Camden Property Trust (CPT) 2010 Q4 法說會逐字稿

Hello and welcome to the Camden Property Trust Fourth Quarter 2010 Earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Kim Callahan. Please go ahead.

Good morning, and thank you for joining Camden's Fourth 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 staples 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 Fourth Quarter 2010 Earnings release is available in the Investor Relations section of our website at www.camdenliving.com, and 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 one, 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 would be happy to respond by phone or email after the call concludes. At this time I will turn the call over to Ric Campo.

Thanks, Kim. First I want to thank everybody at Camden who made it in today with the ice storm that we have here. I know across the country the big storm has affected a lot of people and a lot of companies, but when you get ice in Houston, it is a pretty difficult to move around.

So Bruce Springsteen's song, "A Brilliant Disguise", sums up how the apartment markets unfolded in 2010. We began 2010 with a significant uncertainty on the job front and the apartment markets overall, which disguised the improving fundamentals that gained momentum throughout the year.

Our original 2010 same store net operating income guidance was down 7% at the beginning of the year. We ended the year only down 3.5% with improvement in every quarter thanks to the great teamwork of our entire team in the field.

2011 apartment fundamentals should continue to improve. New supplier remains constrained at historic lows. Demand will continue to be driven by lower homeownership rate, the increase of the baby boom population, and the continued unbundling of hunkered down roommates and young people who are living with their parents who really don't want to.

We expect a 5% increase in our same store net operating income in 2011, or an 850 basis points increase over 2010. 2011 will be a transition year for Camden where we will increase our acquisitions and development programs and while maintaining our strong balance sheet.

We'll continue to improve the quality of our portfolio through select dispositions. Our team is ready to play offence in what we believe will be one of the best operating environments for our business that we have seen in a very long time. I will turn the call over to Keith Oden at this point.

Thanks, Ric. Consistent with prior years I will use my time on today's call to review the market conditions we expect to encounter and in our largest markets in 2011.

I will address the markets in the order of best to worst assigning a letter grade to each one as well, as our view to whether we think the market is likely to be improving, stable or declining in the year ahead. Following the market overview, I will provide additional details on our fourth quarter operations and 2010 same property results.

Starting with an overview of Camden's markets we'll begin in Austin, which gets A rating, with improving outlook. With nearly 30,000 new jobs expected and less than 1,000 multi-family completions, we expect to achieve our highest revenue growth this year in Austin.

The Washington, DC Metro area, Camden's largest market, also rates an A but with a stable outlook. Job growth is expected to continue at a strong pace in 2011 with nearly 90,000 new jobs forecasted, and the unemployment rate is one of the lowest in the nation. Completions are projected in 2,200 range which should drive occupancy rates in rents even higher. DC Metro was Camden's top performer in 2010 for same store revenue growth, it ranked second in 2009, and 2011 is expected to be another good -- very good year for this market.

Raleigh places third with a B plus rating and a stable outlook. 10,000 new jobs and a mere 1,300 completions will allow the occupancy rates to remain high. With rental rates increasing substantially on both new leases and renewals, we expect Raleigh's 2011 revenue and NOI growth to be among our top performers.

We also rate -- view Denver as a B plus market with a stable outlook. We expect above average performance in this market again in 2011, as over 30,000 new jobs will be more than sufficient to absorb 700 or so new units coming online this year, and provide sufficient demand to keep landlords firmly in control.

Three of our southeast markets , Orlando, Charlotte, and Atlanta earned a B rating this year all with improving outlook. After a relatively weak same store result in 2010, all three of these markets are showing signs of improvement. Orlando is expected to create over 22,000 new jobs this year while completing only 650 new apartments, leading to strong absorption and demand throughout the year.

In Atlanta we expect to see 43,000 new jobs created and we have a projected record low of over 800 completions. We'll look for above average revenue and NOI growth there as well. And in Charlotte, 2011 job growth is expected to reach 20,000 with less than 700 new completions. Recent trends in occupancy and rent growth have been surprisingly strong in Charlotte which bodes well for 2011 performance.

Up next is southeast Florida which we rate at a B with a stable outlook. Job growth is expected to be modest in the 7,000 to 8,000 range, which should be more than sufficient to offset the fewer than 800 new apartments being added in those markets. While there are always lingering concerns related to the over supply of condominiums, especially I in downtown Miami, our portfolio has performed quite well and we expect that to continue in 2011.

Tampa scored a B minus rating this year, but with an improving outlook. Growth in Tampa will be modest, about 10,000 new jobs expected, and versus 2,000 new completions. So we should see things start to improve slowly but surely.

