UDR Inc (UDR) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the United Dominion Realty Trust third-quarter earnings 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, October 25, 2005.

I would now like to turn our conference over to Mr. Larry Thede. Please go ahead, sir.

Thank you. And thank you all for joining us for United Dominion's third-quarter financial results conference call. Our third-quarter press release and supplemental disclosure package were distributed yesterday afternoon. And this morning, we filed Form 8-K with the SEC.

In the supplemental disclosure package, we have 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, you can access the package at our website, www.udrt.com, then click on the Investor Relations tabs and then News and Presentations. Click on the supplement link when you pull up yesterday's earnings release. You will find the direct link to the supplemental data as well as the link to the 2005 guidance details contained in the body of the press release.

We will begin the call with management's formal comments. After which, we will open the call to your questions. I would like to note that 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 we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be obtained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in yesterday's press release and are included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

I would now like to turn the call over to our President and CEO, Tom Toomey.

Thanks, Larry, and thanks to all of you for participating in today's call. Joining me from the Company are Martha Carlin, Bern Detto (ph), Mark Wallis, Chris Genry, Rod Neuheardt, Scott Shanaberger, and Sarah Jo Light. I will offer the prepared remarks, and the entire management team will participate in the question-and-answer session.

Today's discussion will cover four topics -- third-quarter operating performance focusing on same-store sales results and trends, including comments on the impact of recent hurricanes and rising energy costs; an update on the portfolio quality and positioning activities; balance sheet activities and comments on the stock repurchase program; fourth-quarter and full-year guidance.

I guess before I get started, I have to give you a little story about my son, who is a freshman in college, called this morning -- said, "Mom called me, and said you're going to have a rough day today. And I just wanted to remind you, Dad, you didn't nominate your best friend to the Supreme Court. And by the way, can I have your hockey tickets for tonight?"

But let me get started with third-quarter performance. When you look at our results, I think two things stand out. So let's take them head on. First is our $0.39 in FFO per share, and second, the 6.9% year-over-year same-store expense growth. Our FFO per share was within our prior guidance range of 39 to 42 but was $0.02 below the street's consensus number. The earnings release stated that we closed the sale of a development joint venture in Houston in October that we had anticipated closing in September. The gain on the sale was $0.02. So if we occurred just 2 weeks earlier, we would have met the street's consensus estimates.

Same-store expense growth of 6.9 during the quarter; a deeper explanation is called for. First, let me take you back to the beginning of the year, we got expenses would be 3 to 4% this year. Through the second quarter, we had had it at 2% year-over-year expense growth. Third point I would make -- in the second half of the year, four items have changed our view -- first, real estate taxes, primarily driven by condo values and increased NOIs, states have increased our taxes dramatically. To highlight a few, Texas is up 7%, Florida up 9%, Ohio 16%, South Carolina 11%. Our insurance losses this year are greater than last year.

Third, payroll -- pressure from tighter labor markets have caused us to increase our hiring range. And lastly, we anticipate utility costs increasing during the fourth quarter.

So what does this add up to? We expect expenses for the year to be somewhere between 4.5 to 5%. I am certain most of our peers will see similar results.

What I would note is that for every 1% expense increase, this cost is about $0.02 in earnings. Let me now turn my comments to our same-store revenue results.

Same-store represent 63,000 homes or approximately 84% of our total homes or 80% of our NOI. On the revenue front, our same-store revenue performance continued the growth path it has seen since early last year. In fact, this is the seventh consecutive quarter of sequential revenue growth. Our 4.1% year over year is the highest level we have experienced in over 4 years. Third-quarter same-store occupancy was 94.6, up from 94.2 last year, and the highest level in over 4 years. Looking to October, occupancy is at 94.8, and traffic remains strong.

On the rent and reimbursement front for the third quarter, we reported $752 a month in collections per occupied home, up $25 or 3.4% versus last year and up $8 sequentially. A better measure of our success to grow rent is to look at the leases that are repricing during the quarter. And in the third quarter, 33% of our leases repriced. An 8% increase per home translates to an average monthly increase of $24 or just north of 3%.

Concessions and fees were down -- concessions were down 18% from last year. To make this more meaningful, concessions per move-in for the third quarter were $236 versus last year's $299. Fee collections increased 5.9% in the third quarter versus last year, another good signal of market strength.

To wrap up the revenue discussion, let me highlight that 78% of our same-store communities recorded revenue growth year over year and 64% sequentially. These statistics signal that the national markets continued to strengthen, and I believe our revenue growth will stay strong well into 2006.

On the non-mature portfolio, which is 16% of our portfolio, 20% of our NOI and includes such markets as California, Florida and DC -- they experienced sequential revenue growth of 2%, which is almost double the rate of the mature portfolio. Over half the non-mature assets have occupancies greater than 95%.

Our second topic, hurricane impact and energy costs. Let me comment on two significant events. First, we escaped significant damage from the three hurricanes, including Wilma. We saw occupancy increase in Houston and several other markets from Hurricane Katrina. We ended September with 95.8% occupancy in Houston. We wrote 200 new leases in Houston and over 200 new leases in other markets as a result of Katrina. The leases added 100 to $150,000 to our third-quarter bottom line. We did not view this as a land grab, meaning we did not lower our credit standards. My guess is the net impact over the next four to five quarters will be about $1 million to the bottom line.

