UDR Inc (UDR) 2004 Q2 法說會逐字稿

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 today, Tuesday July 20, 2004. I would now like to turn the conference over to Ms. Claire Koeneman from Financial Relations board.

Thanks. Hello, everyone, and welcome to United Dominion's second-quarter conference call. The press release and supplemental package were distributed yesterday, as well as furnished on Form 8-K to provide access to the widest possible audience. In the supplemental disclosure package, the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure, in accordance with Reg G requirements. If you did not receive a copy of these, they are available on the Company's website at www.udrt.com in the Investor Relations section. Additionally, we're hosting a live webcast of today's call, which you can also access in that 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 risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in the press release and from time to time in the Company's filings with the SEC. Additionally, the Company does not undertake a duty to update any forward-looking statements.

Without further ado, I'd like to turn the call over to United Dominion's CEO and President, Tom Toomey, who will introduce management with us today and start his formal remarks. Tom?

Thank you, Claire, for that introduction, and joining me on the call today is the entire management team.

An outline for today's call. I will cover three topics -- the states of the multifamily recovery; my forecast for the multifamily industry over the next 12 months; our plan to create value during that timeframe; and then I will turn the call over to Martha Carlin, who will cover our operations and update you on our outlook for selected markets; Mark Wallis, who will discuss current acquisition and sales environment and our activities; Ella Neyland will cover the balance sheet; Chris Genry will update you on guidance. And then we will open up the call to questions and answers. Let me get started.

The state of the multifamily recovery. In short, the recovery is underway and picking up pace. This is most evident by one clearly visible signal -- jobs. With 1.3 million jobs created in the first six months of the year, for an average of 211,000 a month, that is a great pace. I would add to it economy.com is forecasting another 1.2 million jobs to be generated in the second half of the year, 500,000 of those jobs in UDR markets. I believe the basic element for recovery is in place.

These fact which is not as visible but just as telling -- our sequential topline revenue growth of 0.5 percent is the best first to second-quarter revenue pickup in the last five years, and 2.5 times the normal seasonal pickup. To further emphasize the point, 77 percent of our markets experienced revenue growth above the five-year average seasonal pickup. This is more than the seasonal pickup; it is a true recovery.

My second topic -- forecast for the next 12 months. First I would say state that we believe this recovery will continue and accelerate. Supporting this assertion, like you, I'm watching the convergence of many elements, which I will try to summarize the positives and negatives of each. The bottom line is my forecast is for a 5 percent growth in NOI over the next 12 months for the apartment industry.

The primary factors I use in weighing this forecast, first, is inflation. The primary driver for inflation this round is not too dissimilar to those in the past. Fuel costs are high. Oil at $41 compared to 31 a year ago versus 26 three years ago, with no let up in sight. The positive is this will put continued pressure to increase interest rates and continue pressure on increasing construction costs, which in turn should increase the cost of homes, condominiums and new multifamily construction.

To add some color to this construction comment, costs nationally we have seen rise 4 percent over the last six months. Broken down, concrete is up 10 percent, steel up 20 percent, lumber up 10 percent, and labor up 10 percent. You can double those numbers for construction activities in California and Florida. The negative side of this type of inflation is that utility costs will rise, putting pressure on our rent increases. Some of this has been mitigated by us over the last year by the fact that we now bill 58 percent of our utility cost to our residents. This is up from 52 percent a year ago.

Second, our customers. Positive signs. You heard me speak about the jobs, but let me add that we are now in a loss to lease position. Concessions are decreasing in a number of markets and are down to $366 per move-in during the second quarter versus 379 in the first quarter. A point to highlight further is that our residents are willing to pay more rent on our completed and renovated properties. The negative is still 61 percent resident turnover, of which 18.5 percent are still leaving for single-family and condominiums.

Third is competition. Single-family and condominiums continue to be a formidable competitor. We have posted on our website a comparison of the monthly mortgage payment for a single-family and condominium against our rents. These are not market averages but are actual competitors for each of our communities. You will see that we have a significant gap and potential to raise our rents against mortgage payments for single-family homes, which has now widened out to 62 percent. But against condominiums this gap is only 14 percent -- very formidable competitor.

While I'm on the housing market, let me read to you a recent excerpt from a Business Week article, which I think is very -- capsulizes what I think about the housing market and the housing bubble. Today's housing prices are predicated on an impossible combination -- the strong growth in income in asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. There's hope for us.

A fourth fact that has gone unnoticed by many in this industry is that 85 percent of the apartment stock was built before 1990. By my calculation, the average age is now nearing 30 years. Couple this with the recent economic downturn, during which many owners did not reinvest in their assets, to create a number of inferior competitive products. This will create an opportunity for companies like United Dominion who have maintained their assets and are positioned correctly.

