UDR Inc (UDR) 2010 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the UDR 2010 Q3 earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Monday, November 8, 2010. I would now like to turn the conference over to Andrew Cantor. Please go ahead.

Thank you for joining us for UDR's third quarter financial results conference call. Our third quarter press release and supplemental disclosure packet 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 measures 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 statement are based on reasonable assumptions, we can give no assurance 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-ups. Management will be available after the call for your 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, Andrew, and good evening everyone. Welcome to UDR's third quarter conference call. With me today are David Messenger, Chief Financial Officer, Jerry Davis, Senior Vice President of Operations, who will be discussing our results, as well as Senior Executive Vice President Mark Wallis and Warren Troupe, who will be available to answer questions during the Q&A section of our call.

After the market closed today, we reported FFO for the third quarter of $0.27 per diluted per share, and Core-FFO, with $0.28. The difference is $2.7 million, or a $0.015 charge related to the $412 million of acquisition made during the quarter. We had a very busy and successful quarter, completing over $1.2 billion of transactions, including the acquisition of five communities containing 1,374 homes for $412 million, and one land parcel for $24 million. We raised $365 million of equity and $370 million of new or restructured debt, and sold one community for $21 million. In addition to these activities during the quarter, we were also extremely focused on acquiring Hanover's interest in a portfolio with an aggregate value in excess of $2.3 billion. The transactions successfully closed on November 5. If you haven't done so already, please download and review the UDR-MetLife presentation that we posted on our website earlier today at www.udr.com. The link can be found on the Investor Relations home page, and is entitled "UDR MetLife Portfolio Summary." The presentation contains details on each of the assets in the portfolio.

Let me start by discussing the quarter while you pull up the presentation. In the third quarter, we saw a return to positive same-store operating results for the first time, since the first quarter of 2009. The positive results come from us having pricing power in 22 of our 23 markets. In fact, with these results, combined with the current supply demand fundamentals, we are well-positioned for growth into 2011 and beyond. During the quarter, we announced the acquisition of five communities containing 1,374 homes for $412 million, including two communities in Boston, two in Southern California and one in Baltimore. Three of these communities were acquired from the Hanover/MetLife partnership. For more information on these acquisitions, please refer to the September 7 press release that can also be found on our Investor Relations section of our website. In addition, we also acquired a two-acre land site located two blocks from AT&T Park and four blocks from our Edgewater community in Mission Bay neighborhood of San Francisco. During the quarter, we reduced our leverage as a result of the issuance of $365 million of equity, and also took advantage of the historical low interest rate environment to refinance and secure new debt of $370 million, while extending our maturity ladder and reducing our future interest payments. David will cover this activity in more detail during his prepared remarks.

I will now turn to the MetLife venture that we announced earlier today. UDR has successfully acquired Hanover's equity interest in Hanover/MetLife Partnership. The Partnership owned a portfolio of 26 operating [facilities] containing 5,748 homes and 11 land parcels with potential to develop approximately 2,300 additional homes. The new UDR-MetLife venture has many strategic benefits for UDR, including furthering our goal of our owning high-quality communities in urban sub-markets, which appeal to our target residents, by also growing our cash flow as the majority of the communities are completing lease-up and will benefit from implementing UDR's technology and operating platform. Third is the access to the development pipeline, and, of course, having MetLife, a Fortune 100 Company, as a partner. UDR will pay a total $93 million for a 12.27% weighted average interest in the 26 operating communities, a 4.14% weighted average interest in 11 land parcels, and the property management and asset management agreement for the partnership. $63 million of the $93 million was paid at closing, and the balance will be paid to Hanover in two interest-free payments, $20 million to Hanover on the first anniversary of the closing, and $10 million to Hanover on the second anniversary of the closing.