I'd like to recognize and commend the efforts of our team, which did a number of things including gathering clothing, baby formula, school supplies and transportation. I especially want to recognize Kathy Klem (ph) in Houston, who is a past President of the Houston Apartment Association, and her team and Cheryl Pucci in Dallas, the incoming President of the Texas Apartment Association, and her team. They both worked closely with the partner associations and all the major players in helping solve many of the needs of these people.

Secondary at energy costs. I want to talk briefly about the recent increases in energy costs, and they're really two topics -- the direct impact on higher utility costs on our expenses and the perceived impact on our ability to raise rent.

First, let me give you the facts on our energy uses. All of our residents pay for their electric, and most pay for their gas. We don't rebill all but 8,000 homes or about 10% of the portfolio for gas. Last year, we told a number of communities that were high energy users -- most of the stuff in Michigan, Detroit area -- which resulted in over $1 million annual savings. And we have plans for the 8,000 homes that we currently do not re-bill; we start that process shortly.

We have modeled several scenarios about the higher energy costs and have come to the conclusion that a 30 to 50% increase in natural gas and electric would charge $0.01 to $0.02 to our earnings number.

Second, let me comment on the ability to raise rents in an environment of higher energy costs. Gas prices over the last 9 months have gone from $2 a gallon to near $3. At the same time, we have grown rents 3.4%. And we have not seen a meaningful increase in our bad debt. In all this talk about the impact of higher energy costs, I believe people have missed a key point, the impact on the single-family housing market. Higher energy costs is going to also hit them in the wallet. And they will factor that in in their buying decision, and mortgage rates are now above 6%.

In the third quarter, we saw a 30% reduction in the people moving out to an apartment to buy a home. So what is driving the rent and occupancy increases that we are seeing? The answer is jobs. During the last 12 months, the U.S. economy has generated over 2.2 million jobs -- in UDR markets, 750,000 jobs. So one out of three jobs generated has been in the UDR market.

Let me now turn to our changes in our portfolio. The press release contains the detail on our third-quarter activity, which included three acquisitions for 150 million at a blended cap rate of 5.4 and sales of 138 million at a 6.2 cap rate. We completed two transactions in October. We closed on the purchase of a 127-home community in San Mateo, California. Price is 23 million or 183 a home at a 5/2/5 cap. This community is 98% occupied, and average monthly rents up near $1,500. It will go under some rehab over the coming next 1.5 year.

Two communities under contracts for purchase that we expect to close in the fourth quarter, they total 400 homes -- total purchase price, 73 million at a 5.2 cap; they are located in Northern California and Seattle. This month, we closed on the sale of Villa Toscana, a joint venture development in Houston. The sale was expected to close in the third quarter, but as I mentioned earlier, has just recently closed. We have a 20% interest in this joint venture, which consisted of 504 homes; it was 96% occupied. We built this for 57,000 a door all-in and sold it for 77,000 a door. The selling price was 39 million, which represents an $11 million gain to the partnership.

We also have a community in Arizona under contract to a condo converter that they expect to close during the quarter at a sub-3 cap rate for nearly 80 million. We closed on the sale of 64 condos in the third quarter. The sales generated an after-tax profit of 5.3 million and were executed at an after-tax cap rate of 5.3.

To summarize our 2005 acquisition disposition activity through today plus what's under contract, our sales totaled a little over 6,000 homes for 306 million at a fixed cap and acquisitions of 2,500 homes for 390 million at a 5.5 cap. We have a development pipeline of over 1,900 homes that is detailed in Attachment 8 of our supplement. The budget is 210 million with an average yield of 7.4.

Also on Attachment 8, we detail five communities undergoing full rehabs, containing 2,250 home, are expected to reach stabilized returns of 8% on $62 million of investment.

Next, let me turn to our kitchen/bath and limited scope rehab programs. In the third quarter, we completed 1,500 kitchen and baths at a cost of 11 million or $7,000 per home. Year to date, we've invested 27 million in these programs. Our target is 9 to 10% return on this investment. We do see doing less of them in the fourth quarter due to the occupancy level in the portfolio.

We calculate that the kitchen and bath program added approximately 50 basis points to our third-quarter same-store revenue growth and 80 to 85 to our same-store NOIs. While I see plenty of people focused on the impact of Same Community results, I think the key for me is -- are we creating shareholder value? And it's simply put, I am sure many of you have rehabbed part of your home at one time or another, and you expect it to get paid; I do as well. And my view is for every dollar I put into this program, I am expecting to get about $1.50 back in value creation. So that needs a good value creator.

Balance sheet. Our floating rate is at 22.8. Last couple of years, we continued a program of taking advantage of dips in interest rates to fix our floating debt. And thanks to Rod and his team for their work. They took advantage of the 10-year dipping to 4% in early September, issued 100 million at 5.25 for a 10-year maturity. The Board has authorized us to buy 11 million shares, of which 8.7 had been bought over the last 3 years with the remaining 2.3 million shares available to buy. I highlight this because it highlights to me the fact that we will buy shares on weakness and see it as a good value.

