UDR Inc (UDR) 2003 Q4 法說會逐字稿

Please stand by for United Dominion conference call.

Good afternoon, later, and welcome to the United Dominion Realty Trust conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference please press the star followed by the zero. As a reminder this conference is being recorded today, Tuesday, February 10, 2004. I would now like to turn the conference over to Claire Klennamen[sp] from Financial Relations Board. Please go ahead.

[inaudible] [inaudible] available on the company's website at www.udrt.com in the financial performance section. Additionally we're host ago live webcast of today's call which you can access in the same section. 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 attained. Factors and risk factors that could cause which 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 United Dominion's CEO and President Tom Toomey. Who will introduce management and begin his formal remarks. Please go ahead, Tom.

Thank you, Claire, and welcome to United Dominion's fourth quarter earnings conference call. Management's comments will take about 20 to 25 minutes and then we will open up the conference call to questions. The basic agenda for this call is Martha Carlin [sp] will give an overview of the fourth quarter operations, Ella Neyland will review the balance sheet. Mark Wallace will cover acquisitions, dispositions, activities and results. Chris Genry will discuss the fourth quarter '03 results, first quarter '04 and full year '04 guidance, and just as important, next years dividend increase.

Let me start my comments by bringing some focus to the investment attributes of United Dominion in a business climate before turning the call over to Martha. My comments will focus on four areas. One, the relative value of our stock, two, growth prospects for the future, three, performance, we do what we say, four, an update on the fundamentals of the business. Turning to relative value. Simply stated, our shares are cheap. We currently trade at a 12 times 2004 FFO, or a 100 basis point discount to the multi-family industry average of 13.

This equates to a discounted share price of $1.50 to $1.70 a share. Let me repeat. We trade at 100 basis point discount to the industry average. Two, growth prospects. At the midpoint of our 2004 guidance, our AFFO growth will be 3 percent, or the top quartile for our peers. I have five areas I'd like to highlight and focus on our ability to deliver this growth and the same time focusing on the quality of this growth.

First, acquisition pipeline. Mark will give you more details on the volume of transactions under contract, but I would say we have over $800,000,000 under some form of due diligence so meeting our goal of $500,000,000 for acquisitions in 2004 seems very achievable. Second, O. P. unit transactions. With the improvement in the share price the balance sheet and a track record of 27 consecutive years of raising the dividend, we have successfully negotiated over 90 million of O. P. placements in 2003.

We will most likely see more transactions than our peers in the future in this area due to our middle market focus and our national platform.

Third, development. Has historically been a low priority for United Dominion and most likely will continue for the immediate future. But we have a pipeline of 140 million, yielding between 7.5 and 8% when stabilized. Fourth, redevelopment in ROI. At this point in the multi-family cycle we are focusing more attention on redeveloping our assets in superior locations where rents growth will be evident in 2005. I believe I'll see us do between 50 and 125 million in redevelopment in ROI activities during the next 12 months at returns greater than 9%.

An example of some ROI that we have underway is where we've completed nearly 2300 kitchen upgrades at an average cost of $4,400 per apartment home with an increase in monthly rents of $71. That's a 19% return. Martha will give you some more color in this area later. Fifth and finally, two areas of operational focus, associate turnover and resident turnover. In 2001 our associate turnover exceeded 70% on an annualized basis. We saw ourselves struggling to maintain high occupancies and give quality service to our residents. As a result our resident turnover was 72% during 2001. In 2003 we've made significant progress on both.

Today our turnover is 50% for associates, representing a 30% improvement over the last two years, and our resident turnover is 61 percent, representing a 15% improvement. While we have many more initiatives in the operational area I believe these two have the highest long-term value. Let me now turn to performance. Three areas of focus, operations, acquisitions, total shareholder return.

Under operations, U. D. R. has led the national REITS[sp] in terms of same store sales six of the last eight quarters and has been in the top quartile for all multi-family REITS[sp] in four of the last six quartile. Our operating team gets it.

Acquisitions. I'm glad to report our recent acquisitions in 2002 are delivering a 7.3% yield and 2003 are delivering 6.6. Both are better than our underwriting. And for those total shareholder return whose measure of success is total shareholder return, we delivered 25% in 2003, which turns out to only be average. Our three-year average annual return has been 30%, which is tops for the multi-family group. That should make a lot of people who are short term investors very happy but for the long-term investor U.D. R. has delivered a 17.6 annual return for its 32 year history.

Let me now turn my comments to the economy and the drivers of our industry. And certainly many of you have heard these comments from many of our peers and other sectors reporting their results. And it is clear to us that the economy is recovering and with our short term leases this should help us in a recovery. But I think we all need to be reminded that we are digging ourselves out of a whole and it will take time. The highlights some of the drivers, jobs. All of us have seen the numbers but the question that remains is what industries are going to generate jobs and when? My answer to you would be, you'd have to go back and look at the start of this recession. The first industries to lose jobs were the tech, airline, tourism and hospitality.

