UDR Inc (UDR) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen thank you for standing by. welcome to the UDR's second quarter earnings conference call. During today's presentation all parties will be in the listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Tuesday the fourth of August 2009. I would now like to turn the conference over to Dave Messenger. Please go ahead.

Thanks for joining us for UDR's second quarter financial results conference call. Our second quarter press release and supplemental disclosure package were distributed earlier today and posted to our website, www.UDR.com. In the supplement we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. I would like to note that statements made during this call which are not historical may constitute forward-looking statements.

Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no insurance that our expectations will be met. A discussion of risks and risk factors are detailed in this evening's press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question and answer portion, we ask that you be respectful of everyone's time and limit your questions and follow-up. Management will be available after the call for the questions that didn't get answered on the call.

I will now turn the call over to our President and CEO, Tom Toomey. Thank you David. Welcome to UDR's second quarter conference call.

On the call with me today are David Messenger, to discuss our financial results, and Jerry Davis to talk about operations. In addition, I have Warren Troupe and Mark Wallace here to answer any questions that you have on our external growth activities. We appreciate you dialing in after the market close. Our hope in changing the call time is to help make everyone's lives easier with fewer competing calls and maybe even fewer research reports to go through by eliminating the pre call notes.

Now turning to the quarter. UDR had a good deal of success in the quarter. As previously communicated, we collected a $200 million note receivable in cash. We made a tough decision to reset our annual dividend to $0.72 per share, but we believe it is the right call given our prior AFFO payout ratio and the challenging operating environment that we find ourselves in today and perhaps for the foreseeable future. Consequently, we will retain 79.5 million per year to pay down debt or to invest. These actions strengthened our financial flexibility, and with nearly 900 million of undrawn credit facilities, we can meet all our debt maturities through 2011.

In addition to these two events, we had a very good -- very strong quarter operationally. Our FFO was $0.35 per share, putting us at $0.72 year-to-date. We increased occupancy in each region, maintained solid expense controls, and achieved minimum NOI erosion in the quarter. We maintained our 68.3% margin sequentially and year-over-year despite the pressures on the revenue side. The advancements of our technology platform continue to be the cornerstone of our strategy. The benefits are three fold. One, our web based platform keeps our doors open 24/7 for potential and existing resident. Two, technology levers our operating platform, allowing us to realize cost reductions without sacrificing our level of service. And third, our web-based tools speak directly to our main renter age cohort of 25 to 35 years old who take the flexibility of using the Internet for granted and who also use the Internet for their primary method of conducting personal business. We think that we are in the seventh inning here on what we can do to operate smarter in using technology, but more importantly is our ability to deliver what our residents desire, a completely flexible delivery system. I look forward to sharing some more exciting things that we are currently working on after they are fully tested and ready for prime time.

As you are all aware, leading economic indicators are up, but there's still head winds. Job losses have slowed, but there's still no sign yet of a reversal on that front. Our expectation is the operating environment will remain challenging for the balance of 2009 and will continue to 2010. Of course we can't control the business environment, but we can control how we run our business. With that let me turn the call over to Dave to discuss our financial performance.

Thanks, Tom. My comments today will focus on three topics. The second quarter results, our balance sheet capacity and capital activity, and our 2009 guidance. Earlier this evening we reported $0.35 of FFO which consists of $0.32 from our core operations and $0.03 from the gains on debt repurchases. We have excluded the $0.01 effect of adopting APB 14-1 from these results. Jerry will provide detail on our operating results in a moment. Our core FFO of $0.32 compared to $0.31 last year included a 7.9% decrease in G&A expense to $9.2 million, and a decrease in interest expense to $35.4 million as a result of our year-to-date tender and repurchase activity. Turning to our balance sheet and capital activity, as of June 30, we had approximately $900 million of cash and credit capacity which will meet our debt and development needs through 2011.

As Tom stated, during the second quarter, we decided to retain an annual $79 million by resetting our annual dividend to $0.72 per share. In May, at the earliest repayment date, we collected $200 million from our note receivable related to our '08 portfolio sale. We used a portion of the proceeds to pay off $92 million of the 6.5% notes in June, pay down our revolving line of credit and execute our open market repurchases. Throughout the quarter, we were actively executing these open market repurchases of our debt. We completed 79.3 million at an average 9% discount to par value and recorded $0.03 of gain.

We've been very successful in taking advantage of these opportunities as they've arisen and will continue to look for transactions that allow to us pay off debt at a discount and improve our maturity level overall cost of funds. Concurrent with the release of our second quarter earnings tonight, we announced a tender offer at 101% of par for any and all of our 8.5% debentures that mature in 2024. We are in the latter stages of completing our final construction loan on Vitruvian Park Phase 1, which we expect to close in August. Upon closing of the loan no further outside financing will be required to complete our $419 million development pipeline. During the third quarter, we expect to close on a new $200 million secured facility with Fannie Mae. The proceeds of the facility will be used to retire existing debt and proactively manage our maturities.

