accelerating into next year. Keith and Dennis will provide more insight on same-store results in their products. Camden's transformation continued with the acquisition of two new properties since our last call, an investments totaling $102 million, for a first-year cap rate of 5.45%. We're on track to complete our 2005 target of 200 to 300 million in the acquisitions in disposition. Some of the late acquisitions this year may roll into the first quarter. We expect a 50 to 60 basis point negative spread between the acquisition and disposition cap rates given that we're selling some of our old and non-core assets.

Our development teams have had a busy quarter this past quarter preparing and beginning construction between now in the middle of '06 on 8 new properties totaling 2368 apartment homes, with a total cost of $411 million. As we have discussed before, the funding of developments will be a competency from a combination of joint ventures and assets sales recycling older, non-core assets into new developments.

While constructions cost increases continue to be a challenge, we have been able to maintain our projected average yield of 7.5% on our projects that are currently under construction and and 7 to 7.4% on the zone pipelines. I would like to take this opportunity to thank all the Camden team members who worked many hours over the Labor Day weekend to find homes for the Katrina victims. We had a tremendous influx of people from the affected areas and our people really did a great job above and beyond the call of duty often times to get a lot of people in our properties in the Houston.

We can take a little bit more about that in a minute. At this point I would like to turn the call over to Keith.

Thanks, Rick. In my comments today I will address the third quarter operating results as well as talk about several other areas of interest, including hurricane hits and misses and 2006 operating costs challenges.

Our same-property operating results continue to produced better than planned results. The markets with the greatest outperformance are Tampa, Orlando, South Florida, Las Vegas, Metropolitan DC and Phoenix. The markets with the worst performance relative to plan are St. Louis, Houston, Atlanta and Raleigh.

Our California portfolio continues to perform below plans, although there are signs that we're headed in a more positive direction. In the quarter same property revenues in California rose by $300,000 over the second quarter. We expect it see trend continue in 2006 as we make up for the ground we lost to the prefers in the first half of this year. We continue to be encouraged by the improving fundamentals in most of our 19 reporting markets. The best evidence of this strength is our occupancy rate, averaged 96% for the third quarter, the highest quarterly average we've ever seen.

The sustained high occupancy rates have allowed us to more aggressively reduce concessions, and/or increase market rents, resulting in a sequential increase of revenue of 2% with the 17 of the 19 reporting markets experiencing a sequential revenue increase over the second quarter which historically been the strongest quarter. We are no estimating 2005 same-store revenue in 3 to 3.5% range versus our previous guidance of 2-3%.

2005 same store expenses are now estimated at 3 to 3.25%, versus previous guidance of 2-3. This should result in same-property NOI growth for the year at the top end or slightly higher than our original guidance of 1 to 3% for the full year. Traffic remains strong in the third quarter which is the further indication of an overall strengthening market condition.

Rapidly escalating home prices and interest rate increases, as well as a renewed focus among lenders of credit quality continue to shift the rent versus buy decision in our favor. This trend is likely to continue as higher utility costs and property taxes are passed onto homeowners.

While we're on the subject of utility and property tax cost, let's cover the potential impact of these increases on Camden's operations. Based on preliminary estimates from the six operating regions, we are currently estimating increases for 2006 as follows: electricity up 13%, natural gas up 18%, water up 6% and property taxes up 4%.

The dollar impact of the 13% electricity increase is $1.1 million and 18% increase in natural gas about $400,000, for a total impact of $1.5 million for electricity and gas, or roughly $0.025 a share. Since we have instituted a portfolio-wide resident utility billing system for all water expenses, our non-recoverable increase for the water expense for the full year of 2006 will amount to only $150,000. If you combine with the gas and electric increases, it still represents less than a $0.03 per share impact for 2006.

Our projected 4% increase in property tax costs represents the best estimates of our in-house tax professionals and third party consultants. While this is above our 2005 projected increase of 3%, at this point we don't see a huge increase over the previous years. Obviously, these utility and tax numbers are preliminary and we'll continue to refine them and update you on our thinking as part of our full year 2006 guidance.

Finally after dodging several bullets named Rita and Katrina, we finally got hit by Wilma in south Florida. It does not appear we suffered any substantial structural damage to our communities, and at this point, we believe that once power is restored, all of our apartments will be habitable. We had no storm surge or flooding, but the wind storm damage is widespread, consisting mainly of minor roof damage, documented trees and debris removal.

