UDR Inc (UDR) 2002 Q3 法說會逐字稿

Good afternoon. At this time I would like to welcome everyone to the United Dominion Realty Trust third quarter earning conference call. If would you like to ask a question during the question and answer period press star then the number one on your telephone keypad. Thank you Ms. Kodemin you may begin your conference.

Welcome. I'm going to read a brief statement. I wanted to let people know we're hosting this webcast -- that you can access on ccbn.com and udrt.com. Also, on udrt.com is a copy of our press release. At this time management would like me to inform you certain statements made during this call, which are not historical may be deemed forward-looking statements of the private securities of litigation act of 1995. Although United Dominion believes that the expectations reflected in any forward looking statements they are based on reasonable assumptions they can give no assurances its assumptions will be obtained. Factors and risk that could cause actual results to differ materially form expectations are detailed in the press releases from time to time and company's filings with the FCC. At this time would I like to turn the call over to Tom Toomey, UDR's president and CEO. Tom will introduce management with him today and he will begin the call.

Thank you Cheryl and Claire for that introduction. Welcome to United Dominion Realty Trust third quarter conference call. Joining me on the call are Mark Wallis, Ella Neyland, Chris Genry, and Kevin MacCabe. The goal of this call is: first to report our results, second to tell you how we see the business going in our prospects for the future. Third to provide earnings guidance for 2003 and the fourth quarter of 2002. And to answer your questions. Management comments will take 25 to 30 minutes.

Let me start by high lighting our results. 3% F.F.O. growth which will lead the sector again. We met first call estimates, we delivered same store sales results which should be near the top of the industry and completed 354 million dollars of capital transactions. Before I turn the call over to the management team to discuss these areas in detail, I would like to give you our view of the state of the industry. Which will set the backdrop for our earnings guidance for 2003. I want the remind you we own and operate portfolio 75,000 apartment homes in 37 markets with no one market greater than 6% of our results. As we stated in the past, six major factors drive our business. I would like to give you my view on these.

First construction. While total starts appear to be at the 10-year industry average of 300,000 annually. Fundamentals do not support construction at this level. The numbers are being supported by aggressive lending in spread sheet magic being low reversion airy Rates. Most of this new product deliver does not compete with United Dominion's operations as we're primarily focused on middle market segment. The second area factor in our business is competing housing alternatives. Over the last year we have stated that the extraordinary single family market was not sustainable. And that it was in fact built upon one low interest rates. A 40-year low. Two, aggressive lending practices in which 23% of all new loans have less then 10% down. Third, heavy reliance on floating rate debt in which 30% of all mortgages are floating. The signs of trouble for the 68 million single family homeowners in this country are showing. First foreclosures at 5% or 3.4 million household. Bankruptcies over the last 12 months of 1.5 million. Credit card debt increasing from 170 billion to over 600 billion over the last 10 years. With delinquencies up 30%. The news does not get any better for the 68 million single family homeowners. According to the Mortgage Bankers Association of America mortgage rates are expected to rise by 75 to 100 basis points by the end of 2003. In response to this greater risk and the losses being sustained.

How does this impact our business? Well, it certainly is starting to show some signs. Based upon residence screen services we used the process over 1.5 applicants annually we have seen a couple disturbing trends. First a 16% increase in the number of applicants with bankruptcies primarily driven by their home ownership issues. 27% increase in the number of applicants who have had foreclosure proceedings against them on their credit records. These two telling signs may not bode well for the home ownership, but certainly point towards multi-family sector being a benefactor.

The third area, job growth. During the last 21 months this economy as endured a loss two million jobs. Most recently it looks like we're heading for a flat period where very little job growth but also little job loss is occurring. Immigration. While no solid interim data exists, the based upon looking at the I.N.S. website and interpretative work from the 1990 and 2000 census certain observations can be made as expected the impact 9-11 and and the consolidation of the I.N.S. agency has created an 8% increase in the back log of immigrants to the United States. We estimate now that they are between one million and 1.2 million applicants for residency caught in the system. This would translate to approximately 400,000 renters. Certainly on the 40 million rentals in America, 1% would be a welcome relief. With the pending consolidation of the agency and the increase in its budget this backlog should start clearing in 2003.

Fourth, interest rates. No change in the base rate. But we see certainly a widening of spreads: inflation no significant amount at this time. So in summary we see an operating environment for 2003 similar to the second half of 2002 in which there will be little job growth and certain isolated pockets but no rebounding of overall job growth. Second single family that the tide may be turning in our favor and we don't see continued loss to single familiar home ownership. Lastly construction level supported I this low rate environment sustaining at its currents 300,000 annually. Let me turn the call over to Chris to discuss the financial results for the quarter and our earnings guidance for 2003.

I have three things I would like to cover in today's call. First noteworthy items from third quarter results, second, our earnings guidance for the fourth quarter and for 2003, and then I would like to close with a brief discussion of our dividend policy and coverage.

What about third quarter results? First and foremost we met our expectations much 40 cents per share for funds from operations during the quarter. I will leave it to Kevin to cover real-estate results and I would highlight one item. We have a one time credit of approximately penny per share in our current quarter overhead costs, which is driven by the reverse after an expense provision related to an offer we head to buy out the security monitoring contracts on certain of our properties. Though we continue to believe our residents in these markets don't value that service to the full extent of its costs and we may revisit this issue again in the future we're operating in a market where security concerns are heightened and every competitive advantage counts. So we have withdrawn our offer to buy out these contracts. This resulted in the credit this quarter. This means our year date overhead costs include no significant non-recurring items.