The last market ranking as a B would be Dallas, which we rate at a B minus with an improving outlook. The outlook for job growth in Dallas this year is favorable with over 50,000 new jobs expected. A completions will be in the 3,000 range -- a 3,000 unit range, and 2011 will add to the existing 3,000 units will add to the existing headwinds of supply still being absorbed in the Dallas market.

Southern California and Houston each earned C plus ratings with stable outlooks. While 2011 job growth should be moderate in both markets approximately, 55,000 new jobs in Southern California, 30,000 in Houston, we expect both markets to lag this year due to weak economic conditions in California, as well as excess supply in Houston that still working its way through the system.

For the first time in three years, Phoenix did not receive the lowest ranking in our portfolio. This year we rate Phoenix as a C with an improving outlook. Moving up from a D last year, and the one and only F ranking we have ever given, in 2009. After several years of under performance due to massive job losses and steadily declining revenues, we are finally seeing some improvement in this market. Phoenix is expected to produce over 37,000 jobs in 2011, with virtually no new completions. This will allow occupancy and rental rates to move back in the right direction.

Coming in last place this year is Las Vegas, which we rate as a D market with a stable outlook. This is undoubtedly one of the most challenging markets in the country right now, and the only Camden market in which we expect to see negative revenue growth in 2011 of just less than 1%. While roughly 25,000 jobs are expected in Las Vegas later this year, the extremely high unemployment rate coupled with below average occupancy levels, make a turn around in this market unlikely until late 2011 or early 2012.

In comparing our 2010 outlook to last year once again, 11 of our 14 markets have a better rating this year than last, with only Houston, Dallas and Las Vegas earning lower ratings. Overall our portfolio this year would rank as a B compared to a C plus ranking in 2010. In addition, all 14 markets are rated as either stable or improving which is certainly a step in the right direction.

Now a few observations about our same property results. We closed out the fourth quarter with a sequential NOI increase of 3.4%, which was primarily due to lower expenses specifically property taxes.

Although revenues were down 0.3%, this was primarily due to a seasonally anticipated drop in occupancy. More importantly our rental rates rose a solid 1% from the third quarter with increases in every market except Las Vegas.

Traffic was up over 10% from the prior year quarter and this trend continued into January, where in the third week of the month of January, we had the most first time visits since the summer leasing season. The strong traffic allowed us to close out January 93.9% occupied.

Our turn over rate for the quarter was right at 50%. We continue to benefit from the incredibly low move-outs to purchase homes, which for the second straight quarter came in at 10.5%, which tied the all time low move-outs to home purchases we saw in the third quarter at the same level. In January we also saw solid rental rate growth with renewals up 5.8% and new leases up 2.4%. This compares to the fourth quarter results of 5.3% growth on renewals and 0.5% growth on new leases.

Last quarter we discussed our peak to trough rental rates with the portfolio being down 8.5% on average. At that time from the bottom we recovered 1.8%. In the fourth quarter we recovered an additional 0.6%, leaving us 6.1% below prior peak rent.

Finally, I want to thank all of our Camden colleagues for making Camden a great place to work, a distinction recognized by Fortune magazine for the fourth year in a row. Placing seventh on the list of the Top 100 Company's to Work For, is an honor we claim on behalf of all Real Estate Investment Trusts. And now I will turn the call over to Dennis Steen, our Chief Financial Officer.

Thanks, Keith. I will begin today with a couple of comments on our fourth quarter results. Camden reported funds from operations for the fourth quarter of 2010 of $53.9 million or $0.73 per diluted share. These results included two nonrecurring items.

The first being a $4.2 million gain we recorded in interest and other income related to the dissolution of a development joint venture. In December of 2009 we recorded an impairment charge of $4.2 million for a potential bank loan guarantee payment on a joint venture development project in Austin that we had abandoned. We were able to successfully dissolve the venture without having to perform on our guarantee and as a result we reversed the $4.2 million set aside for the potential guarantee payment.

The second nonrecurring item was a $1 million impairment provision associated with a technology investment which we determined was no longer recoverable. Excluding these two nonrecurring items, our FFO for the fourth quarter would have been $50.8 million, or $0.69 per diluted share, $0.01 above the midpoint of our fourth quarter guidance range of $0.66 to $0.70 per share.

Core results coming in at $0.01 per share above the midpoint of our guidance resulted primarily from two items. Property net operating income exceeding our forecast by $1.5 million partially offset by higher than expected G&A and property management expenses of approximately $900,000.

The $1.5 million favorable variance in property net operating income for the fourth quarter was almost entirely due to better than expected performance of our same store portfolio. As the NOI impact from our acquisition and disposition activity was minimal for the fourth quarter.

