UDR Inc (UDR) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the UDR 2011 second quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Monday, August 1, 2011. I would now like to turn the conference over to Mr. Andrew Cantor, Vice President of Investor Relations. Please go ahead, sir.

Thank you 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 this 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 assurance that our expectations will be met. A discussion of risks and risk factors are detailed in this morning'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 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. Welcome to UDR's second 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, Harry Alcock, and Matt Akin, who will be available to answer questions during the Q&A portion of the call.

On the call today, we will discuss our comments on four areas; first, our significant investment activity in 2011; second, capital markets activity. Third, David will discuss our financial results and guidance for the remainder of the year. And finally, Jerry will discuss our operations. The team has accomplished a great deal this year. I appreciate all their hard work and believe we have a great deal of momentum to continue our success. With that, let's discuss the results.

In the first seven months of 2011, we have grown the portfolio by more than 15%, or $1.2 billion, through the acquisition of over 2,600 homes in seven communities in Manhattan; Washington, DC; San Francisco; and Boston. We have announced four new development projects containing over 1,300 homes, for an estimated cost of $375 million, and the redevelopment of our Rivergate Community for an estimated cost of $40 million to $60 million. As shown by our investment activities, we believe it is an opportune time to continue to grow our Company and take advantage of the multifamily tail wind and the long-term positive fundamentals of the business.

Let me take a minute to discuss our recent success in Manhattan and the rationale for our nearly $1 billion investment in this market. I think it is clear we have demonstrated the ability to find attractive off-market deals, with above-average growth prospects that will strengthen our portfolio. 10 Hanover Square, Rivergate, and 21 Chelsea were all acquired from three different families, each an off-market transaction. These types of acquisitions require an additional level of patience and creativity. Ultimately, we see significant value creation at these communities through the implementation of our operating platform and redevelopment expertise. We will continue to look for similar opportunities to grow our presence in Manhattan. Jerry will discuss in more detail the success we've already seen at 10 Hanover Square and Rivergate.

Turning to capital markets activity, our recently completed $500 million secondary offering was very well received by the market. The deal was four times oversubscribed, and it was priced at an attractive 2% discount to the previous day's close, demonstrating investors' confidence in our strategy. The offering combined with the ATM and OP unit issuance bring our year-to-date equity raise to over $930 million, which means we have funded over 75% of our acquisitions through equity.

In summary, our Company has gone through a dramatic change since the beginning of the year. And as a result, we have improved our balance sheet, a larger percentage of our NOI coming from above-average growth markets, and dramatically increased our income per occupied home. We have successfully executed on what we said we are going to do. Deleveraging through acquisitions and high barrier to entry market. We aren't done yet, and we believe that this is the right time to enhance the quality and size of our portfolio through acquisitions, development, and redevelopment. With that said, we also believe now is an appropriate time to sell selected communities, as NOIs have recovered, combined with low interest rates provides us an opportunity to execute at attractive prices.

In closing, with the substantial improvement to our portfolio and balance sheet, as well as the continued success of our operating platform, we look forward to the remainder of the year. With that, I would pass the call on to David.

Thanks, Tom. Earlier this morning, we reported a year-over-year 15% increase in our quarterly FFO to $0.31. This consisted of $0.32 from our core operations, and a $0.01 charge from non-core items, or $1.1 million. Our results are consistent with our original guidance announced in February. Further details are included in our press release and supplements.

The four non-core items for the quarter consisted of the following. First, we completed $628 million of acquisitions, consisting of 10 Hanover Square in Manhattan; and View 14 in Washington, DC; as well as our previously announced $500 million asset exchange. In connection with these transactions, we recorded $2.1 million of acquisition costs and will record additional costs in the third quarter, as we have announced $578 million in acquisitions, specifically the closing of Rivergate in Manhattan, and we are under contract to purchase 21 Chelsea, also in Manhattan.

Second, we completed a $350 million refinancing for six assets in our UDR MetLife joint venture. The refinancing was done at a fixed rate of 4.73% and has a term of 10 years. UDR was paid a refinancing fee of $844,000. Third, we incurred $745,000 of severance charges, which will result in future G&A savings. And fourth, we sold Mustang Park, a community owned by (inaudible) and recognized a gain net of taxes of $891,000. This asset was developed by a third party through our pre-sale program in the third quarter of 2009, and subsequently sold this quarter.

Turning to our balance sheet, as of June 30, we had $882 million of cash and credit capacity, which will more than meet our debt maturity, development and redevelopment needs through 2012. During the quarter through our ATM, we raised $231.2 million through the sale of 9.4 million shares at a weighted average net price of $24.51. Also, we took advantage of an opportunity to repurchase 141,200 shares of our series G preferred stock at $25.38 a share, and a yield of 6.71%.

As previously announced, we priced a seven-year, $300 million unsecured bond offering at 4.25%. The bonds will mature on June 1, 2018. Subsequent to the quarter close, we sold 20.7 million shares at a price of $25 per share, with proceeds being used to fund our most recent acquisition, pay down debt, and for general corporate purposes. The balance of the year has $103 million of debt maturing, which we plan to pay for through asset sales. This debt has a weighted average dated interest rate of 3.8% and an accounting rate of 5.6%. We also had the opportunity to prepay at par $100 million of a secured credit facility that carries a 6.78% interest rate. This, too, we plan to pay with sales proceeds.

As a result of our acquisitions in 2010 and 2011, and the equity we have raised over the same time period, our credit metrics are improving faster than originally anticipated. We expected our debt to EBITDA to have moved from above 10 times to below 8.5 times. Our debt to DAV will decrease from being above 53% to below 48%, and our fixed charge will be above 2.4 times.

