UDR Inc (UDR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to UDR's 2Q 2012 conference call. (Operator Instructions). This conference is being recorded today, Monday, July 30, 2012.

I would now like to turn the conference over to Mr. Chris Van Ens, Vice President of Investor Relations.

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 the supplement, we have reconciled all non-GAAP financial measures to the most directly-comparable GAAP measure in accordance with Reg G requirements.

I'd 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-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 second-quarter conference call.

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

My comments today will focus on three topics -- first, broad operating trends in our quarterly results; second, a business plan update; then finally, an update on our CFO search. Following my comments, Jerry will provide additional commentary on the operating results and emerging operating trends.

During the quarter, our business continued to operate at a high level, driven by accelerating new and renewal rental rate growth, as well as stable occupancy. Multifamily supply-and-demand fundamentals continue to provide a strong tail wind for apartment owners and we expect will do so for a number of years to come, and especially for those REITs with portfolios concentrated in markets that exhibit above-average job growth, low single-family home affordability, a high propensity to rent, and limited new multifamily supply pressures.

In the second quarter of 2012, core FFO per share of $0.33 increased by 3% year over year. Strong year-over-year same-store revenue and net operating income growth of 5.6% and 6.7%, respectively, as well as solid execution in our non-same-store portfolio, drove the improvement, offset by dilution from our late May secondary equity offering.

Second, a business plan update. Creating shareholder value remains our top priority. As such, we will continue to focus on growing NAV per share and on increasing our cash flow per share, which in turn supports dividend growth.

Increasing topline growth and expanding operating margins are low-risk, consistent generators of NAV growth per share. A strong operating platform has historically been one of UDR's hallmarks, and we expect will continue to be our primary driver of NAV creation moving forward. Capital allocation is the second variable in an NAV growth equation.

Over the past two years, our portfolio quality and footprint have improved dramatically, primarily the result of purposeful repositioning into coastal gateway markets, while simultaneously selling suburban locations in non-core markets.

Some comment with regard to these activities. First, acquisition activity. We intend to further expand our presence in our core markets over time, markets that exhibit above-average job growth, low home affordability, a high propensity to rent, and limited new multifamily supply pressures. The capitalization of any future acquisition will be determined in the context of a lower leveraged operating model, but currently there are a limited number of deals that fit our acquisition criteria.

Second, disposition activity. We own a number of communities located in non-core markets, but not all non-core markets are equivalent, in our view. Let me break them down. We have several markets that do not fit our long-time operating plan and we intend to exit them over the next 12 to 18 months. Combined, these markets represent $200 million to $400 million of value, minimal when compared to our total enterprise value.

Beyond these, we operate in a number of geographies that do not fit our long-term plans, but serve as warehouses of capital until sold. These markets, which comprise the majority of our non-core portfolio, are more susceptible to new supply and generate lower rents and margins than our coastal markets.

Some of these markets, include Florida and Nashville, are generating solid results currently. We are in no hurry to sell these assets and these solid performers. Their ultimate disposition will depend on potential use of the proceeds, asset pricing, and the cost of alternative capital sources at the time of sale. When the time is right, these dispositions will be consummated in the usual course of business and will represent normal capital recycling.

Moving onto development and redevelopment, we intend to deliver roughly 5% of the enterprise annually. This implies a development and redevelopment pipeline in the $1 billion to $1.5 billion range, versus our current pipeline of $1 billion, when assuming a constant dollar funding approach and a two- to four-year average construction cycle.

First, development. New development is in a [tract box] into drive external growth, whereas acquisitions are often event driven and therefore their timing is difficult to predict. Development represents a relatively predictable capital investment.

Our current $742 million pipeline is 45% funded, and 80% of it is scheduled to be delivered by the end of 2013. With stabilized deals of 100 to 150 basis points above spot cap rates, on average, we are confident in the value creation these projects represent and we'll continue to target core coastal markets for future expansion.

Second, redevelopment. Redevelopment often gets minimized in our prepared remarks, but should not, given it's important to our business, as well as significant value-creation potential. Our current $279 million pipeline is 15% funded, and 35% of it is scheduled to be delivered by the year-end 2013.

