Camden Property Trust (CPT) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to the Camden Property Trust second-quarter 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

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

(Operator Instructions)

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

Good morning, and thank you for joining Camden's second-quarter 2013 earnings conference call. How did you like our hold music today? A little different than our usual rock mix. Well actually, all of the songs we played have something in common, and there's a specific reason we chose them. If you know the answer, please send me an email at kcallahan@camdenliving.com. The first person with the correct answer gets a shout out on call and the opportunity to help select music for next quarter's 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 2013 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 Alex Jessett, Chief Financial Officer. Our call today is scheduled for one hour, so we ask that you limit your questions to two, with one follow up, then rejoin the queue if you have additional questions. If we are unable to speak with everyone in the queue today, we'd be happy to respond to additional questions by phone or email after the call concludes.

At this time, I will turn the call over to Ric Campo.

Thanks, Kim. Good morning. We announced strong quarterly performance last night, apartment fundamentals continue to be stronger than long-term trends, and we believe this above-trend performance will continue for the foreseeable future. This is a great time to own apartments. Job growth is improving, along with the single-family, for-sale home market. We are excited that our move-out rate to buy homes has started to move up towards its historical average. A recovery in the for-sale market will increase demand for multifamily, as it did in the 1990s, and continue to support strong revenue growth. The latest multifamily supply report showed slowing permits and starts activities, which is exactly what we expected -- a plateauing of the development starts that had been increasing over the last couple years. We expect multifamily demand to exceed the supply for the next few years, continuing to support higher than long-term trend revenue growth.

We continue to find opportunities to improve the quality of our portfolio through dispositions and recycling that capital into newer acquisitions and development. There's no better for time to be in the multifamily business. I want to give a big shout out to our Camden team for another great quarter. Keep it up. I'll turn the call over to Keith Oden.

Thanks, Ric. Our Camden team produced another solid set of results --

Keith, I'm sorry, but I'm going to have to interrupt you, here. We have a winner to our pre-conference music connection challenge, and it is Rod Petrik. Good job, Rod. The 1993 was an interesting year for music. We think -- some people think, a pretty bad year for music, but based on the hits that we played -- which were hits from 1993 -- '93 was a great year for a company like Camden to have its initial public offering. So, we connected the music with our IPO debut.

I think it's always important to take time to reflect back on where you've been so that you can apply past learnings to ensure a bright future. So, a couple of stats -- in '93 we were in 1 state, today we're in 10. We were in 3 cities -- we're in 17. We had 7,000 apartments, now we have 65,000. We had 20 properties, now we have 189 properties.

Our development pipeline was $25 million; today, it's $750 million. The Company's market cap was $193 million in '93 -- $193 million, and we are now at $9 billion. We had 245 Camden team members, and now 1,804. Our revenues grew from $33 million to $800 million. And, I think one of the interesting pieces was our average monthly rent was $471 a month, and now it's $1,130 a month. Definitely a strong 20-year run, and we think we'll be able to keep this strong performance going. We are celebrating this 20-year anniversary -- our 80th conference call, today, with the ringing of the bell opening the New York Stock Exchange on Tuesday, so watch for the opening, and hopefully, we'll open to a strong session on Tuesday, July 30.

Keith, you can continue. Thanks, Rod. Good job.

Rod, I'm not sure what that says about either your taste in music, or maybe it's a generational thing, but well done on ferreting that out as quickly as you did.

As Ric mentioned, operating conditions are still quite strong across our entire portfolio. The results keep us on track to deliver 6.5% same-store NOI growth for the year, which is the second highest in the sector based on current guidance. This is particularly noteworthy as it follows our sector-leading 9.2% NOI growth last year. For the second quarter, rents on new leases were up 5.1%, and on renewals, they were up 7.3%. July activity is trending very similar to the second-quarter numbers. August renewals are trending up 7.7% with about 40% completed. For our entire portfolio, we are roughly 8% higher than previous peak rents.

The overall strength of the market is shown by an average 5.4% growth in revenues for the quarter. Houston had another double-digit revenue gain, and Charlotte just missed double-digit growth at 9.7%. Denver, Atlanta, and Corpus Christi round out the top five markets for revenue growth in the quarter, and DC Metro was in line with our expectations for revenue growth at 3.1% up for the quarter. Vegas remains the one soft spot with flat revenue growth. Sequential revenue growth was also strong with Denver and Charlotte above 3%, seven other markets greater than 2%.

Our occupancy rate was 95.4% for the quarter. It's currently just north of 95%, which is right in line with our expectations. Despite the fact that we continue to push rents, our net turnover rate was 60% for the quarter, versus 59% for the second quarter of 2012. Moveouts to purchase homes did tick up in the quarter, as Ric mentioned. They were 14.6%, versus 12.3% for last quarter, and an average of 12.3% for last year.

