UDR Inc (UDR) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to United Dominion Realty Trust fourth quarter 2005 results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Tuesday, February 7th, of 2006. I would now like to turn the conference over to Larry Thede, Vice President of Investor Relations. Please go ahead, sir.

Thanks. And thanks to all of you for joining us for United Dominion's fourth quarter financial results conference call. Our fourth 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 didn't receive a copy, you can access the package at our website, www.udrt.com, and then click on the "investor relations" tab, and then "news," and "presentations." Click on the "supplement" link when you pull up yesterday's earnings release. And you'll also find the direct link to the supplemental data, as well as a link to the 2006 guidance details contained in the body of our 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 attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are details 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.

Thank you, Larry, and joining me on the call are a number of the management team and associates. The majority of the prepared remarks will be given by me, and Chris will provide more details on the 2006 guidance. To give us all more time, I will not read the press release. I think it's important while we have you for the next hour, to provide you our view of the state of the industry, and to give you some insight into our opportunities, and how we plan to create shareholder value, and to answer your questions. In reading several of the sell-side notes this morning, I wanted to highlight that the fourth quarter results exceeded our guidance estimates by $0.01 to $0.02. The majority of this variance was due to an insurance recovery associated with 2004 hurricanes. Chris will expand on this later in the call.

On the subject of the state of the multifamily business, I would make the following observations: 2006 to 2008 will be the best years we have seen for some time. Why? All aspects of the business from demand and supply are in great shape. All markets have positive revenue momentum, which appears to be accelerating. Capital is readily available, valuations continue to grow, the single family business that has constrained our growth in the past, is at the point of equilibrium and turning south. The current environment provides a vast number of opportunities for companies like UDR, who create value through operations, asset quality, meaning rehabs and upgrades, development, and matching capital to opportunities in our over 30 markets.

Let's get into the revenue side of the business. You've read the headline, quarterly revenue growth of 5.2%. The best in 8 years. But looking below the surface, some key points. 1, we have reached the inflection point whereby we have pricing power in most markets. 2, revenue growth continues to accelerate, reaching 8 consecutive quarters of accelerating growth, which looks to continue into 2006, with January at 6.3%. During the fourth quarter, 84% of the communities had positive year-over-year growth in revenues, in 91% of our markets. Concessions are down 28% for the quarter, and 20% for the year, or $3 million, and continue to fall, with January down 30%. During 2005, our total concessions were $11 million, and we expect this number to fall.

Traffic counts were up over 15% during the fourth quarter, and bad debt is down 16% from 2004 to 40 basis points, indicating that our residents have the ability to pay our rent increases. Fourth quarter, 85% of our communities had occupancies greater than 94%. And eighth, and lastly, during 2005, utility reimbursements grew at almost 3 times the rate of utilities. Reimbursements increased 11%, versus a utility increase of 3.8. Our revenue guidance for 2006, we have provided a range of 4 to 5.5% increase.

Moving on to expenses. In all the years I've been in the management of multifamily, I've always said quarter-to-quarter comparisons do not reflect a true picture of expenses. The last 2 quarters are just that. So instead of spending a lot of time trying to explain the whole list of timing differences, I will just point out that year-to-date expenses grew 4.4%. Our beginning of the year guidance was around 3%. The results in a little bit more detail. During '05, insurance increased 5.4 %; payroll, 5 %; admin and marketing approximately 5 %; taxes, 4.3; utilities, 3; repair and maintenance 3. The surprise in 2005 was in the real estate taxes area, primarily due to higher asset values, and in the insurance and payroll areas. Our expense guidance for 2006 is a range of 4 to 4.5. Before moving on, I wanted to thank the operations team for a good year. As I look over all the peers who have reported results so far, our 3.4% NOI growth stacks up very well against the national companies, all of who have significant higher multiples than we do.

Turning to the investment environment, during the last 5 years, we've seen an extraordinary period in which cap rates have fallen 2 to 300 basis points. And more importantly, cap rates compress from both quality and geographic markets. This environment has afforded UDR the opportunity to sell 1.3 billion of assets, with an average rent below $700, and replace them with 2.3 billion in acquisitions, with an average rent of greater than $1,100. Said another way, to look at the portfolio, in 2000, California, Florida and DC comprised 25 % of our NOI. Today, it is over 50%. In 2003, our average rent was $700 a month, and in 2006, it will be $870, a 25% increase. Our opinion is that cap rates have stabilized, with little movement either way in 2006. Our plan during 2006 is to sell 2 to 250 million in the Carolinas and some one off markets, to payoff 170 million of debt that is maturing, within a weighted average rate of 6.7. The remaining will go to purchase shares of assets. We see no dilution from our asset acquisition and sales program during 2006.

On the development front, which is detailed in Attachment 8 to the press release, our current pipeline of 210 million, 70% will be delivered during 2006, at an average return of 7.5. We are engaged in a number of negotiations with well known developers, to build for UDR. I estimate that we will be able to generate 4 to 500 million in annual pipeline, or around 5 to 7% of our market cap from these relationships. Our rehab upgrade program, which is also detailed on Attachment 8, I would highlight the following: We've been very active and have 2,200 homes with 63 million of additional invested capital which we estimate will be an 8.5% return for rehabs underway. Second, we have an in excess of 5,000 homes involving 150 million of capital, which we estimate will give 8 to 9% returns under study, with a high probability of continuing our rehab program into 2007 and '08.

