Camden Property Trust (CPT) 2012 Q2 法說會逐字稿

Welcome to the Camden Property Trust second-quarter 2012 earnings release conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note, this event is being recorded, and I would now like the conference over to Kim Callahan, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining Camden's second-quarter 2012 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 with our filings with the SEC and we encourage you to review them. As a reminder, Camden's complete-second quarter 2012 earnings release is available in the investor relations section of our website at 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 is scheduled for one hour, as another multi-family company will be doing their call right behind ours. As a result, we ask that you limit your questions to two with one follow-up and rejoin the queue if you have additional questions. If we are unable to speak with everyone in the queue today, we will be happy to respond to additional questions by phone or e-mail after the call concludes. At this time, I will turn the call over to Ric Campo.

Good morning to most of you on the call, except the East Coast folks. The band Train's hits, Maybe This Will Be My Year, was surely on the minds of our on site teams as we prepared their 2012 operating budgets. After the first two quarters, I suspect most of them, if not all have dropped the Maybe part. The apartment of business is great, and despite a slower job growth than we would like, our markets are growing jobs faster than the national average, keeping demand strong. New supply is not a threat.

Camden residents are doing very well. Their incomes have increased from $63,000, to over $71,000 annually over the last year, reducing the percentage of rent income from 18.4% to 17.7%. Our residents have the capacity to pay more rent, even with the large increases that they have already experienced. 50% of our markets have yet to reach peak rent levels we achieved in 2008. Rents are still a bargain in many of our markets. I salute our teams for making the most of a very strong environment. It's easy to get complacent in an environment like this.

During the quarter, we acquired two properties for $100 million at cap rates in the low 5%s. The exclusivity period for acquisitions has expired for our fund. These properties and future acquisitions will be wholly-owned by Camden. Our capital recycling program for the rest of the year will include sales of $350 million in properties with an average age of 23 years and cap rates in the 6%s. Our $551 million development communities in lease-up and under construction continue to outperform our expectations. We expect the stabilized returns to be in the 7% to 8% range, which is 50 basis points higher due to higher rents, faster leasing and lower construction costs. We plan on starting 1,237 apartments in four properties, totalling $290 million by the end of the year, at returns in the same range as the communities that I just previously discussed.

We plan on continuing pre-funding our development investment with a combination of ATM equity issuance and unsecured debt. We have raised $233 million of equity through the ATM program during the second and third quarters. We have a target range of 4.5 times to 5.5 times debt to EBITDA and will continue to strengthen our balance sheet and improve the quality of our portfolio as we go forward. I'd like to turn the call over to Keith Oden, our Chief -- President and Operating Officer, I guess.

I'm Chief President. Thanks Ric. Compared to expectations so far this year, our on-site teams have gotten not to a remarkably good start. After a quarter like this, it's tempting to acknowledge our team members for a great quarter and move onto Q&A. With that in mind, my comments will be brief. Virtually every metric that we use to monitor the conditions on the ground at our communities remains either very good or excellent. For the second quarter, same-store average rents on new leases were up 6%, and renewals were up 8.4%, for a blended increase of 7%. August renewals are trending up 8% as well with 40% completed so far in the month.

Revenue growth for the second quarter was strong across our entire portfolio. We saw double-digit revenue increases in four markets, Houston, Austin, Charlotte, and Phoenix and double-digit NOI growth in 7 of our 15 markets. Sequentially, the top six markets for revenue growth were Houston, Charlotte, Austin, Dallas, Atlanta and Denver, all with greater than 3% sequential growth. Our occupancy for the quarter averaged 95.3%, up 0.4% from the first quarter. We currently stand at 95.6% occupied. Our budgets assumed our occupancy rates would rise gradually over the year, but as it turned out, we were able to increase occupancy aggressively in the first and second quarters while continuing to raise rent. Our occupancy rates budgeted for the balance of the year look achievable, so the occupancy-related gain in revenue in the first and second quarter will likely not be a recurring variance to our plan.

