Camden Property Trust (CPT) 2011 Q2 法說會逐字稿

Good day and welcome to the Camden Property Trust second quarter 2011 earnings conference call and Webcast. 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, VP Investor Relations. Ms. Callahan, please go ahead.

Good morning, and thank you for joining Camden's second quarter 2011 earnings conference call.

Before we begin our prepared remarks I would like to advise everyone that we will be making forward-looking statements based on our current expectations and beliefs.

These statements are not guarantees of future performance, and involve risks and uncertainties that could cause actual results to differ materially from expectations. Further information about these risks can be found in our filings with the SEC, and we encourage you to review them.

As a reminder, Camden's complete second quarter 2011 Earnings Release is available in the Investor Relations section of our website at Camdenliving.com and it includes reconciliations to non-GAAP financial measures which will be discussed on this call.

Joining me today are Ric Campo, Camden's Chairman and Chief Executive Officer; Keith Oden, President; and Dennis Steen, Chief Financial Officer. Our call today is scheduled for 1 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 2 with 1 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 to additional questions by phone or e-mail after the call concludes.

At this time I'll turn the call over to Ric Campo.

I hope you enjoyed our recycled Bruce Springsteen pre-conference music. We plan on recycling our second-quarter operating results for the next few quarters and foreseeable future. We actually had different music planned but somehow the file got recycled.

With that said, despite weak job growth and uncertain economic activity, our business continues to strengthen. Our markets are adding jobs while new supply continues to be limited. Growth markets that are pro business with low taxes and affordable housing added most of the jobs in America.

On Tuesday, USA Today ran a front page headline that if you want a job you need to move to Texas. Texas has created over half of all the jobs created in America in the last 12 months. We have continued to accelerate our acquisition and development programs to capitalize on what should be the best multi-family operating environment we've seen in decades.

On the acquisition side, we expect to complete over $500 million by the end of the third quarter. We will have an additional $225 million of acquisitions remaining to finish up our fund.

On the development side, we'll start another $150 million through the end of this year. And we're on track to start $400 million to $600 million of new development in 2012. Last week we began leasing at Camden LaVina in Orlando. We leased 35 apartments in the first weekend, which is the strongest opening we've ever had for a new development.

First half of the year has been busy for all of our teams. We completed over $1.7 billion in transactions, including acquisitions, development starts and capital market transactions. All of this activity has strengthened our balance sheet and positioned Camden very well to capitalize on future opportunities.

I'd like to give a big shout-out to all of our Camden teams for a great first half of the year. And remember, we have the second half to complete.

I'll turn the call over now to Keith Oden.

This was another quarter of outstanding execution by our real estate operations and support teams. Their efforts allowed us to once again raise our FFO estimates for the full year. Ric summarized the transactions in the quarter and I'll share some details on our operations for the quarter and give some thoughts on what we think may lie ahead.

The drivers of our outperformance are the same as we cited in our original outlook for the year. Demand continues to be really strong coming from some of the usual places, as well as some unexpected ones. Although job growth remains quite weak nationally, several of our larger markets are experiencing robust job growth.

Houston is projected to add 72,000 jobs this year; Dallas 64,000; Washington, DC, Metro area 59,000; Atlanta 37,000; Denver 30,000; and Austin 21,000. In each case, those numbers are sufficient to move the needle by themselves.

In addition, the home ownership rate continues its inexorable decline. The average home ownership rate in Camden's 15 markets now stands at 63.6%, below the national average of 65.9%. This rate is dropping at roughly 0.1 of 1% per quarter. While the majority of those households probably end up in a single-family rental, many are finding their way back to apartment homes.

We believe this will continue and the home ownership rate will stabilize around the long-term average of 64% to 65%. Although some published research indicates the rate could fall as low as 62%.

New supply remains very limited. We're still shrinking the overall inventory of multi-family housing due to the demolition of roughly 150,000 apartments per year. Across all 15 of Camden's markets we expect a total of 22,000 multi-family completions in 2011. That's more like the number of apartments we would have seen built in an individual market like Houston, Dallas or Atlanta during a typical year.

These trends are likely to remain in place throughout 2012 and will continue to support strong fundamentals in our business. As they say, facts are stubborn things.

Our fundamentals continue to be strong, as well. Our occupancy rate currently stands at 95%. We averaged 94.8% for the quarter, up from 93.9% in the first quarter. Despite the increase in occupancy, we've been able to continue pushing rents. During the second quarter, new lease rents were up 6.1%, and renewals up 8.6%.

For July to date, renewals are up 8.8%, new leases up 5.3%. Current renewals out to September are trending up approximately 9%. Portfolio-wide we're 3.4% below peak rents. And we still have room to increase rents just to bring our residents back to paying the rental amount they were paying 3 years ago.

On average our residents are paying roughly 18.5% of their household income for rent, which is well below the peak of 20.5% in 2007. Our best-performing markets for second-quarter revenue growth were Austin, South Florida, Dallas and DC Metro. Our weakest markets for the quarter were Las Vegas and Southern California.

Sequential revenue growth grew at a very strong 2.9%. This is the highest sequential revenue growth that we've ever reported. The most improved was Houston, up 5.2% sequentially, joined by Dallas, Austin and Denver, each up by better than 4%.

Despite these rental increases, our turnover rate remains below our expectations. For the quarter, we saw 55% turnover, which was less than the 57% in the second quarter of 2010, and still below plan for the year.

One big reason for the lower turnover is due to the continued low levels of move-outs to purchase homes. The percentage of move-outs to purchase homes ticked up from a record low of 10.4% in the first quarter to 11.5% in the second quarter, but still well below historical norms.

In summary, we find nothing in the data to alter our view that 2011, '12 and '13 should be the best 3 years in the multi-family business in a generation. Based on that, we think we're probably in the second inning of what should turn out to be a really good game. Stay tuned.

I'll turn the call over to Dennis Steen, Camden's CFO.

