UDR Inc (UDR) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you all for standing by. Welcome to the United Dominion Realty Trust first quarter 2003 results teleconference. 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 today's conference, please press the star followed by the zero for operator assistance. As a reminder, this conference is being recorded today, Tuesday, April 29, 2003.

I would like to now turn the conference over to Ms. Claire Kodemin (ph).

Please go ahead, ma'am.

Thanks, and welcome everyone to United Dominion's first quarter call. Just so everyone knows, the press release and supplemental were distributed yesterday. If you need a copy of those, the documents are available on the company's website at www.udr.com in the new section. Also we are hosting a live webcast of today's call, which you can access both on ccbn.com and again on the company's website under the financial performance section.

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 means of the Private Securities Litigation Reform Act of 1995. Although United Dominion believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, you can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from expectations are detailed in yesterday's release and from time to time in the companies filings with SEC.

Have said all that, I will turn the call over to Tom Toomey, UDR's president and chief executive officer for his opening comments and introduction of management.

Go ahead, Tom.

Thank you, Claire (ph) and Wendy for that introduction, and welcome to the United Dominion Realty first quarter earnings call. I'm joined by the executive management team and a number of our associates on this call today. UDR had a good quarter. We met street consensus and continue executing our strategy that will ensure we can continue our tradition of growing cash flow and the dividend.

There are four key areas in the results I would like to focus my opening comments on. First operations. On the plus side, net rental income remains relatively largely unchanged for the last ten months. Occupancy remains stable; concessions have slightly decreased; our bad debt remains low; and our gain to lease has reversed from a negative $500,000 to back to being in positive territory. The negatives in the operations from the first quarter were first, our net rental income remaining largely unchanged.

Second, we have little pricing power at the resident level. And what I would not read too much into out of the operations numbers would be the decrease in seasonal resident turnover. And second, the seasonal expense trends in the utility and snow removal area. Kevin will give you more color on our operations later in this call. On the balance sheet points, we continue to improve on key measures of fixed charge, interest cost and debt maturities, and I would add that we're not done making improvements on these key metrics. Ella will go over our plans in this - later this call. Chris will discuss our recent equity raising efforts.

The third critical point I would point out is our acquisition in sales pipeline. Mark will discuss it in more detail, but rest assured we have a significant number of transactions that both on the acquisition and sales fronts that should materialize during the second and third quarters.

And fourth, the U.S. economy. As it limps towards its recovery, we are certainly seeing a number of bumps ironed out, including the elimination of the hangover from one war which is done, and we won; to two, the size of the tax cut being settled on; three, the large layoffs are on the decrease; four, the cost of homeownership is on the rise; five, corporate earnings rising against soft comps. But there is also some still clouds hanging over the economy. A recent homebuilder's survey points to optimism among home builders.

Second, unemployment across the country edges up and our multifamily building starts continue to remain at high levels. These factors, combined with UDR's performance, signal to me optimism, but I'm reminded that it takes any change in direction three to six months to get to our bottom line. I'm also very comfortable with our earnings estimates that we have previously provided of $1.51 to $1.59 per-share which Chris will cover in more detail.

Let's now get on with the call. Let me turn it over to Kevin, who will discuss our operations.

Thanks, Tom.

My goal for the next few minutes is to provide some color related to two specific issues: First, first quarter results; and second, a preview of the second quarter of '03. As in prior quarters, my focus will be in providing perspective on what was encouraging in our first quarter and where we continue to see challenges rather than reiterating the financials included in the press release.

To begin, let's talk about the bright spots. First, our year-over-year NOI (ph) decline of 4.5 percent was in line with our expectations and is a solid number given the economic environment and the difficult comparison related to last year's first quarter performance. Additionally, between $800,000 and $1 million of the decline I would attribute to the unusual weather we had in the quarter, including increased insurance claims, utilities, snow removal costs and service overtime.

Second, our sequential NOI (ph) decline of 2.3 percent consisting of a 1 percent decrease in revenues and a 1.3 percent increase in expenses failed to explain a number of favorable trends that we experienced in the quarter, including (A) our occupancy levels, which at 93.5 percent represents a 0.2 percent sequential improvement and brought us flat with year earlier level. Additionally, we saw sequential occupancy improvement in 30 of our 57 markets, or 53 percent. (B) concessions declined $363,000 on a sequential quarter basis but as telling declined on a per movement basis from $34 per unit per month in the fourth quarter to $32 per unit per month in the first. (C) on a sequential basis we saw revenue improvement in 26 of our 57 markets, or 46 percent, indicating that in many markets we were able to overcome weak fundamentals. (D) bad debt at 0.5 percent declined from the fourth quarter of 0.7 percent and remains within our own internal guidelines, reflecting our efforts to maintain our credit quality.

