UDR Inc (UDR) 2006 Q2 法說會逐字稿

Welcome to the United Dominion Realty Trust second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded, Tuesday, August 1, 2006. At this time I would like to turn the presentation over to the Vice President of Investor Relations, Larry Thede. Please, go ahead, sir.

Thanks for all of you for joining us for United Dominion second quarter financial results conference call. Our second 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 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 will also find the direct link to the supplemental data 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 thank you, to all of you for participating on today's call. Joining me from the Company is Erin Ditto who is subbing for Martha who is on vacation this week, Chris Genry, Mike Ernst, and Mark Wallis. To ensure we have sufficient time to address your questions, Mark Wallis and I will offer prepared remarks and the entire management team will participate in the question-and-answer session. And a special thanks goes out to our sell side who we understand have 10-plus calls today, you will be glad to know that I've contributed to the fund to have all of us do all of our calls at the same time. And that ought to help you in the future.

But anyway, our second quarter results came in at FFO was $0.43 or 7.5% greater than prior years. FFO of $0.43 was $0.01 ahead of consensus estimate. cents. Condo gains of $0.01 and acquisition and sales contributed a $0.005, offset by entire interest expense of $0.015, and higher G&A of $0.01 and higher redevelopment of $0.005 Same store NOI representing 84% of our communities was 8%, ahead of our guidance driven by accelerated revenue metrics and expenses meeting our forecast. We intend to cover five topics during the call. Second quarter operating performance, increase in management depth, highlight some of the enhancements to our supplemental quarterly reporting package, and Mark Wallis will comment on our acquisition sales, development, and redevelopment activities, give you an update on guidance and then open up to your questions.

Apartment fundamentals, as you have read, and many companies have reported, are in great shape throughout the United States. We will focus our comments on our business, and how we are creating long-term value. A few operating numbers I would like to point out in the second quarter performance, revenue was up 6.1% year-over-year, with 87% of this from rent increases. Revenue was up 1.2% sequentially, with 100% of this from rent increases. July revenue which will be posted shortly to the Internet, but looks to continue these trends, is coming in at 6.6% year-over-year. The revenue growth is broad-based with 24 out of our 25 core markets recording year-over-year revenue growth. Concessions continue to shrink by 18% year to date, but continue at an annual run rate of $10 million. I'm confident we will capture this over time, given the market strength.

On the utility reimbursement front, we surpassed a milestone with two-thirds of our billable utilities being paid by our residents. We continue to chip away at the balance of 10 million annually, but feel good given the strong occupancy levels that we will get this again over time.

Expenses. Our operations group did a solid job this quarter, and met their plan, which continues to reinforce our beginning of the year guidance of 3.5 to 4% increase. Another milestone, we hit an all-time high on monthly total income per occupied home of $878. This is a 22% increase over 2003's $719 per month. This is the largest increase of all national apartment REITs during this period of repositioning. We completed the rollout of our web-based on-site property management system to all 259 communities in five months. And I thank our systems effort group for a great effort, which will enable us to advance our technology initiatives which include expanding the number of leases we secure from the web, most recently this quarter, it was 40%, gives us the opportunity to investigate pricing software such as LRO and yield starts.

Our other lines of business continue to benefit from fundamentals, so we continue to increase our investments. Development and redevelopment programs have a pipeline in excess of $1 billion. Mark will give you more details on this, with his comments. At times we spend a great deal on the Street and financial measures and we fail to highlight the management depth. We added three key players to our leadership team. Mike, former CFO at Prentiss Properties has joined United Dominion in the Denver office. And he is on this call with us today.

I'm glad to be here. When I was interviewing with these guys I way very excited about the commitment I head to ramping up future growth by investing in people, processes, and in the real estate. I think you're seeing evidence of that already in the development pipeline that is drawing and I think it is going to be a very exciting place to be for the next five years and I am glad to be here and look forward to working with all of you. So thanks a lot.

Mike, I hope you're here longer than the five years. [Laughter] You got to talk to your family about that. Mark Culwell, he's a former Gables Residential Regional Vice President of Development, he and joins the development group in Denver, excuse me, in Dallas, and Doug Walker, former COO of Harwood Pacific joins our Denver office to manage our other income activities. Each of these gentlemen have a vast experience at creating value and are a welcome addition to an already deep team. Additionally, I would like to highlight two of the members of our property management organization, Cheryl Pucci, who was just elected the Texan Apartment Association President, joins Kathy Ratchford who is the Florida Apartment Association President. Each of these ladies has been elected and it is a great honor by their peers to these positions.

And last point, in a period of tight labor markets, we have improved associate turnover from over 60% in 2001 to just over 36% annually in 2006. Our average tenure with the top 50 leadership positions in our operations group is now over seven years with United Dominion.

