Camden Property Trust (CPT) 2005 Q4 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Camden Property Trust fourth quarter 2005 earnings conference call. At this time all parties are in a listen-only mode and there will be a question-and-answer session following the presentation. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Miss Kim Callahan, Vice President of Investor Relations.

Thank you. Good morning, and thank you for joining Camden's fourth quarter 2005 earnings conference call. Before we begin, I would like to advise everyone that we will be making forward-looking statements based on our 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 you to review them.

As a reminder, Camden's complete fourth quarter 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 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'd like to turn the call over to Rick Campo.

Thank you, Kim, and good morning. I'd like to just offer a brief apology to our West Coast friends who had to get up a little early for this call, but, as most of you know, we have three multifamily companies that are reporting earnings and doing calls over the next three hours. We will try to keep our call to about an hour to make sure that people can jump off of this call and onto the next. 2005 was a transformational year for Camden.

Market conditions finally improved with solid job growth and significant momentum shift in demand and pricing favoring multifamily owners. We began this transformational year with the closing of the Summit merger, which improved our product quality and expanded our geographic footprint to the attractive East Coast markets, while lowering our exposure to the middle of the country. The merger transformed and expanded our development pipeline. In 2005, we started nearly half a billion dollars of new developments, 80% of which are located in southern California, Washington, D.C., and northern Virginia. During the year, we transformed our customer leasing experience and improved on-site efficiency through the successful implementation of our integrated web-based customer relationship management, property management and revenue management systems, OneSite and YieldStar.

Reviewing the fourth quarter results Camden had another solid quarter providing further evidence that the multifamily operating fundamentals are accelerating nationally. Revenue growth was strong in nearly all of our markets posting 6.7% growth over the fourth quarter 2004, combined with a 1.2% sequential revenue growth over the last quarter. Expenses increased 7.7% over the fourth quarter 2004. While expenses have been trending up and are a concern for 2006, the increase for the quarter and year-to-date are skewed by noise in the Summit numbers caused by differences in pre-merger reporting methods. Expenses in the Camden [Site Stabilize] portfolio grew at 3.4% for 2005 over 2004.

Summit Property expenses came in slightly better than our budget for the year and our merger model. In spite of the comparability issues with the Summit portfolio, same store NOI grew at a solid 6.1% for the quarter and 3.5% for the year. The strong core portfolio performance for the year has been a direct result of the hard work of our outstanding and dedicated on-site teams. To perform at this high level while implementing new systems, along with the Summit merger integration, is truly exceptional. Thank you, Camden team members. We expect the strong market conditions to accelerate during 2006. We will continue our transformation.

We will start another 300 million to 500 million of new development, primarily on the East Coast with 150 million to 200 million of the developments being completed through joint ventures. In spite of a difficult construction environment, our projected yields on the development continue to be within the range of 7% to 7.5% on the average. We will continue to improve our geography and quality of our portfolio through asset recycling. We expect to sell between 475 million and 600 million of properties in 2006 and acquire 200 million to 300 million.

Our recycling program will result in an FFO dilution of $0.03 to $0.04 a share. During 2006 and into 2007, we'll be completing leasing at $588 million for the development properties providing significant internal growth through 2008. We expect that the delivery of the apartment homes and revenue production through leasing will produce FFO dilution of $4 million to $5 million, or $0.07 to $0.10 a share during 2006. We also will be selling several land parcels where the development of rental property has been difficult to underwrite to an acceptable return in the current environment. These sites will likely be sold to for sale developers. We expect to record gains on sale of these land parcels around $10 million, or $0.17 per share during 2006.

Our shadow development pipeline on the East Coast and the West Coast will replace these land sales. So our development pipeline will continue to be robust going forward. Subsequent to year end, we acquired our partner's interest in Camden Westwind. The acquisition is projected to produce an effective 6.7% yield upon stabilization. Westwind is not included in our acquisition or development guidance.

A year ago, our 2004 fourth quarter conference call there was concern voiced by investors about the premium price paid for Summit. We believe and continue to believe that the merger was a tremendous value and a transformational event for both Camden and Summit. The market has agreed with our view on Summit as evidenced by the solid performance of our stock price since closing. Our transformation will continue. At this point, I'll turn the call over to Keith Oden.

Thanks, Rick. I want to spend my time on the call today covering two topics. First, I'll give my annual review of the market conditions for 2006 in our largest markets. Beginning with our top performing markets, I'll give you our view of current market conditions expressed as a letter grade A through F, and also provide our view of the outlook for each market through year end 2006 as either improving, stable or declining. Second, I'll provide some additional details of same property guidance for 2006.

First, let me say that 2005 was an amazing year. We completed the integration of the Camden Summit portfolios seamlessly, and accomplished our goal of rolling out OneSite, our web-based property management system. In addition, we implemented YieldStar nationwide by our deadline, December 31, 2005. The YieldStar revenue management system is an amazing tool for our on-site professionals that relentlessly and dispassionately recommends market clearing rents at every community, which should allow us to take full advantage of the recovery that is well underway.