I'll start today with a few comments on our second-quarter results. We reported funds from operations for the second quarter of 2011 of $30.4 million, or $0.40 per diluted share. Representing a $1.7 million or $0.02 per share improvement from the $0.38 per share midpoint of our prior guidance range for the second quarter of $0.36 to $0.40 per share.

As a reminder, included in these results and our prior guidance were 2 nonrecurring items. The first being a positive $4.7 million or $0.06 per diluted share impact related to a gain we recorded in the second quarter on the sale to our fund of the Camden South Capitol development in Washington, DC. The gain was related to the reimbursement we received for previously written off third-party development costs.

The second nonrecurring item was a negative $0.40 per diluted share impact related to a $29.8 million loss on the discontinuation of a hedging relationship of an interest rate swap, and a $500,000 write-off of unamortized loan costs. Both related to the payoff of our $500 million term loan in the second quarter. You can refer to our press release dated June 6 for further details on this transaction.

Excluding these 2 nonrecurring items, our FFO for the quarter would have been $55.8 million, or $0.74 per diluted share, representing a $1.7 million or $0.02 per share improvement over our expectations.

The better-than-expected performance for the second quarter was primarily due to property net operating income exceeding our expectations by $1.5 million, exclusively due to larger than expected property revenue growth across all of our operating regions.

Total property expenses for the 3 and 6 months ended June 30 continue to come in line with our original budget as lower levels of self-insured property and general liability insurance claims have substantially offset higher benefits cost. Resulting primarily from an increase in self-insured medical claims for our employees. And higher utilities expense due to an 11% increase in water expense across our Sunbelt market experiencing drought conditions.

Over 80% of our water expense is rebilled to our residents with the recovery included in property income.

With respect to our capital position, during the second quarter we continued to take steps to further strengthen the Company's balance sheet metrics and to position the balance sheet for increasing investment activity. During the quarter we tapped the debt market, issuing a total of $500 million in new 10- and 12-year unsecured notes at an average yield of 4.85%. We used the proceeds to retire our $500 million term loan, which was originally scheduled to mature in October of 2012.

Additionally, during the quarter and in early July we issued approximately 1.1 million common shares at a weighted average price of $63.73 under our at-the-market-share offering program. As a result of these actions, our liquidity position is sound. With $64 million in cash on hand, full availability under our $500 million line of credit, no scheduled debt maturities for the next 4 quarters, and we have reduced our total debt maturities in the second half of 2012 to a manageable $294 million.

Moving on to earnings guidance. We have revised our 2011 full-year FFO guidance range to $2.65 to $2.75 per diluted share. With the midpoint of $2.70 representing an $0.08 per share increase from the midpoint of our prior guidance range.

This $0.08 per diluted share improvement at the midpoint is primarily the result of the $0.02 per share outperformance we recorded for the second quarter of 2011, and a $0.07 per share improvement in FFO attributable to higher forecasted property NOI for the second half of 2011.

This increase in forecasted NOI is almost entirely due to higher-than-expected property revenues resulting from the continuation of higher-than-expected rental rate increases across our portfolio. We now expect same-store revenue growth between 4.75% to 5.75%, up from our prior guidance range of 4% to 5%.

Property expenses continue to perform in line with our expectations and the midpoint of our full-year 2011 expected growth in same-store property expenses remains at 3%.

The above 2 positives will be partially offset by $0.01 per share in dilution resulting from equity previously issued during the second and third quarters through our ATM program. As we continue to reduce leverage and prefund the equity requirements of our development activities.

Our revised full-year 2011 guidance also assumes no additional shares issued under our ATM program, $100 million to $150 million in new on-balance-sheet development starts, and $100 million in both acquisitions and dispositions late in the fourth quarter, at a negative cap rate spread of 100 to 250 basis points between acquisitions and dispositions.

Our FFO guidance for the third quarter of 2011 is now $0.74 to $0.78 per diluted share, with a midpoint of $0.76 per share representing a $0.02 per share increase from the $0.74 of core FFO we delivered in the second quarter. Which excludes the previously mentioned nonrecurring items.

This $0.02 per share increase is primarily a result of the following. A $0.01 per share increase in FFO due to higher same property NOI as a projected sequential increase in same property revenues, driven primarily by the continuation of increases in rental rates across our portfolio, more than offsets our expected increase in property expenses due to normal seasonal summer increases in utilities and repair and maintenance costs.

This results in an expected sequential increase in same-property NOI of approximately 1%.

We will also have a $0.01 per share increase in FFO due to lower interest expense resulting primarily from net interest savings related to the payoff of our $500 million term loan in the second quarter with the proceeds we received on our new $500 million 10- and 12-year unsecured notes issued during the quarter. And a reduction in interest expense resulting from an increase in capitalized interest expense due to the increases in development spend related to our 6 communities under construction and communities in our development pipeline.

At this time, I'd like to open the call up to questions.

(Operator Instructions) Jana Galan from Bank of America-Merrill Lynch.

Hi, good morning. I was curious in your view, your development starts for 2012, what parts of your portfolio would you be expanding in. And then also maybe some discussion around what kind of land costs you're seeing.

Sure. The starts for 2012 are throughout our portfolio, including Austin, Denver, South Florida, Atlanta, and Washington, DC. So, it's pretty well spread throughout our portfolio. Interestingly enough, land prices are pretty close to coming back to peak levels, where they were in 2006 and 2007.

The good news, however, is that construction cost continues to be much less than peak. Construction costs relative to type 1 building, or concrete construction, is probably down 20%. Even though we are starting to build into our development models some escalation in costs associated with commodity price increases. We haven't started to see much pressure on pricing relative to personnel costs or those types of things yet, but definitely commodity prices have had some effect.

Thank you. And you mentioned that the industry will have very limited completions in 2011. You said maybe 22,000 in your markets. I wonder what are you tracking for 2012.

2012, there's definitely been a tick up in potential supply for 2012 but it's not anything that we're worried about at this point. Do you have that number?

Yes, across all of Camden's markets the number goes from 22,000. And the forecast that we're using right now across all of Camden's 15 markets is 38,000. Again, relative to a normal period of time across these growth markets, that's still an astonishingly low number.

