Camden Property Trust - 10-Q quarterly report FY

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Business. Formed on May 25, 1993, Camden Property Trust, a Texas real estate investment trust (“REIT”), is engaged in the ownership, development, construction and management of multifamily apartment communities. Our multifamily apartment communities are referred to as “communities,” “multifamily communities,” “properties,” or “multifamily properties” in the following discussion. As of September 30, 2007, we owned interests in, operated or were developing 199 multifamily properties comprising 68,245 apartment homes located in 13 states, which includes nine communities with 2,515 apartment homes classified as held for sale. We had 3,783 apartment homes under development at 12 of our multifamily properties, including 1,257 apartment homes at four multifamily properties owned through joint ventures, and several sites we intend to develop into multifamily apartment communities.

Principles of Consolidation. The condensed consolidated financial statements include our assets, liabilities and operations and those of our wholly-owned subsidiaries and partnerships. We also assess whether consolidation of any entity in which we have an equity interest is necessary based on applicable accounting guidance. Any entities that do not meet the criteria for consolidation, but where we exercise significant influence are accounted for using the equity method. Any entities that do not meet the criteria for consolidation and where we do not exercise significant influence are accounted for using the cost method. All significant intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Reporting. We have prepared these financial statements in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”) for interim financial statements and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnote disclosures normally included for complete financial statements. While we believe the disclosures presented are adequate for interim reporting, these interim financial statements should be read in conjunction with the financial statements and notes included in our 2006 Form 10-K and 2006 Form 10-K/A. In the opinion of management, all adjustments and eliminations, consisting of normal recurring adjustments, necessary for a fair representation of our financial condition have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the full year.

Use of Estimates. The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, results of operations during the reporting periods and related disclosures. Our more significant estimates relate to determining the allocation of the purchase price of our acquisitions, estimates supporting the carrying value of our real estate assets, estimates of the useful lives of our assets, reserves related to co-insurance requirements under our property, general liability and employee benefit insurance programs and estimates of expected losses of variable interest entities. Future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Reportable Segment. Our multifamily communities are geographically diversified throughout the United States and management evaluates operating performance on an individual property level. However, as each of our apartment communities has similar economic characteristics, residents, and products and services, our apartment communities have been aggregated into one reportable segment with activities related to the ownership, development, construction and management of multifamily communities. Our multifamily communities generate rental revenue and other income through the leasing of apartment homes, which comprised 96% and 95% of our total consolidated revenues for the nine months ended September 30, 2007 and September 30, 2006, respectively.

Real Estate Assets, at Cost. Real estate assets are carried at cost plus capitalized carrying charges. Carrying charges, principally interest and real estate taxes, for land under development and buildings under construction are capitalized as part of properties under development subject to impairment consideration. Expenditures directly related to the development, acquisition and improvement of real estate assets, excluding internal costs relating to acquisitions of operating properties, are capitalized at cost as land, buildings and improvements. Indirect development costs, including salaries and benefits and other related costs that are clearly attributable to the development of properties, are also capitalized. All construction and carrying costs are capitalized and reported on the balance sheet in properties under development until the apartment homes are substantially completed. Upon completion of the apartment homes, the total cost for the apartment homes and the associated land is transferred to buildings and improvements and land, respectively, and the assets are depreciated over their estimated useful lives using the straight-line method of depreciation.

Upon the acquisition of real estate, we allocate the purchase price between tangible and intangible assets, which includes land, buildings, furniture and fixtures, the value of in-place leases, above or below market leases, and acquired liabilities. When allocating the purchase price to acquired properties, we allocate costs to the estimated intangible value of in-place leases and above or below market leases and to the estimated fair value of furniture and fixtures, land and buildings on a basis determined by assuming the property was vacant by applying methods similar to those used by independent appraisers of income-producing property. Depreciation and amortization is computed on a straight-line basis over the remaining useful lives of the related assets. The value of in-place leases and above or below market leases is amortized over the estimated average remaining life of leases in-place at the time of acquisition. Estimates of fair value of acquired debt are based upon interest rates available for the issuance of debt with similar terms and remaining maturities.