Compared to year ago, our traffic is slightly down, but is still sufficiently strong to allow us to raise both occupancy and rent. Despite the aggressive renewal increases, we continue to see manageable turnover rates of 59% in the second quarter. This compares to 57% in the quarter a year ago, and 48% last quarter. The percentage of residents moving out to purchase a home did move up to 12.6% in the quarter. It looks like this percentage may have finally found the bottom. The financial health of our residents continues to improve, the percentage of our residents listing move-outs for financial reasons or job loss fell to 4.8% versus 9.3% a year ago. Also, our bad debt expense for the first half of 2012 totaled 0.4% of rental revenues and that is well below our budgeted level of 0.6% of rental revenues. At this time, I would turn the call over to Dennis Steen, our Chief Financial Officer.

Thanks, Keith. I would like to spend a few minutes this morning on our FFO guidance. We revised our 2012 full-year FFO guidance range to $3.50 to $3.58 per share, with the midpoint of $3.54 representing $0.09 per share improvement from the mid-point of our guidance range issued back in April. $0.08 of the increase is the result of higher than expected property net operating income, with $0.02 of the $0.08 reflected in our out performance to the midpoint of our guidance range for the second quarter 2012, and $0.06 related to a projected increase in property NOI for the second half of 2012. The improvement in property NOI is primarily due to higher revenues from the lease-up communities in our development pipeline, as lease-up velocity and rental rates achieved are both running well ahead of our original expectations. Higher revenue growth from our same-store portfolio resulted from the continuation of higher than expected rental rate and other income increases across our portfolio. We now expect same-store revenue growth between 5.5% to 6.5%, up from the prior guidance range of 4.75% to 6.25%.

Lastly, property expenses are trending slightly better then expected. We have revised downward the midpoint of our full year 2012 same-store expense growth to 2.75%, down 25 basis points from our original estimate. The favorability in property expenses this due too slightly lower than anticipated utility, repair, and maintenance, and leasing cost, partially offset by higher property and casualty insurance premiums, resulting from our insurance renewals completed in May. As to property taxes, we have been expecting property taxes to rise more dramatically as assessors recognize the recent improvements in apartment values. We originally anticipated our property taxes to be up approximately 4% in 2012. The vast majority of our assessments are now in, and our Texas markets were the only markets where assessed values materially exceeded our expectations.

However, the negative impact of higher assessed values in our Texas markets has been entirely offset by favorable settlements of prior year tax protest for a number of our communities, and as a result, we anticipate property tax expense for 2012 to come in generally in line with our original budget. The remaining $0.01 per share increase in our FFO guidance is primarily the net result of the timing of our capital market and acquisition disposition activities. The favorable impact from the delay in expected disposition timing has more than offset the dilutive impact of increased ATM issuances in the second and third quarters, as we continue to reduce leverage and pre-fund the equity requirements of our upcoming development activities.

Our current 2012 guidance is based upon the following assumptions for the remainder of the year. $290 million in new on-balance sheet development starts in the third and fourth quarters. $150 million in additional acquisitions and $350 million in additional dispositions, all expected to occur in the fourth quarter at a negative cap rate spread of 100 to 200 basis points, between acquisitions and dispositions, and no additional shares issued under our ATM program. Our FFO guidance for the third quarter of 2012 is $0.88 to $0.92 per share, with the mid-point of $0.90 per share representing a $0.01 per share increase from the $0.89 in FFO per share we delivered in the second quarter. This $0.01 per share increase is primarily the result of the following, a $0.03 per share increase in FFO due to higher property NOI as the continuation of revenue growth for our same-store portfolio, and the additional contribution from the lease-up of our development communities and recently-completed acquisitions more than offsets our expected increase in property expenses due to the normal seasonal increase in utilities and repair and maintenance costs. The favorable impact from the growth in property NOI is being partially offset by $0.02 per share in dilution, resulting from the full quarterly impact of the 3.5 million shares we previously issued under our ATM program in the second and third quarters of this year, as we continue to reduce leverage and pre-fund the equity requirements for our development activities. At this time, we will open the call for questions.