And finally, while recognizing the seasonality of the business, resident turnover at about 58.2 percent annualized was our best performance in any quarter in over two years and reflects the increased focus being paid to our existing residents. These positives on the revenue side helped offset the anticipated rent declines of about $500,000 that we spoke of on our last call as well as a slight decrease in various fees and business development income that ticked up in the fourth quarter. Additionally, aside from some favorable 2002 year-end true-ups regarding our insurance and tax accruals and the increased expenses related to the unseasonal weather, our sequential expense performance was encouraging as well.

Given all that, the operating environment remains challenging. An optimistic might point to revenues not declining further as a positive, we continue to find revenue gains elusive. Despite having 36 percent of the portfolio's properties at occupancy levels of 95 percent or better, the market conditions are such that leverage remains with the new prospect and with our existing residents. This remains our biggest optical today, and will remain so until the key drivers of our business improve. And we continue to monitor safe and local municipalities, many of which are faced with large budget deficits for information regarding where taxes might head in the near future.

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 (inaudible) to single families. Our continued focus on managing the downside including on-going emphasis on our lease management efforts and limiting the number of month-to-month leases has allowed us to eliminate the need for excessive leasing needs in any given month.

Our April performance would indicate that recent trends will continue. However, unlike the first quarter, our second quarter gained a lease exposure has actually reversed, albeit marginally, at about $24,000 to existing leases, which would indicate that the downward pressure on revenue may be easing slightly.

Sixteen markets are projected to show improvement. Thirteen markets are projected to decline with 28 remaining flat. Let me expand on that a little because I think it bears repeating. For those leases maturing in the second quarter, if we apply the rents we executed in our March leases to those rolling in the second quarter, we would actually see overall rents increase $24,000. Again, this compares with the $500,000 decline that we mentioned on our fourth quarter call.

Our expectation for the second quarter would be as follows: first, on a year-over-year basis, revenues down in the 0.5 percent to 1.5 percent range; expenses up 1 percent to 2 percent leading to a year-over-year decline in the 3 percent to 4 percent range. As a side note, we would expect this to be the last quarter where we would post a significant year-over-year decline based on relatively difficult comparisons to last year. And finally sequentially, we would expect a seasonal improvement in occupancy and decreased pressure on rent to provide slight sequential revenue improvement which in conjunction with some utilities relief from a sequential perspective to lead to NOI improvement in the 0.5 percent to 1 percent range sequentially in the second quarter.

With that, I'm going to turn the call over to Mark.

Thanks, Kevin. I'm going to give you a brief update of the status of our portfolio repositioning. This quarter we sold one apartment community in Phoenix for $10.2 million and realized the gain of approximately $1 million on that sale. In addition, we sold a retail center in Virginia for $2 million, and we closed on a future development site in Dallas for $3 million. Our development pipeline of 1,120 units remains relatively insignificant.

And to summarize on schedule A at the press release, the first quarter has been a busy one for our acquisition group, as we are working on a pipeline that totals almost $1 billion in opportunities. Over 25 percent of the pipeline represents opportunities in California; 35 percent are located in Virginia and Maryland, with about uniquely distributed between Florida and Texas. The cap rates of some of those acquisitions range from a low of 6.75 percent to a high of 8.5 percent. We currently have approximately $200 million tied up with the potential to close those deals by the end of the second quarter.

On the sales front, we have $70 million in assets that are under contract and/or NOI. These are scheduled to close in the third quarter at an average GAAP rate of 7.7 percent. If these sales close as expected, we will exit four more secondary markets. In addition, we have another $384 million listed for sale in nine different markets. We're seeking to average cap rate with 7.5 percent or better, but will continue to manage the timing of the sales so they match up with acquisitions in order to minimize any dilution and keep it at an immaterial level.