As you'll recall, our moveouts to purchase homes bottomed at just under 10%, so we've come a way back, but we've still got a long way to go. This is something we've been expecting to see for some time. We're still well below the long-term average of 18% of moveouts to buy homes. Our top reason for moveouts continues to be moving out of the city, or moving closer to work, at 21%.

Regarding new supply, we continue to believe that current levels of new permitting, relative to projected job growth in Camden's markets, will not be a major obstacle to continued rental increases. We believe that the peak in multifamily completions will occur in 2015, with roughly 270,000 apartment homes delivered nationally. This translates to completions in Camden's markets of 114,000 apartment homes. The job growth projected for 2015 for Camden's markets is 823,000, which if you apply the ratio of five-to-one of job growth to apartments completed that's generally required to maintain equilibrium, would imply a shortfall of almost 50,000 homes across Camden's markets in the year of peak completions.

Ric mentioned that we will be celebrating our 20th anniversary and ringing the bell on Wall Street next Tuesday. We've seen a lot of changes over the last 20 years -- over the last 20 years, the multifamily industry has changed dramatically in many ways. This change has been driven primarily by the public companies, which have completely reshaped the way our industry serves our residents. One of the most important changes has been the emergence of large, financially strong, vertically integrated national and regional multifamily companies, as opposed to the loose aggregations of assets with external advisors and third-party property management that existed prior to 1993. The evidence of this transformation is that the best managed multifamily companies, today, operate in the public arena.

Camden has been recognized as a great workplace, not just among REITs, but among the best companies the country. This year, for the fourth-straight year, we were included in the top 10 for Fortune's list of 100 best places to work. This has only been done by 11 companies since Fortune started compiling their list -- rarefied air indeed. So on our 20th anniversary, we say thank you to all of our Camden teammates who have helped make our Company a great place to work.

At this point in our quarterly call for the last 40 quarters I have said -- now, I will turn the call over to Dennis Steen, our Chief Financial Officer. As you all know, Dennis proceeded with his long-standing plan to retire this quarter, and he will be missed by all the Camden team. The better news is that, as with all great leaders, Dennis planned carefully for his succession. So today, one streak ends, and another begins.

On the call with us today is Alex Jessett, making his debut as a speaker on our call. Alex just celebrated his 14th year with Camden, so most of you already know him. What you may not know is that since 1999, Alex has participated in every material transaction Camden has completed. From mergers to equity and debt offerings, joint ventures, acquisitions, dispositions, development, and operations, he has been involved in every aspect of Camden's business. In some cases, he played an important supporting role, but on many cases, Alex took the leading role, working directly with Ric or me, in bringing some of Camden's largest and most complex transactions to closure.

Therefore, it is with great pleasure, and well-placed confidence, that I turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. Last night we reported FFO per share of $1.02, exceeding the midpoint of our quarterly guidance by $0.04 per share. This $0.04-per-share positive variance is a result of a promoted equity interest we received in conjunction with the May 2013 disposition of our 14 joint-venture communities in Las Vegas, Nevada. As a reminder, we owned a 20% interest in this venture. This joint venture was formed in 1998, in conjunction with our Oasis Residential merger, and delivered an annual internal rate of return of 16% over a 15-year hold period. Who says you can't make money in Las Vegas? Excluding this promoted equity interest, FFO per share for the quarter would have been $0.98, in line with the midpoint of our guidance range.

We had two other nonrecurring items during the quarter, which offset one another. First, we received a $1 million payment, recorded as other income, to release a deed restriction placed on a parcel of land which we sold in 2006. This parcel of land is adjacent to our Long Beach, California community, and we had previously restricted multifamily development on the site. And second, we incurred at approximate $1 million separation expense in conjunction with the retirement of our prior CFO. This amount is reported as a general and administrative expense. Although this separation expense was unfavorable to plan for the second quarter, there is no significant net impact for the year, as the payment was an acceleration of remaining full-year budgeted compensation expense.

Portfolio operation performance continues to be strong, as same-store revenues increased 5.4% in the second quarter and 5.6% year to date. These increases were driven entirely by increased rental rates. Of note, each of our markets registered positive sequential revenue growth in the second quarter. On the expense side, regarding property taxes, the vast majority of our assessments are now in. And, our Texas markets were the only markets where assessed values materially exceeded our expectations. We contested many of these valuations with varying levels of success. In Dallas, initial valuations were reduced from a 33% increase to a 19% increase; and in Houston, initial valuations were reduced from a 38% increase to 31% increase. We now expect same-store property tax expense for 2013 to be approximately $1.5 million above our original plan and 12% above the prior year.

On a same-store basis, we expect the remainder of the year to track as anticipated. We narrowed our revenue and NOI guidance and modestly increased our expense guidance to account for the higher property taxes. We now expect same-store revenue growth to be between 5% and 6% -- one of the highest in the multifamily sector, expense growth to be between 3.25% and 4.25%, and NOI growth to be between 6% and 7%. We have also revised our full-year 2013 FFO-per-share outlook. We now anticipate 2013 FFO per share to be in the range of $4 to $4.08, versus our prior range of $3.89 to $4.05, representing a $0.07-per-share increase to the midpoint.