UDR will be paid a property management and asset management fee, as well as a financing fee. And we'll participate [peri past two] in the cash flow and capital proceeds of the venture. By now, you have hopefully pulled up the presentation on the communities. As you can see, the buildings in the portfolio are recognized as some of the top quality communities in each of their respective markets. Some of the highlights of this portfolio include an average age of just over one year, an average home size of 1,257 square feet, and an average monthly income per occupied home of $2,167, which is 85% higher than UDR's current portfolio. The communities feature condominium quality finishes and amenities, and they are 72% high-rise or mid-rise structures. They have an average occupancy of 83.5% as of October 29. And, you can see from the photos in the presentation, this award-winning portfolio would be hard, if not impossible, to replace in today's environment or for many years to come. And, lastly, the portfolio fits very well with UDR's existing portfolio, with 80% the communities located in the current UDR submarket.

Now, turning to returns. Our cash-on-cash returns for the venture will be 9%. The transaction will be $0.02 to $0.04 accretive for 2011 FFO. The range of accretion varies based upon how we finance the $93 million, and we will provide additional details when we give you a complete guidance for 2011 on our fourth quarter call. The operating portfolio is currently financed with approximately $1.4 billion of mostly construction financing, and has an average maturity of two years, and a weighted average interest rate of 2.7%. We have been negotiating with various lenders and with the GSEs on refinancing scenarios, and expect that, by the end of the year, we will have permanently financed $665 million at an average interest rate of 4% and an average maturity of eight years. In connection with the refinancing, it is anticipated that the Partnership will repay $144 million of debt. UDR's pro-added share is $16 million. Following the refinancing, there will be $626 million of debt remaining to be financed, with bears interest at 2% and has a weighted average maturity of two years. In the end, we expect the leverage on the portfolio to be in the 55% to 60% range.

Before turning the call over to David to discuss our financial results for the quarter, I'd like to take a moment to discuss Mark Wallis' retirement. As we announced In October, Mark will retire at the end of the year, and will remain involved through 2011. Mark has been a great business partner, an even better friend for the last 25 years, and I fully respect his decision to retire so he can spend more time with his family and his charitable work. Let me now turn the call over to David.

Thanks, Tom. This evening, I'm going to cover our quarterly results, capital activity and 2010 guidance. Earlier today, we reported $0.27 of FFO, which consisted of $0.28 from our core operations and a $0.015 charge for expenses related to our third quarter acquisitions. Further details are included in our press release and supplements. Turning to our balance sheet and capital activity, we had a very active quarter, completing a combined total of $735 million of capital raising and debt activity. During the quarter, we raised $365 million from the sale of 18.6 million shares at a weighted average net price of $20.36, utilizing an overnight transaction and our at-the-market equity offering program. We used the proceeds to fund the previously announced $412 million of acquisition.

During the quarter, we completed $370 million of debt extensions, assumptions, amendments and new construction loans through seven transactions. Details of each are provided in our earnings release. These activities have reduced our interest cost, strengthened our balance sheet and helped us to manage our future debt maturities. Looking at our 2011 debt maturities, they consist of $112 million of secured debt, with a weighted average interest rate of 5.4%, and $263 million of unsecured debt consisting of two convertible debt issuances, with a weighted average stated rate of 3.9% that, for accounting purposes, we expense at a weighted average rate of 5.53%.

This is an extraordinary debt market that is deep, and is paired with a very attractive interest rate environment. Currently, secured debt prices at rates of 4.3% to 4.5% and unsecured debt, at rates of 5% to 5.2%. We will continue to seek ways to strengthen our balance sheet and cash flow. Turning to guidance, we have a policy of updating our guidance in conjunction with our second quarter earnings release or when a material event has transpired. Our process of updating guidance consists of reviewing traffic, new lease rates, asking renewal rates, occupancy trends and current capital market plans. Nothing has materially changed in the 98 days since we updated guidance. While we are proud of our year-to-date and third quarter results, they are in line with our expectations for the full year.

Accordingly, we are maintaining our FFO guidance for 2010 of $1.07 to $1.11 per diluted share and the previously announced guidance for same-store results. Through the three quarters, we have earned $0.81 of FFO, implying a range of $0.26 to $0.30 for the fourth quarter. $0.30 can be achieved through improved operations and better-than-expected expense control, while $0.26 would be a result of possible capital market actions taken to get ahead of our 2011 debt maturities and/or potential acquisitions. Now, I'll turn the call over to Jerry.

