Camden Property Trust (CPT) 2009 Q2 法說會逐字稿

Hello and welcome to the Camden Property Trust second quarter 2009 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 call is being recorded.

Now I would like to turn the call over to Kim Callahan. Ms. Callahan?

Thank you. And good morning, thank you for joining Camden's second quarter 2009 earnings conference call. Before we begin our prepared remarks I would like to advise everyone we will be making forward-looking statements based on our current expectations and believes. These statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC and we encourage you to review them. As a reminder Camden's complete second quarter 2009 earnings release is available in the investor relations section of our website at Camdenliving.com . And it includes reconciliations to nonGAAP financial measures which may be discussed on this call. As there is another multifamily company hosted their earnings call after ours we will plan to end our question-and-answer session by 1:00 PM eastern time. Joining me today are: Rick Campo, Camden's Chairman and Chief Executive Officer, Keith Oden, President, and Dennis Steen, Chief Financial Officer. At this time I will turn the call over to

Good morning. As our hold music suggests, we hope the economy will break on through to the other side very soon. We had a very busy second quarter. On the operating side of the house our teams in the field exceeded our expectations and their budgeted NOI during the quarter and for the first half of the year. Since our business lags the economic environment we expect the second half to be more challenging than the first half. Camden's markets continue to react to the economic environment as we expected. We continue to be encouraged that our markets will emerge as some of the strongest markets in the recovery.

Advisors second quarter market analysis suggests that the markets that entered the recession first and were the weakest in 2008 and 2009 will have the strongest revenue growth coming out of the recession. Some of you might have remembered the wiso term we have been using, weakest in, strongest out. I want to thank our Camden on-site support teams for their hard work an continued focus on providing living excellence to our customers. While this recessionary cycle has been challenging especially on the capital and liquidity side, the relative strength in operating fundamentals has surprised us. During the last downturn leading up to the single-family bubble in the credit crisis our net operating income declined 12.5% from peak to trough with far fewer jobs losses and more headwinds with move-outs to buy houses. Our 5.8% NOI declined for the first half of the year is a pleasant surprise given the job losses and the jobless rate. I'm encouraged by the resiliency of the multifamily markets in this environment. The relative resiliency is the result of strong demographics, the failure of the home ownership society promoted by government policies combined with low multifamily supply which is going much lower before this is all over and a shrinking shadow supply.

During the quarter we completed over $1 billion of transactions including a $272 million equity offering designed to strengthen our balance sheet and position Camden to get back on offense as soon as the market allows. We have completed all of our wholly-owned developments, leasing is going well, slightly better than planned. Our remaining joint ventures developments are fully funded with constructions loans and are also on plan. With improved balance sheet and our $1 billion fund we are positioned to take advantage of opportunities as they unfold over the next year or so. At this point I will turn the call over to Keith Oden.

Thanks, Rick. The second quarter for Camden is probably best described as more of the same. Overall our operating results were roughly in line with our expectations for the quarter. Year to date we are slightly ahead of plan, but that will likely change as we move to the second half of the year. Our original guidance was predicated on a much more robust job growth outlook than we will see in the second half of the year. Now, those of you who have either perfect recall or really good notes will realize that my opening comments today were copied verbatim from my comments on our second quarter call from last year but still fit nicely with this year's facts. This certainly give credence to Yogi Berra's observation that it's deja vu all over again. If you stay at something long enough you're bound to see patterns repeat. The trick is to recognize them soon enough to use it to your advantage. In the 24 years since 1985 there have been three distinct eight-year period. In two of the three eight-year periods private real estate companies have had the playing field tilted greatly in their favor at the expense of public real estate companies. This was true between 1985 and 1991 and again from 2000 to the year 2008.

These periods were generally characterized by loose credit, aggressive loan underwriting standards and high leverage all of which favor private market participants and hinder public market participants. The recession of 1991 to 1992 caused great distress among private real estate companies, and many were bailed out by the markets, primarily through IPOs and restructuring. This began a period of comparative advantage for public companies as credit and underwriting standards tightened and excessive leverage vanished. From 1993 to the year 2000 public companies dominated the transactions market, but as the institutional memories of lenders faded following the 2001/2002 downturn, loose credit and leverage returned with a vengeance, which begat another seven years of private company advantage over public companies. We believe this period came to an end in 2008, and in 2009 the playing field is now tilted clearly back in the favor of companies with access to capital through the public markets. Further, we believe that this period is likely to last until the institutional memory of the lenders once again fade and they return once again to their old bad habits, which will take roughly eight years. In the meantime we've positioned ourselves to take advantage of opportunities in the upcoming years similar to what we experienced in the 1993 to 2000 time frame.