In fact, the way the stock is trading today, we would be buying back shares at approximately 84,000 a door or a little over a fixed cap on AFFO numbers.

On the topic of guidance, our fourth-quarter guidance for an FFO is 42 to 43. Do we expect the full year to be 1.59 to 1.60? And I'm certain most of you are anxious to hear why we have pulled it from 1.65 to 1.60 on the top end. I think it's -- the $0.05 can be broken down into about four elements. First, the high end of our operating NOI will be about $5 million lower than previous forecasts, reflecting a 90 basis point decline in our outlook for mature results as a result of reduced expectations for non-mature results, primarily resulting from timing issues.

Our total interest expense assumption at the high end of the guidance is almost 3 million, reflecting an increase in our expectations for rates as well as the timing of acquisitions and debt issuance.

We've increased our expected non-recurring income as not only will it achieve higher profits from condo conversions, but we will see more of those gains follow the bottom line because we have elected not to incur additional pre-payment penalties on pre-payment debt.

And lastly, we have increased our G&A expense assumptions by $1 million to reflect the utilization of non-recurring income to make incremental investments and improving associate retention in operating processes, which we've discussed on previous calls.

As I wind down my comments, I think a couple of things stick out. This is a very competitive landscape for multifamily sector and all of real estate. There is significant amount of capital flows out there from a number of new sources. We are seeing markets cycles mature and reach the peak in some cases. We've also seen consolidation in this sector in the last 10 years; it is 34 public companies are now 12, with 2 companies taken out recently.

As I see this, I'm backed up and look at the value creation, what I realize is this is -- most of these companies including ourselves are moving their platform to be able to prosper through an all-market cycles. In fact, it is being rewarded in value given to those companies that have sold. Most recently, if you look at the two, you'll find that they have partially captured public to private pricing of real estate, which may now be 100 to 150 basis points on cap rates but also accompanies bought platforms and management teams and rewarded them for the value they've created over time. We think UDR is very much in that same mold.

Lastly, our 2006 guidance will be completed and presented to our Board in our December meeting. And after that, we will provide it to the public.

So let me now open up the call to your questions. And I will invite the rest of the management team to participate in those answers.

(OPERATOR INSTRUCTIONS). John Stewart.

It's John Stewart here with Jon Litt and Craig Masserum (ph). Tom, could you please drill down on your comments that you expect same-store NOI to be $5 million lower specifically due to timing. Can you give us some color there? Is this timing of expense recognition or what exactly do you mean by that?

John, this is Chris. Tom actually hit on two points there. One is -- our expectation is that same-store NOIs are going to be up about 90 basis points to the top end from what we had previously forecast could be the top end. And that's primarily driven by the operating expense increases that you're seeing. We are hitting our numbers on revenues pretty much across the board. But our concerns with the expense side, particularly property taxes and utilities, remains high going into the fourth quarter. So we have booked those numbers down.

The timing issue relates more to non-matures. And that is exacerbated by our accelerated focused on these condo conversions. As you know, once you decide to convert an asset to condos, time is of the essence. So we jump on those; we convert them very quickly. And those units have been coming offline for conversion and in a couple cases for renovation. And the timing of when all those things happens is difficult for us to portray for you on these guidance ranges for these fixed data points. But that's really the primary driver of that 5 million.

What about the prospects for recovering some of the increase in operating expenses, especially through appeals on the property taxes?

We've gone through and looked at it. We're practically litigating probably seven out of every ten assessments these days. It's hard to win it when you have a period of NOIs are going up, and they are using condo cap rates. Had we not won several of our appeals, the tax number would probably be a 7% year-over-year number. And now it's probably going to be more in the five category. I think you're just going to see that wave continue throughout the sector. It's just a matter of time before you get caught in it.

So I think we are doing a good job. We've got one guy that's ran the practice for Arthur Anderson for a number of years in Dallas. Michael, we hired him 3 years ago, come in and work our program, does a good job and certainly a guy who's smart about litigating this stuff and settling this stuff.

But when you see Ohio go up 16%, it just grew way past our expectations. And we look through the numeric exercises is really condo cap rates, even though we're not selling them as condos.

Can you give us a bit of granularity in terms of the $15 million of non-recurring income? I presume the gain from the joint venture sale is in there and condo gains as well. But how does that break out?

The joint venture sale is definitely in there, and that's about 4.3 million.

I will let Chris gather his notes. Why don't we go on to the next question, and he will detail it out for you.

Basically last question for me, Tom, what level of condo gains do you think is sustainable going forward given the results that you have seen this quarter?

Well, I think one thing that I am seeing on the condo business as a whole is -- first, it's a very competitive product with entry-level homes. Second, we've got 27,000 homes in California, Florida and DC, which at some point could potentially be an exit. And what I look at and my thought process continues to mature on this, we started with a program of picking off the one-off orphan children, if you will, and making some profits is -- as we've gotten into it, we continue to see more and more opportunities in the portfolio to harvest that. And the after-tax cap rates is how we evaluate whether it makes sense to sell the asset or harvest all that value for our shareholders.

So for us to identify the pipeline sustainability, what I'd say is we've got a long list of assets in those markets, which I think are going to be very sustainable because the entry-level home in much of California is 0.5 million, and our condos are on our books for 130, 120,000 a door. With a good program, you can harvest that value.