The kitchen and bath program, during 2005 we completed 5,400 homes, with an average investment of $7,000 per home, with a return ranging from 8 to 10%. With high occupancies, it's becoming more difficult to ramp up the pace. We see 250 to 400 homes a month during 2006 with an average rent increase of 75 to 125 per home, with similar yields of 8 to 10%. On the condo business, we view this, first, as housing. And I'd note over the many years that housing sales continue to hover between 1.5 and 2 million, annually. So I don't think it's going to go away. The second, it's a great way for us to capture value on asset sales. During 2005, we sold 240 homes, gross proceeds of 69 million, and after tax of 16.7, which equates to a 3.8 cap rate, after tax.

Looking ahead, I see the business as sustainable at the 2005 levels . Farther down the road, in 2007 and '08, we have 1,400 homes, with existing condo maps in markets where entry price of a home is between 4 and 700,000. Clearly, we can sustain this business for some time. My conclusion is that UDR will move to the upper quartile of earnings growth, and that we will capture a significant portion of our multiple discount this next year, which will lead to superior returns. Let me turn the call over to Chris now, to discuss guidance.

Thanks, Tom, and greetings to everyone on today's call. I thought I might start with just a little bit of commentary about 2005 results before getting into 2006 guidance. Our taxable REIT subsidiary business made a strong contribution to our earnings in 2005. And our results were also impacted by the integration of the Essex Portfolio, and the completion of all the transactions that were necessary to finance that significant acquisition, and by rent.com gains, and an insurance recovery. We sold a development project for a gain of 3.8 million, or $0.026 of FFO per share after tax, which represented an IRR to United Dominion of 63%. We increased the volume of our dispositions through the condo conversion process to 240 homes this year, generating proceeds of 69 million, and an after tax gain of 16.7 million, or $0.111 of FFO per share before overhead. I would highlight that this represents an after tax cap rate of approximately 3.8% on the trailing 12 months of earnings on these properties, before the conversions began. We use non-recurring rent.com gains to improve our balance sheet and reward our associates, prepaying 109 million of debt, and setting aside a special bonus pool for site associates, netting to a gain of $0.012 to FFO. As a result of the refinancing effort, our secured debt is now just 35% of total debt, our floating rate debt is now under 20% of total debt, and our coverage ratios remain in our target range.

We did an analysis to evaluate how the core, pre-Essex Company actually performed in 2005, before all of this, what I call noise, all these unique transactions that hit our numbers for the first time in 2005. To isolate the significant repositioning work that we undertook through the transaction with Essex, we netted together the impact of all the acquisitions since September 30, 2004, and all the capital raising activity that we undertook during that period of time that would not have been required to satisfy debt maturity obligations that existed before the Essex transaction. If you net all those things together, the FFO impact in 2005 is exactly 0. If you compare what we would have earned on condo conversion properties, had we continued to run them as rentals, to what we actually earned in operating NOI and the after tax sale gains, we find that condos contributed just over $0.07 to FFO in 2005.

We netted the rent.com gain against the prepayment penalties and special incentives that we paid, and we concluded that this added $0.012 to FFO. An insurance recovery that Tom mentioned, of $2.5 million that we highlight for you on Attachment 6-A to our press release, related to the significant hurricane losses that we incurred and recorded in 2004. And I would highlight for you that neither the losses in 2004, nor this recovery in 2005, were included on our same store results. With the impact of these hurricane expenses in '04 versus some recovery in 2005 from insurance carriers, represented a year-over-year swing of $0.055 of FFO. Deducting out all these impacts, we find that our core pre-Essex portfolio contributed $0.057 of incremental FFO in 2005, which was offset by $0.017 of G&A growth, and further offset by $0.103 of interest expense growth. But to just sort of summarize that for you, and walk it forward, if you take our 2004 FFO of $1.51, you add $0.06 for core operations growth, you add $0.07 for our condominium conversion projects, you add $0.03 for development sale gains, you add $0.01 for rent.com gains, net of the prepayments and incentives, and you add another $0.05 for catastrophic property loss experience, on top of that, you manage all the repositioning activity that we've done, including Essex, the issuance of stock, the issuance of debt, and the sale of other assets to finance that acquisition, you manage all that activity to such a sterile result, and then you deduct $0.10 for interest, you deduct $0.02 for overhead, and you'll get the $1.61 per share of FFO, that we actually reported for 2005.

So, how will we grow that FFO in 2006? As Tom said, we are continuing to expect strong performance from our same stores, which in 2006 will include 2004 acquisitions that we did, which include the majority of the Essex Portfolio. We are expecting revenue growth of 4 to 5.5%, we expect our expense growth on average for the year, will moderate to 3.5 to 4.5%, with controllable expenses growing at the low end of that range. We expect that we are going to continue to see moderating marketing and repairs and maintenance expenses, with taxes, insurance, utilities, and payrolls remaining a challenge for us at the top end of that range. As a result, we expect NOI growth in the 4 to 6% range in 2006.

New development coming on line, as Tom highlighted on Attachment 8, will contribute $0.02. We are expecting continued strong contribution from our transactions business in the TRS, with condo conversions and development and land deals in the works, we are modeling $0.10 to $0.12, which is plus or minus $0.01 off our 2005 numbers. Essentially the same result year-over-year. With 172 million of debt maturing at a 6.7% average rate, we are expecting to finance the repayment of that debt, mostly with sale proceeds at a 6% cap rate. Our expectation is that LIBOR will be up another 50 to 100 basis points by the end of 2006. Acquisitions of 80 to $250 million at cap rates around 5.5%, and dispositions of the 200 to 250 million to fund the debt retirement and acquisitions activity.