Now for some details of our second quarter performance. Although we managed to outperform our plan in the second quarter this came despite the continuing deterioration of market fundamentals. Only Houston and Dallas were able to produce revenue growth for the quarter with all other markets showing declines. Notably Charlotte was the worst revenue performer with a 6.8% decline over the prior year quarter. With the county-wide unemployment rate running near 12% in Charlotte, it was just a matter of time before we got smacked by the proverbial other shoe. Expenses rose 7.1% for the quarter resulting in a negative NOI growth in all 15 of our reporting markets. However, normalizing the 7.1% expense increase for our cable and valet waste program would put that increase at roughly 5.1%. Additionally, we had a one-time adjustment to benefit costs in the second quarter of last year of $1.1 million and after adjusting for this item it would put the second quarter expenses at roughly 2.7%.

We expect our full year expense growth to be well below our original guidance of 5% to 6.25% and have revised guidance accordingly. The revised range of 2.5% to 4% up includes roughly 1% of growth attributable to our cable television and valet waste initiates, leaving our comparable expense growth for the year at roughly 2.25% at the midpoint. While our on-site teams are doing an excellent job of controlling costs we will not allow cost control to jeopardize our asset quality or our commitment to living excellence for our residents. Overall occupancy for the quarter was 94.2%, down slightly from last year but up 0.6% from last quarter. Average rental rates dropped 4.4% from last year and 1.9% from last quarter. Traffic continued to tick down from last year's levels with the second quarter down roughly 10%. Our turnover rate fell by 6% from the prior year which is attributable to our focus on renewing existing leases.

Our focus on renewals is critical as they currently yield our highest rate $934 a unit versus in place rent of $927 per unit and new rent at $892 per unit. Our percentage of moveouts to buy homes picked up to 12.8% from our lowest ever level of 10.9% of last quarter, but it is still well below the long-term average. The overall health of our resident base seems to be relatively stable as the percentage of our residents who moved out due to financial reasons was basically flat with last quarter at 11%. Also, our monthly bad debt per unit remains at very manageable levels at $7 per unit, which was also flat with the first quarter. All-in all a decent quarter with some signs of stability, but with a lot of wood left to chop. At this time I'll turn the call over to Dennis Steen, our Chief Financial Officer.

Thanks, Keith. As Rick mentioned we continued to be highly focused on navigating through the prolonged recession and credit crisis. During the second quarter we raised a total of $692 million in new debt and equity capital, further strengthening our balance sheet and liquidity position. On April 17th we closed on a new $420 million Fannie Mae secured facility. The facility has a 10-year term and is interest only at a fixed rate of 5.21%. We used the proceeds of this new facility to pay down all balances outstanding on our $600 million unsecured line of credit and to repurchase through a tender offer and open market repurchases a total of $182.3 million of senior unsecured notes originally scheduled to mature in 2010 through 2012. These are purchases resulted in a gain on early retirement of debt of $1.1 million which was included in our prior FFO guidance.

Additionally to further strengthen liquidity and reduce leverage, we completed an equity offering on May 11th which resulted in the issuance of 10.350 million common shares generating $272.1 million in net proceeds. These proceeds have been invested in short-term investments. On June 30 we used $139.1 million of these proceeds to repay $135.3 million of our secured mortgage debt which had an average interest rate of 4.8% and was originally scheduled to mature at various dates in 2010 and 2011. We recorded a $3.8 million loss on the early retirement of these mortgages which was not included in our prior FFO guidance. As a result of our capital market activities we had $158 million in cash and short term investments on our balance sheet on June 30th, 2009, $82 million of which was used on July 15th to retire the only remaining debt maturity of 2009.

With no remaining debt maturities for the balance of 2009 and with no significant funding requirements for development activities as our 100% owned development projects have all completed construction and current joint venture development activities will be funded with existing construction loans, we currently expect to have over $50 million in cash and full availability under our $600 million line of credit at year end 2009. Additionally debt maturities have been reduced to approximately $137 million in 2010, all of which can be funded with existing liquidity. Taking a look at our quarterly results we reported funds from operations for the second quarter of 2009 of $46.6 million or $0.72 per diluted share, the only nonrecurring item included in FFO for the quarter was a net loss of $2.7 million or $0.04 per diluted share related to the earlier retirement of debt.

As I mentioned earlier we recorded a gain of $1.1 million or $0.02 per diluted share on the repurchase of $182.3 million of senior unsecured notes which was included in our prior guidance, and we recorded a loss of $3.8 million or $0.06 per diluted share on the repurchase of $135.3 million of our secured mortgage debt which was not included in our prior guidance. Excluding the $3.8 million or $0.06 per share loss on the repurchase of the secured debt, FFO for the second quarter would have been $50.4 million or $0.78 per diluted share, $0.02 above the midpoint of our expected range of $0.74 to $0.78, and $0.03 above first call consensus. The $0.02 per share outperformance to the midpoint of our expected range was primarily due to: property net operating income exceeding our forecast by $1.1 million, and a favorable variance of approximately $450,000 in total property management, fee and assess management and general and administrative expenses, resulting from a focus on reducing corporate expenses and reductions in professional fees.

