UDR Inc (UDR) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the UDR, Inc. first quarter 2008 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded Tuesday, May 6, 2008. I would now like to turn the conference over to Larry Thede, Vice President of investor relations. Please go ahead, sir.

Thank you, and thank you for joining us for UDR's first quarter financial results conference call. Our first quarter press release and supplemental disclosure package were distributed yesterday afternoon. In the supplement we have reconciled all non-GAAP financial measures to th most directly comparable GAAP measure in accordance with Reg G requirements. Our press release and supplement is posted to our website, www.udr.com. We'll 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 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 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.

Before I turn the call over to management for comments I want to highlight that we will hold an investor day in Washington, D.C. on Monday, June 2nd. Senior management will discuss the Company's business strategy, performance and future outlook beginning at 2:00 p.m. on June 2nd at the Doubletree Hotel, Crystal City. Cocktails and dinner will follow that evening. The next day on June 3rd we will host a property tour of three apartment home communities. The tour will conclude prior to noon, allowing guests time to travel to New York for the NAREIT conference. To register for the event please go to the investor relations section of our website.

Let me now turn the call over to our President and CEO, Tom Toomey.

Thank you, Larry, and welcome to our call. Joining me on the call today is Mark Wallis, our Senior Executive Vice President responsible for investments and development; Mike Ernst, our CFO; David Messenger, our Senior Vice President and Chief Accounting Officer; Jerry Davis, our Senior Vice President of operations. We have a new member to the executive team on the call today. Let me introduce Warren Troupe. We announced in February that Warren had joined us as Senior Executive Vice President and general council, but frankly he may have had one of the longest interviews on record at nearly seven years. You see, Warren has been our outside general council since 2001 and has been involved in all our transactions over the years. Topics to cover on the conference call today is operating results. Jerry will focus on fundamentals in his prepared remarks and will respond to specific market questions. Investment activities, including an update on development, redevelopment and acquisitions will be Mark Wallis. And the status on the portfolio sale, use of proceeds and guidance for the year will be Mike.

Let me begin with our view of the economy. It certainly seems like we have been in a recession, whether you measure it by GDP or business sentiment. Who knows when it started and when it will end, but over the last 60 years we've seen ten recessions lasting 16 to 18 months each. While they are never the same, they usually are focused around specific sectors or geographies. We believe this is true with this recession, specifically the financial and home building sectors leading the downturn. We believe this recession will be below average in duration for a variety of reasons. History will also point out great opportunities are born during recessions and inflation periods. UDR is in a position to take advantage of this environment in three ways.

First, capital. It is hard to find and will cost more. This will not be a challenge for UDR. With the portfolio sale we have funded our development, redevelopment and debt maturity through 2009and have zero outstanding on our line of credit. We will also be paying a special dividend later this year in the $130 million to $190 million range, or $1 to $1.50 a share.

Second, we have transformed the portfolio focused on 22 markets. As many of you know, the right market position and price point are key. Let me highlight three statistics based upon our NOI weighted average portfolio. Supply. First, economists are forecasting a record-low multifamily single-family delivery in 2008 of less than 800,000 homes this year. Amen. Price point. Our average monthly rent of $1,200 compares to an entry level condo in our markets, which would be $2,000 a month payment and entry level house of $2,400 a month, meaning even further drops in housing prices should not represent a great threat, if anyone can qualify for a loan for those homes. And lastly, jobs. 19 of our 22 markets posted positive job growth in the first quarter. While the U.S. is expected to lose 120,000 to 200,000 jobs in 2008, our portfolio is expected to have zero job growth with a weighted average unemployment below 5%.

And third, an experienced team, True none of us have seen all of ten recessions, although we have enough gray hair to prove we prospered during many of them, coupled with our strategy, we believe we're positioned to create shareholder value. And again, I want to extend a personal invitation that our investor day on June 2nd. You can see the details on our website and we look forward to seeing as many of you there as we can.

Let me now turn the call over to Jerry Davis.

Thanks, Tom, and good afternoon, everyone. I would like to give you some brief commentary on our first quarter operating results. Revenue was up 5% at 32,342 apartment homes that we classify as same-community homes. Expenses actually decreased by 0.5%, resulting in NOI being up 7.7%. The revenue growth is the result of effective rent growth of 3.6% and an increase in occupancy of 60 basis points from 94.0% last year to 94.6% this year. 15 of our 22 markets had higher occupancy year over year and 19 of the markets had higher revenue. We completed our Yieldstar rollout in the fourth quarter of 2007, and to date we are pleased with the results. In addition to our 4.7% growth in net rental income, we also enjoyed an increase in utility reimbursements of 15.9%.

The expense growth was -0.5%, due entirely to insurance expense in the first quarter '08 being 73% lower than last year. Because we are self insured up to a limit, we've benefited in first quarter '08 from very low loss experience compared to first quarter '07. Last year we had heavy losses caused by several large fires in the first quarter. In addition, we rewrote our insurance policy late in 2007, which resulted in a reduction in our premium of about 6%.

