Camden Property Trust (CPT) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Camden Property Trust First Quarter 2006 Earnings Conference Call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host Ms. Kimberly Callahan, Vice President of Investor Relations.

Good morning, and thank you for joining Camden's First Quarter 2006 Earnings Conference Call. Before we begin, I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs. These statements are not guarantees of future performance, and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be viewed in our filings with the SEC, and we encourage you to review them. As a reminder, Camden's complete first quarter 2006 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 maybe 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.

Thanks, Kim. Good morning. First quarter operating results continue to reflect a strong, broad-based acceleration in multifamily operating fundamentals. Our brand promise of providing living excellence everywhere our residents look is creating operating earnings excellence. FFO for the quarter was $0.88 a share, compared to the adjusted FFO for the first quarter of '05 of $0.77 per share, which represents a 14% increase in core FFO. Dennis will provide you with a reconciliation of the two quarters in his comments. Same property net operating income of 10.2% was Camden's best quarterly performance ever. Our 8.3% same store revenue increase is also the highest in our history as well. Our portfolio transformation and geographic diversification strategy is beginning to produce broad-based growth in operating earnings. We continue to believe that our market balance operating strategy of concentrating our properties in high growth markets will lead to higher earnings growth compared to our peers and will do so with lower overall voluntarily.

There's been a lot of discussion about which market will deliver higher growth rates over the long-term, and whether barrier markets will outperform low barrier growth markets. Our research, which is confirmed by independent sources, has been the basis for our investment strategy which has resulted in our current operating platform. The research results are compelling and yet contain some results that might be considered counter to the popular belief of which markets produce best results over the long haul. We analyzed average annual rent growth in non-barrier and barrier markets for the last 15 years and projected rent growth for the next five years. And the results are pretty interesting. Over the 15 year period, high barrier markets produced annual rental growth of 3.8% with a standard deviation of 5.4, compared to low barrier markets that produced 3.2% rent growth with a lower standard deviation of 4.5. Barrier versus growth markets delivered 60 basis points of excess rent growth during that time period, but with higher volatility. For the next five years, rent growth is projected at 3.5% for high barrier markets and at 3.4% for low barrier growth markets.

Digging a little deeper into the numbers in the 15 year data. Non-barrier markets outperformed during the period of 1991 through 1995, producing rent growth of 6.1% versus 2.7% for barrier markets with comparable volatility. During 1996 to 2000, high barrier markets outperformed with 8.4% rent growth compared to 5% rent growth for lower barrier markets, but with higher volatility. In the last five years, high barrier markets have outperformed with 0.2% rent growth compared with negative 0.9% rent growth for low barrier markets. We believe that high barrier alone does not lead to rental growth outperformance. Local market conditions create market cycles that are unique to each market. Growth markets do well when employment is expanding. Supply does increase in the growth markets to match demand but, evidenced by recent history, excess supply is reduced when investment returns are not achieved. Houston is a great example of this. Houston achieved an annual same-store NOI growth of 6% between 1995 and 2001. Starts averaged 5000 to 6000 apartments per year from 1995 through 1997. Then they began to ramp up significantly as a result of the strength of the market.

Starts peaked at 20,000 in 1998. The market recognized the perils in overbuilding and started to reduce supply dramatically. By 2001, supply was down to 7000 units, leading Houston into the recession with relatively low supply compared to other market that were peaking in supply at the beginning of the recession. This cutting back of supply by developers like Camden positions Houston to be one the top performing markets during the recession ,compared with the high supply constrained San Francisco Bay area where rents dropped on an average between 30 and 40% during the same timeframe. We've argue for 13 years that NOI performance in multi-family properties is mostly closely correlated with employment growth and household formation. We fully expected that when job growth accelerated in markets like Houston, Dallas, Atlanta, Phoenix, or Charlotte or Raleigh that rent growth would follow.

