UDR Inc (UDR) 2006 Q4 法說會逐字稿

Welcome to the United Dominion Realty Trust fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] This conference is being recorded Tuesday, January 30, 2007. I'd now like to turn the conference over to Larry Thede, Vice President of Investor Relations, please go ahead, sir.

Thank you, and thanks to all of you for joining for United Dominion's fourth quarter financial results conference call. Our fourth quarter press release and supplemental disclosure package were distributed yesterday afternoon and this morning we filed Form 8-K with the SEC. In the supplemental disclosure package we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you 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 and you'll 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 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 included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

Before turning the call over to Tom, I wanted to draw everyone's attention to the part of our earnings release that announces that we will host an Investor Day in New York on Monday afternoon, March 19. We invite you to register for the event at the Investor Relations tab of our website and more information on the meeting will soon follow. Let me now turn the call over to our President and CEO, Tom Toomey.

Thank you, Larry, and again, welcome to the UDR fourth quarter and year-end 2006 conference call. Joining me on the call today is a number of the management team and associates, but it's also for a moment the First Call without Chris Genry who was an instrumental part of our team for the last five years and who has recently retired and just to say thanks, Chris, and we miss him.

The prepared remarks today will be given by Mark Wallis, who will cover our investment activities;, Martha Carlin, Operations; Mike Ernst will detail on our 2007 guidance. To give us all more time, I will not read the press release. I think it's important that while we have you for the next hour to provide our view of the state of the multifamily business, give you insight into our opportunities, and how we plan to create shareholder value, and to answer your questions.

On the subject of the state of the multifamily business, I'd make the following observations about 2007. First, it's going to look a lot like 2006. Why? All aspects of the business from demand and supply are in great shape. Most industries across the country appear to be in great shape and poised to continue their job growth. This, coupled with extremely low unemployment indicates that our future residents will be able to pay more. Household formation and immigration are continuing to create more customers for us. All markets have positive revenue momentum. Capital is readily available from many sources. Asset valuations continue to grow, and lastly, the single family business that has constrained our growth in the past is at a point of equilibrium.

Let me turn my remarks to how we see our value creation opportunities both in the short-term and long term. First, we have spent the six years rebuilding the portfolio and the balance sheet. That work is done. Second, we have built a team in the property management, asset, quality, development, and acquisition areas which are just now hitting their strides. Third, an investment in UDR, you will gain exposure to opportunities in both low, affordable index markets and demand driven job growth markets. Number four, a Company who will be in the upper half of earnings growth for peers in 2007, and with this team in platform, I expect this trend to continue. How might you ask? We see four areas of focus. First, operations, led my Martha Carlin and Erin Ditto have consistently performed in the top quartile and expect to do so in the future through A) a well positioned portfolio with exposure to markets with above average job growth; B) our continued investment in technology to meet our changing resident profile will start to pay off; C) on the ground, a team with top leaders possessing an average of 16 years in the industry who have proven their mettle with executing through a variety of market conditions.

The second area of value creation is redevelopment led by Richard Giannotti. Currently Richard has a pipeline of $350 million representing 4,000 homes. The current NOI from that portfolio is $16 million. When Richard finishes at work, it will have doubled to $33 million when stabilized. We've added more disclosure on this area in our supplemental package under 8-C. This type of value creation requires that we absorb some short-term dilution. During 2006 that was $0.05 a share. In '07, it will be between $0.07 and $0.08 a share, but it creates value. We estimate the value created from these activities will be in excess of of $300 million or $2 per share over the next two years. What's exciting to me about this as well is that Richard has a skill set and a team that we can utilize in the future to create value on our future acquisitions.

The third area is in development led my [Mark Colwell]. Mark currently has a pipeline in excess of $2 billion. We believe when this pipeline is delivered that it will create between 500 and $700 million of value which is 3 to $5 per share. The fourth area is buying and selling assets. Our team has bought and sold nearly 5 billion over the last six years. Mark's team has proven to be very good at reading markets with some examples including the purchase of over $1 billion of communities in California in 2004 at then a blended cap rate of 5.5. We have seen some of these same dynamics most recently leading us to significantly expand our holdings in Seattle and Bellevue, through both acquisitions and development. And let me close with talking about the dividend.

We have a record of 30 years of increasing the dividend and with our Board meeting later in February, we will announce another increase. With that, let me turn the call over to Martha.

Thanks, Tom. Today, I'm going to cover four topics, a general overview, some market details, our expenses, and our long term strategy. First, you've seen the release, annual revenue growth of 6% and quarterly growth of 5.4. Our ninth quarter in a row of revenue growth. We continue to have pricing power in most markets. This is our first quarter in some time with every market in positive growth territory. Concessions are down 8.5% for the quarter, 17.6% for the year or 2.2 million. Traffic counts are up over 15% during the fourth quarter. 2006 utility reimbursements grew at four times the rate of utilities growth with reimbursements increasing 3.1 million or 18% compared to a 4.4 increase or 1.5 million in utilities expense. Our outlook for revenue growth in 2007 is between 5 and 7%, consistent with our 2006 results.

Second, since ours is the First Call I want to cover a little more detail on the overall market and what we're seeing in some specific markets where I've seen questions come across the Internet. Job growth in our markets continues to outperform the national average. Job growth translates to apartment demand and continued pricing power, even in markets where condos are coming back to the rental market. Some of the strongest job growth forecasted for 2007 is in Phoenix, Seattle, Orlando, Houston, and Dallas. In terms of specific markets let me talk first about some of the occupancy softness we've seen in our Florida Markets and in Houston.

First, let's cover Florida which includes Tampa, Jacksonville, and Orlando. Investor owned condos and single family homes have increased their impact on rental market supply during the quarter. This impact is primarily in two and three bedroom apartments. Despite it's 290 basis point decline in occupancy in Orlando, we still have pricing power in our rent and we posted 8% revenue growth for the quarter. As we move into the second quarter and job growth continues to feed demand, we anticipate a pick up of some of this lost occupancy at the sustained higher rent levels, therefore affording us the opportunity for continued strong growth.