Turning to our guidance, in conjunction with our July equity offering, we increased our 2011 guidance. Our full-year 2011 FFO is expected to be between $1.25 and $1.30 per diluted share, compared to our prior guidance of $1.20 to $1.25 per diluted share, a 4% increase at the midpoint. The change in the midpoint can be accounted for through the following. A $0.02 addition from improvement in same-store property NOI, an $0.08 addition from our 2011 acquired properties, a $0.02 to $0.03 addition from improvements in other non-same-store property NOI, a $0.01 reduction from interest expense, resulting from our $300 million, 4.25% unsecured offering occurring earlier in the year than originally forecasted, and a $0.06 deduction related to the common equity issued in 2011 through our ATM program, the July equity offering and the issuance of OP units.

Let me give you some additional details on the following three material components impacting our new guidance. First, our NOI. For revenues, we expect the full year range of plus 4% to plus 4.5%. For expenses, we have tightened our range to plus 2% to plus 2.5%, as a result of certain real estate tax appeals that were settled in the second quarter. Our NOI is now projected to range from plus 5% to plus 6%. Second, our share count. During 2011, through our ATM, we sold 15.2 million shares for $368.3 million in net proceeds. In July, we sold 20.7 million shares at rates of $496.3 million in net proceeds. In addition, as part of the 10 Hanover Square transaction, we issued 2.6 million operating partnerships, operating partnership units for $64 million. In total, we have raised $930 million of equity at a weighted average net price of $24.16 per share. Third, asset sales. We have announced that we expect to sell $200 million to $300 million of assets in the second half of the year, with which the proceeds will be used to pay off maturing debt. Now I'll turn the call over to Jerry.

Thanks, Dave. Good morning, everyone. Same-store NOI in the second quarter was up 5.1% as a result of revenue growth of 3.6% and expense growth of 70 basis points. Total same-store income per occupied home increased 3.7% to $1,181, and occupancy was down 10 basis points to 95.7%. This is the ninth straight quarter that our occupancy has averaged greater than 95.5%, translating to continued pricing power. In fact, our loss to lease at the end of June 2011 was 6.3%, or $74 per home.

In our same-store portfolio, effective rental rates on new leases entered into during the quarter were on average 5% higher than what the prior resident was paying. Renewing residents on average paid 5.5% higher on an effective basis. Renewal increases sent out for the month of August and September averaged greater than 6%, with increases in our strongest markets, like San Francisco and Washington, DC averaging 7% to 8%. While we are pleased with our ability to push rents and maintain occupancy this year, it has been done without substantial job growth in the majority of our markets. We believe we will see more job creation in 2012. Resident turnover was down slightly in the quarter to an annualized rate of 55%, compared to 56% in the second quarter of 2010. This marks the ninth consecutive quarter of declining turnover.

Expense growth of 70 basis points was the result of higher utility insurance costs, which were offset by lower real estate taxes. Repairs and maintenance and personnel costs were up less than 1%. Given the acquisition, development, and redevelopment activity over the past 12 months, our same -- our non-same-store portfolio has grown to 6,900 homes and now represents 20% of our total NOI, including over 3,100 acquired homes located in markets such as Boston, Manhattan, San Francisco, Washington, DC, and select Southern California submarkets. The completed development of over 2,200 homes in six communities at a total estimated cost of $434 million, or $185,000 per home. Over 80% of the homes -- these homes will enter our same-store pool within the next year. In addition, we have 2,000 homes being developed at a total cost of $607 million, or $304,000 per home. 40% of these homes will be delivered in 2012 and the remainder in 2013.

Over 850 homes are in redevelopment. The pipeline consists of three communities, totalling 862 homes at a total cost of $117 million. Highlands of Marin, San Rafael, California is expected to enter our same-store portfolio in the second quarter of 2012. Barton Creek Landing in Austin, Texas is scheduled to be completed later this year, and City South in San Mateo, California will be completed by midyear 2012. Leasing and pricing continue to be very strong in both of these communities, and both our operating ahead of plan.

Our joint venture with MetLife continues to progress well. After taking over management of the portfolio in November of 2010, when physical occupancy was 83%, we have pushed that number up to over 94% occupancy, and we have fully implemented our operating platform, which has driven expenses down. We are pleased with our continued success with this portfolio.

Let me turn now to our recent acquisition. These acquisitions were completed in the third quarter of 2010. First, 10 Hanover Square. Since acquiring the asset in April, effective rents have increased 14% on new leases signed, exceeding our initial expectations. This level of rent growth in Manhattan over such a short period is an example of our ability to create value through our operating platform. We believe the World Trade Center development site will continue to define the lower Manhattan residential market. With plans for approximately 10 million square feet of office space; 500,000 square feet of retail space; a performing arts center, and an improved 800,000 square foot transportation hub; the redevelopment of the World Trade Center site will continue to increase the desirability of the lower Manhattan area, including the residential market. We believe the financial district is an attractive submarket of Manhattan to grow our presence, and we will continue to look for opportunities.

Second, Rivergate. Let's take a minute to walk through this transaction. It's a 706-home community located in one of the highest barrier-to-entry markets, Manhattan. Current in-place rents that are below $500 -- that are more than $500 below market. Put another way, a loss to lease of $500, or over 15%. In the first 10 days since acquiring the asset, we have increased lease to occupancy from 95.6% to 98.2% and raised rents 15% over the expiring lease rates. This is 5% ahead of our initial underwriting. While it's only 18 leases, the results are very encouraging.

Next, we plan to do a $40 million to $60 million redevelopment project, which will include a new rooftop fitness center and deck, as well as an updated lobby and building entry way. We anticipate an additional $700 in rent following the renovation. Clearly, we are excited for the continued opportunities we see in these assets and will keep everyone updated on their future success. With that, I'll now turn the call back over to Tom.

And thank you, operator. Now we're prepared for the Q&A portion of the call.

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Anthony Paolone with JPMorgan. Please go ahead.

Thanks, good morning. Tom, with the MetLife JV on the land side, you guys were able to take down a piece of land and start construction there, or at least do the pre-sale deals. I was wondering if you could tell us how that process went, and the prospects for potentially more of those deals, and also the economics.

Well, certainly. I'll let Harry cover the economics. With respect to the process, certainly we're having a dialogue with Met on a broad range of topics, not just the operations of the properties and how they are doing very well, but also the land inventory and how it will ultimately be disposed of, or built upon. And we're working through the 11 sites, and suspect that we'll find other opportunities in there that we can either work together or we will buy the land and build it for our own account. So I think there will be more activity over the next year on that front.