The primary expenses will be associated with the tree removal cleanup and landscape renovations. Based on preliminary estimates from our facilities director that we received this morning, we believe the total cost will be in the $1 to 3 million range. If costs come in at the low end of the estimated range, they will most likely be absorbed by our insurance reserves. The upper end of the range would require a charge that has not been provided for our in quarterly guidance, which Dennis will give you more color on.

On a more positive hurricane related note, the Houston market continues to benefit are the influx of Katrina and Rita evacuees. Our Houston portfolio averaged 95.5% occupancy in the third quarter, which is a 2.9% increase in occupancy from the year ago quarter. The direct impact to our Houston communities were approximately 200 additional hurricane-related leases.. The indirect impact was an overall increase in Houston's occupancy rate from 89% to 93%. As our competitors begin to adapt to the fact of occupancy rates by eliminating concessions, we should be able to push rents more aggressively in Houston.

Finally a brief update on our Yieldstar revenue management software. We completed the roll out in our Houston region, which encompasses Houston, Austin and Corpus Christi, and we continue to be encouraged by the results. We'll complete the roll out to the balance of our portfolio by year end. Part of the preparation process for the conversion to Yieldstar is the adoption of net market rents that is a net of concessions, since that is the way our Yieldstar pricing model works. In this quarter's supplemental, we have adopted the net rent presentation to avoid confusion as we roll out the new methodology. The changes reflected in the weighted average rental rate in the same property tables, and this is the presentation we will follow going forward.

At this time I'll turn the call over to our Chief Financial Officer, Mr. Dennis Steen.

Thanks, Keith, and good morning to everyone on the call.

I will start my comments this morning with a review of our third quarter results. We reported FFO for the third quarter of $0.76 per diluted share in line with mean first call estimates and at the midpoint of previous guidance of $0.74 to $0.78 per share. These quarterly results reflect property net operating income exceeding our forecast by approximately $500,0000, as growth in property revenues more than offset slightly higher than anticipated repair and maintenance and utility expenses.

Additionally, interest and other income for the third quarter was approximately $600,000 above the prior quarter and our forecasts due to additional interest income recognized upon the early payoff of a $7.4 million mezzanine loan on a multi-family community in Dallas, Texas. These two positive impacts were offset by higher than anticipated fee and asset management, and general and administrative expenses. Fee and asset management expense was negatively impacted by $925,000 in the third quarter as a result of warranty and repair-related costs on third party construction projects.

General and administrative expenses totaled 6.2 million for the third quarter, which was $300,000 higher than our forecast, entirely due to the write off of approximately $400,000 in development pursued costs on an abandoned transaction in Southern California. Also during the quarter, we completed the early pre-payment and subsequent refinancing of the mortgage that associated with our Sierra Nevada joint venture.

As discussed in the prior quarter's call, we incurred a one time charge of $2 million or $0.035 per diluted share during the third quarter representing a combination of prepayment penalties and acceleration of loan costs amortizations associated with the original financing in 1998. This charge is included within equity and income of joint ventures on our consolidated statement of operations. The new seven year mortgage loans are at rates of approximately 160 basis points lower than the original loans.

Additionally, Camden received a net cash inflow of approximately $12 million from the new increased leverage from this financing. You can refer to page 15 of our supplemental package for further details on the impact of this refinancing on our joint venture operations.

Taking a quick look at our capital structure, there have been no significant changes during the quarter. Total debt increased approximately $36 million as amounts were drawn under our own secured line of credit to fund the real estate assets resulting from development spending and net acquisition disposition activity. Additionally, 7.7 million in fixed rate secure debt matured during the quarter.

Our capital structure remains sound. As of the end of the third quarter, debt to market capitalization was 43.2%, 91% of our debt was at fixed rates, 77% of our assets are unencumbered and we have significant capacity available under our unsecured credit facility. Looking into fourth quarter of 2005, we have 25 million in unsecured notes maturing and we'll be paying off 33.2 million in fixed rate secured debt at an average rate of 8.1% that was scheduled to mature in January of 2006.