What we are seeing in this recovery is that the airline and tourism industry's are already in full recovery, and hospitality is not far behind. All these industries have significant number of middle market residents employed by them. Household formation is returning to its ten-year average of 1.3 million annually. Immigration is returning to its ten-year average of 1 million annually. Construction, we've covered this topic many times. Most new construction is either class A. or tax credit driven. Neither compete directly with our middle market.

With that said, the current level of 300,000 to 325,000 homes is more than our current household formation and jobs can support. So we will remain in an over supply condition for the foreseeable future. On home ownership, and I don't need to through all the publications and what they've quoted here, but what I have done is go through our individual portfolio, community by community and priced our individual rents against an entry level home mortgage payment.

So that's an entry level mortgage payment financed on a one-year ARM. And what I've concluded is that 98% of our homes have rents that are 10% or $50 a month below the mortgage payment for an entry level home. If these individuals were financing with a 30-year fixed rate mortgage, that would grow to 30 percent, or $200 a month. So in summary, the price differential and gap between home ownership and our middle market product seems to have restored itself. And hopefully will reduce our loss to home ownership in the future. And lastly, the condo conversion.

Phenomena not seen in awhile but has a number of significant transactions seem to be on the horizon. We see this as a zero sum gain in which removing apartment stock but also removing renters. And lastly in a year of politics we will certainly see more interest around the minimum wage, which currently stands at $5.50 an hour. It looks like this may have some momentum to be increased which would be a positive for us. Let me now introduce Martha Carlin, who has been promoted to leading our property management team. Let me give you a brief overview of why she is qualified to lead this group. First, Martha and I have known each other and worked together in a number of different enterprises spanning 17 years.

In fact she was my first new higher at United Dominion. She is an experienced Chief Operating Officer. She has leadership and energy and, frankly, gets results. And in my assessment was ready for this opportunity and I look forward to working and continuing giving her this opportunity and chance to lead a big part of our organization. Martha.

Thanks, Tom. This morning I'ill cover a few points about the fourth quarter and remark on the challenges and opportunities we see moving into 2004. I won't cover the fourth quarter details as you can see the press release attachments for that information. There were no surprises and we met expectation. Revenues were down $300,000 sequentially.

However, drilling down into the details clarifies that some of this decline is the result of positive indicators. Fees were down 600,000, the result of seasonally lower application fees and a 13% decline in early lease terminationa and evictions. A positive sign. Reimbursements and other income were up 450,000, another positive. This leaves rental revenues essentially flat overall on 20 basis point lower occupancy. Expenses were in line for the quarter,

however, we expect to see a jump in utilities in the first quarter due to higher rates and the extreme cold we've been experiencing in the east. These higher utilities were anticipated in our 2004 earnings forecast. Over supply continues to be an issue in many of our markets, making it tough to improve occupancy much less exercise pricing power. However I am encouraged by some of what I'm seeing. Concessions are down 200,000 a month in January on higher occupancy, the lowest on a percentage basis in 12 months. Associate turnover improved from 58% to 50 percent, a 16% decline year over year. Resident retention increased 4.5% year over year and is a continued strong focus of our team.

Bad debt at .6% indicates we've maintained our high credit standards. Utility reimbursements continue to increase which will help insulate us as utility costs rise. Our reimbursement run rate has increased 23% from early 2003 levels to over 47% of total utility costs. We are continuing to reinvest in the portfolio, spending 15.4 million in 2003 upgrades, ranging from garages and washer dryer installations, to kitchen and bath upgrades. Kitchen and bath upgrades represent roughly two-thirds of this investment and we're getting returns in excess of 19% and a weighed average of $71 a unit in increased rents. We have an additional three to 5 million approximately 800 to 1100 units in the pipeline for completion prior to peak leasing season.

All of these factors are contributing to better margins. In my opinion we have ourselves in a stronger position when jobs return because we've maintained our resident quality, improved our real estate quality and retained more of our quality associates. This will continue to keep us at the top of the peer group in 2004. Ella?

Thank you, Martha. Each of the last three years we've ended the year with a much stronger balance sheet than we started that year with. And 2003 was no exception. Year end '03 versus year end '02, our fixed charge coverage ratio was 2.5 versus 2.2, our unencumbered assets of 2.8 billion was 14% higher and our average cost to debt at 5.2% was lower than where we ended last year at approximately 6% into 2002.