The dialogue, relatively straightforward. We have recurring meetings with a lot of different Met, from the local asset managers all the way to the top, and how to manage this $2.5 billion portfolio to optimize its value, and continue to reiterate our interest in owning more of it. And we're working on a long range of topics there, but I would expect that you'll see us over time figure out how to accomplish what Met wants and what we want, which is to own a little bit more real estate with them.

The deal itself and the economics?

Just from a yield standpoint on today's rents, for untrended rents, we expect to get close to 6.5% on that one.

Okay, and just my follow-up here, now that you've done these deals that now are about -- or you now have about 20% of the portfolio not in the same-store, and the numbers out of New York seem really quite strong. Just wondering how we should think about growth out of the non-same-store pool, like over the next, I don't know, either few quarters or year, whatever you feel comfortable commenting on. Seems like it may be different than the rest of the core.

Yes, Tony, this is Jerry. I think our non-same-stores will grow at a higher rate. When you look at the bulk of them, they are in New York, Boston, DC, some in northern California. I think you're going to see annualized growth rates that exceed what our core portfolio is. If I had to guess -- and you're looking probably in the high single digits in many of those markets, which is quite a bit higher than our same-store.

Okay, thank you.

Thank you. And our next question is from the line of Dave Bragg with Zelman & Associates. Please go ahead.

Thanks, good morning. Tom, last quarter you opened and closed the call with some interesting thoughts on home ownership. You said that the new dynamics there may redefine how the multi-family business has been traditionally underwritten and modeled. Can you expand on this thought, and offer any comments as to whether or not this has already been -- you're seeing this contemplated by those in the acquisition market today?

Well, with respect to home ownership, I believe you'll continue to see it fall for some time, as inventory and foreclosed get delivered at lower prices, appraised values pick those up, financing available for housing tightens. So I think we're still -- have not felt the bottom of home ownership in America, and I think the dynamics and the future of people's willingness to gamble on housing is going to be less receptive. So where that pendulum swings to the bottom, David, I'm not certain. But as long as it's continuing to swing in our favor, I think it's good for our business.

Okay, and a follow-up to that is, given your portfolio strategy of investing in higher barrier markets, can you talk about the long-term threat of home ownership versus supply, and perhaps update us on the trajectory of multi-family supply here as we look into 2012 and beyond?

Certainly, and one of the keys of that strategy is to try to get to more of an urban and more -- less home-ownership-friendly environment, if you will, and to get away from the suburban, primarily because I do worry, not over the next couple years, about the supply equation, but certainly if you talk to lenders, you can see that they are lending more aggressively on multi-family because of the NOI growth rates. Merchant builders will find a way to secure capital, and they're going to start building in a suburban location. You can already see that reflective in the start, so why would I want to have a company exposed to that? I'm trying to move us away from as much of that as possible, and I think you'll see us take advantage of that by selling a lot of our suburban real estate in the years ahead to shrink that exposure.

Got it, thank you.

Thank you. And our next question is from the line of Eric Wolfe with Citigroup. Please go ahead.

Hello, guys, thanks. Tom, just following up on your answer there, could you just tell us for the $300 million of dispositions you're expecting this year, what kind of valuations you're expecting? And then also looking a little bit longer term, how much capital recycling is going to play into your strategy versus just going out and issuing equity and issuing debt to grow and upgrade your portfolio?

Well, great. Very good questions, Eric, and to start with the sales side, we're out in the market today exposing $600 million, and we'll wait and see how the pricing comes in on that. Our suspicions are with the 5-year secured loans interest-only at about 3.5% as of last week, that we'll get good pricing. We're currently thinking that's going to be selling probably at about a fixed cap. The markets that we're exposing is Florida, [orphans] in southern California, suburban Texas, and suburban DC. So we'll see what the pricing is, but I think it's a great time to sell, and I think being patient and waiting for NOI trajectory to recover, and with a low-interest-rate environment, I think we'll be able to thread a needle and get that out.

With respect to capital recycling and our plans towards the future, what we're modeling and thinking here is that every year we'll sell a portfolio that is equivalent to what our delivery for development will be, and we anticipate that will probably be $200 million to $300 million a year, and then any high-coupon debt. So that will minimize the dilution, and fund our development pipeline in high-coupon debt. So I think that's a good, prudent strategy over the next couple of years, and we've sized our development pipeline. Today, she stands at about $600 million. We'll probably grow that closer to $1 billion over the next year, and as a result, that, coupled with the maturing debt or high-coupon debt in the next 3 years, probably gets us to a portfolio that will sell in the $1 billion, $1.2 billion range over the next 3, 4 years. And we don't see much dilution out of that activity.

And all of that I assume is the suburban non-core product that you referred to, or is there anything in there that you would consider core, just not in a market that you really see yourself being in long term?

No, I would see that as probably the suburban marketplace for us.

Okay, and just one quick one on your markets -- Monterey saw some pretty strong sequential revenue growth, over 7%, and I was just curious, also in San Diego, you saw negative sequential growth there. Just wondering if anything has changed in the outlook there.

This is Jerry. In Monterey, that is predominantly an agricultural marketplace. So you typically see seasonal growth between 1Q and 2Q. You'll make the most of your money in that Monterey portfolio really between February and December of every year. So that's a normal occurrence.

In San Diego, you had some military movement that impacted that area, and we saw similar issues in both Jacksonville, as well as Norfolk, and in part of our Seattle portfolio that's reliant on the military, there seemed to be an increase in movement this quarter.

Thanks, guys.

Thank you, and our next question is from the line of Jeff Spector with Banc of America Merrill Lynch. Please go ahead.

Good morning. Tom, you've discussed a couple times now that you're not done yet with the portfolio transformation. Can you provide the ideal mix in percentage terms of what market, the markets, or at least ex-suburban?