We continue to evaluate our existing portfolio for redevelopment opportunities and have identified candidates located in key markets, including southern California, Washington DC, and San Francisco.

One final point on redevelopment. Our projects go beyond simple kitchen and bath upgrades. When redeveloping a community, our objective is twofold. We aim to meaningfully grow rental rates while also achieving cap rate compression through asset quality improvements. All of our redevelopments are significant undertakings.

Moving on to cash flow and per share growth. We expect that our improving operations, as well as real estate investments we have made over the past three years, will drive growth in the years ahead.

With regard to the balance sheet, we have reached peer average leverage metrics following our late May equity offering and subsequent community disposition activity. We have worked diligently over the past three years to deleverage our balance sheet and do not intend to re-risk it. Even as we continue to examine growth opportunities, we expect that this strategy will yield dividends moving forward, especially in more volatile economic times.

Finally, our CFO search is progressing. We have retained an executive search firm. We understand the importance of filling this position in a timely manner, but we also have the necessary skill set at UDR to wait for the right hire.

To summarize, all aspects of our business continue to perform well. With that, I'll pass the call over to Jerry.

Thanks, Tom. Good morning, everyone.

We're pleased to announce another strong quarter of operating results. In the second quarter, same-store net operating income grew 6.7%, driven by a 5.6% year-over-year increase in revenue, and somewhat offset by expense growth of 3.3%. Versus last year at this time, same-store income per occupied home increased by 5.6% to $1,330, while same-store occupancy remained flat at 95.8%.

As we indicated on our first-quarter conference call, 2012 is unfolding according to plan. In the second quarter, effective rental rate increases on new leases at our same-store communities accelerated 4.5% on average. Renewal rate growth remained comparable versus previous quarters, averaging 6.5% higher year over year.

Accounting for approximately 31% of our same-store NOI, San Francisco, Boston, Austin, Dallas, and Orange County were our best performing same-store markets during the quarter, delivering weighted average revenue growth of 8.5% year over year. Markets such as other mid-Atlantic, Sacramento, Norfolk, and the Monterey peninsula struggled and contributed a relatively minimal 9% of same-store NOI in the second quarter.

Weighted average revenue growth for these markets was 0.4% year over year.

Resident turnover remained grossly contained at an annualized rate of 58% for the second quarter, 300 basis points higher than last year at this time. Importantly, the pace at which we have been able to refill moveouts has not slowed.

Turning to the performance of our non-same-store wholly-owned communities. 4,600 homes, or approximately 65% of our total non-mature pool, were stabilized during both the first and second quarters of 2012. These 14 communities generated sequential revenue growth of 3.6% during the second quarter, far outperforming our same-store sequential revenue growth of 2.0%.

Our non-mature communities now contribute 26% of NOI, down from approximately 32% last quarter. As 2012 progresses, we expect this to decline to approximately 15% of NOI by year end.

As you can see on Attachment 7-C, Highlands of Marin, a redevelopment located near San Francisco, and Savoy, the first phase of our Vitruvian Park project, both entered our same-store pool during the second quarter.

Another 2,350 non-mature homes will enter our same-store portfolio by year-end 2012. These are primarily located in higher-growth markets, including Washington DC, San Francisco, Boston, and New York, and have a weighted average income per occupied home of $2,185 in the second quarter. By year-end 2012, these additions should increase our same-store income per occupied home to roughly $1,385, all else being equal. Additional details can be found on Attachment 7-B of our quarterly supplement.

A brief update on New York. As many of you heard during our Columbus Square property tour, our Manhattan acquisitions are still generating above market rate rent growth with blended new and renewal leases increasing 8% to 12%. This level of growth has not impacted occupancy, which averaged approximately 96% during the quarter.

The Rivergate redevelopment is progressing. We rehabbed 33 homes through the end of the second quarter and achieved rent increases in line with expectations.

Moving on, I want to address the question that I'm frequently asked. What do the next six to nine months, or longer, look like from an operations perspective? The dominant themes that we have seen over the past few quarters continue to hold true toward our view that apartments still have a good runway for growth over the coming years.

