Camden Property Trust (CPT) 2010 Q3 法說會逐字稿

Good afternoon and welcome to the Camden Property Trust third quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn conference over to Kim Callahan, Vice President of Investor Relations. Please go ahead ma'am.

Good morning and thank you for joining Camden's third quarter 2010 earnings conference call. Before we begin our prepared remarks, I would like to advise everyone that we will make 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 the 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 2010 earnings release is available in the investor relations section of our Web site at Camdenliving.com and it includes reconciliation 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, so 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 will 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.

Thanks Kim, and good morning. As Dave Matthews pointed out in our pre-conference music, "Make the Best of What's Around" was exactly what our on-site teams did this quarter. Third quarter operating fundamentals continue to improve in all apartment markets, driven by broad macro factors. Increased apartment demand has been driven by the falling home ownership rate, the unbundling of consumers that doubled up or moved home to save money, and strong demographic trends as a result of the baby boom echo.

While overall job growth has been weak, there has been over 1 million jobs created for people under 34, who are our prime customers, and this morning's job report further evidences that jobs are coming and at the entry level, which is helping our customers ultimately. New apartments supply continues to be at post-World War II lows. It is expected that there will be a net reduction in apartment -- in the national apartment stock through at least 2013.

Clearly apartment fundamentals are the best they have been coming out of a recession that we've seen in many decades. Camden's operating portfolio is improving in all markets. Same property revenue has improved for the third consecutive quarter. We expect same property revenue to turn positive in the fourth quarter. Sequential third quarter revenue grew in every market except Southern California and Las Vegas. And we expect Southern California and Las Vegas to improve in 2011.

During the quarter, we acquired two properties with 416 apartment units for $41 million at a 6.2% stabilized cap rate. We have increased our acquisition pipeline to $221 million where we are under contract or letter of intent. These acquisitions will be completed in our fund at a projected stabilized cap rate of 5.9%. Acquisition cap rates have compressed 50 to 75 basis points since the beginning of the year. Debt rates, on the other hand, have compressed 125 basis points during the same time. Leverage equity cash on cash returns have increased in spite of rising asset values. This situation has made us more constructive on acquisitions for our fund at this point.

During the quarter we acquired our partner's joint venture interest in our Main & Jamboree property in Southern California at a 4 3/4 cap rate. As we discussed at our investor meeting last month, we have started two developments during the quarter. We plan to start $400 million to $500 million of developments in 2011. Stabilized development yields are expected to be 6.5% to 8%, depending on the market. We will continue to fund our development on a leverage neutral basis through equity issuances through our ATM program and property dispositions. I want to take this opportunity to thank the entire Camden team for their dedication and hard work in providing living excellence to our residents. I will now turn the call over to Keith Oden.

Thanks, Rick. Our results for the third quarter were generally in line with our re-forecast, and that provided the basis for our increase in guidance last quarter. As such, I'll be brief with my comments and hopefully allow a little bit more time for Q&A today.

Same property NOI for the third quarter declined by 0.6%, compared to a year-to-date decline of 4.6%. Sequentially same-store NOI rose by 0.4%. Expenses rose 2.2% over the prior quarter. Revenues were up 1.1% over the second quarter and were positive in all markets except Las Vegas and Southern California, which had slight declines of 0.2% and 0.1% respectively.

While the revenue recovery is broad-based it is also very uneven among the top and bottom performers in our portfolio. Sequentially, our best revenue growth markets were DC Metro at up 2.9%, Austin, up 2.6% and Denver, up 2.3%. The three at the bottom of the list are Las Vegas down 0.2%, San Diego down 0.2%, and L.A. Orange County down 0.1%.

Based on our aggregate same-store results in terms of rent-per-unit, our portfolio peaked in February 2008, even though several of our markets were declining prior to that. Based on the same set of data our portfolio bottomed in February of this year. However the unevenness of the recovery across markets is readily apparent when comparing the peak-to-trough rental rate declines and the subsequent recovery. Portfolio-wide the peak-to-trough decline lasted two years and averaged an 8.5% decline. Since the trough, the portfolio has recovered 1.8% leaving us roughly 6.7% below the peak rents on average.

