UDR Inc (UDR) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to UDR's third quarter 2011 conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this call is being recorded today, October 31, 2011. I would now like to turn the call over to Chris Van Ens, Vice President of Investor Relations. Please go ahead.

Thank you for joining us for UDR's third quarter financial results conference call. Our third quarter press release supplements, and the disclosure package were distributed earlier today and posted to our website -- www.UDR.com. As a supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.

I would like to note that statements made during this call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, we can give no assurances 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-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to our President and CEO, Tom Toomey.

Thank you, Chris, and good morning, everyone. Welcome to UDR's third-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.

My comments will primarily focus on two topics. First, quarterly results and the overall state of UDR's business now and moving into next year, and second, our expansion efforts over the past year, how our investments have performed and what is in store for moving forward. Following my comments, David will discuss our financial results and Jerry will provide commentary on operations.

First, UDR's business remains strong. The Company generated robust same-store revenue and net operating income growth of 5% and 7%, respectively, in the third quarter, translating into 14% year over year increase in core FFO per share.

While we are in a challenging and volatile macro environment, the effects on our business have been mitigated by the combination of declining homeownership rates, a multigenerational low in new supply, low turnover, and solid job growth amongst younger aged cohorts. Late in the third quarter, we saw typical seasonal slowing in rental rate growth that as of yet have little evidence that this is anything but

industrywide seasonality consistent with my many years in the business.

We continue to push new leases and renewal rates with little effect on occupancy.

The year to date rent growth we have realized in 2011 has provided us with initial visibility into revenue growth into the early portion of 2012. Jerry will provide an overview of how our core market is performing in his prepared remarks.

Second, we have grown and improved our overall portfolio over the last 12 months through a combination of acquisition, development, redevelopment, and disposition, totaling a net investment of $2.7 billion. These strategic actions have resulted in our average portfolio rent for our wholly owned communities increasing to $1,320 per home at the end of the third quarter. This is up from $1,150 per home in the second quarter of 2010 or [a] 15% growth. And, the corridor between Boston, Washington DC,

now comprises 36% of our net operating income while the West Coast comprises 38% of our NOI.

First let's discuss and focus on the acquisitions. Our 2010 and 2011 acquisitions have targeted urban markets with favorable job formation in the renter cohort. Low single-family home affordability and advantageous multifamily supply and demand dynamics such as Manhattan, Boston, Washington, DC, San Francisco, and Southern California. Integrating these high-quality assets into our portfolio has been a top priority. I'm pleased to report that Jerry and his team have made great progress in driving operating efficiencies at these assets and thereby creating significant value.

Before moving on to development and redevelopment, I'd like to say a couple words on $1.2 billion of acquisitions we've completed in Manhattan during 2011. We are very encouraged by the improvement in operations and the rent increases we have achieved thus far in Manhattan. While we are just beginning our redevelopment efforts, I'm excited about the initial outperformance versus our pro forma expectations across our entire portfolio there. Jerry will speak in more detail on the successes we are achieving during his prepared remarks.

Next, our development and redevelopment pipelines continue to grow totaling nearly $1.1 billion or 12% of the enterprise value at the end of the third quarter. This is consistent with our comfort level of 10% to 15% of enterprise value. Importantly, many of our projects are in unique infield locations in high barrier to entry markets where we are better insulated from future upticks in new multifamily supply.

Our redevelopment pipeline continues to provide opportunities to improve the portfolio at a good risk-adjusted return and can be rightsized quickly to changing market dynamics. Non-core asset dispositions will be our preferred tool for funding our development and redevelopment activities. To date, we have sold $440 million of properties in such markets as Dallas, San Francisco, East Bay, as well as non-core communities in Southern California and Raleigh. Currently we have approximately $50 million of assets under contract and in marketing over $200 million more.

We believe that there is a strong market for asset sales as potential buyers are hungry for yield right now. NOIs are benefiting from solid fundamentals and the lending environment for multifamily remains very supportive and accommodating. David will provide more information in his prepared remarks on our dispositions.

In conclusion, market fundamentals remain strong. Our asset integration efforts are beginning to yield results at our acquired properties. And our operating platform is running on all cylinders. We look forward to our continued success.

With that I'll pass the call over to David.

Thanks, Tom. Earlier this morning we reported a year-over-year 14% increase in our quarterly core FFO to $0.32. Our results are consistent with our guidance announced in July. Further details are included in our press release and supplement.

During the quarter, we had two primary nonrecurring transactions. First, we recorded $2 million of costs in connection with our acquisitions and, second, we completed the sale of a technology investment realizing a gain of $2.6 million.

Turning to our balance sheet, during the quarter we raised $584 million through a combination of our ATM program, secondary offerings and operating partnership units. This equates to 24.2 million shares in operating partnership units at a weighted average price of $24.12. For the year, we have raised $974 million of equity at a weighted average price of $24.19. This is consistent with the amounts disclosed during our second quarter call and no additional shares have been sold under the ATM since.

