UDR Inc (UDR) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to United Dominion Realty Trust third-quarter 2004 results conference call. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded today, Tuesday, October 26, 2004. I would now like to turn the conference over to Ms. Monique Elwell, Vice President of Investor Relations at United Dominion Realty. Please go ahead, ma'am.

Thank you. Hello everyone and welcome to United Dominion's third quarter 2004 earnings conference call. The press release and supplemental package was 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 at the Company's Web site 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 obtained.

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 statement. Let me now turn the call over to Tom.

Again and welcome to United Dominion's third quarter earnings call. Joining me on the call today is a number of the management team. We are going to change the format from our prior calls to reflect a little bit of your input. First I will cover three topics, an overview of the third quarter results, a state of the multifamily recovery, and lastly a summary of market conditions and outlooks. I will then turn the call over to Chris who will discuss 2005 guidance, which is on our website at udrt.com, and a status of funding of our announced acquisitions, and lastly fourth-quarter guidance. Our comments will take about 20 minutes and then we will open up the call to your questions.

First, the third quarter results. The quarterly were what we had expected at 39 cents for FFO before a 4 cent charge for hurricane damage. The details of that damage are previously published in a press release dated September 29. During the quarter we announced a number of significant acquisition and sales totaling 1.1 billion. You can see a press release of September 7 for those details.

In summary, what gives me the greatest feeling of accomplishment after the third quarter is that United Dominion has reached a milestone in our three year effort to reposition our national portfolio. Now approximately 50 percent of our 2005 estimated NOI will come from high-growth markets of California, Florida and Metropolitan D.C. In fact, about 16 percent of our 2005 estimated NOI will come from Southern California, arguably one of the best multifamily markets in the nation today and in the future.

During the third quarter operationally we saw a number of positives. Occupancy was up 90 basis points year over year, up in 63 percent of our markets, up 30 basis points sequentially, up in 66 percent of our markets. Occupancy ended the quarter at 94.7 percent.

The trend in rent per occupied home, or cash put in the bank, has been positive. Since June it was $708 per occupied home. We have increased it each sequential month to 714 in September. Looking at the details, 67 percent of our markets have enjoyed this positive trend.

Loss to lease. Looking ahead to leases expiring in the fourth quarter, on average are $17 below our current rents. This coupled with our occupancy gain indicates continued revenue improvement into the fourth quarter.

Our utility recovery rate continues to show improvement. Our reimbursements year to date are averaging $22 per occupied home per month, an increase of $3 per home or 16 percent over prior years. And our overall recovery rate for utilities has improved from 46 percent to 51 percent this last year, and lastly, concessions per move in. During the quarter we gave $309 per move in. This is the lowest level in three years.

In summary, these four revenue metrics demonstrate we're starting to see more pricing power in the majority of our markets. That our customers are responding to our asset quality programs. And that we are carrying the best occupancy into the slow leasing period in the last three years signaling good prospects for the fourth quarter and 2005.

Somewhat offsetting these gains in revenue was the increase in expenses year-over-year to 4 percent. A portion of this is permanent and a portion of this is temporary. On the temporary front, with the increase in occupancy we turned approximately 13 percent more homes than prior years. This led to one time increase in repair and maintenance. On a permanent level we have reduced our associate turnover to an annual rate of 40 percent. This is down from 48 percent in prior years resulting in fuller employment along with rising pay and benefit costs. In summary, approximately 25 to 30 percent of our 4 percent increase is due to higher volume and temporary in my opinion.

These trends established that the recovery is continuing. I emphasize continuing. Two questions remain though. What is the pace of the recovery? What markets are going to lead or lag? First the pace of recovery. Let's look at the drivers. Jobs, to start with. According to a panel of experts at economy.com, national job growth will be about 1.5 percent or 2 million jobs for 2005. Using this same survey UDR markets are expected to see double the national rate. So we are expecting 3 percent job growth in our marketplaces.

Looking at this on a pure numbers of jobs, for UDR's top 15 markets representing 70 percent of our 2005 NOI, these markets lost 20,000 jobs in 2003. In 2004 they are estimated to generate 295,000 jobs, and this is expected to jump to 500,000 jobs in 2005.

Construction, the National Association of Home Builders is forecasting multifamily construction at about 330,000 homes for 2005, a slight decrease from 2004. A couple of points that have shifted in this that are worth noting. Condos now represent nearly 35 percent of the current deliveries, up from historical averages of 25 percent. Second, all these forecasts have not taken into account the recent rapid rise of construction costs and fuel costs. My point on construction, I think the 330,000 is heavy and probably will come down.

Interest rates, I'm certain all of us are looking at this and looking at the number of projections out there. What surprises me is that very few economists use oil prices north of $50 when talking about interest rates. And in fact if you look at the price of oil it declined from $30 a barrel a year ago. And as recently as the second quarter of 2004 was 40.

What is the relationship between interest rates and oil? And how does it relate to the multifamily business? I think two things are important to point out. First, with the rise in fuel costs over this last year it is estimated that every individual home or household is having to increase its expenditure related to fuel by $1,000. This will be a drag on our ability to raise rents.

The second, almost all businesses rely upon transportation to deliver their goods or to secure their resources. With the rise in fuel costs it is a matter of time before that is putting pressure on their margins, which may cause disruption in the employment number. My point is that high fuel costs will retard economic growth, thereby in my view keeping short-term interest rates low.

