Camden Property Trust (CPT) 2010 Q2 法說會逐字稿

Hello and welcome toll the Camden Property Trust second quarter 2010 conference call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Kim Callahan. Please go ahead. I'm sorry, Ms. Callahan, you may go ahead now.

Good morning and thank you for joining Camden's second quarter 2010 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 second quarter 2010 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 will 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. Our call today is scheduled for one hour as there is another multi-family Company hosting a call at 1 PM Eastern. As a result, we ask that you limit your questions to two with one follow-up and rejoin the queue if you have additional questions. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or e-mail after the call concludes. At this time I'll turn the call over to Ric Campo.

Good morning, as Tom Petty pointed out in our preconference music, the waiting is the hardest part. The waiting for sequential revenue growth and overall improved conditions in department fundamentals in all of our markets is over. The strength of the apartment fundamentals during the great recession had surprised us. We expected market conditions to be much more difficult and to last longer than they have. This strength has led to our increased earnings guidance and a more positive outlook for the rest of 2010.

Apartment fundamentals have been supported by low supply, a significant decline in home ownership rates and eco boom demand increasing from unbundling. These positive macro conditions will continue to be supportive to our business for quite a while. Supply is at post World War II lows and it's not going to rebound quickly as merchant builders restructure and banks require real credit support for new loans. The home ownership rate continues to fall. Some housing economists believe that the rate will drop below 64% to its long-term average adding an additional 3.5 million to 4 million more households to rental demand.

The unbundling of hunkered down 20 to 30-year-olds has just begun and has a long way to go. In the last half of 2008, nearly 45% of our residents were under 30. At the end of 2009, just over 39% of our residents were under 30. Where did they all go? Today that number has grown to 41%, and still has a long way to go to get back to 45%. These numbers reflect the hunkering down and the unbundling of the under 30 residents at a time when they are the fastest growing demographic cohort.

On the transaction side, since the last quarter we completed two acquisitions for our fund, one in Atlanta, one in Houston, a combined stabilized cap rate of 6.1%. Given the strong fundamentals, and expected acceleration of revenue growth as the economy starts to add jobs, we anticipate that we will start $100 million in new developments by the end of the year at initial yields of 7% or higher. And an additional $250 million of developments in the first half of 2011. We will also begin $40 million in redevelopment projects on 14 existing properties. We expect returns to be at 10% or better on that new invested capital. Our Camden teams in the field continue to provide living excellence to our residents with a new resilience and determined to drive revenues. At this point, I'll turn the call over to Keith Oden.

Thanks, Ric. Last quarter we were still fairly cautious on the outlook for 2010 operations. As the level of job growth net of census jobs was still fairly anemic. It just didn't seem like there were enough jobs on the horizon to allow for a strong recovery in the rental rates. Based on the continued weak employment in the second quarter, we were pleasantly surprised with the improvement across all of our markets. In terms of same store performance for the quarter, sequential occupancy was up in 12 of our 15 markets. Sequential revenues were up in all markets except Phoenix which is understandable based on seasonal trends and Houston which was basically flat due to continuing pressure from lease-up communities.

Our current occupancy rate is just north of 94.3% which is in line with our expectations. As we forecasted on our last call, the second quarter was indeed the inflection point for sequential NOI performance in our portfolio. Based on our revised forecast, it looks like year-over-year same store NOI will be positive in the fourth quarter.

Now that we've reached what we believe to be the trough in revenue and NOI decline for this cycle, we took a look at the peak trough declines for our same store portfolio. This cycle, which included the great recession produced a peak trough revenue decline in our portfolio of 8%, and an NOI decline of 10.5%. It lasted for six quarters and came with a total employment loss of 8.4 million jobs. By comparison, during the 2001 to 2003 downturn, our portfolio experienced a roughly 6% revenue decline and an 11% NOI decline. It lasted five quarters and we lost a total of 2.7 million jobs. In other words, despite the loss of 5.7 million more jobs than the 2001 recession, our revenue decline was only 2% worse. Given the close historical relationship between employment growth and revenue performance, this is truly remarkable.

It's further evidence of the positive counterveiling macro trends supporting multi-family housing, increased renter demand from the baby boom echo, falling home ownership rate, historically low new supply, almost offset the worst drop in employment in over 60 years. It is also evidence of just how good our fundamentals will be when employment growth finally joins the party.

Regarding new leases and renewals, the trends continue to improve. New leases in July were up 2.6% over expiring leases and renewals were up 4.8%. Traffic through the first half of the year was flat with last year, and yet was up 2% over the second quarter of the prior year. Our turnover rate continues to trend well below last year's rate of 55%, down to 50% for the first half of 2010. Move-outs to purchased homes rose to 14.3% during the second quarter, versus 12.2% in the first quarter.

Once again, we believe this is tied to the home purchase tax credit which has expired yet again. It will be interesting to see what happens in the third quarter, what the third quarter brings for this metric. New and existing home sales have dropped since the expiration of the credit and the overall home ownership rate is projected to continue falling towards the 64% level. We believe that the move-outs to purchase homes may not have seen their lowest point in this cycle.

