Camden Property Trust (CPT) 2013 Q3 法說會逐字稿

Good day, and welcome to the Camden Property Trust third-quarter 2013 earnings conference call and webcast. All participants will be in a 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 Ms. Kim Callahan, Senior Vice President of Investor Relations, please go ahead.

Good morning, and thank you for joining Camden's third-quarter 2013 earnings conference call. As you may recall, Rod Petrik, of Stifel Nicholas, was the first person to correctly guess the theme of last quarter's hold music, earning him the opportunity to select music for today's call. The theme he chose for us was Texas legends, well done, Rod, and we hope you enjoyed all of those songs.

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 third-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 1 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 e-mail, after the call concludes. At this time, I'll turn the call over to Ric Campo.

Good morning. To quote that legendary Texas songwriter George Strait, I don't have any exes, but Texas is a place I dearly love to be. That's definitely describes our Texas markets today. Camden had another solid operating quarter with 12 of our 16 markets exceeding 5% net operating income growth, and 9% with revenue growth higher than 5%. The apartment business continued to exceed long-term trends, and we expect that to continue.

We continue to be active at recycling capital, selling older, slower growing properties and buying and developing new-generation properties. We completed property sales of $174 million, so far this year, with an average age of 26 years. We held these properties for 16 years, and realized an 11% unleveraged IRR on these property sales. We expect to close sales with an additional $175 million in the fourth quarter. We've acquired $225 million of new-generation properties during the year with an average age of 6 years. We do not expect to acquire any additional properties this year.

Sales prices and cap rates have held reasonably stable for our disposition properties. We will likely be a net seller of assets going forward, using the proceeds to fund development. During the quarter, we started three new development properties with a total cost of $156 million. We expect to start two additional properties by the end of the year, a total cost of around $200 million.

While there's a lot of concern about new supply, we think that job growth will create enough demand to absorb new completions during 2014 and 2015. I would like to give a big shout out to our Camden teams in the field, and our support teams, who continue to outperform their markets, and continue to make Camden a great company and a great place to work. I'll turn the call over, now, to Keith Oden.

Thanks, Ric. I'm mindful of the fact that we're one of the last apartment companies to report for the quarter, and many of the themes have been beaten to death, so I'll keep my comments brief. Our third quarter results were solid, and inline with our expectations. Our team has focused on finishing the year strong. After last year's sector leading same-store NOI growth of 9.2%, we're determined to achieve our original guidance of 6.5% same-store NOI growth for this year, which would be the second highest in the sector, this year, giving us a 2-year total of 15.7% growth in NOI.

Can I get a why-so, anyone? In our same property portfolio, rental rates were up 4.9% year-over-year for the third quarter, with a slight dip in occupancy of 20 basis points. We're still getting strong growth in Texas, and Charlotte, both with 6.4% revenue growth, followed by Atlanta at 6.2%, and Denver at 5.9%. Perhaps surprisingly, Raleigh was up 5.2%, despite being closely watched for the impact of new supply. Our weakest three markets were DC, Vegas and San Diego, all with less than 3% revenue growth.

Sequentially, our revenue was up 1.7%, following the 1.8% increase in the previous quarter. Sequential NOI growth was up 2.2%, versus the 2% that we discussed on our last call. In mid-August, we made the decision to push up occupancy in our portfolio for two reasons. First, to offset the seasonally weaker occupancy rates we historically experience in the fourth and first quarter. And second, to help offset the additional days vacant caused by the ramp up in our reposition program.

On average, the additional days vacant for a reposition versus a normal turn, is 14 days. In order to accomplish this, we increased our occupancy targets and YieldStar by roughly 1% across the entire portfolio. The results of this decision is that we currently have a same-store occupancy rate of 96%, or 90 basis points higher than in the fourth quarter of last year. Based on our current pre-leasing rates, it looks like we should be able to sustain a 95%-plus occupancy rate for the fourth quarter, which was exactly what we intended to have happen.

Raising the sustainable occupancy rate results in incrementally lower new lease rates. Our new lease rates for the quarter were up 1.5%, while renewals were up 6.8%. We got slightly more than the occupancy gain we expected, and we've since reduced our sustainable occupancy rates by the 1%. Based on current and projected occupancy levels, we should see new lease rates increase for the fourth quarter, above the fourth quarter Q2 2012 new lease increases. Our turnover rate in Q3 was 70% versus 71% last year. And as we expected, our percentage of moveouts to purchase homes dropped to 13.3% from 14.6% in the second quarter. This puts us roughly halfway between the moveout to purchase homes rate at the bottom, which was just under 10%, and our long-term average rate of 18%.