In December we acquired 95 Wall and issued 1.8 million operating partnership units for $45.1 million at a price of $25 per unit. At September 30, there were 232.2 million common share equivalents outstanding, and for your models, if you assume no further equity issuances for the remainder of the year, the fourth quarter weighted average share count would be 232.2 million and the year-to-date average would be 214 million. As of September 30, we had $506 million of cash and credit capacity.

Last Tuesday we announced the closing of our new $900 million revolving line of credit which has an interest rate of LIBOR plus 122.5 basis points, a facility fee of 22.5 basis points, matures in four years with a one-year extension option and includes an accordion up to $1.35 billion. At the same time, we announced the repricing of our $250 million unsecured term loan due in January 2016. The pricing was improved to LIBOR plus 142.5 bps from LIBOR plus 200.

The balance of the year has no debt maturing and does not have an extension option. During the quarter, we repaid $97 million of our 3.625% convertible notes and two secured mortgages for $15 million. Combined, the debt had a weighted average stated interest rate of 3.9% and a GAAP accounting rate of 5.6%. Our retirement of these funds eliminates the convertible debt amortization of $359,000 per quarter.

In the fourth quarter we had the opportunity to prepay at par $100 million of a secured credit facility that carries a 6.78% interest rate. We are currently planning to repay the facility with sales proceeds.

To recap our balance sheet metrics, since 2009 we have discussed how we would delever through acquisitions and how they would be funded with a larger percentage of equity and debt. Accordingly, our debt to EBITDA has moved from greater than 10 times to an annualized 8.5 times today. Our debt plus preferred stock to gross asset value ratio has decreased by more than 500 basis points to approximately 48%. Our secured debt to assets ratio improved 900 basis points to 23%. Our fixed charge ratio has improved to 2.5 times and our unencumbered asset pool has grown by more than 25% to more than $5 billion on a historical cost basis. We anticipate these metrics will continue to improve as we execute our strategy.

During our second quarter call, we provided asset disposition guidance of $500 million to $600 million. To date we have closed on an asset swap for $237 million and sold three Texas assets for $81.5 million. Subsequent to September 30, we close on the sale of the Tribune in Raleigh, North Carolina for $56 million and two communities in non-core markets in California for $69 million. We have two additional communities in non-core Texas markets under contract for $53 million expected to close in the fourth quarter, which will bring the year-to-date total to $496 million.

In addition to these transactions, we have several other non-core communities listed for sale. The proceeds from these sales will be used to fund debt repayments and our development and redevelopment pipeline.

Turning to guidance for the balance of 2011, our year-to-date and third quarter results are in line with our expectations for the full year. Accordingly we will maintain our practice to update guidance midyear for when a material event has occurred. Now I will turn the call over to Jerry.

Thanks, Dave. Good morning, everyone. We are happy to report same-store NOI in the third quarter was up 7%, as a result of revenue growth of 5% and expense growth of 1.1%. Total same-store income for occupied homes increased 4.9% to $1,201 and occupancy increased 10 basis points to 95.6%. Our loss to lease at the end of September 2011 was 5% or $58 per home and market rents has increased 6.6% since last September.

On a sequential basis, revenue increased 2%, expenses were up 2.5% and and NOI increased 1.8%. In our same-store portfolio, effective rental rates on new leases entered into during the quarter were on average 4.7% higher than what the prior resident was paying. Renewing residence on average paid 6.4% higher on an effective basis.

Tom mentioned the seasonality of our business and I would like to expand on his comments. We manage our lease expirations to have more leases ending during the second and third quarter when traffic is heavier. Accordingly, during the fourth quarter we see a natural deceleration of traffic and we have fewer leases expiring.

The pricing engines are more aggressive when demand is high for the second and third quarters. In addition, because we have fewer leases turning over in this fourth-quarter time period we have fewer opportunities to increase rents. And what we are seeing this year is no different than what we've seen historically. Going back to 2005, our sequential revenue growth in the fourth quarter has averaged flat to nearly flat. We would expect fourth quarter of this year to be consistent with the past.

But it's more important than looking at the next three months is looking out beyond that. In that same timeframe since 2005, our first quarter sequential growth has averaged 0.7% and in each year was higher than the preceding fourth quarter sequential revenue growth. I would remind you that our loss to lease at the end of September was 5%. Assuming market rents don't fall over the next year, we should capture most of this in rent growth.

As we entered the fourth quarter we began to experience the typical seasonal slowing I just discussed that has resulted in slightly lower increases on both new leases and renewal leases. That said, we saw our same-store new lease rates increase 3.2% in October led by San Francisco with average increases of more than 12% and Austin and Dallas with over 7%. Renewals in October remain strong, up 6% led by San Francisco at 9%, and Phoenix and Seattle over 7%. Renewal increases sent out for the remainder of the fourth quarter averaged 6%.