The $1.1 million favorable variance in property NOI was entirely attributable to lower property expenses. Property revenues were essentially flat to expectations as a slight shortfall in same store revenues was offset by better than expected leasing results for our communities and lease-ups. The favorable variance in property expenses was primarily due to lower utility costs resulting from lower electricity and natural gas rates, lower repair and maintenance costs due to lower unit turn costs and control of discretionary expenditures, and lower real estate tax expense due to lower valuation increases than originally projected. Moving onto earnings guidance, in conjunction with our equity offering in May we revised our full year guidance to $2.87 to $3.09 per diluted with a midpoint of $2.98 per share to reflect the impact of the 10.350 million common shares we issued.

We still expect the midpoint of our 2009 full year FFO guidance to be $2.98 per diluted share as property results continue to perform in line with our original expectations with same property net operating income still expected to decline between 4.5% and 7.5%, and with interest expense reductions in the second half of 2009 resulting from the early retirement of the $135 million in secured mortgages and lower rates on our variable rate debt, offsetting the unforecasted $0.06 per share charge we recorded in the second quarter on the early retirement of the secured mortgages. Additionally we have narrowed the full year range by $0.04 per share on both the top and bottom ends to $2.91 to $3.05 per diluted share. For the third quarter of 2009 we expect projected FFO per diluted share within the range of $0.67 to $0.73 per diluted share. The midpoint of $0.70 per share represents a $0.06 per share FFO decline from the second quarter of 2009, excluding the $2.7 million nonrecurring net loss recorded on the early retirement of debt in the second quarter.

The $0.06 per share decline results primarily from the following: a $0.05 decline in FFO per share due to the increase of our average shares outstanding in the third quarter as compared to the second quarter as a result of our issuance of common shares in May; a $0.04 decline in FFO per share due to lower property net operating income resulting from a $0.03 decline in the same property NOI and a $0.01 decline in NOI related to our disposition of Camden West Oaks in the second quarter of 2009. The above two negative variances will be partially offset by a $0.04 per share increase in FFO due to lower interest expense resulting primarily from our debt repurchases in the second quarter, lower interest rates on our variable rate debt and the pay off with available cash of $82 million in unsecured senior notes which matured on July 15th. At this point we'll open the call up to questions.

Thank you. (Operator Instructions) Our first question comes from David Toti at Citigroup.

Good morning, everyone. Michael [Bilkman] is here with me as well. Rick, assuming a modest somewhat jobless recovery maybe in the next 12 months, can you give us some sort of picture of what 2010 looks for Camden relative to the operating environment? I know you can't give specifics, but maybe just some color around expectations for pricing power and occupancy trends.

Well, depending what happens in the economy, and obviously we have had a good GPD number for the second quarter, and there is a lot of buzz about having a positive GPD in the second half then picking up steam in 2010. But because we are a lagging industry meaning that it takes about six months for the economy to really affect our business, that's primarily because of the 27 weeks of unemployment benefits that people get when they lose their jobs, we don't expect 2010 to turn at the beginning.

We think that if the economy plays outside the way that some folks think it will play out and based on what I just talked about, you should have sort of continuing deterioration of pricing power due to the first half. Then a firming on the second half, and perhaps pricing power continuing somewhere in the third and fourth quarter, then very strong 2011. That's sort of the planning model we are using right now and that would include a jobless recovery.

Great. And then just shifting over to the balance sheet. You guys are in pretty good shape relative to maturities and liquidity. What are some of your top goals for the next 12 to 18 months in terms of activity around the balance sheet and things you want to accomplish?

I think the key thing in this environment today is to continue to be in a position where you are strengthening your credit metrics through a number of different of activities including selling assets. We cut our dividend obviously which creates cash flow that we didn't otherwise have to pay back, but -- or pay down. The fundamental focus that we have on our balance sheet today is to continue to delever over the next few years and make sure that our coverages are very strong and to be in a position where we -- when we get back to growth, we probably will give up a little growth for -- in FFO for delevering, but definitely we are focused on the balance sheet and obviously we did the equity issuance as a first step on that, but it's going to be a multiyear type of programming to make sure that we are in the right position.

Great. My last question relates to your strategies in California at the operating level. Obviously that market is very much in focus relative to the downturn in the looming fiscal crisis. Is your company rolling out any specific operational tactics or strategies relative to those tenants or those prospective tenants that's a little bit different than the rest of the company, or does that all through the revenue management system the same way? I guess my question is are you being more defensive in California at this point?

