Camden Property Trust (CPT) 2008 Q1 法說會逐字稿

Hello, and welcome to the Camden Property Trust first quarter 2008 earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please note this conference is being recorded. Now I would like to turn the conference over to Kim Callahan.

Good morning, and thank you for joining Camden's first quarter 2008 earnings conference call. Before we begin our prepared remarks, 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 found in our filings with the SEC, and we encourage to you review them. As a reminder, Camden's complete first quarter 2008 earnings release is available in the Investor Relations section of our website at camdenliving.com and it includes reconciliations to non-GAAP financial measures which may be discussed on this call. Joining me today are Rick Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President and Chief Operating Officer; Dennis Steen, Chief Financial Officer. At this time, I will turn the call over to Rick Campo.

Thanks, Kim, and good morning. While reviewing our results for the first quarter, I was reminded by the opening words from the Charles Dickens book A Tale of Two Cities. They start out as, "It was the best of times, it was the worst of times." Camden's market performance for the first quarter can be described as a tale of two markets. First, strong markets with positive operating fundamentals that have avoided the housing debacle. These markets include Houston, Dallas, Austin, Charlotte, Raleigh, Denver, and coastal California. Then there are markets at the epicenter of the housing bust: Florida, Arizona, Nevada, suburban Washington DC, and inland California. These markets are experiencing job losses related to the continued unwinding of the housing related employment, and an increased shadow supply of rental condominiums and houses. Operating fundamentals remain challenging in these markets.

First quarter same property net operating income grew 1.4% over 2007 and revenue growth was up 1.5% for the same period. It is interesting to contrast revenue and NOI growth in the strongest versus the most challenged markets. Revenue growth for the strongest markets increased 4.1% compared to a 1.6% decline in the challenged markets. Net operating income increased 4.8% in the strongest markets versus a 2.4% decline in the weakest markets. We think that the underperformance in these challenged markets will continue through next year until the housing market and the overall economy improves. Our management teams onsite continue to be focused on providing living excellence to our residents and are up to the task in our most challenged markets. Camden continues to enjoy a strong balance sheet and strong liquidity.

During the quarter, we closed an additional $150 million of capital commitments for our value-added fund, bringing the total capital commitments to date of $300 million. With Camden's capital and the use of 70% leverage in the fund, that should give us capital in excess of $1.2 billion to fund our acquisition program and our development. We continue to make progress on the completion and leaseup of our development pipeline. Cost budgets are intact, and leasing is generally on plan. We continue to evaluate our pipeline in light of market conditions and have delayed the start of several projects. The credit crunch and negative investor sentiment should lead to a substantial slowdown in multi-family construction starts this year, and while we expect the rest of 2008 to be challenging, lower supply and moderating construction starts should foster excellent market conditions for development deliveries in 2009 and into 2011 for developers who can't access capital today. At this point, I will turn the call over to Keith Oden.

Thanks, Rick. Overall our operations came in slightly better than planned for the first quarter, although as Rick mentioned there was more variability to plan in our individual markets than we would normally expect to see in the first quarter of a forecast period. This variability highlights the uncertainty that the well documented cross currents affecting our markets have created. It also reflects the impact of the reduced job growth forecast across our markets. We know that job growth is the metric most highly correlated with NOI growth, and that was evident in our results for the quarter.

Overall occupancy for the quarter rose slightly from last quarter to an average of 93.8% and has continued to trend upward. Our most recent occupancy rate was 94.3%. Rental rates were down slightly from last quarter, but the slight decrease was more than offset by an increase in other income, primarily the continued rampup in cable television and Valet Waste income. Overall traffic in our portfolio was flat versus the prior year quarter, but the distribution of pluses and minuses mirrors our NOI performance by market, with Houston, Dallas, and Denver showing big gains in traffic, offset by weakness in Florida, Las Vegas, Phoenix, and Charlotte.

Our turnover rate for the quarter was 53%, in line with the first quarter of 2007 and down slightly from last quarter. The most interesting data point for the quarter was the percentage of residents moving out to purchase a home, which fell to 14% for the quarter. This is the most concrete evidence we have to indicate that the single-family housing mess is causing our residents to delay or cancel their home purchase options.

The current environment has significant challenges for our residents. Slowing job growth, falling consumer confidence, rising cost for food and energy have taken their toll, and naturally there is a concern that bad debts may rise. For 2007, our bad debt expense was about $6 per unit per month or roughly 0.5%, and for the first quarter of 2008 bad debt was $5 per unit per month, which is consistent with our long-term trends. So far so good on that front.

The cross currents associated with the over supplied housing markets have been well chronicled over the past three quarters. Subprime mortgage defaults, foreclosures, falling home sales, reduced job growth -- but a greater propensity to rent and moderate and declining multi-family deliveries, just to name a few. We continue to believe that the net net of all of these factors will be a slight positive for multi-family performance as 2008 unfolds.

Our same store NOI growth came in at 1.4 for the quarter, which was slightly better than our plan and against our full year guidance of 2.75% growth at the full year midpoint. You should not interpret this to mean that we're projecting a strong recovery in fundamentals in the second half of the year. Last year our first quarter and second quarter results were quite strong at a 6% same store NOI growth and the second quarter was up 2.1% sequentially over the first quarter.