Mark, what else would you add?

Well, I would just add that when you look at what we are harvesting today, we're just getting ready to bring to market an asset in Scottsdale, where we realize some of those profits this year, the bulk next year -- an asset down in Tampa that we're just bringing to market at the end of the year. So we have a carryover from our current program of assets that are being converted today. And then when we look forward, as Tom mentioned, we really haven't moved into harvesting the really more profitable markets of DC, Florida, California. We have an asset in DC that we are looking at that is very promising. It's not yet on my board but should be by the first of the year.

So to emphasize what Tom said, we have a depth of assets and it only -- right now, this pipeline of six properties is feeding this current pipeline. It carries over to next year. And we can add to that as we see appropriate in these early markets that are the better markets.

How much do you think that carryover represents in gains?

Can you see that again please?

How much do you think the carryover, I guess backlog that is supposed to go onto next year represents in (multiple speakers)?

I think we are looking at a range of what we did in '05, a similar range in '06 and you'll look at those numbers.

I don't see -- this year, we started out the year at $0.04 to $0.06. It's probably going to grow more to $0.08 to $0.09. Next year, we see a pipeline clearly in that range that is doable. And I would add, we've got a pretty good discipline. When somebody walks in and offers us one in Scottsdale that's a 30-year-old asset for a sub 3 cap, it is gone. And I ran the numbers with Mark, and we said, we cannot do that. We cannot make any money. Somebody's going to pay for all that upfront. It’s a goner. And we will continue to harvest the portfolio that way. If we get cap rate offers like that, that is our job here -- maximize shareholder value. Chris, do you want to loop back on the 15?

Yes, if you will recall the rent.com gain was 12.3 million. The Houston sale that took place a couple weeks ago size about 4 -- debt pre-payment is counting the discontinued as well as the continuing ops is 8.6 million that comes off of that number. Condo gains are forecast to be in the 12 to 13 million range for the year. And the remaining 4 million offset is incentives and other non-recurring G&A investments.

Rich Anderson, Harris Nesbitt.

Can you -- the $0.05 one more time? I got the NOI, but there was a bunch of other things that were ups and downs. I think I am probably providing a service if you could just go through it really quickly because it went a little fast for me.

The $0.05 on the operation?

Yes. On the guidance (multiple speakers) -- beyond the NOI; I got that number. What else? There was timing, there was interest, there was non-recurring, and there was a G&A comment. And I was just wanted to -- if you could just--?

You had about 5 million of NOI, which you got. You had about 3 million of G&A -- I'm sorry not G&A -- (multiple speakers) interest.

Interest being -- that's a positive or a negative?

(multiple speakers) a lot faster than what we had thought they were. We anticipated the beginning of the year a 50 basis point movement in LIBOR at a value of what, Rod, at 120?

129.

So that's 3.

You also have in that interest element, we had forecast that we were going to pre-pay some more debt and incur some more penalties, which is the primary reason that the non-recurring is jumping up from our former expectations. And we have now elected not to do that, which helps you on the non-recurring side, but it hurts you on the loan interest expense side.

So it is a -5 million NOI, -3 million interest, positive on the non-recurring income and then $1 million negative on the G&A. Is that right?

That's it.

With the $0.02 that you -- timing this -- I guess are those some sorts of fee associated with the sale to the joint venture? (multiple speakers) Isn't that why it would be an FFO?

He'd tell you a little bit about his deal.

It's related to fees, and we're promoting the joint venture. It says in the release, there will be a 20% interest. But there's also a promote waterfall, and the price was at that level that we got into our promote and that produced that extra fee income. It was basically, (indiscernible) our partners was above 70 because it is such a short --

No, 70 to us, above 30 to them.

I'm sorry. 70 to us, 34 for them.

It is not a bad IRR.

Once we got above about a 14% IRR to them, we started getting into a promote.

It just goes to show the appetite for new product in even a market like Houston. You build it all in for 57. You turnaround and sell it for 77. It was just a compelling offer.

On the 5.4 assumption or estimate for your cap rate for acquisitions, two things stood out to me -- one, the $375 per door CapEx number and also the fact that you're planning to rehab them. First of all, on the rehab number, is that -- are you getting the revenue pick up on that 5.4?

It is pre-rehab. There will be an incremental rehab program put on it. It is Manassas. It is a great little location. It's a product that the guys that owned it didn't complete a proper rehab. We are going in and do the kitchen and baths and the exterior rehab. The other two assets, as you can see, are practically brand-new.

But the rehab is not an element of the 5.4. You don't do that typically, is that right?

We're seeing it as 5.4 write-off of today's run rate.

And then the 375 is low simply because they're relatively new assets?

Yes.

They're both practically new construction.

One is brand new construction.

The last question is, on taking back the note on a sale (multiple speakers) on the sale, $91 million, 6 and 6.75%. Can you comment on the credit quality of the borrower that will pay their 675? I mean is that an issue to even think about?

Well, definitely, it's the credit quality of the borrower. They put a 10% of cash money day one. There's basically a quarterly takedown schedule, where we are in the first-lien position. So we feel very good about -- one, their credit and two, the structure of the deal more importantly. If they didn't perform, they will those about 10% immediately of an asset that we already run. So the structure, it works well that they're taking that down on a quarterly basis and they come with 10% cash upfront.