This improvement led to an upgrade in our rating from S&P which I believe we are the only apartment REIT[sp] to be so recognized during 2003. We are still the only apartment REIT[sp] to be in the S&P mid cap 400 since we were included at the beginning of last year. The strength of our balance sheet is the result of issuing and refinancing approximately $2,000,000,000 of debt over the last three years. Throughout that period our goal was to lower the risk profile of our capital structure.

And what do we consider a lower risk profile? Smoothing the maturity schedule, creating a balance sheet that gives us optionality to access capital markets at times and prices that optimize execution, increasing our level of unemcumbered assets and allowing us to execute on our business plan and take advantage of opportunities as we fund them. Looking forward to the balance of this year, we only have $5,000,000 of debt maturing at a rate of 6.5%.

And we have $68,000,000 of swaps expiring at 8.1%. If you look at attachment four it shows as of December 31 for this year we would have 147 million of maturities, but let me reconcile that 147 million to the balance maturing of only 5 million. The 147 million includes a $54,000,000 one time investor put in September of this year of some 2024 debt that had an interest rate of 8.5%. Truely doubt that that's going to be put to us, although it would be nice. The $47,000,000 of MTNs we paid off in January with the issuance of our bonds and all but 5 million of the secure debt has matured and been repaid. So only $5,000,000 of debt maturing the balance of this year.

Our assumptions for debt issuance that we gave for guidance in 2004 included 125 to $425,000,000 of bonds at rates between 5.5 and 6%. We've already issued $75,000,000 of those this year at 112 spread. So based on the treasury I just saw a 410, that'd be about a 525 rate; which means we have a cushion in those interest rate assumptions of 5.5 to 6%. Furthermore our guidance assumes an increase in LIBOR[sp] for this year of 100 basis points which is arguably unlikely given the current pace of the recovery and the short time frame for the fed to change rates before the election.

All of this improvement has been previously provided in our guidance and can be found on our Web site. So having covered that significant progress in the balance sheet I will turn the call over to Mark.

Thanks, Ella. I will speak briefly regarding what we are doing to improve the quality of our assets and the overall growth potential of our portfolio. Before I talk about our buying and selling activities I want to discuss a couple of strategic personnel moves we have made. First, we promoted Richard Gianotti[sp] a licensed architect who has worked in development, acquisitions and rehabs with United Dominion for over 19 years to the position of Executive Vice President. He will oversee the expenditure of all of our Capex funds including recurring rehab and upon initial acquisition.

Second we added Mike Kelly to our acquisition team. He will focus on acquiring properties in the eastern half of the country. Mike is well known in the brokerage community. He will add additional market knowledge of this area that has been his backyard for over ten years. Now, some detail on our buying and selling activities. We had an active fourth quarter in which we acquired six communities for the cost of 161 million we sold one community for 12 million.

Details are in our prior press releases for those transactions. Our 2002 acquisitions are performing at a 7.3% yield. Our 2003 acquisitions, not including those we just acquired in December, are yielding a 6.6% yield, and that is better than our initial underwriting. Our development pipeline is directed by Mark Wood of our Dallas office and consists of 1300 homes. The details of this effort that will also upgrade the quality of our portfolio is detailed on attachment eight of the press release. What progress have we made to date in our reposition strategy?

In 2001 32% of the company's NOI came from our noncore markets. Now only 18% of rent NOI is from these secondary markets. With that progress being made we are now focusing on selling older, less desirable communities first, even if they are located in a core market. We will still exit one off markets but we will be slower where the quality of the asset not a current problem. In other words we will not be taking pins off the map as our sole criteria for selling. It is a highly liquid market for the selling of multi-family properties. So why aren't we selling first and building a warship of cash and waiting for higher cap rates?

We were net buyers in 2003 with acquisitions exceeding sales by 335 million. And our goal is to be net buyers again in 2004. The reasons for this strategy are with the sales liquidity in the market we do not believe it is necessary to ask our shareholders to take the dilution that is created by selling first and then sitting on the cash. The question is, what about these low cap rates? While cap rates are low by historical standards, we believe the most important benchmark is the cost per home in comparison to replacement costs. Today we are able to find acquisition opportunities at or even below replacement costs.

Those assets still have rehab upside or have growth upside because they are currently being under managed. Even if interest rates begin to rise we do not see cap rates rising high enough to warrant the risk of waiting to invest. Finally by going ahead and buying these opportunities now we can take advantage of locking in low, long-term interest rates that are available. So for these reasons we will continue our strategy of being net buyers in 2004. Our acquisition pipeline remains active and we are currently working on three potential transactions that should close by the end of this quarter.

We are continuing to seek out O.P. unit transactions by proactively contacting long time owners of apartment communities that have tax issues. And hope to do more of the type of O.P. unit transactions that we did in 2003.

Now I will turn the call over to Chris.