Now to the overview of Camden's market conditions. In San Diego, we rate current conditions as an A with a stable outlook. This market has experienced 12 straight years of economic growth. Job growth has been consistent for the past three years with a 2006 forecast of 25,000 additional jobs. Housing prices have leveled off and we may be past the peak of condo mania, but multifamily permits and mortgage originations are declining keeping multifamily demand strong and creating opportunities to push rents.

In south Florida, current conditions are rated as an A with a stable outlook. Steady employment growth is expected to add 20,000 new jobs in 2006. Forecast show in migration increasing by 30,000, declines in multifamily permits and a tightening housing market for 2006.

The combination of these factors will keep south Florida strong in 2006 and a top performer of same property in [INAUDIBLE] growth. In Orlando we rate current conditions as an A with an improving outlook. The economy remains among the most rapidly expanding in the nation, with 2006 employment growth of 2.9% over 2005. Demand and supply are in equilibrium, but home price appreciation and increasing population growth combined with Camden's high occupancy rates will allow solid rent increases in 2006. We believe this lead to another year of solid NOI growth in Orlando.

We rate current conditions in Tampa as a B plus with a stable outlook. Companies continue to make Tampa their new home due to the highly educated work force and low cost of doing business. Employment growth of 46,000 will keep apartment demand high and position Tampa for another year of solid performance.

In the Washington D.C. metro area we rate the current conditions as an A with a stable outlook. Washington, D.C. was among the nation's top job producers in 2005, and is projected to remain above average in 2006, adding 40,000 to 50,000 new jobs. Rising single family housing costs and a decline in multifamily permits will keep this market one of the highest rent growth areas in the country.

Next in Las Vegas, we rate current conditions as an A plus with a stable outlook. Vegas is one of the fastest growing metro areas in the nation with forecasts showing the addition of another 40,000 jobs in 2006. Marketwide occupancy rates at 97% have eliminated concessions and the focus in 2006 will again be growing rents. The lack of apartment home completions, continued condo conversions and rising single family home prices will position Las Vegas as one of the nation's top performers again in 2006.

In Orange County, we rate current conditions as a B plus with a stable outlook. Going forward this market shows signs of steady but moderating job growth. Limited multifamily supply and the high cost of single family housing will continue to influence the decision to rent versus buy in Orange County during 2006. Multifamily permits will remain at a very manageable level of 3,500 to 4,000 units per year, and demand should continue to outweigh supply, as we've seen over the past several years.

In Phoenix, we rate current conditions as a B plus with a stable outlook. Phoenix has recorded strong growth in employment and population and occupancy levels remain high. These conditions should bode very well for same property NOI growth in Camden's Phoenix portfolio once again in 2006.

In Houston, we rate current conditions as a B minus with an improving outlook. The apartment market saw a dramatic increase in demand after hurricanes Katrina and Rita when over 150,000 evacuees made Houston their home. Several New Orleans companies have relocated operations to Houston, and nearly 50,000 Louisiana residents are expected to take up permanent residency in the city. High energy commodity prices are a key driver for employment growth, with 55,000 to 70,000 new jobs expected in 2006. And for the first time since 2001, multifamily completions are forecasted to be below 10,000 units, a sign that supply is moderating. Camden's marketwide occupancy rate of 95% should allow for moderate rent growth in 2006.

In Dallas, we rate current conditions as a C with an improving outlook. Although the outlook in this market is not as positive as Houston, it is gaining momentum. The addition of 40,000 jobs and the in migration of 12,000 new residents to the Dallas area will help absorb the excess apartment inventory in this market. Demand is expected to exceed supply this year supporting rental rate increases and improving revenues.

St. Louis we rate current conditions as a C plus with a stable outlook. Supply remains very manageable and expectations are for slow and steady growth. Same property NOI is projected to increase modestly in 2006.

We rate Austin current conditions as a B, with an improving outlook. Employment growth is expected to accelerate across all sectors, adding 25,000 new jobs and stronger in migration levels will support the multifamily market. Concessions are finally declining, which is helping us to grow net effective rents.

In Atlanta, we rate current conditions as a B minus with a improving outlook. This economy was originally forecast to improve significantly during 2005, but indicators now point to 2006 as the year that we should regain momentum. 40,000 new jobs will strengthen absorption by accelerating demand for apartments. New supply coming online should be more than offset by demand, helping to improve occupancy and allowing for rental rate increases. Overall, Atlanta is expected to be a more attractive market with better prospects for growth in 2006.

In North Carolina, we rate current conditions as a B with an improving outlook. Merger activity in the financial sector has aided long term growth in the market, healthy population growth, relocation of corporate headquarters, and continued job expansion allow for improving market conditions throughout the year, supporting meaningful gains in same property NOI.

Denver, we rate current conditions as a C with a stable outlook. This market has been on a long path to recovery. But 2006 shows some signs of hope. Employment, migration and population are all on the rise with 26,000 new jobs forecasted this year. Camden's marketwide occupancy levels have remained relatively flat during 2005 and are expected to remain the same in 2006. If we execute well same property results will improve slightly compared to 2005.