Both of these transactions are funded with advances under our line of credit. We do not anticipate any new debt offerings in the fourth quarter. Moving on to earnings guidance, we expect fourth quarter FFO of $0.82 to $0.86 per diluted share, resulting in full year 2005 FFO of $3.44 to $3.49 per diluted share

Our guidance range is based upon the following assumptions: Same property NOI growth of 2.8 to 3.3%, derived from revenue growth of 3 to 3.5% and expense growth of 3 to 3.5%. G & A and property management expenses of approximately 9.6 million for the fourth quarter and the disposition of the two communities held for sale occurring late in December and no acquisitions closing for the balance of 2005.

Based upon an $0.80 per share run rate for the third quarter of 2005, after eliminating the one time non-recurring charges in the second quarter I discussed earlier, our fourth quarter FFO estimate of $0.82 to $0.86 per share represents a $0.02 to $0.06 increase for the fourth quarter. This increase will be achieved by the following: a $0.02 to $0.04 per share improvement in property revenue, driven by continued same-store improvement, and additional contributions from the two resent acquisitions and development lease ups.

A $0.02 to $0.04 decline in operating expenses, resulting from the normal seasonal decline in expenses we experienced in the fourth quarter, and a $0.02 per share increase in interest expense, resulting primarily from higher interest rates than our floating rate debt and higher average debt balances resulting from recently completed acquisitions. We will provide 2006 guidance in late December or early January once our property and corporate budgets are completed.

I will now like to open the call up for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. One moment please. Sir, our first question is from the line of John Stewart with Citigroup.

Good morning. Just curious why raise the guidance for the fourth quarter given the potential for charges for the hurricane?

The guidance or the fourth quarter was actually sent out prior to conference call this morning when we got the first estimates of our folks in the field of what the damage would be, and we wanted to get those to you as quickly as possible, but had we had, the fact is at this point we still don't know whether it's going to impact our fourth quarter number or not. A: We didn't have the information until this morning, and B, if we did have the information, we still don't have sufficient clarity about what the damage will be, as to know whether it's going to be absorbed in our insurance reserves or not.

Can you give us a bit of color in terms of integration of the Summit portfolio. It obviously looked like same store revenue were up strong there and expenses were too?

Integration is actually kind as we think about the merger process with the the single expectation of the physical change in signage on-site and the supporting collateral materials the integration from our prospective is complete, and been an extremely positive experience. The revenue growth that you mentioned that we've seen has been a little stronger than what we originally laid out in the plan prior to the merge.

The expenses, their total expenses are actually below plan for the year as we had laid them out, as you look at the year over year comparison for Summit expenses, they had extremely low below run rates expenses in the second and third quarter of last year, and frankly we are kind of hard pressed to explain all of those variances one way or the other.

But from our prospective relative to our plan that we laid out for expenses, we are still below plan on Summit side from our original merger model. So from our perspective it's been a an extremely positive integration and when it's all said and done, the Summit portfolio on an NOI basis is going to outperform our original plan.

Okay.

Thank you.

Lastly could you just touch on trends in October, specifically with respect to benefits from Katrina in markets outside of Houston I was a bit surprised to hear you mention Atlanta as a market that was struggling.

Impact outside of Houston has been real minimal in our portfolio we had a small impact in Dallas in in our portfolio and some very slight impact in Atlanta. We really have not seen a big--big impact in our portfolios.

You got to keep in mind we went into the event, our portfolios in those markets even though they're not the strongest from the standpoint relative to our plan for the beginning of the year our occupancy was a fairly high--there wasn't a lot of room for direct impact on us. The secondary impact and residual impact of other people getting their occupancies cured, we certainly think we may see some impact from that down the road.

In the Dallas market, we saw a market-wide increase of roughly 1.5% that we kind of think is attributable in some way to the Katrina and Rita affect, but again I think the longer term trend is really more the secondary affect of getting a little bit healthier markets which will allow us to continue reducing concessions, and those two markets, which as you point out, are still concessionary markets.

Okay thank you.

Our next question is from the line of Rob Stevenson with Morgan Stanley.

Just to follow up on last question. Keith, is the current occupancy in Houston anything dramatically different than the 95.5 from the third quarter?

Current occupancy in Houston is at 96%.

Okay.

On the last weekly report. But I would also point out to you that in our overall portfolio, I didn't give this number in my prepared remarks--but in the overall portfolio, we are on the last weekly report 96.5% market wide--portfolio-wide so Houston is part of that strong performance and 96.5 in the middle of October is a fairly extraordinary number for us and from a comparative year over year.

