UDR Inc (UDR) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the United Dominion Realty Trust first quarter 2006 conference call.

At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press star followed by the zero. As a reminder, this conference is being recorded today, Tuesday, April 25, 2006.

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

Okay. Thank you. And thanks to all of you for joining us for United Dominion's first quarter financial results conference call.

Our first quarter press release and supplement 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 Web site, www.udrt.com, and then click on the Investor Relations tab. Our press release is posted there and you can click on the Supplement link when you pull up yesterday's earnings release. You'll also find the direct link to the supplemental data as well as the link to the 2006 guidance details contained in the body of the press release.

We'll begin the call with management's 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 detailed in yesterday's press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

With that, I'd like to now turn the call over to our President and CEO, Tom Toomey.

Thank you, Larry, and joining me on the call is Mark Wallis, Martha Carlin and Chris Genry.

Topics to cover today, first quarter results, update on the fundamentals of our business, guidance for the second quarter and 2006 and then open it up to questions.

FFO was $0.42, or 7.7% greater than prior years in the first quarter. FFO $0.42 was one-tenth ahead of our estimates.

Just to give you my view of why we exceeded our estimates I would say $0.01 from operations, $0.01 from condo gains offset by higher interest costs of about a penny.

Same store sales, excuse me, same store NOI of 6.6% is ahead of our guidance driven by accelerating revenue metrics and expenses met our forecast. This is the first quarter that the 2004 Essex acquisition has come into our same store results.

I think everyone agrees that it was a terrific acquisition. Just to refresh your memory, we bought this portfolio at a cap rate of about a 5.5%, or $163,000 a home.

Today we are realizing better than a fixed cap and believe the homes are to be worth better than 200,000 if sold as apartments, and better than 230,000 if they were sold as condo convertible. The first quarter revenue from this portfolio was up 12% year-over-year, NOI was up 18%.

One more point on the first quarter results, we all spend a great deal of time trying to discuss the last/next 90 days and missed some important trends which are more telling. One such number that sticks in my mind for the first quarter was total collections per occupied home had reached $852.

This is the highest number in the 34-year history of United Dominion. This number is also a 22% increase over the 2003 $700 per occupied home.

Why? The Company has changed that much in terms of market position and quality of real estate and with our operating team we believe this will translate into higher growth rates in the future.

Let me now turn my comments to the fundamentals of the business. Starting with revenue, as you can see from the exhibits of the press release the number of markets showing revenue growth represented 96% of the portfolio. We see broad market strength and have significant pricing power.

27% of our leases expired during the first quarter with an average renewal rate increase of $35 a month, or 5.5%. My earlier point on acceleration is supported by our March average monthly rent increases being $48 a month, or 6%.

Concessions are down 25% to $241 per move-in, and as we move into our prime leasing season, we should be able to reduce this further. Occupancies remain right around 95% throughout the quarter.

Our early April revenues bode well for the second quarter as we continue to see acceleration in the majority of our markets. Later in the call, Martha will be glad to answer your questions about specific markets.

On the expense front, we recorded expenses year-over-year of 5.7%. This is exactly where we thought we would be for the first quarter and in line with our overall year guidance of 4 to 4.5%.

We have previously stated in our guidance that expenses growth would be high in the first half of the year.

On to condominiums. Overall guidance for the year was 14.5 to $18 million, or 10 to $0.12 a share. During the first quarter we recorded $8.5 million of gains and Supplemental Schedule Nine details our activity in our pipeline.

Our original sales target for 2006 was 425 to 525 homes. As of March, we had sold 181 and have 153 under contract. Our after-tax cap rate of 3.3 for these sales is extraordinary.

Turning to our rehab development, kitchen and bath programs.

We have an active pipeline on all these fronts with 4,850 homes in rehab and development for a total budget of $300 million with anticipated returns ranging from 6.5 to 9.5. We have provided details of these on Attachment Eight of our press release.

We have previously stated our goal to grow this business to 5 to $600 million annually. I'm very excited about the number and quality of projects potentially in our pipeline which is in excess of a billion dollars today.