We've also noticed that we have better pricing power at our A communities than at our B communities within a given market. Over the past three months, new lease rates at our A communities were up 5.5% versus 3.8% for the B communities. We believe this is the result of higher rent residents being more concerned with location, amenities, and interior finishes while lower rent residents are looking for the best deals. Our higher end properties tend to be more urban and our lower end -- lower rent communities are more suburban.

Resident turnover was up slightly in the quarter to an annualized rate of 66% compared to 65% in the third quarter of 2010. Year-to-date our annualized turnover rate decreased by 100 basis points to 55%. Move outs [around purchase] remained well below historical averages at 12% and while move outs due to rent increases are rising slightly, they still represent only 7% of move outs. Expense growth of 1.1% was the result of higher real estate taxes, utilities, and insurance costs which offset by lower repairs and maintenance, personnel costs, and administrative and marketing costs.

Given the acquisitions and development -- redevelopment and disposition activity over the past 12 months, our non-same-store portfolio has grown to 10,107 homes and now represents 28% of our total quarterly NOI, including over 3,200 acquired homes located in markets such as Boston, Manhattan, San Francisco, Washington, DC, Los Angeles, and Orange County. These properties are performing as expected and are generating better growth in our same-store portfolio. In fact, on a sequential basis, our 2010 acquisitions had revenue growth of 2.8% compared to 2% of our same-store portfolio.

Our 2011 acquisitions produced revenue that was almost 2% over pro forma in the third quarter. Our recent New York acquisitions are giving rent increases in the 11% to 14% range and have occupancies averaging 98%. In addition, since acquiring these properties we have been able to eliminate broker commissions and reduce maintenance costs.

Average occupancy for all properties acquired in both 2010 and 2011 is just under 97%.

If you refer to attachment nine in our earnings supplement, you'll see that we have completed the development of over 2,200 homes in six communities at a total cost of $437 million or $186,000 per home, all of the homes within our same-store pool within the next year except the Tribute which was sold last week. These properties had sequential revenue growth of 2.4% in the third quarter.

In addition, on attachments 10 and 11 you'll see that we have 2,573 homes being developed at a total estimated cost of $751 million or $292,000 per home. On attachment 10, you will see we have close to 3,000 homes in redevelopment. The pipeline consists of seven communities at a total investment of $337 million. Barton Creek Landing in Austin, Texas, is scheduled to be completed by the end of the year, City South in San Mateo, California, to be completed by midyear 2012. Leasing velocity and pricing continue to be very strong at both City South and Barton Creek Landing, both properties are operating ahead of plan.

We have five additional properties in Southern California, Metro DC and Manhattan that are just now beginning the redevelopment process with estimated completions ranging from the second quarter of 2013 to the second quarter of 2014. Our joint venture with MetLife which includes 26 properties containing 5,748 homes continues to perform well. During the third quarter, we reached 95% physical occupancy for the portfolio. The 23 communities that had stabilized occupancy in both second and third quarters achieved sequential revenue growth of 3%.

With that, I would like to give my thanks to all of our dedicated associates in the field and in our corporate and regional offices for a strong quarter. Now I'll turn the call back over to you, Tom.

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

(Operator Instructions). Tony Paolone, JPMorgan.

My first question is, Tom, you mentioned the environment for selling assets and just transactions in general are still pretty strong. I was wondering if you can comment on how participants are underwriting NOI growth over the next few years versus say how underwriting shaped up a few months back.

Certainly. Thanks, Tony, for calling in. With respect to the environment, I'll let Harry and Matt speak about bidding and what people are underwriting.

But on the environment topic, I think one thing that's telling about that is that as we've talked to a number of lending institutions about their plans for 2012, we have found every platform is going to increase its lending to the multifamily space over 2012 and believe that that will be a great environment conducive to getting our sales done that both are in the pipeline and those that we're going to undertake in 2012. With respect to the underwriting, what people are underwriting, you guys have an idea?

Yes, I think buyers are still underwriting strong revenue and NOI growth. There hasn't been any substantive change over the past several months. It's still a good fundamental operating environment.

I'll just add that I think the value add buyers are coming back more and more so we are seeing a little bit more emphasis on value add opportunities.

Okay and then my follow-up is, when you went and underwrote your New York City transactions, can you give us a sense as to maybe -- I think a couple of them have been up and running for several years or for a long time now, just what the peak to trough decline in cash flows were during the last downturn, like call it 2007 to, I say, 2010?

Tony, can you repeat that again, please? For New York?

Yes, for your New York City assets. I guess with concerns over financial services potentially pulling back and what the implications may be for Manhattan, wondering how those assets you brought that were up and running from 2007 to 2010 performed.

Well, the assets --. They experienced a dip in revenue and now they are at or above their peak revenue levels.