My last topic is how we plan to create value during this recovery. First, I think you have to get the right starting point. 2005 consensus on the Street for us is 1.61 a share in FFO, representing a growth rate of 4.5 percent over 2004. This is below the industry average FFO growth of 6 percent. We've looked at our modeling, the impact of recovery, our investment plans, and believe the Street is on the low side, primarily due to not considering the portfolio repositioning efforts and our ROI efforts. We anticipate coming out with more firm guidance at the end of the third quarter 2004. We feel very comfortable that we will be better than average growth 2004 to 2005.

Second, a fact, as I mentioned earlier, missed by most is the Company has now shifted a significant amount of assets into markets with better growth prospects. And in fact, 43 percent of our projected 2005 NOI is coming from California, Florida and D.C. markets. And relatedly, we have reduced our exposure to slowing-growing Texas to 16 percent of our 2005 NOI.

Third, successful acquisitions will continue. By the end of 2004, we should be down to 44 markets, down 18 markets from three years ago. On a related point, Mark Wallis and his team have demonstrated the skills of being a smart buyer. Over the last three years they have bought nearly 1 billion in assets in 26 separate transactions at an average cap rate of 7 percent, and in fact, are achieving those targeted returns, which few are willing to report.

Fourth, asset quality investment programs. Martha will give you more facts and details, but simply, the answer is, we have worked to build a team which is now almost complete to a complete 50 to 60 million annually in ROI, including face-lifts, kitchens and baths at an average return of 15 percent, and another 30 to 50 million annually for major rehabs with an average return of 10 percent.

With that, I will now turn the call over to Martha.

Thanks, Tom, and good morning to those on the call. This morning I will cover the second-quarter operating results and market trends.

Overall, the results were in line with our expectations, and I feel good about where the business is headed. We continue to make progress, albeit not as fast as any of us would like to see. Revenues were up sequentially 0.5 percent, or 719,000, which is more than twice our best sequential growth rate of the last five years, posted in 2002.

Net rental income increased only slightly as the 700,000 improvement in vacancy loss was partially offset by a 30 basis point increase in concessions and an increase in bad debt of 300,000. Fee income associated with application and other fees on seasonally-higher traffic contributed another 470,000. Concessions increased due to a higher volume of move-ins than in the first quarter, but were down 3.5 percent on a per move-in basis.

Collections per occupied homes have stabilized and are starting to improve in almost 50 percent of our markets. Occupancy increased 50 basis points over the prior quarter, despite pressure from early move-outs due to home purchases and traffic challenges in selected markets. Expenses were down sequentially as warm weather set in and pressure on utilities cost eased, resulting in a decrease of $1 million. This was partially offset by a seasonal increase in turnover expenses of 4 percent, or 380,000.

On a year-over-year basis, net rental income was down slightly 0.5 percent, or 700,000, due primarily to lower market rents offset by a decline in concessions of 20 basis points. We expect revenues in the third quarter to show positive year-over-year growth as we see pricing strength return in a number of our markets.

On a year-over-year basis expenses increased 4.5 percent, or 1.6 million, due to a 4.8 percent increase in insurance and taxes, a 6.6 percent increase in personnel and an 8.2 percent increase in repairs and maintenance. As I mentioned on the first quarter call, insurance costs are higher due to poor claims experienced in 2003. Personnel increased due to lower turnovers, resulting in fuller staffing, a January pay increase of 3 percent and increased benefits costs.

Repairs and maintenance were up as a result of two factors. First, we experienced warmer temperatures than in 2003 in the East, contributing to a higher volume of AC work. We are implementing full HVAC replacement programs for our communities with high work-order volumes and high HVAC-related R&M costs. We estimate the return on this investment will range from 12 to 15 percent. Second, and a focus on associate work/life balance directed towards keeping our associates, we encouraged them to use their earned vacation, which they have not done historically. This resulted in our vending out to third parties work that would otherwise have been done in-house while service associates took vacation. We do not typically maintain additional staff to cover vacations. While historically we see an increase in associate turnover as we move into the summer, our turnover has remained flat at 38 percent, down from 55 percent last year -- a dramatic improvement.

Other key points in the business I would like to bring to your attention. On a sequential basis, 54 percent of our major markets had positive revenue growth and 60 percent of our major markets had positive NOI growth. Resident turnover is down 2 percent year-over-year, reflecting improvements in the economy. We posted double-digit improvement in Orlando and Northern California as those markets began to show strength in job growth.

On a sequential basis, turnover was up 10 percent, in line with our seasonally-anticipated increase. Utility reimbursements continue to increase sequentially and year-over-year, up 1.5 percent sequentially in spite of a 10.9 percent decrease in utility costs, and up 11.6 percent year-over-year. With rates increasing as much as 10 to 15 percent in many municipalities, this represents our best hedge against these cost increases but will continue to put some pressure on our ability to raise rents. We have recently implemented water billing in several markets in California, which represents an opportunity for us of approximately 600,000 per year when fully implemented.