Last, I want to address our guidance for the balance of the year. Our 2009 guidance remains unchanged with an FFO range of $1.23 to $1.35 per share. We'd expected our same store results to be strong during the first half of the year, but as we stated during our first quarter call, we expected those trends to deteriorate during the second half of the year, and we think that our original annual guidance of same store revenue down 1% to 3% and same store expenses up 1.5% to 2.5% is still appropriate and should result in an overall NOI decline of 3% to 5%. We don't believe it's appropriate to revise our guidance range given the struggling economy, rising job losses, and continued pressure being exerted on our rent structure. We may be erring on the conservative side but we see no catalyst for change nor clarity into the economies future.

Now I'll turn the call over to Jerry.

Thanks, Dave and good afternoon everyone. In the second quarter our NOI decreased by 1% as revenues fell 0.9% and were offset by a decrease in expenses of 0.8%. I am happy to say that even given these difficult operating times, we are able to maintain our operating margin at 68.3%, which is the same as it was last year second quarter and in this year's first quarter. Our effective rents were 2.2% lower in second quarter of '09 compared to second quarter of '08, and down 1.4% to the first quarter. Rental rates on new leases that were signed in the second quarter of 2009 were 8% lower than what the prior resident was paying, while renewing residents averaged flat rent renewals. These amounts vary throughout the markets with Phoenix, Jacksonville, northern California, Los Angeles, Orange County, and Seattle experiencing the largest rate drops. Our DC, , Mid-Atlantic, Monterey, San Diego, and Texas markets experienced the lowest rental rate drops on new leases. Our strategy in 2009, has been to drive occupancy during prime leasing season, in anticipation of tougher quarters ahead.

Same-community occupancy increased 90 basis points to 95.7% from 94.8% last year. During the second quarter, 19 of our 21 markets had occupancy rates over 95%. Because of our technology advances, superior locations, and consistent investment in our real estate, we have been successful in maintaining these occupancy levels over the past -- last several months, even as job losses have continued in many of our markets. Our plan is to continue to run occupancy in the 95% range for the remainder of the year. In fact, last Tuesday, July 28, our same-community occupancy rate was just over 96%. Utility reimbursements increased almost 10% as our efforts in past years to pass these costs on to our residents have helped to reduce the effect of rate increases for water, sewer, gas, and trash expense. We are currently being reimbursed by our residents for 85% of these expenses.

We have also continued to improve our turnover with an annualized resident turnover rate for 2Q '09 of 60.1% compared to 63.4% in 2Q '08, a decrease in move-outs of 5%. You saw significant declines in turnover in the Phoenix, Inland Empire, metro DC, , Mid-Atlantic and Orange County markets. The highest increases in turnover have occurred in the northern California markets as job losses mounted, in places like the Bay Area, Monterey County, and Sacramento. Move-outs for home purchase continue to be very low in most of our markets. During the quarter, only 12.6% of our departing residents left to purchase a home. This compares to 13.5% last year and 11.7% in1Q '09.

We saw move-out rates for home purchases of 20 in Phoenix, Austin, Nashville, and the Inland Empire as would be expected given the relative affordability. These markets contributed less than 10% of our stabilized NOI. Markets with hire home prices, such as Orange County, San Francisco, Seattle, San Diego, LA and metro DC all had move-out rates for home purchase under 10%. These markets represent approximately 45% of our stabilized NOI. Homeownership remains out of reach for many of our residents, even after the large drops in home prices, low interest rates, and tax incentives that have occurred over the past 12 months. Our rents are roughly 80% of an average monthly mortgage payment for an entry level home in the majority of our markets, and that's after the price declines of over 30% from the peak. In places like Orange County, the difference is almost $700 per month versus rents. In the bay area, it's over $1,000. Our expectation, is that the second half of the year against very tough comps will see revenue down between 3% and 5% compared to the second half of 2008. We will see higher occupancy compared to the second half of last year offset by lower rental rates.

Now turning to expenses for the quarter. Total expenses were down 0.8% for the quarter compared to 2Q '08. Real-estate taxes were flat, utilities were down 2.2% as increases in water and electric expense were offset by lower natural gas prices. In 2008, we began renegotiating pricing with the vendors that service our properties. These efforts, along with lower resident turnover, helped to drive down repairs and maintenance expense during the quarter by over 2%, including a reduction in turnover expense of 8%. Personnel costs decreased less than 1% as we have been able to realize some staffing benefits as a result of automating the way we conduct our business. Over the past three to four years, we have been putting a lot of effort into our technology. Initially we focused on using the Internet to drive more and more prospective renters to our website. This has resulted in over 62% of our second quarter move-ins originating through an Internet source. This up from 46% last year and from 56% in the first quarter of 2009.

Additionally, for the first six months of 2009, we have experienced an increase in the traffic to our website, UDR.com of, 53% year-over-year. Driving more traffic through Internet sources, including mobile devices, has been beneficial not only in driving our occupancy, but also in decreasing our administrative and marketing costs during the second quarter by almost 9%. For the past year, we have been moving towards giving our residents what they want to, 24/7 access to us and self-service At that time beginning of this year we began offering to all of our residents an Internet portal that allows them to electronically communicate with us as well as pay their rent on-line by ACH. Just six months into the program, more than 75% of our residents are signed up to use the portal to conduct business with us electronically, and over 40% of our residents paid their rent by ACH in July. Additionally, during July, 19% of resident work orders were submitted through the resident portal. This means the customer can submit the work order when it happens rather than waiting for our office hours. It also means the labor involved to in put the information into our system is eliminated, and that the work order is automatically put into the queue to be completed, enabling to us address the problem more quickly.