Again, looking at the individual markets highlights the uneven nature of the recovery. The three markets with the largest peak-to-trough declines were Phoenix, Las Vegas and Charlotte. Phoenix rents declined 17.8% from the peak, and have since recovered 1.5%. So current rents are still down 16.3% from the peak in Phoenix. In Las Vegas, rents have declined 16.5%. We still haven't seen a recovery, although we think we are bumping along the bottom in Las Vegas. In Charlotte rents declined 14.8% and have recovered 1.8% leaving rents 13% below the peak.

At the other end of the spectrum, Washington DC metro rents declined only 3.1% from the peak and they've recovered 4.5% producing rents that are actually 1.4% higher than the previous peak. Denver fell 5.7% from the peak and has seen a 3.7% recovery for a net decline of 2%. And Houston has declined only 4.2% from the peak, and that's basically where we are today. The good news is that, except for Las Vegas, which is basically flat, all other markets are making up ground versus the trough rent experienced. The mixed news is that the markets experiencing a robust recovery are being offset by the markets that have yet to fully yet participate in that recovery.

Regarding new leases and renewals in the quarters -- in the quarter, the trends continued to improve with renewals up roughly 5.6% over expiring leases and new leases up roughly 2.4% over expiring leases. Traffic was actually up 4% over the prior quarter and is now essentially flat with the prior year, and despite moving rents up on renewals and new leases, occupancy picked up just slightly over the second to 94.3%. As long as we're able to continue increasing market rents, we're comfortable with occupancy at the current levels. Our renewal rate fell from the second quarter, which it always does, but remained above the renewal rate from third quarter 2009. Move-outs to purchase homes dropped dramatically, from 14.3% last quarter to only 10.5% in the third quarter.

As we expected, the expiration of the home purchase tax credit last quarter pushed the number of move-outs to purchase homes back to an all-time low in our portfolio. Move-outs due to financial reasons fell again to only 8.5%, the lowest level we've seen in three years. And finally a shout-out to our on-site teams who continue to outperform our original budgets in every market, delivering great customer service is allowing us to renew a historically high percentage of our residents, who know the value of living excellence at a Camden community. Keep up the great work and we will see you soon. Now I'll turn the call over to Dennis Steen.

Thanks, Keith. I will begin today with a couple of comments on our third quarter results. We reported funds from operations for the third quarter of 2010 of $46.7 million or $0.65 per share. This represented a $0.01 per share improvement from the $0.64 per share midpoint of our third quarter guidance range of $0.62 to $0.66 per share.

The $0.01 per share improvement to the midpoint of our prior guidance range was primarily due to property net operating income exceeding our expectations by $800,000 due to the following -- a $200,000 favorable variance in property revenues resulting primarily from slightly higher than expected average new lease and renewal rental rates across our portfolio, as Keith just described; and a $600,000 favorable variance in property expenses due to lower property insurance expense resulting from lower levels of losses during the quarter, lower repair and maintenance expense due to general expense controls, and lower than budgeted unit turnover and lower real estate tax expense as we continue to experience lower revaluations of the assessed values of our properties without significant increases in tax rates. For our same store portfolio, we now expect real estate taxes to be down approximately 6% for the full year.

These three positive expense variances were only partially offset by higher than expected on-site salaries and benefits, driven primarily by higher health insurance costs due to a rash of large medical claims during the third quarter and higher on-site incentive compensation accruals due to our improved operating performance. We now expect our full-year same store property expenses to be up between 0.5% and 1% with a midpoint of 0.75%, representing a 200-basis-point improvement from our original 2010 guidance. The majority of which is attributable to lower real estate tax expense.

All of the components of income and expense for the third quarter were generally in line with our expectations. The only other notable item for the quarter was the restructuring of the joint venture which owns Camden Main & Jamboree in Irvine, California. The restructure resulted in Camden's ownership interest increasing from 30% to 99.9%. As a result, during August, we consolidated this entity for financial reporting purposes, recording the assets and liabilities of the venture at fair value, which resulted in an increase in our real estate assets of approximately $93 million and the elimination of our prior mezz loan and equity investments in the joint venture, totaling approximately $42 million. We did not invest any additional cash in the venture and we did not record a gain or loss on the restructure.

Subsequent to the restructure, we paid off the existing construction loan and put in place a new $53 million HUD loan, which has a term of 35 years and a rate of 4.35%. The restructure and resulting consolidation will be approximately 0.3% of a cent accretive to our FFO per share on a quarterly basis.