Same store NOI exceeded our forecast for the fourth quarter by $1.4 million. This favorable variance was due to same store property revenues exceeding our forecast by approximately $900,000 and same store expenses coming in approximately $500,000 below our forecast. The favorable variance in same property revenues was entirely due to better than expected increases in rental rates across our portfolio.

The weighted average rental rate for the same store portfolio increased 1% in the fourth quarter as compared to the third quarter. The favorable variance in property expenses was primarily attributable to real estate tax savings driven by lower tax rates and valuations which were finalized in the fourth quarter for our Texas and Florida markets.

For all of 2010, same store property expenses increased 0.4% over 2009, significantly below our original 2010 guidance range of 2% to 3.5%, almost exclusively due to real estate tax expense declining 6% from 2009 as compared to a 1.2% budgeted increase due to the success in achieving valuation reductions and lower than anticipated increases in tax rates.

The $900,000 unfavorable variance in G&A and property management expenses for the fourth quarter, was primarily due to the following three items. Higher incentive compensation expense, as we adjusted full year accruals to reflect actual 2010 performance, higher legal expenses related to various corporate matters, and higher employee benefit costs. All other components of income and expense for the fourth quarter were generally in line with our expectations.

Another notable item for the quarter was our acquisition of substantially all of the ownership interest of the ventures which owned Camden Plaza in Houston and Camden College Park in College Park, Maryland. The acquisitions resulting in Camden's ownership interest increasing from 30% to 99.9%.

As a result, effective December 21, 2010, we consolidated these entities for financial reporting purposes, recording the assets and liabilities of these ventures at fair value which resulted in an increase in our real estate assets of approximately $146 million. And the elimination of our prior mezzanine loans and equity investments in the joint ventures totaling approximately $16.7 million.

We did not record a gain or loss on the acquisitions. As part of the acquisition, we assumed the existing $22.5 million, 5.3% secured loan on Camden Plaza which matures in May of 2019. And we paid off the existing construction loan associated with Camden College Park.

With respect to our capital position, during the fourth quarter we continued to take steps to strengthen the Company's balance sheet metrics and to position the balance sheet for increase in investment activity. In the fourth quarter we raised $97 million from the sale of approximately 1.9 million common shares, at a weighted average price of $50.55 under our at-the-market share offering program. At the end of 2010, we had approximately $170 million in cash and short-term investments on our balance sheet and full availability under our $500 million line of credit.

Our current cash position will be used to retire $123 million in 2011 unsecured debt maturities in the first and second quarters of 2011 and to fund our expected development and acquisition activities in 2011. Our 2011 forecast does not assume any additional debt or equity issuances.

Now we would like to take a few minutes to discuss our 2011 guidance. You can refer to page 27 of our fourth quarter supplemental package for details on the key assumptions driving our 2011 financial outlook.

We expect 2011 projected FFO per diluted share to be in the range of $2.70 to $3 per share with the midpoint of $2.85 representing a $0.33 per share or 13% increase from our adjusted 2010 FFO per share of $2.52. Which excludes from 2010 results to $3.2 million net impact fourth quarter nonrecurring items I previously discussed, a nonrecurring gain of $2.7 million related to the final resolution of a real estate tax contingent liability on previously sold assets that was discussed in the first quarter of 2010. And after adjusting 2010 fully diluted shares outstanding, for the incremental full-year impact of our share activity.

The major assumptions and components of our $0.33 per share increase in FFO at the midpoint of our guidance range are as follows. A $0.23 per share or $17.3 million increase in FFO related to the performance of our 47,600 unit same property portfolio. We're expecting positive same store NOI performance of 4% to 6%.

A $0.16 per share or $11.8 million increase in FFO related to the increased NOI from our non-same store properties as a result of the three on balance sheet acquisitions we completed in the third and fourth quarters of 2010, and the incremental contribution from development communities which stabilized in 2010.

A 14 -- additionally a $0.14 per share or $10.5 million increase in FFO related to reduced interest expenses. The decrease in interest expense is primarily due to reductions in outstanding debt in 2010 and 2011 as we utilize proceeds generated in 2010 from our ATM program to reduce leverage through the pay off of maturing debt and to pre-fund the equity requirements of our new development projects. All unsecured debt maturities in 2011 will be paid off with available cash.

Additionally, interest expense will decline by approximately $2.8 million as we capitalize interest related to our 2010 and 2011 development starts. These two positives in interest expense will be partially offset by a $2.7 million increase in interest expense related to the secured debt which was assumed as the result of our Camden Main and Jamboree and Camden Plaza acquisitions completed in the third and fourth quarter of 2010 respectively.