Administrative and marketing costs were also down 1.8%. Increased administrative expenses this quarter were offset by a 19% reduction in marketing and leasing costs as we continued to pull out of print advertising and push more of our marketing efforts to the internet. During the fourth quarter -- I mean during the first quarter 46.7% of our move-ins originated through the internet compared to 35.2% last year. Utilities were flat, in large part due to the relatively mild winter. Repairs and maintenance expenses were up 3.8%. Personnel expense was up 4.1%. Real estate taxes increased 4.2%.

We have seen our resident turnover drop in the first quarter to an annualized rate of 50.2% compared to 51.7% in first quarter '07. Move outs to home purchases were 13.0% in first quarter '08 compared to 16.02% in first quarter '07. This quarter our traffic has increased about 10% to 20% year over year, due predominantly to our increased efforts in internet marketing, as well as in mid-April we completed our full portfolio rollout of the level one call center. Level one now handles all prospect calls after hours, as well as handling rollover calls when our associates are busy helping our residents and are not able to answer the phone. So far the second quarter is tracking well within our plan. Our physical occupancy last Tuesday, April 29th, was 95.1%. That compares to 94.4% in the same week last year, an increase of 70 basis points. This gives us confidence that we'll have good pricing power as we move into our prime leasing season.

We're very encouraged by our first quarter results, but for the most part they were in line with our expectations. We feel that there is still quite a bit of uncertainty in the economy for the remainder of the year and we do expect revenue growth to ease. We know that we also can't count on the continuing favorable insurance claim comparisons every quarter. At the beginning of the year we gave operating guidance of 4.4% to 4.5% growth in revenue, 3% to 3.5% growth in expenses and 5% to 5.5% growth in NOI. We're still comfortable with those ranges. In closing I would like to thank all the UDR associates who worked so hard to stay focused during this first quarter. Even while being distracted with the portfolio sale of approximately one-third of our apartment homes, they were still labeled to turn in industry-leading results.

Now I'd like to turn the call over to Mark Wallis.

Thank you, Jerry. I'm going to speak to our core strategy, the first one, which is to strengthen our portfolio, and I believe we made significant progress in the transformation of UDR's portfolio that began with the $1.7 billion sale that closed at the beginning of March. Now we are involved in the execution of using those proceeds for 1031 exchanges and I want to briefly review the $580 million acquisitions that we closed this quarter and then I'll briefly touch on our development and redevelopment activities.

First, community -- is a community named Edgewater. It's located in the Mission Bay submarket of downtown San Francisco. Now the Mission Bay redevelopment area is an area that will include the headquarters to the California Institute of Regenerative Medicine, a 2.65 million square foot research campus for the University of California San Francisco, six million square feet of office life science and tech space, and ultimately that's going to create over 31,000 new jobs in that submarket. Now we own 1,800 homes in the metro Bay area. That's now our third largest market from an NOI measurement standpoint, with 497 of those homes located in downtown San Francisco. This gives us a property near the location that's in walking distance to Giants stadium and all the restaurant and retail amenities that make this location one we want to own for the long term. Another plus about this property, that unlike most San Francisco properties it does not have the required below-market rental element in the unit count.

The second community we acquired is known as Delancy at Shirlington Village in Alexandria, Virginia. This property has great visibility and access. It's located just south of the Pentagon off I-395, the major highway that likes Northern Virginia and downtown Washington, D.C. It's easily accessible from I-95 and is in close proximity to employment centers, such as Crystal City, the Pentagon, Rosalyn and the Eisenhower corridor. This is a new product with loft, mid-rise and high-rise homes and it's located within walking distance to just under 600,000 square feet of office space that's currently 97% occupied. This community has an attractive streetscape with retail amenities the renter of the future will expect. You can go downstairs to a gourmet grocer, you can buy a Starbucks, you meet friends at a restaurant, once you're home you don't have to get back in your car. And with this [infill] location you've avoided the typical D.C. commute of up to two stressful hours. The property was in lease-up when we acquired it and provided opportunity for us to purchase without the typical competition we face from leveraged buyers who now really can't buy this type of lease-up property with GSA money and have to wait until stabilization.

The next acquisition was located in the Baltimore market, in the heart of Towson adjacent to Towson Town Center and that central employment area. This property was built in 2003. It includes a structured parking garage and it's adjacent to Towson Town Center, which is a premier shopping destination with quality restaurants. Again, you're at home, you're close to all you need without having to get back in your car. This property has excellent visibility on Delaney Valley Road that carries over 40,000 cars every day. We believe, too, there's a percentage of kitchens that can be converted to a more upscale finish that will provide extra future rent growth.

Circle Towers is a mixed-use development contained in three high-rise towers located in Fairfax County, Virginia. The property is located in a highly-desirable area near the Vienna metro station at the I-66 corridor and just outside of the 495 beltway. This is the only residential high-rise product in the Vienna metro market and the mixed use design again provides for renter needs, needs that you can meet without having to get back in your car. There's more than 15 million square feet of office space located within a three-mile radius of the site. This property was constructed in the 1970s. We will redevelop it and it will be done by our team, headed by [Richie Geonaute], who has successfully done extensive redevelopments in this region. The incremental rehab expenditures should produce incremental rates of return of 7% to 8%.