Turning now to the road ahead. How does the fourth quarter look? Our F.F.O. in the quarter will match the third quarter 40 cents. We see sequential same store results up only slightly will little revenue growth. For the last three months our monthly revenue trend has shown growth each and every month albeit slight growth. We'll have favorable expense comparisons next quarter with lower utilities and turn over costs versus the third quarter. Our total real-estate results will be down slightly overall largely due toe the late quarter sales of our Texas portfolio. This will be offset by lower interest costs due to the bond redemptions of 98 million so far this year and average coupon of 8.3%. Combined with the debt reduction that we got from the proceeds of the Texas sale. This 40 cent number is two cents below our previous guidance for two reasons. One, our newly acquired properties are turn around situations which take time to develop and achieve their proforma results. Even a good market scenario. Second, on the mature portfolio our occupancy rates are running 50 basis points below targeted level for this time of year.

How about 2003? 2003 FF0 will be in the $1.63 to $1.70 range per share with targeted results at $1.67 a share. These are our following assumptions. Our same store results will be in the .5% to 1% range. With one to 1.5% revenue growth driven by slight increases in occupancy. We're currently modeling 93.3 to 93.8% as a range for occupancy. Collections per occupied unit next year will be up $5 a month. Our expense growth next year will be in the 2.5% range. For non-mature properties I would highlight these will contribute 32 to 34 cents a share. Our non-mature portfolio represents a larger percentage of our portfolio. This is 5300 existing homes plus 178 homes under development that will come online in a second quarter of next year. We also have approximately 1.5 million dollars a quarter of operating income that is generated by commercial and other properties. Built into this non-mature scenario is a hundred to 150 million in sales next year at Cap rates of 8.25. 50 to one million acquisitions at cap rates of 6.75. Though the acquisitions this year are performing better than 6.75, California is a key target area for us so we modeled in more conservative cap rates for next year. The buying and selling -- each quarter over the year and using excess sales proceeds to pay down our revolver.

Next year maturing debt and maturing swaps gives U.D.R. and opportunity to capitalize on the current interest rate environment. 115 million dollars of unsecured notes averaging 8.8 will mature next year in the first quarter. We have 200 million in issuance we did in June of 2002 that gives us the power it takes us to satisfy these. So the timing of the refinancing on these are flexible. We will have 198.5 million of existing swaps that mature next year. All of them by the first of August. Their currently running at an average rate 7.23% with the underlying hedged instruments running libor plus 118. Giving us -- another spread opportunities, so the timing in the rates to fix our interest rate exposure combined with excess sales present seeds we're modeling next year and the recent bond reductions that we have done and the it pact that has on next year's interest costs will all combine to result in interest costs in 2003 that are 6 million to 9 million lower than the 2002 interest expenses. And, built into our assumptions for next year is a [inaudioble] increase 50 basis points in the latter part of the year.

Our over-head and property management expenses will be flat. Recurring capex is models 435 dollars per home per year, which runs 25 cents a share. Our dividends are projected to grow to $1.14 per common share, which results in free cash flow projections of 45 million that will be used make investments in our existing portfolio or debt. We have not models any share buybacks those though those could be undertaken. And we have not model new capital issues this year. Perhaps a simple way to look at this is if you start with a $1.63 of SFO in 2002, a slight growth in same store sales of generating 2 cents less, offset by 2 cents less on the non-mature portfolio. As of a result of the fact that we didn't sell the Texas portfolio at the end of the third quarter in 2002.

Financing picks up and extra 6 cents, which combines to leave us room for up to 6 cents of additional dilution on top of our model capital transactions for opportunistic thing that may come up during 2003. For a total of $1.63 to $1.70 in 2003 which should stack up favorably against the peer group in this market.

Why is this guidance below our previous $1.75? The occupancy on our mature portfolio is running 50 basis points below our target and we see no catalyst for growth. Collections for occupied units are going to fall short of our early year economic recovery levels we were previously predictions. Our portfolio repositioning must precede in this good seller's market even though acquisitions are going to be tough to do. So we factored in some more room in our guidance for next year for dilution in our portfolio repositions efforts.

Before closing I would like to address dividend policy and coverage. We recognize that 50% of our shareholder basis retail and they rely on these dividends. So we're committed to continue annual increases in our dividends. Our long term goal would be to raise the dividend and commensurate with increases and assets. But uncertain economic times does call to be conservative. So we modeled 2.7% increase in our dividend next year. From the $11.14 in 2002 to a $1.14 per share in 2003. Which would result in a pay off ratio of only 79 to 83% of our projected 2003 assets - one of the safes pay offs. The key take away from this high rate, high interest rate maturities give UDR another interest rate opportunity. We see moderate growth in 2003 SFO but we do see growth. Dividend will increase for the 27th on connect tough year and we'll retain excellent dividend payout coverage. With that I turn the call over to Kevin.

My goal for the next few minutes is to provide color related to three specific issues. One, year over year in sequential third quarter results. Two, selected markets, and, three, a preview of the fourth quarter of 2002. Let me start by talking about the third quarter from a year over year perspective. Our third quarter same community and decline of 3.4% resulted from a 1.4% decrease in revenues and other income and a 2.3% increase in operating expenses over last year. Across the portfolio our occupancy rate of 92.8% for the third quarter was down from 93.5 percent in the third quarter of last year. Despite the market conditions and the fact these results will be among the leaders in our sector we're disappointed. Why? He essentially three reasons.

One, the historic up take we have seen in years past from an occupancy perspective didn't occur. Two, the seasonal increases in turnover combined with increased pressure on rental rates hurt our revenue numbers. Although our continue emphasis on raising rents at the unit level helped we could do better. Finally, I believe we took our eye off the ball in certain parts of the country and did not run as tight a ship as we're capable of.