Thanks Dave, and good evening everyone. Our NOI increased by 0.1%. Revenues rose 0.1%, and expenses were flat. The last time we registered positive quarterly year-over-year revenue and NOI growth was the first quarter of 2009. Market rents over the past nine months have increased 5.7%, or nearly $60 per home. 85% of our communities have had market rent growth over the past nine months, with double-digit growth in Nashville, Phoenix and Portland. We have gone from a gain-to-lease of 1.3%, or $14 per home, in December 2009, to a loss-to-lease of 3.3%, or $36 per home, in September. A loss-to-lease is the percentage that in-place rents are below current market rents. This means that, even if the market rents were so stop growing today, that over the next 12 months, as leases turned, our leased rent would grow by more than 3%. Gross rental rates on new leases that were signed in the third quarter of 2010, were 1.9% higher than what the prior resident was paying. In October, this was roughly the same percentage. Renewing residents in third quarter on average paid 4.3% higher on an effective rent basis than they had been paying. In October, that percentage has grown to 5.2%.

On a sequential basis, our same-store communities experienced an increase in total income per occupied home to 0.8%. Same-store occupancy averaged 95.7% in the third quarter of 2010. That's ten basis points above 3Q 2009, ten basis points lower in the second quarter of 2010. That makes six consecutive quarters that we've reported same-store physical occupancy of 95.5% or greater. During the third quarter of 2010, 71% of our community had occupancy rates that averaged over 95%. Keeping our occupancy at these high levels has provided pricing power that has enabled our in-place rents to be flat for the third quarter of 2009. We plan to continue to maintain our occupancy in the 95% range for the remainder of the year, and we expect year-over-year revenue growth to continue to improve in the fourth quarter.

Annualized turnover for third quarter of 2010 was 64%, compared to 67% in the third quarter of 2009. Year-to-date, annualized turnover was 55%, compared to 60% in 2009. We've had almost 1,500 fewer move-outs in the first nine months of 2010, compared to the same period in 2009. Move-outs for homes purchased during the quarter were 11%, slightly lower than both 3Q 2009 and second quarter 2010, when they were 14%. We believe this is a continuation of a trend towards a lower national home ownership rate. Total expenses were flat for the quarter compared to third quarter 2009. The favorable comparisons in real estate tax expense, insurance and administrative and marketing expenses were offset by higher personnel and repairs and maintenance expense.

We remain focused, and continue to drive revenues that control expenses. We anticipate that we will see increasingly positive revenue growth in the fourth quarter, but expenses and NOI will be negatively impacted by difficult real estate tax comparables that positively affected our fourth quarter 2009 results. In July, we completed the rollout of online renewables throughout our entire portfolio. This completes our electronic platform. The ability to renew online has been very well received. As a matter of fact, in October, of the almost 3,700 leases that expired, 2,000, or almost 54%, renewed. Of those 2,000 renewals, a little over 1,500 were 77% renewed online. Properties that participated in our pilot program have had more than 90% of renewals being completed online.

Our customers want the flexibility of being able to review lease terms and pricing at their convenience, as opposed to having to take time away from their busy schedules to come into our office to sign a lease. The primary advantage to UDR is knowing sooner which residents are renewing. This enables us to better manage pricing on our available inventory, whereas in the past, we likely didn't know until 30 days before the expiration of the lease if the resident was going to move out or renew. The online renewal capability fully completes the electronic platform for existing residents that we began planning and implementing three years ago. Progress on our electronic initiative is shown in the table on page three of our press release.

I'd like to give you some details on the performance of our non-mature portfolio of almost 6,300 homes, which represent just under 10% of our total NOI. If you refer to attachment nine in our earnings supplement, you will see that we have completed ten developments containing almost 3,200 homes at a cost of almost $527 million, or $159,000 per home. Leasing has been strong at these properties, with leased occupancy of these properties ranging from 77% to 99%, a leasing velocity well ahead of schedule.