Housing, we see no change in the housing environment. It has been a formidable competitor for the last three years and it will remain one. So without being a licensed economist, we see in this environment a modest economic growth in which operating incomes will continue to grow, while values should be slightly negative impacted by rising interest rates slightly.

On to our next question. What markets will be strong or weak for 2005? Martha and I have decided to percent this section a little different, focusing on revenue growth. We divided our markets into quadrants. Four star markets, markets in which we see revenue growth will be greater than 4 percent in 2005 via positive trends in occupancy, rent per occupied home, reimbursement and concessions. Some of these markets are Orlando, Tampa, D.C., Austin, Southern California, or 34 percent of our 2005 NOI.

Three star markets, which revenue growth will be between 3 and 4 percent in 2005. These are Baltimore, Wilmington, Richmond, and Norfolk, or 17 percent of our NOI.

Two star markets, revenue growth between 1.5 and 3 percent. These markets include Nashville, Charlotte, Raleigh, and Seattle, or 25 percent of our portfolio, and one star markets in which revenue growth will be flat to negative. It includes Houston, Dallas and Columbus. In summary, 51 percent of our portfolio is positioned in markets that will generate revenue growth greater than 3 percent next year.

I want to now turn to acquisition and sales pipeline. (technical difficulty) the numbers down as they go through it. The acquisition pipeline. We closed in the third quarter of '04 $301 million of acquisitions at a 5 6 cap rate. We will close in the fourth quarter 530 million at a 5.7. 323 of that was announced in the add six (ph) transaction of (technical difficulty) 95 million at a 5.7 from the Pacific transaction previously announced. So there is approximately $122 million of a Florida portfolio that I will let Mark give you more details on later.

We will close in 2005 400 million. Under contract is 171 of that in the Essex at a 5.8 cap rate. Under due diligence $200 million at cap rates between 5.7 and 6.3. The sales pipeline. First during the third quarter we closed 59 million at a 5.3 cap. We have closed in the fourth quarter 20 million at an 8.1 cap. We will close in the fourth quarter 91 million at an 8.6 cap. Listed and actively marketed is 170 million at a 5.6 cap.

Speaking of the environment, we don't see any significant change in the buying and selling apartment communities since our last call. Cap rate remains at historical lows, related to everyone's expectations and continued improvement in multifamily fundamentals, low interest rates and investor demand.

I might add while we're talking about acquisition and sales environment, two factors to continue to watch and how they will play out. The first is the lending practices. In a recent quote that we received on a secured piece of paper at 80 percent LTV (ph), a 10 years piece of paper, floating at a 3.6 cap, 3.6 interest rate, with a cap of 6.25. You look at that number at 80 percent of proceeds and you realize that you can pretty much make a lot of deals work. And if we continue to see that type of lending practice, I think you're going to see cap rates stay down where they are.

The Fannie Mae situation, normally your thoughts on the disruption of a significant part of capital in the sector would turn towards tightening. When we look at what happened ultimately at Freddie, we saw the opposite. We saw increased and more aggressive lending practices. So I think Fanny is worth watching, but I think it is going to surprise people. It may turn it out to be a more aggressive lender in the years ahead, not constricting.

So with those comments and to keep moving, why don't I turn it over to Chris to talk about his pieces.

Greetings to everyone on today's call. I would like to take a few minutes to discuss three things before turning the call over for questions and answers. Third-quarter earnings and the outlook for the fourth quarter, the status of funding of the Essex Portfolio acquisition, and our earnings guidance for 2005.

I would start by highlighting one item that impacted our third quarter same-store results that many of you likely noticed. Take a look at our results in Southern California. The year-over-year third quarter results reflect the inclusion this quarter for the first time of the 1,067 homes that we purchased in Orange County during the second quarter of last year.

As you know, operating expenses can be favorably impacted when a property is first acquired, as it takes some time for vendors to get accustomed to billing the new owner. For this reason, if you compute the operating margins for Southern California off our attachment 7B, as in boy, you'll see 2003 margins in this market of almost 75 percent. First there is a more normalized 70 percent for this market. If you adjust last year's operating expenses in order to derive a normal 70 percent margin, valid (ph) results in 2004 expense growth of just 6.6 percent, and NOI growth of 3.5 percent this year compared to the -2.9 that is incorporated into our results this quarter.

Because this market is so significant to our results, this one adjustment would result in a 40 basis point improvement in our year-over-year NOI growth to generate a positive .1 percent growth quarter over quarter versus the reported negative .3 percent.

Our reported results are proper, but I thought this point was worth bringing out. Looking to the fourth quarter, we are expecting same community revenue growth of 2 to 2.2 percent and NOI growth of 1.7 to 2 percent for our first quarter of positive year-over-year NOI growth in nine quarters. This week we will close the second $323 million tranche of the Essex Portfolio assets. And we could possibly close up to an additional 200 million of acquisitions before year end. We also have sold one asset for 20 million so far in the fourth quarter, and we could close up to 91 million more before year end.

Although there remains uncertainty surrounding the execution of these capital transactions, we have actually tightened our range of guidance for the fourth quarter funds from operations to 38 to 39 cents bringing the full year range to $1.50 to $1.51 per share.