Next subject is enhancement to our quarterly reporting package to provide our investors more information on how we're creating value. I would highlight the 20-page supplement that we've given to the press release, and won't intend to flip through it, but want to highlight a few schedules for you. In particular, schedule 4A and B, we've given more disclosure on our debt structure and highlight that 80% of our debt is fixed with 5.5% interest rate with an average maturity of 7.6 years. And we've greatly enhanced our disclosure on our coverage ratios.

On 6, we provide a calculation of our return on invested capital which is now at a blended 8.2%. And then 8-A through C we enhanced our disclosure on development and redevelopment pipeline and now to discuss that in more detail I will turn the call over to Mark Wallis.

Thanks, Tom. We've ramped up our list of opportunities as evidenced by our total pipeline now exceeding $1 billion for the first time. And I wanted to outline a brief overview of our strategy to maximize the value of our large real estate platform.

First, we are appropriately expanding the development pipeline. We believe that the basic economic and demographic fundamentals favor selected development and redevelopment activity at this point in the cycle. Part of our strategy is to use private development companies to help us in our high barrier to entry markets. We can do this quicker and without building up a large overhead structure, so we have closed the JV with JPI development to develop 298 apartment homes in Marina Del Ray, California. In July, we closed a joint venture with Sioux Development in Belleview, Washington. The plan is to build a 400-home community there and we will own 49% of this venture.

Second part of our strategy, we also have a pre-sell program, we've talked about in the past, with third party developers, which will provide us opportunities in the high job growth population growth markets such as Orlando, Phoenix, and Dallas. Third, as Tom mentioned, we've added strength to our inhouse development team with the addition of Mark Culwell. His most recent experience was with the Gables Development Group.

In addition, Doug Walker, a former COO of Harwood Pacific has joined the Denver office to administer and help lead our TRS enterprises. Over the past three years, we've gained a foothold with our group in Southern California. We are pursuing several ground-up development opportunities there, and have a site in Glendale, California, under contract and plan to build up to 250 homes there. Our development team is very experienced in Dallas, in the Dallas, Austin, and Houston markets. We are working on two development sites in Houston that we've developed in our TRS, and it will provide us the option of one, adding this new product to our Texas portfolio, which we've lightened up on, in the last year, or two, selling this product upon completion if the market cycle indicates we should. I will remind you, last year, we sold our new development in Houston for an internal rate of return of about 74%, and when those opportunities present themselves, we will execute similar strategies like that in the Texas and southwest markets.

Fourth, we continue to execute our redevelopment program, as we build up that pipeline, and if you will note again, on exhibit 8, I believe it is 8-C, that we have 3100 homes in that pipeline now, and they should provide yields of 7 to 9%. What I thought I would do is walk you through a recent completion that we've done in this redevelopment pipeline. The community known as English Hills in Richmond, Virginia, and UDR purchased that 576-home community in 1991. This community was built in 1973.

Now, as a point of reference, two years ago, this community had a cash flow of 2.3 million. But that was lagging the performance of its submarket. Our asset quality team began a full 36,000 of the $21 million rehab that involved a full exterior/interior makeover. As we systematically brought the buildings online, we remarketed the property as Legacy at Mainland, gave it a new name, we dramatically improved our customer base. Now, that community is complete and should stabilize at about 4.6 million of cash flow, over the next year. So when you cap that out at a modest really 6.5 cap rate, in 24 months, we've created over $20 million of asset value. And the yields on the incremental investment is 9.7%. We did this with a talented operations team that effectively minimized dilution during the redevelopment, and it took a visionary asset quality team that took this asset to a new property status that fit the market demand. So we're going to continue this strategy of maximizing the value of these well-located communities we own that can be redeveloped into essentially new product.

A fifth part of our strategy, we continue to buy assets that provide multiple options for us to increase the profitability of our company. This quarter, we bought two assets in San Ramon, California. This is a growing community, and it is -- this transaction provides us the opportunity to expand our presence in the northern California market, and to leverage off our condominium expertise. Our condominium group is working with the city to convert this into a for sale product as the city is in need of more affordable entry level housing. And just to give you an estimate, our estimates indicate that this $50 million purchase could yield a pre-tax profit of 40 million in the condo sell-out. The purchase -- the second community in San Ramon in the same neighborhood will assist us in executing that condominium strategy as we will have a community to provide housing to current residents, and as that conversion process proceed, and that's a good solid rental asset.

We also bought an asset in San Diego that provides us sort of a triple option approach to the development, the first option is to run this as a pure rental property. It is well located and will provide us a strong long-term rent growth. The second option that we will apply is 50% of its homes are in need of a kitchen and bath rehab. We can execute on that, and capture that value. The third option is this community has a condo map, and while the San Diego condo market is undergoing a pause at this moment, we believe this location and type of product will provide some excellent condo conversion opportunity in the next couple of years.