We expect our G&A will be flat to up $2 million. We have new technology that we are rolling out in 2006. To some degree, this offsets R&D investments that we have been making in 2005 and process improvement initiatives already in our run rate. But we do expect that G&A will be flat to up 2 million, and encapsulated in that is the roll-out of new web-based technology for our sites. Recurring CapEx we expect to be up about 3% to $525 a home. So to walk that forward for you, if I start with 2005 FFO, and walk forward to the midpoint of guidance at $1.68, if you take the $1.61 of reported results in 2005, and you add NOI growth from our fourth quarter mature properties, that's $0.09, that gets you to $1.70. If you add $0.05 of growth from our 2004 acquisitions that will become part of same stores in the first quarter, that gets you to $1.75. If you add development coming on line of $0.02, you get to $1.77. If you add $0.03 for the fact we repurchased shares and have a reduced share count going into next year, you get to $1.80 a share. Subtract $0.03 for interest expense growth, gets you back down to $1.77, and subtract another $0.01 for G&A growth, that takes you to $1.76. If you take out non-recurring rent.com and insurance recoveries of $0.03, that gets you to $1.73. And if you allow yourself $0.05 for all the repositioning activity that we will expect in 2006, including lost earnings on our condo conversion properties, you end up at $1.68, the midpoint of our guidance range. With that, I'll turn it back over to Tom.

Thanks, Chris. I guess, when considering UDR as an investment, I ask that you think about 7 things. We've spent 5 years rebuilding our portfolio and the balance sheet. That work is done. We've built a great team in the property management, asset quality, and acquisition areas, which are just now hitting their strides and have capacity. We have relationships with many developers to expand our development pipeline, without the overhead burden. We can invest -- in UDR, you'll gain exposure to 30 plus markets, as opposed to limiting yourself to 5 markets, or 1 state. A Company whose earnings growth will be in the upper quartile of earnings growth for peers in 2006. We traded a deep discount to our peers. When recapturing this discount, you have significant returns. And at dividend growth, we have a record of 29 straight years of increasing dividends. And with a Board meeting later this month, we should be able to announce a thirtieth year. Let me now open up the call to your questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Jon Litt.

Hi, it's Craig Meltzer here, with Jon Litt and John Stewart from Citigroup. Tom, you noted that same store revenue growth continued to improve into January, the 6.3% year-over-year? Can you reconcile this with the full year guidance of the more modest 4 to 4.5?

Well, I think you are going to see the first half of the year, you are running against, I wouldn't call them soft comps, but reasonable comps. You have got accelerating occupancies that occurred in the second half of the year, running against first half of the year, and we are seeing part of that. Second, our teams are getting in their stride of raising rent pretty rapidly. And I think you'll have the first half of the year at the high end of that range, and second half of the year, you're going to be running against some strong comps, that might make it more toward the middle of that range. So we've put a range out there that we are comfortable with, and can rest assured, we're going to do our [expletive] best to exceed it.

Does the utility reimbursement come in that month?

Yes.

Do you expect more of a ramp in that this year? It was up I think 3 times -- ?

Yes, I might ask Martha to add some color to the gas area, which, with the strengthening of the Texas market, we're going to have a big pick up there.

Well we just started billing for gas in our Texas markets, and they are roughly 25% of our total gas cost. So as we increase our penetration in the Texas assets of billing to residents, we should see an increase there on the reimbursement side. And there are in Salinas, as well, the Monterey market, we just started billing all of the utilities there, and penetrations have continued to increase each month, so we should see that grow as well.

One thing, I think if you look at our utility reimbursements during the fourth quarter averaged about 53%, and on our targets are to move those north of, up to 60%. And that represents probably, in the case of about a $3 million pick up. But as your leases roll, you have got to do it on lease renewals.

What do you think that adds to your overall growth rate?

I'm sorry?

What do you think that adds to your overall growth in revenues? Is it that like 0.5%? I don't have the math in front of me.

Yes, my guess is it's probably more like 20 to 40 basis points next year.

And on the acquisition disposition activity for next year, it's a pretty big slow down from what you've seen, particularly in '05.

I mean, we are just laying out a real, I wouldn't call it a lay up number, but to announce a huge number, and then we have got to explain every quarter how we are going against $1 billion. We just felt it was best to say at a minimum, are are going to do these numbers, and we are going to shop a lots of assets. And if we get prices like we did in Phoenix, at a 2, 7 cap, the puppy is gone. So we are going to shop a lot of assets. But we are going to look very hard at the pricing of those, versus of prospect of hanging on to them.

I guess along those lines, it seems as though, I think 50 % of your portfolio is in 3 key states,. But it seems as though you still have, when you look through the amount of assets you have in other markets that probably aren't core, you still have quite a ways to go in terms of repositioning.

Well, we've sold a lot. And in what we have, you look at the rehab program, you've got another 10% of the program -- properties that are going to be rehabbed in the next 18 months. So I tend to think that the portfolio is in not bad shape. I mean, we would like to put a couple 200, 250 out of the Carolinas, and shop the rest and see what we get for prices. I'm not a believer that you have got to concentrate and become a bi-coastal REIT. You've got 8 other guys chasing the same [expletive] markets. And I tend to think that you want to be a little bit more diversified. You are going to have more opportunities if you are in 30 markets, than you do in 5. So we are going stay with our national platform, and we'll seek out opportunities in all those markets. Mark, you got anything to add to that?