Well, certainly, Jeff. I would think of it this way -- that the market that we would label 10% to 15% exposure, and I'll ask Harry to chime in on these as well, would probably be the New York, Boston, soCal, and San Francisco will probably be the 10% to 15% marketplace, [and] DC. You add that up, you're probably going to end up with somewhere between 60%, 65% of the Company in those 5 markets. We're probably at a little over 50% today in that market mix, so there's a little bit more buying left to do, primarily in New York, Boston, and San Francisco.

With respect to how much is left to sell, I think we said in the previous answer to Eric, we're probably looking at about $1 billion, $1.2 billion, but our intent is really just to use that money to fund our development. You look at our development pipeline, it's clearly concentrated in those markets, so that I highlighted 10% to 15%. There will be a range of markets that will be somewhere between 5% and 10%. Obviously, that's probably Seattle, San Diego, and Dallas. And that will make up the rest of the portfolio.

Okay, thank you. And then just 1 follow-up on your comments about off-market transactions. I would have thought even a year ago, year-and-a-half ago, it would be tough to do, and you guys have done that. Do you anticipate that will continue? Is it getting tougher? Your comments -- I think it was David's comment on Rivergate about the dramatic improvement you've had there, just in 10 days. It would seem as if people would market the sale of their assets.

Harry, want to color a bit?

Sure. We're out there actively looking for additional opportunities in New York City. As you know, it's hard to find these deals. They come along on an opportunistic basis, and it -- candidly, it's helpful that we're active in the market. Our name's out there, so we're finding additional families to talk to, just given our recent track record in that market. So we're optimistic that we'll find other opportunities. We certainly would like to.

This is Tom, I would add additional color that, A, we've done 3 different family groups. You've had 1 take OP -- the other 2 have looked at OP transactions, decided to take the cash and pay the taxes. Commonality between them was really the law firms, their tax advisors, so now we've got a familiarity as well as a framework, and it's a lot easier for the professionals to go to their clients and their relationships, and explain our structure, the way we close, the way we negotiate. And I feel like we're going to have more success in that area, but it's patience, patience, and patience that gets these deals. And we're excited about trying to find more, but they are complicated. They take time.

It's a great strategy, in our view, is to pursue that that's really an A-quality location, but a B asset, and bring not just the operating platform to bear, but also the potential for redevelopment. And I can understand the owners and operators of these assets today. They have done a fabulous job of creating value for themselves, for long periods of time. But every once in a while, there's an opportunity, and they want to get some liquidity. And we would like to help them in that. So I think we'll find more.

Thank you. Very helpful.

Thank you. And our next question is from the line of Jay Habermann with Goldman Sachs. Please go ahead.

Good morning. Tom, as you talk about Rivergate and some of the other acquisitions you've made so far this year, clearly pushing rents 15% right off the bat is a very good start. Can you give us some sense of what you're assuming, perhaps in years 2 and 3, especially from markets like New York?

We've got a couple things going on. One, we generally expect, over the next couple of years, to be able to raise -- to be able to achieve market rent increases of 10% to 12% in aggregate. But in addition to that, the Rivergate property and 21 Chelsea property, we also have a redevelopment component, and expect to be able to capitalize on that investment as well.

And what are you assuming for the returns on redevelopment?

Well, it's an all-in return on the asset. So it's the purchase price plus the money spent, and you look at your total return. So the redevelopment, we're not looking at necessarily as an individual investment decision, but rather that's part of our game plan going in.

Okay, and maybe, Tom, just thinking big picture, is it too early to think about job growth for next year? I guess what are your assumptions that you're baking in for 2012 at this point for job growth?

Boy, it is a little early for that, Jay. What I would tell you is to watch what's going to happen in DC, and what's going to get [axed] and where. I didn't think Defense would be on the agenda, but clearly it's front and center now. So that's changing the dynamic that I didn't think was on the table. I think we have to wait and see, both the interest rate environment and a little bit about where these cuts in programs are going to occur, as well as if there's some give and take on the tax issue. So it's just premature. There's a lot coming out of DC that I think we all ought to be sensitive to and watch very closely. I'm still hopeful that small businesses take up the slack, and that we get back to 2 million jobs a year. But more importantly to me is our local dynamics of our supply/demand, and how that plays out and not the aggregate of the US.

Great. Thank you.

Thank you, and our next question is from the line of Rob Stevenson with Macquarie. Please go ahead.

Good morning, guys. Tom, you've talked in the past about your New York City strategy being mostly a Manhattan-only strategy for the time being. When you think about Boston, how far out into the burbs are you willing to go there? It seems like that market, especially the downtown Boston and such, is a less deep market right now, at least right now for acquisitions. Are you comfortable going, stretching further into the burbs there?

Well, this is Harry. A lot of our portfolio is in the suburbs in Boston. In terms of our investment strategy going forward, our goal is to acquire for our new acquisitions to be closer into the downtown area. And you're right, it is not as deep a market as some of these other downtown areas, but that's where we intend to focus the majority of our efforts going forward in Boston.

Okay, and then -- .

This is Tom. I would add, Rob, that you will probably see us sign up a couple development activities in Boston. It's still a great city, long term -- it weathered the downturn enormously, surprisingly very well. And so I think we'll find a couple development sites down in the business district, if you will, and we'll see how those pan out. But we'll get our exposure there. We'll just be patient about how we get it.

Okay. What about the development in New York City? You basically bought in southern Cal, San Francisco, DC, and then started developing there. Sounds like buying in Boston, now thinking about developing there. At what point does development in New York City make sense for you guys, or does it?

Well, Rob, I don't want to say never. Certainly at some point in the lifecycle, the Company and its talent base, it may. Today we're just very, very comfortable that there's a very deep pipeline of this product, similar to what we've got in Rivergate, 10 Hanover, and Chelsea, where they are great properties, good locations. There's upside in what we can do tomorrow, and I think we'll stay at that bandwidth for a while.