We continue to invest in our assets. Our interior upgrade program delivered approximately 2400 kitchen and bath upgrades at an average cost of 2200 a unit, down from 2800 a unit in the first quarter and 650 washer/dryer installations at an average cost of 800 a unit. Our average cost is down due to the higher volume of work, resulting in better pricing from our vendors. We are getting more for less, in certain locations adding higher-end touches such as granite and tile. Average returns on these investments are 15 to 18 percent, or $1 million a year in rent. These continue to be well-received by our residents and we have had no complaints about staying with friends or family for a day or two while the renovation is completed.

We're moving forward with additional exterior renovations in conjunction with these interior upgrades in markets such as Washington D.C., Maryland, Southern California and Florida, where we see stronger potential to drive rents in the near-term. We are planning to deploy just over 20 million on these renovation projects over the next six months and will expand the program in 2005 as other markets begin to firm.

Now I would like to take a few minutes on the markets. Our strongest markets from both a revenue and an NOI perspective were Southern California, Norfolk, Austin and the military markets in North Carolina. In Southern California occupancies remained firm at or above 95 percent as residential permitting is forecasted to taper off through the first quarter of 2005. We have pricing strength in this market and will continue to push rents. We expect continued strong growth.

Additionally, our Orange County portfolio will roll into our mature results in the third quarter, and we are seeing rent increases averaging 100 to $150 a door, several months in advance of pro forma, as a result of the rehab of these assets.

Our military markets in Norfolk and North Carolina posted strong year-over-year growth as they rebounded from the initial Iraq deployment. Our North Carolina Marine base markets in Jacksonville and (indiscernible) are currently undergoing a call-up, which may have some impact on the third quarter. We won't know the full impact until August. Our other North Carolina military markets remained strong and we continued to grow rents.

Our Austin assets showed strong revenue growth as the completion of the expansion of Highway 183 brought increased traffic, resulting in significant occupancy gains. And permit issuance began to flow, contributing to a gradual firming of the market. Austin showed signs of emerging from the recession, and we anticipate continued strength into 2005 as migration into Austin is expected to bounce back. This led us to purchase an asset in Austin which we feel has great upside as the market rebounds.

Markets with weak performance where we anticipate continued pressure into 2005 are Charlotte, Dallas and Houston. While the Charlotte market overall is fairly stable for us, we have assets in two sub-markets where our resident base is being impacted by a slowdown in residential construction, resulting in occupancy and collection challenges. It will take us a while to overcome these challenges as we re-tenant these two assets.

In the Dallas market, we've outperformed from an occupancy standpoint, but market rents continue their downward slide. New units being delivered in 2004 are higher than the net absorption of 2003 and 2002 combined. Pressure from home purchasers continued on pace, while seasonal traffic improvement has not materialized due to lack of job growth and pressure from Class A properties.

Houston is a story of oversupply as developers continue to build. An additional 14,000 units are on target for delivery in 2004. We don't see the market improving until this excess supply abates or many more jobs are added to the area. Overall, our markets continue to feel the impact from home and condo purchases this quarter, as interest rate fears and loosening lending criteria stressed our core customer base.

Move-outs to homes purchased were 18.5 percent of the total, down slightly from a high of 20 percent in the first quarter. Markets most impacted were Baltimore at 28 percent; Charlotte at 21 percent; Tampa, Orlando and Jacksonville at 22 percent; and Riverside, California at 22 percent. We do not expect this to improve in the near term.

Looking forward to the third quarter, July continues to show gradual strengthening. Occupancy on the mature portfolio is 40 basis points ahead of last year with strengthening rents in many markets. Overall traffic is holding to historical patterns with some weakness in selected markets such as Dallas. Concessions have fallen back from the increase we saw in June.

And now I'll turn the call over to mark.

Thanks, Martha. I'm going to talk about the progress we continue to make in our efforts to reposition our national portfolio.

We continue to make acquisitions in core markets with an emphasis in (indiscernible) more of our NOI in California and Metropolitan D.C. As of the end of the second quarter we have closed on 185 million of acquisitions, and we have three additional communities containing 130 homes in Northern California, and 743 homes in Southern California under contract, for a total cost of 100 million, which is 115,000 per home and a cap rate of 5.6 percent.

All of our due diligence is completed on this transaction (indiscernible) it will be closed in two stages -- 15 million will close by the end of July and the balance will close on November 1. However, we will take over management of all of the (inaudible) of the properties on August 1.

In addition, on July 15, we closed on the purchase of 309 homes in Austin, less than a mile from our Redstone ranch community in Cedar Park. This is a new community built in 2002 and was purchased at a total cost of 18.2 million, or 59,000 a home at a 6 percent cap. We have sold 100 million of properties as of June 30, which has taken us out of two additional markets, and also trimmed some older assets in lackluster sub-markets.

We have two assets under contract for sale at a price of 57 million that are scheduled to close by the end of July at a blended cap rate of 6 percent. One of those asset sales will take us out of another one-off market. With this sale we have exited a total of 15 markets since we began our repositioning efforts in 2001. We are now down to 47 markets from our starting point of 62. In addition, we are negotiating a possible sale that would take us out of the two markets we own in Michigan. The sale price will be in the $105 million range. Our acquisition pipeline remains full and we are confident by year-end we will have completed an acquisition transaction in excess of 500 million.