The subprime meltdown began in the summer, and our portfolio got slammed. Occupancy rates dropped in the fourth quarter to 93.6% and we are just now seeing our occupancy stabilize at higher levels. Our forecast assumes we maintain our occupancy rate in the 94.5 to 95% range for the second half of the year, and in addition, through the first four months of the year, our other income is running roughly $250,000 per month ahead of plan. Most of the increase is from cable television, Valet Waste, and fewer waived fees. We expect this positive variance to be maintained which is equal to about 75 basis points of same store NOI pickup. The combination of the occupancy increase and the other income pickup on top of the favorable comparables in the third and fourth quarter provide the basis for our forecast to maintain our full year same store NOI range.

The most serious risk to our 2008 results is a further reduction in job growth in our markets. Our original guidance was based on aggregate job growth estimate in Camden's markets of roughly 290,000 jobs. Our updated forecast cuts that estimate to in half to roughly 140,000 jobs. If the job outlook worsens or we fail to see positive impact from the unraveling of the housing mess, we'll have to revisit our guidance. The key leasing period of May and June will likely give us much better visibility of what the full year 2008 should be, and should our May and June results disappoint and cause to us revise our thinking about our full year guidance, you'll be the first to hear about it. At this point I would like to turn the call over to our CFO, Mr. Dennis Steen.

Thanks, Keith. Camden reported FFO for the first quarter of 2008 of $52.3 million or $0.89 per diluted share. It is at the midpoint of our prior guidance of $0.87 to $0.91 per share and equal to the First Call mean estimate for the first quarter. Our performance at the midpoint of our guidance range is reflective of same-store and total property net operating income results for the quarter in line with our expectations and the absence of any significant nonrecurring or unusual items in all other categories of non-property income and expenses. On the transaction front during the first quarter we sold Camden Ridgeview, a 24-year-old asset in Austin, Texas, recording a gain on sale of $6.1 million which is included in discontinued operations. Additionally, we sold 4,100 square feet of retail space adjacent to our regional office in Las Vegas and recorded a gain on sale of $1.1 million which is included in continuing operations. Neither of these gains are included in our quarterly FFO. We are continuing to pursue our strategy of selling older assets in our portfolio. We have begun marketing our next round of dispositions and we have substantial interest in this portfolio. We still forecast 2008 total disposition volume in the range of $175 million to $380 million.

Moving to our development activities, we currently have 15 development communities underway with a total projected cost of $920 million in our on balance sheet and joint venture pipelines. Four of the communities are completed and should stabilize over the next two quarters. Of the remaining 11 under construction, eight have initiated leasing activities. Projected costs are continuing to come in slightly below budget, and leasing absorption and rental rates are generally in line with our expectations. We are still projecting up to $100 million in on balance sheet starts and $200 million to $400 million in joint venture starts for 2008.

Taking at look at our capital structure, as volatility in the debt and equity markets continues, we continue to be rewarded by the strength and flexibility of our balance sheet. As of March 31st, we had just over $400 million available under our $600 million line of credit. Additionally, we have very manageable debt maturities over the next several years. For the remainder of 2008, we have $189 million of scheduled maturities consistent entirely of maturing mortgage debt, the vast majority of which matures in the fourth quarter. We currently do not anticipate tapping the capital markets for the remainder of 2008. Although spreads on unsecured debt have been declining recently, they still remain high. Due to the current low level of secured debt -- due to our current low level of secured debt, which totals only 10% of our gross asset value at March 31st, we do have the ability to add significant new secured debt to our balance sheet if it continues to be a more attractive alternative to unsecured debt.

During the first quarter, we repurchased 690,400 common shares at an average price per share of $43.41 for a total of $30 million. Over the past four quarters, we have completed a total of $230 million in common share repurchases under our prior $250 million authorization. Also during the quarter, our Board approved an additional share repurchase authorization of $250 million.

Moving onto 2008 guidance, we are maintaining the full year FFO guidance we issued in early February of $3.60 to $3.80 per diluted share. We have made no changes to the key 2008 financial outlook assumptions we laid out in our prior quarter supplemental package. For the second quarter of 2008, we expect projected FFO per diluted share within the range of $0.87 to $0.91. The midpoint of $0.89 per share represents flat performance as compared to the first quarter 2008 results, primarily resulting from, number one, a projected $0.02 per share increase in property net operating income as revenue growth from our stabilized portfolio and communities under leaseup is projected to more than offset our seasonal increase in property expenses we experienced in the second and third quarters of each year.

This positive increase is entirely offset by a projected $0.02 per share increase in interest expense due primarily to a reduction in the capitalization of interest on our development pipeline. This is due to the significant number of apartment units completed during the first quarter of 2008 and the units to be completed in the second quarter of 2008 for the communities under construction and currently in leaseup in our development pipeline. Development dilution will begin to decline in the third and fourth quarters of 2008 as we make progress towards stabilization of a significant portion of the development pipeline which is currently in leaseup. At this time, I would like to open the call up to questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Michael Bilerman at Citigroup.

Keith, something you could expand first on the -- what we should expect as we go through the quarters this year for the same-store revenue growth, just given the 1.2 being 1.5 ramp? To hit the 3.5 to 4.5 seems quite a ramp. I know you talked about it some, but if you could talk about maybe the level of revenue growth we should see as the quarters go on?