Last quarter I talked about the actual forms of our acquisitions and indicated that the proxies were performing closer to a 7 percent cap versus the original projections that were in the 8 percent cap range. A lot of companies do not disclose this information on their acquisitions, but I would point you to the task in 6 A and 6 B of the press release. You can see there that the acquired properties are showing positive growth in revenues, NOI, and occupancy. We're starting to see the results for planned re-tenanting process. We're improving the creditworthiness of the tenant base in these new properties, and we are now seeing trends on those properties starting to improve and move up. To summarize, we expect to be able to report some significant activity by the end of the second quarter that will place us further down the road to our repositioning strategy.

I'll now turn the call over to Ella.

Thanks, Mark. We had a busy first quarter that resulted in some very positive transactions for the company as we continue to strengthen the balance sheet. First of all, we obtained a new three-year, $500 million unsecured revolving credit facility. This facility replaces the company's $375 million revolver and $100 million unsecured term loan. The facility is co-led by Wachovia and J.P. Morgan with a total of 16 participant banks. We significantly improved the pricing by 25 and 30 basis points respectively, which assuming an average outstanding balance on the revolver of about $225 million is roughly $600,000 reduced interest expense annually. This savings is already in our previous guidance.

Second, in the first quarter, we had $107 million of unsecured loans that matured with an average interest rate of 8.34 percent. As we mentioned on our last call, we planned to issue bonds in July to refinance these maturities. We had a window in February where rates were low, our spreads were tight, and there was an unusually high demand for five-year paper, so we issued $150 million of five-year bonds at 4.5 percent. Those bonds were issued at a 169 spread, and are actually trading today at a spread of 145. When we refinance an issue debt, we're always cognizant of our maturity schedule. This issuance fit very nicely in our 2008 maturity slot and stayed with our goal to have no more than 12 percent of our $2 billion of debt to mature in any one year. In our guidance, we still have another $200 million of bond issuance factored in for later this year.

On other important issues, we had no maturities for the balance of this year and only $150 million of debt with a 2004 maturity, so no exposure on that front. With regard to our remaining swaps that were put in place in 2002, we had $54 million burning off on May 15, and another $100 million on August 1st. They'll convert from an average fixed rate of seven and-a-half to live (ph) plus 90. And again, this improvement was in our previously provided guidance.

Floating rate debt is at 23.3 percent and an average interest rate of 1.84 and approximately half of that balance is our revolver, which by its nature is floating to avoid any breakage on live war traunches (ph). So that leaves only about 12 percent of our debt that floats, but could be converted to a fixed rate on about two weeks notice. So there's very prudent exposure to any interest rate risk.

Our fixed charge coverage ratio ended the quarter at 2.21 which is roughly flat from last quarter, and our unencumbered asset pool is strong at 62 percent of assets. And this is significant, but I would like to highlight it. We do have $2.5 billion of unencumbered assets, which is up from $2.4 billion last quarter. It's a very important measure of our balance sheet strength. In closing, we continue to strengthen the balance sheet in terms of fixed charge coverage ratio as well as reducing our refinancing risk and reducing exposure to any upward tick in interest rates.

And so, now I'll turn it over to Chris.

Thanks, Ella, and greetings to everyone on today's call. I have three things I would like to cover with you today. First, confirmation of our previous 2003 guidance; second, last week's $3 million share stock offering; and third, our G&A run rate.

First with a look at guidance. As we indicated in our press release last evening, management is affirming its previous range of guidance for 2003 funds from operations of $1.51 a share to $1.59 a share, with our internal target still set on the midpoint of that range. Operations are generating rents and occupancies within our expected range. And as Kevin pointed out, the revenues remain essentially flat from month-to-month, indications are that we will achieve our goals of holding occupancy while moderately increasing collections per occupied unit as the year progresses. As Mark described, we have a significant amount of transaction activity underway on both the sale side and the buy side, and we remain focused on transacting this business throughout the year without any dilution to our earnings.

We had modeled (inaudible) remaining flat throughout the first half of the year with a 50 basis point increase occurring in the second half, which now could prove conservative. However, as Ella indicated, we did issue $150 million of 4.5 percent unsecured debt in February versus the 6 percent issuance that we had previously forecast for the June time frame. So our forecast for total interest costs remains in line. And let me remind you that $154 million of our high-interest rate swaps will burn off in the next two quarters, resulting in reduced sequential interest expenses.

Our performance through one quarter combined with indications of positive trends would normally lead to us begin tightening the range of guidance toward the midpoint. We believe there remains sufficient uncertainty in today's economic environment to behoove us to hold the wider range for another quarter and see how the second quarter plays out.