Depreciation and amortization is computed over the expected useful lives of depreciable property on a straight-line basis as follows:

As discussed above, carrying charges are principally interest and real estate taxes capitalized as part of properties under development. Capitalized interest was $6.2 million and $16.7 million for the three and nine months ended September 30, 2007, respectively, and $5.3 million and $16.0 million for the three and nine months ended September 30, 2006, respectively. Capitalized real estate taxes were $0.8 million and $2.7 million for the three and nine months ended September 30, 2007, respectively, and $0.7 million and $2.3 million for the three and nine months ended September 30, 2006, respectively. All operating expenses associated with completed apartment homes are expensed.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Indications of impairment include, but are not limited to, significant declines in occupancy, other significant changes in property operations, significant deterioration in the surrounding economy or environmental problems. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge equal to the difference between the carrying value and the estimated fair value is recognized.

Derivative Instruments. All derivative instruments are recognized on the balance sheet and measured at fair value. Derivatives not qualifying for hedge treatment under SFAS No. 133 (subsequently amended by SFAS Nos. 137 and 138), “Accounting for Derivative Instruments and Hedging Activities,” must be recorded at fair value with gains or losses recognized in earnings in the period of change. We enter into derivative financial instruments from time to time, but do not use them for trading or speculative purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on variable-rate debt.

We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking the hedge. This process includes specific identification of the hedging instrument and the hedged transaction, the nature of the risk being hedged and how the hedging instrument’s effectiveness in hedging the exposure to the hedged transaction’s variability in cash flows attributable to the hedged risk will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. We discontinue hedge accounting if a derivative is not determined to be highly effective as a hedge or has ceased to be a highly effective hedge.

Recent Accounting Pronouncements. In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN 48 prescribes a two-step process for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The first step involves evaluation of a tax position to determine whether it is more likely than not the position will be sustained upon examination, based on the technical merits of the position. The second step involves measuring the benefit to recognize in the financial statements for those tax positions that meet the more-likely-than-not recognition threshold.

We adopted FIN 48 as of January 1, 2007. If various tax positions related to certain real estate dispositions were not sustained upon examination, we would have been required to pay a deficiency dividend and associated interest for prior years. Accordingly, we decreased distributions in excess of net income as of January 1, 2007 for the adoption impact of FIN 48 by approximately $2.5 million, and recorded interest expense of approximately $0.6 million for the six months ended June 30, 2007 for the interest related to the deficiency dividend for these transactions. Our period of uncertainty with respect to these real estate dispositions expired during the current quarter and we have recorded a net credit to interest expense of approximately $3.1 million and $2.5 million for the three and nine months ended September 30, 2007, respectively. As of September 30, 2007, we have no uncertain tax positions or unrecognized tax benefits requiring disclosure.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent other accounting pronouncements require or permit fair value measurements. The statement emphasizes fair value as a market-based measurement which should be determined based on assumptions market participants would use in pricing an asset or liability. We will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. This statement is effective for fiscal years beginning after November 15, 2007. We are currently evaluating what impact, if any, our adoption of SFAS No. 157 will have on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which gives entities the option to measure eligible financial assets, financial liabilities and firm commitments at fair value on an instrument-by-instrument basis (i.e., the fair value option), which are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a firm commitment. Subsequent changes in fair value must be recorded in earnings. Additionally, SFAS No. 159 allows for a one-time election for existing positions upon adoption, with the transition adjustment recorded to beginning retained earnings. This statement is effective for fiscal years beginning after November 15, 2007. We have not yet determined whether we will elect the fair value option for any of our financial instruments.

Reclassifications. Certain reclassifications have been made to amounts in prior period financial statements to conform to current period presentations. We reclassified nine properties previously included in continuing operations to discontinued operations during the quarter ended June 30, 2007. Please see further discussion of assets held for sale in Note 4 — “Property Acquisitions, Dispositions and Assets Held for Sale.”

Basic earnings per share are computed using income from continuing operations and the weighted average number of common shares outstanding. Diluted earnings per share reflect common shares issuable from the assumed conversion of common share options and awards granted and units convertible into common shares. Only those items that have a dilutive impact on our basic earnings per share are included in diluted earnings per share. For the nine months ended September 30, 2007 and 2006, 3.0 million and 1.7 million units convertible into common shares were excluded from the diluted earnings per share calculation as they were not dilutive. For the three months ended September 30, 2007 and 2006, 3.0 million and 1.6 million units convertible into common shares were excluded from the diluted earnings per share calculation as they were not dilutive.