Employment growth was revised upwards significantly in these markets. In Houston, 2005 employment growth was increased by 27,000 jobs. In Dallas, 30,000 jobs. In Atlanta, 51,000 jobs. So employment growth was far greater than anyone expected in those markets, and the projected growth in '06 is even greater than the projected job growth for these markets in '05 as revised. Occupancy levels increased dramatically in all of our markets all of these markets. 360 basis points in Houston and Dallas, and 420 basis points in Atlanta. The most striking evidence of this positive change in the job picture for these markets is Camden same-store NOI growth for the quarter for Houston at 10.6%, Dallas at 7.1% and Atlanta at 6.7%. Despite some market Chicken Little cries that the supply is going to ramp up dramatically in the growth markets, we remain skeptical. Construction cost increases across the country continue to put pressure on starts. People just can't make their numbers.

We don't see a major increase in starts coming in Houston, Dallas, Atlanta or any of the growth markets. While the Katrina effect has helped Houston's outperformance, we don't believe that supply will ramp up dramatically as a result of Katrina. We have been, and continue to be, focused on creating investment excellence for our shareholders. Our operating platform is one of the best in the industry. Our $1.4 billion development pipeline will produce solid risk adjusted rates of return, driving FFO growth and improving property quality. I want to thank our 900-plus employee shareholders from operations, development and our support teams for the great quarterly results and their continued commitment to providing living excellence to our residents. At this point, I'll turn the call over to Keith Oden.

Thanks, Rick. I have three areas to discuss with you today. First, I'll discuss the details of our first quarter operations. Second, I'll update you on the initial results of YieldStar, our revenue management tool. And third, I will outline our asset repositioning initiative. Our first quarter results were remarkable and, actually, statistically improbable in several ways. First, of our 19 reporting markets, every one beat their budget for the quarter, a rare occurrence in our world. Second, for all 19 reporting markets, revenues were up sequentially. Equally rare. And third, the 8. 3% revenue increase over the prior year was the highest increase in 13 years. In fact, in our 50 quarters as a public company the next highest year over year increase in revenue was 6%. The 50 quarters cover three business cycles with numerous periods of revenue peaks and valleys, which makes the 8.3% gain this quarter a real eye opener.

So let's examine the growth a little closer. Rick gave you the macro case for improved market conditions. And while it's safe to say that fundamentals have improved, it's also true that we anticipated significant market improvement in our 2006 plans. Our planned revenue growth for the first quarter was 5%, just 1% below our previous all-time high of 6%. Historically, our ability to forecast first quarter revenues has been very good. This is, no doubt, due to the fact that we don't finalize our budgets until mid December, by which time we already know January revenues. So, in essence, we're just forecasting two months of revenues. And under those conditions, you ought to be pretty darned accurate. So how to explain the difference in the planned 5% revenue increase for the quarter and the 8% actual.

Well three things were at work. First, our occupancy rate was forecast to drop from a 96% to 95% for the quarter, which is consistent with our historical results, and occupancy actually remained at 96% which explains 1% of the difference. Second, our other property income was ahead of plan due to fewer concess fees and represented roughly 0.8%, leaving 1.5% of above planned performance yet unexplained. In our last quarterly call, I said that I would give you an update on our revenue management system and that any outperformance in the first half the year would likely be attributable to our new revenue management tool. We completed the rollout of YieldStar to all of our communities in December. So this is the first quarter of system-wide participation. We believe that the revenue management contribution to our quarterly results is in the 1 to 2% range, and that we are likely to see that hold up throughout 2006. To put that in perspective, at 1% level the contribution to NOI would be approximately $6 million for the full year, or $0.10 per share.

We are extremely pleased with the way the system is performing not just in terms of the positive financial impact, but also the enhancement to our sales process and customer interaction that it has allowed. We will continue to provide you with updates the results this exciting tool. With the completion of the YieldStar roll out, we now operate exclusively on a net rent basis, with no concessions being offered on any leases. As you would expect, our concessions declined over the prior year quarter by 40%, and will continue to fall each month as embedded concessions burn off. By year-end, the concessions should be minimal in our entire portfolio. We do expect that as the full impact of the revenue management rental increases rolls through our renewal base that we will trend back towards the 95% occupancy level, which will leave us with a net increase in revenues relative to plan of approximately 1%. This revenue increase will be partially offset by an increase in property insurance costs of roughly $2 million, which Dennis will discuss in greater detail. These revenue and expense adjustments result in our increase in same-store NOI guidance from the 4 to 6% range to the current estimate of 5 to 7% range. Additionally, move outs to home purchases for the quarter were 19%, below our peak levels of 22% but still well above our long-term average of 16%.