No, I think that's well stated. I think with our rehab kitchen and bath program, that in the non-coastal work, if you refer to them that way, there's opportunities there that we can buy a good process, with less competition than we have in the other markets.

I mean, if you buy a lot -- if these cap rates start to spread out between the A's and the C's again, I'm not afraid to go back to buying that B minus, C asset, putting on a rehab, and bringing it up to a B plus program, and get a superior return. I think there's going to be a lot of that. But first, you have got to get the cap rates to move and differentiate themselves, and we don't think that's going to happen in '06, but we're going to keep looking for it.

My last question is on the stock buyback program. You only have 1.2 million shares remaining on your current authorization. Do you have plans to increase that?

It's on the Board agenda for the end of the month. We will go through it with them. I would certainly think we will A, seek an increase that that program, and announce it accordingly. And if the stock doesn't respond, we will probably get back into the market and be buying it.

Thank you.

Rob Stevenson.

Morgan Stanley. Good afternoon, guys. Tom, what is your threshold for condo conversions? You said that you thought that you could keep it at sort of current '05 levels going forward. But is there an opportunity here to deliver substantially more than that this year, before reverting back? What's the risk threshold, and the sort of portfolio threshold that you are looking at?

I think one of the first things we evaluate is, looking at each of the communities we are converting, what would they bring in the open market, on an after tax cap rate, versus going through the conversion? And so that regulates a lot about what we are going to do, what's the best thing we can, if you will, get the best return. And so Mark has got a pretty deep pipeline. And for us, it's just weighing through that math, whether it makes sense to pull the trigger and sell it as a straight out asset at a low cap rate, or do the conversion ourselves. What we are focussed on is making sure that we do a good quality job on the ones we do convert, and that we won't be faced 9 years from now, or any time, with suits from these. And that we optimize the price. Any other way to look at it, Mark?

No, I think that's well said. We have a deep pipeline. Our -- we have already sold 300 units, under contract -- they'll sell during the year in January. So I think our baseline numbers look very sustainable and like Tom said, we just look for what's the right exit [inaudible].

I think our experience, we certainly listen to other people's calls, and your write-ups. And what you're finding is, is that we are really selling at an entry level housing price. And with housing prices still holding their own, I believe that we are going to hold our prices. We have not seen a drop-off in pace. We never entered this with the concept of selling 30 in a day. We believe it's got a normal pace to it, like selling a house, and that's what it is. So for us, it more looks like a sustainable business, that if you manage it carefully, you are going to continue to make a good profit for years to come. If there's a period where we can accelerate it, we would take advantage of it. But it's not the way we are trying to run it right now.

Okay. On the 4 to 500 hundred million of third party development, is that basically fourth quarter of '07 and into '08 deliveries.?

Yes.

And are there any markets in particular that you are concentrating on there?

We are concentrating on Tampa, Orlando, Phoenix, Southern California.

Okay. And then a couple of sort of number-oriented questions. First, the guidance, with respect to the TRS contribution. Is all of that condo sale gains, or is there anything else flowing through the TRS right now?

That number is primarily condos at this point. I will say that there are a number of other things that we have in the hopper that could be in there, but we didn't elect to put them in guidance. And if they happen, that's great, it will be a plus, and we will report them when they happen.

I look at it as a safety net.

Okay. The hurricane recoveries in the four quarter was from '04. Is there any hurricane recoveries from the '05 season in the '06 numbers right now?

Our '05 hurricane damage was surprisingly minimal. We got by virtually unscathed in '05.

Keep our fingers crossed for '06.

And then last question is, turn over, and move out to home purchases?

Martha?

We're seeing that continue to decline. Turnover is down about 2 percentage points, and move outs to home ownership were the lowest this quarter, down about 900 move outs, to below 19%, just below 19% for total move outs.

Okay. Thanks, guys.

Rich Anderson.

Thanks. Harris Nesbitt. The 3.8 million gain, is that the $0.02 that you referenced last quarter that you expected? The unconsolidated entity?

Yes.

Okay. And in terms of G&A, would you expect a trailing back, or sort of a steady sort of $6.5 million type of quarterly run rate?

I think it's going to be pretty steady.

Okay. Is the 1.56 million, is that the insurance recovery? I might have missed that.

No, it's on 6-A, is it?

There's a footnote on Attachment 6-A that tells you there was about 2.5 million, there was 2.47 million of insurance recoveries that is not included in our same store expense comparison.

What is that 1.56 non-property income number? The third quarter?

I'll have Scott look at that.

That's interest income on notes that we took on sales this year.

Okay. So can you talk a little bit about some of the relationships that you are building for your development pipeline?

Well.

Who are they with?

It's with several national players. Obviously, a lot of us have relationships with Lincoln System, some of them are in there. A couple of local developers that are more regional we are talking to, in addition to the national players. But we are seeing opportunities with guys that are operating in the Southeast, like Cypress Realty. We're doing a deal that is in Phoenix with Zaremba, which actually operates out of Cleveland, they have offices there. So it's those type relationships, and there's other national players that we have just begun negotiations with, it's probably a little bit early to report on it.

Would you say there will be -- how would these relationships be, and these joint ventures be structured? Would there be like sort of an unwinding period after they stabilize, or how would it work, do you think?