I would like now to talk a little about a redevelopment and development progress. If you refer to attachment nine in our earnings supplement, you will see that during the last year, we have completed the redevelopment of eight communities containing 2,363 apartment homes. These properties have leased occupancy between 93% and 98% and are performing in line with their pro forma. We have also completed nine new developments containing almost 2,000 homes. Lease-up velocity has been very strong at these properties. As our development and redevelopment assets reach stabilization, along with our recent acquisitions, our reliance on California, and in particular Orange County, will begin to diminish, and our metro DC market will gain prominence in our portfolio. In fact, DC will become our second largest market and will account for 12% of our NOI. This also means that while Orange County will still be our largest market, it will represent only 13%, down from 17% today.

Overall, our first half results have been in line with what we expected as our operating team has executed our strategy. That being said, we know that we are in a challenging environment with uncertainty in the job markets and government programs. We know that throughout the year, we will continue to see new leases reprice at lower rates. Over the past few months, we have begun to see asking rents start to stabilize in many markets. That gives us hope that we are approaching a bottom in many of our markets, but we have little visibility on how long the bottom can last. In closing, I would like to thank all of my fellow UDR associates who continue to stay focused on executing our strategy every day.

With that, now I will turn it back to

Thank you, Jerry, and, operator, we're now ready for the Q&A part of the call.

Thank you. (Operator Instructions). Our first question is from the line of Mark Biffert with Oppenheimer.

Yes, maybe you can comment on what you're seeing in trade-downs from class A to B apartments in your portfolio, and by market if you can talk specifically.

Sure. We are seeing some trade-downs. People are definitely his losing pricing power in the A product, and we're having to cut rates there. We're also struggling a little bit more in those A properties to maintain occupancy. We've seen it a little bit in our Seattle market. Some of our product up there, especially in the bell view submarket, has been impacted by that. You've got in that bell view as well as the new supply coming on-line. But we felt that -- we've felt it there. In our San Francisco market, same thing. Our B, B plus assets tend to be doing a little bit better than our A product. When you get down to LA, this could be more of a market that an A to a B, but our west LA product is A. There's a lot of new condos. It's all in Marina Del Rey. So you've got some condo product, but we do tend to be better when you look at the B product that we have over in the eastern side of LA in the San Gabriel Valley.

In Orange County, I think to a degree we benefited. We're well located down there, but we probably have B plus A minus product there. You don't have the A product like a lot of other companies do up in the platinum triangle where there's a lot of competition. We have felt people trading down somewhat there. In the DC submarket, where we have A product, it's all inside the beltway. It's doing well, but there is new supply there, too. It's been a challenge. Some of those properties we finished lease up, late last year, early this year, and we have been having to continue using concessions to maintain occupancy and keep rents up in that market. But, Yes, I definitely think there's a situation where people, if they have the opportunity to trade down, they have, if it's a significant decrease.

And are you seeing any kind of stabilization in the southeast markets? It seems to continue to decline. Just what's kind of driving the declines there?

I think it's continued job loss. When you look at a market like Tampa, I mean, the unemployment rate there, I think subpoena around 11, 12%. You don't have the supply issues you had there, but you do continue to have the job issue that the rest of the country is facing. I'm not ready to call a bottom. I've tried to do that multiple quarters, then it will take another step down. Market rents feel pretty stable in quite a few of our markets within the southeast, where the rents we were asking on the street three or four months ago are about the same as they were today. Now, they're down from a year ago, and that's what's causing the rental rate year-over-year decline, but we have seen stabilization in quite a few of our markets there.

Okay. David or Tom, I'm wondering if you can comment on your uses of capital. Obviously you've got the payback of the 200 million, then the dividend reduction giving you some incremental cash. What's kind of your target for leverage for the company and how you see yourself 6 to 12 months from now in terms of a target leverage level?

Well, I think you can look at our plan. We've pretty much outlined it. To meet the current maturity schedule, and from there, continue to work on the 2011 and 12 maturity schedule. So we're still focused, in terms of our capital and refinancing our balance shea, and with respect to our target leverage level, I tend to try to take a long-term perspective at what that should be, and not get caught up in the current window where you have trough earnings and trough valuations, but looking out to what 2011 stabilized earnings might look on the portfolio at a stabilized cap rate and target about 40 to 45% leverage of the enterprise, and if you did that math today we would probably be, oh, 400 to 500 million short of that target by cutting the dividend we pick up about half of that, and so our capital plan calls for the next three years to figure out how to pick up the other half of that to get into that target range for leverage.

Okay. And lastly, David, just in terms of the expense savings that you guys have talked about, to get to that increase that you're expecting for the second half of the year, can you just -- maybe I missed it, but what was the driver of that expense growth for the rest of the year? Was it utilities or taxes?