Tony, to be clear we didn't buy anything until April of this year. And so, in underwriting the historical numbers, we didn't really go back all the way through the last 10 or 15 years to see where the troughs were in the impact. But it's clear from our value adds that we are getting in rent increases better than 12%, and in some cases up to 15% and that's primarily what we identified in the underwriting. And so, we are exceeding our pro formas on those.

Okay. Thank you.

Eric Wolfe, Citi.

Thanks. Could you just talk about the level of traffic that you saw in October, relative to the same time last year and how that trended through the third quarter? I'm basically just wondering whether you're seeing the same pause in demand that one of your peers mentioned.

Sure. This is Jerry Davis. We've been hearing a lot about traffic over the last week or so, and I'd like to tell you that our traffic and rents in the fourth quarter are in line with our expectations. Now if I were in home building or retail, I would focus a lot more on traffic but we tend to look a lot more at leasing activity and putting money in the bank.

I think the key points to focus on in our business really are what's sequential revenue growth going to be from 3Q to 4Q. And, when we look back over the last five to 10 years, the typical growth from 3Q to 4Q is flat in a good year, down in most years. This year it's looking like it's going to be flat to slightly up.

Let me repeat that. We think it's a good quarter and we think sequential revenue growth from 3Q to 4Q is going to be slightly up.

The other thing we focus a little bit more on is, what does 4Q versus last year's revenue growth look like. And right now it's looking like it's probably going to be 5% to 5.5% up.

And, lastly, we look at the strength of our ability to renew. And I think I put -- had in my prepared remarks that through the fourth quarter we are sending out 6% on average and we think in January so, as we turn into 2012, at the beginning of the year we're going to see rent increases going out to existing residents of 5.5% to 6.5%. And I would remind you that this is from my same-store portfolio.

In our non-same stores which represent over 25% of the Company are expected to do even better than that. Outside of New York will be slightly better than the 5.5% to 6.5% and in New York it looks like it's probably more in the 8% to 10% range.

So again, traffic is where we expect it. There's no surprises on traffic and pricing. The fourth quarter is playing out like we thought.

That's helpful and that sort of leads into my next question because, Tom, you mentioned that the leases that you're signing now give you a pretty good look into the early parts of 2012. So just based on those leases, would you expect growth to accelerate in the early part of the year or just sort of stay flattish or what do you think that sort of revenue growth might look like without of course providing guidance?

This is Jerry. Tom can jump on after me if you'd like. I would tell you in the fourth quarter again, you typically have a drop down in your ability to increase rents just because there is reduced traffic. As you enter the first quarter, you typically pick up some momentum. Traffic comes back usually about mid-January and accelerates throughout the spring and then really accelerates in the summer.

So again, without giving guidance we would think things would pick up in the first quarter.

Eric, this is Tom. One thing I would add is, and I think it's in my prepared remarks, if Jerry were not to increase rent any more than he's already at in terms of market, and his occupancies were to stay flat, he'd be embedded somewhere around 4.5% revenue growth next year.

Obviously we're not standing still and obviously we think fundamentals are strong, and we'd like to be able to beat that number. It's just saying there's a floor if you would under that premise to next year, and then it's only to the upside is where we're looking.

Understood. That's helpful. Thank you.

The line of [Saroop Purewal], Morgan Stanley.

Jay, you mentioned in your comments that there seems to be a bifurcation in As versus Bs in your ability to push rents. I was just wondering, does that hold true also for the -- for your markets which are at the top end of the rent growth like San Francisco and Austin?

Yes. I think it holds true throughout the entire portfolio of the disparity between As and Bs, in the markets that we operate in. You know, there is definitely -- the disparity I talked about as far as ability to push new rents. The other thing is, occupancy levels on our A properties are about 95.9% in the third quarter and Bs were about 95.4% and you know you tend to see it -- more of our portfolio on the market basis, more of our portfolio in San Francisco tends to be in the A range and we're getting much better performance there.

Got it. And just turning to redevelopment, what are the yields you're looking at on the new redevelopment projects you're starting and also, what was the difference in what you realized at City South and some of the other ones which are completed versus pro forma?

This is Tom. Our underwriting, which we've discussed in prior years is, first, you have to undertake the effort to bring the asset to market so, if we think the asset is on our books at $10 million but truly we could sell it for $20 million, we calculate our return assuming the $20 million. And our return expectations for the redevelopment pipeline generally are probably going to be $7.5 million. If you were to take out that step up in market value, you are probably more in the 9 range.

Got it. And did that hold true for City South and the way the rents are looking right now?

Yes, I think both City South and Barton Creek are up in that range. We've increased rents at Barton Creek over $500 from pre-rehab to post-rehab and at City South are up well over $700.

Jana Galan, Bank of America.

Following up the comments you made on the disposition environment, I was wondering if you can comment on how you are thinking about acquisitions and now and do you see better opportunities in redevelopment, development or maybe land purchases?