Houston has been impacted by an overall decline in the number of Katrina evacuees returning the market occupancy closer to its historical averages. Our Houston assets are at 93.4% which is about 100 basis points above our long term historical average. Houston is a top job growth market for 2007 and we're forecasting revenue growth above 4% for the year. Markets with accelerating momentum are Seattle, Northern California, including the Bay area, and Sacramento, Atlanta, Denver, and Orange County. Pricing power is strongest in these markets. We're experiencing stronger year-over-year occupancies in Seattle, Sacramento, Denver, and Orange County. We're forecasting revenue growth in excess of 6% in Atlanta, Austin, Charlotte, Denver, the Bay area, Southern California , and even in Orlando and Tampa. Several of these markets are high job growth areas, and several are high cost of home ownership markets.

Next, let me briefly address expenses. We consistently said that quarter to quarter comparison are not the best way to evaluate expenses. The overall year paints a clearer picture. Our expenses for the year were up just 1.8%, which is better than we anticipated at the beginning of the year. This was primarily due to better than forecasted outcomes on tax appeal, more moderate gas prices resulting in lower utilities, and an accelerating reduction in print media advertising in the second half of the year as we sharpened our focus on the strategy to move our business to the Internet, which brings me to my fourth and final topic, moving our business to the Internet.

Our goal is to process 90% of our leases via the Internet and 100% of our payments electronically by 2011. We're currently generating 34% of our leases via the Internet, up from 24% in 2005. We developed industry leading positions with Google, MSN, and Yahoo. These relationships generated more than 580,000 unique visits to the UDRT.com website via the low cost organic search engines.

We're having some fun launching a YouTube advertising contest in conjunction with our website redesign in the second quarter and adding video content to our site to enhance its appeal. We're implementing web 2.0 in our redesign which will allow visitors to perform multiple tasks without having to leave the web page they're currently on. Translated simply, this means fewer clicks to close the sale.

Today, we process 4% of our rent collection via ACH or credit card. By the end of 2007, we expect this to reach 10 to 15% and are targeting to triple this amount in 2008. We're working on a technology solution to enable electronic signatures for closing leases online. The final step in the process is a fully electronic lease and something no other apartment company is doing today.

Finally, we'll be selecting a pricing system in early April for implementation. As I've said in the past, having a pricing system is a critical piece of our ongoing strategy. Having a dynamic pricing engine for presenting rates in real-time is fundamental to this strategy. Our business is more complex than many of our competitors however, who are currently using yield management systems due to the high volume of repositions, lease ups and kitchen and bath upgrades. We're working with the software vendors to enhance their systems to address these more complex business needs prior to implementation. And now let me turn it over to Mark to discuss some of the innovative ways his team is creating value in the business.

Thanks, Martha. I'm going to cover a couple areas. First, I'll talk about the overall investment climate and then second, I'm going to discuss some significant value creation activities that we achieved this quarter. Now to the overall investment climate.

There continues to be a significant amount of unleveraged institutional capital chasing multifamily products. Most major multifamily markets are experiencing rent growth and that's being built into the models of those acquiring this product. Replacement costs have increased the past two years because of significant increases in construction costs along with rising land prices due to the scarcity of multifamily zoned sites. So from the going in cap rates remain compressed in most major markets, but the price per pound compared to replacement costs doesn't look that unreasonable, and when you factor in double digit growth rates that are expected in a few markets such as Northern California, you see underleveraged buyers and that's including REITs, offering process that result in sub-4 cap rates in those markets.

Healthy NOI growth rates in the job growth markets like a Phoenix or Dallas, are resulting in cap rates around 5% to 5.25% for newer product and at 6% for older product. I think we see construction costs leveling out and we've seen some components actually drop, such as lumber prices, and with the pull back of the single family home builders are more subcontractors available to bid on our jobs. So I think the overall outlook is that cap rates remain at their near current level with some markets like a Bay area going down from last year.

Now, I want to shift over and talk about our significant value creation activities we accomplished this quarter. I indicated on our last call that we had depleted our condominium inventory early in 2006, but that we expected to be able to capitalize on the strong demand in the market for some of our TRS developments. In December, we sold a newly constructed 367 home apartment building located in the Dallas sub market of Las Calinas. We realized an FFO gain of 8.8 million and an unleveraged internal rate of return of 5.3%, -- 15.3%, yes, 5 wouldn't be good, 15.3% and that's a wholly owned UDR development. That was a four story structure wrapped around the structure's concrete parking garage. The price was 123,000 a door and that was top of the market price for that sub market.

So, we expect additional opportunities to sell land and completed apartment projects by the end of the second quarter and that the bulk of our condo sales this year will be in the third and fourth quarters. We have removed our 208 home community located in Daytona Beach from our condo for sale inventory and that's due to the softening sub market in that part of Florida. We did complete a next year rehab on this property and we really expect to achieve a mid 5% going in yield as a rental, and I expect more upsell in this property as we benefit from homes that have not undergone kitchen and bath rehab.

Now, I want to update on the redevelopment pipeline. We believe that our redevelopment pipeline of 4,000 homes is going to provide us the value creation capability that provides yields that are 75 to 125 basis points higher than traditional development yields and they can be completed in half the time of a traditional ground up development. We're taking older communities that we have owned or even recently acquired that are in forever good locations and we're redeveloping them to like new conditions with a new tenant base that will pay higher rents.

In December 2006 we completed the lease up of the 576 home community known as Legacy at the Mainland in Richmond where we spent $36,000 per door transferring this into a new attractive community and more than doubled the NOI on this property. If we sold it today at a mid 5.5 cap rate we would realize a gain over 30 million on that investment. So what we deliver this year, we're expecting to complete two communities containing a total of 560 homes in the second quarter of this year, a 400 home community in the third quarter and then two communities totaling 462 homes in the fourth quarter. Our plans are to build this redevelopment pipeline for 2008 by focusing on [Inaudible] communities located in California where significant rent gains can be achieved on those.