Of the 15 markets we just covered which constitute 94% of Camden's NOI, 11 had improved ratings compared to last year while four remained the same with none declining. The breadth of the recovery in property level fundamentals is impressive. None of this is surprising when viewed at a macro level, given the employment growth projected in CPT's markets for 2006. Nationally, job growth is projected at 1.9%, whereas Camden's markets are expected to see a 2.8% growth rate. We've always believed that job growth drives results in the multifamily sector. Our visibility of NOI growth in 2006 is the best it's been in four years. We spent the better part of three years chasing the market down and more recently have found ourselves chasing the market up.

If you calculate a weighted average for our letter grades, it indicates that the overall current condition in Camden's market is about a B to B plus, with a stable to improving outlook. This strikes me as about right, supports our same property NOI guidance in 2006, of a 4% to 6% growth. The midpoint of our same store NOI guidance is 5% with expenses up 4% to 5% and revenues up 4.25% to 5.25%.

With regard to expenses our biggest challenges in 2006 will be in utilities, up 10.7%, repair and maintenance costs up 4.2%, and property taxes forecasted at up 4.5%. The combination of these three categories are causing the majority of the increase above our historical 3% to 4% trend. Regarding revenues, we are projected average occupancy to remain flat with the prior year at 95%. Concessions will come down dramatically as we burn off prorated concessions on existing leases. All new leases are being executed based on net rents provided by YieldStar.

Property revenues are projected to rise 4.75% at the midpoint. This assumes only a modest contribution from our revenue management program. Although early indications are positive and there is an abundance of anecdotal evidence to support a higher contribution in 2006, 70% of our portfolio implemented YieldStar in the last 45 days of 2005, and one month does not make a trend.

Due to our higher confidence level in forecasting our markets this year, particularly in the first two quarters of 2006, any outperformance in property revenues in the first half of 2006 will likely be attributable to the impact of YieldStar. If that occurs, and appears to be sustainable, we will adjust our guidance accordingly. At this point, I'd like to turn the call over to Mr. Dennis Steen, our CFO.

Thanks, Keith. I will start this morning with a review of our fourth quarter results. Camden reported FFO for the fourth quarter of $49.5 million, or $0.84 per diluted share, representing a $5.1 million, or $0.08 per share improvement from the third quarter and coming in at the midpoint of our guidance of $0.82 to $0.86 per diluted share. The $5.1 million improvement in FFO from the prior quarter was primarily due to the following: A $5.3 million increase in property net operating income, a $458,000 net gain on the sales of undeveloped acreage in Houston and Dallas, and the fact that the third quarter results included a $2 million, one-time charge on the refinancing of joint venture mortgage debt.

These positives were offset by a $941,000 decline in interest income from our mezzanine loan portfolio from the prior quarter due to lower outstanding balances and prior quarter additional interest recognized as a result of loan payoffs. A $1.2 million increase in property management and G&A expenses, primarily due to higher incentive compensation expense resulting from our 2005 performance and slightly higher professional fees related to audit, tax, and legal matters, and lastly, a $801,000 increase in interest expense, which resulted primarily from the purchase Camden World Gateway in Orlando, FL, and Camden Gaines Ranch Austin, Texas, for a total of $101.5 million near the beginning of the fourth quarter.

Taking a closer look at the $5.3 million increase in property net operating income for the quarter, approximately $1.3 million is the result of our acquisition activity, $2.2 million is attributable to the increased contribution of our non-same property communities, development and leaseup communities and communities held for sale, and lastly $1.8 million relates to a 2.5% increase in the NOI contribution from our same property communities resulting from a 1.2% growth in revenues and a 0.7% decline in expenses.

The $314,000, or 0.7% decline in same property expenses for the quarter was approximately $1.1 million less than expected due to the following, a $500,000 increase in insurance expense to fully provide for the $1.6 million in estimated losses from Hurricane Wilma, and $200,000 in expense related to the Camden branding of our Summit communities, originally budgeted for in the first quarter of 2006, and lastly, slightly higher than anticipated utility and repair and maintenance costs. Year-to-date same property expenses totaled $182.4 million, up $8.3 million, or 4.7% from the full year 2004 amounts, and $2.2 million, or 1.2% higher than the top end of our prior full year guidance of growth of 3.5%.

This unfavorable variance relates to higher community level incentive compensation, resulting from better same store performance, and slightly higher than anticipated repair and maintenance, utility, and insurance expenses. One additional item to note on our fourth quarter results is the fact that we recognized a gain of $11.2 million, which is included in the equity and income of joint ventures line item on our operating statement related to the sale of three operating properties held in joint ventures. We sold Oasis Heritage and Oasis Suites in Vegas, and Summit Green in Charlotte.