So, what is the status of the buying and selling environment and cap rates in major markets? I'm afraid I'm going to sound like a typical weatherman in July -- it was hot yesterday, it will be hot today, and the long-term forecast is hot with no rain in sight. Cap rates remain compressed. The market is still hot. And we even see cap rates falling on higher quality deals, and that's because of condo converters and pension funds, who are both extremely aggressive. Cap rates in markets like San Diego and Southeast Florida have in some cases fallen to sub-5 levels.

The good news is we are seeing more assets being brought to the market for sale, with some sellers being fearful of holding assets with floating-rate debt. We believe that the tactical markets like Tampa, Orlando, Atlanta, Dallas, Austin, Denver, Houston, are starting to see real job growth, and this is a good time to cautiously add newer products and trim off some older product.

In addition, we have repositioned the portfolio through development of new assets and rehabbing existing assets. Attachment 8 details the status of our 13-home development pipeline. I want to point out that the cost has increased 1.6 million on the Rancho Cucamonga project, and that's due to dramatic increases in concrete, lumber and steel that we experienced as we completed our buyout of the job. However, our forecasted rents look good and our yields should remain within our original range of 7.5 to 8.5 percent.

Our asset quality team is pursuing the kitchen and bath rehab program. In addition, they are doing minor exterior rehabs to approximately 15,000 homes at an average cost per home in the 1000 to 1500 per home range. In addition, we anticipate doing major rehabs on 2000 homes in the upcoming 12 months.

So, (indiscernible) United Dominion -- with 43 percent of its projected 2005 NOI from California and Metropolitan D.C. and Florida, improved asset quality in its other core markets -- is well-positioned for improving apartment market fundamentals expected to begin in 2005.

Now I'll turn the call over to Ella.

Thank you, Mark. The press release outlines the capital market activity for the quarter and it also references the July 8 Moody's upgrade, which we were very pleased to have received. Since that upgrade, we've seen our bonds trading roughly 6 to 7 basis points higher, which is about what we expected as far as the change from our previous split ratings. It will certainly benefit us going forward since we have additional bond issuances in our guidance for the balance of 2004 in order to fund our net acquisition activity.

Also since we last met, the Fed increased the Fed funds rate by 25 basis points, and they have signaled to make measured moves. So that answered the old question of how are rates going up, so now the important question remains how much about and what velocity. There are four meetings left this year. Looking at the futures market and the forward LIBOR December contracts, our model has LIBOR forecasted for year-end levels that market forecasters anticipate.

So what does that mean to United Dominion and the impact on our 2004 guidance? Well, we need to look at two parts. First, the amount of our variable-rate debt, and second, the rates used in our model to derive 2004 FFO guidance.

As we have stated before, our range for variable-rate debt will be between 25 and 28 percent of total debt. And we've stayed in that range year-to-date and anticipate the same for the balance of the year. Of our 620 million in variable-rate debt, 92 was our line and the balance of 528 million -- roughly 85 percent -- was for the most part our Fannie and Freddie credit facilities, which are tranched, so they do not simultaneously reprice for changes in market rates. In fact, our tranches go into the fourth quarter. So we have modeled into our guidance the timing of those tranches, as well as the earlier referenced increases in LIBOR. Once again, we can always convert those facilities to a fixed rate debt, if needed, on about one-weeks notice.

And second, what type of long-term interest rate assumptions have we made in our model? To keep our variable-rate debt in our range, we have modeled in the issuance of $75 million of additional bonds starting late third quarter at a blended rate of 5 percent. Our June issuance was at 4.3, so we're currently inside of our long-term interest rate assumptions also.

Given what we know today, our model, and the flexible structure of our variable-rate debt, we're comfortable with the range of variable-rate debt and its impact on our earnings.

So with that, I will turn it over to Chris.

Thanks, Ella. Greetings to everyone on today's call.

As you have heard from the team, we continue to execute the plans that we've previously laid out for you, and our results continue to come in on target with our expectations. We have tightened the range of our guidance by 2 cents on each end, which reflects our increasing confidence in the midpoint of our range.

While we continue to view the third quarter as our first to report year-over-year positive same-store results in a while, the third quarter will likely reflect the seasonal increases in expenses that we experience every year, and our interest expense will begin to tick upward.

According to plan, we will close 18 million of acquisitions and 57 million of dispositions in the third quarter. And we expect to report funds from operations of 38 to 39 cents per share when we talk with you again in about 90 days.

As we become increasingly confident in these numbers and look toward 2005 and beyond, we believe it's prudent to allocate an increasing portion of our earned cash flows and our investment capital back into our existing assets, better positioning them to provide growth in earnings and to continue to compete effectively with similarly-priced product.