The primary components of this $0.07-per-share increase are as follows. First, the $0.04 in promoted equity interest we recognized in the second quarter. Second, the $1 million payment we received in the second quarter to release the deed restriction. Although this amount was offset by the severance expense in the second quarter, for the full year, it will be a positive variance, as the severance expense was merely a timing issue with no significant full-year impact. And third, an approximate $0.02-per-share increase related to both the timing of our remaining pro forma acquisitions and dispositions, and better-than-anticipated leasing results at our development communities.

Our revised full-year 2013 FFO guidance is based on the following assumptions for the remainder of the year -- $350 million in new on-balance sheet development starts, spread between the third and fourth quarters; and $200 million in additional acquisitions and dispositions, primarily occurring in the fourth quarter, with acquisitions at a 5% yield and dispositions at a 6% yield. Based on our planned third- and fourth-quarter 2013 development activity, and a $200 million unsecured debt maturity in December of 2013, we anticipate needing approximately $300 million of new capital for the remainder of the year. And, we anticipate utilizing the capital markets opportunistically. The composition of our remaining 2013 capital activity depends upon a variety of factors, including capital market conditions at the time we go to market. As a point of reference, we currently anticipate that we could issue a 10-year unsecured bond at 4.15%, based on a 2.55% 10-year treasury and a spread of 160 basis points.

Last night, we also provided earnings guidance with third quarter of 2013. We expect FFO per share for the third quarter to be within the range of $0.99 to $1.03. The midpoint of $1.01 represents a $0.03 increase from the second quarter of 2013, once you exclude the nonrecurring items. This $0.03-per-share increase is primarily the result of the following.

First, and approximate 2% expected sequential increase in same-property NOI, as revenue growth from the combination of rental rate increases, and increases in fee income as we move into our peak leasing periods, more than offsets our expected increase in property expenses, due to the normal seasonal summer increases in utilities and repair and maintenance costs. Second, an approximate $400,000 decrease in core general and administrative expense, due to the removal of budgeted compensation expense for our prior CFO. And third, an approximate $400,000 increase in NOI from our one development community remaining lease up. Of note, this one community is Camden City Centre 2, which is profiled on the cover of our second quarter supplemental package. This Houston development is now 84% leased and is expected to stabilize a full three quarters ahead of our original pro forma, with rental rates 25% higher than projected. We anticipate delivering this development at a 10% yield.

At this time, we will open the call up to questions.

(Operator Instructions)

Derek Bower, ISI Group.

I'm not sure if I missed this, but where is occupancy today? And, can you talk about how new leases trended throughout the quarter? At NAREIT, I think you said new leases at that time were about 6%?

Right now, occupancy is just north of 95%. We were 95.4% for the second quarter, and that's exactly in line with where we would expect it to be this time of year. New leases, 5.1%. And then, subsequent to the quarter, it's been in line with that. Renewals are 7.7% for the quarter, and in July they have continued that trend.

So, June new leases were 5%?

No, for the quarter, new leases were up 5.1%. In July, new leases are up in line with the 5.1%.

Okay. Got it. Thanks. And then, which markets face the most risk from new supply in your portfolio? And, what impact do you think the 20% supply increase in uptown Dallas do you think is going to have in that market in your view?

I think the two markets where we've got the imbalance right now, with regard to projected employment growth with new deliveries, would be Austin and Raleigh. Those are the two that would [screen] the most risk with regard to supply. Actually, uptown Dallas -- there's a lot of new stuff coming, but the job growth in Dallas has all -- if you take that relative to what the total new supply is, there's not nearly enough new supply coming for the job growth.

Obviously, if you -- in any particular submarket, if you've got two lease ups going on right next door to you, there tends to be pressure because lease ups act differently than stabilized communities. In particular, if it's a merchant builder, they have a tendency to sprint for the barn, and if they're not hitting their numbers exactly, they get real aggressive on concessions. There's no way you can avoid that in someone that's immediately -- in immediate proximity to your communities. I don't think -- Dallas certainly isn't on my radar screen of the markets that I'm worried about rent growth, either this year or next year.

I think the other thing that supporting uptown, and also supporting inner loop Houston, in Texas in general in these urban markets is that you've seen a real increase in the urban population moving from suburban to urban, and that trend was starting to happen before the recession. And then after the recovery side of the equation has come about, you've seen that accelerate, where young people want to be where every thing's happening. They want to be inside the loop in Houston, they want to be in downtown Austin, they want to be in uptown in Dallas, and in those urban markets. So, not only are they going to have great job growth in these markets but you also have excess demand generated by the idea of these same people getting jobs, and they want to be where the action is, which are those markets.

