UDR Inc (UDR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the UDR 2011 first-quarter earnings conference call. (Operator Instructions). This conference is being recorded today, Monday, May 2, 2011. And I'd now like to turn the conference over to Mr. Andrew Cantor, Vice President of Investor Relations. Please go ahead.

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

Our first-quarter press release and supplemental disclosure package were distributed 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 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 statement.

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 morning, everyone. And again, welcome to UDR's first-quarter conference call.

On the call with me today are David Messenger, Chief Financial Officer, and Jerry Davis, Senior Vice President of Operations, who will discuss our results, as well as senior officers Warren Troupe, Matt Aiken, and Harry Alcock who will be available to answer questions during the Q&A portion of the call.

Before the market opened today, we reported FFO for the first quarter of $0.30 per diluted share. There were four nonrecurring items, which David will cover in detail during his prepared remarks.

first, revenue trends; second, the improvement in the quality of our portfolio, leading to a more predictable and stable cash flow; and third, our thoughts on housing and the long-term influences on our business.

First, our loss to lease at the end of the first quarter had grown to 5.8% as the results of five straight months of continued growth in market rent. Currently, 80% of our portfolio has a loss to lease of 5% or greater. A combination of this embedded rent growth, high occupancies, and continued decline in turnover confirms that the wind is at our back as we enter the prime leasing season.

Second, on the portfolio, over the past eight months, excluding development and redevelopment efforts, we have completed over $1.3 billion in transactions, or a 20% change in our portfolio through four transactions -- one, the acquisition of five communities in the third quarter of 2010; two, MetLife joint venture; three, 10 Hanover acquisitions; and most recently, the asset exchange with AvalonBay.

A common theme of these investment activities is that they were very complicated in nature and took a long period of time to ultimately [company]. Each of these transactions improved the quality of our portfolio and was consistent with our long-term strategy. I'm pleased with our team and their ability not only to complete these complicated portfolio-enhancing transactions, but literally doing them simultaneously. Expect us to continue to seek these unique opportunities to grow our business in the future.

I'd like to add some color on each of these transactions. In the third quarter of 2010, we acquired five communities, located in Boston, Baltimore, Anaheim, and Marina del Rey. This transaction not only improved the quality and age of our portfolio, but also marked our entrance into Boston, a market where we are now owned or have an ownership interest in eight communities consisting of almost 2,500 homes.

With regards to the MetLife transaction, we completed the first full quarter of operating the portfolio and are pleased with the operating improvements we've made and continue to work with our partner on ideas to expand our relationship. Third, the acquisition of 10 Hanover Square was our entrance into a high-barrier market of New York and was strategically financed partially through issuance of OP units. Fourth, the asset exchange was a win-win for both companies. The exchange allowed us to increase our exposure in key markets, while reducing our exposure in certain southern California submarkets.

My last topic, and often on these calls we spend little time talking about the long-term fundamentals of our business and how they are helping to shape our strategic actions. While it is generally accepted that positive demographics, supply constraints on construction, and recent census data are all positive signs of our business, and while our team has significant experience in managing through various cycles including recessions, financial crises, and building and bust boom cycles, what we find more profound is the effect of the change in homeownership and how it's redefining the long-term growth prospects of our industry.

The industry is just beginning to understand how the consumer has gone from a focus on homeownership to a nation beginning to embrace the flexibility of renting and acknowledging the risk of home ownership. The trend away from home ownership is amplified by many uncertainties, specifically the GSE financing, the mortgage interest deduction, high down payments, continued falling home prices, and stringent underwriting standards. We believe that the changes in home ownership are redefining the long-term growth prospects of our business. The unknown factor is how fast and how far the pendulum swings, and to what level consumers leap back into home ownership, and will the government generate another artificial market.

We foresee a range of possible outcomes. First, the home ownership rate continues to decline from its peak of over 69% to its long-term average of 64%, which brings an estimated 2 million to 3 million additional renters into the renter pool. This scenario will be beneficial to our business until new apartment development begins. Our thought is that history will repeat itself and inevitably new development will return, first in low barrier to entry markets and inexpensive suburban markets.