First, we expect the general economic recovery to remain choppy, but many of our markets should continue to exhibit incremental steady growth. Year to date, the majority of our core markets have generated job growth above the national average.

Second, demand for apartments remains robust, especially in urban, coastal markets. In addition, more cyclical geography, such as Florida and Texas, are generating improved results.

Finally, new multifamily supply. Typically, new supply has been the predominant driver behind a slowdown in rental rate growth as the recovery progresses. However, new multifamily supply pressures still appear moderate. Deliveries this year and next are expected to be below or, at worse, near historical averages in many of our markets.

The single-family rental market has not negatively impacted our business, and I do not see this as a significant risk, given our substantially reduced exposure to markets with high single-family affordability. In short, we continue to see a good runway for growth in the multifamily space over the near and intermediate term.

Turning to more recent results, through the majority of July renewals continue to trend well, up 6.7%, or 60 basis points above last July's results. Renewal increases sent out for the remainder of the third quarter have averaged 6.5%, and we expect to capture close to all of this increase, as is generally the case. With occupancy holding close to 96%, we expect that third-quarter results will be strong.

A couple of words on expenses. You will notice that year to date, same-store expense growth of 1.6% is still below our 2012 guidance of 2% to 3% growth. We continue to believe that our guidance will prove accurate. Expense comps toughen in the second half of the year. Turnover is expected to incrementally increase and high real estate taxes are expected to hit.

As a reminder, we provided updated 2012 guidance at the June NAREIT conference. These expectations can be found in our second-quarter press release published this morning. Assuming no further equity raises for the balance of the year, a 2012 fully diluted share count will be approximately 252.7 million.

Finally, I'd like to direct everyone's attention to a couple of new attachments in our quarterly supplement. First, on Attachment 4-B, you will see a debt covenant analysis. Second, you will see a new development layout on Attachment 9-A, which better illustrates redevelopment versus under construction projects.

With that, Operator, we'd like to open the call up for questions.

(Operator Instructions). Jana Galan, Bank of America.

Thank you. Good morning. I wanted to get a little bit more detail on the turnover, and if you were seeing any changes based on reasons for moveout or maybe elevated turnover in certain geographies versus others.

Sure. This is Jerry. We are seeing reasons for turnout. They're pretty consistent with what they have been.

Moveouts to home purchase is up about 100 basis points from where it's been running at about 13%. And the markets you're really seeing that in, for the most part, are the locations like Austin, Nashville, Richmond, the Inland Empire, and one surprising one where we've seen an increased moveout to home purchase is in Boston.

Most of our West Coast markets, with the exception of San Diego, are still seeing moveout to home purchase under 10%, though. West Coast affordability is still difficult for most of our renters.

And when you look at moveouts to rent increase, it's been growing each of the last probably five quarters, and today it stands at about 8%.

One area that we have seen a slight reduction year over year in moveout reasons is money issues, which is skips, evictions, lost jobs, things like that.

And markets where we've seen an increase in turnover through the first six months, they're predominantly in the West Coast markets where we've had quite a bit of pricing power, and -- so we've been increasing people the last two to three years. And those happen to be the markets where, three years ago, our peak to trough rents dropped the most, so your B renter was able to move into in A property or your C renter was able to move into a B, and now we've escalated rents to a level where they've gone back to where they were before.

Thank you, Jerry. And I believe in your prepared remarks, you said you expected to continue to increase on the back half of the year. Do you mean higher than this 58% level or is it just the year-over-year turnover to increase?

No, I think year-over-year turnover for the year is probably going to be [300] to [400] basis points over what it was last year, which will put us in that probably 55% to 56% for the year. Third quarter, historically, is our highest turnover quarter, so it usually gets north of 60% on an annualized basis, but then it comes down significantly as you get into the fourth quarter.

Great. Thank you very much.

Sure.

Karin Ford, KeyBanc Capital Markets.