Pretty simple, the way we are structuring most of these. It's a pre-sale contract, and what we do is, they find the property, we fund their pursuit cost up to a budget that we both agree upon. And when it's a go project, they go get the construction loan, we provide a bankable take-out. Then, what we have is an agreed upon stabilization date we value the property, we agree, or we appraise, to solve if there's a disagreement. And then we have a split that we negotiate on an additional payment we make the developer on top of his cost. So the I way I would state it is, we buy between wholesale and retail, that way. And we incur no overhead on our books to do it.

So if there's an overrun, Rich, they pick it up.

Yes.

That's the issue. They are carrying their own overhead. They deliver to us at leased-up property, and we buy it. And I think it's a great low risk profile to gain access to 1, some of the best developers in the country on a completed basis for assets, and what we get out of it is a steady pipeline of quality assets, that we can then go to and either fund through asset sales or additional capital sources. So it's a good program. One that Mark and I are very comfortable with, and frankly, very comfortable with the people that we are working with on the other side of the table. These are high quality, capable people that in all frankness, we have worked with in the past, so we know them.

Okay. And then on the acquisition side, have you been contemplating doing some sort of fund/JV type of structure to acquire assets, as well?

We've had some preliminary calls and conversations with a variety of people about looking at transactions. We looked at the one that you've been following handily is Town & Country, and frankly couldn't get to the price that it was going for.

Who? Who?

Another company. And I think that forum and that opportunity is out there. We certainly have the capacity, both in our asset quality and property management organizations to do it. We're just looking at it and saying, price is the most important element.

Okay. Thanks.

Craig Leupold.

Green Street Advisors. Tom or Chris, I guess, in your guidance for next year, I'm not sure if you touched on this, but your summary sheet of your assumptions, it doesn't have anything there for the kitchen and bath, and other revenue enhancing spending. What kind of assumptions for total spending are embedded in that guidance?

I would look at it this way, Craig. We're going to do 250 to 400 a month, at about $7,000 a door. As you have had a number of conversations with us, what we would highlight is, is the first month you have got disruption, because you have got people moving in and out, you've got to get the work. And after they stabilize, they come in at 8 to 10. And I think we'll just report them as we go. I think in Martha's guidance, she's probably at the low end of that range on the number that she has got in her same store sales assumptions. And with high occupancies, it is tough. We are not literally throwing people out, but we are certainly being aggressive with the program. And a couple things that I might highlight, and just give me a minute to talk about it. First, the program is a lot more on the -- than what it appears on the surface. We are at 58% of the portfolio has had a kitchen or path program on it. So we've left them in the same store sales, because if you took 58% out, we would be reporting something like 20,000 homes in our same store sales.

The second, I don't see a lot of our peers, or anyone else, reporting the impact of paint jobs and unit turns, and other programs that they do to upgrade and raise rents. And we see that as very similar to what we are doing here. It's a little bit more expansive. But it the same type of idea. You improve the asset, you get a rent increase, and you move on. Third, the $7,000 kitchen, and we posted pictures on our websites, is a substantial upgrade. And we think over the long run will lead to lower turnover, and higher closing ratios. And I think we will report on more of that down the road, as we get a track record on it. But I think you are going to like the returns, and what it does for the overall value of this Company. Anyway, thanks for the moment.

Absolutely. No problem, Tom. The numbers that you threw out there though, that implies just the kitchen and bath portion? Isn't there another portion of kind of other revenue enhancing spending that occurs?

Really minimal, next year. I mean we are comfortable with the program, I don't see any level of, what we would call, limited scope rehabs. We are either going to take them all the way down to the studs, and spend 25, 30,000 a door, or we are going to do a kitchen and bath. Not much else is left in this portfolio. I mean, if you look, in the last 2 years, we've probably repainted 65% or re-roofed 58% of the portfolio. We've caught up a lot of our capital, and we don't see that same level necessary in the future.

Okay. On your forecast for '06, can you provide any kind of color in terms of maybe the dispersion, or divergence of your expectations for revenue growth next year, by market? I'm trying to get a sense -- obviously, you've given us kind of portfolio-wide what you are expecting for '06. I'm just trying to understand where the best markets might be, and what kind of level of revenue growth you're expecting there, versus the worst markets.

I'll look at [Erin] and Martha to throw some numbers at you.

Sure. Craig, about 13% of our markets in '06 we are projecting to have growth in excess of 4%. Those top markets would be Southern California, Orlando, Phoenix continues to be strong, Columbia, South Carolina.

NOI, or you're talking about revenue?

Revenue. We really don't have any terribly weak markets. Our worst is other North Carolina, where we still have some impact from the military deployment, and that's at 1.5. In general, the next closest lower market is above 2.5.

Okay. So a relatively tight range still?

Still a relatively tight range.

Okay. And then, last question, the Houston joint venture sale. The venture was 11 million, and you had 20% interest. So it would have implied 2.2 million gain for you? But you got 3.8. Is that promoted interest the difference there?

Yes.

Okay. What was the rationale for including that gain in FFO?

We put the property in TRS.

Okay.

Because, obviously, put in the rate, you couldn't [inaudible] it. Inside of the 4 year hold period.

Okay. And is that 3.8 million gain, then, after tax?

Yes, it is.

Great, thank you.

Steven Mead.