Moving on to earning guidance, we project fourth quarter 2010 FFO to between $0.66 and $0.70 per diluted share, resulting in full-year 2010 FFO of $2.64 to $2.84 per share, with a midpoint of $2.66 per share. The midpoint of our full-year guidance represents $0.02 per share improvement from the midpoint of our prior full-year guidance of $2.64 a share.

This $0.02 per share improvement is primarily the result of the following. A $0.04 per share improvement in operating results driven primarily by continued improvements in rental rates across our portfolio and reduction in property expenses as I detailed earlier. Partially offset by $0.02 per share in dilution resulting from equity previously issued during the third and fourth quarter through our ATM program. As we continue to reduce leverage and pre-fund equity requirements for our new development projects.

As I previously mentioned, for the fourth quarter of 2010, we project FFO per diluted share within the range of $0.66 to $0.70 per share. The midpoint of $0.68 per share represents a $0.03 per share improvement from the third quarter of 2010. The $0.03 per share improvement is primarily due to the following; a $0.04 per share projected increase in FFO due to higher property net operating income, almost exclusively due to our expected seasonal decline in utility and repair and maintenance expenses in the cooler months of the fourth quarter.

We expect property revenues to be relatively flat from the third to fourth quarter as the continued improvement in rental rates will be offset by a slight decline in occupancy due to seasonality and lower other property income due to lower levels of leasing activity in the quarter. And a $0.02 per share projected increase in FFO due to lower interest expense, resulting primarily from our payoff during the third quarter of $82 million of maturing unsecured debt using available cash, and higher capitalized interest in the fourth quarter of 2010 related to our initiation of construction activities on two new development communities, and the commencement of development activities on several communities in our development pipeline. The above two positives are partially offset by a $0.01 per share projected decrease in FFO due to lost NOI on dispositions as we expect to close on $100 million in dispositions in early December, and a $0.02 decrease in FFO due to the diluted impact of ATM equity previously issued during the third and fourth quarters of 2010 as I mentioned earlier.

And lastly with respect to our balance sheet, we have no balances outstanding on our $500 million line of credit. We have over $90 million in cash on the balance sheet, and we have no scheduled debt maturities in the fourth quarter, and a very manageable $154 million in debt maturing in 2011. Over the past two years, we have significantly improved the strength and flexibility of our balance sheet and with our current (inaudible) and our access to the equity and debt markets, we are confident in our ability to meet upcoming obligations and to fund our development and acquisition activities. That concludes our remarks and we will be glad to answer any questions at this time.

(Operator Instructions) Our first question comes from Michelle Ko of Bank of America Merrill Lynch. Please go ahead.

Hi. I was just wondering if you could give us some data points in October in terms of occupancy renewal rates, new leases and kind of give us a sense for how that's trended the last couple of months leading up to that.

Sure, Michelle. We have numbers through the end of October, and our occupancy has ticked down slightly, but that's to be expected. Our average decline and occupancy from third quarter to fourth quarter over the last ten years has been about 60 basis points.

That's not unusual, it's just seasonal. In terms of the rent at the end of September, the average, if you take the blend on the renewals and new leases, would have been about 4% up between the two of them, and if you roll that forward to October, that number is about 3.5%. So again, not to be unexpected, because you're having a little bit weaker occupancy -- a little bit more vacancy, which is, again, strictly seasonal. So we're not concerned that there's anything of a trend in place other than the seasonal trends that we always deal with.

And I guess what are you pushing in terms of renewals, like 60 days out? For November? Do you have numbers?

Let me -- I think we can get those to you by the end of the call. So we'll come back to you with that Michelle.

Okay. And I was just wondering, seems like you started the developments a little bit earlier. We were anticipating in the fourth quarter from conversations from the last call. I was just wondering if that's because -- you started them earlier because the acquisition environment in terms of pricing still remains tough and can you tell us what you're seeing out there with cap rates and has transaction activity increased?

Sure. The development started once we sort of put the go on developments. We just told our people to get them going as fast as we could, and they're just really efficient and started early. So didn't have anything to do really with acquisitions or what have you. It really just has to do with the timing of -- they were shovel-ready, if you will, and they got the shovels in the ground quicker than we had anticipated.