Legacy Apartment Homes is located in Legacy Town Center, one of Dallas' newest premier mixed-use developments. This consists of three apartment communities that provide urban-style living, with 40 restaurants in the area, 450,000 square feet of retail and office within walking distance. The adjoining Legacy business park provides a solid job base with a number of Fortune 500 companies. Some of those names are Frito-Lay, PepsiCo, EDF, AT&T Wireless, JCPenney, all of which supports the need for apartment housing in this area. This is a vibrant kind of -- it's kind of an uptown Dallas-type area, but it's located in the west Plano job growth corridor.

The Place at Millennia is our first closing under our presale program. Again, this product is in walking distance of an upscale mall where you arrive at your apartment and you can reach the entertainment and restaurants and retail there within walking distance. This property is in lease-up. We leased 30 homes last month, which is a respectful number for what is considered a soft market. We've completed our 1031 exchange identification process and we expect to purchase an additional $375 million to $425 million of apartment communities that will close by August 30. We have identified properties that are primarily located in Northern and Southern California and in Seattle, and they're in submarkets that complement our existing portfolio.

Now up on our development activities we continue to complete our redevelopment communities and turn them back over to operations. This has been a success and we will have sharper focus in the future on the Northern Virginia market, especially Circle Towers, which I mentioned, and upon assets in California. Our $2.6 million pipeline provides UDR with long-term growth potential. However, we believe that we are managing that pipeline judiciously and with careful restraint. We have only 6% of lease-up and 35% under construction. With 50% -- 56% of the pipeline producing income, we can be patient in our timings and we look forward to a recovery in the economy in the 2009-2010 timeframe. Our yields remain in the original range and construction costs are not inflating beyond projections.

Also want to point out that we obtained approval from the city of Addison for a contribution of $39 million for infrastructure and amenity costs of our development in [Addison]. This development is located strategically near the important intersection of the north Dallas toll road and the LBJ freeway. The location puts residents within six miles of some 11 million square feet of office space and the high-paying jobs that fill that space. And if you extend that corridor now to the George Bush toll road, an additional 7.7 million square feet of office space is added to that number. Another important point, it's 20 minutes from the DFW airport and only 15 minutes from the Love Field airport. With the city of Addison approving their funding, we anticipate the Phase I construction commencing this summer.

That's my comments regarding our investments and development activity and now I'll turn the call over to Mike.

Thanks a lot, Mark. Let me start by updating everyone on the uses of the cash from our $1.7 billion portfolio sale that we closed about 60 days ago. On March 3rd we received $1.45 billion, which was the sale proceeds net of the mezzanine loan of $200 million, closing costs, and then there were two small deals that were delayed due to lender approvals. We closed one of these deals last week and expect to close the other one in the next 30 days. Of the money we received we useD it in the following ways during the quarter. We acquired $580 million of assets, as Mark has outlined. Our cash balances increased by a little over $350 million. We reduced debt and other liabilities by about $350 million. In addition, we bought back during the quarter 4.8 million shares at $23.33, a total of $112 million, and then we bought another 500,000 shares back since quarter end. At this point, with the state of the capital markets and our considerably higher share price, we're being cautious about additional repurchases, but we'll keep you updated in the future on those. We also spent about $60 million during the quarter on development and redevelopment capital expenditures.

At the quarter end, as Tom mentioned, we had nothing drawn on our $600 million line of credit. We had about $400 million of cash balances. For most of March we had about 100 -- we had about $1 billion of cash on our balance sheet, because most of the closings that Mark described actually closed right at the end of the quarter, so that was extremely dilutive during the course of the month of March. We were very cautious on how we invested the funds because of all the uncertainty and the "safe investments" that we've seen over the last few months, and unfortunately we were only earning about 2.5% on the cash during the quarter. One other thing to note, because these properties closed right at the very end of the quarter -- in the last three days basically -- there was very little income that came off of those during the first quarter. As Tom mentioned, if you look at our cash sources and uses over the next couple of years, we have identified sources for basically all of our committed capital needs, including our development pipeline through the end of 2009, so we're feeling very good about our position on that front right now.

During the quarter, we closed a $240 million two-year bank term loan facility with a group of nine banks. We swapped $200 million of this loan at a 3.61% rate for two years, and the remaining $40 million is flowing at LIBOR plus 85. We used the proceeds to retire $200 million of 4.5% bonds, which matured in early March, and for various other corporate purposes. Tom also mentioned the special dividend. We believe the range is $130 million to $190 million. We will nail that down by the end of August when the 1031 exchange periods expire. We are contemplating whether we will pay part of that in stock, and we'll make that decision later this year depending on a number of factors, including our share price at that point, attractiveness of other investment opportunities, and the state of the capital markets.

With our sale now closed and the benefit of a couple of months to analyze how all the pieces are coming together, we have reevaluated our forecast for the year and are lowering the top end of our guidance to $1.55 from $1.60. The significant factors leading us to reduce the top end are the lower returns that we're getting on our cash investments, the increase in our stock price, which has made it -- the economics of the share buybacks somewhat less compelling than we originally modeled, and then we're buying some assets that are in lease-up that we think are great investments, but create quite a bit more dilution in the short term than we were originally expecting. As a reminder, our new guidance range of $1.50 to $1.55 per share is for core FFO only and does not include any potential gains on sale and RE-3. By our numbers the current consensus on the Street of $1.54 has about $0.03 of RE-3 gains in it, so the comparable number's $1.51. And then as Jerry mentioned, we've not changed any of our operating guidance for the year and he's still confident that we will be in the range we outlined last quarter.