Now, let me touch on our portfolio repositioning efforts led by Matt Aiken. We continue to reposition and improve the portfolio and we sold one of the first communities the current management team purchased in [Federal Washington] over five years ago. We booked a gain of 22 million and realized an unleveraged IRR of 15% from the the $58 million sale. Now, about ten days ago, we made a reinvestment in the Seattle area by purchasing a 49% interest in the newly completed high rise apartment community known as 989 Elements located in the Bellevue, Washington, and at a total cost of $58 million. This year, as part of our repositioning going forward, we plan to sell our communities located in Atlanta and we continue to sell some in the Carolina markets.

Last, I want to recap progress our development team is making. As Tom mentioned, we're pleased with the progress and the building of our development pipeline is over 2 billion. Part of that expansion, including the closing on a joint venture that would develop the second phase of the 989 Elements community I previously mentioned is located in Bellevue. Bringing along 49% of the 271 home mixed use development that will cost $96 million. Also this quarter, we closed a $16.3 million site in Glendale, California. It's a site that's 3.5 acres and it currently has an office building on it, but with leases that will expire by early 2008. Our plans are to tear down the office buildings, construct a 225 home community that will wrap around the existing concrete parking structure. It's an interesting deal.

Our development group added a pre-sale deal on the Dallas market and our pre-sale program is a contracted person, an asset from a developer at cost once it's complete. Later at stabilization it's paid at market and we pay the developer half of the value that results. Some of these can be used in a TRS transaction or if we choose to keep in the portfolio, they make excellent 1031 exchange properties.

Our development team is focused on our opportunities in areas that have low, single family home affordability indexes such as Southern California, Phoenix, and Northern Virginia. In addition, we're pursuing opportunities in the high job growth markets like Phoenix, Tampa, Dallas, and Houston, which should provide a pipeline of transaction opportunities for our TRS enterprise in the future. Now I'll turn the call over to Mike.

Great. Thanks, Mark. As you'll see in the press release, our initial FFO guidance for 2007 is a range of $1.80 to $1.90 per share. At the mid point of the range, this translates into a little more than 10% growth over 2006. I'll walk you through the assumptions that we're making in our forecast to get to the midpoint of the FFO range of $1.85.

First, we expect to be a net seller of about $250 million worth of assets this coming year. The impact of the lost property NOI should be entirely offset by interest savings from lower debt levels so no real impact there to overall FFO. Secondly, same-store property revenue is projected to grow, excuse me, property NOI is projected to grow approximately 7%, which is driven by 6% revenue growth and 4% expense growth. The properties that we currently own and expect to own for the full year will add about $0.18 per share of growth to FFO.

We'll pick up about $0.06 from interest savings and lower preferred stock dividends. This is a result of last year's convertible debt offering, calling our Series B preferred which we expect to do in May and refinancing various other higher coupon debt. Our interest rate assumption is that rates will stay pretty much flat to where they are today for the year. We expect G&A to cost us about an additional $0.02 to $0.03 over 2006. And finally, we expect that the TRS will add about $0.06 over 2006. If you look at that number, we have four identified asset sales that are projected to generate significant after-tax gains. These sales are all in the market currently and we expect that most of them will be closed by mid year. The condo business is expected to be down about 35% from last year, and most of those profits will be realized in the second half as we ramp up some of the sales of Northern California assets particularly.

The gains that we show in the TRS are a great offset to the dilution that we take from a number of other activities which kind of work the other way on us. If you look at attachment 9-B of the supplement, you'll see that last year we sold 445 million of assets in markets like Greensboro and Fayetteville, North Carolina and Louisville, Texas. These assets were sold mainly in the second half of the year and were higher yielding assets. On the buy side, we bought earlier in the year and bought new assets at top quality markets with considerably lower yields. These were all great strategic decisions and they've continued to make our portfolio a lot better, but we took a bit of dilution last year from that trade and the full year impact of that trade will be felt in 2007 and will cost us about $0.05 of growth over last year.

We don't expect to be making trades with similar types of dilution in 2007 so I think 2007 should be the last year where we have that kind of drag from asset sales and redeployment. The other thing that's going to dilute earnings in 2007 is we will have about $0.03 of incremental dilution from acceleration of the redevelopment program and additional interest costs related to the projected 2007 kitchen and bath expenditures. This is on top of the baseline dilution of $0.01 or so a quarter that we have been taking in 2006, and then finally, one last thing working against us in 2007 is we will be down about $0.02 on other income. We had some technology gains and higher interest income this past year than we expect to incur this coming year. So when you take all of these things together, FFO increases by about $0.17 a share, taking us up to the mid point of $1.85.

Let me turn to the first quarter for a minute. We're currently expecting a range of $0.36 to $0.41 for the quarter. Our baseline FFO which includes no transaction income is expected to be $0.36 to $0.37. Transaction income may add another $0.04 if one of the deals that I discussed earlier closes by the end of the quarter, but that is by no means a done deal at this point. The first quarter is being impacted by several different items. First, we're substantially ramping up the redevelopment projects. To put this in perspective in the fourth quarter we delivered about 230 redeveloped units.

During the first quarter we expect to deliver close to 600 units and believe that we will average deliveries, in the 500 to 600 even unit per quarter range throughout 2007. While this causes near term dilution as we ramp up, we expect to be seeing noticeable NOI increases on the redevelopment portfolio by year-end and further significant increases in 2008. Also in the first quarter, we expect to incur some level of additional severance cost due to some reorganizations that have happened in a couple departments here and we are projecting basically very little condo sales, less than $0.01 of condo sales in the first half of the year, in the first quarter rather, and then as I said earlier, it's going to ramp up in the second half of the year.

And then to close, let me just cover one item from the fourth quarter. As a number of you have noted in your reports this morning, G&A was up by about $0.02 over the third quarter and the same quarter last year. This was impacted by three things. First, as Tom mentioned, Chris Genry retired at the end of the year and was paid some severance. Second, we have expanded the management team and there's a certain baseline increase to G&A that's permanent. And third, bonuses were up during the quarter. So that concludes my comments. I'll turn it back to Tom to wrap up.

Thanks. Why don't open it up now to questions. Operator?