Turning to the Essex transaction, by week's end we will have closed 585 million of that acquisition, assuming 181 million of debt at a weighted average interest rate of 5.2 percent, and financing the remainder of that acquisition from the proceeds of asset sales and drawing on our 500 million revolving line of credit.

Although we have discussed an equity offering as part of the financing for this transaction, we still have a significant list of assets in noncore markets that could be sold in lieu of such an offering, and we are pressing to execute on those opportunities first.

Looking ahead to next year, as we customarily do during our third quarter call, we wanted to provide some insight to the range of possibilities that we see in 2005. We have provided a complete breakdown of these (technical difficulty) and a walk forward of our funds from operations from 2004 to 2005 in the Investor Relations section of our website at www.UDRT.com. And I will quickly walk you through the highlights.

Although reported job growth may not be as consistent as we would like to see at this part of the cycle, we have been steadily increasing our occupancy. And we're starting to see growth in collections per occupied unit in the portfolio on average. As Tom indicated, we expect those trends to continue into 2005.

We closed the third quarter at 94 percent occupancy. And we are forecasting 2005 occupancy to average 93.5 to 94 percent. Our net rents per occupied unit reached $714 in September. And we are forecasting those will continue to rise throughout 2005 as concessions continue to moderate and rent increases become more commonplace.

An average growth of $5 per home per month, or .7 percent above the current level is our low end projection versus an average growth of $20 per month per home, or 2.8 percent above where we stand today is our high-end projection. These results will drive same community revenue growth in the 2.5 to 4.5 percent range in 2005. We're forecasting same community expense growth to average 2.8 to 3 percent with larger increases in utilities, partially offset by reductions in turnover expenses and advertising costs. The net result is projected same community NOI growth next year of 2.2 to 5.6 percent.

Our G&A and property management expenses will be increased 1 to $2 million in 2005, as we continue to invest in R&D efforts to improve the long-term productivity of our workforce and our ability to attract the right customers at the right price.

We will invest $510 per home in returning capital expenditures for an AFFO charge of 27 cents per share. And we're forecasting $50 million of development expenditures and 20 to $40 million of capital enhancement projects in the existing portfolio consistent with our ongoing upgrade programs.

Property acquisitions of 300 to 475 million, 163 million of which is already contracted and under management through the Essex transaction, along with property dispositions of 200 to 300 million, at negative cap rate spreads of 25 to 125 basis points are targeted for next year.

We'll only have $96 million of debt maturing in 2005 at an average interest rate of 7.33 percent. We're assuming we will issue 100 to 200 million of unsecured paper in 2005, sliding into our maturity schedule as we have typically done in order to achieve an average rate of 6.5 percent.

Balancing out the financing for this range of business activity, we have assumed that between now and the end of 2005 we would raise up to $80 million of proceeds through the issuance of equity securities for the use of joint venture structures.

So to summarize, we walk forward our 2004 funds from operations forecast to our 2005 guidance in the following manner. With a range from a low estimate to a high estimate. If you start with 2004, ranging from $1.50 to $1.51 per share, add back 4 cents a share lost in 2004 to the succession of storms we endured in Florida. At 5 cents on the low end and 14 cents for the high end for same community NOI growth, at 33 cents on the low end and 36 cents on the high end, for incremental optimum operating earnings from acquisitions that we have completed in 2004. Deduct 10 cents on the low end and 6 cents on the high end for a dilution from dispositions completed in 2004, and the net of acquisition and disposition activity in 2005. Deduct 21 cents on the low end and 22 cents on the high end for increased interest expense associated with rising interest rates, as well as the debt financing of net acquisitions in 2004 and 2005. Deduct 1 penny on the low end and 2 cents on the high end for G&A expense growth. And deduct 3 cents on the low end and 5 cents on the high end for equity financing. And this gets you to a range of $1.57 to $1.70 per share of funds from operations in 2005. Again, realizing that this is a lot of data to digest, we have posted all these assumptions on our website for your convenient access.

So to summarize, our fourth quarter funds from operations of 38 to 38 months -- 38 to 39 cents per share is anticipated. The majority of the Essex transaction will be close this week using our revolving line of credit. And we're focused on increasing our sales of noncore assets to pay down this line balance.

We see a wide range of outcomes for 2005, primarily due to the uncertainty of rent growth. With funds from operations growth in the range of 4 to 12 percent, resulting in FFO of $1.57 to $1.70, and adjusted funds from operations of a $1.30 to $1.43. As an aside, for the Board to increase the annual common dividend by 4 cents in 2005, this would translate to a forecasted AFFO payout range of 85 to 93 percent. And an FFO a range of 71 to 77 percent.

With that I will turn the call over to the operator for questions and answers.

(OPERATOR INSTRUCTIONS). Jordan Sadler.

Jordan Sadler from Smith Barney. I'm here with John Lett (ph). Chris, you walked out and threw a lot of numbers obviously. I was just looking at walking through some of the 2004 range to the 2005 range, the future acquisitions and dispositions. It should be 60 10 cents of dilution. But the 2005 assumptions obviously acquisitions are up to $175 million higher at the high end. Could you walk me through that dilution? Does that include the dispositions you are expecting for '04, the rest of '04?