With respect to the best opportunities, I think the best opportunity for capital would probably be the redevelopment effort in our mind. Why? Because you have an embedded cash flow. You take a part of it off-line but the efforts that we're undertaking mostly in California right now many of the residents, frankly, do not move while we are conducting the redevelopment. And so, very little delusion out of that effort.

Next up with that would probably be the acquisition front. But that's hard to predict. We're certainly looking at a number of opportunities. We're never certain about which ones will get across the goal line but, there's plenty in that front.

On the development front where we can't buy or we don't have existing assets, then we'll undertake development. On the land pricing, we think land really did not take a hit in the downturn and is right back to the 2007 pricing levels. And so, we are looking for development sites. We've got a lot of front of us. We'll just have to pick through the opportunities and see what really fits us in our return expectations.

So there's plenty of opportunities for us to put capital to work. We're just going to be very selective and thoughtful about that process.

Rob Stevenson, Macquarie.

Tom, just to follow up on that last question, in the release you guys talked about the [B 12] JV potentially starting in the next year and I think you've got some more Vitruvian land and a Wilshire, Los Angeles site. I mean, is that basically -- am I correct and that's basically right now what's on the books is the extent of your development capabilities for future starts?

That's correct. As well as I would add the met joint venture which has 10 sites remaining and we're out examining those right as we speak and I would suspect over the next year that some of those will be undertaken.

Okay. And then, Jerry, can you give us the monthly breakdown during the third quarter of the rental rate growth increases for both new leases as well as renewals?

Sure, Rob. For renewals, in July it was 6.2%. August was 6.6%. September was 6.4%. And for new leases, July was -- July was 4.7%. August was 4.5% and September was 5.2%.

And then, one last question on expenses. Can you guys talk about whether or not you're seeing any significant upward pressure on expenses as you had through the back half of this year relative to expectations?

Yes, really the only real category of expenses that we expect to see some pressure compared to last year's real estate taxes. They should be even with what they've been throughout the last quarter or two. But last year in the fourth quarter, we had some revaluations that came through to us and gave us some savings in the fourth quarter of last year. So year-over-year growth in 4Q will predominantly come from real estate taxes.

Rob, one thing, this is Tom Toomey to add to the expense front here one is to take a little bit and pat Jerry on the back and his team so we look at the long-term trend of expenses and you can have short swings but the truth is, over the last five years, he has grown expenses on average under 1% for each of the last five years. And certainly, I think a lot of that is people, a lot of it is technology and just better but the end is, what it does is leads to a better margin. And we've crossed back over 66% and if you add in the non-matures I think our margins get into 68%.

People lose sight of sometimes that in the real estate field [is] it's a big metric to us, especially when we go and look at acquisitions and we say if we are running down the street, 68%, 69% margin and the existing operator is running at 62%, we know we can get that margin over time. So, it's an important metric to start thinking about.

Is there -- is there anything big left on the horizon to improve that any further?

I think we will have one of the biggest frontiers open and you're going to see it as we probably move through this slide in homeownership is retention. If we can figure out how to unlock more and more of this turnover and bring it down with an average turn cost of $2,000, we could intentionally capture a great deal of upside in that area.

And, on the new technology front, you know how you procure your customer we've all made the first frontier which is to get into pricing technology. The question now is, how to identify to spend the right marketing dollars on the right customer. And so, to work backwards on channeling of marketing dollars to get the high probability tenant who's going to stay there for long periods of time. And I think you're going to see more and more of that predictive model about how to score your customer, how to attract your customer and then how to keep them.

So, I think there's a lot to gain in this area. And, certainly that's where our focus is in our technology and people efforts.

Derek Bower, UBS.

I just wanted to follow up on the earlier question. I understand that traffic is in line with your expectations but can you help us quantify what that means in terms of actual year on year increase or decrease?

Sure. This is Jerry. I would tell you, our third quarter unique visitor traffic to UDR.com is up 30% year over year. And in October, it was up 35% to 245,000 hits. In addition -- whereas part of that our mobile traffic which represents about 14% of our unique traffic, the UDR.com, is up about 132%.

And what about at the actual asset level -- people walking in the door?

It's about what we expected. It's down probably 15%. That's what we projected it would be. You know, what you had happen last year and the year before is people were aware that there was a large drop from peak to trough, and they went out and looked and in 2009 they were able to find a great deal. So, traffic was up and instead of looking at three competitive properties they may have gone to 10.

Last year, they went again and thought they could play the same game and get a substantial decrease. And I think what they found was that price was roughly the same if they were paying at a comparable property. And this year I think people look online more than they did two years ago. They do all of their price shopping through places like UDR.com to help narrow down their selection.

Understood. And then, on market specifically, can you talk about trends in Norfolk, Virginia and I guess comment on the mid Atlantic overall? It looks like your rent per occupied home actually slipped sequentially. So, any additional color there would be helpful, thanks.