Moving on to the balance sheet, there are a couple of items to note, first, properties held for sale now totals 172 million and includes the book value of seven operating assets totaling 2,956 apartment homes and 12.2 acres of undeveloped land. The seven communities held for sale are Camden Live Oaks in Tampa; Camden Trails and Camden Highlands in Dallas; Camden Pass and Camden View in Tucson; Camden Wilshire in Houston; and Summit Brickell in Miami. Camden Highlands actually sold in January and the remainder are expected to close by the second quarter.

As Rick mentioned, during the fourth quarter we decided to sell 3.1 acres of undeveloped land in southeast Florida, and 2.1 acres of undeveloped land adjacent to our Camden Harbor View community in Long Beach, California. These parcels, with a book value of $17.7 million, are now also included in properties held for sale.

On the liability side of the balance sheet, unsecured debt increased $104 million from September 30, 2005, as advances under our unsecured line of credit funded our acquisition and development activities and the payoff of $33 million in fixed-rate mortgage debt, which had a weighted average interest rate of 8.1%. Secured debt declined $35.8 million during the quarter reflecting these payoffs and normal principal amortization.

Our capital structure remains sound. At December 31, 2005, debt to [INAUDIBLE] capitalization was 42.9%, 87% of our debt was at fixed rates, 76% of our debt was unsecured, 83% of our real estate assets were unencumbered, and we have very manageable debt maturities over the next several years. 2006 debt maturities will total $200 million, with $50 million maturing in February, $25 million maturing in May, and $125 million maturing in November.

Additionally, in January of 2006 we amended our $600 million unsecured line of credit extending the maturity for two years to 2010, improving pricing and making significant improvements to the covenants. Moving on to 2006 guidance, we expect 2006 projected FFO per diluted share to be in the range of $3.45 to $3.65, as compared to the $3.40 for the full year 2005.

Our 2005 FFO per diluted share of $3.47 included approximately $0.19 attributable to the net impact of gains on the sale of technology investments, and the amortization of below market leases related to the Summit acquisition, partially offset by transaction compensation and merger expenses, joint venture debt prepayment penalties, and preferred unit redemption charges. Adjusting for these non-routine charges 2005 FFO would have been $3.28 per diluted share resulting in 2006 FFO per share growth of 8.2% at the midpoint of the range.

Please refer to page 23 of our fourth quarter 2005 supplemental package for the details of the key assumptions driving our 2006 financial outlook. For the first quarter of 2006, we expect projected FFO per diluted share within the range of $0.82 to $0.90. The midpoint of our guidance assumes continued improvement in NOI from our stabilized communities, partially offset by slight dilution from planned asset sales. The upper and lower end of the range is dependant upon the timing of asset sales and other fee-based transaction activity. I would now like to open the call up to questions.

Thank you, sir. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question is coming from John Stewart of Citigroup.

Hi, it's John Stewart here with Jon Litt. Dennis, can you just go back over the one-time items in '05 quickly and sort of itemize them so that we can reconcile to the $0.19? And also can you address -- I was under the impression that rent.com was $0.59 but it looks like in the release you're talking about $0.43 of impact from the sale of technology investments?

Yes, the sale of technology investments was $24.2 million, which is right at $0.43 per share. We also had the amortization of Summit above and below market leases which is right at $2.7 million, which was $0.05 per share. That was offset by transaction compensation and merger expenses of $14.1 million, which was $0.25 per share, and then the joint venture prepayment and preferred -- the preferred unit redemption charges was right about $2.4 million, or $0.04 per share. If you net all those together you get the $0.19 per share.

Okay, thanks, that's helpful. Can you speak to the -- I guess is the 96.1% occupancy in the press release, is that an end-of-period number and why you were referencing flat occupancy at 95% in the guidance?

That is actually an end of the fourth quarter average number, 96.1%. Our portfolio right now is about 96.2%. Our guidance for the year is 95%, and the primary reason for that is with the implementation of YieldStar it will, and it has shown it will do this, it will continue to press rents in an attempt to force to produce a 95% occupied condition, so we do expect to see occupancy trend down. The likely offset to that will be a higher rental rates as the model seeks to optimize revenues at 95%. We expect that over '06 we will trend back to our historical norms of around 95%. And the model is actually designed specifically to produce that result.

Okay, thank you. And then lastly, can you speak to the $12 million to $14 million of non-property income in the guidance? How does that break down and how much of that is one-time and what, if any, is mezz prepayments?

If you look at the guidance, the majority of that is management fees and interest income on our mezz debt. So management fees are approximately a $12 million number. Our mezz portfolio is going to generate about a $4 million income number and that's offset by fee and management expenses of about $4.7 million.

There are no prepayment penalties assumed in the mezz line. The $12 million in management fees relates to ongoing joint venture business and the joint ventures that we are going to structure in our development pipeline.

Okay, thank you.

Our next question is coming from Ross Nussbaum of Banc of America Securities.

Good morning, it's Karin Ford here with Ross. Could you just talk a little bit about the progress you're seeing at your leaseup properties, and in particular, could you talk about Camden Westwind, it looked like there wasn't a lot of leasing progress this quarter?

