UDR Inc (UDR) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the United Dominion Realty Trust third quarter 2006 conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Larry Thede, Vice President Investor Relations. Please go ahead, sir.

Thanks, and thanks to all of you for joining us for United Dominion's third quarter financial results conference call. Our third quarter press release and supplemental disclosure package were distributed yesterday afternoon and this morning we filed Form 8-K with the SEC. In the supplemental disclosure package, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure accordance with Reg G requirements. If you did not receive a copy, you can access it 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 links when you pull up yesterday's earnings release. You will also find the direct link to the supplemental data in the body of our press release.

We will 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 are also included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

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

Thanks, Larry, and thanks to all of you for participating on today's call. Joining me from the Company are a number of executives, and to ensure that we have sufficient time to address your questions, we will offer limited prepared remarks. We intend to cover three topics during the call today. Martha will give you some color on the operations trend and market outlooks. Mark will comment on acquisitions, sales, development, re-development activities. And Mike will update you on the guidance for the balance of 2006. And then we will open it up to your questions.

Before we review our third quarter performance, I'd like to reinforce that the results we delivered are consistent with our commitment to deliver superior and dependable returns to the shareholders. We accomplish this by successfully managing, buying, selling, developing, re-developing real estate properties in targeted markets. We executed on sales and acquisitions consistent with our strategy of harvesting value in markets and increasing our presence in communities that will benefit from low housing affordability, strong job growth and limited new supply of multi-family homes. And we executed on value-creation initiatives through innovative development and re-development projects in locations where we can obtain the best returns. Our strategic is focused on value creation, and I am proud of our progress and our team's execution.

It seems appropriate to comment on our views of the strength of the business, and asset valuations. First, on strength of the business. Looking ahead, at the fundamentals of our business, I'm drawn to the simple math of the pool of 40-plus million renters in America increasing at around 5% to 7% annually, through two sources; echo boomers entering the renter pool and immigration. With limited new supply and sustained low housing affordability, while I'm no economist, this simply means to me we have a strong wind at our back. With respect to valuations, with few exceptions, apartment values are holding firm to increasing, supported by higher availability of equity, low interest rates, but also strong market fundamentals and high replacement costs.

I will not review the press release in detail but want to draw your attention to seven points that may help you in fully appreciating the value of UDR. One, FFO was $0.41 or 5% greater than prior year's, meeting consensus estimates. Having made significant investments in our repositioning of the portfolio and our balance sheet, we see our growth rate in the future more closely matching our operating results. Two, same-store sales NOI growth year-to-date of 8.6% is strong compared to high multiple apartment REITs. Three, another milestone, we hit an all time high on monthly collections per home of nearly $900. This is a 25% increase over 2003's $719. In my view, in 2007, we will be approaching nearly $1,000 a month.

Number four, the quality of the portfolio is very hard to get a feel when you have not physically visited each of the 250-plus communities. Some facts to help you. During the last five years, we have sold $1.7 billion in real estate and we have purchased 2.5, meaning we have sold over 40% of our 2001 holdings, and re-developed -- developed another 20%. Our holdings are approximately 35% West Coast. 30% in the Florida-DC corridor. These markets are clearly in the five cap range, which means the rest of the portfolio, today's valuation, is at about a 6.5 to 6.7 cap rate. For every 25 basis-points movement in the cap rate, this is approximately $2.00 a share. We believe our development and re-development activities under way have imbedded value of $2 to $3 a share. Some simple math. We have $375 million of re-development under way at 200 to 300 basis-point spread and we also have $900 million in development pipeline at a spread of 150 to 200.

Number six, debt. We have fixed debt of $2.6 billion at 5.5%, with a weighted average maturity of 7.6 years. What most investors miss is this is below market by 30 to 50 basis-points, or $0.30 to $0.50 a share. And finally number seven, return on invested capital. We have always thought that returns on invested capital is a very important measure of management's capital allocations. As of today, we are achieving unlevered ROIC of 8.5%. I would suggest that, in today's investment environment, these are very attractive returns.

Let me now turn the call over to Martha.