Does that--i mean given the timing of year I mean normally most apartment companies are just trying to hold on to the occupancies that they hit the winter months with. Is this level of occupancy likely to have you pushing rental rates significantly more than you otherwise would?

The answer is in the markets where the recovery is kind of a little bit seasoned, which are the places where weaver outperforming our plans, the in Tampa, Orlando, South Florida, and Washington, D.C. area. The answer there is absolutely no reason to expect the kind of performance that we see this year which is we're going to end up with a great same-store performance in those markets. There's to reason to expect that there's going to be any slowdown in our ability to push rents in those markets.

Some of the markets where we have struggled this year with concessions, even though our occupancy in our portfolio is substantially improved many of our competitors have not. We still find ourselves competing with folks would seem to be struggling with occupancies which in our markets we're not doing that.

It's result of much more aggressive outreach marketing efforts and kind of controlling our own destiny to a certain extent. The reality is until our competitors get to a point where they feel they have stabilized their occupancies at a higher levels they continue to be the least lowest common denominator competitors by giving concessions.

What we need to have happen, which has happened in the markets where we do see the significant strength is you've got to have your competitors also realizing that. It's coming. I mean the occupancy rates have improved and certainly in Houston we had at immediate improvement, but also in Dallas and Atlanta , and even in Denver, but we kind of got to get to ta tipping point occupancy wide and then we should be able to push rents.

But in terms of our portfolio and occupancy rates looking forward, we always want to try to budget to a 95, 95.5% condition and there's absolutely no reason why looking forward in '06 that we won't be able to achieve that.

Okay in terms the unit turnovers, I think 71% during the quarter is that what you guys expected in the portfolio?

Yeah it was basically flat with the prior quarter. You know that's pretty consistent with what it is if you look at it year over year. There's no surprise there.

Was there any meaningful drop off and move outs for home purchases?

Actually our estimate for home purchases force the quarter, we gave, last quarter we were up 17.5% this quarter we're going to be up slightly north of that at 18%. We did see a rebound on that. The good news there on trend basis relative to where we were last year we were running consistently in the 21 to 22% that's still a significant improvement and I think that number only gets better going forward.

Lastly the eight development starts that you guys are going to do start through the middle of '06 what markets are those located?

Those markets are primarily Florida, DC, northern Virginia and then we have a couple of projects in Houston. But primarily Washington, D.C. and Florida.

Okay thanks guys.

The next question is from the line of Lou Taylor with Deutsche Bank.

Thanks and good morning. First thing, my condolences to the Astros for --

We weren't going to bring them up.

First thing if maybe I can just touch on expenses, they've been trending and staying pretty high in DC, south Florida and LA. Keith what are your expectations in there in terms of moderating those increases?

Well, you knows comparatives that we're looking at on those higher expense trends are in the Summit market and again we just got some really funny comparisons second and third quarter over last year. Again we expect to be below plan from what we laid out in our merger model for expenses this year and then looking forward, sort of preliminary indications from our first look of RVPs estimates for expenses for next year we don't expect see any difference for Summit versus Camden portfolio going forward. Where that will end up for the year, Now, where those end up for the year, we'll seethe guidance next year I would be very surprised to find any meaningful difference between the Summit markets and Camden markets for '06 expenses.

could you also talk a little bit about LA I know you had some personnel changes there in terms of what kind of traction are the people getting there and what's your outlook for kind of winter?

California I think the good news in the quarter is that we had got a $300,000 quarter over quarter sequential increase to revenues. Expenses are up ahead of plan we expect those to moderate in the fourth quarter but we'll get back on track. The expenses are never anything I spend a lost time concerning myself with because we always end up on plan--the concern is revenue and has been for the last two quarters a $300,000 quarter over quarter increase is a good sign and good first step to getting back on track in California. All positions community manager positions are filled. And we think we've got the right team in place to get us back on track this California.

How about in terms of Houston, all the evacuees from New Orleans. What's your sense in terms of whether they're going to stay or whether you're starting to lose some of those to other cities or back to New Orleans?

It's really interesting when you sort of go through that question because the I think the answer is it depends on the people, it depends on where they are. We have not seen a meaningful reduction in demand in Houston for people moving back to the affected areas. And even more than that, there's going to be demand that is come into market basically out of hotel rooms currently there are still 45,000 to 50,000 people that are displaced by the hurricanes sitting in hotel rooms. There was a meeting in Dallas in FEMA and the NMAC, National Apartment Association, and our understanding is that FEMA is going to draw the line in the sand very soon about stopping reimbursement for hotels and push people out very costly short term hotel rooms and into apartments.

