UDR Inc (UDR) 2007 Q4 法說會逐字稿

Good morning. Welcome to the UDR earnings presentation call. This conference call is being recorded today, Wednesday, January 30, 2008.

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

Good morning, and thank you for joining us for today's conference call. We will cover our fourth quarter financial results and discuss yesterday's announcement that we've entered into a contract to sell 25,684 apartment homes for $1.7 billion. The press releases the supplemental financial disclosure package and a set of Power Point slides were distributed yesterday afternoon, and are available on our website at www.udr.com. For the Power Point slides, which we will review during this call, click on the corporate tab on the upper right of the page, which will then take you to the page with the links for those slides. The link is labeled 1.7 billion portfolio sale supplemental material.

In the fourth quarter supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with reg G requirements. We'll begin the call with comments from management and then open the call to your questions. I would like to note that statements made during the 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 risk factors that could cause actual results to differ from those implied by forward-looking statements is detailed in yesterday's press releases and are included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Let me now turn the call over to our President and CEO, Tom Toomey.

Thank you, Larry, and again, welcome to this call. Joining me on the call today is Mark Wallis, Mike Ernst, and Jerry Davis. I have some prepared remarks and then we'll open up the call to questions and answers. Again, I want to highlight that we have a Power Point presentation, which I will use in my comments, and I encourage you to pull that up. It is at udr.com under the corporate tab and encourage you to get that while I prepare - give you my prepared remarks.

As Larry stated, we issued three press releases last night, one dealing with a $1.7 billion portfolio sale. The second, the fourth quarter and full year financial results, and the third was our share repurchase program, which has been expanded. We will cover all three on today's call in detail, but before I get into individual ones, let me talk about the fourth quarter operating results, which first were in line with our expectations at $0.43 before a one-time charge of $0.03 for restructuring. A lot of that related to just both the portfolio sale and corporate-wide review of the organization. We did not record any gains on sale in RE 3. I think everyone is quite aware that the fourth quarter was a turbulent financial time and liquidity was not available, so a number of transactions did not occur. And what I consider the highlight of the quarter is NOI growth of 8% on a healthy near 5% revenue line, and achieving an operating margin of nearly 70%. So in summary, I thought it was a very good quarter. I thought Jerry and his team did a number of great things in our marketplaces, and the company did well.

Let me now turn my comments to the portfolio sale, and before I turn to the Power Point, I would like to just give you what I feel is probably hard to pick up from the press releases, which is why did we do that, what with were we looking at and how were we thinking about the portfolio sale? And I think there are three things that were overwriting in our thought process about this transaction. First was to take advantage of the public first private valuation arbitrage. I mean, clearly we sold a hand picked portfolio of assets that we would classify below average compared to the remaining portfolio out of 6.5 cap rate and we can certainly talk about how to calculate cap rates. When the stock was trading at a greater than 7% cap rate, I think that is capturing that public to private valuation was critical to us. The second was in a period of time that we have today, where liquidity is tough to come by. Financial flexibility was critical in our view and so we wanted to create more financial flexibility for our future, in particular to acquire assets, complete our development, redevelopment efforts, and certainly repurchase shares. And the third, focus the company. Focus the company was important in our long-term view in executing our strategies. So with that, why don't I turn to the Power Point and I hope by now all of you have it.

First, on the cover, clearly the topics, we have six to cover today. First up is the portfolio sale and go through the details of that transaction, including the benefits. Second is to talk about new UDR and the characteristics of our portfolio. The third, our development activities and pipeline. Fourth is the redevelopment effort. Fifth is the corporate realignment and related charges, and our outlook for 2008.

Page number 2, certainly I chose the title transformation for growth because I think in the end when you get done with this presentation, you're going to realize we have transformed UDR. And I think we're very excited about that future and look forward to it. The transaction, first, we are selling a little over 25,000 apartment homes for $1.7 billion. The buyer is DRA and they are partnering with Steven D. Bell to run the assets. They are expected to close on March 3, which is pretty close to 30 days. That's a tight close. We're comfortable that they will get there. We'll talk about how much money they have up and the likelihood of closing, but we are very confident they will close. What will they close on? First, a portfolio that has an average rent of $744 a month. We calculate the cap rate at 6.56. That's trailing NOI, less $650 a month in CapEx, 650 a door per CapEx, and a $2.75 management fee. Clearly, we believe these assets have historically consumed more than 650 a door, and we'll get into, I'm certain on this call a little bit more about cap rate conversation. The average age was 24 years. This represents the selling price of $67,000 per door.

What will we receive and when? On March 3, we expect to receive $1.5 billion in cash and a note receivable with a fixed rate of 7.5%, with maturity of six years, locked out for prepayment for 14 months. Certainly the 7.5 is a higher coupon than could be obtained in the mortgage market, and so we expect to be paid off in 14 months.

What will we do with the capital? First, acquisitions, we've got $500 to $600 million that we're targeting, of which $320 million is already under contract in targeted markets and expected to close the first week of April. We expect to pay off debt, $500 to $600 million, leaving us cash between $300 and $500 million at closing and a note receivable $200 million. The benefits of this transaction certainly a stronger portfolio for growth. We will have a little over 44,000 apartment homes in 10 states with an average rent in the fourth quarter of $1,163 a month, which we expect to grow past 1,200 a month, with an average age of 15. We believe that this portfolio had less capital requirements than the prior enterprise, and certainly has better exposure to the right demographics and job growth.

Again, the other benefits we see, capturing the arbitrage between public and private, generating the ability to buy back our shares on an accretive basis, reducing our debt and creating further financial flexibility, and I would note that we expect to continue to maintain or grow the current dividend, and certainly the ability of our development, redevelopment will have a greater impact on a smaller enterprise. And lastly, we have completed the right-sizing of this organization, and it will not be a lingering thought or effort on our part.