That concludes my comments and I'll turn it back over Tom for for any closing remarks.

Operator, we're now ready to take call -- questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Your first question comes from Michael Bilerman with Citigroup. Please go ahead.

Hi, it's Craig Melcher here with Michael. Can you talk a bit on the -- who the sellers of the assets that you acquired so far in the first quarter?

Mark, do you want to --

Yes, I can give you some general information, respecting some of their wishes on disclosure. The asset in San Francisco was a -- part of the Millis [Chap] Group sold that, a developer there in -- a private developer in San Francisco. In -- let me go through this list here. The one in Shirlington Village, another local private owner there. Towson Town Center was a group that had acquired this asset -- another private group acquired the asset probably about ten years ago and have been operating that themselves, so it has not -- a smaller management company there. Legacy Apartment Homes, which maybe you're familiar with, Shaw Development group built that property, which was actually part of the original Columbus REIT. Great developer down there, excellent product. And then the Place at Millennia was a Lincoln property company.

Okay. Do you have a blended cap rate on the acquisitions that you did and also the acquisitions that you're planning on over the next few months?

Yes, the blended cap rate's probably going to be in the high fours.

That's current or --?

That's current.

And where do you --

There's upside in that number, obviously, as we -- some of these have got some lease-up upside and some management upside.

And so high four's on the existing ones you bought and on those targeted ones that you're anticipating, that other $350 million to $400 million?

Yes.

And Craig, just to clarify, that is net of CapEx.

Right, right.

So the actual FFO impact would be higher than that, yes.

Is that -- what type of CapEx and/or management fee are built into that?

We built in our typical 2.75% management fee unless there's some areas where that may need to be modified based on additional staff or whatever, but that pretty well's how we run it. And on -- all this product is new product, but we run it at basically what our standard CapEx is for the whole Company, even though generally they'll be less than that for the first couple years.

Okay. And just two income statement items, probably for Mike. The income tax expense line and the subsidiary interest -- or investment income, if you could just comment on those two items and what we could expect for the balance of the year (inaudible)?

Well, the income tax expense is actually a -- that's a benefit that was realized because there weren't a lot of gains on sale during the first quarter so you had the ability to recapture prior-year's taxes paid. And I'm sorry, the other line item you mentioned, Craig?

The -- it was also on the FFO add back, the subsidiary investment income.

That's a pretty small number. It's $374,000. Okay. I think it's related to one of the joint ventures.

Okay, thank you.

Our next question comes from Jay Habermann with Goldman Sachs. Please go ahead.

Hey, guys, how are you?

Great.

I had a question for you. Obviously on NOI growth, you're clearly running pretty strong level year to date. Based on the occupancy level you cited up until the present, I'm just curious what sort of assumptions you're building in to get to your full-year guidance. What are you assuming if you're maintaining your occupancy level, is it really a function of a deterioration in job growth in the back half of the year?

Not, not a whole lot of that. A lot of it is we just finished up last year so strong it's more difficult comparisons to last year. We're still a little concerned about some parts of Florida and the Inland Empire is weakening a little bit for us, but everywhere else right now we don't see the job growth really hurting us in our markets.

Okay. And obviously the pickup sequentially in expenses, can you just provide some more detail there? And I guess in general you've been pretty good at keeping expenses under control and what do you anticipate moving into the balance of the year? Is there still more to go there on expense control?

Well, first, I'll discuss your sequential increase. The biggest part of that was real estate tax and sequentially we're up 15.7%, and we accrue taxes throughout the year based on our estimates of rate changes and reassessments and then when we get the final tax bill, typically near the end of the year, we true it up or true it down. And luckily in 4Q '07 we had to true it down because we were accruing at too high of a rate. What you're seeing right now is first quarter '08 we're accruing at a rate that is 4% -- 4% to 5% higher than all of last year. Because we basically reduced our accrual in fourth quarter '07 it looks like a huge increase. In addition, we had gas expense in first quarter for heating that was 50% -- 57% higher than in 4Q. And I guess the last component is in fourth quarter of '07 we had extraordinarily low healthcare and workers' comp expense in our personnel lines and we had more normalized loss experience in those this quarter.

Now, going forward we, we still feel like the 3% to 3.5% expense growth is in line, as I told you in my opening remarks. Personnel's up about 4%, R&N is up 3.8%, taxes, like I said, we think are going to be up 4% to 4.5%, utilities we're hopeful are going to be in the 3% to 4% range. So we really -- we don't anticipate great savings, but a lot of it does depend on our insurance -- our insurance claims, since we're self insured up to a limit.

Okay, just one more question. In terms of the kitchen and bath and the upgrades -- the renovations you're doing to your properties, what are you seeing from the competition generally in your markets?

We're--

In terms of the same activities?

We're seeing them do what they call a kitchen to bath, but we don't think they do it as well as we do. Lot of times they'll just change the doors or paint the cabinets, change the countertops. We do a kitchen and bath we replace the entire cabinetry. We also go in and typically put in -- we put in all new appliances, do a lighting upgrade, and change out the flooring. So a lot of people's K&B is, let's pull the old doors off, put new doors on and paint the boxes.