The following table presents information necessary to calculate basic and diluted earnings per share for the three and nine months ended September 30, 2007 and 2006:

In April 2007, our Board of Trust Managers approved a program to repurchase up to $250 million of our common equity securities through open market purchases, block purchases, and privately negotiated transactions. We intend to use the proceeds from asset sales and borrowings under our secured line of credit to fund any share repurchases. Under this share repurchase program, we repurchased 1.3 million shares for a total of $85.2 million through September 30, 2007.

Subsequent to September 30, 2007, we repurchased 21,100 common shares at a total cost of $1.3 million using proceeds available under our unsecured line of credit.

Acquisitions. In April 2007, we acquired Camden South Congress, a 253-apartment home community located in Austin, Texas for $42.8 million and in June 2007, we acquired Camden Royal Palms, a 352-apartment home community located in Tampa, Florida for $41.1 million. Both properties were purchased using proceeds from our unsecured line of credit. The purchase prices of these properties were allocated to the tangible and intangible assets and liabilities acquired based on their estimated fair values at the date of acquisition.

Discontinued Operations and Assets Held for Sale. Income from discontinued operations included the results of operations for nine operating properties, containing 2,515 apartment homes which were classified as held for sale at September 30, 2007 and three operating properties with 930 apartment homes sold during 2007. For the three and nine months ended September 30, 2006, income from discontinued operations also included the results of operations of eight operating properties sold during 2006. As of September 30, 2007, the nine operating properties held for sale had a net book value of $58.3 million.

The following is a summary of income from discontinued operations for the three and nine months ended September 30, 2007 and 2006:

During the nine months ended September 30, 2007, we recognized gains of $31.0 million from the sale of three operating properties, containing 930 apartment homes, to unaffiliated third parties. These sales generated net proceeds of approximately $48.7 million. During the nine months ended September 30, 2006, we recognized gains of $59.9 million from the sale of six operating properties, containing 2,227 apartment homes, to unaffiliated third parties. These sales generated net proceeds of approximately $106.3 million.

At September 30, 2007, we had 5.5 acres of undeveloped land located in Southeast Florida and Dallas, with a net book value of $14.3 million, classified as held for sale.

During the nine months ended September 30, 2006, we sold four parcels of undeveloped land totaling an aggregate of 8.7 acres to unrelated third parties. In connection with these sales, we received $41.0 million and recognized gains on sale of discontinued operations totaling $20.5 million.

Asset Dispositions and Partial Sales to Joint Ventures. During the nine months ended September 30, 2006, we recognized gains, which are included in continuing operations, of $91.6 million from the partial sales of nine properties to an unconsolidated affiliated joint venture. These partial sales generated net proceeds of approximately $170.9 million.

During the nine months ended September 30, 2006, we recognized a gain on the sale of land located adjacent to one of our development assets in College Park, Maryland of $0.8 million. We also recognized gains during that period of $0.5 million and $4.7 million on the partial sales of land to joint ventures located in Houston, Texas and College Park, Maryland, respectively. The gains on the sales of these assets were not included in discontinued operations due to our continuing involvement with these assets. These sales generated net proceeds of approximately $55.5 million.

The joint ventures described below are accounted for using the equity method. These joint ventures have been funded with secured, third-party debt. We have guaranteed the repayment of the construction loans of four of our development joint ventures in an amount equal to our proportionate equity in the related joint venture. Additionally, we eliminate fee income from management services to the extent of our ownership.

Our contributions of real estate assets to joint ventures at formation where we receive cash are treated as partial sales and, as a result, the amounts recorded as gain on sale of assets to joint ventures represent the change in ownership of the underlying assets. Our initial investment is determined based on our ownership percentage in the net book value of the underlying assets on the date of the transaction.

As of September 30, 2007, our equity investments in unconsolidated joint ventures accounted for under the equity method of accounting consisted of:

The following table summarizes balance sheet financial data of significant unconsolidated joint ventures in which we had ownership interests as of September 30, 2007 and December 31, 2006 (dollars in thousands):

The following table summarizes income statement financial data of significant unconsolidated joint ventures in which we had ownership interests for the three months ended September 30, 2007 and 2006 (dollars in thousands):

The following table summarizes income statement financial data of significant unconsolidated joint ventures in which we had ownership interests for the nine months ended September 30, 2007 and 2006 (dollars in thousands):