So it goes away in how long?

It's about 12 months.

And how much more of this is in your portfolio taking back notes?

(multiple speakers) We'll look at everything that we're -- took advantage of selling. We talked last quarter about a portfolio, 240 million, a big chunk of that was in Houston. With the hurricanes bearing down and the operating REIT numbers getting better, we have pulled it from the market and are back out remarketing it, and we will see how it executes. It's a good way for us to manage capital into the future. Rod has got some 7% paper coming out next year that I'd like to move that money up against and just pay off that debt when it comes due.

So we will continue to evaluate it. The others shares shell of the weaknesses they're showing. It makes sense for us to sell assets at low fixed cap rates and buy a company that's got 50% of its cash flow out of California and Florida at a fixed cap. So we are going to continue to look at selling assets. We don't think there's dilution in those sales because we have got uses of proceeds either paying off seven coupon debt or buying back stock. I think it's a great time to capture some of that value between public and private that is out there.

I guess one quick last question. Man, I just lost my train of thought. I lost it; I will call back.

Ross Nussbaum.

It's Ross here with Karen (ph). Two questions for you -- first is, I'm trying to reconcile the increased resident turnover, up to 73% versus a little over 70% this time last year. Despite the 38% reduction you had for people moving out to new homes, what drove the turnover increases?

I think it's a credit to Martha and her team pushing rents. You've got to push rents in this type of window. You are going to see that number jump a little bit. I'm not troubled by the 73. I'd like it certainly to be lower. What I'm looking at is whether -- is our topline growth and when you're moving rents at $25 a whack (ph), that's going to start putting people sensitivity. That's a 3% increase. Is that enough to force them out? Are they willing to stay? I think it's a good point, but I'm not overly troubled by 73. It's part of the season of this business.

The other question I have is relative to your comments regarding where the yield on the stock is and your thoughts on the stock buyback. How do you and the Board think about a buyback versus looking at other strategic alternatives, particularly in the light of the consolidation that's going on in your sector?

Well, you're cutting to the back-ended question is, is the Company for sale?

Well no, I think it's sort of the logic behind why would you pursue a buyback but not consider a sale? Aren't they one in the same?

They are. They are a different type of investment decision. And if this Board were faced with an offer that reflected the value of the enterprise, I'm certain they would take it under consideration. I don't speak for the Board; that is their job is to consider activity like that. My job is to run the Company the best I can for both the long-term and the short-term and try to unlock shareholder value.

So I think what you're seeing in some of the transactions that have occurred is what I alluded to earlier -- I think you've got 100 to 150 basis points difference between private market trades of real estate and public. And you've got a lot of pension money and other types of opportunity money, not just locally but globally that are looking at it and saying, listen if I buy a company at a 5.4 cap, I sell off part of it condo converters, I can average into a 6% return. That looks pretty good to my pension clients; I will take that.

And what I'd note is that most the transactions done in this space so far have been in the 2, $3 billion range. And that's not hard money to raise today in this environment. And I think those companies are not just buying the breakup value of the company, they're buying a platform that you look at what those management teams have done -- they have put up good development pipelines and other opportunities.

So you're seeing a little bit of opportunity there. I think some of the big funds are stepping in and taking advantage of it. Are they done? I don't know. For us, we've got to go run a business and do the best we can with it. And then if anything happens on that front, I'm certain my Board will take the appropriate action for the shareholders' benefit.

I think Karen has got a question as well.

Can you tell me how many units are in the Tampa/DC and Scottsdale projects that you referenced that would be starting potentially condo conversion in early next year?

Mark can give you that.

Scottsdale is 159 units. Tampa is -- there's really two phases. First is 176, and then there is a smaller town home pace of 54. And the DC deal that I mentioned is 218 units.

Craig Leupold.

Green Street Advisors. Tom, kind of following up on Ross's question -- you guys used to provide NAV estimates, and I am just curious where you guys think your NAV is today as you think about (technical difficulty)?

I find it very hard to peg. You can run a lot of different models on DF -- DCFs. You can run a market cap liquidation scenario. You can run a 5-year game. You can run a lot of different numbers. And so I don't really frankly want to get trapped into a number. What I want to do is look at it and say -- what's the best action I can take to maximize that number? And so sorry, I just don't have a number I feel comfortable with publishing. And I think the market is so fluid, and the asset base -- whether you value it as condos or apartments or breakup -- so many different variables to really peg. I will tell you, I think it's higher than the number you have on us.

I know that. I knew that when I asked the question.

If you want to change your number, I'll change my number.

Let me maybe ask it in a slightly different way, which is -- to the extent you think you are trading at a discount; obviously many of your peers are trading at large discounts as well. To what extent might you be interested in closing the gap between private market and public market pricing by being engaged in M&A activity as opposed to share repurchase activity?

I find when you have a very low multiple trying to go upstream and in fact one of the lowest multiples in the sector -- trying to go upstream is a transfer of wealth to the seller than it is of creating for us. So I think it's easier for the high multiple guys to come down and get the low multiple guys than for the low guys to go get the high guys, to tell you the truth. Cash flows might be $1 per $1 in the same, and we could argue quality. But when I got to pay $1.20 to go get something that is worth $1.00 to my shareholders -- and I don't think you do M&A deals hoping to capture the synergy/multiple expansion. You do them because they make business sense to you.