The revenue growth is going to primarily the pickup will be primarily in the third and fourth quarter, and it is -- a big piece of it attributable to the occupancy rates that we had in the third and fourth quarter of '07. And I mentioned the fourth quarter occupancy rate was actually 93.6. We were a little bit better than that in the third quarter, but we were trending down for the whole quarter. So I think you can expect to see the revenue pick up in the third and fourth. We do have some pretty modest rental increases that are modeled, but again they were very modest given our original guidance of NOI range in the 2.25 to 3.25. I think you'll see a little bit more impact in the third and fourth. The other thing that is running through our numbers that you will see in the total revenues, not necessarily in the rental revenues, is the outperformance on other income. The run rate through the first four months of the year is in the $250,000 range, and we believe that most of that is sustainable as run rate and recurring.

Okay. On the moveouts to buy a home, how is that looking in some of these most challenging markets, and how is that impacting -- when you said net net the housing crisis is helping apartments, how is it playing out in those markets on the moveouts?

It is interesting because we look at it market by market, and it is all over the map. Actually, there is some -- for example, in Tampa, it was quite low which is a little counterintuitive to the view that the world is falling apart on housing prices. And there might actually be more of a demand because of the price structure has shifted down. And also you had more of an impact from the lower price point communities. But it is really all over the map. And again a quarterly number like that can be pretty volatile. So I think the takeaway is really the difference between where we were last year at this time, which was roughly 20% moveout to home purchases, and where we are today which is 14 for the quarter. And that doesn't sound like a big deal, but 6% differential on your back door turn rate turns out to be a big deal in our portfolio. So I think the takeaway is more the 14 and we'll see where that goes for the second quarter and throughout the year.

Okay. Last question is on the maturing debt this year. What's the plan to refinance that?

Right now we have enough liquidity in our balance sheet we don't need to refinance it, so right now we're going to actually pay it off with balances outstanding under our line of credit.

Would you consider tapping either the unsecured market or what looks better than that versus some of the agency financing today?

The markets are changing dramatically, and over the last month or so the actual spreads in the unsecured market have actually come back in somewhere between 150 to 200 basis points. So we're just going to stay attuned to the markets. And if the unsecured market is still expensive, we have the ability to go out and get some debt from the agency. So we'll just going to stay attuned to it, but the good thing is we don't have to go out into the markets any time soon.

Fundamentally we're an unsecured borrower. It is much more flexible financing to use with our model. But at the end of the day if there is a substantial differential between the cost of an unsecured versus a secured Fannie or Freddie type of facility, we'll look at that. And we have a lot of capacity to be able to do secured debt. But we would rather stay in the unsecured market. But if there is 200 basis points differential, we'll explore the agency debt.

Thank you.

Next question comes from Alex Goldfarb at UBS.

Good morning.

Good morning, Alex.

Going back to clarify on the revenue, in the first quarter the 1.5% revenue growth includes or excludes the ancillary income, the cable and trash and all that stuff?

That includes.

The 1.5 includes that. Okay. You said that the ancillary income is running $250,000 a month ahead of schedule?

It is $250,000 ahead of plan.

Okay. Okay. So if I interpret your comments about the back half of the year, sounds like you're just expecting that occupancy will get back to where it was in the 94.5 to 95, so that's where the bulk of the pickup will come from?

That is correct, but, Alex, it is not like we're having to make a huge leap from where we are today. We closed outlast week at 94.3% occupied, but more importantly, we were at 92.8 leased. And the given in our portfolio is if you'll trend forward 30 days from the lease percentage, that's going to be at 200 basis points to it, that's your occupancy percentage. So trending forward off that number, we're looking at 94.8% within the next two to three weeks. So coming off of 93.8 number for the quarter, that's a pretty good pickup, and our forecast is that we can get to that and maintain it even though our rental increases have necessarily been extremely moderate across the portfolio. And it is really kind of as Rick mentioned we've got some pretty decent rental increases in the markets that are not getting slammed, and we've got less than planned increases in the others, but the yield star model is calibrated to 95%. We think we're pretty close to getting back to that level, and our expectation is we can maintain it through our stronger leasing periods.

Just want to go back on the difference between the secured and the unsecured spreads. If you can just comment, I didn't know if you were commenting that unsecured is now [150 to 200] over or that's how much they've come in, so if you could just clarify that, and also comment on what the spread would have to be where the unsecured would start to look attractive to you guys again?

The comment I made earlier is how much they've come in. Our unsecured spread as we sit here today is probably somewhere in the 275 to 300 basis points over range, and on the agency side we're probably looking at somewhere around [2 to 2.25]. So if it is sitting at [50 to 75] over, it still might make sense to use more secure debt, but we'll have to once again wait and see after the job reports settles down exactly what the spreads are going to be going forward.

I think the issue on how wide the spread has to be to start focusing a little bit on secured debt, you do have to remember that on secured debt you have a lot of other costs associated with it, not only costs associated with environmentals and titles and all that that you don't have in the unsecured world, and you also have a lot of flexibility issues. So they don't have to be right on top of each other to make a decision to stay in the unsecured market and as I said before, we are an unsecured borrower. We'll continue to be an unsecured borrower, and if the margins make sense, we will do some of that. But clearly a month ago the spreads on our unsecured bonds were like 4.25 over plus or minus versus agency debt of [200], and when you have a spread that wide, you got to look hard at agency debt.