Another potential outcome is that the home ownership rate will stabilize or even increase from today's 66%. If this is the case, it will most likely be caused by a combination of continued low interest rate environment, a quick recovery in the job market, and/or government intervention. Under this scenario, job growth will continue to drive our operating results.

As evidenced by our recent transaction, we consider the psychology and the economics of this change in home ownership to be an important factor. And we believe wherever the pendulum settles, our growing ownership in our core markets will allow us to continue to prosper and deliver long-term value to our shareholders.

With that, I'd like to pass the call over to David to discuss our financial results.

Thanks, Tom.

Earlier this morning, we reported an 8% increase in our quarterly core FFO to $0.30. This consisted of $0.30 from our core operations and a $0.01 charge from non-core items, which netted to approximately $1.5 million, or approximately a $0.01 charge, and will be described later in my remarks. Our results are consistent with our previously announced guidance. Further details are included in our press release and supplement.

The four non-core items for the quarter consisted of the following. On March 2, we announced the redemption of our 4% convertible debt. On April 4, the entire balance of the notes, $157.8 million, was redeemed. In conjunction with the redemption of the bonds, we wrote off the balance of the deferred financing costs, which was being amortized over the original maturity of the notes, 2035. This amount, $3.2 million or $0.017, was consistent with our previously announced guidance. Absent the one-time charge, the transaction is likely to be [sterile] to our earnings as we were expensing interest at an effective rate of approximately 5.5%, which is consistent with recent indications on an unsecured debt offering.

Second, we took advantage of opportunities to pay off certain secured loans. We repaid $170 million of secured loans which had a blended rate of 3.2% and an average maturity of 2.4 years, and incurred $800,000, or approximately $0.005 for the write-off of unamortized deferred financing costs. These payoffs were not contemplated in our guidance.

Third, we completed $524 million of acquisitions, consisting of 10 Hanover Square in New York City and our asset exchange with AvalonBay. In connection with these acquisitions, we recorded $650,000 of acquisition costs and expect to record additional costs in the second quarter related to these two transactions, which is consistent with our guidance.

Offsetting these charges, we recorded a gain of $3.1 million on the sale of marketable securities from a technology investment. This amount is less than our guidance range, as the share price at the time the restrictions on our shares lapsed was less than the price at the time our guidance was announced.

Turning to our balance sheet, during the quarter we sold the remaining shares under our original at the market program and announced a new 20 million share at the market program. Since January 1, and through April 15, we have raised $153.4 million through the sale of 6.5 million shares at a weighted average net price of $23.43.

Turning to our guidance, we are pleased with our first-quarter results. We are encouraged by the sequential trends in our portfolio and expect to be near the top end of our existing guidance range. Accordingly, we plan to provide new guidance ranges on our second-quarter earnings call.

Now I'll turn the call over to Jerry.

Thanks, Dave, and good morning to everyone.

First-quarter same-store NOI was up 3% over last year. Same-store revenues were up 2.6% over the first quarter of 2010, driven by a 270 basis-point increase in income per occupied home and a 10 basis-point drop in occupancy.

Total expenses rose 2% for the quarter compared to the first quarter of 2010. Increases in repairs and maintenance personnel were offset by a slight reduction in real estate taxes. This marks the eighth straight quarter that our same-store portfolio occupancy has averaged greater than 95.5%.

Market rents have increased 7.6%, or $81 per home, over the past year, and are up 2.4%, or $26, since the fourth quarter of 2010. We have gone from a loss to lease of $15 per home in March of 2010 to a loss to lease of $67 per home in March of 2011.

92% of our communities have achieved market-linked growth over the past 12 months, with double-digit growth in fixed markets, including San Diego, San Francisco, Dallas, and Austin. Gross rental rates on new leases that were signed in the first quarter of 2011 were 2.7% higher than what the prior resident was paying. This is up from 1.3% in the prior quarter. In the month of April, this percentage was 4%. I expect this trend to continue through our prime leasing season.