Our residents's confidence in financial conditions seem to be on the mend as move-outs due to financial reasons or job loss fell to 8.7% from 10.7% in the first quarter. Also, it appears that we're well past the peak for skips and evictions as both categories dropped year-over-year and quarter-over-quarter. Bad debt expense for the quarter was 0.7 of rental revenues, continuing to be still well below our plan. At this point I'll turn the call over to our Chief Financial Officer, Dennis Steen.

Thanks, Keith. I'll start today with a few comments on our second quarter results. We reported funds from operations for the second quarter of 2010 of $46.7 million, or $0.66 per diluted share. Representing a $2.4 million or $0.03 per share improvement from the $0.63 per share midpoint of our prior guidance range for the second quarter of $0.61 to $0.65 per share. The better than expected performance for the second quarter was primarily due to the following three favorable items. Property net operating income exceeding our expectation by $1.8 million. Property management and general and administrative expenses were approximately $400,000 lower than anticipated, primarily due to lower legal fees and proceeds we received from a nonrecurring legal settlement.

And lastly, we recorded the gain of $236,000 on the sale of two outparcels of land totaling 1.7 acres at one of our land holdings in Houston, Texas. The $1.8 million outperformance in property net operating income for the second quarter was split between property revenues and expenses. Property revenues exceeded our forecast for both our same store and non-same store portfolios, due to better than anticipated growth in rental rates, lower than anticipated bad debt expenses, and higher realization rates on the major components of other property income.

Property expenses for the second quarter came in below our forecast, primarily due to favorable variances in property taxes due to lower than anticipated valuations and rates in several of our markets, and refunds received on prior year taxes upon successful protest, utilities due to lower electricity, trash and cable costs and salaries and benefits due to lower employee benefit expenses. Please see page 15 of our quarterly supplemental package where we have provided additional details on the components of our same property operating expense.

As you can see under the year-to-date comparisons, same property operating expense for the first six months of 2010 was essentially flat to the prior year. A year-over-year decline in property taxes due to continued success in achieving reductions in property values across many of our markets and lower salaries and benefits expense due to lower medical, workers' comp and other benefits expense have offset an increase in utilities expense, resulting primarily from expenses associated with our roll-out of our cable TV, and Valet Waste initiatives and an increase in property insurance expense primarily due to the self insured damages I mentioned last quarter related to the severe rain storms in California, Nevada, and Arizona and the winter storms that hit the East Coast in the first quarter of 2010.

Also during the second quarter, we raised $89.2 million from the sale of 1.9 million common shares at an average price of $47.24, under our after market share offering program. All proceeds were retained in cash and short-term investments, which totaled approximately $128 million at June 30. These cash balances will be used to retire $82 million of unsecured debt that matures in the third quarter of 2010. We have no scheduled debt maturities in the fourth quarter of 2010, and a very manageable $154 million in debt maturing in 2011.

We have no balances outstanding on our existing $600 million line of credit, which matures in January of 2011. In August, we expect to close on a new $500 million line of credit. The new line will have a two year term which may be extended at our option for an additional year and all in drawn pricing will be 250 basis points over LIBOR.

Moving on to earnings guidance, we have raised our 2010 full year FFO guidance range to $2.58 to $2.70 per diluted share, with a midpoint of $2.64 representing a $0.14 per share increase from the midpoint of our original guidance range for 2010 of $2.35 to $2.65 per diluted share. This $0.14 per diluted share improvement at the midpoint is primarily the result of two items. The first, a $13 million or $0.19 per share improvement in FFO, attributable to higher actual year-to-date and forecasted property NOI outperformance, partially offset by a $0.05 decline in FFO per share due to dilution resulting from shares issued under our ATM program in 2010. As we continue to be opportunistic in reducing leverage and positioning our balance sheet for potential future growth.

Of the $13 million expected improvement in property NOI, $7.7 million relates to higher revenues driven primarily by improvements in rental rates across our markets and better than expected leasing velocity and rental rates at our recently stabilized and under lease-up development communities. The remaining $5.3 million improvement in property NOI relates to lower property expenses. As property taxes are expected to be $3.7 million or 5% below our original plan and all other property expenses are expected to be $1.6 million or 1% below our original plan. We had budgeted a 1% increase in property taxes for 2010, but due to refunds received on 2009 tax protests and success in lowering property tax valuations, we are now projecting a 4% decline in property tax expense compared to the prior year. Our revised full year 2010 guidance also assumes no additional shares issued under our ATM program. G&A and property management expenses of approximately $12.2 million to $12.7 million per quarter for the remainder of 2010.

New development starts of $100 million late in the fourth quarter. And $100 million of dispositions also occurring late in the fourth quarter. Our FFO guidance for the third quarter of 2010 is $0.62 to $0.66 per diluted share. With the midpoint of $0.64 representing a $0.02 per share decline from actual second quarter of 2010 results. The $0.02 per share decline in FFO is primarily the result of the following. A $0.01 per share decline resulting from the increase in our weighted shares outstanding due to the 1.9 million shares we issued in the second quarter under our ATM program. The $89 million in proceeds from the second quarter ATM issuance will be used to retire $82 million in unsecured debt which matures throughout the third quarter.