David, our posture with regard to managing our residents and our rent rolls right now I would describe as extremely defensive in about two thirds of our markets and that would include California, even though our operating performance in the last 12 months, it wouldn't necessarily qualify California as being among the most hard hit markets in our world, but the reality is with the uncertainty on the horizon and left of unemployment that we are going to ultimately see at the peak in California we are being very defensive. What that means in practical terms is we are doing there what we are doing everywhere else which is working incredibly hard on renewals. Our renewal program that we rolled out throughout our portfolio really in the beginning of 2008 system wide includes contacting residents 90 to 120 days in advance of their lease renewal and working very hard on the renewals, and the reason for that is clear and it shows up in the numbers that I gave in my opening comments. We are renewing leases at an average of roughly 4.5% to 5% above where our new rent structure is and that's across all of our 15 markets. So renewals renewals renewals is the watch words in the markets where we're being defensive.

We have been in this defensive mode really since the second half of 2007 when we started getting killed in Phoenix and the Florida markets. So we have had a little bit more time in the penalty box to figure out what you should be doing to maintain occupancy and keep your revenue stream as robust as you can during this downturn. California is clearly in that group for us of markets where we are being very watchful and very defensive.

Great. Thank you for the detail.

You bet.

The next question comes from Dave Bragg of ISI.

Hi. Good morning to you.

Good morning.

Could you talk a little bit more about your Florida markets? Last quarter you sounded cautiously optimistic. This quarter there appears to have been some sequential weakness. If you could just break down each of the three key markets there.

Yes. Let's start with Tampa down 1% sequentially, a lot of the weakness that you are looking at at the NOI growth side of things, there's just a lot of noise in the expense numbers as there always are on a quarterly basis, so down 1%. Portfolio wide we were basically flat down 1/10th, so a little bit worse than the average in our portfolio, but certainly not unexpected given everything that is going on in Tampa. Orlando down 8/10th, and again, we had some goofy expense comparisons in Orlando which shows up in the NOI, but that will work itself out over the course of the year, so down 8/10% not particularly unexpected and then southeast Florida down 1.4%.

Southeast Florida is actually in the last 24 months since it got on our watch list has actually performed much better than we would have anticipated throughout this downturn, and I think there is just a little bit of catching up in the South Florida markets to where Tampa and Orlando have been for the last 12 months, but I would say also if there was a note of cautious optimism on last quarter, it would have been heavily planted toward the cautious and not the optimism, because those three markets are clearly still on our list of markets that require a very defensive posture.

And is there any opportunity for you to move street rents up in those markets or are they still declining?

No, the street rents are still declining in that market. There are in our portfolio wide street rents, you kind of go back to where they were 12 months ago, they are down on average about 6.5% and that's a portfolio wide average and clearly in Tampa, Orlando, and in south Florida would exceed that average. So we are not really even thinking about moving street rents at this point, we are focused on maintaining occupancy and doing everything we can to emphasize renewals, so that we don't have to be out there in the new resident acquisition market which is pretty painful right now.

Just one last question for you. You mentioned the move out to buy home metric to take up bouncing off the bottom. Could you talk a little bit more about in what markets did you see that move more than others?

Really it was across the board and the move from 10.9% to 12.8% there is just a lot of noise in these numbers on a go-forward basis. I don't know. Go back to last conference call, I said I thought we still might see a quarter where we get a single digit number. I haven't taken that off the table. So I think that is still something that is overall helping in every one of our markets. So even in markets where you might suspect with all of the foreclosure activity that you might be more impacted it is just not happening to us. The interesting thing is that with system of the most hard hit markets as we went through our last call are experiencing some of the lowest percentage to move outs. It is a little bit counterintuitive. But it just tells you that our renter base is still at a discounted home price it is not the price of the issue that's the issue, it is the qualifying standards that is the impediment for most of our renter base.

Got it. Thank you.

Our next question comes from Rob Stevenson at Fox-Pitt Kelton.

Good morning, guys. Rick, when you were talking about the spread renewals expiring/new, at this point are you guys expecting that sort of -- you're basically 4% down versus either renewals or expiring on new leases or so, do you expect that to hang in for the back half of the year, or are you expecting deterioration in that sort of spread implicit in your guidance?

Well, I think, Rob, that we will probably see it bounce around that 4% level. It has actually come in a little bit from where it was in kind of the April/May, time frame. We saw a gap as wide as 6% then. It wouldn't shock me or surprise me to see that number kind of bouncing down in the 4% to 6% range throughout the balance of the year. As the in place rents kind of roll down and they have, clearly, we are down about 5% on in place rents from where we were 12 months ago or August of last year. So as that rolls down, the question is are the new rents an renewals going to roll down at an even faster pace. We don't think so because there again we are still rolling down on the in place rents. So I would expect to see that number pretty stable in the 4% to 6% range throughout the balance of the year.