Okay. And just for Mike, are you assuming any share repurchases in the guidance for full year -- additional share repurchases?

No, the current guidance does not have any additional share repurchases. However, obviously we may very well do that, which would provide upside.

Okay, thank you.

Thanks, Jay.

Our next question comes from David Bragg with Merrill Lynch. Please go ahead.

Good afternoon. Just another income statement question for Mike here. Could you talk about the other income line, what are the components of that in addition to interest income?

You know what, David, I believe most of that is interest income off of the $1 billion of cash that we had sitting on the balance sheet for a good -- well, for most of March. You also have one month worth of income on the mezzanine note. That runs a little over $1 million a month. And I don't think -- I think that was really most of it. There may have been a few minor miscellaneous things.

Okay, thanks. Then looking at the development page, Mark, could you just run us through real quick the expected commencement of deliveries -- or the commencement of lease-ups over the balance of this year?

Yes, I can do that, and I'm going to refer to -- I'm over on schedule 8, if that's what you're looking at.

Yes, or 8-B actually.

Yes, 8-B, that's correct. If you look at Tiburon, that one is in lease-up and we expect that to be stabilized probably by the third quarter. Lease-up's been going very well there. [Atruvian] Park will just be commencing construction, same thing on 14th street. Mission Viejo has not commenced construction, yet. Signal Hill will commence construction in the second quarter. Laurel Wood, we just turned two buildings there and opened the clubhouse, so that lease-up has just now begun, and the rate of lease-up down in Houston that's been 20 to 30 units a month and we're hitting a good period. There's a lot of jobs out there in that whole submarket, so we expect that to go well.

Belmont is just commenced construction in the last quarter. We have not commenced on Waterside Towers. We have started a grading work at the Residence at Stadium Village, so there will no be lease-up -- not be any lease-up this years. [Reache] Phase II, I would expect based on all the pads have been poured on that site and we're going vertical on two or three of them, so we'll start lease-up there probably in the -- probably end of the third quarter we'll have buildings turned and the clubhouse ready to go. That's -- and then Jefferson and Reno Del Rey, which is our joint venture with JPI, the clubhouse is now open and we started turning units and gotten the permits to do those COs there, so that has commenced lease-up in the last three weeks. And then -- let's see, the project in Orlando, which really, I guess, isn't our development page, but was, we're in lease-up there. Today we're probably about 58% leased at this point. I think I covered all of them, unless I've left one out.

No, I think that's it. Thank you. And then just lastly, Mike, what's your expected redevelopment spend over the balance of this year?

It depends a little bit on timing of some of the starts later in the year, but I think it's only about $60 million, $60 million or $70 million.

Yes, we'll -- I don't think we'll top over $60 million just based on timing and permitting. Some of these are getting in -- some of these western California markets the permitting process is just more prolonged, so that'll probably keep some of the $60 million or less range.

Yes, we're really at the point where we're finishing a lot of the stuff that was in the first phase and we are getting ready to identify some new ones, so there will be actually a little bit of a lull during the course of the middle part of this year on the redevelopments.

And then you would shift towards California?

That's right.

Is that correct? Okay. All right.

And I mentioned we'll still do some work in the Northern Virginia markets, especially Circle Towers.

Okay, thank you.

Our next question comes from Rich Anderson with BMO Capital Markets. Please go ahead.

Thanks, and good afternoon. Good morning.

Yes, it is.

Morning, right, still? In terms of the stock dividend component, do you have any idea how much of it would be stock? Have you talked to investors about their interest in getting a stock dividend in lieu of cash? How much of this have you investigated so far?

This is Tom. Rich, I think what we've seen from large institution is a leaning towards stock instead of cash, but we're still out collecting input and always want to listen to our shareholders and be responsive to their desires. I mean we do work for them, so.

Okay.

That's where we stand on it.

Okay. If the stock were trading where it is today, would you be inclined to have a stock element?

Most likely, yes.

Okay. In terms of the buying activity, obviously you had some redeployment needs and executed on a lot of it this quarter -- this past quarter. How did you handle that 1031 redeployment pressure with making sure you got the best deal that you could? In other words, did you -- what was your pipeline of deals that you had to choose from so that you knew sellers weren't going to pressure you into a better deal for themselves?

Well, I'll comment on that first and Tom may have some comments on that, too. This is Mark. In the 1031 process you're allowed to identify assets over and above the dollar amount you ultimately spend and there's some specific rules there, but it -- let's say generally at least it's two to two and a half times the amount. So we've approached it where we're identifying a lot of quality properties and now we're trying to pick the best of several on our plate. And the ones that we closed, some of these we started work on before, obviously, the sale had closed so that we wouldn't be under that pressure. They were assets we wanted to buy and last quarter we mentioned the closing of Tierra Del Rey and Marina Del Rey, that actually was a reverse exchange that came into this $1.7 billion sale. So two things, we've identified properties early in markets that we wanted and then the second thing is we've identified more properties than we ultimately will buy and we're competing them against each other to get the best deal.

Okay, that was the point exactly, actually. So how do you feel -- let's say you weren't under any pressure to buy assets today. Do you think you maybe gave up the 25 basis points, the cap rate, or do you have any sense of what you could have done in terms of the negotiating process?