On attachment 10, active developments and redevelopments are presented. Currently, there are two communities comprising 712 homes under development at a total estimated cost of $152 million, or almost $213,000 per home. Leasing activity at Signal Hill in Woodbridge, Virginia, which is a Washington DC suburb, has been very strong, as evidenced by being 63% leased just four months after the delivery of the first apartment home. Savoye II, the second phase of our Vitruvian Park project, will begin delivering apartments in the summer of 2011, and be completed in first quarter of 2012. We also have three properties, or 862 homes, currently undergoing redevelopment, at a total budgeted cost of $77 million..

Lastly, I'd like to talk briefly about the new MetLife venture. We are excited to roll this portfolio into UDR's operating platform. The Hanover Company is considered one of the premier apartment developers in our industry, and their communities are known to have the best finishes and large floor plans. We have been working with very closely with the Hanover Management Team over the past several months, and we are appreciative of all of their assistance, as well as access they have given us both to their properties and their very strong group of property management associates, almost all of whom have joined UDR.

We see upside in these properties over the next several years, as concessions burn off and marketing costs are reduced significantly, due to the completion of the lease-up of 14 communities that, today, have occupancy below 93%. In addition, because of the size and scale of UDR's operating platform, this portfolio will benefit from our national purchasing programs and the significant advances that UDR has made through technology. With that, I'd like to turn the call back over to Tom.

Operator, we're now ready for the Q&A portion of the call today.

Thank you. Ladies and gentlemen, we will now take questions. (Operator Instructions) Our first question comes from the line of Eric Wolfe with Citigroup. Please go ahead.

Thanks. Michael [Zoff] is on the line with me. Just on your partnership with MetLife, just wondering if you have an option to buy out their interest in the portfolio, and whether you think MetLife is a willing seller at the moment?

Hi, this is Warren. In terms of the [partnership] agreement, we've just gotten into it. In terms of options, there are various options on the partnership agreement, but that's something we'd discuss with MetLife as we get farther down the road.

I guess I'm wondering how you're thinking about this from a strategic perspective, whether it's a platform for further acquisition, th way for you to diversify your markets, or if you're considering other opportunities with MetLife. Because it's kind of like why bother with the 12.3% interest, all the labor and time and the resources it's going to take to manage these 26 properties. So, I'm just wondering from a strategic perspective how you think about it.

Eric, in my prepared remarks, I highlight how I think it fits best strategically in terms of quality portfolio and how it fits in that scope. As we tend to look at this, what's up on [task] versus the refinance [of] the portfolio into a long-hold format. And we've already traded with Met on purchase of [three] assets earlier this year. And we'll continue to look at being a first long-term value creator with them on this portfolio. And at some point, we would certainly like to buy more of the portfolio on an individual basis or on a partnership basis. That will be on Met's timetable, and we look forward to that. With respect to the development, we're continuing to look at those particular sites, and when the markets conditions make sense, we'll propose developing them with Met, maybe without Met. But as Warren stated, it's early in the venture. I don't see it as an acquisition joint venture. I see it as a create value on the existing portfolio, and potentially increase it through development activities.

Right, got you. Just last question, if you could comment on where you are in the process of selling your Norfolk portfolio, and what type of pricing you might be anticipating.

This is Mark Wallis. We marketed that portfolio and really, we're not satisfied with the process as they came in and the level of interest of the buyers, what they would be willing to buy. And so, we're just going to hold that at this time based on -- We still get good margins on those assets and a decent return. So, we're going to hold them for now.

All right. What do you attribute the lack of interest to? I haven't been down there. I'm just wondering how close it is to the [JFCA] Obviously, a lot of jobs might be lost if they're closing down the bases down there. So, I'm just wondering what you attribute that to?

This is Toomey. When we looked at this, typically we would find a B-minus, C-plus kind of portfolio. We, particularly looking at these communities, thought that they should price against the five-year secured debt, which is roughly at 4%, 4.5%. They should have priced somewhere at 6%, 6.5% cap rate. And the bids we got were above that, and we didn't feel that was the right price for this portfolio, and hence, we're not going to sell it right now.

Great, thank you.

Thank you. Our next question comes from the line of Jay Habermann with Goldman Sachs. Please go ahead.

Hi guys, good evening. Just some questions back on the acquisition of the JV portfolio, I guess based on the current rate, you're at about a 4.25% yield. And I'm just wondering, based on the burn off concession, where you think the stabilized yield could be, and how long you think it'll take to get there?