As far as acquisitions and where they are going today, pricing has definitely gone up and cap rates compressed since the beginning of the year and somewhere in the 50 to 75 basis point range. So that would mean that acquisitions of core assets in most major markets including markets that surprise people like Houston, Dallas, and Phoenix, core assets are 4.5 to 5 and if you're out a little further from the center of main and main, if you will, the cap rates are probably 25 to 45 basis points higher than that. The interesting thing that we found, and I mentioned this in my original remarks, was had you bought properties in the early part of the year and put debt on them, the value proposition of -- because rates -- debt rates have compressed far more than cap rates.

The value proposition of the return generated from the cash on cash returns that you get during the life of an investment are actually better now than they were then, because that spread -- because of the spread difference between cap rates compressing in debt has been so dramatic. So we sort of think, since we're a leveraged buyer in our fund, that we were much better off holding off on acquisitions and having this situation happen, so that we can actually put higher cash yielding assets into our fund than we could at the beginning of the year.

Okay. Great. And how much --

Michelle, just to follow up on your earlier question, November renewals are up roughly 5.2%. December renewals are up 4.4%, and we renewed 42% of the exposure in November and 9% in December.

Okay. Great. Thanks. That's helpful. And just lastly, I was just wondering if you could talk a little bit about Jamboree and why you decided to take -- pretty much take over that asset?

Well, when you -- you know, we love the California market long term. It's a great asset, and in the restructuring it made sense to take our partner out. Their view of the world was a little different of ours. We wanted to own a hundred percent of the assets, so we went ahead and did it.

So you approached them about the opportunity?

Yes.

Okay. Great. Thank you.

Our next question is from David Khani of FBR Capital Markets. Please go ahead.

Good morning, guys. A couple of sort of big picture questions for you, Ric. Maybe you can't answer them, but I'll give it a shot. Given the changes that we've seen in Washington, do you think this changes -- or at least your sense of the outlook for the GSCs going forward given any of your recent discussions? What's your sense of the impact to those entities?

Clearly, with the Republicans taking over the house, they've been more vocal about dismantling Freddie and Fannie and lowering their investments and what have you, but I still think that Freddie and Fannie are going to be a very complicated group to deal with, and nothing is going to happen in the near term even with the Republicans taking over. The treasury is supposed to put forth a plan in January, and then there's going to be lots of debates and lots of issues that have to be worked out over time.

So in the near term, I don't think there's any issue about where they're going to be there or not. In the longer term it probably sways the debate toward less of an impact and less of a government guarantee, if you will, for all housing, and I think that debate is going to a very long and hard debate. On the one hand it's sort of an interesting thought, because all of our private competitors rely pretty much a hundred percent on that financing, and the public companies who have access to all sorts of other capital, including unsecured debt and preferreds and common stock and all that, if you think down the road and say that the GSCs have helped -- have definitely been a major part of the market for multi-family -- it actually would benefit the public companies if our private competitors have less access to capital and we have more access to capital.

There's been some studies on the GSC impact on pricing and depending on whose study you look at, they say anywhere from the GSCs went away tomorrow and you have to go to private funding with banks and insurance and what have you, that there would be a -- somewhere between a 25 basis point increase in cap rates all the way up to maybe a 50 or 60 basis point increase in cap rates. So on the one hand you would have an increase in cap rates, but on the other hand, we would have -- we, the public companies would have a better access to capital than our competitors, so it longer term helps us. So I don't think anything is going to happen in the near term; but, long term we'll just have to see.

That's really helpful. My second question is also sort of big picture, and it has more to do with the government's activities in the bond markets, specifically QE2. Do you think these activities could eventually lead to better pricing, barring any changes to the GSCs or the economy? Are you underwriting any improvement to the kind of spreads you're seeing, the kind of rates that could be available going forward? Have you heard any commentary from your lenders along those lines?

Well, when you look at our borrowing spreads today are around 200 basis points plus or minus over the curve on unsecured bonds for us. The interesting thing is that is based on our historical spreads, it's wide by historical rates, so I think there's some ability for spreads to contract further in the unsecured bond market. In terms of whether the QE2 really affects spreads, I'm not sure. I do think that there's stickiness in those spreads even when the 10-year continues to decline. We just have to see how it works out. We're hearing a lot of -- there's a massive demand for unsecured paper and we're getting sort of pushed by our bankers on an ongoing basis to issue; but clearly with nearly $100 million dollars in cash and a development pipeline coming up, it's clearly something we're watching and will hopefully take advantage of it when we get ready to.

Great. I appreciate the opinion. Thank you.