Thanks, Tom. I'd just like to take a couple of minutes to comment on four topics. First, my view on the overall strength of the market. We saw revenue growth of 6.4%, with growth in every market. More than 52% of our revenue base experienced growth in excess of 8%. In particular, I'd point out that Orange County, which now represents almost 11% of our revenue base, posted better than 9%. Tampa and Orlando, which combined represent another 10% of our revenue, posted growth in excess of 11%. I see growth opportunities across the portfolio. In terms of improving momentum, I'm very pleased with what I'm seeing out of Seattle, Portland and the San Francisco Bay area on the West Coast, and in Denver, Houston, Nashville, Charlotte, and Atlanta in the broader portfolio.

Second, my outlook for 2007 is for strong revenues in a similar range to 2006. Job growth in our market is above the national average. I see less attraction to home ownership with current affordability very low in most markets. Our move outs to home ownership are down a significant 43% from this time last year. And finally my sense is that supply will remain relatively stable.

Third, I'd like to share what we're seeing specific to failed condo projects coming back into the rental supply. What I would say is yes, we're seeing supply come back into the rental pool, with the greatest impact in our Orlando market. You can see this reflected in our current occupancy level, which is 250 basis-points below the peak. However, I would point you to the sustained strong rent growth evidenced by 11.4% revenue growth, despite this additional supply. I believe that the market will continue to absorb these units in an orderly manner. My outlook for rent growth in Florida for 2007 is in the healthy 6% to 8% range, but not the double-digits of the preceding several quarters. Fundamentals are strong across the board and we believe that this supply can be absorbed without much disruption.

Finally, I know many of you are interested in where we are in our revenue management decision process. We're currently testing both LRO and YieldStar. That testing is just under way. so it is really too early to speculate on which direction we'll go. The team is very excited about the parallel testing, which has provided us a more detailed understanding of how the two systems work. They approach pricing and forecasting from very different perspectives. We will make the decision that best fits the execution of our business strategy.

A key point I want to make is that having a pricing system is a critical piece of our ongoing strategy to move our business processes to the internet. Having a dynamic pricing engine for presenting rates via the internet is fundamental to this strategy. Our long-range goal is to obtain and process 90% of our leases via the Internet where we are currently processing 36%. Let me just close by recognizing our outstanding operating teams for delivering another great quarter of results, the best in eight years. Without our great people in the field, we would not continue to achieve these results.

Mark?

Thanks, Martha. I want to briefly highlight three areas; income from our [Tier S] Enterprises, sales and acquisitions for the quarter, and our development and re-development pipeline, which continues to grow. First, our Tier S Enterprises have delivered $19.1 million of profits as of September 30, which is on track with our expectations. We believe we have factored in the relative cooling of the condominium market into the expectations for our Tier F Enterprises. We still see strong demand for land and development projects in our TRS, and we expect in the future to have sales of new development and land to offset any potential decline in condominium sales volume. We experienced strong sales of condos in the first two quarters and depleted our inventory early of units that are ready for sale. We are now building our condo inventory for 2007 and 2008, and we'll have a significant amount of our for sale inventory located in California.

Second, we continue to take steps to prove the value of our large real estate platform. In this quarter, we sold all of our remaining assets in the North Carolina cities of Greensboro, Asheville, and Fayetteville. In addition, we sold our last asset we owned in Memphis. We also sold a 600 home community in Aurora, Colorado. Now I'd like to highlight that transaction because we were able to sell that asset for a 5.1 cap rate, the great price for an older asset, for which we did not see rehab potential. And we then used the proceeds from that sale and part of a 1031 exchange for the 305 home community we bought in the uptown market of Dallas at a 5.2 cap rate. So, we exited an asset with average rent for $770 a month and traded up to one that averages almost $1,500 a month and it's 20 years younger. Now, that's an excellent trade-up for the portfolio. We are looking to possibly sell two more assets in the fourth quarter for proceeds around $65 million, and we have one possible acquisition left to make in this quarter for approximately $40 million. We continue to evaluate sales that make sense. When we can use the proceeds to pay down debt on an accretive basis or buy assets to provide greater growth rate to the portfolio, we'll do so.

Third, as I mentioned in our last call, we have added strength to our development team, and they're working to find us good opportunities for development in markets such as metro DC, Bellevue, Washington, southern California, Phoenix, Dallas, and Houston. You can see that the pipeline of future development that is under contract for investigation on the exhibit has expanded from 173 million in the second quarter to 200 -- to 918 million this quarter. Mark Calwell and his team in Dallas have a list of growing opportunities that provide us -- should provide us the ability to choose outstanding developments to add to our pipeline, so that we can deliver finished products on an annual basis of around 500 million to the portfolio in the TRS Enterprise. This figuring of 150 basis-points spread on development yield versus cap rate on a $500 million delivery to the portfolio, that's worth $1.00 a share in stock value every year.