During the question-and-answer, I'll let Mark provide you more details in this area.

In addition to our rehab development, we have our kitchen and bath program. We anticipated with the tightening of our occupancies and the pace of the program would move to 350 homes per month, with returns continuing to average between 8 to 10% on our annual investment of $30 million.

I'm glad to report that the asset quality team led by Richard Gianattii and Chuck Barth and our operations group have increased the pace to 500 homes a month with an annual investment of 50 to $60 million. During the quarter, we completed kitchens and baths in 105 of our 260 communities in 23 markets. I see little change in this pace throughout the rest of the year.

On the acquisition and sales front, it's a very competitive environment. In fact, cap rates continue to compress in selected markets and I'll let Mark give you more color on that later.

Our strategy for 2006 was to acquire and sell on relatively the same cap rates. This is similar to the strategy we executed in 2005 in which we bought 400 million primarily in California and the West Coast at a 5.4 cap and sold 500 million at a 5.2 cap.

The good news is that we are finding our Southeast assets listed for sale totaling between 130 and 200 million to be receiving very lively action, leading to what we estimate is a third quarter close at cap rates consistent with our prior guidance.

Speaking of guidance, during the second quarter we expect FFO to be 42 to $0.44 and at this time, believe our original guidance for the full-year of $1.62 to $1.63 a share representing 5 to 7% growth is reaffirmed.

At this time, I'll open up the call to your questions.

[OPERATOR INSTRUCTIONS] Our first question is from Jonathan Litt with Citigroup. Please go ahead.

Hi. It's John Stewart here with John Litt and and Craig Melcher.

Tom, should we infer from what you just said that the reason you're not taking guidance up having closed basically half of your condo contribution for the year is because you expect at least to have a lag in reinvesting the proceeds from these asset sales that seem to be going quicker than expected?

No, I think there is embedded two questions in there and I'll try to address them separately. One relates to condo and the pace and the second related to guidance.

On the guidance front, our thought process you've got one quarter in the books, you've got three quarters left of the year. We gave a dime range. We still think that range is very valid. And really would prefer waiting 'til after the second quarter to adjust the full-year guidance at that time.

So I think the original assumptions are still very valid and we're comfortable with that range.

The second was on the condos having booked almost 50% of the anticipated gains this year in the first quarter, what I would say about that business is we outlined a pipeline that we've been working on for six months for all of '06. So halfway through '05 we laid out a pipeline and said here's is what we're going to do this year. And we're chewing through that pipeline pretty darn quick. We have not backfilled that. We have been working on our '07 and '08 pipelines.

If we're able to accelerate those into '06, we'll be glad to tell you. At this time we're not certain we'll be able to accelerate our '07-'08 pipeline into '06 so we don't feel compelled to really change the guidance around that number at this time.

What I'd say is business has been great in that area. And we'd be glad to answer more questions about it.

Okay.

Did you buy any stock back during the quarter and what are your thoughts about stock buybacks going forward?

During the quarter we did not buy any more stock back and certainly, as we continue to sell assets and look at proceeds, use of them, the stock is one alternative. And we'll keep looking at it that way and should the stock respond poorly in the marketplace, we're again a company that has shown a track record of buying back our stock and we'd be glad to at a certain price.

We aren't at liberty at this point to tell you what that number is it as it adjusts over time but we still like the stock.

I think Craig Melcher has a couple of questions as well.

Sure.

How have the cancellations rates been in the condo business trending?

I'll let Mark question. It's been very, very, very low for us and I might just comment as to why we believe that is. First thing we do is we feel like we mitigate that risk by keeping the pricing competitive.

Frankly, what's happened in most of our communities, we have buyers looking at prices going up and they're seeing equity that they would walk away from. So that's one thing that we would price them competitively and so the buyer's getting a good value.