Secondly, a $0.01 per share decline in FFO attributable to the combined impact of no expected land sale gains in the third quarter, compared to the $236,000 recorded in the second quarter, and an increase in the amortization of deferred financing costs in the third quarter due to the initiation of amortization of financing costs related to our new line of credit that we expect to close in August. And lastly, we expect no growth in FFO for the third quarter from property net operating income results as the expected growth in property revenues for the third quarter driven primarily by expected increases in rental rates is entirely offset by an increase in property expenses resulting from our normal seasonal summer increase in utilities and repair and maintenance costs. At this time, I'd like to open the call up to questions.

(Operator Instructions) Our first question comes from David at FBR Capital Markets.

Good morning, everyone or good afternoon. Can you talk a little bit about the sudden change in your view on development? It seems pretty radical compared to where you've been positioned previously and maybe talk a little about some of the regional focus for the starts.

Well, in our original guidance we had zero to $150 million in development and we had sort of back loaded in the back half of the year. I think that from pure -- sort of think about how we feel at the end of this quarter and going into the fall from the last quarter, clearly we have -- we feel better about the recovery. We feel better about the dynamics for multi-family overall and as evidenced by sequential numbers and occupancy increases and what have you. So overall, we're more constructive on our industry than we were 90 days ago because of what's been happening and when you look at the positive results without job growth and it's pretty much across the board, even in the toughest markets, they're improving as well, that's very constructive and I think when you layer on even a jobless recovery, I don't think we lose much steam from these dynamics going forward. And so to me, it makes a lot more sense to say okay, what kind of external growth opportunities could we have and is it time to start up development and to be more constructive on development and we really believe that in fact it is. Especially given the backdrop of merchant builders struggling with their leverage situations and their business models, that just don't work with their capital structures today. We think the development market is going to be pretty much over the next 18 to 24 months sort of wide open for people with capital and there aren't going to be a lot of development starts so we would rather build into it as opposed to sort of wait until everyone figures it out. In terms of regional, we think that -- this might hurt some people's heads out there, but we think we're taking a hard look at Florida and everybody knows DC is really good and we have a couple of projects in DC that we're looking at we're also looking sort of out past -- when you start thinking of middle of '11 we're starting to look at Houston and some of our more normal markets where you can build very efficiently and effectively a good, reasonable, cap rates relative to what you can buy at. Great.

Are you in any way changing the product in terms of the size, the level of finish, the price point that you're trying to target? Is it still too early to determine?

We have a lot of sort of shovel ready projects that we just shut down and we've taken a look at those projects over the last couple of years since we shut them down and really hasn't been much change in our product merchandising or marketing program in those projects and we don't anticipate any change.

Great. My last question, Ric, is -- this is kind of a big one, maybe. What's your thoughts on the long-term outcome of the GSE situation?

Long-term outcome is I think they become more like a public utility. When you look at all the discussions we've had with senior administration officials, that's sort of the model that people are looking at and what that really will entail is simply a securitization with an explicit government guarantee for a fee and I don't think that politically the government is going to just sort of shut them down and liquidate them. There's just too much political capital invested in the GSEs and too much sort of public policy that's embedded in the idea that the government is going to subsidize housing and housing including multi-family. I think there's a lot of people that are worried that multi-family gets sort of thrown out because it's only $350 billion of a $5 trillion issue and -- but we don't think that's going to happen, given the conversations we've had with Barney Frank and with Shawn Donovan and others, multi-family is an important component of housing and whatever happens to the GSEs, I think multi-family's going to be a part of it and it will continue to get favorable financing.

Great. That's helpful. Thank you.

Next question comes from Alexander Goldfarb at Sandler O'Neill.

Yes, hi, good morning.

Hi, Alex.

The Tom petty was certainly energizer.

There you go.

Just following up on David's development question, the $100 million, can you just remind us, is that the original investment amount or has that -- is that net of some of the write-downs that you took?

Depends on which ones we start, but it is likely to be projects that have shovel ready that have not been written down.

Okay. So it's the $100 million original investment. And the 7% quoted yield, that's current yield or that's with trended rents?

We look at actual costs and trend cost increases during the construction period and we look at what rents will be in the future so they're trended rents.

Okay. Okay. And then the second question is just more strategic. It's been a while since -- I didn't hear you mention California as a development market and just sort of curious, it seems like rents are still a little weak there. So want to know, is that market more attractive from an investment perspective, either acquisition or development? I have to imagine prop 13 is still well below where it was, just given the weakness out there, want to know if some of the yields make it now the spread is worth putting some capital there.

I think long-term California is a good market and we have development properties out there -- one development property out there in Hollywood that we're relooking at at this point. But we don't have a shovel ready project in California at this point. California I think has got its own dynamics and is an interesting market and one that we're committed to and that we'll be looking at both from an acquisition and development perspective in the future.

On the acquisition side, have you seen anything attractive or it's still not meeting your -- ?