I want to comment on an asset we bought earlier in the year in Nashville. How does that fit into our strategy? Well, it fits in our strategy of using our national operating team, which is very strong in Nashville, and we bought this asset to capture, by improving the core operations, and by executing a kitchen and bath program there. So here, we can invest an additional 3 million that should provide an 8% return for that kitchen and bath program, and that's on top of the initial 6% going in yield on the existing asset. So we continued to find opportunities to maximize value with our development, condominium and acquisition team.

Six, the last part of our strategy is asset sales. We were offered excellent prices for assets in Dallas, Fort Worth and Phoenix and we closed on those. We also have assets in the Carolinas, Tennessee, and Denver that we have under contract to sell at very good prices. Our operations group, in concert with our asset quality group, has done a good job of positioning these assets, to take advantage of the market. We believe that we're getting great value. And we are shopping another $165 million homes in the Carolinas and secondary markets such as Virginia. We will execute those sales if we get an outstanding value if the price is right. So to wrap up, I believe that we have strengthened our team, and we look forward to pursuing this value creation for the next few years.

Thanks, Mark. On the guidance front, and then I will open up to the question-and-answer session, during the third quarter, we expect FFO to be between $0.40 and $0.42 or about 5% year-over-year at the midpoint. This reflects one operational typical seasonal increase in expenses, due to utilities, and repairs and maintenance, offset by continued strength in the revenue area, and condo gains about one-half of the second quarter or two-thirds of last year. On the topic of full-year guidance, we're comfortable with the current consensus FFO estimate of 1.69, and clearly, the message is, we have elected to continue to improve our portfolio team, balance sheet, and value creation capabilities, which we believe coupled with the strong fundamentals across all our markets will produce accelerating growth into 2007 and beyond. With that, I will open up the call to your questions.

[OPERATOR INSTRUCTIONS] Our first question will come from Rob Stevenson with Morgan Stanley. Please go ahead.

Good afternoon, guys.

Yes, it is.

Tom, how do you characterize the market for your condo assets these days?

I will turn it over to Mark and let him talk to you a little bit more about it. That group works directly for him.

Well, I would characterize it as the first two quarters that's been strong, we actually had a faster pace than we had originally projected . The way we look at our condominium business, we pick selected markets, we're at the entry level end of the market, you have got to have a hook like in Tampa we have got units on the water we're going to sell, you have to look at your price points very carefully and our price point, we see that it is still strong, and if you look at it, even though interest rates have moved up, rents have moved up, so that belt between owning and buying is still favorable in a lot of these markets. And we're not in the southern Florida market where it is -- there has been probably too many conversions, so pick your markets right at the entry level, the market seems strong right now.

Okay. So you haven't seen the type of weakness that is pervasive out there in the regular single family housing market and haven't seen the need to lower prices, and seeing cancelations, et cetera, like other people have?

No, we haven't. And do you have people camping out at your doorstep, like we had some of our first deals? It is not at that frenzy where maybe you're selling 30 or 40 in a weekend. But that would be the only thing I think I might notice it's more of a reasonable pace. A lot of our people now are looking on the Internet and shopping on the Internet, and so that sort of smooth things out, too. But that would be the only difference that we've seen.

And Rob, I would add that Mark's absolutely right. We price the product against the rent. So if the rents in Florida have moved to $1,000 a month, we're pricing our product at about $200,000, you convert that to a mortgage payment, they get 100% financing, they're in for about 1250, 100, and a lot of people look at it and say I'd rather move that because I've seen my rent move $100 and a lot of people look at it and say I would rather move that because I see my rent move by $100 a month, why don't I try to cap it by buying a condo. It's entry level housing, it is a great way for us to maximize the value of selling assets. And we like the business. And it is a good business. And we will keep it up. We have not seen any erosion in terms of pricing, or traffic, at this point, because I think we're right at the entry level point and that's a good spot to be.

Okay. And then in terms of sort of nonrecurring income, is there anything, land sale gains, anything of a nonrecurring nature that you guys are expecting in the back half of this year?

This is Mark. I will answer that question. We've got -- in our TRS enterprises we're working on those type of transactions, and we have land sale opportunities, and also community sale opportunities. So we're working on those. And we certainly see that as a factor as we go forward in '07, '08 for sure.

And last question, Tom, in terms of looking for nonrental income sources and utilizing the TRS, are you going to start buying and rehabbing and flipping or buying in noncore markets assets in the TRS for sale? Like basically are you creating a similar situation as Archstone has with its Ameritron subsidiary?