We actually had some leasing progress and then some leasing degress. We had a large corporate user that represented about 30 units, Karin, that gave notice and moved out in January post year end. It's included in those occupancy numbers. We actually ended the year at a good deal higher, about 8% higher occupancy than what shows there. The corporate user of 30 units gave notice. We had slower than what we would have liked to have seen and expected leasing velocity in November and December. We had 15 net leases in each one and we were projecting about 25 net leases in each of those two months. The good news is that in January, we netted 26 leases against a forecasted 25. So I think we are back on track there. We took a step backward with the corporate units. Those are sort of live by the corporates and die by the corporates when you have a large block like that.

There was also an issue with delivery of units where delivering large buildings and there was about a two-month delay in delivering some units. At one point during the fourth quarter we were 100% leased with no availability so you had a situation where you couldn't actually lease because you didn't have availability. So it was sort of an unusual situation.

Secondly, could you give us a little bit more color on the Katrina effect in Houston, have you seen any of your Katrina residents move out? Are you seeing continued momentum there or have things started to trend downward?

The interesting thing about Katrina is prior to the hurricane, we were at 95.5% or 95.6% occupied in our portfolio. The Katrina effect has been positive overall for the city. The latest numbers that I saw, I was at a housing task force meeting this week, we have about 38,000 apartments that are currently occupied by Katrina folks. A lot of the apartments that are being occupied are sort of the B minus, C plus sort of zone of apartments.

If you look at bifurcating or stratifying the Houston market, the top end of the market, which is where we operate pretty much in Houston, was already well occupied. If you go into the middle part of the market towards the bottom end of the market that's where the vacancy was in Houston and that's where most of the Katrina effect is felt. Now, clearly, as the middle part of the market leased up with Katrina, it allowed us to experience more pricing power, if you will, by virtue of having the bottom part of the apartment market just below us fully occupied.

There have been some anecdotal evidence that some of the Katrina people are leaving. But the other piece of the equation is we still have somewhere around 40,000 people in hotel rooms because the of the way FEMA has sort of gone off and on about when they're going to force people out of hotel rooms, they haven't done that yet in Houston. We've been able to secure sort of reprieves from FEMA through the housing task force that the mayor is involved in and that we're involved in and also through the governor's office.

There are still a fair amount of folks that need permanent housing that are sitting in hotel rooms. The economics of the hotel rooms are just absolutely absurd. FEMA is paying somewhere around $70 to $90 per day for those people in the hotel rooms, so you have a situation where apartment rent is far cheaper and far more efficient for FEMA to put these folks into apartments. We think there's going to be another wave of Katrina folks moving into apartments over the next quarter or two, so that will have continued effect on the middle part of the market.

Great. I think Ross has a question, as well.

Yes. Two questions. The first is, can you give us a sense of -- has the implementation of the YieldStar software sort of shifted how you're mixing the blends in concessions in just pure rental rate growth, are you pushing rents more now?

Well, it shifted in this respect, we really don't -- our lease structure really does not even provide concessions. It's purely a net rent. There are no concessions. The fact is that the market that's about -- up until about -- and still in many cases, many of our competitors have adopted the concession and then you prorate the concession. I never understood what that was other than that's net rent. In our model, in the YieldStar model, it's purely a net rent where the resident pays a flat rental rate from day one in the lease without any upfront concession and no prorated concession.

In our world, the concessions that still exist in our financial statements are literally the burnoff of embedded concessions where we have prorated those on leases that are already in existence. Those should roll off and by the middle to the third quarter of this year we literally should not be showing anything other than a very trivial amount of concessions in our financial reporting.

The rest of the world, many of our competitors have continued their concessionary practices, some people prorate them, some people give them up front. There are three hours worth of arguments to be had on each side of that equation. Where we came out for our business model with regard to the net effective pricing in YieldStar is just net pricing.

Customers are smart. They know what they're paying. When you sort of try to hoodwink them and say, gee, you're going to pay $1,000 a month but I'm going to give you a prorated concession of $100 a month off for 12 months. You know what? They know they're paying $900. Playing this game we've felt has been just a lot of noise. At the end of the day, the customer knows what they're paying.

Okay, the second question is on Vegas. I'm trying to reconcile your comments about it being an A plus market and the decision to sell two properties in the fourth quarter. Why would you do that in an A plus market?

Well, the two properties were a joint venture properties that were part of our Sierra Nevada LLC joint venture, and the two properties,specifically, no indifference to the buyers. They were the bottom end of the portfolio. They were very complicated high CapEx difficult properties to manage, and we sold them for a cap rate that I just couldn't believe. So the bottom line is we improved the Sierra Nevada portfolio dramatically and achieved peak pricing on the bottom tier portfolio.

Thank you.

Our next question is coming from Lou Taylor of Deutsche Bank.

Thanks, good morning, everybody. Just along those same lines, Rick, can you talk a little bit about the average cap rates you got on your recent acquisitions and what your expectations for cap rates are on your '06 acquisitions and dispositions?