At this point, I'll turn the call over to Alex Jessett, Camden's Chief Financial Officer.

Thanks, Keith. Last night, we reported funds from operations for the third quarter of $93.3 million, or $1.04 per share, representing an approximate $2.5 million, or $0.03 per share, outperformance to the midpoint of our prior guidance range. This outperformance resulted primarily from $1.2 million of additional promoted-equity interest received in conjunction with the May 2013 disposition of our 14 joint-venture communities in Las Vegas, Nevada. $1 million in higher-than-anticipated property net operating income, and $200,000 in higher than anticipated fee and asset management income.

The $1.2 million of promoted-equity interest received during the quarter is, in addition, to the $3.8 million previously received in the second quarter. The venture has now completed its final accounting, and we anticipate no further income. Of the $1 million in higher-than-anticipated property net operating income, approximately half came from acquisitions that occurred in the third quarter but were forecasted to occur in the fourth quarter. And, approximately half came from higher net operating income from our non-same-store communities.

The positive variance from acquisitions is the result of our purchase of two communities in September, for a total of $116 million. Our prior guidance was based on these acquisitions occurring at the beginning of the fourth quarter. The positive variance from our non-same-store communities was primarily due to lower unit turnover costs, and lower-than-anticipated levels of self-insured insurance claims. And finally, the $200,000 in higher fee and asset management income resulted from the accelerated construction timing of select third-party construction jobs.

Same-store net operating income continues to be inline with our expectations. On a quarter-over-quarter basis, our weighted average same-store rental rates increased by 4.9%, and our revenues increased by 4.3%. The large delta between rental rate increases and revenue increases, for the third quarter, resulted from an usually high utility rebuilding income recorded as other property income in the third quarter of 2012.

We've revised our full-year 2013 FFO per share outlook. We now anticipate 2013 FFO per share to be in the range of $4.05 to $4.09, versus our prior range of $4 to $4.08, representing a $0.03 per share increase in the midpoint. This increase is a result of our third quarter outperformance. Our revised full-year 2013 FFO guidance is based on the following transactional assumptions for the fourth quarter, $225 million in new on-balance sheet development starts, and $170 million in additional dispositions with no additional acquisitions. $34 million of these dispositions have closed subsequent to quarter end.

Based on a $200 million unsecured-debt maturity in December of 2013, and a current line of credit balance of approximately $180 million, we will likely access the capital markets in the near future. The exact timing, and composition, of our capital markets activity will depend upon a variety of factors. As a point of reference, we currently anticipate that we could issue a 10-year unsecured bond in the 4% area, and a 7-year unsecured bond in the 3.25% to 3.375%. Last night, we also provided earnings guidance for the fourth quarter of 2013. We expect FFO per share for the fourth quarter to be within the range of $1.02 to $1.06. The midpoint of $1.04 represents a $0.01 increase from the third quarter of 2013, once you exclude the nonrecurring promoted-equity interests.

This projected $0.01 per share increase is primarily the result of -- an approximated $0.03 per share increase in FFO, due to higher same-property net operating income, as our normal third to fourth quarter seasonal decline in utility, repair and maintenance, unit turnover and personnel expenses, should be combined with a non-typical third to fourth quarter improvement in revenues, resulting from our current occupancy push that Keith mentioned. This positive variance is projected to be partially offset by an approximate $0.02 per share decrease in FFO, due to our net acquisition and disposition activities. That's a contribution from our $116 million of acquisitions in the third quarter, will be more than offset by the impact of a $225 million of dispositions in the third and fourth quarters. At this time, we will open the call up to questions.

(Operator Instructions)

Rob Stevenson, Macquarie.

When you're looking at the DC market is there any reason, given what you're seeing on the ground there, to believe that revenue growth isn't going to turn negative in the fourth quarter, and early 2014, and then stay there for a while?

Yes, Rob, I think that it's likely that based on where our portfolio is currently, even though we were able to eke out a small positive number in the third quarter, early results in the fourth quarter look like it's certainly likely that they could be flat to slightly negative in the fourth quarter. So, I think as you look forward to next year, it would certainly be reasonable to forecast that you may get some slight negative in our portfolio.

We've got a different aggregation, or different geography, of assets than some of the other companies do that, I think, have taken an earlier and bigger hit. But, I think the overall story in DC continues to be one of slowing down, and fighting our way through some additional supply. So, yes, I think that's fair to say, but we'll give you specific guidance on that after we do our property-level budgets, and get them all rolled up for you in the first quarter.