From an expense standpoint we're making progress on a number of key line items. Payroll costs were reduced on a year-over-year basis by 0.9%. Admin. and marketing expenses were essential flat. Additionally our new insurance programs and a favorable loss experience allowed us to reduce our cost by $900,000. These decreases all set a 4.3% increase in taxes and 8.9% increase in utilities as well as increase of 8.5 percent in repairs and maintenance. On a sequential quarter basis we saw reach news decrease 1.1% from the second quarter related to our occupancy decline. Expenses increased 5.6% leading to a 4.8% sequential decline. Again he sequential we saw revenues increase in 26 our 57 markets. Includeing North Carolina and Washington, D.C. Sequential expenses declined in 17 markets including California markets and in Seattle. Let me expand on our sequential expenses a little more. First a significant portion of our sequential expense increase was expected given higher utility costs seasonal turnover related expenses. However, over and above the seasonal increases we see between the second and third quarter each year today's landscape of attracting and retaining residents requires us to encourage and even ensure we're putting our best foot forward. To give you some color regarding this. Despite 1.1% decline in residence turnover the expenses were up 18% in the third quarter. We did see some positives in the third quarter. As mentioned our resident turnover level declined on a year-over-year basis by 1.1%. The increase in concessions on a year-over-year basis seems to be easing as well increasing only 113,000 dollars. Concessions in the third quarter were 67 dollars per unit versus 53 dollars per unit in the third quarter of last year. Our concessions per unit in the second quarter of this year were $65 per unit. Third with our bad debt level at 0 0.9% gross potential rent, which is consistent with year earlier levels within our own internal guidelines. We're maintaining our resident profile. We touched briefly on a couple cities across our national portfolio. Next I'll provide expectations for our top 10 markets in in the quarter keeping in mind no one market account for more than 6% of company N.O.I. Not trying to predict the market's performance but our performance in key cities.

The one market among the top ten in which we expect fourth quarter growth is Houston. Markets where we believe we'll be managing slightly flat to down Richmond, Phoenix, Tampa and Charlotte. And finally those markets where we have our work cut out for us include Dallas, Orlando, Columbus, and Raleigh. Regarding the fourth quarter we're seeing positive signs. While not going away concessions do not appear to be getting materially worse. From a turnover perspective third quarter's annualize the return over was down from last year. The bad debt levels remain in line with expectations and finally the energy level of our property level associates remains high indicating to me that we're up to the challenge regarding finding ways to overcome market conditions. With all that said we expect continued choppy conditions throughout the quarter. We will benefit from managing the down side as well as from the national market portfolio. With that our assumptions for quarter year over year performance are as follows.

Revenues will decline slightly down between 1% and 2%. Expenses will increase in the 1% to 2% range. Flat to slightly improving occupancy, turnover and concession numbers all total same store sales year over year decline to the 1% to 2.5% range. Regarding take aways. Third quarter same store sales results in the upper part of the sector. Based on third quarter results we instituted a number of measures and organizational changes to insure intensity and focus going forward. Three, we all recognize here that improving operations continues to be an evolutionary process and continue to manage with the down side in mind. And finally we believe opportunities exist given that over 26% of the portfolio is over 95% occupied which would indicate some pricing power and 14% of the portfolio is under 87% which would indicate both underperformance and some occupancy potential. With that I will to turn the call over to Ella.

Throughout this year we have focused on identify refinancing opportunities that will strengthen the balance sheet our company. I would like to highlight some of those. First, this quarter we redeemed some of our higher coupon bonds. This June 30th we redeemed $98 million. This created long term value for the company as we significantly lowered the run rate interest expense of the bond redeemed. The average rate on the bonds redeemed was 8.3%. So we'll see an improve in the our fixed charge coverage ratio. After paying a blended premium of 13.9% totaling 13 million dollars we'll have a positive net present value of 1.3 to 2.2 million dollars on this remediation. Furthermore 70 million dollars of the bonds redeemed were reflected in our 04 maturity because of this. Second, the in first quarter of 03 we'll have a hundred million of bonds and average rate of 8.2% maturing. So our plan is to issue new bonds next year to refinance the bonds redeemed this year as well as those bonds maturing in Q1 of 03. Third, we have seen meaningful improvement in a key metric our unencumbered pool. This stands at 2.4 billion dollars and 61% of our N.O.I. is derived from this pool assets. Forth, another important factor is the liquidity. Our outstanding balance was $674 million which represents usage of 17%. Over the last two years usage has averaged 54%. This revolver matures in August of 03 and we are in the initial base of recasting that facility. Based on the improved fundamentals of our balance sheet we are hopeful we'll improve upon the terms in the existing covenants but again we are just starting that process. I mention our maturity schedule earlier. At the beginning of last year the maturity schedule is extremely lumpy. But we're please to say we reached our internal goal of having no more than 10% to 12% of our debt maturing or repricing in any one year. In fact in the next three years we have only 28 percent of our debt maturing. This schedule is important for the prediction built of interest expense. Our goal is prediction built for the stability and safety of the dividends. This is an important point that bears repeating because with no more than 240 million dollars maturing in any one year we'll not be captive to a forced refinancing in an unfriendly capital environment. During the third quarter we had a window in July to repurchase common stock at prices that presented attracted investment alternatives. In total for the quarter we're we purchased 302,300 shares at a blended cost of $13.98 per share. How do make a decision to buy back stock? First, well, as of today we got 2.3 million shares authorized for repurchase. Second, as Chris mentioned we have positive cash flow of 40 to 45 million dollars annually including all of our expenses. Third, our shares are trading below [N.A.V.]