Let me now turn to Page 3. Characteristics of the portfolio, contrasting it, where it was as of December 31, where -- what is sold and certainly what a new UDR looks like. Highlights in my view, as an operating margin of nearly 70%, and an average monthly rent of $1,200 a month, and you can see how that compares with an old and new UDR to our peers, and I would highlight on the bottom the recurring capital expenditures as a percentage of the NOI. You can see certainly the assets that we sold had a disproportionate amount of capital that was being spent on them.

Page 4 highlights the portfolio before, what assets are sold by state, and there is a detailed list now on our website of every community that is being sold, the details related to them, and certainly the new UDR. Certainly a focus that I think we'll get into in the Q&A is California, now representing 41% of our 2008 NOI forecast, Florida at 19, and Virginia, DC and Maryland combined are nearly 25%. So when I back up, I look at the enterprise and say that nearly 90% of the enterprise is California, the DC Corridor, or Florida, where we see long-term growth, job formation, all in positive territory. And certainly we can understand where Florida is today and we'll discuss our view on that later in this call. This is a -- if you will, a hand-picked portfolio. We looked at every asset from the perspective of its rent, its margin, its exposure to its submarkets, its exposure to competition, its future capital requirements, and we chose this portfolio. We're very excited about what it does for us, both in the short-term and its long-term potential.

Moving to Page 5, I want to discuss -- I think we continue to read a lot about development and how people view it. We have always had a cautious stance on development and we do have a planned $2.6 billion program with our target being $400 to $500 million annually, with targeted returns of 6.5 to 7%. I think it's important -- what I would call a transitional part of the cycle to understand what your exposure is to development and we measure exposure in terms of how much is leasing up, where it's leasing up, how much is under construction, and certainly how much of it's generating NOI and how much of it is making dirt. And we provided that detail. You can certainly see that one, we feel very comfortable that our pipeline is being delivered into the right markets at the right time. With the current $400 million coming online in '08, 80% of that is being delivered in Southern California, Texas, or DC. And looking at '09, 80% coming on in Texas, Southern California and Seattle. So, we think we're delivering the right pipeline at the right time and we'll be -- Mark will give you an update in terms of how the lease-ups are going.

Moving on to Page 6, our redevelopment efforts and we feel this is one of our strengths, certainly one of our better value creators, with targeted returns of 8 to 10%. A lot of our efforts in the Florida, Virginia, Tennessee and Maryland, Texas markets are coming online in '08 and will help our earnings and certainly we are now more focused on the West Coast where we believe we have an active pipeline under review and you'll see us start delivering results out there in '08 and '09.

Moving to Page 7, in connection with both the portfolio sale, we really completed a top-down review of the organization, as well as a bottom-up and looked at it as if we were starting over, where would we go and how would we align our resources, what areas did we not have enough resources, and literally took the enterprise apart and concluded that first and foremost, we needed to change the corporate office, the Denver, that in fact it had been here but we just needed to recognize that. And second, that we needed to realign a lot of our resources around our key drivers and our business leaders. Dallas is now about 80 individuals and represents the core of our development effort. Richmond is our focus for redevelopment and some back room support functions and has approximately 80 people as well, and then you have Denver with about 80 dealing with corporate, IT and finance, and financial reporting. In connection there with in the fourth quarter, we took a $3.6 million charge, which we would believe generates a $2 million annual savings but become -- creates a more efficient and effective UDR. The table at the bottom, I think, shows that we're pretty sensitive to our G&A, as a percentage of our revenue and very comfortable with it relative to our peers.

Page 8, certainly we look back in the November 5 and gave guidance in a core of our portfolio, as well as our RE 3 gains, and as you can see without the restructuring, we were right at the target level for our core, with no RE 3 gains and certainly post restructuring, we are $0.40 for the quarter. What else would I say, I think you look at the operating results by region and you can see that on revenue line, the southeast continues, which is primarily Florida, could be weak, but the rest of our regions are very strong in revenue growth. Jerry will probably comment later on the call about how January and '08 outlook are. I thought again, it was a good fourth quarter, performed where we expected, certainly in the market through all of us a curve ball as it relates to capital and liquidity.

Page 9, let me tell you, we've got a lot of moving parts which make it extremely difficult at this time for us to provide '08 guidance. First, we would like to get the closing of the sale done. Second, we've got some acquisitions under contract, as well as others that we're underwriting. We would like to have firmer grip on that. hare repurchase, certainly we have the authorization and the financial fire power to do so, and then the potential for a special dividend in connection with this transaction we've got an $840 million tax gain. We believe we can cover a lot of that in a number of ways, but there is a potential for a special dividend. Though we provided overall guidance as it relates to our same store sales outlook and other key assumptions on our CapEx per door and our G&A, and certainly you can see our market outlooks. There's a number of what I would call very solid markets, some extraordinarily hot markets and again, we think Orlando and Tampa probably will have a negative for '08.

One other highlight about the outlook for '08, given this capital environment, we do not believe that giving guidance on RE 3 gains is practical. That's not to say it's not a good effort, but we've always entered into that effort saying, if someone paid us the right price, we would sell an asset. We think it's very difficult in this capital environment for us to see some of those gains, so if we do lock in on a few, we'll tell you about them, but we're not providing any guidance on that area. So with that, I think what you'll see is the transaction fits our strategies in terms of strength in our portfolio, expanding our RE 3 capability, implementing an operations platform, which we call 2.0 and sourcing low cost of capital. In the transaction fits all of these strategies and helps us move forward as an enterprise. I think you'll find the rest of us are extremely excited about completing this and that it is an opportunity to create a new UDR and we're excited about that UDR. So with that, I will now open it up to questions and appreciate your time. Let's go.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Dustin Pizzo with Banc of America Securities Please go ahead.