California is interesting because depending on if you're talking about Northern California or Southern California, Northern California since we don't have a presence in it really hurts my head to buy oneoff in Northern California if we don't have a good base of operation toss run those properties out of. We looked at California properties and the ones we looked at so far we've been outbid on pretty dramatically and cap rates compressed dramatically there and to the extent we can find something, we will. But it's one of those kind of issues that it's more difficult -- everybody continues to I'd say -- every institutional owner still has a bias for the coast and that tends to be lower cap rates. You sort of have to balance your going in cash on cash yield with your total return over time on what you think rent growth is going to be and what have you. So we have definitely struggled in California just because we haven't been able to find transactions we like that are -- have high enough going yields.

Okay. Thank you.

Our next question comes from Dave Bragg at ISI group.

Hi. Thank you. Could you just talk a little bit more about the pace of improvement that you've seen over the recent months? I have in my notes from your first quarter call that you had renewal rent rate increases up 0.3% in April and now up 4.8% in July and if that's correct, is that driven by yield star, you adjusting yield star or what would you attribute that to?

The markets clearly have improved and it's across the board. The almost 5% increase in renewal rents is interesting and it does compare favorably to where we were in the first quarter. I think the one that is probably more telling is the new leases that were signed. Renewals are embedded and they have their own dynamic. We are pretty aggressive on our renewal program. Sometimes we're out as much as 60 to 90 days doing renewals. The new leases signed in July, number I gave you of up 2.5% I think is a little more indicative of what's going on across our platform and that's a good number. That's a solid increase portfolio-wide. So we continue to see not only in the second quarter but in the July -- at the end of the July numbers, we're still up 2.5%. So that to me is a little bit better tell on what's going on in the markets and there's no question, they're better.

Just to understand the pace of improvement there, I think from my notes from May you had a down 1.5% number in May?

That's correct.

Okay. Good. Just on to looking forward and Ric I think you mentioned that jobless recovery and the potential there. What are your thoughts on the ability to repeat this performance? I'm thinking about renewal rent increases into next summer. We do have basically no job growth over this time, what are your thoughts on the ability to push 5% again on renewals and continue to push market reps rents as well.

With the dynamics that I went through in the beginning of the call, I think there's a pretty good chance. I think what you have to look at today is defining no job growth. Okay? No job growth means a lot of different things to a lot of different people, but to us what it means is anemic job growth, not enough to drive the unemployment rate down but you're going to get 300,000 jobs, 500,000 jobs, 1 million. If you had 1 million jobs people would say that was no job growth. To me, the difference -- what I think is happening to the unbundling psychology, if you look at those numbers that I put out there on the under 30 folks, in end of 2008 and through the middle of 2009 the under 30s lost their jobs at a higher rate than people above that and the people coming out of college didn't get jobs and you're having layoff, layoff, layoff, all this news about layoffs. If you look at the layoff picture, it's very much improved. You don't have massive layoffs going on. You don't have that psychology aspect of everybody's losing their job so they're hunkering down, has pretty much passed in a lot of industries. What's happening then is people, even with the jobless recovery, they're not worried about losing their jobs and that will -- that is a positive thing for the unbundling. And we've got a long way for unbundling. If we just get to 45% of our people to be under 30, that's like 6,000 people, and 6,000 new leases that we could get. So when you think about that, I don't think you need a massive amount of jobs. What I think you need it positive psychology within that group and that comes from not worrying about losing their jobs more than it does about adding jobs. You put jobs on top of that, and then you get robust growth as opposed to just decent growth from the unbundling.

Dave, the other thing I think is a real -- there's no question that this isn't one of those macro trends that's pretty powerful is the roll-down in the home ownership rate. We're at 67 plus or minus, heading to what most people think is 64% home ownership rate and that represents a roughly $3.5 million households that still are -- still yet to be converted back to a rental status and while people are still losing their homes at pretty staggering rates, they're not losing their jobs. And people who happen to have gone through a foreclosure and lost their home who still have a job are our down the fairway renters. So you've got a long way to go on that process and most people think that that plays out sometime in the 2012-13 at the bottom. But $3 million additional people out of homes, yes, some of those are going to find their way into rental housing and some may at some point filter back into the for sale market but I don't think they will any time soon, so the preponderance of those people are going to rent, most of them, in their own residence and we know that roughly a third of those people are going to end up in multi-family. It's a pretty powerful trend that doesn't really require anything else to happen on the job front.

And just on that point, I know that there's a number of reasons why people aren't moving out to buy homes but of the various reasons that you've heard, which is the most common? Is it psychological? Is it the ability to have a down payment?

I think it's a couple of issues, but I think in our prime target market, this under 30 crowd, the bloom is off the rose. Number one, there's a lot of of people in a lot of sort of anecdotal evidence that people that bought in their early 20s got stuck. They got out of college, daddy bought them or daddy. They can't sell but the job is in New York. Mobility is the big issue. When you read articles about is it right to be a homeowner or a renter, mobility is a big issue. Mobility is the big issue for that demographic. And then the idea that if you think about what led to the excess home ownership was speculative fever, right? Gee, you were stupid if you didn't own a townhouse or a home because prices were going up so much, it was amazing. If you didn't get in on that bandwagon, you were nuts. Today I don't think people are talking about house prices going up dramatically over the next three to five years. The investment thesis, the mobility issue and then you bring in down payments, you know, you're looking at -- when you look at interest rates today, they're at like -- they're the lowest we've seen them in history, yet that's not fueling home ownership, it's not fueling people getting back into the market because that psychology has changed. I don't think that psychology is going to change overnight. It's going to take time for people to get back into it. I don't want the -- I think fundamentally our economy and our country needs positive housing market both on the for sale and the rental but that's not -- the for sale side is definitely going to take some time to get back to where people think that's the right thing to do, especially young people.