Okay. Just for my final question, is are you seeing any difference between the pay patterns of folks in your housing affected markets versus the nonhousing affected markets?

No. We really haven't. I mean, the bad debt expense that I gave you earlier, if you were to look at it across markets, there is not $0.05 worth of difference in them.

And delinquencies?

Delinquencies are in good shape.

Thanks.

People pay their cell phone first and then their rent.

Perfect. Thanks.

Our next question comes from Jeff Donnelly at Wachovia.

Good morning, guys. Just a couple of questions. I could jump around. Have you guys been active repurchasing shares after the quarter end?

No, we have not.

Okay. Then I am curious on the DC market, I guess likewise how is DC faring I guess subsequent to quarter end? Are you seeing any improvements in the leasing pace or price in year-over-year revenue growth?

No. The continuation are the same. Our challenge in the DC market is really northern Virginia. The DC metro assets are doing great. The Maryland north suburban assets are doing fine. It is really just the Arlington, northern Virginia area where we're just getting hammered with the single-family home competition and to some extent condos. But there was a fair amount of new supply that was in the process that is being delivered. We're part of that. We've got a couple of -- Potomac is a good-sized leaseup, and it is going quite well right now, but that's because a couple of the competitors in the area have finally gotten over their hurdle of fighting their way through their leaseup. So it is a combination of all three of those things, but it is clearly -- our challenge is the northern Virginia piece of that DC metro.

I guess two follow-ups on that. What's been your experience out in the Dallas market and are you able to maybe give us an indication of what the same-store revenue growth was inside the Beltway versus outside if you have that number?

I don't have it broken out in front of me. We can get that to you. In the Dulles area, it is actually better than the Arlington area. We got a leaseup that's underway there that's off to a good start, and I think that we're going to be okay there. It is definitely -- our challenges are concentrated in the Arlington/Northern Virginia area.

Last question was concerning the financing market today. After the agencies, I am curious, where do you find I call it the the next best comparable loan to value available to you and/or pricing? I am not sure that is found with the same lender -- I am curious after you pass through Fannie or Freddie, what's the next best alternative?

The next best alternative would be life companies. You still have life companies out there that are active. They are active a little bit lower on the loan to value. You can still get Freddie and Fannie at 70% plus or minus loan to value, depending on the product location and the sponsor. Life companies tend to be a little bit lower leverage, so you'll see some 60 -- 50 to 60% LTVs on those, and they're going to have a little wider spread as well.

Okay. That's helpful. Thank you.

Our next question comes from Karin Ford at Keybanc Capital Markets.

Have you guys given us what the revenue growth would have been this quarter without the ancillary income?

Let's see. No, we did not give that to you. It would be $750,000 for the quarter, plus or minus.

Okay. Question on guidance. If you assume the midpoint of your 2Q guidance, it looks like you need about $0.91 for each one of the last two quarters of the year to hit the low end. Is that -- given sort of the flattish nature of top line growth from here, what do you expect is going to drive sort of the sequential quarterly FFO growth in the back half?

Karen, this is Dennis. As I look out to the next couple of quarters, one of the things you have to model in is our development dilution is going to probably be less by $0.04 to $0.06 in the second half of the year. As Keith mentioned, we're going to have higher occupancy in the balance of the year. We also have lighter expenses in the fourth quarter compared to any other of our first three quarters, and we'll have a slight tick up in fee income relating to our fund activities, so we feel very comfortable with our guidance range and being able to be up in the midpoint of that range.

That's helpful. Final question is you mentioned delaying some developments. Do you expect any abandoned pursuit costs later on this year?

In the quarter we actually had abandoned pursuit costs of about $350,000, I believe, but we are monitoring our spend on projects that we are working on, and we don't have a big amount of pursuit costs on deals that we've delayed at this point. The delays are primarily projects that we already either own land on where we can sort of time the timing to make sure we want to deliver into the late '09 and early 2010 timeframe, so there are more projects already owned that we're going to delay. But the deal costs that we incurred in the quarter was projects that we clearly abandoned which would -- there were a couple in Phoenix, and one in Las Vegas, I believe. So at the end of the day we don't have a lot of big pursuit cost issues that we have to worry about.

On the land that you own, if you ultimately end up deciding to sell it, do you think you have to take any writedowns on value on that?

No. We evaluate our land positions an ongoing basis and we still own our land at good numbers.

Thank you very much.

Our next question comes from Christeen Kim of Deutsche Bank.

Hey, good morning. Keith, could you maybe provide a little bit more color on what you're seeing in terms of traffic patterns and also if you're seeing any material change in your closing rates?