That doesn't mean that we don't see a lot of development opportunities. We're just not comfortable with that risk/reward at this point, and feel like there's enough opportunity in the bandwidth that's in our strike zone to find those. And I do like the opportunity just trading with these families. They are very sophisticated. They are very capable, and there's a lot of assets that they hold. We see it as a pretty good pipeline, if you will, that not many other people are pursuing with the same intensity that we are.

Thanks, guys.

Thank you. And our next question is from the line of Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Good morning. Just curious, as you guys underwrite the New York deals, what you're expecting for turnover as you guys were a new institutional owner versus these were privately run from a family perspective. And how that turnover -- your turnover assumptions there, if they differ materially from what you typically underwrite for other acquisitions.

Alex, a very good question. Generally, what we find is, is when we do a light rehab, is that the residents can take the absorption and they don't frankly move. When we do a more higher intense regrade, we expect almost to turn 100% of the residency over. And so I think the people at Rivergate are probably over the next 3 years going to get enough rent increases that it will push a substantial number of them out. I think in the case of the Chelsea, that they will probably generally stay. And in 10 Hanover, we're finding that they are taking the rent increases and not really moving.

So we weigh it as part of our overall strategy of each acquisition, each opportunity. But the higher end, the more intense work rehabs, generally we do try to target turning over the entire resident base. And then it's a question of how deep the market's going to be at $4,500 to $5,000 a month basically for 1,000 feet. And we think at $50 a foot, $52 a foot, that in that particular location of Rivergate, that the market's pretty deep in that price point.

Okay. So sounds like the image for Chelsea and Hanover stay the same, but I guess resident perception of Rivergate is being the more affordable. That I guess will change as you guys upgrade it and run it more institutionally, it sounds like.

Absolutely.

And then the second question is for David. Just wanted to make sure I got everything. The $1.25 to $1.30 guidance, 1, just want to know what the transaction expense in the third quarter and for the second half of the year we should model in. And if there are any other 1-time items, like any other gains or anything like that in there?

The $1.25 to $1.30, you could take the acquisitions that we're going to close on here in the third quarter. Rivergate, 21 Chelsea, and then you've got another, call it roughly $300 million that we have in guidance, and assume between 50 basis points and 1%. Beginning of the year, we came out with 1% at our guidance, but we've seemed to trend down from that a little bit. So you can probably back off that a little bit. So there's probably $0.02 in there in terms of acquisition costs. Then the rest of the earnings is pretty sterile, I believe.

Okay. So no gains or anything like that?

No.

Okay, thank you.

Thank you. And our next question is from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Hello, good morning, everyone. Are you there?

Yes.

Okay. So Jerry mentioned the expected job growth in 2012. And Tom, you mentioned you expect the housing market to remain weak for the time being. And those 2 comments could be argued that they contrast with one another, that is, the revitalized housing market is going to be a part of recovery in the jobs market. So I'm curious as to why you think jobs will return in 2012, if you think the housing market's going to stay weak.

Well, I'll take my shot at what I think jobs -- first, I would put up, the dollar's going to get weaker. I think the export cities will do well in that. I think technology will continue to strengthen. Healthcare, up in the air, but it's clear to me that there's just a work force shortage in that industry. So I think those are going to be 3 that will probably grow in terms of jobs.

Construction, which has always been the industry that's led us out of recessions in the past, I think is going to be muted. I just don't see any need for construction, so there bores one down. The other down is probably going to continue to be government, and now it might be Defense. So that being said, it's going to be a lot about what markets you're exposed to, and where that jobs are going to take place. I would probably would add oil and gas to the positive side as well.

Home ownership is really -- can you give me any reasons yourself that you see it swinging back around? You've got to save up for a down payment. You're probably going to be faced with higher interest rates. You're going to squeeze your mortgage payment. I just don't see people wanting to venture back into that while the economy is still maybe in a double dip, maybe trying to find its way out of this recession. So, that's how I reconcile the 2, Rich.

Okay, and second question is -- you guys obviously pretty aggressive buyers of real estate in key markets, and been made for an interesting story to cover, obviously. But when do you think -- you can't know for certainty that it's going to be the right call, right? Something could turn against you, and the prospects for multi-family could, this time next year, maybe not as good as what we're feeling today. It could happen. Let's just say that, right? So what are your trigger points, as you're going through this aggressive, or active acquisition effort that might make you say -- wait, hold on, let's slow this down a little? What are some of the things you're looking for that might give you pause?

Well, Rich, I'm not trying to time out a market. What I'm looking at is the long-term aspect of saying -- if you had a blank sheet of paper, where do you think the best prospects are for the long term. I think they are in multi-family. I think they are in urban settings with what I would call amenity-driven space around them being transportation, parks, job centers. So, I just look at the long term and say -- that's probably the areas that are going to have the most enduring quality cash flow growth prospects, as well as value, appreciation, and assets.

And my experience, and history proves it's probably right, this industry generally gets in trouble mostly when we overbuild, or the housing market becomes an artificial bubble, enabled by the government. So if you take away the government enabling the housing bubble, which I can't control, then it's a function of supply. Where does supply occur? It occurs in all our markets at different times and different paces. And so our theory is that it's going to start in the suburbs, where land is relatively available, cheap, and people will build out there to meet a growing demand of the long-term demand, if you will. So that's why you see the push for us more on an urban, more affordability.

And lastly is the equation of margin. Our suburban portfolio margins are probably in the low 60%s, and our urban portfolio margins are probably in the high 60%s, a 10% margin differential combined with a better growth rate tells me you're going to get a lot better return over the long term. In the short run, there's a lot of things that can go wrong. And the old saying -- when Washington's in session, nobody's [safe], is true. And I don't know what's going to come of that. I think it's our biggest threat to our industry over the short term, but that being said, it seems to me that I would rather buy today than I would build, because of that uncertainty over that time horizon.

That being said, we're going to find those unique sites that are worth building on, and we'll continue to pursue that, and we'll fund them with our sales. So I've tried to weigh both the capital risk by saying I'll sell assets to fund my development and my high-coupon debt, and that I'll continue to buy, as long as I have a very accretive possibility with my share price, and the acquisition and the growth prospects. So that's how we think about capital allocation over both the short term and long term.