Okay. Great. And then, lastly, looking ahead to your NoMa development, given the supply that's going to be in that immediate area, what's the risk that there's change to your initial yield there in the first year, whether it comes from additional concession usage or longer lease up time?

Right now, we still like the NoMa market. As a matter of fact, the interesting part of NoMa is that if you go back four or five years ago, there was nothing going on there, and it was really a very transitionary neighborhood. And now, with all the new development, it's a really hot area, so I think the addition of NoMa will be great for our portfolio. We will obviously watch the market and make sure that the numbers that we are underwriting are good. I think, long term, it's a great market, and it may -- we just have to see, but I don't think it affecting our numbers at this point. The rents are actually higher at NoMa 1 than we had originally anticipated when we opened it up in first quarter of [2014], so we're a ways away from pulling the trigger on NoMa 2, obviously, but our numbers for NoMa 1 are fine.

Nick Joseph, Citigroup.

How much cost pressure are you seeing on construction? And, how do the projected yields differ for the developments delivering in next few quarters versus what you're underwriting for the developments that you're starting today?

There definitely is construction cost pressure. When we bought out our first round of jobs, we had significant construction savings in those jobs, and that definitely helped yields. The good news, though, is that I think rental rates have gone up enough to offset the construction cost increases so far. It does make newer deals harder to pencil, and I think what that's one of the reasons why we're seeing a plateauing of the starts -- is that it's more difficult to make the numbers work.

Early yields that we had were out of control -- good, as Alex pointed out, our City Centre project, here in Houston, is at 10% cash-on-cash yield. We aren't going to be able to do deals like that in the future, but the properties that we are going to start this year and next year, even with construction cost increase, the rental rates have offset the construction costs, or increased rental rates have offset those. So, we're still in the 7% zone in terms of returns on the starts for this year and early next year.

Great. Thanks. You've talked about all the changes you've seen over the last 20 years at Camden, so looking into the future, what markets would you like to increase your presence in, and where could you see yourself decreasing?

We're pretty comfortable with our allocation currently. We have a -- we're pretty meticulous about modeling how much exposure we want to have, and it has to do with the size of the market and the projected NOI growth rates long term in those markets, so we're actually pretty comfortable with it. We are not currently investigating or doing any foot work in any markets beyond our existing platform. We think the opportunities in the 17 markets that we're currently in are substantial, now, and will be over the next 20 years. So, I think that we're comfortable with our portfolio. There's clearly opportunities in some of our less represented, from a percentage standpoint, the Phoenixes of the world -- we're somewhere around 3% or 4% of NOI in Phoenix, and that's probably going to trend up over time. We think there's significant opportunities in these markets that we serve.

The other thing is, our footprint is so different from the other public companies in the sense that we've got entire markets where no other public companies are represented in any meaningful way -- one of which is Houston, by the way. But, that also happens in Phoenix. It's true, for the most part, in Raleigh. There's a small presence in -- public presence in Tampa. We're in markets where other -- we just don't have a great deal of overlap, or have opportunities to develop and acquire and transact where -- we still run into the public companies, and I think, for the most part, that's a good thing for us.

Great. Thanks.

Rob Stevenson, Macquarie.

Keith, when you're sending out lease renewals, what's the spread these days between what you're sending out and what you're actually achieving?

Not much -- about less than $10. There's been times -- on $1,000 average lease rate, so certainly less than 1%. That hasn't always been the case. That number moves around quite a bit, but in today's environment, as we apply our revenue management, we've got plenty of traffic, plenty of qualified traffic -- there is a small spread, but it's not meaningful.

Okay. And then, Houston's been king of the hill for a long time now for you guys. How much longer, when you take a look at the runway between wages, supply, et cetera, how much longer you think Houston stays there before a Charlotte or an Atlanta starts bumping it off, in terms of year-over-year revenue growth, just simply, if nothing else, because it has been so strong for so long?

I think it can be strong for a long time and here's why. There's a secular change going on in the energy business. Shale gas and shale oil is going to change the US energy view or the energy complex dramatically.

Just a couple of interesting numbers, there are 13 million square feet of office space under construction in Houston right now. All right? 83% of that office space is 100% -- or is leased, so there's only 17% spec space out of that 13 million. All of those buildings being built are energy companies that are going to house very high paid folks. So, what's going on here is that the energy companies are continuing to invest in shale, and given that Houston is the energy capital of the world, all of the activity that's going on around the world is all handled through Houston, not only the technology aspects of managing flows and mud and things like that, but also the financial side of the equation -- M&A, financial services, that relate to the energy sector.