Renewing residents in the first quarter on average paid 5.6% higher on an effective rent basis than they had previously been paying. In April, that percentage has remained at 5.6%. Looking out into the summer, we would expect renewal increases to average in the 6% range and increases on new leases to be in the 4% to 5% range.

We also continued to see improvements in our rate of turnover with annualized turnover for the first quarter of 2011 at 45%, compared to 47% in the first quarter of last year. This now marks the eighth quarter in a row of lower turnover, which continues to help us drive rents while maintaining occupancy.

Leave-outs for home purchase during the quarter were 11%, flat with the last two quarters, slightly better than last year's first quarter when they were 12%. Progress on our electronic initiatives, including online service requests, ACH rent payments, Internet-initiated move-ins, and renewals completed electronically are shown in a table on page three of our press release.

Our high penetration levels are further evidence of the success of our technology platform as our customers appreciate and expect the convenience of working with us through our 24/7 electronic platform. As well, we have seen the adoption rates at the communities we acquired over the last nine months grow steadily and expect them to approach or exceed the levels of our stabilized portfolio by the fourth quarter.

Our non-mature portfolio consists of almost 6,900 homes, representing 16% of our total NOI. Our completed developments include eight communities containing almost 2,900 homes at a total cost to date of $513 million, or $170,000 per home. Leasing velocity of these properties in 2010 and the first quarter of 2011 was very strong, with most properties reaching stabilization within 15 months, which was several months ahead of plan. Each property has leased occupancy greater than 91% as of the end of the quarter.

For more details, see attachment nine in our earnings supplement for completed development and redevelopment.

At quarter end, there are five communities comprising 1,170 homes under development at a total estimated cost of $382 million, or $326,000 per home. Savoye II, the second phase of our Vitruvian Park project, will begin delivering apartments in the summer of 2011 and is scheduled to be completed in the first quarter of 2012. The remaining new projects are in the early stages of development.

Attachment 10 and 11 in our earnings supplement show our active developments and redevelopments, including joint ventures. We have two properties totaling 538 homes currently undergoing redevelopment at a total budgeted cost of $47 million. Barton Creek Landing in Austin, Texas, is scheduled to be completed in the third quarter of 2011, and City South in San Mateo, California, will be completed in the second quarter of 2012.

Leasing and pricing at both of these projects is ahead of our pro forma. We currently project stabilized rent to be $500 to $700 higher than pre-renovation rent.

I'd like to give a quick update on our MetLife JV. Since taking over management of the portfolio and implementing our electronic platform in early November, we have been able to take occupancy from 83% to its current level of 90% physical and 93% leased. We continue to find new ways to improve the performance of these very high-quality communities.

In closing, I'd like to thank the 1,600 UDR associates that have worked hard over the past several years to advance our platform.

With that, I'd like to turn the call back over to Tom.

Thank you, Jerry, and now, operator, we are ready for the Q&A portion of the call.

(Operator Instructions). David Toti, FBR Capital Markets.

Just quickly, I just want to touch on the New York City acquisition a bit. Tom, is it possible for you to go into a little bit more of the strategy around that and maybe talk about your vision for the platform, the ideal size and scope? And then, if somebody could just comment on pro forma margins for that asset.

Certainly, David. With respect to the strategy of New York, certainly it's very well known that 70% of the people in Manhattan are renters.

Second, our portfolio strategy would probably be more around acquisitions. Third, it'll be targeting more of the B-plus product, and we certainly like the particular focus on the Battery Park area, given the lease-up of office space and the resurgence of the WTC and what's going to happen down there over the next five, 10 years.

So, we think it's a great market. It always has been. It's a good transaction for us to enter, and we're in continued pursuit. The size and scope of our investment is really dependent on the size and scope of the overall enterprise. Our target to get to a $10 billion-plus enterprise, we would probably see an investment of around $1 billion at that level. If the enterprise grows beyond that level, certainly part of that growth would be targeted at New York. The specifics of the transactions, I'll leave that to Matt and Harry.