Okay, and then the other question is, you talked about two fourth quarter starts, roughly $200 million or so. I mean, how are you guys feeling about new developments, sticking shovels in the ground today, in general? And are there any of your pipeline communities where you've gotten more pessimistic on, over the last quarter or so, about starting those?

I would say that our development pipeline, we feel good about what we started, and we feel good about our near-term starts, but I would say that we are definitely tapering off in terms of adding a lot to the pipeline in certain markets. Clearly, we're far enough into the cycle now where some properties remain impacted by construction costs, and just availability of labor to get projects done.

So, I think that the whole industry is starting to taper off. We've started seeing permits start falling in August, and I think you're going to see the flattening of starts, and we're going to be included in that group.

Okay. Thanks, guys.

Alex Goldfarb, Sandler O'Neill.

Good morning, and certainly enjoyed the Texas music up here in rainy New York. Just going to the Capital Markets, as you guys think about, I think you said, Alex, you have about $170 million of dispositions. You've the $200 million bond coming due. Are you thinking about just doing like an index eligible? Or would you do more than that? Or would you look to, maybe, as you said, be net sellers of assets so you'd rely more on disposition proceeds, in the coming year, to help fund things?

Just trying to figure out. Because, obviously, apartment prices are still pretty healthy. The debt markets have settled down, so just trying to see where you see better pricing for funding your activities.

Absolutely. So, to be index eligible you have to do $250 million bond size. And likely, we'll be closer towards that than doing a larger transaction, obviously we continue to evaluate it. But, we're probably more towards the index-eligible size.

And, as far as net selling, the market is really holding up well for these older assets, people look at them as value add. And so that the bid for them is still very strong, and the cap rates are still very solid. And, it makes a lot of sense to sell those assets, in combination with some bond proceeds, to fund our business going forward.

Okay. And then as far as property taxes now that we're almost towards the end of the year, year to date, they're up 12%. Do you think that most of the communities have marked your properties to market, so that next year, that property tax reassessment should moderate? Or you think next year there's still going to be some pain in there?

No. I think you're right. I think it should moderate. We anticipate we'll probably finish the year close to the 12%, which is where we have been year to date. And if you think about most of that increase came from large increases in Houston and Dallas, which were really a catch up for the prior three years, so we're certainly not anticipating that either municipality will hit us again for a large number next year.

Okay. Thank you.

Nicholas Joseph, Citi.

Going back to the development pipeline, what are the expected yields on the new starts, and how does it compare to transaction cap rates today?

The yields on our new starts are 6.5% to 7%, continue to be in that zone. 6.5% for the coastal properties, and 7%s in the interior. And when you look at cap rates for like properties, they're in the 5% zone, so we still are having a 150 basis point to a 200 basis point positive spread to the development yields. On the coast, it's actually better because cap rates are still very, very low in Southern California, and so in those markets, the spread is still pretty wide.

Thanks. And then, just looking at the Texas markets, can you talk about what you're expecting going forward in terms of supply and demand?

Yes, actually the only market of the three Texas markets that screens, if you look at 2014 job growth to deliveries, it screens less than the 5 to 1 that we consider equilibrium is Austin, and it screens at about a 4.2 to 1. Houston and Dallas still screen well above the 5 to 1, based on 2014 estimates on employment growth versus deliveries.

Obviously, there's a lot of communities in the pipeline, but when you reflect on the kind of growth that Houston and Dallas are both seeing on the employment side, it still looks pretty manageable to us. And you've still got ratios in Houston and Dallas in the 6s and 7s. So, I think, through 2014, given we have really good visibility on what's going to happen on supply, if the job growth holds up the way it's currently forecasted to in AXIOMetrics, than then we should be okay.

Great. Thanks.

Nick Yulico, UBS.

If I look at your year-over-year revenue growth in the quarter, it dropped off pretty substantially from where it was in the first half of the year. How should we think about that? Are you now starting to finally see more of a supply impact in markets, and even putting aside DC for a second?

Yes, I think if you're thinking about the slowdown, and what the root cause of it is, clearly in DC there's a supply consideration there. If you look at the other two markets that screen on our 2014 numbers at below a 5 to 1 ratio, which would imply that you're getting net supply pressure, that's Raleigh and Austin. And we really haven't seen it yet in Raleigh, but my guess is that 2014 we will see some supply related pressure, and I think you're going to see some in Austin, as well. Fortunately for us, a huge percentage of the new construction in Austin is happening south of the University in the downtown area. And we just don't have assets that would be directly impacted by that. Not to say that when you have a large spike in supply it hits all submarkets.