Traffic remains strong across all markets, although our closing ratios were lower primarily due you to the lack of inventory occasioned by 96% occupancy rates. Despite aggressive rental rate increases on renewals, the portfolio-wide turnover rate for the quarter was 54%, actually down from 58% in the prior quarter. This bodes well for our ability to continue raising rents without sacrificing occupancy. Finally, I want to make you aware of our asset repositioning initiative. Due to continuing challenges in identifying acquisitions with acceptable yields, we've refocused on opportunities in our portfolio to conduct asset repositioning on some of our older, but very well located, assets. We have identified 15 communities where we believe the opportunity exists to invest $35 to $40 million, which would produce an incremental return on investment of 10 to 12%. Most of the work will be completed by year-end, so the contribution to earnings will primarily affect 2007 results. One last word to all of our Camden associates. Great quarter, team! At this time, I would like to turn the call over to Dennis Steen, our Chief Financial Officer.

Thanks, Keith. I'll start, this morning, with a review of our first quarter results. Camden reported FFO for the first quarter of 2006 of $51.8 million, or $0.88 per diluted share, representing a $2.4 million, or $0.04 per share, improvement from the prior quarter and coming in at the upper end of our guidance of $0.82 to $0.90 per share. The $2.4 million improvement in FFO from the fourth quarter of 2005 is entirely due to growth in our property net operating income driven by a 2.2% increase in property revenues, as Keith just discussed, and property expenses coming in essentially flat with the prior quarter. Comparing our first quarter results to our prior guidance. We came in at upper end of the range, as the better than expected growth in property revenues was only partially offset by general and administrative expenses, exceeding our expectations by approximately $780,000. The unfavorable variance in G&A expense is due to a $400,000 one-time charge related to the adoption of FAS 123R, resulting from the accelerated investing of share awards previously granted to our trust managers who have met the retirement conditions of our share incentive plans. The remaining variance is split between slightly higher benefits, incentive compensation and legal cost.

To compare our 2006 first quarter results to the results of the first quarter of 2005, you have to adjust for a number of significant one-time items in the first quarter of 2005 and add the impact of the Summit merger as if it had occurred at the beginning of 2005. Adjusting first quarter 2005 reported FFO of $54.4 million, or $1.10 per diluted share, for the following -- The elimination of $24.2 million gain on rent .com, $13.8 million in transaction compensation and merger expenses, $6.1 million in one-time JV restructuring fees and mezzanine loan interest adjustments, and after adding the two additional months of Summit operations, including the incremental shares outstanding, the adjusted FFO for the first quarter of 2005 would have been $45.2 million, or $0.77 per share. Thus our first quarter of 2006 FFO of $51.8 million, or $0.88 per share, represents a 14% increase over the adjusted 2005 results and is consistent with our 10.2% growth in same-store NOI over the same period. Moving on to transactions for the quarter. Our only acquisition during the quarter was the purchase of our joint venture partner's 80% interest in Camden Westwind, a $97.6 million development in Ashburn, Virginia which should complete construction in the second quarter. The acquisition environment remains very challenging, and we're having difficulty finding assets at suitable yields. We have, therefore, reduced our expected acquisition volume by $100 million.

Of the seven operating assets held for sale at the beginning of the first quarter, two were sold during the quarter, Camden Highlands in Dallas and Camden View in Tucson, resulting in a gain on sale of $27.4 million. Additionally, there've been two assets subsequently sold to quarter-end, Camden Trails in Dallas and Camden Pass in Tucson, marking our exit from the Tucson market. Our year-to-date dispositions were completed at a 6.1% average cap rate and resulted in an 11.4% IRR to Camden. Additionally, we added three new communities to properties held for sale, Camden Crossing and Camden Wyndham in Houston and Camden Oaks in Dallas. We now project full-year disposition volume to be between $275 to $400 million, and down from our prior projections of $475 to $600 million. Looking at the liability side of the balance sheet, total debt increased approximately $109 million as we used advances under our uncured line of credit to fund the increase in real estate assets resulting from our acquisition and development activities, pending the receipt of proceeds from the future sales of assets held for sale. Our balance sheet remains strong and provides us great flexibility and ample time to evaluate various debt and equity alternatives as to the financing of our development pipeline. At March 31, 2006, 83% of our real estate assets were unencumbered. Our debt to market capitalization was 39. Only 19% of our debt was floating rate, and we have very manageable debt maturities over the next several years.