This is Matt. If you talk a little bit about the pro forma margins today, with the tax abatement the margins are above 80%. Trending over the 10-year tax abatement period, it's probably mid-60% to 70%.

That's very helpful. And then, I just want to touch, maybe, Jerry, you can help me with this, the -- in some of your stronger rent growth markets, in San Francisco, for example, there were some occupancy declines. Do you think that there is a relationship relative to pushing hard on the rents relative to losing some tenants?

Absolutely. We tend to push and then retreat if we see we're not getting the traction we can find. Late in the fourth quarter and early in the first quarter, we pushed very heavily in our San Francisco/San Jose market and had a lot of success early, but as we pushed a little harder, we started creating turnover and backed down a hair on the rents.

Jerry, how are you coming in April on that market?

In April, in San Francisco, we're actually up to -- new leases is at 4.4%, and in April, our renewals in San Francisco are north of 7%.

Okay, but you didn't see the same impact in Washington, so it seems like there's a bit more pricing strength in that market on a relative basis. Still.

(Multiple speakers). Yes, a little. I think, as the year goes on, San Francisco is going to end up being stronger than DC, but we push very hard. And you had a lot of people -- your normal increases were a little bit higher, typically, in San Francisco because it had fallen further than the DC market.

Swaroop Yalla, Morgan Stanley.

I'm just wondering, the asset swap is not a part of your guidance, right, for acquisition.

This is Tom. That is correct.

Just wondering how the pipeline is looking, Tom, for acquisitions down the line for the year. Anything under contract or any other things you can share?

This is Harry Alcock. No, there's nothing we can share now. We're actively in the market looking at a lot of opportunities in a very competitive environment. We hope and expect that we'll find some transactions that work for us.

Great. Just wanted to touch upon supply growth. When do you see supply becoming an issue? I'm more curious about low barrier markets like Austin and Dallas. What are you seeing on the ground there?

This is Tom. I think -- first is is we're not seeing a whole lot of activity that gives us any concern for the balance of 2011 and 2012 in those markets, particularly I would call low barrier being Phoenix, the Texas market, and some of Florida that we still have holdings in. So, I don't think it's going to be much of an issue for 2011 and 2012.

I do think the merchant builders that we talk to, and we are engaged with them in a lot of different conversations, and we're getting a lot of feedback that they're going to be able to get to their pipelines in 2012 and 2013 and that they're targeting the Phoenix, the Texas, Florida markets. And hence, why you are continuing to see our strategy of focusing on the coastals and certainly Boston and New York. We don't see the threat of supply in those markets overwhelming the demand side of the equation.

And I've been at it a long time, and I'll tell you when you start getting NOIs like this, a lot of merchant builders will come out of the woodwork and find capital to start building into this cycle.

Eric Wolfe, Citigroup.

Michael is also on the line with me. Some of your peers have been pretty aggressive recently in selling out of the secondary markets, at least as they define them. I'm just curious, from your perspective, if you have any desire to go the same route and if you're concerned about valuations in those markets, given the potential pressure from interest rate.

A couple of different questions there, Eric. First, with respect to sales, there's no question that we are in the market exposing assets to sales and seeing what the prices they will fetch.

But they're mostly on an orphan basis that, back in 2008, we sold 1.7 billion or 30,000-plus doors, and that cleaned us out of a lot of markets that we just did not want to have a long-term exposure to. And so now, what's left is orphan, or what I would call good arbitrage where we could sell something at a nice cap rate and then move that money to what we think is a longer-term growth trajectory.

Second part of that question, Matt?

Related to interest-rate concerns going forward, the GSEs, I mean, I think we, obviously, are going to track that. But we're seeing a lot of substitute lenders in the market today, and it's pretty aggressive interest rates today, so we are seeing cap rates on those tertiary markets are actually coming down and we're seeing more demand from the investor side in those product types today.

