Camden Property Trust (CPT) 2009 Q3 法說會逐字稿

Good morning. Welcome to the Camden Property Trust third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Kim Callahan. Ms. Callahan, please go ahead.

Good morning, and thank you for joining Camden's third quarter 2009 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 you to review them. As a reminder, Camden's complete third quarter 2009 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 Ric Campo, Camden's Chairman and Chief Executive Officer, Keith Oden, President and Dennis Steen, Chief Financial Officer, Because there are several earnings calls being hosted today, including another multifamily company at 1:00 PM Eastern, we will limit the time for this call to one hour. If we are unable to speak with everyone in the queue today, we would be happy to respond to additional questions off line after the call concludes. At this time, I'll turn the call over to Ric Campo.

Thanks, Kim, and good morning. As Billy Joel points out on our conference music, if that's moving up, then I'm moving out. Clearly he was talking about the housing bust based on failed government policies at moving the national home ownership rate up. Over two million people have taken his advice and moved out of home ownership and into apartments, taking the home ownership rate down from 69% to 67.4%.

Our operating results for the quarter were in line with our expectations with same property net operating income declining 7% for the third quarter over last year. Year-to-date, same property net operating income declined 6.2% over last year. If someone had told me that we would have lost nearly eight million jobs had an unemployment rate pushing 10%, and that our properties and our industry in general would have performed as well as it has, I would have thought they were crazy. Clearly, multifamily demand has been reduced by the employment losses, but there are three counter veiling trends that have helped our industry.

First the reduction of the home ownership rate by 1.8 percentage points has created two million new renters. Some believe that the home ownership rate will fall to pre government programs to around 64 to 65% potentially creating another 3.1 million renters. In the last cycle, we had people moving out to buy homes who really couldn't afford to their apartment rents. That number peaked at 24%, now we're at about 13, 14%.

Second biggest difference in this cycle versus the last one, is that multifamily supply peaked at the beginning of the downturn. In this cycle, multifamily supply was moderate going into the downturn. Multifamily developers were crowded out by homebuilders who could pay more for land. Construction costs increased faster than rental rates, so getting development yields to work was very difficult.

New supply will likely hit World War II levels, post World War II levels in terms of low supply as a result of lack of equity and debt in the market. I'll talk about that more in a minute. 85% of the new apartment starts historically has been produced by merchant builders. That model is dead for the foreseeable future. The third biggest difference in this cycle is that demographics are better. They're on our side.

The baby boom echo is in full swing. The 18 to 24 year old age cohort rose annually for the next six years, peaking at more than 60 million people. 85% of these folks rent. These major influences on our business will set on strong recovery in rents and occupancy when job growth resumes. The key is when does job growth resume, obviously.

Let's us talk a little bit about WISO. It's a big topic these days. For those of you who haven't got into the WISO discussion yet, WISO is weakest in, strong out. The idea of WISO is about job growth, which markets get job growth first. Our portfolio has been build on the premise that apartment demand is driven by job growth. The growth markets before this recession will be the job rent generators post recession. Job growth markets will grow again because they are pro business, they have a lot cost of doing business, they have young educated work forces, they have affordable housing. Clearly the housing bust has given them even a more competitive advantage in that regard at this point, and they have good weather.

One of the things that we have always enjoyed debating is this concept between barrier and nonbarrier markets. Some of the -- of our analysts call these supply constrained versus nonconstrained markets. I've got to tell you, in the next five years plus, all markets are going to be supply constrained. So I think the idea of being in the growth markets where jobs are going to come back first, and the idea that the -- that the markets -- that all markets are going to be supply constrained, is a pretty good position to be.

So let me talk a little bit about-- just give you an example of what's happened in the markets, and use Houston as an example. From 10 years after the the big Houston bust in the early '80s there were nine properties built per year between 1985 and 1995, for a total of 2600 units a year. Between 2000-- in the last 10 years, there's been 40 properties built a year, for an average of 12,000 units. The projections going forward is somewhere back to the 80s through '90s number of about 10 to 11 properties a year. I actually think that's going to be lower than that. In the next five years, Houston is supposed to add 500,000 new people. In the next 10 years, a million people.

So you have a very interesting situation setting up where you have supply constraints because of the financial markets, and the equity markets, the merchant builder market is basically dead, and will be dead for a long time. And what's going to happen is that when growth comes back to these markets, you're going to have a housing shortage. Now, the key ultimate issue is, when does that happen? What's going to happen in 2010, 2011. Obviously none of us know that. We're positioned well for the future, and we like where we are, and we're going to continue to be in these markets.

I want to take this opportunity to thank all of the Camden people in the field and the corporate office who have been doing a great job managing expenses and managing through this complicated time. They provide living excellence to our residents and customers. At this time would like to turn the came over to Keith Oden.

Thanks, Ric. My one word description for this quarter would be uneventful, which in this environment is probably a good thing.We hit the mid-point of our FFO guidance of $0.70 a share for the quarter and we are reconfirming that we still expect to achieve the middle point of our original same-store NOI guidance of down 6% as we wrap up 2009. There were no material unknown pluses or minuses for the quarter. So, in a word, uneventful.