Actually our traffic, even though it is moved around, was flat year-over-year with the prior year first quarter of '07. We were up about 20% from the fourth quarter of '07, but that's typical. Fourth quarter is always our lowest traffic point, so that's not unusual at all. We were basically flat to the prior year. The thing that is very interesting, and it certainly ties in with the kind of results that Rick pointed out -- the haves and the have nots in the market -- if you drill down to the traffic patterns, it is very consistent. The markets where we have the most challenges from the oversupply conditions, they had relative to what we would normally see in the first quarter. Traffic was down across the board. And fortunately in those markets that we have not had those issues, Dallas, Houston, Denver, Austin, Charlotte -- traffic actually was up pretty nicely. So it is really -- it really kind of is market driven and what's going on in that market. But net net our traffic was no worse than it was first quarter of '07. But first quarter '07 was a pretty good quarter for us both from a traffic standpoint and rent -- NOI was up 6%. We were up sequentially first to second, almost [2], first and second quarter last year were pretty good. So it is kind of encouraging to me we have the same traffic levels that overall in the portfolio that we had then. Closing percentages in our portfolio -- our target for closing percentage is 40%, and we're within 4 or 5 percentage points of that on any given reporting period, and that really hasn't changed.

Great. My other question is you've been tracking obviously moveouts to home purchases, but are you tracking moveouts to rent other product types like single-family homes or condos?

We do. We track moveouts to rent, and we don't necessarily know what they rented, but we do track out -- tracks moveouts to rent other varieties. For the quarter that was 2.7%, and that, the delta in that from the prior quarter, it was about 1.7%. So if you kind of wanted to think of it as combine those two together, we've always had some component that moved out to rent. We just started tracking it last year as a separate line item. So there is some piece of that that's going from our apartment to rent something else, but it is not a big part of it, not a big part of the incremental change.

Great. Thanks.

The other thing I think that's kind of interesting to add onto that thought is that we have started seeing anecdotally people who are moving out of condos because they don't like the management, and condo management and single-family home management is very different than a professionally managed property. And we're starting to see people moving out of the condos and houses and going back to apartments to some extent. Also we've seen some moveins that -- some demand that's being created by people who have been renting condos, renting houses and being foreclosed on where the investors who are renting were keeping the rent and not paying their mortgages. And so when the foreclosure happens, the resident gets -- mortgage companies aren't set up to rent, so they basically just evict the people and they have to go and find another place, and we've seen a fair amount of that going on in Las Vegas and in Florida.

Great. Thanks, guys.

You bet.

Our next question comes from Dustin Pizzo of Banc of America Securities.

Good morning, guys. Keith, just to follow up on the last point, have you seen any anecdotal evidence of an increase in renters from the increased marketing efforts you have towards those that actually foreclosed on their homes and not necessarily the people that may have been renting those homes or condos?

The two areas where we have done that more extensively are in Las Vegas, Tampa, and Orlando, and anecdotally we've seen some evidence that that program has had results. I think that when you combine all of those things and factors together, whether it is outreach marketing to people who are having to go through a foreclosure from an owner's perspective or the two other categories Rick mentioned, which is people coming back to the apartment rental pool from their bad experience in single-family home or condominium rentals. When you combine all of that together, that is part of the explanation for why our traffic year-over-year is not down, and that has to be some component of it.

So I think that as you look at all the cross currents and try to do the handicapping on is our subprime foreclosures more or less significant than the slowdown in the rate of home sales. It is really hard to handicap those individually and get good metrics around them, but the one thing that is pretty consistent is the traffic levels across the portfolio of our size. And to see first quarter traffic levels in '08 still at the first quarter '07 level in the aggregate is pretty encouraging. So it is kind of hard to know where that additional traffic is coming from, but we're in -- one of the things that is for sure we are seeing an experience in is we're in a completely different market with regard to the consumer's attitude towards buying a home. If you -- it seems like forever ago. But if you go back to the first and second quarter of last year, the mindset and mentality was that housing was still the best investment option available to the individual investor, and people were still buying homes hand over fist in the first and second quarter. And it really wasn't until the subprime bust in June/July timeframe that that really started to change in earnest. And so it is hard to handicap the individual components, but it is hard to argue with traffic levels at the same this quarter as they were in first quarter '07.

Okay. And then, Dennis, you touched on the assets that you have out in the market right now. And I know you may not be far enough along in any of your sales right now to notice, but generally in your marketplace, have you been seeing deals get over the finish line? I know a number of your peers have mentioned as it has gotten to crunch time, the buyers have either come back to try to retrade the deal or backed away entirely. And I was trying to see if you've seen deals getting completed and also perhaps what you're seeing on a pricing level as well?

I will take that. There is a lot of anecdotal evidence out there that some deals aren't getting done. There is a question about that. I think there was a lot of -- in the first quarter there was a fair amount of retrading and uncertainty, primarily as a result of the agencies starting to widen out their spreads. The spreads widened out 50 bips then 75 bips then 100, and that was going on in the first quarter.

What happened then was you had people who had underwritten properties at much lower debt rates, and they came back to try to retrade. Some retraded, some didn't, and I think that sellers today are not pressured, okay. So if they don't like the price, they're not going to sell. And so I think there is definitely a bit of spread when it comes to the changes that were going on in the debt market.

We had a situation, for example, on Ridgecrest where -- which is the one asset we sold in the quarter, and we started out having to retrade. We didn't retrade. The people -- we took their earnest money, and then they came back. Ultimately the spreads came in on a Fannie deal, and they ultimately did the deal, but I think generally that volatility in rates is pretty much over, and the spreads have come in on Fannie and Freddie because of the -- I think they thought they would have a big rush and a lot of deals and they didn't have them, so you had sort of a more reasonable spread situation, and it is a little more stable today than it was then. But again I think it is a function of -- there is a bit of spread today, but when you can get Freddie and Fannie financing in low 5s to high 4s, you can still make positive leverage play with a cap rate in the 5.75 to 6.5. And on our portfolio that we have out there now, we've had properties in Houston that are getting 20 bids, properties in Dallas that are getting the same number.