Jay, this is Toomey. We looked at it little bit different than probably you're looking at it. Our view was, cash-on-cash return day one is better than 9%. It's hard to allocate the purchase price when you're buying an entity between the three components we have have, being the real estate that clearly is in a lease-up concession burnoff mode. Second, was the management agreements, and third, was the development of the land. And so, hence, we just rolled all three of them in and said, what's our day one cash? How does it look like? What's our future commitment as it relates to potentially putting long-term financing on it? And so, we rolled those in and really said to ourselves, at 9% cash-on-cash return out of the gate, and probably a levered IRR somewhere in the 13% to 15% range was a very attractive use of our capital at the time. And additionally, it's accretive to earnings immediately. So, that's how we started to value the portfolio.

Okay. And in terms of the development, would you expect to maintain that same interest going forward? Or, do you think you're going to take a disproportionate amount on future projects?

I think we'll take one of them at a time and see how they pencil out, and go to our partner with a plan and determine if it makes sense to start development. At that time, we may negotiate a different capital structure on each individual development opportunity, or we may, in fact, ask if we can buy it ourself and hence, build it for ourself.

Okay. And then just on the San Francisco development, can you comment there? I know it's about $12 million an acre or so. So, can you give us your expected yield on that project?

This is Mark Wallis. We're in design development on that site. It's 315 homes. We're very close to our Edgewood property, close to a light rail there. Great location. We expect that to yield today about a [6.5%] stabilized, although I think that will improve based on a delivery time of 24 months out.

Great, thank you.

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

Hi, good evening. Quick clarification on the MetLife deal. The 9% cash-on-cash, is that assuming all the refinancing takes place, including your additional capital committed in the refinancing?

First, Karin, it's day one -- this is Tom again. It's day one [nine], and we anticipate a couple of things, in that it will stay at that level or grow in the future. And the variables that are going to influence it are first, the NOI from the properties as they go through stabilization. The second, will be the what the terms of the last part of the refinancing, and we announced that we had in essence refinanced about half the portfolio. We still have half to go. And what those potential pay downs as well as rate structures will look like. So, we're anticipating that pretty consistently, we'll be above a [9%] on this year-in and year-out.

Got it. Second question just relates to the capital [raising] activity potentially in the fourth quarter that you mentioned could swing guidance between the $0.26 and $0.36. Could you just talk about what types of capital activity that might be? Would it be ATM issuance? Would it be unsecured debt issuance? And just sort of a magnitude that you guys are looking at.

Karin, this is Dave. Real quick, the range is $0.26 to $0.30 [not] $0.26 to $0.36. But generally, we don't comment on our perspective capital raising. But obviously with the debt markets where they are and the equity markets where they are, both appear to be attractive options for us.

Okay. Thanks.

Thank you. Our next question comes from the line of Andrew McCullough with Greenstreet Advisors. Please go ahead.

Hi, good afternoon. On the MetLife transaction again, and I know it's a small part of the overall deal, but can you give us an idea of what the ballpark market value of the land parcels are?

No.

Okay. And then to ask a previous question a little bit differently, on the remaining interest, do you have a right of first refusal? On the [assets] if MetLife decides to sell their interest or portions of it?

Yes. If they decide to sell, we have a right to acquire it.

And then just one other question. You've been pretty active with Hanover recently. Are there any more deals with them that you're looking at?

Well, we continue to be in a very long dialogue with them on both development opportunities. And we'll see if that comes to fruition. But, we think they're a great developer. We think they've identified a number of opportunities, and we're glad to talk to them about future development.

Great. Thanks, guys.

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

Couple quick questions, still on the MetLife portfolio. Can you break out the expectation in terms of fee income from the asset management as well as your [proportionate] share of NOI?

Michael, this is Toomey. The difficulty in doing that is that you have a management agreement as well as an ownership stake in each asset, and they're really linked together in the sense that what you have, is a case where we own an interest. If,in fact, the management agreement is not renewed, it triggers, if you will, a put whereby either party has to make an offer to the other one to buy them out of the asset. So, they're kind of linked. And it's hard to ger, per se, a separation of the management agreement and the GP interest and the ownership interest. And so, it's a very cumbersome way of saying it's almost a cash flow management agreement, if you will.

