UDR Inc (UDR) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Dominion Realty Trust conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, Tuesday, October 28th, 2003.

I would like to turn the conference over to Ms. Diane Huttwer of FRB Weber Shandwick. Please go ahead, ma'am.

Thanks, and welcome to everyone on today's call. The press release and supplemental disclosure were distributed yesterday as well as furnished on Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package, EDR has reconciled all non-GAAP financial measures to the most directly comparable GAAP measures. If you did not receive a copy of these documents, they are available currently on the Company's web site at www.EDR.com in the Financial Performance section under earnings calls. Additionally, I wanted to let everyone know we're hosting a Webcast of today's call, which you can access in the same section. Finally, to be added to the company's distribution list, please call the company directly or me at 312-640-6760.

At this time, management would like me to inform you that 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 believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in yesterday's press release and from time to time in the Company's filings with the SEC.

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

Hello, and welcome to the United Dominion third-quarter earnings call. My opening comments and management's comments will take about 30 minutes, a little bit longer than normal, to give us time to provide guidance for 2004. Given that each of you have already read the earnings release, we will refrain from restating that information and instead will focus on adding some perspective to its contents.

Quickly, the basic agenda for this call is my overview of the third-quarter operations and UDR's prospects for the future. Ella Neyland will review the balance sheet and interest rate policy; Mark Wallace will cover acquisitions, disposition activity and the results; Chris Genry will discuss third-quarter financials, the impact of accounting pronouncements, the fourth-quarter '03 guidance, and full-year 2004 guidance. I will then close the call with a brief overview of selected markets and then open it up for Q&A.

Third-quarter operations. In essence, the quarterly operating results were pretty much what I had expected. No material surprises, positive or negative. I believe that it's important to reminder those on the call that seasonally, the third quarter is our slowest quarter of the year due to higher maintenance cost, higher turnover of residents, and our student residents coming back from the summer. That said, I would highlight certain measures on either a year-over-year or sequential basis that are meaningful for comparisons.

First, on the positive side, occupancy was up 30 basis points year-over-year, and flat to up in 61 percent of our markets. Concessions were down 13.5 percent year-over-year, with 52 percent of our markets decreasing over prior year. Expenses were up 2 percent year-over-year, which is a solid reasonable number. Resident turnover was down 10 percent year-over-year, representing significant progress. Our gain to lease is expected to see improvement in the months ahead with 2 percent or $170,000 per month.

Negative -- rental rates per occupied home were down $2 per month on a sequential basis, although I do not expect to see this slide to continue.

Second area is our prospects for the future. I think it is important to look at our prospects, and for management to tell you where we are focused on creating shareholder value. There are five primary areas -- management's track record, financial resources, the overall economy, the primary drivers of our business, and lastly, specific opportunities to create this value.

First, under management's track record -- I would point to three critical points here. Acquisition dispositions. During the last 2.5 years, this team has acquired 6,300 apartment homes with a gross value of 510 million, and sold 10,700 apartment homes with a gross value of $520 million. We know how to find opportunities.

Property operations. UDR has led the national REITs in terms of same-store sales, NOI growth in each of the last six quarters, and has been in the top quartile for all multifamily REITs in four of the last six quarters.

Alignment of interest. Management now owns 6 percent of this company.

Financial resources. I think one word says it -- over the last 2.5 years, significant progress. Our fixed charge coverage has improved 1.88 to 2.4. Our balance maturity schedule -- we have no year greater than 12 percent of maturing debt -- in fact, only 6 percent in the next twelve months. Our unencumbered asset pool has increased 13 percent to 2.6 billion.

And flexibility -- with this financial strength now, we can take advantage and add what our property management organization can absorb, which is 10 to 15,000 apartment homes, without adding overhead.

The next is the overall economy. At the macro level, the fact (ph) pattern looks good. Fueled by tax cuts, low interest rates, the U.S. economy has been exceeding almost every front recently, the lone exception being job creation. Most economists predict that on October 30th, the Commerce Department will announce GDP growth between 5.5 and 6.5 percent, representing the best outlook for this indicator since 1999. Frankly, since labor markets turn slowly and job creation typically lags in economic recovery, it should come as no surprise that it will take time for the great job machine to fully crank up.

Turning to the drivers of our business -- let's continue with that topic of jobs. According to a panel of economists surveyed by the Wall Street Journal, job growth for 2004 is expected to be 0.9 percent or 1.3 million jobs. Looking at this in more detail, United Dominion's markets appear to have job growth targeted at 1.8 percent annually, or twice the national average -- a good sign for this portfolio. Looking at it from a pure number of jobs, UDR's top 15 markets generate about 98,000 jobs in 2003. For 2004, it is (technical difficulty) estimated that these 15 markets will generate 264,000 jobs.

Where will these jobs be created? They're forecasted to be created in health care, communications, utility, and of course, the government. UDR's portfolio is well-positioned, with over 40 percent of our existing residents, being employed by the sectors. So I think when the job recoveries start happening that are forecasted, we will see it in our portfolio.

Construction activity has been muted in our markets. 2004 forecasts from the National Association of Home Builders states that the multifamily construction will be between 300,000 and 310,000 for 2004, representing a 5 percent decrease over 2003. According to Axiometrics, total residential permitting, both multifamily and single-family, in UDR's top 15 markets is projected to decline 7 percent in 2004. So supply is starting to move down.

Rising interest rates will slow the move to single-family homes. According to the Mortgage Bankers Association, thirty-year fixed rates have increased from their low of 5.9 in the first quarter of '03 to 6 percent today, and are projected to be 6.5 by the end of 2004 and 7 percent by the end of 2005. While not an immediate relief, relief is on the way.

Turning to management-specific opportunities that we have -- and I have eight of them I would like to highlight, so bear with me. First, acquisition pipeline and recent transaction performance. Mark will give you more details on the volume of transactions under contract, but I would say we have over $300 million under some form of due diligence. I'm glad to report that our recent acquisitions in the first half of 2003 totaling 266 million, underwritten at a 6.7 cap rate, are in fact delivering at a 7.5 cap rate.

OP unit transactions -- with the improvement in the share price, the balance sheet, and the track record of 27 consecutive years of raising the dividend, we have successfully negotiated over $100 million of OP unit placements this year alone. We will most likely see more transactions than our peers in the future in this area, due to -- A, our middle market focus, our national platform, and lastly, I think most people have missed on this OP unit front -- that they have talked at great lengths about the demographics and the aging renters, but what they have missed is that the people owning these apartments are aging, too, and many are hitting their retirement years, and OP unit transactions will be more conducive to their retirement plans.

Development -- has historically been a low priority for United Dominion, and most likely will continue for being immediate future.

Redevelopment and ROI -- this is the point in the multifamily cycle where we are focusing more attention on redeveloping our assets in superior locations, where rent growth will be evident in 2004 and 5. I believe you will see us do between 50 million and 125 million in redevelopment and ROI activity during the next twelve months at returns greater than 9 percent.

Operations -- two areas of significant focus -- associate turnover. No surprise -- and shouldn't be to anyone -- that when associate turnover exceeds 75 percent on an annualized basis, we see ourselves struggling to keep our occupancies above 90 percent. So this is an opportunity. Reduce it below 75 percent -- and in fact, we've already been successful and have our turnover down at 53 percent annualized for our associates. That's a 25 percent decrease over prior year. I think this will start showing up in our results in the months ahead.

Marketing -- certainly we have found some best practices in our company -- particularly, I would highlight the team in Dallas, who are outperforming the market by 200 to 300 basis points. We're now taking those practices across the country and preparing ourselves for the next leasing season in February to May.

The balance sheet -- Ella will cover some of this, but conversion of our preferred deeds for $100 million in December will represent a $1.5 million annual cash flow savings. We have hedges and debts maturing of $191 million that are burning at 7.6 percent. We will do better there. And the recent rating upgrade reduced our borrowing costs between 20 and 25 basis points or $625,000 annually.

And lastly, the earnings multiple -- the company currently trades at 100 basis points. Let me repeat that -- the company trades at 100 basis point discount to the industry average. Meaning to me -- we can certainly be at or above the industry average, which would translate into $1.50 to $1.75 in share price appreciation.

Conversation is not complete without some concerns -- particularly, two that I think are evident to UDR and the industry as a whole.

First is utilities. With the recent blackout, we've noticed a trend in the number of municipalities having a "get out of jail" card, if you would, whereby they can pass on significant rate increases if they are associated with building infrastructure. This trend is very disturbing. And we see utilities rising between 8 and 12 percent next year. This combined factors mean that our residents are going to be less receptive to rent increases. We will see how this plays out.

The second is the accounting pronouncements. They confuse the clarity of the true earnings of the company, and I think there are periods of time when investors will have to adjust these. And it will take some time to adjust to the new accounting standards.

In closing, our earnings forecast for 2004 -- we see a wide range of potential outcomes. While Chris will give you the details -- and in fact, if you look at our web site, we have posted his document that goes through the roadmap for 2004 -- you will see overall growth at 1.5 to 3 percent in earnings for 2004, and a dividend increase of between 2 to 3 percent.

Let me now turn the call over to Ella to discuss the balance sheet.

Thank you, Tom. Without going over press release, (technical difficulty) I would highlight that we continue to improve the strength of our balance sheet as Tom outlined. In fact, first part of October, we issued another $75 million (technical difficulty) a 5.13 bond at a spread of 112 basis points that mature in 2014. This issuance fit very nicely into our maturity schedule. We only had 2 million dollars maturing in that year. And once again, we took advantage of a dip in the ten-year rate, we benefited from a better balance sheet, as well as an upgrade from S&P.

So I thought I would take this opportunity to discuss our approach to variable-rate debt. We're very comfortable with the level of variable-rate debt on our balance sheet, and believe that we are in a range where we balance exposure with opportunity. Our variable-rate debt, as we've outlined in our exhibits on our press release each quarter, has ranged between 20 to 28 percent over the last year. But in addition to monitoring our exposure to variable-rate debt, we also analyze our exposure to what we refer to as rate sensitive debt. So let me walk you through our thoughts on how we analyze our exposure to changing interest rate environments, since it breaks down into a couple of main areas.

First, our definition of rate-sensitive debt. We view this as all variable-rate debt, as well as debts and swaps that are maturing in the next twelve months -- and for this company, that's about $740 million. Although our definition is slightly more expansive than the industry uses, we believe it's really the most prudent way to view the impact of changing rates in the short-term.

On the traditional definition of variable-rate debt we have our revolver, which today has about $450 million of availability. We have our Fanny/Freddie debt, which is long-term in nature -- 10 to 14 years -- but 400 million of that can be converted pursuant to the terms of the loan documents to fixed debt on about one-week notice. We have lots of flexibility to term out this debt.

And the second component of rate sensitive debt is maturities in the next twelve months. We have refinancing opportunities in the portfolio because we have $68 million of swaps that are maturing at an average interest rate of 8.1, and we have 123 million of debt maturing with an average interest rate of 7.4. So we take this and we compute various sensitivity analysis with different changes in interest rate, and then we analyze the impact on earnings and free cash flow. So, for example, in this scenario -- if rates were to go up 50 basis points, our rate-sensitive debt expense which actually show a decrease over the next twelve months of about $4 million.

So let me explain why. Although our variable-rate debt expense would go up 1.5 million, because of 50 basis point increase, it would be more than offset by a decline in interest expense of about $5.5 million due to the maturities of the debts and swaps.

The second part of our analysis of our exposure to rate-sensitive debt is we look at the impact of changing interest rates on our revenue. We have engaged NERA, which is a very well-respected economic consulting firm, to develop a proprietary model that helps us analyze the risk and impact of interest rate changes on our revenue stream. And as part of that study that they're undertaking, they have reviewed our operations by quarter for the last seven years, and they found a very strong correlation between short-term interest rates and the impact on our rental revenue. This has always made sense intuitively, and as we work through the development of this model, it will provide us with a way to analyze the negative impact on earnings from a rise in interest expense, but offset by an increase in rental revenue from those same interest rate changes. This correlation creates an economic hedge that results in increased revenue in a period of rising interest rates as determined by the history of our portfolio.

And last but not least, access to capital. At an industry level, capital available to apartment companies has historically been more readily available and less expensive than other property types, since apartments are viewed as more stable. We also have unique financing opportunities with Fanny and Freddie.

And on a company level, we still continue to improve access to capital at lower cost. We have a much stronger balance sheet than we've had in the last few years. We have close to $800 million of untapped availability on our existing secured and unsecured credit facilities, as well as a recent upgrade from S&P.

So to summarize our position on variable-rate debt -- or more accurately, on rate sensitive debt -- we are comfortable at these levels because we monitor sensitivity to changes in interest rate and impact on rental revenues. We have an economic hedge from increased rental revenue because of the correlation to changes in short-term rates. And finally, we have a much stronger balance sheet with existing unused capacity and great access to capital. So with that, I'll turn it over to Mark.

Thanks, Ella. I will discuss the progress we've made on our portfolio repositioning in the third quarter and our expectations for what we will be able to accomplish in the balance of this year and in 2004.

First, what we did in the third quarter -- we added 149 more homes to our southern California portfolio. That brings our total portfolio in this market to around 2,800 homes, which represents over 8 percent of the total company's estimated 2004 NOI. We are pleased that, in spite of a very competitive acquisition market in southern California, we have added over 1,200 units this year to the portfolio at an average cap rate of approximately 6.7 percent -- and as Tom mentioned, we are realizing yields above 7 percent (ph) today. We continue to pursue acquisitions in southern California, but are seeing property sell at cap rates at or below 6 percent. So we believe that we executed these California transactions at favorable prices.

What did we sell? We closed on the sales of five apartment communities that provided a complete exit from multifamily assets in Indianapolis and San Antonio. The asset we sold in Centerville was in a secondary location with limited growth potential. The Lakeland sale was a completion of our windup of our development JV with CSFB -- and it was sold (ph) for a gain of 812,000.

This brings our total sales for the year to 84 million. We are now down to a total of 55 markets in which we operate. While the larger growth markets are trading at cap rates in the mid to low-6s, the cap rates in our smaller noncore markets, while attractive, are generally in the mid- to low-7s.

What are our expectations for the fourth quarter in 2004? We have approximately 73 million of acquisitions under contract that should close in the fourth quarter, and we expect the other (ph) contracts on at least two additional transactions totaling 75 million that are currently under a letter of intent, for a total of 150 million of acquisitions in the fourth quarter.

As far as sales, we have one asset under contract for sale, located in the one-off market for approximately 12 million that should close by early November. Also, we are negotiating the sale of another asset in the $16 million range that is in a single-asset market.

Again, in 2004, our plan is to be net buyers of real estate. I believe that our acquisition team will be able to close, at a minimum, 400 million properties in our core markets, and that we will sell another 100 to 125 million of our older assets in secondary markets.

A year ago, looking ahead at the market, we planned for a balanced program of acquisitions and sales in the $100 to $150 million range. We have exceeded that plan, and have actually bought and sold almost 350 million worth of assets this year.

We believe that our core markets will experience job growth that is above the national average. When the recovery picks up momentum in 2004, it will be a good time to buy. In addition, we're starting to see some differentiation in cap rates related to age, quality, and location. I expect that the range of cap rates on acquisitions will be in the 6-1/4 to 6-3/4 range. Cap rates on assets we sell should be in the 7 to 7.5 percent cap range. I would direct you to Attachment 8 for information on our development activity.

And now, I'm going to turn the discussion over to Chris.

Thanks, Mark, and greetings to everybody on today's call. I'd like to spend my time with you today talking about three things -- earnings guidance, unusual items in our third-quarter results, and the lack of impact on UDR of recent accounting pronouncements.

First, looking ahead to the next quarter and 2004. When we provided 2003 earnings guidance in February, management provided a range of $1.51 to $1.59 cents a share for FFO. And I am pleased to say that despite shoring up our balance sheet this year with over 12 million new shares, converts, and OP units, we will finish the year within that original guidance range.

Through the third quarter, we have reported $1.15 of FFO, which combined with the 37 cents we expect to report for the fourth quarter, will result in $1.52 cents a share of FFO for the year. Although we expect to see sequential growth in revenues and in NOI in the fourth quarter, the quarter will be challenged by the net loss of NOI on properties that we sold versus what we acquired in this past quarter, and also by 1.7 cents of dilution related to common equity and debt offerings in September. Management is confident that our 2003 FFO results will be 37 cents for the third quarter and $1.52 for the full year.

Looking to 2004 is a bit premature, as the extent of job growth that will emerge from the current economic recovery remains a wild card. However, I did want to give you some early indications of how we view the range of possibilities for 2004.

Many analysts that cover the sector have already published the fact that we will have to achieve rent growth and more occupancy growth from where we stand today just to break even year-over-year on same-store results in 2004. For example, our breakeven scenario for 2004 same-store net OI requires a 35 basis point increase in average occupancy, an average monthly collection per occupied unit of $6 higher than what we collected this past quarter, and a net 2.8 percent increase in operating expenses.

Each of those is within reach. In fact, we're already beginning to see rent growth and several of our major markets. However, a scenario where same-store results actually decline year-over-year by up to a percentage point remains possible. Also, the likelihood -- based on what we have seen of this recovery so far -- that same-store results could exceed 2 percent NOI growth is improbable.

So starting from the $1.52 of share of FFO that we will earn in 2003, we see the range of impact next year from same-store results in a range of a negative 3 cents up to a positive 5 cents.

Through September 30, we have acquired 263 million of apartment communities and have sold 77 million of apartments and 7 million of commercial properties. Assuming an annualized NOI growth rate of just 1 to 2 percent on the acquired properties, the net increase of contributed NOI in 2004 for these properties versus the NOI in 2003 for both the acquired and the sold (ph) properties will be 5 additional cents.

As Mark described, we intend to be net buyers of real estate in 2004, putting the capital from our recent property sales and equity issuances to work on an levered basis. We expect acquisitions from now through the end of 2004 to exceed this position by $100 million to $500 million, with transactions closing throughout that time frame at a negative cap rate spread of 75 to 100 basis points, resulting in a net impact on 2004 FFO compared to 2003 FFO in a range of negative 1 to a positive 14 cents.

We have 123 million of debt that matures in 2004 at an average rate of 7.4 percent, plus 68 million of 8.1 percent slots (ph) that burn off in May of 2002 -- or 2004, all of which give us another opportunity to reduce our cost and approve our fixed charge coverage next year. We are assuming that LIBOR will increase by 100 basis points between now and the end of 2004, and that we will maintain floating-rate rate debt in a range of 25 to 28 percent of total debt, and that we will issue unsecured debt at a 6 percent interest rate as needed to accomplish this objective.

If property acquisitions exceed this position by 500 million, we would seek interest cost next year up 8 cents over the share. If acquisitions exceed this position by only 100 million, we would seek interest costs down a penny in 2004 versus 2003.

Our core G&A costs are expected to increase 2.5 to 3 percent next year. But the greatest variance in our overhead costs would relate to our result-based incentive compensation (technical difficulty), such that the total G&A per share would increase a penny if results are the high end of our range, but would decrease a penny if they're at the low end of performance.

Minority interest expense will be down next year due to the acquisition of last quarter of our minority partners interest in our properties in Salinas, CA. We will also pick up earnings next year for the current year technology write-off that I will discuss in a moment. The combination of these two items adds 2 cents a share in FFO next year.

We will be down 9 cents as a result of the share issuance in 2003 that set the stage for the 2004 acquisitions growth.

So to recap our range of guidance for 2004 -- start with a $1.52 cents a share that we'll report for 2003. Add 5 cents on the high side, and deduct 3 cents on the low side for same-store results in the negative 1 to positive 2 percent range. Add 5 cents on both the high and the low estimates for existing non-mature property results. Add 14 cents on the high side for net real property acquisitions, and deduct a penny on the low side for this activity. Deduct 8 cents from the high side for interest cost, but add 1 penny on the low side for interest cost reduction on our maturing debt.

Add 2 cents on both the high and the low end of the range for minority interest and the Realeum write-off. Deduct a penny on the high side for G&A, but add back a penny on the low side.

Deduct 9 cents from both ends of the range for equity capital raised in 2003, and this gets you to a range of $1.48 to a $1.60 cents per share for FFO in 2004. As Tom said, we're posting a recap of this guidance on our web site this afternoon, as I suspect this is a lot of data for you to assimilate.

Management is comfortable predicting that our results for 2004 will fall within that range of $1.48 to $1.60 per share of FFO, and that we will spend 25 cents per share for recurring cap-ex dollars next year.

Our common dividend payout, which currently stands at $1.14 per share, will be increased next year, continuing a 27-year history of increases in our dividend. The exact amount of that increase will be announced after our board meeting in February.

Two more quick things to cover before turning the call over for questions. First, I would like to address three unusual items in our third-quarter results. You will note that we have written off our investment in Realeum this quarter. As many of you know, in 1999 United Dominion was one of three multifamily REITs that joined together to develop the property management software solution that became known as Realeum. Over a period of three years, the company invested both financial and human capital into the development of this software, the costs of which were capitalized on our balance sheet and were to be amortized after the implementation of the software as the expected benefits to be derived from its rollout began to impact our operating results.

When our management team joined the company in 2001, we discontinued the company's involvement in software development, but we continued to provide advice to Realeum as requested, and we continued to evaluate their software solution in addition to others as a future opportunity for our company. In the fourth quarter of 2001, after a follow-on capital raise (ph) at Realeum, we wrote down the value of our investment to reflect the market value of our ownership stake as determined by that venture capital infusion. Although it appears that Realeum continues to make progress with its product and with sales to new customers, they also continue to raise capital as they need to support those efforts, and United Dominion is not contributing further capital, nor is it protecting its existing ownership stake in Realeum from further dilution. Because this investment is illiquid, its true value is not readily determinable, and its realization through any means is uncertain, management has determined it is prudent for us to write the value of our remaining 1.4 million dollar investment to zero, and we have taken that charge in the third quarter.

Partially offsetting this write-off is an $812,000 development profit that Mark mentioned on the Parke 33 asset in Lakeland, Florida. This was developed as part of our joint venture with CSFB. You may recall that we dissolved our JV with CSFB last year, and that as part of that dissolution, we have created a taxable REIT subsidiary to hold the Parke 33 asset as we continued to market it for sale. Both the operating profits of this asset as well as the ultimate gain on its disposition were subject to taxation inside this TRS, and the 812,000 gain represents a true cash-on-cash gain from the development of this asset after providing for those income taxes.

The third item is the catch-up adjustment of $650,000 that was recorded this quarter for capitalized interest on land that we acquired for the development of Rancho Cucamonga, 2000 Post Phase III, and Mandalay on the Lake in Las Colinas. These three parcels were acquired for immediate development, as opposed to being inventoried for later development, and interest cost should have been capitalized on each parcel from the date of acquisition. Approximately $1 million of interest costs were capitalized into these projects this quarter, with approximately $650,000 of that representing a catch-up adjustment.

The combination of the Realeum right off, the Parke 33 development gains, and the interest cost capitalization adjustment net to zero impact for our third-quarter results.

In closing, I also wanted to touch on recent accounting pronouncements that are impacting many companies, particularly those in the real estate business. FIN 46, which will govern whether partnerships and joint ventures must be consolidated by reporting entities, and FAS 150, which addresses the recording and valuation of minority interests and certain other amenable securities, are projected to have no impact on the accounting for our current transactions or current balance sheets for our current or projected earnings. Our unconsolidated activities are minimal, and both qualify, we believe, for continued deconsolidation, and all of our minority interests and our convertible securities meet the definition for equity or mezzanine equity (ph) accounting treatment.

So to summarize -- the fourth-quarter FFO will be 37 cents, and we will report $1.52 of FFO for the year. Our 2004 FFO will be within a range of $1.48 to $1.60 cents per share. There is no net impact on our third-quarter results from nonrecurring items, and there's no perceived impact on United Dominion from FIN 46 or FAS 150 based on our current transactions and entity structure.

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

Thank you, Sir. (OPERATOR INSTRUCTIONS) Jonathan Litt, Smith Barney.

Hi, its Jordan Sadler here with Jon. I guess the first question is just a follow-up on that capitalized interest catch-up adjustment. Will that be the number on a go-forward basis? Is $1 million a good number?

The capitalized interest this quarter -- below (ph) in this quarter was approximately $350,000, and that would be expected to be the run rate. Of course, as we start to put development in place, the number will change. But just on the land fees, the third-quarter expenditure would have been 350.

Okay, and then could you talk about the expected funding of the acquisitions? Will you be using floating-rate debt on a go-forward bases? I guess up until the 25 to 28 percent range, is that --

That would be correct. We currently have about $440 million available on our revolver. Our intent would be to use the revolver opportunistically to take advantage of transactions, and then to do periodic refinances with unsecured debt. I think I quoted a 6 percent interest rate that we have got factored into our model to raise the money to pay down the revolver opportunistically as we like what the rates picture is.

Okay, and then I guess, Tom, you talked about redevelopment opportunities going forward into 2004. One, I was curious how that was factored into your guidance -- the 9 percent returns on $50 to $125 million worth of investment --

It's not in Chris's guidance, because I think if you identified one of those opportunities today, by the time you got it permitted, detented (ph), retented (ph), it wouldn't be but maybe a second half of '04 kind of impact. And I think as we get more and more ramped up in that caption, we will adjust our guidance to be reflective of the dollars that we're putting out. So it's -- as a place saver, telling you what we're going to be going after, what our targets are, particular opportunities today, we have got a number that are under pretty good study. So I think more of that as the year progresses, Jordan.

What would be -- can you give us an example of what sort of -- I mean, would you be -- you said de-tenanting -- you'd be taking a property offline to do this sort of redevelopment?

Well, last time I checked, it's hard to replace bathtubs when people are living in apartments. But I'm willing to try that --

So you wouldn't do it under (technical difficulty) of an apartment, I mean --

No, we're more of the people who do it by building-type program then necessarily individual units. In fact, this level (ph) -- looking at it from, saying, doing $10,000 to $20,000 in apartment home. Currently, in the case of southern California, the four assets that we're doing there -- today, we're getting 7-plus return on them. We think that we can go in and spend about 20 grand a unit on those and get another $150 to $220 in rents in that marketplace.

So that's what we're targeting. Again, I would say that we'll add to our disclosure as these become moved from drawing board and market study to in fact deliverables.

Lastly, just looking at your development schedule, I noticed that you guys lowered expected stabilized development yields by 100 to 200 basis points on each project. What was the catalyst for that?

Well, there's a couple of factors. One -- on the properties that are completed here (ph) in Dallas, we're just reflecting the rents that we are achieving in release of (ph), and in the others, we had some costs -- in the southern California properties, costs due to development. Those are the nature of some enhancements that we wanted to add, and then, as we took apart bid (ph), we're seeing prices from some of the contractors higher that their original expectations. Those properties we've left for rent at original projected levels, even though we're seeing growth rent in those markets.

I might add that you're -- you know, with the fires that are occurring in southern California, which are not impacting our communities at this point, I think you're going to see lumber cost rise, and you're going to see labor cost rise as a result of people rebuilding these homes that are going up. Unfortunately, their loss -- insured, but I think it's going to drive the demand for lumber, as well as labor, in those markets up. So we are being conservative by getting ahead of that and bidding out our contracts and trying to lock in those costs, but Mark's being conservative in his efforts.

Kerry Callahan, Goldman Sachs.

Sorry, can you hear us now? It's Nora Creedon with Kerry. And the first question we have is just on the disposition activity. It looks at 100 to 200 million in your guidance range, and back in July you'd said there was may be $300 to $500 million of assets you might consider selling out of noncore markets, potentially in a JV-type structure. Can you comment on that, and whether that strategy is now off the table?

This is Mark, I will comment on that. If you look at what we said on the last call, we were investigating the possibility of a portfolio-type sale, maybe in the $300 to $500 million range. And our expectation is, because we were able to deliver free and clear portfolios, that those should command a pricing premium.

And so we really -- at least in negotiating and working on these type of transactions with a couple different parties, we are sensitive to two things -- pricing and structure. And the pricing premium has just not been there, especially if you look at the way these properties are performing, and they're performing fairly decently -- in fact, at more (ph) of a premium. So we have not been able to find the deal, to hit the premium we want.

And then there's always some structural issues of a lesser degree that we're sensitive to. So we continue to look at it, but we're not seeing that out there today.

Okay. And on the cap rates on the properties that you think you can acquire next year -- you do have those cap rates coming down, despite an interest rate forecast that is going up, and what sounds like an ability to get better yields out of some of these acquisitions once you begin managing them. How conservative do you think this 6.25 to 6.5 percent cap rate assumption is?

Well, I do think it is conservative, in the sense that they're a little bit lower than what we've been seeing. And the reason for that is that those markets where we are buying or seeing growth -- so there's real -- we're buying into growth. And so trying to allow ourselves to be competitive where we can buy assets, we're going to have true rent growth. And that's why you see that.

In some of the other markets, we're seeing some -- a little bit higher cap rates, but you don't have the growth rate to go along with it.

So the 6.25 to 6.5 are going in rates, and over time, those will hopefully go up.

Absolutely.

Okay. And then the last question -- Tom, you mentioned at the beginning of your comments that you do have confidence that rental rates are not sliding much from here. And after that, you mentioned that utility costs going up would probably impact your ability to raise rates. Can you reconcile those comments for us?

Yes. I think -- here is what I was trying to get across, is that we are seeing him tightening on the concession front. Pricing -- look at it at from this point -- net rent collected per occupied unit. We have gone from a $730 two years ago down to about $702. When I look at our peers and stack that same number up over that period of time, we have not fallen as far as many others.

What I worry about in this point of the cycle is, is I don't see much on the downside. But at the same time, when we go to press rents and increase rents in some markets -- take Dallas, Houston -- we are getting pushback. And that pushed back is coming from people saying they want a larger concession, or they want lower rent.

So there's some compression in certain markets that are going to press down. And the wild card in this -- no one really knows where these utility rates are coming, and where they're going to hit. We are just seeing activity in this front in the number of municipalities -- who, I think, when it becomes evident to the general public, are going to get a lot of criticism, and may back off.

But the preliminary conversations with people we talk to in the utility industry across the country indicate many of them are proposing significant increases. If they are successful in those efforts and get 8 to 10 percent increases, it will be hard for us to move rents. And as a result, you can see kind of Chris's guidance to a low-end number and maybe even potentially negative same-store sales.

I think that is a possibility. We highlight it for our investment community because our research indicates that it is a possibility. How much? Time will only tell. So that is my thought process and what I was trying to communicate.

Thanks. And that expense -- sorry, just a last question -- that expense on the utility side of 8 to 11 percent increases -- that is included in your guidance of 2.5 percent operating expense increases for your communities, the --?

Our current guidance includes an 8 percent increases.

Rob Stevenson, Morgan Stanley.

Tom, just a follow-up on that. What are you guys expecting next year in terms of property, tax, and insurance increases?

You know, property tax has been an interesting study. We all were worried greatly in 2003 about the increase, and it looks like we're going to settle in at about 2 to 2.5 percent this year. And my forecast for next year has a repeat of about 2 percent in real estate taxes that we are finding in this lull in operating results that we're getting to benefit of that in taxes, if you can call that a benefit -- that mill rates are being litigated very heavily, and the municipalities are being forced to find revenue and expense cuts to shore up their balance sheet.

So I think the wild card in this is what's going to happen in Prop 13, and there's a lot of experts speaking to that out there. But we generally think next year is about a 2 percent tax number for us.

And on the insurance side?

Insurance is a matter of premium and loss exposure. This year was unusual for us in one respect. In 2002, we had the best insurance loss history this company has ever had. It was half of what it normally was, and it is reflected in our numbers last year. In 2003, we have incurred more of what I would call our five-year average loss history, and as a result, we are probably up about 5 percent this year over last.

So next year is kind of wild card. We're kind of penciling in a 2 to 3 percent increase in insurance. We are out in the markets -- in fact, over in London, working our policies. And we'll probably have more clarity to that over the next quarter. But a big part is going to be dependent upon what our actual losses are.

So, I wouldn't use us as a good gauge for the industry based on the information we have today. But I think it is a couple times -- couple percentage points at this point.

Okay. And then the other question I have is -- back to the disposition side. If you guys are expecting interest rates to start ratcheting up, and for the acquisition market to get better for you guys in '04, why not sell more assets now in preparation for that, especially in these markets that you don't want to be in longer-term, if you can be getting 7, 7-1/4 cap rates on those?

Well, if you look at what we did this quarter, that is really exactly what we're doing. And we're -- continued to list assets, and when we get the price, we'll sell them. We're not so bent on selling assets for the purpose of selling them we don't get the prices and (indiscernible) affect their markets. I guess the way I would describe it -- we're staying at a pace that is patient. And I think you'll still see us exiting these one-off markets, as we did this quarter.

And are you guys -- are any of the disposition assets some of the stuff you would wind up targeting for redevelopment? Is there a thought in your minds that, by putting a little bit of money in now, which is (ph) that you can get more money on the back-end?

I think on the repositioning assets -- what we're thinking are assets we want to own long-term in our core markets where we've got operating efficiencies. So when we put an asset on the sale list, it's one we've determined is not in our best interest to do kind of rehab for (ph) --

So certainly (ph) -- this is Toomey again -- want to get your resources -- we don't have an unlimited supply here -- targeted toward where we can add long-term value. The short-range propping something up and then trying to sell it is an unknown. There's risk in doing that. And if we were to do it, we certainly add to our risk profile. So that's kind of my attitude on that front.

And then just to remind you -- we've always said we will continue to be a buyer and seller of assets. The focus on repositioning the company was not a timeframe-oriented -- directive. It was -- here's where we want to be over the long-term. We'll continue to push and see where we can strategically sell assets -- at the same time, support earnings that support the dividend.

Okay. Last question -- how much of your portfolio is rolling -- the leases on rolling in the fourth and then first quarter, roughly?

You're going to get about 7 to 9 percent a month of our leases rolled. I don't have in front of me right now what the October and November and December are, but what we are finding is that what's rolling over compared to what we are renewing at is about a 2 percent increase.

So we are seeing some potential to move rents there. Not a significant amount, but 2 percent is better than none. So that's what drives me to believe that collection per unit will do better in the future is because we're just starting to roll more leases over at higher prices.

Richard Paoli (ph), ABP Investments.

Hey guys, I just have a couple of questions. First, I don't recall you speaking to bad debt. Maybe I missed it, but what happened in the quarter with your uncollectible rent?

I think it still under 1 percent, Rich -- I haven't looked at in significant detail. But as long as it is under 1 percent, it's acceptable to me. That's what it normally is, so --

Okay. And then shifting to the guidance range -- maybe I missed it, but on the G&A side, what have you incorporated with regards to your HPU (ph) program, and if you could remind me of where some of the important thresholds are with respect to the share price and -- because one of your goals was obviously to improve the multiple -- and is that encompassed in your guidance?

You can see from Attachment 4 -- we have built into our share count the 1.8 million shares related to ops A (ph), which actually was valued in June of this year. The new HPU program -- ops B (ph) -- we have not forecasted any dilution related to that. The performance of the RMS (ph) has been very strong this year, and as you know, we have to outperform the RMS for any of those shares to vest. The last time I looked at the target share price, we needed to be in the high 19, even just to breakeven with the RMS, and we've not forecasted that we would have any dilution in '04 for that.

Okay, thank you. And then I have just another kind of house-cleaning question. Could you just go back over -- because there was a lot of numbers going -- on your fourth-quarter acquisition and disposition target, or what you think you can do? I think you said 150 in acquisitions, roughly thereabout -- and I missed the disposition target.

Acquisitions are targeted at 150. And we have one asset that is under contract for sale at 12 million, and another that should come under contract in the 16 million range. So minimal disposition activity in the fourth -- I mean disposition activity.

And then what was just the nine months to date through September -- what did you do, both on acquisitions and dispositions?

163 million of acquisitions and 77 million of dispositions.

And just a follow-up, a more theoretical question -- the market for assets has been highly competitive. And with the presumption that the economy is improving, you would -- at least I would think that some people would be less sensitive about buying. What makes you guys think you can do 500 next year off (ph) the high end? Do you feel confident that you can get that done, or is it -- I have heard that some other companies have been able -- they have come in second a lot, which is probably place you don't want to be in terms of the purchasing.

Well, I would answer that that we just really look at what we have done historically. We're going to finish out this year above 400 million. And just noting (ph) what our team has done and our context in the industry -- while it is competitive, I think we'll get our fair share.

So the 163 was just for the third quarter -- what was the full-year number in acquisitions again?

263 (multiple speakers) year-to-date, and another 150 --

Oh, okay -- I see what you're saying.

So you're just over 400 million for 2003.

Karen Ford (ph), Banc of America Securities.

Hi, I'm here with Lee Schalop. First question was -- I know you said the third quarter typically has a seasonal impact for increased turnover and the drop in occupancy and the slight drop in average rental rates. Is that all attributed to seasonal items, or did you notice any slippage that attributed any of that occupancy drop or any of that rent drop?

Well, particularly focusing just on the revenue side and the seasonality of it, I look back at the third quarter of '03 and compared to the third quarter of '02 -- our rent per occupied unit dropped from 721 to 702. The same comparison for this year is 704 to 702. Our turnover in third quarter '03 was 82 percent, third quarter '03 75 percent, and this year is 68 percent. Then our concessions in the same third quarter of '02 was 3.3, third quarter '03 2.9, and again 2.9.

So you can see there's higher turnover. It consistently happens that it puts pressure on our rental rates, that our occupancies remain relatively flat through all three of those periods -- at 92.6, 92.9, and 92.9. So I look at -- there's a natural seasonality on the revenue side primarily tied to -- people move out of the end of school years, and move to their next location for the next school year. And that drives some of the turnover. There is a student portfolio inside of this company of about 2000 units that, at the end of the school year in May, goes empty and starts leasing back up in August and September. So you end up with vacant units -- call it 1000 units -- that you know you're going to sit with them empty during those couple of months.

So there is a real seasonality to this portfolio. And I think you also have to factor in some other markets that -- Phoenix, for example, is a market that always has a lull in the summer, as well as Florida, where people go back north, spend their summer, and then come back for the winter. So those are the factors that I look at and drive us toward our guidance and the way we run our business.

Fair enough. Secondly, in your 2004 guidance, I noticed there was no pickup or lease-up of development projects. Is there upside to your guidance based on where the development comes in next year?

Development and the non-matures (ph) -- I've rolled them all together in a 5 cents improvement next year versus this year --

Okay, can you just break out what portion of that is due to the development pickup?

The development piece really doesn't even move the dial, it's so small.

Okay. Lee?

Tom, I was struck by your comments about the idea of using your OP units in an opportunity to acquire more assets at better pricing. This is something we've heard about from time to time in the REIT world over the past few years, and it's something we sort of always hear about with great fanfare, and then it never really materializes in any kind of significant way.