I would like to point out that two of our larger development deals are in the final stages of lease-up and performing well. First, Verano at Town Square in Rancho Cucamonga is over 86% leased and is achieving rents of a $1.59 a square foot, compared with $1.41 a square foot that was originally forecast. Second, the Mandalay located in the urban center of Las Colinas in Dallas is 71% leased at $1.29 a square foot, which is originally our original pro forma of $1.17 a square foot. We have a significant number of assets on our re-development list and we'll carefully stage these assets to minimize the solution that occurs when you take them offline. The value creation when we take them offline is worth it. For example, Legacy at Mayland is essentially complete. We [inaudible] the NOI from $2.4 million to $4.6 million, and created over $20 million of value. We want to take advantage of the value creation that this list of assets should provide, so we'll continue to execute these rehabs, and I think we're becoming more efficient in our process of doing this. That's the three area I wanted to highlight.

And now I will turn the call over to Mike.

Great. Thanks a lot, Mark. For the fourth quarter we have a lot of moving pieces, with two large merchant investment gains that could hit during the quarter. Because of these transactions, we're maintaining a pretty wide guidance range of $1.65 to $1.73 for the year. We believe that at least one of these two gains will be realized in 2006, which should take the final results towards the midpoint of the range, but until the sales are closed, we obviously can't count on them. One thing I would like to note in the fourth quarter guidance is that it incorporates substantially reduced condo income, as Mark Wallis's condo group has sold most of the inventory that they had lined up for 2006 already.

One other thing I want to cover is the significant capital transaction, which occurred after the end of the quarter. In early October, we closed a $250 million convertible debt offering at a three and 5/8 coupon and a 20% premium to that day's closing price of $31.29 a share, which was, at the time, our all-time high share price. Simultaneously to the close we also executed a capped call transaction, which effectively raised the conversion premium to 40%, or a $43.81 per share stock price. Because of our strong conviction about the potential for the stock to appreciate over the next five years, we felt that this transaction was much more compelling with the cap call structure in place. The cost of the cap call effectively pays for itself, as long as our annual share price only appreciation exceeds 4.75% for the next five years. Considering our bullish outlook for apartment fundamentals and our relative under valuation, we thought this was a very good bet.

I am going to turn it back to Tom for concluding comments.

Well, I think, operator, we'll open it up to questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Jonathan Litt with Citigroup. Please go ahead.

Hi, it is Craig Melcher here with Jon. Tom, I just wondered if you would go back to a comment you made, and I just wanted a little bit of clarity in terms of -- you mentioned that you think mor FSO growth should be generated from your NOI growth, going forward. Can you just walk through some of the items of why the NOI growth is going to slow more than the FSO going forward relative to what we saw in the third quarter?

Well, I think there's a couple of things that happened. First, we have come through a period where we've fixed an enormous amount of our debt gone from a floating rate type of environment to a fixed scene, and so our interest costs were substantially growing throughout the year. As you look at the trailing quarters, you can see that. The second, as we've discussed before, we've made significant efforts to ramp up our re-development in our kitchen and bath programs. Both are short-term a dilution, and in the long term, when you hit a certain plateau, the capital invested starts generating in excess of the dilution of new units being taken offline. So I think those are the two primary components And the third I would mention is that the earlier comment about dilution from sales, that we're at a point in the cycle where we have substantially sold the asset portfolios that we are eager to sell. And the dilution that we are taking from those is now in the rear view mirror, and in the future we don't see the same level in those three areas.

On the re-development, though, the pipeline -- the re-development pipeline grew pretty significantly from last quarter. Is it more that it's -- is the kitchen and bath part slowing or the major rehab, as well, contributing to the better growth going forward?

Well, we've listed a pipeline there that Mark mentioned. Judiciously we will take units offline and get better execution where we're emptying fewer homes out at a time. The kitchen and bath we'll probably see, like we did this quarter, where we moderate it more along seasonal lines. Next year's target's probably more the $500 -- 500 a month range, and this year, you can see we are going to clearly exceed that level this year, so I see a combination of those two things.

And last question, is just on the [inaudible] debt on the income statement. And on the condo line this quarter, it also mentioned JV investments in part of the game. Can you just elaborate on that a bit?