Anchor Capital. Just 2 questions. On the expense control side, what kinds of things can you do to really do things differently, in terms of the expense side of the equation? And that was the first question. And the second question, is just to talk a little bit more about the condo market, and the implications of creating a lot of supply of condo units that, from an intuitive standpoint, you don't see prices going up in the condo market. You see prices coming down. So that in terms of competition from a shelter standpoint, how do you deal with that? But deal with the expense question first, and then the -- .

Sure, start out on the expense front, and then I'll hand the ball off to Martha to clean it up. First, on the expense run, I would highlight this. One of the big pluses we see is the Internet in attracting our residents. This last quarter, we leased 2,500 homes to new residents over the Internet, at an average cost of $100. Our typical cost of attracting and leasing an apartment has been $400. And the Internet, if look at last year, it was practically one-third that number -- excuse me, 10% of that number. And now that type of increase, and as we've gotten better, we are finding more and more ways to channel customers to the Internet, lease over the Internet, and so we are going to see a substantial reduction in our marking cost, and it also helps in vacancy loss, because, they are are competitive, they make a decision. They sign it right now, and they start paying right now. So I think marketing is going to be an area of cost containment that will help us substantially next year. Other things, Martha?

I think there are a number of things that we've done on the ROI front. The kitchens and baths have an impact for us in terms of the appliances being newer and more energy efficient. It brings down our vacant electric cost, when we do have vacancy. It also brings down our overall costs, when we are doing HVAC systems for those properties that have interior hallways, that's bringing down our overall electric costs. We continue to evaluate lighting programs to bring down utilities, installing new boiler systems where we've got some aging equipment that is not as energy efficient. So we have got a number of things on that front. On the personnel side, it's a little bit tougher as we continue to see wage pressures across the board with condo converters trying to take people away at higher prices. But we continue to look at our leasing and incentive programs, and at higher occupancies, we have fewer units that we are leasing, so that does bring down our commission programs a little bit.

On to the condo question, I think of it the following way. You are absolutely right, at some markets we are seeing the single family house price top, and start to come down. Which would indicate that an entry level home or a condo pricing pressure would occur. And I think some of that is going to start happening in the DC and Florida corridors, as the softness in single family housing starts stacking up. And what you'll see, is we will move our program from those markets, which will wrap up in '06, to markets where the entry level and price of a home is 4 to 700,000, and we can be selling a product inside of that in the 3 to 400 range, and sustain sales activity there. Particularly Southern California. We don't see housing prices coming down, and even if they did, you start with 700 and take 20% off of it, you are still trying to sell at 560. We are going to have a good looking product in there, and trying to be selling it at 350, 450 range, I think we'll do okay in that market. And that's why we see it as sustainable. Some markets it will, others, there's going to be some softness. It will track with the single family housing market, and we continue to monitor both. With respect to what we've seen so far and what we are delivering, prices have not contracted. We are increasing pricing over our pro formas when we launch these deals, and we've not had to at any point A, cut back the pace, or the price. So we are not seeing that pressure. But I think it will eventually mount. We are planning for it, and anticipating moving out of those markets, and into our other markets.

One thing I might add, too, that while you are seeing some sales drop off at the very high end, upper product, one thing that is not talked about a lot is the trend nationally, by most cities and counties, to restrict the ability to obtain condo maps on existing apartments. That's going to be -- puts a restriction on the supply. Maps will still get done, but at a slower pace than they have had in the past, which is going to make map condo communities in these high barrier to entry markets more valuable.

Does that help you?

Yes. Thanks.

Any follow-up?

Anthony Paolone.

Thanks, JP Morgan. Just a couple things. Number 1, on the development program, you mentioned funding your partners pursue costs. Do those get capitalized or expensed?

They are capitalized.

Okay. And then just my other question. Tom, in the quarter, it looked like there was a nice pop in some smaller markets, like Norfolk and Richmond, Columbia and some other like southeast places. Does that -- is that a blip, does it change the way you think about those markets? Or is that something that you sell into?

I'll let Martha comment on the operations side of that, and I'll give you my view on the asset positioning.

I think some of that you see is the result of a little bit of strengthening in those markets, but also our kitchen and bath program was very strong in both Raleigh and Norfolk, and also some of our LSR work, so that has helped to bring us up a level in that market.

On the investment side, as the decision we are weighing is, is 1, there's going to be a material -- a military withdrawal, and those markets should have substantial recovery in the next year. And weighing the pop in the NOI that we are going to be able to get, versus selling the asset. And our strategy is, is go out and list them. See what prices we get, and try to price in that pop that's coming, and if somebody will pay us for it, they get the keys to the ship. Well, they're not ships, but communities.

Got it. Okay, thanks.

Chris Pike.

UBS. Tom, I'd like to ask the condo question from a different angle. A lot of your peers have talked about this condo bid waning, especially in some of these super-heated markets, starting to see some moderation in the single family. If you combine that with your rather bullish comments on topline and NOI's for apartments, what's going to stop developers from rushing into these markets, and then layer upon just additional supply over the next 6 to 9 months?

Well, Mark will have his view. Mine is, is land entitlement costs and land process, if you will, is lengthening dramatically in a lot of these markets. Today, if you found a piece of dirt, and you were to go through, before you could even put a shovel, it's a minimum of a year, and in some markets, stretching to 18 months. And so my earlier comments about improving fundamentals 2006 to 2008, I'm built under the premise that a lot of people will run out and try to start building, but are going to get delayed because of that lengthy process. And by contrast, let's take a city like Orlando. I've spent some time there looking around at -- 2 years ago, the apartment stock was 170,000 homes. It's now 135. The 35 was completely taken off-line by condo converters, and in fact, you look at the drawing board, they are out another 5000 in the permitting.