It includes all the dispositions for '04. We actually have netted all that together in that one number. So you've got dispositions for '04 and '05 netted against the acquisitions for '05. We are estimating all that would shake out to a 6 to 10 cent of dilution range.

And this fourth quarter number, just to add up some of the numbers that Tom walked through for dispositions, could be 280 million? You mentioned the 20 million that has closed, the 91 million that is expected to close, and another 170 being marketed?

The 170 will close sometime next year.

Just the 110.

You've got basically the 110 closing in the fourth quarter.

And then does that not include any additional sales you might make in lieu of the equity issuance, as you discussed?

We're certainly looking through the portfolio at this time. And we will probably increase what is being actively marketed and see what we get for prices. What we can report is what has been marketed is one asset in Southern California that we think will fetch $100 million, and a portfolio in Phoenix and Houston combined right now that we think will fetch about $70 million.

So that is what is actively out there being brokered and shopped. We think the blended cap rate on that 170 is going to be 5.6. We're currently re-examining other assets in a number of markets that we will probably put to the market and see what we can get.

Are there any noncore markets or markets you would be looking to reduce? Would those include the Houston, Dallas -- I guess you called them your one star or zero start markets?

This is Mark Wallis. We're certainly looking at Houston, and we have a portfolio being actively marketed there. There are two to three assets in the Dallas market that when the time is right, we have looked at selling. And then we're also looking at where we can trim in the southeast and some of those markets, which would be sort of more secondary markets.

I think to Jordan, you're right. They would be our one and two star markets. And I think that is the right thing for us to be doing at this point given where the share price is.

And then Tom or maybe Chris, how much G&A or overhead have you guys capitalized so far this year?

I'll ask Scott to look for that number. Let me go on to your next one and he will come back with it.

Okay. And then maybe just -- I noticed that a couple of weak markets that were a little bit surprising maybe sequentially included Charlotte and Seattle. Maybe you could give a little bit of color on what you think is happening in those markets?

Charlotte, I addressed a little bit on (technical difficulty). Charlotte I addressed a little bit on the last call. We have got two assets there that are really bringing down the overall average of the market. Those two assets are being marketed for sale. One we have an offer on. Generally the performance in the rest of the Charlotte portfolio has been pretty strong.

On Seattle, we're not seeing the recovery that we have heard a couple of people talking about. Occupancy is still down for us with increasing concessions. And we just haven't seen the signs of the recovery there. We do think we will start to see it improve a little bit into 2005, but we're not projecting it to be one of our better markets in 2005 either. I think some of that relates to the submarkets we are in compared to people who are seeing a little bit better recovery there.

Sure. So you're sort of expecting flattish growth from Seattle next year for your assets?

Let's see. I have got Seattle as one of my two star markets, so it is about 1 percent.

You might highlight where our assets are in Seattle, because it is a big metropolitan area. And what you'll find is most of them are in the South related to the shipping business, which I think in the long run will be a good play for us. Because frankly if you look at this port that is up there compared to the rest of the West Coast and the China and how much they are shipping this direction, a lot of these ports are at capacity, and we think Seattle has room to grow. So I think being in the south part is going to be a better than trying to be downtown fighting it out with the condos or in the North relying upon Microsoft to not make baby millionaires.

That it for my questions. Just if you could follow up on that capitalized interest.

I think Scott is back now.

$2.5 million.

And that is year-to-date?

Yes, sir.

Predominately the asset quality group and the developmental work that we are doing.

Rob Stevenson.

It is Morgan Stanley. Time, can you talk about -- there was mention on the call here of doing a joint venture instead of essentially doing part of the equity raise where in lieu of some of the disposition. What type of JV are you looking to do there? Is this basically a disposition JV for you guys where you just keeping management and a small ownership? Is this basically putting some of the acquisitions that you guys have lined up into a JV, etc.? Can you sort of elaborate on that?

I think Mark and I'm and Chris tend to look more at this as a disposition joint venture, in which we would sell out of some of are markets that we have operating efficiencies in, a lot of capital tied up. But it would probably make sense to JV our way out than to try to sell them in bulk. So we would look at that.

And you're right, we retain some management for some period time, but it it looks to us an effective way to raise some capital versus the alternatives today. So we're exploring it with a little bit more vigor than we have historically.

Can you talk about where you guys had been seeing recent returns on the redevelopment?

Redevelopment. Martha?

On the ROI or the redevelopment?

I think -- answer both.

Okay. Because we don't have any of the major redevelopment -- the one that's got rehabs completed at this point, but we are seeing rent start to move in advance of that. As far as the kitchen and bath rehabs, those returns are still in the 12 to 15 percent range. And we did another 1,300 kitchen and bath rehabs this quarter.

And how quickly are you slating some of the Essex Portfolio for this program?

We were out last week on the seven assets that we have already closed on. outlining the capital plans for those. And we should be getting started on a number of those projects in the next 30 days, the projects that don't require permitting. And then the permitting of course -- as soon as the permitting is done.

The washers and dryers out there which will be a big component of that will be -- you're going to get a 90-day permitting cycle out there, but the kitchens and baths they will start on almost immediately (multiple speakers) and be able in the fourth quarter to start reporting some progress on that.

And the Essex acquisition, we closed as Chris mentioned a portion of it just three weeks ago. And we've got another portion next week. But what I would report is there is no surprises. We already said we operated assets next to them. We knew what was going to happen. And it has. I think the pleasant surprise has probably been the number of associates that we have been able to retain, AND their eagerness to buy into the way we manage assets.