Hi. Good morning. I wanted to ask, Tom, about a comment in your press release where you said most of the heavy lifting on delevering and repositioning are behind us. Can you just talk about where you see UDR when you say most -- what type of percentage that means for each one of those activities, where we are today?

Certainly, Karin, and good morning.

With respect to the portfolio, when we look at it, we start with it's a $12 billion enterprise today, and our portfolio in the Southeast, which is somewhere around 12%, 15% of the enterprise, is a portfolio that's performing very well, strong NOI growth this recent quarter, and we expect that to continue over time. But it probably doesn't fit the long long-term aspect of where we'd like to be, which is basically from DC to Boston and the West Coast.

And so, as a result, we view it as a warehouse piece of capital that over time, as opportunities are found, developments are completed, we'll look at the pricing that we can achieve in that portfolio and then redeploy the capital into there.

So, we're looking at it as relatively a static $12 billion enterprise and asking ourselves, when do we and how do we move out of those markets? And we feel no rush. In fact, the performance and where it looks like, we'll probably hang onto them for some extended period of time. But it's a directional aspect, and I would not probably see us be an active seller of those any time soon. Jerry? Or Harry, would you add any more to that?

Well, the markets Tom is talking about, the Southeastern markets, and we're talking about three major cities, Nashville, Tampa, Orlando that I think that had the same-store NOI growth of about 9%. Interest rates are low. There continues to be investor interest.

So to the extent we do decide to sell those markets in the future, we expect there to be very liquid markets. There are a couple of markets that we would expect that would probably sell in the short term. We're done for the year, given -- for a variety of reasons. But as we look into the relatively near term, there are a couple of markets that we probably look to exit that might be $200 million to $400 million in total.

Great. And just on the delevering front, as well, following the equity deal and the portfolio sales, where do you think you are versus your plan today?

I think we're in line with our peer group, and our intent is to stay in line with the peer group, and any activity undertaken in the future will be to continue to be in line with the peers. So I don't think you'll see us make dramatic moves one way or another.

The natural growth of the cash flow of the enterprise will help. In addition, as we refinance maturing debt will help. But we're comfortable continuing to be in line with the peer group.

Great. Thank you.

Eric Wolfe, Citigroup.

Thanks. Just a question on your operating guidance. It looks like you're expecting around 5.5% revenue growth this year. So I just wanted to sort of break it down in terms of the different components and see what your expectations are. It would sound like from your commentary that you're expecting this mid-6% renewal rate to kind of growth continue, mid-4%s on new leases, and sort of flattish growth on occupancy. Is that pretty much what you're expecting for the balance of the year?

Yes, I would expect say that's what I'm expecting for third quarter. I think when you get to fourth quarter, if history repeats the way it has the last two to three years, you will see the new lease rate growth decelerate down to the 2% range.

I think the renewals do tend to stay fairly strong, but this year, our expectation is to back down a hair on the renewal increases, probably starting in October. So instead of being in that 6%, 6.5% range, I think we're going to get down more in line into the 5.5%, because last year we saw our occupancy in 4Q drop to 95.1%. Our preference is to keep occupancy north of 95.5%.

But this is pretty normal seasonality. But, yes, the midpoint of the guidance is 5.5%. That's where we're right now. I continue to see strength in most of our markets and very little deceleration.

Great. That's helpful.

And then, you mentioned that some of your non-core markets were performing very well. I think you said 9% same-store NOI growth. I mean, is it surprising to you that these markets are doing so well, even though they don't have a lot of the characteristics that you would seem to want in markets that presumably, obviously -- the most obvious is home ownership is much more affordable. So I'm just curious, is that surprising to you at all, and whether that makes you more inclined to keep a decent percentage of those non-core markets in your portfolio over the long term?

Eric, this is Tom, and then I'll ask Jerry to comment as well.

My view, over the long period of time, you look at those markets and they're bouncing off the bottom. In the case of Florida, it was five years of down-trending on rent and NOI growth, and now it's coming back up. And it probably has a good two- to three-year run in it, but in that time frame, development pipelines will start to rebuild rapidly and will represent a threat to the long-term value of those assets.

