UDR Inc (UDR) 2002 Q4 法說會逐字稿

Good morning, and welcome to the United Dominion Realty Trust conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. This conference is being recorded Tuesday, February 11th of 2003. I would now like to turn the conference over to Ms. Claire with FRB Webber.

Thanks and welcome, everyone, to United Dominion's fourth quarter and year-end call. Everyone should have received the press release. If you did not, there's a link set up on both FRB and UDRT's website to get a copy of that. We're also holding a webcast of today's call if anyone is interested in that, and that can be accessed at CCBN.com or UDRT.com.

I'm going to read a brief safe harbor. At this time management would like me to inform you that certain statements made during this conference call which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurances they will be attained. Factors that could cause results to differ materially are detailed in the press release and from time to time in the company's filings with the SEC. Having said all that, I'd like to turn the call over to Tom Toomey, CEO and president, for his opening remarks.

Thank you, Claire, for that introduction, and welcome to the United Dominion Realty Trust fourth quarter conference call. Joining me on the call are Mark Wallace, Ella Neyland, Chris Genry, Kevin McCabe, and a number of our associates.

Let me begin with the goal of this earnings call. One, to report our results, two, to tell you how we see the business going and our prospects. Three, to provide earnings guidance for 2003, and to answer your questions. Management comments will take about 25 minutes.

Let me start with the highlights of our results. During the quarter, 3% AFFO growth, flat FFO growth, which will lead the sector again. We met First Call estimates. We delivered same store sales at the top of the industry for the quarter and the year. We completed 123 million of capital transactions, and we were added to the S&P Midcap 400.

When I look at UDR's performance for the fourth quarter and frankly all of 2002, I see many positives. Again, operating results led the industry. One of only two apartment REITs to improve its balance sheet during 2002. Repositioning the company continues at a good pace with over 600 million in asset acquisitions and dispositions during 2002, which is on top of 250 million in 2001.

The 27th consecutive yearly increase in the dividend, and finally, total shareholder return of 22% for 2002. Kevin, Ella, Chris and Mark will discuss these in detail, but I would like to say that it was again the second straight good year for this company. And I owe a lot of thanks to those associates on the call for their efforts in accomplishing our success. Let me turn the call over to Kevin to discuss operating income.

Thanks. My goal for the next few minutes is to provide some color related to three key issues. First, fourth quarter year over year and sequential results, second, selected markets, and finally, a preview of the first quarter of '03.

As many of you may have noticed, we have expanded our press release and attachments to provide more detail regarding our financial performance on both a year over year and sequential basis. Given that, I will spend my time providing some perspective on what was encouraging in the fourth quarter and where we continue to see challenges.

To begin, let's talk about the bright spots. First, our year over year NOI decline of 3% will place us in the best performers of the apartment sector again. Many may be asking why we continue to outperform. I would contribute that to the following. A, our middle market focus, B, our geographic diversity across a national platform, C, our continued focus on managing the downside, including continued emphasis on our lease management efforts and limiting the number of month to month leases.

And finally, and as importantly, I believe our property management organization's energy, determination and focus all are contributing to improved performance. Second, our sequential NOI gain of 2% consisting of a 1% increase in revenues and a 0.6% decrease in expenses will put us in a select group of multifamily REITs actually posting positive sequential results.

Third, in a primary driver for our sequential improvement was our 0.5% increase in occupancy in the fourth quarter, especially meaningful given these came in a period during which historically we see occupancy declines. Fourth, on a sequential basis, we saw revenue improvement in 39 of our 57 markets, or 68%, indicating that in many markets, we were able to overcome the challenging market conditions. Fifth, with bad debt at 0.7%, down from year-earlier levels of 1.2%, and within our own internal guidelines, we are maintaining our credit quality. Finally, resident turnover at about 15% for the quarter was our best performance in any quarter in over two years.

With all that said, we still face certain challenges or have opportunities to improve upon. First, despite our operating results, we share the sector wide frustration in our ability to effect revenue. Despite having 52% of the portfolios' properties at occupancy levels of 94% or level, the market conditions are such that we do not have much leverage in both prospect discussions as well as in renewal conversations. This remains our biggest challenge today and will remain so until the key drivers of our business improve.