Sure, the cap rates on our acquisitions have been in the 5%, 5.5% range, but with growth rates that put us up into the 6% cap rates within a reasonably short period of time. Cap rates generally have not moved yet. If they're going to move, you have a situation where even though the 10-year is up slightly, you still have historic low interest rates. What's happening, interestingly enough, I think, is that cap rates have been very sticky at these very low levels.

What's happening, though, is when folks are projecting higher interest rates and potentially higher terminal cap rates on sale, what they're doing is they're putting in more aggressive underwriting assumptions on rents. When you look at a market like Las Vegas, or Austin, elsewhere, people used to be underwriting, say, six or eight months ago before this recovery was so widely verified by the rent growth, people were using 3% to 4% NOI growth.

When you have numbers published where you're getting 10% to 12% to 14% rent NOI growth, what people are doing is continuing to underwrite at the current cap rates, but putting more aggressive, or if you will, more market oriented underwriting for the first couple years on their rent, so they're getting their cap rate up a lot quicker than perhaps underwriting was done at the beginning of the year.

How about on the disposition side? Are you getting similar cap rates, or are cap rates above --?

I'm sorry, on the dispositions?

Yes.

Yes, we are, the dispositions that we did during '05 we experienced about a 5.5%, 5.75% cap rate, or 5.5% cap rate plus or minus and those dispositions on average were 18 to 20 years old. The unleveraged IRR on that book of business was nearly 15%. One of the things I think is really interesting when you sort of taking quarterly numbers -- I don't think a lot of people realize this but if you take the total dispositions that, in terms of capital recycling that we have accomplished when we first started working on the Summit transaction, that would be the fourth quarter of '04 through today, the total actual closings, we've done a little over a billion dollars of recycling at an average cap rate of about 5.33%.

When you add in the held for sale and the projected sales that we'll do this year, we're talking about bringing that billion up to a total of $1.5 billion, or 25% of the total assets of the combined companies have been recycled, and we've either invested those dollars in development or we've invested those dollars in new acquisition. It's been a major disposition and recycling portfolio and that's why we continue to use this term transformation because we really have transformed not only the geographic but the product quality in a major way over the last 18 months.

Okay, and then last question just along those same lines, in terms of your disposition strategy, is it market related? Is it asset related? What's the common theme or profile of your dispositions that you expect in '06?

As you know, we have achieved our long-term goal that we talked about for a long time about having no more than 10% of our NOI contribution from any single market. We are at a point now where we look more at the assets. Obviously, you look for opportunities to fill out, if you've got markets where you're underrepresented you'd be less inclined to sell, markets where you're overrepresented and you've got a significant development pipeline, you'd be more inclined to sell. The reality is that our criteria for disposition at this point are more asset related, with regard to age of assets, with regard to their future growth potential. That's the first cut, and then, obviously, we always look at the portfolio balancing aspects of it.

Great, thank you.

You bet.

Our next question is coming from Craig Leupold of Green Street Advisors.

Good morning. Hey, Rick, on the Westwind acquisition, I think you said that you guys bought that at a 6.7 cap?

Yes.

How do you pull that off? I remember when we were touring that asset you were indicating there were condo converters who had come and made unsolicited bids at cap rates much more aggressive than that. How do you end up buying something at such a high yield for such a high quality asset?

Well, the complication was is that our partner wanted to sell to a converter. The project was not completed. So we were still under construction. There are lots of issues about -- from a converter perspective of whether you wait until it's completely constructed and then ultimately sell to a converter. We had a situation where we were able to make a deal with our partner that was attractive to them from a total return perspective, attractive for us from a total return perspective and we just made a deal. If the property had been fully completed and in a stabilized or close to being stabilized position we could not have made that deal, I'm sure.

Keith, of your revenue growth projections for '06, how much of that is already embedded in a portfolio, either through a loss to lease concept, in other words, thinking about current rent pricing that's in place versus what you're now signing at the margin?

Craig, in terms of what we're looking at for actual rental rate growth, is that what you're really asking? Rental rates as opposed to total revenues?

No. I'm trying to think about how much of that sort of already in the bag, if you just mark to market your current leases?

You're saying on the embedded concessions?

Yes.

You would look at what the total embedded concessions are. And right now, the total embedded concessions at the end of the fourth quarter are still about -- they are still at about -- in 2005, they are still at about 3.5 weeks on average of rent, of rental revenue that's embedded that will burn off

Okay, so 3 1/2 weeks over, call it a 52-week, would be about 6% or 7%, so that's almost all of your revenue growth?

True.

Craig, I think you make a great point, because instead of in the past talking about how our concessions are growing or declining, the new question should be, which you, I think, are hitting right on the head, which is what's your loss to lease, what's the markup between where you are today and where you could be with your current lease market? That's what we're going to be talking about a lot in the next few quarters.

Okay. And then, I guess, two last questions, one, on the $10 million land gain for '06, is that all related to what's currently held for sale? I think you indicated the book value of held for sale is about $17 million or $18 million, so does that imply a market value of $28 million for the land held for sale?