So, this is not a blip in Houston's growth. This is a long-term massive shift going on for US energy dominance, and it's based in Houston. So, I don't see a scenario where, unless there's some dramatic shift in the shale gas and oil and gas play, which most people don't think -- they think in their early stages of this production, that that's going to change much for Houston. So a Charlotte doesn't have energy like this, and you don't have a secular change going on in the banking system, or a Raleigh. The energy business is here to stay in Houston, and it is as strong as I've ever seen it. And, these jobs are incredibly good too, they're good jobs, $150,000 25-year-old technicians working Internet systems and stuff like that, so I think it's a long-term play here.

Rob, Witten's forecast for employment growth in Houston for the next three years -- this year it's right at 100,000; next year it's 70,000; and the year after that about 72,000, and the history of this series has been upward revisions every year. It can be really good in Houston for a long time, although honestly, Charlotte at 9.7% for the quarter is not very far behind.

Okay. Thanks, guys, and congratulations on the anniversary. I was worried there that you guys had finally broken down and let Rich Anderson pick your music (laughter).

And, you gave him a shout out (multiple speakers). There you go. I'm sure he'll have a retort.

Alex Goldfarb, Sandler O'Neill.

Sorry to get in the way of Rich's retort, but I'm sure he'll be on deck pretty shortly. Just two really quick questions. First, going to the -- you said permits are leveling out. Just curious with the backup -- with rising interest rates and rising construction costs, are you seeing the private guys get impacted? Or, everyone's redoing their pro formas to make the numbers work and it isn't really impacting their plans from what you can see?

I think it's impacting everyone. We have canceled projects that we had that we were working on in California, for example, and elsewhere, that we had under contract and we had spent dollars on. I don't think it's just private guys getting impacted by construction costs. Anecdotally, it's affecting everyone. I will say that there are a couple of surveys that have come out from NMHC and also from the National Home Builders Apartment Groups that show expectation of private and public developers are that their starts are slowing down because of these issues. And I know people -- we know a lot of these private guys, and while they're plateauing, keep in mind, a lot of these people had legacy land deals just like we did. So, when the market turned and you were able to then build those out, they built them out, and that's why it ramped up so fast.

Today, if you're going to add to that pipeline that you had, you have to go out and pay above peak prices for land, and rising construction costs, rising interest rates, in an environment where it's much more difficult to make your numbers work. So, most people are not cutting their pipelines, they're just keeping them very stable, but they're not increasing their pipelines. I think that's the challenge and the worry that everybody had in the market was that you saw the straight line going up from 200,000 to 300,000 to 400,000 because the apartment business was so good. I think it's going to plateau and that cost issue is definitely part of the equation.

Okay. And then, the second question is, Ric, given that you are the unofficial spokesman of Fannie, Freddie, what's your take on what the government does? Right now, they seem to be getting a free lunch by confiscating all the profits from Fannie and Freddie without compensating the private investors. Do you think they continue that because of the budget wars and this is essentially free money for the administration? Or, you think that something will actually get resolved with the two entities?

I think the answer is yes to the first part. At the beginning of the crisis, they said they're going to wind it down in five years. They didn't do that. And now, there's another five-year plan. It is free money and they have bigger fish frying in the government than Freddie and Fannie, and when they're printing money the way they are printing, they're just going to keep collecting those dividends. Until something dramatic happens with either tax policy or some grand compromise or whatever, I don't think anything's going to happen. I think you're going to go along, get along.

Okay. Thank you.

Jeremy Metz, Deutsche Bank.

You talked about being comfortable in your current footprint -- obviously, you sold a big JV exposure in Las Vegas, and you talked about Phoenix exposure turning up over time. Can you give us your long-term view on Vegas? And, is that one where we should expect to see the percentage trend down over time?

Las Vegas has been the only market in America that hasn't come back very strong, and primarily, because the bust in Vegas was double. You had a casino hotel oversupply, and then you also had single-family oversupply, so it was a double hit. And, it's just starting to come back. Some of the analysts and market-trend folks believe Vegas will be in the top five growth, from a revenue perspective, markets in 2015, 2016. Over the long term, Vegas has been actually a very good market, it just happened to be one of the biggest bust markets, obviously. I think it's instructive, based on what Alex said earlier, we sold the portfolio there that we had owned for 15 years, after -- when we bought Oasis because we wanted to lower our exposure in Vegas. And, we made a 16% compounded IRR on that asset, in spite of the ups and downs that Las Vegas had in the last cycle.

We like Las Vegas long term, and it doesn't make sense for us to sell down our core position there before the market turns because I think it's going to have a nice run and it makes sense for us to keep that piece of the portfolio through that period. Long term, I'm not sure what we'll be doing there, but it's a great long-term market.

It's 6% of our total NOI contribution at this level. And as Ric mentioned, it's the only one of our 17 markets that has not, in any way, participated in a recovery. In fact, we're still about 18% below peak rents in Las Vegas, and that's not -- every other market in our portfolio is either at or past peak rents and markets like Houston are up double digits. We think its time will come. And whether, it's '14 or over into ' 15, long term, we think there will be a good opportunity to grow cash flow there.