So there could be another major push if demand once those people exit those hotels. You have a tremendous amount of folks that still have very short term housing at a very costly rate, and in the apartments are very viable alternative for the folks. The question becomes how long does it take to reopen the areas that people are in in New Orleans? I think the estimates are anywhere from six months to a year.

I don't think that you have some of things people don't realize is there were 17,000 new enrollment or kids enrolled in HISD schools as a result of Katrina. You have a lot of people that are put their kids in school here and out in the job force looking for jobs and getting jobs because we have a great September/October job numbers in Houston.

So my guess is that the people don't take their kids out of school once they get established and are going be here at least through the end of school year and when they start getting jobs, you have a situation where they are highly likely to stay. Of some of the big job growth has been in the teacher area.

There were 1700 teachers hired that were displaced from the Louisiana area so you have a situation where it's a tremendous I think benefit to Houston. But they're not all leaving tomorrow, trust me.

Rick staying with you for a sec what's your expectations for the MEZ business any growth or further shrinkage there.

The mess business is not going to grow in the traditional way we may do some MEZ in the joint ventures I would say it will flatten out in the probably decline.

Last question for Dennis in terms of our '06 debt maturities. When do they fall within the year and what are your plans to take out asset sales or just refinancing?

Right now '06 maturities, we have approximately 50 million that matures in February we have another 125 million that matures--i'm sorry 150 million that matures in November.

is your expectation to just refinance that?

Right now we have a debt offering that we have scheduled for the mid-part of next year as we stand here today that will take that out permanent.

Great thank you.

just to follow up since you raised it we weren't going to your comment about astros. If you had my guess is if when the Astros were 15 games below 500 at 15 and 30 in the month of June. In every Astro fan alive had been offered a devil that basically would have guaranteed that we would play in the World Series but swept, there's not one alive that wouldn't have taken that deal at the time, so expectations are important so we understand that.

Great thanks.

You bet.

Sir next question is from Ross Nussbaum with Banc of America.

It's Karin Ford here with Ross. Just want to make sure other than the potential hurricane charge there's no other potential one-time items in fourth quarter '05?

No one-time items are forecasted at this time no.

You sold I guess a land parcel and a community but there was no gain on sale this quarter; is that right?

Thanks that's correct the community was a community acquired in the Summit merger in that acquisition we had to mark that community to the fair value so there was no gain there. The two parcels that we sold in Dallas were Farmer's Market Track and we moved that into discontinued operations a couple of quarters ago, wrote that parcel down the fair value at that time there was not gain on those two parcels either.

the assets that you're currently holding for sale today, are you expecting to sell those to condo converters? If so, are you seeing more or less interest from condo converters for assets today?

One of the assets is potential going to be sold to a condo converter. We are not seeing any slowdown in the condo converter market. Maybe slightly. Instead of 15 offers you might get 12.

Okay, thanks very much.

Okay.

[OPERATOR INSTRUCTIONS]. Sir, next question is from the line of Rich Anderson with Harris Nesbitt.

Thanks, and good morning. You said disposition is 200 to 300 million is that the total for the year is that right?

The math we're matching acquisitions and dispositions together yes so there would be no net acquisitions.

Okay. But you've only done 150 million of acquisitions?

102 million of acquisitions and about 32 million of sales.

You said no acquisitions assumed for the fourth quarter, didn't you say that for the balance of year?

In the guidance, that's correct.

So you're assuming that much in acquisitions but you're not assuming anymore in the your guidance; is that right?

No if we do we have some acquisitions that are working to the except that they close they would close in the end of year or early in the beginning of 2006.

Okay. Understood. Dennis you went through the math to get to the fourth quarter number, I think I heard $0.02 to $0.04 revenue positive and two negative components were expense growth, seasonal issues and $0.02 down on interest expense.

No the expense variance is positive, seasonal declines and expenses.

Okay that's what I missed. Understood. Regarding Yieldstar, you talked about it pretty quickly did you add--I guess it sounds like you did--added more than five communities you spoke about from the beta test round from your conference in DC. Can you give us any insights in what you're seeing in the terms of upside and maybe quantify what you're seeing in terms of revenue growth from Yieldstar from the communities you identified a month ago.