So there is a lot of activity. Cap rates definitely have gone up from the sort of low lows in the last year when you had CMBS lenders willing to give 95% financing, and the nature of the buyer has changed a bit because the high leverage buyer is basically out of business. And anybody who is going to buy today is going to put 25 to 30% equity in the deal. So by and large, I think the deals are starting to get done more than they were in the first quarter.

And just lastly on that, do you anticipate your sales being more portfolio type transactions or more one-off?

More one-off.

Okay.

I think the problem people have today is that there is more one-off buyers out there than portfolios, and it is more difficult for buyers to come up with bigger checks if you will, so I think it is going to be -- we've had some portfolio offers, but in the aggregate the individual offers added together are better than the portfolio offers.

Okay. Thanks.

Our next question comes from Rich Anderson at BMO Capital Markets.

Thanks. Good morning, everybody.

Good morning.

So I guess the question everyone is hanging their hat and Fannie and Freddie -- do you have any sense that there is a feeling to the amount of business they ultimately want to do in multi-family and where they could get sort of capped out or do you think this is going to go on in perpetuity for them?

There is always a ceiling at some point. When you look at what Freddie and Fannie are doing now, it is a very profitable business for them. They have very minimal defaults or bad multi-family loans out there, and when you think about what's going on in the housing market, whenever the government says that they're going to improve the liquidity of the housing market by improving the GSE's ability to provide liquidity, that's good for multi-family.

We have to remember that one third of Americans live in rental housing, and Fannie and Freddie's charge is to provide liquidity and stability to the housing markets, and they define the housing markets as all of the housing markets, not just single-family. When you hear about the bills in front of Congress today, about expanding Freddie and Fannie's ability to help housing, they're also talking about multi-family. When you have a situation where you've got companies that need earnings and have a great product and have sort of the market to themselves, they're going to do as much as they can, and if you look at what they did last year, it was huge. It was almost I think over $120 billion between them or something like that. It was a big number. So I don't think is that the industry is worried too much about Freddie and Fannie having issues, and when you have a profitable product, and they're sort of the only game in town, and they have the need to put the money out.

Do you think that they were maybe influenced or pressured by the declining spread in the unsecured market?

Absolutely.

Okay.

I think the other part of it was that they were influenced by deals not getting done because what was happening is they were walking their rates up in the first quarter and then people were trying to retrade the sellers. Sellers said no, and the deals got blown up. They didn't have as much deal flow as I think they thought they were going to get because of the bid ask spread issue, and now that's why I think the spreads are a little more stable now.

Okay. Rick, part of your comments, your prepared remarks, you said you expect the challenged markets to be to -- challenged through 2009 is the word you used. You mean all the way through to December of '09?

Rich, I think it is hard to predict the future, but I know that the challenge markets have had more employment hits because obviously as you -- when the speculative housing bubble busted, you had a massive amount of dislocation in the jobs that were related to that. And so places like Las Vegas, I think we sort of estimated that we had something like 12% of our residents were related to the housing industry, the construction workers or mortgage bankers or real estate brokers and people like that. So I think that it is going to take longer in those markets to work through the inventory. So you have to work through the inventory, number one, and then number two you have to be able to get back to a more normal job growth. I just don't think -- I will not be Pollyanna. I don't think it's going to happen tomorrow. I think it's going to take time.

How long it takes into 2009, I don't know, but I know it is going to be a challenge through the rest of 2008. And with all the economic stimulus that has gone on and the tax rebate checks that are coming back and the people here soon should have a positive effect on the economy, but it will take awhile for those markets to come, people to get back into thinking that they're good times. I think we've seen -- when I was in Florida last week and talking to our people, and it was interesting because I started hearing some of our senior management there talking about they're going to get back into the housing market now. And they're starting to talk about I am going to buy a house probably in the third or fourth quarter, and they're starting to feel like maybe the market is going to start turning around because there is a lot of value.

Okay. In light of those comments, Keith, any D or F markets in your repertoire right now?

I don't know if we have any. I still don't know if we've gotten to an F, Rich. An F would have been Houston, Texas, in 1984.

So you're not F?

That would have been an F because the market occupancy rate was 77%, and I believe that rental rates bottomed at about $0.48 a square foot. That's an F.

Rich, the interesting thing, we've had discussion at NMHC, and I am the chairman this year in the National Multi-Housing Council. And we had a conference call here a week or two ago, and the research folks at NMHC are talking about potential multi-family housing shortages in 2010. And because of the credit crunch and the fact that we think that multi-family starts are going to be at 15 to 20-year lows going forward over the next twelve to eighteen months given the credit crunch. And so you have a situation where you have markets that are -- the fundamentals are fine in the sense of their long-term demographics or long-term job growth or long-term population growth. And right now we have the credit crunch/housing bust that negatively impacted those markets. But long-term those markets are great markets, and what should happen this year and going into next year is the difficulties will lead to a lot better growth in the future because of lack of supply.

Great. Thanks very much.