Thank you, Mark. Greetings to everyone on today's call. Our operating rule for the quarter were straight forward; consistent with the expectation that we set last quarter so I am going to keep my comments brief and then I will open the call to questions and answers. Looking at the fourth quarter we made our guidance of $.37 per share of FFO we had expected same store revenues and NOI to be up slightly this quarter, but our occupancy fell short of our target and as Martha described, we ended the quarter with essentially flat same store results compared to the third quarter.

We continue to deal with an imbalance of supply and demand in most of our markets and it remains difficult to grow the top line despite our intense focus on property operations. Looking at year over year results, the 4.5% decline in same store NOI is more a reflection of the strength of our fourth quarter last year than it is representative of a trend. A few examples may be useful. Last year we made an aggressive push for occupancy in the fourth quarter and we will knowledge that we were not as careful as we should have been with screening the credit quality of our traffic and assuring that we were putting the right residents into our homes.

This year we focused more on the quality of new leases and we believe you'll see the results of that effort in improved resident retention early in 2004. On the expense side our fourth quarter insurance costs were favorablely impacted last year as we ended the year with such stellar loss experience that we were able to reverse significant accruals for loss exposure that did not materialize. In previous years we've also enjoyed a reduced property tax provision in the fourth quarter when accruals get adjusted to match up with the actual assessments that we get and this year we did a much better job of estimating our ultimate tax expenses up front such that our monthly accruals throughout the year were virtually right on target.

We believe that factoring out these fourth quarter anomalies puts our year over year NOI variance to a closer to a 1% decline which is in line with an improving trend and has us on target for results within our previously established range of guidance for 2004. The silver lining this quarter is the financial performance of our 2003 acquisitions which continue to out perform our expectations, keeping our total property NOI in line with our expectations for the quarter. Of particular note our mid year portfolio acquisitions in Orange County, California, is on target to exceed our underwritten first year results by almost 4%.

Looking ahead to 2004, we have made no revisions to our previously provided earning guidance range of $1.48 to $1.60 cents per share of FFO nor have we changed any of our underlying assumptions. We posted those assumptions on our Web site after last quarters call and those remain for you in written form so I won't bother to rehash them here. We're still expecting same store results in the range of negative one to positive 2% and we will be in a much better business to tighten that range during the second quarter, after we get a peak at leasing season notices, the reasons behind those notices and the quantity and quality of our traffic.

We are also still projecting to be a net acquirer this year as capital costs remain near historic lows. As Mark discussed we've beefed up our acquisitions team and we're in pursuit of a goal of acquiring 100 to 400 million more in assets than we sell in 2004. Mark made the point that we're not pursuing dispositions just to take pins off the map and think that point bares re-emphasis. In numerous cases the assets in our noncore markets are performing extremely well both from a growth and a margin perspective. And we do not suffer significant inefficiencies in the management of those assets.

Many of these assets do not feel the ocmpetitive pressures of supply and demands that are buffeting the rest of the portfolio and it makes no sense to sell simply for the sake of selling particularly when we know NOI will raise when and possibly even before cap rates start to rise. We're evaluating each asset on its own merits and many of these assets in noncore markets still have significant upsides for our shareholders. Although we have provided a pretty wide range of assumptions for 2004 I believe that's warranted in this economic environment. We will continue to evaluate our progress on each of our goals and we'll update our earnings guidance each quarter.

Looking at the first quarter, we will enjoy a full quarter of income from the most recent series of property acquisitions. However, we will face increasing operating expenses while same store revenues remain essentially flat. We gave salary increases this year for the first time in two years. We endured significant property losses to wind, hail and fire in 2003, which translates to higher insurance premiums in 2004. And we start the new year with property tax accruals approximately 3% higher than last year. Utilities costs will be sequentially higher, especially in our Mid-Atlantic markets. So our range of guidance for the first quarter has to give credence to the possibility that total property NOI will be flat to the fourth quarter.

While we're clearly working toward an increase of a penny. In closing I would briefly mention the dividend. We look forward every year to our annual shareholders meeting in May, where we meet face to face with many investors that is have held our shares for over a decade. We invite you to join us. It's an occasion for engraining in each member of management the reason why we are here, to provide a consistent stream of dividends and an annual raise to our shareholders. We have given them that raise for 27 consecutive years and you can bank on number 28.

Management has made its recommendation to the board which will vote on the dividend increase this Friday and an announcement will be made shortly thereafter. We continue to have one of the safest payouts in the sector and we're dedicated to providing the protecting the safety and security of our dividend. Operator, I will now turn it over to you for questions and answers.

Operator?

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question and answer session. [Caller Instructions]. One moment, please, for our first question. Our first question is from Jordan Sadler [sp] with Smith Barney. Please go ahead with your question.