There was not any JV investments during the quarter. I think, had we had some, it would have been in that line item.

So is $0.03 a condo gains in the quarter?

Yes.

Okay. Thank you.

You might want to clarify that the condo gains, there's two components inside of that. There's the sale of condos, and you saw the number. Mike, why don't you give clarity to that.

Okay. You have basically about $0.01 of the condo gains is really related to a much higher level of tax efficiency. Early in the year, we were not doing as good of a job as we could have of managing the tax number. I think we've taken some steps so they can help us do that going forward. So I think you're going to seat margin in the condo business improve. It may not be quite as high as it was this quarter going forward, but it certainly should be higher than it was in the first couple of quarters of the year on a go-forward basis.

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

Hi. Mike, could you give us a bit of additional color in terms of the merchant investment gains that you referenced in the fourth quarter? Without going into specifics, maybe just qualitatively describe a bit more what those projects relate t, and what the -- at either end of the range what the dollar actually could be?

Well, you know, you've got $0.08 of potential gain there. And the two transactions are roughly the same size, one of them is a little bit bigger than the other. But one of them's a land deal out in California. Another one is a development property that we will be contemplating selling.

Okay. That's helpful. Thank you. And then Tom, when you think about markets that are represented by low housing affordability and limited new supply, Dallas isn't necessarily the one that comes to mind. I mean, I understand that the acquisition was in Turtle Creek, but can you kind of help us reconcile that? Was it really -- was it driven by the need to do a 1031? Or maybe you can amplify it for us a bit what the additional investment in Dallas?

Mark will answer and I'll follow up with it.

We had really already circled that asset before the 1031 exchange situation came up, but it fit very nicely with that as it turned out. We like the uptown market in Dallas. It is not typical of the whole market. It's been there. It's essentially built out now. This asset is one of the best assets in that market. It's got great parking. It's on the Caden Trail, which for those who're familiar with Dallas is a new extended jogging, bicycle trail that's a great amenity and really is a great address. So we saw it as just an asset that was going to out-perform in an urban infield location, and that's why we bought it. But it fit nicely into the [inaudible], it wasn't driven by that.

Okay. Thanks for the additional disclosure on the Shadow development pipeline. In particular I was hoping you could comment on the 2,400 unit project in Addison.

Let me comment on that. We figured that would get some attention, but we wanted to highlight that it's a really unique opportunity we have on the ground here. We've purchased a couple of assets that are adjacent to each other. Now, these are operating apartment assets. It's in the Brookhaven country club area of Aspen, which to orient you is not far from the Galleria of the intersection of LBJ Freeway and the tollway. The city of Addison would like to see this area re-developed. What that -- the opportunity that provides is density, where the city is wanting to see us triple the density from close to 20 units an acre up to 60 units an acre. It's a great opportunity. It would be an urban mixed-use development. We foresee that probably the kind of deal that a joint venture partner would come along in with us, to either co-develop or co-invest. And we're seeing we have an option on a couple of more properties there. In the interim we can operate them as is, but we see a great potential for a tear down and re-development there and really create a brand location.

And John, I'd add we have a team on the ground there. As you know, we added Mark Calwell to the team earlier to the team this year. And he's very capable of executing projects of this magnitude and scope, and we've got a lot of confidence in him and his team. So, it's right in his backyard, he lives there and, frankly, I think you know about Dallas, so you'll know the area very well when you see it.

How much of that $900 million Shadow pipeline is represented by this one project?

It is only probably about 20% of it at this point in time. It could grow to be a little bit larger, depending if we decide to [spin the board]. It's really a land assembly that has revenue that's close to 6%, so it's that kind of a play. So it could be larger, but I'd say 25% or so at this point in time.

Okay. And then last question for Mike, on the resident credit loss during the quarter, it looked like it was up 30 basis-points from 0.5% to 0.8%. Is that a function of reserving when times are good or are you having a harder time collecting, given the higher rents that you're asking?

I'm going to let Martha handle that, but I think that is an actual number rather than a reserve.

It is. There are two components to that. One is with our new system in place, we are grossing up the way we are recording some of our top line items now, so there's a little bit more from that. Also, I would point to you to the fact that our -- having our higher revenues, we have had a couple of markets where pushing the rents has caused a little bit higher turnover and a little bit more bad debt in those markets, as we change out the resident base.

Okay. Thank you.