So I don't see us as a buyer. I know our name is thrown around a lot. And I certainly am proud of the guys at Tamely (ph) -- 37, that was a great number -- a lot. The guys at Gables did a great job with their numbers. So I think that's a better reflection of what in the hell these companies are worth is what people are really trading for and not the spot quote of the day on the stock exchange. With that being said, I live with what I am and I do the best I can with it.

A few other just quick data points I would like to get. On the disposition, on the cap rate, what kind of CapEx are you assuming on those disposition assets in the quarter?

5.10.

5.10. And then, can you give us any kind of sense as to what you are expecting for expense growth in '06? I know you probably hesitate to give too much guidance on '06 at this point. But I am just trying to get a real rough range in terms of expense growth.

Martha just threw herself over the microphone. I got to throw her body off it, so I can give you that number. In all seriousness, I think we're really going through our budgeting and our forecast. I think you're going to find pressure where we've highlighted it. It's going to be in the payroll numbers; it's a tight labor market out there. And it has finally caught us, and it's catching us in a lot of our good markets -- California, DC, Florida. So you're going to see that number be more than what I call the historical norm.

(multiple speakers) So maybe another year of kind of 4 to 5%?

Craig, I will just tell you, give me 60 days. We will come out with a real plan and one that we will support. And trying to peace it together today is just tough. I don't know if it serves me any purpose. But anyway, what else can I tell you today?

Bill Takowitz (ph).

Prudential Equity Group. Tom, I just have one question kind of looking at your guidance. You've talked about pushing the rents and kind of that. But then when I look at the guidance, the collections per occupied unit kind of comes down pretty sharply the guidance you put out today versus the kinds you had after the second quarter. So just kind of trying to figure out what kind of drove that?

I will let Martha think about how she wants to answer that or Chris.

I've got exactly the same numbers, Bill. We didn't move that assumption at all. We've had the same assumption pretty much all year long, and we are hitting those numbers.

Because I don't know -- I'm looking at it, and I have 7.40 to 7.45 I guess on the second quarter and now 7.30 to 7.35. I don't know if I'm --

I am looking at 7.30 to 7.35 in both areas.

(multiple speakers) We'll come back and look at it. We think we kept it the same.

I can tell you though that we have not dropped our expectations for collections per occupied unit.

And then just one other question. On the last quarter I think with the condos, I think you had like 70,000 a unit was kind of the gain. Looking at this quarter, I think it was around 80 -- a little over 80,000. And maybe I think on the call last time, you said you'd probably be in the 40 to 45,000 kind of ranges like a gain going forward. What kind of numbers should we maybe looking for there?

Well, it is tough on market composition. I think you're going to find is I think of the industry as it matures, the 70 to 80 will still be available in markets like California and DC. But it is going to tighten up in the Floridas into the 40s.

That is sort of a midpoint number because we see opportunities still like Tom said in the 70 to 80 range but also on some assets that we would like to do some trimming on, so maybe in the 25,000 range. And so that I was taking a midpoint between those two numbers when I answered that question last time.

Rob Stevenson.

Morgan Stanley. Tom, can you tell us what the average rent on the total portfolio is, not just the same-store number when you start factoring in all the non-mature stuff?

I will let -- Scott is digging for that. It's in the back of one of the exhibits.

We actually disclosed that in Attachment 6B (technical difficulty) the correct number.

7.94.

7.94 versus the 7.52?

Plus you got reimbursements on that, I would add.

And then an additional 32 for reimbursements, so you are at 8.20.

So the breakdown is in Attachment 6B. You'll see per buy, a year of acquisition as well.

And then the other question I have, Tom, is, looking at any of your market breakdowns. Your average rent on the same-store is 7.52. There's a mixture of markets that are above and below that. What is the appetite these days from institutional buyers to do joint ventures, not for Class A assets like an Amalie or a Gables but to do something on a mixture of a and b or predominate b stuff, where you might be able to put some of this stuff into a joint venture -- you could pick up the fees and get some capital back either buy back stock or make acquisitions in other markets?

Well, this is Mark. I think obviously, there is interest in the a's, but we see interest in a joint venture standpoint in good b assets. I think there is a pretty good appetite for that out there. And we are continuing to look at the right opportunities in that area. But I don't see b's being excluded from that appetite.

To add some color to it, you look at the Australian programs and what they've been trying to attract. And somehow, it doesn't really make sense even at this number. But a year ago, it was a 10% going in return that they wanted. And the most recent quote I've seen is a 6% return, including the cost of money on a global level is just coming down. Part of this in tough when we have, much to our chagrin, we called it about a year ago and said -- listen, cap rates have to be getting close to it because debt cost is moving. And both the management cost and equity just keeps falling. While debt has moved up on the short end, it is just a flat curve.

Overall cap rates have not gone back up, as we had started and felt that they would. In fact, what you find is the price of assets are climbing because cap rates are staying low and the NOIs are going up. It's never good to try to call a top or a bottom; it is a damn good market.