Second, while concessions actually declined $136,000 on a sequential quarter basis, concessions per move in actually increased sequentially from $27 per unit per month in the third quarter to $33 per unit per month in the fourth. And finally, on the expense side, taxes and personnel , our two biggest expense line items, were up 4.7% and 3.5% respectively on a year over year basis. While we expect to be able to manage the personnel costs close to our 2002 levels, real estate taxes are a little more uncertain in an area where we may see an uptick in 03. Let me next speak briefly regarding some of the markets in which we operate. I know that many of you on the call have heard market commentary by a number of our peers would have already reported Tony their fourth quarter results.

In general, I would agree with their assessments and believe that our experience are be will be similar. Everyone will be challenged in markets like Phoenix, Denver, Austin, Atlanta, Dallas, and the larger North Carolina markets. I would add that while we may not see the outstanding levels of growth we saw this year in the mid Atlantic region, including Washington, D.C., we still expect to see positive numbers, as well as in Southern California. The only thing I would add is that for us, we have seen some recent momentum in Atlanta and Charlotte based on some personnel changes that are finally taking hold. And our Dallas properties have made great progress on the occupancy front. This may help us mitigate some of the weak fundamentals in these markets.

With all that said, we expect the choppy conditions to continue. Our national middle market portfolio continues to help us weather the lack of job growth, unabated multifamily supply in certain markets and the low interest rate induced flight to single-family.

Our January performance would indicate that traction remains elusive. Our first quarter gain to lease exposure at about $500,000 to existing leases would indicate that progress on the revenue side remains difficult. Let me expand on that a little bit because I think it bears repeating. For those leases maturing in the third quarter, if we apply the rents we executed in our December leases to those rolling in the first quarter, our downside from a rent perspective would be approximately five hundred thousand dollars. That said, I still think it's too early to call this the bottom given the recent trend in concessions and the inability to raise rents at our highly occupied properties. Expenses may climb in the first quarter somewhat, given the weather we've been experiencing in the east, but overall, the choppy sequential performance we've seen for essentially the last two quarters should continue through the first quarter. With that, I'm going to turn the call over to Mark.

Thanks, Kevin. I'm going to cover two main areas. First I will update you on our portfolio repositioning strategy. Second, I'll discuss our development pipeline.

Now portfolio repositioning. In 2002, we sold 314 million apartment communities located in Memphis, Tucson, Naples, Florida, Las Vegas, Dallas, Fort Worth, San Antonio,[inaudible] , California and Albuquerque. For a blended overall cap rate of 8.1%. In addition, we sold a tract of undeveloped land in Brandon, Florida and a small warehouse in Bristol (ph), Tennessee for an additional 4.7 million of proceeds.

So we made good progress in slow growth markets, and trimming some excess in our larger core markets. We acquired 327 million apartment communities located in northern Virginia, Maryland, and [inaudible] we added in Anaheim, Long Beach and Riverside. We also added communities located in Dallas, Austin, Denver, Seattle, Raleigh and Lakeland (ph), Florida, at an overall forecasted yield at 8.2%. Cap rates versus actually performance are not often talked about, but we're going to talk about them today. They're not often talked about in a soft market. But the question s how are these acquisitions performing? We bought 212 million in assets in the first half of the year at an expected yield of 8.4%, but their current yield is at 7%. This shortfall has resulted primarily from con concessions we had to give during our re-tenanting process in excess of our original forecast. In the second half of the year, we bought 150 million of assets, and they are currently beating the forecasted yield of 8%.

So what is in store for 2003? As I stated in the last quarter's conference call, in 2003, we will not paint ourselves into a corner by pegging a large volume of dollar in acquisitions. That might force us into a pace of transactions that does not take into account rapidly changing market conditions. So in 2003, we will be active in the market, looking at many deals and opportunities for acquisitions, but our caution is that with the low cap rate environment and sluggish rental markets that require heavy concessions, it is difficult to accurately predict what volume of deals can be done. On the disposition side, we currently have over 250 million of assets for sale that are located in some of our secondary markets, listed at cap rates that average around 7.5%. With you But I want to emphasize, it is our intent to only sell when we can get an outstanding price for the particular asset we are listing.

So our plan is to proceed with caution, sell only when we can take advantage of the low cap rate environment, and then use those proceeds to buy younger, higher growth rate assets at the same approximate cap rates. We expect this will cause no dilution to our 2003 earnings numbers.

Now briefly on our development pipeline, our development pipeline remains small and is detailed in the exhibit 8 of the press release. In the last half of 2003, we'll complete a phase two development of 178 units that will be delivered. We then have 292 units coming on line in 2004, and then another 650 units that will not be delivered until 2005. So we start to curtail our development activities in early 2001, which has resulted in a limited development lease of exposure in the next couple of years. We have maintained our core competency in development and will be seeking opportunities with our joint venture partner, Aegon, to develop in markets which will emerge first when the market ultimately begins to cycle back. Now I'll turn the call over to Ella Neyland.