Got it. Thank you.

The next question comes from Karin Ford at KeyBanc.

Hi, good morning.

Good morning.

Another question on acquisitions. It looks like your pace for the first half of the year is a little slow relative to guidance and you raised a big slug of equity this quarter to keep your powder dry. Do you have anything under contract currently and are you looking at any big portfolios potentially in the back half of the year?

Well, we have been slow in acquisitions and we probably miscalculated that market. We thought that there were going to be more portfolios and properties coming out. Now, there actually is a lot more product out there in the marketplace but pricing obviously has gotten more robust and cap rate's compressed which really surprised us in the first quarter, the end of the first quarter. There are -- as I said, there are more properties out there to look at today and banks are starting to get more constructive in taking losses and pushing their borrowers to pay off loans that are in fact not in the right balance. We don't have anything under contract right now but we're looking at lots of different properties and we have been looking at a number of portfolios. The challenge is that some of the quality of properties out there is just not what we want.

That's helpful. Second question, just relates to the merchant builders that you discussed earlier. You said you still think you have sort of an 18 to 24 month window here without any private developers coming back into the market. But are you seeing any construction debt now being available to the private guys even at sort of very low LTV levels?

Yes, absolutely. There's construction debt. But the key to construction debt today is that it's at a lower loan to value, for sure, and the biggest difference is that the banks are looking for a real, live entity that has capital and liquidity to guarantee those loans. Just to give you a sense, I had a conversation with a merchant builder that would be in the top five merchant builders in America last week. They were working on two deals. They were doing billions. Now they're doing a couple deals and at the peak they were levered 30 to one on their guarantee entity and their guarantee entity was not cash, it was a bunch of real estate interest. It was ill liquid inpenetrable balance sheet with equity interest in real estate, levered 30 to 1. Today, the bankers are a, not going to make loans to those sort of opaque entities and number two are not going to do 30 to one. There are construction loans being done but they're lower leveraged and they're to real borrowers that have real liquidity and real capability to guarantee debt.

Thanks very much.

Next question comes from Eric Wolf at Citi.

Thanks. Most of my questions have been answered. Just looking at Phoenix and Las Vegas and Florida, they remained pretty weak on a sequential basis. What do you think is needed to drag these markets off the bottom? And do you think that the improve ment you're seeing in some of the other hard hit housing markets is sustainable?

Two things. Ultimately, even though they are I think dragging along the bottom is probably a fairly good assessment, there's still a lot of weakness in those markets but if you look at sequentially Phoenix was down a little bit, which that's not unusual in the second quarter. That's more of a seasonal phenomenon. I think the worst is over. We are still on renewals. We're still able to get decent increases in those -- in all three of those markets. I think that the -- those three markets are going to be some of the biggest beneficiaries on a percentage basis of a recovery in job growth and that's clearly what the ultimate solution is for these markets that are -- that have been the hardest hit by the housing debacle. So I think that there's a -- we'll probably drag along the bottom in those markets. I think meaningful improvement probably comes with job growth. We've seen some of the same dynamics there that we've seen in the other markets with regard to unbundling but you're just starting from a much lower base.

Got you. So essentially I mean those would be the most correlated to job growth while the rest could sustain the type of growth that they're seeing sort of with the other demand factors that we talked about?

Yes.

Got you. Great. Thank you.

You bet.

Next question comes from Rich Anderson at BMO Capital Markets.

Hello?

Hello. We can hear you, Rich.

You can or you can't?

I can. Got you.

Okay. Okay. I wanted to talk about the strategy that you alluded to I think last quarter or the quarter before about allowing occupancy to decline. I guess it was about a year ago where you made the conscious decision to led occupancy sort of trend down as you kind of saw the making of a recovery. I'm curious to know if the performance that you're seeing right now is a function of the occupancy gains that you are seeing that maybe your peers are not, because they did not take on that strategy.