These three positives to FFO will be partially offset by a $0.13 per share or $9.7 million decline in FFO related to NOI from our 2010 and 2011 dispositions. The 2011 dispositions are anticipated to incur in the second half of this year. A $0.02 per share or $1.3 million decline in FFO related to increased G&A and property management expenses. Our guidance for these items is $50 million to $54 million with the midpoint of $52 million representing a 2.5% increase from 2010, up primarily due to higher compensation benefits and technology costs.

A $0.02 per share or $1.7 million decline in FFO resulting from reductions in interest and other income primarily due to lower levels of interest income on our mezzanine loan portfolio, as the portfolio has declined from approximately $46 million at the end of 2009 to approximately $3 million today.

Lastly, a $0.02 per share or $1.8 million decline in FFO related to higher amortization of deferred financing costs in 2011 due to higher bank fees paid on our $500 million line of credit executed in August of 2010.

Page 27 of our package also details our expected ranges of acquisitions, dispositions and development activities. The midpoint of our 2011 FFO per share guidance range assumes the following, $50 million in both on balance sheet acquisitions and dispositions in the second half of the year. $550 million in acquisitions in our value-added funds spread throughout the year, $300 million of on balance sheet development starts, $100 million of development starts through our value-added fund, and additionally our guidance does not include any new equity or debt issuance's in 2011.

For the first quarter of 2011 we expect projected FFO per diluted share to be in the range of $0.65 to $0.69 with a midpoint of $0.60 representing a $0.02 per share decline from the fourth quarter of '10 adjusted FFO per diluted share of $0.69. Which excludes the nonrecurring items I previously discussed. This $0.02 per share decline is primarily result of three items.

Number one, lower projected first quarter same store net operating income of $1.5 million or $0.02 per share. This decline is the result of a $1.3 million or 0.9% sequential increase in same property revenues due primarily to expected increase in rental rates and improvement in occupancy over fourth quarter levels.

And, a $2.8 million or 5% expected sequential increase in same property expenses resulting primarily from a $2.1 million increase in property taxes due to the fourth quarter of 2010 favorable variances. And, real estate taxes as we adjusted our full year accruals for final 2010 tax rates and values and slide increases in all other expense categories as we expect same property expenses to increase by 3% in 2011 over 2010 at the midpoint of our guidance range after coming in only up 0.4% in 2010 versus 2009.

Number two, a $0.01 per share decrease in FFO due to the dilutive impact of the $1.9 million common shares we issued in the fourth quarter through our at-the-market program. These two negatives are expected to be partially offset by the third item, an expected reduction in interest expense of $1 million or $0.01 per share primarily driven by the pay off of our $88 million, 7.6% unsecured notes due in February of 2011 using available cash.

That concludes our remarks and we will be glad to answer any questions at this time.

(Operator Instructions)

Please limit yourself to one initial question, and one follow-up question. Then, you may re-enter the queue.(Operator Instructions)

Our first question comes from Eric Wolfe at Citigroup.

Thanks. Could you tell us what your turn-over expectation is for this year and whether you've factored in any sort of increase for residents moving out just from higher rent increases or to purchase homes?

Yes.We're basically budgeting flat with 2010 levels. We saw really nice decline in '10 over '09, and in '09 over '08. We think we're in about the right zone right now as far as turn-over is concerned, probably we should be around the 56% range for the year.

Thanks. And then as far as your expense growth, it has come in pretty well below your guidance for the last two years. What do you think the key will be for the same thing to happen in year and if maybe you could provide a breakdown across the major expense categories, that would help also.

Yes, the real swing this year in our expenses was primarily in property taxes, and we have -- when you start the year, there is a couple different things that come into the picture there, and they're both very hard to predict. We do the best that we can.

We have consultants that we use, but at the end of the day you're primarily dealing with two different things. What are the valuations going to be, and what are the tax rates going to be. And our view this year is that there is probably going to be catch up in the property tax arena with all the pressure on the states and municipalities that we operate in. Property taxes in our markets constitute a little bit higher percentage of total operating cost than most of our competitors, but really the swing number in our expenses this year relative to guidance was in property taxes.

We're at -- if you take our full year of 2010 expense increases, we were up four tenths of a percent. If you take what our midpoint of our guidance for 2011 is 3%, and kind of mash those two together because of the timing issues of taxes, it is an average of 1.7% increase in expenses for a two-year period. And that would be the lowest increase in operating expenses going back 18 years as a public company. So overall we're very pleased with our ability to control our costs, but the big factor is again going to be in property taxes. We're going to do everything we can to minimize them, but I think there is going to be a lot of pressure there. That's helpful. Thank you.