No, that does not. The gain on sale is sort of a complicated analysis. The complication is that we have these transactions, these land parcels sitting in taxable REIT subsidiaries and we may have some tax on those sales because of our tax position at our taxable REIT subsidiary level. We've also been reasonably conservative in our analysis. The parcels are really, the California one is the last phase of Long Beach. Then two Florida transactions that basically were part of the Summit portfolio where we just can't pencil the yields and get comfortable with the construction environment to make -- you know to built rental property. I think that we've been very conservative with our evaluation on that.

One last question. I figured you make me get up early I'll ask all the questions I can. Intermediate term outlook for the Florida market, as condo sales start to slow, what's your expectation of how that plays out? Do you have any comments or thoughts?

Craig, we get a lot of questions in that kind of go around the premise of if a condo, which is an apartment rental community, goes through a conversion process but the end user of that conversion is an investor, and then they stick them back in a rental pool, isn't that really -- isn't that -- can't that potentially be a bad thing? I guess my take on that is -- and I'm always puzzled by it -- is if it was 100% rental community yesterday and it gets converted, if all but one unit comes back in individual -- in an individual owner's hands, then we're better off.

So I've never really spent any time worrying about the existing rental unit being converted to condo, going into the hands of an individual owner who is somehow going to compete with us from a management perspective. Now the flip side, the other side of that equation which is condominium product that is built solely as a condominium use that never makes it into the rental stream, is not a rental product, but it gets converted to a rental product solely as a result of not being able to find end users, that's a different issue.

You can't ignore that incremental supply, but the existing condominium conversions, which has been the bulk of it outside of areas like -- if you move away from southern Florida, you move away from Washington, D.C. and California, the bulk of the balance of the condominium phenomenon has been a conversion phenomenon, which the net result to us has been incredibly positive.

I think the other key point on the whole -- what happens if those come back on the market, let's take markets that people worry about the most, southeast Florida and Las Vegas for example. In Las Vegas our average rent for our portfolio there is $837 a month. In south Florida it is $1,263 a month. If you look at the condos that are being sold, especially in Las Vegas on the strip, there are not a lot of low end condos being sold. The same thing goes in southeast Florida.

You have people paying a quarter of a million dollars and up for condos, and maybe they are South American investors or whoever, but the bottom line is there has to be a huge dislocation in the marketplace for those people to come in and try to compete with an $837 rent in Las Vegas, or a $1,263 rent in southeast Florida. You could come up with a scenario and there are probably scenarios like this in Houston in the '80s and other markets, south Florida when the condo bust happened in the mid '80s where people capitulated and said, well, my $500,000 condo is not worth that anymore, I default on my loan, the whole building goes back to a lender, and the lender says let's get cash flow going, we don't care, just mark to market.

At that point you have to have a major economic dislocation that causes people to capitulate that they're units are not worth what they were and to try to go compete with an $837 renter, $1,263 renter, so at the end of the day, unless you believe there's going to be some major cataclysmic decline in values or some external economic shock that creates that kind of situation, I don't think we have a lot of competition.

Thank you.

Our next question is coming from David Rodgers of KeyBanc Capital Markets.

Yes, good morning, Rick. First question for you, can you talk a little bit more about the development backlog selling some of the parcels, maybe focusing specifically on southern California since you inherited the other two. With rents growing the way they are, what's your ability, why, one, sell that land, and two, or how do you that backfill that pipeline with land costs where they are today?

If you remember, Long Beach we've owned for a long time. Let's talk southern California, specifically, and we'll walk you through the logic of why we're making that sale. In Long Beach, we had three parcels of land, the big parcel in the middle, which we built, Harbor View, 500 plus apartment units. Built it for $140 million. It's probably worth $250 million in today's market. We sold the second phase originally just to a condo person to lower the exposure there.

The third phase was originally a hotel site, 500 hotel rooms. We were always going to sell it. We thought it was worth somewhere several million dollars above our costs. We decided to go into the city and rezone it into condos. We got that done. We believe we more than doubled the value of the property. So the calculus you use is you look at the property and say, okay, we could build multifamily on it. It has to be a type one high-rise construction, 12, 13 stories construction. We ram the numbers. We work really hard trying to develop a scenario where our California development and construction team could justify building that building. I got to tell you that the yields are in the 3% range.

When we look at IRs -- if we were going to build it, say, to a 3% cash-on-cash yield going in, and then flip it to a condo guy for a two yield, which a lot of people are doing that today, we could probably make money. The bottom line is that the risk associated with that kind of play and the rate of return that we would earn in the marketplace is just not worth the risk, so we're deciding to sell that asset. And we're going to realize a very nice gain on that land.

As far as the backlog goes, we've been working in California since 1997, working on deals. And we have a significant pipeline in California. The issue there is simply finding the right sites. We have sites we've been working on for two or three years. So we have a decent backlog of property there.

In southeast Florida, you have an unusual situation with the condo market there. We have the same situation, we can't pencil a rental deal, but we have significant profits. If you'll recall, when we did the Summit merger, we basically valued the land at what we thought the land had to be valued at to build apartments and make a reasonable rate of return on the apartments. Selling to a for sale developer is a different animal. So we just think we can make a better return on our capital by making those land sales.