Thank you, John.

Our next question comes from [David Brag] with Merrill Lynch. Please go ahead.

Yes, thank you. It appears as though your budgeted cost for a couple development projects has increased from last quarter, two in Plano, one in Phoenix. Just curious what you're seeing there as far as construction costs and how this has affected and possibly contributed to the widening of your development yield range?

Well, in both of those cases, the rates are keeping up with the increased cost. If you look at development and construction costs over the last 24 months, I think most people would characterize it as probably the cumulative increase in costs has approached 25% to 30%. Those were a couple of the projects that have been in the pipeline for some time and sort of caught in that. As we go forward, we're seeing some other factors happen. We're seeing lumber prices come back into a more normal range. It looks like, with the slow down in single family home builders, that labor costs are being mitigated somewhat. So at this point, I think conventional wisdom is that there's a good likelihood that construction projects are going to experience a leveling out, as we go forward. And a couple of other increases we had in there, you look in the re-development, we're really just scoping increases. But we knew we could get the rent if we improved the units a little bit more than we originally planned.

Okay. Thank you. nd just a quick question for Martha. On Atlanta and Denver, two places where occupancy increased?

And is the question why did occupancy --

Yes, just looking for your comments there on those two markets, please.

Well, we've seen strengthening jobs in both of those markets. Denver, I would also add the asset that Mark sold here was requiring a lot of time and attention on the part of our operating staff. And having disposed of that asset has really given us an opportunity here in the Denver market to focus our efforts on the two remaining assets that we have. But we have seen job growth in both of those markets. And also, I would add that I think that our kitchen and bath program has helped us to pull up the resident base there and attract a different market.

Thank you, David.

Our next question comes from Paul Morgan with FBR Investments. Please go ahead.

Hi, this is Steve [Rodonovic] with Paul. A quick question. What was the turnover for the quarter?

Turnover was 68.3%, which is down about 80 basis-points from last year. And we saw the most significant declines in turnover in our West Coast markets.

Okay. And then what percentage of your portfolio have you implemented the utility reimbursement program?

We're currently collecting about 97% of the portfolio on water. Electricity is typically billed out individually, so 100% of that is addressed. And on the gas side, we started billing in Texas, and the penetration there is up to about 40%, so there is still some opportunity there. But in the Ohio and East Coast markets, where we can bill, we are billing 100% of that.

Great.

[inaudible] Sorry. Keep moving.

Oh. And then you mentioned the potential sales in the fourth quarter. Do you have anything under contract to buy?

I ment -- this is Mark. I mentioned we have one asset under contract to buy that -- in the $40 million range.

Thank you.

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

Good afternoon, guys. Tom, with your comments earlier about dispositions and that you expected them to slow because were you fairly happy with the portfolio heading into '07. Can I read into that that, you know, UDR is going to be an owner of sizable assets in Columbus, Ohio, and Columbia, South Carolina, and markets like that that are sort of 25% or more below where your average rental rate is, going forward?

Well, Rob, a picture's worth a thousand words. And if you could see the seven people in the room's faces when you asked that question, yes, I think over time, we will use those markets as a capital source. And certainly look at ways of monetizing them when we need capital. In today's market, we don't need the capital. We would shop a lot of assets and see if we can't hit the bell on prices. And if we did, we'd come to our shareholders and say we got a good price. I'm just not actively looking at those individual markets and say, I need to get out of here because job growth isn't going to be there or in the long term it's not a great place to be. That phase has passed, and the phase that we're moving into now is an opportunistic capital raise and by selling assets in those markets. And how we do that, either in direct sale or a joint venture or some other means, is also in our radar, and a big part of why Mike is part of the team now, to come in and help monetize them there.

Okay. And then another question on the kitchen and bath rehabs, if I'm doing the math correctly, the per unit cost is about $11,000, in the third quarter, up from about $9,800 last quarter. Is there anything other than higher construction costs going on there? Are you doing heavier remodels or are these targeted more-in locations with higher costs? What's the cost differential behi -- what's the rationale behind the cost difference there?

It's a combination of thing. It is a change in the mix in terms of shifting to some of the markets where we're doing a little bit higher level of upgrade with more granite and higher finishes. Some of it is a little bit of cost increase. But primarily, it's a change in mix, and we are getting the returns at the higher costs.

What are those returns averaging on the kitchen and bath alone?

They've currently moved to about 10%, up from just above 9% last quarter.