Second thing which is a balancing act, is we maintain earnest money deposits that are significant to the first time buyer, and that's who our primary market is, the first time buyer. You've got to balance that with we go between say 2500 to 5,000 a home, at 5,000 a home, it's low enough that you're not discouraging buyers in our demographic target, but at the same time if they walk away from it, it's a big number to them.

So that's really what we're doing to -- it's the product has been received well and we've had a handful of people walk away from the contracts.

It's Toomey.

I might add, when I look at this and I look at the individual communities, first you have to realize is we're all over the country doing these and that we've got a great inventory of product and I think we've put it in previous road shows totaling between 1,000 and 1500 homes and you can see that's about a three year inventory that we've got backlogged, if you will.

Second, we're picking markets and assets where we do the math in reverse which is, for example, in the Florida communities we're selling them at $200,000 a door. We would never be able to sell these as apartment homes at $200,000. A fully loaded mortgage payment for those people is about a $1150 a month.

Their rent right now is about $900. So it gives me a sense about where that gap is between the rent and what their mortgage payment is going to be. And if it's that type of a range, we feel like we can move some of our existing residents into them and reduce our exposure to the open market and marketing.

And it's also a way that we can take larger communities, case in point in Tampa where we have a 900-unit community, we can sell half of it as condos and strengthen our market position with the other half as a rental property. So it's a complete solution to an apartment cycle business, meaning another way to sell an asset, it's entry level housing and last time I checked entry level housing continues to hold up pretty good even as the overall housing market slows.

Okay.

Second question is on, your NOI growth during the quarter varied pretty significantly from 1 to 12% by your major regions. Do you expect that spread to narrow for the remainder of the year? It looked like the expense growth was pretty high in the Southwest and the Midwest.

Martha?

Actually, we see broad strength on the revenue side in all of our markets, all but Salinas and Denver, really, so I don't expect that to soften up throughout the year. And we expect in the second half of the year for expenses to be more favorable. So I would say, no, we don't expect that to narrow to any great extent.

Thank you.

Thanks for the questions.

Our next question is from Rob Stevenson with Morgan Stanley. Please go ahead.

Good afternoon, guys.

Yes, it is.

Tom, can you talk a little bit more about the JPI JV? If I do the math from your Attachment Eight development schedule it looks like there's about 125 million in that joint venture right now, is that correct?

I'll let Mark talk a little bit about the terms on the JPI and maybe we can talk a little also how we view development inside the enterprise in our overall strategy. But I'll let him answer questions specifically and then come back and talk about development as a whole.

Well, back to your specific question, the number's around, will be around 130 million. The relationship of JPI goes back a long way. Tom and I have known them for over 20 years, a national developer, they're in about 30 markets.

It's a non-exclusive relationship with them. They do partnerships, obviously, with other players, but we've worked out an agreement with them to do certain developments with them if they present themselves.

The first one is a great site in Marina del Rey. If I could hit a driver straight, it's about a driver from the ocean. Great site. Structured parking. Condo quality kind of deal.

What we have structured with them is they do all the work. We come in as their partner providing the equity on the deal that's probably leveraged in the 75% range, and they have a latter prep up to 8.5% after we get our 8.5% then it goes to a 50/50 split.

Okay.

And you guys are required to take out the asset? I mean, could you just basically punt it into the market if you decide?

We can sell the asset, yes, if we want to as partners at the end, there's mechanisms for that to be able to happen.

Okay.

And is there any sort of buy/sell that could possibly cause a problem down the road if you guys were sort of scraping for capital at the moment?

No. I think the buy/sell provision is structured really towards us as investor to give us an option to buy the asset. There's a window that occurs near stabilization. Bit it's a favorable provision really for us.

Are they picking out the land sites and then coming to you and giving you the option of whether or not you want to participate or is it basically the two of you guys just trying to go out there and find stuff and decide together?

They're picking the sites and that's why we're doing it because they have the infrastructure to do that and find sites that would be outside of our in-house group's range. And that's why we like this.

When I was with Lincoln, you know, we were in a lot of markets, too, and it cost us 3 million a year just to staff up an office to find these kind of sites, so we avoid that kind of overhead. So they're bringing the sites to us to answer your question.