That's helpful. Then, I appreciate what you guys are saying about some of the, I guess, what you're calling lower barrier to entry markets, but it would seem like the cost to enter the sort of higher barrier to entry markets already reflects the higher growth that you might get later on. How do you think about the potential trade-off there because cap rates in the fours in the lower -- in the higher barrier to entry markets versus six, even up to seven in some of the lower barrier to entry, how you weigh that trade-off in terms of investment?

This is Tom. I think I've said it in my prepared remarks. We're trying to build sustainable cash flow, lower-risk cash flow profile for the enterprise.

And -- been at it a while. I certainly know that the low barrier markets will have a period of time where they're going to have outsized growth because of jobs, because of lack of supply, and what will inevitably happen is the building will come, it will penetrate those markets first, it will penetrate that [de] suburban product portfolio quicker, and then it did a drop right off like a rock, as it always has.

If you look over time in the volatility risk/reward, I think on the barrier to market, particularly the West Coast, East Coast platforms endure over time much better. And so, as a stock picker, you're certainly making the right call. As a Company and what we are trying to do for the long term, I think we are making the right call.

Rob Stevenson, Macquarie Capital.

Tom, can you talk a little bit about the redevelopment strategy of the Company? Are there more sort of smaller redevelopment projects that are not reflected in attachment 10 where it's $60,000 to $100,000 a unit there where you're doing this traditional $10,000, $30,000 kitchen and bath programs and such?

Rob, it's a very good question. I think the low range in the redevelopment program pretty much has been completed for us.

What we like to do is focus on that $40,000 to $70,000 a door where you actually get a completely new product, you completely re-tenant the community, and you extend the life of the asset. Where are we targeting that? We think it's a great time -- in all frankness, I joke with the guys. Tear up everything you can in California because the cycle is coming, and we'll continue to get a great return, for example in San Mateo, where we've taken a community, literally taken all the siding off, rebuilt it. We're spending $70,000 a door. We are raising the rents $500 to $600 a month, and frankly, the occupancy did not fall that much. People did not move.

And so, those are the things that we're seeking as it minimizes our dilution, gives us a brand-new community on the backside, and like the overall market that we're in pursuit, or the asset specifically that we'd like to retain. So I think that's the focus of our redevelopments, and we're probably not going to do much in the $10,000, $20,000, $30,000 a door stuff. I just don't think there's that much left in the portfolio really to do.

How much opportunity is left that is bigger cost, bigger impact stuff in your portfolio today?

For example, in our Orange County, we are sitting with 8,300 doors. I would say probably one-third of that represents an opportunity.

The San Francisco portfolio is right around 5,000 a door again -- 5,000 doors. I would expect about half of that. Those would be two very focused. And then moving to DC, we've got a handful of what I call the old towers that were built in the 1970s that Richard Gionnatti and his team have done a fabulous job of coming in and spending that $80,000, $90,000 a door and generating a completely new high-rise, if you will. So, we're focused on those three markets through redevelopment efforts.

And what's prevented you -- you've got two projects underway right now. Why isn't that six or seven at this point, given the lower risk and the higher returns at this point?

I think we're very careful and thoughtful about studying them. And I think you'll see in the quarters ahead announcements of more projects that fit that profile.

But what's been nice about this part in the cycle is, is now when we go into the cities with permitting and designs, we go right to the front of the queue by virtue of, A, the impact fees are very low, but the cities need them. And their staffs have been reduced and, frankly, looking for work. So we're seeing a lot more responsiveness out of the cities that we've approached about these programs, and I think in the quarters ahead you certainly will see more of those announcements.

And then, in terms of New York, what is the sort of overall strategy? Is this a Manhattan-only strategy? Is this a boroughs and still staying within the city? Are you going to go to northern New Jersey, Long Island, Westchester, Connecticut, wherever you find opportunity in the tri-state (multiple speakers)

Rob, I think our focus is certainly more on the Manhattan and particularly that B-plus kind of price point product where I think either our operating platform or some degrees of redevelopment opportunities exist. And certainly the 10 Hanover fits both of those questions for us. And opportunities.