Is there something about either your strategy or your view of the current environment that makes it likely that somehow this time it's different, and we're going to see more significant activity on that front?

Well, I can't speak for the peers. And I know several have made runs at this. What I would differentiate our efforts is -- first and foremost, is we're middle-market product. And a lot of this stuff that we're pursuing is assets that you would look at and say they're held by family members for many years. And that doesn't necessarily fit the investment profile of many of our peers. So that is one.

Two is (technical difficulty) -- nationally, that when you do these transactions, you find these individuals pick up assets in numerous markets over their life. And if you are a focused operator in one, and it doesn't fit -- that's another.

The third is our pursuit. We have got a number of OP successful holders who represent a very good selling force. And we have encourage them to make contact with other people in the industry, and we'll see if they can help us identify opportunities.

Third, we've got a very good set of standard documents and providing the tax shelter that is at market or above market today.

So I think those are the things. And I think it's a focus of this acquisition team -- I know certainly, Mark has had a number of efforts that we've run at. They take time. But what we want to highlight is -- I think we have the right formula, in terms of dividend increase, continually be showing flexibility in our structure, the asset quality, and the balance sheet strength.

So we will see. I think your skepticism is warranted, and I over the number of years have seen these transactions come and go. And it takes a lot of dedicated effort on the management team even at the top to make them work. But we will keep running at them. And I think we have got the right formula.

(OPERATOR INSTRUCTIONS) Robert Promisel, Lend Lease Rosen.

I am wondering how much of your portfolio is actually unsecured?

We have 39 percent -- we have 61 percent that is unencumbered.

2.6 billion dollars (multiple speakers)

Okay. And in a general sense, I wonder if you could generalize if there's any type of difference in cap rate between properties that trade that are unencumbered versus those that have some debt on them.

This is Mark -- from my experience, absolutely yes. You're seeing a lot of people bring assets to market because I think individual owners have placed high interest rate debt expecting to get the low cap rates, and obviously that (ph) gets factored in. The debt can't be prepaid; it definitely presents (ph) that computation (ph)

Kevin Lampo, Edward Jones.

I missed some of the details when you are talking about the capitalized interests on the free development properties. When were those free properties purchased?

One was purchased this past quarter. The property in Las Colinas, Mandalay on the Lake, was just purchased this past quarter. And the other two were purchased in the fourth quarter of last year.

What stage of development are they in currently?

The one in Rancho Cucamonga is -- we will start that project in the fourth quarter. We're close to starting the project in San Francisco (ph), and really just working to some permit issues there. And in Las Colinas, we're really -- to answer that (ph), we don't want to start that soon. We're being patient because that market will be driven by job growth. We expect that job growth to come. So we're looking at that -- basically monitoring that job growth. When it starts coming, we will start that one.

David Rodgers, McDonald Investments.

Yes, Tom, my first question was on the G&A expenses. I know year-over-year, there has been compliance accounting, legal costs that have gone into that. But even over the second quarter, I think, and the third quarter, the G&A was up another 7 percent. And I know you've given a run rate for next year, but could you give us a better idea of what's increasing those costs?

We have there are definitely quarterly timing differences that happens inside of our G&A, whether those are related to changes in staffing or timing of incentive, comp expenditures, acquisition search costs, consulting fees -- you name it. A lot of them are not strictly month-to-month run-rate type items. So I would point you to the year-to-date totals really as sort of more evidence of where our run rate.

Year-to-date, we're up 4 percent over last year, over 100 percent of that increase relates to accruals for potential incentive compensation awards. And we're targeting our fourth-quarter G&A being $4-and-a-quarter to $4.5 million range, which is probably more in line with the run rate that you're accustomed to seeing.

Great, thanks. And the second question on property operating expenses -- it looked like mid-Atlantic was up pretty big in the operating expense year-over-year in the same store portfolio. Can you give us anymore clarity there?

Well, we have certainly seen in that area that paying (ph) jobs, a lot of maintenance work in terms of getting ready for the leasing season in the winter. We've put a lot more money up there. And that's been our focus.

And I would add just utilities in that area the country have been probably more of a rapid increase than anywhere else in the country, particularly the water and gas costs. So I think you're going to see that moderate in the fourth quarter.

Great, and the final question, just on occupancy trends throughout the quarter -- did it improves toward the end of the quarter from earlier in the period, or did it decline? Any clarity you can give there would be greatly appreciated.

Well, I think the clarity I can give is looking at the October rent number and occupancy, you'd find them very similar to the September -- that we came out of our lull in July, it improved in August, and that's going to improve in September. October is about flat with September. So we are repeating the cycle and the rhythm of this portfolio, if you will, that we have over the last five years -- which is it hits its lull in July, starts its recovery, and hits is what I call winter peak October, November, and then starts to drop a little bit in November and December. And then starts cranking back up in February. I think we put that in our website when we reported our monthly rents, so you will see that continue.

Thank you. At this time there are no additional questions. Please continue with any closing comments.

Thank you, operator, and thank you for those attending this call today.

What I would close with is just a short comment that says -- first and foremost -- I in the last 2.5 years cannot think of a time that I have been more excited about the prospects for this company, particularly with this financial flexibility, this team, and the recovering economy and housing industry. I think we're going to find ways that we can deliver on creating shareholder value. We have certainly given you a wide range of potential outcomes, and certainly just as time unfolds, we will tighten that as more and more and things get to become actual and not forecast.

So I'm very encouraged by what we have done, what we have available to us, and by our prospects. And with that, I would say thank you for your time, and please take care.

Thank you, sir. Ladies and gentlemen, this concludes the United Dominion Realty Trust conference call. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236, or 303-590-3000 with passcode 549493. Once again, if you'd like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 with pass code 549493.

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