There is no question that Ameritron has been very successful and we take our hat out to the Archstone team. They are creating a lot of value there. We certainly look at our company and say that we make money five ways and we present a unique opportunity in that we're in 25-plus markets, we're going to see those opportunities, and we will bring to bear our redevelopment group, our development group, acquisition sales, and operations, to find a way to just buy an asset and make money and we're glad to tell you about it. I think some of the examples you've seen that Mark highlighted are just the things that we're capable of doing, and we've been saying for many years, that what goes unnoticed is 70% of the apartment stock in America was built in the '70s and '80s, and a company like ours that can come in and buy something, fix it up, and run it, can create a lot of value, and there is a lot of opportunities like that. So I think you would see Mark's team, and that's what we're building it out, we will attack that, and the examples he gave are just a few of what we see, not just in our portfolio, but in the market. So certainly, it is a platform, and we will be out there seeking the opportunities and tell you about them as we generate them.

Okay, Thanks, guys.

Thank you.

Our next question will come from Jonathan Litt of Citigroup. Please go ahead.

Hi, it is Craig Melcher here with John. Do you have updated same store and LICOS guidance for the full year.

We have not tried to drive through the details of the guidance. But elected to say that most of you are at 1.69 and have you models that reflect that, and we're comfortable that the 1.69 in most of your models are pretty darn close. You are getting to the number. What we have elected more to do is to say second half of the year, there is a lot of acquisitions potentially could happen, there's a lot of asset sales that could happen and frankly none of us know what in the heck is going to happen on interest rates and instead of trying to make guesses over that range, what we've elected to say we're comfortable with the environment, the opportunities and frankly where your numbers are. And we will report against those each quarter and that as we get closer to '07, hopefully next quarter, we will provide detailed guidance about '07 to the same level we have in the past. So I think we've tried to look at our guidance in that light, and believe it serves us best to do so, and most of you guys are pretty darn close in your numbers, so no reason to try to fix 17 models on the phone.

In terms of the assets you purchased in the second quarter, what are the -- what were the cap rates?

On the ones we purchased this quarter, those cap rates range from -- they're at about 4.5 to 5.5%, and an average of 5%. The lower one being the one in San Diego.

But the other one you intend -- or you're considering signing the condo?

Right.

Should we expect more deals like that potentially in the pipeline and in the good condo business, should we see less in conversions and maybe more from new assets you would acquire and then convert?

I will answer it this way. I think you will see both. And we're out there looking for these kind of opportunities every day. And so we will manage the amount of capital that we're going to end up putting in this area, so that will be sort of a -- the collar on it. So we're out there looking for them, but we've got a good pipeline within the portfolio, but as you get better, at executing that, you see opportunities on the acquisition side, and so we're just now getting into that.

And one of them that Mark highlighted in California, we got a chance to double our money inside of a year, we will do that every day.

And then in terms of the development pipeline, there is a footnote that the yield is going to be from 7.1 to 8.4, can you give a little bit more color on that? Is that based on in placement, rents and does that break down differently by the different segments?

Well, there is two factors to that. One is ground-up development and one is redevelopment. Redevelopment obviously we're retaining those properties so we're moving the rents up to what we see the more A product rents are in that submarket. We put a modest growth on that of about 3%. And we beat those numbers, all the ones we've done so far. And then on development, we look at those as a traded rent of about probably 4%, which I personally think is very light. I think most people on development would be fulfilling most of the market at 6%, because the whole nation is going that way. And some of these markets obviously are in double digits. So we try to stay in the 4 to 5% when we grow the rents going forward on the development deal.

And the last question on the development is there is several projects in Texas, but your asset sales during the second quarter were -- several more focused in Texas. Can you just walk through the thought process there?

Yes, I think that is a very appropriate question. We believe that in a job growth market like Texas, which a lot of us in our company have experienced, that there are opportunities in those cycles to make good money. So when we sell 80-something million of assets in the Dallas/Forth Worth markets, it is because we're getting great cap rates and we know the markets well enough to know when to hit the bid there, but we also see ourselves as being able to play on the development side of the market there, where you've got job growth, and we look at Texas as one of the late rebounders, and the numbers on jobs are going up in all three of those cities, we've seen it before, we develop them in the TRS, so that we've got options, of either defeated in the REIT because it turns out to be a great long term asset because we've lightened up a product there. Or, like we did last year, when the price is right on those developments it provides us opportunities to make value and profit just on selling the asset as we lease it out. So we lighten up and we've lightened up in Texas, providing us with an option to play more in the newer development product game down there. Which we're very comfortable doing. We're not going to do 10 deals down there. We're going to do a select number of deals.

Great market to be a timer at and we think we got the capability and the people on the ground to do that, and by adding certainly Culwell and the rest of the team there, we've got people on the ground doing a great job. Good question, Craig.

Our next question will come from Ross Nussbaum with Banc of America Securities. Please go ahead.