I think the thing you have to recognize also is when we talk out percentages like this, two percentage points on a $900 lease is $18, right? So if a resident sitting there going what will my alternatives, move out, go through all the hassle of changing everything I have from my mail to my cable TV and all that for $18, our people are very good at quantifying the cost associated with the move, and often time the cost associated with the move is in excess of the rental rate roll down that they are going to get, so that's why we have the ability to keep these people in at a higher rate. Now obviously they are going to come in and negotiate when they see online rents and stuff like that. Now if the gap was really big and it is like a couple hundred dollars a month or something, then you probably have no shot at keeping those renewals. But I think you have to remember that a couple percentage points on $1,000 is not that much.

Okay. Can you talk a little bit what your experience has been with the revenue management system in some of the more challenging markets? Like I'm thinking specifically I take a look at Phoenix right now. You are 91% and change occupied rental rate still dropping. When you get into a market like that, is the revenue management software able to really -- you are probably maximizing as best you can, but is it really able to get to an occupancy in rental rate maximization level, or do you get to a point where the market is just too weak and you can't get to where you want to be or need to be?

Well, Rob, it is a process. We are constantly tweaking the model, but the answer in a market like Phoenix's sake irrespective where it is in the market, the primary -- one of the primary drivers in the model is the model hates vacancy, and so it really will be very aggressive in chasing market rents in order to close the vacancy gap. Now, one of the things that we have done in some of these markets where in Phoenix the market wide occupancy is now running in the [89%] to 90%, even though our portfolio has hung in there at 91%, 92%, 93% most of the first quarter, as the overall market rate falls away then we have adjusted our target occupancy rate. Because if the overall market is 89% and we are still jamming revenue management to try to get to a 96% target, the decline that it would take in street rent adjustments to get there and close that gap is just too wide, and then you end up chasing your tail a year from now with rents that are way too far below market.

So in that case we have adjusted in some of the markets our target occupancy rate. We are at 93.5% in Phoenix right now on a target basis. So models are a tool and you have to look at it constantly. We review our rental structure with our [RBPs]. Literally we are doing that once a week. We go through every market, look at all the rental adjustment that are being made. There are safeguards in the model, there are triggers that won't allow any rental adjustment of more than X% to be had even, if the model wants to chase occupancy, it creates an exception that has to be cleared. So there are safeguards in the model, but at the end of the day you have to always be looking at what are the facts on the ground and how does that square up with what you are trying to achieve. So I don't know if that helped you much, but that's our process, and the answer is you do have to tweak the models to get at these kind of unique market conditions.

Let me just describe the way I describe it to people because I hear all these folks who don't use revenue management going revenue management just doesn't work in a down market. And my response is great, let's just take your Excel spreadsheets away from you and give you a yellow pad because that's what you are doing, because the model is simply a tool as Keith said to help you understand what's happening, it is not the [panacea], you don't just plug in your information in your Excel spreadsheet and trust the answer, do you? Don't you have to test it, don't you have to manage it? So for people who don't use revenue management it is as if they are using a yellow pad as opposed to an excel spreadsheet. That's the way we look at it.

Okay. Thanks, guys.

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

Hey, good morning, guys. What kind of -- if the focus is on renewals, what kind of success have you had in terms of minimizing turnover?

Our turnover rates were down 6% from where they were a year ago in the quarter, Rich. So we are pretty pleased with that. That's enough to move our needle in our world. That's about a 10% delta in renewals from where we were. So we are going to keep working as hard as we can. Obviously our renewal rate if we can tweak it up another two or three percentage points that takes a lot of pressure, not only off the amount of traffic that has to be generated, but it takes a lot of pressure off the rents that we're putting in place that on average are 4% or 5% below our renewal levels. It is a major focus of ours and it is something we are putting a lot of time and energy into and we are getting good results.

Thank you. Rick, in the first part of your talk you mentioned shrinking shadow supply. Can you explain what you mean by that? What you are seeing?

Well, if you look at occupancies of single family homes have dropped for the last I think three months. You started to see inventories clear for single family homes in markets. Interesting like in Phoenix, for example, home purchases are way up, they are clearing the inventory and the percentage of foreclosures and people buying homes with the intent of investors that are buying foreclosed homes has actually gone down in Phoenix. So in markets like Tampa, Orlando, maybe not south Florida and downtown Miami or maybe Fort Lauderdale and some of the highrise condos we are converting right now. But clearly in Tampa and Orlando, the busted condo deals that happened 18 months ago, two, or three years ago plus or minus are all leased. So you just have fewer condo reversions in Florida, fewer foreclosed houses that are being leased and fewer empty single family homes overall. So you are seeing a definite shrinking of the excess housing inventory.