(Operator Instructions)

The first question comes from Michael Bilerman at Citi.

It Eric Wolfe here with Michael. I wanted to follow-up on your last comments there leverage, I'm trying to get a better understanding because obviously you have issued a lot of equity so far this year. If you're designed to operate at lower leverage levels going forward, if this is a short-term lower leverage to pre-fund the development pipeline, and we will see that leverage come back up as you go into 2013 and 2014?

As I said, we are issuing the equity to pre-fund the development pipeline. Our target range is 4.5 times to 5.5 times debt-to-EBITDA. But generally, we are operating at lower leverage levels than we have in the past.

In the last cycle, the funding of the development side of the business was done differently than it's being done today. We use to draw on lines of credit, get them up to about 50% or 60% of the available balance, and then we would either do an equity offering or and unsecured debt offering to fund that.

The challenge today though is that we want to lock-in our financing cost with these new developments, so that we don't have a financing risk in the future associated with funding the development. I think we are doing both. We are definitely operating at a lower debt to EBITDA leverage ratio then we have in the past and we are definitely pre-funding the development.

If you're going to be at 4.5 to 5.5 times, that would imply that you're going to keep deleveraging further, is that a fair assumption? I think you're at 5.7 times today.

I think that's fair.

The second question, obviously, your results are very strong and it's weird to be talking about a slowdown in apartment growth, but obviously looking at analyst's reports, that is the fear, that we have reached this inflection point, that growth is on the decline. I'm just curious, from your point of view, do you feel things are slowing down, and your tenants are become more than willing to pay a higher share of their income? Or for you it's just continuing the strong growth that you have seen for the last couple of quarters.

I don't think we see a slowdown. It's about as strong a market we have seen in five or six years. I don't think we are in the late stages of the game. I think we are in the middle part of the game.

Part of the issue you have out there is we haven't built anything for three years. The building that is going on right now is just filling a hole in the market that was created by the financial crisis.

Our residents, while they don't particularly like to get rental increases, they have the cash to pay it, and half our markets are still below the peak in 2008. I think there is a fair amount of runway left in this business. We all get caught up in the second derivative slowing, and keep in mind, this is a seasonal business. Last year in September, everybody freaked out when most of the apartment companies started slowing down in getting ready for the seasonal slowdown in traffic. Our customers, they move around a lot in the summer, and then they slow down in the fall and slow down in the winter for obvious reasons and then they pick back up in the spring.

I think were going to see the same seasonal patterns. But what happened last year is the market looked at it and said, oh my god, the apartment run is over and it was really just seasonal factors that we have every year for the last 25 years that I have been in this business. We don't feel like our residents can't pay more, and that they are pushing back so hard and don't want to pay a larger percentage of their income.

That's helpful, thank you.

The next question comes from Jana Galan at Bank of America - Merrill Lynch.

I was curious if you could give us more detail on the DC market and how it's been trending, better or worse than your expectations at the beginning of the year, and then your outlook for the back half?

The DC Metro for year-to-date posted about 3.7% on revenues, NOI growth of about 6%, any other -- most other environments we operated in, those would be considered really strong results. But when your overall portfolio is cranking along at something closer to the 9% same-store NOI growth, people look at that and it feels like it is weaker than the rest of the portfolio, which it most certainly is. But with those kinds of numbers it is just not relative to historical norms. It is still a market I think of that is quite healthy.

Relative to our expectations, not only will DC exceed our original budget but by the end of the year we expect every single one of our 15 markets will have exceeded our original plans, including DC. We think we set our expectations appropriately for the DC market and we think when it is all said and done, there we will hit slightly above our original targets for the year. There is a lot of conversation about new supply and while there certainly is some new supply coming into DC, we think the deliveries will be in the 5,500 or 6,000 apartment range. But if you juxtapose that with the projected employment growth of about 50,000 this year and about 40,000 next year, if you take the deliveries expected plus the employment growth expected, we are still in a ratio of employment growth to new supply coming online that feels very comfortable to us at about 8.5 times employment growth to new delivery.