Hi, guys. Good afternoon. Let me just follow-up on Craig's question on Dallas, because it is one I had. What kind of cap rates did you sell those Louisville assets for, and is your thinking just that job growth in Plano is significantly better than up by the evaporating lake up there?

Lakes are evaporating in Colorado too. I think your first question is what was the cap rate on that sale. It was the 6.0 on those assets and some of those assets were in Louisville. That is a good cap rate for Louisville. And what was the second part?

Why Plano? Is it just the job growth and the activity that's going on there?

Up there in the EDS sort of corridor it is a good job growth market, it is quality of life, it is hard to believe that actually Plano is building out from the multi-family standpoint, so.

Great freeway access. You got offices all over these sites. We're going to be good.

Urban markets in Dallas, we ranked that as one of the highest points.

Okay. I appreciate the ROIC disclosure. It is actually helpful. And I just wanted to see if I could understand it a little better. Year-over-year up it was up from 8.5 up to 8.8% on the same communities which is about a 3.5% increase year-over-year, I may be missing something on the rounding. And I'm trying to reconcile that against the 8% same store NOI growth and I'm assuming that the major difference is their rehabs and the recurring CapEx spending. Is that the right way to think about it?

That would be correct. And you got changing in your mature--.

I'm sorry I missed that last part.

The changing your mature properties and you got more capital moving in and [Inaudible].

And then I guess the last question is just the timing of condo income on the projects, where you're preparing those for sale. What are your expectations for that to hit earnings over the next couple of quarters?

We've listed those two assets are under redevelopment right now. We expect that they will start coming in delivering units in the fourth quarter of this year, but our main target is to really hit those in '07. We've got a couple other projects not listed there that are in entitlement that are California deals that also are mid year '07. But the way I answer it is yes, we could get sales from those that are in development, and not put the big number on that. To be reasonably conservative, without delivering the construction.

Okay. So it sounds like there is a little bit of a lull in the third quarter and then it starts picking up again in terms of level of activity as to when these are going to hit the market?

Right. Right.

Okay. And then Tom, last question. In your guidance comments, it just sounded to me like you were suggesting that you've made some investments on the G&A front, that would potentially be offsetting some of the upside on the revenue line that we've been seeing. Is that a fair comment?

That is a fair comment. Both in terms of systems and people, and what we see is basically in '07, that probably levels off, but we would like to really go through it in detail, because I think, for example the yield star or LRO, are significant investments, and we would like to finish our tests before providing guidance on subjects like that. And the people, Mark and I personally believe we have added the right people but they got to get up to speed and produce. And we will. And so that's why we would not try to nail it to a number. We're making the incremental decisions there. And the intent is to provide more detailed guidance in '07 later.

Appreciate it. Thank you.

Thank you, Ross.

Thank you. Our next question comes from John Stewart with Credit Suisse. Please go ahead.

Hi, Tom, it sounds like you've got about $325 million of dispositions either teed up, under contract, or shopping around, but I didn't get a great sense, you said that there were a lot of acquisitions in the second half, but if you quantified that, I missed it, can you give us a sense for what acquisition volume could look like?

Oh, I wouldn't put any more -- I would say Mark and his team are looking at a number of opportunities similar to the ones we've closed, and it is just -- we're tough on the price. And if people don't hit the price, we're glad to just move on. The sales, we're comfortable that the number Mark put out is probably a good number an estimate, but for us to provide numbers and what we're going to buy or sell, I think just doesn't benefit us trying to nail a number. We would rather say listen, we're going to make good incremental decisions, then tell you what they are. So I would say we got an active pipeline, and we will keep shopping at heart.

I guess if you're comfortable with our numbers, they must be too low. But can you give us a sense for what pricing, Mark, you talked about very good prices on the assets that are under contract to sell, can you give us a sense for what kind of yields you're looking at?

Yes, I can give you a feel for that. We've got a portfolio out there that's got some Carolinas, Memphis, a lower asset in Aurora, and it is low 6 cap. It is above a 6. It is going to come in there above a 6, but below a 6.5. So that's pretty good pricing, we believe. Those type of markets. And it seems to be holding pretty well in the stuff that's out there, and there's -- if you get into really markets, some secondary, say Virginia, or Maryland markets and it starts dropping below 6, so we're just trying to be smart about it, and when we see a really good value, we could redeploy the money to make more money than where it is, we're going to do it, but we're just out there making sure we're making it at the top of the cycle as best we can.

Okay. And Mark, you mentioned nonrecurring land sales that would be more of a factor in '07, '08, does that mean that you don't expect any in '06?

Like Tom said, it is hard to precisely predict those kind of sales. So we're working them to hit '06, '07, there is a possibility that could happen. But certainly, in '07, I would expect that might occur.