And then last on transaction market, when it sort of starts to restart again, if you're right and you start to get pricing power the second half of 2010, how far in advance of that happening do you think transactions start to make sense, assuming that the capital, the credit starts to thaw out over the next six months or so? Is it credit or is it about having some vision into fundamentals?

Well, I think it is both. One of the challenges you have today is that overleveraged borrowers are not being pressured to refinance their mortgages today. You have this sort of renew and pretend strategy that a lot of the construction loans and banks are doing today where they are renewing loans for six months or 12 months that clearly can't be refinanced today where the property value is less than the debt and the banks aren't being pressured to market those to market yet with the new accounting rules and all that. So there is definitely less pressure on people who will be pressured in the future. So one part of the transaction environment is going to be when do the banks start pushing people to have a reality check and ultimately force them to sell. That's one part.

The other part is as you point out, that if you wait to acquire when everyone in the market knows that it has turned then you probably missed an opportunity, and so what we are looking at a lot is when should you make those moves and if these markets continue to unfold the way that some people think they are going to unfold then a buying opportunity would be in the first half of 2010 in my view. But again, it sort of depends on what happens with the banks and what happens with some of these -- the properties that are just -- they are sort of what we call sort of the walking dead.

A lot of variables?

Yes.

Thank you, guys.

The next question comes from Alexander Goldfarb at Sandler O'Neill.

Good morning. I locked the doors this morning. It was a good choice.

Thanks.

Some of your peers have taken some impairments this quarter on land, development pipeline, etc. I think it is a quarterly review, right? I just want to understand when you guys do your quarterly review if anything came close to where you felt like you may need to do something and how you feel about your land and pipeline?

If anything came close in the quarter we would have reserved against it. The gap is pretty specific. You review all of your assets including operating assets on a quarterly basis and do the various tests for impairment. Obviously land that was purchased a couple years ago relative to current values today you have some concern that the values are not where they need to be, but when you evaluate land and you go through the process you evaluate it based on whether you think a development will work within a certain period of time at certain rates, and we are evaluating our development pipeline on an ongoing basis every quarter.

Good news is construction costs have come down substantially which helps underwrite returns. Bad news is that rents have fallen off as well, so you have on the one side good news on the construction costs, the other side bad news on the rent. However, we have seen in the past that rent doesn't rise or fall on an even sort of line. It spikes, and we think that there is going to be some pretty substantial rent spikes coming in late 2010 and 2011 and 2012. So what we will be doing with our existing development pipeline that we haven't impaired or written down or changed our development strategy that we did last year. We will be evaluating those as we go.

And to the extent that development doesn't work or make sense under that methodology we will develop the land position and carrying cost, and if we have to do a write down we will do it when we believe we can't get a development to work, and we will do that on a quarterly basis. But a lot of it just depends on how the economy unfolds, because I think there is a fair number of us who believe with pretty much post World War II starts being the lowest in the next 12 to 18 months, the development markets could be very robust in 2011 and 2012, and that with the sites that we have we should be able to harvest that value. It remains to be seen if it takes a couple years longer than that then we will have to review that and likely take impairments.

So it is not just the rent today it is the rents over the next few years.

Yes. Absolutely. Do you a model that says if I'm going to build this property you have to put in place what you think construction costs are, what current rents are, and what future rents will be to be able to model it.

Okay. And then just my next question and my final. Just a little bit on the nuance between in the DC area inside the beltway on the Maryland side and then outside the beltway in northern Virginia, what you guys are seeing.

The stuff that is inside the -- in the DC proper as we refer to it, is still killing them. We are raising rents and our two communities there are a little bit unique because they are incredibly well located within the DC proper, but I think if virtually in all of the DC proper rents are pretty strong. Northern Virginia obviously is getting better. We couldn't have the kind of sequential results that we had on revenues in DC without getting an uptick in northern Virginia, but it still lags both the Maryland side and both of those lag DC proper. But again, when you stratify it and look across our portfolio and say where is the potential strength coming from it is clearly still the Texas markets and then a close second would be DC, as you think about what has got to happen in terms of total employment in the DC Metro area in the next couple of years to support the growth in government that we know is coming.

The next question comes from Jon Habermann at Goldman Sachs.

Hi. Good morning, guys. Keith, you talk about eight-year cycle. I'm just curious, what sort of pricing gets you back into the market? And two, I guess maybe for Rick as well, is you think about new markets, are there opportunities that you see emerging in this cycle?