Hey, good morning. Tom, just first on the portfolio transaction, I mean how much of a spread do you think that there is between the assets that you're selling and the remaining portfolio on a cap rate basis, and then also if you could just comment given the changes in the Capital Markets, I mean where do you think these assets would have traded 6 to 9 months ago?

Well, the spread between what we sold and what we think we have left balancing it all out, I'll ask Mark his opinion. I think it's probably 150 basis points, maybe 170.

I would say 170.

I mean, I think the portfolio post, if you look at 41% California, 25 DC, I can't find anything in that market that would trade north of a 5.

Okay.

I think Florida representing 20% of the enterprise is probably in a market that's probably trading 5 to 7 range. Do the math, you're probably at about 4.8 to 4.9 range.

Okay, just--

Where would they have traded ?

What's that?

Where would they have traded six months, a year ago?

Yes.

I think a couple things. Six months ago, this portfolio doesn't trade because frankly there was no lending, no capital available. And so zero's your answer. Wouldn't have traded at all.

All right. We'll call it 9 to 12 months ago, then.

Prior to that, my view is probably trade about where it is. I think what you got, you got NIOs that improved and this portfolio probably 5% over that time where in capital costs, Fannie Freddie lending practices are about a 5% at 75 to 80% loan to value on this portfolio. You do the spread. It probably trades at about 6.5. It hasn't moved a lot over that timeframe. I think it went way down and has come back up. Mark, you got a viewpoint?

No, I think that's right and I think that there's somewhat of a uniqueness in trading this as a large portfolio that we got a good auction and that we might not have gotten nine months ago. In fact, I don't believe we would have. So, I think certainly it's the same, if not slightly better.

Okay, and then with respect to DRA, it sounds like they are funding it through Fannie and Freddie at about 80% leverage, 5%?

Well, I don't want to speak for them, but our understanding of their financial structure is something along the lines, 75 to 80% Fannie financing at 5 or less on a 6 to 7-year piece of paper. And they have our -- and they have now rate locked with Fannie and have hard money up with them and by Friday of this week, they will have $25 million up hard with us. We're comfortable they are going to close. And for a company that uses a lot of leverage, we think they have got a good deal and they hit the market. I think at about the right hour almost in terms of their rate lock and their financing. So, it's a good deal for them as well.

Okay.

One of those few transactions you back up and look at and say I think both parties want. They got something out of it they wanted and we're excited about it and think they are good operators and I know a lot of our people are on the call and I'll tell you, we picked them. I think they are a good operator, Mr. Bell and his team.

Fair enough. And then, just turning over to the same-store guidance real quick. I mean, I'm not saying you have any better flexibility than anyone else, but what kind of broader economic assumptions do you bake in there for job growth and GDP growth, and maybe you could just elaborate on how you kind of view the world right now?

Well, that's kind of asking me to pour the Mississippi River into a tea cup and try to explain. I'm not much of an economist. And so, I've always kind of been a person that says when you throw a blanket over big numbers like job growth of a million next year, what you really have to realize is somewhere in the U.S., its 2 million jobs are being generated and a million jobs are being lost. Where I want to be is where the 2 million jobs are being generated. And so, we're very encouraged about our particular, for example, Southern California portfolio, because a lot of it's right up within 2 to 3 miles of the beach and so that's where people want to live. We're very encouraged about the DC portfolio, primarily because we're inside the beltway or we're on transportation hubs.

Florida, we understand that it is a weak market today, but over the long-term, given its taxes, its job growth, its diversity of the economy, it is going to be a booming state and we felt that it is important to hold our presence there and we sold what we thought we had extracted all the value out of. So, a lot of it, I know it would be great if I could say, gosh, we think it's GDP of 1.5, I couldn't tell you how the 1.5 or 1.7 would drive down into the markets. What I can tell you from the bottom up, which is how we run our business, looking at individual assets, our exposure to jobs, our exposure to the long-term aspects of investment, we're very excited about the markets that we're in. And we think we've picked them not just for the short-term, but the long-term and picked the hand picked the assets. I think that's what's important about the transaction to us. And I think out there, you back up and say how do I view the world? One, it's an election year. People need to realize election year, as you see it all the time politicians want to make you feel like you need change and so they talk down everything and that's to drive you to vote for them because they are going to make it all better. The second element is I'm encouraged by the feds and a lot of other people taking action, even the government, stimulus package, cutting rates, trying to get this economy going a bit. Third, I can't identify a lot of employers or industries that are frankly softening that we have exposure to, so I don't worry much about it. That and the financial markets, we certainly see lenders coming back to the market, just slowly and at higher prices. So, I think the [log jam's broke]. It's just going to take time to start moving capital freely. So, I'm more of an optimist than a pessimist about the future but I don't want to keep going into much of that. I said, it's like pouring the Mississippi River into a tea cup is too hard to do, why don't we move on.

Sir, just a last question. I just want to followup on Southern California since you mentioned it. I mean, would you attribute kind of what appears to be somewhat more aggressive guidance than your peers out there who has also giving guidance to the better locations as you leaded.

I'll let Jerry speak.Yeah, I agree with what Tom says about our geography. As you know, Jerry run that operation up there for three years with Number One in the market for three consecutive years. First, I would tell you it's him but I'll let him add to that.

Yes, I agree with what Tom says a better geography. We have 4,100 units in Orange County. The bulk of it is located in Newport beach, Huntington beach, and Costa Mesa, a few miles within each other. So, we have good concentration. We have great people and like Tom said, we're near some jobs but we're really located where people want to live.

So, I think we did a great job years ago buying these deals and that's what makes the difference between our portfolio and everybody else.

Okay. Thanks, guys.

Thanks, Dustin.

Thank you. Our next question comes from Jonathan Litt with Citi. Please go ahead.

Hi, it's Craig Melcher here with John.

Craig, how are you doing?

Good.

Glad to hear it.

The -- 500 to 600 million, what type of rate do you expect that debt to be paid down at?

Well, you have $200 million of bonds that are coming due in March that are at about a 4.5%. You have our line of credit, which currently is about a 4, and then we have a couple other pieces of debt that are at considerably higher rates, in the 6s that don't add up to huge numbers, but probably $100 million of debt that will be in the 6s.

Okay. In terms of the cap rates on the deals you're currently looking at or the ones you're under contract, how are they shaping up?

The ones we have under contract today are an average of 5, 5 cap, and we're looking in the West Coast from Southern California, Seattle, concentrate on metro DC. Those cap rates are in the 5s, probably low 5s in those markets. Southern California, as Tom mentioned, is going to be sub-5. And we see -- we have one opportunity we're looking at in the North Dallas market near the EDS Corridor, very -- it's a nice high end multi-use project, and that's about a 5.8 cap on that one. So, that's the range we're looking at.

And Tom, you mentioned that the on the DRA assets, those assets you think would be at the similar price to 9 or 12 months ago, but on these assets you're looking to acquire, have you seen any movement in pricing over the last 9 or 12 months that's made you say this is the time to buy rather than either buy back more stock or pay a special dividend?

Well, I mean I think we've seen some movement in cap rates. Now, these are new assets, in-field locations. There's still competition for these, but I think its 20 to 25 basis point improvement is there today. We'll just see how that plays out as we go forward. But there's not a rapid increase in cap rates. Certainly in California, they still remain low. A slight improvement in the DC market and the rest of the West Coast is still pretty competitive.

Craig, I would also add that a lot of the acquisitions we're looking at, in fact all of them are 1031s.

Right.

So, the drive behind that is not -- we're holding to our discipline. I mean, it's not just to go out and say lock up a bunch of assets. It's really to be focused around what is our investment philosophy and to follow through on that. And so, we've known this transaction's been in the works and frankly for six months have been shopping, which has been entertaining because there's very few people in the market. And feel like we've negotiated pretty strong pricing on assets, but we found good values and we think this announcement strengthens that. I think the only asset that we would say that are probably mispriced in the market today are probably assets in lease-up and while they might be short-term and dilutive, the reason they are mispriced is because Fannie and Freddie won't lend on a lease-up. And so those assets probably represent the best value and buys and we'll keep hammering away and looking for that type of opportunity.

What type of financing would Fannie and Freddie give on a lower cap rate asset, the 5.5 cap rate? Would it be lower just cash flow in the assets compared to the --

What's interesting is Fannie is generally for the an asset quality driver. What they are is a coverage cash flow driver of their lending practices, and they are kind of a gradient lender in terms of you could borrow 60% or up to 80% and you're going to pay at different points on that curve and different maturities. But, you know, we think, for example, we let DRAs speak for themselves, but we think they hit it at the trite time and that was one of the things for us was the treasury market went weak there for four days. We accelerated the pressure on the bidders and said you guys need to all come up because this is not going to last, and so we think they got it done under 5 at 80% loan to value, or 80% loan to purchase price for six years. That's a decent piece of paper. Where would that be today? Probably more at $5.25 or better. So, as long as Fannie is lending at those levels, those rates, I think all this talk about cap rates is just circling a bad number. The fact is we've demonstrated a transaction and it was financed and there's a lot more of these to come. Not from us, but in the marketplace.

My question's just on your NOI growth guidance, the 5 to 5.5. If you wouldn't have sold these assets, how would that have looked, just to get a sense of the difference in the NOI growth, expectations for what you're selling versus--

I would have shaved 100 basis points off of it that I would have told you would probably be more at the 4 - 4.5 range on the NOI line. That's probably my view. Jerry, you got --

I think that's accurate. I think the rent growth is a little lower.

Thank you.

Thanks, Craig.

Thank you. Next question comes from Christine O'Connor with Morgan Stanley. Please go ahead.

Hi. Thanks, good morning. A question on the $200 million note receivable. Were the transaction had been feasible without you guys issuing that note and how did you arrive at this 7.5% interest rate?

The 7.5% was just the negotiated rate. The transaction certainly would have been feasible without the note. Having the note was helpful to us in terms of the tax structuring and being able to manage the very large gain that Tom referred to earlier. One thing about the note is that it has recourse to a very substantial entity, as well as security in the partnership interests of all these properties. So, we feel that it's a very secure note and as Tom mentioned earlier, we fully expect that to be repaid in 14 months.

Okay, and on the $2 million of cost savings from the restructuring, should we expect that to appear in the G&A line, or in the operating margin line?

That's really G&A right there.

Okay, and last question, on the same-store expense guidance for next year, 3 to 3.5%, it seems like the last two years you've been in the 1 to 2% range. So, just wondering what's driving the acceleration there.

Jerry?

Yes, I can tell you a big part of it is the past couple years our insurance expense has been down just because we've had good experience. You know, we're self-insured and we haven't had that many claims and they haven't been that extensive. So, those are up a little. Our utilities this past year were virtually flat. Some of that was because gas rates were down 3.5%. We expect gas is going to go up about 3% going forward. Personnel expense, this year was slightly down. Again, a lot of that is related to our healthcare and workers' compensation expense, which is also self-insured and we had good experience. We're hopeful that will happen again next year, but we can't count on it, so where it was flat last year to slightly down, we're budgeting for personnel to be up 3.5 to 4% in 2008. And our admin and marketing in 2007 was down about 7.5%. We think in 2008 the decline's going to be more moderate. We've -- over the last two to three years, been getting out of print publications and we're virtually out of all of those. So, it's hard to keep cutting.

Okay. Thank you.

Thank you. Next question comes from Mark Biffert with Goldman Sachs. Please go ahead.

Hey, guys.

Hi, Mark.

How are you?

Great.

Good. In relation to the joint venture that you guys have, you still have another $300 million on that and when you look at your acquisitions over, say, the next six months as you try to reinvest the proceeds, how do you decide whether it goes into--

The joint venture has a first look opportunity and any properties that are in Texas. Outside of the state of Texas, you know, we can show them things. I think in the short-term while we're trying to get these 1031s covered we probably will not show them that many things outside of Texas, but certainly anything in Texas, they will get first look at.

Got another question, Mark?

We're going move on. Our next question comes from Richard Anderson from BMO Capital Markets. Please go ahead.

Hi. Thanks and good morning. Congratulations to you.

Thanks, Rich.

The -- I guess we sort of screwed this up in our note, but when you talk about NAV creation and the sort of the cap rate calculation and backing back in management fees and CapEx and all that and looking at an apples to apples type of cap rate on this transaction, can you quantify or take a step at what type of NAV creation you think this transaction, in and of itself, does day one before you sort of consider the growth potential, the remaining portfolio?

Well, Rich, I mean it's hard to say that the transaction by itself creates NAV. I mean we sold them at a market price. I think where the NAV creation really comes in is the opportunity to buy the shares back, where we perceive to be a significant discount to NAV.

Okay. So, but I mean when you look at the are, sort of an apples to apples cap rate, would you say, you know, it's in line with your implied, where your stock is trading on an apples to apples basis?

No, no way. I mean if we do an internal NAV calculation, and we don't discuss our number with people and we're not going to do that here, but if you look at the implied cap rate at last night's closing price, based on our NAV model for the stabilized portfolio, it's north of a 7%. Using the same methodology of taking the 650 a door out and taking the 2.75% management fee. So, for the whole company, we're north of a 7 at the stock price today. We sold what is sort of the bottom tier of the assets for 6.56. I mean I think it's -- as you said in your note, the math works.

Okay.

And the market, realizing that we're shopping the market hard, in these targeted markets that we now have our company concentrated in, and you and Harris mentioned a whole hell of a lot about fixed caps or -- it's a low between a 4.5 and a 5 kind of cap rate for this portfolio on a go-forward basis.

Okay. In terms of use of proceeds, it looks like maybe you have like $500 million after the acquisitions and the debt paydown that, at most $500, that you have to deal with, and maybe you'll buy back stock, you'll acquire more, or you'll have a special dividend. It's interesting to me that $500 million divided by $22 a share is $22 million shares, which is the amount of buyback opportunity you now have. Is that a coincidence? And the question is--

Rich, you're good.

The question is how much of that buyback can you actually do and sort of keep in a comfort level from a leverage standpoint?

Well, this transaction provides us the opportunity to do a lot of buybacks if we choose to. Now, will we go out and do $500 million of buybacks? You know, if the stock goes to 18, we might. But I don't know that we would do that level certainly quickly, but it does -- we would have the capacity to do that.

Okay. So, a special dividend to the extent you do it's probably something in the $200 to $250 million range, something like that?

I think that would be, I'm doing the math in the top of my head here, but that would be the high side.

Okay. You mentioned, Mark, I think, about the auction process. Can you just sort of characterize how big of a process it was beyond DRA, and their partner, you know, how many other players were involved in this process?

Well, I'm going to let Tom could probably weigh in on this, too, but we started with a select group of over a dozen players, probably close to 15, as I recall. And they all looked at the portfolio. Then we narrowed that group down to about half a dozen, and then in the last 30 days, I think probably I would say about four emerged as strong players and then got it down to two. And so, the auction was really run from that four down to two. And then as the -- I think we anticipate this probably taking a little longer. Probably another 20 to 25 days out, but when the debt market started moving favorably, we accelerated the auction process and asked everyone to really step up and see what they could do. Tom, you may want to add to that.

Richard, here's some color that I think would help. First, Mark got it right in terms of number of players, but let's talk about competition. In the final four, we're down to two foreign capital and one pension fund advisor and one levered buyer. We really tried to create a marketplace for this transaction, so we did five months ago with Fannie's help, is we started underwriting each individual asset with them on what would be their loan and getting in. In fact fronting the dollars to have them do the physical survey, the title work, so that we would present to this auction group a pre-packaged here's your loan, here's your pricing grid, with Fannie, and in essence put them on equal footing because they had locked up -- in essence knew where they could get their financing. And in today's market, you talk about people buying and selling without the financing. No deals are going to get done. So, we took that approach. It came down to four. In the end, I would tell you we had pricing power. We were running them against each other and in the end we picked the group that we thought, A, highest degree of certainty, good price, and we went for that. And feel good about the process. Certainly, we used [Marty Chico] and his team and felt that Marty helped us keep it quiet as long as we could and effectively it was a good conduit of communication. And I'm proud of the process. I thought it worked very well for us and I'm grateful for Fannie and his patience and help in this transaction.

Okay, and then just a last question on the internal growth prospects for 2008 with this new portfolio, 5-plus percent. I am just curious, is that sort of a number that, I mean, is that -- is that what you see now? Is that sort of maybe not hair cut or sand bag or anything like that, but sort of taking into account some sort of what could happen in terms of a recession? I'm asking because your peer Essex, who is almost entirely California is in that same range. And so, I just was wondering if you can reconcile your thought process for internal growth in 2008.

You know, Keith and I haven't gotten together and compared notes by asset. So, I can't really speak to his guidance. What I can tell you is that year in and year out, I look back at our guidance range on operations and then I look at how Jerry or the operating team has delivered it. And I recall last year people looked at it and said you gave 6 to 8 and we ended up at 7.2. I'm very comfortable that this team knows how to run its real estate and it is comfortable enough not to sand bag me, but push and get these results. So, I think that's it. Providing the markets, you can certainly see that everyone would say Portland, Seattle and San Francisco are going to be north of 10. And I think they would all agree. I think the disparity will probably be Southern California, where we've discussed in detail where we think we have a better located portfolio, and I think the surprises next year are going to be Dallas, Texas is going to be a strong market next year, or this year, excuse me. The negatives, I think we're all anticipating Orlando and Tampa to be negative this next year. So, if we were to take out the bottom 20%, which would be in the Orlando, Tampa, the Florida exposure, you would probably find us another 100 basis points up from this.

Got it. Okay.

I don't think that's optimist. I think it's a realist built up from the bottom up and the assumptions utilized, you know, we got one month already in the year and we're doing better than our budget already.

And you hand picked Florida, Tennessee and Arizona markets like that because with a longer-term perspective, you know that the short-term doesn't look so great.

That, and wells the redevelopment potential -- specific locations. It was a nice, it was a nice opportunity to just go through and hand pick everything and say this is what we really think we can do something with in the future. And I can't stress that enough. It was a top -- we looked at every asset in that -- and we really have a plan by asset over the next five years about how to ring out value out of them. Any comments, Jerry?

I agree with your comments about those locations. You know, in Phoenix, three or four years ago we owned 3,500 units there. We peared that portfolio down and for last couple, we have three extremely well-located assets right now.

Okay. Sounds good. Thanks very much.

Thank you. Our next question comes from Michael [Demler] with UBS. Please go ahead.

Hi, guys. Just wanted to get a little more clarification on the notes receivable. You said it was a 14-year expected payoff, is that a hard maturity?

That's 14 months.

14 months.

There's a hard maturity that is -- would be underlying debt, which has a six-year term, but there is incentives and we have every reason to believe that when it becomes open to prepayment in 14 months, it will get paid off.

Okay, and you said that was an unsecured note?

Well, it's secured by the partnership interest and all the real estate here, plus a guarantee.

So you have direct title to the real estate?

Well, we don't have direct title. We have security interest and the partnership interest that owns all the real estate.

And my follow-up is, in terms of sales transactions today versus 12 months ago, what would this note receivable have been 12 months ago? Would it have been bridge equity, would it have been mezzanine debt? How would this deal have been financed?

This, this note receivable is really not comparable in a lot of ways to what you would typically think of as a mez note because of the recourse aspects. We have a fund with 1.2 billion of equity that is fully liable for the note and we think we would be comfortable with it totally unsecured if we hadn't had it that way, but we have sort of the security interest is gravy. So, typical mezzanine note is non-recourse, so very hard to compare.

The only reason I ask is first time we've seen a note receivable as part of a transaction proceeds in quite sometime.

Yeah, Michael, you're as old as I am. We used to live on these things. Number one, it's a tax strategy. Number two, it's a capital. You know, Mike and I, and Mark look down the road saying $200 coming in 14 months from now. We like our chances to redeploy that and again it might be short-term earnings dilutive, but in the long scheme of things, $200 million of fire power 14 months from now has got a lot of option although for it.

Okay, thank you.

Thank you.

Thank you. Next question comes from David Bragg with Merrill Lynch. Please go ahead.

Hey, good morning. Just back to that revenue growth guidance question again. Does that include an impact of yield star expected?

Not really. You know, we would expect to get those earnings with or without yield star.

Okay, and Jerry, what's your take on operations so far this year, specifically in Orange County and Central Florida?

I can tell you so far this year, and with January kind of in the bag, we're performing at our budgeted plan. You know, revenues in the, up in the 5 to 6% range. Central Florida, it's struggling, as you would expect with roughly flat revenue growth.

Okay, and we notice that you dropped a redevelopment project I believe in Tampa. Is that just indicative of how tough that market is?

It was part of the 1.7 sale.

Okay. Sorry?

It was a quick way to drop it. We sold it.

Yeah, that's easy. Just the last question for Mark. Could you just touch on your lease-ups right here in this environment, and on your future developments in Southern California, what are your targeted yields?

I think we've had the targeted yields in our supplement on Southern California in the high five range. What's going on in lease-up right now is the product we're delivering in Texas, first of all, and it's been very strong. I mean we're -- we typically budget lease-ups 20 homes a month in lease-up and we're running at 30 down there. And we're meeting for former rents. Those look very strong. We have a pre-sale in Orlando. Traffic's good, activities is good but our concessions are higher than we predicted two years ago, but we like that long-term asset and the replacement costs due to the impact -- higher in the future, so we're very comfortable with that property. But Texas looks very strong. Our Southern California project, we turn the clubhouse open in the March-April timeframe and we expect very good results there. And that's submarket.

Okay, thank you.

Next question comes from Jeff Miller with JMG capital. Please go ahead.

Hi. I just wanted to get a proforma combined kind of outstanding debt and your average combined interest rate going forward, assuming the transaction closes.

Well, if you look at the numbers, I don't have that proforma interest rate going forward, but if you look at the numbers I talked about earlier, I mean we're probably paying down debt that has an average coupon in the high fours with the $500 to $600 million that we're going to be paying off as part of this transaction. So, if you factor that into the debt numbers in our supplemental package, you can get to that number. And we'll be paying down as we indicated $500 to $600 million right away with the proceeds.

Right, okay. So you can't give me, then, also just the, you know, carving out of 40% of your portfolio, you can't give me that updated debt number at this time? Not complaight the 500 to 600 million of debt paydown. Just trying to get an idea of what kind of portfolio you have now going forward, what kind of leverage you'll have.