Thank you, Mark. Throughout 2002, we focused on identifying refinancing opportunities that would strengthen our ball balance sheet. In the fourth quarter, we continued the redemption of some of our higher coupon bonds. We redeemed $48 million. This redemption created long term value for the company as we significantly lowered the run rate of the interest expense from the bonds redeemed. The average rate on the bonds was 8.12%.

We also refinanced $8.6 million of commercial properties with an average interest rate of 9.3%, so we'll see an improvement in our fixed charge coverage ratio as a result of these refinancing activities. After paying premiums, prepayment penalties and fees of $7.6 million, we'll have a positive net present value of about 1.4 million on this redemption. The NPV levels are based on treasury rate assumptions that are actually 30 to 45 basis points higher than what we're seeing today, so based on current spreads, we you should see these NPV's improve.

During the fourth quarter, we had a window to repurchase our common stock at price that represented extremely attractive investment alternatives. In total for the quarter, we purchased 611,700 shares at a blended price per share of $14.19. Given our AFO 03 (ph) estimates, this would equate to a cap rate in excess of 9.2% for all of our repurchases for the year. As of today, we have 2.3 million shares authorized for repurchase. In looking forward to the next four to six months, we have some positive developments on the balance sheet. One, we still have in this quarter $107 million of unsecured notes and bonds that will be matures with an average rate of 8.3%. And second, we have 154 million of swaps that will convert from a current all end swap rate of 7.5% so to a variable rate of our Libor by August. That's at an average rate of 7.82% today. During 2002, we also increased our fixed charge coverage ratio from 2.02 to 2.24 and 11% increase in one year, while increasing the level of our unencumbered pool to 2.4 billion, or 61% of NOI. I also want to point out that our unsecured bonds are trading well in the secondary market. In fact, the $200 million issuance we had last year of our 09 are trading tighter by about 18 to 22 basis points.

So in closing, we're pleased with the continued progress in the balance sheet, the blended cost of debt on a $2 billion portfolio at 5.9% is significantly improved from the 7.6% at the end of 2000. Cost of capital 9.23%, and our maturity schedules balanced. Our fixed charge coverage ratio improved 11% and we continue to improve the level of our unencumbered pools. Finally, we hope to close on the restructure of our new revolver next month. And now, I turn it over to Chris.

Thanks, Ella. Greetings to everyone on today's call. I would like to spend the next few minutes framing the impact of Kevin's, Mark's and Ella's comments on our financial outlook. But first just to give you a quick overview, here's a way to get from the $1.63 of FFO that we earned in 2002 to the range of earnings guidance that we published in last evening's press release in four steps. If you start with the $1.63 and turn to same community results, these will likely be down 1 to 5% next year, which is three to 13 cents per share. Interest costs will be 7- to $9 million lower next year, which is 5- to 7 cents of improvement. Absent acquisition activity, our non-mature results will be down 4 cents a share, and our recent equity offering is 2 cents dilutive.

Those four steps get to you the 1.51 to 1.59 range of guidance. For a little color in each area, first let's take a look at operations. We hit our targets in the fourth quarter. Last call, we indicated a sequential quarter revenues would be slightly positive, expenses would be slightly down, and same-community results would be up, and that is indeed what occurred in this quarter. However, rents did not meet our expectations. Our net rent trends had bottomed in August, and we saw sequential growth in both September and October, so management was somewhat bullish about the potential to push rents in 2003. But the trend reversed in November, and we saw two sequential months where total revenues were essentially flat, but rents showed moderate declines. Although concessions as a percentage of rents remained constant, two related issues aren't so apparent. First, the same ratio applied to a reduced level of rents means aggregate dollar volumes of concessions was down, which is a positive for cash-based revenues as Kevin pointed out. And also as Kevin mentioned, turnover was down significantly, so concessions per new lease are actually up quarter over quarter from $27 per month to $33 a month.

So we're encouraged by the occupancy gains and the reduced turnover, and I would like to add my thanks to the associates on the call who have been working very hard to achieve those goals this quarter. Catalyst for growth in revenues are nowhere to be found. Interest rates remain low, job growth is sputtering at best, new supply remains high, concessions are not abating, and revenues will fall as expiring leases are repriced to market. So we're shaving 50 basis points off our occupancy projections for 2003, and we're reducing our previous target for collections per occupied unit by a range of 10 to $20 a month. This results in year over year ma mature revenue of flat to down 1.8%. Our expense growth ratio of 2- to 3% remain unchanged, leading to same store results down 1 to 5%.