Let me start with the pricing and relative to kind of where we were in the opportunity that we think might emerge because of the shifting in the playing field. I don't know that there is so much a cost per door that we are looking at. It is not going to be like it was certainly in the unwinding of the RTC days, where you really had, I guess undisciplined sellers that just wholesale through properties out in the marketplace. I think Rick hit it right in his comments as the pretend and extend that is going on with the banks, I think that will continue for some period of time and will probably take the edge off what otherwise would be a market where you might get some pricing by the pound. But I think more importantly for us as we look at opportunities to put capital to work you're going to get back to a situation where positive spread investing works, and literally for the last five, six years we have not been in an environment where unless you were willing to presuppose ever-falling exit cap rates that you could ever make any sense out of positive spread investing, but it is coming.

Cap rates are moving. They are not where they need to be yet for a market clearing price to happen but we think that will happen. We think it probably happens within the next nine to 12 months and when it does happen if those cap rates on assets that we like in our markets and particularly in some of the more stressed markets, the Phoenixes of the world, the Las Vegas and Florida markets, as those cap rates start to approach 7.5%, 8% and you still have access to 5.5%, 6% Fannie or Freddie debt, those are very good accretive opportunities for us to put capital to work. And we think it is coming. We are just being patient right now because we are not there yet. The best evidence of that is look at the total transaction volume that's happened in the first half of this year, and it is astonishing how few deals have actually traded in the markets that we are active in. So I think we are more focused on generating positive spreads over our cost of capital, and we think that's coming.

As far as new markets go, the increase in cap rates obviously in some of these really low cap rate environments allow us to make more accretive acquisitions in markets like southern California, maybe northern California. We long-term like those markets even though I do believe California is going to be stressed longer than a lot of people think just because of the debacle the state is in, the unemployment rate and everything else.

It is going to have a hard time digging out of the hole it dug for itself, but I think that will create some opportunity for getting into those markets at very attractive cap rates. When you look at some of the transactions even though they are small a number of transitions people have been trading real estate. They are at 200 basis points, 250 basis points wide of what the ultimate what they were doing before so instead of a 4.5% you are seeing a 6.5% or a 7%. And to me the key is going to be when is the right entry point and that's going to be just a function of when you think cash flow is going to turn there? Because I think cash flow in California is going to be negative for several years and probably not going to turn as fast as Phoenix.

Okay. And just last question. Can you comment on single-family homes. Sounds like the moveouts aren't that much. Can you talk about just competitive threat from rentals? Could that weigh sort of our same store NOI into next year?

No, I don't think so, because what's happening in the single family home market it is taking much longer to underwrite a mortgage, it's taking longer to get it apprised. The pendulum has swung so far over into the ultra credit, you've got to have the right scores and all that. And most people think, you look at the Harvard Center for Housing study believes that the home ownership rate may drop from 67.5% now to 65% or 64%, toward historical average before the government decides that everybody in America should own a home even if they couldn't afford to pay for it. So that when you think about home ownership, home ownership is good and if people move out of our apartments at the historic rate which is about 14%, then that's fine. We are happy with that. It is the 24% and 25% move out rates that killed us. And so I don't think you're going to see 24%, 25% of our people moving out because the credit criteria is so strong today and the down payment requirement is there, that you are not going to have the people -- they're just not going to be able to afford it. Americans are overleveraged as it is and apartment -- I think apartment dwellers are going to continue to be apartment dwellers until they save enough money and that's really tough today.

What about the single family rentals though versus people buying homes?

If people were going to rent houses we would have been killed already. Look at Las Vegas. We have 93% occupancy plus or minus. And you've got all these single family rental homes. They are in the wrong place and they are too big. So a lot of people want the amenities and the urban locations of an apartment as opposed to going out into the [hinterlands] and renting a house on the edge of the desert in Vegas.

We track move outs to buy, and we also track move outs to rent. The move outs to rent is down plus or minus 2.5% for the last four years. So it's just I know the concern is still there but for the last three years we have been I think making the case that it is about jobs, and I think we have seen that in sort of bright headlights for the last five or six quarters that the jobs picture is far more impactful to the multifamily picture fundamentals than is the overhang of housing, whether it is for sale or for rent.

Okay. Thanks, guys.

You bet.

The next question comes from Karin Ford at KeyBanc.

Hi. Good morning. Just a quick question on July performance. I know we are still technically in July, but any update post quarter on occupancy or rent trends that you could share?

Yes. Our occupancy is down about 50 basis points from where we ended the quarter on average right now. But again, those numbers tend to move around. I think throughout the balance of the year we are still going to be in the 93.5% to low 94% range. And we are a little bit above that right now, but I think that's the zone that we will stay in and that's what we calibrated, recalibrated our revenue management model to.