Sure. Norfolk is predominantly a military town. Sort of the naval bases -- Norfolk has been hurt more than most of our other properties. All of their decline recently is not seasonality. It can really relate to ships going out versus ships coming in.

So you have some unique phenomena that occur there as well as in our San Diego and at times Jacksonville markets. So, that's the primary thing that happened in Norfolk -- military rotations.

Derek, this is Tom. I would add that the recent administration's announcement that they are going to pull back some of the people from the Middle East, it would be interesting to see which markets and what divisions get pulled back and what the timing of that is. But I think the long-term aspect of Norfolk is it will recover just on the indications that we are going to draw down our troops.

Karin Ford, KeyBanc Capital Markets.

I wanted to follow up on your answer to Tony's question. You said that all the lenders you spoke to are looking to increase their lending activity to multifamily. Are you finding that is true for construction lending as well and is it just for the multifamily REITs or are they looking to expand their activity to both public and private borrowers?

This is Warren. I'll tell you that with respect to we're out in market and construction loans and it's a very competitive pricing and there's a lot of volume for construction loans, I think that's true with respect to the public REITs. We have heard anecdotally that construction lending is still difficult for the private.

Okay. And my second question is just a clarification from Jerry. Did you say that you thought sequential growth from 4Q to 1Q on the revenue side would be 0.7%?

I did. That's really -- I didn't say that's what I thought it would be this year. I said when we look back over the last six to seven years, that's what it's averaged.

Okay. So if (multiple speakers) -- I'm sorry. So, if 4Q ends up flat to slightly up sequentially and then 4Q to 1Q ends up at that average of 70 basis points, what do you think the year over year revenue growth would be in 1Q 2012?

I don't think we want to get into guidance right now.

It would be positive, Karen.

Dave Bragg, Zelman & Associates.

Just back to this traffic topic, don't mean to dwell on it but, I think it has the figure that you put out and also another peer put out in terms of a year over year decline has caught some people's attention. I know it's not your preferred metric in terms of visits to the communities but could you just put this in historical perspective for us on a year over year basis? Have you seen other periods where you've seen a decline like that?

Yes, I have. Traffic will fluctuate at any given time. I can tell you for the full year our traffic is probably down a little over 10% so what's happening right now is a little bit more pronounced. But, again, I think what happens last year and the year before is, people were out looking for a deal that they were able to get in 2009, they discovered in 2010 they couldn't find it. And this year they are just looking on the Internet when they are price shopping.

David, this is Toomey. I do believe that there was a little too much emphasis on the early part of the reporting season on this traffic pattern when in fact what really matters is what cash we're putting in the bank, what our occupancies are, what we're sending out for renewal notices, what those renewal notices are going to be -- the take rate. And, in our business, we are telling you, we see continued revenue growth that we are not at all surprised at the seasonal pattern. And frankly, it makes a lot of sense to us in light of both holidays, heat wave, all those traffic elements that influence it.

But the truth is we are pushing rent, we're not getting a pushback on it and, that's where we think that the business is headed and headed for a long period of time.

Got it, thank you. And Jerry you had an interesting comment on As versus Bs. You mentioned the spreading terms of pricing during the third quarter. Is this a widening spread or is that spread consistent with what you saw in the first half of the year?

I'll be honest with you, Dave. We weren't really tracking it in depth earlier this year so I don't have that number handy. I may be able to go dig that back up.

Thanks. And last question. Tom, just given your preference for redevelopment today could you talk about that pipeline? Maybe put it in perspective for us in terms of how large of an opportunity that is in your core markets? What's the potential annual spend there? Thanks.

Well, David it's hard to forecast exactly how much of the pipeline we'll pencil out. But moving it [out] by $300 million as we done I would like to continue to increase that to have about $300 million underway each year and the source of that, we think a lot of it is going to be frankly in the California corridors, where it's so difficult to really develop from the ground up there with sometimes three, four years of lead time to look at something and scrape it. And a lot of our portfolio in those markets, frankly, are up against the west side of the [405] and we think that's a great place with a high propensity to rent where an improved product has a wide pool of renters available to it.

So we'll focus on that, which happens to be our largest market at, present. And then, followed by that we'll probably be looking at the DC corridor and the inner loop there where we think we have a handful of opportunities. But the redevelopment is as you can visit at many of our assets for us, it is not a $10,000 a door effort. We are actually taking the community apart. We are really attempting to read tenants it completely. Not just on a cash on cash return analysis but also on a cap rate compression.

And for many of you that have seen Cityview, if we -- Southview, excuse me. We had City South. If we had sold that on the open market we probably would've been a 6.25% cap and post-redevelopment is probably a 5.25 cap. And with a $700 a month increase rent increase you can kind of pencil in, it's at a great return and it's a great location. So that's why we really gravitate to the redevelopment efforts and believe on a risk-adjusted basis it's -- why it scores the best on returns.