The next question is from Rob Stevenson at Macquarie.

Good morning, guys. Can you talk a little about what you're seeing out there in the acquisition market that has you fairly optimistic? You guys didn't do much acquisitions in the fund last year, but this year the midpoint $550 million that's that what you're seeing out there that gives you comfort that in that level?

Sure. We definitely have seen more properties in the marketplace today than we did a year ago, and what's happened is I think there are two things driving it. One, is the expectation for higher rates, and what happens with property values relative to rate. And that because a lot of these sellers out there have debt that's coming due, and are having to deal with those issues.

I think the second big issue is banks. Now that they recapitalized the balance sheets substantially are not continuing to extend and pretend game and so they're pushing the borrowers to sell. So you have a I think a lot more pressure on those kinds of situations. So when you look at those two things, the acquisition market in terms of product volume should be more significant than it was in the prior year.

Okay. And then a follow-up question on development. On page 19 of the supplemental you guys list out the nine properties at just under 2,500 units that are in the pipeline. What does that represent in terms of, if you built all of those out, in terms of a dollar value roughly and then, given that, plus your current land holdings, how aggressive do you need to be in terms of buying land over the next twelve to eighteen months in order to continue to back fill your pipeline going out over the next couple of years?

Well, the build-out is around 400 million plus or minus.

For the 25 units?

Pardon me?

For that 2,500 units or 2,469.

That's correct.

And then, how aggressive do you need to be back filling the land in order to meet your sort of developments, thresholds over the next couple of years?

We clearly have still have $75 million of existing land that's in the portfolio that we can build on, so we don't have a tremendous amount of pressure at least near term. But we do think that it makes sense now to increase the land portfolio as we find select reasonable transactions to buy, and our development guys are definitely out looking for new transactions in addition to ramping up our existing portfolio. I think we're in good shape probably for starts into '12 with our existing portfolio, but you can expect us to add to that portfolio as we go.

Thanks, guys.

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

Good afternoon. Ric, on your last call you mentioned $221 million of properties under letter of contracts you enclosed on the 23 million. The rest of those expected to close here soon, and also like to get an update on the Midwest portfolio sale?

The 221 million on the last call we had two things happen. We do have some that will close in the first quarter for sure, and we also had a couple of projects where we found some trouble and decided not to buy them, and so some of that pipeline has been reduced because of due diligence issues we couldn't get comfortable with. But given the environment that we're in right now, we think that is not a problem to hit our midpoints in terms of what we put in guidance at this point.

The Midwest portfolio sale is progressing, and we're having conversations with potential buyers, negotiating contracts that we've got confidentiality agreements with our partner that preclude us from giving any more information but it is going well and we still expect that to get done.

One thing I would follow up on that. There has been a fair amount of discussion about the sweet spot for acquisitions in the middle of '10 through the end of '10, was core assets in most markets, high quality, well located, assets in every market, and across the country. What's happening now is we're starting to see a lot of activity in secondary markets, end market that is aren't "the gateway city market".

So, on this portfolio in the Midwest we had substantial interest on it from a lot of different players, and I think that's an indication of the broadness of the appeal for multi-family, not just in the sort of core cities with core assets, but in markets where you have are starting to pick up because people are being sort of forced out of the core markets given that the prices are so high and the yields are so low.

That's helpful. My follow-up here, can you talk about where occupancy is at currently with the portfolio, and also embedded in your guidance what's your market rent growth expectation for 2011?

Yeah. We closed out January at 93.9% which was, for seasonally for us that's a pretty strong number. Our forecast for the entire year is at 94.7%. So I think that starting at the end of January at 93.9% is a good place to be to get for our target for the year at 94.7%. And second question was rental rate increases in the guidance?

In terms of market rent increase. Obviously you got some embedded loss to lease from last year cycling through. In terms of market rent expectations for 2011, just wondered what the number you guys are --

Our pickup in occupancy is roughly is 1%, and so if you roll that through to get our total revenue increase, you would be about a 3% market rate increase.

Okay. Thanks.

You bet.

The next question comes from Dustin Pizzo at UBS.

Hey, guys, it is Ross Nussbaum here with Dustin. Ric, a question on the occupancy line. You ended the year at 93.5%. Running sounds like just right at 94% now. When I look at your multi-family peers, they're all running call it 95.5% to 96.5% at year end. And I know this is a topic that came up last year and you had talked about not wanting to -- I think you used the word encumber the portfolio with low rents last year. Why is Camden operating at such a different occupancy level than the peers in your view?