At September 30, 2007, we were under contract on third-party construction projects ranging from $2.2 million to $15.9 million. We earn fees on these projects ranging from 3.9% to 4.8% of the total contracted construction cost, which we recognize as earned. Fees earned from third-party construction projects totaled $0.1 million and $0.9 million for the three and nine months ended September 30, 2007, respectively, and $0.8 million and $2.7 million for the three and nine months ended September 30, 2006, respectively, and are included in “Fee and asset management income” in our condensed consolidated statements of operations. We recorded warranty and repair related costs on third-party construction projects of $0.7 million for the nine months ended September 30, 2007, and $2.8 million and $5.3 million for the three and nine months ended September 30, 2006, respectively. These costs are first applied against revenues earned on each project and any excess is included in “Fee and asset management expenses” in our condensed consolidated statements of operations.

We have a mezzanine financing program under which we provide secured financing to owners of real estate properties. As of September 30, 2007, we had $11.6 million of secured notes receivable due from unrelated third parties. These notes, which mature through 2009, accrue interest at rates ranging from the London Interbank Offered Rate (“LIBOR”) plus 2% to Prime Rate plus 1% per annum, which is recognized as earned. We have reviewed the terms and conditions underlying the outstanding notes receivable and believe these notes are collectible, and no impairment existed at September 30, 2007. Notes receivable outstanding as of December 31, 2006 totaled $3.9 million.

We provided mezzanine construction financing in connection with certain of our joint venture transactions as discussed in Note 5, “Investments in Joint Ventures.” As of September 30, 2007 and December 31, 2006, the balance of “Notes receivable — affiliates” totaled $48.2 million and $41.5 million, respectively. The notes outstanding as of September 30, 2007 accrue interest at rates ranging from LIBOR plus 3% to a fixed rate of 14% per year and mature through 2010. Additionally, we eliminate interest and other income to the extent of our percentage ownership.

The following is a summary of our indebtedness:

We have a $600 million unsecured credit facility which matures in January 2010. The scheduled interest rate is based on spreads over LIBOR or the Prime Rate and the scheduled interest rate spreads are subject to change as our credit ratings change. Advances under the line of credit may be priced at the scheduled rates, or we may enter into bid rate loans with participating banks at rates below the scheduled rates. These bid rate loans have terms of six months or less and may not exceed the lesser of $300 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations, with which we were in compliance.

Our line of credit provides us with the ability to issue up to $100 million in letters of credit. While our issuance of letters of credit does not increase our borrowings outstanding under our line, it does reduce the amount available. At September 30, 2007, we had outstanding letters of credit totaling $18.1 million, and had $283.9 million available under our unsecured line of credit.

On May 4, 2007, we issued $300 million in senior unsecured notes from our previously filed universal shelf registration statement. The public offering price of the notes was $299.0 million, and we received net proceeds of $297.0 million, after underwriter fees of $2.0 million. The notes bear interest at 5.7% beginning May 4, 2007, and interest is payable each May 15 and November 15, beginning November 15, 2007. The entire principal amount of the notes is due on May 15, 2017. The notes are redeemable at any time at our option, in whole or in part, at a redemption price equal to the principal amount and accrued interest of the notes being redeemed, plus a make-whole provision. This provision is consistent with all of our previously issued unsecured note offerings.

On July 25, 2007, we refinanced one of our maturing secured conventional mortgage notes, which had a balance of $6.8 million and a variable interest rate at maturity of 7.31%. The new note was for a principal amount of $9 million with a fixed interest rate of 6.0% and matures on August 1, 2014.

On August 17, 2007, we entered in to a $250 million unsecured bridge facility with a maturity date of November 16, 2007 and an interest rate of LIBOR plus 0.5%. The scheduled interest rate spreads are subject to change as our credit ratings change. Certain of our subsidiaries have guaranteed the payment and performance of all of our obligations under the credit agreement. On October 4, 2007, the entire balance of this bridge facility was retired when we entered into the $500 million credit agreement discussed below.

On October 4, 2007, we entered into a $500 million credit agreement with an interest rate of LIBOR plus 0.5%. The scheduled interest rate spreads are subject to change as our credit ratings change. The initial term of the credit agreement ends on October 4, 2010 and may be extended at our option for two one-year periods. Concurrently with the closing of this transaction, we entered into an interest rate swap, with a notional amount of $500 million, to fix the LIBOR interest rate at 4.74% per annum for five years. This swap has been formally designated as a hedge and is expected to be a highly effective cash flow hedge of the interest rate risk. The resulting effective interest rate for the term loan is 5.24%. Certain of our subsidiaries have guaranteed the payment and performance of all of our obligations under the credit agreement. We used the proceeds to retire the entire balance outstanding under the $250 million unsecured bridge facility, reduce borrowings under our unsecured line of credit and for general corporate purposes.