But it is not in the guidance for '06?

No, we're just be looking at -- we've got several opportunities there, and want to see if one of them closes by the end of '06 before I answer that.

And then just last question on condo sales, it looked like the pricing per units on the level -- activity during the second quarter was about $20,000 a unit lower than what we saw in the first quarter. Tom, you said there hasn't been any erosion in pricing. Should we not read anything into that? Is it just a function of mix?

It is actually a function of mix.

Okay. Thank you.

Thank you. Our next question comes from Craig Leupold with Green Street Advisors. Please go ahead.

Tom, can you comment on kind of your year to date revenue and NOI growth and where that is relative to your initial expectations for the year, at least for the first half of the year?

For the first half of the year, I believe we gave guidance of 4.5 to 5, on revenue we gave 3.5 to 4.5 on the expense front, and we said that the expenses would be higher in the first half, but we would be running against these year comps in the second and the inverse on revenue. And I still believe that's true. The outperformance against those targets year to date, I would say operations has probably been $0.09 to $0.11 better than what we had anticipated. And a big chunk of that was eaten up by higher interest costs. Rates moved a lot faster than we had thought. And that seems to be stabilized.

Second, we elected to bring down our floating rate from 27% to 20%. So I think we spent a lot of that outperformance working on our balance sheet, and frankly, a miss on interest projections, and we spent the other parts in increasing our rehab pipeline, and G&A. So I think that's where we have elected to, if you will, take our outperformance and plow it back into what we think are long-term beneficial for us, and our shareholders, and we think that leads to better performance down the road.

It looks like also -- initially you guys guided to condo gains for the year of $0.10 to $0.12, you're at $0.10 at the midpoint of the year and you're projecting another $0.02 in the third quarter so that puts you at the high end of the range. Any thoughts on -- I mean have you adjusted internally your thoughts on condo gains? I mean given that right now you're implying nothing in the fourth quarter.

Well, I think we set out in the business plan to execute 500 homes this year, or around about. And it takes some entitlement. Second, market mix. We're looking at it, and saying we think we can continue that level for years ahead, by looking through our portfolio and realizing there is a lot of opportunity to sell assets, in California, at probably sub 4 cap rates, if the pricing holds up in those markets. So we think it is a business that continues. The balance of the year, when you sell out of your inventory, you would like to reload. If we could, we probably would quicker. But we want to make sure we're doing a good quality job in terms of delivering the product, and selling at a good price. So I don't see us any more than executing our plan.

Okay. And then one last question, related to CapEx and kitchen and bath, it looks a year to date you guys have spent about $32 million on kitchen and bath programs, where as if you look at your attachment 10, your revenue enhancing CapEx in aggregate has been about twice that amount, call it $71 million. I'm wondering, what's the balance of building interiors and such that would be -- that you would consider revenue enhancing that is not part of your kitchen and bath program.

One, we've made a very conscious effort in the energy management area. And we have actively gone into a number -- as you recall at the beginning of the year, there is a new AC standard, and all of the old AC units you would not be able to replace, we pent out and actively purchased a large inventory of AC's, and have been installing them throughout the portfolio. And that's a significant investment. My guess is that estimate is over $20 million of that and I'm getting a signal it is 25 million, on AC units, so that's one.

And I think in a period where you have higher energy costs, I don't know about you, but if you're out in the west and your AC unit broke this last two weeks, at 104-degree heat, you're moving. So I think it has helped us in our turnover, which is down to 53%. I think it is a good investment. It will pay off for years ahead. But what we wanted to do is get ahead of the law change and we made that decision consciously and frankly, we didn't tell a whole lot of people because we thought all of our peers would be trying to do the same thing.

I guess since you hit on utilities I will beg your forgiveness and ask one more question which is at the beginning of your comments you mentioned that two-thirds of your billable utilities are being passed on to residents.

Yes.

You plan to work harder to get that number even higher. What might the financial impact of that be?

It is about $10 million right now, that we have the legal right to bill the resident for, but have not washed it through the lease maturities. A big portion of that is gas and a big portion of that is in Texas, and with our strong occupancies, and improving markets, that's probably the market where you will see us get the greatest pop out of that. So it is 10 million. My plan is, and Martha's and Aaron's, it might take us another year to get at it, but we see it as a real pop.

Thanks.

Thank you, sir.

Our next question will come from Jim Cowen with Morgan Stanley. Please go ahead.

Just on the building into your expenditures again, how much of that would impact your same store expenses?