So, it's not structured like a typical fund or joint venture investment where you take a percentage and then [earn or promote?]

No, that's why we ended up in the [peri per Su] mode, is that we didn't fully look at what is the potential ranges each individual asset we own something of. And then you look at future financing, we didn't want the conflict of leverage on one asset to off lay another, so we elected really to lump them together. That's why we ended up looking at the valuation of cash-on-cash. How much are we putting out? The second thing remind you about that, is that we're putting $30 million of the purchase price interest free. So, that give us a little bit of runway, if you will, as it relates to letting the assets mature in [the] operation.

And the $30 million payment over the next two years, that's dependent upon what hurdles does Hanover have to hit?

[Those are fixed amounts], MIke. Those amounts are fixed. I think it's $20 million on the first anniversary and $10 million on the second anniversary.

Correct, but what's hurdle? What does Hanover have to do earn that, if there's a deferral?

There's no contingencies to it.

There's no contingencies, okay. The second question --

There's no way for us to compensate for the ramp-up in cash flow in leasing of the communities.

Okay. The second question I have relates to the land parcels. Can you give us a sense of where the land parcels you're acquiring an interest in are located? Also, is Hanover the preferred developer for those? Is there anything contractual with Hanover as do they have the right to be the developer on those?

This is Tom again. No, there are no contractual obligations for Hanover to build those sites. With respect to the location, we really have a confidentiality agreement about discussing the land sites an how they will be managed. What I will tell you as an overview, is they are similar in terms of urban setting and product potential consistent with what was already built by Hanover.

They're not ground leases, correct?

They are not ground leases. They are wholly own pieces of land. There are 11 of them.

Okay, thank you.

Thank you. Our next question comes from the line of Michelle Ko of Bank of America.Merrill Lynch. Please go ahead.

Hi, I was just wondering in terms of the JV acquisition, if you could give us the range of cap rates for the various assets?

Michelle, this is Tom again. To kind of repeat myself a little bit, if you will, it's really their asset burn of the lease-up mode. It's probably not prudent to apply a cap rate to the current run rate of them. So, hence, the way we valued it was cash-on-cash return.

Okay, and so you're anticipating that you'll some occupancy gains from the 83%, up to about 93%?

Yes, absolutely. This is Jerry. We actually would expect to run these things once they stabilize probably in the 95% to 96% range, like we do the rest of our portfolio. But currently, we have about 14 of the 26 properties that have occupancy under 93%.

I would also add, that you have to realize to get to the 83%, in many cases, that's a two- or three-month concessionary type approach on this portfolio. And so, we would expect those to burn off over time. I think that's your big pick-up.

Yes. The concessions, the occupancy gains and obviously, the reduction in marketing expenses over the next year or so are what will get the gains.

Okay. And I was just wondering if you could tell me -- it looked like quarter-over-quarter, in terms of same-store revenues, that the Southeast and Southwest did a little bit better than some of your other markets that have seen growth in the first half the year, like DC. I was just wondering, is that just seasonal? Or, do you think those markets are picking up?

The best growth continues to be in the mid-Atlantic area, where we had revenue going up 2.8%. It was led by DC. Right now, the worst market is still the West Coast, where revenue was down 2%. We're seeing every one of the markets improving. And our expectation is as you get into the fourth quarter of the year, all but a handful will probably have year-over-year revenue growth.

Okay. And I was just wondering if you could tell me, I guess, in terms of your total portfolio and for some of your major markets, how much the rents are off from peak?

Sure. They're off about 4% in total. We were in the trough, we were off by 12%, so we've picked up about 8% of that. Still have large variances to peak in about six or seven markets, where it's still greater than 10%. Most of those are out on the West Coast. When you look at the mid-Atlantic markets of D.C. , Baltimore, Norfolk, that area, we've actually already achieved rents that are above our

Okay, great. And just lastly, are your same-store NOI expectations in line with what you had guided to previously?