And Tom, one last question on that. In terms of your underwriting on the new redevelopment starts, is that 100 basis points of compression a pretty good rule of thumb for us to think about?

I would do that, yes.

Alex Goldfarb, Sandler O'Neill.

Just going back to, Tom, on the redevelopment front, if you could just give us some examples on Marina Point and the two Costa Mesa deals, what your team is expecting for the revenue for the rental pop from those redevelopments.

Alex, it's Harry. We expect somewhere in the neighborhood of $600 to $700 per month in incremental revenue on those over what it is today.

(multiple speakers) what it is today.

Marina Point, do you remember what it is?

$1,500.

Marina Point is about $,1500. It's going to $2,100 or $2,200. The Villa Venetia and Pine Brook assets which are next door to one another are going to be very similar. Going from that $1,500 to $1,600 up above $2,000 per month.

And then those assumptions are based on current rents today, right? It's not like you're trending it forward?

Those are based on current rents today, yes.

So, Alex, you visited enough of these. You realize the vast majority of the people are not going to move while they are being rehabbed. That our team has been very good at deciphering how to properly do the rehab and sequence it, so we really don't take much of a hit in the cash flow.

Yes, no, I appreciate that color, Tom. The second question is, as you talk about your dispositions in recycling capital, sort of curious, your -- the Fannie JC, I'm just sure that they wouldn't mind raising a few extra dollars although I don't want to speak for them. But, given that JV, is there any chance that maybe that's a harvest opportunity for you?

We are always talking with Fannie, both in terms of the joint venture and lending in the market and if the opportunity avails itself, those assets will either be sold or split the baby so to speak. But I'm sure when the time's appropriate there will be a dissolution of that.

Okay but nothing -- there is nothing actively being discussed in the near term?

I would just say we are always in conversation with them.

And the last question is for Warren. You guys are the latest to do the line of credit and the term loan refinancing. Just sort of curious where you started conversations to where you closed, how much of an improvement in rate do you think you get from banks being more competitive versus simply just the market coming in?

I mean, obviously, we'd looked at this and done the analysis on it and EQR have been out in the market and a couple of our other peers and so pricing really is going to set on what your peer's price is at. It was -- I will tell you that it is a very competitive market and the banks bid very heavily to be in the line and that's, I think the combination for them, we get pretty good pricing on it.

Okay, but you can't give us some perspective as far as how much that competitiveness helped pricing versus just general market trends?

No, not really.

Steve Swett, Morgan Keegan.

Tom, you've got another $250 million under contract and being marketed. When those sales are completed, where does that put you in terms of your long-term portfolio transition goals? Are you going to be kind of where you want to be or is there still more selling either by market or submarket where you -- that you got planned?

Steve, I think this managed management group sees that as a continual effort to always improve the quality of the portfolio. And so, there's always going to be an evaluation of every asset in terms of where it stands, what do we think is left in the upside of it, what are the CapEx needs and a decision made about the long-term right use of capital.

At present, what we're targeting is to get into a program of $400 million to $500 million annually in sales to offset what is coming online in new development. And we think that nice match if you will if we think developments are getting [6, 6.5] and we can go to the market and be selling North Norfolk Virginia, Tennessee, those markets at 6 or 6.5 that it's a great redeployment of capital. It won't be done, won't be dilutive.

So I think we'll continue to do that and we think that environment will sustain itself for while primarily because of the low interest rate environment that looks like it's going to persist for some period of time and most of those buyers of that caliber of assets are very leverage- sensitive. And they are going to be there in depth so I think it's a long-term program for us.

Thanks, and then second question either for David or Warren. As you look into 2012, at the debt maturities, any initial thoughts in terms of refinancing that either with maybe some incremental equity or your sense on what kind of terms you would use?

This is Dave. I think that we'll always look at all the different alternatives and possibilities that we have when that time presents itself. We're always trying to keep our finger on the capital markets as to where debt pricing is and equity pricing, and if an opportunity presents itself one way or another we would utilize it. But as of today we wouldn't pin ourselves down to one mode or another.

Michael Salinsky, RBC Capital Markets.

Just to go back to the rental traffic, can you talk about qualified applications? I understand people coming into the property but, maybe people that are actually looking to lease the property as well. Maybe that's a better way to look at it?

Qualified --. I can tell you that the rent scores are comparable to what they have been. You know, there's really -- we really haven't seen a change in that.

Has there been any change in the number of applications? I mean a person walking in and shopping the property versus a person actually putting in a rental application I think are two different things. So --?

I'm sorry, I didn't follow your question. No, you are right. Applications have really stayed fairly constant with what they were last year. We are -- today, our occupancy is 95.3%. It's a little bit lower than we had last year but what we're really trying to do this year is maintain some of the rate, not cut price too much to load up on occupancy right now so that will better benefit us in 2012.