Great color. Thank you.

Thank you. And our next question is from the line of Karin Ford with KeyBanc Capital Markets. Please go ahead.

Hi, good morning. Just another question on the non-same-store pool. Appreciate the color that you're expecting high single digits growth there. Did you own enough assets long enough, or do you have enough data that you could talk about maybe what the sequential growth was in revenue in the non-same-store pool compared to the 1.6% you posted in the same-store pool?

Karin, this is Jerry. We really don't have that information. Most of the properties in that non-same-store pool were purchased, at the latest, in the fourth quarter of last year or late third quarter. And you're still working through some things like concession burn off. So you don't really have true growth rates to really give meaningful data on.

Okay. And second question just relates to acquisitions. You funded 75% with equity from here, drove EBITDA down to 8.5%. What percentage of acquisitions from here do you think will be funded with equity, and where ultimately do you think debt to EBITDA will wind up by the end of the year?

Karin, this is Tom. Funding source in the future, I still think we probably need to be doing 60% or greater in equity. I think it's a good balance for us, and a good strategy for us to lock up acquisitions to come back to the street and say -- here's what we have locked up, here's our strategy. Here's how we think we're going to manage this asset and increase its value, and let the street actually see what they are investing in. That will probably be better than 60% for the time being, and we'll see how that goes, as well as we'll watch the stock price and how it responds.

Karin, it's Dave. Regarding debt to EBITDA, assuming everything works out as we expect it to in the second half of the year, I would say our debt to EBITDA ends up somewhere between an 8% and 8.5%.

Thanks very much.

Thank you. And our next question is from the line of Paula Poskon with Robert W. Baird. Please go ahead.

Thanks, good morning. To follow up on that home ownership penetration rate discussion, one of your peers last week compared their average home ownership penetration rate in their markets to the national average. How would you do the same?

This is Jerry. I haven't pulled that data. I would tend to say it's probably fairly close to the national average. When you look at markets like San Francisco, New York, Boston, I would say it's below the national average. And then when you get into markets such as Nashville, Florida, Texas, Phoenix, it would tend to be a little bit above. My guess, and this is just a guess, is it's probably close to the national average.

Thanks, Jerry. And also, to talk about turnover, what percentage of move-outs this quarter were due to home purchase and also to high rent. And how did that trend compare year-over-year and sequentially?

Sure. Move-outs to home purchase were just under 12%. That compares to 14% last year in the second quarter, and it's up slightly from about 11% in the first quarter. And I would tell you that's just seasonal home buying more than a trend. Move-outs to rent increase were about a little over 6%. That compares to about 2% last year, so it is up quite a bit, but still not a meaningful number. And in first quarter, it was about 5%, so it's inched up a little.

What's interesting, when you do look at move-outs to home purchase, there's 2 different scenarios. One is a place like San Francisco, where we've pushed move-outs to rent increase above 10% there, so it's above our average. But what's great is we're able to reload quickly with people willing to pay upwards of $300 more than what the departing resident was paying. And we're able to maintain occupancy levels in that San Francisco market of above 96.5%. So in some markets, you can push. You don't really care if they move out, because you're going to reload at high rates.

Conversely, when you go to markets like Florida, you'll push, and at times we'll see occupancy get high and we'll get aggressive on renewal increases. There, you'll find people will move out and it's more difficult to reload quickly. And therefore, as you struggle to get your occupancy back up to over 95%, you may have to reduce your rents. So when I look at my rates on new leases in a place like San Francisco in the month of July, we were getting over 16% increases on new leases in San Francisco, which was the best in our portfolio. In Florida, that percentage was more in the 2% to 4% range. So, sometimes you don't mind when you push people out with those high increases, and sometimes it gets painful, and you have to relook at your strategy of how hard you push on renewals.

That's very helpful, Jerry. Thank you for that.

Paula?

Yes.

Just to add to that, because think we've read through the dialogue on a lot of these conference calls about people trying to look at percentage of income. I'm not so certain that metric has the same relevance and power that it did in the past. Why? Because I don't think home ownership is as appealing as it was during when a lot of people were measuring that and trying to correlate this next -- where are rents going to go to or where are they going to top out to.

I think what Jerry pointed to is very critical, which is how much do you grow rent, how long does it take you to reload the property after pushing that rent? And that's probably a metric that I think maybe the sell side/buy side should focus a little bit more on, because that's the one we are very much focused on, is push the rent. When we see people move out, we say -- well, wait a minute, that's okay if we can reload in 15 days. If it takes us a month to reload, then we've pushed too far.

So it's a lot about where's the top in rent. The question's more of how many people does it take to refill the property, and how quickly do you identify them? So I think that plays well into both our electronic platform, which has really given us daily information on that reload and that traffic to determine if we're getting there on the pricing point.

Tom, I certainly agree with you on the -- all of the reasons why we don't, shouldn't be excited about the return of home ownership. I happen to subscribe to the theory that there's a secular trend under way among the psychological approach of the next generation coming out. Do you subscribe to that theory, as well? Or do you take issue -- do you think that once the economy straightens out and there's wage growth, that home ownership will return to norm?

No, I believe that there will be -- the pendulum is swinging in our favor. At some point, absent government intervention, it will slow down and start to swing back the other way -- individual market by market. What's the right number? I think ours, with the interest deductibility on the table potentially, that the true dynamic of where it settles out won't be settled for the next couple years. I like the fact that it's swinging in our favor during that period of time.

So, secular change depends on how your time horizon. Having 2 kids that are post-college graduate, out there in the workplace, I listen to them, listen to their friends and they say -- listen, home ownership ties me down. I know I'm going to have to move around to get jobs. I don't want to be tied to a home. Plus, I can't save up the damn money. I can go to mom and dad and get it, but the truth is, I would rather have my lifestyle, the flexibility, and all the amenities that renting affords me today. And they are not really inclined to see home ownership as what we saw it in my generation. And Paula, you're much younger than I, so you can fill in the gap.