Even if they come on line, it's going to take them 2 years to get there, to get a delivered. And it's still not going to catch up the stock to a city that is growing 20 to 30,000 jobs. So the housing shortage in Orlando is going to persist for some time. And I think you're going to see that same type of model replicate itself in a lot of these markets. Cities are just getting smarter, tougher about the building cycles, and you are not going to see the same overwhelming tidal wave come to market as quick as it has historically, in a lot of these markets. That's why I think Florida is going to be very strong for years to come, minimum 2, and will stretch beyond that. And we see a lot of other markets like that , same characteristics as Orlando. And those are the ones we are pursuing.

Okay. If you are so bullish on fundamentals, that JV structure that you are talking about, is it just a matter of sourcing deals? Otherwise, it could be implied that you are diluting shareholder value by giving half the year, or whatever portion it is, away to someone else. If you could just help me understand the JV concept there.

Sure.

This is Mark Wallis. I think what we have in mind is with our acquisition team, seeking opportunities to buy assets that would fit well in a joint venture. So that that would not causes us to dilute our own asset pool. Versus carving out of the REIT, itself. We look for trying to fit acquisitions -- .

But these are develop -- these are situations where you go out and you pair up with the developer, correct?

Developer, or with our rehab capability, we are seeing opportunities where we would rehab those assets in a venture, something we would buy and bring up to the B plus quality that Tom was talking about earlier. So we see opportunities to do that in a venture structure.

Okay. And then on the rehab, especially on the kitchen and bath, geographically, where are you pushing kitchen and bath upgrades, 75 to $125 a month at this point?

It's almost easier to list where we are not, because 60% of the communities have some kitchen and bath program on them right now. What markets are you not -- .

Yes, but at the upper end, Tom. I mean, where are you pushing -- I think -- ?

California.

I can tell you an example in California, where we were estimating maybe we would get 100 to 125. We put in the new kitchens, and we are getting 150 to 175. So in some of those markets, like Southern California, Florida, and DC, we are seeing the higher end numbers there.

And are these assets that you are looking to hold, or do they fall into that, I guess, shadow disposition bucket, up and above the 300 that you talked about in the release or the guidance page?

Our attitude is, is that frankly, Chris, everything is for sale. Okay? If we can get the price that makes sense to us, and we've optimized the cash flow out of it, we are glad to let it go for a price. I mean, we are in the business of A, buying assets, improving them, and selling them.

Okay. Great, thanks a lot

Richard Paoli.

ABP Investments. Couple of questions for you. Basically, mostly follow-ups. On the rehabs that you did in 2005, how much did you spend in total on those?

Mark is looking at his numbers now.

Okay, and I don't know if you have the break out or not, but how much of that was in the same store pool, versus maybe stuff that you've acquired?

None were in the same stores. Well, your point is probably, did we take them off-line and then rehab them.

Well, no, I was asking about your spending on kitchen and baths, and you said it's in the same store pool. Then you have down to the studs-type stuff, which is not in the same store pool, right?

Correct.

Okay. I was thinking more on just on the kitchen and baths, how much you spent on that in the same store?

5,400 of them last year, and an average of 7,000 a door, so 35 million.

35 million? Okay. And I have a related question. Just bear with me for a second here. I was -- I think you guys are the only ones to do this, but on your Attachment 6-B, you put your ROIC for your same store portfolio, as well as the other, I guess, pockets of assets. And 1 thing, just maybe walk me through the calculation, but the same store communities correlates to the 3.5% same store NOI growth, or is it 3.9% for the year? Why is the ROIC flat from fourth quarter to fourth quarter, and from '05 to '04 at 9, presuming that you are spending capital on the assets, and then you are getting same store NOI growth? Am I thinking about this the wrong way? Or shouldn't this be growing at a faster rate?

I'm going to have to think about it. That's a fair question, and I can follow your logic, and say it would seem that your same store communities would grow if your NOIs were growing, and you were getting a superior return off the them. But if you were putting dollars in at 9, you were getting 9 before, it would be flat.

Right. But then you've got same store NOI part of it, also. Because I was kind of working this through my head, and saying, all right, they spent 35 million at least on the kitchen and bath that's in that number. That's sort of corrupting -- .

You are getting 9 before and 9 after, and you if you said your NOIs were growing, you should get a better return on top of that.

Right. And do you know what the asset -- the dollar value or the book value of those assets are, that's in that ROIC calculation? I'm just trying to figure out what it represents in terms of total -- ?

Of total asset base. You know, I don't know that off the top of my head, but that's a [expletive] good question.

Okay. And then my last question, and not to look like a, I guess, a tool for somebody else, but one of the other REIT executives basically threw rocks at the rest of the apartment REIT industry, and said that everybody is too chicken to report their IRRs on their dispositions. Care to reveal what your IRRs are? I mean the cap rates look pretty low on the stuff that you are selling, and was curious if you have that number calculated.

On the sales for this year, did you guys calculate it?

I wouldn't say that we're chicken, Rich.

I didn't say you were.

But give us a 25 multiple, and we're after that question.