Our next question comes from Michael Salinsky of RBC Capital Markets. Please go ahead.

Good afternoon. The first question, just an update on the Midwest portfolio sale. I know you guys had talked about that on your investor day, and also on the development starts here, both in the third quarter and fourth quarter, can you talk about your return expectations if you look at those unimpaired land values?

First, on the development question, I'll hit that one first. The development yields are stabilized yields for projecting 6.5% in sort of DC markets, and then up to 8% in other markets. In terms of -- and those are stabilized yields based on whatever we have on the books, whether it's been impaired or not impaired. We also look at our development yields on an existing current rents in place and make sure that our yield spread on the development versus an acquisition in that market is at least 125 to 150 basis points wide.

And an update on the Midwest portfolios?

On the Midwest portfolio we're in the process right now of conducting tours of the assets, all the marketing materials have gone out. We have a lot of interest, which is great, and we'll just see how it plays out. It's unlikely at this point -- we think it's unlikely that it closes by year end, but if it doesn't then it would be an early 2011 event; but again, good interest. A lot of participation in the marketing process, and we'll just have to see where the potential buyers come out on their underwriting in the portfolio.

My second question relates to maybe just a clarification. In the press release you talked about the ATM issuance to deleverage, but sounds like more you were pre-funding development based on your comments on the conference call. I would just be interested in getting a clarification there, and the follow-up to that is you added what looks like five projects to the pre-development pipeline. Did you start capitalizing the costs on those as well this quarter again?

In terms of the ATM program, we are definitely pre-funding the development, but we are also delevering. So ultimately, around we said this at our investor meeting, that over the next couple of years we will continue to delever. What that sort of means is we will are going to do it through the ATM and also through property sales and we're sort of going to give up part of our growth going forward to make sure that our leverage is maintained and continues to go down. And I think that's been our -- that's our strategy, and we're going to sort of keep doing that opportunistically. Dennis, terms of capitalization, why don't you answer that one?

Yes. There was really not much change to our third quarter numbers as it relates to capitalization. But if you go into the fourth quarter, we will have a full quarter's of capitalization on the two properties that are on page 17 of our supplement, and all nine properties that are in our pipeline summary on page 19. That's going to result in about another $300,000 in the fourth quarter of interest capitalization for the projects that we have begun development or construction efforts on.

Okay, just a follow-up on that on the leverage question, where is the target leverage for Camden these days?

I hate -- I don't have a specific number, and I hate put a number out there, but when you look at -- we look at debt to EBITDA primarily and fixed charge coverage. We like the numbers on two and a half times on total fixed charge and the 7 times plus or minus debt to EBITDA, and the way you get there is you obviously lower debt, but you also grow your EBITDA. So you can do it two clear ways.

Okay, that is helpful, thank you.

Our next question comes from Andrew McCulloch at Green Street Advisors . Please go ahead.

Hello, good morning. It seems like the 35 year HUD money is kind of the best thing out there right now. Why not do more of that? Is it because the process is so arduous in getting it?

You hit the nail on the head there. It's very tough to get that kind of money. And so when you get down to it, you go through major hoops to get it. Once you get it, it's great. On the other hand too, we did a lot of agency financing during this last year and a half.

So we did nearly with that, probably nearly a $1 billion of agency financing, and while we still have a lot of capacity in our balance sheet to do secured debt, the unsecured debt market is pretty close to what the secured market is, and we want to make sure we maintain our bond covenants and that we are true to keeping our balance sheet very well structured from an unsecured debt perspective. So, when you look at the current environment, yes, rates are low on secured basis, but there's a lot of, sort of underlying issues that come up with secured financing, there's a lot of other cost that's not built just into the interest rate. So we will balance our debt issuances between unsecured and we will probably do more unsecured here of late versus secured like that, with the exception of our joint ventures which we primarily use agency debt.

Okay, great, thanks. And on the expense front, and obviously you can't give guidance for next year, but if you look at kind of the major expense food groups, where do you think you'll see upward pressure next year and which items may you get some relief?

Well, relative to this year, Andrew, I think you are going to see upward pressure, again on a relative basis, on wages and salaries. Where they have been almost flat for two years running. Secondly, property taxes. We're down 6% this year, or will be at the end of the year, on a year-over-year basis, and on the one hand, that's been great. On the other hand, as you kind of think about and you hear all of the background noise about states and municipal governments and what they're dealing with on the fiscal side of things, at some point you have to believe that some of these jurisdictions are going to bite the bullet and despite all of the negative connotations and all of the anti-tax sentiment that's out there, at some point you have to believe they are going to raise rates to offset the valuation decreases.