Well, a lot of it has to do with three of our markets, or two of the markets right now are roughly 91%. One is Houston and one is Las Vegas. And so when you run that through our portfolio, it makes our number look low relative to the comp set because none of our comp set, not a single person in our comp set, has any assets in Las Vegas and only one other company has any assets in Houston and that's not a meaningful number.

Our two weakest markets that are currently running at 91%, 91.5%, nobody else has exposure to. We're not -- we're very comfortable with where we are from an occupancy standpoint given the fact that we have been pushing rents very aggressively. Again, our plan for the year is our budget for the year is 94.7%. I am always confused and mystified by why anyone wants to run their portfolio at 96% occupancy instead of pushing rent. If we have a 94% in our number, that's an okay place for us to be. Our plan for the year is 94.7%.

I would be thrilled with that if we get our market rate increases we expect and maintain 94.7%. So I can't speak to what anybody else's view is on that, but we calibrated our revenue management system to operate somewhere in the 94% to 95%, low 95% range, and that's where we expect to be for 2011.

Got it. And where currently are you guys pushing renewal rents?

In every market. The only --

Sorry, in terms of number, what's the percentage increase that you're actually getting on renewals.

On renewals in January we were up 5.8%.

And renewals interestingly enough are up in Las Vegas too, in spite of the overall revenue declines.

And based on the renewals you received back for February/March you think five eights is a sustainable number?

So far we have gotten 31% back and they're trending better than the five eights or in the 6% range so we feel like the recovery is very sustainable from here.

Ric, any thoughts on what Fannie and Freddie will have to say for themselves next week?

No. Fannie and Freddie going to be -- that whole debate is going to be a long-term debate. We started hearing -- I am on the task force for national housing council and we had a conference call last week about where they are and what they're going to do, and it is going to be a long slog. We're hearing from the new Republican leadership that they were originally going to push something really hard in the first and second quarter, and now we're hearing that it is delayed and even the new Republican group is delayed. They just don't have a good answer.

You have a $5 trillion behemoth that you have to deal with and the clearly the Republicans don't want to come in and shut down housing lending at a time where the housing market is incredibly weak still. I think it is going to take time.

They will probably be lots of debates and we'll have lots of meetings in Washington and have people -- have articles that come out that say they're going to shut them down, articles say they will kick the can down the road, and I think what's going to happen is this probably won't get resolved before the next presidential election.

Thanks. Appreciate it.

The next question comes from David Toti at FBR Capital Markets.

This is (inaudible) for David Toti. I was wondering if you could provide more color on your development team in the sense that do you have in-house development team or are you outsource that operation?

We do have an in-house development team, and we have been outsource the development activity. What we will do in markets like Washington, D.C. when we do a Type 1 concrete structure, we do have a general contractor that we bring in and then we do the construction management on the on the projects. But we do have in-house development capability. Most of our stick builds or wood frame construction we do in-house.

And, a follow-up question on development. What are your initial yield expectations on the pipeline?

The pipeline on the 6.5%. On the high-end is around 8, 7.75.

Thank you.

Thank you.

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

Yes hi. Good morning.

Hello, Alex.

Good things you guys in Houston didn't have our ice storm the other day.

We had it last night.

Alex, we fought our way here this morning through one eighth of an inch of snow that paralyzed the city. I think there has been over 2,000 wrecks this morning and it has been very interesting. I was watching outside -- I live in a high rise, and it was very interesting watching the bumper cars out on the freeway. People don't know how to drive in ice in Houston. It paralyzed the city.

You all would get a big kick out of the whole experience. Don't laugh at us too much.

Maybe the equity guys, maybe there can be knowledge transfer on the snow on getting to work in snow. Just two quick questions here. One is at NMHC you spoke about unwinding or not doing any more passive JVs to continuing on with JV's where you are in control, and not doing any more where you are minority. How many more do you have left to unwind and is there any financial implication assist you do so?

We only have two left to unwind, and they're not any significant financial implications to those transactions.

Okay. So when you do unwind them there is not any material potential for anything material hit.

No.

And then second is, also just coming out of NMHC, there was the development panel and I think you guys were on that. A lot of concern it seemed about potential for over development in DC just because of all the economic growth there. So two questions on that. One, do you share that concern and then, two, if people are in fact paying up for sites, it sounded like pretty healthy numbers, would it make sense for some of your land holdings in the district to maybe sell those and let someone else take a crack and redeploy that capital elsewhere?

When you look at the starts in DC, I am not concerned about the starts at this point, and I think in NMHC you hear a lot of chatter about people who are going to do deals and there is still a significant gap between chatter and getting shovels out of the ground.