Moving on to 2006 guidance. We have updated our 2006 full-year FFO per diluted share guidance, increasing the entire range by $0.05 per share to $3.50 to $3.70 per diluted share. The $0.5 per share increase is primarily driven by better than expected growth in property revenues, partially offset by an increase in our property insurance premiums. We completed our annual insurance renewal in April and due to our wind storm exposure in Florida and Texas, our property insurance expense for the remainder of 2006 will be approximately $2 million, or just over $0.03 per share, higher than originally projected. Our full-year guidance range is now based upon the following key assumptions. Same-property NOI growth of 5 to 7%, derived from revenue growth of 5 to 6%, and expense growth of 4.5% to 5.5%. G&A and property management expenses of approximately $11.2 million per quarter for the remainder of 2006. Future development starts of $200 to $300 million in the last half of 2006, the acquisition and disposition volumes previously mentioned with a 200 basis points negative spread on the cap rates between acquisitions and dispositions, and $10 million in expected gains on the sale of undeveloped land held for sale. The remaining land gains are expected in the third and fourth quarters of 2006. Our FFO guidance for the second quarter of 2006 of $0.85 to $0.90 per diluted share is reflective of continued growth and revenues at our stabilized communities, offset by the seasonal increase in property operating expenses and slight dilution from asset sales. At this point, I would now like to open the call up to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is coming from Lou Taylor of Deutsche Bank.

Hi. Good morning. Congrats on the quarter, everybody. Keith or Rick, can you talk a little bit about your same-store performance on the balance of the year? I mean you had a great start, but you're guiding to a little bit lower. Are you being cautious? Are some things in there -- whether it's tougher comps or other trends that you're worried about?

Yes, Lou, it's really just the comps change over time. If you look at our progression last year, we really started to accelerate rent growth in the third quarters. The bottom line is we run into a tougher comps. The other thing is, we are assuming in our current guidance that our occupancy trends back towards the 95% level. That is actually the target that we've established and included in our revenue management model with YieldStar. So I'll be a little bit surprised if we don't trend back towards the 95% sometime in the second quarter. If we don't, then that will just be an indication of really the strength in the underlying markets. But I suspect that we will. The other thing is that another part of our outperformance in the 8.3% for this quarter was what really did show up in our other income at the property level. Primarily that came from concessions of fees and waiving some deposits, et cetera. Primarily that was a first and second quarter event last year, and we had much less of that in Q3 and 4. So the combination of all of those things kind of -- When you run it through the model, it leads us to to believe that 5 to 7 is the right range for the full year.

Okay. And then with regards to development yields. What are your expected yields on the existing pipeline and what do you think -- what are you expected yields on future starts?

Lou, the development yields really haven't changed since our last call, even though we continue to be diligent in trying to make sure that we hold those yields in this current construction environment. So our current pipeline, which is roughly $800 million, is 7 to 7.5%. And the pipeline going forward, depending upon where you are, it looks to be in the sort of 6.5 to 7 and some change perhaps, with the lower yields being in the California and D.C. areas.

Great. Okay. Thank you.

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

Good morning. Rick, just curious on your high barrier to low barrier entry analysis. Where is that data from?

The data was from a couple of sources, but primarily from REITS.

That interesting, because I've looked the REITS data and I've came up with different answers.

We'd be happy to send you a copy of it, too.

Sure. I'd love to see it. Also, you were focused on revenue growth, I guess. You're talking about 60 basis points of outperformance, but then when you get down to the NOI line that would imply 100 basis points of outperformance in terms of NOI. Obviously the volatility issue is still there, but given that investors can diversify on their own, I'm still a little puzzled by it. But that's just my pontification. How much of the same-store in the -- kind of from the Summit portfolio -- is improving market conditions versus your prior expectations that you guys can improve the operations relative to what Summit was doing?