And the second thing is, if you think about where valuations are and where assets are trading at today, in most cases -- in most cases in our markets, assets are, with maybe the exception of Phoenix and Las Vegas, but assets are back within 5% to 10% of -- on a price per door and a price per square foot basis, back where they were in the peak. Cap rates have continued to come down. Rental rates have backed up. But in some of our markets, the one where there's probably a little bit more exposure on taxes, DC metro, rents are back above where they were at the peak. I dare say that cap rate were below where they were at the peak.

So, a combination of increase in valuations and municipalities maybe having to take a look at actually raising rates in addition to the valuation moves. I think taxes are going to be a challenge. Whether that bleeds -- whether that is quick enough to get into the '11 numbers in a meaningful way, that's open to discussion, but I think as you think down the road '12 and '13, that's an area we are going to have to continue to have to be very diligent in.

Okay, thanks guys.

You bet.

Thank you, our next question is from Eric Wolf of Citi. Please go ahead.

Thanks, good afternoon. Should we take your comment on the increased cash on cash yield from the beginning of the year to mean you'll become a more active buyer through your fund? And to what degree, when you are underwriting acquisitions, do you factor in an expansion cap rate as interest rates potentially move up?

The answer is yes. We are definitely more constructive on acquisitions today than where we were six months ago; and then in terms of -- I think the great thing about what's happened and hopefully this stays that way a while in terms of that spread between what you can buy at and what debt rates are, and we can capture that higher cash on cash return, is one of the biggest issues we look at when we think about our fund is if we are going to hold for seven years plus or minus.

We expect cap rates to go up. So when we underwrite, we're underwriting not using existing cap rates, but increasing those cap rates appropriately based on the expectation that interest rates are going to go up and cap rates will go up in the future. Now the good news, however, is we're able to offset some of the denigration of value by increasing cap rates by increasing the cash flows by virtue of our expectations over the next two or three years of having above trend growth in cash flow.

What we're trying to accomplish now, what I think is happening with these new acquisitions is that we're getting a higher percentage of our total return from cash flow as opposed to buying -- if we would have bought at the beginning of the year at a 6 1/4 cap rate, say, and financed it at 6%, so you have a positive leverage of only 25 basis points, now you can buy at 5 1/2 or 5 1/4 and finance it 4.5, you are getting 100 basis point lift in positive leverage, which gives you current returns much higher than you had if you had bought in the early part of the year, so with that said, the percentage of return that we're getting from the cash flow is going up so we don't have to rely on as much price appreciation to get our total return.

Thanks, that's helpful. And just a question on DC. Obviously been a very strong market for you, and your largest, so that's good, but we've been hearing anecdotally that there's a lot of pressure being put on government contractors to cut costs. And while there haven't been many layoffs some see them coming. Just wondering whether you've heard or seen anything like this and if you're concerned at all.

Well, we've certainly not seen any on the ground impact to what you're talking about . I mean, you always hear the background noise. I think, with the change in leadership in Washington and the House, there's certainly speculation that the governments all of the sudden the Federal Government is going to get religion on spending, but I guess my view on that is I'll believe that when I see it, and I think that most of the things they're talking about is freezing discretionary spending and kind of nibbling around the edges.

I think the bigger wood to be chopped is in entitlements, and I'm just not sure that at the end of the day that has much to do with how those entitlements are administered, that has to do with what the beneficiaries get. So call me a skeptic on -- they're going to get their act together and reduce the size of government below what it is today. I'm certainly hopeful of that, but I'm not -- it's not something that I would put into our planning at this point.

So you would still anticipate DC being one of your stronger markets? I guess what's concerning if you think about what you talked about and the potential cuts to come not this year, but next year and you think out a little bit further to 2013 with some of supply coming online, if it starts to becoming a little bit less of an attractive market for you to develop into.

If you look at the supply and what's in the pipeline today in the DC Metro market, I mean, you're still in the 2500 apartment range and I think that while there's no question that supply will increase from that number, the amount of supply that we're talking about is not particularly troubling. It would have to change dramatically. I just don't see that happening.