I wouldn't bet on that, but thank you for the color. I appreciate it. And then just 2 housekeeping questions for Dave. What did the severance charge relate to, and what is that savings that you mentioned going forward? And secondly, what were the insurance-related expenses?

On your second question, insurance-related expenses, we had a significant fire at one of our communities in northern Virginia that related to -- there was a series of units that were downed because of that, so the deductible related to that fire. And the severance charges of about $750,000 were related to individuals throughout our enterprise that are no longer with us. And the savings will be not dollar-for-dollar, but will be somewhere less than that on a go-forward basis.

Okay, thank you.

Thank you. And our next question is from the line of Michael Salinsky with RBC Capital Markets. Please go ahead.

Quick question, guys. In terms of -- you talked a little bit about near-term targets. What are the long-term targets from a leverage standpoint? And how much -- in addition to that, how much of the $75 million to $300 million of acquisitions you have in the guidance for the second half of the year here is identified at this point?

Michael, with respect to identified targets, I can say that we probably put in $300 million in the guidance. We are probably looking at assets that are double that. Likelihood of closing, unclear to us. We're trading a lot of terms, if you will, so any time you're trading a lot of terms on a deal, it's a lower probability of securing it. Long-term capital and leverage level, I'm a big fixed charge guy. I really think that's the key metric. We're at 2.4% today. I've always been very comfortable at the 2.2% to 2.5% range. So I'm getting very comfortable where our leverage is. I know there's a debt to EBITDA orientation. We're looking at -- we're going to be in the low 8% range. I would look at the shape and form of debt over that, and that I've got $3.5 billion of debt at a 4.4% with a weighted average maturity of 6 years. So I think we've got a good balance sheet. We've got a good shape to our debt structure, and really don't have a desire to see it down in the 6%s, if you will.

That's helpful. Then switching over to operations here for the second question -- can you give an update on, in terms of June and July trends in Orange County. I know Irvine Company changed the caps they had in place there. Also curious as to the performance of Boston. You gave a great deal about New York, but I didn't hear anything on Boston there during the second quarter in terms of your portfolio. And then, Jerry, if you could break out loss to lease, maybe by region or a couple of your larger markets, that would be helpful as well.

Sure. I'll start with Orange County. Orange County did have a good second half of the second quarter, and it has continued. Orange County, we've been able to maintain occupancy levels up north of 95%. We're sending out -- our renewal increases that we are sending out for August and September in Orange County are some of the highest in our Company.

Our average increases, by the way, that we're sending out for the next couple months are up in the mid 6%s. Orange County is, in August and September, call it blended 7.5%. It's not as good as San Francisco, but it's probably up in the same ball park with Seattle. So we feel pretty good about Orange County right now. Some sub-markets within Orange County are strengthening more quickly, and the Platinum Triangle while it is getting better, it still isn't at the strength of the coastal properties.

Boston, we've continued to see good results in Boston. We're sending out rent increases there north of 6%. We've maintained occupancy levels in that Boston portfolio that we have, both the MetLife venture, as well as the wholly owned. The average is probably in the 96% to 98% range, but it's a very strong market. We don't see a whole lot of new supply that's been affecting us up in Boston.

And then finally, just in terms of loss to lease, could you maybe break it out by a few of your larger markets, just to get a sense of how it's trending. And specifically for DC, maybe versus the west coast.

Sure. In June, the total loss to lease was a little over 6%. San Francisco was pushing 12%. Austin was at about 12%. L.A., Orange County were both in 7% to 8%. You get back to DC, DC is actually at about 4%, 4.5%.

Okay. That's helpful.

And everything else, I would tell you is roughly in that -- it's bundled up close to the 4% to 5%. Probably the Florida stuff is a little at the lower end, down in the 3%s also.

Okay, that's helpful. Thank you.

Sure.

Thank you. And our next question is from the line of Jeff Donnelly with Wells Fargo. Please go ahead.

Hi, guys. Just a question or 2. I guess, Tom, first, the GSEs had floated the idea of renting single-family homes out to relieve pressure on housing markets. We can debate whether or not that would actually solve anything, but I'm just curious, do you think it's possible for a private enterprise, not necessarily UDR, to profitably manage a single-family home rental business in scale, or even for the government to do it without losing money?

It's interesting, because I had 3 people in my office in the last 2 weeks that were asking about what systems they thought would be needed to be able to secure that, and that they were actually putting together companies to make bids on that effort, if it were to come to fruition. And listening to the dynamics of it, they were going to tap realtors as their leasing agents, and pay them a commission. So it seemed to me that an efficient structure could be put in place to manage that. I didn't think it was a high-return business. It looked to me like their margins were somewhere between 15% and 20%. So, I don't think that's a great use of capital or manpower, but it seems to me that there could be a market that would be efficient and effective in that, and an opportunity for some entrepreneurs to jump in it.

So, can it happen? Certainly, if the government puts its will and heart behind it. How much business you want to do with the government's always a cautious statement in my mind. Is it much of a threat to us? Looking over what their business plans were, and the identified product, I didn't see it as much of a threat to us in terms of our portfolio or our business model. And so if it helps the housing market, strengthens, helps the overall account, the economy, I would probably be for it, if all things being equal.

And just a follow-up to maybe some earlier questions. When you think about your purchases in New York, as well as the assets involved and the exchange of Avalon, where your initial cap rate was when you bought them and maybe where you think that can go. Now that you've had more time with these assets, are you able to maybe put a finer point on us to say, for example, you see 100 basis points of upside to your yield and that's split -- what between, I'll call it better revenue management versus better expense controls, it's really that latter piece I'm more interested in, and where you see the source of your upside?

I think in New York, the vast majority of the improvement's on the revenue management side of the equation, that the cost structures that we would say probably get eaten up by the higher tax equation, but it's probably leaning 80% towards the revenue side of the equation in the Manhattan stuff. The other stuff we bought in DC, I would think it's a combination Boston, probably more 50/50 revenue and expenses. They are not poorly run real estate. It's probably just not optimized and not responsive to the resident.

