UDR Inc (UDR) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the UDR, Inc. second quarter 2007 earnings call.

During today's presentation, all parties will be in a listen-only mode. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Tuesday, July 31, 2007.

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

Thank you for joining us for UDR's second quarter financial results conference call.

Our second quarter press release and supplemental disclosure package were distributed yesterday afternoon. In the supplement we have 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 Web site, 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 the press release. We will begin the call with brief comments from management and then open the call to your questions.

I would like to note that statements made during this call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in those 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 forward-looking statements is detailed in yesterday's press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

I'll now turn the call over to our President and CEO, Tom Toomey.

Thank you, Larry, and again, welcome all to this call.

The topics we are going to cover today include a state of the industry, execution of our strategies, give you an update and a Q&A session. Joining me on the call today are Mark Wallis, Martha Carlin and Mike Ernst.

I will not spend any time reading the press release, but will say that we are very pleased with another solid quarter, and we'll be glad to answer your questions after management's comments.

As we are early in the earnings reporting for apartment companies, we feel it would be a value to give you our view of the state of the industry. First, asset valuations. We have not seen a change in asset values. Mark will give you some more color on this later in the call.

Capital is readily available, with many investors sitting on dollars raised over the last several years. In fact, during our recent marketing of our joint ventures and assets for sales, we found a significant level of interest. Mike will update you on our progress in this area.

On the debt side, as a reminder, the apartment industry generally utilizes two GSAs as our primary source for debt. And while the treasury markets remain volatile, we've only seen a small increase in rates for quality loans. An example is a recently negotiated secured facility of seven years at 75% loan to value at a sub 5.9% rate.

Lastly, growth in operating cash flow. The current national trend of 6 to 7% are well above the historical 3 to 4% averages. While Martha Carlin will update you on operations, I will say that we are excited that 97% of our markets showed year-over-year revenue growth.

In summary, we see a number of opportunities capitalized on today's environment. Therefore, we intend to, first, continue executing our strategic plan, as these activities create long-term value.

Second, with our stock trading at an implied cap, 7% cap rate on the mature portfolio, we will become more active under our authorized $10 million share buyback as we close on the sale of 5500 homes representing sales proceeds in excess of $600 million at a low 5% cap rate.

Let's move on to the specifics of our value creation efforts through execution of our strategies and I'll turn the call now over to Martha.

Thanks, Tom.

Today I'd like to cover four areas, our overall performance for the quarter, some regional and market highlights, progress on Operations 2.0, and some color on the outlook for the third quarter. Our operations team delivered another solid quarter of performance with 5.3% year-over-year revenue growth and 6.5% NOI growth.

As Tom mentioned, 97% of our properties had positive year-over-year revenue growth. Gains from occupancy momentum in the quarter picking up 60 basis points of occupancy and our sequential revenue growth of 2.1% was the best in several years. This should set us up well going into the third quarter.

Overall, expenses remained in check. We continued to migrate our advertising to low cost/no cost Internet sources which contributed to an over 20% decline in marketing and advertising costs.

Move outs to home ownership remain steady at 16% during the quarter, while overall turnover was down 70 basis points year-over-year. During the quarter we won several tax appeals resulting in lower than expected tax expenses.

The west, which makes up 31.5% of our NOI, continues to be our strongest performing market, with revenue growth of 7.6% and NOI of 9.7%. The region was led by Portland at 12.8%, Monterrey at 9.1% helped by a fully penetrated reimbursement program, and the Inland Empire at 8.7%. We continue to have good pricing power in the western market.

The southwest market is performing well with solid revenue growth at 5% and NOI at 4.7. Occupancy in this region is above 95% and pricing is holding up as well.

In our mid-Atlantic region, Charlotte and Raleigh have continued to perform well with 8.8% and 6.3% revenue growth respectively, despite higher move outs to home ownership in these markets. The DC metro area continues to lead the portfolio in occupancy at 96.7%, as it has seen the benefit of fewer move outs to home ownership. Pricing power remains strong in the metro area.

The southeast, which primarily consists of Florida, continues to show revenue growth despite the 190 basis point decline in occupancy. Pricing power is largely a factor of submarket competition, where some assets have held up better than those competing with failed condo lease-ups. We expect another six to 12 months of absorption will be needed before this returns to a more normal level of inventory.

We continue to make progress in laying the foundation of our Operations 2.0 strategy, taking two significant steps this quarter. We launched our new Web site in June, which includes cutting edge technology and more customer-focused design.

We also solidified our decision and implementation plan for yield management, selecting the YieldStar product. The full implementation will be completed by year-end.

And finally, the outlook for the remainder of the year is still strong. In July, we're continuing to see occupancy above 95% and strengthening year-over-year net rental income growth. We expect occupancies and pricing power to continue to hold up through the remainder of the year in the broad portfolio, and are comfortable that same-store sales NOI growth will be in the 6 to 7% range.

And now I'll turn it over to Mark.

Thanks, Martha.

I want to comment first on where asset valuations are in the marketplace today and then I'll discuss our progress on two of our strategies strengthening our portfolio and expanding RE-3.

First, the question of the day, have the values for multi-family communities begun to decline, or are we seeing an increase in cap rates? The answer is no. The overall economy is still showing job growth.

The rental pool is increasing and demand fundamentals are good. Supply has not gotten too far ahead of itself, and the relationship between acquisition costs and replacement costs per home is still reasonable.

For example, auctions being run on assets in California, which we have seen, are clearing at low 4 to sub-4 cap rates. The winning bidders are investors still using aggressive growth rate assumptions in their underwriting metrics that support paying these prices.

Cap rates in DC for new product are in the low 4s, while cap rates in Dallas and Houston for new well-located product are in the low 5s, Austin cap rates are sub 5. We have a portfolio of 2300 homes located in Atlanta and Denver under contract for sale, with harder earnest money up, pricing in the sub 5 cap rate and we had close to a dozen bidders on that portfolio.

There is still a lot of institutional demand to own apartments and we see that values are strong. Investors are willing to buy with negative leverage because of the strong growth fundamentals and the favorable attitude towards risk of owning multi-family properties versus other categories of real estate.

So at this point, we're not seeing a rise in cap rates that would result in declining values, however, we remain alert and realize that these markets are dynamic and values can move as the capital markets change.

Now to our strategies. We continue to strengthen and focus our portfolio. With the assets under contract to sell in Denver and Atlanta, we will completely exit those two markets. We had a relatively low home count in those markets, so they had some operational inefficiency, and we wanted to improve on that and this sale will accomplish that.

Expanding RE-3. We added an asset in the Bellevue market which continues to show outstanding job growth.

We are extremely pleased that we have completed our assembly of approximately 100 acres of land in Addison, Texas. That's a place where there is a current nighttime resident population of 16,000 people versus its daytime population of over 100,000.

It's in the middle of thousands of jobs in an in-fill location. This will provide RE-3 with a source of value creation and fee streams for at least the next five years.

Our development pipeline is now at $2.9 billion level. That should allow us to reach our goal of $400 million to $500 million of new product being delivered to us annually.

We have the team in place ready to do the work that's necessary to create this future value. We still believe in our strategies and that we are making good progress in our pursuit of them.

Mike, I'll turn the call over to you.

Great. Thank you, Mark.

I'm going to start by discussing some of our capital markets activity during the quarter. We'll update you on our joint venture activity, and then we'll cover guidance for the third quarter and for the year.

During the quarter we executed several notable transactions. The first was we redeemed our $135 million 8.6% Series B Preferred on May 29, and then we issued a similar amount of Series G Preferred two days later at 6.75%.

We also paid off three secured loans that totaled about $97 million and had an average interest rate of 6.25%. These loans had been secured by $340 million worth of assets and they are very inefficiently leveraged as well as being at a higher rate, so we unencumbered those $340 million of assets.

We also restructured one of our large secured facilities, increased the size by $50 million, extended the maturity and locked rate on about $190 million at an average rated of 5.61%. As part of this restructure, we also got $200 million more of additional collateral release, so during the course of the quarter we unencumbered $540 million worth of real estate.

On July 27, as you probably saw last week, we closed a renewal of our line of credit. We decided to increase the size by $100 million to $600 million, reflecting the growing size and scope of the Company. The new terms included dropping the rate approximately 10 basis points across the pricing grid and extending the term to five years.

Since our last call, we bought back about 1.5 million shares at an average price of a little over $28 a share. We discontinued purchases about a month ago so that our asset sales program could catch up with the buyback, but with 6 to $700 million of sales expected over the next 90 days, we anticipate being a very active buyer at today's share price once those sales happen.

Turning to joint venture activity. In March at our investor day, we announced the fairly broad initiative on the joint venture front, and I'm pleased to report that we've made significant progress on the first two venture platforms. We have negotiated term sheets and have selected a partner for both the Texas joint venture and the development joint venture and I expect that both will be closed prior to our next conference call.

Our second quarter results were very consistent with the guidance that we gave you on the last call. We earned $0.45 with about $0.05 of that coming from an RE-3 gain on sale and about $0.40 from recurring operations.

If you look at the recurring FFO number, it was up from $0.36 in the first quarter of this year, and from $0.38 during the second quarter of last year, which were an 11% and 5% increase respectively. If you compare this quarter to last year's second quarter, we were up about $0.04 from same-store NOI growth and up about a penny from lower capital costs, and then this was offset on the downside by about a penny of incremental dilution related to rehabs and asset sales, and another $0.02 due to higher G&A.

Moving on to guidance. Guidance for the third quarter is a range of $0.45 to $0.48, with FFO from recurring sources generating about $0.40 to $0.41and FFO from gains on sale and RE-3 net of tax generating $0.05 to $0.07.

RE-3 has one fairly substantial gain that is under contract with Merit Money [Har] and contingencies waived, so the low end of the range should be pretty solid with the high end depending on condo sales. At the midpoint of our third quarter range, we will show 14% growth over the third quarter 2006 FFO, and if you look at just at the recurring component of that, it will be 7% growth from last year's third quarter recurring FFO.

As you'll notice in the press release, we're tightening the top end of our guidance range to $1.85. As Martha highlighted at this point of the year, it looks like same-store NOI growth will be in the 6 to 7% range. Our original range was 6 to 8%.

And we also believe that the high end of the condo guidance range will probably not happen, so between the two of those, we think the likelihood of getting over $1.85 is not that high at this point. So we thought it was prudent to bring the top end down.

That concludes my comments. I'll turn it back to Tom.

With that, operator, we will open the call up now to questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question is from David Bragg. Please state your company name followed by your question.

Yes, Merrill Lynch.

And my question is regarding asset sales. You provided comments on Atlanta and Denver. Could you update us on the Texas JV and a potential cap rate there?

Well, I prefer not to get into a lot of details, as Mark commented on the cap rates we're seeing Texas in the low 5% range and what we're experiencing on that is fairly consistent with his comment on that point.

But we are making good progress. We're negotiating documents, and as I said, we hope to have something very concrete to tell you, certainly, before the next conference call.

Okay.

And given your commentary on cap rates and share repurchases, what are your thoughts now on increasing disposition activity over the course of the year in order to buy back more stock at this implied cap rate?

David, as you know, a significant constraint in there is our tax gain capacity, and with what we have queued up right now, we will have exhausted our capacity for this year. Should the stock price remain down, we may look at additional assets and sales above that and other alternatives, but at this time, we're prepared to execute on our $600 million-plus and take the proceeds and use them the best we can.

Okay. Thanks.

And finally, Mark, what are your expectations for condo sale gains in the second half?

Well, I think Mike commented on that, that we've got a range that -- and our gains in our RE-3 operations are really several buckets. Mike, I don't know if you have any other further comment on that.

Yes, I think if you look at the third quarter, obviously, there's $0.05 to $0.07, about $0.05 of that is from a single gain coupled with $0.03 maybe will come from condos, you know, and then the fourth quarter I think there's probably a total of $0.08 or $0.09 coming from a variety of different sources within RE-3 of which condos is a piece of that.

I mean our condo inventory is now back up and we expect, you know, sales to be more weighted, obviously, towards the last half of the year and all that's starting to progress nicely.

So the two California projects that are listed are currently available for sale?

No, they are not. They will become available during the fourth quarter.

Okay. Thank you.

Thank you. Our next question comes from Jonathan Litt. Please state your company name followed by your question.

Craig Melcher here with John Litt with Citigroup.

Your bad debt expense ticked up a bit year-over-year and sequentially. Is there anything specific that you've found with that?

There's two different things here. On the year-over-year basis, I think I may have mentioned on a previous call, last year we started recording bad debt on a gross basis rather than a net basis, and this will be the last quarter that you'll see the year-over-year difference where that gross recording of bad debt is in there.

And then on a sequential basis in the first quarter, we actually ran a sale on some of our old receivables where our collection company went back to residents who had had balances outstanding that were maybe two or three years old and that sale popped us back up. So if we looked at our sequential bad debt, it would actually be flat had it not been for that one-time sale.

And this is Toomey.

I might add I mean at 60 basis points it's, over doing this for 20 years now, that's a pretty low number. I'm generally used to more as a 1% of your gross revenue. So I think it still speaks to the health of our customers still pretty solid.

Okay.

And with the full-year NOI growth guidance, is there any markets or specifics that are coming in a bit weaker than you're expecting, or on the other side as well, that are surprising you there in 2Q or your outlook for the second half?

Well, Florida continues to be below what we thought it was going to be when we did the original forecast, and while there are pockets that are doing better, overall Florida is not performing where we would like it to be, but generally the broader portfolio is still performing well.

Thank you.

Thank you. Our next question comes from Mark Biffert. Please state your company name followed by your question.

Hello, everyone. Goldman Sachs.

Martha, relating to concessions, I noticed they picked up in the quarter. Now that you guys have put the YieldStar program into place, where do you see those concessions going over the next year?

Actually, for the YieldStar rollout, we will be moving to an effective rent model so concessions will go away as we roll that out and be priced into effective rent.

Okay.

And, Mark, related to the buyers that are acquiring these assets, the $600 million you mentioned, what type of financing are they using and at what leverage levels are you seeing?

Well, you know, we don't really -- on some of those comments that I was making regarding sales are bids that we've been involved in and didn't have the winning bids and I'm not sure the particulars, like levels of financing, but there's a lot of guys out there on some of the portfolios when we're selling and they are about 75, 80% leverage and they're from some traditional sources that wouldn't surprise you.

Okay, and--

They're using Freddie and those kind of sources.

Okay. So what kind of spreads are you guys seeing on yours? Are you seeing a widening at all?

You know, I think there's certainly pressure, and if you look at all the different sources of debt, there's pressure on spreads, but as Tom said, you know, we're still seeing at sort of 70%, 75% leverage levels that you've got all-in rates below 6% with today's treasury yield. So you might have been at the tightest, you probably got down in the 80 bips kind of a range on the spread there and now you're talking maybe low 100s, depending on the structure of the deal and the asset.

And I think, you know, if you went to the CMBS market, you might not get a quote and it might be a lot wider than that, but the life guys and particularly Fannie and Freddie are still very competitive.

Okay.

And in regards to your G&A guidance for the rest of the year, you had guided originally 34 to $35 million and today you have about 19. Just wondering if you're, and given that last year a lot of the G&A was back-end loaded, what do you expect for the full-year now?

Well, one of the things that we have done this year is we had taken a much more straight lined approach to the incentive comp piece of G&A, whereas last year it was more sort of back-end loaded and tied to some of the transaction income. What we've tried to do is make that a more stable number over the course of the year.

So I think the number that you see this quarter should be fairly reflective of what the run rate will be through the rest of the year with these sort of minor variances in either direction. So I mean I think it will be up a bit from where we had hoped it would be at the beginning of the year but, you know, I don't see it being a whole lot more than where it is right now.

Okay. And my last question is for Mark.

In regards to the redevelopment projects that you're adding to your pipeline versus the ones that you delivered, what type of yield compression are you seeing in those assets?

The ones -- you mean once we deliver them?

Yes.

You know, those cap rates I was mentioning, we're seeing those kind of, you know, low 5 kind of cap rates on the other end, if that's what you're asking.

In terms of, like, development spread, or yields.

Yields.

Oh, I'm sorry. I'm sorry. We're still, you know, on development, you're at 150 and I think on redevelopment, you're at 200-plus basis point spread.

Over acquisitions.

Over an acquisition price, yes.

Okay.

Baseline of 5, you're going to be developing to a 6.5 or better and you're going to be redeveloping to 7 or better, and ours coming out, that came online today were much better than those.

Right.

Okay. And that's on the larger scale redevelopments, not the kitchen and bath?

Kitchen and baths are similar, if not superior yields.

Okay. Great. Thanks.

Thank you. Our next question comes from the line of Rob Stevenson. Please state your company name followed by your question.

Morgan Stanley. Good afternoon, guys.

Tom, or Martha, can you talk a little bit about the challenges operationally in markets such as California, the southwest and Florida, where you've seen these massive upticks in foreclosures, as well as a bunch of condos coming back on the market as rentals?

You know, actually in California, our experience has been that that has helped us in terms of fewer people moving out or being able to qualify, so that tightening there in California has not hurt us.

I would say in Phoenix we are seeing -- if you were to go to someplace like a Craig's List, where people who are renting, if individual investors are renting condos or homes, we've seen quite a bit of uptick in the inventory available on Craig's List in the Phoenix market. So obviously you see that in the softness of the occupancy numbers in Phoenix and that's been a little bit of a challenge, but it has been a positive in California so far.

What about Florida?

Florida, as I said, you know, it's mixed depending on where the pocket is, but Orlando, again, there's a substantial amount of single-family home rentals in the market, and that's where I had said it would probably take six to 12 months for all that inventory to get absorbed in that market, because there's still quite a bit of job growth in Orlando.

So overall we're not concerned about it, but it has obviously impacted occupancies because there's just a lot more supply of other type products.

Rob, this is Toomey.

I'd add, I think there's two things that may represent opportunities in the second half of the year and lead into next year, as I think we're all still looking at the military and when that redeployment coming back will occur, and we see that as a plus for us. It certainly has been a drain over the last couple years, and that's going to reverse at some point, it appears.

And the second is, remind you that hurricane season in the southeast always represents an opportunity for construction activity and if we're fortunate enough not to take a hit, we'll get a lot of jobs out of that and a lot of activity and that will probably be a little bit of a burst in the second half of Florida's operations coming down the road.

Okay. And then Tom or Mike, do you guys own any stock in any other multi-family REITs?

Not that I'm aware of.

Personally, or the Company?

No, no, the Company.

Personally, or the Company, Rob?

The Company. And the reason why I ask is that you're trying to do a bunch of opportunistic stuff in RE-3, and, you know, if you go back a couple of years ago, Archstone made a big profit on buying somebody else's stock and [riding] it up because they didn't have to worry about the leverage of buying back their own.

Yes.

And so I mean if you, if you guys are confident that the cap rates are going to remain low, and that, you know, that these assets are worth significantly more than where the stocks are trading today. I mean doesn't it at some level pay to, you know, buy somebody else's stock rather than your own given the leverage issues of buying, of having to pay down debt?

I would answer -- this is Toomey. I would answer it the following way, Rob. It's a fair question. No, we do not own stock in other companies today.

Second, would we? We have not entertained that at this juncture. What we feel is, is we know our company. We know what it's potentially going to do and there's people that are much better at that than we are, and I would rather focus on our company and our efforts to create value and we're not inclined to probably at this time look at other companies and take positions in them because we're speculating on their stock price. I think we can find a way to do (inaudible).

How high are you willing to -- are you willing to leverage up to buy back stock if the stock continues to get cheaper for a short period?

Rob, we have taken the position that we do not want to throw our balance sheet out of whack, which is why we are selling assets and trying to match the buyback with the asset sales. But, you know, as discussed, I mean we had a big asset sales program in process and assuming it all comes to fruition, which we fully expect, it will allow us to buy a lot of stock.

Okay. Thanks, guys.

Thank you.

John?

Thank you. Our next question comes from the line of [Tai-Ben] Kim. Please state your company name followed by your question.

Credit Suisse. I just have one quick question.

In regards to your asset sale at Canyon Oaks, could you just give some more color behind that asset? Was it a development project?

Was the question the color on the Canyon Oaks asset?

Yes, that's right.

This asset was an asset that was developed by a third party developer that -- so it's a new asset and we bought it during lease-up. We saw an opportunity of value creation by getting involved in the lease-up and lease-up risk, which we thought was not much risk. So it was not an asset, we built, a third party developer built it.

Okay. And one more question.

I don't know if you're ready to answer this or not but your land (inaudible) in Dallas, just give some reasons behind why you would chose to keep and RE-3 versus balance sheet?

Yes, that's a good question. This is a master planned community. It will have several phases.

Included in that, we have a large capacity of zoning for our retail and office, which we see as sort of gravy to the transaction. Also, so there may be buyers that would come in on a short-term basis that would offer you an attractive price for a piece of the deal.

Also, it makes us, gives us more flexibility when we're seeking joint venture partner to know that we're not constrained by typical REIT holding period. So it just gives us the flexibility, when you've got that size of deal with multiple phases, you know, you have a senior family guy that comes in and wants a piece of it. If it's the right price, you would certainly have to look at where that would be a sale you would want to make and this RE-3 structure gives us that flexibility.

Okay. Did the city of Dallas give any kind of incentives on that project?

It's the -- we're working with the city of Addison on incentives right now and having very favorable discussions at this point.

Okay. Thank you.

Thank you. Our next question comes from the line of Rich Anderson. Please state your company name followed by your question.

Hi. BMO Capital Markets.

I guess to Rob's question, I would look at it the other way. You think anybody else owns your stock?

As Larry reminds me, we've got 270 shareholders right now of institutional grade, so if one of them does, I -- we don't know, Rich.

Any other multi-family REITs I mean?

None that we're aware of.

I didn't think you would answer me, so that's all right. Do you -- when you think about M&A, to speak more seriously about it, the, sort of the turbulence in the market, does that pretty much shut it off for now or does it create opportunities?

Well, I, think there's always opportunities. These companies, as we highlighted, we're trading at a 7 cap, where the private market is valuing assets that were selling at 5.

And 200 basis points are, in some respects, may be 30 to 40% below NAV is an extremely attractive buy and what we're trying to do is continue our position of selling assets, strengthening the balance sheet to someday taking an opportunity at that. It's got to fit us both from a strengthening under our strategies and our portfolio, and right now, we're not seeing that as our opportunity.

We see our opportunity as that we've outlined on this call. And so I'm not predisposed to be looking at a lot of M&A right now. Will it happen? I mean, heck, we've talked before.

In '94, there was 34 companies and you're down to 10 now and it appears a couple of them are going the go-private route. We don't want to particularly comment on particular companies or transactions. It's not our place. That's for shareholders to do and for guys like you.

Okay. And then just a modeling question.

The preferred dividends for the second quarter, is that, since you had some in and out for the quarter, is that a good number or is that going to go down in the third quarter?

It's going to go down in the third quarter. You had two months at the higher coupon and one month at the lower coupon basically. You just take $135 million times 6.75% divided by 4, it will give you the run rate.

I'm sorry. Two months of the higher and one month of the lower?

Correct.

Okay. All right. Thank you.

Thank you. Our next question comes from the line of Brian Lay. Please state your company name followed by your question.

Yes, Millennium Partners.

Can you all talk about, and by borrowing through Fannie or Freddie, what type of LVT can you get up to?

We don't generally push the high-end of the LTV range. I believe you could get 80% or more from those guys at some price but, you know, our generally our strategy has been to borrow more of the 70% kind of a range, you know, the venture partners we're talking to, that's more their target leverage range.

So we're, you know, we're trying to get the best combination of proceeds and pricing and particularly in today's market, the incremental dollars get very expensive.

And do you have a sense of where spreads would be? You said that spreads might be in the low 100s over treasury for, you know, in the 70, 75% range? I mean if you got up to the 80, 85% using Fannie or Freddie do you have any sense of where spreads would be?

You know, I really don't want to speculate on that right now. That's the wacky end of the debt yield market right now and--

Okay.

We have not been in the market looking for that kind of debt.

Okay.

And as far as instructing through Fannie or Freddie loans, can you get a large portfolio done quickly as really a substitute to going to the CMBS market, or is that a challenge?

You know, Fannie and Freddie have got huge teams of people in the field. They're very quick at underwriting. They know the multi-family business as well as anybody. They can underwrite very quickly if they are motivated to do so.

Okay.

And where do you -- given that cap rates, you're talking about cap rates in the low 5% range and debt costs around 6%, so clearly you have negative leverage there, particularly when factoring in real Cap Ex. How much do you think interest rates would have to go up to really impact cap rates in today's environment?