Dave Bragg of Zellman & Associates.

Hi. Good morning. Just wanted to expand on your comments from earlier about the second inning of the cycle. And you said earlier that 2011 to '13 could be the best years for the apartment industry in a generation.

Obviously, it's unfolding at a faster pace than even you expected. So, is your outlook for this recovery that it gets stronger from here, is stronger in aggregate than you previously expected? Or is it getting pulled forward, especially given the supply outlook for 2013 and beyond?

I'm not smart enough to pars whether it's being pulled forward from '12 or '13. But the facts, as you lay them out and you look at what's driving the performance in our markets, these are tectonic moves. Particularly with regard to the home ownership rate as it continues to tick down.

0.1 of 1% per quarter doesn't sound like a whole lot but each quarter that that comes down, 0.4 over the course of a year is worth about 500,000 households that are coming out of a home, into a rental condition, whether it's single family or multi-family. And we think we're still fairly early in that process.

The number that came out today, the Census Bureau put out a number of 65.9% home ownership rate. But there are studies, and there are a lot of smart people, including some people at the GSEs, who think that, as pendulum swings tend to do, that we're probably not going to stop at the 64%, 65% historical trend. That we may overshoot that and end up something closer to 62%.

So, that's just a fundamental shift in the way that people in the last 5 to 7 years made a choice to buy a home as opposed to rent an apartment are evaluating that decision. Some of that has to do with the credit conditions and the underwriting and all those kinds of factors, as well. And again, I think there will continue to be pressure on that side of the equation.

So, that's number 1. And that doesn't stop in '12. It probably doesn't even stop in '13. I think we're going to have that tailwind for some time.

The second part is with regard to supply. And I know there's a lot of people doing forecasting and a little bit of hand-wringing about supply. But the fact is, that we are currently bumping along at a rate of multi-family starts that are in the low $100,000 range.

I think that number would have to get -- you would have to see starts in the $250,000 to $300,000 range to get anywhere close to just keeping up with the current level of household formation, notwithstanding what's going on with the home ownership rate. So again, apartments are not like cornflakes. You can't go to the grocery store and get more apartments.

It's a long lead time associated with bringing on new supply. We do agree that supply is going to get added. There's no question about that. But I think you're talking about degrees of scale.

When I see and think about 2012, if we were to add 38,000 apartments across our 15 markets, that's almost not enough to, in most of those markets, to even move the needle with regard to supply. The 2 big issues are in place. The results are going to play out in a way that's hard to see much change in trajectory in the next 12 to 18 months.

The only thing I would add to that is that if you look at numbers like the doubling up scenarios where people are living at home or in roommate scenarios, we've only unlocked about 33% to 40% of those folks. The rest of them are still doubled up at home or in roommate scenarios.

So, we have a fair amount of people, a little under 2 million people, that still can unbundle. The other piece of it is if you think about job growth, 60% of all the jobs are going to people under 34 years old, which are our prime markets.

So, our normal demographic is doing really well economically relative to an older demographic. So, those things, combined with what Keith said, makes us think that we're not pulling things forward, pulling demand forward, but it's going to be stronger from here, assuming that we have some job growth.

That's helpful. I know you guys are baseball fans. Just wanted to confirm that you're talking big league baseball and not little league, 6-inning game there. That's very helpful.

We're talking about the 9-inning kind.

Got it. Just 1 follow-up question here. Just near term, when you see the strong job growth in some of your markets in Texas, as you talked about, can you contrast your pricing power there over the last quarter or 2 as you've seen the job growth come in to some other markets where fundamentals appear pretty strong still, but you're not getting the job growth such as Atlanta, Charlotte, and DC, which all rank below the national average?

Yes. It's clearly no coincidence that our top 4 sequential revenue growth markets for the quarter were Houston, Dallas, Austin and Denver. We've always said, and no one's repealed this law or rule, that job creation and employment growth creates households. Household formation creates demand for multi-family.

There's obviously a little bit of a lag there. It's no coincidence that that's what we're seeing. We hope that we will see a broadening out of the job growth experience in our other growth markets and I expect to see similar results.

But we were having a pretty decent recovery. If you look back at the results of 2010, there was a lot of strength in these markets that you couldn't explain by job growth. So that's where we started thinking of other things that could be driving it.

And the most obvious, to us at least, is the decline in the home ownership rate. If you get both of those things combined, which we do believe we're going to get at some time in 2012 and 2013, that leads to our thesis that we think this will be the strongest 3 years in a generation.

David Toti of FBR.

Good morning, guys. Ric, quick question for you. It's a big picture. Given that you're projecting a pretty fantastic playing field for the next couple of years, and it looks like job growth and wage growth is somewhat stagnant, do you think there's a risk of rent fatigue with renters that we could start to see next year? In the form of elevated turn that begins to put a lid on how much you can raise rents?

I missed a part of -- you cut out a little bit. You're talking about tapping out rental increases because renters can't afford it because the job market's not that great?

Yes I'm wondering how much renters can tolerate in terms of rent growth if their incomes aren't increasing and their rent continues to go up by high single digits.

Right. First of all, if you think about where we are today, we are still at pretty low levels from a rent income perspective. As Keith pointed out in his comments, we're at 18.5% of income. And at the peak in 2007 we were like 20%-and-some-change.

And if you go back to peaks in the past, it's been somewhere in the low to mid-20%s of income to rent that people could afford. So, first of all, I think we do, in fact, have a fairly good gap to make up before we start having a lot of rental rate shock because residents don't have enough capital or income to pay the rent. So, that's 1 thing.

The second thing is, we manage our rental increases such that we try to have a perfect match between turnover rates and rental income because it doesn't make sense to have someone move out for $5 or something like that. You make them move out for $200 when you get down to trying to maximize that revenue piece of the equation. I think we have a fair amount of room at least in our portfolio to raise rents without pushing people out.

David, in our portfolio, don't get the impression that we don't have people that move out and give the reason that I can't afford the rent. That does happen.