Good afternoon. I just wanted to touch back on your redevelopment investment. I think last quarter on the call you disclosed that you would be pursuing this but you said that none of it was in the guidance yet for '04. Have you factored any of the income from this or the prospective income it into the guidance yet or is that an '05 number?

Well we don't have a specific assumption on the Web site related to the ROIs, but I think underline our same store forecast which is improved over a lot of the others that is you're hearing, is the fact that we intend to see stronger results in our same store portfolio from this ROI investments. But that having been said, if we're successful in doing everything that Tom described there is some upside in that number?

Are you going to break out your same store numbers with or without the benefit of the kitchen program?

That would not be my intention, it's very difficult to do. The way that we typically roll these out, we will get a proposal from the property and we will do five to ten units and see what the impact of that is in the market.

You are not taking properties off-line to do this?

Absolutely not. We will do five or ten units, we will make sure that we are getting the yields that we thought we were going to get and we will do five or ten more.

Okay, and I guess Tom mentioned initially that $4,400 is an average cost that you guys spent on the initial once you have done. Are those kitchens only and going forward you'll do bathrooms?

What we are trying to do is we have a process. Right now we are averaging $4,400 and what we do is we by cabinets in bulk and what we've really focused on is, seems really to be working, is to do these in 48 hours. That's the phenomenon that's unique. Is to be able to come in, give somebody keys to a hotel for the weekends and come back and get a new lease and increase the rent. And so we're not trying to take units off-line. We're not trying to do them and wait for turns.

We're actually trying to go to properties and residents who've been there and say, here's the program, are you interested, walk write down the hall, you can see it. So for $4,400, here's what you get. You get new appliances, you get a new floor, you get cabinet hardware, you get cabinets and you get new countertops and new fixtures and lighting.

So you don't even do it on the turn you are actually doing it while residents are still in the apartment but they go to a hotel room for the weekend?

Absolutely.

We're doing both.

We're doing both.

Okay. And then I guess just curious on those home ownership statistics that you were citing, do you think that there's going to be any pressure or additional pressure given the expected help that sort of the, or subsidiaries for the low rent housing in the zero down sort of infrastructure that's proposed by the administration?

We are trying to see the targeting of the, very good question, we are still working through it with our contacts at Freddie and Fanny, trying to find out exactly who they are targeting, what the credit scores are for those individuals and how many of our residents qualifying under that targeting. So we really don't have enough information to respond. What I can just say is any time government takes in essence the tax burden from you and I and gives it to a benefit of others, we see it as an election kind of year employ and we'll wait and see how it really ultimately gets played out.

So I don't view it as a positive. I don't know how negative it will be. But certainly like you we'll continue to watch it and size it up against our resident profile and our marketing strategy and see. And Martha highlighted that 14% of our move outs this last year were to home ownership and that's down from the 20 to 25% in prior year years,so it seems to me that getting to the end of this but if they were to re-invigorate or create new subsidiary programs certain the it could kick another waive out.

Okay. I may have missed it. You said during the year in '04 you expect to buy $400 million more than you sell. How will that be financed?

That would be financeed?

And we have a range of acquisitions, too and we show in our guidance that we will funds that you about bond issue in the 125 to $425,000,000 range.

That's really putting to work a lot of the equity that we raised in 2003.

And fixed charges which is what our focus is the how the financial strength looks next year to be in the two four to two five category, ah reminds you that we've got some more series D that's going to convert later in the year and some other preferreds that should be converting next year as well. So.

Your 75 or percent or so through those series D [inaudible].

We have one trawnch left this year.

Okay and then lastly, I guess I may be over analyzing but you said the development, you have 140 under development now but you said you don't look to ramp that up significantly in the near term. Is that something you're exploring that... maybe widening that program?

I didn't really choose my words that carefully. And so I appreciate you trying to read in between the lines. We're comfortable being able to execute that. We've got a pretty good team that is over the years built to that level and built up more. We don't really, we're not really trying to pursue a lot in that area. What we've done is we've had a few opportunities, if it stays in that range I am comfortable with it. If it were to grow to 200 million I am comfortable with that. Above that, I'm not certain that's our line of business.

Okay. Thanks guys.

Thank you. Our next question is from Kerry Calhan with Goldman Sachs.

Good afternoon, Tom I wondered if you could review from us given the repositioning that you did in 2003, about 25% of the portfolio and really the repositioning you did in earlier years since you took over in 2001, what do you think the portfolio today would have in terms of a normalized same store NOI growth rate? I know that's a challenge because it depends on what normalized is but if you look out beyond '04 what do you think the growth rate could be?