Then just one last question on the redevelopment. You guys in your guidance for '05 have 20 to 40 million range for the ROI investments. What is 2004 looking like in terms of aggregate numbers by year end dollar value?

On the redevelopment side?

Yes.

It's probably about $30 million.

Okay. So basically you're basically considering doing about the same next year as you did this year?

Yes. I think you're going to see as the year goes in '05 probably ramp that up. But right now our team is focused a great deal on getting the kitchen and baths program up to full speed. Martha mentioned we're doing 450 a month. I would like to try to see that number grow to 1,000 month. And we think that is a more immediate, quicker return them to be taking apartments off lined and redeveloping them. So that is why that number is low initially, and I think it will grow as we get that team around the last bend, if you will.

Carey Callaghan.

Carey Callaghan. I'm here with Dennis Maloney as well. Just firstly on the concessions, you have indicated concessions are off 16 percent sequentially. Can you just qualified for us where concessions stand today and where you think that goes in the fourth quarter?

As Tom mentioned -- this is Martha again -- concessions per move in are down about 8 percent from the same quarter last year. And they're down about 24 percent from the fourth quarter of '03. So we feel like we are going to be able to sustain that lower concession per move in, which should translate over the next twelve months to 1 to $2 million. I will say we had 13 percent move ins this quarter than we did last year which contributed to the higher dollar volume of concessions (technical difficulty) get those in advance.

What do they work out to in dollar terms per move in?

It is about $309 this last quarter. A couple of things to emphasize there. Martha's has got it right, 8 percent on the quarter. Year-to-date it is 16 percent which is the number I used in my quote. What I would be cautious about is that that is a three-year low. But we would expect it to slightly climb during the fourth quarter as we enter a tougher leasing season. But it is still in aggregate be below what it has in historical trends. To put it in perspective, at its high point we were probably at n the $500 per move in number and we're now down to 300. It is certainly a signal to us about pricing power and the cost to attract new prospects is coming down. So we look at that number in the third quarter it historically always low. That is why I used the year-to-date number for you.

Thanks Tom. And then just on maintenance CapEx I think maybe it was the first quarter conference call you had indicated $490 per unit. What is your full year projection? I know you had 339 through the nine months? Is 490 still a good number?

For 90 is still a good number. And that is based on an annualized rate of 510, which is what we put in our guidance for next year. We increased our allocation to recurring CapEx midway through this year. You've got part of the growth to 510 in this year year's number and the rest next year.

Terrific. And then just lastly, I am trying to square the net units that you added in the quarter. The Essex property, the seven communities, are they included in your apartment unit totals?

They closed subsequent to the quarter end.

That was subsequent? Okay.

I stand corrected. I've gotten three shakes on the no's, and only one vote on the yes. It happened to be I got outvoted on this one. What is it?

We closed that first tranche of the Essex transaction the last week of September. And that was how many total units? Your list is on the exhibit for our press release.

I believe 1 thousand 7.

(indiscernible)

1,777 homes.

And then not to delve too much into details, but in Schedule 6A is that factored into the number of units that you indicate there? It just didn't seem like you had a --.

Well, the total units in Southern California are there well as (indiscernible).

It's because sequentially the details in that Schedule, it didn't look like it jumped. I know there is ins and outs.

The 6,281 homes -- acquired homes.

Right. That compares to 52 52 (ph) in the second quarter. But then your same community declined sequentially. So on a net basis it doesn't look like you are up, that is why I questioned it.

We had the 1067 homes that I referred to that moved from the acquired properties (indiscernible) and matures this quarter as well. So you had some moving out of acquired into same communities. Some moving out of same communities into dispositions. And then the new Essex coming into the acquired properties. We can walk that forward for you.

Okay, I will call you off line. We need to follow up. Thanks.

Steve Sweat.

A couple of questions on the 2005 guidance, Tom. You've got laid out some nice detail with collections per unit, etc. If I look at the revenue growth in that does that include contributions from the kitchen and bath upgrades in the same-store numbers?

Yes, it does.

And how many kitchen and baths is included or assumed for next year?

It is roughly the same pace we think -- the 12 to 1,500 homes a quarter.

So you are not assuming any real ramp up there? Mark, do you have any idea how much of a contribution that makes to the revenue number?

I do. Looking at our third quarter results it is not an exact science, but my estimate is that roughly 30 to 40 basis points of the 1.3 percent revenue growth was attributable to ROI kitchen and baths. And as an example, I could give you Washington D.C. which ramped up earlier than a number of the other markets in the program. Theirs is about 70 basis points on D.C.'s results.

Chris, you went through some cap rates on the sales I think, and some of the recent sales it sounded like they were north of 8, and your expectations on the forward sales were a lot lower. Could you comment on what you sold versus what you're selling?

Mark -- why don't you?

Let me comment on that. We sold some older assets. The one in Louisville was 36 years old. The one we have -- Michigan asset that we have under contract are 30 plus years old. So the cap rates we have seen are really those older assets. The cap rates are more in that 7.5 to 8 percent range in secondary markets. But the assets we're looking at selling that are not quite as old and where there are more buyers for we're seeing just better cap rates. But it really relates to some older assets we moved out.