At September 30, 2007 and 2006, the weighted average interest rate on our floating rate debt, which includes our unsecured line of credit and bridge facility, was 5.5% and 4.9%, respectively.

Our indebtedness, excluding our unsecured line of credit and bridge facility, had a weighted average maturity of 5.2 years. Scheduled repayments on outstanding debt, including our line of credit and bridge facility, and the weighted average interest rate at September 30, 2007 are as follows:

We perform property management services for certain properties owned by joint ventures in which we own an interest. Management fees earned on these properties totaled $0.8 million and $2.4 million during the three and nine months ended September 30, 2007, respectively, and $0.6 million and $1.7 million during the three and nine months ended September 30, 2006, respectively. See further discussion of fees earned from joint ventures for construction management and development services in Note 5, “Investments in Joint Ventures.”

In conjunction with our merger with Summit Properties, Inc., we acquired employee notes receivable from former employees of Summit. At September 30, 2007, the notes receivable had an outstanding balance of approximately $2.0 million, and were 100% secured by Camden common shares.

Share Awards. Share awards generally have a vesting period of five years. The compensation cost for share awards is based on the market value of the shares on the date of grant and is amortized over the vesting period. To determine our estimated future forfeitures, we used actual forfeiture history. At September 30, 2007, the unamortized value of share awards totaled $24.7 million.

Our computation of expected volatility for 2007 is based on the historical volatility of our common shares over a time period equal to the expected term of the option and ending on the grant date. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield on our common shares is calculated using the annual dividends paid in the prior year. Our computation of expected life was determined using historical experience of similar awards, giving consideration to the contractual terms of the share-based awards.

Share-based Compensation Award Activity. The total intrinsic value of options exercised during the nine months ended September 30, 2007 was $2.8 million. As of September 30, 2007, there was approximately $0.1 million of total unrecognized compensation cost related to unvested options, which is expected to be amortized over the next twelve months.

The following table summarizes share options outstanding and exercisable at September 30, 2007:

The following table summarizes activity under our 1993 and 2002 Share Incentive Plans for the nine months ended September 30, 2007:

The effect of changes in the operating accounts on cash flows from operating activities is as follows:

Construction Contracts. As of September 30, 2007, we were obligated for approximately $82.3 million of additional expenditures on our recently completed projects and those currently under development. We expect to fund a substantial portion of this amount with our unsecured line of credit.

Summit Merger Contingencies. On December 19, 2003, Camden Summit Partnership, L.P. received notice of a demand for arbitration asserted by Bermello, Ajamil & Partners, Inc. (“Bermello”) against Coral Way, LLC for unpaid architectural fees. In this demand, Bermello alleged they were entitled to an increased architectural fee as a result of an increase in the cost of the project. Camden Summit Partnership, L.P. asserted a counter-claim against Bermello for damages related to the cost to correct certain structural and other design defects, and delay damages. On October 31, 2006, the parties entered into a settlement of Bermello’s claims for unpaid architectural fees and its claims were dismissed. On February 22, 2007, the parties entered into a settlement of Camden Summit Partnership’s counter-claims for damages and its claims were released.

Equal Rights Center. In September 2007, The Equal Rights Center filed a lawsuit against us and one of our wholly-owned subsidiaries in the United States District Court for the District of Maryland. This suit alleges various violations of the Fair Housing Act and the Americans with Disabilities Act by us in the design, construction, control, management and/or ownership of various multifamily properties. The plaintiff seeks compensatory and punitive damages in unspecified amounts, an award of attorneys’ fees and costs of suit, as well as preliminary and permanent injunctive relief that includes modification of existing assets and prohibiting construction or sale of noncompliant units or complexes. At this stage in the proceeding, it is not possible to predict or determine the outcome of the lawsuit, nor is it possible to estimate the amount of loss, if any, that would be associated with an adverse decision.