Well, I think what you have to look at is we've been balancing ourselves into some markets that have had above average growth rate, particularly California now which is 14% of the NOI next year and followed by DC, which is at about six, 7%. So you've got 20, 21% of the company that has historically delivered a couple hundred basis points over the national average. And so if I were to do that and say that the rest of the portfolio were to deliver at a national average, call it 3% , so you are staying at 4%. This is kind of a number that rounds to my mind. I think a superior management team can deliver above that another 100 basis points, 150 basis points. So I think the long-term growth rate in our operations should be targeted at four, 4.5. When we get to the portfolio we want to be at, and we are getting there. I think what, I highlight the 25% change in assets is, a lot of people continue to look at this and look at our rents and say, my, gosh, that's a lower quality.

One, we are middle market by design. Second, I look from 2001 our average rent for all apartment homes was $650. Today that number is 730. So in a period of time in the last two years where what was we've seen industry-wide rents fall 15 to 20% our number is in fact increased closer to 10%. So that's a real change in the dynamics of this portfolio. And I think that trend will continue. We are trying to move this, and it's a piece at a time, to manage our dividend and manage you know, the delivery and the safety of that dividend to our earnings. And I think we haven't been given credit for it, frankly. But we'll keep plugging. I mean I'm very satisfied where we've made it and where we're going.

Tom, on the sell-side of the equation can you just talk a little bit about what you intend to sell, you know for not so much geogra geograph, well it could be geographically but also in terms of the age profile, maybe the you know structural type?

I think what we have looked at and Mark and both Chris highlighted it, we're not pulling pins off the map, we're really looking at individual properties and neighborhoods. I have a small group of student portfolio that I'd like to sell, an asset that's in Pullman, Washington, I have a couple in Phoenix that because of recent construction activity and freeway placements, the neighborhoods are changing and so we'll to sell those.

So we are targeting assets that we, A., believe have hit the top of their earnings cycle, a change in demographics in the neighborhoods do not bode well for the long-term prospects and, third, just more of where somebody walks in the door and pays us a crazy price. I mean we've got a couple in condo conversion that are going to be low buys. We look at and say, that just doesn't make sense. That's what we have been targeting and it certainly, people who are buying assets in that caliber, it takes time. We work with them. But we're are going to get rid of them.

And I think Nora Credence[sp] who is with me, has a question as well.

On the balance sheet, guys, on the floating rate debt, can you talk about your plans to term some of that out or whether you're comfortable with that kind of exposure of roughly 27, 28%?

In our guidance, Nora, we provided that the range we feel comfortable with is 25 to 28%. And as I kind of went over the maturity so we don't have a need to access the capital market to finance maturities. So what we are looking at on the variable rate debt side is at the 25 to 28% side, roughly 83% of that is our Fannie facilities which we can term out without going to the capital markets on basically a one-week notice. So when you combine all that with the interest rate projections that we think are very conservative, 100 basis points in LIBOR[sp], we do believe that's a prudent floating variable rate debt for this company.

You do not plan on terming any of that out in '04.

We do not anticipate terming out any of that Fannie Mae debt in '04.

Okay, thank you.

Our floating rate's debt is going to be around 25, 27%.

28.

And and if you'd...we've done a lot more economist modeling in the area and what we've really found is as the short end of the interest rate curve arises we will see a corresponding increase in our rents. And we've even factored in the time lag of renewals and believe that a movement of, for example, 100 basis points in our interest rates would cost us about 1.2 million a quarter, but we would see a corresponding offset in rents at about 1.5 million. So we've thought about it that way and I think Ella on previous calls and in some of the publications buy/sell side have gone through it in more detail. We'd be in addition to do it with you as well.

Okay. Thanks, guys.

Thank you.

Our next question is from Richard Paoli[sp] with ABP investments. Please go ahead with your question.

Hey, guys. I think that I've heard something on your call that I did not hear explicitly or implicitly from any of the other apartment REITS[sp] that I've been on the calls this quarter...

That would be all of them.

And that is your, and that is your ascertation that, apartments are not trading above replacement costs. There was one REIT[sp] that explicitly said and it and there have been others by their actions that are ramping up their development pipelines materially that are implying that that it's now a better time to buy, excuse me, build than buy. Could you help me get over that, you know, that difference of opinion? You guys seem to be the contrarians out there.

This is Mark Wallace I might speak to that. In all those cases it always is a market by market approach. Because you can see we are developing in some markets. Now, development opportunities are unique, hard to find, and often times if you can work those opportunities over maybe two to three years you can create a situation where you can build at a cost that yields stronger going in yield than just straight a acquisition.

But what we see in most of these markets because there are no distress sellers practically in these markets like you saw at the end of 80s and early 90s, that produce sales that were significantly below replacement costs, what we see is, significantly below but there are some markets such as in the southwest where we can acquire existing middle market properties at below replacement cost prices. Usually these are large transactions.