Our pipeline is still robust. We have a significant development team out in the field that are constantly working on deals. And we have a shadow pipeline in D.C. and in Florida, and southern California. So we feel like we're not losing anything by trying to stretch and build on land that we can make significant profits on and we believe that we can find transactions that do make sense, not necessarily in these particular land transactions, though.

Do you have any options on additional land that don't show up in that backlog, in the supplement?

Absolutely.

All right. Quick question for Keith. Collections from residents, either through the transfer from New Orleans or from FEMA, have you had any problems with that?

No. None whatsoever. We didn't change our underwriting standards. We did make some accommodations with regard to waiving some fees and just doing things to be a good neighbor. But we underwrote every resident by our existing standards, and we really have not seen any issues with regard to that.

Let me just add to that since I've been involved in a lot of these discussions with the city. The hurricane victims from Katrina are flush with cash. They have a lot of money. They have more cash, a lot of these folks in apartments, have higher incomes under the FEMA voucher system than they did in New Orleans.

One of the interesting issues that's sort of a social issue, not related to whether we can collect rent, but sort of like if you are making more money today unemployed in Houston than you were in New Orleans employed, or semi-employed, why would you ever go back? That FEMA money is supposed to go on for a reasonable period of time, through this year at least. You have some really interesting situations. Bad debts is not a problem now. There are some crime issues that are starting to creep up in Houston, where you've got an increase in crime. There's a lot of discussion about that that's related to Katrina displaced folks. We haven't had a huge issue on your properties, but there definitely are, what I talked about earlier those lower tier properties are experiencing a lot of unemployment and a lot of people with cash that are driving the crime rate up.

One other question. What's your projection for recurring CapEx on a per unit basis for 2006?

We're at about $750 on CapEx for '06 which reflects a lot of -- a fair amount of carryover from '05 where we had some discretion on like paint jobs, et cetera, that are showing up in '06 CapEx.

Okay, great, thank you.

Our next question is coming from Rich Anderson of Harris Nesbitt

Thanks. Rick, or Keith. How long do you think this sweet spot can last fundamentally from the multifamily sector?

You know, Rich, I think we're just at the very beginning of it. If you look at what's going on around us and what we're projecting in 2006, if we end up doing, having the kind of year that we think we're going to have in '06. We had a decent year in '05, which was the first positive year that we had had in three years, if you start looking at where real rents were five years ago, prior to the beginning of the downturn that lasted really for three years on net effective rents. We had a decent recovery in '05, '06 looks like it's pretty good.

But the reality is that even on that math, in most of our markets -- and there are exceptions because some of the markets didn't have the hard downturn, but overall in our portfolio I'd say it's fair to say that even after the projection of rental increases in '06 we will have recovered about half of what we lost in the downturn.

So on a real rent basis, our residents' rent large across the portfolio are still renting at a discount to what they were, and in some cases a reasonably significant discount from three or four years ago.

In your experience, do positive cycles like this last two years, three years, one year, 18 months? Will you feel more optimistic 12 months from now, do you think?

The real answer to that is let's go back to '91, '92 recession, or '91 Desert Storm sort of situation, and then fast forward from '92 through '99, that sort of seven-year time frame. We had average same [INAUDIBLE] [eye] growth during that time from about 6% per year. Okay, the interesting part of that time frame was that you had the worst demographics for multifamily, meaning that we had fewer people that were high propensity lease people in the 18-year-old to 25-year-old sort of cohort. You also had a huge runup in home ownership, interest rate driven and demographic driven. The big difference is you had a huge number of jobs. You had a huge number of jobs during that time period.

We have less job growth now, but still significant job growth. If you look at where we are today relative to that last uptick, that was a nice seven-year run, it had to do with the economy and how well the economy was doing, with the backdrop of pretty bad fundamentals from a demographic perspective. Today, we have great fundamentals from a demographic perspective. We also have had a situation where a lot of people today -- it's not a social scourge for you not to buy a house.

In the last two or three years if people were talking about renting, it was like you were a social misfit. You should buy a house because you're an idiot if you don't. Today, with all the discussion about the housing bubble and when you look at the mark-to-market of rents we've done over the last few years we have the best sort of rent versus own dynamic that we've had in five or six years. And, socially, people don't necessarily think that they need to buy a house at the quote unquote top of market.

The demographics are good, the housing equation is good, job growth is good. You have inventory being taken out of the marketplace and being converted in a lot of markets. So you have a very limited supply that's coming on line relative to historical norms. This ought to be a decent run assuming the economy stays in the zone that it's in now.

You're thinking you have some positive momentum at least for the next two years?

Absolutely

Okay, thanks.

We appreciate your time and attention on the call. And I think it's time to roll off to the other -- to the other companies. Thank you very much. We'll talk to you again the next quarter.

Thank you, ladies and gentlemen, for your participation in today's teleconference. You may disconnect your lines at this time and have a wonderful day.