Okay.

And then on this size, I mean where do you see the size of this thing going? And then also, what are the implications for the wholly owned development pipeline on balance sheet?

I mean, I think the size is we're going to get the first deal done and we anticipate that they're going to bring us, you know, of this size deal maybe one to two a year and we'll evaluate those. And your question -- what was your question regarding our in-house?

Does this diminish the appetite to do development in-house or are you guys just going to continue plowing along at sort of current sort of levels in-house as well?

Well, we were going to continue and I would say this, we really looked at filling a couple holes in our in-house team to build it up slightly so that we can do a few more in-house units than we're doing here versus the 1300 on the books today that could grow to more like 2,000 in the pipeline or 2500, that kind of range.

Not a huge buildup but certainly doing what we've done in the past if not slightly more.

Okay. And this 130 million is just this one asset currently with (multiple speakers)?

Correct.

Okay.

And then a question for Martha, what was unit turnover during the quarter and move-outs to home purchases and where does that compare versus the first quarter a year ago?

Move-outs to home purchase were down 80 basis points year-over-year and 70 basis points sequentially.

Still running around 19% of our total move-outs. So not a huge impact there.

We have seen higher turnover, resident turnovers up primarily from the pushing of rents as we move forward with some of our kitchen and bath which is repositioning us in a number of our markets from a client base perspective. We've seen the turnover go up at those properties and, frankly, that provides us the opportunity to rehab the unit and push the rents more.

Where was that during -- for the quarter?

Almost 58%, 57.7%.

For an annualized number.

For an annualized number.

And is that what was that behind some the big occupancy declines that we see in Denver or Wilmington or Charlotte, Monterey Peninsula and at Jacksonville? Was that just basically you guys pushing rate and the occupancy dropped as a result?

I would say that that's true of the Charlotte market to some degree. Wilmington has some new campus housing that's come on the market and that was supposed to be in the pipeline last year and wasn't. And with their student population up, it pushed our occupancies to an artificially high level in Wilmington. So that's had a little bit of impact on us but still strong revenue growth there.

Monterey is really more of an issue of the rain that they've had out in California has delayed the hiring of seasonal workers and that does impact a couple of assets that we have in that market.

Okay. Thanks, guys. I appreciate it.

Thanks, Rob.

Our next question comes from Karin Ford with Banc of America. Please go ahead.

Good afternoon.

Could you give us some detail on the components of the expense growth and is the expectation for lower growth in the second half due to easier comparables on the utility side or is there something else driving that?

This is Toomey.

Just to refresh your memory on the growth range for the full-year of 2006 and it's in a number of our road shows, we thought personnel was 3 to 4% for the year it would be up. It's 27% of our overall expenses and in the first quarter it was about 2.5%.

Taxes, we think it's 4 to 5% for the year. The first quarter 6% primarily driven by Florida and Texas. We think that will moderate.

Repair and maintenance we thought it would be up 1 to 2% for the year. It's 17% of our overall operating expenses. It was relatively 1%.

Utilities, it's 15% of our overall expenses. We thought it was going to be 6 to 7% for the full-year. And what we thought during the first quarter it was going to be 15% and it turned out to be 15%.

Okay.

Admin, it's 4 to 5% for the year, it's 5% of our overall cost and it was down 7% and that's primarily we're just getting better at Internet marketing and that's paying off.

Insurance, we thought beginning of the year was 4 to 5%. It's about 2.5% of our overall cost structure and it was up 30%. I think there's been couple pieces published on that. We want to drive into the insurance area -- we can talk about it more. It's just not a big operating number. It's catching headlines because of its percentage, but overall, we still think 4 to 4.5 is a good number and we're comfortable with it.

And so like we said earlier, first half of the year would be on the high side and the second half of the year will come under that but it's going to balance out at 4, 4.5.

And this is Chris.

To the second part of your question we'll have easier comps in the second half on taxes and insurance as much as anything.

Okay. Helpful.