Turning to acquisitions and dispositions, I'd like to make two points. First, we will be a smaller company in 2003 than we were in 2002. As most of our 02 buying activity occurred in the first half of the year, and most of our dispositions occurred in the second half of the year. So there were reporting periods in 2002 when we owned above both the assets that we acquired an many of the assets that we sold.

Second, as Mark indicated, our newly acquired properties are facing the same challenges as the mature portfolio. Our previous forecasts were too high for both yield and growth rates. Because NOI growth rates are increasingly elusive, we are no longer willing to assume the risk of negative cap-rate spreads in our portfolio repositioning. So we've pulled this dilution out of our model. Given the current environment , we're now modeling zero capital transactions in 2003.

Looking at finance, you will recall from our October call that we intended to allow our floating rate debt to drift upwards during 2003. As maturities were funded with the revolver and the existing interest rate swaps burned off. We are revisiting this strategy. As Ella indicated, spreads in trading of our outstanding debt securities have narrowed and we're facing a tremendous opportunity to lock down some long term debt at very attractive rates.

Modeling in 200 to 350 million of new debt issuance in 2003, potentially shaves 3 to 5 cents off our previous guidance, and we have made room for that in our new guidance. Another 1 to 2 cents impact to our October guidance results from the recent 2 million shares that were issued in connection with our inclusion in the S&P 400. So again to sum it all up, we see same store results in the negative 5 to -- negative 1 to negative 5% range, down 3 to 13 cents from our 2002 results. Acquisitions and dispositions will be offsetting, probably at a very low volume, leading to know dilutive events, but earnings in the non-mature portfolio at 4 cents less because, as I mentioned, we will be a smaller company. Finance 5 to 7 cents off our previous guidance with no additional equity issuance, and 200 to 350 million of new unsecured debt.

Interest costs will be in the 124- to 126 million range versus 133 million in 2002, a savings of 5 to 7 cents. Overhead costs will be flat to slightly down, giving rise to a range of FFO guidance of $1.51 to $1.59. The first quarter will be our highest cost quarter for utilities, interest expenses, and G&A, so we're forecasting a range of 37 to 39 cents for the first quarter. Looking at each quarter, we're looking at 37 to 39 cents in the first, 39 to 40 cents in the second quarter, 36 to 38 cents in the third quarter, 39 to 42 cents in the fourth quarter for the $1.51 to the $1.59 for the full year. These numbers reflect a significant revision to our 2003 business plan. Changes that ultimately improve the predictability of our cash flows and the certainty that we will be positioned to continue our 27-year history of annually increasing our dividend.

Although issuing common shares and reducing reliance on floating-rate debt will penalize our earnings in 2003, it has more predictability to and likely enhances our earnings in 2004 and beyond. So now I'll turn the call over to Tom for questions and answers.

Thanks. Why don't we open it to questions at this time, and I see we're on time and on schedule. So operator?

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press '*1' on your pushbutton phone. If you'd like to remove your question from the polling process, please press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled in the order they are received and if you are using speaker equipment, you will need to lift your handsets before pressing the numbers. One moment, please, for the first question. The first question comes from Dan Oppenheim (ph).

Thanks. Bank of America Securities. Tom, just a quick question for you. In thinking about the acquisition assumptions for this coming year, it seems that what's driven the change has been a lot more caution about the market conditions and that you think the NOI could deteriorate. Is it just what you're seeing in the December and January results or is it concern that we could see much worse as the year progresses and another dip?

This is Mark Wallis. Dan, I'll answer that question. I think you picked up on the right tone. We're looking at it cautiously. There still will be opportunities out there, but last year, we were making acquisitions in markets that were softening. Today, we see that they've flattened out, but we're just going to be very cautious with these opportunities with this low cap rate environment. And also not to assume that there's going to be a large amount of products that come on at the last half of the year until we actually see it.