They have to be acted on quickly. You have to close quick and that's how we've been able to do that. But I think you can look at it across the board. Everything is trading at around replacement cost generally. There are some exceptions to that. I'm sure with the condo converters out there you can look at some of those prices that they are happening in south Florida and in California, those prices do not relate to professional cost prices. They are significantly above. That's one exception I see where prices are above replacement costs because of the condo converters.

Okay. How about in your, your tertiary markets, it seems like the appetite for real assets among the broader market seems to be quite strong if I look at the volumes. You, you know you kind of touched on the iss...issue and I kind of look at it and say, are cap rates going to snap back on these tertiary markets a lot quicker? Where do you draw your opinion on that that they are going to stay down for longer than most people belief?

In, in the secondary markets I think there is a spread in some markets where the cap rates are higher. What we've done is we prioritized those secondary markets that we wanted to get out of first because we see assets that had a lot of deferred maintenance, poor performance, and we've gotten out of those markets first. What we were speaking to earlier is that some of that these secondary markets our assets of good quality, they are performing well.

We may only have one or two assets in those markets. And if they are the better assets in those markets, there are always local buyers who will come in and by those assets. Ah, if they are good assets. So what we did was target those that were of lesser quality and we will get a few of those done this year, of the lesser quality assets in secondary markets but in a market where we're sort of at the top end, we feel like there will be buyers there.

One other quick question for you guys, it's starting to become a common theme now to discuss cash gains on sales as well as internal rates of return on executed sales, not on individual transactions but on maybe an annual look back. Could you guys touch on that in terms of what type of experience you had last year? And I'd ask that perhaps you can include it in your supplemental on a going forward basis although you are not selling that much because it seems to be a good way to benchmark who's, you know over a longer period of time you are getting a good return on their investments?

Yeah we would have liked to have been around to buy these assets, too, Rich, but I'm looking at and somebody said 10% IRR on the 2003 disposition and we'd be glad to add it to our disclosure.

Thank you.

Frankly, we take these requests for disclosure very seriously so keep them coming.

Thanks.

Thank you. Our next question is from Craig Leopold with Green Street Advisors. Please go ahead with your question.

Good morning or afternoon as the case may be. I want to get back to this redevelopment issue and 50 to $100,000,000 of redevelopment spending at the midpoint that's roughly 20 to 25% of your portfolio, and if you're getting a 10% rent increase, wouldn't that imply revenue growth of two to 2.5% just from this program? And if you did it ratably over the year you would expect, then, you know half of that to come in in '04. So you'd have one to 1.25% revenue growth just from the redevelopment program, which would presumably translate in NOI growth of two to 2.5%? Am I doing that, one, am I thinking about that math right and, if so, does that imply that you're not really expecting much growth in your markets other than just this pick up from redevelopment in your same unit guidance?

I think there's a couple of things there. First I don't disagree with your math. I think you are as usual right on target. What I would do is tell you that the 50 to 125 million involves a couple of different components. One, true redevelopment of properties where we would take an asset off-line and in essence redevelopment it both exterior and interior.

Second, programs as we've highlighted, kitchens, baths, and others being washer, dryer, those types of programs. And so what we are doing is in our quarterly disclosure is highlighting the dollars we're spending in what caption and then what I would do is commit to you in the future just looking at it, we'll both try to enhance our disclosure and our conversation on these calls to highlight how much additional income we are garnering from these efforts, and then back into, you know what is a same store sales perspective. Right now our kitchen and bath efforts Martha highlighted 2300 units I think you'd will find those predominantly in the DC corridor.

We're starting up the program in the... California, and those are two markets where we are seeing it. So we probably need to bridge the gap between the disclosure of what we are spending and also what markets we are spending it in and we'll look at how to do that more efficiently. The programs are just getting started. What I am encouraged by is the reception we are receiving both from our associates and the residents and, two, the potential. I mean, it's not, you can go find an A class portfolio and do this and get these pops.

And you can't look at a C portfolio and do it. This is a B kind of business. And we'll just keep enhancing our disclosure. Looking at what our revenue growth, I...I'll stick to our prior guidance. You know we see revenue down 1% , up 1% , on a national basis. The markets that are going up and going down, you know I've listened to enough calls by now, I don't disagree with people. What we are encouraged by is, we like this value add to our enterprise that is not unique but materially could be helping us in the future.

Tom, given that...can you give us a sense of the 50 to 125 million, what portion goes into maybe the same store pool versus what portion goes into something that you would really take off-line and do a major rehab on?

No, I really couldn't give you that. I mean it would be shear guess and that's just not good for you or me.

Okay.

But what I would be doing is, you know we're going have... oh, we are going to have a dividend announcements on Monday so it doesn't fit that press release. We will come up with a way to get that information out there and post-it to the Web site.