Okay. And then the 9% that's talked about in the release, for the actual rehab program, is that inclusive of the kitchen and bath or is that just separate for the full-on rehab units?

This is Mark. That's separate.

Okay.

Obviously, the units get a lot of work done, but that's the total package rehab here.

Okay. Thanks, guys.

Thanks, Rob.

Our next question comes from Dave Rodgers with RBC Capital Markets. Please go ahead.

Good afternoon, Tom. One question for you, in terms of condo commentary, it seems like you made comments that the future of the condo business would likely be in California or at least that's the way I took the commentary. Could you give a little more color on that, particularly given where some of the new additions were, as well as does that continue to make sense to sell in some of you high growth markets?

Well, it makes sense to sell an asset for a great price. So -- and we've always looked at this as a way of monetizing an asset, Dave. And clearly, from the exhibit that's in our attachment 9-B, you can see that we've moved our emphasis out of the Florida, Arizona markets, and more into California, and that's been by design. We've always thought that that market was a little stretched. In the case of Florida, we like our product. We like the entry level, but we always thought that we would be moving towards California. And if you do just the math, you take Canyon Oaks, there's an asset that is on our books for $225,000 a door. We think in a housing market that it's in, it is going to sell for $350,000, $400,000 a door. Clearly above the value that would be realized if we were to sell it as an apartment. And we think that's again a good way to monetize assets. And California is a market that we think has sustainability in this line of business, and certainly want to maximize the value.

Over time, will you stay competitive in the entry level point? Or given your comment that you just made, do you think you will move up in the quality spectrum?

No I think we'er trying to focus a lot on that entry level. I like -- you know, an entry level in California of 400 for this type of product in those markets. But what we continue to look at a lot is what does it rent for and then how much more beyond the rent does it cost per month to get somebody into a condominium. And if you did the math, for example, in some of our Florida, as we're winding down, wrapping up there, we're renting for $1,000 a month and they can get into a condo for $1,150. And there's a lot of people in the marketplace who have $150 in their pocket a month, and it is a good economic decision for them, And we get a lot of value out of the sell.

Is your shift away from some of the Florida or Texas markets to California a function of the markets or a function of your own backlog?

Yes, Mark --

I think it's both. We've always thought California is a great market. It takes a little bit longer to get the legal work done on the condominiums there, which queues it up a little bit later. But we like the long-term market there because of the housing affordability affects It just makes sense,because it's long term sustainable market. We did [inaudible]. We've got a good inventory there and we can do that.

Thanks. In relation to the development, I think, Mark you referenced $500 million of annual completions was a goal over time. How long do you think it takes you to get to that point?

Well, I think when we're on the call next year, we're going to be close to being at that point. We may be more in that $400 million range, but we can start dropping those numbers in there in '08. It does take time to build this up, but we've been working at it for some time, and now our new team down there, I see it [making that time range].

And final question, I think this is asked frequently, Tom, but what was the contribution from kitchen and bath to the same-store performance in the quarter? Do you have that?

Martha's got it here.

The NOI impact net of dilution from the units offline was 102 basis-points.

Okay. Thank you.

Bottom line.

To the bottom line, NOI.

Thank you.

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

Mr. Leopold, how are you doing, sir?

How're you doing, Tom?

Great.

Good. Hey, as a follow-up to that call, how many units were offline or what is the NOI drag from units that are offline as a result of development and/or kitchen and bath remodels?

The kitchen and bath drag, if that's what you want to call it, of the units offline for this quarter was about $340,000.

Re-development?

The re-developments was another 400.

Condominiums?

Condos was -- for the two that are completely sold, that picked up somewhere else, but the one that we've got on the east coast of Florida, that was another 300.

Okay. All right. So somewhere between R700,000 or $1 million of drag from these activities?

Yes. And then historically, that's been about $1 million to $1.5 million a quarter --

Okay.

-- throughout this year. And we just see ourselves basically hitting a plateau on that number in the future.

Okay. And Tom, it looks -- I mean, based on the outstanding results you guys have delivered year-to-date, it looks like you guys are probably 300 basis-points or so above your initial NOI growth forecast. I know previously you guys had talked about maybe a 5% NOI number.

Sure.

Year-to-date, you're 8.6. Obviously, that is pretty solid. I know you guys haven't talked about '07, but as you look prospectively, could you feel comfortable sharing any thoughts about looking into '07?