Rich it's too early for us to be sort of generalizing and forecasting trends. I can just tell you the rollout is going extremely well and we're very pleased with the pricing that's being generated from the model. We added all of our Houston communities which is additional from the beta test is additional 14 communities, and office in the Houston and Corpus Christi we're up it around 23 to 24 communities with it deployed.

The primary mare test for deployment across the Houston region was really to make certain that our rollout scheduled could be achieved by year end. We wanted to make sure to test our capacity to sort of do 20 in one fell swoop because we're going to repeat that process about nine times between now and end offer. That part of equation rollout went extremely well. I can tell you your community managers district managers and our RBP in Houston are extremely pleased with the results they're seeing-- we look at guidance for '06 we'll give you more color on that.

Have you seen any employee turnover on the Summit side of magnitude?

At the operating level, absolutely not. We brought everyone over that from onsite operations and then in all other areas, nothing that is not in the expected range in terms of turnover.

Last question is on Houston on comments you know on what could be maybe a little bit more drawn up upside from the impact of the hurricanes. What about development are you seeing it tick up? I noticed you included Houston as part of your development starts on a go-forward basis.

I don't think we've seen a big hiccup on the Houston projects, we believe even without the hurricane benefit that '06 was going to be a pretty good year to start developments in Houston. We look forward into '07 and '08, Houston looked like a pretty strong market in the development even without the hurricane.

The hurricane demand clearly has accelerated the recovery of Houston, but we haven't seen a dramatic pick up in development. In fact the development was declining over the last couple of years you know because it was basically overbuilt, and that's why Houston is having a slower recovery than rest of the country. It actually was did very well through the recession and then was only one of the places you could build and actually do well and then of course it got overdone.

The starts--I don't expect starts to dramatically ramp up as a result of the hurricanes.

Have you seen some indication that starts are picking up in Houston? That he's picked up.

Not really.

Our next question is from the line of Chris Pike with UBS.

Good morning everyone. A quick question. I guess Dennis and/or Keith.

Dennis you indicated positive variance with respect to expenses. I think Keith in an earlier question you indicated you may have some pricing power some stronger markets going into the quarter. And that would possibly imply higher turnover and maybe higher turnover costs.

Some of the weaker markets will offset that, so maybe your turnover stays flat or maybe even down a little bit even though you're going to have pricing power in some of these stronger markets?

Are you talking about fourth quarter result?

Yeah.

If you look at fourth quarter from the seasonal standpoint, the decline and expense is not driven that much by turnover, it's more driven by utility costs in our portfolio, All of our peak R and M costs always are related to air conditioner systems, et cetera, that have to be replaced. I wouldn't be looking for any real net change relative to the turnover rate or turn rate it's really more of seasonal decline.

Secondly I think you talked about an influx of jobs vis-a-vis teaching. Rick, can you tell us what you see happening in the commercial market for office, do you see more businesses coming and, leasing space driving up job growth in the areas in the local economy in Houston?

Yes I think the numbers I saw for October job growth and September job growth accelerated pretty good. I think there were like 12,000 jobs that were--that were generated in September after the hurricane. We have, just anecdotally, we were actually working on our lease renewal here in Greenwood Plaza and we definitely spent sometime talking with our landlord, who's Crescent and they indicated there was a reasonable amount of new demand come off of New Orleans.

I know the banks had to relocate operations here and took additional space the increase in job growth in Houston I think it was originally projected to be 20 to 30,000 and now they're projecting the last twelve months was about 45,000 job, and next year was projected to be 54,000.

We definitely had a pickup probably 10 to 15,000 jobs. It's been a function of I believe not only high energy prices and pretty good energy business and clearly the hurricane affect because a lot of cleanup and rebuilding of New Orleans will be clearly based out of Houston in this area.

okay, thanks a lot.

Thanks Chris.

Sirs we have a question from line of Dave Rodgers, KeyBanc Capital Markets.

A question for Rick. After spending a couple of years out of the acquisition market, this year has obviously been a much more active year. With cap rates down, can you talk about the differential in the growth rates that you're underwriting maybe from two years ago to today?

Sure. The it's definitely a lot easier today to check better growth than it was two years ago when we were worried about continuing declines in the markets and clearly two years ago we were prudent in in viewing the market as we didn't know where the bottom was so how could you project? Today it's a lot easier to project an uptick.