Yes, sir. [OPERATOR INSTRUCTIONS] Our first question is from Jonathan Litt with Citigroup.

Hi, it's Craig Melcher here with John. Mike, I just wanted to go back to the TRS and the condo business assumptions in '07. Do you have them on a per share basis for your expectations on '07?

Well, let me think. I think it's up $0.06, so that would be, what did we earn this year from TRS? It was about $0.15, something like that? $0.20, $0.21 next year.

And the condo piece?

Condo piece is probably about $0.08 or $0.09 of it maybe. Yes, $0.10 maybe.

Okay, thank you. And on the, I just wanted to talk about Orlando and Tampa Bay. You mentioned that those were two of the markets that would have the greater than 6% revenue growth. What does that assume in terms of the additional deliveries, to the rental pull from condos coming back into the rental pool.

I'm not sure I understand your question.

Do you assume anymore of condo projects coming back into the rental pool in '07 or do you think the situation is going to stabilize in 2007 and not in Florida?

We see it at a level similar to where it has been in the fourth quarter, so we don't see a substantial increase in the amount of supply. We're also projecting that the job growth is going to absorb quite a bit of that.

So do you think you'll maintain occupancies at these levels and you'll get most of the revenue growth through the rent increases? Or do you think there will be a bounce back up in occupancies?

I think in my notes I said we're looking for occupancy to bounce back in the second quarter as demand is fueled by that job growth.

Okay, thank you.

Thanks, Craig.

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

Thank you. Tom, in your remarks, you mentioned that you see the multifamily business in equilibrium and you think that's going to drive an '07 that looks a lot like '06. Can you kind of expound on that and what specifically are you referring to? Are you talking unit supply or how is it you expect to have continued pricing power at equilibrium?

Well, I think you hit on it right there. It's not often that you see a period of time where you have revenue growth in 100% of your markets that occurred in '06 and we anticipate in '07 that trend to continue. Second, we do not see any demand-supply issues that are not on a local level that won't be absorbed through jobs or curtailment of construction activity, so big drivers in our business, supply-demand seem to be at a state of equilibrium at 300,000 to 350,000 deliveries. The single family business certainly has curtailed its construction activities so we feel good about supply/demand.

In the case of jobs. You can go from a variety of economists to what next year's number is going to be. Is it going to to be 100,000 a month or 150,000? The answer is it's going to be based upon individual markets. We think we've got a portfolio positioned in the right markets for job growth next year and we'll do well there, and I think a lot of the activities that we have are going to start paying off in '07 and '08 with redevelopment, the development activity, and the expansion of our talent base inside the organization. So when I look at '06, '07 from an industry perspective, everybody came out in '06 and beginning of the year with pretty conservative revenue and operations numbers and it appears everybody beat them. I think everybody is moving their overall initial guidance up and we'll see how the year fares, but I feel good about the fundamental the of the business and as long as that job number stays there, that will be the critical thing to watch and that's what we focus on on a by market basis. Anyone else want to add? Mark, Mike? That's good. John, is that responsive?

Yes. That helps, thanks. Mike, just real quick. You mentioned that you think '07 will be the last year that you see a drag from dilution from repositioning the portfolio. How about the redevelopment program? Is '07 kind of the last of that or do you expect to continue that program going forward?

I don't think you'll see incremental drag going forward from the redevelopment program like you saw this year because we're ramping it up quite a bit this year, but we will continue to be in that business and I would expect the drag to maintain at '07's level in the future.

This is Toomey. I'd add in one I like that business a great deal. When you look at it and say you can double your NOI's and you can do it in half the time of a new development, that's an attractive and it's a price we will pay in dilution in the short-term to double NOI's I think is a great bet to make. If you look at the recent one Mark highlighted in his comments, we get a 9.9, I kind of kid him about missing the 10 a little bit there, but 9.9% return on our capital in that deal. It's not a bad deal and in addition we probably created $30 million or about $0.30 a share in NAV. That's just on one asset. And we've got now a pipeline of 14 going, so I like the business. It works well.

Just as a reminder, most of the apartments in America were built 60, 70's, and 80s in great locations now and if we can move our business model into those markets and rehab them, I think we can buy them right, rehab them, and create a lot of value for our shareholders. So the short-term dilution is probably worth making it and what are we doing to offset that dilution? We're ramping up the TRS in certain aspects, but that's not as risky as everybody lays it out to be. We've got most of that money already circled in our mind and in the market, so I'm very comfortable where we are and given the guidance we have and the model that we're executing to get there.

Okay. Just two more quick ones and I'll yield the floor. Along the lines of the transactional income, can you give us just given the magnitude there, can you give us a sense for what specifically we talked about, are these land sales or what else is going on? And then lastly, what's the rationale for holding the condos off the market until the second half?

Well this is Mark Wallis. It's both land and apartment communities we bought in the TRS and that's where we see opportunities that Tom's talking about we've circled, and we didn't really hold the inventory off as a couple things happened to us. One we sold them faster than we thought we would in 2006 and then second, a couple just getting through the permitting/paperwork process where you get these things approved. Cities are dragging their feet just a little bit and it probably cost us a little bit of time there that a year ago we didn't see.

Thank you.

Thanks, John.

Our next question comes from Ross Nussbaum with Banc of America. Please go ahead.

Hi, good morning, it's actually Dustin Pizzo here with Ross. Or good afternoon, sorry. Tom, it looks like the return on invested capital on the properties that were acquired in 2005 is down about 17% year-over-year and I was hoping you could just help me reconcile that against the strong same-store NOI growth you guys are seeing?

On the 2005 acquired properties, that includes an asset that we bought in the fourth quarter, so the comparative numbers are a little off because when you buy in a quarter, it takes a little while to ramp up on the expense side. September of this year, we had a tax adjustment on some favorable activity there, so that's skewing those numbers a little bit.

That's helpful and similarly looking at the recurring CapEx numbers, I might be missing something but it looks like it increased about 30% during the fourth quarter on a year-over-year basis even though it was down for full year and can you just help me understand what happened there? And also if you can provide any further guidance on what you expect the recurring CapEx to be this year?