Okay. Then last question, where are you guys seeing the market for land today? Is there a decent product available at decent prices, or limited product, very high prices?

My overall summary of that would be land prices never took the hit we thought they would. That they are very competitive. They bounced right back up to the top of the curve. We're seeing a lot of competition for dirt, particularly the stuff that's close to entitled.

Alex Goldfarb, Sandler O'Neill.

David, just wanted to go to your opening comments. I think you said about guidance to expect it toward the top end of -- the new range to be towards the top end of the existing range. I just want to clarify. Do you mean to say that the top end of the range will stay as sort of a bookmark or the top end of the range would become sort of the new midpoint?

No, what I said was that our operations are currently trending towards that top end. We'll re-evaluate it during the second quarter, fall.

And then, you guys have been doing the technology stuff for a long time now, and clearly a lot of mediums have -- new ones have come up, old ones seem to have, perhaps, faded a bit.

I just want to know from your experience, are there any sort of technologies, whether it's different -- whether it's e-mail, Twitter, Facebook, and different websites, initiatives, ones that seem to be sustaining themselves versus others that seem to -- they were hot at one point and now your residents really aren't using them as much. Just sort of curious what's going on on the technology side.

I can tell you a lot of the social media, we never have thought it, garnered us a lot of leasing activity. This is Jerry, by the way.

One thing we have found and implemented at probably a quarter of our properties is an internal social media platform that allows residents to communicate and interact with each other, but people from outside the community not do it. We feel like think that helps us on the resident retention, but really not the resident procurement side.

One avenue, I think, that has grown quite a bit is -- or is growing is really the use of a mobile device to find UDR. That continues -- traffic on mobile continues to increase at a much higher rate than any other forms of traffic.

Okay, so you have (multiple speakers) -- so basically it's either the mobile apps as you just described or the standard UDR website for renewing leases, paying their rent, and submitting maintenance, et cetera, those are sort of the two mainstays?

Yes, it is. I can't tell you that all of the things on our portal that really are directed towards our existing residents. The penetration levels that are shown in our press release have reached that 80%-plus range. Service requests and payments are at 80%, and we found that the renewal percentage, I believe, is up to about 87%. So, we are going to continue to look for opportunities to roll more things out that our residents expect, that both keep them happy and make us more efficient.

Alex, this is Toomey. I'd probably add a couple of points to that. I think one trend that we continue to watch is the utilization and penetration of the ILSs.

And that seems to be on a slow degradation, and in fact, we've eliminated a couple of them from our traffic utilizations and finding that that savings has not interrupted our occupancy or our traffic patterns. So, I think the ILSs are on a slow trajectory down.

The other aspect, and Jerry has probably more statistics, resident referrals are up, and we think that's an important part that both it speaks to maybe our service element, but also the happiness of our residents, when we're finding more and more of them are just referrals from existing residents.

Jay Habermann, Goldman Sachs.

Tom, you'd mentioned with the MetLife portfolio that you're looking to expand the relationship. Can you give us any updates there?

I can't be specific, but the dialogue has been a great dialogue over our five-month relationship in terms of assets that they're interested in selling. They certainly give us a call and let us know about them. If they fit our profile, we'll take a run at them. So far, they haven't.

Second, we continue to look at ways to work together on development, and lastly is lending platform. They are one significant lender in the multi-family space and represent a good set of pricing and availability, and so we continue to talk to them on those fronts.

And lastly, the individual assets in our joint venture together and what the ultimate outcome of those might be. So, I think the dialogue is, five months in, it is very good. I think they're very pleased with the performance of the asset and I think you've got two happy partners, and we're five months into our honeymoon.