But, a key is whether you can quickly backfill that apartment with a new lease. And so far, again, looking at our turnover rate over the prior quarter of last year, it's actually down 2%, which is a little bit surprising, given that we're pushing rents on new leases in the 6% range and we're getting 8%-plus on renewals.

Okay, that's helpful. I keep feeling that the '07 peak was a very different context where people were generally very optimistic about their income and their outlook for their own personal wage growth. Today's world is a little bit different. So, I'm just wondering if those metrics are really comparable.

That's true, David, but at the '07 peak we were losing 23% of our residents to purchase homes. That number is a whopping 11% now. So, those 12%, that's huge in our portfolio when you think about those people are choosing to rent as opposed to pursuing some other housing option.

I agree. It's a strong argument. My second question, it's a little bit off the track a bit. Are you guys doing any LEED certified construction in your development? Is there any demand from your tenants, from your renters relative to the new product you're putting out around green initiatives?

There absolutely is. And we are definitely pushing the edge on sustainability and communicating that with our residents. The challenge with LEED, however, is LEED is really set up for office and other uses. And we as an industry have put together several programs for multi-family. But, we focus on that in a big way.

As a matter of fact, 1 of the projects we did here in the city of Houston, that we did in a third-party construction for the city, was actually Platinum LEED. And even though the LEED aspect is something we don't really shoot for, we shoot for a broader definition of green.

But our residents are definitely asking about those issues. And it is a differentiating point that we are focusing on, on all of our new construction. And actually even in our existing projects, talking about recycling and sustainability issues is a big issue with consumers.

Is there any impact to yields or is it de minimis?

No, it's pretty de minimis. If you went to LEED and went to LEED Platinum it is significant cost, for sure. But, most municipalities have some sort of requirement and then we exceed those requirements generally. And then we use the green aspects that we're putting into our buildings as marketing for our residents.

Eric Wolfe of Citi.

This is actually Nick Joseph here with Eric and Michael. I was wondering if you could give us a breakdown of how you see the different expense items trending in the back half of the year. Just trying to get an understanding of how you're getting 4.5% growth in the back half versus 1.5% in the first.

The biggest issue in the back half of the year is that we had large property tax reductions in the third and fourth quarter of last year. So, that's why it appears as though you're going to have a large increase in the second half of the year.

But property tax for the full year period is only going to be up right over 2 points, a little over 2%. When, on a quarterly basis for the next 2 quarters, property taxes are actually up 6.5%, and 17.9%. So, if you normalize out those property tax adjustments, there's really nothing that's really amiss as it relates to our forecast for full year expenses.

Let me broaden the response a little bit on expenses because several of the eagle eyes picked up our expense number relative to the comp set, and asked some questions about it. And as always, the devil's in the details.

If you look at our expense number over a 2-year period, which you need to do to understand where the growth is coming from, if you strip out the expense associated with our cable TV and Valet Waste programs, we actually experienced a negative 0.4 expense growth last year. So, in 2010, our expenses actually fell by 0.4 of 1%.

If you make the same adjustment to the 2011 number, the midpoint of our guidance is 3%. You strip out cable TV and Valet Waste, that puts you at 2.7% increase for 2011. If you match those 2 years together, minus 0.4 and 2.7% up, it leaves you at 2.3% expense increase for a 2-year period. or an average of 1.15%.

That number is not only below the average or midpoint of peer guidance for the 2-year period, but it represents the lowest 2-year expense growth experience in 20 years in our Company. So, you've got to put these things in perspective.

We're very comfortable with our expense and our control of expenses. We're below plan for the year. We think we've got a little bit of exposure in Q3 and Q4, as we always do, from turnover. But, we're comfortable with that number. And as a management team we're very comfortable with an average expense growth of 1.15% for each of the last 2 years.

Okay, thanks. On the call last quarter you mentioned correlation between job growth in the DC and government spending. With everything going on in Washington, short and long-term budget cuts becoming increasingly likely. Are there any thoughts to recycling some of that DC portfolio, given that it's your largest exposure?

I wish I agreed with your premise that it looks increasingly likely. I think the jury's still out on that. You look at these numbers and the plans that they laid out, and who knows. It's impossible to handicap.

But, I do know this. When they talk about $1 trillion or $900 billion worth of cuts, that's over a 10-year time frame. If you think about where the expense cut actually happens, unless they start significantly reducing headcount at the federal government level, which by the way there's no evidence whatsoever, unlike the states and municipalities who have already gone through severe headcount reductions, we've not seen any of that at the federal level.

Until you get to something like that, it's hard for me to see how the spending curve is going to change materially. Keep in mind, in Washington-speak, they're always talking about the rate of increase. It's against the baseline and the baseline always increases.

And then further down the road, if you think there is some grand bargain, and they actually get to the point of dealing with the real issue, which is entitlements, at the end of the day, if you cut Medicare reimbursements or you cut Social Security, or cap increases in some fashion, it doesn't take any fewer people to process a $90 check than it does a $100 check.

If the real money comes out of the system, it really comes out of the system to beneficiaries. So, then you've got to think about where are the beneficiaries to think about where the impact would be. And, by and large, our business is not affected by Medicare and Social Security reimbursements.

So, anyway, it's a wild card for sure. It's something we do think about. If they ever get to meaningful cuts that gets over into headcount at the federal government, clearly there could be some impact there. And that's something that we do concern ourselves with.

But, we're not changing our portfolio strategy at this point.

Jay Habermann of Goldman Sachs.

Good morning, guys. Question on development. As you look at your pipeline communities and your landholdings, you talked about $400 million to $600 million of starts next year. But over a multi-year cycle I'm assuming you could have $1 billion-plus of potential starts or development. How do you think about the pipeline communities in landholdings? Do you think you're well-positioned for this 2- to 3-year cycle?

I think we're very well-positioned for this cycle. We are working through our land bank that we had from the last cycle. And we are, in fact, working on new transactions with new land transactions to fill the pipeline for '13 and '14. So, I think we're very well-positioned.

I will say that we will not have the same size of a development pipeline that we did at the last peak, so we will stay in this $400 million to $600 million range annually. And as we roll new ones, finish up and we lease up, we'll roll new ones in. But I feel really good about where our development teams are. We've got great teams in California and DC, Florida and Houston that manage the portfolio and they're doing a great job.

Okay. And then just switching gears a moment, maybe Keith if you could talk a bit on Florida in terms of what you're seeing across some of the markets there, maybe focusing on Tampa and Orlando. Is that coming from the weak single-family housing market? Are you seeing job growth there? And maybe talk about rent growth, rent as a percentage of income, just how sustainable you think those gains could be.

The job growth numbers for 2011, Orlando we're forecasting 28,000 jobs. It's a meaningful number in a market like Orlando, enough to move the needle. In Tampa, we're at about 17,000 jobs for the year, not quite up to where Orlando is. And then in Miami, we're at 23,000, which includes Fort Lauderdale.

So, Orlando and Miami's enough to move the needle. And we had good sequential growth in those markets. So, I think that Florida is going to continue to do reasonably well. I don't think we have been impacted by the single-family debacle in terms of losing residents to single-family homes out in the suburbs as an alternative, any more there than we have been in markets like Phoenix.

Yes, there's tons of unsold inventory still out there, and at some point there needs to be a resolution to that. My guess is a huge part of the resolution is going to come from people who are being foreclosed in their existing residence seeking a single-family rental alternative because they have a need to have a family because of their family size and composition. So, I think that that's the most likely resolution. But that, again, just doesn't really have much of a direct impact on our business.

Rob Stevenson of Macquarie.

Good morning, guys. Keith, if I think about your comments in terms of you guys still being below the income to rent numbers in the portfolio, and you guys are still pushing rents on renewals close to 9% and still getting decent bumps on new leases, is it basically the market that's preventing you from raising rents even more at this point? Are you guys opening a gap between you versus the market?

We're not opening a gap between us and the better competitors, which, by and large, are the public companies. And then there's always some well-run private companies. 1 of the things that, you can never run so far ahead of the market that you have created an uncompetitive situation.

But if you're using a good revenue management system, then it is capturing the strength that is inherent in those marketplaces. We can't manufacture the strength. So, you have great demand quarter-over-quarter it's up almost 8%. Some of that's seasonal. But, if you look at it year-over-year our total traffic across the portfolio is up 6%. There's just more people out there looking for well-located multi-family as an alternative.

When you think about 8.8%, 8.6%, 8.8% on renewals, and 6%-and-change on new leases, if you look at the trend going back for the last year, it's just been a pretty steady straight line up. And I think that that kind of trend is going to continue. Because the fact is, is that the market-clearing rent for our communities is continuing to march up.

Our competitors that use revenue management are seeing the same things that we're seeing. Now, the less sophisticated competitors are always late to the movie, and that's okay.

We know that we're pushing rent in ways in some of our submarkets that our less sophisticated competitors haven't gotten on to yet. But, at the end of the day, even the less sophisticated ones do their comping, and when they look at what we're getting with no concessions, it's pretty hard to get around the fact that they should be raising rents too. And they eventually do. It takes them a little while to get there, but they get there.

When you take a look, excluding the REITs, et cetera, if you take a look at the less sophisticated guys that are operating, which is, I would assume, the majority of the guys that you're competing against in any given market, where are they? If you guys are pushing rent 8%-plus on renewals, are they down in the 3% level or so, on average, do you think? Or are they much closer, but not quite as high as you guys?

It wouldn't surprise me if they were half of what we are right now on renewals and new leases. But even that, in their world they're looking at that and going -- My gosh, I'm getting 4% on renewals, I'm getting 3% on new leases. Most of them are playing a different game, too, Rob. They're third-party fee-managed.

And the worst thing in the world, the 1 statistic that everybody, every asset manager can look at and beat you up over, is occupancy. So, they tend to manage to occupancy much more than we do. But in their world they get 3% increases and call it a day. They're just playing a different game than we are.

Okay. Because it seems like there's additional upside that could accrue to you guys just from having the competition be better.

There's no question about that. That's why we made our revenue management system available to the masses and people are adding on to it every time. The worst thing in the world is to have a stupid competitor across the street. And what we try to do is get our managers to educate them that they're selling their product at too low a price. We spend a fair amount of time doing that without getting into issues of getting everybody to have the same rent.

Okay. Then just a second question, Ric. You talk about the $400 million to $600 million development pipeline as where you want to keep things. Have you guys considered, to any great extent, funding some of the merchant developers in pre-sale takeouts where your capital isn't at risk as much as a way to either, whether or not you're calling it quasi developments or quasi acquisitions, as a way to get additional investments without the risk?

We have looked at a few transactions like that in markets that have really long lead times where we don't have a big pipeline. Bit generally speaking, we shy away from that because at the end of the day, you made a comment that you have less capital at risk.

I've found in those kind of transactions that you have as much capital at risk, and you have additional risk and that is that the merchant builder doesn't deliver and doesn't build the project on time and on budget. And you end up having to deal with a lot of those issues. So, given that we have a very robust development background and experience and team, it's highly unlikely we'll do transactions like that.

Alex Goldfarb of Sandler O'Neill.

Good morning down there. Just going back to Atlanta for a minute. If we look at the latest BLS data, I think there were job losses, in fact. If you look from the dot-com bust, Atlanta never really regained the oomph that it had in the '90s. And what's interesting is Phoenix, despite having been obliterated with the housing downturn over the past 2 years seems to be rebounding strongly.

Do you think there's something with Atlanta? Or why aren't we seeing the growth that it used to have? Why didn't we see that come back? And why is the job losses recently, why are we seeing that as opposed to some of the other Sunbelt growth year markets that are rebounding?

Our forecast for this year actually showed a loss of 10,000 jobs in 2010 and the Whitten forecast is 37,000 this year and the CBRE forecast is 40,000. Those may end up being a little bit optimistic. This is my 2 cents worth. And I don't have anything more than this.

Which is, if you look at Atlanta's economy, 1 of the things that was always a selling point of Atlanta was that it is almost exactly the distribution of the United States in terms of where the industry is. So, it's almost a snapshot mirror of the distribution of the US economy.

And so you think about that, and the US economy has struggled mightily in the aggregate to move the needle on jobs. And you almost would expect that to be the case with Atlanta, because the drivers are the same as the overall economy.

Now, contrast that with, where's the job growth happening in our portfolio? The top four are Houston, Dallas, Austin and Denver. And there's just no question that the energy component of those markets -- and Austin's a little bit different story but it's part of the Texas story.

Denver is very much affected by what's going on in energy prices. So, you think about those economies, they're marching to a different beat than the national economy is. My guess is that Atlanta is just doing what you would expect from Atlanta given the weakness in the overall national job growth.

And I think your juxtaposition with Phoenix is very telling, too. Because Phoenix, for example, if you think about why Phoenix is doing well right now, it's doing well because its cost of doing business went down big time as a result of the housing bust. You've had massive declines in housing prices and lots of unemployed workers.

And that has actually given Phoenix a competitive advantage against other economies where you haven't had housing busts and what-have-you. You look at some of our properties in Phoenix, for example, we have a lot of engineers and construction workers and architects that are building the $1.3 billion Intel outside of Peoria.

When you look at what's driving the Phoenix market, it's actually Intel, medical, and distribution services, call centers, those kind of things. And they can relocate to Phoenix at a very, very low cost. And the government is just welcoming them in with tax incentives and all kinds of different gifts and give-aways to try to get their economy back on track. And so, that's why it's doing really well.

But, if you think about it, you guys are always big into your portfolio weighting and how you balance the different markets. Clearly you guys have been interested in Atlanta, because you bought the equity deal in Buckhead.

There are news reports about a former high school site that now has an apartment on it or something like that. But if you think about it, if Atlanta, from what you're describing, doesn't sound as rosie as what it was, wouldn't that almost suggest that you may want to down weight Atlanta and increase the weighting towards other more pro business or low cost or markets that have more growth potential?

We were just doing a juxtaposition between Atlanta and Phoenix right now. But if you look at Atlanta over the long haul, I think Atlanta is a great market. It's still in the South. It's still in the flow of business, it has a lot of Fortune 500 companies that are headquartered there. It has a lot of positives.

I don't think you can ignore Atlanta and say Atlanta is off the edge of the earth and we shouldn't be there. We like Atlanta. The growth has been okay given the job growth scenario there.

And I think Keith's view or his discussion of, that it's like the rest of the US economy and that's why it's having issues, as you grow the US economy Atlanta will do great. Right now the US economy is not growing as much. We think there's some pretty attractive opportunities in the Atlanta area and we're committed to Atlanta over the long term.

Just my second question is, on the land sites, who are you seeing out there? Land values have rebounded strongly. Who are you seeing out there competing? Is it home builders? Is it other rental builders? Who is out there bidding for that land?

It's definitely not home builders. In the last cycle home builders outbid the multi-family people in terms of building developments. Today, the home builders are pretty quiet.

I think what the home builders are doing are buying existing lots and things like that as opposed to outbidding us on multi-family sites. The typical players out there are the typical players you've seen in the past which are REITs like us.

And then the merchant builders are coming to life again. They still have a lot of infrastructure to build out in terms of getting to the point where they can be anywhere close to the level they were in the last cycle. But there definitely are merchant builders and REITs out there, and it's pretty much the same players as we had in the past, albeit on a much smaller basis.

Just for clarification, even infill sites, like urban sites, you're not seeing the home builders there?

No.

Karin Ford of KeyBank Capital Markets.

Hi, good morning. After listening to a lot of multi-family calls this week, it sounds like Texas and the West Coast are really the 2 regions of the country seeing the best acceleration over the next few quarters. Given the supply picture that you painted, and you operate in both regions, I'd be curious to hear your thoughts on whether Texas and some of the better Sunbelt markets will be able to keep pace with the West Coast, say, over the next 3 or 4 quarters.

Over the next 3 or 5 quarters I think they will because there's just no major supply coming on in those markets. So, you have a classic situation where you have substantial job growth, limited supply. And that is a great recipe for, and backdrop for, good growth and outsized growth than you would otherwise have.

1 of the examples I use a lot on the supply side, because I know everyone believes that supply is going to come back with a vengeance, especially in the non supply-constrained markets, but to give you a sense, Trammell Crow residential had 23 properties under construction in Houston in 2006 and '07. Today they have 0. And they are looking at sites today, but best case scenario are not going to have any new product in the market until 2013.

So, we still enjoy a very limited supply of new product coming into these markets. And I think it's going to take at least another 18 to 36 months for any supply concerns to start to manifest. If you're talking about 3 to 4 quarters, you just can't get it in the ground and out of the ground fast enough to hurt those quarters.

Got it. Second question just relates to rents. I know you said on the last call you expected new rents to cross over renewal rent increases probably in the next couple of quarters. It looked like the spread widened out a little bit this quarter and even a little more in July. Can you just update your thoughts on pushing rents in those 2 different groups?

The widening came primarily from the pushing up on the renewals. We may have to revisit our forecast on that. And if you look at the stat I quoted earlier, Karin, if you look at our renewals going out, on what's already in the bank for the August and September renewals, that number pushed above 9%. So, it could take longer but that would be a good thing.

Okay. But you're not seeing weakness on the new lease side that in any way concerns you?

No. But the gap did grow, but it grew because renewal increases were actually at a faster clip. And again, looking forward, the evidence that we have right now of the August, September numbers, it looked like that's going to continue.

Derek Bower of UBS.

It's Ross Nussbaum here with Derek. A couple questions. First, where did occupancy end the quarter and where is it here at the end of July?

Yes, we ended the quarter at 94.8%, and we're at 95% as of yesterday.

And how much more upside do you think there is to those numbers? I know the portfolio average is being held back a little bit by Phoenix and Vegas. But, is there another point that could get squeezed out over the next year?