There is a tendency to want to look at DC as a weak market. If you rank it against our other ones, it would be, but we don't see it that way. I think 3.7% revenue growth year-to-date is quite good, and we see that continuing without a lot of disruption from the new supply that's slated.

Thank you very much.

Our next question comes from Karin Ford at KeyBanc Capital Markets.

Just a clarification, Keith, did I hear you say that traffic was down on a year-over-year basis in the quarter?

Year-to-date it's down about 2%. We had a great traffic here last year coming out of the 2009 time frame. It doesn't surprise me that it is down slightly.

The best tell, with regard to traffic, is whether or not you have the sufficient traffic to both raise occupancy rates as well as push rents and we've done that for the last few quarters. Statistically speaking, I wouldn't call it significant but it is down about 2% from the prior year.

Did that continue into July as well?

I don't have the July traffic numbers but I can get them to you.

That's fine. My second question is on Las Vegas, a couple calls ago you said you had some hope for that market to turn around this year. It look like it made a nice sequential move this quarter, both in occupancy and revenue, can you talk about your outlook is on Las Vegas going forward?

I don't think our view has changed much. We think we are probably just off the bottom. All the metrics that we see on a sequential basis, it did move up a little bit. I think we are in a slow grind out in Las Vegas.

If you look at all the economic and macroeconomic factors in Vegas, whether it is visitor traffic or revenues on the Strip, clearly there is a marked improvement from where we were two years ago. Has that translated into a bunch of new job growth? Not really.

The real challenge Las Vegas has with regard to employment growth is during the downturn, not only were there layoffs, but as the casinos got to the point where they literally couldn't lose any more bodies, they started cutting back work hours. And so what has to happen first is they have to build back to the point where you are working a full 40-hour week before you hire new folks.

I don't think we are back to that point yet, but I think you can see it from here. At the point when Las Vegas gets to that tipping point, and starts adding new employment you can see the game change pretty quickly. But I think that is probably still a 2013 story.

Written has Las Vegas moving into the top-10 employment markets and revenue growth markets by 2014.

Thank you.

Our next question comes from Alexander Goldfarb at Sandler O'Neill.

Two questions, the first one is going to taxes, you had said that the increase in Texas was offset by wins from prior years grieving taxes. Going forward, is it reasonable to think the legal wins and reducive taxing will diminish such that the increasing of taxes is going to start to be the driver, and you're not going to have the two offset each other? Is that fair as we think about 2013?

As you go further into the recovery you will that less of an impact from prior year settlements. To give you a scope of what that was this past year, if you took that out of our number instead of us being up close to our budget of 4%, we would probably of closer to the 5.5% and 6% range for taxes for the current year.

We have always had very aggressive litigation and tax strategies, and I don't think there is been a year in the last 10 years that we haven't had some good wins on that subject. But obviously the market today, governments need capital, and it's no secret that property values have increased, so it is definitely more difficult to win those battles. We will be very aggressive on that front.

As far as timing of those wins, the wins you settle this year, those are relating to what year? Last year, two years ago, three years ago?

All last year.

You never know when you're going to get that win because you protest and then you litigate and then you settle or go to court. You have to remember taxes, it is very interesting. People think property taxes are a function of the market value of the property is, but it isn't that simple.

Property taxes are a function of the relative value of your property, and how it is assessed compared to your neighbor. For example, if we think the property is worth $25 million, and it's actually worth $25 million, but it is assessed at $15 million, it is not about whether it really is $25 million, it's what the properties across the street are assessed at, and the relative value. So that is where the litigation comes into effect, because it gets into a fairness issue on how your property is valued relative to others, so that is an interesting nuance of the property tax game.