Craig, we have -- When we kind of laid out the case for the Summit merger, one of the things that we anticipated was that the Summit markets would actually outperform, by about 10%, the Camden markets on a same-store going-forward basis. Not only did we do that in '05, but that trend continues this year. We're seeing more than a 10% outperformance relative to what our expectations were in the plan. Summit markets are -- Obviously across the board we've got outperformance when we've got 10.2 NOI growth relative to a 5% plan, but the strength is across the board and the gap that we expected is continuing to be there.

Okay. The cap rates that Dennis mentioned on the sales is 6.1%. Is that a reasonable number or a reasonable expectation for the balance of what is held for sale?

It's probably going to be a little higher than that.

Okay.

I would say.

Okay. My next question was going to be, given the 270 basis point dilution that you expect, that would imply acquisition cap rates at the 4% range. But maybe the more mid 4s?

Well acquisitions -- Actually, we have them at 5. That's been one of the big challenges, is matching acquisitions with dispositions, obviously with this current market. Because the market really hasn't changed dramatically from a cap rate perspective. So that has been a challenge. No question.

Okay. Just two more questions. One, clearly you guys are seeing a lot performance in your Florida, Phoenix and Vegas markets. I'm sure a lot of that is attributable to product being taken out of the market for condo conversions. What's your thought process in terms of expectations of some of that supply maybe come back into the market, given the slow-down in condo sales that certainly we're seeing in several markets?

Right. We haven't seen a whole lot of that at this point. And what you -- We have seen a few properties that were going to convert that are not converting now and are back in the market. But when you go down to south Florida, for example, there have been so many conversions already completed and properties that are in the sort of mid stream of conversion. While the inventory is up from a converter perspective in terms of sales slowing down, sales have not stopped totally. They've just slowed, and so what's happened is that the converters have in fact sort of stopped buying new inventory. But as evidenced by some of the information we're getting from properties that we sold to converters that we're monitoring, their sales have slowed but they have not stopped. So I think that properties that sort of were just bought in the last few months that haven't been converted yet are probably back in the leasing pool or never really came out of the leasing pool and are going to stay in the leasing pool. Deals that came out a year or two ago and that are half sold or a third sold are still in the sale program, and they haven't abandoned the idea that they could sell their units out over albeit now much longer sales cycle or sales period. But they haven't come back into the market. The other thing -- I think in certain markets, like in Orlando and in Las Vegas, you have more of a recreational market. So you have a fair amount of the condo inventory that came out of there, went to more recreational users, if you will, people that are either putting them in time shares or they're planning on living in the apartments for a few months while they visit the area from a recreational perspective. And then they're putting them in sort of vacation rental pools, as opposed to long-term lease pools. So we really haven't seen a huge amount of inventory coming back into the market as a result of the slow down of the condo converters, at this point.

Okay. And then my last question is related to the -- your expectations to start renovations. Do you expect to take those properties out of your same-store results or leave them in your same-store results?

That's a good question because we really hadn't talked about that yet.

Yes. We'll let you know how we handle it, Craig. We haven't made that decision yet.

Great, thanks. I would assume you like to see them out.

Well, or just appropriate disclosure to help us figure out the impact of the renovations on any reported --

Sure.

We're all for disclosing and making sure everybody understands the difference between same-store NOI growth and investment -- return on investments.

And Craig, in any case, we will separate -- Regardless of that, we will separate any dollars associated with that capital program from our normal capital program that we've already announced for the year.

You guys have always been great on disclosure. Good quarter. Thanks.

Thank you.

Our next question is coming from Rich Anderson of Harris Nesbitt.

Hi. Thanks, and good morning.

Good morning, Rich.

I just want to get to YieldStar, and I think I sort of missed it. But you said, Keith, you attribute 1 to 2% upside from the YieldStar rollout. Is that right?

Yes.

How did you formulate that conclusion?