All in markets that are really hard to attract a lot of bidders. I mean there are just not a whole lot of people standing in line to say, I want to get into Detroit or I want to get into Louisville. So I think there's just a short list of buyers in those markets. Whereas in Phoenix and Houston and Southern California we put an asset on the market and we get 20 offers. So it is a different environment as it is -- as we have been saying in these primary markets versus tertiaries. The good news is we have gotten rid a lot of the tertiary markets in this portfolio, and feel good about what we're going to be listing and the prices we're going to get.

Does the 200 to 300 million next year include a combination of those types of assets or have you just assumed a rise in cap rates over time?

The 200 to 300, if you look at it, 170 of that we have already got on the street and listed, and we have got pretty good indications on prices. So where we have got in here disposition volume of 300 at a 7 or 200 at a 6.5, I hate to use the word lay up but that is a lay up, okay? We will do pretty good.

From the assumptions and what you have said about having stuff under contract, or at least listed for sale, you have front-end loaded these assumptions on sales in 2005? Is that fair in terms of the timing?

Yes, I would say the 170 we have got listed they will probably come in the first half of the year. And if we only do 200 that means I got 30 million to do in the second half of the year. I can guarantee you the acquisition sales group isn't going on vacation. I think they will be able to do the 30. Or if they do 300 can they do 130 in the second half of the year? I think they will be able to do that. You do the math on the blended cap rates. We've got 6.5 to 7. And if we have already got listed and actively marketed a 5.6, 5.7, you can see we have got plenty of room to make those targets.

Just one more question, Tom. As you have explored the potential for selling a greater number of assets as opposed to issuing equity, have the rating agencies expressed any concern about either increasing the asset sales or the timing of those sales?

No, we have been in contact with them and talked through what has happened both to the share price and to the rest of the market, and what has happened to our asset prices. And we will continue those conversations and keep them abreast as we move through it. But they are aware of how we're looking at the situation.

Karen Ford.

Banc of America Securities. A question on the expense side. Expenses are up almost 4 percent year-to-date. And you mentioned the higher utility costs offset partially by lower turnover costs you're expecting. Can you just talk about how you arrived at the 2.8 to 3 percent expense growth assumption in your guidance, given that it is so much lower than the 4 percent you have seen this year?

Yes, our expense growth next year -- the largest component of our expense growth we are estimating about 5 to 7 percent utilities expense growth. Taxes, we're looking at about 2.5. Our insurance quotes are coming in pretty favorably. We think that is going to be flat to just slightly up. And R&N (ph) and admin and marketing will be in the 1 to 1.5 percent range.

How about payroll?

Payroll, I think we've got in at about 3.75 based on average pay increase of about 3 percent and increasing (technical difficulty).

I think a couple of things to focus on in the 4 percent this year versus 3 next year is first, in the case of utilities the bigger portion of that is being now billed to residents so that helps offset that. Insurance, I think Chris and his team have been to the markets and gotten favorable pricing there, where this year we have got really caught up. Lastly on the people front, when you move your turnover numbers down from 50 percent to 40 percent, you've got more full staffing. That cost was probably 3 of this year's 6 percent increase.

So I think there's a lot of programs that we have implemented in '04 that caught us up on some of these fronts, if you will. And headed into '05 we feel very much that we're on the right foundation. And the asset quality is improving and the market is improving. That is how I see the expense area.

Second question in the guidance you had zero to 50 million of potential equity issuance. When do you anticipate making the decision on issuing equity versus your asset sale program? Have you sort of set a time line, time horizons in the first half of the year when we would expect to see potential that $50 million of equity?

I go home every night and pray for the share price to go up. I am watching the share price. I certainly am liking what Mark and his team have been attracting on prices for assets. And it makes a very compelling argument for us. We really look at it and say if we can move some of our slower assets in those markets in Houston and Phoenix and a few others, then why sell shares at this price?

We have looked at it. We're trading off about 3 percent while the market went up 3 percent. That is a 6 percent gap. That is an awful expensive discount in my view. I would rather look at it and see what my assets fetch, which I don't think the assets went down 6 percent. In fact, I think they probably went the other way. I think cap rates are falling in some places and we will be able to get good prices on those assets, might as well look at seeing what we can attract.

Let me ask it this way. In the low end of your guidance when you issue $50 million, can you give us a sense for what you assume the timing was on that?

I can't lift my skirt that high. I appreciate your question. And just rest assured that -- how we're looking at it.

Fair enough. Just one final, G&A ticked down this quarter. Is it safe to assume that given Sarbanes-Oxley and the like that that number is going to go back up in the fourth quarter?

It will tick back up in the fourth quarter. As I said in my guidance for 2005, we are anticipating 1 to 2 million even higher next year. And a portion of that increase does relate to Sarbanes-Oxley and the additional audit work that we will incur next year.

Craig Leopold.

Greenstreet Advisers. Tom, let me take another shot if I can at this question about equity issuance and your investment activity forecasted for '05. It looks like you guys are forecasting acquisitions and dispositions exclusive of the remainder of the Essex Portfolio to close to be about even. How long are you comfortable running at this high a leverage ratio? I know when you guys talked about the Essex transaction there was an indication that you guys would be doing an equity offering. I understand your reluctance to do it, given what has happened to your share price. But at some point does that have an impact on your appetite for acquisition?