I think part of it is, for sure. We have more occupancy to make up than some of our peers. You know, the issue of whether we are lowering occupancy or lowering targets for occupancy and yield star, that's a dynamic that you have a lot of debate about. We especially -- we in markets like Las Vegas and Phoenix and Florida where you have tremendous pressure on occupancy, tremendous pressure on rents, we definitely let our occupancy fall and the idea was so that occupancy fall at a time where we thought the recovery was around the corner, primarily so that we didn't have to buy occupancy and lower our overall rental rates for new leases in the future. Now, if you just did simple math and said gee if you lost 1% on occupancy and took six months to recover it, you're never going to get it back by increasing rent on those units that you let go occupied. That's pretty simple math and if you just looked at it that way you clearly would not do that. However, in markets like Tampa and Orlando, when the bottom is falling out and people are giving three months, four months free rent which is taking your rental stream down 20, 30%, if you let your entire rental rate structure go down by 30% in a two or three month time frame, it's going to be very difficult to increase those rents 30% six months later. And so you end up with a situation where there's a balancing act between buying occupancy and destroying your existing rent roll and we've seen it in the past where people have gone to what's called the heads and beds strategy which is I don't care what the price is, I want a head they that bed. What happens sometimes is that they lower their rents to a point where they're getting a different demographic in the project. And then when rents do recover, those people can't afford the rent, the new rent and therefore, you have higher turnover, higher cost, and so we did not go to a let every market fall. We did it on a very strategic basis and tweaked yield star where we needed to. Just to give you another sort of example of that, in Phoenix, for example, the average occupancy for the market is 88.4%. Our portfolio is 92%. So we're 400 basis points better than the market. Now, we could get to 95% but in order to get to 95% we would have to drop our rents dramatically. So we would rather sit at 92, 400 basis points better than the market but not destroy our rent roll to get than the market but not destroy our rent roll to get to 95. That's our thought process on it. But it's not a do it to every -- drop occupancy to every market. It's definitely submarket driven and property driven depending on what's going on in that specific submarket.

A follow-up question is to your point that there's much more to go to get to that 45% level for under 30, 6,000 people, all the rest, but I mean, does that sustain 2010 or do you think that that will sort of keep demand percolating for you guys well into next year as well? Or is this kind of like we're all talking about 2010, 2011 is sort of on the clock right now because ultimately we'll need jobs for 2011 to be able to sustain the type of growth we're seeing.

Rich, I think that two things. I think the unbundling will continue into 2011. I think we've still got a fair way to go there. But there's less hard evidence around that. There's a lot of anecdotal evidence. We've got some pretty good data in our portfolio that that phenomenon is going on. It's harder to judge how long that will be sustained. The one that's pretty simple, though, is the declining home ownership rate. I mean, this is a sort of like a medicine my tsunami of 3 million people and as long as that home ownership rate continues to fall and the best evidence is it will, you're going to get -- let's say it happens over a three year period you're going to get a million plus people converting from home ownership to rental. That's huge in our world. That plays out over the next three years.

Put a backdrop of supply on that.

Historically low supply numbers where we're actually destroying the standing inventory of multi-family by building 80,000 apartments while stairing down 150. I think those two things combined are fairly powerful big ticket drivers and will continue well into the '11 and '12 time frame.

Thanks, guys.

Next question comes from Paula Poskon at Robert W. Baird.

Thanks very much. Good afternoon. I have a perspective question for you. Do you think that there is any credence to the argument that despite an overall high unemployment rate that there is some bifurcation between unemployment rates for experienced college educated workers and lower skilled or unskilled workers? And if so, what do you think the implication is for your portfolio in terms of your targeted tenant bases in the various markets?

I think there's definitely a bifurcation between low skill and high skill people. There's no question about that. I mean, you just look at the data, it's wide. And I think the good news for us is that the lower skilled workers that have more difficult -- a more difficult time with employment are not our target market. We're more middle of the pack and higher educated folks. When you get down to the issue of long-term unemployment, we don't have unemployed people living at our apartments. Unemployed person usually moves out when they lose their job. They don't kind of hang out and start getting unemployment benefits and then hope to get a job during that time frame and we started to see improvement in our tenant base, in our resident base, less financial stress as a result of move-outs and those kinds of things. So I think the sort of functionally unemployed folks that are not well suited for the new economy in the future are definitely going to be a difficult group. But they're going to be in the sort of C and D properties as opposed to the As and Bs.

I think another way to think about the bifurcation is not just in that respect but the respect of age of the unemployed. And in this downturn, it's pretty well documented that a huge percentage of the layoffs have been among older, middle management type personnel and the question -- I think the real open question is, as hiring comes back, are you more likely to hire a younger employee back, are you more likely to hire a younger employee at a lower entry point than the person who left at a much higher point who was much older and maybe more experienced in that job. So to the extent that the second part of that is true, then that certainly benefits the rental market as well.

Appreciate that. Thank you.

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

Good afternoon. First question just relates to the predevelopment pipeline there. Obviously you showed the five projects. I'm trying to get a sense of. How many projects you could be shovel ready either right now or in the next six months.

In the next six months we could have a lot of them ready. Today, it's interesting, it don't take that long to get them ready. Probably three to six months of total planning, if we haven't done plans, and that sort of thing. We have a -- if the market continues to look like it is from a prudence perspective, we talked about $100 million this year, $250 million by the second half of next year. We have clearly a lot more in our pipeline that we could do. We are likely to do some of our -- some of the development in our fund, not just on balance sheet. And but it would be fairly easy over the next 12 months to get every project we have in our pipeline ready if we wanted to.

And then the second question I have, just looking -- I think you gave the statistics on your leases versus renewals. Could you give those in terms of year-to-date, be it January to currently, how much you've seen an improvement in new leases and also as you're looking out, 90 days available, what kind of renewal increases and new lease rates are you targeting at this point?

Yes, on the year-to-date on new leases, we were down 1.5% in the first quarter and we're up 2, 6 today. So a swing of about 4% from the beginning of the year. So quite a bit of improvement there. As we look out, so when these are the numbers I'm giving you in July and we have continued to see increases month over month throughout that period. And so we're up to now in the July leases at 2.6, ahead of on the expiring leases and I would expect to see that continue to roll forward as we continue to roll off some of the leases that were signed at more close to the bottom of the rental cycle.

So you haven't seen any kind of resistance at this point and there's no plan to kind of back off, some of the slower, traditionally slower leasing months?

No. The good news in our numbers for the quarter was not only did we raise rents and we continue to raise -- roll rents upwards on the expiring leases, but we also gained a tenth of a percent of occupancy during the quarter which is always a good thing to be doing both of those. We had, as Ric mentioned, we had further to go than some of our peers did and we're at 94.3% occupied today and just let me step aside for just a second to address that because there's -- in the reports that -- preliminary reports and I -- we very diligently read all of the reports that come out, there's still a fair amount of handwringing. Should we be concerned about that. And I can give you perspective on that. Is that anything that's in 94 or better in our world where you're raising rents and you're getting 5% increases on renewals and 2 or 3% increase on new leases and you're 94% occupied or better, it's just not something that we spend a lot of time fretting about and here's the reason. Five years ago, prior to yield star and a revenue management tool, that would have been something that would have been a constant conversation with us internally with our district managers and community managers and it's as simple as this. In the old days where the community managers had great discretion on their own pricing, 95% occupied was the ultimate security blanket. 96 was better but they felt okay at 95. So there was this constant pressure to maintain 95, 96, because it made them feel more comfortable which may or may not have been the truth anyway because you've got to look at a lot of factors, demand, upcoming demand, lease expiration, et cetera. In a yield management world where the model is really giving great guidance as to what's coming up in the next 90 to 120 days with regard to expiration, natural demand, unit types and all those type things and then setting prices appropriately, it's just not something that causes us a great deal of consternation if you're somewhere in the 94s. Now, at some point I would expect that the combination of factors that we discussed today and the positive environment that we see coming, yeah, we'll see 95%. You'll see a quarter where we get another 70 basis points pick-up in occupancy and we raise rents. But when we're raising rents the way we are right now on both renewals and new leases, I'm just fine with 94.3%. And ultimately, we'll harvest that other 70 basis points but right now we're going to maximize revenue by using the revenue management tool.

Thank you.

You bet.

The next question comes from Michelle ko with Bank of America.

Hi. Just wondering, how long does it take to get the asset from shovel ready to completion?

It depends on the project. The typical suburban or in-field stick built construction is probably shovel ready to stabilization, 18 to 24 months. A project that's a type 1, concrete building in DC is probably 36 months.

Okay. Great. I was just thinking about the window that you guys told us of the 18 to 24 month build and how quickly you can get these assets up and running. And just in terms of you were talking about some of the merchant builders are still having some difficulties where it's not easy to get a construction loan. Have you been talking to them at all about opportunities, potentially? Opportunities where they build for us or something like that?

Right. Or maybe take on something, if they're overleverred that they might have halfway built that you might see as a potentially good opportunity. We have been talking to some about sites they have and where they can't build it and we could bring our credit there to acquire that. There really aren't a whole lot of half built buildings with developers out there. There's anecdotally a few here and there but it's really not a dramatic market. Most of the good merchant builders have done a pretty good job of building their projects and being in a position to deliver them and the banks have been very constructive as to helping them even if the banks underwater and the developers underwater, they haven't shut them down very often and just gone forward to build the asset and finish it. So there hasn't been a lot of carnage to take advantage in that regard.

Okay. Great. And then just lastly, I was just wondering if you could give us a sense for the GSEs the rates that are out there now and the terms and also we heard that some of the life insurance companies have become more competitive especially on the five and seven year loans and what kinds of rates and terms you're seeing from them as well.

Sure, Michelle. We actually in one of our recent transactions just placed a seven year note on one of our acquisitions and were able to get it in around 4.6%. So I think that's kind of where the secured would kind of come in, 70% levered and I think that's kind of where the market is currently today. And life companies definitely were bidding on that specific loan and they were about probably 20 bips higher than that quote and once we went back for sort of best and final quotes, the life companies came in right on top of the agencies and we decided to go with the agencies versus the life Company, just because we've done a lot of agency debt and have a good relationship with them and really didn't want to open up a new relationship with a life Company. But they are definitely back en masse and are now quoting at the same level as the GSEs.

Okay. Great. Thanks so much.

The next question comes from Dustin at UBS.

Thanks, good afternoon, guys. Given that yield star goes out 30, 60, 90 days, can you tell us specifically what kind of renewal increases you're looking at today for August and even beyond that, understanding that the increase may change between now and the time that we get closer?

Yes, yield star really is more -- it's further out than that. It's really more of about 120 to 150 days out in terms of the planning horizon. And I don't have that number in front of me right now but I can get it to you offline.

Okay. That would be helpful. And then also, I may have missed it when you were talking about the numbers through July but where are you today on the net change in rent between move ins and move outs on average for the whole portfolio?

If you took the -- averaged the renewals and the new leases, we're at about 50/50 right now on the two. So two and-a-half versus five, call it five, so three and three quarters, something like that.

On the net change, if you just add it up?

A net change on a combination of -- a blend of both renewals and new leases.

Thank you.

You bet.

Our next question comes from Tony at JPMorgan.

Hi. Good morning. It's Ralph Davies on the line with Tony. Just had a question in regards to when you talked about today in terms of using your equity raised to pay down your unsecured debt coming due. Just. Looks pretty good for you guys and the economics we're seeing on unsecured paper right now, was just wondering I guess what the motivation for that was and in particular, I guess would it be safe to say that you raised the equity, anticipating some acquisitions but now looking at I guess the opportunities that maybe the deals that you're seeing, maybe the five, sevens or subfive, seven cap rates don't look attractive to you guys?

I would say the -- clearly the ATM program and the way we managed our balance sheet has been to do two things. One is reduce leverage. We talked about how we're reducing our leverage and we're going to continue to reduce leverage over a period of time and the other piece is to be able to be opportunistic and fund our development going forward. So if we're going to start $350 million of development over the next year, we need to fund that with equity and with debt. The unsecured market is wide open and it's very attractive. However, we have $128 million on our balance sheet right now. And I think we have an $83 million maturity coming up in the fall and beyond that we don't have any capacity, any real need for unsecured financing just yet. In order to get in the index for unsecured financing we need to do a quarter of a billion dollar issue and we would have three or $400 million of cash on our balance sheet which we don't think is prudent. But bottom line is we are going to continue to fund our development activity and our acquisition activity with a combination of using the ATM program, unsecured debt, and asset dispositions.

Okay. So it's not a read-through in terms of kind of a lack of acquisition opportunities?

No.

Okay.

No, it's not.

And then my second question was just looking at your unconsolidated debt, how will you be approaching that, your exposure this year? Will you be looking to pay down the stuff that's coming due as well or are you confident you can roll that?

Yes, for the third quarter, we actually have two facilities that are maturing and in both of those cases, we're actually in the process of extending each and every one of those and we'll have those completed in the third quarter. So one we're going to extend for -- we're proposing a 35 year loan and the other one we have a new five-year loan to take those out and put in permanent financing on those joint venture developments.

Thank you.

Our next question comes from Steve Boyd at you Cowen & Company.

Hi. I believe historically you all have excluded redevelopment properties from the same store pool. I was just curious if there's been any change in that policy.

No, there hasn't been a change to that policy.

So I think you talk about $40 million, 14 different properties, those will be removed from the same store pool?

I think as we go forward into the third and fourth quarter, these repositions are kind of on an on-demand program versus a take the complete property out and start a wholesale update of the repositioning of every unit in the community. So we're going to have to evaluate exactly how we're going to deal with that in our same store analysis but it's going to be like we previously did. This program actually is going to reposition kind of on demand and as that community manager and DM evaluate the need for a repositioned unit in their community.

Okay. So I mean, so it is a bit of a change; correct?

We're not sure how we're going to handle it yet. We will make sure that however we do it, the information is available to understand whether it's in or not and then what the impact is of the program so that we don't skew same store results.

None of that's reflected in the guidance you guys have updated?

That's correct. That's correct. None of it's reflected in the guidance. And no significant dollars have been spent on those either.

Last quick question. Do you have any guidance on the cap rate for the dispositions you talked about?

I think it would probably be somewhere in the high five, low six range for the combined dispositions.

Great. Thank you.

Our next question comes from, at KBW.

Hey, there, guys, most of mine have been answered. Just a couple quickies. Just to follow up on that last question, do you have unlevered IR projection for those acquisitions and what will the near term growth rate assumptions be?

The IRRs are probably in the high single digit unleveraged and in terms of growth rates, the near term growth rates actually are fairly muted. One's in Houston so it's pretty flat for the first year and then it starts accelerating pretty good once the supply issues are dealt with here in Houston and the one in Atlanta I believe we're pretty flat the first year and then start accelerating after that. The Atlanta project requires -- we're going to have to do some completion, completing the units, there's some finish-out work that has to be done on about 40 of the 111 some odd units. So that's more of a 2011 conversation as far as growth and if you look at Whiten's numbers for Atlanta for 2011 it's really forecast to be one of the stronger markets.

What is the incremental investment on that property in Atlanta?

$2 million.

Yeah, the total construction, incremental?

Incremental, right. About 2 million bucks.

And lastly, just to follow up on another earlier question, where are the renewal increases most aggressive today in your portfolio. Just to tack on to that. What do you think the best revenue growth opportunities over the next call it three to five years are in your portfolio, given current rent levels, incomes, housing prices, et cetera.

Is your question with regard to renewals of leases or new leases?

Well, I guess first where the renewal's most aggressive today and the second question is more bigger picture, rent growth outlook over the next several years.

Most aggressive renewals in July were in Atlanta, Austin, Mid-Atlantic, which is DC Metro and Raleigh. Those would be the top four. South Florida wouldn't be far out of that pack. New leases, same group, Mid-Atlantic, Atlanta, Austin, Denver makes the list and then South Florida.

Okay. All right, guys, thank you very much.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Ric Campo for any closing remarks.

Well, thanks for everybody being on the call and we'll see you next quarter. And probably sometime at one of the conferences over the next quarter or two as well. Thank you.

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