Turning to the events of last week, why raise equity now? Last week our shares of common stock reached a split adjusted all-time high, presenting the company with an opportunistic window to issue common shares and improve our balance sheet. The achievement of net proceeds of $16.41 per-share represented a discount of only 3.3 percent, up $16.97 issue price. We believe we will be able to execute the repayment of certain debt and the repurchase of certain preferred securities using the proceeds of this equity offering on an earnings neutral basis while improving our balance sheet and our cash flows.

Now with a look at G&A. As I indicated during last quarter's call, our G&A expenditure budget for 2003 is on par with the run rate for 2002, and we still expect to meet that target. However, if you take the first quarter G&A and multiple by four, you'll derive a larger number than we're forecasting for the full year. The difference is primarily caused by two factors: One, first quarter G&A bears a significant portion of our annual governance-related expenses, so it has a higher budgeted cost; and second, we increased our accrual for incentive compensation costs for our property operations as well as the executive team this quarter with an adjustment of approximately $900,000 greater than our normal run rate. To reiterate, our total G&A expenses for 2002 were $19.3 million, and we're controlling our spend to meet or beat that level in 2003.

So in summary, no changes to our earnings model or to our FFO guidance of $1.51 to $1.59. Our first quarter performance enabled us to increase our incentive pool reserve by $900,000 over our normal run rate. And last, the strong performance of our common share enabled us to take another step in our balance sheet improvement process this quarter.

So now I'll turn the call back over to Tom.

Thank you for those comments from each of you.

And operator, at this time, we will open it up for questions from the participants.

Very well, thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question today, please press the star followed by the one on your push-button phone. If you wish to decline from the polling process, please press the star followed by the two. You will hear a three-tone prompt acknowledging your selection, and your questions will be polled in the order they are received today. If you are using speaker equipment, it is necessary to lift the handset before pressing the numbers.

One moment, please, for the first question.

Lee Schalop (ph), please state your company named followed by your question.

Bank of America Securities. Dan Oppenheim (ph) is here too.

Tom, can you talk about what appears to be a change in philosophy about acquisitions? I think on the last quarterly call you were relatively cautious, and now you're sounding much more optimistic about opportunity. Has the market changed? Has anything else changed that is causing you to be more optimistic?

Well, I think a couple of things that we see, in particular in the case of California I believe we're finding that we're penetrating that market and have more credibility. And we closed some transactions so we're seeing more people interested in talking to us who are seeking us out for transactions, including OP unit trades. And so, that's been one. Second, we're starting to see more portfolios come to market that are pricing with their debt. And what I mean by this is that we've seen a lot of people who can present unencumbered assets to the marketplace and getting very high-headlined pricing, if you will, out of those. And now we're starting to see people who have debt, secured debt, who are now presenting those assets and coming to the realization frankly, that that debt - that it impacts that cap rate. And so, we're seeing a lot of what I would call realization of pricing coming back to the portfolios that we have been kicking around. And so, that's helped us. I mean, some prices are coming down, and certainly a better image of ourself out in the marketplace as a group that can close deals. That's what has driven my change in change in direction. And I applaud you for picking it up, because it is true.

Tom, I also wanted to see if you could offer some comments on the current conditions. Have you seen anything -- maybe this is for Kevin, also -- in terms of the trends in April relative to the first quarter and how you're looking at the second quarter this time?

I'll let Kevin speak on the operations of the early April results.

Dan, what I'd say is April is more of the same. We're seeing where we're able to maintain the occupancy levels between the 93 and 94 percent range. In fact, last week we ended at 94 percent. The leverage still remains with prospects and existing residents, so again, no real change from the first quarter, which is a positive or a negative, depending on how you're looking at it.

Okay, thanks.

Thank you, gentlemen.

Thank you.

Our next question comes from Rod Stevenson (ph).

Please state your company name followed by your question.

Morgan Stanley. Tom, what regions or markets are worrying you the most at this point?

Well, from an operating standpoint, the regions that I would be focused on, on the negative side would probably be the D.C. corridor. We're seeing a lot of building coming out of that area. Job growth seems to be slowing a little bit. Still positive, but I worry that that development pipeline that is being delivered will threaten pricing in that area. That is one I would put on the caution. Houston, as you can see from our results, took a dip, but we're starting to see some recovery in those numbers, and it's also competing against very high operating numbers last year. So I'm not overly worried about the Houston corridor. I guess that would be my two I would watch.

On the upside, we're still somewhat surprised at the strength of Southern California, that it continues to churn out jobs that development is not prevalent. And we've got what I would call pricing power in that market still. That's what I would highlight. Other areas, you're seeing pluses and minuses. The Florida markets, in our case, Tampa and Orlando, remain stable, and we're seeing on the ground some job growth there, but we remain cautious waiting for the tourist season to kick in. In the Atlanta market, certainly seem to be bottoming out, sustaining our occupancy. We're not getting lost to homeownership that we were a year ago at this magnitude, so I think that has stabled.

Markets that I'm concerned a little bit about would be probably the Nextby (ph) Charlotte and Raleigh, that those continue to show no job growth, in fact slight job losses. But the good news is the development activity has pretty much dried up. Dallas, what I would say there, clearly our team there on the ground has performed spectacular. They're outperforming the market on almost every measure, and what I understand is that they're seeing some bottoming there, not strength, but they're not following any further down the path. Here in Denver where I'm at, I'm concerned here mostly because of existing homeownership seems to be on the wane (ph). We're starting to get a lot of houses come to the marketplace and are staying on the market listed longer. The good news is our product here doesn't compete a whole lot with single-family homeownership. So I would -- if I were an (A) apartment owner in Denver, I don't think I have seen the bottom yet. And Seattle, Portland corridor, pretty stable. No development activity is significant. Jobs starting to rebound slightly, but no pricing power on our rents. But we're holding our own up there. That is my overall summary by market.

Addressing your comments on the (A) there, I mean, not specific to Denver, but when you look across your portfolio in general, either your portfolio versus the sort of comp group. And when you look at the rents right between on a per square foot basis between what (A)'s and (B)'s are able to achieve in various markets, are we looking at a compression these days? Are we looking at an expansion? Where are we throughout the cycle here?

Well, I think you have to also take into effect not just where the (A)'s are enter-playing but how about homeownership in that caliber as well. And so, those are our two direct competitors. And what I would say is what we are not losing is a lot of people to homeownership. That trend continues to decrease. I think this last quarter it's under 20 percent again of our exits went to single-family. So that tells me that the scraping, if you will, the home builder out of our portfolios seems to have subsided. Now the (A)'s coming down and pricing into our price range hasn't really been that prevalent yet, and I don't think we're losing a lot of people to the (A) caliber product, because again we're pricing at $150, $200 a month below the (A)'s need in rent. And so, that is quite a number for a lot of people.

And so, I'm not seeing the same threat out of those two fronts that we did a year ago at this time. In fact, I think it's pretty much run its course, and what I would watch for is the general economy. If we see a spike in unemployment and the (A) guys cut their numbers more, then they could play into it. But boy, they would have to cut it a lot.

Okay. And what are you looking at in terms of expectations for second quarter turnover? I mean, you're about to hit this sort of seasonal high point. Are you expecting it to come down versus the past couple of years in the second quarter?

Certainly in the second quarter last year, I reminded of the second and third quarter where we almost reached the 80 percent caliber annualized number. I would think you would start to see it return to its normal 60, 65 percent level, is probably where I would peg myself in the second quarter. And that is what we're striving on. I mean, we have been, as we have said before, very active in working our renewals 90 days out. And that drives some of my optimism towards it. We're seeing more success in those programs, more focus and I think it's going to help us beat last year's numbers.

Okay. And then the last question, what have you been seeing recently in terms of closing ratio versus prior periods?

You know, we have never been one to publish a lot on our traffic as well as our closing, primarily because I have found it like a lot of measures in life, it doesn't have a lot of validity. My people on the ground, Kevin included, give feedback that, you know, we're seeing higher traffic, that we're closing more, that our effort in retraining our sales force, in repricing our product in our renewals are paying off. But to put numbers on it, I would really look at the overall delivery of rents by market and occupancies and concessions and look at them in whole and tell you that I think we're just getting through the bottom of this and really that gain-to-lease number is awful important. And Kevin went over it very much in detail. But we have it by market, by unit literally, and that points to me that we're getting to the edge of this and starting to see the tick-up. That number has now gone to a positive territory, which you couldn't have said over the last two years.

Okay. Thanks.

Thank you.

Thank you. Our next question comes from Andrew Rosivach (ph). Please state your company name followed by your question.

Piper Jaffrey. Good morning.

Tom, maybe you can help me avoid becoming a part of that group that's thinking too much about turnover. I'm wondering how much following turnover helps you on the expense side. First, I'm wondering what percent of your outbacks is turn costs; and second, how much you guys could potentially save on a year-over-year basis, both in terms of turn cost and the Capex reserve if turnover does go to a lower level?

I think a couple of things I would point to, Andrew, and one it is good to hear you. First, cost per turn. Historically I have seen that number run about 1,100 to 1,300. During this recent period of high turnover and where we thought the pricing power flipped to the resident, we saw that average turn cost probably go from 1,400 to 1,800 and again that is taking in the wide range portfolios that we manage and own. So that was the first thing we saw. The impact, you can do the math. If we start dropping 5, 10 percent of that down, you'll start to see our repairs and maintenance costs decrease. But what we're doing is we're committing to re-invest those dollars, including our Capex dollars, in improving the quality of the product that we're presenting. So you'll see us do more paint jobs, get ahead of maintenance by putting in a preventive maintenance program. So I'm not certain that I would immediately take all of those dollars to the bottom line. I might take more of them and channel them back into improving the quality of our product.

Yes.

So we'll look at it and continue probably look at our disclosure in the second quarter and try to isolate cost per turn and disclose that, but also tell you what we're doing with our dollars.

You wouldn't happen to know that 1,100 or 1,300 could -- how much of that you capitalize and how much you expense?

Well, typically you're going to find about 75 percent of it is expense, 25 percent capped.

Got you. And I wanted to switch over to Ella. I apologize. Thanks for all the guidance that you gave on capital issuance, but I found out the hard way that if you move a debt issuance from one quarter to the other it can really change your numbers. Can you give any additional detail on both the timing of when you may do some debt issuance, and also what the maturity of that might be?

We had in our previous guidance talked about $350 million of issuance, with the first one initially pegged at July 1 at 6 percent. We did in February $150 million, same dollar amount, but at 4.5, so basically it was neutral to the model. The second part is that we still have $200 million modeled for the balance of the year, and we'll use that to offset the $154 million of floating rate conversions when the slops burn off.

So do you think that is the way to model it is to match-fund it when the swaps burn off?

I'm not sure that we're saying we're going to match-fund it any more than we match-funded the February issuance. We're going to look at sort of the timing of the demand of the money and then see if there is a window of opportunity. And clearly when we issued those $150 million in February, initially modeled it for July but it is hard when you're looking at it and have that kind of a window not to take that timing. So it's really on that sort of a basis. We'll continue to monitor the maturity schedule and those swaps burning off, and then the use of the proceeds and what their rates on that bond issuance would be.

Okay, just let me ask you this, you mentioned you tried to match up your maturity schedule where you don't have too much debt rolling. Kind of what is the sweet spot in terms of the maturities where you think you'd be issuing debt?

If you look on our website, we have got the maturity schedule by year and you can sort of see how we're planning those maturities and see that we're looking to make sure we don't have more than, say, 10 to 12 percent return in any one year.

Oh, I'm just being - I'm being lazy, Ella, and I was hoping you could give me what the sweet spot was.

The window in the ten-year plus.

Okay, great, thanks so much.

So that will probably be. And rest assured, what we are weighing is not trying to be the perfect market timers, that this is a volatile market but as you can see, I haven't heard what Greenspan has had to say today. I doubt that he's going to cut rates, but we're watching those events week-by-week and anxious to term out the rest of our debt and fix it. So we'll be very sensitive to the pricing as well as making sure our hedges don't go uncovered.

Terrific. Thank you.

Thank you, Andrew.

Thank you. Our next question comes from Jonathan Litt (ph). Mr. Litt (ph), please spell - or, I'm sorry, say your company name followed by your question.

This is Jordan Sadler with Smith Barney here with John.

In the context of Mark's comments regarding acquisitions and dispositions, I was just wondering to what extent success in the area I guess of dispositions would translate into success and reducing the number of total markets? I think you have 57 markets or so and you had a goal of reducing that by 10 or 15 or 20 markets.

Well, what I stated earlier is that what we have on the board now with $70 million in sales scheduled for the third quarter would get us out of four markets. The properties we have listed that we are seeking attractive prices on would exit us out of nine more markets. So...

What was the value of those?

$350 million.

That is the nine markets, right?

Right. So if we get all of that done, which as you know, we probably won't get them all done, but if we did that would be 13 markets. We have been pretty good potential to whittle that number down this year.

I guess associated with reductions in operating expenses, are they factored into guidance at all yet, or not really, Chris?

Not really.

Okay.

The property operating team pretty much stays intact.

Okay. And then you had mentioned property tax expectations. You are saying close to the municipalities. Can you talk about what your guidance is for - or your expectations for the full year?

We have modeled property tax increases in about the 3.5 percent range with some markets where we have improvements and some where expense growth is higher than that. But it should average about 3.5.

Okay. Thank you. That is it for my questions.

Thank you. Our next question comes from Craig Loopold (ph).

Hi, Green Street Advisors.

Tom, can you - I just want to make sure I understand your comment that revenues have been consistent over the last ten months, yet we see a sequential decline in revenues from the fourth quarter, the first quarter. I'm trying to reconcile those two.

I'm looking at net rents and looking at not just the same-store portfolio but on balance the entire company.

Okay.

That is one aspect of it. Kevin, what else would you add to it?

Craig, they have been relatively stable as Tom mentioned from a net rental income perspective, where we saw a decline that we weren't expecting was below the net rental income line. So in our fee income, we probably on a sequential basis lost $500,000, and I'd say that in the fourth quarter we did a very, very good job in enforcing the lease and all the fees that are associated with that. Didn't do as good of a job in the first quarter, and that is an area of focus for us. And secondly, we lost a couple of hundred thousand dollars, I'd say, in the business development area, the telephone cable area. And again, I don't think that is reflective of a change in the business development run-rate, just more true-ups in the fourth quarter that we generally see.

Okay. On the lost to lease turning positive at 24,000, is that 24,000 an annualized number?

No, that is for the second quarter.

Okay. Okay. And so if you -- your sequential expectations going from the first to the second quarter, I know NOI you said up half a percent to 1 percent, but could you go through the revenue an expense again? I'm sorry, I missed it.

That's okay. I would expect to see revenue increase along the magnitude of about a half a million dollars to $800,000. The rest of the NOI improvement on the expense side predominantly related to some utilities relief.

Okay. And what kind of pickup are you guys thinking about in, you know, going from second to third quarter and third to fourth quarter? I'm just trying to understand what your expectations are really for the second half of the year in terms of same unit NOI results on a sequential basis?

Well, Craig, I think we have mentioned on a couple of calls that the seasonality of our business, so we would expect that sequentially from second to third, you would see a slight decline. And I think Chris has outlined our guidance declining between second and third. And then I think you'd see a pick-up in the fourth quarter -- I think the fourth quarter will be very, very similar to the second.

Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from Richard Payolee (ph).

Please state your company name followed by your question.

Hey, gang. I have a question. You mentioned you track your 90 day availability very closely and you try to manage that. Could you give me a sense of where that is, you know, what kind of -- take a peek around the corner here. What is the second quarter looking like in that regard versus, you know, the previous quarter?

Well, I could fill in part of the blank and Kevin will help with some other pieces. The first thing I look at is in Q2, how many leases are expiring or up for renewal on the existing resident base, and that number is about 26,000. So obviously from that we would have renewals in -- in fact that tick-up in our occupancy from 93.5 to 94. You can see that we have, in essence, probably renewed a third of those or slightly better, meaning that I've probably got somewhere around 15,000 leases that I have to renew in the next 60 days, May and June. In addition to that, I've got the availability of about 5 percent of the portfolio, or another 3,500. So I have got 18,000 leases I need to go do something with or have an opportunity with over the next 60 days. And we look at our normal traffic patterns and believe that we're going to get some gains there.

And what it really comes down to is can Kevin and his team get some rent pops out of them? And we feel comfortable that we'll be able to not just sustain 94, but get a little bit above 94 in occupancy. And it's now just a matter of what are the leases rolling over and what concessions do we have to offer to get more movement there? And do we have any pricing power? He mentioned that 36 percent of the communities have better than 95 percent occupancy. I would hope that we would get some movement on those. And those that are between 92 and 95, that we don't decrease our net rent. So it's, as you know, a pretty intricate community-by-community game plan. That is the gross numbers.

Kevin what would you add to it?