Well, I mean we're going through it in detail right now. And my opening comments were that I think we see a lot of strength in the fundamentals of the business. And in the positions that we're in, and what markets we're in, we like our prospects. It is kind of hard at this point to say you're 8.6 year-to-date NOI, and that's going to continue. Clearly, Martha and her team have outperformed our expectations. But I would expect that we would continue to see pretty darn good strong growth next year. I know you're looking for a number, Craig, and what I can tell you is that we're just not prepared at this time to nail it down, and defend it by market, by product. And we like to have our people go through the discipline. And at the same time, I can tell you I feel very good about our prospects for '07 and beyond. And like anything else, you can flip on a dime, but we're pretty confident about next year and beyond.

Okay. And then getting back to maybe kind of the first question, about the drag from other items. I mean given that you're 300, 400 basis-points higher than your initial expectations in terms of property level performance, that's about $0.05 to $0.06 per share.

Right.

I'm trying to think about where you're losing ground. Because clearly with the converts, you're picking up, you know, further benefits, due to low coupons, at least initially, prior to any kind of conversion taking place. And most of your capital markets activity, you know, in terms of fixing debt took place last year. I'm trying to figure out kind of where other short falls are? Your condo business is looking good.

Yes, I think you coined it, the phrase, which I only have to answer about 20 questions at NAREIT on the hole in the bucket. Let's -- here's -- put at my point. First, a lot of it was debt. That we came into the year with a lot of floating rate debt, and we went out and termed all of that debt. And then the answer, it looked like we guessed right because we fixed it at the low point in the debt cycle are pretty [expletive] good and we paid a price in the dilution by fixing that debt. The second is we ramped up, just as we said, $1 million to $1.5 million a quarter in going from very little kitchen and bath, very little re-development, to a lot of activities in that area. And we think it creates value long-term, but it's extremely dilutive in the interim. I mean, you're taking an earning asset to nothing in many cases for periods of time. So it was debt, it was dilution from those two programs. Both I think create long-term value.

The third is we increased the G&A in the Company, and the G&A appropriately needed to be increased. It's still one of the lowest in the sector, but if we were going to expand into more development activity, we needed to add a talented group. And build up, lastly, our financial capabilities by bringing Mike and some people in that area. So I think those are the three primary areas where we reinvested in our Company, either in the terms of people, asset, or balance sheet, and you know, if I had it to do it all over again, I'd do it again. I think it's the right decision for our shareholders in the long term. And lastly, it's probably some of dilution from the sale. I mean, you just can't sell, in this case, almost 4,000 homes in the Carolinas at a 6.7 cap and call it accretive. It wasn't. But it was a great execution by Mark and his team. And I think that's a good time to get out of that market. And again, I think it's a good decision for our shareholders and on a long-term basis.

Okay, fair enough. I'm not -- I'm certainly not questioning the execution. Just trying to kind of understand.

No, no, no. Craig, I always appreciates the questions. I think you're right on target by asking them.

Given the increasing development activity, will some of that G&A, Mike, eventually get capitalized, and therefore, start to ratchet back down? I mean, Tom, your answer was sort of you ratcheted up J&A for development activity.

Well, I'd also put in there technology. Martha's spending money, and we put a whole new on-site system in place. That's a one-time hit. But I would expect the technology investments to continue, as we try to garner more and more of our business over the internet and complete that, so I don't think that'd drop. With respect to the development team, and what is capped, certainly. I mean, I think there's some potential but we may decide to add G&A in other areas as we see opportunities. So I think the run rate, what I think is property management and G&A, in this Company, is about $50 million, and that's probably a number that we would look at next year and say it's going to be there or a little bit more.

Okay. And then one last question, kind of, you know, Mark touched on this on a perspective basis, and did you, too, Tom, in your comments, that you expect the property level results to more closely match FFO growth prospectively. I guess the one area where I see maybe potential drag would be the condo slowdown but I know Mark, you made some comments about reloading condos for '07, as well as made reference that maybe some gains on the sale of land and/or developments. Could you talk a little more explicitly about how large that might be relative to what we saw in '06, so we can get a sense as to what kind of drag that might create on core earnings?

Well, I think -- this is Mark. [[inaudible] the answer to that is we expect the same kind of level in '07 as we had in '06, based on what we've got in the pipeline today. And we're not only -- you know, TRS Enterprise is not only focused on condominiums. We are focused on good buy, especially deals that are in the lease-up, where we can manage that risk, and other -- and developments that we're doing ourselves.