Looking long term we'll balance repurchases with investment alternatives as well impact on our key financial ratios. We have been repurchasing shares this quarter using the same approach. So far this quarter we purchase an additional 585,700 shares at an average $14.18 per share. Given our 03 estimates adjusted of G&A this would be a cap rate in excess of 10% for stock repurchases. So in closing we're pleased with the continued progress in the balance sheet, blended costs of debt on a $2 billion portfolio is improved to 7.6 at the end of 2000. Our maturity schedule is balanced. Fixed charge coverage ratio is on its way to 2.3 by year end. Liquidity at level the company has not seen for every years. Although, we enjoyed great access to the capital market if we elected we would not be forced to access the equity or debt market through the end of next year and we would still be able to handle all our financing and debt maturity obligations. And, now I turn it over to Mark.

I'm going to cover the following three items. First the statistics of your portfolio repositioning efforts. Second, the overall environment that exist for buying and selling apartment today and third our development pipeline. This quarter we achieved a major step in our portfolio repositions strategy by selling 3400 apartment homes in San Antonio, 496 apartment homes in Fort Worth and trimmed 228 units from around Dallas portfolio. To date we sold 296 million properties under average cap rate of 8.1%. While we have acquired 264 million at a cap rate of 8.3%. We have the 29 million dollar community under contract we hope to close by year end. This will bring the total acquisitions for the year to 293 million. So we're pleased we have kept our selling and buying program in balance and we have executed this on a non--diluted basis.

What is the environment for buying and selling apartments today? Well the environment generally favors sellers. Cap rates are unusually low with a major markets with the majority of assets being priced at 7% caps or better. However with concessions and vacancies being high resulting cost per unit is not changing that drastically. We're seeing less of a compression in cap rates in secondary markets and fewer bidders in those markets. We'll continue our strategy as selling assets as long as the sale prices are favorable. In addition we expect to sell older assets in our core markets then acquire new assets in those core markets when we can. However, we're not going to force acquisitions in sunbelt markets where it appears overbuilding and look of job growth are going to produce flat growth and rents for the near future. And we're seeing process in other core markets being bid out with auctions of multiple bidders and level that are too high. We're little seeing differences in cap rates between major markets like Atlantic, Dallas, and southern California. Frankly, we would rather pay the lower cap rates in California where we can benchmark an acquisition to replacement cost. To forecast with some confidence decent rent growth in the near term. So during this climate we're planning balances acquisitions and sales in 2003 in the 100 million to 150 million dollar range.

How much exposure to development do we have? Our development pipeline will only deliver 178 units in 2003, that's .2% of our portfolio of 78,000 units. Practically a rounding [inaudioble]. So as a result of our cut back in development activity last year we're not facing lease of exposure from development in 2003. We're planning to start a community in Houston with a total cost of $28 million as part of our previously announced joint venture with [Agon] in around 60 days. Those units will not come online until 2004. Our cost of unit is 56,000 and is expected 10% year to loan cost. In addition it's part of our strategy to add homes in California. We plan to develop 14 units in [Rancho Cucamonga]. With the first quarter 03 start and delivery of those units beginning in late 2004. Our cost is $45,000 per units with expected 8.5% yield on cost. We believe we should take counter cyclical approach to development, build on the markets on the flat part of the cycle, and deliver units on job growth should cycle back. However, I want to emphasize our plans to be cautious with any of addition to our development pipeline and total development pipeline will stay relatively small. We'll continue to actively seek opportunities to sell in the secondary markets when the price is right and we'll remain active in looking for acquisition opportunities. Now I would like to turn the discussion back over to Tom.

Why don't we open it up to questions.

At this time would I like to remind everyone in order to ask a question please press star then the number one. Rob Steveson-ph even son with Morgan Stanley.

Tom, can you talk about the gap between your physical and economic occupancy at this point?

I am not a proponent of economic occupancy primarily because it requires an estimation of what the true market is. And so I do not track that and don't believe it's a number you can run a company off of. I prefer to run it as what is the last lease in the door and what did it take to attract that prospect. So we don't publish that and frankly don't track it.

Okay, moving on. How do you feel about the credit quality of the people coming in the door given the comments you made at the beginning about the 16% increase in applicants with bankruptcy on their record and 27% increase in foreclosure on their record. Are these people that you are still turning down or are these people that given the lack of demand out there that you are having to sort of cherry pick through?

Well, we certainly have fallen in the latter. We are cherry picking through that. Our view has been if someone comes to us with a bankruptcy on their record, recently filed and that they have employment that we do believe that is a good prospect with the right security deposit and we'll take them. As individuals come to foreclosures or higher credit scores we're screening those and not taking them. We have not lowered our standards and certainly it's reflective in our bad debt expense where it's maintained its level the last couple years. It's a period of time where certainly many competitors have if you will dropped their credit standards and they will pay over time. But we'll not elect to go down that path.

Then finally, the analyzed turnover level was 82 and change in the quarter. How do you feel about that just in general? I mean it just seems high versus some of your peers. Is there something you are driving there? Are you driving people out on purpose in some instances are do you expect that could to come down in time?

I suspect a couple things. It's one of our biggest opportunities in that the industry probably operates in a 60 to 65% annual turnover. And we certainly would like to move towards that average. Second, I think it's artificially high for a couple reasons. We have focused on our lease management in which we would not bend our standards and we prefer to keep a certain amount of leases maturing. And that doesn't always go well with some of our customers. Third is we have been shying away and continue to maintain our diligence on month to month leases in which 3% are month to month. We do not want that number to creep up. We certainly could take more risk in the area but at this time we have been sticking to our guns. I think in the long run it is the right thing for us to do. That if you will when you change the operating mode of our site associates and you start giving more latitude you start digging holes. And holes cost you money in this business. So I think in area of improvement primarily focusing on customer service and certainly an area that we probably are driving a little bit more of it by our policies and approach to management.

Thanks, guys.