That's helpful. Dennis, the second question is, as we think about the $190 million that's due in the fourth quarter this year. Just your general thoughts on the unsecured debt markets have been very good, but the bank unsecured term loan markets are equally competitive. What are your thoughts between weighing one market versus the other for the upcoming maturity?

You look at our cost of that would be as we sit here today for an unsecured bond offering, we're looking at a 10-year that's in a 3.3% to 3.4% range. And unsecured debt with 55% leverage would be around the same ballpark so we are still very much an unsecured borrower. And we like the unencumbered aspect of our properties with using unsecured debt. And as we look forward we are probably more on the side of an unsecured offering versus secured.

But you would prefer the straight tenure corporate versus the bank term loan?

Yes.

Thank you.

Next question comes from Rob Stevenson at Macquarie.

Keith, you're starting -- going into the third quarter of 2012 50 basis points higher occupancy than you went into the third quarter of 2011. Is that enough occupancy to allow you to keep pushing rental rates for harder, for longer before you start backing off because of the seasonality.

We are basically at our plan right now. We have a fair amount of seasonality to our occupancy rate and always have. I think you can expect that all things being equal, we will continue to get pretty healthy rental increases.

We're probably going to give up some occupancy in the second half of the year just because we always do. We model our portfolio and have consistently tried to stay right around that 95% range. We consciously made some decisions to let the occupancy rate drift up this year over what we did last year, because we definitely had a dip in the third and fourth quarter and we're going to see that again.

As we trend our portfolio down relative to our original plan, it probably get back down to the high-94%s, mid-94%s in the fourth quarter. I think you will see that, as we typically have in the past, but I still believe were going to be able to get the rental increases that we have got in our plan.

The other question I have is, given your commentary on developments starts in the back half of the year and acquisitions, why not sell more assets to fund that, given how good that market is right now? And my guess is that you are probably looking at at least 100 basis points of margin differential between the bottom part of your portfolio and the average, so you have a significant addition by subtraction?

We are. Our disposition program is $350 million between now and the end of the year, we probably have more like $470 million that's in the pipe to be sold but some of that will spill over into 2013. This is the biggest disposition pipeline we have had in the last four or five years. So we view that as a disposition program in the capital recycling side of the equation, as a major source of capital to fund the development, as well.

It's a balance between how much you're willing to sell, versus how much ATM issuance and unsecured debt you are willing to do. We definitely are doing that, and we think it is a great move.

Thanks.

Our next question comes from Rich Anderson at BMO Capital Markets.

Good afternoon, I'm here with Jeremy Lynn.

On the topic of Houston, you mentioned asset sales being -- or the disposition pipeline being as big as it's ever been in four years. Would Houston be one of those markets given oil prices being where they are, and maybe, if anything that market starts to dwindle down a little bit if oil reigns in, in the future?

The way we look at our disposition program is we try to improve the quality of the portfolio. We really focus on the bottom part of the portfolio from a sales perspective, and there are some Houston assets in there. But I don't look at the market and say Houston is having a great run, therefore we ought to load up on selling assets in Houston. It gets down to the quality of the portfolio and where that asset is vis-a-vis its sub-market.

I think Houston is going to have a long run on this oil issue. When you think about what is going on, the natural gas fracking that's going on across the country is being run in Houston. A lot of people don't realize that the mining jobs in Houston that you see when you see the nature of the jobs, the mining jobs are actually high tech jobs, they're 25-year-old to 30-year-old tech people monitoring flows and the fracking business. I think Houston is great long-term, and I wouldn't want to sell my best assets in Houston at this level, I would want to sell my worst, which is what we're doing.

Ric, early on your commentary, you said the exclusivity period is over for the fund, and so that everything else you acquire will be 100% on the balance sheet. But I'm curious, is there any left over volume, I assume there is, I don't know what the number is, that the fund could buy if you wanted them to?