I know last quarter you guys announced four starts, and then just trying to get some perspective. I know, Tom, you mentioned the portfolio growing over time and sort of that $10 billion reference, but do you see acquisitions -- I mean, how do you see the split between sort of acquisitions relative to development at this point in the cycle? Because most of your developments are really either stabilizing or delivering over the next two years.

Certainly, Jay, we'll reload the development pipeline as opportunities present themselves.

I don't particularly have a sway towards one or the other. I look at individual opportunities, look at the portfolio's goal, and what I do realize is this team has consistently grown the portfolio somewhere between $1 billion and $1.5 billion a year through a combination of acquisitions in development, and we'll probably feel comfortable doing it at that pace. And so, today, we're probably a $9 billion enterprise, and we're managing another $3 billion of assets in joint ventures, so I would see us growing the $9 billion pretty steadily at $1 billion to $1.5 billion a year.

Just final question. I know on leverage you guys are sitting today at about nine times debt to EBITDA. Where do you see that trending over the next two years? What is your new target, say, longer term?

Jay, I think we are specifically at 8.8. And over the timeframe, if NOIs grow and we continue to grow the enterprise and use equity to grow it, I think you'd probably settle in the eights.

One other thing, Jay, I think it's important to highlight. Everybody in the industry is certainly looking at the demographics, looking at supply, the demand characteristics. We think it is a great time to grow your enterprise. And it's just -- you can't sit there and look at the wall of demand that keeps growing and not feel enthused about your investments and where they might be headed. So I think it's a great time to grow these enterprises, and I think we've got the team to do so.

Paula Poskon, Robert W. Baird.

Just a couple of housekeeping items. The $1.3 million in management fees, is that a decent run rate for the rest of the year?

This is David. I think you're going to see that number grow over the next couple of quarters as the MetLife portfolio starts seeing stabilization, as Jerry's group has continued to increase occupancy, and the NOIs have started to grow. So we might be a quarter or two away from what would be a true run rate number that you could annualize in your model.

And any ability to provide a little bit more disclosure on that? As time wears on?

As time wears on, we'll look at it.

Okay. And then, the gain on the sale of marketable securities, I just want to confirm. Is that the sale of the technology that was previously disclosed?

Yes.

Okay, and the timing of the write-off of the deferred financing costs. Why did that happen in the first quarter, given that the -- that didn't actually close until April 4, the beginning of the second quarter?

When we called for the redemption of the bonds, we had to accelerate the life, accelerate the period for which we were amortizing the deferred financing costs over. So you went from amortizing it over the next 24 years to the next 27 days, or 30 days, from the date of calling to the actual date of payment, and just for housekeeping purposes, you have three or four days outstanding in the second quarter, and so we accrued the entire charge, all $3.2 million, in the first quarter.

Michael Salinsky, RBC Capital Markets.

First question, and I'll try to weave these into one each. Can you talk about additional development commencements? Any thoughts on that for 2011, as well as, Tom, in your comments you referenced a loss to lease and I know, Jerry, you talked about that. Could you maybe break that out by region or even some of your larger markets? If you could provide that, that would be very helpful.

I'll let Jerry take the loss to lease. This is Tom, with respect to development starts in the balance of 2011. Certainly, we have been -- did not stop working on entitlement throughout the cycle. And I think you'll see the balance of the year, Jay referenced it, we'll reload the development pipeline.

Right now, I think we are delivering 400 million to 500 million into the operating platform and soon to be the same-store pool. So I would see us getting back to that 400 million to 500 million of annual deliveries. Jerry?

Sure. Loss to lease, we've got several that are in double digits, right around the 10% range. Those would be San Diego, Austin, and in our other mid-Atlantic portfolio.

Norfolk and LA are both in the very high single digits. And then, our lowest are actually Sacramento and -- Washington DC is at the low end. This is loss to lease, when you think about it, it's -- if you've had a recent spike up in market rents, most of your residents aren't paying at that level. So DC tends to be near the bottom because it's been growing gradually over the last, call it, two years.