I would add, Dan, that our primary value-add is through operations, and when we look for an acquisition, we're being very sensitive to what we believe the turnaround timetable is for some of these acquisitions. I think it's a degree of caution. And fundamentals, I think Kevin and Chris both highlighted them. We're very proud of the organization being able to keep its occupancy where it is, but what's been striking is our inability to move rents when over 50% of the portfolio is at 94, 95% occupancy, and you're not able to move rents in this environment. We think that when that turns, you'll see it right there. You'll see it in the burn-off of concessions very rapidly, and you'll see the ability for us to increase that. So we're focused on maintaining that high occupancy and readying for the day that the turnaround does begin. I would add also a moment of caution that any time you see job growth or you see construction subside or a rapid rise in interest rates, it's going to take, in my opinion, six months for those results to finally bear into our operating results, so it's not going to happen overnight, and that's added to our caution about if you are not projecting a hockey stick in 03, we have not backloaded the numbers and said, gosh, we think things are going to better. We think we're operating in a pretty flat market right now and don't want to get caught in the trap or the misconception of putting a hockey stick out there.

Ok. Great. Thanks very much.

Thank you. The next question comes from Jonathan Litt (ph).

It's Jordan Sadler (ph) from Salomon Smith Barney here with John. Just had a question regarding development. In September, you announced the joint venture with Aegon of up to 200 million, and looking at your development schedule today, Mandolin (ph) was obviously still on there, looks like costs increased 30% and the project seems to have been delayed, and then is seems that there were a few developments added to the schedule. Could you discuss them a little bit for us?

I'll let Mark field that question.

First, on the increase on Mandolin2, actually we're correcting a prior area, subtotal before soft cost was picked that budget is still in line. On the delay, that's really both -- a little of nature and a little of our plan. Some weather delays in the start and then as we're trying to deliver that phase two at a good time in the market, that's been factors into that. I might add that our phase one there is almost 96% leased, and we've put some concessions in our numbers. We've lowered the yield still at 9, so I wanted to cover that part. With Aegon, we are continuing to look at deals. We have begun the Houston project with them. The other thing that appears on our list is the 24-unit addition at 2000 post. That's an opportunity of an out-parcel that's the only parcel we don't control on the block that came available for sale. It protects our back door, and so we bought that. And 2000 Post is 97% occupied. And before we really started the process with our joint venture, came on with the opportunity in California. That is today the inland empire we feel probably is the strongest market from a job growth to everything you want there. So that's a way for us to increase our exposure to California and balance our portfolio more that direction, which has been one of our stated goals. So that's sort of an overview on development. Is there anything I didn't answer there?

No, I think that's about it.

I think what I would also add is, as you know, the entitlement process is quite lengthy, and frankly, getting harder and more difficult as the years go by in my recollection, and what we are now in pursuit of frankly won't be delivered, and Mark outlined it, until 04 and 05 timetable, so it's not a change in our strategy, it's still going to be a diminimus activity for us, but one that we think now is the time to be working through those entitlements in markets that look to be early in the recovery.

Ok. I think John Litt has a question as well.

I want to talk about the acquisition assets that you did in the first half of the year. I guess the repositioning is what's driven the yield down quite a bit. Can you talk a little bit more about the repositioning and, you know, what you're doing there and what the yield expectations are in the first half of this year?

Well, to recap what we've done is we've set out to improve the company for the long term, and all these assets we've acquired, we liked. They strengthened the company. In the first half of the year, general views of the market including ours and a lot of other people's was fairly strong market. We made those acquisitions knowing that typically when we make these acquisitions, we're going to do some re-tenanting, get the tenants up to our standards, and that was a more protracted process as the market softened than we expected. So we see those long terms being good assets. We actually are seeing improvement in those numbers gradually coming up each month, so in the second haft of half of the year, buying in some stronger markets as it turned out for the year in California and Columbia, those markets -- Maryland, those markets are looking pretty good for us.

So the second half acquisitions, you're not seeing the same dip in yield?

No, and I think too, what's happened is that we see a tightening in -- well, people are not getting what they're asking for on assets. There's a tightening up of the underwriting process from everyone. In the first half of the year, you would not hear of any retrade process at all during due diligence, and we've seen some of that and we've heard others talk about how that's now part of the process, so I think the numbers are getting more realistic on both the buy and sell side, not still where you want them in all markets, but it's improving a little bit.

John, I would add, I think the returns that we forecasted on the first half of 02's acquisitions, we'll probably get them in a year from now. I look at a particular couple assets, we bought one in Austin inside of Mopack (ph), very good, quality asset. It's going to be the right location, you can't build inside a Mopack, and it's just had to re-tenant the property. The same goes for Denver (ph) a location at 225 and Parker, a corner that will be there for the next 30 years in this city and will be very visible and a good product, but with we are to really go in with the prior landlord and really, if you will, almost turn over almost 100% of the residents there. We knew that going in. What we did not forecast is the continued softness that has occurred in both of those markets. That we would go in and typically think we could do a one and a half month free rent, and now it's been expanded to two, two and a half. That immediately hits your returns. What's good is that our expenses on both of those projects, for example, we've hit right on our targets.