Well I kind of walked from the 8.3 for the quarter, which was our total revenue gain. Our plan was 5 for the the quarter and we obviously had great visibility into the 5 because we already had one month of those revenue numbers when we completed our budgets for the the year. So we're really forecasting two months of revenues, and we're usually pretty darned good at that. The fit between our forecast and the actual revenues for first quarter historically has been very tight. So if you take the 5 in the plan, you're trying to reconcile to the 8.3 for the actual. We had a 1% better than plan occupancy. We planned 95. We actually delivered 96. So that's 1%. We had about 0.8% above plan in other property income, primarily related to fewer concessions of fees than we had in the prior quarter. And if you take those two together, it's 1.8%. We're missing about 1.5 that's not possible to rationally explain any other way. So we split the difference and call it a range of 1 to 2.

Okay. So it was just math. I thought there might be something.

It's supported, Rich, by anecdotal evidence, not just statistical stuff but the anecdotal evidence. And obviously, this is the first quarter where we were completely rolled out and we'll -- If we get better visibility and we can give you better guidance on that in the second quarter, we'll do so.

Would you say -- You mentioned Summit portfolio performing better, 10% better or more, than the Camden portfolio. Would you say then that Summit grew by 11% and Camden, original Camden grew by 9? Is that way to look at it?

I think the issue of Summit 10% -- When we look at acquiring Summit until 2004, we did a forecast for the next couple years and we believe that -- in that forecast that Summit markets overall would grow at a 10% greater rate than Camden. And I think we believe that. What's happened, however, is that we've had much stronger job growth in Houston and Dallas, and in Phoenix, and in some of the markets that we anticipated to be slower growth markets out of the recession. And that has really changed those dynamics. So I think that while Summit markets are slightly -- are probably continuing to be a little bit better than Camden markets, because of this outperformance in employment growth and the sort of unexpected strength in Houston and Dallas, that the gap is probably substantially less than it was in the past. And I would not say that when you take the 10.6 -- that the Summit portfolio added the bulk of that. And you can see, when you look through the numbers in the supplement, that really the only common market we had with Summit is Charlotte. So you can look pretty clearly through there. The Summit markets did really well, but so did the Camden markets as well.

Okay. So then how do you come to that conclusion that Summit is outperforming by more than 10%, if in fact it's not?

Well it -- The Summit market is performing better than we had anticipated and so is the Camden market. I guess the question is -- The original thesis I think was correct. We haven't gone back and said okay, let's do an analysis of what we thought it was and what it is. We just know that they're all strong and we're beating our numbers.

All right. The lower dispositions. Is that purely a function of the fact that you're reigning in your acquisition target?

Well the lower -- Yes, that's correct. We are reigning in our disposition and acquisition target for two reasons. One, the acquisition market remains very challenging in terms of the kind of property that we want to buy versus the kind of property we want to sell. The other piece of the dispositions is that we had a couple of older properties, or reasonably older properties relative to recent condo conversion activities, that we thought could go to condo converters. We actually have one property in Florida, for example, that was under contract to a condo converter and as a result of the market tightening up and from -- and the condo conversion story being very slowing down a lot, they didn't close on that property. So what we've decided to do is to lower the disposition target, and if we could sell a condo convertible asset at a very incredibly low cap rate we would.

If we have to then take that specific asset into the market and sell it at sort of an okay cap rate relative to a condo converter cap rate, we decided to sort of change the strategy and keep those assets because they're good assets. That's why condo converters want them. And then focus on disposing of our -- some non-core market assets, as opposed to core markets where we can get a really good cap rate. So that's why we lowered our disposition and acquisition targets for the the year. Those numbers are going to move around and given where we are in the year, if we ramped up an acquisition program we wouldn't close those towards the end of the year anyway. So for this year, I think it's just reasonable to lower the number. And iff we end up beating that, it will be fourth quarter activity which won't affect this year anyway.

Are any of those older properties, properties that you're contributing to this asset repositioning program.

No. I don't think so.

Last question. Just the numbers for land sale gains in the third and fourth quarters. Could you quantify how that might break up?

Right now I would split it between the third and fourth evenly. A little more than $4.5 million for each quarter.

Thank you very much.