That's helpful. Just one more. I know you get asked every quarter generally your thoughts on Fannie and Freddie, and any concerns you may have on their availability and volume. I guess the difference this quarter is that since the last time we asked you guys have done an equity deal. Just curious if anything on the Fannie and Freddie front motivated your decision to do the equity, or was it merely your goals as you said earlier about delevering?

Interesting enough the equity offering actually increased our ability to do Freddie and Fannie debt to a point of about $1.1 billion. So on the one hand the equity raised was to delever which allowed us then to pay off some existing Fannie Mae loans, but also allowed us to increase our capacity for Fannie and Freddie loans, so we didn't do the equity just for that but it was clearly a parts of that because when you look at -- I talked to people about the equity offering being half defensive and half offensive. And if you subscribe to the double dip recession, and oh, my God real estate is never going to be financed again or anything like that, the equity offering gives us a whole lot more flexibility in terms of how we finance our business including with Freddie and Fannie.

Now on the Freddie and Fannie front we didn't do the equity front because we thought they were going away. We fundamentally believe they will stay for a long time and they are going to continue to be a very active participant in our market. Two things that have happened this quarter compared to last quarter and those two things are our financing, $420 million financing, was not done on Fannie's balance sheet, it was a mortgage-backed security, a direct placement of a mortgage-backed security. So Fannie didn't even fund it off their balance sheet. What Fannie did is originate the transaction, get a structuring fee and servicing fee and then an investor did the spread and we did the deal. And if you look at our rate it was 5.13%, there was another multifamily company that came out and announced their deal two days before we did ours and their's was at 5.8% or something like that.

So we had a tremendously great execution because it was a mortgage-backed security execution. Now, Freddie has also done a very large multi -- or a mortgage backed security execution as well. So what happened to Freddie and Fannie now is that they're moving to rather than do their own balance sheet funding they are used mortgage-backed securities which have opened up, which if you think about it, so they are not taking any risk on the debt, they're earning a spread over the investor rate and making money. So why would the government ever want to stop that when they are not even putting money out?

Is your sense that the mortgage-backed security execution rather than the balance sheet execution might be getting you a better rate, but is a slightly more onerous underwriting and slightly less flexible facility than what you get previously?

Absolutely not. We were worried that it was going to be and we were -- when you go through sort of the terms of our deals compared to the terms of our brethren that have done just direct window deals, there is very little change.

That's good color. Thank you.

Sure.

Our last question comes from Michael Salinsky of RBC Capital Markets.

Good afternoon. Two quick bookkeeping questions here. Disposition guidance for the second half of the year as well as the debt repurchases in July, are there any gains on those?

Yes. We have no disposition activity for the balance of the year and we have no planned debt repurchases either.

Was there any gains on the transaction action done at the quarter end which we expect in next quarters numbers?

No, you should not. There were no gains.

Okay. A little bit bigger picture question for Keith. I know you give letter grades only at the beginning of the year. If you had to sit back and look at that right now is there any markets that have outperformed your expectations specifically or conversely underperformed your expectations significantly?

Yes, I think DC is probably a little stronger than what we would have expected to see at the beginning of the year. Worse than we expected. Certainly didn't see a 7% down in Charlotte this quarter. We had a fairly weak scenario laid down for Charlotte. If we continue on this path Charlotte may end up rivaling Phoenix on decline this year. So that would be the one that's probably on my greater worry list than the others at this point.

Okay. Then finally, I've asked the question a couple times but it is always helpful. Rick, any comments you can make about lobbying efforts. What's going on there? What's the plans for the second half, the focus now? It would be helpful.

We are definitely full court press on lobbying at the NMHC and a lot of areas. We had very good success with the housing bill last year and in getting rid of zero down payments and charitable down payments and things like that and big government subsidies for homes. This -- the real challenges that are out there now, this energy bill is an interesting one that we have been really working hard on, because the government is trying to mandate specific energy efficiencies. And unfortunately they're doing it through the code which is really hard, because when you think about an energy efficient building, most of the energy that a building uses is from the user plugging in their iPods and having their flat screened TVs turned on immediately and their computers, so mandated we're fighting, we're really making sure they understand about mandated code changes and things like that. The other big thing that they are lobbying on is this carried interest for real estate is a big issue for how a private real estate side is financed and funded but NMHC and [MNAA] are very engaged on the hill. We have made multiple presentations to various committees and stay very engaged.

Great. Thank you.

Sure.

At this point I just wanted to say thank you to everybody who sends in suggestions for our music. They are much appreciated. We do take them into consideration. We did get one suggestion for music for this quarterly call after yesterday's long sessions and it was "A Little Less Conversation" by Elvis Presley, so we could not play the music, but we do like the idea behind that suggestion. And with that we are going to sign off for today. Thank you for all of your continued support and we will see you down the road.

Thanks.

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