I am not very concerned about that at this point. In terms of our land holdings in DC, we're actually starting construction on three of the land holdings, and the last piece that we hold there is a second phase of our project north Massachusetts. So it probably doesn't make a lot of sense to sell a second phase when we're building the first phase. So the answer would be no, we wouldn't be selling our positions there.

Now, you will see, though, that we have sold our Westwind project there which was a development we had in Loudoun county a few years ago. And the idea was to lower our exposure somewhat in the suburbs in DC so that we could redeploy that capital and deploy it inside the district.

Alex, the best evidence that we have on from our data sources for 2011 DC Metro is right at 4,000 multi-family permits, so you sort of trend that forward versus the job growth that's expected. Yes, they are going to go up in terms of starts, but relative to what's required to just kind of keep pace with the job growth. I think we're still going to be in pretty good shape in DC for the next couple years.

Okay. Thank you.

You bet.

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

Thanks. Can you hear me?

We can.

We can.

I think they should have order these calling queues alphabetically if you ask me.

We'll take that into consideration.

Just one question. Do you guys think you are out performing during the recovery?

We're out performing in our markets. markets for sure.

The whole call was your markets would out perform during the recovery.

Yeah. My question is, is this the recovery? We have 1.1 million jobs that we got back in 2010. What our forecast is based on next year in '11 is about 1.6 million jobs which would put us at 2.6 million out of the 8 million that we lost, so I am not prepared to did he declare a recovery.

Okay.

Now, I think if we see a year -- let's just fast forward to 2012. If 2012 ends up being a year where we get 4 million jobs, then I think it will be a really great time to judge lyso theory and the job growth and the recovery. Or the performance and the recovery.

Okay. That's all I have. Thanks.

The next question comes from Paula Poskon at Robert W. Baird.

Thank you. Good morning. In what market do you think you will see the weakest rental rate growth and what do you expect that to be. And conversely, what market do you expect the strongest rental rate growth in what might that be?

Weakest is easy. That's Las Vegas. Probably down eight tenths of a percent, plus or minus. Strongest would be in Austin.

Let me talk a little about Las Vegas because Las Vegas is a very interesting market, and our team spent, our senior management team spent two days there this past week sort of doing a deep dive on the economics in Las Vegas. What's happened there has been very interesting. With the downturn in the convention business and hospitality business in Las Vegas, the casinos obviously have cut staff dramatically.

Give you a sense there is 150,000 rooms in Las Vegas. Prior to the downturn it took 1.4 employees to operate those rooms and that's direct employees. There is a fairly large, sort of non direct job related to that number, but I'm just talking about direct employees, so today that number is 0.8. What's happened in Las Vegas is that because of the downturn in the hospitality industry they have really cut back on the people.

I stayed, for example, for the first time at ARIA, which is a $8.5 billion city center development, and I was very, very mindful of watching everything going on in the casino and including my room and experience that I had. And I will tell you that you can really see that there is 0.8. The elevators weren't particularly clean. There were things in the room, in one of the high-end suites that weren't fixed. They didn't get things done the way they should have.

So what's happening is Las Vegas has cut to the bone in terms of employment, and as convention business and as hospitality business has been improving, and it clearly has been improving based on visitor counts and based on the spend and the winnings of the casinos, you know, they're going to have to put more people in place to be able to service the customers that are there. And a 10 basis points increase in that body count per hotel room is 15,000 jobs.

If you get back to the 1.4 which is probably not going to happen, it is 90,000 jobs, but just a couple of percent basis point increases in those numbers will add a lot of jobs, and I think what's going to happen in Las Vegas is you are going to have a spike when it happens. It is not going to be one month, five quarters of just slow slog up. It is going to be immediate spike once the jobs come back, I think, and it will be interesting to see how it happens.

I appreciate the color. Go ahead --

Just to finish up, Austin is up seven. The worst would be Vegas, down 0.8. The best is Austin at up seven.

That's helpful. Thanks. Just one other question. On the JV interest that you acquired, what would have been the implied cap rate on that transaction?

Around 5%.

Thanks very much.

Our next question comes from Jay Habermann at Goldman Sachs.

Hi everyone. Question for Ric or Keith on the supply side. I know we're sitting here today in a pretty favorable environment, but I guess what does it take to sort of get the supply to come back? Clearly we are seeing the rents recover, but does it ultimately have to come from the lending side in the banks and is that too far away at this point?

That's a question that we ask ourselves all the time obviously. It has to come from the banks, but then what has to happen, clearly the banks -- and the banks over the last 45 days have become more constructive in at least the money center banks and large banks that are clear of tarp and clear of the issues, have become more constructive on development construction loans today. And there is definitely plenty of equity.