No. We do have some excess capital left in the fund and it could be used for development and not acquisitions.

That clears that up. Thank you very much.

Our next question comes from Dave Bragg at Zelman.

I did want to revisit the question from a couple of questions ago, about the relationship between or your [interim] relationship between dispositions and starts. And seeing as your start plans for the year appear to be pretty consistent with your initial expectations but your disposition plans have really picked up, as the year has progressed. Can you talk about that?

Sure. When you think about funding our balance sheet, we have a lot of ways to fund it, via equity issuance, unsecured debt and dispositions. We have ramped up the dispositions and part of it is that balance between capital sources. And the other part is there has been a significant narrowing of cap rates on older assets versus cap rates on newer assets.

So what has happened is while cap rates have gone in places like Charlotte and Houston and elsewhere, the core assets now are all selling in the 4s, and because core assets have sold in the 4s, you are pushing buyers properties in those markets into older assets or non-core, middle, maybe secondary locations or assets that aren't on the 400 main-to-main. So what has happened is the spread that used to be 250 basis points wide is like 150 basis points wide. So you have got a interesting opportunity to sell assets at lower cap rates and higher prices than you did 12 months ago. And that's one of the reasons we are ramping up our disposition program, because we think that the opportunity to capture those lower cap rates and lower the negative spread that we have between our acquisitions and our dispositions is pretty attractive today.

That's interesting, thank you. As you think about the group of assets you are planning to sell, you certainly touched on their asset quality, but can you talk about the market mix and your thought process behind that part of it?

Dave, the assets that we have for sale, I think Ric mentioned in his comments have an average age of 23 years versus our average portfolio age of about 11.5 years. On average, they are twice as old as the average asset in our portfolio. They go across probably seven of our markets, so it is pretty widespread from the standpoint of where the dispositions are going to come from.

But more importantly as Ric mentioned, it's not about making a market call, it's about making an asset and a sub-market call. We have a very detailed are ROIC tracking metric that we look at, and when assets fall to the bottom of the three- and five-year return on invested capital ranking within our 200 assets, which obviously takes into account the higher CapEx requirements on older assets. If you find yourself in the bottom 20 assets, then you're likely to be on the disposition list.

And then it gets down to what is the appropriate timing, and as Ric mentioned, this happens what we view as a very attractive time to sell these older assets because of the cap rates that are being attached to them. And obviously a large part of that is being driven by the available financing that Fannie and Freddie are still active, and individual investors or small groups of investors can put together a club deal on these assets. Get a Fannie or Freddie loan if they're willing to go shorter on the yield curve at 2.5%, 3%.

And even though what looks like a relatively low cap rate to us in the 6s, when you marry that up with 60% or 70% levered, on the worst assets on our portfolio are still quite good relative to all multifamily. These folks have the opportunity to put together a capital stack that produces 8% or a 8.5% on cash return in equity and in today's yield start up environment there's a lot of people that find that very attractive.

The last question on that point, you mentioned about half of your markets are below prior peak rents. That is the relationship between cap rates at the market level and where rents are relative to peak? For example, Las Vegas, where rents are well below peak, what is the relationship between cap rates there and some of your other markets?

They are very low even in Las Vegas. At the beginning of the year we sold a property in Phoenix for example, that was a 25-year-old asset at nearly a 5.1 or 5.2 cap rate, and we were shocked by that. But it goes to the issue that Keith brought up about the financing availability, and the expectation of rent growth. So Las Vegas is an example If the assets are trading there in the low 5s because there is an expectation is going to be a big rent pop in Las Vegas, we are still down 18%. So we have very little recovery, so we lost 18% of our revenue in Las Vegas during the downturn.

So when investors go to Vegas, it is the last place that people can buy property that have that kind of upside. Most of the other markets, Phoenix is getting back some of theirs but maybe about half of what they lost, but Las Vegas has gained back zero. People are buying by the pound, which drives the cap rate really low.

Dave, to put some macro touch on those comments, from where we are today, portfolio wise across 15 markets, rents are 2.4% higher than peak in our entire portfolio. Obviously there's a pretty big dispersion there and Ric mentioned several markets where we are below peak, other than Las Vegas, where that occurs, we are down into 2% to 3% range in terms of distance from peak. I would guess within the next six months, absent Las Vegas, we will probably be close to back to peak in virtually every market except Las Vegas. And as Rick mentioned, we've got a lot of room to recover there from where we want to be.

Thank you.

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

A question on the field staff, are you seeing any increase in employee turnover at the properties? And as job growth improves broadly in your markets, how do you think about staying ahead of that in terms of retention strategies?

That's a good question. I would hazard to guess that we have the lowest turnover rate, not just this year, but going back over a period of 10 years in the multi-family business. Our company-wide turnover last year was less than 20%. Obviously it is lower than that in the corporate office than it is on site.

We have a remarkable track record of being able to retain our employees, and there are a whole lot of things that go into that, but obviously competitive compensation and benefits. And we also do a lot of things none of our competitors do and most of the private companies are not able to do. For example, our community managers every year get a grant of Camden shares that is five-year vesting, which is 100 shares per year, and we have been doing this for almost 15 years. So we have a lot of community managers that have been with us for a long period of time that have a decent stake in the Camden game by virtue of share grant.

So a whole lot of things, but at the end of the day we have not seen an increase in turnover rate, nor would I expect us to do so. I will say though that one of the places that we definitely have seen pressure, and we're not dealing with and haven't dealt with in the last five years is in Houston, with regard to our corporate staff. The oil companies, the demand for talented financial, either two-year, five-year, or seven-year people is off the charts.

And while you might not think there would be much translation from the real estate business to the oil business, if you are a talented financial professional, it is crazy what the oil companies are doing in terms of making offers to folks. And in particular we have had to deal with that, and we're making adjustments where we need to and have to but that is an area of pressure that may be unique to Houston because were going to create probably close to 90,000 jobs this year. And it may be unique to the oil patch, but we happen to be headquartered here, so it's an issue for us that others might not be dealing with.

That's helpful. Sticking with the Houston discussion, I recall from the NAREIT dialogue you will be in the market for new office space. Have you started that process yet, and if so, how is it going?

We have started the process. That means were looking at alternatives. Back to the oil business, for those who may not be up to speed on this, but we have a lease that expires in 2015. We had a right to an extension but it was subject to a prior right of Occidental. And Occidental has basically told everybody in this building that as their lease expires they intend to exercise their prior right and eventually occupy 100% of the building that we are in.

The good news is we have time to do with it, the bad news is there are a lot of moving parts. In our case, it is good news-bad news because we have grown so much over the years for being less than a full floor user too almost three full floors. And we have done it by dribs and drabs, and our configuration and stacking relative to what we would do in an ideal world is pretty abysmal. And we've got people sitting on top of each other, so will be a good opportunity for us to rethink how we should be organized and take a fresh look at things and the good news is we have got the years to deal with it.

Thanks very much.

The next question comes from Michael Salinsky, RBC Capital.

Ric, in light of your comments on the jobs front there not being quite up to what you had hoped, but still having good rent growth. Could you give an update on how you feel on supply? I know you had statistics talking about job creation for supply, I wonder if that holds true and how you feel about the supply situation going forward?

As I said in my initial comments, supply is not a threat in any of our markets right now. I know people worry about supply because when you look at the low levels we had during the ugly part of the recession, where we dropped supply down to 75,000 units a year, which is not enough to offset the obsolescence of about 125,000 units and now we're back up too nearly 200,000 units. With that said, the supply that is coming now is really just filling the hole.

If you look at places like Houston we are 97% occupied, which is basically full. There was really no place to go. So what's happening is the supply that is coming into play in most markets, especially in markets where you can build, and build because you need it, the units that are coming in this year and into next year are filling a hole that will balance the market. It is the supply that will come in, in 2014 and 2015 you have to worry about, not 2012 and 2013.