So, I think in those three markets, you could think of the slowdown as, and then into 2014, more of a supply story, but in the rest of our markets, it's just the math. We did 9.2% same-store NOI growth last year in the portfolio, and we guided to 6.5% this year. And there's just no getting around the fact that, at some point, you're going to put up numbers on a quarterly basis that are less than what they were the previous year. But, I think we're still pretty well positioned going into the fourth quarter with an occupancy rate of 96%.

And that's directly related to a specific tactic that we undertook to make sure that we got our occupancy rate up. And, hopefully, we can sustain that through the fourth quarter and into the first quarter, which are, historically, our weakest two. But, I think it's more just a natural progression of trees don't grow to the sky, and 9.2% becomes 6.5%, and 6.5% becomes something that, in 2014, that's probably still well above trend.

If you look at a 20-year average for apartments, you get about a 3.1%, 3.2% revenue growth over a long period of time. And so, this is an inflation, plus a little bit growth business, so when you have the kind of growth that we've had post recession, obviously, it has to come down some. And, it's coming down now, but it's still way above trend, and it should be above trend for the next couple years.

Okay, yes, that's helpful. Just one other question on the guidance. You didn't change your same-store guidance for the year yet, year to date your essentially tracking right between the bottom to the midpoint on NOI and revenue. I'm wondering, I mean, is there any chance at this point to still get to the top end of the ranges?

There's always a chance, or it wouldn't be in the range.

How do you (laughter) and what gets you there?

Here's what I would say, we didn't tighten the range. You could do that, but at the end of the day, it probably doesn't make much difference, people take the midpoint. We still see a path to get to the midpoint of our range or we wouldn't have it there. And if you think about, so what's different and what's unknown in terms of modeling the fourth quarter, would have been, I would guess for most people, is we have roughly 100 basis point positive variance on occupancy relative to both our plan and, probably, most people's model. And that's a meaningful piece of revenue that we think we're going to be able to sustain throughout the fourth quarter. So, if you think about the delta to where we are in the third quarter, it looks like our revenues will be up over, for the fourth quarter over the third, which is very unusual for us.

Thank you, very much.

Rich Anderson, BMO Capital Markets.

[Wiso], a broken clock is right twice a day, just FYI. So the occupancy push that you talked about it, it contradicts back. I think it was 2009, Ric, when you undertook a strategy to let occupancy slip. I'm wondering what changed or what's different about the two timelines and strategies that are causing you to look at occupancy with a little bit more of a defensive mindset?

Yes, Rich, I'm just glad that there's somebody that's survived long enough to remember what wiso was. So, the difference is that -- two things. One, we really did want to see if we could gain some occupancy going into the fourth quarter so that our traditional pattern is fourth quarter falls off into the mid-94%'s, and then that carries over to the first quarter. So, we think we had sufficient strength in our markets that we could push occupancy, sustain it through the fourth quarter.

But, in addition to that, and in addition to that, and so I will tell you there's a little bit of let's see what can happen if you increase the sustainable occupancy rates within the pricing model. Well, guess what. It works. And within two to three weeks, our occupancy rate across our entire portfolio was up almost 100 basis points. So, that's number one. The other thing that really led us to let's try this was are the repositions. I mean, repositions are awesome. The returns that we're getting our incredible. We have ramped up the program very significantly from what we thought, at the beginning of the year, because of the success we've had.

But, the reality is that it takes you incrementally 14 more days to turn a unit that's a reposition versus just doing a normal unit turn. So, we didn't want to put that additional pressure in the fourth quarter without having something supplemental. So, we decided to make this conscious decision to change the sustainable occupancy rate, and we're very pleased with the results.

And, what I would say, just to add to that, is that different times require different operating methods. And that's the great thing about having a flexible system is you can say here's what I want to do today, and here's what I want to do tomorrow. And it's just all about trying to get the best fit you can to maximize the revenue that you're trying to produce.

Okay. And then, secondly, on the talk of a capital raise, I'm wondering how much of that has changed over the past 6 to 12 months in terms of how your financing the development pipeline? I mean you, obviously, are less inclined to use equity now, but do you think 12 months ago when you were thinking about financing in the period ahead, that you would have been using more equity than you're willing to do now? Is that a fair statement?