Well, I'll try to answer that question first by saying I don't know. But, you know, I think one thing, the way we step back and look at that rise in interest rate and cap rates is historically there has been a relation to rental rates and a rise in interest rates because that's tied into maybe what's, hopefully, what's happening in the economy.

There's been a historical lag, maybe six months before the rental rates catch up. So it may effect, obviously, there has to be at some point a correlation between the two, but you still have to look at where the growth rates are and does it ultimately effect valuations? The valuations could still remain healthy even with some uptick in cap rates as long as it doesn't get way ahead of where interest rates are.

Okay. And last question.

Tom, you talked about two companies going to go private route. Are you including Archstone in that number?

Yes.

Okay. Thank you.

Thank you. Our next question comes from the line of Richard Pelly. Please state your company followed by your question.

ABP Investments.

Guys, you made reference to the asset sales program that you have going on. You said you're exiting Atlanta and Dallas, excuse me, Atlanta and Denver. Are those -- what's the timeframe on that?

I remember you speaking about those in the first quarter call and earlier this spring. Could you just kind of give us an update on what the timing looks like and when those should be closing?

This is Mark, and we do have hard money up and we're set to close mid-September.

Mid-September. Has that been pushed back at all?

No.

Okay. Thanks.

Thanks, Rich.

(OPERATOR INSTRUCTIONS) We do have a follow-up question from the line of Mark Biffert. Please go ahead.

Hey, guys. Tom, follow-up on the M&A talk.

Can you address the potential for REITs purchasing other REITs, and if so, I mean are you guys interested in, you know, potentially in any of the other REITs where shares were trading well below their NAVs right now?

To be fair, there's just no comment I can give you on that.

Okay.

It wouldn't lead to much of a conversation.

Okay. Thanks.

Thank you. Our next question comes from the line of Craig Leopold. Please state your company followed by your question.

Green Street Advisors.

Mark, did I hear you right? I was a little confused when you were talking about the Bellevue acquisition. Was that made in RE-3?

We did make it in RE-3.

Okay. And does that have to do with the kitchen and bath remodel program and a possible flip of that asset?

Well, it's a smaller asset, and there is potential to move assets from RE-3 to the REIT, and also it has long-term condo potential. I'm not stating that's the current strategy, but we like to -- when we have these assets that have two or three options on them, either a K&B upgrade or possibly, you know, a condo strategy and that size of asset, it's a pretty good RE-3 play to keep those options open.

Okay.

And then just curious, on the kitchen and bathroom remodel, I mean given that it's an asset that was constructed in '01, did they just, in your opinion, under improve that asset or is this an actual, you know, case where the improvements really needed to be replaced?

It's really not under improved. When you walk a lot of apartments in this country, they're pretty nice kitchens, but it's a unique opportunity. There's a real high-end customer there, you know, people who have homes in the country, in the mountains who maybe want an apartment there in downtown Bellevue and some of them want to see some granite and stainless steel that we see might be a possible upgrade.

And there's other customers, but there's high-end customers in a small property like that that we see that -- but there's nothing -- the kitchens themselves are fine.

Okay. Thank you.

Thank you, Craig.

Well, with no more calls, why don't I close the call. My closing comments and thoughts, first I'd like to thank all the UDR associates for a great second quarter.

The fundamentals of the business are in great position. Investing in UDR presents an investment in a great platform in targeted markets with a team experienced in creating values in our four lines of business.

First is operations where our technology investments are leading to a competitive edge. Second, in the acquisition and sales where we've completed over $5 billion of transactions to shape our portfolio, where 30% of our 2008 NOI will be from California, 10% from Texas, Florida, 16%, and DC, 16%. And our average collections per home will surpass over $1000 a month.

Third is our development and redevelopment where our $2.8 billion of activities will deliver superior product and growth for the future. And fourth is our capital sourcing, where our utilization of a variety of capital sources will lead to superior returns on invested capital, coupled with a strong balance sheet will continue to ensure that our dividend grows. With that, take care.

Ladies and gentlemen, this concludes the UDR, Inc. second quarter 2007 earnings conference call.

If you'd like to listen to a replay of today's conference call please dial 1-800-405-2236 and enter the access code 11091944. ACT would like to thank you for your participation and you may now disconnect.