You will note in our APPO (ph) disclosures that we have bumped up our capital charge from $470 per apartment home to an annualized rate of $510 per apartment home for the balance of this year, which will result in our spending $490 per home in 2004, for a total allocation of 26 cents a share, which is an increase of a penny over previous forecasts.

Increasing our current rate of spend moves some of our future planned paint jobs, roof replacements, landscape replacements, pool improvements and asphalt paving work into the nearer-term schedule, in anticipation of the increased traffic that should result from an improving economy.

We continue to find good opportunities to add to the portfolio, but we also continue to believe that there are many good opportunities for investment in growth inside the existing portfolio. Let me recap for you some of the pieces you have heard in a concise format.

Our improvement investments can be broken down into three categories.

First, the kitchen renovations. We have already completed about 8200 kitchens, spending a total of approximately $18 million since inception of this program in 2002, and are generating returns averaging about 15 percent by renting these units for higher rents than similar floor plans on the same properties. We are confident that we can perpetuate this experience in more and more of our markets as they begin to see job growth, and we're building the in-house capability to manage 12 to 16,000 of these units upgrade annually. This translates to an annual investment of 26 to $36 million for the foreseeable future.

Next come the exterior renovations. We have invested approximately $5 million to date in the façade updates, landscaping and sprinkler upgrades, and safety and lighting upgrades that represent an exterior improvement initiative. We have identified similar projects across the portfolio that would involve the investment of 20 to $40 million more over the next 12 months, and we'll likely identify at least that much that we can invest in the following one-year period. Returns for these investments are also expected to be in the 15 percent range, and we'll continue to reduce that investment hurdle if capital costs remain low, such that more and more of these projects will become a reality.

And finally, there are other ROI-type investments that we have been making in the portfolio, comprised mostly of energy efficiency projects, in-home washers and dryers and garage spaces and storage units. We have spent $6.5 million over the past year on these kinds of projects at returns exceeding 15 percent, and we foresee investing similar amounts annually for the next few years.

These three target areas provide us the opportunity to capitalize on the improvement in the economy by making investments in markets we already know well in assets that we already own. Summed together, they represent 50 to $80 million of annual spend at returns that should average 12 to 15 percent.

I will now turn the call over to the operator for questions.

(OPERATOR INSTRUCTIONS). Jordan Sadler.

I was just curious to get a little clarity on your third quarter expectations. You're -- sequentially, what are you expecting to happen to revenues? I know expenses usually pick up in that quarter.

We're expecting revenues to pick up in the third quarter on same-stores sequentially just under 2 percent. I'm sorry -- sequentially just under 1 percent. Year-over-year it's over 1 percent.

And NOI?

Sequential NOI flat, and year-over-year up 0.5 percent to 1 percent.

Now, is your -- the ROI initiatives, or the guidance associated with that -- the 50 to 60 million -- I think that Tom mentioned. I know you just went through it as well, and it's 50 to 80, which I think that includes a bigger project. Is that a little higher than you had outlined previously? I remember a 25 to $30 million number.

Yes. We continue to identify more and more of these kinds of opportunities.

I think as the economy gets -- Jordan, this is Toomey. As the economy gets better -- someone asked me how big is this potential. I said listen, a lot of it depends on how the economy rebounds and where it rebounds. We're just actively pursuing it where we think we're going to get paid for it, and paid handsomely for it. So that's our forecast; it's up from what it used to be. And you can to that in the third quarter we expect year-over-year to hit the point of inflection where same-store sales go positive.

If this is up, I mean if the numbers keep moving up and the returns are better, it's juicing your NOI a little bit I would imagine. But what is happening to your core NOI without these upgrades? Is it slipping a little bit? Are the concessions higher than you anticipated?

Jordan, it's like art; you can't necessarily separate the two. In essence, we don't try to make the precision measurement of asking someone if you put a kitchen, could you have gotten $25 rent increase without the kitchen? And now that you're getting 70 with it, how much is which one? And that's just false precision. I think what happens is we are paid as a management team to take capital and deploy the best way possible at the highest returns, and then that's what the kitchen and bath and these other renovation opportunities -- which are unique to United Dominion. There's not many B-market companies out there, middle market focused, that's going to have this opportunity inside it. So I tend to look at it -- first, not trying to slice the apple and get a false measure of something; two, we're trying to tell you how we're spending our money and what the returns are on it; and we'll continue to take that focus. I don't see the benefit in trying to differentiate the arts, as you'd like us to slice it.

I guess you don't have to break it down for me by members, but I guess in terms of your expectations on the core, are they coming in a little bit weaker than you saw or are they just sort of coming in in line?

I'll let Martha comment a little bit about it. She handles it on a day-to-day basis.

I think they're basically in line. We are making these investments as markets recover. When we see a market start to firm up, that's where we are driving most of these dollars in. So as an example, in a market like Houston that is still having a lot of challenges, we're not making as many investments there today as we are, say, in Washington D.C. and Florida and California.