I would also add, Craig, I will jump in there before Tom does, that our guidance for '05, as I indicated, assumes that some time between now and the end of next year we raise $80 million. That gives us a lot of options. We can either do the capital transaction ranges that I outlined and raise the equity capital either in the open market or through venture structures, or we can pare back on the acquisition activity and not raise the equity. So I think we've got both the ranges that you're looking at on the buyers themselves and the equity built into our guidance.

But from the net impact when you guys first announced the Essex acquisition and the other acquisitions, 900 million less planned sales at that time, 175 million, must be sort of a net investment of a little over 700 million, which would imply if you wanted to maintain your current capital structure from a leverage standpoint, that you would be issuing well in excess of $80 million of equity, or raise well in excess of $80 million of equity.

There's a couple of things to add to that. First the fact pattern was at the time we announced Essex you had a fixed charge ratio well over 2.6 that we believe a midlevel B rated company at a 2.4 ratio is quite acceptable. So the Company was under leveraged. Frankly at that point in time, looking at the multiples of the balance sheet we weren't being rewarded for it. So taking on a little bit of leverage at forty-year lows seemed like a pretty wise thing to do.

So that is one aspect that -- you have to look at the entire picture which I know you're looking at. So one we have balance sheet capacity to borrow. Two, the $174 million of asset sales, it would appear by the end of the fourth quarter those will have been accomplished. That we're set. So those are not ifs, those are done, I consider them.

The next logical step, and I think anybody who is looking at issuing equity in what is your alternative sources of capital? All we're doing is outlining to you parameters, okay that say we ought to think about looking at selling assets. The last point about disposition, acquisition activity, I think it is always important to come out with a sterile and net number to saying we're going to buy some, sell some. Try to minimize the dilution associated with that, but improve the asset quality.

So I think that is our posture. If we do, which we have in historical years, in the last 3.5 bought more than we sold, that would be a good thing. We will make accretive acquisitions that will pay off the rate shareholders in the long run. So I think that the things that I have been looking for it, and what you and many people on the call are trying to isolate is, well if you're going to do equity why haven't you don't? When are you going to do it?

And what we're trying to say is we're very concerned about issuing equity at prices that punishes our existing shareholders. It is just not a good thing to do. We're very conscious of those people who are in the stocks to try to do a better job for them and to give them a better value tomorrow. And if sometimes that is selling some of our assets to make that work, then we should be doing that.

I don't feel at all, if you look at first the leverage of the Company, on the low range is at 2 3 6 on a fixed charge, and in the high range of 2 4 5, that is with a moderate growth number. We think that this economy might pick up a little bit more steam than that. We might find some acquisitions that are better than the ones we have saved (ph) or sell assets at better pricing. So I am comfortable carrying a 2 4 fixed charge. And I think that frankly is better than most of the industry.

And lastly is the dividend coverage. You look at it, we've got the second-best coverage. We are going to maintain the second-best coverage. So there is no reason to rush out and issue equity at a discount.

I understand. What I heard now, which I guess is a little different from the time of the Essex transaction it sounds like now you're more comfortable with carrying a higher leverage ratio as opposed to trying to do the transaction on a leverage neutral basis.

I agree.

Then two last questions. One for Chris. Your G&A number for the third quarter was down pretty significantly from the first two quarters of the year. I'm curious is there some explanation for that? And what is the expectation for the full year '04 G&A level?

Our expectations for the full year has been and continues to be approximately 20 million flat to last year for total G&A. And I have not adjusted that guidance this quarter. I believe the fourth quarter will play out to get to that total.

So it will pop a fair amount from where we were in the third quarter then? It looks like -- through the nine months you are a little over 13 million, so you've got to get another 6, 6.5 or so million in the fourth quarter versus 3.8 or 3.9 in the third quarter.

That's correct.

And I know you said -- I was looking for the '05 guidance on your website and I know it is under your Investor Relations tab somewhere. Could you give just the next string to find it, or link?

It is in the Company Overview section under Investor Relations. I can send you an exact link.

All right. I'll look around a little more. Thanks Chris.

Mark Howe (ph) from Spectrum Advisory Services.

Mark Howe from Spectrum Advisory Services. Tom, I wonder if you could give us your view on changes in the apartment industry in the intermediate term looking out beyond just next year, next 3 to 5 years? Which sectors do you see in particular performing better? And do you see change in some of the fundamentals of the industry in terms of either supply, demand, the kinds of apartments that are -- will be in demand?

I think looking out the time horizon, I think things that we are going to come to realize in the apartment industry over the next three to five years. Let's start first with one market. You certainly see the demographics towards the sunbelt and the number of renters are going to continue to grow disproportionably in markets like California, Florida and D.C. Those economies are vibrant. They are deep renting basis.

The second is you're going to see a disproportionate growth in the number of minorities renting. Hispanics, Asians are continuing to be, if you look at the demographics as well as the census data, a bigger proportion of our customer base.

And the third is I would look toward what industries or employment basis are going to do well over the next 10 years. And I think those are going to be centered on defense and health care. And so a company that is positioning itself, that is sensitive to the growing minority population, sensitive to health care and defense industries, and is located in Florida, California and D.C. I think are going to have disproportionate growth -- substantial growth come in fact -- over the national average.