If we hang a number out there, I want it to be right. And 1 of our issues with the assets that we are selling [inaudible] -- Several accounting systems, so tracking historical cash flows and tying it down to a precise IRR is not something [inaudible]. You think it's valuable, I'll make it valuable.

Well, it's just another data point. I wish all the other companies would put this ROIC calculation in here, especially for the same store, because basically, it's almost like a bank, right? You are investing capital and you're getting a rate of return.

Your point is well made, and I think Chris' response is appropriate. We didn't buy a lot of the stuff we are selling. So to reflect upon, gosh, you have got to buy it and run it. But we are glad. I mean, heck guys, we run somebody else's money here. We are are glad to tell you what in the [expletive] we are doing with it, and what type of returns we are getting.

My sense more is just trying to equate what the -- because those are pretty impressive cap rates on the stuff that you are selling to the converter.

Yes, I mean, you look at this last year, even we sold $400 million of stuff at an average cap rate of 5.4, and we bought 400 million of stuff at a 5.3. And you look at where we sold, and where we bought, and you say, [expletive], I'd do that every year, and that's my personal attitude, we will again. If I can trade up the quality curve at a flat cap rate tray, I'll do it all along. But your IRR is a fair question, and we are glad to take up the gauntlet and run out there, because frankly, it's your money that we are running. Tell you what we are doing with it. Don't have it right now.

Okay, no problem. Thanks, guys.

Jamie Feldman.

Thank you. Prudential Equity Group. This morning, in Toll Brothers release, they talked about how in some markets there's an overhang of inventory levels from speculative buyers that are now becoming sellers. I'm wondering in which of your markets you're seeing that for already constructed condos.

Well, I didn't their -- but I saw the overall tenor of their comments about the slow down,and how they took down their starts and their production cycles. And you're going to see a lot more home builders say the same thing. In the markets that we're using our condos, again, I think Mark answered it, with the high end product is slowing down across the country. And if you think you are a speculator, would you rather speculate on a $200,000 bet, or a $1 million bet? Lot of the stuff we are selling is owner occupied, or people who are saying, I'm paying rent of 1,000, and I can get in and finance a condo for 1,200, I'll go for that. Not a lot of speculation in the communities that we are selling, but what other color would you add?

Well, I think what we are seeing at the entry level product, we are seeing second home buyers that want a very affordable product, they are not going away. And so that's providing strength that we really didn't foresee, in addition to the occupied -- the renters that are buying the units. And another thing I would say is, we have small communities spread out in a lot of different markets, so we see our risk profile as pretty low. We are not like a home builder, that is marketing 300 homes in 1 location -- single family homes. . We are marketing maybe 150, which are at this point, are selling out upon opening 30, 40%.

Did they breakdown their price back up? Did they say, in this market, it's 400,000 homes, and they are backing up, or did they say it was a 600,000 product?

No, but I guess my question really focuses more on, like are there any market where you are actually seeing condos come back for rental?

Not yet.

No.

Not at all? No market?

Not yet.

Okay. And then my next question, have you taken a look at how much rental prices have gone up in your markets where you are doing the kitchen and bath renovation? I'm trying to break out, how much of your return on the kitchen and bath is just improving market. How much of it is actually your investment.

What we are giving you is the incremental that we are getting. So, for example, in California, Martha is increasing rents anywhere from 70 to 100, and she comes in and does a kitchen and bath, she is adding to that, another 125, 175.

So the returns you're quoting are actually beyond normal market -- ?

They are the incremental returns on the incremental capital.

Okay. Thank you.

Dave Rodgers.

Our meter ran out, or -- ?

KeyBanc. Tom, 1 question for you. It relates to, again, the redevelopment program. You had said some time back, that the increased level of spending per unit for the kitchen and bath program was related to your thoughts about long term value creation in the asset. Have you been able to realize or recognize any of that yet? Or is it still too early to tell?

I think you're going to see value created out of that in the following manners: First, this is a revenue game, and ultimately, when people buy assets, they look at the revenue stream and it's potential, and they run their own expenses. So I think it's going to ultimately lead to a higher value for the asset when, and if, they are sold. Second, I think it will lead to lower turnover in the resident, because they are going to look if the marketplace and say, I have got a very high quality rehabbed apartment home with a lot of square footage, and that's going to be a nicer place than the alternative in the market. And so I think when it costs you $1,100 in turn, another 100 if you get them on the Internet, or 400 if you buy them in a normal channel, you might save a turn out of every 3. And so that should give you a better return. I think we will be able to report in the coming quarters more of that. But as I recall, the second half of the year is when we really ramped up the higher quality program, and a lot of those leases haven't started rolling yet, to see if that turnover number. Second, we haven't sold any of the communities that we've been doing major kitchen and baths on yet. But certainly if they come to the market, the logic would dictate they come with a higher rent, and therefore, should fetch a higher price.

That's fair. Then, my last question for Chris is, what amount of receivables do you have on the balance sheet today, or at the end of the year for seller financed receivables? What's the duration and the average rate on those?

It's about $60 million. It's about 7%, and it burns off by the second quarter of the year.

Fair enough, thanks.

Thank you, management. At this time, we will turn the conference back to you for any closing comments you may have.

Great. Well, operator, thank you. And to all of you still listening on the call, we appreciate your time today. And again, at any time should you have questions, we're always available to answer them. We appreciate your questions today, and your time. Take care.

Thank you. Ladies and gentlemen, that does conclude today's teleconference. Once again, thank you for your participation, and at this time, you may disconnect.