So it's a revenue softness, part of the cycle. I don't think it's going to deter us from making smart buys, and smart sells, but we don't want to put our self out there with some number and really don't believe that's the right thing for us to do in this environment. What we are encouraged by, is as Mark has highlighted, there's a lot of retrading going on at the closing table, and I believe that as people move through this cycle, there's going to be more opportunities, and we are certainly looking at an active pipeline, but retrading it pretty darn hard.

Great. Thank you.

Thank you. The next question comes from Rob Stevenson (ph).

It's Morgan Stanley. Thanks. Tom, how close with the 57 markets are you today of having the right mix there? I mean, what's the sort of ideal number for you?

You know, we came out two years ago after about a four-month study an really told our self about 30 would be the target, and so what I would look at is the difference between the 30 and the 57 we're in today, we've got pretty close to 17 -- no, 19 markets that we have one or two assets. And so we could get there quickly, and that is part of what mark has listed, as a lot of one-off markets, if you will, where we think that we'll be able to exit where we're looking for a unique buyer, and what we said also at the same time, we put forth that strategy of concentration to attain more operating effectiveness was that we would take our time doing it. That we were in no particular you had reto-burn down -- hurry to burn down shareholder value, if you will, to get to a number. We would list it, price it, compare it with our opportunities. If they didn't match, we would Tampa Bay continue to run it. And I continue to support that strategy and believe it's in the best interest of our shareholders in the company for the future.

Given the active disposition environment now, is it just the case that even if you sold down 20 markets or so, that you just couldn't redeploy the proceeds fast enough at an accretive rate? Is that the deal?

That is the environment. You've got differences that are still wide, both on the buy and the sell. They seem to be converging rapidly, and, you know, as mark highlighted, 250 million listed for sale at seven and a half caps, we still think there are some markets that we could find assets in the 7 to 7-1/2 cap range that are younger. One thing that mark mentioned was that we're selling stuff that's 17 years old, and we're buying stuff that's 10 years old. So we're trying to get younger, better locations at the same time, and still competitive market. So I think we're going to be able to execute in that area, and again, we'll take them one at a time.

Ok. And then the other question I have for you is, what dilution or what type of assumptions are you guys using for the program in the 03 numbers here?

The outperformance partnership program dilutes approximately one and a half million shares. Obviously the number of share equivalents is heavily dependents on the share price. We have not forecast that that will change much in 2003. You see from attachment 4 in our press release that had December 31st, that was 1,578,000 shares, and we're projecting that to stay basically constant.

Ok. And is that the main reason for the dip-down in the third quarter FFO assumption?

No, the FFO is -- the share counts have been in our numbers since day one. That we adjust every quarter what we believe the outperformance program will pay off as you would the same thing would you do for options. On the dip in the third quarter, we have a seasonality in this portfolio. Have you a reliance in the Phoenix market and the Florida market, and high utility bills in the Texas area, so what we always anticipate is that we will have a drop in our occupancy as those two markets go through their natural seasonal elements, and arrive in utilities. And it's also a period of time when you do have your greatest turnover in residents, so it's a natural rhythm for this portfolio, and frankly for the industry that's in those markets. So that's our dip.

Ok. And then one last question. What's the level of month to month leases in the portfolio now, and where that has that been over the last couple quarters?

Rob, this is Kevin. It's at 3.4% currently, and it's been there for probably the last three quarters.

Ok. Thanks, guys. Appreciate it.

Thank you.

Thank you. The next question comes from Kevin Lento.

Kevin Lampo from Edward Jones. First question I v you talked about the half a million dollars in gain to lease. Is that an annual number or quarterly number?

That's a quarterly number.

And then Tom, you've in the past -- I think you've hired somebody to look exclusively at real estate taxes, maybe a potential way of saving some additional money and yet you're talking about all three maybe seeing an increase in that. Has there been less progress than you've expected on that front, or is it just the nature of the environment that we're seeing today?