All right. Thanks, appreciate the color there. And then, second question, it was interesting earlier to hear you talk about the positive moveouts for home increasing this quarter. Which markets are you seeing the highest moveouts for home, and are any of them above historical averages at this point?

We'll get that number to you, but I will tell you that -- that 14.6% across the portfolio -- the long-term average is 18%, so on average, we're well below that.

Okay.

I see some low-20%s in Colorado, which is still below the long-term peak in Colorado.

I think the key --

The rest of them were in the low teens.

The key issue, and the reason I brought that up is, because we continue to get a lot of conversation -- and not so much from dedicated REIT investors, but from non-dedicateds -- they can't understand how our business so good in spite of single-family houses being cheap and interest rates being low, and then all of these companies that are renting houses. They have this view that the commodity of a house is directly competitive with an apartment. And, at the end of the day, we have seen cycle through cycle through cycle that single-family and multifamily can do well in a growing economy together, and one doesn't have to suffer versus the other.

I think that the idea that people are financially driven from an apartment to a home because it's cheaper is not the case. It's very demographically driven. If you look at ages of age cohorts, the people from 25 to 30 have a lower propensity to own a home than people from 30 to 35. As you go higher in age, the higher propensity to own a home, and that has to do with the ability to save money for a down payment, their social situation, people getting married later in life, having kids later in life, all are good things for our business. I've always been fundamentally a fundamental proponent of a strong housing market, in general, including single-family and multifamily.

Great. Thank you.

Jana Galan, Bank of America Merrill Lynch.

This is Jane Wong for Jana. Just a quick question -- if you could go over what happened in LA expenses during the second quarter? And then, my second question was if you could comment on what's going on with your portfolio in DC -- what kind of changes you've seen in the last few months?

Absolutely. I'll take the first part of that question. LA expenses at 15.6% up on a quarter-over-quarter basis is almost entirely due to some favorable property tax adjustments we had in the second quarter of 2012. If you took out those favorable property tax adjustments in the prior-year period, the expenses will be up right around [4%].

On DC, trends in last couple months, if you look at the numbers for the quarter, we're at 3.1% revenue growth. If you drill down into that a little bit, we think of our exposure as three separate markets -- we've got the Maryland exposure, the Northern Virginia, and the District. If you parse those out, the strongest of those three is actually Northern Virginia at about 3.6%, Maryland's hanging in there at 3%, and the weakness that we've seen has been in the District. Our portfolio was basically flat in the quarter in the District. So, you mash all that together and it's 3.1%, but it's definitely a tale of three different markets.

Overall, the 3.1% revenue growth is exactly where we thought we would be when we laid out our plan for the year. In any year where we weren't having 6.5% portfolio-wide NOI growth, 3.1% would look pretty good. But by comparison, it's weak. The only market we have that's weaker than that, really, is the Las Vegas market. From a historical perspective, that's a really strange place to be -- us lamenting about 3.1% NOI growth in a market.

Do you think the year-over-year growth will continue to slow this year in DC?

I think our plan for the entire year was about 2% to 3% NOI growth, and I think that's where we'll end up.

Thank you.

Rich Anderson, BMO Capital Markets.

Rob Stevenson's just upset because he still has a 1993 hairdo (laughter).

Now, that was a good one. At least he has hair.

I'll let my -- as a former rock star myself, I'll let the music of the Junebug speak for itself. You can look it up online.

I was following the transcript, and the most profound comment that was made today was -- we expect the remainder of the year to track as expected, which isn't the most profound comment I've ever heard from you guys. I'm wondering if you could be a little bit more profound? If you could think about a lot of things are completed, the property tax issue is known now -- what is that hangs in the balance for the second half of the year and into 2014 that could change things directionally one way or another? Is it a government action? Is it rising interest rates that maybe fuel some activity in the transaction market? What do you think can happen that's unknown at this point?

I'm not sure it would be profound -- it might be profane (laughter). I think when you talk about -- I know everybody wants to have something -- wow, right? Oh, gee, we're going to increase our guidance, or we're going to increase revenues or -- I'm not sure what the wow factor is. Bottom line is that we are going to make our numbers this year. If we hit those numbers, it will be one of the top same-store NOI growth companies in the sector. We're clearly looking at a lot of transactions. It's a very interesting market out there, and the uncertainty about the [10 year] and what that's going to do to the private side and all that, but who knows? I think we're positioned very well to do lots of interesting things.

I think, Rich, if you think about our plan for the balance of the year, we are where we are, from the standpoint of what we think we're going to accomplish on revenue growth and controlling expenses, we've always done a great job of doing this that. This year we've been absolutely crushed by property tax increases, and those are -- it's always problematic when you lay out a plan at the beginning of the year and you don't have valuations or tax rates. But other than that, we're trending in really comfortable position on expenses and we think we're in really good shape on revenues.