Yes.

Okay, thank you.

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

Yes, hi. Good afternoon. Just going back to the Hanover deal, first, was this under consideration for the fund? Did the fund take a look at it? Or, was this not an ideal venture for the fund?

Alex, the fund is limited to buying individual [statewide] properties, pretty tight criteria. So, this is not something the fund would have invested in.

Okay. And then as far as the type of investment, the way that you have it structured and way you're thinking of it, it doesn't preclude ultimately [condoing] some of the assets or carving off pieces of the portfolio that may not ultimately fit your strategy, does it?

They're very unique assets. And you're right. Many of them are condo quality and have condo maps on them. They ultimately could be sold to a condo converter. But I think that decision will be made both with Met and UDR in the room in deciding the ultimate best way to maximize the value of the asset. (inaudible recording skips here)

I'm sorry?

Next question.

Thank you. our next question comes from the line of Paula [Poskin] with Robert W. Baird. Please go ahead.

Thanks very much. Are you contemplating marketing any other assets for sale? And could you give us the cap rate on the sale of Pacific Palms?

This is Mark Wallis. The sale of Pacific Palms was a [5.6%] cap rate, a very good price. We always were exposing assets to the market. We do that every quarter, and we'll continue to do that. But there's nothing at a point where we would say, [for interested parties] on any particularly group of assets or assets today.

Thank you. And just one question for Dave. What's your comfort level on [FFO] dividend coverage?

Define comfort level.

Do you have a targeted range that you'd like to keep the coverage ratio in?

No. This is a good conversation that we hold quite often with the Board of Directors, and with them, look at our long-term dividend policy. And what we've stated is, very carefully we will weigh our FFO with growth potential and capital needs of the Company. Obviously, where we are is a very safe dividend, and we're anxious to look at 2011 and 2012 as the cash flows grow, increasing that dividend. But we do not have a set targeted policy towards a payout ratio. I think we'll take them each year at a time.

Thanks very much.

Thank you. Our next question is from the line of Steve Swett with Morgan Keegan. Please go ahead.

Yes, good afternoon. Another question on the MetLife partnership. Is there a defined life to the partnership agreement, Tom?

No, there is no life. No defined --

Okay. And when you guys purchased the Hanover properties in the third quarter, you emphasized kind of where you were paying, relative to replacement cost. Do you have a sense in where your interest is here? Where your pricing is relative to that replacement cost?

Again Steve, I think it's a fair question. It's difficult to break out the components of the purchase price down into individual assets. It's hard for me to answer that question about how much per door we're paying. We feel like we're paying a very fair price. We've got lot of upside, both in the cash flow and, hopefully, some day acquire these assets.

Great, last question. Dave, do you have any acquisition costs in your guidance for fourth quarter?

No, we do not.

Okay, thanks.

Thank you. Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Good evening, everybody. I guess I'm still having troubling trouble understanding how you don't know what the value of assets are. And why it's difficult to break out. And I'm curious if that's just another way of saying that you have some sort of confidentiality agreement and you can't talk about it? Is that part of this thing?

That's certainly part of it. Certainly, the other part I would really clearly reiterate again. When you get assets that have this heavy concessions, you have assets that you're buying a management agreement, which is embedded in, if you will, the GP interest, how do you divide the interest between the two? And then, of course, what's the land? So, as we've looked at it, we think the cash-on-cash is best as it serves you to try to figure out the acreation. And remind you it's $63 million today and another $30 million of the next two years. It's really not that significant of a capital [outlay.]

No, I understand. But it would be nice to know what the assets are worth. I assume you know that to some degree.

We think the overall venture is worth about $2.3 billion. You look at the land and you look at the individual asset, so, that's how we think about it.

Okay. As far as the other 20%, I think you said, that are not in UDR markets, 80% are. Is that what you said?

That is correct.

Imagine, you buy a portfolio, you get some assets you don't really necessarily want. Are there some assets targeted for disposition, maybe some non-core markets and maybe can those proceeds be used on help the refinancing process?

At this time, there's no assets that are being marketed. I think we'd like to first get them leased up. We'd like to get long-term financing on them. And then we'll examine the right option for each individual asset.