We have seen utilities go up. Real estate taxes, we have increases budgeted there. We have a variety of appeals filed, but we aren't going to predict whether we're successful on. That so increases on that for year-over-year basis for the second half. Self-insurance cost, second half of '08 were very good. So we're projecting an increase there. Bad debt is up about 70 basis points this year. So we expect that to be another driver for the second half of the year.

Okay.

Does that help you out?

Yes, does it. I appreciate it.

Thank you. Our next question comes from the line of David Toti with Citigroup.

Hey, guys. Michael Bilerman is here with me as well. Relating to your Internet progress, I'm wondering if you can provide a little bit of detail on the level of pricing transparency in your current program, your on-line presence, and how much of a link is there to your revenue management system? Is there a life feed that pushes rent through actively? Then I guess the third part of that question is how much input does the ground staff have on that kind of Internet control.

I'll take that. What you have there is on the Internet, the prices are very transparent. You can go to our website and you can see the rates that we have by floor plan, and then you can drill it down and even see what's available by unit for the particular units that we put out there. Those are uploaded every night, so you can't really push it over from our pricing software, but it is priced, I think at about 3:00 in the morning every night, and that's what stays on our website until 3:00 the following night. So do we have the opportunity to manipulate that price? Yes, we do. We do the prior night. And I can tell you we do like the yield management system. It provides discipline for us.

We do think it helps us maintain a more consistent occupancy level across the portfolio, so you're never having to throw out concessions or really cut rates too much to get occupancy back up. But we don't ever just take what the program tells to us do and do it. We do it -- there's a lot of consultation between our on-site and district level people with our pricing, people here in our office. We do have three people that run the pricing program for us here out of our Denver office. And what I like about it is they're looking at prices by property every day. So it is very transparent what the rates are.

Are you finding that the transparency is helping or hurting, or is it relatively neutral?

I think it -- I think it helps to attract customers. I know when I shop, if it says call me for prices, I assume the price is too high, and if somebody will tell me what the price is and it's a good price, that's where I'm going to go shop. So I think on the prospective renter side, it's a huge benefit. I think on the renewal side it can be a challenge, especially when you look at the rates that we're getting on renewals versus new leases, when you send out a flat rental rate increase to somebody, and their comparable unit may be priced to a prospect at 7% less, Yes, that can cause issues at times, but the way we look at it, 7, 8% on our average rents that are over $1,000, let's say it's $70, $80. For most people, at our price points, that's not a worthwhile amount to move for, with the hassle of moving and the cost of moving. So if it was $200, $300 less, I think people would move, but, yes, it does cause existing residents to come in and question their rate versus what's being offered on the Internet.

Great. And then my next question is for Tom. And I know you can't predict the future, obviously. As much as we all try. What's your view on the outcome in California and are you changing or adjusting your strategies in California to some sort of forecast of an outcome relative to the depth of the weakness potentially?

Well, it's a fair question, and it's hard to speculate when you've got 435 legislators trying to opine on how they're going to fix their problem, and all I can guarantee out of 435 is get 436 opinions. But you start with the fact, you get a $2 trillion economy, and their deficit is $26 billion. So clearly they have an enormous revenue base to try to figure out how to solve their shortfall and the variety of proposals on the table, we'll just have to sit back and wait. Now, with respect to our portfolio and our commitment, first you've got to realize, 20% of the US economy goes through California one way or another. And being such a large, diverse economy, we think it is going to recover. Certainly no one knows exactly when that will be, but we feel confident about our portfolio, about our holdings, and wouldn't see any reason to alter our strategy around it.

Great, thanks for the detail.

Thank you. Our next question comes from the line of Paul Morgan with Morgan Stanley. Please go ahead.

Hi, good afternoon. You talked about the move-outs to home purchase and a little bit about trade-downs. Are there any other interesting reasons for moving out that you have seen trends in recently?

Yes, money problems. Whether it's for an eviction, a skip, they lost their job, or they just have money issues, we've seen that percent of reason for move-out increase over the last year. I think it was about 15% or so last year, and it's north of 20% this year. And, Yes, that would make sense. When you look at our bad debt this year, I think it's 70 basis points, or 0.7% of gross potential. Last year we were running at about 0.4%. So job loss, money problems are affecting us just like everywhere else, but I will tell you that 0.7% historically is a very strong number what we used to budget at. Popping a 0.4% last year I thought was just exceptional, so we're back down to an average credit loss percent.

What was your prior peak at the last cycle, and is there any reason to think you wouldn't test that same peak?

Different portfolio, different average rent. I remember when the portfolio rent was 780 a month, and we were running at 125 bips, and we thought we were doing fine at that level. It peaked around 140 at that average rent level. And I don't see us getting near that level on this portfolio or this rent level. People generally, at this price point, have a little bit more financial wherewithal, savings and credit capacity, than those operating at the $700 to $800 month rent level.

Could you talk about your lease-ups and how the concession trend has been going there and the rate at leasing up new units.

Well, this is Mark Wallis. Our lease-ups, as far as velocity, are going pretty well. A couple of cases really we're ahead of schedule. So the traffic has been good. Especially in our Texas markets pretty good. Obviously a little bit softer in the Florida and Phoenix.

And the concessions?

Concessions, we're probably running about 10% more than we had forecast. In the Texas markets we've got one project where it's pretty much right even with pro forma, and the others are about 5% more.