I think his question boils down to -- the core results, if you take out the ROI, do you feel like the portfolio is performing on target? You answered that and said yes. Is it meeting your expectations? Well, the answer is we have higher expectations than what we are delivering. We are a pretty ambitious little bunch here, and I can tell you that I think we could lease more units; I think we could lease them at higher rates than we're leasing them today. And it's the job of our operating team to get out there and do it. We're giving them the tools to get it done. Am I disappointed in him? No. Are we up against a very competitive environment? Absolutely. Are we holding our own? I think we are. I think we can do that better, though. I think we've got a better team. Evident -- our employee turnover is down into the mid-30s. Our messages are getting across. I'm happy with that number. And the three things that I focused on at the beginning of the year -- asset quality, marketing, and associate turnover -- all have moved in the right direction. We have got a good program underway.

I guess, moving onto acquisitions. I know Chris outlined some guidance of what do you expect to close in the third quarter. Maybe you could just say that for me one more time, Chris? I sort of missed the acquisitions (indiscernible) timing.

In the third quarter, we're targeting acquisitions of 18 million and dispositions of 57 million.

I did hear that right. So I guess the 100 million under contract that Mark spoke to would probably flip to November, I guess, transaction-wise?

This is Mark. It closes November 1. There's a debt prepayment we're delaying for that reason only, so we're taking over management. So it will definitely close on November 1, if not -- it could close a couple of weeks earlier than that, which would slip it (multiple speakers) October.

Should we expect to see a little bit of a bump in other income from management, 3 percent or something on the 100 million?

It would be temporarily until we buy it, for 30, 60 days. It's not significant (indiscernible) trying to model.

It's very insignificant.

And then, Tom, last we spoke, I think you mentioned some portfolios you were seeing out there, some bigger portfolios. Any opportunities popping up? Are you still seeing sort of that same sort of activity?

Most of those portfolios are in the marketplace and they are taking back best and final bids. Mark can comment on a few of them. It's pretty widely known; the Walden (ph) portfolio is out there in the marketplace. They're taking signed CA agreements now, and we'll see where that portfolio gets traded. Mark's got the Essex in his gun-sites and can update you on that. And a few others that we're seeing out there.

There's some more -- Berkshire has got a portfolio out there. Some of these portfolios like the Essex have bet on them, which I think narrows some of the bidders down, but still there's plenty of players out there. And like I said in my comments, we're seeing people bring in two to three assets grouped together to market because they perceive that this is a window in 2004 they want to hit. So we are seeing a lot of those deals and we're looking at all of them. And we will pick the right one; if we can get them, we will get them.

The last thing I was just curious about, the bump up in non property income during the quarter. What was that related to and what is a good run rate for that going forward?

That would be related to the interest on the notes for the sales that we did in second quarter.

So it will burn off --

It will burn off between now and the end of the year. There's another payment due in September and a payment in December.

Rob Stevenson.

Mark, what's the timing of the Michigan disposition if you guys wind up doing that?

At a minimum -- I'll say a minimum -- I would say it's 90 days. We're not under contract; we are in negotiations. That will take another -- at best case -- two to three weeks. They will want the appropriate due diligence. So I'd say 90 days at least.

So basically this would hit at the very end of the third quarter or sometime early in the fourth quarter if you guys do it?

Yes. I would say early fourth quarter would be the best guess I have today.

And then, what are your expectations embedded in the fourth quarter other than the California acquisition in the full year guidance, guys? Is there anything beyond that, beyond the 18 million in the third quarter and then the 100 million of California acquisitions? Is that all that's in the sort of range these days, or you guys have more in there (inaudible) expecting?

As I mentioned, our target is 500 million-plus aggregate for the year. We're over 300 million with all those acquisitions we've got either closed or under contract. So based on our last few years' experience and what we see in the pipeline, we are very confident we're going to hit or exceed that number.

And then, Tom, what is your thought these days on joint ventures?

I think I've said it before, that the apartment industry or the apartment REITs frankly have not made much use of JVs. You're starting to see them creep into each of our plans, and just about everybody has one formed or is contemplating one. We see it as a part of the cycle. As cap rates move around and people want to continue to reposition their portfolios, they're going to use them to sell assets into. Or as some of these more complicated portfolios come to market that have debt structures that don't fit those of the public companies, that people will put them in JVs. So I continue to look at these portfolios both in terms of what they would do for us if we were to buy them all out, and those that if we were to put them in a joint venture structure, what the pluses and minuses. As I think the cost of money rises, cost of capital, you'll see more and more JVs. And we will probably be a company that will continue to examine the pluses and minuses of it. We have none currently under negotiation.

Andrew Rosivach.

Credit Suisse. Good morning. Chris, a quick question on G&A. It looks like you're actually running below your full year run-rate for last year. Is that sustainable?

We've cut back on our G&A; we've continued to aggressively manage all of our costs, from communications to compensation. I think we will see slight growth in G&A in future quarters, but nothing significant, within our historical run rate for sure.

So you think you might even come in under that 20 million that you did last year?