The constraining factor is definitely debt. The medium size banks and the regional banks and the small banks are still totally out of the market. They haven't been recapitalized the way large money centers have been. So, that's definitely a consideration.

The other piece of the equation is this. Most of the major merchant builders have down-sized dramatically. To give you a sense, Trammell Crow Residential, the largest developer in America, went from 770 employees with over 20,000 units under construction to today less than 120 employees. So 650 people were laid off at Trammell Crown and you don't ramp that machine up in a week or two or month or two.

That's going to take -- that will take, if everything just cleared perfectly and they could put together 20,000 unit portfolio of starts, it would take them a couple years to really build their teams back. And call it 18 months plus or minus and then you have to get -- when you think about how you get starts in the ground and then all the inertia it takes to get things going, I don't think we're going to have any kind of worry some development starts or development deliveries until end of '13 best case, and maybe '14 or '15. And I can give you the -- I think Trammell Crow's experience with in terms of their amount of layoffs they've had, and their model being totally restructured, is the same way for every merchant builder in America.

Now, on the one hand you may have smaller guys that weren't as big that didn't have the same kind of declines, but again those people are going to do onesy, twosy, not 10,000 units.

Jay, just some perspective on the start number and the construction side of the equation. We do believe starts are going up. There is -- we are at unsustainably low levels. We ended 2010 at roughly 90,000 starts nationally, and our forecast for starts in 2011 ramps up to about 140,000.

Now, on the one hand people will some -- it will give people something to fret about because you will say starts are up 50% over 2010 which they're very likely will be, but keep in mind that in the -- we tear down roughly 150,000 apartments a year, so in order to replace the tear down existing stock we need to build 150,000.

In order to accommodate a normal recovery in jobs, we need to be building probably closer to 250. I think you can get to the 150 pretty easily with the conditions that Ric laid out with the players that are out there, with the banks that are currently making construction loans, but we just don't see anything troublesome about 140,000 starts given the other factors in the environment other than it is going to get people something to wring their hands about.

Okay. Very helpful. Thank you.

You bet.

[ Operator Instructions ]

Our next question is from Haendel St Juste at KBW

Hello, good afternoon, guys. Ric, I guess we also heard quite a bit of chatter over NMHC over development costs pressure here. In your estimate how much do you think development cost can rise within the next couple years and how does that perspective increase impact your view on your near term development pipeline activities?

I do think there are definitely commodity pressures in the development market, and the $100 million that we started in the fourth quarter, we actually did much better than we thought we were going to do on prices.

I think that most people are talking about anywhere from a 3% to 5% cost increase over the next twelve to eighteen months. Really depends on commodities, and when you think about development, about 60% of the costs is materials, and about 40% is labor, and the labor side of the equation has not been a problem yet obviously.

We still have a lot of contractors willing to sort of work for food because of the situation with construction workers generally, and I think you saw in today's employment report construction was down like 30,000 again this month. So we don't have any price pressure on the employment side but we are definitely having price pressure on the commodity side with steel and wood and copper and things like that.

So when we start looking at our developments and our pipeline we obviously are building in if we have starts starting and we haven't bought them out yet towards mid-end of this year we definitely building in those costs expectations of increasing those cost.

Okay, thank you for that. I guess a different tact here. Given your activity in the markets in general, would you sort of give us a sense of what you're seeing in terms of the change in recent cap rates in your primary and secondary markets and also the spread between the A's and B's and would you also comment on that cap rate spread between the markets and between the quality? Does that feel right to you? Where do you feel the most attractive opportunities are?

Cap rates have definitely come down every where and in secondary markets as well as in the primary markets. I do think there is a fairly big gap in quality. You can go buy a C property or maybe a B property at probably 100 basis points wide of a core asset. The question will be location and what have you.

The challenge that you have in C properties is the way the market has worked because rental compression is allowed renters to move up in quality, the C quality properties are the most vacant, and interestingly enough people are buying them by the pound and cap rates don't matter. But from our perspective we have stayed away from the core assets and have dealt with buying properties in good locations, but a little off the beaten track or perhaps more complicated situations where there is a construction issue that had to be dealt with and something like that. And we have been able to in our acquisitions in the fund be able to get cap rates that are 6.5 kind of zone which is pretty newer properties that have been off the beaten track.

Okay, thank you.

This concludes our Question and Answer session. I would like to turn the conference back over to Mr. Campo for any closing remarks.

Take care and we'll see you on the next quarter and hopefully the weather will get better every where. See you later. Thanks.

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