Your next question comes from Brian Legg-ph with Merrill Lynch.

Can you talk about your guidance of the $1.63. It teams strange in your previous guidance your low point was $1.64 and that assumed 3% N.O.I. growth now, you take it down to positive 1%. How are you going to get to the positive 1% when you were sequentially you are down almost 5%?

Well I'll let Kevin speak to the first component of that. But let me go through the math and make sure that I'm giving you clear communication math and make sure I'm giving you -- clear communication how we're going to run the business off this period of time. First, I think same store sales positive range are achievable and Kevin will go through that. Second non-matures. Chris highlighted that will cost two cents. We sold a big portfolio so we're just managing fewer units. The third something unique to this company it the refinancing potential. We see that adding six cents next year. Cash flow re-reinvested, 40 million of cash flow reinvested throughout the year will add a penny. That gives me if you will, five cents to work with to manage repositions. Repositioning. -- I don't know if that will be required. But I do know this -- were receiving offers and Mark lists several hundred million of assets and we're receiving offers on those that frankly are I would call extraordinary prices. Extraordinary prices. So where we see an opportunity where we have high occupancy, we have a price point that is close to single family home in where we have optimized the operations. We want to pull the trigger and sell. What I don't want to be caught is trying to match the streets, you are going to sell 100 million this quarter and you guys to get disappointed that we don't sell it like that. Or be where we sell more and it causes dilution. Causing us to miss numbers for the quarter. I would prefer having the latitude to make those wise and smart long term decisions and tell you up front wear going to be aggressive in that area and opportunistic. Back to the same store sales. I'll let Kevin get to that.

Brian, you have asked a question that's hard to be succinct to answer so bear with me. I'll run through the methodology we used in the past couple weeks. We attacked our 2003 estimate along two fronts essentially. First we employed a bottom up approach if you will to look at our sites in each market factored in macro economic trend like job growth and new supply. We also looked at recent and historical performance on metrics like occupancy, concessions, expense management and resident retention. When we did this analysis and rolled it up it produced a slightly positive forecast of about zero 0.66%. We then employed a top down approach by each major line item and found quite frankly both revenue and expense opportunities. On the revenue side I mentioned we got 26% of our units over 95% occupied or better which would indicate that we have the ability to raise rents or at the least reduce concessions. Next we have about 14% of our units at less than 86% occupied, which I believe presents some upside from an occupancy perspective. I think we under performed. For those units types between 86 and 95%, we have assumed that we'll roll over leases at rental rates less then we currently got in contracts in the first half. But we looked for slight improvement in the second half. And using a range of estimates on the expense side, we think we have got the potential to do just down slightly from a same store sales perspective up 1 percent or 3.6 million dollars. I know we can do a better job in 2003 in limiting the down side of our problem properties and a better job in managing concessions, do a better job enforcing the lease and finally addressing resident turnover at Tom talks to. It's an evolutionary process but we're plan is to leverage our middle market platform to produce positive growth.

And do you think that the sequential decline, it was largely caused by a 5.6% increase in operating expenses. Is that part of your turnover cost that brought it up to 82% may not reoccur for the next quarters.

Our sequential results for the most part were expected. Our sequential revenue numbers typically fall as a result of our Phoenix assets, Florida assets and student properties. The sequential expense increased resulted from increased turnover, increased marketing costs as well as increased utilities. With that said there was a portion we didn't expect related to being out performed on a couple markets. Atlanta, Charlotte, Tampa, Denver being a couple. But again we're pretty positive that we're going to see sequential improvement.

This is Tom. I would add this has a seasonality to it. It was in our first call consensus estimates that we took from 42 cents in the second quarter down to 40 for the third. We knew this was going to happen. If this is just a normal seasonality aspects of it.

Just a coup other questions. The cap rates you are quoting for future acquisitions and disposition are those after capex and what type of capex are you using there.

It is after capex and we have to do that on property by property basis depending on the age of the asset and we do a very specific underwriting and disclose the amount of capex that we use in our press release when we make an acquisition. But it's a property by property basis depending on the age how much of a rehab or not rehab it may present.

Is it safe to say are you using 435 for the sales and maybe something less then acquisition?

It's in that range.

Last question. Looking at the J.B. interest you bought out on the southern California property, they look pretty low. If you just calculate what the value -- was there secured debt? I calculate 50,000, 60,000 per unit for those acquisitions.

Well be it is an older property then we structurally with a joint venture provided us a little bit better buying opportunity that's unique to that joint venture.

I was trying to come up with the total value of the property.

I don't have that number off the top of my head, but I would love to answer that off line. It's a fairly large property and there are a fair number of one bedrooms that does drive that cost down somewhat. But I'll answer that specifically when I have that information in front of me.

Okay, thank you.

Your next question comes from Richard Payolee-ph from ADP Investments.

I have a couple questions. One is a follow-up from Brian's question. On the full year expense for 03 could you go through your thinking? You spoke to the sequential change and I understand that. But speak to me about next year 03. What are you looking for in terms of real estate taxes, insurance, things that has been the Achilles heel of many apartment operator.

We're pretty favorable in terms of what we have been able to do from a tax perspective. We brought in a guy that has really provided some expertise on that particular line item. So we're thinking our taxes next year may go up in the one to 2.5% range. On the utility front we're looking at about a 2% to 3% increase there. On the repairs and maintenance side I think we have a bit of opportunity. I think that we actually may be able to drive those expenses down. Best case in the negative 3. 5% range. Worse case up maybe 2%. From a personnel perspective probably up 2.5 to 3.5%. And on the advent and marketing side we're thinking down 1.5% to maybe up 1.5%.

Okay, I guess what you are saying you are looking for a recovery in I guess in latter half 03, is that fair to say? You are looking at jobs to come back then or is it jobs really picking up sooner and you are seeing a recovery in your rental stream in the latter half?