As you would expect from our quarterly results, and reconfirmed guidance little has happened since our last call that would charge our view of the multifamily operating environments. As such my prepared remarks today will be brief to allow more time for Q&A to address your specific questions. At the end of the third quarter we were right in line with plan for our overall portfolio. Four of our six operating regions were actually above plan and two were below plan. Or Texas markets, DC metro, Florida, Denver and Atlanta, are holding on to better than planned results and those are being offset by worse than planned results in Phoenix, Las Vegas, and California. Traffic levels actually improved relative to the second quarter with a quarter over quarter decline of 5% in the third quarter versus a 10% decline in the second quarter. Our in-place rents continue to trend downward.

Year to date, we are down roughly 3%, reflecting the continued pressure on new lease rates, which are roughly 7% below in place rents. Renewals continue to be a relative bright spot. Our renewal leases remain higher than in place rents by 3% and higher than new leases by roughly 9%. In this respect, our aggressive lease renewal program has certainly paid off. Not only are we renewing leases at higher rates than new leases, we are renewing a higher percentage than in previous years. Year-to-date, our turnover rate is down six percentage points from last year. Our occupancy rate fell 0.5% from the second to 93.7%.

We continue to adjust our revenue management systems occupancy targets to balance occupancy and rate trade-offs in these most volatile markets. Going into the downturn, our occupation targets have been set at 96%. Roughly 1% above our desired occupancy level. As we discussed last quarter, we had adjusted the target downward to combat market pressures. At the beginning of the third quarter, the targets are were actually set at about 94% on average. So it's not surprising that our occupancy rates dropped in the quarter. Since quarter end, we have tweaked the occupancy targets back up closer to the 95% on average range.

Obviously we would prefer to operate closer to our optimal level of 95%, but with many of ouch private market competitors in a lease at any cost mode, there's a point beyond which chasing occupancy through rate reductions is counter productive. Same store results for the quarter were basically in line with our expectations. Revenues fell 4.5% on average, with the weakest results in Las Vegas, Charlotte, and Phoenix. DC metro and Houston showed relative strength with very slight decreases. Off setting the revenue decline expenses fell by 0.6% in the quarter. The savings were primarily from lower property taxes, utility costs, and across the board expense control discipline by our on site teams. We expect the expense savings to continue into the fourth quarter, which is reflected in our lower expense guidance for the full year.

It looks as if the first time home purchase credit may have bitten us a little bit in the third quarter as moveouts to buy homes moved up to 13.8% from our all time low of 10.9% in the first quarter. This is still well below the long term average of 17%, but is certainly something that bears watching. Our residence financial condition appears to have improved slightly in the quarter, as the percentage of skips and evictions declined again and remain well below their peak that we saw in the fourth quarter of last year. Also, our bad debt expense remained below plan for the year at less than 0.8%.

Before I turn the call over to Dennis, I want to acknowledge the incredible job our on-site teams are doing, offer though the operating environment in most of our markets is far tougher than anything we modeled and developing the budgets for this year, the goal of achieving our original same store budgets for the year is still well within reach. You've certainly done a great job of coping with the chaos, the marathon that has been 2009 is almost over. Let's finish strong, and we'll see you soon. At this time, I'm turn the call over to Dennis Steen, our Chief Financial Officer.

Thanks, Keith. My comments this in the morning on our quarterly results will be brief as our third quarter of 2009 operating performance was in line with our exceptions, and we had no unusual or nonrecurring transactions in the quarter. We reported funds for operations for the third quarter of 2009 of $48.1 million or $0.70 per diluted share in line with the mid-point of our prior quarterly guidance range of $0.67 to $0.73 per share, and $0.01 per share above First Call consensus of $0.69 per share..

All components of income and expense for the third quarter were generally in line with our expectations. We continue to make significant progress towards the completion and stabilization of our current development pipeline. For our on balance sheet development pipeline, we reached stabilization at three communities during the quarter. Camden Potomac Yard and Camden Summerfield in metro DC , and Camden Whispering Oaks in Houston, Texas. This leaves only three communities in our remaining on balance sheet pipeline all of which are currently in lease up.

In Orange Court in Orlando, and Camden Dulles Station in Oak Hill, Virginia have completed construction and are 93% and 81% leased respectively, and the third community, Camden Travis Street in Houston, opened in October, and is expected to stabilize in the third quarter of 2010. For our nonconsolidated joint venture development pipeline, we reached stabilization at Camden College Park in College Park, Maryland during the third quarter. This leaves only three joint venture communities under development. Two of these communities, Camden Amber Oaks in Austin and Braeswood Place in Houston have completed construction, and are 74% and 52% leased respectively. The third community, Belle Meade in Houston opened in September, and is currently 20% leased and expected to stabilize in the third quarter of 2010. With only Camden Travis Street and Belle Meade still under construction, we have less than $10 million in anticipated funding requirements for our active development projects, all of which will be funded with existing construction loans.