And so for us, I think we're going to ride the cash flow up, and then we'll look at it and ask ourselves when are they going to get threatened by supply or any other economic downturn that may occur there, and we'll time out our exit and repositioning of those dollars accordingly.

Yes, I would agree, Eric. There's very little supply coming into those markets. When you look at the long-term average, for example, in Nashville, is to add almost 2% of supply a year. And over the next year, it's only going to add about 1.4%.

When you look at that same metric in Tampa, Tampa usually adds almost 2%. It's looking like it'll add 1.2%.

And then, Orlando typically adds just under 3% a year, and it's only going to add 1.2%. So very little new supply, and, I would say, in addition to what Tom said, in those markets we do have exceptional management teams that probably outperform the market in general.

Great. That's very helpful. Thanks, guys.

Dave Bragg, Zelman & Associates.

Hi, good morning. Just a couple extra questions here on the disposition plans that were outlined at the beginning. The $200 million to $400 million of near-term sales, can you talk a little bit more about what markets those would be in?

Yes, this is Tom. You know, I think they're going to continue to always look at what we can do with the Norfolk portfolio, the Sacramento portfolio. I mean, we feel like we have assets there that are generating decent cash flows, but it's tough when you have a boat go out and it drops your occupancy from 97% to 90%. And that volatility to sustain cash flow growth and pricing power is awfully hard to continue in that market.

I think Jerry and his team have done a great job of operating them. But we'll see what they fetch in price, and if they don't, we're glad to rent them and continue to generate the cash flow off of them.

Okay. That's helpful. And I think Harry alluded to this, but are you currently marketing anything for sale now?

No.

Okay. And last question is, under what scenario might we see you buy any assets in the next few quarters?

Well, I think the scenario that would cause us to buy something would be finding the right asset and having the ability to capitalize it appropriately.

So I think -- look, we're continually in the market looking at deals, like everyone else. We simply haven't found anything of size that we're comfortable with pricing or been able to make a deal with the seller.

In fact, we bought a couple land parcels. We're looking at a couple smaller deals now that are really contiguous to existing properties that we can sort of obtain an operating efficiency.

But if you think about it, we haven't bought anything of size for several quarters. Columbus, we made that deal in the fourth quarter of last year, closed it in the first quarter of this year. So we're continually out there looking. We just simply haven't found deals, particularly these off-market deals that we like to look at. And we just simply haven't been able to strike a deal with a seller.

David, what I would add is our view of an ideal transaction would probably be something that is, first, off market, adjacent to or very close to our existing communities where we have some operating efficiency, that have a redevelopment potential, something we can look at over a time horizon and have a very high comfort that, both, we can grow NAV through one of our three metrics and drivers, which would be either some ground-up development, the operating platform, or the redevelopment platform, and we're not going to find that in trying to win an auction for a Class A urban asset where a dozen people show up.

And so, hence, we see them, but we're not overly engaged by them and don't see the upside for us or our shareholders in doing so. But I think we'll stay more focused in the off market and it's probably a quiet period. We anticipated it being a little bit more quiet. I think we'll be intrigued at what happens in the pending tax code and rate structure, and if that triggers a selling window, but mostly the assets we're looking for aren't really going to be in that caliber.

So I think you'll see a lot of Bs and Cs come to the market, probably not stuff we're going to look at unless we really think it's well located and got a rehab. So I would expect us to be pretty quiet for the balance of the year on the acquisition front, and we'll look at it from there next year and see how the market evolves.

Okay. That's helpful. And then, just one last related question. Tom, you opened last call and you spoke about improving the portfolio, both as it relates to the market mix, but also urbanizing the portfolio itself within core markets. So we've talked a lot on this call about the first part. Can you touch on the second? In what markets that are core markets of yours would you like to urbanize the portfolio, and how much work does that involve?

You know, that's just a long-term directional aspect of it. I tend to think when we look at our portfolio, we really break down each market into quartiles of submarkets and we stay very focused on wanting to be in the two upper quartiles, and I think over time we'll continue to examine how those submarkets evolve and position ourselves accordingly.