Secondly, am I right that condo margins went way up this quarter versus fourth quarter last year and why is that? Is it just a mix issue?

This is Mark. It's primarily a mix issue.

Okay. That's all I had. Thanks.

Thanks, Karin.

Our next question is from Rich Anderson with Harris Nesbitt. Please go ahead.

Hi thanks and good morning for you, good afternoon.

Do you think your April results made you more or less likely to raise guidance even though you didn't do it?

I think you have to take it on balance. It's certainly that we're continuing to see acceleration on the April results off the revenue side, but again, I'd reiterate that we'd like to wait until the second quarter's in the bag to change any full-year guidance.

And we're comfortable with the basics of the industry are all in the right direction right now, Rich, and we gave a wide range of guidance at the beginning of the year. And if it's not going to move materially at this time, why fiddle with it? I mean we'd spend half the time on this call just fiddling with numbers. We ought to be out there running our business and making money.

Okay.

I was looking at the condo disclosure. I just did some rough math versus what you had done the previous two quarters it was sort of like a moving target in terms of your sale prices, you know, per home, some went up, some went down. But are you seeing any signs at all of the weakening condominium marketplace in terms of your per unit sale levels?

This is Mark.

We're really not. Some of that is mix related. For example, on our Florida project last year I think we only sold eight before the year closed out. We were testing markets on some of our higher priced units that had some water views and some vaulted ceilings, so we've got some big numbers there.

We're seeing at this entry level that we had where we average $200,000 [inaudible]. We're not really seeing much drift off that at all anywhere.

Okay.

You mentioned to Rob's questions about development, joint ventures. Do you plan to add any other additional partners to expand the development joint venture, you know, strategy?

As far as third-party partnerships?

Yes. Are you talking to anybody else?

We are.

It's a great way to tap it. I mean if you remind, Mark and I both spent time at Lincoln and as it has spawned a great number of qualified, capable people in this industry and we know a lot of the old Trammell Crow people.

I mean these guys know how to build. We trust them. We can see they know how to identify sites.

It's a great way to tap a relationship and local expertise that get things done on time and build good quality product. And if we want to be building or have a platform that is capable of looking at 20 plus markets for development, then you have to have relationships in those markets to make them work.

And that doesn't mean that we aren't going to try to attack it ourself, just gives us another opportunity to find a way to create value. And we think they do it and they do it well. We'd be glad to do more of them.

Okay.

You mentioned the 8 .5 return until you get to the promote for your partner. Is that, that's a return on equity I assume? And how quickly do you think you'd get there and how quickly does the partner start to participating more in the share of the profits?

Typically the way those pro forma out it's going to be upon sale. So when you look at those deals most of the cash flow from an operating basis is going to go to us [inaudible].

Okay, I had a little trouble hearing you there.

What I was saying is it's really the cash flow at that [prep] is going to go to us. The partner's going to participate upon the sale or exit of the asset typically.

Okay, understood.

Rich, I'd add in this case that particular asset, and I'm sure in one of these future property tours, you're [beyond] it, what I'd recommend is you stop and look at it. We're building it at little over 400,000 a home. It's a product that JPI is familiar with building in that marketplace.

If you look around the homes in that neighborhood, you can't find anything that is in a mid seven figure number. This is going to get condo mapped and our estimation is somebody walks along and offers us a great price, she's a goner.

But I'll be glad to be selling it and I'll be glad reporting the profits we made for our shareholders. But every one of them is out there for sale, we'll be glad to try to maximize the value and keep moving.

Where do you think you'd generate the most value, most value creation? Would it be in the kitchen and bath, would it be in the rehabs or would it be in the ground up development?

Well, I think it's hard to say. In the kitchen and baths, we certainly look at it and say, for example, that we're putting 8, $10,000 a door in a kitchen and when you cap the NOI increase off of it, you're probably getting paid 20, $22,000 a door. So it's a doubler of money, if you will. And we think that's a great thing.

You look in development, how often are you going to double your money in the door? Not that often. So on an incremental dollar in, dollar out, I would think that your kitchens and baths are better payoffs, but you've got to sell the asset in both cases.

To remind you we're in the business of growing the dividend. We weigh what the long-term growth prospects of every one of our assets are and that's how we decide who's getting sold and then we look out and we market them and where we get a good price they're gone. And I think we've proven that over the last five years, we're glad to sell them.

Last question is, in the next five years from now will you be in more or less markets?

More or less markets five years from now? Today we're at 43. We're kind of targeting 40 as a good number.

I don't tend to look at it as a market, gosh, do I have a target number? I'd say I'm going to be around that number and plus or minus five isn't going to bother me one way or another. I think that's how you diversify your risk and your opportunities. And a lot of people are concentrating in five or six markets.

Hell, I remember being in Texas in the '80s when it was great and then I remember when oil went to $19 a barrel and we couldn't give them away. And we were all in five markets.

You've got to be diversified in this business to participate in value creation through all points in the cycle. I think that's where you're going to start to see us communicate better is how do we see individual markets? What is the best way to play those markets?

And a case in point right now is Phoenix. We have been doing a lot of conversions down there and sells outright and you'd find that we pretty much liquidated most of our Phoenix portfolio at better than $200,000 a door.

That's not a bad price for most of that stuff I could go out and build today at probably 150, $160 a door. So that's how you get a company that can create value. You participate in many markets and you have different value creation opportunities and you work on each market with the best you can.

And that's how we're going to play Phoenix right now. We're going to sell it and we're going to sell it at that price per door and do well. Thanks. Thanks, Rich.

[OPERATOR INSTRUCTIONS] Our next question is from Chris Brown with Banc of America Securities. Please go ahead.

Hey, just to throw in a quick debt question here. Could you just update us on kind of where you stand on managing your leverage in your balance sheet?

And then just looking over the course of the year, I know you have some asset sales in process but what are your expectations with respect to raising capital on the debt markets?

One, our posture in reverse order in the debt markets, we will continue to watch treasuries as well as spreads. And, you know, our view on those two fronts because I think it's worth spending a little bit of time talking about it is, there's another 25 to 50 basis point movement in the treasuries, but they're getting towards the end. I think that's pretty common knowledge in our sense.

What we're glad to see is that spreads continue, if not tighten, and we like that. So now it's a matter of waiting for the market to, if I will use the term, overreact to news and if treasuries dip, we're always an opportunistic issuer.

Right now we haven't seen them have any, excuse me, have any softness, we'll keep an eye on it. Our plans for the year, if you just pencil it out simply is this, we've got $110 million of debt maturing during the year at about a 7.5, 7, 6 weighted average interest rate. We've got strong asset acquisition and sales of about 300 million each and we've got another 100 million of condo sales.

So we're pretty much self-funding for the balance of the year along those lines and believe that we can accomplish all those tasks without any dilution to our earnings. And that's our preliminary plan right now.

Should more acquisitions present themselves, more opportunities, then we would obviously want to keep our balance sheet at its current level, if not continuing to try to improve it, which is going to happen by virtue of just the operating numbers anyway. That's my overall two minute balance sheet statement.

Very fair. Thank you.

Fair enough.

[OPERATOR INSTRUCTIONS] One moment, please. At this time, there are no further questions in queue. I'd like to turn the conference back over to management for any closing comments.

Thank you, Operator, and thank all of you for your time.

First, in closing I'd like to thank our associates for a great first quarter. Certainly the operating team's delivering on results and the fundamentals of the business in terms of job growth, demographics, immigration, supply and demand and the provision of a portfolio all point to me to continued if not accelerating growth.

We believe the stock is an attractive investment. We have a growing list of opportunities to increase our shareholder value and we'll continue to report against those, and lastly, I'd remind you that tomorrow is Executive Assistant Day. Don't mess that up. But we certainly look forward to you on our next call and please take care.

Ladies and gentlemen, this concludes the United Dominion Realty Trust first quarter 2006 conference call. Again, we thank you for your participation. You may now disconnect.