One, I'm very happy with the progress we've made. We've got tighter controls over that area than I've ever seen in my career . We know more about what's going to happen, and that's led us to be more conservative as it is our belief that you have a number of states that are in legislative efforts, and I'd say right now about two-thirds of them are leaning towards the spending cut strategy, but we believe as the legislation has moved through, you're going to start to see taxes increase. I highlight, for example, state bill 17 in California in which they are trying to carve out prop 13 differentiate single-family homeowners from commercial. And we believe that if that were successful, you would see a rapid rise potentially in the California tax situation. Other similar states that are pressing on on the tax side of increasing it looks, for example to be Arkansas, and much to our surprise Florida.

We'll see how those progress. Bush in that state has promised no new taxes, and we've heard that speech once or twice. Don't know how he's going to balance his $10 billion shortfall with that. So we're watching it with a great deal of caution. Certainly as we talk with our consultants and we talk with the local appraisal districts, we're getting back an underlying tone that says, guys, don't even kid yourself. We're coming after you this year. And it seems to be a predominant -- they're not going to negotiate a lot this year, they're going to press things, they've seen these properties trade over the last year at pretty high values and they're going to be using all that ammunition against us. So we've been cautious about our outlook for 03. We will continue to present ourselves in our best case possible, but believe it will be a difficult environment, and more difficult than the one we just faced in 02.

Ok. And then can you also comment on repurchase of stock in Q4, you had the issuance of stock in Jan/Feb was that simply to -- I guess the reissuance of stock, although you did reissue at a nice gain. Was that simply to accommodate the -- being added to the mid cap index?

I'd add a couple things there and Ella will probably fill in the blanks. One, the repurchase was 611,000 shares on softness. We believe that every day we look at the share price, we look at what Mark has for a pipeline, we look at what Ella has for debt repurchases, and frankly, if you look at it on an AFFO basis, it was probably bought at about a 9.5 cap. So that was a goodbye of those shares. The reissuance that was certainly with the added to be the index and imbalance in our trade, and the index was going to add about 4.5 million shares to their holdings, and we looked at it and said we can move a little bit improvement on our balance sheet. Two, we can do that at a transaction that only costs us 13 cents a share, and so we netted in the 15.60 range out of that, which was equivalent to a 16.45 open market sell of equity, so we thought we would make some money for our shareholders, expand our shareholder base, and presented with the same circumstances, would continue to be a buyer and a seller of equities when the price presents an opportunity.

And on that note then, essentially -- I know one of the things that companies made a lot of progress in the past couple of years is strengthening the balance sheet, reducing the debt, improving the fixed charge ratios. Are we kind of at the optimal balance sheet level at this point?

No, I am not there. I believe this company will get itself to a BBB rating, that we're at a 2 to 5 kind of range today. We see ourself being able to, with what Ella outlined as debt maturings and refinancings in that area, that we will be able to move ourself close inventory that BBB. That has been our stated goal. We will make some progress in 03 on that front, and we hope to, with an improving market and improving share price to convert part of that con ver tans to equity, and we believe those two transactions which will occur when they occur, we hope in 03, will move us into a solid 2.4 fixed charge range, and get us back our BBB rating. In addition, I would point, Ella has made huge progress on the maturity schedule, that you look at our maturity schedule, you will find that we have minimized repricing risk and maturities risk, and we believe that is again in the vein of what we want to be, which is a very predictable earnings stream and a very safe and secure dividend stream.

Ok. Thanks, Tom.

Thank you.

Thank you. The next question comes from Craig Leopold.

Good morning. I guess this question is for Ella or Chris. In the guidance that you had provided, the makeup of the guy guidance, you gave sort of the four major components, one of which was interest savings of 5 to 7 cents. Does that include your expected debt issuance of 200- to $350 million in 03?

Yes, it does.

Ok.

It has a combination of two. It shows the numbers I had mentioned earlier, the $261 million of debt that will reprice that's currently at 7.82, and then it also has assumptions on converting bad debt in those transactions to fixed.

Ok. Great. And then just looking for some commentary on the Houston market, I noticed, you know, obviously it's your largest market and it's one that experienced one of the larger sequential declines in revenues. I'm not sure how much of that might be seasonal versus, you know, maybe a chance for the worst in Houston. If you could provide a little color on that?

Craig, I mean, obviously our occupancy declined. I'd say that fundamentals have weakened somewhat in Houston in some of our submarkets, but quite honestly, I think our reaction was not quick enough to the occupancy decline, and we didn't address the occupancy decline with the intensity we did in some of the other markets. All I can say now is that we've recognized it and we're addressing it.

Ok.