I would say overall there would be no job growth next year is my view of it. I think what you are going to see is a lot less of people headed towards the single family homeowners. And that's where we're seeing it. There are some markets which, Richard where you are seeing some job growth. But it's not much more than what's going to be needed to absorb. What's there already in the development pipeline. So we're not seeing a lot come back in the job growth area.

Right, Thank you.

He's looking for what are you projecting for maintenance, payroll?

I got those. I have a question related to your extraordinary item this quarter. How much of that is related to the notes that you bought back and then how much of that is related to standard mortgages that you have been refinancing? And a follow up to that is what in terms of cash?

Rich, on that the 13 million dollars is all related to the bond reduction that we did in the third quarter.

Ok. Then how does it -- net to 11 because of the minority interest portion?

That is correct.

Then what do you have built in next year in terms of your balance sheet repositioning?

As far as extraordinary items we do not have anything modeled in for 03.

So it's fair to say you won't have any repositioning anymore mortgages like you did this year?

I think the first have of this year we did a lot of the secure debt side and the second half we did a lot on bond portfolio. I think we went through a significant portion of that so that's why we didn't model anything next year.

We're assuming interest rates aren't moving. So if you tell me the feds are going to go to zero, we might want to revisit that. We'll be revisiting a lot if the world goes to zero.

Just to follow up to this would it be fair to say when you are quoting you're A.F.F.O. you are looking at it not more or less on a cash basis because with these extraordinary items in terms of dividend coverage your cad to get more particular would be lower. Would that be correct, consider cash available for distribution?

That is correct. We would exclude those items from our A.F.F.O. computation.

Thanks.

Andrew Rosevitch-ph with US Bancorp Piper Jaffray

Good morning. Kinda of a follow up to Rich's question. If you were able to redeem debt this quarter, above book at a loss, and essentially get a positive net present value result, do you think across the board in and this isn't just specific to U.D.R., are we overstating our N.N.A.V.'s because we're understating the liabilities of above rate debt?

I think that no one's N.A.V. is reflect touch of the debt, whether it be an asset for liability to N.A.V. We have always contended it ignores it. I wish at times that if you would look at this company in the improvement on the debt side that it would have increased it. But I think in the end if you want to look at N.A.V. and my personal view of it get back to what is it per unit, and what is that, what is an asset going to trade for? Currently our share price at 14.50 we're trading at 53 grand a unit. I think that's a good buy. Buying our communities today. I think there is a lot of other companies in a similar position to ours.

Right, do you have any estimate of what the market value of your debt is relative to book?

No, we have not done that. But we would be glad to revisit it and probably put it both in one of our next press releases.

Just to recap we have $2 billion worth of debt at 6.3%.

Right, and the high stuff is due next year anyway.

Then you wipe out with the slots you are finishing off 300 million dollars priced near 8%. You factor that in, you know that's what we think is a big upside in both our numbers next year and also one liability we would like to get rid of.

Thanks so much.

Your next questions comes from Rich Anderson with Salomon Smith Barney.

When you walk through your guidance and the components for 03 you mention the six cents that was the wild card that you gave yourself. The opportunity if they present themselves. To dispose of more assets. What would that be in dollar terms if you are assuming 100 to 150 million in your current guidance. How high can it get?

Seven to seven and a half million dollars.

Does six cents represent the 50 million in dispositions or something biller bigger than that -- 150 million --

We have an active priority list of 300 million. And if you look at the historically, that gives us room to operate in 300 to 350 million range. If we strike to low cap rates we can do even more.

It's approximately 300 million dollars. If you were to sell that and the cap rates were spread $50 basis points. Cap rates were spread of 150 basis points.

Okay, Tom you talked about higher potential for higher mortgage rates in 03 some 75 to 100 basis points. I presume you have that in your forecasts for same store growth to some degree. What do you think the impact is of that assumption? What would same store NOI growth or occupancy be in 03 in the absence of an expected rise in mortgage rates?

Well, let's put -- here is how I think it impacts us. 75 to 100 basis points rise in more gain rates means that the individual who has on average 160,000 home just increased his mortgage by payment let's call it $200 a month. That is a lot when you are talking about an entry level home pushing somebody back from the table saying I can't get there to closing. So I think that's one that will slow down the exit. This year normally I would say that turnover a third of it would be people leaving to go to a home. I would estimate this year that number probably rose to 43% 45% of the people leaving were headed to a single family home. So at 10% increase with the slow rate environment, if that reversed and we go from 80% annualized number down into 70, you are turning less 7,000 less units a year and an average turn of 1200 to 1500 a door is 10 million bucks. I'm not counting on that to stop. I think it takes the entire year to get that mortgage rate increased. But certainly it bodes well in my view towards the long term prospects that maybe the crest has happened in the people leaving for single family and that it may be turning back towards our favor. Meaningless or more normalized.

But your assumption of flat occupancy for 03 does not impacted by your assumption of what might happen to mortgage rates.

I'm being conservative in my assumptions.

Last question on revenue enhancing capex. That number for your company has come down dramatically for your company relative to 2001, this year, on a run rate basis as I look at your cap ex table. What do you think you might do in 03 and I guess the first question is why has it come down so dramatically and what might you do in 03?

Rates have come down this year because the new management team set a higher hurdle rate for approving expenditures that get processed. We're taking another look at that because as we mentioned, we do have 40 to 45 million of annual free cash flow and we need to be investing that as wisely as we can. -- we're looking at perhaps cutting back our hurdle rent a little bit and increasing those expenditures a little bit next year.