Moving on to capital activities and our liquidity position. During the first half of 2009, we made significant progress in strengthening our balance sheet by raising $692 million in new debt and equity capital. Using the proceeds to pay down all balances outstanding on our $600 million line of credit, and to repurchase near-term debt maturity. We began the third quarter of 2009 with $158 million in cash and short term investments on our balance sheet. In July, we used $82 million of this cash to retire our 4.74% senior unsecured notes which matured on July 15th. We had no other maturities or no new financing transactions during the third quarter.

As a result, at September 30th, we had approximately $82 million in cash and short term investments on our balance sheet. No remaining debt maturities for the balance of 2009, no significant funding requirements for development activity and full availability under our $600 million line of credit. Additionally debt maturities for 2010 totaled approximately $137 million, all of which can be funded with our existing liquidity. One other item of note.

In October, we exercised our option to extend the maturity date of our line of credit for one additional year. Our $600 million line of credit now matures in January of 2011. We are currently in dialogue with our lenders regarding a new line of credit, and will likely commence a formal process in early 2010. Based on our discussions, we believe that if we were to negotiate a new line of credit today, our borrowing rates would be approximately 225 to 275 basis points over LIBOR. We are encouraged to hear from our lenders that the credit environment continues to improve every day. As we move close to a formal process, we will provide more details.

Moving on to earnings guidance. We expect fourth quarter 2009 FFO of $0.69 to $0.73 per diluted share resulted in full year 2009 FFO of $2.97 to $3.01 per share with a mid-point of $2.99 per share. The mid-point of our full year guidance represents a $0.01 per share improvement from the mid-point of our prior full year guidance of $2.98 per share. The $0.01 per share improvement is due to a reduction in property operating expenses due to lower than anticipated real estate tax expense resulting primarily from successful process of real estate values and lower than anticipated tax rates for our Florida and Texas communities. We have also updated our full year same property guidance. We have narrowed our projected 2009 full year same property NOI decline range to 5.5 to 6.5% down. Keeping the mid-point at a decline of 6% which was the mid-point of our original guidance we issued in the first quarter of 2009.

Our revised NOI guidance range is based upon full year 2009 same property revenue declines between 2.75% and 3.25%, and same property expense growth now between 1.75% and 2.25%. At the mid-point of 2.0%, our expected same property expense growth for 2009 is 3.6% below our original guidance we issued in the first quarter of 2009, this decline is primarily due to lower than anticipated real estate tax expense resulting from successful protest of real estate value, and lower than anticipated tax rates for our Florida and Texas communities. Favorable variances and utility expense due to lower natural gas and electricity rates, and our communities continued focus on controlling costs and reducing discretionary spending.

As I previously mentioned, for the fourth quarter of 2009, we expect projected FFO per diluted share within the range of $0.69 to $0.73 per diluted share. The mid-point of $0.71 per share represents a $0.01 per share improvement from the third quarter of 2009. The $0.01 per share improvement is primarily due to two items. First, a $0.07 per share projected increase in FFO due to lower property operating expenses, resulting from our expected seasonal decline in utility and repair and maintenance expense in the cooler months of the fourth quarter, the lower real estate tax expense related to our Texas and Florida community and lower incentive compensation costs due to the expected seasonal decline in leasing activity in the fourth quarter. The $0.07 increase in being offset by a $0.06 per share projected decrease in FFO due to lower property revenues due to our expected seasonal decline in occupancy in the fourth quarter, and the continued repricing of new rents to market rates across our portfolio. Projected non property income and all categories of other expenses including interest expense for the fourth quarter will be comparable to third quarter amounts. At this time I'll open the call up to

(Operator Instructions) Our first question comes from Dave Bragg of ISI.

Just wanted to get your thoughts on cap rates. I believe last quarter, Keith, you spoke about potential to see a market clearing price, especially in the Phoenixes and Vegases of the world over the next few quarters. Since then, we've seen some data points out of some stronger markets, like DC, that have been, perhaps, lower than expected. Is there a widening of the spread that's occurring between the stressed and nonstressed markets?

Dave, this is Ric. I don't think so. I think what's happening is, over the last 60 days, cap rates have tightened, and I think there are two things driving that. One is there's a -- there is a lack of product in the market. The average multifamily, this in our markets, average multifamily transaction volume over the last four years before the recession was about $95 billion, and this year so far it's been about $6 billion a transaction, so very limited supply of product.

That has been sort of offset by a fairly robust demand for product that is coming out of what we call country club money and maybe private REITs and those sort of groups. Those people have been driven by yield, and I think that what's happened is, is that most sort of decent properties have had anywhere from 20 to 30 bids, and when you look at the economics of buying between a -- say a 6 and a 7 cap rate and financing it at a 5.25 or 5.50% Freddy or Fanny Freddy rate, the equity return is pretty robust. At the high end of that range you're getting 9% return on equity or higher, and at the low end of the range, you're getting probably 7, 7.5%.

So given that a lot of money markets are paying .4%, I know in our $82 million in cash, we're getting a robust .4%. So, that has driven a lot of capital into the multifamily market, and I think with the back drop of very good fundamentals from a supply and demand perspective, looking out into 11, 12, and 13. So with a limited supply and the economics I went through, it doesn't surprise me that cap rates are compressed, and I don't think that there's a wide gap between -- you might -- I have heard of some sub-six cap rates in really high quality properties in DC In Dallas, we have sub-six cap rates, as well as in uptown.

If you go into the more secondary markets and into the hinterlands, you can get 7s, and 7.5s, 8 You can also buy really, really horrible product that I don't think any of the public REITs ever want to buy or own at higher than that. The so there is a differentiation in the product side, in locational side but high quality products in any major markets are pretty tight, and there's not a big differentiation between DC and Phoenix, for example, and it's Scottsdale type really first class product, it's probably going to trade close to six.

Got it. That's helpful Just one follow up on that. Given the lack of supply in the market now, are you seeing more product being brought to market currently to respond to that demand? And could you just update us on potential opportunities that you see out there in the fund? Thanks.

Well, I think as the pension funds do more mark to markets and get their asset values right on their books, you're going to start seeing more properties come to market, I would think. I think it just takes sort of time for the private market to wake up to the rationale that they had a margin call, and they've got to pay it, and that's going to take some time, and it may be middle of next year before you start getting a lot of that come out.

I think part of the issue that keeps a lot of sort of let's say new development product out of the market, that is in sort of short term hands, is that the banks are just not pushing borrowers to refinance deals that may be out of balance from their loan perspective. They sort of have the installment plan, which is push it out as far as you can, and why take a borrower down when there's no really good market today. So there's a lot of that going on. I suspect that in, having lots of conversations with borrowers and with lenders, that as the -- as the recovery unfolds, and as banking profits increase, it will be a regulatory driven thing, and as the regulators start pushing the banks to push some of this product out, it will start coming out, and I think it takes two or three or four quarters of strong bankering to push them to the point where they will actually release inventory.

There's a lot of companies that need to be restructured and banks that need to move product off their books. I've got to believe that the $600 billion of multifamily debt that comes due in the next three years, that there will be opportunity. I think that the opportunity is not going to be fire sale opportunity, it's going to be solid cash flow, solid properties, a positive spread to your underlying debt cost, and, decent cash on cash returns to your equity in the 7 to 8%, but it's not going to be the market like it was in the RTC days where you could buy 10 or 11% cash on cash return. That's not going to happen.

Got it. Thank you.

Okay

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

Good afternoon, guys.

Hi, Rob.

Keith, could you talk a little about the strategy that you guys have with respect to the second time a lease will renew during the downturn? I mean, you guys have been successful in sort of renewing leases at sort of flattish rates, but when you're going to do that the first time, and it's a 50 to 70 a month gap that somebody might save by moving to another community, that's not a lot of money, and it's the cost of moving and changing your cable and all of that other stuff is too big of a hassle for that, but once you get to the second time, and that is starts to snowball, and you have two times mark to market, what are you seeing on the early second time renewals and you guys proactively taking leases down slightly, rather than trying to renew them a second time at flat?

Yes, Rob, actually in five to of our markets, which would be Phoenix, Las Vegas, Tampa, Orlando and Northern Virginia, we are, in most cases, in the third renewal. Keep in mind, we started -- we started seeing the -- feeling the effects of the housing debacle really in the second quarter of '07, so really in '07 we've now been through '08 and '09. The strategy is really no different. It's being incredibly proactive on renewals. Get out way ahead of it. We contact our residents 90 to 120 days before their lease expires. We have a very detail specific program for handling our renewals. We've adjusted our commission rates to reflect the importance of renewals with our on-site staff. So there's a whole lot of things around that.

The question is not really the time or the number of rolls that you have, it's the absolute gap between what new leases are and what your renewals are, and I said on our last conference call that in our world, with average leases in the low 900s, and that number got to be greater than 10%, it would cause a fair amount of concern, because we have obviously in a revenue management world there's great visibility from our imbedded rental base and our customers, as to what current market rents are on not just theoretical alternative apartments, but actual alternative apartments, so it's something that we are concerned about, but so far so good.

Our renewal rate, if you look at where we're renewing leases, we're only down very slightly from the beginning of the year, whereas our new lease rates, we're down 7, 8% from where we were at the beginning of the year. So it is something that we are aware of, but so far so good, and the key is really just in execution, and knowing that within a certain band, our residents are being incredibly well taken care of they have a great customer experience, and right now they're still minus and ex the cost of all of the moving and headaches associated with it it, it still makes economic sense for them to renew their lease.

And as a follow-up, Ric, is there anything on your books that you guys could see starting developmentwise in the next six or so months? And what's the key one or two things that you're looking at to judge whether or not you would be starting anything in the early part of 2010?

Well, I would say just generally it's not going to be in the early part of 2010, or this quarter. The -- what we do is we will continue to monitor our development deals. And when I say monitor, we'll continue to work on them, making sure that our entitlements continue to be in place, and we actually have been negotiating -- negotiating incentives from the cities who want to see these developments built, and we've been able to negotiate tax incentives and other things to actually improve the yields during this sort of hiatus in development, but what we will be doing, and we do this generally every quarter, but lately it's been pretty much every six months, we will be evaluating between now and the end of the year all of our development properties, looking at existing rents, redoing the construction numbers, and trying to decide when they make sense to build.

The -- I think fundamentally we have great sites. The development world is going to be very, very difficult to get started again, and the public REITs are really the only game in town in terms of being able to put new supply into the market. So what's going to drive us to do development in the future is going to be, number one, are the going in yields reasonable yields relative to what we can buy properties for. We have to have a premium to that. There's no question about that.

And then what in the economy is going to give us more confidence that we do have a a recovery in that when you project out into 2012 and 13, that we're going to have a robust multifamily business, and I think what that is going to to be, just watching the economy unfold, and seeing what happens to job growth, and what happens to rental rates, and we'll monitor those situations before we -- before we start anything.

Thanks.

The next question comes from J Jay Habermann at Goldman Sachs.

Hi, everyone. Question, I guess, going back to occupancy, I know you mentioned changing the target in your lease optimization model, but some markets did see a dip I guess quarter over quarter. So can you give us some sense-- are you losing traction there? Do you think as you look out to 2010, that rate is going to become -- you're going to see more pressure on rate as competition intensifies as you mentioned?

Well, Jay, in every market, it's a balancing act, and clearly in a market like Las Vegas, where we saw the -- many of our competitors, just -- you drive around now and see two months free signs fairly commonly. Our private market third-party managed absentee ownership competitors which is still the preponderance of the people we compete with, have fairly nonexistent discipline when it comes to pricing relative to occupancy, and will do almost anything to maintain a -- try to maintain a 94, 95% occupied condition, because that's the one thing that everyone, no matter where you sit and evaluate data, it's the one thing you can immediately understand and get your hands around.

So there's a great temptation by our private market competitors to use price as the only mechanism for balancing -- for maintaining their occupancy. Well, there's a point at which, it doesn't matter what revenue management system you're using, or none at all, there's a point at which chasing market share, if it means that you're absolutely embedding rental rates that you don't think make any sense, 12, 15 months out, it just doesn't make any sense to do. So in those markets, for example in Las Vegas, where we -- this quarter saw some really silly pricing strategies, at least from our perspective, from our competitors, we're just not going to do that.

And part of it is, you have to adjust the targets in the model, so that the model hates vacancy, the number one weighted factor in the model, but, at the same time, you have to use that model as a tool. And it's a great guide post for what's going on in the marketplace, but on top of all of that is just good operating discretion. And we are currently -- I mean, in markets like Las Vegas, we overrode roughly 25% of all price recommendations in the quarter, because the model, again, was reacting to competitors occupancy and their pricing that is -- it's the most visible thing to get your hands on.

So going into next year, I think, as we continue to see lease rates roll down, which we have seen all this year, I think that we've been pretty clear about we think that 2010, at least the early part of it is going to be certainly a continuation of the projectory that we've been on to this point, and we will continue to have to find that balance point. We are in the fourth quarter historically between third and fourth quarter, we experience about a 6/10 of a percent decline in occupancy just for seasonal factors. It's been that way for 15 years, so certainly wouldn't be a surprised to see our occupancy tick down from current levels. We certainly think that we'll be able to maintain, which, 93.8, maybe it takes down to the low 93s. We're in the low-to-mid 93s as we sit here today, so wouldn't shock no see see that kind of number for the fourth quarter of next year, and then going into 2010 as we put our plans together, we're going to be mindful of the fact that we're still in some really challenged markets, and is we're going to continue to try to find that balance points that maximizes our revenues.

That's helpful. Can you give us a sense, too, I know speaking of WISO, can you give us a sense of which of your markets you expect to be strongest perhaps in job growth over the next 12 to 18 month. And also maybe some comments just on Dallas this most recent quarter.

In terms of job growth for 2010?

Yes, in which markets do you think you're going to see the most job growth over the next 12 to 18 months.

I think for the next nine months we're talking about which -- probably for the next six months into 2010, we're talking a bit of which ones will have the least negative number. then last monthly number was, what, 263 down? I think there are a few brave souls out there that are saying that employment could be slightly positive in the first quarter, but I think those are few and far between. Most consensus views that I have looked at say that, sometime in the second quarter, possibly, we get the first positive print upward on job growth.

It takes a little while for that to work its way through into our -- into our metric, so I think latter part of '10, you could start to so positive job growth. And our point on WISO really not -- it doesn't presuppose a time certain for that to happen. Our point is simply that, you're going to have to -- everybody has to have their own view of when job growth occurs. Our point is simply that when it does occur, it is likely to occur disproportionately in our 15 markets.

The way I would put it is that when you look at some of the market analysts out there like [Ron Whitten] and others who project revenue growth and base that on employment growth and a moderate recovery and not a major V-shape up, up and away type of scenario, the markets on that list would be Phoenix, Orlando, Houston, Dallas, Austin. Tampa is probably behind a little bit on that, but it's the -- sort of the usual suspects on growth, and it's all about -- about what their economy is made up of. There's a lot of people who go, well yes, but all of those markets grew because of the housing bubble. If you take an Orlando, for example, Orlando, in Orlando the total construction work force in Orlando is 6.7% of the work force. In Florida, it's 6.6%.

You look at Orlando's job losses, through the first half of the year, they lost roughly 18% of their construction jobs. But the construction jobs are not what's driving Orlando's market. Disney has 62,000 employees there. You add all of the restaurants, Wal-Mart, and you've got-- those are the largest employers, and it's a leisure business, and they have defense, and they have healthcare, and a lot of other good things that ultimately when the economy comes back, people want to live in Orlando. And they have a low -- low tax base, they have no state Texas tax. All of these things that have driven these markets for the last 20 years, are going to drive them in the future. It's not going to be new to house construction or apartment construction, it's going to be just good ol' job growth as relates to services and business, expansion. Now, if we all believe that that's never going to happen in our lifetimes again, then we better do something real different than try to make investments, obviously.

The second part of your question was, was -- was Dallas in the quarter. Dallas, on our projections, is currently slated to see, in 2009, about 57,000 employment loss, and a lot of that is back-end loaded, the first two quarters actually weren't that bad in Dallas so we know we're seeing the job loss bug really hit Dallas for the first time in any meaningful way. And the second part of that is, is that we've got multifamily completions in Dallas of roughly 15,000 apartments in 2009, which is roughly the same number of completions in Houston. So those are the two Dallas-Houston, probably the last two to -- last two to markets standing where merchant builders could get deals financed and get them into the pipeline. So we're -- we're working through supply in both of those markets at a time when the job loss bug is really finally caught up to the Texas markets.

Just on that point quickly, I had lunch with Trammell Crowe partner in Houston yesterday, and he started 22 projects in Houston and Dallas in the last 18 months, and actually maybe eight or nine months ago from that, and today he will start zero projects for the foreseeable future, he thinks maybe five years before they get back to building anything. And they're in total asset management mode, and sort of restructure mode. So that -- that merchant builder, just one merchant builder, accounted for 22 projects in these markets, and they are totally out of the market, and they won't be in the market anytime soon.

And just a strategy question for Rick. I mean, just do that to that point, do go effect it the makes sense too raise capital today in anticipation of that distress that you heightened?

We already did. We raised capital in May, sold common stock to position. We also have pretty much an unfunded, billion-dollar acquisition fund with our institutional partners. So, I don't think you -- with $82 million sitting on your balance sheet today, to raise more capital and put it in cash at such a huge negative spread to to the cost of funds, doesn't make a lot of sense to me. But I tell you that if an opportunity came along, and we had the ability to raise funds for specific deal, then we would absolutely be doing that.

Okay. Thank you.

Okay

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

Yes, hi, good morning.

Alex.

Just want to go to your condo background. What's your take on the course trade. What do you think the returns are like there?

Well, I guess the chorus trade, when you think about returns, first of all, you have to think about a non-interest 50% nonrecourse, non-interest-bearing loan from the government. That's pretty value added,oriented right? Yes. If I could could go to the bank and get a $2.5 billion nonrecourse, non-interest-bearing loan for seven years, I might have a pretty good shot of making a good return. I think the chorus deal was and awesome trade for Starwood, and I think their going to make a lot of money with it. And, I think the government is smart in what they're doing, they're a 60% partner with Starwood, so Starwood only put in $550 million, and then he government put 60% more, which I guess would equate to about a billion or maybe 6 or $700 million-- so they're not in a dump mode at all, they're in a hold, let's do this rationally, let's make sure that they don't do what the RTC did.

If you think about what the government did in the RTC days, there was no capital, and they had a no reserve auction with very few people. And what that leads to is massive price reductions and massive dislocation, and there was billions of dollars made in that time frame as a result of the government action. Today, I think the government is really smart doing that, because you're not going to have a lot of chorus assets being thrown into the market at really low prices. What their total returns will be will clearly depend upon how the recovery, comes out, and how -- how well they do in terms of managing that asset base, but I've got believe with no carrying cost to your debt, and having basically 50% free money, they had to do to really well.

Well, hopefully you guys condition get similar financing on some of your future deals.

That would be nice.

Along those lines, Dennis, what are your thoughts on where -- on where unsecured is for ten year for you guys, and then also where you think you would find convert pricing.

We haven't looked at convert pricings , so I can't give you an update on that one, but from a ten year, we are get ting indications we would price somewhere about 300 over. So for a 10-year all in would be about 6.5% and for a five-year based on the treasury, about 5.5%, updating pricing on the converts, I don't want to give

Thank you.

The next question comes from David Toti of Citigroup

Hi everybody, MIchael is with me as well. Ric a question from you relative to some of the comments you made earlier about move outs to housing and It looks like the government stimulus could be extended. What's your view of the impact on that program that seems to be mounting across the board in terms of being a negative force in the multifamily space and what's your view to 2010 as to the momentum of that effort by the government.

Yes, this is Keith. Think that the tick-up we saw if you look at the progression of moveouts to buy houses from the first quarter, it was 10.9% went to 12.6% in the second quarter, we were 13.8 %this quarter. While that's an interesting tickup our long term average moveouts to buy homes is in the 17% range At the peak, it was 24%. So if you put that in perspective over the last 15 years, this is still really -- we're still getting a lift at the margins from the current level of moveouts to buy homes.

Now, there's a lot of other crosswinds out there that we all know about, but if you just isolate that one, it really is not a big part of the picture. The other thing that's kind of interest is when you look at it, if you look at it at the market level, three of the lowest moveout to purchase home data points that we got in the third quarter were in Florida, Las Vegas, and California. Those are the three lowest. That's 10.9% in Florida, 11.9% in Vegas, 8.4% in California.

So if you think about -- it just doesn't correlate very well with the anecdotal evidence of there's tons of all these to houses in the foreclosure pipeline, and that's what's driving people to move out and buy homes. The tick-up in the real big spikes that we saw in the moveouts to buy homes, were in markets that really have not -- would be on no one's list of really trouble from a housing inventory standpoint. Denver was at 24.7%, Raleigh, North Carolina was at 23%. So it's just -- it's just -- it's counter intuitive, butt it's consistent with what we've been saying all along, that the story in these markets of our performance and the rental declines is about employment, and really not about, this sort of shadow housing supply that everybody seems to fret so much about. I still think it's an employment question.

Are you guys doing anything to combat aggressive homebuilders and brokers that are targeting your tenants specifically? There's been lot of the reports about increasing efforts on some of the larger apartment complexes around the country.

No, you really can't do that. And when you get down to it, I'll just ad to the issue here, into the discussion about home ownership. When you get down to it, people have to have a down payment now. They have to have credit.

Even with the $8,000, first-time credit they were giving people, they actually have to have some credit to get the debt, and there's a lot of people that are over leveraged that shouldn't be buying homes, and are buying homes, that bought homes last time, they're going to be renters. So we're not worried about all of a sudden the people going out and saying oh, my God -- have to go out and buy a house, because I'm going to make a gazillion dollars on houses again Consumer psychology takes a long time to change and I don't think, if you did consumer studies on whether people thought it was great to buy a house now, they might think so, but it's going to take years to change that mentality again.

Then my last question is just, could you provide a little color on what's happening in Phoenix. (inaudible) to mention that. Just in terms of on the ground. It seems to chronically weak.

Phoenix continues to be one of our most challenged markets. It's below plan. Year-over-year, we're still -- it's still near the bottom of the pack in terms of NOI growth, down 13.4% for the year-to-date. And it's -- in our portfolio, the worst performing market.

So not only the worst performing of all of our 15, it's the worst performing to plan, and any way you look at it, Phoenix is a real challenged scenario for us, but again if you go back to what's the underlying cause of what's going on in Phoenix, we have 2009 job losses forecast for this year alone at 116,000 jobs lost in Phoenix. In 2008 that number was at the mid-point of our three data sources was 90,000.

So you're talking about, almost 200,000 jobs lost in Phoenix in a two-year time frame, and,, again, in our world, if you -- if I didn't know about anything else going on with housing or shadow supply, or any of these other cross winds, that kind of job loss in a market like Phoenix would be sufficient for me to say, yes, I get it, we're going to be down 13, 14% NOI growth over the course of our -- if you go back and pick up last year, close to 20% down NOI growth in the Phoenix market. So that's going to continue to be a challenge, and it will be until the job and the employment situation turns around nationally in particular in our markets.

Thank you.

The key thing, though, I would just ad, in Ron Witten's analysis for reference growth in 2011, Phoenix is the number one market in America with revenue growth of 10.2%. Not our numbers, his numbers. Go ahead.

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

Rich here with Ron Witten.

Hey, Ron, how are you? I'll take your question first.

Of course you will. Just kidding with you, of course. What are the chances, and would you be willing, you have this fund, to never fully put the entire buying power to work if this environment?

If -- given that we're in 20% of the fund, and we -- it's our money, too, we'll invest the fund based on what we -- what we want to invest our money in, and if we don't think that the investment environment is reasonable, we won't invest the money. So as you see it right now, what were the prospects of putting the entire fund to work? I think they're very good. I think that based on the conversations that we're having with a lot of different folks, there's a lot of, sort of constipation the market right now, but I think they're going to get some religion next year and we're going to start having more transaction volume and be able to to, place our capital at reasonable returns.

Okay.

Rich, the good news for our institutional partner and this part of our conversations when we were putting the fund together, and that whether we put that capital to work or not today, tomorrow, next -- a year from now, the fees associated with putting that capital to work are not a meaningful part of our world. Whereas with most private market sponsors, it is their world.

Okay.

So just a little bit different perspective.

And last quick question, so you can fit another call or two in. What are you seeing in terms of IRRs on asset pricing today? And what percentage of that value creation is cash flow, and what percentage is terminal value?

Well, when we look at IRRs today, it's probably going to be 2/3 cash flow, or maybe more, and then the rest price appreciation. When we're doing our analysis, if you look at -- say you buy it at a 6.5 cap rate, and finance it with 5.5% Fannie Mae debt, you put in a growth rate above trend in 2011, 12, and 13, go back to a sort of three percent trend after that, seven year hold with a 50 BIP increase in the exit cap rate gets you about a 15 IRR, 15.5 IRR.

You said 50 basis points?

Yes, Increase terminal 50.

All right. Thank you.

The next question comes from [Michelle Coe at Bank of America Merrill Lynch.]

Hi, I was just wondering, some of your competitors are saying that they're seeing the rental rate decline, or it's getting better in certain markets. Are you seeing that in any of your markets?

Yes, Europe, basically DC metro was flat,, and they're outperforming plan. Houston and Dallas have kind of hung in there around flat. We had rental growth in those two markets up until this quarter. So there are signs out there that some of the markets are stabilizing, but, , overall, in a portfolio like ours, when you see the -- for the quarter being down on revenues of 1.3% sequentially, tells you that most of our rents are still rolling down. And I think that -- I don't know that the folks that I have talked to, or heard -- had conversations with, I think that's pretty consistent with their experience. I think they're -- some of the recent revisions in terms of guidance, have actually guided to more rental rate declines in some of our competitors than what they would have seen at the beginning of the year, which tell me that they may be about to enter the worst part, but we've been dealing with this for really two and a half

Okay. And in terms of the roll down, how long do you think it would take, you know, for those renewals to role down to the new lease rents in ask that the next six to nine months, or could you give us a sense of the timing for that?

If you look at our in-place rents, they have declined every month since -- throughout this year. so through nine months, even though they've were relatively small declines we've had a decline if every month, which tells me that at least for the next nine month if you stopped the world today, and rents were flat or up, you're still going to be dealing with not being able significantly raise your NOI or your rental portion in the next nine months. So I then there's a tail associated with these lower rents that we're going to live with for at least some part -- through the mid-le of 2010.

But I would say also if you take our -- our strategy of letting our occupancies fall and keeping our rental rates up, when the market turns, we're not going to have to raise rent to increase revenues. We'll just have to keep street rents at where they roll down to, make new leases at that level, and increase our occupancy, which will drive our revenues before our competitors, who are at 95%, have to raised their rents. So that's, I think, a really interesting nuance when people get all stressed out about lower occupancy, but we're driving our occupancy low to try to maintain our revenue. I would much rather have higher revenue at lower levels than lower revenue at higher occupancy levels, because it will allow us to really increase our revenues quicker than our competitors without raising rents.

Okay. That's helpful. Also, can you give us a sense for what you anticipate in terms of, are there going to be further expense cuts in 2010, or do you think, you would have probably anniversaried some of the expense cuts by maybe mid-10, or somewhere thereabouts?

Yeah, think the biggest opportunity that we're going to have in 2010 is in property taxes for further downward revisions on valuations. We've gotten some benefit of that this year, but most of the bulk of our revaluations happen in 2010. Our markets happen to be very property-tax dependent for the revenue source. Property taxes make up about 27% of our total expenses, which would -- my guess is that at the very high end of the multifamily sector because of the markets in which we operate, so the extent we get property tax relief that everybody is going to get some of, we'll probably benefit a little bit more from that. I think that's the biggest single area for opportunity for us in 2010.

We're going to take two more questions to be -- make sure that we stay on our promised time frame, and each question needs to be a one-part question, because we have two more people the queue. So no three-part questions. Next?

The next question comes from Michael Salinsky at RBC Capital Markets

Just had a quick question about development. Given that you -- you're not expecting to deliver any new projects for some time, and you've been working on a number of them in the predevelopment, are there any ones where you're so far along that you have to move forward or stop capitalizing interest at this point?

Well, the evaluation of stopping the capitalized interest really is a function of deciding whether we're going to continue to work on the development, and also where the cost is relative to -- to the land position. So we will evaluate all of those ongoing developments in the fourth quarter, and to the extent that we abandon a development, we would have to mark that land to market and stop capitalizing. Last year, we, of course, did that in the fourth quarter. I think we had a write down of, like, $51 million plus or minus. We haven't made those evaluations at this point, but each quarter we look at it, and make sure that we are analyzing whether the developments are reasonable to go forward with and if there are impairments.

Okay. Thank you.

Yes.

At this time, we show no further questions.

Great. Well, thanks a lot, we appreciate your time, and we can get on the other call now, and we will talk to you again at the end of the quarter.

Thank you for attending. You may now disconnect. This conference has concluded.