But does that lead you into a situation where you could sell as much of some of the markets, where you're not getting paid on a valuation basis for but that you can acquire enough to offset the dilution, and they would drive you into a dividend issue?

Exactly where we are at, exactly what we see as the opportunity. And frankly it is why we think we can sell assets in the Carolinas and Texas and some of our tertiary markets at cap rates and still get out on a non-dilutive basis and strengthen the Company either in debt or stock. We think it is a great opportunity. And we're focused very much on trying to sell assets.

Carey Callaghan.

Carey Callaghan from Goldman. Did I hear you correctly Tom say that the Houston asset, I think I heard you say $270 million -- likely slip into next year in terms of the sale? And I think you talked about using the proceeds against 7% paper, and that would be accretive. So do you have a sense of where the cap rate might be for that?

You know, you still got to trade. But I'd say it's below the seven cost of the paper. The number we had was 240, and it has included some of the Carolinas and Houston activity. NOIs on those assets have gone up since the hurricanes. But we will just have to trade. We've got a couple different buyers, and we'll just have to see how the trading works out.

You talked about the non-comparable portfolio performance broadly, but can you comment on Essex specifically and just give us an update on the performance there?

Essex is very close to what we underwrote it at. And the things that have been surprises, the revenue continues to meet or exceed our expectation. The cost structure has gotten a little out of twist, primarily in the payroll area and the insurance programs. So I think overall, it is right in there. It's maybe 1, 2% on an annualized basis, which is not a material hit or miss. It is going to be right on the number.

Further moves you can make Tom in combining the management of the assets that will result in more cost savings?

We have not pushed that this point. Initially, when we took over the portfolio, we had to rehire probably about 70% of the workforce in a tough labor market. Part of it is just style of management -- ours versus the prior owner. And we've been digging out from that. I like the team we've got there. Jerry and his team, if you look at this quarter on a mature portfolio delivered 9%, which I think you'll find is one of the best performers of all the apartment REITs when all the performance comes in.

So I really commend our team. And I think it just give them some time to get some seasoning and then move on to the consolidation and running them as sister communities. But we certainly like what we have done there. It was a good move. I heard on somebody's call I think it was yesterday, they thought they stole a portfolio at $140,000 a door. And I think we have got better located assets and better upsides, and I think we paid a little bit less than that for this stuff. So maybe we got bad price.

Dave Rodgers.

KeyBanc Capital Markets. Tom, could you give us an update on kind of where you are with new development with not having a lot of land on the balance sheet, with some in the discontinued portfolio, and costs continue to rise -- what do you think about that? And I ask in context of the two Plano developments that you've got, which really didn't look to make any progress during the most recent quarter.

Mark?

Well, those two projects were just in the beginning phases. And so that's typically how that goes. I guess you had a question about just the overall environment relating to costs, is that one question?

And the costs related to development because it's one thing and then your overall view as costs go up, does it become more favorable for you guys to become more involved in development or do you step further away?

I think we see opportunities in development. I think when you look at the highly competitive market on acquisitions when there's a dozen bidders for every property you have that's on the market it seems like, that if we can through entitlement of some of these sites or sites that we have entitlement on -- create value. I think we see opportunities there.

We have a pretty good track record on controlling our costs historically. I do think that every one -- with energy prices on the rise, with the hurricane demand, there's some question short-term on how some prices say lumber, shingles, wherever we are going to spike. But we've managed through those in the past.

So there is some caution that whenever we look at new deals, we're looking at -- we're really -- puts pretty strong increases on our prices. But our team is doing a pretty good job of evening that environment, keeping in control. So we will just have to see what happens if prices get out of whack, we won't do them. But right now, even with some of these pricing increases, we're still seeing opportunities in that. And I think some of that gets reflected in, have you bought the land right. And we've been pretty fortunate there.

Are you continuing to actively look for land, or are you focusing on the land you have on the balance sheet currently?

We are looking for some land outside of what we have on the balance sheet. Because we've pretty well worked our way through most of that what we had on the balance sheet. And also, we've got good relationships with developers, who are also helping us feed that pipeline of land they have.

And then maybe one question for Martha on the real estate tax just here in Ohio -- obviously, that was a statutory increase that was going to -- maybe known about for sometime. Do you have any of those other states rolling off as it might be a big chunk all in once that you'd have to absorb?

We are seeing general increases across the board. But some of the larger states where we're seeing that, we've seen some in North Carolina, Texas, Georgia.

Anything in the future that you think is going to be a big (multiple speakers) that's kind of my question (multiple speakers).

I think Mike has planned pretty well for them through the end of the year.

Colorado might be a surprise. They have got a couple different props on the agenda right now; they're going to go to the ballot here in November. That could have a negative impact on those who are here in this state. But we're not aware of any others that are that significant. Certainly keeping our eyes out -- Virginia is a state to watch.

(OPERATOR INSTRUCTIONS). Rich Anderson.

Just to the buyback, I don't know if this was addressed. But have you or could you have done anything since the end of the third quarter in terms of buyback?

No, we have been locked out. It is tough as hell sitting there watching it and just saying -- personally, I can't touch it. And as a Company, you cannot touch it.

I figured that. So now, you're sort of probably chomping at the bit to buy back some stock?