I'll answer it this way. I think any time you're making a number of purchases like this, they -- each deal has its own character to it and we're viewing it -- the way I think about it is, we're buying a portfolio in the end of $800 million to $900 million and how do we like that portfolio? How does it fit our Company? And so you have one -- I can think of one (inaudible) I think we've got 50 basis points better than I thought we would get. Another, maybe we're 25 basis points -- we paid maybe 25 basis points higher, but there's some benefits, that being adjacent to other properties, so Jerry's got the management benefits there. So I think it pretty well equals itself out, that's how it's been going so far. There's some high-quality properties here that we're buying at a good stage of lease-up. There's some upside in them, but we're not taking them at zero occupancy. So overall, they're balancing out. Some are up. Some are down, but overall we're pretty well where we want to be.

Last question. You mentioned the high fours cap rate with CapEx, et cetera in it, where do you think that number trends on an apples-to-apples basis once you get the lease-up properties to stabilization?

Well, I think pretty quick all these assets are going to be in the 6% yield range in the next, 12 months, 18 months. That's how we're forecasting this portfolio to perform. And I think Jerry's been pretty pleased with the assets we've turned over so far. We're hitting our numbers, and Jerry's team is very much involved in setting this process. The acquisition group just doesn't turn a property over to him and hope they hit the numbers. They sign off with us on these numbers and we go at it as a team, so --

Rich, this is Toomey, I'd just add a couple of things. And one time we made a decision last July to go after the portfolio sale. At that time we knew we were going to be a 1031 buyer, and Mark, we turned him loose and his team, Matt Akin, and really said, listen, lock up what makes sense and extend, extend, extend and keep bleeding the prices to make sense. And so a lot of these were assets that you'd -- if you'd look back at the contracts and the negotiations you'd find several addendums and you'd find that we strung them out to, A, ensure that the closing happened, but also sweating out sellers in terms of credit crisis, you're not going to find GSEs lending that much, and that was one tactic.

The second tactic was to really go after value creation efforts. The 1972 Tower, great deal, it's almost 100% occupied, haven't raised rents in ages on the darn things. We've got a real opportunity to add some value by rehabbing it and the other's lease-ups where the GSAs are not going to finance those deals. There's no money available. The only other buyer of those are going to be 1031 buyers or pensions and we didn't find a whole lot of people knocking on those doors. So we understood the market very well and think that in the end, it might have not been a great short-term earnings positive event, but a long-term value creation for our shareholders, and a lot of stuff that fit right in our strike zone in terms of markets, overlaid our new portfolio in terms of 22 markets, and in terms of value creation capability. We're not finding -- great buys in my opinion.

Okay, great. Thank you very much.

Thank you.

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

Thank you, and good morning to you. Just following up on the 1031 questions, can -- just looking at your 1031 balance on the balance sheet of about $350 million, can you just reconcile that to the $360 million or so that you've done so far?

Well, the balance that's on the balance sheet at March 31st is in accounts for future acquisitions. So it's March 31st, all the ones we've already done they've been funded out of the cash from the sale.

Okay. So the remaining balance of $350 million is also more 1031 money, it's not cash that it's free and clear?

That's correct.

Okay, because I thought earlier in some of the previous conversations there was an amount of money, maybe $400 million or so, that was free and clear cash above and beyond the 1031 needs?

No, the $400 million that I referenced was all cash, so it included the approximately $350 million that's sitting in 1031 accounts and then about $51 million that's just free and clear to do what we want.

Okay, okay. And then going on to the expense line, just two expense questions. One, when you guys do any bill backs for utilities or anything like that, is that netted out in the expense line, or is there a revenue line with an offsetting expense line?

It's a revenue line with an offsetting expense line.

Okay. And then on the self insurance, does all of that flow through the operating expenses, or does any of that flow through D&A or another nonproperty related line?

It's all operating expenses.

Okay, so whether it's a claim or an expense, it's all through operating expenses?

Yes.

Okay, great. Thank you very much.

That's an interesting question, does somebody do it differently, Alex? I thought if we were insuring property it seems like a (inaudible). That's all right, keep going.

Our next question comes from Steve Schulz with KBW. Please go ahead.

Thanks. Mike, with the increase in development activity ramping up here, can you just give me a sense of where capitalized interest was in the first quarter and then where it goes throughout the rest of the year?

Yes, I believe in the first quarter -- it's in the supplement. I believe it was $3.3 million, is that correct, Dave? It was $3.5 million, $4 million, something like that -- yes, $3.3 million in the first quarter. What we're expecting over the course of the year, I think what's in our forecast is it's about $4 million in Q2, $4.5 million and $5 million. Those are approximations in the third and fourth quarter, so it ramps up a bit over the course of the year.

Okay. And then you had mentioned a couple of the dispositions held over into the quarter. There's $50 million, or so, I think as held for sale on the balance sheet. Is that those properties, or are there other things held for sale?

There's a couple of condos that are still classified as held for sale. I think if you look at that $55 million number, I believe $35 million to $40 million of it was the other two properties left over from the big portfolio sale, of which we closed the larger one, so there's only about $10 million left of those, and then the rest is condos.