Other Contingencies. In the ordinary course of our business, we issue letters of intent indicating a willingness to negotiate for acquisitions, dispositions or joint ventures and also enter into arrangements contemplating various transactions. Such letters of intent and other arrangements are non-binding, and neither party is obligated to pursue negotiations unless and until a definitive contract is entered into by the parties. Even if definitive contracts are entered into, the letters of intent relating to the purchase and sale of real property and resulting contracts generally contemplate such contracts will provide the purchaser with time to evaluate the property and conduct due diligence, during which periods the purchaser will have the ability to terminate the contracts without penalty or forfeiture of any deposit or earnest money. There can be no assurance definitive contracts will be entered into with respect to any matter covered by letters of intent or we will consummate any transaction contemplated by any definitive contract. Furthermore, due diligence periods for real property are frequently extended as needed. An acquisition or sale of real property becomes probable at the time the due diligence period expires and the definitive contract has not been terminated. We are then at risk under a real property acquisition contract, but only to the extent of any earnest money deposits associated with the contract, and are obligated to sell under a real property sales contract.

We are currently in the due diligence period for certain acquisitions and dispositions and other various transactions. No assurance can be made we will be able to complete the negotiations or become satisfied with the outcome of the due diligence or otherwise complete the proposed transactions.

On October 4, 2007, we entered into an interest rate swap agreement with a notional amount of $500 million as discussed in Note 8 “Notes Payable.”

We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our consolidated financial statements.

Lease Commitments. At September 30, 2007, we had long-term operating leases covering certain land, office facilities and equipment. Rental expense totaled $0.7 million and $2.3 million for the three and nine months ended September 30, 2007, respectively, and totaled $0.7 million and $2.1 million for the three and nine months ended September 30, 2006, respectively. Minimum annual rental commitments for the remainder of 2007 are $0.7 million and for the years ending December 31, 2008 through 2011 are $2.6 million, $2.3 million, $2.1 million and $1.7 million, respectively, and $7.9 million in the aggregate thereafter.

We have maintained and intend to maintain our election as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement we distribute at least 90% of our taxable income to our shareholders. As a REIT, we generally will not be subject to federal income tax on distributed taxable income. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax. Historically, we have only incurred state and local income, franchise and margin taxes. Taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to applicable federal, state and local income taxes. We have provided for income, franchise and margin taxes in the condensed consolidated statements of operations for the three and nine months ended September 30, 2007 primarily for state and local taxes associated with property dispositions, entity level taxes for our taxable operating partnerships and federal taxes on certain of our taxable REIT subsidiaries. We have no significant temporary differences or tax credits associated with our taxable REIT subsidiaries.

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this report. Historical results and trends which might appear in the condensed consolidated financial statements should not be interpreted as being indicative of future operations.

We consider portions of this report to be “forward-looking” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to our expectations for future periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items relating to the future. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance our expectations will be achieved. Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements. Reliance should not be placed on these forward-looking statements as they are subject to known and unknown risks, uncertainties and other factors beyond our control and could differ materially from our actual results and performance.

Factors that may cause our actual results or performance to differ materially from those contemplated by forward-looking statements include, but are not limited to, the following:

Based on our results for the nine months ended September 30, 2007 and projected economic conditions, we expect healthy but moderating revenue growth during the remainder of 2007. Economic factors affecting our revenue growth include continued job growth, population growth and household formations in the markets in which we operate, as well as declining fundamentals in the for-sale single-family housing market. Negative sentiment currently surrounding single-family housing may have a positive impact on multifamily demand, as more potential home buyers choose to rent and existing renters extend their stays in apartment homes. However, high inventories of unsold single-family homes in select markets could cause further declines in home prices, making home buying a more attractive option for some renters.

We intend to focus on our market balance investment strategy and to improve our portfolio mix through the development, acquisition and disposition of real estate assets. We expect market concentration risk to be mitigated as our property operations are not centralized in any one market, and our portfolio of apartment communities is geographically diverse. We intend to continue focusing on our development pipeline for future growth, and maintain approximately $2.0 billion to $2.5 billion in our current and future development pipelines. Total projected capital costs and the commencement of future developments may be impacted by increasing construction costs and other factors.

Our multifamily property portfolio, excluding land held for future development, is summarized as follows:

We typically consider a property stabilized once it reaches 90% occupancy, with some allowances for larger than average properties. During the nine months ended September 30, 2007, stabilization was achieved at four recently completed properties as follows: