UDR Inc (UDR) 2003 Q2 法說會逐字稿

Good morning -good afternoon ladies and gentlemen. And welcome to the United Dominion Realty Trust Conference Call. At this time all participants are in the 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'. As a reminder this conference is being recorded today Tuesday, July 29,2003. I would now like to turn the conference over to Miss Claire Koeneman(ph) from FRB Webber Schandwick. Please go ahead.

Thanks. Welcome everyone to today's call. I will refer to the press release and supplemental disclosure that were distributed yesterday as well furnished on Form 8K to provide access to the widest possible audience. In a supplement non-disclosure package UDR has reconciled all non-GAAP financial measures with the most directly comparable GAAP measures. If you did not receive the copy of the documents, they are available currently at the company's Web site at www.udr.com in the financial performance section under earnings call. Additionally I wanted to let everyone know we are hosting the Web cast of today's call, which you can access at the same section.

Finally to be added to the distribution list please call the company directly or me, at 312-640-6745. At this time, management would like me to inform you certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although United Dominion Realty Trust believes the expectations reflected in any forward-looking statements are based on reasonable assumptions and can give no assurance its expectations can be obtained. Factors and risks that could cause results to differ materially from those expressed or implied by the forward-looking statements are detail in yesterday's press release and from time to time in the company's filings with the SEC.

Without further ado, I will like to turn the call over to UDR's CEO, President Tom Toomey, who will introduce the rest of management with him and start formal remarks.

Thank you Claire and Operator for that introduction and lengthy safe harboring language. Welcome to United Dominion's Second Quarter Earnings Call. I'm joined by the executive management team and a number of associates on this call today.

UDR had a good quarter. We beat the Street consensus estimates for earnings and we continue to execute our strategy of repositioning our portfolio into higher growth markets and march forward on improving our balance sheet strength and flexibility. The four keys to UDR's results are first, operations. On the plus side, net rental income remained relatively unchanged for the last 10 months. Occupancy remains stable at 93 to 94% levels. Concession are stabilized at about 3% of gross rent. Bad debt remains low at about half a percent Our T management revenue tools lead maturities month to month and 60 day vacant count remain inside our expectations which ensure predictability and sustainability of our revenue stream. Our gain to lease over the next 90 days has reversed from negative 500,000 at December 31, to relatively flat as of June 30th.

The negatives on the operation side. Net rental income remains largely unchanged from the last 10 months. Little pricing power at the resident level. Kevin will go into more details on these points later in the call and provide you color on our markets. Turning to number two, the balance sheet. We continue to improve on our key measure of fixed charge. We are now at 2.4 times. Secondarily in the balance sheet, our floating rate and debt maturities are all within our plan. We maintain one of the industry's lowest payout ratios, meaning UDR's dividend has room to grow and continue its 27 consecutive yearly dividend increases. When the economy recovers, we hope to accelerate this dividend growth rate.

I would note that we are not finished on the balance sheet. We have a strategy that continues to improve on these metrics and Ella will give you more details later on that. On the acquisition and sales front, Mark and his team have had a successful quarter with $244 million in acquisitions at a blended cap rate of 6.75. These transactions increased our projected NOI for 2004 from California to over 14%. Mark will fill you in on his pipeline of acquisition and sales, as well. Lastly, Chris will discuss the tightening of our earnings guidance for the full year and the reaffirmation of our third quarter earnings range.

Turning to the last point I would like to make, the U.S. economy. Certainly there have been positive signs, large lay-offs are on the decrease, cost of homeownership is on the rise. And particularly the rise in long-term mortgage rates, taxes and insurance. Corporate earnings are rising on soft comps. There is still concern, though. Consumer confidence lags. Homebuilders survey point to optimism among homebuilders. Unemployment as a totality continues to etch up multi-family building continues at a high rate. What do these factors mean for United Dominion's performance and what do they signal to me?

First, disruption in the purchasing sale price of assets. As interest rates rise, it would be natural to expect cap rates to rise. We believe this will create an opportunity that UDR is positioned to capitalize on. Second, we continue to see relatively flat operating results for the balance of the year. With that, I think we might as well get into the details of the call. I will turn over to Kevin to talk about operations.

Thanks, Tom. My goal for the next few minutes is to provide color related to three specific topics. First, second quarter results. Second, outlook for selected markets. Third, a preview of the third quarter of '03. To begin, let's talk about some of the second quarter bright spots. First, our year-over-year NOI decline of 3.8% was in line with our expectations and is a solid number given many of the markets in which we are operating. Second, our sequential NOI increase of .8% included a number of favorable trends we experienced in the quarter, including A, our occupancy level, 93.6% represents .2% sequential improvement. Second, concessions increased 254,000 on a sequential quarter basis, but more importantly, actually decreased slightly on a per move-in basis. Regarding concessions, as we had previously mentioned, we account for concession on a cash basis and believe this line item will be a leading indicator of a market improvement. Along those lines we saw encouraging signs out of Tampa and Orlando, as well as Richmond and Washington, D.C.

Bad debt at zero.6% increased from the first quarter's .5% but remains within internal guidelines and below many of our peers reflecting our effort to maintain our credit quality. Let me expand upon that for a moment because I believe it is important. Despite the deterioration in qualified traffic in certain markets our site associates are maintaining the overall credit profile of our community. Finally, resident turnover at about 69.2% annualized continues to outperform prior years and reflect the increased focus being paid to existing residents. Taking out the seasonality and our student deals our turnover would have been about 59%.

These positives on the revenue side helped offset rent decline of $4 per unit on portfolio-wide basis. Given all that the operating environment remains challenging. First, net rental income momentum remains difficult as we strive to find the right balance between rents, concessions and occupancy. Revenue remains our biggest obstacle to date and will remain so until the key drivers of our business improve. Secondly, we continue to monitor state and local municipalities, many of which are faced with large budget deficits for information regarding where taxes might head in the future. With 62% of our values finalized and 20% of the taxes finalized, we believe we have an adequate accrual for this line item.

With all that said, we expect relatively flat conditions to continue. Our national middle market portfolio continues to help us weather the lack of job growth and unabated multi-family supply in certain markets. As Tom mentioned, our continued focus on managing the down side has allowed us to eliminate the need for excessive leasing need in any given month.

Switching to markets. I would break it down this way. As I look at our portfolio, I believe we will continue to see market-related challenges in Phoenix, Dallas, Houston, Austin, Denver and the Bay area. Markets where we're starting to see some fundamental improvement include Tampa, Orlando as well as the continued strength from Southern California. Finally, markets where you may see UDR perform relatively well despite continued weak fundamentals include Atlanta and Charlotte. Shifting gears a little, let me talk briefly about July in the third quarter. Our July performance would indicate the trends will continue. As Tom talked about, recent analysis on second quarter gain to lease exposure has increased albeit marginally at about a $100,000 for existing leases which would indicate we are still fighting to push the trend in a meaningful positive direction. Most of this gain to lease exposure is in two of the difficult markets I previously identified, Houston and Austin. Let me put the $100000 in perspective, that's on a quarterly revenue base of $143 million or 1-10th of 1%. Related to July, concessions will be in line with June as will bad debt and reimbursement. We will see increase in vacancy related to seasonal market and student deals. Overtime and utilities will be up slightly.

Our expectation for third quarter would be as follows. First, on a year-over-year basis, revenues will be down in the 0.5 to 1% range, expenses up 2 to 3%, leading to a year-over-year decline in the 2.5 to 3% range. Sequentially we would expect the seasonal decline in occupancy related to our Phoenix and Florida markets combined with our student sites to offset any progress we might make from a revenue perspective leading to flat to down 1% on the revenue side. On the expense side, we are anticipating seasonal increases in utilities and repairs and maintenance, which combined with our revenue estimate, could lead to a sequential NOI decline in the 1.5 to 2.5% range in the third quarter. In conclusion, the second quarter met our expectations, a third quarter that aside from the seasonal differences will continue to present opportunities and challenges. With that, I'm going to turn the call over to Mark.

Thanks, Kevin. I will speak briefly about progress in the long-term strategic plan to achieve greater operating efficiencies I am investing in fewer more concentrated markets with higher, long-term growth potential. We made three acquisitions that added quality to our portfolio, which should translate into better quality of earnings in the future. First, we are very pleased in mid-June we added a 1068(inaudible) apartment homes in Orange County, California for $137 million at going in cap rate figured before benefit of renovation expenditures of 6.6%. Here is what we like about this transaction.

First,location. The assets are located in two to four miles from the beach in Orange County, which has one of the nation's strongest job markets and rent growth has historically been very high because of the constraints supply of apartments. Operating efficiencies. It is very difficult buying larger-sized apartment communities in Southern California. Typically, communities that are available for purchase are 75 to 150 homes in size. Communities we acquired were 200, 220, 264 and 384 homes each, a rare find. And they are located within five miles of each other, providing us with immediate critical mass in that market. Also we believe there is return upside. Over the next two years we will renovate the interior and exterior of each community and spend between 14,000 to 16,000 per home and we believe there is upside in the way the properties will be managed by us.

Finally, we raised $87 million of new equity in this transaction through the issuance of OP units and convertible preferred stock at per share price of $16.61 with no issuance cost, which is higher than our last offering on a net basis. This brings our southern California holdings to 6.5% of our estimated 2004 NOI. Our second acquisition, we purchased our minority partner's interest in 1706 homes located in Northern California of Monterey Peninsula for $76 million. At a going in cap rate of 7%, we liked the following things about this transaction. It's in a barrier to entry market. This is agricultural-based economy that generates consistent demand for middle market multi-family housing. Medium single-family home prices are approaching $300,000 at net market, that requiring monthly payment of around $1900. There is virtually no multi-family land available for development and if new product is developed, the all-in cost will require very high rents. Rents that miss most of the renters in the market. We also see management upside in this transaction, United Dominion will now manage these assets with our operating team and we see operating efficiencies available under running 1700 unit portfolio.

This transaction brings our Northern California holdings to 8% of our estimated 2004 NOI. The third acquisition we acquired a 464-unit community in St. Petersburg, Florida for $30.7 million. At a going in cap rate of 6.8%, this is a beautiful community, located nine minutes from our Bay Meadows asset that we already own. So, we've acquired $244 million this quarter at average cap rate of 6 and three quarters. We continue to see gulf and union acquisition opportunities. of course these have long lead times but we're working on a couple of these type transactions. Thats is where we are on acquisitions.

What are we doing on sales? We have approximately $78 million of one-off assets under contract for sale. They're undergoing due diligence and we expect average cap rate of 7.2%. Our plan is to sell aggregate for the year of around $100 million of these one-off assets. Now, in order to more efficiently exit some of our non-core markets, we're working to sell a portfolio of $300 million to $500 million of assets in a staged transaction. We are currently investigating the possibility of either an installment sale or the formation of a joint venture. The structure we are seeking would provide for the receipt of cash proceeds to current steps over 18 to 24 months. Why would we do this?

First, it gives us time to find acquisition necessary core markets at a pace we can execute effectively. This will mitigate dilution. Also, a free and clear portfolio of this size should command a pricing premium. We can take advantage of the favorable selling climate. Other items, we have nothing new to report in regards to the development pipeline and refer you to the attachments for that information. You will note on the attachment 6-A and 6-B that the acquired properties continue to show positive growth in revenue NOI and occupancy. In summary, we continue to make progress towards our repositioning goals. We expect in 2004 that around 75 to 78% of NOI will come from our targeted core markets. That number was 68% in 2001. Now I am going to turn the discussion over to Ella.

Thank you, Mark. In our press release we outlined some of the progress we continued to make to improve the safety and firepower of our balance sheet. Important ratios have improved such as fixed charge coverage ratio of 2.4, which started at 1.9 in this management tenure. And we have unencumbered assets of $2.6 billion. These improvements have not gone unnoticed by the rating agencies which just recently raised our outlook from stable to positive, and that's both from Standard & Poors and Moody's Investor Services. Rather than recapping the press release, I was going to focus my remarks on how United Dominion is positioned with regard to any potential refinancing risk. The way we view this it breaks down into three aspects. One, to access to capital. Two is debt maturity and three-interest rate exposure. I will take each one separately.

First on the access to capital. We positioned ourselves well on this front. On secured debt side we have several secured credit facilities already in place with total excess capacity of $300 million. These facilities not only allow us to add new communities and allow us complete flexibility on wiser substitution if we want to pull one out for sale. We can borrow at variable rate debt but we also have the right to convert to fixed rate, which I will discuss in more detail in a minute. On unsecured debt front, we had successfully passed the bond market for two index deal totaling $350 million in the last 13 months. Our spreads traded in on both bond deals. In fact, we are now pricing closer to triple B than our current rating of triple B minus. The improvement in outlook is also positive for future bond offerings. Finally with regard to access to capital. We've issued common stock five times in the last 18 months. We look at stock price, use of proceeds of making this determination, but this is always an option for raising capital. The second aspect is debt maturity. Our debt maturity as shown on attachment four are insignificant for the balance of this year. Next year we only have $61 million of secured and 107 of unsecured scheduled to mature, which we can readily refinance at much lower rates. In fact, with our new half billion revolver these maturities can be refinanced on the availability on the line.

The maturities are not a threat, then third interest rate exposure. In the second quarter, we had little over 28% of total debt at variable rates that averaged 1.85%. Our revolver was $254 million of the variable rate debt. The balance was for the most part, Fannie Mae agency facilities, which can be converted all, or part of the outstanding balance to fixed rate in about one week. Today that rate would be somewhere between 5.3 to 5.4% on 10-year secured debt. Despite the recent run-up inyeild 10-year rate, all in rates are at historically attractive levels. As we mentioned on earlier calls we do have hundred million of swaps that expire August 1, which will increase variable debt by 5%. We also have indicated previously our plan to issue new bonds or fix existing debt by year-end that would offset this increase in our level of variable rate debt. Once those swaps expire in August, we only have another $68 million remaining and those don't expire until next year. With regard to refinancing issues. We are comfortable with our level of variable rate debt; we have insignificant maturing debt over the next 2 and-a-half years, less than 12% of our portfolio will mature over that time frame. 75% of our variable rate debt can be converted to fixed in approximately one week. Great access to capital and a strong balance sheet. So, with that, I will turn over to Chris.

Thanks, Ella and greetings to everyone on today's call.

With operations in line with our expectations there are not many financial variances for me to highlight. I will take a minute or two to talk about our guidance for 2003 before turning back over for questions and answers. For the last two earnings calls we provided 2003 FFO guidance in the range of $1.51 to $1.59 per share. As Ella and Mark have both discussed, we're managing through our balance sheet and our real estate transactions opportunistically, yet with a commitment to deliver the predictable result that we have previously forecast to our investors.

Our view of the outlook has not changed. Occupancy is holding within the anticipated range and net rents have moderated as we expected. While we're seeing pockets of pricing opportunities, they're not as widespread as we had hoped to see by this point of the year. So absent an uptick in rent in the second half, it becomes increasingly likely that results will settle near the midpoint of our range. In our two previous earnings calls, we indicated that while we continue to work through numerous real estate transaction opportunities, we would manage to control the potential for dilution and therefore for modeling purposes we had assumed no transactions. With the announcement of a series of transactions this quarter, we can be a little more certain about the numbers that will likely play out in 2003. We are now modeling acquisitions in the $250 to $300 million range, and I would remind you that $244 million of that has already been completed through the first two quarters . And we're looking at dispositions in the $100 to $150 million range, all in at negative cap rate spreads in a range of 80 to 120 basis points. Again, controlling deal selection and timing to mitigate the dilutive impact on FFO. Our success to date in completing 2003 portfolio repositioning transactions without dilution results in a tightening of the lower end of our guidance range to $1.52 a share. In April, we issued 3 million common shares in anticipation of redeeming for cash the 25% of our outstanding Series D preferred shares that became eligible for redemption with the appreciation of our share price. At the end of the 20-day notice period, the holder elected to convert these shares to common instead of taking cash.

Although this sequence of events resulted in overall balance sheet improvement, reduced our annual dividend cash outlay by $564,000 and enabled us to proceed with the buyout of our venture partners share of nine communities in Northern California without increasing our leverage, it did result in 1.5 cents of dilution, which is why we are adjusting the upper end of our guidance to $1.57 a share.

The third quarter is normally a slow quarter, given the seasonal slowdown in leasing in the Florida and Phoenix markets and the higher sequential comparisons in utilities and turn costs. These factors, combined with continued softness in the overall markets for multi-family, will result in third quarter results declining somewhat from the second quarter. So we are reaffirming our previous guidance of 36 to 38 cents a share of FFO for quarter three. To summarize, we're slightly tightening the guidance range we first gave back in February. We indicated at that time we would likely see capital transaction activity during the year, but that we would be able to manage the dilution to deliver results within that range.

We remain on target and we're bringing in our full-year FFO guidance range to $1.52 to $1.57 per share, and reaffirming our third-quarter FFO guidance of 36 to 38 cents per share.

With that, I'll turn the call back over to the operator for questions and answers.

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

Our first question comes from Jonathan Litt from Smith & Barney. Please go ahead with your question

Hi guys, it's Jordan Saddler (ph) here with John. Just quickly, mortgage rates, obviously, as you talked about, have moved up in the last five weeks or six weeks or so. Just wondering if you guys have seen any real-time changes in terms of move-outs related to single family home purchases. Has it ebbed at all, or not?