Okay. And, Tom, I think you referenced that basically you've got everything funded through 2009. Does that include any incremental sales from here?

No, it does not.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Our next question is a follow up from Michael Bilerman. Please go ahead.

(inaudible) question, the 500,000 shares you bought in the second quarter, where were those done?

The -- I don't have the exact number for those 500,000, but I know when you average those in, you're at $23.50 instead of $23.33, so they were up a bit higher, obviously as the stock price has gone up, and they were very much weighted towards the first couple of weeks of the quarter.

Right. And it sounds like given the stock at close to $25 your appetite to buy stock is completely diminished?

I wouldn't say completely diminished. I think what we felt is, it was the time to take a pause, take a look at how some of these 1031s play out, get a better gauge of how the capital markets play out over the next couple of months and see where we stand. I think we still like the price. I think we don't like it as much as $21 or $22.

Well I guess with your stock trading -- let's call it 6.3, 6.4 implied cap rate and these deals that you went into, high fours and hope to get to a six, I know there's some tax implications in 1031 decisions, but help me understand why you wouldn't be aggressively continuing to buy the stock if it offers a better return potential than going out and buying assets?

Well, you look at the return potential of the development pipeline and the rehab pipeline and it looks very compelling, even compared to the stock, and you haven't seen us go out and just buy acquisitions unless there was a tax-motivated reason to do it. And we think the tax issues are significant enough where it makes sense for us to do the 1031s in most cases.

Plus, we've also -- very cautious in the capital market environment. But if you're a company that's got to raise capital in this environment, you might be paying dearly for it and that doesn't look like it's going to ease any time soon. So saving capital's an important part of -- and creates an opportunity for the window.

Right. And I think, Tom, you had mentioned on one of the assets --of the assets you acquired they hadn't raised rents in, I think you said 20 years or something. Maybe you can walk through growth in that return from the high fours -- or is it low fours -- now I may be mixing up my own notes -- going to a six. How much of it's just leasing up those 200 leased assets, how much of it's rent growth, then just sort of splitting it out in terms of going out 12 to 18 months?

That's a hard question.

Well, I mean it's -- I'll try to give a general answer there as far as splitting it out. Probably there's 30%, 35% just lease-up improvement in there and Jerry is agreeing with that. And then I think the balance is just our team getting in there, putting our leasing strategy, our internet strategy on top of it and raising rents. And I mentioned, too, that there's a limited amount of K&B opportunity that will go down the road that'll help us get there. But I think 35% or so would be lease-up and the rest is just us working on it and our style of management.

Just getting up that monthly revenue number?

Yes.

And the monthly revenue numbers that you show, those are current, or those are your targeted?

I believe those are the current ones in the disclosure, yes.

Okay, thank you.

Our next question comes from Ryan Bennett with Lehman Brothers. Please go ahead.

Good afternoon, guys. I know you don't give earnings guidance regarding RE-3, but I was wondering if you guys were actively in the market with any assets from RE-3, and if so, what markets they would be in?

This is Mark. I'll answer that question. There's nothing active. Obviously at times you do get unsolicited offers. I will say, the (inaudible) we have a RE-3 in our Dallas and Houston markets. Those markets are pretty strong and we're just getting those to the point where it would be proper to market them. We don't want to market them too early, but we're -- there's some interest once those things get stabilized and we'll look at that at the latter half of the year.

Got it. And what sort of buyers usually look after those, pension funds, life insurance companies?

Yes, people who want brand new product and those markets, there's always a lot of buyers in those markets and you have obviously people that can tap those sources. You've got management operations (inaudible) assets, so we'll see how that plays out.

Got it. And just lastly, in your dealings with the Capital markets, have you seen anything like the spreads widening out at Fannie and Freddie over the past quarter or so?

Spreads -- what we have seen with guys is that the absolute rate has actually stayed pretty constant, so the spread has tended to widen and narrow according to the -- what happens with the underlying treasury's, but if you're at the five-year end of the curve, you're kind of in the low to mid fives. If you're at the ten-year end, you're probably in the high fives somewhere. And that's been, I think, fairly consistent for the last several months.

Hey, great. Thanks.

Our next question comes from Haendel St. Juste with Green Street Advisors. Please go ahead.

Hey, good morning -- or I guess good afternoon for you guys. Good morning for us. Tom, just wanted to get some color from you. We've been hearing talks of portfolio discounting in the marketplace, wanted to hear your thoughts on this and if you could also discuss the fast spread in the marketplace today, what you think it is, when we could see that closing a bit?

I guess bid/ask, I'd chime in and ask Mark for any more color there. It certainly seems like everything today is funneling through what Fannie and Freddie are able to lend at and that people are seeking anywhere from 100 to 150 basis point spread over that to get into this market. So if they are lending at 5.25%, seems to me that the market is at 6.25% to 6.75% and that's where people are able to transact with an ease of comfort about this economy and whether it's slowing and at what pace. So I don't see that -- I guess I read the same research you do. Looks like volume is up five billion a month, which is about an average pace and year, if you take out the LBOs. So it seems like transactions are getting done and seems like to us Fannie and Freddie are there lending at a stabilized number and proceeds are tightening in terms of what their coverages are, so people are having to put more equity. Seems to me in past experience when more equity is required, pace slows down, bid/ask trades lengthen out. Translated I think it'd be very tough for us to get our portfolio sale to done today at the cap rate we did just 90 days ago. So I think we got a great execution in that calendar. Anything else you would add, Mark?