Okay, great. Thank you very much.

Thank you, and our next question is from the line of Seth Laughlin with ISI Group. Please go ahead.

Thanks. Given that you're exposing assets in the more suburban markets, and obviously looking in the higher barrier markets to acquire, wondering if you can comment on the cap rate spread, how that spread has changed over the last 12 months, and maybe where you see that spread going forward over the next year, call it?

Yes, this is Toomey. I'll ask Harry to comment further. My view is cap rates on the B products, suburban is always a function of the debt. And so with debt, if nothing else, coming down, I literally dropped my jaw to see a 5-year piece of paper at 3.5% [file] only. And to look at that paper and say -- guys, suburban, you should be talking about 5 caps. They are saying -- let's think 6. We'll see what we can do, and maybe we'll get better.

So I contrast that where I look at the urban portfolios where it's a lot more competitive, and we're seeing it's basically turned to a 4 cap market. Does it have much room to fall from there? I don't have any idea about where cap rates are headed. But I know the urban is not as rate sensitive as in the past. So that's some color.

If I think about interest rates in the future, maybe the base rate stays down low like it is, but my sense is, given what's going on in Washington, spreads are going to have to widen. And I think that's going to have a more direct impact on the pricing of the B and suburban portfolios than it is the urban orientation, which has more institutional, less levered players trying to pursue it. That's been my experience, and I would probably think it's going to continue to repeat itself in this part of the cycle.

Any other comments on cap rates?

I don't think so. They have clearly come down in all product types, the A stuff, as well as the B product that we're going to be selling. I remember a lot of what we're buying and have been buying, particularly in New York City, has had a rehab component. So in addition to getting some market growth, we're going to get a return on our investment dollars, as well.

Understood, and then maybe a quick follow-up for Jerry. It looks like, from your comments, Orange County is firming up. Is it your expectation that we could see revenue growth above the portfolio average sometime this year, or do you think we have to wait till 2012 for that?

I think you're probably looking at 2012.

Understood. Thanks for the comments.

Thank you. And our next question is from the line of Derek Bower with UBS. Please go ahead.

Yes, thanks. Most of my questions have already been answered, but 2 quick ones hopefully. On the future Manhattan deals, are you only looking at off-marketed deals where there may be some operating inefficiencies that you can exploit to help juice your returns? Or are you also looking at assets, which are more well leased with rents in line with the market average?

Well, we're looking at, we're looking at the deals that are in the market, as well as the off-market transactions. The properties that we've acquired, the 3 properties happen to be from 3 families, and we believe we will realize, or capitalize on the operational inefficiencies in those properties. So at the end of the day, perhaps those are the deals that are just easiest for us to get done, to get across the finish line rather than competing with everyone on the marketed deals. But we're looking at all of them.

Okay, got it. And then quickly, just back to DC. Can you discuss your overall acquisition position strategy there going forward, and maybe touch upon the View 14 acquisition you had there -- and given your commentary of expecting DC to no longer be a top market for your portfolio, starting in 2012.

Yes, this is Toomey. With respect to DC and 14 View, the benefit out of 14 View is that we're developing a community right across the street from it. And so truly it was an auction. We've been courting the seller for the better part of 3 years, knowing that we were under development, and thought that it would make a great complement. It's in the Union area, which is very trendy and upbeat. So that was an auction that, frankly, we thought was worth stepping to the top of the list and winning, because of the synergies that we could run the 2 of them together and achieve some better returns out of that.

On a go-forward basis, I always liked the strategy of, in DC, of buying what I call the old towers, of buildings that are 8 to 15 stories and rehabbing them. We think that the rehabs give us a chance to create value. And that the suburban portfolio in DC is just trade and capital over time. And we'll trade out of that, but no particular hurry. We like its exposure, but that would be how we'd probably shape DC in the future.

Okay, great. Thanks.

Thank you, and our next question is from the line of Saroop Purewal with Morgan Stanley. Please go ahead.

Yes, hi. Actually, just to touch upon expenses, some of your peers have reported strong expense controls and so have you this quarter. Just wondering if you see any opportunities to control expenses, maybe other tax appeals this year.

We definitely are hopeful that we'll win some tax appeals for later this year. We're comparing against favorable taxes last year in the second half of the year, so it's hard to determine if that's going to come. Another expense control items, I would tell you when you look back over the last 3 to 5 years, we've been really pushing electronic initiatives to make our advertising more efficient and less expensive, as well as the work force in our site offices. So we've reaped a lot of that benefit historically, and we continue to lead the way and look for additional ways to really drive down expenses going forward. We are cognizant though, that you need to continue to maintain your assets at a high level, if you want to command premium rates in occupancy, so we're not going to make a short-term decision just to drive expenses down this year.

Got it. And Tom, I hear your comments on rental income as metric, which is changing as the rental psychology is changing as well. But just curious, as you have repositioned your portfolio, how has the rent to household income changed as you have moved between your markets?

This is actually Jerry. It's really stayed the same for the last 2 to 3 years, Saroop. It's about 17%. And it will be a little higher in some markets, a little lower in others, but it's been fairly consistent the last couple of years.

Great. And is the long run average around the same as well?

I think longer term, when you go back a few more years, it was probably in the low 20%s and now it's in that, again, the 17% to 18% range. What we've seen is our average renter's income has gone up about 4% in the last year, and sometimes that's the guy that was living there last year got a 4% raise, but more often, I think we're just -- we're trading out departing residents with higher income, higher grade residents.

Great. That's very helpful. Thank you.

Thank you. And that does conclude the question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Well, thank you, all of you for the time today, and we look forward to another second half of the year, hopefully as busy as the first half, but we do like our business. We like its long-term prospects, and continue to believe it's a great time to grow our enterprise, and all the momentum in the industry seems to be very positive. So, look forward to talking to you more in the future. Take care.

Ladies and gentlemen, this concludes the UDR 2011 second-quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325, or 303-590-3030, with the access code of 4453360. ACT would like to thank you for your participation. You may now disconnect.