The same store expenses, I think first, the kitchen and the bath which normally people keep asking that question, what's the impact, we see it as about 60 basis points on the bottom line, and in the case of the AC units, it is a little premature to look at what that is doing to our bottom line. The programs really been active over the last three months. We underwrote it at probably better than an 8 to 10% return, and we will probably report more on it as we get to see more data. I certainly hope it helps us in this recent heat wave, and I think that's part of the reason we can attribute a low turnover number, which was 53% on an annualized basis, down from 63% a year ago. So there is a lot of things going into that, Jim. We probably just get better numbers by the end of the third quarter, on what the impact of that has been.

But would those costs have been, like historically, capitalized, or if you had an AC repair job, would that have been expensed before?

This is Erin, Jim. We actually would capitalize replacements of each AC unit which this program did entail, as far as normal repair in HVAC expense--.

So but in general, the $60 million you spent year to date, on the building interiors, that hasn't had an effect with regards to kind of reducing what you may have otherwise expensed, because you're doing more full replacement instead of repair jobs?

Well, as Tom said, we're still measuring the total impact of the investment [Inaudible - audio difficulties].

So in essence what we did was we bought the things in the warehouse, and we're out there installing them as we can generate labor, sufficient enough to do so. We have focused mostly on our Phoenix portfolio and our Texas portfolio. I don't think they got to Florida yet. But so what you've got is, is we bought inventory. We're out there working it in. That's why it is not that meaningful of a contribution to the second quarter. It should be more, as we get more of an install.

And so is that number now topped out or where do you think that building interior number kind of goes to for the full year?

Well, I think you continue the kitchen and bath program. And our pace there is probably going to fall off in the fourth quarter by virtue of -- you have a high occupancy, you don't have many homes that you can go into and do, and we target about 500 a month, and the unit mix will drive the cost anywhere from 8,000 to 10,000 a door. And so if you say six months, 3,000 doors at call it 9, you got another $50 million.

Thank you.

Thank you. Our next question comes from Dave Rotors with RBC Capital Markets. Please go ahead.

Hey, Tom, in terms of a full redevelopment program, have you thought about at what point the dilution from the additional spending and adding new projects to that either plateaus or you start to see a positive contribution from redevelopment.

Dave, a very insightful question. Certainly, as we have taken that program from zero to where it is today, we have been absorbing, taking homes offline. And we have debated how to disclose that effectively, and having arrived at an internal conclusion, but you can certainly say the first six months of the year, it has been a drain on us. On plateauing it, Mark and I and the team here are just, we think we're getting close to the top of that plateau. We don't see it going from its current program of 3,000 to 10,000, for example. We like it, it is going to be an opportunistic play. As markets move, the mix may move, so I think we're getting closer to a plateau of that, and hopefully the drain there on our earnings will subside and we think it is is part of the reason why '07, we can allude to a better growth rate, is we won't be ramping that up, and a similar goes for the kitchen and bath program. A year ago, we were doing 300 homes a month, and now we've moved it to 5 to 600 a month. We see that as subsiding at the 500 a month level and now as homes come back online you can get the returns and do the math and you can see that it should help our growth rate. So it's a very insightful question.

And on the TRS activity, it sounds like you're looking to spend more time, more money on the noncondo conversion component of the TRS activity. Could you tell us, other than the condo business currently, what -- how much investment you have in the TRS? And then also, related to that, your future investments or future capital allocation to the TRS versus the core business?

Well, I think if you look at all of the assets we've put in the TRS, I think I said this earlier, we view that as an option, so they may end up in the REIT. But today, you have got 200 million plus sitting in the TRS. Some of those are buildings, some of that is land, and the bigger numbers are actual buildings that have operations in them.

Thank you.

And the range is tough. I mean Mark's already alluded to it. It is going to be dirt. It is going to be built-up ground and sell. And it may be communities that we buy that we think we can do a little bit of work on and turn around and flip. There is a range of stuff there but -- and I think that is kind of the beauty of of the platform. We're going to see 25-plus markets of opportunities like that, and listen we're in the business of making money for you. And we're going to go at it any way we can, and we got platform and the capital to do it. And the people. Now, what are you, down, Dave?

I wasn't sure if they were going to cut me off. A follow-up question for you. Over the next two to three years, how big does that business get in terms of investment.

It is hard for us to sit here and forecast an investment. I think it is such an opportunistic business, and the talent we have on the ground, I'm not comfortable that they could just give me a target. I want to go out and do as much as I can, as profitably as I can. And if we don't have enough capital, we will find other capital. But it is not a business to put a number on it. It is an opportunity by opportunity, and if you will, management is going to go out and try to do as much as it can.

Okay.

I don't have a target.

Thanks.

Thank you. Our next question will come from Richard Paoli with ABT Investment. Please go ahead.