That's possible.

And Tom, I want to talk you about the 5 percent same-store. If you broke that up between the markets where you've been selling and the markets where you're buying, what do you think the spread would be in terms of internal growth between those two sets of markets?

I could break it out better than that, which is Texas -- you're going to be hard-pressed to be at a point, point and a half growth in that. And, I think, in Florida and Southern California you're going to see potentially the 6 and 7 percent numbers over this next 12-month period. Then what you have is the balance of markets like Seattle, Washington, probably closer to that 5 percent number. What I find interesting about it is basically six, seven months ago, before jobs really started being posted positive, our people on the ground were telling us a lot of people were coming in; they were working for smaller companies, but the job growth was being created. And what I would give you is that information has continued to be more robust as we have moved farther into these job postings. More and more of our people on the ground are telling us there's a lot of job growth, there's a lot of movement, there's a lot of traffic. And they're seeing that, and that weighs on -- this is just not optimism; this is really a feed up from the ground level, and we feel pretty good about that input.

Let me ask you a really unfair question, because I know you're a real estate guy and not a bond analyst. But that 5 percent same-store number, what do you think that ties to in terms of the Fed funds rate?

Ella's probably a better expert on the Fed's funds. I would tell you that you -- probably in my view, the five-year, 10-year number is -- the 5 percent 10-year number is about what I think this thing will settle out to over the next 12 months. And I think Greenspan is going to look at that and target that. But that's my guess. It's a nice safe guess. Why? Because if you ask, nine out of 10 economists are probably right on that number.

And in reaction to that do you think UDR would fix out more of their debt beyond that 25 to 28 percent range?

That's why we've left the low side of the curb; as rates move, we think it's going to be an every other meeting, 25 basis points kind of approach (indiscernible) as long as he's seeing positive jobs and he's seeing inflation moving that in tandem. If one of those gets out of whack and he changes that approach, we want to be opportunistic and either -- A, jump in and fix before a rapid rise; or B, as we've recently seen -- the market is overreacting to the June job number. There was 112,000 jobs. Frankly when they come out with revisions, I'm willing to put $20 on a 200,000-job number. And the bond market will move back from 4.3 back into 4.7 territory, just as rapidly as it deteriorated. What we want to do as a company is when misinformation like that comes out is jump in and take advantage of it and help lower our long-term cost of debt. And that's how we see it and that's how we're going to play it.

One last question in terms of where you're coming and where you're going. It looks like it -- at least this last quarter, it cost you a little over 100 dips of spread to (indiscernible) -- in terms of cap rate spreads to reinvest your capital. Do you think you're going to continue to have to pay up 100 basis points-plus to get into the markets where you want the growth?

This is Mark. I will answer that. As I talked about the 57 million we have under contract now, that's that at a blended 6.0 cap.

From the sales side.

So that's pretty close to what we're buying at; in some cases we're buying better than that. So I don't think we'll be any worse than 100 basis points. And I think if we're careful we maybe can improve on that. But you're probably not too far off, because what we're also trying to do is sell assets that are less desirable and a little bit older now at this point.

Roger Law (ph).

(indiscernible) International; good afternoon. Could you comment in terms of competition from the condos for your units? Have you seen any change in the mortgage lenders' appetite for risk? So are they getting a little more conservative on what they're willing to lend out at, in terms of down payments -- 10, 10-80's (ph) -- whatever?

Yes. We've seen quite a bit of pressure in a number of our markets from the -- on the condo side, and what lenders are doing targeting our customers with mailers on no down payment, down to the specific floor-plan type, where they know what our people are living in and what their condo -- how their condo compares, and taking more credit risks.

I don't think there is any underwriting.

Let me ask one philosophical question, if I might. On your "core markets", could there be a point where you got -- where the rates got So low they would say gosh, we're just better off selling some of these properties and holding the cash for a couple of years and waiting to reinvest at a more opportune time? Is that possible?

It's hard to imagine on a national portfolio reaching that level. On a local market phenomenon, certainly. We are offered some prices in Southern California on some of our assets that we're looking at them and saying, at that price we probably should take our chips of the table and where can we buy a better value. As a national company, that's what the advantages of being in 30-plus markets, is we can look at those trade-offs and make them in a very astute fashion. Mark and his team are up against a couple of elements -- first, our desire to reposition; two, the element of managing dilution; and three, the optimization of asset valuations. You know, we've got a particular asset, I'm thinking Southern California, we could get a low 5 cap on. We're looking very hard at selling that asset and saying can we buy newer, fresher product with better growth prospects somewhere else. And so we are weighing it. I mean it's somewhat -- I look at what our competitors are doing, and some of them are selling crown jewels and redeploying it. I can't run their companies, but I think it's pretty wise in some cases. Ours, we are weighing it. If we get those knock-out-of-the-box numbers, we would probably jump on a couple of them.

Carey Callaghan.