Okay. Great. Thank you.

Our next question comes from Steve Swett with Wachovia Securities. Please go ahead.

Hey, Tom.

Hey, Happy Halloween.

Thanks. Mark, I think you mentioned $65 million you expected to sell in Q4. The rest of the stuff in the held for sale then is likely to bleed into '07?

Yes.

Is that under contra -- or is that being marketed for sale or is it just not ready at this point?

It is not ready at this point.

Okay. And just one final question for Martha. I think you've broken apart your southern California results in your same-store results in this quarter. It looks, if I try to piece it back together, that you saw some deceleration across all of southern California. But it's hard to know exactly which sub-markets or markets maybe were actually decelerated in the revenue growth. Can you just touch on any markets, if you saw anything from a deceleration in the top line growth?

Well, what I would say is we pushed our top line rents very, very hard the first half of the year. And in doing that, we did take a little dip in occupancy, so we looked at it and decided to make a trade-off here in the third quarter, to pull that back a little bit to push occupancy for the winter. So there was some deceleration across the board, but I believe the Inland Empire continues to accelerate. The other southern California markets, we pulled back a little bit.

Okay. Thanks.

Our next question comes from Dennis Maloney with Goldman Sachs. Please go ahead.

Hi, good morning. Martha, just to -- if you could just broaden the answer to that previous question. Which markets aren't leading --you know, living up to your expectations nationwide?

I would say that all of our markets are living up to our expectations. We don't really have any that are disappointing, in terms of what we're seeing in the fundamentals in each of those markets. I'd like to see a little bit more growth out of Dallas, but we're seeing more job growth there and we hope to see that accelerate into 2007. Monterey, while it's inside where we thought it would be, obviously I would like to see that do a little bit better. That's been impacted by some job loss and a high level of move-outs to home ownership from last year to this year. We've seen that slow and we're seeing a little bit of strengthening in occupancy there. But overall, I would say we're pleased with what we're seeing, and not really surprised by anything.

And then you noted that the higher level of bad debt this quarter, which leads me to ask, what percent of income have renters typically spent on UDR apartments? Where do we stand now? And when do problems arise, at what level?

Well, so far, we haven't hit that threshold and we don't see that threshold any time soon. It's too hard to characterize our diverse portfolio by what percentage of income. What I'd say is -- it's just too hard for me to speculate on that number.

Okay. Thank you. And I think Mark Bifford has a question or two.

Yes, in regards to that new disclosure you gave on development under contract and investigation, how much of that is actually locked in, and what's the difference in, I guess, the under contract?

There are probably -- let's see, looking at the list, we've got three of them that we have under control, and the rest that we're, you know, either negotiating or in discussions to get under control or doing severe due diligence on.

So what percentage of those do you think will actually come through? Or is there risk of some of those projects not coming to fruition?

Well, --

Are you sitting at the Vegas tables right now? Because I mean if you could, I got some numbers you need to put down for it.

Well, my experience in development is, if we don't have a pretty long list -- and actually, there is, you know, two to three outside this list that we didn't feel were further enough along to put on here -- we're not going to have the kind of picking and choosing that we want. So typically, if a developer has $1 billion list like this, if they hit 25%, they're doing good. I think we'll get higher than that, but I think we've got have that kind of pipeline out there that you're doing serious due diligence on, so you're not forcing deals, if that makes sense.

Sure. And my last question relates to the Bellevue Plaza joint venture. I noticed the costs more than doubled for the project. What is tha -- what's behind that?

The accountants changed the disclosure to 100%, I believe. Is that correct?

We went from 49%, which is what we really have, to disclosing 100% of development costs to the community.

Okay. Thank you.

At this time, I'm showing no further questions in the queue. Please continue with your presentation.

Well, again, thank you for all of your time. We appreciate it. I think you can feel from the call that we're very happy with the quarter. We'e grateful for our associates and their efforts. And certainly from our comments, hope that you can feel that we're headed in the right direction, creating value for our shareholders. And certainly we look forward to seeing many of you at NAREIT in the next week. So with that, thank you for your time again, and take care.

Ladies and gentlemen, this does conclude the United Dominion Realty Trust third quarter 2006 conference call. You may now disconnect. And thanks for using AT&T teleconferencing.