Obviously, the public companies are in a posture where the sites that they have that are ready to be built on, can be built on, and certainly that includes us. But if you get outside the public companies and you have conversations with the private guys that in the past might have been working on and thinking about 8 to 10 transactions, they're now working on and thinking about 1 to 2. So it's a different scale in terms of what the potential new supply is, recognizing that it will increase, but I think it will be manageable. Then you've got to look at -- the flip side is you look at the job growth picture, and again I'm just skeptical on whether or not that's going to change meaningfully in the next three to five years.

Thank you.

Our next question is from Rob Stevenson with Macquarie. Please go ahead.

Hello everyone. It's Nick on with Rob. I have two quick questions on the development pipeline listed on page 19. The numbering for those nine projects. Are we supposed to take it that's the order of priority of delivering developments.

No. There's no magic to the numbering sequence.

Okay. Are you able to say which markets or projects you think might start earlier than others?

Well, each depends on where it is in its process, and a lot of these are the ones that we're looking at for 2011 still have work to be done on them. When we shut our pipeline down in 2007, we slowed the final, plans and things like that down as well on projects that were not necessarily "shovel ready." So it really just depends on that. Probably by the --- I don't have a good sense for all of those -- which priority they are, or where they are in their process right now on the call, but we can give you some more color on that later or offline.

Okay, great, thanks. Just one other thing, I'm sorry if I missed this, but have you said at any point, how to think about -- what's the total cost for developing these nine communities? That's all I had. Thanks.

Well, we've talked about where we are going to start, and the cost -- we've already said the starts this year are at $100 million and the starts next year $400 million to $500 million. If we started everything in our pipeline, even the ones that aren't on the list -- it's $1 billion or $1.2 billion probably. But we are clearly are not going to start $1 billion or $1.2 billion next year, we'll start $400 million to $500 million, some of which may be in our fund. And we are going to make sure that we keep our development pipeline manageable and that it's pre-funded and not increasing our leverage.

Thanks.

Sure.

Our next question is from Paula Poskon of Robert W. Baird. Please go ahead.

Thanks very much. Looking out over the next few years and the pricing power that's expected to emerge, what do you think the opportunity is for margin improvement?

Well, the key there, Paula, is going to be what actually happens on the expense side of things. I think, if you're using the numbers that we have talked about and talked about on our analyst day, Ron Whitten has used in his modeling. You're talking about rental rate increases that are likely to be in the 5% or 6% range as you get out on a run rate basis out toward the end of '11, and there's no reason, given the supply picture, and even assuming just a moderate recovery in '11, '12 and '13, there's no reason why that type of rental rate wouldn't be repeated. So model out -- take 5% to 6% increase on the top line, and let's say we go back to trend on expenses at something closer to 2.5% to 3%, our margins would improve.

I would just point out, too, if you take historical analysis and compare margin expansion from the last recession, our margins prior to the recession were 60%, our property operating margin with our overall margin at 55% to 56%, and today our operating margin is, like, 55.8% or something like that, and our overall margin is about 51.5%. So if you get back to just the peak was 60%, so I would expect that based on what Keith said that you could have significant margin expansion over the next couple of years.

That's helpful. Thanks. And sort of on a related basis, what's your comfort level on dividend coverage in terms of AFFO.

Dividend coverage on AFFO is, we like to see it in the -- in the expansion phase of this business, we like to see it driven down to 65, something like that. We're at about 83 or 84 today. As we increase that cash flow over the next few years we'll likely raise our dividend like we have in the past to about 50% of the growth rate, so we can drive the number down, and given the sort of outlook for the next few years, we've talked about probably our board will look at raising the dividend in the first quarter.

Thanks very much.

Thank you. Our next question is from Alex Goldfarb from Sandler O'Neill.

Hello, good morning.

Hello Alex.

Just two quick questions here. First, in the time since the -- Florida has changed the bulk condo sale, have you seen anything down there of interest, or has all that stuff pretty much settled out now?

Well, a lot of the bulk condo stuff got delivered to Starwood as a result of the Corus Bank deal, because Corus Bank did a lot of the condo deals, and there's some deals here and there down there, but they're -- a lot of them today are still pretty -- sort of gnarly in the sense that you have busted ones where you have the third sold and two-thirds not sold. So you have to go into pretty complicated issues. They are not as clean as they were in the past. I think there's still opportunity to go down there, but not as great as it was.