I mean, I think Tom summarized it pretty well. Just from a philosophy standpoint, you know, we are very, very concerned with occupancy. I think that our belief is that no one wants to live in an apartment community that feels empty, and low-occupancy communities don't feel quite as vibrant as more highly occupied units. We've been very, very conscious on the occupancy side because it allows us the ability to take shots at rent increases. Charlotte, North Carolina is a great example where we have had occupancy in the 96, 97 percent range, which has allowed us to periodically take a shot to see if we can get some rent increases. And in that particular market, we've seen that we can't. Sort of a little bit more color to Tom's comment.

As a follow-up to that, say these 15,000 units that you've got left to do in the next two months for the quarter, how far in advance do tenants generally have to give you notice that they are not going to re-up? Is that 60 or 30 days? And so, of those 15,000, how many do you know for sure you've got to find a new body for?

A good question. Again, the amount of notice really is dependent on the markets we're operating in. Some markets it's 30 days and some markets it's 60 days. I don't have an exact number based on that 15,000 units, but I can give it to you, you know, an hour after the call.

Okay. Yes, I just wanted to get some color if you felt that it was, you know, above normal, or if that big churn that happens in the spring is maybe below normal.

Yes, if you're looking for a qualitative answer, I think it is in line or it's tracking with where it is tracked historically or for the last couple or so years.

Okay.

My recollection is from last week's report, on Tuesday is when we get another look at that, that being today. And last week, Kevin, I think it was 73, 7,400 units looked at it. We see people made progress on that. The typical answer is, is they clip it down. And then we also look at it if it is a 90-day rolling, so it will start to have the July numbers in there as well.

Right.

So we'll be glad to give that information out after we look at today's report.

Fantastic. Thank you.

If you could help us find a few people we would love it, Richard. You get basically $75 for every lease, so, you know...

Is that the finders fee?

Yes, yes, don't quit your day job though.

Yeah, I'm going to try not to.

Thank you. Our next question comes from David Kostin (ph).

Please state your company name followed by your question.

Goldman Sachs. My question relates to capital structure decisions. Could you speak to the thought process that you have as management and the board with respect to decisions on issuing equity? You chose to issue equity twice year-to-date. Could you explain how that process transpired?

I think what we weigh is both the prospects for the company, what our earnings look like. And second, we weigh what the use of the proceeds will be, and third the price. We are continuing to move towards improving our balance sheet. We believe we are close to getting an investment grade triple-B rating back and certainly have moved the fixed charge, which has been a focus, fixing the balance sheet and generating firepower, if you will, that Mark can get out there on the acquisition front.

So I think those are the factors we discussed with the board that we are very sensitive to the price of the stock and we adhere to a policy that we will issue equity above NAB, that we will issue it at a price that is higher than the last time we issued it. And so, that is the rational data point that we use to discuss with our board, and with the market that this last offering of a little over $3 million shares was done predominantly about 70 percent of it retail. And so, we knew the demand was there. You know, these people are buying securities that they're getting a 7 percent coupon on. and the company that has had 26 straight years of raising the dividends. So they're very comfortable with buying that security and the price is very attractive. And just as that is said, we will buy back our paper, our securities, when the price drops.

Thank you.

Thank you, David.

Thank you. Ladies and gentlemen, if there are any further questions today, please press the star followed by the one at this time. There appears to be no further questions. Please continue.

Well, operator, thank you for that. And in closing, I thank you all for your questions, very good questions today.

I would like to close with six key points: First, I'm upbeat on the operating results. It's clear that we're seeing some turns and certainly feel like we've hit a bottom. And we'll press our management team and our communities to deliver on that result. Second, the predictability of earnings, that this company now under this management team for eight consecutive quarters has met the street's estimates. Third, the quality of earnings. We're very transparent. We have no nonrecurring items in our income stream. Fourth, the improving balance sheet and financial flexibility will continue. We have a plan, we're executing on it, and we believe we will continue to strengthen this company's balance sheet. Fifth, a note to the workforce, many of who are on the call today. I'm proud of their performance through this period of time and anxious to continue our out-performance of the sector.

And in closing, the dividend. We have one of the lowest pay-out ratios in the industry which ensures your dividends will continue to flow. Again, I thank you for your time and wish you the best.

Ladies and gentlemen, this does conclude the United Dominion Realty Trust first quarter 2003 results teleconference. We would like to thank everyone for their participation and you may now disconnect.