The question and argument over many years will be the issue of what is a value add of an enterprise? Can it articulate it and demonstrate it? And our value add as an enterprise is to acquire existing communities and to improve their operations through either asset quality programs or property management programs. We think we have demonstrated a track record of doing both, and believe that those trends will continue and eventually lead to a multiple expansion of our share price whereby the value add is recognized.

And the last is balance sheet management. Many people run their balance sheets on a real estate basis, we tend to run ours as a corporate. And looking at it and saying it supports our growth, but it also supports the growth of the dividend. United Dominion has increased its dividend 28 straight years. And I check with the Board every year and they say if I get another year, I get to keep my job.

So we focus on that dividend increase and see that that will drive it. We think the shareholder base is under a state of evolution. That the industry has done a fabulous job of attracting and getting itself into 401(k) and retirement systems. And that is partially some of the reasons of the continued positive funds flow. We see that continuing and believe that our track record of raising the dividend and the safety of that dividend make us an appealing investment for those types of people.

So that is my views of customers, where to invest, and what are value adds and what we think the -- what our people we work for, our shareholders, and what they look for.

Thanks very much. I am sorry if the background noise got into the call.

Not at all. I hope that was an answer, but certainly glad to discuss it in more detail.

David Rodgers.

T. McDonald (ph). Chris, is the breakdown -- sequentially in real estate tax and expense, there was a fairly significant drop there. I didn't hear anybody ask that. Could you touch on that real quick?

The real estate tax and insurance number that is on our income statement is for the total portfolio, not for the same-store portfolio.

Right. You had a reduction about 1.5 million, 1 million 7 sequentially with roughly the same size revenues and not much of a change. Your average unit count went up. What drove that reduction sequentially, I guess, is the question.

On a sequential same-store basis, the number is essentially flat. So I haven't really analyzed it on a -- I don't have a good answer for that.

Okay. But sequentially the same-store was flat? I guess that's good enough.

There hasn't been anything fundamentally that has changed there other then ins and outs to the portfolio that would have created that change.

It could have been just some timing differences?

It could have been.

All right. Fair enough. Tom, I think on the last call, and in follow-up to Craig Leopold's question, on the last call I think you said you would do better than $1.61 in 2005. The bottom end of your guidance now, $1.57 for next year. I wanted to reconcile that given the fact that you may be more apt to do it on a leverage neutral basis. And also kind of get your feelings should we just consider that bottom 4 cents as maybe some extra breathing room, and you're still feeling comfortable in the mid 160s.

I think we gave a range because there's a couple of things that are looming out there that I am concerned with. First, we have built our business over what we have in place today. Looking at what we have for leases expiring and what we believe revenue growth and the take rate on our occupancies are going to me. If the economy, okay, has or sufferers a reversal of job growth, I have concerns about what that will do to us. I have concerns about oil and gas prices. At $50 a barrel, it's got to impact our ability to raise our rents. We have not seen that, but I don't believe the 50 is going to stay up there. If it takes a guy who is working for $40,000 a year and all of a sudden a tank of gas went from 30 to 60 every week, that is 120 bucks out of his pocket that he's going to feel immediately. And that is going to impact our ability to raise his rent.

So I think those two things are my concerns. I'm not worried about the homeowner thing. I think it's got another couple of years to play out on us. The condos are aggressive, but we have taken the brunt of that already. So my sense is we are going to have to watch the price of oil, and we going to have to watch that employment growth number.

Now I will tell you that what is published and what is really going on in the job growth I think are two different things. And I'm certainly more of a believer that there's a lot more job growth going on than what is being published. 96,000 jobs last month doesn't make sense to me. I think a lot of corporate America is holding its breath for next year's budgets under the disguise of who wins the election. And as soon as that is pulled and revealed to us, people going to go out and finish their hiring plans and their budget plans and they're going to kick back into job growth. I think that is what is going to emerge.

But I want to keep a love low range that says guys, guess what, it doesn't, it didn't. I'm comfortable that we will do better than that 161. And I have said that publicly and I say here again today. I've got a lot of confidence about this team, about frankly the entire team, all the way down to the associates about our prospects. And this is just a better Company. Fifty percent of the company is in Florida, California and D.C. Those markets are going to do better than 4 percent next year. That to me is -- that is where we're at. Sorry. I went off a little bit there.

Jim Collin.

Morgan Stanley. Just a question on your guidance for '05. What type of NOI growth do you guys have assumed for your acquisitions you completed in '04?

About 5 percent.

Okay, thanks.

Most of those acquisitions remind you of Southern California, D.C. and Florida.

(OPERATOR INSTRUCTIONS). Management, there are no further questions at this time. Please continue.

In closing, I thank you again for your time. And I think the associates who are on the call for their efforts. They have delivered great results this quarter. And I look forward to results they're going to deliver in the years ahead.

I would conclude that United Dominion has above average growth prospects. And second we've got the great dividend coverage. You're going to see that dividend grow. What that, we thank you and look forward to talking with you after the fourth quarter is closed. Take care.

Ladies and gentlemen, this concludes the United Dominion Realty Trust third-quarter 2004 results conference call. If you would like to listen to a replay of today's call, please dial in at 303-590-3000 or 1-800-405-2236 and enter the pass code of 11007390. (OPERATOR INSTRUCTIONS).

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