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

Good morning. It's Karin Ford. Question on YieldStar. I know you said you're expecting the 1 to 2% benefit to likely continue through the balance of the year. Is the system designed to sort of learn from the data it collects over time? And would you expect to get additional benefit beyond sort of the initial 1 to 2% pop?

Karin, it is absolutely a system that learns as it goes, from all of the data that we get. So every month that goes by, there's some history that gets added that becomes part of the price determining engine. If you think about what has to happen in the first 12 months, you basically have to go through your entire portfolio, primarily on dealing with both renewals and also new leases, resetting market rents in a YieldStar world. The 1 to 2% this year -- What we believe is that that is the gain strictly from resetting market rents and efficiently pricing every unit in our inventory at the market clearing price. If you -- Once that initial increase -- And in our portfolio, at 2% level it would represent a pickup in bottom line NOI of about $12 million a year, or $0.20 a share. That would absolutely be recurring year after year after year.

What happens beyond the initial increase is you will -- We expect to see a much better fit between what our stated rents are and offered rents are, and what the actual market conditions are. A lot of the loss of potential rental revenue in our world in the past, in a non-revenue management environment, has to do with the time it takes for our operations group, particularly at the site manager level, to respond either to a dramatically increasing market condition which we're seeing right now or when the opposite happens. And so what you would expect to see going forward is you would get to include the $0.20 per share at 2% range in our run rate going forward. And then going forward, we'll just have a much better fit with market conditions. We won't have the lag time to respond either to a declining occupancy situation or missing the opportunity to push rents when it's available.

Makes sense. Sounds good. Second question. Does your asset reposition program include expanding any densities at your properties or getting any more entitlements?

No, it does not.

Okay.

It's strictly going back and doing renovations. Kitchen and bath renovations. That type of thing.

I think Ross has a question as well.

Yes. Hi, guys. Two questions. First is when I look at the 5 .4% same-store expense growth. How much of that was attributable to rising taxes in Texas and Florida? How much of a concern should that be over the next year?

The actually tax increase over the prior year was only about 4 to 5%. So it wasn't anything different than our expected increase in expenses in total.

Then as far as the future year, we think Florida's going to be pretty much the same as it was last year. And quite frankly, in Texas there maybe a net benefit. The Texas legislature has been, for the last six or seven years, trying to figure out a way to lower property taxes and increase business taxes, if you will. As a result of some lawsuits from -- that are in the supreme court right now that require the state to change its method of funding school systems, the -- both the House and the Senate in the state legislature are in special session right now. They both -- They've passed bills that are sitting on the governor's desk that will reduce property taxes across the board from a school perspective and increase business taxes. So we expect to actually have a reduction in property taxes next year somewhere in the -- depending on how it all shakes out, in the several million dollar range.

That's helpful. And also on the insurance front. When do your insurance policies come up for renewal? I'm assuming you're expecting that to be an issue in both Florida and Texas, as well?

Our renewal just completed. Our policy renews on April 15. So we have now put in place the coverage that should carry us through the next year, and that was the reason for the increases in insurance expense impacting our forecast. So we're expecting an additional $2 million dollars in insurance expense for the remainder of the year because of our Texas and Florida wind storm exposure.

Okay. And then finally, Rick. There was some talk in one of the trade publications -- I don't know, about a month or so ago -- that you may or may not have been pursuing a sale. Do you want to comment? Was there any truth to that?

We don't comment on rumors for a lot of different reason. So we wouldn't comment on that, no.

Was there any, inside of G&A, any nonrecurring costs that aren't going to show up for the remainder of the year?

Yes. In G&A, I did actually talk about a $400,000 increase in G&A due to the implementation of FAS 123R relating to the vesting of our trust manager shares who are at retirement age. So you should be able to back that out of the run rate from the first quarter going forward.

And that's it?

Yes.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question is coming from Jon Litt of Citigroup.

I'm also here with Jon. If I take your first quarter actual FFO and your second quarter guidance and annualize that, I'm getting a number around the low end of your range. But then you add in the land sales you expect in the second half, it gets you towards the high end end. But what are you expectations on a sequential basis for your core results?