Goldman Sachs. I'm here with Darren Kennedy (ph) as well. A question on occupancy. In the first quarter, you had commented the exit rate on occupancy for the core was about 93.8. (indiscernible) you commented at the time of your comments, which was in April, that you were actually 94. And if you averaged 93.6 for (technical difficulty) just comment on (technical difficulty)

There's a typical cycle through the month of how occupancy goes, and at the point of the last call it was toward the peak cycle of the month. So when you asked where we were, we were at about 94 percent. Typically at the early part of the month we get a larger percentage of move-outs and occupancy will drop, and we build it back up over the course of the month.

Can you sort of -- some of your competitors have built occupancy nicely in the second quarter. Can you just kind of benchmark for us what you see as the difference with your sequential occupancy performance versus some of the others?

I haven't seen some of the others, so I can get back to you on that.

There is some -- (indiscernible) for instance was up, I think, 120 basis points. (indiscernible) occupancy etc. So I guess that's where I was coming from.

Carey, what I would add -- this is Toomey. One, occupancy is one measure of revenue success. Martha and her team are really focused on three different angles towards revenue success, depending on the market and the particular assets. In some cases you have already heard where we increased our utility penetration from 58 percent, up from 52 last year. Where we believe utility costs are rising rapidly -- for example California, where we can now start to bill for water -- we may forego rent increases to get residents on the water billing, because water rates in California are going to go up 20, 25 percent. And that rapid increase, once you get them on the paying utility side, will help us long-term much more than trying to get them for $10 more this month.

Second, occupancy is always a trade-off between what you are offering in a concession and what you have for prospects. We are focused not on running up occupancy and having a bunch of leases mature. If you sign six-month leases they're all going to be coming mature in November and December. We are more interested in long-term management of occupancy. And you've heard me speak many times about our lease management programs. That's why we sustained occupancy throughout the year at higher levels than most of our peers. We don't make these run-ups and buy occupancy, which usually buys bad debt. And you'll see our bad debt is 50 basis points; it's probably half of what most people in this industry run. Why? Because we don't want the beat-up, tear it up type resident who has a hard turn cost coming on the backside of it. So that's how I would kind of look at just isolating one number in occupancy gives you a real unclear picture about people's strategy and results. Sorry -- a little long.

Steve (indiscernible).

Steve (indiscernible) with Merrill Lynch. Tom, I was wondering if you could maybe just comment -- I know the fact is that you're primarily a B-portfolio. And the Journal had a good article today kind of talking about the haves and the have-nots, and how sort of upper income people are doing well. And the, you know, guy kind of lower down the food chain isn't doing well and isn't getting wage increases, and how that kind of goes into your kind of 5 percent NOI growth scenario?

Well, a couple of different things. I think the article was written by John Kerry's press agent, probably supported by his friend Sandy Berman (ph). That was a bad sense of humor, I guess, Steve; you must be a Democrat. Moving from that, how do I see the 5 percent? First, what I see is the housing market that's going to come under further stress. Second, a dry-up in construction activities along the single-family, multi-family. This construction cost is going to weigh -- starting to weigh heavily on people's margins and how much more they're going to put up. Second, you've got an economic interest rate environment that is going to rise. That is going to cause the mortgage payments to have to rise. If the guy in the middle is contemplating moving out -- 18 percent of our move-outs last quarter -- to a home, and all of a sudden he is caught in a squeeze, he is going to stay put. That's one side of the equation.

I see lower turnovers. I see the home market being stunted, and multi-family supply also receiving a little bit of stunt. And this construction cost -- when you go out and bid a job and you realize your costs have gone up 8 percent, and your rents are still flat to slightly positive, up 1, 2 percent, it's going to be hard to make your return numbers, and certainly hard for a lender to see through that. So that's part of the equation. Second is the jobs. Most of these jobs that are being generated are in our price point. These are people who are in the service sector, in the military, in support roles, that we believe creates more traffic and creates more opportunity for us to increase our occupancies, and in some markets raise rent.

So you'd see it more on the occupancy side than on, I guess, the rental side, since these people aren't really getting wage increases.

No question about it. You look at it and you see national occupancies have leveled off at 91 percent, and you'll start to run most (indiscernible) companies' numbers -- at one point of occupancy most of the apartment companies are going to be 4 to 5 cents of earnings. That is enough to move them from a 2, 3 percent growth to a 4 to 5 percent growth number. And a point of occupancy -- on this portfolio that's 790 apartment homes more per day than we had last year. That is achievable. So I think there's some room there. How else can I clarify it, Steve?

That's fine. Thank you.

At this time we have no further questions.

With that said, I want to thank you for your time today. And I would add it personally feels great to see the business get better. You guys don't know how hard it is to watch a business three years struggling. But let me add also that our company is prepared to take advantage of that. Let me conclude with a brief statement.

We have above average growth prospects via the portfolio re-positioning and our asset quality programs. We have the second-best dividend coverage, meaning the dividend will continue to grow, minimum development risk and no non-recurring fee activities in our results. With that, I wish you the best. Take care.

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