It would be very surprising for me to see that. Again, we are pretty careful to try to operate our portfolio in the 94% to 95% range because that's where we think we maximize revenue. If you see in any 1 of our markets that's got anything above a 95% for more than a quarter it's probably because we just can't get ahead of pushing the rents as fast as what people are willing to pay the increases at.

It would be unlikely that you would see us operate for more than a quarter at something above 95%. But the flip side of that is if it continues to stay that way, our model is optimized to continue to push new leases and renewals even harder if that's the case.

Okay. While we're on the new lease topic, did I hear correctly that the new lease growth in July was running around 5.3%?

That's correct.

And that's slightly below what you had in the second quarter of 6.1%?

It is. But, that number jumps around a lot. If you go back 2 quarters ago we were at 5.7%. The 5.3% doesn't concern me at all.

How quickly do you think that starts pushing higher? I would think if you're doing 8% and 9% on the renewals, would start giving you some confidence with the occupancy where it is to start pushing the new rent higher than 5%.

Most of that has to do with where the lease was initiated for the people that are renewing. You dial the clock back, most of these folks initiated their lease at a point in time when we were raising rents 2%.

And if you go back prior to that, many of these folks got in leases that are probably 15% below where street rents are today. And there is, as Ric mentioned, there's a little bit of calculus to, you don't want to force turnover beyond the point where you can backfill the units, comfortably backfill the units. But, most of that gap really depends on the starting point. Obviously on new leases, it's whatever the market clearing rent is.

Okay. On the development side, I don't know if I heard this. What's the stabilized yields at this point you're targeting on the developments that you broke ground on in 2Q?

The yields are anywhere from the high 6%s to the high 7%s.

And when I blend that together with what was started before 2Q, does it bring it down a touch?

No, it's about the same. Actually, our weighted average is somewhere in the 7.25% to 7.5% range. It doesn't really bring it down, no.

And is that up slightly from what you were targeting?

It is up slightly, yes.

Okay. And then lastly, you touched on the expense growth which was very much appreciated. But 1 thing that I think puzzled me, in just looking at the line items, was the 7% year-to-date increase in salaries and benefits. Can you help me understand what's going on in particular on that line item?

Yes. If you look at salaries and benefits, I'll break it into 2 components. Both salaries and bonuses were actually up 2.9% year-to-date which is, for all practical purposes, our 2% salary increase, and slightly higher incentives due to the lease-up in our portfolio over this period of time.

The rest, or the 4.1% increase, the remainder of the increase is all related to benefits. And it's really 2 things. We had an extremely good year last year on medical costs and this year we've had a rash of large claims. So, of that 7%, 2.9% is our core increase and 4.1% is just unfavorable variance on medical costs.

Got it. You got an easy comp on that next year, sounds like.

Yes. And hopefully we won't have any major experience issues.

Andrew McCulloch from Green Street Advisors.

Good morning. I know we're almost at the end of the call, so I just had 1 big picture question for Ric. Is there anything on the regulatory front that you're particularly troubled about today, or even potentially excited about, whether it's changes to Fannie, Freddie, changes to mortgage interest deduction, rent control coming back in certain markets or changes to carried interest? What's front and center on your radar screen today?

Clearly if the change in the mortgage interest deduction made it through on a big way it would be a real positive for our business, obviously, because that deduction is really just a subsidy from the government on a home. And right now we don't get a lot of subsidies from the government to rent an apartment, other than maybe the implied government subsidy that you get from Freddie and Fannie.

So, there isn't really any big pictures that bothers us. I know a lot of our lot of our National Multi Housing Council brethren who are very lathered up over carried interest, but carried interest doesn't apply to public companies. We pay ordinary income on all of our stock options or restricted stock grants.

And the fact that our private brethren who pay capital gains on their incomes might have to pay ordinary income, that's their issue and not ours. Of course, they argue to Washington that it would have a negative impact on supply because they wouldn't do as much.

And maybe it would and that would be good for us. So, I'm not sure -- there's really no big ticket items out there. Freddie and Fannie, there's still a lot of gnarling going on about what's going to happen with them.

But given everything else on the political agenda, you're not going to see any major movement with Freddie and Fannie, or even a plan for Freddie and Fannie until after the '12 elections. So, I think it's just go along, get along at this point without any major political risk for multi-family today.

Jeffrey Donnelly of Wells Fargo.

Yes, just 1 last question. I was curious about your thinking on the supply outlook for the DC Metro. Can you put the unit growth in context around the timing for us? And maybe talk about what your leasing strategy will be ahead of it and how you think that will play out in your NOI.

On the supply side, we've got an estimate of completions in Washington, DC of 2,200 units for '11. And our estimate or forecast for 2012 is right at 4,000. Neither 1 of those numbers are problematic, in my view.

If you think about the job growth that we're forecasting in 2011, we think we get 58,000 plus or minus jobs. Our back-of-the-envelope rule of thumb that has some historical correlation to what happens is that for every 5 jobs that get created, it creates a natural demand for 1 additional market rate multi-family completion.

So you translate the 58,000 jobs, you would expect you could absorb 10,000 new apartments without upsetting the natural balance. We've got 2,000 coming this year. Forecast for next year is 2012 we've got another 50,000 jobs forecast.

Using the same math you would be able to support 10,000 without upsetting the balance. We've got 4,000 forecast. So, unless something really odd or unusual or dramatic happens on the job growth front in DC Metro, we think we're really still in very good shape.

That's helpful. Thank you. 1 last question on the single family rental point you brought up earlier. Do you have a sense on where pricing has gone on single family rentals? And do you have any history on where the gap in pricing has been between multi-family and single-family?

The gap, interestingly enough, has been that single-family houses have actually been pretty affordable. Interestingly enough, in most markets the rental rates are going up on single-family houses.

And the real issue with single-family houses is it's really just a different product from multi-family. If you look at our portfolio we have 6% of our portfolio is 3-bedroom units. And pretty much every multi-family house is a 3-bedroom or more.

So, when you think about the product, maybe 6% of our product competes with it. And if you look at the vacancy rate, I'll use our favorite market that people love to use as an example for single-family problems, and that's Las Vegas. There's about a 30% vacancy factor in the single-family market in Las Vegas. Yet our property is at 93%, 93.5% occupied.

Which means that if those were really competitive products, there would be this giant sucking sound out of the multi-family and you would have a really low occupancy rate, high vacancy rate. So, whether they're more expensive or less expensive at the margins is important but really not a broad macro thing that hurts the apartment business.

Mark Biffert from Bloomberg Research.

Hello, guys. Keith, just to expand on the data you provided on the markets, I'm just wondering if you've looked at what the spread to rent versus own is in those markets? And with the job growth and the thought that as incomes grow and people get married and move out and start having kids, I'm just wondering what that spread is and where we could potentially see that cross over and people decide to move out to own.

When you look at the spread of buy to own right now, or rent to own, it's probably at 1 of the best relationships today for home ownership. It's right at even in the sense that you can rent an apartment for the same price you can buy a home in a lot of our markets.

The question, however, is do they want to buy a home or can they buy a home. When you look at the issues related to just the home ownership rate dropping, the fact that prices continue to fall, consumer sentiment is obviously very negative towards buying homes.

As the time goes on and people get more constructive about home prices rising and their family situation, or whatever changes, so that they're more likely to buy a home, then they will buy a home. I'm 1 of the -- and I think we are in general -- we have a view that the home ownership rate dropping is not a secular change in consumer habits in the future.

Because most people, when they get to their mid-30s and start reaching their 40s, they have more capital, they have more stable job situations. If they do get married and have children they have different kinds of needs for housing and they will, in fact, move out and buy a house.

And I think that actually is good for America because you'll have, then, ultimately the housing supply will go down, the excess supply, you'll have more construction workers and products being made and what-have-you in the overall housing market. But, generally speaking, you can't look at the rent to buy ratio and say -- Uh-oh, they're getting ready to all move out to buy houses.

In addition, I think 1 of the things we really learned the hard way in this last cycle is that comparing the cost to rent to the mortgage payment is just really fallacious. It's the cost of occupancy. And in a rental environment your cost of occupancy is your rental payment plus a little bit of utilities.

And in a single-family home it's that, it's utilities, it's maintenance, it's property taxes and all these other things. So, it's a little bit of a funny comparison to say rent payment versus, as a percentage of, relative to mortgage payment.

So, is it your view, then, that the echo boomers that are really driving this push and where we're seeing the biggest move-outs, I think you said 50% of the ones that had doubled up are now coming out, or maybe it was 30%. Is it really a few years out before we actually see that? Maybe it's the echo boomers that drive that shift back into housing? Or is there another thing that might drive that?

I think it is, definitely. The echo boomers, once they get more established. And these statistics on propensity to rent go back 25 years and they haven't really changed much.

Is that a 21-year-old has a higher propensity to rent than they do to buy. A 40-year-old has a much higher propensity to buy than they do to rent. As the baby boom echo ages, and as they get into their mid-30s, they will start buying houses, there's no question about that. At least through the next 3 or 4 years, like through 2015, we still have an increase in that cohort between 18 and 24 years old that continues to increase through 2015.

So I fundamentally believe that as the markets improve and consumer sentiment improves with respect to housing prices, and mortgage availability improves, and credit metrics improve, people will, in fact, buy houses. When they get to the point where they have a higher propensity to buy versus rent because of lifestyle issues and choices.

But today, you have negative consumer sentiment. You have all these people doubled up. You've got a lot of young people coming into the marketplace. It's made our business really, really good. And ultimately in 2015, '16, '17 you'll probably get more to a market like we had in the '90s.

Because if you look at the '90s you didn't have the baby boom echo. All the baby boomers were buying houses. But, interestingly enough, through the early part of the '90s, after the early '90 recession, through the end of the decade before we had the tech bust, multi-family did incredibly well, primarily because we added 25 million jobs during that time frame and created a lot of new households and demand.

If we have decent job growth and decent economic activity after '15 then it should be a good business too. But, between now and then it's going to be a really good business.

Just back to development. Previously, Ric, you've talked about moving up the coast either New York, Boston or San Francisco. And I'm just wondering if any of the deals you're looking at from either a development or acquisition side are in those markets, or if you're just comfortable staying where you're at in your core markets.

We're absolutely comfortable staying in our core markets. And the developments that we talked about, the, $400 million to $600 million are all in our core markets.

William Kuo from Cowen and Company.

Thanks for squeezing me in. Just had a quick question. I was wondering if you could give a little more color on the rent to income ratio. Is that coming more from people who they get raises, like existing residents who instead of moving out they're staying put? Or is that coming more from new residents coming in with higher income levels and that's bringing the rent to income ratio down?

These are just our embedded base. It's just taking the household income that's reported on the lease application and dividing it by the average rent. It could be driven by either 1 of those. Obviously the average rents are going up pretty significantly but household incomes have been going up, as well.

An interesting thing, is that for the 91%-something of people in this country who are employed and who are our demographic cohort, but below 30 years old which is roughly 40% of all of our residents, those people have a job and they've gotten increases in the last 2 or 3 years. And the fact that total wages are down is primarily a function of 9% unemployment rate.

But, for people who have jobs, their household income has increased at a time where for 3 years their rental payment was going down. And obviously that's reversed and we have a fair amount of room to go before we even get them back to what they were paying in 2007 at a time when their incomes have clearly grown.

Okay, thanks. And a quick question on real estate taxes. I know last year a lot of people had positive surprises because they appealed and found out in the back half of the year. What are the chances of that happening again this year?

I think we're pretty comfortable with our full-year forecast, where our expense growth on real estate taxes is going to be just above 2%. We're still appealing a lot and having good success on it. But after a couple of years of having some pretty decent decreases in real estate taxes, we're looking at a little over 2% increase.

I think the tax assessors have been listening to multi-family conference calls and looked at stock prices and net asset values of the REITs and have figured out that property values are not falling anymore.

That was our last call. We appreciate your time and attendance on our call and we'll talk to you next quarter.

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