Our next question comes from Michael Salinsky at RBC Capital Markets.

Good morning, guys. Keith, the rent growth numbers that you show, does that include the impact of Valet Waste and Perfect Connection?

Yes, they do.

If you excluded that, what was rent growth in the first quarter?

It is roughly $750,000, probably works out to about 0.7 or 0.8, something like that.

Second question for Rick, the closing -- you mentioned $300 million commits. Does that close in the second quarter and do you begin adding properties in the second quarter? Is that a second half of the year event?

We've actually started adding properties already. It is closed, and what we do now -- we we haven't completed the fundraising. We're still going to raise additional dollars, but as far as commitments closed, the $300 million are commitment that are closed, so we can draw those down any time.

Actual purchases or developments in the fund, do you anticipate anything in the second quarter or is that --

We put a development in the fund in the second quarter, I believe, and we will -- we have a program to complete acquisitions and have developments through the second, third and fourth quarter.

Just given your comments previously about asset pricing, also about refinancing in terms of on balance sheet -- using balance capacity, do you still feel there is a lot of opportunity for share repurchases this year?

It is a total function of the share price and our ability to sell as we've been doing on leverage neutral base. We still think the shares are undervalued and will be a purchase of the shares. We sort of rested a little bit in the buyback in the first quarter, primarily because the market started rallying pretty big, and we were in the process of selling -- getting our next slug of dispositions to reload our ability to buy stock. But we're -- I haven't changed my view on the stock value relative to the net asset value, and I think it is definitely from a capital allocation perspective one of the best things we can do.

And finally in terms of this is the environment currently, what do you see mezzanine opportunities?

That's an interesting question because we have seen mezzanine opportunities, and we're working on a few transactions. The mezzanine market got very overheated along with a lot of other credit markets obviously. We think we'll be able to do some mezzanine financing going forward. We haven't done any yet, but we're working a lot of deals.

Great. Thanks, guys.

Our next question comes from Jay Habermann at Goldman Sachs.

Good morning.

Good morning.

Rick, a question on development. You did mention a couple of properties that did sort of fall out of the mix, but in your comments you mentioned sort of evaluating the level of development. But at the same time you sort of mentioned that 2010 to 2011 could be an interesting time period. So I am just wondering is any sort of pullback very temporary and do you think development really will remain the top priority?

Development is not necessarily our top priority. I think we believe that development creates a lot of value, and we create a lot of value over the years, and it is just a balanced part of our strategy. I think as the year unfolds and we see what happens to some of these markets in the next six to eight months, that could give us some light on perhaps moving development into production modes. We're likely to do a lot of developments in our fund, and I think we've shown $100 million of starts -- plus or minus zero to $100 million on our balance sheet for this year, and the balance in our joint ventures or fund. But I think the development business is going to be a very good business going forward, especially when you sort of look through the issues, challenges that merchant builders are having today with leveraged levels and an ability to get investor capital. We'll be opportunistic and make sure at the same time that we're managing our balance sheet so we don't have to go into the capital markets. Had we been in a position where we had to go fund in the first quarter, and it would have been not a good time to go in the market. So it is all about balance, and it is about trying to be cautious in an uncertain environment.

Okay. Just to push a bit more on the share repurchase, the stock is trading at roughly an implied cap rate of about 6.5, are you talking about cap rates on asset sales perhaps in the 5.75 to 6.5 range? So would that seem to indicate that your preference is going to be pay down debt?

Not necessarily. I think the asset sales we're talking about are the oldest slowest growing assets in our portfolio, and when you look at the implied cap rate and then look at our best assets, those assets aren't trading at 6.5 and wouldn't ever, at least in this current market. If you look at Washington, DC, cap rates -- there it's continuing to be in the low 5s. So I think there is still a pretty big spread between what we're selling our worst assets or our slowest growing assets at and the implied cap rate in our stock. So it still makes sense to continue from a capital allocation perspective sell assets and buy stock as long as we're doing a net leverage neutral and not increasing debt to do it.

Last question. What are you seeing broadly in terms of concessions perhaps by market, like trends in concessions?

Well, a lot of our competitors are kind of going down those trails particularly in the challenged markets. It is common to see other people offering one month free. The crazies are -- on occasion you'll see something more than that. But in our world we do with the yield star pricing, we really don't even have the word concession in our language anymore. But, yes, our competitors have tried to maintain higher base rates and do the one month, but when we're comping rents, we're always comping to the net effective.

How about in markets like northern Virginia or even in Florida?

A lot of concessions in both of those markets from our -- again, concessions is more of a structuring matter for our competitors than it is for us. We're again pricing it net effective.

Great. Thanks.

You bet.

Our next question comes from Steve Swett of KBW.

Thanks. Most of my questions have been asked, but, Keith, could I just ask you about Charlotte? It is a market that's been pretty solid for you guys, but seems to have really weakened considerably in the last quarter. Is that demand related, supply related, and do you think that's heading down towards the level that some of your other weaker markets are at?