Okay. Thank you.

Thank you. We have a follow-up question from the line of Eric Wolfe with Citigroup. Please go ahead.

Yes, this is Michael filling in. Tom, just in terms of the right of first refusal or last -- how will it work? Dol you have a last look if they take out the asset to market, and is the management agreement -- Can you follow along and tag along in that sale? Or, do they have to come to you first and say, "We're going to take it out to market and you offer a price," and they don't accept it. Then they can take it out to market and have to get in some range?

We can't go into a lot of the management agreement. It's not a right of first refusal. We have certain rights if there's going to be a sale of property on the partnership, where they have to us or we have to go to them. And then we have an option to acquire the property.

I guess throughout this process, there [was an ability] -- Going back to this whole point of taking only a 12% stake though leveraging your entire platform, I would think that you would want to be able to garner a larger share of the asset base to make much more of an impact just given the resources that you're having to spend on the acquisition.

Correct. We've been consistent that we like the properties, we did the first transaction. And this gives us an opportunity in the future to acquire additional properties.

Michael, [I could add], this is Tom. All that was offered to us was to buy the Hanover interest. We certainly made inquiries if we could increase our ownership at this time. And the answer was no, at this time. But, certainly as we progress as partners down the road, and as Warren highlighted, there's a potential that we will be in the mix as it relates to when these assets are brought to market.

Do you earn fees, like for all refinancing that you're doing? Is that going to be generating a lot of FFO outside of just the 9% cash-on-cash?

This is Tom. It's a one-time financing. As you can see from what we've done already, we've put a weighted average eight-year maturity on these, and we anticipate the second wave will do similar. [It will go] very long with what is my view, record low interest rates on this portfolio. So, I doubt that it'll be a second or a third or any other types of financing after the initial. And the fee is really immaterial..

Okay. Is there anything that you can share with us at all sort of fee generation and extra G&A that as this rolls into UDR, how will the financial statements change due to bringing such a large portfolio, but a minority interest with a fee stream associated with it?

Michael, this is Dave. From the back office perspective, we're not anticipating adding a significant amount of G&A, given our electronic platform for how we process UDR's portfolio. Outside of the district managers and the staff that Jerry has brought on, we don't anticipate bringing on that much to the G&A line item for the portfolio.

So there won't be that much G&A. And then the fees, it will be a gross fee number?

Yes. There's a gross fee, and then you'll have DM cost and oversight cost.

Okay, thank you.

Thank you. (Operator Instructions) We do have follow-up question from the line of Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Thank you. I think I got cut off before. Just one final question, just circling back, as far as rating agencies. Does the debt associated with this portfolio have any impact? Or, is there any NOI benefit from this portfolio?

We wouldn't see this having an impact to our rating. And certainly, the long-term goal of this portfolio would be to have it at 50% to 60% leverage. And feel very comfortable we'll be able to get that in this marketplace. I think in the long term, it will not have an impact on the rating.

Okay. So, have you sat down with the rating agencies to go over the how the portfolio will be delevered over the next few years? And what their expectations and thoughts are?

We're scheduled to do so.

Okay. And the NOI benefit, that helps you? Do they count that in the numbers?

This is Dave, Alex. I'm not one to speak for the rating agencies. But, we'll obviously sit down with them and have a very in-depth conversation as to how the deal is structured. Based on what we see today, we don't anticipate any change to UDR's ratings, as the transaction will be viewed positively.

Okay, thank you.

Thank you. Our next question comes from the line of Paula Poskin with Robert W. Baird. Please go ahead.

Thanks. Apologies if I missed this. What was the weighted average cap rate on the five assets you bought during the quarter? The $412 million.

It was [5%]. This is Tom.

Thank you.

Thank you. And at this time, I'd like to turn the call back over to Management for any closing comments.

Again, thanks to all of you for your time this evening. We appreciate it, and certainly look forward to seeing many of you at [NAREIT] next week. Take care.

Thank you. Ladies and gentlemen, this concludes the UDR 2010 Q3 earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 followed by a passcode of 4375361. AT&T would like to thank you for your participation. You may now disconnect.