Okay, so the activity we're seeing on the West Coast, we shouldn't expect to see that emanating from Florida?

No, I don't think so. I think when you look at the Corus Bank deal, I mean, there's a couple of West Coast deals right now that are in the marketplace, like the one downtown Los Angeles, high rise condo that is in play, and it is an interesting deal, because the Corus Bank has a loan on it, which is obviously a Starwood and the FDIC. And they're trying to sell it in the open market, but I think that most of those deals that were the easy deals are pretty much done in Florida, but they are starting to manifest themselves on the West Coast for sure.

Okay. My second question is, just as you guys were thinking about the unsecured market, would a 30-year deal be something that would be of interest to you, and just then, sort of your thoughts, if it is, your thoughts of whether it would be a straight 30-year or if you're attracted to -- if it's worth paying up for the non-call 5 feature ?

We have -- Dennis might answer part of this, but we haven't really thought through a 30-year versus a 10-year. If you look at the sweet spot in the unsecured market, it's clearly 7 to 10. Dennis you might add to that.

Yes. Ultimately if you went to a 30 year, the pricing is around 6, 6 1/4. Given where we are, we have conditions to stay in the same year launch.

Okay. Thank you.

(Operator Instructions) Our next question from Rich Anderson. Please go ahead.

Okay, thanks. If nothing changes and you're in the surroundings - environment, jobs, the economy or whatever, would you say that next year could kind of be something like this year?

We're not commenting on '11 yet. I would point you to Ron Whitten's numbers he gave out at our investor meeting. '11 looks like it could be good, especially with the job number that you saw today, 151,000 print was big, and we need 300,000 a month to lower the unemployment rate, but that was a good number.

What do you think -- what could go wrong for next year that could maybe make you a little bit less optimistic?

What could go wrong? There's a lot of things that could go wrong that are just out of anybody's control, like a major incident, a European bond crisis again or something like that where you have the world freak out over it, but, given everything that's out there in our market with demographics, with supply. I don't see -- other than some factor that none of us can sort of contemplate right now turning negative for our business.

Fair. And the second question is, on acquisitions, you mentioned some pretty low cap rates, but I think you said 5.9% in the fund is your average. Is that right?

That's right.

Curious how you're able to get that sort of above market cap rate?

There are two things going on. One is we're not chasing core deals that a lot of the emphasis has been on institutional investors. So we're not going to the 4 1/2 cap rate deals. We're moving a little away from core and going to more to sort of -- not outlying locations, but just out of core and doing value add as well, meaning that we found some property that we can, increasing the cash on cash returns, and we're able to get a little bit higher yield by going in that direction.

And could you comment on how you use those returns by virtue of the fact they're in the fund? Can you quantify that with what the management sees, and all that sort of stuff?

In terms of what Camden's returns are?

Yes.

Well Camden clearly has -- the returns that we're stating are just gross returns and not leveraged returns based on Camden's promoted interest in the fund. We earn a 3 3/4 management fee, plus a management of the fund fee, and then we have a promoted interest after we get it over 9. We get a 20% promoted interest. So our returns are definitely going to be higher than the returns going in probably by 20% or 30%.

Thank you.

Our next question comes from Paula Poskon from Robert W. Baird.

Thanks. A follow-up. Given the current pricing environment, are you considering at all accelerating disposition volume?

We clearly have looked at selling more assets, and I think the key is sort of a trade-off between how aggressive we think rent growth is going to be versus where pricing is going to be, and with financing rates as low as they are, I don't think pricing is going to move away from us, so we're going to focus on it on a methodical basis, but we probably will ramp up some of our dispositions.

And one operational question, any changes in the reasons for move-out and in particular, in job transfers ?

I'm going to have -- I've got the reasons for the quarter. But in terms of a change quarter over quarter I'll have to call you back on that.

I was looking for changes in trends as opposed to --

It's actually -- the one that's bounced around the most has been the move-outs to home sales. The biggest change we had this quarter was from 14.5 last quarter or 14.3 down to 10.5.

Thank you. That's all I have.

Thank you this concludes the question-and-answer session of our conference. I would now like to turn the conference back over to our speakers for any closing remarks.

Thanks for everybody attending our call, and we hope you have a good holiday season, and we'll talk to you next quarterly call.

Thank you. This concludes today's conference. Thank you for joining. You may now disconnect.