That's helpful. Any updates to your acquisition outlook for 2011? I know you guys aren't talking about guidance at this point, but just given the acquisition pace you had, it just seems like you're well on your way to exceeding that at this point.

Michael, Toomey again. I can't really say that the 500 and what it's going to. We'll be back on the call in 90 days, and you have a better, firmer look at that.

But a lot of the transactions that we've closed in the last eight months were transactions that, frankly, we spent almost a year working on many of them to get done. The current stuff that we're looking at, complicated timing of it. Is it this year? Is it the first part of next year? Hard for us to guess.

We're more looking for sophisticated, complicated transactions than just to show up with a broker package and say we've got to win that one. So it's hard for me to give a guidance on that number for the balance of the year at this time.

That's fair, and just as a follow-up to that, just as you're looking into growing into a $10 million enterprise. What's the asset allocation? Do you still want to be West Coast heavy? Do you want to be more balanced with New York and Boston? Does the Southeast -- I mean, are you expecting to change the portfolio composition significantly?

I think as we've looked at it with Harry, Matt, and the rest of the team, Warren, we certainly look at Boston and New York as underweighted. San Francisco is underweighted. DC is about equal weight, and it might be more strategic moving from burbs to basically urban portfolio there. So, I would see us targeting San Francisco, Boston, New York, and selectively moving sideways in southern California. Selectively moving sideways in DC.

Karin Ford, KeyBanc.

Good morning. Following up on Michael's question regarding the acquisition pace, and the ATM pace, I guess the issuance there is a little bit ahead of the $300 million to $325 million that you had guided to previously. Do you guys think you'll end up above the high end of your equity issuance guidance, and if so, would that also be accompanied by higher acquisition guidance as well?

Karin, you're absolutely right. If we acquire stuff, then the equity issuance would be above that. If we only land 500 this year, then it would be right on it. So, I think it's going to be dependent on the acquisition opportunities that we find.

Got it. And the second question is just related to the asset swap. From a 30,000-square-foot perspective, it looks like you traded -- you gave sort of later-cycle assets and you got earlier-cycle assets. Is that sort of not the right way to think about it, given the submarkets, or are you taking a longer-term perspective on it, given your desire to get into Boston and improve the quality of the portfolio? How do you guys think about that?

Look, Karin, I think it was a win-win for both companies. I think it was a direction that [Brice] and his team wanted to go, and at the same time it matched up with the direction we were going.

It's kind of hard to call them at what point the assets are in their cycle. We certainly like the three that we've got of the six that we sold. Good assets. And I think they'll do well with them. So, for us, it's just a win-win, and building towards our long-term ideal portfolio, the acquisitions that fit that very well.

I show no further questions in queue at this time. Management, please continue.

Thank you, operator, and to all of you for participating on the call today.

In closing, I just said it in my opening remarks, I think the industry is facing an interesting and very intriguing set of new dynamics with home ownership in America changing radically, and where that pendulum ultimately settles may have to redefine how all of us have traditionally underwritten and modeled this business. And I don't think anybody's got a great crystal ball on how this is going to turn out.

But certainly, the early tea leaves point to a very positive and dynamic influence on ultimately our business model. And in that, we think it's going to end up on -- in our favor. And as a result, it reinforces a strategy to grow your enterprise, but grow your enterprise where housing is going to be a difficult challenge in the future. And we think that our recent acquisitions, where we are developing, point to that, and we are intrigued by the long-term prospects that brings to our business.

And I think, over the years, more and more is going to be written, studied, and understood about this period of time when it changed. But certainly the benefits and the dynamics are just now starting to show up in not just our pricing power, but in asset value power. So with that, I think we are in the right direction. I think we've got the right team to execute on those opportunities. We look forward to a really, really bright future.

With that, thank you again for your time, and I suppose we'll see many of you shortly here at NAREIT. Take care.

Ladies and gentlemen, that concludes our call for today. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 and enter the access code of 443-1795. Thank you for your participation and you may now disconnect.