UDR Inc (UDR) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the UDR Q1 '07 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation the conference will be open for your questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Tuesday, May 1st of 2007. I would now like to turn our conference over to Larry Thede. Please go ahead, sir.

Thank you, operator. Let me first ask, are we coming through clear to you, operator? Because we're picking up static here.

Yes, you're able to be heard just fine.

Okay. We'll continue. Thank you, then for joining us for our first quarter conference call. Our first quarter Press Release and supplemental disclosure package were distributed yesterday afternoon. And in the supplement we reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G. Requirements. Our Press Release is posted to our website at www.udr.com. To obtain the supplement, click on the supplement link when you pull up yesterday's Earnings Release. You'll also find the direct link to the supplement in the body of our Press Release.

We'll begin the call with brief comments from Management and then we'll open the call to your questions. I'd like to note that the statements made during this call which are not historical may constitute forward-looking statements. 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 met. A discussion of the risks and Risk Factors that could cause actual results to differ from those implied by the forward-looking statements is detailed in yesterday's Press Release and also included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. I'd now like to turn the call over to our President and CEO, Tom Toomey.

Thank you, Larry. Joining me on the call today is Mark Wallis, who will discuss our progress on the Real Estate portfolio, RE3 and our Development and redevelopment activities; Martha Carlin, who will discuss our First Quarter operating results and early Second Quarter operating trends; Mike Ernst, who will update you on our Second Quarter guidance, our progress on our capital plan, and our JV activities. At which time we will open up the call to questions. Let me begin. It always seems difficult to get across all the key point and our accomplishments in a Press Release so I wanted to use my time to cover some of these.

First, during the quarter, we held a well attended Investor Day in which we announced the changing of the Company's name, our vision, and four strategies to achieve this vision. It has been well, a very thorough and rewarding process and most importantly, well received by our shareholders and associates. Second, while many things have changed with UDR, one that has not is the dividend increase. In the quarter, we increased the dividend for the 31st consecutive year to $1.32 a share, a 5.6% increase, the best in ten years. Third, moving on to our quarterly results, particular, operations. I'm very pleased with the 5.6% rent increase, and while we did give up 90 basis points of occupancy, I would take that trade again as our view is the strength of the job growth will provide prospects during our normal heavy leasing seasons of April, May, and June, at these higher rates. Martha will give you an update on how our bet's working out. Our focus on using the internet as the most cost effective source of residents is continuing to bear fruit, with nearly 40% of our traffic in the First Quarter. RE3. [Inaudible] taken and Mark Colwell have been very busy. We grew the Development pipeline by a net $300 million.

I think it's important to point out that $2.2 billion is under way or under our control which represents 80% of the $2.7 billion pipeline. During the First Quarter, RE3 generated $0.03 related to tax benefits. Our guidance given in January of '07 included $0.03-$0.04 from an anticipated sale of an asset during the First Quarter. It turns out this sale is under hard money contract and will close shortly. The next area, we've heard from a number of analysts requesting we expand our disclosures around our redevelopment value creation efforts. In a quarterly supplement, Schedule 8-A, we've added current quarter NOI and projected stabilized NOI as well as the details of our joint ventures on [eight D].

Another topic we monitor very closely but continue to find better ways to communicate is the dilution we take to increase our NAV. The First Quarter, we absorbed $2.7 million in dilution from kitchen and bath redevelopment and condo activities. This was slightly up from the 2.2 in the Fourth Quarter of 06, but the First Quarter was well within our original anticipated $10 million for this year. Our view is that this short-term reinvestment creates long term NAV and increases our prospects for better growth in the future.

Lastly, commenting on the state of the industry. It appears to me in all the news about a slowing economy many have forgotten a few basic points about our business. First, jobs. Always drive our business. UDR's Top 25 Markets representing nearly 90% of our NOI produced one in every three jobs this last year. Second, demographic drivers all remain intact and have positive momentum. [Inaudible] while new construction remains an acceptable range, we are seeing some markets with supply from single family and condos returning to the pool. Particularly speaking of single family, historically when the housing market suffers, the apartment industry prospers. This is evident in our move outs to home ownership this quarter at a four year low of 16%, and our overall annualized turnover below 50%. What does this add up to in my mind? A short period in some markets to work out the imbalance of single family and condo business through continued job growth, leading to results much like this quarter, with a 5-8% range in NOI growth, anticipated over the next couple years coupled with a 4-5% dividend, this will generate a low teen return, which I would characterize as a normal market, which is why we believe the capital flows into the apartments will remain strong during this period. So with that, I will turn the call over to Martha to bring us up-to-date on operations.

Thanks, Tom. We started 2007 off as we expected, continued rent growth offset by somewhat softer occupancies resulted in revenues [Inaudible] that was in line with our plan for the first quarter and better results in insurance and utility expenses put up just ahead of plan on NOI. First quarter revenue and NOI growth were positive in every market. While growth has moderated from the blistering pace of 2006, we're still very positive about the overall industry fundamentals. Job growth in our market in our top 20 markets is nearly twice the national average and continuing to look strong. As Tom mentioned, we're starting to see benefits from tighter lending standards as our move out to home ownership declined in the First Quarter to 16%, the lowest point in over four years and while occupancy has softened a bit concessions remain moderate and we are well positioned to pick up occupancy going into peak leasing season. We're already seeing increased leasing momentum towards the end of March and in April, and in addition, our resident turnover is down to an annualized rate of 48.6% or improvement of 360 basis points over 2006.