That's helpful. And it puts it in better perspective there. Second of all you talked about a 5% loss to lease. Can you give us a --? Can you break that out maybe by region or market a bit more, just so we can see how pricing trends are going?

Sure. As of September, you know our largest loss to lease in September was in Austin at about 12.5%. It was followed by San Francisco at about 10%. Dallas was around 8%. The bulk of the rest were near the middle. The lower loss to lease is currently are in some of our outlying tertiary areas like Sacramento, other mid-Atlantic, Portland and Monterey around 1% or 1.5% and actually Washington DC is down around that level too.

That's helpful. Finally just in terms of non-core assets, as we start thinking about you mentioned from next year recycling assets to fund development. Is that -- are we to assume then that acquisitions will be more equity funded as with this year or is that something is that going to be also funding under with recycling proceeds?

No, Michael, I think that is our preferred path with equity and we think it's a great partnership with our shareholders. They can look at individual acquisition opportunities and determine if we are headed in the right direction and they get to vote with whether they're going to buy in or not. So we think it's the right path.

That's all for me, guys. Thanks.

Paula Poskon, Robert W. Baird.

Just a follow-up on Karin's question around the environment for construction financing. Are you more or less concerned about new supply across your markets than you may have been maybe six months ago?

This is Tom. You know, as I've just recently come back from ULI and a number of conferences, it's very clear to me that the merchant building model is out there seeking capital. But the capital is picking through deals. And so, they will announce, I think as the Millwood guys for example, are going to say they had started out in 2012 thinking they were going to do 2,000 doors, and they are not really upping their increase because capital is being very selective.

So, I think the merchant builders are hanging around the hoop, if you will. There is not a lot of equity or they don't have the financial guaranteed entities to get the deals done right now. The markets that they are looking for and building in no surprises there. It's the suburban DC. It's the Texas markets. And we're starting to see them spring up a little bit in Florida. So, mostly suburban-oriented product.

But again, recognize, we are at record low, generational low supply numbers. And they could go up from here and still not represent a threat to our revenue outlook.

Thanks very much. That's all I have.

Haendel St. Juste, KBW.

Jerry, I guess this one is for you. Can you expound a bit on your Southern California experience during 3Q, particularly LA? Recent third party data indicated LA strengthened materially during 3Q yet your numbers don't seem to reflect that.

LA stayed stable. I think the Marina area during the summer saw a month or two of weakness, has since stabilized with our occupancies there being up in the 95% to 96% range. But yes, early in the summer, June, July maybe the first part of August, the Marina area was a little soft but it strengthened and probably half of our LA portfolio is up in that market.

And your thoughts on the other pieces of the LA market maybe downtown or some of the other areas you're exposed to?

Downtown has been performing strong for us. You know our MetLife deal -- 717 Olympic has been able to push rents and have a good strong occupancy, send out pretty good rent increases in the 5% to 7% range.

Thanks. Tom, for you I guess more broadly your thoughts on potential acquisition activity today? What are the minimum threshold IRR today, how does that change over the past few months and is it fair to assume that despite your preponderance of investment activity over the past year or so on the East Coast, that the West Coast is probably where you'll be focusing your attention a bit more going forward?

Well, I think it's clear from where our platform is headed that we are going to continue to focus from the DC to Boston Corridor and focus on the West Coast as well. With respect to IRRs, I think it's one metric, we use a number of them. One is just replacement cost and still believe that we are buying assets well below the replacement cost in some of these urban corridors.

And so, I think that's going to be the metric we are focused mostly on as well as the growth prospects in terms of what Jerry and his team can do to bring the NOIs up to market or exceed market. The IRR, to ask it, answer it directly, I guess we kind of look at an 8 on an unlevered basis and believe that that's kind of a minimal threshold. Sometimes we'll dip below that and take a little bit more risk in terms of the prospects for the future of the enterprise. But, that's kind of a number we think about.

Great, just one more modeling question. Can you guys talk about the cap rates achieved on the assets sold during 3Q and also on the assets that are currently under contract today?

This is Matt. I think, overall, we're looking at a blended 6 cap rate on the dispositions of that probably be equivalent to what we have under contract as well.

Forward 12, back 12, (Multiple Speakers).

It's really a forward 12 book --.

After CapEx?

After CapEx and management fees.

Thank you guys.

At this time, there are no further questions in the queue. I'd like to turn the call back over to Tom Toomey, for any closing comments.

Thank you, all of you and I hope that the snow has not inconvenienced you a great deal in the Northeast. And we will see many of you at NAREIT and certainly hope that you'll sign up for our tour of Vitruvian Park. With that, thank you again.

Thank you very, much, sir. Ladies and gentlemen, this does conclude the conference for today. If you would like to listen to a replay of this conference you may do so by dialing either 303-590-3030 or 1-800-406-7325. You will need to enter the access code of 447-2872. (Operator Instructions).

Again, we do thank you for your participation. You may now disconnect your lines at this time.