Okay. What kind of leverage -- okay. Yes, there's a million different ways to look at leverage, but when we think about it, we generally think about debt relative to what we believe the private market value of the assets are. Pre-transaction, you're kind of in the mid-40s. Post-transaction, you're kind of in the 40% debt to private market value of the assets.

I think you got a fixed charge is kind of how we also look at it on a proforma basis. We're, what - over 2.3 to 2.5 and more over 2.5, something like that.

That's correct. One clearly, we continue to be committed to maintaining the rating and believe that this transaction on the back side of it strengthens that rating and we think having access to undersecured market when they come back will be an important part of our strategy. So, we're not throwing in the towel on that front by any measure.

Right, thank you.

Thank you. Our next question comes from Karin Ford with KeyBanc Capital Markets. Please go ahead.

Hi, good morning. Just a couple quick ones. Are you guys out marketing anything in RE 3 today?

This is Mark. I'll answer that one. There are assets that we are not currently marketing today. We do have one asset that's development side in Southern California that we have talked to people about, but it's not formally listed. We will have certain assets in the development pipeline that we expect once they get stabilized we'll be approached about and so I don't anticipate us widely -- having to widely market those, as Tom said, usually we are approached by people offering us a price and then we see if we can create a small quite auction on those assets, but nothing other than that one asset is being in a marketed place today just because where the market is.

Okay. Next question, am I correct to assume that it sounds like your strategy on reinvestment of the proceeds is to minimize the special dividend piece, if necessary? And under what scenario will you guys be forced to pay the special dividend? What level of acquisitions?

Well, Karin, as usual, you have asked a very insightful and thoughtful question and it's one matter that we'll take up with our board. As we see it today, clearly in the case of what we identify in 1031, we've got $500 to $600 million as a target. That would cover $340 to $400 million gain, that pulling the dividend forward, we would cover another $200 and with the note, we defer 100. So, all that being said, and it's similar to Richard number, you know, on the outside if we were to just estimate that plan, you're looking at $200 million of uncovered gain. We would like to be thoughtful about what we buy and we see that as the outside number. We'll keep shopping it. As you know, 1031 windows, you got 45 days to identify and you got 180 to close. So, we're not going to have a definitive number for sometime. Our strategy is not to try to focus on minimizing it. It is try to focus on the strategic advantage and opportunities in the market and if we are not able to adequately disploy the money in a prudent, thoughtful way, then the special dividend is a relevant and important thing to recognize that discipline. We're just not at this point comfortable with that range and we would like some time to execute. And we'll tell you exactly how we're coming out and give you updates first when this transaction closes about where we stand, so we'll be back on this call about a month from now and tell you about the transaction closing and where we stand then. So, I think that's all I could really tell you right now, but again, I think it's a very thoughtful question.

Okay, thanks. Final question, do you care to estimate what the impact of this transaction's going to have on your payout ratio?

Well, first we start out with one of the lowest payout ratios in the industry, which, and that gives us comfort in being able to make the statement that we see no scenario in which we would cut the current dividend. And exactly where we come out, we're not going to drive it down to 100% or anything like that. We think that should have a prudent coverage. Where that comes out ultimately is a matter that we'll take up with our board and be able to give more clarity on in the near future.

One other note on that, Karin, is that the portfolio that was sold to he reiterate had a much higher percentage of capital expenditures. So, when you look at the impact on AFFO, it will be much less significant than it will be on any potential impact on FFO.

Just to give you the back of the envelope numbers there, because I think, if you look at 650 a door at 65,000 doors, into $145 million share count, you're about $0.29 charge. We currently look at basically the future and say you got 40,000 - 44,000 doors at $650 on a different share count, that's about $0.20 a door, $0.20 a share. So, you're picking up $0.09 in AFFO coverage and to also emphasize I think one of the questions we probably have it covered is the CapEx on this portfolio that we're selling last year ran over $1,100 a door. So, it was disproportionate in terms of what we were spending on it to the remaining portfolio. We're comfortable with 650 going forward, primarily because you look at the age of the portfolio. It's now down to 15 years and probably will continue to get a little bit younger as Mark's development pipeline and our redevelopment pipeline get executed. So, I think we're maintaining a good discipline in that area and in fact have completed five-year capital plans for all the assets and feel comfortable with that level. So, you should be able to pick up $0.09 in the AFFO in our opinion, which when you run that through your models, you're going to see that dividend coverage is probably pretty adequate.

Very helpful. Thanks.

Thank you. Our next question is a follow-up from the line of Mark Biffert. Please go ahead.

Hi, guys. Sorry about that.

No, you're back!

Yeah, Page 5 in the supplement there, I guess not the supplement, but the release that you went through.

To our point?

Yes. You guys talk about your potential increase in NAV and you kind of give a sensitivity analysis there. When you look at your targeted returns as you go up on your sensitivity analysis, it really crimps your spread there. I'm just wondering, how do you look at development, when does it become unattractive, given the risk premium, you know, that you should -- most developers put onto development?

Well, I think we've talked about this rule of thumb in the past, and of course they are never hard and fast. It's still deal by deal, submarket by submarket. But you like to see, if you're looking at specific market, 150 basis points going in premium for the risk factor, and I think that's pretty well how everyone looks at that. And one thing about development, what we are able to deliver is known product in the mix we want, the design we want, the quality we want, and the long-term durability of the product and that's a factor in there, too. There is some risk on the acquisition side when you buy an asset and you do all you're due diligence. As everyone knows, and there's some risk in setting those budgets, too, and what you thought that yield could be. We've had good results there, but there's also that you weigh into all those risk factors. I think it's generally 150 basis points, what's your submarket, what's your long-term growth in some of those markets. Obviously, some markets like Southern California, you see tighter yields because of the rent growth and the land itself cannot be replaced and that land deflate in value and that drives some of those spreads tighter.