Yes. Our core results -- You'll have a continued improvement relating to property revenues. The mid point of our range is right around $0.87. So if you have the increase relating to continued improvement in property revenues, that will be offset slightly by our normal seasonal increase in expenses, which usually runs $0.02 to $0.03. And that's how we've gotten back to the midpoint of $0.87.

So sequentially, NOI should be relatively flat?

Yes.

And what was the rate on the new mez loans you issued in the quarter?

Excuse me?

The rate on the mezzanine loans in the quarter that were issued?

They were 14%.

Okay. And did the predevelopment pipeline -- It looked like there was a project that went from -- that was previously in the predevelopment that now is land held for sale. Is that correct? In south Florida?

Yes, that's correct. That's Las Olas in Florida. It was one of the properties that we are holding for sale at this point. And the issue that we've discussed in the past is that there are a number of land positions -- And this really goes into the reason we're selling land and reaping land profits. The challenge with some of our properties that we acquired in the Summit merger and also some of the ones that we've had for a while in California, is that because construction costs have risen at such a fast pace and rents have not followed that same pace in terms of increase, the total returns or the risk adjusted returns that we're calculating on those developments just don't justify going forward with the development. So we've placed those lands for sale. And that's what we have done with Las Olas. We've done that with about three or four other sites where the numbers just don't work, so we think we can make a better value and return selling the land, making a profit on the land and moving onto a development that does work.

This is Jon Litt. I just wanted to follow up on the sequential numbers. The revenues in the first quarter were up 2.2% sequentially. Are you saying that you'll have revenue growth sequentially, but no NOI growth sequentially?

We will have some revenue growth from our same-store portfolio that will be offset by increases in seasonal expenses of about the same amount. So from first to second, the midpoint of our range is very close to what we delivered for the first quarter of $0.88.

That's a traditional, once we have outperformance again, which we're assuming that we continue on this growth line at this point. But when you look at historical operating expenses, your operating expenses fall off in the fourth quarter -- fall off, generally in the first quarter, and then ramp up in the third and the fourth primarily because of seasonal issues. It gets a lot hotter in Las Vegas and Phoenix in the summer, and we have a lot of our R&M projects ramping up for the summer as well. So you have an increase in operating expenses during the period.

But isn't that also the time when you're going to see a seasonally stronger demand? And usually the fourth and first quarters are seasonally slower?

That's true.

Except, John, we had 96% occupancy in the first quarter. So there's really not a -- there's not much room for us to go to increase. In fact our forecast is that it will trend back to the 95%.

Although you could increase rents, I imagine.

And we have forecast that we increase rents.

Right. And what's the gap between the housing affordability versus the cost of rent in some of your key markets?

In most markets -- Of course, the coasts are very broad gaps between housing and rent. And the same thing -- When you look at overall -- I'm going to just sort of talk macro for a second on Houston/Dallas. Some of the low barrier, high growth markets. What's happened there is you've had markets that have marked the rents down dramatically. In Dallas, through the recession our NOI went down 25%. In Austin, about 40%. So you have very, very good dynamics when it comes to rent versus own scenarios, even in these low barrier markets. We're probably at 7 or 8 year low periods in terms of where it makes more sense economically to rent versus own.

You still have a fairly high affordability in these markets. But when you look at a Houston market, for example. But when you look at a Houston market, for example, you can buy a $120,000 house. But you have to drive an hour and a half to get to that house if you work in the inner city or if you work close in. So there's a lot of sort of dynamics within the market. If you look at our Houston portfolio, it's highly concentrated inside the loop. Very high rents relative to sort of the [inaudible] properties and the -- So when you look at properties that we have in the urban core, they're going to act very differently than properties out in the hinder lands where the $120,000 houses are because they're are no alternative for cheap housing inside the urban core. So traffic and congestion issues drive people to the inner city, which continue to drive rents. But we are at the best sort of economic position from a rent versus own scenario in these low barrier, high growth markets as well.

Thank you, guys.

Sure.

Gentlemen, there are no further questions in queue at this time. Do you have any closing comment?

We appreciate your participation in our call, and we look forward to discussing our results with you again next quarter. Thank you.

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.