The fourth quarter activity was really a ramping up and trying to close out the year on a number of those projects, so it was an acceleration of trying to get that work done before we started the New Year and we're forecasting 610 a door for '07.

Great. Thank you.

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

Good afternoon, guys. Tom, with the TRS activities, are you guys ramping up the land sales and apartment communities, sales from within this? I mean, is this basically are you trying to create a mini sort of Ameritan like Archstone has here?

Well, I don't know if we're trying to replicate exactly what Ameritan does, because I don't understand all of its activities, but what we see it as is first, the enterprise of TRS is a great way for us to participate in the current cycle as Real Estate entrepreneurs, and Mark highlighted a piece of dirt for example that he bought three years ago that we've gone through the zoning on and gotten it permitted. It's ready. We've looked at the ultimate price and said would we develop on it or would we sell it at that price and then the answer is it came back. It's probably more beneficial to have if sold it, so I think everything we still drive back to our core business of owning in Real Estate, developing it, managing it, but the TRS helps us participate on a private competitive market basis and the other cases where we have bought assets we thought were poorly priced in the market, where we could create some value, we look at them and say that's a way to tap and use our talent to create value for our shareholders.

So I don't know if I'd class it fight it as Ameritan. I'd classify it as private entrepreneurial activities within the -- inside the REIT which I think our shareholders will benefit and also it helps you attract the right talent to the organization. If you've watched, more companies going private, the reason is is because they feel constrained by what they can do and we see this as a way to bridge that and participate in private market opportunities and deliver on them. Mark? What else? You add anything to that?

No, I think that's good and I think the TRS structure really has opened the doors for REITs in some of the high demand markets that maybe people might have concerns about if you're going to own the assets 15 years, because it goes through cycles with a less -- with a shorter hold period than the TRS affords this, you can see deals like we did in Las Calinas, there's great opportunities there to harvest local market knowledge and management knowledge we have in those markets that used to not be there. So it's back to what Tom says, there is a way to be entrepreneurial in those markets to benefit the shareholders rather than in missing those opportunities.

And we like it, also, Rob. I mean, you're in 30 markets today. We feel pretty consistently looking at those that this is a cyclical business, that we're on the ground. We can find the right point in the cycle to tap some of those opportunities and being in 30 of them, you're going to see a lot of variety of activities and half the rest of the organization to deliver on them.

With that net 250 million of dispositions, are you just basically recycling capital within the markets or are there certain markets that you're going to be looking to get out of?

Mark mentioned a couple that we're going to get out of.

Yes, I mentioned Atlanta. We've never had the critical mass there that we want and it looked like some pretty attractive prices and then I also mentioned that we continue to lighten up in some of those Carolina markets where we see the bid prices getting in the range we want, so we're still doing that. It makes sense.

I mean, you look at last year, we started out with guidance at zero acquisition, zero buys, and it's hard to model when you're going to do them, what you're going to do. Our attitude is list a lot of stuff. Last year we sold nearly 500 million, and this next year, the net number is 250 on the sale. If the market pricing works in our favor, we wouldn't mind taking it up.

What is the return expectations on the stuff that you're putting into the redevelopment pipeline today?

This is is Mark Wallis. I mentioned in there that usually it's going to be about 75 basis points higher than what a development deal would be and we've outperformed that actually. I think that's a conservative number when you look at the deal Tom mentioned that we almost hit a ten on. Generally, they're pricing out about 75 to 100 basis points better than the development deal and I think that's -- I'm just being conservative. Historically we've done a little better than that.

So that's what, somewhere in the neighborhood of a 10, 12% IRR?

Yes.

That would be a 12.

Yes.

Okay. And then lastly, Mike, is there any costs that you're anticipating from the Series B redemption in May?

I guess that there may be some write off of original issue costs, but I have to talk about that.

It's fully amortized, May is the First Call period though.

But none of that is--?

Our Chief Accounting Officer is nodding, no.

Okay so--.

I'll take him at his word on that.

So no impact to the numbers in the second quarter?

I don't anticipate any right now.

Okay thanks, guys.

Thanks, Rob.

Our next question comes from David Bragg with Merrill Lynch.

Hi, David.

Hi. Good afternoon.

It is.

First, on the expense growth. If you could just walk us through the key components there that get you to your 4% expectation?

Oh, for next year?

Yes.

Off the top of my head, we've got payroll at 5%, utilities -- digging up the detail here, utilities are around 6%, RNN's 3, personnel is a little bit above 5, and marketing is coming down about 3%, taxes we're looking at a 4% increase, insurance another 9. I think that's the major categories.

Great, thanks. And then Mark, just specifically on the condos, I want to ask which projects, it sounds like the bulk of it would be in the second half. Which projects are prepared to come on line first and start selling?

The gallery at Bayport is coming on pretty quick. We're ready to go there. That's the second phase of a very successful deal down in Tampa. I know there's probably from a general standpoint, everyone says Tampa, that should be a concern but the price point there is great. It's got water frontage and we have such a backlog and then the next one to come on line will be Sierra Palms which is a deal in the Phoenix area, a great location. We're just really waiting for the final release of the permits down there, the products ready to go. We should bring on this little deal down in Plano, Pine Avenue would be another one that's coming on and then we're pretty close, I skipped over this one, our small deal in San Francisco, 2000 posts should be one of the first ones, but they are all going to hit their stride second half of the year.

Okay. Specifically on the Tampa project, how would the price points there compare to the first phase?

They are going to be similar to the first phase. I mean, obviously, some of the first buyers on that first phase made a good deal, so they have pretty good equity in it but the prices will be very similar.

David this is Toomey. A couple things about that deal and I think you've been there is--.

Yes.

You realize that we're charging 1,000 a month for rent?

Right.