Okay. That was my only question. Everything else was answered. Thanks.

Thank you. Our next question comes from from Alex Goldfarb from UBS. Please go ahead.

Good morning. Just a quick question on the portfolio repositioning. Are you guys now complete with repositioning the portfolio and also is there any further changes incorporate restructuring, like relocating of offices, or are both of those items complete now?

With respect to the restructuring, I believe we're done. We really have taken our time, took six months really looking at it, and said this is the best way to run our enterprise in the future, where we want to go. In terms of asset sales in the future, we will certainly not be out marketing assets, but if we get an offer that's an out of body experience, I'm always glad to hit that, but we probably won't be marketing assets for sometime. We think we're very comfortable with this portfolio and its prospects, but you want to always be disciplined in this area, and if there's a chance to cash in on value, we'll gladly take it as well.

Okay, and with regards to the special dividend, have you given thought whether it could be a stock special or cash special?

You know, we're considering that. I would not say we've made any decisions. As Tom said, we need to talk to the board. I want to understand better the option of doing the stock dividend and the impact of that. So, it's not out of the question, but it's certainly not a given that we would do a stock component to it.

Okay, and then my final question just relates to Fannie and Freddie. Certainly they have gotten a lot of attention as lenders for multi-family these days, and given that spreads from other lenders are higher, do you see any chance that Fannie or Freddie may start to take advantage of their position in the market and increase the rates they are charging for lending?

Well, they have already increased their spread a lot. I think the great rates we're seeing is really because of the treasury is dropping. But their spreads are probably 1.75-ish. So they have already widened out quite a bit. I don't know whether they will widen more. I think they take their mandate to provide financing and liquidity for housing pretty seriously. So, I doubt they would ever be in a position where they are trying to squeeze the last nickel out of the market.

So if -- with like other lenders, like life companies, et cetera, charging -- do you think those lenders will come down or do you think they will be that big 100-point basis point gap between borrowers.

There's always been a huge gap between Fannie and Freddie and the other sources of financing out there. I mean if they, Fannie and Freddie are very tough to compete with for the right kind of product. I think there are certain things, as Tom alluded to earlier, lease-ups and maybe the very high end of the market, where they are less competitive, where the -- CMBS guys can play more, but for the sort of, you know, main stream kind of stuff that we do and that most of our peers do, there's nobody that can really compete with them.

Thank you.

Your next question comes from Paula -- with Robert W. Baird. Please go ahead.

Thank you. Just one question. Could you characterize the assets that you are seeking to acquire, and in particular the ones already under contract? Terms of their being either fully positioned in their markets, redevelopment opportunities, lease-up opportunities, et cetera?

Well, the ones we currently have -- we have two really newer products. One's three years old. The other is two years old, and this would be instructed parking, four-storey kind of product. We have one product that's high-rise that could either do -- we could either do a moderate renovation on. We're looking at maybe doing this actually towers. We might do one tower more extensive renovation in the future. So, and the other product that we are also looking at is generally a product that's similar in-fill with a structured parking, four-storey kind of product. And we're looking at some of that in the California markets. So, the answer to your question is generally newer product in-fill locations and where we call that Texas rapid rise.

Thanks very much.

Next question comes from Michael Salinsky with RBC Capital Markets. Please go ahead.

Good morning, guys. Real quickly, could you provide us with an update on your condo business? I noticed the page there in the supplemental is not there this quarter.

This is Tom. It's just become an insignificant part of the enterprise. I mean certainly at this point, we've got three communities, one in Tampa, one in Arizona, and one in Southern California. And what we're seeing is good interest in Arizona and Southern California. Tampa's a little slow right now. What you have to realize is all three of those were operating apartments that we've leased the apartments, and then what we do is we pull off 10 a month and if we sell them, then we pull off another 10, but it's really an insignificant part of the enterprise on a go-forward basis. And I think that's prudent capital and time management on our part.

Okay. That's fire. And then real quickly on your outlook for '08, you provided kind of acquisitions and dispositions there. Could you talk about your plans on the development front in terms of spending?

$400 million coming up out of the ground on an annual basis. That's pretty much the number I would put in there, is 400 and then on the redevelopment, I would put another $75 million on that front.

Yeah, I think those are good gross numbers. I think on the development side, there's probably 100 or so of that, that will end up being funded through venture partners, so the actual dollars out to us will be a little bit less than that.

Okay. Thanks, guys.

Thanks, Mike.

Thank you. And management, there are no further questions. I'll turn it back to you for closing comment.

Thank you, operator, and all of you for certainly your time today. I know it's a big day in the market, with seeing where the feds go. What I can tell you is that I'm very excited. The entire team is excited about where we're headed. I mean this is a great portfolio. This is a company that has financial flexibility and it has the skills to use that financial flexibility in terms of development, redevelopment, acquisitions. So, I think you're getting the best of everything you can get in this marketplace with UDR. An experienced team, with financial fire power, the opportunities identified and stuff that we know how to do. And I think this transaction is a culmination of really seven years of effort, in putting this portfolio and this company in the right place, with the right value create and the right team.

And with that, I would say I'm grateful for the teams that were operating the assets that are sold. We're not across the goal line. I'm grateful for their efforts, and for everyone else that was dealing with the organizational restructure, as well as this sale. It's been a very, very busy period of time, but I think what wee feel is very positive about where we're headed and relieved to get this done. And with that, there's a lot more to communicate as we go forward. I think you'll find us, as always, very forthright in what we see, what we're trying to do, and why. And with that, I always encourage you to just pick up the phone or call us and we can only help you make a better decision, but we're excited about it and, again, thank you for your time today and all of you, good luck.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time, you may disconnect.