We would like to. We're going to have the discipline that says if we can't get the return, we won't put the money out. Just as we don't go out and buy an asset and expect not to get cash flow or return in it. So it's a very -- if you will, a wide-open window in the industry. We have been very diligent at making it a very refined process in which we want the make sure we're getting our returns just so people don't start sweeping it into recurring cap ex that we be defend it to ourselves and our investors as good solid invested capital that we expect a return on.

We would never do that, Tom. [Laughter] Thank you very much.

Your next questions come from Steve Swit-ph with Wachovia Securities .

Just a couple of questions that haven't yet been answered. If I could just push a little bit more on. It seems to me to be a little bit of a divergence between some of your general comments about the industry and your outlook and then from a sequential -- perspective your expectation for positive revenue growth. You know going forward. Is there anything different in your expectations, say, for first part of 2003 versus second half of 2003 or is it generally an outlook for positive sequential trends even in this environment?

Well, I think we're sitting here at the end of October and you are asking me what does the future look like over the next 14 months. I'm trying to provide Steve, kinda our view of the direction of things. We certainly when we go asset by asset, unit by unit, market by market see opportunities. Where we have laid what is construction, where we're priced in the market, and the job growth forecast. And believe that there are opportunities for us to grow revenue. We also believe that the turns that we have had as it relates to multi-family losing residents to single family, that that's tide will start to slow down. The exact timing of it, the impact on each individual community is very hard for us to estimate. And so we have gone to the conservative side of the equation and said, we don't think that is going to influence us so much to change our guidance, why don't we be conservative. Again our overall mantra is 95% of surprises should be positive. We don't want to disappoint you or our investors. And, so we lend in our guidance to be conservative in our outlook and the way we run the business we lend to be optimistic and aggressive. And I think you want to keep that balance in that way. So I think as it relates to second half of the year, first half of the in 03 we will probablely come out at more towards the end of the year with a stronger guidance by quarter and go through an operating plan and a process. But I really if I look at Kevin highlighted it briefly and I add to it, we hit what I would call bottom in August which is a natural sequence for this business. It's a natural cycle. September was better in two forms. In occupancy and in net rent collected and concessions were down. October, that trend that continued. That we have seen a pickup in our leases in fact in October we had the best weak this company has had in four years, a net 560 leases picked up the first week of October. We have had a drop in concessions. And we also have had net rents move. So I don't want to point to two months and say this the trend, let's start getting optimistic and make projections for the street. What I want to be is let's get out there, deliver, a lot of the changes Kevin made during the third quarter are taking route. They are showing up on the bottom line. And you know we would like to be able to come into the fourth quarter and report solid progress on a lot of fronts. And what holds me back is always the sense that you know if we lift our optimism to the street they tend to run away with it and we get -- we end up disappointing them. I think we have a great start to the quarter. I'm optimistic about 03. I think we have an operating team and a profile of assets that we'll probably beat most of the sector again next year. I think that's [Inaudible].

Okay, Tom. Maybe Kevin can just clarify what was the occupancy at the end of Q3 versus the average?

The end it was 928 was the average and at the end we were at 933.

One question for Ella. When you look at the refinancing opportunities next year I want to make sure that I understand the assumptions you have underpinning the guidance includes a refinancing of that $300 million with unsecured debt, is that right? Or are you assume had what the your replacing that with shorter term debt?

We're assuming the bonds we redeemed this year and the bonds that mature first quarter next year will be reinsured with debt.

So that is the refinancing opportunity not putting it back into very short term maturities.

That's correct. That's one of the refinancing opportunities.

Thanks.

The next question comes from Lee Shallot-ph with Banc America Securities.

On the optimistic outlook you are painting, when do you see same store growth turning positive on a prior year basis. Is there that something we could see in the first half of 03 or do we have to wait?

My sense of that will be the third quarter. That we have two very strong quarters at the beginning of 02. And looking at my revenue stream and where I believe occupancy and net rent numbers will come out we started to see softness in pay of 2002. -- may of 2002. Until the we're running against that number you probably have one or two more quarters frankly two more quarters at least of negative same store sales. And negative being consistent with Kevin's prior guidance which was a 1%, negative 2.5%. I think I would continue to look at and what we always proponent of is he sequential concessions. Concessions are the first thing given in softness and the first things withdrawn in strength. And so watching people's concessions and net rent collected per unit, and I say net rent being cash, You' ll start watching those numbers. As those improvements, I think you will have an indication of the tide turned on a national basis or market basis.

In terms of concessions could you remind is how you record that? Do you amortizes it or record concessions up front?

Right up front. We keep our books as close as we can to cash. I prefer that, I think it's a true indication to our shareholders. What they are buying these shares for is a dividend and it's easier to account for. Written write off, day one.

Can you talk a little more about the philosophy behind paying off debt and paying prepayment penalties? How do you think about that clearly you take a charge today which we all forget about and it saves you interest down the road. But if you look at it -- how too you justify it from a firm value perspective rather than F.F.O. next year?

We look at it a couple different ways. And one of they is N.T.V. , one of them is impact on the fixed charge coverage ratio which we considering to an indication of our balance sheet, and the third is the maturity schedule. So we look at this and have a net present value that's positive of between 1 million and 2 million after the friction costs the prepayment penalty costs associated with redeeming the bonds. It also improves our maturity schedule and it will contribute to an improvement to our fixed charge coverage ration. And, so we take a multi-task approach to it.

Stan Your outlook for cap rates, is there anything but interests rates that will drive any meaningful change in the cap rates for dispositions?

I think interest rates with leveage buyer is the number one factor out there. I think the second thing is just competition for product. So how that plays out in 03 we have to wait and see. But I think generally our, I characterize it as not as much product in the market as would you expect for the economic times we're in. And also it relates to interest rates because some people are locking and holding assets. Normally we have seen market for sale. So I think it's two things. Interest rates and then that plays into the fact there is not as much product on the market and a lot of people chasing that product. We will see how that plays out. History always proves these things cycle in and out.