I think that's a very fair statement. You have to respond to the market, right? And we are nimble enough to respond to the market. So, we have a strategic plan that we put forward to our board that's a three-year plan, and we toggle that plan depending upon where the most efficient source of capital is, in terms of when we need capital. So, the bottom line is, is when the stock price volatility, obviously, has changed the metrics on whether it makes a lot of sense to issue equity versus making sense to sell assets, as opposed to issuing equity.

And so, bottom line is we're being responsive to the capital markets, and it doesn't make a lot of sense to me to sell equity at $62 a share, which is below most people's NAV. To go out and build NAV, and have it be discounted by the market. So, it makes a lot of sense to sell assets for $1 on Main Street, and reinvest that dollar into assets for our balance sheet.

Okay. So, that was the easy part of the question, but I mean, I was thinking in terms of balance sheet capacity to go this route, for how much more do you think you have? And also, layer into that balance sheet question, stock buyback. Is that an option, too, for you?

Rich, one of the things that is very different, for us, in this part of the cycle from where we were in the last go round, is the fact that we have the lowest leverage in the entire sector. So, it creates a lot of flexibility for us to do things that make sense at the time. Obviously, we don't want to be selling equity at these prices, and we don't have to. We have great capacity on our balance sheet because of where our leverage is. And, if we have to supplement our disposition proceeds by tickling our leverage in order to fund our development pipeline, and not have to sell equity to do that, then that's obviously an option that we have.

As far as repurchasing shares, again, I think it's back to the flexibility. We have more flexibility than anybody in our sector to be able to make those kinds of decisions when, and if, we think it makes sense. So yes, that's something that at some point you have to consider when you have the disconnect, that is continuing to persist, between our assets that we're selling, and we know what the valuation of those are, versus our stock price and NAV. So, it's just all part of the mix, but we're just fortunate to be able to have the flexibility to look at all those options.

The only thing I would add to that is, on the stock buyback scenario, is that we, I believe, were the most aggressive buyers of our stock when the stock was persistently below NAV for a reasonable period of time, that would have been 1999 through 2001. And in those days, for people who weren't around then, everybody wanted click throughs, and so real companies that had real dividends and real earnings, no one wanted them. And our stock was trading at $0.75 on the dollar, and we sold assets on Main Street for $1, and bought back those assets from Wall Street for $0.75 on the dollar to the tune of almost 16% of our total market cap. So, we definitely know how to do it, we know when to do it, hopefully. And, it's not something that we're afraid of. It's just trying to figure out what the opportune position is.

Okay. Thanks. Appreciate it.

Dave Bragg, Green Street Advisors.

Ric, in your opening comments you characterized asset pricing on dispositions as reasonably stable. Can you elaborate a little bit on that, what you expect the dispositions in 4Q to come in at versus your initial expectations?

They're right on target of our original expectations and, as a matter of fact, they are maybe slightly higher but not a lot. We had put this disposition program in place, we figured the assets out right in the first quarter, put them in the market at the end of the second quarter. And then marketed through the summer, and then the fall has been picking buyers and doing the contracts, and all that. And, we are right on where we thought we would be in pricing, and the pricing was done before the May taper tantrum that was created in the market.

So, with that said, we still have a number of bids on, more bids than we thought we would get, and we were all nervous about cap rates, and what would happen to these assets because they're 26 years old. But, what we found is that the buyers are not using the ten year, number 1. They've never been using the ten year. So, number 1, when the ten year was 1.6%, and now it's 2.5%, that increase didn't really affect them, because they didn't really use ten-year financing, anyway, they used shorter-term financing.

And what we found is that about half of the buyers are using floating-rate financing, and they're doing floaters and all kinds of different ways to create really high cash-on-cash returns for their investors. Obviously, we would not do a short-term financing and floating in this environment, but there are a lot of investors doing that. So, they've either stayed short on the curve, or they've used floating-rate debt, and the yields that they are getting are still very substantial. So, there really hasn't been any material move in the B-plus asset base from a cap rate perspective.

That's helpful, thank you. The next question is just on the full-year revenue guidance, we're struggling to get to this 5.5% midpoint that you're expressing confidence in, given the fact that you're at 5.2% year to date. Can you just talk a little bit more about the fourth quarter, how much of a favorable occupancy comp do you expect to have?

Right now, we're at just at a little bit over 100 basis points favorable to plan. So, I think that is likely to hold, because if you look at the prelease percentage that we're currently at and project that forward for six weeks, which gets you out in the middle of December, it implies that we're still going to be right in the 96% range. So, that's probably a big piece of, from a modeling standpoint, what you may not have in your numbers. But, I would just say that we've reaffirmed our 6.5% midpoint, and we think we've got a way to get there.

Okay, and last question is, when you provided initial 2013 guidance, you suggested that revenue-enhancing repositioning would have a 50 basis point positive impact on same-store NOI. Where do you expect that to finish the year? Will it hit that target or will it be more impactful?

We think it's in that zone. The thing that has been interesting about these repositionings, and Keith alluded to it in his previous comments about how we have been managing the occupancy, is that we're getting the premium in rent, the challenge has been that the process of getting the premium rent has had some disruptions on-site with contractors moving in and out, and people working above somebody's apartment or adjacent to somebody's apartment. And the logistics of getting it done expanded the days to get it done from 9 days to 14 days. So, we had a little more vacancy than we had anticipated, and a little more disruption to the existing tenants. But, we're actually getting a little bit more than we thought we would in premiums, so, with that said, I think we're in the original zone that we talked about.

Thank you.

Michael Salinsky, RBC Capital Markets.

Just as a follow-up to that last question, can you just talk about what the spend is? I think you guided to $50 million to $60 million, but it sounds like there's some upside to that this year. And then, as we think about 2014 and 2015, how big is this program going to get?

The total size of the program is $200 million, a little bit plus or minus. And we're about halfway through that, a little bit more than halfway through that program. So, in terms of balanced spend for the balance of the year, we're at a run rate now of about 900 apartments turned per month. And they're running $11,000 per door or something like that. So call it $10 million a month. So, balance of the year, call it $20 million, and then that leaves us roughly $80 million for next year if my math's right.

Okay, that's helpful. And second of all, just a bookkeeping issue. The two predevelopments, Hollywood and Victory Park, you saw a pretty substantial budgeted increase, but you didn't see a change in the unit counts. What was that related to?

Well, the Hollywood transaction was related to a lease that we did. Originally, we were planning on doing, there was roughly 25,000 square feet of retail that was required by the city. And then, there was also some live work units. And we were able to make a lease that we think really enhances the value of the property, with Equinox, which is a high-end fitness group. And so, we had to reconfigure the retail space to accommodate Equinox, add some more parking. So, the majority of the increase was, or a large part of it, was the Equinox lease and Hollywood. We did have, both in Hollywood and in Victory Park, construction escalation costs. It was probably in the 6% to 7% range, and we did have to reconfigure the garage a bit in the Victory Park, as a result of requirements from the city to get that there. But, at the end of the day, there was some higher inflation in construction costs, and we also added a little bit higher-and interior finishes.

One of the things that we're doing now, and this is costing more for some of these properties, is we are focusing in on a problem that's been inherent for stick-built apartments forever, and that is sound transmission. Being able to hear people above you, or to the side of you, or what have you. And we have been adding dollars, from a premium perspective, to try to improve the sound issues in these projects. So, when you combine all those things, we've increased those budgets. The good news is the rents in all those areas have increased above what our original projections as well, so we're pretty intact on our yields.

Thank you much.

Tom Lesnick, Robert W Baird.

Hello, everyone, standing in for Paula today. I'm sorry if I missed this earlier, but could you discuss the expense growth, specifically in Houston, if there was one main item there?

Are you looking at the quarter over quarter?

Yes.

So, it's all property tax driven.

All right, that's helpful, thank you. And, are you guys seeing higher moveouts for home purchases and some markets than others?

Market by market, the range would be probably at the high-end in the 18%, 19%. Some markets still as low as high-single digits. I think, the better way to think about it is where we are versus our long-term average. For the quarter, we were at about 13.3% moveouts to purchase homes, which was down from the previous quarter, 14.6%, and we actually predicted last quarter that we thought we were going to get some pull forward just based on the level of existing home sales that were happening. I think there's a lot of impetus for people to, as they thought mortgage rates were going to get away from them, there was a lot of impetus to get off the fence, and go ahead and make a trade for a house. So, we did see that. And, then, we did get the bump up in the second quarter at almost 15%. But as we thought, it's back down to 13.3%.

Now, from the standpoint of where that puts us against the long-term average, our long-term average for moveouts to home purchases is about 18%. So, at the very peak of the housing boom, we were 24%. At the very bottom of the trough, we were high 9%s. And we've recovered to about 13%. But we're still well below the long-term average, and we've been saying for some time now that we don't think that there's a race to get back to that. It's probably still a couple years away before we see, I think, before we see 18% again.

That's very helpful. What were some of the markets at the high end of that range, and what were some of the markets at the low end?

So, at the high end of the range, Denver, 24%, and this is for the third quarter, Charlotte, 17%; Raleigh, 16.8%. Those are the ones that jump out at me on the high-end. On the low-end, Las Vegas, 8.5%; Southern California, 8%; Phoenix at 11.7%; Florida at 9.5%, and that would be the rollup of all the Tampa, Orlando and South Florida. So, those would be the ones that jump out on the low-end.

All right. That's extremely helpful. Thanks, guys.

Steve Sakwa, ISI Group.

It's actually Derek here, on with Steve. Can you talk about if there's any markets where it doesn't make economic sense, any longer, to continue to put renovation dollars into? Rehab dollars?

Yes, it's not market specific, as much as it is community specific, Derek. Our underwriting starts with what's the competitive set look like in terms of quality, age, and interior finishes? And whether or not, if we were to go through a renovation process and make our interiors to the consumers eye look like, essentially look like new construction, whether the rent premium that new construction's getting is sufficient to justify that. So, it's really more of a submarket consideration for us.

So, if you think about these assets, the average age of the assets that we're repositioning is about 10 years, 11 years, so it's not like we're taking 20-year-old assets, and trying to turn them into something they're not. In many cases, these are assets that are incredibly well located, but if you think about the interior finishes that were to put in place 8 years ago, 10 years ago, to the consumer's, our customer's eye, it's a very different product offering than what new construction is offering, today, in terms of interior amenities and finishes. So, if you have the opportunity to take what is an incredibly well-located asset with a long useful life, maybe another 15 to 20 years in our portfolio, spend $11,000 per door, and have the consumer, both on the exterior because of our standard of care of how we maintain our communities, but also when they walk in, as they're out shopping the new construction versus us, and we have a price point that's just below what the new construction is, to the consumer's eye, it's an apple and an apple.

So, all of those considerations are done, really, at the submarket and the community level rather than saying does it make sense to do it not in Vegas, but yes in Phoenix, et cetera? But, obviously, the markets where we're able to get those premiums also happen to be the markets that have had much higher growth rates and rental rates for new construction in the last couple of years.

Got it. And then, just thinking about that 50 basis points or so of lift this year, do you expect that to be a similar amount going into next year of what's baked in from what you spent this year, and most of that $200 million spend over the next year? Could it be more than 50 basis points, or would you experience a similar boost?

I think it's going to be in the same zone. We've gotten a lot more experience, now, at how many days vacant and we're, I think, better at turning them. The challenge, again, is this issue of the negative impact that you do have on the existing product. And then, how do you calculate what that value is and offset it against the income that you're getting from the rehab? So, we're going to do a lot more work on that, and we'll provide better guidance in the first quarter.

Got it, thanks. So then, just lastly, with the supply that everyone's worried about in Raleigh, right now, are you doing anything proactive there to mitigate it? And just thinking about what the next few quarters were like, you haven't seen the impact yet, but would you imagine it a slow decline like DC has been? Or is it going to be material drop off, say from 5 one quarter to 2 or 3 the next, or maybe even 1?

Well, point 1A is we're not building in Raleigh, so we're doing that part of it. But obviously, we are subject to, if we get this big run-up in supply, we think it will affect everyone. So, offsetting that, we increased our occupancy targets in Raleigh, just like we did everywhere else, and we had good results with that. So, I think we are about as well-positioned as we can be. Fortunately, a lot of the new construction are in two submarkets where we don't really have a lot of exposure. But, that's not to say that if the whole market's getting turned upside down, it certainly will have an impact on us. But, I think we're not as exposed as some of the other operators are to those particular submarkets.

Got it. And then just, so would you expect it to be a pretty sharp drop during one quarter or again, just a slow seasonal unwind throughout the next year?

No, the way our leases roll, you just very rarely see anything sharp, that you would consider sharp. I mean, obviously, where that could occur would be if you have some material falloff in occupancy, and we just don't see that happening. And, again, from a new construction standpoint, geographically we are not as exposed as some folks, and then from a product standpoint, we're probably different price points than what the new developments are. So, I think you're going to see, like anything else, you would see that rollout as we started to see impacts on new lease rates.

Okay, got it. Thank you, guys.

Karin Ford, KeyBanc Capital Markets.

At least one of your peers mentioned seeing some renter fatigue this quarter. Just given your comments on trees not growing to the sky earlier, are you seeing any of that? And is that what's behind perhaps that view?

Well, I don't know if it's renter fatigue, as much as it is just the math catching up with you on 15% same-store NOI growth in two years. The good news in our portfolio is that even though our rental rates have moved, and we've moved them pretty aggressively, the ability of our residents to pay, as measured by what percentage of their income the rent payment is taking, has continued to fall, which is interesting. And, it's tells me that were getting A, the folks who have jobs are continuing to get increases in their disposable income and, overall, we're probably got a little bit better demographic in our communities, today than we did four or five years ago.

So, I tend to look more at, for sustainability of increases, at the income-to-rent ratio, which is, right now, in our portfolio running at about 17.2%. And, it's been as high as 21% in our portfolio. So, by looking at that I don't get that concerned about it. But, I just think as you look forward, and you start thinking about rental rate increases that we've seen over the last two years, yes, that's probably going to continue to moderate. But, as Ric mentioned, we're talking about moderation, but still well above long-term trends.

Thank you.

(Operator Instructions)

Ryan Bennett, Zelman and Associates.

I just wanted to follow-up on your comments about development, just real quick. You noted on the starts that there's still a healthy spread between, or you expect the development yields to pencil out, versus where cap rates are today. And then, you also spoke about how you start to see a deceleration in permit activity, which would suggest spreads are narrowing across other projects. Is it just a function of your projects that you're currently starting, right now, with the better land basis or in terms of the construction costs in the particular markets where you're starting projects? I'm just trying to get some color around that.

Yes, absolutely. Properties that were in the pipeline, where we had half the plans done, where we're buying jobs out today, are definitely better off, and have better construction costs, better land basis. If we had to go out and get a brand-new piece of land today, and at today's prices, because prices are over-peak prices in 2007 for land today, and construction costs are back to or higher than 2007 peaks as well.

So, in order to underwrite new transactions that aren't in your pipeline already, it's just more difficult, there's no question. The other challenge, I think, is that as you develop the pipeline further, and this is happening to merchant builders more than it is to us, but if you think about 85% of the construction starts in America are done by merchant builders, and the merchant builder model is to build and sell. And they have to believe that that spread that they're measuring today, which is the difference between, on an untrended basis, what your going-in yield is versus what your acquisition rate is, right?

So, the question is, if you think about what's going on in the public markets, the apartment REITs are selling at below NAV because people are worried about rising interest rates, or worried about too much supply. They're worried about single-family home is taking share from apartments. And so, the same investors that are investing in apartment stocks are also investing in merchant builder development deals. And, when you start going forward and saying if I'm going to build a property today and it costs more for the land, it costs more for construction, and even though the spread today is really good, what the public markets are telling people is, or at least inferring today, is that that's not going to last for a while.

And, you have to deliver that product into 2016, 2017. I think that people are getting more nervous about 2016, 2017, not so much 2014, 2015, but further out. So, even though the spread today is reasonable, overall, you're seeing starts decline. That doesn't mean they're going to go down to 150,000, but they're going to stabilize probably into that 250,000 zone. I think a lot of folks have been thinking that the multi-family starts are going to go a progression of 150,000, 250,000, 350,000, 450,000 because people like to draw lines that fit well, right? I think today, even though spreads are good, it's not going to shut the business down, but it's definitely going to moderate business.

Okay, great, thanks for the color there. And then, just one question, I know Phoenix is a small part of the portfolio, but I noticed that revenue growth declined sequentially in the third quarter, for the first time in the third quarter, since 2009. Just curious what you're seeing in that market, given that you've had two starts in the Arizona market this quarter, if it's something specific going on that we might need to be concerned about, or what might have caused the sequential decline?

Yes, I think you just got such a small same-store pool that you're looking at, that it's jerked around by any -- you get two or three points of occupancy in a community and you're going to get that kind of a differential. It's hot in Phoenix in September. It's just not a good time of year to be renting apartments. But, overall, Phoenix we really like.

There's tremendous economic activity going on. The job growth, we think, will be there for 2014. And the reality is that there are, because of where Phoenix has come from, there's so little under construction that we feel really, really good about the three development communities that we have teed up in Phoenix.

Okay, thanks.

This concludes our question-and-answer session. I'd like to turn the conference back over to Ric Campo for any closing remarks.

Well, we appreciate the call today, and we will see a lot of you at NAREIT here in the next couple of weeks. So, thank you very much for being on the call.

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