Jordan, this is Kevin. I think it may be too early to see the impact of this latest increase. Right now our moveouts related to home ownership for the second quarter were at about 17.6%, which has trended down slightly from the 20% or so that we've reported in the last couple quarters.

I guess that's not seasonal. What was it last year in the second quarter.

Last year's second quarter, it was 23%, 24%.

So it's down substantially. I guess, moving on, you guys talked about the disposition pipeline and your guidance in terms of acquisitions is 250 to 350, much of it is in the bag. Is there the potential to move beyond that? I understand your guidance, I'm just curious if you have more in the pipeline besides an existing $40 or $50 million.

This is Mark. Yes, we could move beyond that, but what we're really waiting to see and I think would allow us to maybe move beyond that is if this upper tick in rates makes some of the cap rates more attractive, might be slightly up. We certainly still maintain a fairly active pipeline. We're participating in two or three options right now and will see how those turn out. If the price has become more favorable to what we want to see.

This is Tom. I would add to that, one thing that has been troubling in the last 2 years on the acquisition front has been assumption of secured debt. And what Ella and her work on the balance sheet with Chris have given us little bit of capacity in that area, as well as rates moving back up. These are not such a punishing deal to be buying deal that is have existing secured debt on them at the 7% level, let's say. So, it certainly opens up deals that we have passed on in the past that are still out there that we may go back and get if we are watching the rains. We think that would improve under the line. It brings back some of the deals we have passed on. I know we can give you a big large number about the stuff we're looking at. It is a matter of what counts is what you close.

Right.

That's the environment. I'm encouraged by what we see. The levered buyer has gotten a little bit of a punch in the nose and slowing him down a little bit. That is going to help us.

Does that make the negative spread widen a little bit on your sales side of the business, though? I mean, where does the 80 to 120 basis point negative spread stack up against your previous expectations?

I think we have given you quite a range there. What we don't want to do is put too much of a rope around our neck. We want to give ourselves flexibility in that area. We want to be able to execute things that are wide in the long run and not get trapped into the short-run trap. I think we will stay with that type of guidance on dilution and will do little bit better than that is my estimation. We'll just keep you posted.

OK. I guess one last regarding the 5 million shares you filed a prospectus in the beginning of the month, the sale. What is the expectation in terms of timing on selling that stock?

Jordan, this is Chris Genry. I can respond to that. You probably noticed we announced controlled equity offering program without much fanfare. It is not intent to issue, but intent to add opportunity to capital-raising capability. This program gives us a chance to see block trades that are taking place in UDR shares off the floor to entertain reverse inquiry for stock and participate in those transactions as we see fit. Our view of this is similar to the MTN program that we have in place for debt and gives us a chance to do small opportunistic issuances at a very low cost as we see those opportunities arise. We can time them very well with uses of proceeds on one-off property acquisitions or whatever. It is an efficient less dilutive approach to issuing equity as we need it. We currently don't have plans to push the 5 million shares out, it is just a capability.

So, I guess this would go for Ella, as well, you guys are comfortable at 28% variable debt rate at this point in time? I know you have plans to do some fixing later in the year, I don't know what the exact timing is, but with rates moving up do these 5 million shares going to be use to reduce the revolver any time soon?

No, the 5 million shares is not anticipated to reduce the revolver, as far as our level of variable rate debt, we are comfortable with that, a lot is keyed back to what I said earlier about the flexibility we can convert that if we so desire to fix on I short-term notice. As far as the impact on remaining earnings, I saw the piece you put out. These are tied to Libor and DDS, the general consensus is you won't see rates increase in the next 12 to 18 to 24 months and even the Feds indicated their desire to keep those rates down.

OK. Thank you. That would be all.

Thank you. Our next question comes from Lee Schalop from Banc of America Securities. Please go ahead with your question.

Thank you. Karen is here, too. Your comments on leveraged buyer getting a punch in the nose, does that suggest cap rates have started to move up on the apartment market?

I think -- what we are seeing is cap rates are starting to get renegotiated at the closing table and a lot of sellers are saying, you know, we're going to go with people who are not so leverage sensitive meaning they pick more to the rates than a levered buyer. That is just feedback from the sales environment. I think you're seeing if rates continue to climb, let's call treasury at five, will that translate to cap rates moving from a current 6.5 to 7 and a quarter, I think the market will take sometime to swallow 75 basis points on the cap rate. What it is, causing hesitation in that trade at the closing table and we see that as a opportunity that many times we can just jump in there. We are that as sensitive to 90% levered transactions many of these levered players are using. Mark, what would you add to it?

Well, Tom, as you said, we are waiting to see how this plays out. It takes 60 to 90 days for assets to come on the market and see how the players sort out. It has been competitive the first six months. I think we are seeing just a little bit at the closing table as Tom said, some resistance. So, we will to see how that plays out in the next 90 days and report back in how it is doing.

Then, follow-up for floating rate debt issue. What assumption are you using for cost of the floating rate debt for the balance of the year in the guidance?

We are assuming that Libor, which is what most of debt is tied with DDS, those rates remain flat for the balance of the year.

Thanks. Karen has a follow-up question.

On large package disposition, $300 to $350 million on the horizon, when would you anticipate the earliest timing we could see something like that? Does your negative spread guidance of 80 to 120 basis points apply to that, as well?

This is Mark. Yes, that spread definitely applies to that. We've got three different parties really as minimum that are interested in this type of transaction that we have been approached by and are in discussions with. You know, I think best case of when this would happen would be towards the I'd say the October, November timeframe, sort of on a best case when you consider the due diligence required on that type of transaction.

OK. Thanks very much.

I would add to that, Mark is currently got three different bidders in that type of portfolio situation. So, we're pretty comfortable that we're going to get a transaction done in that range. Couple other things I would add on the balance sheet to make sure there is clarification. Our preferred Ds, $100 million of those will convert in December. That will be an annual cash flow savings of around $1.5 million and We will improve our fixed charge by another 10 basis points. That is a positive that may not be in your models. The other element we have given prior guidance on was our desire in December when it made sense given current swaps expiring to go with $150 million at 5 and-a-half unsecured. I think we've given that guidance prior to it and that is in our current range, as well.

So, that would bring floating rate number down. We are keeping an eye on that. We are not promising, but saying it is already in our guidance.

Our next question comes from Andrew Rosivach from US Bancorp Piper Jaffray. Please go ahead with your question.

Good morning. I would like to start with a couple questions for Kevin. I don't know if you have quotes on some of your non-same-store acquisitions you made in the last 12 months and where they are coming in relative to initial yield expectations?

Well, as I refer to, the exhibits, we're seeing improvement on those. Our last few acquisitions have been coming in or better at what we projected at. That is how I would characterize that. We're seeing fairly steady numbers on all those acquisitions the last six months or so.

OK. And also I was looking through your markets. I don't know if they are there for this, but interestingly enough, some markets showing good growth are performing well on year-over-year expense basis. Has there been any reduction in turnover marketing costs in some markets that are performing well on the revenue side?

When I look at the marketing cost related to get a resident in the door, we've really are not seeing any savings on the admin and marketing side. In fact, on a year-over-year basis, our admin and marketing costs were up 6.4%. In certain markets, I think we're doing a better job in terms of how we're allocating those marketing dollars. There is no real trend there.

OK. Say in DC or Southern California, is any of the favorable expense comparison you are having on a year-over-year basis, any kind of margin improvement because of turnover or anything like that?

I think it is more related to turnover as opposed to us doing a better job managing that particular expense line item.

Got you. Tom, just one big picture question. You've made a big step in the (inaudible) California picture. I am sure you think about the economy. How do you think they get out of this fiscal crisis and can the golden calf, if you will, survive it?

Boy, at my last account, there was 34 gubernatorial candidates and each has their own solution. Lee probably would have a pretty good guess on who might win this. I think California is this. It is a heck of a driving machine for jobs. It is certainly has two of the major imports or immigrants in Seattle and southern California. It is certainly the gateway to what I would call the Mexican economy. So, to me it is just going to keep cranking out jobs. And the way if that state is going to have to solve its fiscal problems it is going to borrow money. That is the only way it will cover its deficit. None of these gubernatorial candidates will win running a raise taxes format. They will borrow it, they have to find a way topay it off over time.

The good news about the economy, it generates jobs and people and that might be said for the 2004 presidential election, whoever can demonstrate a plan to pay off the deficit, which we have all signed up and said it's going to happen, i.e., the deficit, it is going to win. So, I sat back and wait. I don't see multi-family being exposed in that area. I know from time to time it kicks up as rent control. I know Prop 13 has a chance to be repelled or slightly modify they are going to attack commercial space. So far the proposal that have been put forth on that have been limited to commercial and industrial office space, not multifamily. So, we feel like it is sliding in the right direction.

While it might suffer for a couple years, it will crank out jobs. I think our exposure in the long-term basis, we'd like to see 20 to 25% of our NOI coming out of that state. And we're well on our way and we certainly like the price point that we're entering that market both in product and what we're paying. So, I'm encouraged by our progress.

So, you think the odds of California getting cute and doing a single-family carve out from multi-family on 13 is pretty slim?

We haven't seen anybody throwing addendum to the bill that would encompass us. I won't say when it is behind closed doors, there won't be fights. But, right now we see no one making that proposal and you know, as soon as you put that in there and everybody realizes the renters are going to have to bear some of the cost, that's going to go back to "Gosh, I don't want to see my taxes go up." Look at Davis, I mean he shot himself when he said, "Your car costs are going to go up." What do you think is happening when you have renter population and say your renter is going up because youre the candidate to promote Prop 13. Everybody wants business to pay for it. They don't want to pay with their votes. So, that is how I see it coming out. But, we continue to monitor it and certainly have an active and strong apartment association in that state. So, we'll see.

Great.

If you have an idea on which of the 34 wins, let me know.

You bet. Thanks.

Thank you. Our next question comes from Rob Stevenson from Morgan Stanley. Please go ahead with your question.

Good afternoon, guys. Tom, you talked about $100 million of one-off dispositions this year and 3 to 500 million in a portfolio. Once you get through the 4 to 600 million of dispositions in the back half of this year, what does that leave you with in the portfolio that you really don't want to own longer term dollar value wise?

Well, two things. First, what would be the value of our non-core markets and what are we trying to push out? That number would be slightly under 20% on non-core markets of our NOI. In addition, there are assets in our core markets, which we would want to trade out of and improve the quality of. So, you're going to continue to see us an active seller beyond the non-core, core market strategy. And I think what we will do in supplemental disclosure, probably starting in '04 is give you a little bit more facts behind that. What I would say is we've gone from about 65% when we started in the company in core markets to now we're closing in on 80%. If it takes me a couple years, which we have been at it for 3, 2 and-a-half, that is fine with me. I'm not in a rush to destroy shareholders value. I am interested in doing it to maintain earnings, growth and dividend security. I can't really tell you pure value, I guess it would probably be 700 to 800 million would be a value on the non-core markets that need to move out.

OK.

I would remind you that given what we have on the current drawing board and what we've already executed, that would probably be close to my head about 850 million we have sold over a three-year period.

OK. You guys talked about the difficult acquisition environment still. Does that cause you to rethink or to think about expanding some of your development stuff? I mean, is there a situation under which in the back half of this year you guys are going to wind up starting more than one or two assets?

My guess on the development is one, I recall the first time I talked on this call, it was one strength I saw in the company that I didn't have the perception of before coming to the company. We are more interested not necessarily in ground up, but in the value that we can create by buying assets such as the ones we just did in southern California with where we come in and put 15 to 20,000. I would see our focus moving away from ground up to more into the rehab repositioning and that's where I would focus that group. I don't see us starting a lot of ground up primarily because it is hard to build to middle market product. It is easy to build to class A. And that is not been our forte and not in our business edgy to be Class A operator that nature of assets. We really want to focus middle market stuff. So rehabbing is where we are focused.

OK. How have you guys been doing with fighting real estate tax assessments? How has that been going?

Here is what I report and we talked about it this morning. 63%, 65% of the values in our assets -- I'm sorry, Kevin reminds me 62%, has been finalized. We're going to keep it inside of 3% for the year-over-year increase in taxes. We've got 38 to go, feel comfortable in those markets that are accrual is sufficient. You never know how these things go when you get to litigation. But, I think we will keep it inside of 3%, which is to me a success. As you recall, a year ago we added Michael Rogers out of Arthur Anderson Dallas, who ran the appeal process there. And he's been very successful and brought a lot of bright, strong ideas. I'm grateful for getting it under 3

And last question. Sort of gazing into the crystal ball, what do you guys expect to start seeing positive year-over-year same-store NOI?

Rob, good question. We've hoping to get same-stores about flat. Beyond that, hopefully seeing mild uptick to the positive.

OK. Thanks, guys.

Thank you. Our next question comes from Steve Swett from Wachovia Securities. Please go ahead with your question.

Thanks. First an operating question, Kevin. You mentioned that there was reducing turnover for people leaving to buy single-family homes. Where are you seeing the increases in turnover where people are going now more than they were say a year ago?

Uh, let me get that. I've actually got that.

Kevin is filing through papers. Steve, jump on the other question.

What specifically were your concessions per unit? You mentioned they were down on per unit basis, from what to what?

Well

We are seeing mild uptick in terms of chasing houses in Dallas, in some of our secondary markets we saw mild uptick in Eastern Shore, pretty significant. Some of the areas in Florida and we're seeing a little bit in Atlanta.

Where else are they going, Kevin, across the portfolio to a greater degree than buying homes? Are they going to other apartments more or are they moving back home? What else are they doing?

They are doing a little bit of everything. Those trends, Steve, haven't changed much from where they have been the last three or four quarters.

Your turnover sounded like it wasn't changed overall, but you were seeing fewer people going to buy homes. I was trying to figure out the incremental uptick was?

Without the seasonality, our turnover was actually down.

OK. All right. And concession on pre-unit basis?

Concessions on pre-unit basis, I don't have the number. Went from a move-in number per move-in from 396 to 380 on a move-in basis.

OK. Tom, the portfolio transaction you were looking at doing, would that be like the San Antonio portfolio, exit from a market or is it a more diversified-type portfolio you would put together?

This is Mark, it would be diversified. We would knock off several secondary markets with the transaction, plus lighten-up know up asset necessary core markets we would like to exit.

Tom, last question on your follow-up out performance program. You restricted the program or the Board restricted the program to fewer executives rather than more. Could you just comment on what the thought process was there and focusing the program more? Also, what was the initial price for the new program?

Initial price 17 and a quarter, meaning we would have to get north of the $19 share price. We would have to create close to billion dollars of equity before it would pay anything to the executives on the second program. On reducing the number of executives from the first pool which was close to 30 to 6, this time around we talked with the 24 people who had not participated and found many of them were uncomfortable with writing a check which in many cases was near six figures to buy the option. Many of them were confident and comfortable with the company, but to ask someone who's making $100,000 a year to turn around and write a $100,000 check to the company was a very steep price and they felt more comfortable with a long-term incentive tied to performance that had less upside but less down side, as well. So, it was an election event.

Second, we looked at the range of executives and the value they can add and create and determine the pay-out ratios were more tolerable for the company in terms of long-term incentives that pay two and three times their base pay over a three-year period. So, we've not lost what I would report out of the top 50 people in the organization since I've been here, we've lost two. So it is not hurting my retention. I don't believe it is hurting my performance or their incentives.

OK.

Steve, this is Chris I would just add. We did implement a new plan for those people that is driven by a matrix of performance. Our same-store results as well as performance of our stock price against the peer group and total return to shareholders. They are participants in equity-driven compensation program within our G&A structure.

OK. Thank you very much.

Thank you. Our next question comes from Jonathan Minium from ING. Please go ahead.

Hi, guys. Just had a question about job growth. What are you seeing in some of your markets? Are some markets adding jobs? You know, can you touch upon your bigger markets briefly?

Well, I think pricing job growth to me has been Atlanta, starting to produce jobs. San Francisco continues to lose jobs. Dallas flat. Austin slightly up, mostly there you are seeing buildings getting curved. The group I watch most for job numbers and production is geometrics. You can access their Web site and see the reports in detail. They live 164 markets. It is pretty good data. But, on the ground DC, Atlanta have done well. Orlando is producing good job numbers now. Those would be what I would highlight.

Thanks.

At this time, there are no further questions.

Well, operator, we're hold for a second if anyone else wants to call in, we would be glad to field that question. Why don't I start with closing comments and let everyone get on to their next earnings call. First I thank you for your time. I know you have many things you could be doing today and I appreciate your time listening to us and engaging us in a conversation. What I have six points to close with. I am upbeat about the operating results. This operating team is coming together and doing a very good job. Second, the predictability of our earnings is evident. UDR for nine consecutive quarters has met or exceed Street estimates. Third, the quality of the earnings is transparent. We have no non-recurring items on the income or expense side. Third, the improving balance sheet. We've highlighted where we are, where we have come from and given you a view of where we're headed. It is a financial strong balance sheet with flexibility. Fifth, the workforce, many of who are on the call today. I'm again proud of their performance. They have delivered on their results. Last, sixth, safety of the dividend. We have one of the lowest payout ratios in the industry, ensuring we will continue to flow. Thank you for your time and please take care.

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