This is Tom. I probably would add that with current environment we have, as soon as lenders start tightening up their underwriting, that you might start to see some better pricing coming back. We have seen lenders give unbelievably short underwriting periods and optimism in their projections. And I think it's going to take them a few times to get their fingers toasted if you will before they start tightening up. But when they do the bidders will disappear. When that happens, you know it took them three years the last time around. Before underwriting finally tighten up. Then it shut down overnight. Probably happened the same way this time. I'm not optimistic the lending side of the business is going to get any tight any time soon.

Thanks.

Your next question comes from Evelyn Ferner-ph with Cornerstonet-ph.

Good afternoon. On the 8.2 percent cap rates you paid for the acquisitions thus far or the prior quarter. Can you give a few of the metrics on those properties? Was that based on rents in place and occupancy in place or some sort of stabilizing projection or trailing number?

Well, it's bases on rents in place. And then in the acquisition of this quart they are was a large acquisition in Silver Spring, Maryland. We took those rents if place. When factor in what we expect in the future and we usually add some turnover time vacancy to those numbers. So do have forward look based on today's rental rates. And also give ourselves some room for the repositioning, which is probably minor. But in most cases there might be some we have some consider.

What was the occupancy for the average occupancy for the acquisitions?

Well, on those this quarter they were about 94%. We had some earlier in the year that are a little bit less than that. But this particular quarter was 94%.

What kind of run away growth did you assume in the underwriting for next year?

We have a strong operating team in the Virginia--Maryland area. We haven't seen the drop-off in jobs there. We forecasted a 3% to 4% rents that growth in the first couple years.

With respect --

That's for the D.C. group. I think there are several other assets, Texas where we would not have that same optimism for rental growth.

Was it 94% average or was -- is there opportunity to improve on the 8.2 through adding occupancy?

There is in the Texas portfolio. Those will be closer to 91% on average. So we have a little more and Kevin alluded to that we have room for growth there.

You mentioned southern California and how you expect that would you like to re-deploy some of the sales proceeds into that market. It's very frothy right now. Everyone wants to own assets in southern California. Is there a replacement market that has the right kind or you know maybe not as attractive as southern California but certainly fundamentals that can be seen healthier are relative to the growth markets where it may make better sense on a going in basis? What kind of IOR what are you expecting at 6.75%?

We expect IOR 11.5-12% range. But we see if you look at the inland empire, for example, strongest job growth in the country. You know, what we can see now that job growth can continue. And historically we're not projecting the growth you see in the 92% range, but certainly when you run it that 5% to 6% per which is fairly conservative, with the obstacles to supply coming on and surprising you. It forecasts out to healthy numbers.

What kind of hold are you doing the I.O.R. on?

We do it on a seven-year hold. --.

And what do you estimate your weighted average cost to capital to be?

It's 10.5%.

Okay, thanks.

Your next question comes from Arthur Hurley from the Tuckerman Group.

Good afternoon. Tom, I have a question that goes back to your opening comments. In regards to the new development and the fact the it's not competing with your portfolio in the middle market focus is that mostly price point and if so can you give anymore details on that?

Certainly. A couple things come to mind. First if you look inside the 300,000 units, and you looked at how much of it was tax credit, you would find somewhere around 50,000 to 60,000 units are taxed credit. So government subsidized orientation where the median income might be somewhere between 50 and 80% of the typical neighborhood. So those people typically are not going to be in our price point for our mid market. So if you will they are building below my resident base. The second is the rest is generally at the a-type caliber product level which command rents that they will have some get 8, 7, to 8.5, 9% on their money. By the time you weigh in the entitlements of the land, cost of that product, it's typically what I would call $150 to $250 over our competing product. So I think most when I look at new construction going up, it's certainly has some impact, but it's not like a direct competitor. Trying to think here in Denver where we have communities out in Aurora and there is a lot of development along 470. In fact too much. We're not losing a lot of people to that. Just the price point and the differences $260 a month between our rent and the new product and that's too far for a lot of people to reach. What you have is the A. person will discount and concession. He lowers his rent. We'll lose a few people to that. What happens is as soon as they raise the rent on the turn, they come back to us. And that story plays out time and time again. So that's my view of it.

Great, thanks.

Operator do we have any more questions? I know Mark had one which was the costs per unit of the two acquisitions in southern California. Looks like they are about is 77 grand a unit. That's a middle market, it looks like one's in downtown Long Beach and Anaheim, not but five miles from Disney. But what you would find both those communities the average age probably 14 years and what I would say Mark has a great buy in those. We would do them again.

At this time there are no further questions.

Let me give you my closing comments if you will. In closing, while the industry struggles to find an impetus for recovery I'm reminded of the strengths of our company. The national portfolio -- dementias development risk, a middle market focus, a balance sheet that has unique opportunities and one that has improved dramatically since we could come. Earnings growth that will be among the industry leaders. 02 estimate of 153 would be 10% over prior years. 03 estimate of 163 to 170 would represent flat to 4% growth. One of the lowest payout ratios for 2003 of A.F.F.O. at 80 to 82 %. Meaning the dividend is safe and would continue to grow. At the current 14.50 share price we have an attractive dividend yield of 7.7. So while this environment is difficult it is no different than prior soft market cycles. It is certainly one that we have seen before and one this management team is prepared to operate in and excel at. We'll continue our operating balance sheet and repositions strategies as we know these will continue to create shareholder value. So with that, I thank you for your time and take care.

This concludes today's Dominion Realty Trust company's conference call, you may now disconnect.