Looking at our April numbers we closed the year-over-year gap in occupancy by 40 basis points and revenue growth is up 60 basis points over the quarter. Our strongest Markets continue to be on the West Coast. Seattle, Portland, the Bay Area and Inland Empire are leading the pack but we have some pockets in the Southeast and Southwest that are also performing very well, in particular, Charlotte, Austin, and Atlanta. Markets with the greatest short-term challenges are in Florida and in our military Markets in Virginia, North Carolina, and Jacksonville, Florida. In our Florida Markets overall, we're seeing the impact from the shadow supply of single family home and condo rentals as well as the completion of most of the reconstruction from the 2004 hurricane having the greatest impact on two and three bedroom occupancy. Even with the softer occupancy, in Orlando and Tampa, we saw effective rent growth of 11 and 7% respectively in the First Quarter with relatively low concession. We believe this should work itself out over the course of the year based on continued very strong job growth in these Markets. Occupancy in our remaining military Markets has been impacted by the troop surge and longer deployments for shifts and soldiers already deployed. We'll just have to wait and see if Congress or the White House gives us a timeline for when we can expect to see that improve.

On the expense front, we continue to see the benefits of our focus on moving traffic generation to low or no cost internet sources, as well as the benefits of our ROI capital investment program. In addition, we benefited from a warmer than normal First Quarter in most Markets as well as renegotiated GAAP contracts at the low point of that market. All of these combined with a slightly better First Quarter and insurance losses resulted in continued low expense growth. Overall, I remain positive about apartment fundamentals. While growth is moderating, it is still strong. If we continue to deliver NOI growth in the 6-7% range, I'm very pleased. Before I turn it over to Mark, I will close with a reminder of my earlier comment that we are seeing leasing to momentum pick up and we expect to close the occupancy gap year-over-year toward the end of the Second Quarter.

Thanks, Martha. I'll provide some background and commentary regarding the pursuit of our strategies to strengthen our research driven portfolio and expand RE3. Demand for the ownership of apartments remains very strong. We do not see any really softening in cap rates. California and Seattle remain at a Sub-5 level. In the strong job Markets such as Phoenix and Dallas, we're at low five's and in Metro DC cap rates are sub-5, even with a softer condo market there. The most important fundamentals, job growth, remains positive and this bodes well for many of our Markets like Houston, Phoenix, Dallas, Bellevue, the Inland Empire, Washington D.C. and Los Angeles Glendale, all Top Ten job growth Markets in the last 12 months. So here is what we are doing in those Markets.

Houston. During this past quarter, we closed in a 13 acre site located in the Woodlands, where we will begin the construction of 350 homes this year. In addition, we have a 320 home community under construction in Northwest Houston. These are both RE3 projects and we expect to be able to market these to institutional investors upon completion. Phoenix: During this past quarter, we purchased a 15 acre site in Surprise, Arizona where we will build a new 382 home community that will start this year. I want to point out a recent [Inaudible] white paper projected this market to have the number one population growth for the next ten years for major Markets. This is an RE3 project.

Dallas. This quarter, we closed on two apartment communities that are part of our assemblage of approximately 99 acres in Addison, Texas as. We expect to more than double the density of the zoning there and hopefully develop over 5,000 apartment homes in the mixed use retail Development in this infield location. This is also an RE3 project.

Bellevue. We closed on a joint venture for a recently completed 166 home high rise tower, downtown Bellevue continues to add jobs from employers like Microsoft, we're also in a joint venture to develop the second phase of 276 homes next to this tower and we have a joint venture to develop another high rise community in this market. All these developments are RE3 investments.

Inland Empire. This quarter, we placed a 30 acre Development site under contract in Rancho Cucamonga California that were [Inaudible] developed up to 600 homes with a projected start in the latter part of 2008, the first phase. This will be our RE3 Development. Washington D.C. This quarter we acquired a newly developed 171 home mid rise community in downtown DC. This asset will be held by the UDR REIT. In addition, we closed on a 19 acre site in Woodridge Virginia where we plan to build 322 homes. We'll build this in RE3 but anticipate that it will ultimately become a UDR REIT asset. So we had significant transactions in six of the top ten job growth Markets this quarter. We grew the Development pipeline by 300 million.

We're providing opportunities to strengthen the portfolio and expand RE3. Other market activities included the completion of a pre-sale contract to acquire a Development upon completion of a 250 home community in infield near downtown location in Tampa, Florida. This contract is currently held by the UDR REIT. We also continue to cash in a low cap rate environment. We sold two older communities owned by the REIT for 63 million, part of our strategy to strengthen our portfolio, and these assets produced an average 20% unlevered IRR. We continue to pursue the redevelopment of ten different communities, nine of which are held by the UDR REIT.

Regarding condominiums, our condominium sales were minimal this quarter. We expect the bulk of our sales to occur in the last two quarters of the year as more inventory becomes available for sale. Also, this quarter, RE3 entered a contract for the sale of a 250 home community in San Maron, California. The contract is expected to close in the next ten days. So in this quarter, we pursue the strategy of expanding RE3 opportunities in several Markets. We believe that the use of RE3 provides us the flexibility needed to be in Development, condo sales that will expand in California to capitalize on short-term investments in demand supply Markets, and it will give us the ability to react quickly to Markets for any possible future softness that may provide unique investment opportunities. Now, I'll turn the call over to Mike.

Great. Thank you, Mark. I'm going to spend a couple of minutes discussing details from the First Quarter and then we'll focus on guidance for the Second Quarter and the full year. For the First Quarter, we tracked right in line with our guidance from last call. This core business generated FFO of $0.36 while RE3 income was primarily the result of tax benefits. As projected we had almost no condo income in the other gains on sale that we had said might happen in quarter one now appear highly likely to close in the Second Quarter. The tax benefits will be offset in future quarters and do not impact annual guidance.

If you compare this quarter's results to same quarter last year, a components break down is as follows: Same-store NOI is up $0.045, dilution from Acquisitions in sales, the redevelopment program, and a few miscellaneous items cost us an incremental $.025. We will continue to feel this for another quarter or so as we have substantial sales of high cap rate assets in June, August, and September of last year, and we have ramped up redevelopments. This impact should moderate a lot after September.

G&A was up about $.021. Let me take a minute to talk about G&A. The increase this quarter was a little bit more than we expected by about $0.005 due to dead deal costs that were somewhat unusual and should not recur. Otherwise, it was pretty much on track with guidance for the year. There's a couple reasons that it's up. First, we've added a lot of talent since last year, supporting the growing breadth of our business plan, and second, we're straightlining our incentive comp accruals this year rather than ramping them up through the year as we've done in the past. This should produce a more consistent G&A number across the quarters. I would characterize current G&A as at a stabilized level and despite the increase, our G&A relative to assets and revenue still looks pretty good compared to our peer universe. The final component of change from last year's gain on sales from RE3, which is gain on sales from RE3 which is down $0.028

Turning to the Second Quarter we are currently projecting FFO of $0.44 to $0.47 for the quarter. Walking forward from Q1 '07 here are the components of the FFO increase at the mid point of the range. Same-store NOI will add about $0.02, interest in preferred stock dividend savings add about $0.01 from the benefit of various refinancings and debt paid off from asset sales. Higher NOI on non-matures and lower G&A add about a $0.01. G&A should be down by the amount of the dead deal costs that I mentioned previously, and then should stay pretty flat for the remainder of the year, and then finally gains on sale in RE3 will add about $0.03. The result is that the core business should generate $0.39 to $0.41 which compares to last year's second quarter core of $0.38. After-tax gains on sale in RE3 should add another $0.05 to $0.06 which gets you to the range of $0.44 to $0.47 versus last year's Second Quarter of $0.43.

Please note that the transaction gains for the quarter include less than $0.01 of pre-tax condo gains with the remainder coming from other RE3 gains that I would characterize as highly likely at this point. As Mark mentioned, we'll have a significant ramp up in the condo pipeline in the second half of the year and then we also have several other large merchant investment gains that we expect to realize in RE3.

As far as the annual guidance goes, we believe that we're still on track to meet the range of $1.80 to $1.90 that we established last quarter and we're leaving the range unchanged. I'm going to hit on a couple of Financings during the quarter.

First at the end of March we issued 150 million of 5.5% senior unsecured seven year notes. Second, last week, we issued a notice to call our 8.6% Series B preferred stock later this month. We believe replacement preferred would be 160-185 basis points lower today. Third, on April 2, we closed a restructure of one of our Fannie Mae facilities. We increased the loan by 50 million to 250 million, extended the term by about four years to ten years, locked rate on 185 million of the 250 at 5.61%, and got about 200 million of collateral released and unencumbered.

Finally, as we previously discussed, we're currently in the market with our Texas joint venture and expect to get first round bids in mid May with a closing in the July-August time frame. Tom highlighted the disclosure changes we made during the quarter and here is a couple of points I want to make on that. If you look at the Development yields, the return on cost for the Verano Development in Rancho Cucamonga, California that is now close to stabilized is almost 7%. This asset should trade well below a 5% cap rate in today's market, implying 25-$35 million of value creation on that transaction alone.

NOI on the two completed redevelopments is up 63% from the prior NOI, and once the 11 projects currently in redevelopment are complete, they will add over $0.08 to annual earnings from their current run rate. In terms of timing, about 40% of that will be added by the end of this year and then by the end of 2008, about 90% of that should be added so you'll start to see pretty meaningful impact late this year and next year from the redevelopment program. We continue to be pleased with our return on invested capital which is at 8.4% for the quarter and 8.6% on the same-store portfolio up from 8.3 and 8.4% respectively last year.

Finally, I just want to touch on NAV for a second. We don't make a practice of disclosing our NAV calculation although we obviously track it in very substantial detail. At today's share price, we believe we trade well below what we consider NAV to be, and we'll be looking at using some of the sale proceeds from the Texas joint venture and other sources to buy back shares. Now I'll turn it back to Tom.

Great. Thank you, with those statements. We will now open up the call to questions.

Thank you. Ladies and Gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question comes from Paul Morgan from FBR, please go ahead.

Hi. Can you just talk a little bit about two Markets in particular, Orlando maybe specifically given the weakness there but Florida generally and where you think how close you might think you're going to get to a bottom in terms of occupancy and then the ultimate hit on revenue growth, and then DC in terms of the condos and what you're seeing there in terms of expectations?

This is Martha. Let me start with Orlando. I think we're fairly close to the bottom on the occupancy impact in Orlando. We've seen the biggest impact in the two to three bedrooms and three bedrooms, traffic will not typically pick up until [Inaudible] of last year and the three bedrooms are off 820 basis points, but we think that's close to the bottom there and we're starting to see some traffic pick back up. Overall, if you look at the one bedrooms in Orlando, they've held fairly steady at about 94%, so it is a very pocket specific impact from single family homes there. So, Orlando's revenue is a little bit softer than we expected but we were looking to see that pick back up the occupancy in May and June. The other market was DC and we're really not seeing a lot of impact in our DC assets from the condos, so we expect DC to be in line with where we're targeting for the year and don't anticipate a lot of impact there.

Do you have just a rough estimate percentage of your revenue that comes from three bedrooms?

Three bedrooms is 7% of our total unit mix in the portfolio.

On a unit basis, okay. Alright. Thank you.

Our next question, thank you, our next question comes from Jonathan Litt from Citigroup.

It's Craig Melcher here with John.

Yes, Craig?

Could you expand a bit on the projections on the revenue growth for the rest of the year? It looked like it improved some from the first of couple months but the guidance has got to continue to improve year-over-year throughout the year so if you could just expand on that a bit?

Our guidance is in the 5-7% range. We did anticipate the occupancy softness in the First Quarter, so part of the pick up is as we accelerate into the peak leasing on the occupancy side. I think we'll be in the high 5% range for the year which is well in line with what our guidance is, particularly with the expenses coming in substantially below the 4% mid point there.

Okay, so NOI around the mid point of the range, is that what it's tracking towards?

Yes.

Yes.

Could you update us on where you're thinking on revenue Management today?

We actually have a meeting scheduled for the end of this week to discuss our decision. We have made a decision but we're not prepared to announce it on this call.

Okay.

[LAUGHTER]. They won't show their cards to me either, so --

Well, we have not talked to either Company yet and we would like to have those conversations before we announce something on a call.

One final beating on the pricing of it?

Yes. [LAUGHTER].

Okay, thank you.

Thanks Craig.

Thank you. Our next question comes from Rob Stevenson from Morgan Stanley.

Good afternoon, guys. Did I hear in the prepared comments right that unit turnover was 14% and move out to home purchases was 16%?

No, turnover is down to 48.6 I believe and move out to home ownership is down to 16.

Okay. But the 48.6 is an annualized number though, right?

It is an annualized number, yes.

What are hard costs for you guys on an average unit? I know it varies depending on what you have to do but on average what's a ballpark cost?

About 800.

Okay. And so- if turnover continues to track at this level, is that savings built already into your same-store expense growth assumptions?

No, it's not, but that's part of why we're performing better than the 4%.

So that would be potential upside to the numbers in the back half of the year if this continues?

Yes.

And then with the turn over following and the move outs to home purchases falling down, how much of that is, did you see starting in March versus what was in place for the entire quarter? Is this a subprime phenomenon or it started in like early March or so, or has this just been the way that things have been moving for the last couple of quarters and sort of finally hit this level this quarter?

They've been moving in that direction. Move outs to home ownership were down substantially in the Fourth Quarter, but they're down a little bit more in the First Quarter. So, I wouldn't say it's a March phenomenon.

So this really isn't, the subprime may be positively impacting but isn't prompting this?

I think it's probably got some impact on it. I mean, obviously the tightening of credit, people are less inclined to be able to get a loan, so that's got to have some impact on it.

What percentage, do you have an idea as to what percentage of your tenants would be considered subprime by FICO scores?

I don't, I can go back and look through the details and get that back to you, but I don't off the top of my head.

Okay, thanks, guys.

Thanks, Rob.

Thank you. Our next question comes from John Stewart from Credit Suisse.

Thank you. Mike, quick question for you. You mentioned that the tax benefits in the First Quarter will unwind over the course of the year. Sounds like that will be back half?

Well it will be weighted to when the quarters are where we have the gains primarily, and that will be in the second half of the year where we'll see the largest part of the games.

Okay. Tom, just reading your remarks, it sounds like you guys still have a pretty offensive posture just given your remark that you would take the occupancy for rents and the comments that you're bullish on fundamentals, what would it take for you to adopt a more defensive posture?

Well, I think the biggest threats to the economy first in my opinion is tax increases, that if the Federal Government takes any movement and increases our income taxes or any other use of taxes, that that's a direct out of the pocket of peoples ability to spend money and I worry about the impact that has in businesses as well. The second area, I would probably get concerned about would be the sustainability of the job growth at these levels, but I can't find one industry that I feel is going to have a bad year or is headed in a bad direction other than the auto industry and we have no exposure there, so I think taxes seem to be at, I think interest rate posture right now seems to be pretty benign. Inflation goes up and down but nothing meaningful there, so I think we're in for a period of stability, and my visibility would be through 08 to that, and it's going to be a market by market situation and I like our posture where we've diversified our portfolio. So I think those are the only things that come to mind. Anyone else in the room want to add?

Okay, and then lastly, Tom, could I just get you to give your perspective on how you expect the subprime situation will play out for Class B versus Class A landlords?

Boy, John, the subprime thing I think is part fact of people losing their jobs, part in fact of psychological where people look at it and say gosh, that could happen to me, and it's playing itself out pretty smoothly at this point. I don't think there's any panic selling in the homefront. I think the move-out trend, we clearly watch the homebuilding industry over extend and make bad homeowners out of a lot of good renters. I think we're going to get our share of those people coming back, and overall, I feel good about our occupancy prospects because of that coupled with the job growth and so Martha, Erin and I really wanted to push the rents and said we'd rather take the vacancy, do kitchen and baths and get them ready for higher rents and take our bet that we'll fill those back up and I think that is a little bit of a bet but this business is about seeing the future, playing it right and I think that's a good bet on our part, and I don't think you're going to see massive swings from the subprime. I mean, it's a small industry. It's washed through very quickly, and I think it's weathered the storm from there.

Okay, thank you.

Thank you. Our next question comes from Dennis Maloney from Goldman Sachs.

Hi. Good afternoon. You noted that you expect your transactional gains and condo gains to be back half weighted this year but just given the state of the cooling housing market, what gives you comfort on the certainty of these gains or sales?

Well, this is Mark Wallis. Well, I would answer it a couple of ways. The transaction we're about to close is for an apartment community we bought in RE3 within 12 months at a very good price based on acquiring it throughout point and lease up, so we're basically dealing in apartment communities. We don't see the single family market affecting those transactions, so we're going to have transactions other than condos. We have an opportunity on our land transaction that looks good, and we are constantly seeing other deals brought to us that are Development related, entitlement related where there's profits there. As far as the condo market, we're moving to California. That's coming in the second half of the year based on finishing up approvals of mapping and construction, so we see that in a stronger market, and the other two we have that are not California, our Florida product, we did very well in the first phase, [Inaudible] condition there, water front makes it very attractive and are extremely good price point, so it's just, it's more of a timing issue and I don't think there's any softness that's going to hurt those transactions.

And Dennis, I would just add that our guidance incorporates substantial reduction in condo income from what we experienced last year. I think we've been reasonably conservative in how we modeled it and as Mark said, the bulk of it is coming from significant sales in California and some projects that we're pretty optimistic about with the market conditions looking pretty good.

Dennis, Tooney. I'd just pile on a little bit. In the sense in the case of Florida, we've been watching the resale of our Phase I communities and have noted that what we sold them for and what they are reselling on the market is about 10,000 higher and we think that that one bodes well for the community and the prospects of delivering it. The other is that when we look at those particularly the case of Phoenix and Tampa, the entry level price from renting to owning is almost sterile and so I think it's a matter of taking our pace, holding our price, our traffic counts for example, in Phoenix right now are averaging 21 a week. That means there were 21 people that walked in and were looking to buy. We've got to get better at closing those, but when traffic counts are that high, there's still a lot of shoppers in the market. So I'm not uncomfortable with our prospects on those two, and as everyone has said, California just the affordability aspect of what we're delivering is a product that is 400-500,000 at an average market price of 7 and 800,000, so we think we capture the entry level buyer still and we have taken into consideration a slower pace. So I think again, we thought it was always a good business. It adds value to the overall enterprise, but it is not the ramp up panacea that it was three years ago. It's a prudent pace.

Sure. It makes sense, thanks. And moving on to kitchen and bath upgrades I'm just curious. How much drag are you currently experiencing, and then just in terms of the NAV creation there, historically, how much of that has come from lower cap rates and how much of it has come from higher NOI at the property level?

Well, the average dilution for this quarter on the kitchens and baths is about 700,000, that's up slightly from close to 600,000 in the Fourth Quarter.

You know, in terms of the NAV, Dennis, you're putting money in at a 9-10% yield, presumably the asset is selling in the low five's in most cases, so you're creating some NAV just on the difference in the return that you're getting on your investment versus the cap rate on the asset. I think you're also probably driving the cap rate on the asset down marginally with each incremental kitchen and bath you do because the quality of the asset, the reinvestment that a future buyer would have to do is less. So I think you get value creation in both ways.

And then Mark Biffert has a question or two as well. Thanks.

One I have to add to the kitchen and bath while you guys are organizing, here is the simple math to me. You raise rent $100. You put $10,000 in it. If you had 95% occupancy, you cap that at a 6, it's 19,000. So, I mean, to put 10 in for 19,000, I like my odds there, and what we have to do is push some of these across the goal line, sell the asset, demonstrate that delivery of that extra $9,000, but there aren't many things that we can do in our business to double your money, but K&B's is one of them, and we like it. We've, as we've said, done over 15,000 of them. We like the pace. We'll keep it up. I'm sorry, you guys had another Question?

Yes. Related to the Bellevue asset, the 989 element, what was your cap rate on that and when do you expect that property to stabilize?

Our cap rate was a low 5 which is very good in that market. Of course it's a JV structure and that gave us some advantage there. We also are the Manager of that property and it is over, Martha, I believe it's over 90 today, right?

Right.

So we're just about at stabilization.

In regards to your spreads on your debt, what are you seeing in terms of that?

Well, we did a transaction at the end of March about 105 basis point spread on that deal over the interpolated seven year Treasury. If you look in the secured market today, obviously it depends where you put your leverage but the secured rates are quite a bit inside of that. I mean, you could do a 70% loan on a stabilized deal at 80 basis points over today probably. So and obviously, the floating rate debt we're borrowing under our line of credit, the fixed rate is 57.5 basis points but we borrow a lot of it on the bid facility at 20 or so basis points, so the cost of debt is very attractive right now.

But from their lows, how much have spreads widened recently, if any?

I'd say they've widened a little bit, but --

My guess is 10-15 basis points would be about right.

But if you look from their lows, if you look back a year or so ago, you'd say boy, I'm pretty happy with where the spreads are today because they had certainly come down from where they were 12 months ago.

And you look at the apartment sector as a whole, most of us on debt to market value are carrying below 40%, fixed charge ratios are anywhere from 2.25-2.7, so and I don't think our industry is going to get much pushback on its credit spreads, even as the rest of the market moves. One other thing about the asset in Bellevue that's gone unnoticed but we're very acutely aware of is Microsoft has signed 1.3 million square foot lease and has agreed to go to a vertical campus which has not been their historical pattern and we think that bodes well for that market and many other markets that Microsoft is in and we think the rest of the technology sector will probably follow suit in these high urban centers, as going to that format, so we're aware of it, changing our product mix to appeal to that, and as you reminded, most of these kids that are there are 25-years-old making $125,000 and have nothing to do in their life but rent 600 square foot apartments, so we're pretty happy with our prospects there.

Great. Thank you very much.

Thank you. Our next question comes from Rich Anderson from BMO Capital Markets.

Thanks and good morning I guess?

Yes, it is, Rich.

[LAUGHTER]. Hard to say. Let me ask you this about the TRS business. First of all, you're not breaking out the sort of merchant building stuff from the other Development pipeline; is that correct? It's all sort of in one schedule unless I'm missing something?

This is Mark and Mike may want to speak to this too, but no, it's all in one Development pipeline because one of the reasons it's in RE3 is to keep our options open, and so we will adjust and decide if we're going to sell projects based on the price that's available upon completion. So rather than merchant building, we view it as a short-term hold scenario that in some cases, it may be something we want the REIT to take before we get the completion based on the way the market looks, we may get an offer like we did last year and it was so strong, it's very compelling to the seller. So we just put them on one list, and we evaluate them as we go.

Yes, and most of the stuff on that list today is in RE3. Anything that's been acquired recently has been acquired in RE3. Some of the things that are in the REIT would be sort of some of the older Legacy pieces of land that we had held and that probably is something we might want to do more disclosure on just to identify on that list whether it's in the REIT or RE3.

I was going to say maybe it's another column to say right now maybe the current plan is RE3 or the REIT, something like that.

Okay.

Get a sense of where or what direction, how you might change in the future and all that sort of stuff.

Okay.

So I mean that leads me to my next question, just anything that you have there, whether it's the Phoenix asset or the Houston assets or whatever it is you're building that you right now think is an RE3 asset, all of it, you would be willing to own as the REIT, if it came to that?

Absolutely. And that's why I said we don't refer to it as merchant building. I think they have the context of its built for sale they're not going to own it long and the quality might be there but we're building it as the quality and locations and we could own in the REIT and we're in all these Markets already.

Okay. I guess if you could answer this quickly, I don't want to spend too much time on it but what was the thought behind changing the name of the Company? What didn't you like about United Dominion?

Well I think it just reflected 35 years of work and when we looked at it, we said we're not really that company anymore, that that company very much doesn't exist and at the same time, we thought people referred to us a great deal as UDR. It made logical sense to us just to move to that name and that with respect to our asset base, our lead operations, the activities that we're doing, they are just not the same company that was there at United Dominion Realty Trust.

Did you ever do any sort of surveys of people of what their general sense of a company named United Dominion and what a company named UDR and what their impressions would be of a different name?

You know, we spent over a year kind of wrangling with different scenarios, about changing a name, going out searching for a name and we just kept coming back to, you know, it's our ticker symbol, it's straightforward, the general tendency is simple, easy to communicate, type names and when we searched names we found a lot of stuff that was already taken that excited us.

Like building REIT?

No, we didn't come up with that but we thought value creator was the best one, and some time, Rich I guess over I could take you out for tequila and get you straight on this. [LAUGHTER]. But that's an offer.

Okay.

And seriously, with respect to the disclosures, if you have recommendations we are very open to how we can enhance our disclosures to help you get the right values on these companies or on our companies.

I don't have a problem with it being in one schedule, but maybe just to distinguish from one another as I suggested. And then the last question is these are two items that are directionally negative this quarter, concessions and bad debt. Is there anything to read into either of those in terms of you're saying some good things but yet those things are going in the wrong direction?

Bad debt, the year-over-year comparison, the difference there is when we move to the One Site software last year, we went to a gross up method and so the year-over-year comps are really reflecting that difference and the number is in line for us. In fact, it's down from the Fourth Quarter, so we don't see any reason for concern there. And our concessions are running fairly consistent. On a per move-in basis, they were up just 5% from the Fourth Quarter, so no real concern there either.

Okay. Thank you very much.

Yes.

Thank you. Our next question comes from Richard [Paoli] from AVP Investments.

Good day all. Just a couple of questions. Earlier today on one of your competitors Conference Calls, they referred to lack of pricing power in a particular market, and I don't know if Martha or Tom, do you guys feel that in any instance that you don't have pricing power at this point? I take it "No", and specifically the market that they were commenting on was Atlanta, so one, a general sense and then two, what you are seeing in Atlanta that maybe this other peer isn't and then I have a couple other quick questions.

Particular to Atlanta, we're certainly not seeing a lack of pricing power there. That was one of our stronger performing Markets and we're still doing well there. I mean, Florida, we still had strong pricing there, but I think it's not going to be as strong as it was, so there might be pressure on pricing power there in the two and three bedrooms.

Okay.

The one's are doing well and that's reflective of job growth in my opinion at kind of the service level, Rich, you're seeing job growth at that point in the price of our customers and those are filling up well. The two's and three's are going to be taking hits from the single family market coming back, but we'll see how that mix changes as we keep moving rents.

Right. Just another question, this might be for Mike. You went through the I guess sequential change in how to get from point A to B on FFO. If I'm doing my simple math correctly, you're looking at like $0.06 this quarter in aggregate and RE3 income, is that correct?

Yes, $0.05 to $0.06.

Okay.

Which we highlighted and said one of those is about ready to close, so --

Right.

I don't want to call it in the bag until I see the wire.

Right. And then maybe some of the other listeners understand it but this tax benefit that you keep referring to? What specifically is that? Could you just --

Yes.

Walk through the mechanics of the transaction that drove that?

Sure. It's pretty simple. If you look at the RE3 business without any gains on sale, the RE3 business due to leverage and depreciation generates taxable losses, so in a quarter like this quarter where we have no gains on sale effectively, there is a tax benefit that is accrued. Later in the year when we project to have much more significant gains on sale, it will offset and you'll lose some benefit of that. So the tax number that we projected at the beginning of the year is going to come in for the full year pretty much where we thought it would be. It's just sort of gets a little lumpy between quarters depending on what the gain on sale is.

And my last question and this is kind of spurred by some of Rich Anderson's questions. With respect to the RE3 business, is this all just development and redevelopment stuff or are there assets that are kind of running in there that are kind of just similar to what is in UDR proper and the gains, are we looking at pre-depreciated gains or are these just gains on book that's getting run through FFO?

Well, Mike can comment on how those gains are booked. I think your first question was the type of assets that are in there?

Yes, I mean, they are stabilized assets that you may think are just slippers or is there something kind of being done to them aside from just owning them?

Well, you know, we've done Development deals in there which I think that will create value by taking the Development and building assets out and doing the lease up so that's one category. We've had transactions where we've seen assets in our Markets that are in lease up, new assets, where we've been able to acquire them and with our Management team seeing if we could step up the pace of lease up and in essence, beat their transactions and realize the gain on that. And then in the Development business, because we're out buying land, we'll see opportunities for the entitlement process may create such significant value that we'll have offers and be able to harvest that value without having to go through a protected Development process. And then I think in our rehab scenario, we're seeing opportunities, one I can, thinking of now we're pursuing that we've rehabed assets in that market, we see the ability to go in there and do a rehab and harvest gains like we do on development, so it's those kind of categories that we're operating in.

So there's no essentially kind of market timing to say we bought something that we think is cheap in market X and if we hold it for a year, I understand the kind of lease up stuff if you bought stuff that's just coming out of development, etc, but there's always an element of value-added to it, not just kind of market timing?

Yes. And I think the market, it would be very hard to find market timing kind of assets for sale. I mean --

Markets are pretty efficient pricing today.

Yes. So you got to do something to it I think to realize some value there.

But if you look at for example, things that make sense is you buy something, you rehab it, and you look at it and say what's the value I created? Is it time to be cashing that out? What's the long term prospects of it? My point I would probably make, Rich, is that our attitude about RE3 is that private entrepreneurial spirit of generating value is really where we wanted to capture that and you realize in the marketplace today both in terms of competitiveness that if we do not try to take advantage of that, we're going to lose out on talented people and opportunities, and I think our goal here is to try to optimize the value of return on our invested capital as quick as possible and RE3 just gives us one tool to do that, and it gives me a chance to recruit some of the best and most capable people in the industry as well as retain the ones I have and if I didn't have that type of exposure or opportunity, one, I'd miss a lot of opportunities, B, I think I'd lose a lot of talented people in this organization, so we see it as an ongoing business and if you go back 10-15 years when a lot of these companies came out public, that's what a lot of shareholders bought was that entrepreneurial spirit and it seems over 10-15 years we've been beaten into kind of a mentality of we'll just pound out the quarters, and we're trying to break out of that and break into saying we're a very talented group of people. We can find ways to make money for you. Generate low cost of capital for you, and get superior returns, so that's our attitude about it.

Well, did Mike have just a clarification on the gains? It doesn't sound like you're holding it that long that it would matter and just my other comment would be that, and it's specifically not in the apartment space but in the past year or so, there's been a couple REITs that have felt the need to compensate the executives based off a transactional lead and it's always seemed to have gone one way and that's up and so just to make it loud and clear that my view on just paying yourself on deals would be pretty jaundiced, but it doesn't sound like you're doing that especially at the executive level. I can understand at the mid level Managers if they've got a project to execute on.

Yes, Rich, no, I appreciate the input. I share a great deal of that view, and also look at it and say, if you look at my comp and the executive level, we're comped by shares and what the share price does, and I think if you can wade through the proxy and make sense of everybody else's send me an analysis but I'm very comfortable with what we're paid, how we're tied to the shares and what we do to create value, and that being said, we got a lot of guys in that development team and that acquisition and sales team which could go other places and we're going to pay them on the value they create and their specific efforts but executive group is going to be looking at that share price just like you do.

Great.

Rich, just on the technical accounting, in concept if you had an operating asset in there, you would depreciate it, and a gain would reflect the reduction of the basis because of the depreciation, but in practice, the assets are a lot of it is land, which doesn't get depreciated. A lot of it is characterized and held for disposition like the condo businesses entirely held for disposition so there's no depreciation associated for that. Development obviously there's no depreciation, so in the guidance for this year, there's a de minimus number that would be attributed to depreciation versus sort of profit of improved value.

Great. Thank you very much.

Yes. Appreciate it, Rich.

Thank you. Our next question comes from Ross Nusbaum from Banc of America.

Hi, guys, it's actually Dustin Pizzo with Ross. I guess Mike or Mark, to follow-up on some of the condo questions, how much of the $0.20-$0.21 of income from the TRS is from condo sales later in the year on a per share basis.

For the entire year, it's about $.08. Pre-tax.

And how many units does that assume that you guys close?

Well, boy I don't have that number in front of me. It's pretty much all of the 2161 Sutter deal, April pretty good chunk of the Long Beach, California deal and the Arizona and Florida deals are much more moderate paces.

It would be about 400.

Okay and have you seen any --

200.

Yes, I'm sorry, it will be about 200. We've got some pretty high profit deals that are on that small deal, San Francisco will help us, so it's in that range.

And have you seen any increase in the concessions that you guys are having to give up front on some of those deals or is it, to help with the buyers?

Not at this point. Tom mentioned traffic is good and so we haven't gotten to that point now and we'll just have to see how that plays out.

And then just turning to the share buyback you guys mentioned potentially, can you remind me, do you currently have any program in place or is it --

This is Toomey. With respect to, we burn through in 06 a 10 million share buyback program and at that time, the Board authorized an 11 million share program, so we're currently under that. We've not bought any shares back under that program to date, and then Mike's correct. We're certainly looking at that share price like everyone else and saying, it's starting to look pretty damn attractive.

And I believe Ross has a follow-up as well. Yes, guys. One question. I wanted to circle back if we could. At the beginning of the call you touched on some dead deal costs. What were those relating to?

Ross, there's really two transactions and both kind of unusual. One was an OP unit deal that we've been working on ever since I got here and it just dragged on and dragged on and OP deals have a fair amount of legal costs and ultimately unfortunately did not close, and then the other one was one where we usually don't get to the point where we're right at the closing that we find something in due diligence that we don't like and can't resolve it but we had one of those happen this quarter.

Yes, I might comment on that. It was a grand lease transaction, on the surface and the original disclosure of the thing looked fine but there's mechanics on passive expenses that got our attention, and we were not comfortable doing that, and the asset is not traded since then. I don't know if it will come back to the market again so it was just one of those deals you shouldn't do on the OP unit deal we were getting into the tax protection of grandchildren for 20 years and it just sort of got beyond reasonableness and but unfortunately, those things do entail some legal costs so they were pretty unusual transactions.

Thank you.

Thank you. Our next question comes from David Craig from Merill Lynch.

Hi, good afternoon. Just a couple quick questions. First on Atlanta and Denver, also North Carolina, are markets that you've mentioned that you would either exit or trim your position in. Could you update us on those and any other markets where we could expect Dispositions over the course of the year?

This is Mark. We're really focusing on Atlanta and Denver as far as a transaction this year. We'll just see if we want to get to the Carolinas but that's sort of our third priority, and we're going to do that. Our goal is to do it as a structured transaction like we've done in the past where we'll take a note back with reasonable down payment to secure the transaction and that should help us mitigate the dilution from that. So we're focusing on the Atlanta portfolio and Denver in a structured transaction.

And then on the DC purchase, can you provide a cap rate on that and was that ever considered for condo conversion?

The asset is condo mapped. We don't see it as going that way any time in the near future, it is thought of as a long term hold asset. And it was a mid four cap rate.

Might highlight what you sold to get it, and you bought a brand new asset at a 4-7 kind of number but what did you sell?

Well we sold older asset out in California that we were able to attain 31 on that was really one of those assets we couldn't pull the trigger on a rehab and we're getting a low five cap so when we look at 50 basis point spread on something like that, I think it's combined with an asset we're doing out in the Seattle area, it looked like a pretty good trade for 50 basis point spread.

Just last question for you, Mark. Could you discuss the idea of selling condos as is, which I believe you're doing now in Phoenix and how that's working out and how that might work in other projects?

Well, it's purely price point in where Tom talked about if you got the tenant, and this is really where it comes up, existing resident, who says for 150 more I could own this apartment and I will put the granite in myself later, that's what you're appealing to. And there's going to be probably we hit about 10-15% of our community like that that that could happen. And really really hot market like there was, sell a lot of them that way because I think you have people that are envisioned on doing the improvements themselves and then sell them. Now it's more personal like I could own this, I don't have to pay rent, and I get the tax deduction, it makes you want to buy

Okay, thank you.

Thank you. Our next question comes from Dave Rodgers from RBC Capital Markets.

Hi. Going back to Mark's prepared comments, he mentioned that you've got some assets or at least one asset in particular in the RE3 subsidiary that you probably would consider moving into the REIT. Long term that's where you'd like to see it. What's the economic impact of doing that presumably your competitors would spend more time on the TRS activities if there was a benefit so can you kind of break that out a little bit more for me?

Well the economic impact, obviously from a tax standpoint which is a non-consolidated issue, you got a value asset that's value and it moves over there. Now, the way we do the option of that asset I mentioned in the DC market is a Development asset, we can look at that in the early parts of once it starts construction and it's at cost. It's subject to lease up and so it would be a sort of a cost transfer over there for tax purposes and it's a narrow window but we do have the opportunity to do that.

Okay, and then last question. Martha, have you changed or is the portfolio changed credit standards at all particularly dealing with potential foreclosures on the tenants resumes?

No, we haven't at this point. We are looking at ways that we might be able to factor in foreclosure. One of the issues you have with trying to do that is somebody who's gone to the point of foreclosure will typically have run up a lot of other means of credit in order to try to stay in the home, so it's a little tricky trying to tweek the credit score to take those people, but we are working with our credit screenings provider to try to see if we can do something that we're comfortable with. But right now, we have not done anything and we think those people coming back to the market, even if we don't change our credit scores, that's going to elevate the overall demand in the market. So we'll benefit either way.

Okay, thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) We have a follow-up question from [Richard Paoli]. Please go ahead.

Hi, guys, one quickie. On the preferreds, is there a preferred redemption charge that's going to come through with respect to the call that you mentioned?

Yes. There is not one that will hit FFO, the Company's practice in the past has been not to take preferred redemption charges against FFO, and that's what we expect to do going forward.

How much is that number just so we know and we can adjust the valuation?

It is about $4 million bucks $4.5 million, $5 million bucks

So about $0.03 a share?

Correct.

Thanks, Rich.

Thank you. And we have no additional questions.

Thank you, Operator. I want to to be mindful of your time and thank you for it today, and thank our associates on the call for their efforts this last quarter and for the quarters ahead. So with that, we wish you a good day and take care.

Thank you. Ladies and gentlemen, this does conclude the UDR Q1 '07 earnings Conference Call. You may now disconnect. Thank you for your participation, and please have a pleasant day.