As I understand, we are restricted till tomorrow morning.

And then sort of a broader question in the context of M&A, if you had to choose UDR as a buyer or a seller, where would you fall?

(multiple speakers) You name the price?

Well, I mean, do you see more opportunities as a buyer or more opportunities as a seller?

I think right now that the spread between private and public at 150 basis points is a very, very tough thing to not look at. It's tough. You look at a company who is trading today at a 6.25 cap rate on cash flow or AFFO, and gosh, 4.5 cap -- if you sold it at that at 150 on a private basis? That's a good job for your shareholders. That's a job you should look at. So I find the private market cap rates extraordinary. And frankly, I'm not certain I see them moving that much off of these levels, as long as there's this much capital in the game.

These are not small funds that are out there. You look at the Blackstone guys and just did a hotel deal at a sub-5 cap turn around and flipped it. And they will do all right with that game.

Our Gables transaction same thing -- Amalie. So I think this is a trend that is not going to go away. And it's really as I said, it's not my choice. I got to run it the best I can -- is what comes along in life, you got to do and do what's right.

Chris Pike.

UBS. Tom, quick question, I just wanted to follow up on Dave's cost question, look at it from a different perspective. Unlike some of let's say the bigger developers in this space, you can put in some significant orders for raw materials with your relatively limited or more modest exposure to rehabs and kitchen and bath upgrades, what impact does the timing of the delivery of materials have? In other words, if there's a rut after these last several hurricanes, there is a run-on on lumber, plywood, cement. Is that baked into some of the yields that you guys have talked about in terms of just not having enough lumber or not having the delivery meet your specs in 4 weeks or the cabinets meet your specs in 4 weeks when they should be there?

This is Mark. I will speak to that. We have national contracts in our cabinets. And we actually warehouse those ahead of time. So we are actually hedged on that in a sense based on the supply we have.

And then on the new construction side, our Senior VP of Development, Mark Wood, who is in our Dallas office, is very experienced. What he does is obviously puts contingencies in the budget in case there is a timing issue say on lumber, which is one of the big issues. But I would say he also has experience of knowing not to jump to quick. We time those out pretty well usually on the conservative side to make sure we have the materials.

So what we go into a budget looking at -- if we can better it with timing and remove those contingencies is how we approach it.

Have you guys experienced any delays, deliveries of materials post the hurricanes that we have experienced so far?

I think what we have seen so far early on is just on the appliance side or Whirlpool, GE. I have got these standing orders from FEMA. How that plays out, we are waiting to see. It hasn't impacted us drastically yet. But that's one thing we've got on our screen to watch for is how that is going to play out.

And Tom, just the tone of the rehabs -- I remembering visiting some of the Southern California properties. You were talking about folks could pretty much see through the sheathing because occupancy was so rich that you can start pushing rehabs regardless. I kind of got a little different tone from today's call. Am I just hearing something differently or--?

No, I a) we would continue to push them down there and continue to look at every opportunity we can. I don't think there's a retreat off of pushing the rehabs. I think what you have got is it takes talent. You have got to keep the workforce in place. The housing market having been so robust out there, you got contractors walking on homebuilders, walking on our sites and saying -- whatever the penalties are, we are hired labor away from you. And so that has retarded our success in some areas. But the market is still very strong. It's execution. It's labor. Mark, you'd add anything?

The only thing I would add since you mentioned Southern California, I do think it's easier where the weather is and the climate to execute some of those as your example as you can see through the siding versus we're doing some more on our East Coast. And so that is a little bit different. The execution on those is a little bit harder than it is California, and that's reflected in our comment (inaudible).

Just lastly, have you guys been able to reconcile I guess the prude question from earlier with respect to the collections per unit? Because I'm looking at the same -- at least I have the same issue with respect to a revision in terms of collections per occupied unit when I look back to last quarter's revised guidance assumption.

We will take a look at it.

I don't believe it has changed. We did not intend it to change.

Richard Paoli.

It's Rich Paoli from ABP (ph). Most of my questions have been answered. But Tom, I see a lot of dancing going around here with respect to people asking you questions. I am just going to put it right out there.

Has United Dominion been approached within the last 90 days by a potential buyer?

No, it has not.

Thank you. There are no further questions. Please go ahead.

In closing -- and I won't take much of your time; I am looking at the clock. I just think a) the Company is doing well. I think we've told you exactly how we see the business and what we're doing to create value. And I would highlight, the portfolio is in very good position with 50% of it in California, Florida, DC, as you got generally market growth in over 78% of our assets. The balance sheet is strong with $3.5 billion of unencumbered assets. Of our $3 billion of debt, it carries an average interest rate of 5.4 and is well-laddered.

The operating team, I think the spirits are good. Team's doing a good job. I think when you get through this earning season, you're going to look at that topline and realize Martha and her team outperformed a lot of people in a lot of markets. They're doing a good job. And the value-add, the kitchen/baths limited scope rehabs, the development -- all our creating value. And we will continue to push those programs and continue to work for you.

Again, thank you for your time today. I wish you the best and take care.

Thank you. Ladies and gentlemen, this concludes the United Dominion Realty Trust third-quarter earnings conference call. You may now disconnect. Thank you for using AT&T Teleconferencing.