On the -- if you think about our plan, what has to happen in the next five months to hit these numbers, and the variation is on acquisitions, dispositions. And it's a wild card right now because we have assets in the marketplace, right now, that we're currently going through the marketing process on. We're not far enough along where we've gotten any meaningful feedback on price discovery, but we think we'll have that in the next 30 or 45 days. That is -- it's a little bit of a wild card now because you can't -- we have not seen through the cycle, from deals put on the market, in light of the new 10 year, but we do know that the assets that we're selling, which tend to be the older assets in our portfolio, those are more likely to go into the hands of leveraged buyers and leverage matters. 100 basis points on the 10 year, or the 5 year, is a pretty big deal. In terms of exposure, we'll see what comes back out of this marketing process.

And then, on the acquisition side, it's very competitive. You would kind of think that with the uncertainty and the interest rates that you might be seeing a little bit of softness on pricing, but the reality is, on the assets that were interested in from an acquisition standpoint, tend to be more core assets. And, they tend to be in markets that people want to be in right now because there's tons of job growth and rents are going through the roof and it's all good. So, people are still running pretty big rental increases through their projections. You've got to get in there and get after it. It's very competitive for the stuff that we want to buy. And, for the stuff we want to sell, it pretty interest-rate sensitive (multiple speakers).

Remember, this is not a sprint, this is a marathon.

Right. Do you think rising rates, or the threat of rising rates, prompt some sellers that have been on the fence to move a little bit more quickly in fear of that happening in front of them?

I think there's some of that out there for sure. We have -- you've seen in the acquisition market, as Keith points out, that it's very competitive and there's still a wall of capital that's private-capital, primarily, driven. And, bottom line is, whenever -- I think it's like single-family houses, right? As interest rates go up, people go -- oh, gee, I better get in, so you have a spike up in people entering the market. And I think the same thing is going through certain sellers' minds as well, so there may be a spike in properties for sale between now and the end of the year, or portfolios for sale as well. I think it's uncertain as to what happens, but we just have to see.

And last, real quick, I asked this on Avalon call -- do you think single-family rental business -- do you think that's a good business? Do you think it will work for everybody, some people, or not at all? What is your thought about how that's going to play out?

The debate is whether it's a business or a trade. I am clearly in the -- it's a trade camp. We spent a lot of time in and energy, early in this process, about 1.5 years ago, trying to make sure we completely understood what the economics were, both from a -- is it a risk to us, number one? And number two, is there an opportunity there for us? After all the machinations and spending a lot of dollars and intellectual capital, we came down on the side of -- if you buy a $100 for $50, you can make money.

But, it's an IRR play, not a cash flow play, because the -- and if you look at the models that people are trooping around -- and not to get any big argument with people who think, or who are doing IPOs on single-family homes, but if you look at the internals and you see that they're using $500 for CapEx for a single-family home turn, that's just astonishing. The number could be five times that by the time you rip the carpet out and place the sheet rock. And, you're going to have 10% or 15% skips and evictions -- there's no way you're not. How do you know when they left and how do you know what they took? I just think the numbers are silly on CapEx side. So from a long-term holding standpoint, I don't think it makes much sense. But, if you bought $100 for $50, and you turn it once or twice and you catch a little air under your wings in the market, yes, absolutely some people can make money doing that.

Okay. Thanks. Appreciate the color.

Michael Salinsky, RBC Capital Markets.

Just a quick question, if you look at supply in DC, Raleigh, and Austin -- a couple of the markets (inaudible) back-end loaded, can you give us your thoughts in terms of leasing strategy for the back half in a couple of those markets where you are facing a decent amount of supply?

Yes. The supply -- again, even in a market like DC, right now, if you look at the aggregate numbers, and you say -- okay, projected job growth versus total supply, you would come away not that worried about it. The challenge, though, is that supply doesn't happen ratably across all the markets, and so -- for example, in our DC portfolio, on our call with our leadership team there the other day, the folks who have directly competitive lease ups -- I'm talking about across the street, right next door yes, they are feeling anxiety about that because these people are coming in they start out with 300 apartments to lease. We only have -- at any given time, we only have 20 apartments to lease. So, it's a different game that they're playing, they have to play it very differently, and we have to respond to that.

The communities where we are having direct lease up competition, sure we are -- sure, we're responding to that, and we're being more aggressive. We have to take that into consideration in our pricing. You can't blindly say -- Revenue Management YieldStar said to do -- this is the price and that's the end of it. We have a lot more hand holding and a lot more overriding of lease recommendations on those communities -- that's how you respond to it. Once that lease up gets out of the way, then I think you're back to a more normal market condition in DC. There will be some pressure, which explains why they're at 3.1% revenue growth and not 6% like the rest of our portfolio is.