I might add to that, Craig, that one thing, when you tour Houston is you realize a year ago, you saw a lot of construction activity related to infrastructure, again, freeways, the medical center, and what we're seeing now is some of the curtailment of that as those programs are completed, and the city sits there and fights through where will it find its new tax base and growth? And so some of that, I think, is softness coming on the back side of that construction activity. What we are not -- we're not faced with a home ownership flight there that we have experienced in many other markets, so I think it's a market to watch cautiously, and Kevin and team, you know, we've been down there quite a bit watching those results, and really mapping out strategies. We think we have the right team. We just need to push them a little bit.

Are you concerned about the increase of multifamily development in that market?

I think when you look at where the stuff is being permitted, it's outside the loop. It's in a commodity market. And we think that we'll have a de minimus impact on our portfolio, but we're surprised at the elevation of it, and as I am with the rest of the construction, I am still surprised that lenders in America are construction-lending-happy, if you will. Frankly, I would think that they would start to return to the fundamentals and pull back, but that has not happened, and I believe it will take an interest rate spike for that to curtail itself.

Ok. And then one last question on the acquisition and disposition front. You know, you've made some comments about maybe more retrading activity happening. Are you -- have you seen that result in any changes in cap rates thus far?

Slight improvement in cap rates at a particular couple of deals we worked on.

50 basis points.

50 basis points, maybe. It's not as dramatic and you're hoping for, but it's a little bit of an improvement that we're glad to have seen on a couple of deals.

Improvement on the acquisition side?

On the acquisition side, that's true.

Discouraging, I guess, on the disposition side?

Yeah, it really comes down to the particular market you're looking at, whether you can offer maybe more than one asset in the market can help you on your selling cap rate. There's a lot of factors that come into that. But it is -- there's two sides of that equation obviously.

Sure. Ok. Thank you very much.

Thank you for the question.

Thank you. The next question comes from Ralph Block.

My question has been answered. Thanks.

Thank you. The next question comes from Todd Voight.

Yes, Corporate Partners. Good afternoon. Actually Craig asked my question about Houston. My other question was really go G&A. You've done a great job over the last two quarters of really taking a hatchet to that line item. Can we kind of use that as a run rate going forward or can we expect anything -- any increases in that line item or further decreases?

This is Chris. I'll take that question. We're projecting G&A expenses will be flat to slightly down next year. Our head count continues to come down. Our payroll cost per person are essentially flat going into 2003, and as you're aware, payroll is the most significant expense in a company like ours G&A. So I think the run rate will stay about what it is in the fourth quarter.

The fourth quarter annualized is what I should use for the run rate? Ok. Now, is there any shift away from non-cash compensation that's driving this decrease, or is it purely just head count?

It's predominantly head count.

Ok. Great. Thank you.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time. As a reminder, if you're on speaker equipment, you will need to lift the handset before pressing the numbers. The next question comes from Andrew Rossivich.

Piper Jaffray. Chris, a really quick question on the share grant that's coming up. Is that just the denominator or is there also a G&A e expense that's associated with the share grant?

It only affects the denominator.

That's true for both FSO and GAAP purposes?

That is correct.

Great. Thank you.

That's primarily because we paid for those options.

Right. Ok. Thanks.

Thank you. Management, you have no additional questions. Please continue with any further comments.

Great, operator. Thank you. In conclusion, I would have the following closing comments. I believe the industry struggles to find an impetus for recovery. I also believe that UDR will continue its outperformance, that UDR will continue to strengthen itself from the inevitable turn around, that UDR will continue its heritage of predictability in growing dividends. The strengths of the company simply stated are its national portfolio, its middle market focus, its de minimus development risk, a balance sheet that has unique units and that has improved dramatically. Earnings that will be amongst the leaders of the industry. One of the lowest payout ratios for 03 on an AFFO basis of 85 to 90%, meaning the dividend will remain safe. At the current share price, we are an attractive yield at 7.4%, and lastly, the shareholder base itself, which has grown with the addition to the index, and predominantly 50% retail-oriented. While this is a difficult environment, it is no different than prior soft market cycles. I've assembled a management team focused on succeeding in an operating environment just like this. We continue to focus on our operations, our balance sheet, and our repositioning strategies. I know these will create shareholder value over time. Again, thank you for your time and please take care.

Thank you. Ladies and gentlemen, this concludes the United Dominion Realty Trust conference call. If you would like to listen to a replay of today's conference, you may dial 84052236, or 303-590-3000. Your pass code is 514561. Once again, your dial-in numbers are 1-80-405-2236 or 303-590-3000 with pass code 514561. The replay will be available through February 18th . We thank you for your participation. You may now disconnect