When you look at the jobs that are created and the demand those jobs are producing in apartments, I think it is more skewed towards apartments, primarily because if you think about the jobs that have been created, nearly 60% of the jobs have gone to people 34 and younger. A lot of these jobs that are created are going to customers as opposed to people have a lower propensity to rent and a higher propensity to buy homes, and live in a single family environment.

I'm not worried about supply. I think there's plenty of jobs to be able to absorb the supply that's in the market between now and 2013. The question will be, if we add 250,000 jobs a month our business, if you can imagine, would be a lot better because there is no place for people to go, and they are competing big time for a few spaces to go.

I appreciate the color. Dennis, just a question with the debt upgrade that you recently received. Does that make any changes to the credit facility, or do you benefit anywhere from that?

We were already split graded and we have been trading from a debt perspective at that higher split grade, so having Fitch move us up really didn't do much to the change in the cost of our debt.

Thanks.

(Operator Instructions)

Our next question comes from Karin Ford at KeyBanc Markets.

I wanted to ask a bigger picture strategy question, as you're doing the portfolio recycling here and asset sales and buying and developing. Do you have plans to urbanize the portfolio more within your markets? Is that a goal as you look towards sites that you are buying and assets that you are acquiring?

Generally I think the answer is yes and primarily because, the demand of the customer is for more urban product in most markets. This is a trend that has been going on for quite a while. You have to think about the millennium, the Gen Y that are our customers, they went to be closer in, they want to be close to the action where they can get involved with all of the social things that are going on in their cities. And so there has been definitely a move towards more urban.

On the other hand, our suburban properties are doing really well. Even though urbanization has definitely been going on and will continue to go on, our portfolio has definitely been getting newer and closer in over the last 5 or 10 years. And will continue to do that over the next 5 or 10 years because that is where the customers really want to be, and that is not new but it is just a continuation.

One of the things that is interesting on the development side is that the apartments are actually getting smaller. What's happening is, the apartments are getting smaller and the social spaces are getting bigger. That gets to affordability, where you're trying to get people, most people want to live on their own, they don't want to live in a roommate situation. If you get a small space that is relatively affordable for those folks, they're willing to do that and live in that.

There was an article that the Houston Chronicle did a while back and one of our projects, Camden Travis Street, and the reporters were shocked that somebody would live in a 535 square-foot unit and pay $1,200 a month in Midtown in Houston. And when you could go out into the suburbs and pay the same price for a two-bedroom. But the person that lived there really wanted a small unit and they wanted to live in that location, it's right on the light rail and they were willing to pay that price in that space. Urbanization continues, the development business is definitely shrinking in terms of unit size and becoming more social space oriented as opposed to big apartments, which I think is an interesting trend. But it definitely will be more urban.

The easiest way to see what Ric is talking about, in our supplement on page 40, where we lay out the development pipeline and land, we reference eight communities on that schedule, representing about 2,900 apartments. And by our characterization of those, roughly 2,100 would be urban and 800 would be suburban.

That's interesting. Finally, as you are bidding out the new starts coming up, are you seeing any upward pressure on construction costs?

We are definitely seeing some upward pressure. I think the days that subcontractors will work for food are over and they are now requiring a profit margin. We are definitely seeing some creep, nothing dramatic, 1% or 2% in commodity prices, so we are putting modest price inflation into our budgets, where we didn't do that last year. The interesting thing is, our construction costs in our existing pools in the lease-up and under construction right now are coming in below our original budgets. But we are definitely putting some price inflation in the new budgets.

Thank you very much.

At this time, we have no further questions. I would turn the conference back over to Ric Campo for any closing remarks.

We appreciate your interest in Camden. It's nice we ended before AMCO starts, so with that we will talk to you next quarter. And if anybody has questions or follow-up, get a hold of Keith or Kim or me, and we will be happy to answer those. So thank you very much.

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