Hi, guys. A lot of my stuff has been touched on, but I just have a bigger picture question and maybe we will get off of the ROIC and the CapEx for a minute. Tom, your resident base is generally more the renter by -- I guess we will call them necessity. They tend to be more sensitive, I would imagine, to things like price of gasoline, price of utilities. At what point do you see that your ability to push rents is limited by just overall affordability, and concerns to that regard? And are you seeing any doubling up of residents at this point? Or slowdown in traffic?

I think several questions there, Rich. First, in terms of does our barrier be any pressure on our residents in terms of absorbing rent increases. First bad debt is at 50 basis points. That's a great level. That tells me when I look at the pay rate and the default rate, they are not under pressure. That's the current resident base. Second, the characterization as a renter by necessity, I don't know where that number, or that statement, if it still fits a lot of this portfolio, in light that we're at almost $900 by the end of the year, we will be over $900 on a collection per occupied home. I think that will compare very favorably to the other national companies, so I tend to think that that characterization is falling a little bit out of date, if you will.

If you take out California, and het's separate it, because I think the affordability issue there is such a wide gap that it is not a question, but perhaps in some of the more sun belty markets, the ability for supply to respond, in either pricing a single family, I mean there are a couple of issues there. So I would agree with you on the comments about maybe mischaracterizing it, but are you worried in some markets or maybe giving you -- what are the top five markets that you worried about, where just pricing is getting out of whack, in general, and not necessarily just rent pricing but the cost of living, things that you can't control?

Yes, I think there is some markets you certainly scratch your head at and we look at it on a bigger picture maybe, but take Orlando, for example. That market is catching a lot of press in terms of, are the condos coming back online. And what is it going to do? Well, the bottom line, you look at the specifics of that market. 150,000 apartments in that market, three years ago. 30,000 of them went condo. Jobs have about 60,000, 60,000, 50,000 a year.

Our business is tied to jobs. If those 30,000 of them, half of them come back on the market, we're already starting at 97, 98% occupied in that market. So putting 5,000, 7,000 more homes on the market might cost you 3, 4, points of occupancy? I mean I would be happy running Orlando for the next five years at 95%. So I think it got a little overheated. And the market is absorbing and fixing itself. But the number one thing that doesn't keep me up at night about Orlando, is it is going to be another year of 40 to 50,000 jobs, and why? It is because the people in Detroit don't have jobs, they're moving there for them. And it's got a pretty [Expletive] good base.

So I don't get overly concerned right now about markets and the reactions because a lot of the things that have been upsetting in the past, overbuilding periods or job losses, don't appear on the horizon right now. Will they occur? Absolutely. It is just a matter of just the way the world works. Good news about our business, Orlando is what, 4 or 5% of the Company. No market is that big. And when we see it coming, we will probably start lightening up and moving to other markets. And that's the beauty of the platform. So I just right now, my visibility over the next year, two years, I can't point to anything that really should be alarming us.

All right. One other question. I think you might have said this, but I missed it. Did you give what your marginal return, and I think in the press release, you cited 18 million issued rehabs. What is the marginal return that you guys are getting on those dollars, I know it is kind of an imprecise science, but your best guess. What kind of rent bumps are you getting?

Well, we're getting about $75 on each of them. It is an 8 to 9% return. Cost range anywhere from 8,500 to 9,000 you will see an uptick second and third quarter, most of it is results -- in the costs, most of it is a result of the unit mix. We have more twos and threes that turn second and third quarter. Just about 8 to 9%.

Right. And last question, in two parts. The 89 million worth of dispositions, that you sold, how old were those assets and how long did you own them? That's part one.

Most of those assets came with Southwest Properties Trust in 1998. And they were typical mid to late '80s product.

So you feel like you're not responsible for the IRR disclosure on those because you inherited those? I'm going to keep asking for this.

We -- some of these assets go back a long way and that's a good point, but if you look at the price per unit and the gain we're reporting, we certainly can look at those IRR's for you. But some of them go back a long way.

That would be helpful, just to benchmark against a bunch of other REITs that are now reporting it, so we're moving in the right direction. And I asked the other ones for the ROIC so.

You're a good man.

Thanks, guys.

Take care.

Thank you. And at this time, we appear to have no additional questions in the queue and I will turn the conference over to you management for any further remarks.

Well, thank you, again, operator and thank all of you for participating in the call. Just a quick close, I would like to thank all of the associates for a great second quarter. The fundamentals of our business are in a great position to continue if not accelerate the growth that we're achieving today and in the UDR, we present a great platform in targeted markets with an experienced team that is creating value in our five lines of business, which are operations, acquisitions, sales, development, redevelopment. I hope you also see that we are reinvesting heavily in the future of our assets and our team, and we will reap the rewards of that investment for the years ahead. So thank you, and all of you take care.

Thank you, management. Ladies and gentlemen, at this time, we will conclude today's teleconference presentation. We thank you for your participation on the program. You may now disconnect. And please have a pleasant day.