Great, thanks.

Thank you. Our next question comes from the line of Rob Stevenson with Fox-Pitt Kelton. Please go ahead.

Good afternoon, guys. When you guys take a look at the markets that are performing above or below materially your expectations the beginning of the year, how many of those are there, and which ones are sort of most in your cross hairs?

This is Jerry. I would say the ones that have surprised me a little to the up side are probably Baltimore, is my biggest positive surprise. It's performing extremely well versus what we had had budgeted. Maintained occupancy, kept rents fairly flat. I would say some of our military markets, like the Norfolk, Virginia area, you kind of live and die there a little bit if the boat comes in, and the boat came in. So we've done well there. We have good pricing power, high occupancy. San Diego has continued to be a pleasant surprise.

Out in California, I think some of that, again, is because of the military. Most of our portfolio there is B product, and San Diego County, we cater a little bit to Camp Pendleton. The negative, probably Seattle. I think at the beginning of the year we felt we didn't really have exposure to downtown Seattle so we wouldn't be affected by Qua Nu. We felt like Boeing was going to hang in there, and what's really happened is there's been some job loss, and there's been a lot of new supply, especially in the Bellevue area and some of the other metro areas there that we probably looked a little more specifically at our sub marks and didn't feel like we would get as affected by the job losses we ended up being affected.

And how are real-estate taxes trending a little over six months into the year versus what you had expected? Is any state or municipality really coming hard on pushing real-estate taxes aggressively?

This is Dave. All the states and municipalities are pushing real-estate taxes out of the gate, but we have a variety of appeals filed with all of them. They're coming in with the mind-set that they need to raise revenue and raise cash, so they're going to go after the landlords. By the same token, the real estate values are falling, have fallen compared to the amounts they have on the assessment, so now it's just part of a process that we go through with them.

Are you getting hit with both millage and assessment, or is it mostly trying to do it on the assessed values?

They've done both.

Is anybody getting really aggressive on the millage rates?

The only ones that were aggressive on that, last year, Virginia got aggressive on the rates.

Okay. You said before, and about -- you were talking about bad debt before, Dave. Did you say that bad debt expense was 70 basis points or had had increased 70 basis points?

It is 70 basis points of gross potential. It's up from about 40 basis points.

40 basis points last quarter or a year ago?

A year ago.

And would was it last quarter?

I want to say it was about 50 or 60 basis points. It was a hair less than it was in second quarter.

Okay, and then lastly, the data that you gave before about flat renewals and I think down 8 on the new leases is that -- was that consistent in July as well as the second quarter?

Pretty consistent.

Thanks, guys.

Thank you. Next question comes from the line of Dave Bragg. Please go ahead.

Good afternoon. Question on expenses. We're seeing a lot of companies put forth strong expense control this year. Could you talk a little bit about the major line items and how those might look going forward into next year?

Yes, Dave this is Jerry. I'll talk more on the controllable expenses and Dave may want to jump in on insurance and taxes. Personnel expense for this year is roughly flat with last year. Some of that is in indirect payroll, which is things like healthcare, Workers' Comp, things like that. We've really -- we self-insure for that, and we've really been fortunate so far this year to have a fairly healthy company, and that's been down. On the direct payroll, we've been able to reduce some of our headcount, very slightly with the advances that we've had on our technology front. We think we're going to be able to drive that down a little bit more as our ACH penetration and the amount of work orders we get on-line escalate. But what we've really seen this year is we've had a pretty sharp reduction in our employee turnover because the economy, there's no jobs out there, so there's no place for them to go, and in the past, we used to have to fill some of those openings with temporary help positions. We drastically cut temps to almost nothing. The other thing is, when people quit, you typically have to pay them out their accrued vacation. So when people aren't quitting, you don't get double-ding with temps and vacation accrual. So I would think going forward you are probably going to see personnel be zero to 3%, say 2 for an average, because I think we will be able to few headcount reductions, and we'll still be able to give some increases next year.

On the repair and maintenance, this last year we negotiated tons of our contracts, whether it was on landscaping or turn type costs. We got them once, we may go back for seconds later, but if we don't I would expect those to be held fairly flat. A lot of is it going to depend if we can continue to keep turnover expense down. So far this year it's down a little over 1%. If we can keep that going and then let it carry forward to next year, you have a chance that R&M goes down. On the admin and marketing side, a big part of our reduction has been to reduce marketing costs, and we did that by eliminating print publications, print advertising, and going to the Internet. That's going to continue to shrink. We eliminated the bulk of those last year, so you have year-over-year declines in the first quarter of about 20% this quarter I think it was about 9. It is going to shrink throughout the year, and now our next task is to look at all the Internet sources we use and determine which ones give us the biggest bang for the buck and see if we can wing that.

On the real-estate taxes and insurance side, as Jerry said, real-estate taxes for the second quarter were flat. For the year they're up about 1.8, 1.9%, and we are forecasting an increase for the balance of the year but that will all be dependent on how successful we are with our appeals and various litigation we're currently going through. Property insurance being the biggest component of that line item, our policy is up and December 15 last year we locked in a premium production going into what was supposed to be a very hard market for the insurance industry as they were dealing with pretty severe hurricane losses. This year don't know what that insurance market will be like when we go into it in the fall. Don't know what hurricane season will hold for everybody. Insurance carriers are experiencing a decrease in investment income, so they'll try to extract that out of premiums, but we'll do what we can to keep our premiums flat or at least minimize any kind of increases that we have, but we won't know that until the fourth quarter.

Okay, that's helpful. Then a question on the development pipeline. Ashwood commons, on this project specifically, there appears to be a significant increase in costs versus last quarter. Can you talk about that?

Yes, Dave, this is Mark Wallis. I'll talk about. Just a little bit of background, it's a 51, 49% joint development with Su Development. Su's the general partner and UDR the limited partner. Su Development is the developer of the project. It's high-rise development, pretty sophisticated and unique architectural design, and Su has incurred increased costs due to that high-end design. There's also been some construction lag, some due to weather, which is not that unique to Seattle, but also some timing of materials that are fabricated off site and have taken longer than we expected and he expected. In retrospect, as we approach completion of the project, I think Su's Development budget was obviously an aggressive one that was at the low end of the expected cost range for comparable built product when surveying what those look like. I will say that the project should end up at a cost that's in the mid-range of cost for product of this type, about $145 a square foot. So from a replacement cost standpoint this is not out of line. It's very desirable product for our perspective. Bellevue residents, I think already like 35% pre leased.

On the mid-rise.

That's right, on our mid-rise building. And that's expected to be ready for a tenant the end of this month. A good long-term addition for the portfolio. Fits in the long-term plan for that market. But that's an overview of where we are on that.

Last question, are you marketing any assets for sale currently?

We are not at this point in time. Now, we're always, testing the market and talking to people, but nothing actively marketed right now.

Okay. Thank you.

Thank you. Our next question comes from the line of Michelle Ko with Banc of America-Merrill Lynch.

Just wondering if you could expand on the 2Q results for California and Seattle. They were somewhat better than expected. I was wondering if you could give us more color around those markets.

Yes, we did do well there, especially when you look at some of our peers. Seattle, the thing to keep in mind it's only about five assets, I think, 1270 units. Most of the properties that are in the same store sales there are more B-grade assets, a couple down in rent, one in Mill Creek, one in [Milo] , one in [Portland.] So we're not competing against the high end. These are more blue collar workers, military workers. I think some of our peers probably have more downtown and Bellevue product in the same store pool, and I think we've benefited a little bit from having a B-grade portfolio up there.

I think when you look at some of our other properties, like Los Angeles, we've done pretty well. I think when you look there, our product that's in our same store sales is over in east LA in the San Gabriel Valley. It's not overbuilt. There's not any new product that we're competing against, so we've been able to maintain fairly well there compared to people that west LA or downtown LA. Orange County, I think we've held our own there. We said before it. We think we have premier locations. We think we have good B plus, A minus product, but we're just well located.

San Diego, we're in North San Diego County. Again, it's predominantly a B portfolio that caters a little to the military. We're not going against any new-built condos or anything closer in to downtown San Diego. And the Inland Empire, I don't know if we've done really better than anybody else there. It's only three assets. A couple of them are well located. One of them is in a town called Marietta. It's a pretty long drive from anywhere. I think as rental rates have come down, you've had an exodus of people that used to make a two-hour drive, then come in closer and not really increase their rent

Okay. Thanks. And then also I believe you said on the call that you're expecting second half revenues to decline down 3% to down 5%. I was just wondering if you could give us more details on which marks you expect to do better or worse in that range.

I think DC will do better. I guess if you want to really break it down, I think our East Coast portfolio, excluding Florida will do better. I think they could be down 1% to up 1%, maybe. I think California is going to do worse. When I look at -- and Phoenix will do worse and Jacksonville, Florida will do worse.

When you look at how my rents are turning, I'm going down double-digits, 8% for the portfolio, but some of my markets I'm down, on new leases, in excess of 10%, and it's pretty much the California market, Jacksonville and Phoenix. So they're going to drag me down. I will keep occupancy up, but there will be a drag in Texas and the East Coast will be a positive, and then I think, Florida is probably going to be slightly down. We'd already taken a big hit last year in the second half of Florida, so hopefully we can stabilize rents. We have higher okay you pens and we'll do okay there.

Okay, and just lastly, you talked about the spread between new leases and renewals being about 800 basis points. Where do you see this going by the end of the year? And what has it been historically, and what's been, I guess, the widest spread that you've seen historically?

Typically, your new leases are higher than your renewals. So what I typically run properties at, if I had had have a street rent at $1,000, I was renewing a guy at $975, $960. So typically you'd have a 3 to 4% differential, but it was the other way. Your new guy was paying more than the renewing resident. I 'll tell you, I've been in this business 20 years. I've personally never seen one where you had this kind of flip the other way, where your renewals were this much higher than your new leases on a portfolio-wide basis. You will occasionally see them in a particular market that gets overbuilt, but it's rare.

Where do I see it going fourth quarter? What I'm hopeful for, but the economy could change is that it could contract a little bit. We're hopeful that we can keep renewing people at flat. What we saw last year is our rents were consistently increasing through August, and then they started to decline, then when you got to October and November, they really started to decline at a much higher rate. So if I've been able to keep my market rents flat for the last, say, three months or so, if I can continue that trend, and I don't have a lot of job loss or something else that hits me, would you think, because I have people renew, or coming up for expiration that are going to be at lower rates, I could tighten that range. Am I ready to say that's going to happen? Nope. I mean, I've been surprised too many times this year.

This is Toomey. I would add a couple things to that. I think it's a very thoughtful question. One of the things about this Newport folio we have, when you look through the rent and the alternative housing, you find there's a bigger gap than we've ever had in the past. Second statistic that's of interest to me, 30% of our existing residents have probably been with us longer than three years. And so I think that leaves an embedded baseline of renters that are in the portfolio that are probably not going to ever move out. They are predominant renters for life, and that gives Jerry some range on renewals and stability in that. And that's why he's been able to help hold that flat. So I think there's a couple things that we're learning as we go through the portfolio in this down cycle that will help drive some of our investment decisions in the future, but certainly that's a big percentage that are going to stay renters forever.

Great, thank you so much.

Thank you. Our next question comes from the line of Karen Ford with Keybanc. Please go ahead.

Good afternoon. Can you tell us what the expected terms are on the new Fannie facility you're expecting to sign up in the third quarter?

Yes, this is Warren Troupe. We're looking obviously at the main facility, 10-year )inaudible) -- and we expect pricing would be somewhere between the 5.4 to 5.6%, all-in.

And any change seen on underwriting parameters coming from Fannie?

It's gotten a little tighter. They're obviously looking at rents. There's a couple markets that they put a little more effort in reviewing due diligence, but (inaudible).

That's helpful. One other one. I know you mentioned that you don't have any assets currently up for sale, but could you just talk about the asset pricing environment, and if you're seeing any trends there and what your thoughts are on disposition versus investment versus the de-levering activity you were planning to do?

I think on asset pricing, Mark can take a little bit of that and I can talk a little more about deleveraging the balance sheet and capital allocation.

On asset pricing, the dilemma is there's not a great deal of traits to point to, a lot of the traits that we've seen are in more the B to B minus category, and maybe not in the prime markets we like to see, so those are interesting, not that relative. I think that if you look at cap rates today for the kind of product you want to buy, it's still in the kind of product you want to buy, it's still in the mid 6's. Obviously as trades happen that may move around, and that's an average. There's some product in the coastal markets that might go lower than cap rates, and other marks, might be slightly higher. So it's best -- I can characterize it today. It's about a 6.5 cap. I think that's for quality. I'd also add, the B stuff that we see traded is generally 150 bips over what they could get for Fannie paper. So it warrants 5.4 to 5.6 so they're pricing at 7's. I think a lot of transactions you hear from our peers, who have reported stuff crossing, fit that profile. And that's what I've seen over the years is that's what B is going to trade in assets that are under $50 million. So asset pricing seems to be stabilized around the debt number, which it usually does, and if there's capital veil along, it probably will stay that way for some time.

On your question about capital structure, and it's a general one, so I may not hit it right on, I kind of start with the facts, which is, first, we've got a plan, we've articulated it and clearly laid it out for investors and the sale side how we manage our maturity through 2011 and 2012, and we're going to stay focused on that. We think there's still opportunities to buy back debt. We think there's ways of lengthening it maturities and extend our debt and continue to keep our financial flexibility high. With respect to the equity today, the stock is current priced at an 8.5 cap, or at $11 per share, pricing $95,000 a door for the enterprise. We think those are not reflective of current market. It's what is current traded, but it's not what we think the company is worth, certainly. And so we find ourselves perplexed at why you would issue equity to pay off debt at 4.5, 5%. What we've said in the past, and probably not articulated very well, we continue to look for opportunities. If we found a sizable opportunity and thought that it advanced the company and could be NAV accretive, that we would probably look at equity issuance tied to those types of activities, but we haven't seen anything that crosses and fits that profile yet, but we'll watch, and we'll see.

With respect to trying to lower the overall leverage of the enterprise, I think I set earlier in the call, we kind of look at leverage over a long period of time, and 2011 is kind of the stabilized market. Looking back from there, if you cap the portfolio at a 6.5 cap rate, and you ask yourself and you wanted to get to 40% leverage, you'd probably need $500 million of leverage paid off one way or another, asset sales, equity, buy back debt. We think half of that we probably already tackled by cutting the dividend, for the next period of time. So I think we're on our way to trying to get inside of that target. We're just going to be very patient about how we approach it and think that's a prudent way to manage this market. It's not one to jump at. The question is survivability has been off the table. The question of managing growth in NAV is what we're focused on.

That's helpful. Did you guys buy back any stock in the quarter?

No, we did not.

No.

Okay, thanks.

Thank you. Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Hi, good afternoon. Tom, going back to the 8.5 implied cap you just quoted is that nominal or economic?

An economic cap rate.

Okay. So what -- and you're doing, what, 3% and like 3 or 3.50 a door?

675. (inaudible)

That's helpful. Getting to my questions, can you give a bit of color about the non-mature southwestern portfolio, the part that's not in the same store. how that is performing and when we would expect that to be in the same store portfolio.