We're selling them for 156 a door, and in essence that translates to about $1,200 a month for a mortgage payment, dues, et cetera before they consider their taxes. So in essence, they can literally move from renting to owning at a sterile cash flow to the individual buyer. We also watch and I'm certain you guys have seen in the past, watched the resale price of what's been going on in that market and you can see that people that bought Phase I have been reselling their condos at the price they sold, bought, or better, and are still within the prices that we're going to list on our Phase II, so I think we found a very good niche in that business model in which we go after the gap between ownership and renting and where it's narrowed, we can deliver a product and it's entry level and that's where the run up in the rents in the Florida market have helped us close that. So I see that as still -- it will be a pace thing. It won't be 100 of them flying off the shelf a month, but we'll still close 10, 15 of them a month, and I think that's how we always saw the business and I think it's good business. Those things, if they net us after-tax 150 on a blended basis, that's not a bad deal in that community.

Okay, thanks.

Same goes for Sierra Palms. The California stuff, the difference is dramatic. We'll sell those at 4 to 500 a door and we couldn't get 4 to 500 a door for them as apartments so I think we'll do well there.

Okay, thank you and my last question is what were the kitchen and bath rehabs during the fourth quarter, the number of units and the cost?

Our average cost is just above 10,000 a unit and in the fourth quarter, we were down a little bit to about 1,200 units and that's primarily because of both of those holidays in there are just kind of slows down the activity level. We had about 50 basis points of occupancy dilution that we attribute to the kitchen bath pipeline that is working its way through the system.

Okay, thank you.

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

Yes, hi, this is [Steve Rodonovic] with Paul.

Okay.

Question on DC. Notice there was a 90 basis point occupancy decrease sequentially there as well as I think an 80 basis point decrease in rent. Can you comment on what you're seeing there?

They've had a little bit of a condo impact, but I wouldn't say it's significant, so that's what I would attribute that little occupancy dip to.

Okay. And then looking at the development that came out this quarter, Verano at Town Square, can you give a sense for what the yields are and how those compared to pro forma?

This is Mark Wallis. We're finishing lease up there. I think we're in the high 80s. We're above our rent pro forma. Our projected yield was close to a 7 and we should be north of a 7. You can't do 7 in California much anymore but that was going to be north of a 7.

And then looking at the four current developments in Texas, are yields still in the 7% there as well or above that?

6.75 to 7. We see, if you look at market by market, it's almost true there's 150 basis points premium you can achieve on development. It just depends sort of where the market growth rates are. California obviously the cap rates go down, but you're still beating an acquisition by that kind of spread.

Sure, great. And then I guess just wanted to clarify on the 2006 acquisitions, there was a drop there in both occupancy and rent sequentially. Are those properties also, any of them in the redevelopment pipeline?

Yes. That is correct.

Thank you very much.

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

Hi, Mike I had a question for you in terms of the of guidance. Did you say that basically 2007 had $0.21 of call it non-core income built in at the mid point?

It has, I think it actually may be a little bit more than that. I think it's more like $0.24, $0.25..

Okay, and could you comment on G&A? If you said it in that space, I didn't catch it.

G&A will cost us about $0.02 to $0.03 2007 G&A will be $0.02 to $0.03 higher than 2006.

Okay. Mark, question on Plano. In the Texas markets, it seems like there were -- although in dollar terms small, there seem to be a large percentage increases in expected spending for development and redevelopment. Is there something in that particular market that's driving that?

We're just a new team on it. We're a little more in tune to what the quality ought to be and we're stepping up that a little bit to the market. Our per unit costs we're still very comfortable with and we're just trying to make ourself as competitive as possible.

Tom, how should we think about the merchant building activity I guess going forward. You seem to have a pretty decent skill in and around the Texas and Florida market. Should we assume that most of that goes into a merchant building activity in the future and how much new development will you be adding outside of those areas, let's say the coastal areas like California?

Well, this is Mark. I might comment on how much we're going to add. I just mentioned, we are focused on those markets on the Coast. We just added them in Glendale, California. There is another site that's listed on our pipeline that's in the inland empire near our Rancho community that we're very close to controlling that. We've got a site in Virginia we're working on. So we're going to continue to pound away at those markets, but at the same time, we've got the ability to do these job supply demand growth markets, deals like we've been doing and those are going to be TRS deals typically. Does that answer that?

Yes. I mean it shows we're going to apply them as we see them and the answer is the Texas, we have a good skill set and if Mark and team can replicate what they did in Las Calinas, we'll keep going at it and the good news is we're building a product and if it turns out that the market turns on us in that, we're glad to own them because we think we've built them in the right location, they are better in our overall portfolio, but if someone is going to pay us for five years of work right up front, I'm glad to take that profit and move on and if the hurdle is 15% IRR's on an unlevered basis, I think we're doing our shareholders a service by cashing in those chips as they come due.

And what should we expect in terms of acquisitions in 2007 with respect to, are we looking for core acquisitions or are these going to continue to back fill the redevelopment activities immediately?

This is Mark. They're really both. I mean, I think Tom mentioned this. We looked at the opportunities. Obviously, we look for core opportunities every day and based on what we see on the board right now, I think we'll achieve some of those, but also, we're not afraid to take on a very attractive redevelopment opportunity when it presents itself. I think that makes us a unique buyer in the market. We're on both sides of that equation.

Okay, thank you.

Our next question is from Karin Ford with KeyBanc Capital Markets. Please go ahead.

Good afternoon. How many apartments are in the TRS today?

There's probably about six communities in there today.

Okay. And then you say in your press release--?

Let me clarify. Six communities but you also have your entire development pipeline being managed inside of that.

Okay. And when you say in your press release that you're adding acquisitions directly to the redevelopment and the development pipeline, those are going directly into the TRS?

It really depends. Some are, some aren't. We do have a 1031 exchange at some point, we hit that level in the year and some assets we feel like are core assets we're going to put in that program versus sticking them in the TRS.

Karin, it's a fair question because I think we look at them and say within a four year hold period do we think this asset will maximize its value and what we want to do is keep our options open, so we may start them out in the TRS and that may ultimately bring them back into the REIT depending on where the return expectations move, but we're finding the TRS is a great front end to giving us more optionality and it's pretty effective.

Yes, okay. I know you mentioned, Martha, you mentioned that the kitchen and bath brought down occupancy 50 bips. Did you mention what the impact was to the kitchen and bath on fourth quarter NOI growth?

I did not. See, if you look at, well, I've got the year-to-date numbers in front of me on a net basis, net of the occupancy, if you take the gain on the revenue, net of occupancy for the year, it's about 40 basis points. I believe that the fourth quarter is about 30 basis points.

Okay. Finally, thank you for the commentary on the fourth Q quarter G&A. Were there any broken deal costs in that increase in the fourth quarter?

Nothing material, no.

Okay, thank you very much.

Thanks, Karin.

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

I was going to say good morning, but I think we're almost afternoon now. Tom, curious on the redevelopment or for Mark, you guys, I thought you said that you can get an extra 75 to 125 basis points of yield versus development, but when I look at your return on the incremental capital on the major redevelopments, it's up at 9.4%. I just want to make sure I'm understanding your comment about 75 to 125 basis points?

Well, I think I said earlier, historically we've actually beat those numbers, but I think it makes sense as we go forward and get better and better at it and see more opportunities, if we see it even in that range, we should pursue it, but historically, if I hear what you're saying right, we've actually achieved some returns higher than that, and it depends on construction prices, if they do remain leveled off, I'm maybe being too conservative on that number.

Okay. Martha, a question just somebody had touched on this in terms of the expense growth and I know you gave the components in terms of the growth for -- projected growth for '07 and I'm just wondering kind of from a big picture standpoint. Your expense growth in '06 was sub-2% and you're talking about 4% in '07. What was it that allowed you to keep expenses in check in '06 versus expectations for '07?

Well, I think it was several things. One, we talked about the HVAC program that we put in place, in advance of needing to do those replacements. That helped us keep our RNM costs down and the focus on the marketing side to bring the business to the Internet really helped us. Our marketing component of the marketing and admin. cost dropped by 20% in 2006 and we expect some additional savings in '07 on that.

And as I said, utilities with -- there was a lot of volatility as we were in the budgeting process from the Katrina and the gas rates, we thought they were going to be through the roof. Those actually turned out to be quite a bit better in '06 and we also had a mild fall all across the East Coast. I can't say that we've had that here in Denver, but everywhere else, the winter has been pretty mild, so that translated to much lower utility costs than expected.

Okay.

And I think Craig, I'd add some of the portfolio mix is helping that as well as we've moved out of some of the areas that Real Estate taxes were really jabbing us hard and we've moved, sold those assets into '05 and '06, so we've anticipated some of these markets, expenses were going to escalate faster than we could move the rent side of the equation and have moved ourself out of those markets.

Okay and then Martha, in terms of your revenue enhancing CapEx, I guess 144 million in '06, what's your budget or what does it look like for '07? How much kitchen and bath is there left to do and other revenue enhancing stuff?

We anticipate continuing at about a pace of about 500 homes a month on the kitchen and bath program. I can tell you in '06, our Limited Scope Rehab program, we spent about $32 million on that and we don't anticipate -- we have a couple of assets that we're looking at for Limited Scope Rehab but that should drop. The HVAC program is substantially complete and that was another 27 million, so -- K&B's at about 60 million and just miscellaneous projects, I think we could probably be in the 70 to 75 million range.

Okay, and then I guess one last question, just I guess maybe Tom, this is more sort of a philosophical question. This idea of including gains on the sales of development in your FFO, I'm just kind of the wisdom of that escapes me a little bit and that obviously is going to add -- I know you've always been wanting to keep your earnings growing in a consistent manner but to the extent that you now have this optionality of selling developments and then running them through your FFO, the same value gets created whether you keep it on your balance sheet versus whether you sell it. If you could address that?

Well, I think your question really boils down the to wisdom of selling the development pipeline and does that make sense. I can't really profess to tell you that -- how to manage the accounting of that is really in our design. What we try to think of ourself is as Real Estate entrepreneurs and if someone is going to pay us for where we think the asset is going to be worth five years from now and they're going to pay us up front, I'm like anybody else. If you can pay me for five years worth of work for not doing anything, or not having to work for the next five, I'm all for it and so I've tended to look at it that way and said, A, every asset in the portfolio is for sale at the right price and the score keeping of how much of it goes through earnings or it goes through retained earnings or any other score keeping, I'll leave to the people who buy stocks and cover stocks.

What I want to be able to say is I made $25 million on the deal. I got a 15 IRR for you and I'm going to take that $25 million and replow it somewhere else and think I can do a better job of creating value for you. So I can't profess to say the score keeping is in our mindset as much as what do we think we can make on the Real Estate and how do we make that, and I believe that anyone else add any comments to that? That's how we tend to think of it, Craig.

Okay.

I think it's a very good point you make and certainly glad to discuss it more in the future with you.

Okay. And I guess last one is for your new '07 condo pipeline, how do the -- what do the after-tax margins look like on condo conversion activity now? Or expected after-tax margins?

Well, I know pre-tax, we still are running in the 15 to 20% range, so after-tax, guys it depends on--.

That's fine, Mark. That's good. Thank you.

Fair enough, Craig.

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

Hi, thank you. Tom, you noted that there's a ton of capital sloshing around out there and yet you've been able to get increasingly involved in attractive joint ventures on both acquisition and development fronts. I'm just wondering what's UDR's competitive advantage here? Is it all about relationships or is there something else involved?

Mark, why don't you take a shot and I'll clean up.

Well, I do think it is relationships. We've been doing this a long time and I think the other thing about joint ventures is you have to properly structure them. You have to properly document them in the right way. They require a lot of attention and we've done a lot of them just in our work lives, so relationships and having experience has just sort of led us down that path.

I think too, the platform of being a public company with transparency I think is very helpful. I think being in a lot of different markets with a lot of different skill sets, we're able to bring a lot of different skills to the table to do different kinds of transactions, so I think we have a great platform to do it with.

I'd echo Mike. He's right on and so is Mark. It's the platform of being in 30 markets, being able to go into those markets, find people that are skilled at one area, might be in the case of development where we bring financial expertise or design expertise and another to be an area where we can go in and may look at a redevelopment opportunity with somebody, but I think you'll see in the '07 and we didn't bring it up but I think you'll see us move more into the joint venture platform where we can bring our expertise with a local and make money together. I think we're pretty good to deal with. We've been on the other side of the equation for a number of years and we know what sensitivity people are and we're pretty fair and transparent to deal with.

And what's making pricing more attractive in the JV market right now? Is it the management fees? Your minority partner status? Risk? All of the above?

Making it more attractive? Well, I think what it is, it's cost of money right now. The cost of money in the JV market has come down substantially as a number of people have significant capital flows that they're trying to put to work and they can't put it to work as quickly, so they're bringing down their cost of that money and we team it up with opportunities or our skill set and cash in on it.

And then you guys noted that cap rates are holding firm. But are you seeing less parties to a transaction?

No.

Okay, good to hear and Mark Biffert here has a question or two.

Hi, guys. Most of my questions have been answered, but Martha, I noticed that bad debt ramped up a little bit in the quarter. Can you explain that?

Well, I addressed that on the last call in terms of the new system we put in place mid year. We're now grossing up some things that previously were netted in terms of move out costs, so you're seeing a growth up there on the top line and it's pretty much in line with the third quarter and we're comfortable with where it is.

Okay, and lastly, on occupancy trends, can you just speak to where you're seeing move outs to home ownership or people doubling up in apartments?

Actually move outs to home ownership dropped again in the Fourth quarter, so it's at about 16% and we're anticipating that it will stay fairly level in that 16 to 20% that we've seen over the last year.

Thank you.

Our last question comes from [Richard Tomley] with with ABT Investments.

Hi, guys. Thanks for taking my call.

We always take your call. God!

Well, it's just that it's long in the call already. Just a quick question, just to clarify. On the rehab completion pipeline that was given in the early commentary, had 560 homes in 2Q et cetera, Are those homes, any of those occupied or are those gut rehabs that come on fully unleased? How should we think about that kind of new lease up?

No. We're leasing them as we go. We turn them building by building and we try to minimize the vacancies on that and not always up to operations request, but we do the best we can. It's a pretty good job. So when I was giving those numbers, that deal is done, leased up, we can measure it, and like we did on the deal in Richmond. We've gone through the entire lease up and we've delivered all of the units so we know where we are and we are -- our construction team is totally off the job, but we rotate through these things building by building to minimize the dilution.

So wouldn't, if I think about this properly, wouldn't there start to be actually an income pick-up from where you are today as you wind down your redevelopment activities and lease back up to what's hopefully full occupancy in short order?

Yes.

When you start a project, you have a pretty significant income loss in the early part of it, say the first half of the redevelopment project, but then as you start bringing the units that are depleted back online and get the benefit of the ramp up and the rents, you start picking up a slight benefit initially and then it's a big pop as you finish it up.

Right. Now this is a big of a technical question. I'm not sure if you'd have this handy, but do you guys have a schedule of the units that as you go through your rehab activities, you plan to vacate or kind of move the residents out to start the rehab? Because I think of in terms of if you were on an even flow basis, it wouldn't matter much but you're talking about ramping up the activity and it's kind of hard from the outside to get at where that dilution comes from. I understand it theoretically because you're just emptying more units than you're filling because you're taking on new projects. Do you have any type of schedule or just in broader sense and you're looking to bring 560 back on fully but you're going to be eliminating 700 or something like that the first quarter, second quarter, third quarter.

Yes. We do have a very detailed schedule which we could provide you off line or anyone who wants to call about it, but I would get back to the point that we had four repositions last year and seven were brought on at the end of the fourth quarter, so that volume of dilution that's accelerating into the first quarter is because we're in that early phase of emptying out some of those buildings on the seven assets that were added in the fourth quarter.

Right. And how many, I presume that's on the schedule but in aggregate, how many units do those seven projects represent? How many are vacating and how many units in total?

Well, the 7 -- the total portfolio is about a little over 4,000 but the 7, if you looked on the schedule, you could tell by the delivery dates, but the 7, the new ones were probably a little more than half of that, so a little over 2000 probably. I'm just eyeballing it here.

Okay, yes, that's helpful. That helps me out a lot. Thank you.

Yes, Rich, I'd just say, that's kind of where we look at the business. They are currently making $16 million in that 4,000 homes and we think the NOI, when you stabilize them as you get into '08 it's going to to be 33 million. So if you're looking at '08 growth, a big part of it is going to be out of that redevelopment pipeline coming back to full strength and I think the business decision we have to continue to make on a community by community basis is where are we in that cycle? Are we adding more or not? I think we saw an opportunity in the market and the strength on an individual community basis. We put the pedal to the medal and went for the take the dilution now because we think we're going to be able to A, turn around in '07, get the full benefit in '08, and frankly, at today's market and asset pricing, we weigh a lot of these and say should we sell them as soon as we get them done? We'll wait and see. Some of them are going to be very attractive priced assets and we're going to create a lot of value in that mechanism. So I think anything we can do to add disclosure in this area given the uniqueness and the volume we do, we're appreciative of your suggestions and ideas, but certainly we see it as a business model that makes a lot of money, unfortunately, it has some short-term pain associated with it.

Sure. And I'd have to ruminate -- I'll ruminate on it and get back to you, but I think one of the things I was kind of looking for when I first looked at it was maybe just occupancy, current occupancy on each one of those projects, because it was almost like a development lease up pipeline where you could say okay, this thing is pretty empty or pretty full.

Yes, that's a fair suggestion.

Yes, we can do that.

Okay, guys, thanks, again, I appreciate it.

Thanks, Rich.

This does conclude our question and answer session. Please go ahead with your presentation.

Thank you, Operator. Closing real quickly, again, thanks for your time, and while '06 was a good year for the Company I think '07 is going to be a great year for UDR, its shareholders, and associates and we look forward to seeing you in March at our investor conference. Take care.

Ladies and gentlemen, this does conclude the United Dominion Realty Trust fourth quarter 2006 earnings conference call. You may now disconnect, and thank you for using a AT&T teleconferencing.