For example in Austin we're seeing the market improve. We had a good occupancy and you can project pretty good strong NOI growth in this new acquisition we bought there. So it's a lot--there's a lot more clarity I think in the ability and confidence in projecting higher NOI growth so that you can underwrite lower cap rate transaction and buy a mid-5 or low 5's cap rate and grow it a couple of years into mid-sixes.

I guess maybe in the broad terms quantifying the magnitude. Is it 200 to 300 basis points not any specific transaction, but --

When you say 2 to 300 basis points.

Of differential in growth between what you were doing or underwriting two years from today?

Absolutely at least 300 probably.

I know you had a long-term plan with your middle market or middle of the country markets, we're seeing a cap rates may start to move up here in the middle of the country would that cause you to accelerate in 2006 any asset sales there?

You know that's a good question. We are evaluating our capital plan for next year, and we clearly have a large development pipeline with the 575 million plus 411 million of starts pushing in on a billion dollars of construction. The key issue will be, and we haven't made this decision yet or created our capital plan, but it's a balance between accelerating sales, funding the development with those sales, and the challenge is is that if we do--if you do an accelerated sales program, delever through that program, and then use those funds to fund development.

It can be a pretty diluted transaction so we're looking at the balance between how much--how much dilution are we willing to take to fund that, even though it may be the right real estate decisioned it may put pressure on '06 earnings. We may clearly put probably on '06 earnings.

With a we're doing right now on capital planning is we're trying to balance the sort of fute FFO growth with the value creation scenario vis-a-vis selling older assets and funding development, and it's a very you know not complicated, it's pretty easy to calculate the numbers, but it's the balance between how much we're willing to take in dilution and how much we're willing to sort of sacrifice next year for the future.

Are you beginning to see any widening in the spreads between those marked?

Not really.

Okay last question for Keith or Dennis it looked like recurring Capex in the portfolio was higher in the third quarter. Is that a trend?

I think the goal is full year basis to of Capex for the entire portfolio of about $33 million. It winds off in the fourth quarter. I don't think we're seeing anything in the current year that's different.

We'll end up a year below plan.

Okay thanks, guys.

We have a question from the line of Craig Leupold, Green Street Advisors.

Good morning, Rick follow up on David's question. Can you comment on cap rate trends and what you're seeing kind of at the margin at this point?

You know the--I haven't seen cap rates move up at this point. The acquisitions we've seen and dispositions we're working on have generally been in the same zone they have been in the year. I started to hear some chatter from brokers I was talking to a senior CB person who is marketing some older assets here in Houston.

He said some of his buyers, his private buyers because the ten year has moved over 450, have started to move their cap rate expectations up 10, 15, 20 basis points but they haven't done any deals yet, and I would expect for long-term rates continue to trend up the cap rates do have to trend up as well. We haven't seen a lot of that.

On the other hand we've seen very low cap rates, for example in Houston, some 5 and sub-5 cap rates paid for inside-the-loop properties by institutions by pension funds. Which usually they're early to this market and usually it's the private buyers that lead the way and pension funds come in later. But we have a substantial amount of pension fund buyers buying at very low cap rates here.

How about any change in the appetite for condo conversions? I mean obviously the numbers through October is still the condo conversions dominating the sales market, but given the increase in interest rates, have are you seeing anything on that front?

You know we're only anecdotally. We haven't seem a number of condo conversion deals not close but you hear that there's more inventory in DC, there's more inventory in Florida, yet, it's more mostly people sort of raising flags of worry. But you haven't stopped seeing condo converter bothers and--buyers or portfolios or properties that we have in the marketplace are getting good interest from condo converters so we haven't really seen a slow down yet even though there's concern out there.

One last question maybe for Dennis, detail question. On page 11 of the supplement, discontinued operations, is it possible to break out how much of that NOI is related to what's held for sale as opposed to what's actually sold?

Sure we can provide that. We'll give that you schedule off line if you would like?

Okay I'll follow up with you, thanks.

Sounds good.

And sir we have no further questions back over to the group for any further comments.

Great we appreciate your attendance on the call and we'll speak to you on the next call, thank you very much.

Ladies and gentlemen we thank you for your participation in today's presentation. This concludes the conference and you may now disconnect.