This is Mark Wallis. You said the southwestern.

Yes.

We've got a deal in Plano, Texas, we just finished at few months, a it's 93% leased, right on pro forma, and I guess that's about a year from now that goes in the same store sales. It's 12 months out. We're just getting to stabilization. We've got a deal in Houston, Laurelwood, 324 units, 93% leased, about -- they're running just about the same time frame. That one is running -- maybe about 5% less than the original pro forma.

We just acquired in a presale deal that we inked about two years ago, a deal in west Plano, Mustang Park, go by Lincoln Property Company, closed it three or four days ago, running ahead of schedule. That one is 85% leased, but obviously that's over a year out before it goes to same store sales. The deals in Phoenix, we have 200-unit deal in Peoria, in Waterford, 72% leased, and it's -- I believe it will be about 15 months out in same store sales also.

So sounds like we have about another year before all that.

Just about. And the deal in Surprise would be a couple quarters past that. So that's really --

You do after couple of deals we bought last year. There's a 1,000-unit deal in Plano that we bought, I think it will roll in the same store, I want to say 4Q, and then --

Austin.

Yes, we have an Austin deal that we bought, I think middle of last year, that's either going to roll 4Q or 1Q.

That's help. On the unsecured side, it would seem like you guys may tap it in 2010. Just want to get your thoughts on that, -- what's the view from the rating agencies as you guys continue on more secure debt.

Alex this is Warren. The answer to the last question, we intend to maintain our investment grade rating, and so we're in constant contact with the agencies, and we'll monitor that activity. With respect to the unsecured, we watch that market and it's -- there's the question of both sourcing uses and the prices we'd like to have.

Okay, and right now do you feel it's attractive, or you'd like to see it come in a little bit?

I think on a 10-year, the feedback we get, it's somewhere between 7-3/4, and 8%, and that's still not attractive pricing.

How receptive are you finding lenders on condo deals to talking to third-party buyers where the bank hasn't foreclosed, but, the outcome looks -- the future looks like that could be the outcome? Are banks willing to discuss with prospective buyers, or is everyone just waiting for the deal to actually collapse?

I think the general answer is, everyone is in the wait mode. Not much activity, not nearly as what we probably would have thought a year ago, where we would be, but most of them are still waiting.

Okay. Thank you.

Thank you. Our next question comes from the line of Michael Salinsky with RBC Capital Markets.

Most of my questions have been answered. Just a couple follow-ups. Can you touch a little bit on the performance of the acquisition portfolio last year?

I think when we look at it overall, our forecast for those portfolios we bought is slightly ahead of pro forma. There's some above. There's some under, but on average we're slightly ahead. Jerry, you got anything to add to that?

I would agree. I think we're above. Some of the stuff we bought in DC, some of the Texas, some of the west coast properties. Honestly, we probably didn't see the decline in rents that have occurred. Up in Seattle, and we bought one in Everett, and I think that's doing well.

Our San Jose asset is really performing very strong, and so it's sort of balancing out. A couple of the others that we aren't quite hitting.

Okay. In the development pipeline, can you touch upon leasing progress on the properties in lease-up and also, I noticed you maintained the disclosure, 5.5 to 7.5 yield. Given the rental rate erosion I would assume that is probable on the lower end. Any commentary you have on development lease-up as well as expected yields would be helpful.

Generally that range is still an acceptable range, but we're moving more towards the lower end. We'll see how it all comes out. We've held pretty well in Texas on our -- as I mentioned earlier, but it's moving it more to lower end when you average in the two Phoenix deals and the one deal in Tampa. I will go briefly again real quickly. I mentioned this lease-up. Texas, right on schedule. Those assets are just about finished on the lease-up. In Phoenix, the asset in Peoria is 72%. Tampa, that asset 73%. And these are -- we're hitting 20 plus leases month on those. Surprise, Arizona, have just started to turn units, and so that one has got a ways to go. We signed six leases there last week.

We're picking up steam. We're doing well.

Okay. Then final question there on the P&L there you have the other income line. Was there any non-recurring items this quarter? I would expect it to be down a little bit, but with the lower interest contribution from the mezz loan, but were there any one-time items in this?

This is Dave. Give me one second. No, it's all pretty much standard stuff that we have in there.

Thank you.

Thank you. Our next question comes from the line of Andrew DiZio with Janney Montgomery Scott.

Quickly, I noticed you were carrying some marketable securities on your balance sheet this quarter. Can you explain what those are?

Marketable securities since we've carried early in the first quarter that we discussed in our first quarter call.

All right, I can review that.

No problem.

And those are all my questions, thanks.

Thank you. Our next question comes from the line -- that concludes our question-and-answer session. Management, I would like to turn it over to you for any closing remarks.

This is Toomey. One, thank all of you, and hope you have a good summer, and we'll continue the good effort on our part to perform well. With that, thank you, and take care.

I apologize. Ladies and gentlemen, this concludes the UDR second quarter earnings conference call. If would you like to listen to replay of today's conference, 303-590-3030, or 800-406-7325 with passcode 4133329. ACT would like to thank you for your participation. You may now disconnect.