I'd just -- general commentary on the bid/ask. I think the bid/ask is narrowing, although there's still sellers out there that -- or maybe the bid/ask is 6% to 7% spread going in. I would say in the last 30 days, the top end of the ask is -- they're coming off it pretty quick, whereas Tom mentioned before, earlier in this process, it was a slow process of negotiating the deal down. So I think they're narrowing, but there's still some people putting assets out there for sale at pretty high prices, but they're having to come off of those. But the sellers seem to be getting a little more realistic now, as Tom mentioned, because they're looking in the rear view mirror and they're realizing they can't sell those assets what they could have done six months ago.

And on your point about portfolio sale, I think you're right on a point there. Even when we were transacting our portfolio we found a lot of buyers with $100 million to $200 million of equity on a levered basis, meaning they could buy $1 billion in the marketplace today, but you don't find a lot of people with $1 billion out in the marketplace and so large portfolios are going to be hard to get done, or they're going to have to be club deals to get done. Anything under $1 billion is probably something that you'd have interest from a number of buyers and probably get an auction going. Anything above that, it appears to us that there's very, very few one-off buyers and so they translate to clubbing, and that means clubbing both ways.

Okay.

Seller gets a little bit of a beating. (LAUGHTER)

Wasn't sure which clubbing you were talking about there.

Yes, I understand. You're always bright. You'll pick it up.

I guess any --any color you guys can share at this point on the Addison JV discussions mentioned, that this was going to be one of your near-term focuses? Anything you could share there?

I would say we -- having just gotten the money nailed down from the city, we sort of -- our numbers have been a little bit in flux until we had that resolved. I think that's a significant priority for the rest of the year.

We're kind of excited and for those who are going to be at ULI on the call later this week in Dallas, we're going to have a ground-breaking ceremony on Thursday and should have a prominent section of the Wednesday "Dallas Morning News" business page on this development, so the city is turning out in mass. It's a defining moment for a small city, a suburb of Dallas, to bring property of this caliber online, so I think that helps us. Second, we've already leveled a significant number of the apartment homes and that's gone well and believe it or not, even a demolition on a green way. So I think the property's going to get a lot of press. We're in control of, A, the development timing, the market's in the upswing. We think it's a good time to be knocking on doors, but don't feel compelled that we have to. It's a multi-phase, multi-year deal.

Okay, thank you.

Certainly.

Our next yes comes from Richard Foley with ABG Investments. Please go ahead.

Hi, guys, just a couple questions. Hopefully I didn't miss them, I had to hop off the call for a minute. Have you guys looked at repurchasing any of our unsecured notes in the market? A couple of your competitors or other REITs have kind of nibbled at that and it seemed like they were, at some point, trading at some good discounts. I have some follow ups also.

We bought -- back in February a face amount of the bonds was about $67 million, bought them at a yield of maturity in the high sixes and bought them at about a $4.5 million discount to face.

Okay. Next question is did you guys provide an outlook for FFO and core NOI for 2Q?

No, we did not. We're trying to get away from doing quarterly guidance. We're -- we updated the year guidance, but don't have anything for 2Q.

Okay. And then the follow-up question. Tom, you kind of gave a shout out earlier about the self insurance and I think the question was relating to, in part one, of your peers excludes what they term casualty and losses from the same store -- not necessarily from operating expense, but from the same-store comparison and I guess you can approach it two ways and I think in part --and I don't want to speak for them, but in part, their argument was that it distorts the core trend if you have a large unpredictable one-time event and maybe you could just give me your take on that?

I think everybody has their own right to make their own decision, it just struck me that you wouldn't be excluding it. It seems like a cost of doing the business and maybe one of those things that you disclose how much self-insurance risk you do take and how you expect to manage it and the rational behind it, But I'm not critical of anyone, I just hadn't heard that before. It caught me by surprise.

Right, and just to follow that up, how much of an influence on the expense rate this quarter was the -- just the comparison of somebody not throwing a toaster in the bathtub this year versus last year? (LAUGHTER)

Well, we hopefully stopped smoking and asleep with a cigarette these days.

This is Jerry. Given where our other expenses lined up, like I said, utilities were flat, repairs were up 3.5% to 3.8%, personnel is up 4%, taxes were up 4.2W%, admin and marketing was down 1.8%. If had you had had flat insurance we probably would have been somewhere in the 3.5% to -- probably about 3.5% growth range.

Okay. That's helpful. Thanks.

At this time I am showing no further questions in the queue. I'd like to turn the call back over to management for any concluding remarks they may have.

Well, thank you, operator, and thank all of you for participating on our call today. We hope to see you on June 2nd in D.C., which I think you'll get to meet, A, a significant number of the management team and tour some fabulous assets, so we look forward to seeing you there. And with that, wish you the best of luck for the rest of earnings season and take care.

Ladies and gentlemen, this does conclude the UDR, Inc. first quarter 2008 earnings conference call. ACT would like to thank you for your participation and you may now disconnect.