Charlotte, it is definitely not supply related. There has been a very modest amount of new supply brought on in Charlotte. I think that what we're seeing right now is uncertainty related. You got Wachovia, B of A, all the banks and the employment impact that financial institutions have in that market. And I think you just got a lot of people who are kind of antsy, sitting on their hands, afraid to make commitments. And I think they're kind of hunkering down, and I think the lack of activity is related more to that. Because you still have in our forecast we have a decent job growth scenario, had really nice job growth in '07, and looks like '08 is going to be okay. But I think that it clearly does not have the characteristics of Tampa, Las Vegas, Phoenix, where you had the incredible runup in home prices that was by and large driven by speculative demand. It clearly didn't happen in Charlotte. You had a decent increase in house prices over the last three years, but nothing like in those other markets. It is hard for me to think about Charlotte given the market conditions in conjunction with the other housing challenged markets.

And, Rick, you talked a little about cap rates and investor interest in properties, but you mentioned markets in Texas. And I was wondering if you could just comment on anything you've seen in the market in investor interest and properties in some of the weaker areas like Arizona, Nevada, and Florida?

I think there are definitely investors looking in those markets, but that's where you have a much larger bid ask spread, and then the underwriting is very tough there, too. So I think that you're not seeing as much activity in terms of sales activity in those markets. That being said, when we're out looking for acquisitions in our fund, we like those markets because of the issue going on there right now. So you have definitely fewer buyers in those markets and a bigger bid ask spread. But we like them from an acquisition perspective, but I am not sure as a seller I would want to be trying to push sales in those markets when you have the negative investor sentiment that's out there.

Okay. Thanks.

Next question comes from Haendel St. Juste at Green Street.

Good morning.

Good morning.

Guys, what was the cap rate on the asset sale in the first quarter?

Cap rate was if you use $250 a door, and 3% management fee, it was like a 5.2. If you use the real CapEx it was like a 4.50.

How about the development that was sold as the JV?

The development that was sold in the JV was sold at our cost.

Okay. Is your sense that there is a portfolio discount out there in the marketplace and is that factoring into your decision to sell assets more on a one-off basis?

That's a good question. I think the answer is yes. There is a portfolio discount today. Any large buyer with a lot of capital is definitely wanting to get a better price than a one-off, and that's why when we put our portfolio out there, we did both scenarios. We said, fine, if you wanted to bid all, great, and we had a lot of bids from one-off people, and when you add the one-off bids up compared to the portfolio bids, there is probably a 5 or 6% variance between the two in terms of price.

One last question, and I guess a follow-up on the stock repurchases, and maybe I am misreading this. If I look at one first quarter's asset sales compared to the amount of stock you bought back, am I misreading it here that you used a little debt to buy back stock in the first quarter? And if that's the case, can we see more of that going forward? I know you've spoken in the past of funding that activity exclusively via asset sales.

You try to match it perfectly, but you never can, and so the key is making sure we're doing it on an overall basis, and we aren't going to get way ahead buying stock and using debt, but we had asset sales at the end of last year. We had some asset sales that include contributing assets to our fund, and we'll continue to fund it with asset sales. You do have to pay down some debt. You can't just sell assets and buy stock because your leverage still goes up, but at the end of the day we're committed to a leverage neutral program. Whether the timing of it works out, you're going to have some variations on the timing now and then.

All right. Thank you.

Great.

Our final question comes from Ben Lentz at LaSalle Investment.

Hey, guys, I am curious about your expectations and guidance for the four markets that have negative revenue growth and have continued to decelerate -- so southeast Florida, Tampa, Vegas, Phoenix. Do you see them hitting a bottom this year and starting to come back by the end of the year in your guidance?

We do. We actually -- the distinction that we see in the next two to three quarters is more on the occupancy rate in those markets. I still don't think we're going to be looking at anything meaningful on the rental growth side, but I think we will see an increase in the occupancy rate in those challenged markets. Our original guidance for those markets would not have had a negative number for the full year, even though you see negative numbers for the quarter. Some of that is because of the way we laid out or plan with regard to the third and fourth quarter and occupancy rate increases, et cetera. But I think that in our revised numbers -- in our revised thinking and forecasting, we're going to have better than expected performance in four or five markets over the course of a year, and we're probably going to have worse than anticipated or originally anticipated performance over the course of the year. And those are the four markets you mentioned are the most suspect.

And in the revised guidance are they negative for the full year number?

Two of them are negative in the full year number.

But we don't see them decelerating through the year? They hit bottom, and in 2009 they'll be weak but recovering from a year-over-year revenue growth perspective?

I think that the -- I think that that's a fair assessment. The question of -- I think we'll see improved performance in the third and fourth quarter even in the face of kind of sloppy, underlying housing conditions. Whether or not it lasts over into the first quarter of '09, when does that recovery start, I think that's the open question right now. But through the balance of the year we think we're kind of kicking along the bottom. We see decent metrics on traffic. We see decent closing percentages, and we see less turnover in the portfolio even in those markets primarily resulting from the reduction in losing residents to home sales. So the net net of all of that is I think we have an opportunity to kind of rock along the bottom, pick up a little occupancy, not drive rental rates, and we'll end up at the end of the year with a couple of those markets with a negative number. But we think that gets offset by the fact that Houston, Dallas, Austin, and Denver will continue to outperform.

Okay. And then DC seemed to decelerate to flat. Is that going to go negative as well?

Not in our forecast.

Okay. All right. Thank you.

Thank you for being on the call today. We look forward to updating you next quarter. Thanks a lot.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.