One related question and that's I think you might have answered it when you indicated that most of this was occurring or the kitchen and bath stuff is occurring in DC and southern California obviously U.D. R. went through this program I know not under your watch but, but under previous managements watch back in 97, 98, so this isn't a redoing of that kitchen, bath program, is it, these are different units?

No, and you are true, I wasn't here in 97 but as I understand those programs were directly related to gating and washer, dryer activities. And you know, I can tell you I'm much more a stickler, I want to see the NOI, I want to see the rents.

So the program that Chris outlined where we do five and they send us the lease and prove that they got the rent before they move on, because it can be just a sink hole of money that doesn't get the returns and I'm not into that business and kidding myself or my shareholders. So I think that's how we've approached it and how we keep control of it and what I focus on is not just on the internal discipline and controls but also the marketing of it. I think there's a lot of, we can do a lot out there when we start buying assets that we see this potential and start turning them around. So.

Okay. One last question for Chris, it looks like in the supplement maybe a page was missing and that is on the in-store performance for the full year, '03 versus '02. Do you have that revenue expense in NOI growth?

It should have been there.

It looks like the one page got, was omitted from the supplement.

YTD versus prior YTD?

Yeah.

That would be attachment seven F.

Yeah,huh, mine stops at E. from the Web site. We will huh...we'll get that out there. Okay, because I have it for you know concessions and resident turnover and that stuff but not for revenue expense and NOI growth.

Just to give you the totals, is revenue is down 1.8%, expenses up 2.5%, and NOI is down 4.2%.

Right. Thank you.

Well get that out there.

Our next question is from Jim Cohen with Morgan Stanley. Please go ahead with your question.

Just a quick one. I guess, you know in the beginning of the call you guys were talking about how cheap your stocks trade at. What then do you try to do O. P. unit transactions and why issue shares at prices below where its currently trading?

Well, I think at each time we've issued stock we've looked at what the multiple was at the time, what the alternative sources of capital were, and looked at the pricing of the asset. So in the O. P. unit transactions that we've issued this last year you will find that the stack, I am looking back at the price 16.50 at the beginning of '03 with one transaction of significance, we were trading at slightly over $16.60 at the time. So we issued it at market.

The returns we were projecting out of the assets we far exceeded those this last year so the upside was in those, and we looked at a, an overall down and thought that the multiple that these stocks should trade at should frankly be more in the 11 type range. On a relative basis we're still very, very cheap. On a historical average, we are very expensive. So it kind of you have to form a view of where are the capital flows going to be and where are the share prices going to be in the future and then what is the use of proceeds. And you factor those items together, I think we made a pretty sound decision and it's turned out to be a creative transaction that added to our earnings and added to the value created.

So that's the O. P. unit decision. A lot of the other stock that was issued in the open market was really to repair a balance sheet that we looked at and said was not in a position of strength, could not fund our growth and insure the stability of the dividend. So we elected to issue equity, fix the balance sheet and we believe we've done that and we have restored the company to nearly a triple B rating which is where our target is. And reduces our long-term cost to capital on the debt side. So.

So the cheap is relative to the peer group, not necessarily to.

Oh, absolutely. Not to the long-term averages. Which I don't know about you, I'm one of these people that I keep reverting back to that and then I keep reminding myself how global the world is becoming in terms of capital flows and how much money today is flowing in from places like Japan, Australia, and Germany; that look at the U.S. and say, first, our currency is beat up and battered, that they're buying U.S. real estate that costs a $1.00 for $.80 and they are getting a safe yield, which it far inexceeds. And in the Dutch system today a standard 3% yield is a pretty attractive return and you can by U.S. real estate 6% yield.

That works pretty good and then the you put the currency translation on it and it even gets better. So I'm huh...I would have told you a year ago, five years ago my view of long-term cap rates and long-term multiples, they always go back to nines and tens. And to tell you the truth I think the world's repriced its self.

Got it.

Sorry, long answer.

No, it's good.

Thank you. Ladies and gentlemen, if there are any additional questions at this time please press the star followed by the one and as a reminder if you are using speaker phone equipment you will need to lift the handset before pressing the numbers. We have no further questions at this time. Please continue with any closing comments.

Well, I thank you all for your time and important associates on the call for their efforts. I ask that you take away from the call today three-point, the relative value of our stock, the growth prospects for the future and performance. We do what we say. Take care.

Ladies and gentlemen, this concludes the United Dominion Realty Trust fourth quarter do thousand three results conference call. If you would like to listen to a replay of today's call you may dial (303) 590-3000, or (800) 405-2236, followed by access number 562462. Once again we thank you for your participation in today's conference and at this time you may disconnect.