Okay. Fair enough. As follow up, I'll try to combine two questions into one here -- as you look out -- capital planning starting for '14, what's the -- obviously the big redevelopment plan this year. What's the redevelopment spend you're looking at for the next couple of years. Also, Alex, in your comments you gave great color on real estate taxes -- curious if you could talk about insurance in a couple of the other areas as well?

Yes, absolutely. We'll jump to the insurance part first. We actually just went through the renewal of our annual insurance premium. We had originally anticipated that the insurance premium would be up about 5%. It actually ended up, up 10%, primarily due to the Sandy impact. So, even though we're down here in Texas, we had the impact as well. That, coupled with -- in the first quarter of the year, we told you we had some additional insurance losses, due to a fire in California and some hail, that's actually ending up where our total insurance is markedly up over our original plan. We'll be in line with increases that we're seeing on the tax front for the full-year basis.

On reposition spend, we're probably going to be an equivalent amount next year and this year, it's roughly an equal split. We had two different pools of assets that are running through the numbers, probably in the $75 million range.

How much redevelopment potential do you estimate within the portfolio, currently, in total?

What we've spent to date? The total program -- and this started really last year, but through '13 and into '14 is about $200 million.

Thank you.

(Operator Instructions)

Dave Bragg, Green Street Advisors.

You touched on the topic I wanted to ask about a little bit earlier, but I want to circle back and make sure I understand your viewpoint on this. On the transaction market with debt costs up 100 basis points or so over the last quarter, you're active, both acquiring and selling, you're seeing no movement in cap rates on the stuff that you're buying, which is probably Class A. And, it seems as though you expect potential movement on the assets that you're selling, which tends to be Class B, but no evidence yet. Is that correct?

That is correct. I think the question will be -- will investors who have capital to spend -- they were getting outsized returns. Most of the private guys that I know who were just giddy saying -- gee, I expected 7% cash on cash and got 12%. So, the question is, is 12% the expected rate -- leveraged return that a private guy wants -- because they were getting 12% and they expected 7%, so the question becomes -- did the 100 basis points wipeout the 12%? Probably. But, they still can get 7% or 8% or 9%, and the question will be whether the market adapts to that. You look at our fund, for example, that we did with Texas teachers, and we're making cash-on-cash returns, I think, over 10% -- 10%, 11% cash-on-cash returns, and our budget was like 8%. So, does that mean that we would then adjust our underwriting saying -- we will not do a transaction unless we get 11% cash on cash -- leveraged cash-on-cash return.

So, I think there's going to be some -- it's uncertain now, in terms of how these private guys are going to react, but I think when you look at unleveraged IRRs, which most people look at unleveraged IRRs before they're leveraged. Those haven't really changed that much, and that's getting to the Class A unleveraged IRR analysis that pension funds and people like us do, but the leveraged buyers don't even calculate what unleveraged IRRs are. They don't care about that. They care about what their actual cash leveraged IRR is. So, I don't think that the rate going up from an incredibly low number to still a pretty incredibly long-term low number is going to have as big an impact as some people think.

Okay. Thank you. And then, on the types of assets that you're trying to sell, any evidence out there of leading indicators of cap rates so far -- deals getting dropped or retraded?

Clearly, there's a retrade -- everybody tries to retrade when there's some major change. We have a lot of activity on these assets that are being marketed today, so at least the number of buyers, the number of people that are doing tours, the number of confidentiality agreements is at the same level it was prior to the increase in rates. So, it will be interesting to see how it all plays out, but right now, we don't have any bids on these assets yet, and we'll just have to see.

Okay. Thank you.

Paula Poskon, Robert W Baird.

As you are underwriting new development projects, for the backfilling the pipeline, how are you thinking about the product mix that you would like to have? Are your new projects gravitating toward all-luxury Class A high rise? Walk us through how you're thinking about the product mix that you want to have, given the demographic shift ahead of us over the next, let's call it, 10 years?

The product mix is a function of where the asset is. If we're building -- for example, we have a development site in Houston in midtown that we've own for a long time, and that's going to be a high-end, urban, small-units, highly concentrated efficiencies and one bedrooms, very few two bedrooms, because that's the market. Now, on the other hand, when you build in Tampa, for example, in the suburbs, you're going to have a higher mix of two bedrooms and fewer efficiencies and larger, on an average square-footage perspective, larger apartments relative to an urban play.

We have always liked to have a mix between suburban and urban, and high end versus more, call it, instead of A-plus-plus-plus, it's A-minus, or something like that so that you can have a price point that people can afford. We've done really well in our suburban stuff in Florida, and we've done really well in our urban product too, so it really depends on the actual merchandising mix that we're trying to get for a specific market.

Any thoughts about creating brands specific to those, much like Avalon is doing?

No.

Okay, thank you.

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

We appreciate everybody on the call today, and we will look forward to waving at you on Tuesday -- next Tuesday when we open the Stock Exchange on our 20th anniversary. Thanks a lot.

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