It gives us what I'd call a direction. Timing on exiting and urbanizing, it's just been part of a normal capital recycling of the enterprise for us. We don't feel like the $12 billion any sense in urgency to try to grow the enterprise significantly. We will, naturally, over time as the cash flows grow well and the development and redevelopment activities come online. But we're comfortable with our size and a steady growth trajectory. And I think that's how I think about it and the group thinks about it. Anyone to add anything?

Thank you.

Saroop Purewal, Morgan Stanley.

Tom, you mentioned growing your development pipeline to $1.5 billion. If you can talk about the markets where you're planning to do that, and also, do you worry about the increase in supply impacting your development plans?

Well, I think for us, when we look at the size and scope of the development pipeline, we look at the triangulation of our skill set, our capital structure, our debt maturities, and maintaining financial flexibility and leverage of the enterprise. And so, those will probably be the governor of how big of a development pipeline we'll get.

The second, we kind of target initially, at this phase in the Company, at about $0.5 billion of annual deliveries. We think that's prudent.

On the Pacific market, we're certainly going to weigh what the supply threat looks like, but as a long-term value creator, a long-term holder, you can't get swayed by what the next six-month pipeline or year pipeline looks at. You have to look over the long period of time.

And then, I think we'll just wade through that factual discipline in determining where and when and how much our development shapes.

And I'll just remind you, I mean, I think one thing that does go unsaid very often is the redevelopment efforts that we undertake and the value creation in those. And you've visited a number of our redevelopment efforts and you can classify them as much more than kitchen and bath. We're actually changing both the cash flow trajectory of the asset, but also the capital rate aspect of it.

And we think there's a lot of value in that, and that's -- southern California is a perfect example of that market where we can rehab and we do not lose all the cash flow of the community. We, in fact, retain a lot of the existing residents at the new higher rent. And that's underway right now at Rivergate in New York, and we're having a very good success there as well.

Got it. That's helpful. And then, Jerry, what percentage of NOI, the non-same-store pool, would enter the same-store pool by 1Q? I mean, you guys have a good breakdown in the sub now with a number of properties, but if you can just quantify the percentage of NOI which will enter by 1Q. And I think that's when most of your New York assets enter the same-store pool.

As of right now, you know, 26% of our NOI is in non-same-store. By year-end, non-same-store will be 15%. I don't have handy exactly what it'll be in one quarter, but we can look that up and get back to you.

Great. Thank you.

(Multiple speakers) it's fair to say that the entire portfolio is at about $1,500 a month in rent. And so, we're just going to gravitate. If we don't do anything, it kind of rolls itself into in your -- that will probably be, as you said, over the next four quarters.

Great. Thank you.

Paula Poskon, Robert W. Baird.

Thanks. Good morning. A housekeeping question for you. What was the amount of the one-time vesting charge in G&A?

Paula, this is Warren. It was $3.8 million.

Thanks. And did you incur any one-time costs in relation to Dave Messenger's departure?

We had a very small -- associated with some stock that had vested during the quarter. Not as a result of the departure, but just normal vesting.

Okay, thanks. And then, what was the transaction that generated the gain in the TRS?

It was Belmont.

Okay. Thank you. And then, just a bigger-picture question for Tom. Could you just give us a little bit more color on the CFO search? Are you already reviewing candidates? Are you seeing the breadth and depth of quality and skill set that you were hoping to see? Just give us a little bit of color on where you are in the process.

Well, certainly, Paula. We've engaged a search firm in that, and we've had a number of people come forth and offer themselves as candidates, and we've looked at internal candidates, and that process is really just beginning.

And we feel very comfortable with the executive group participating in that and the depth of the team, and Mark Schumacher and his skills in the financial reporting area. So we feel like we can take our time and be very selective and thoughtful about the process, and feel that we'll find the right person for the Company.

And what are the defining characteristics of the right person, given the blend of the skill sets you already have on the team?

Well, we would like a guy that could finish the 4x100 in the pool and win the gold.

I think it's fair to say that there's a lot of characteristics we're going to look at and we're going to look at the entire attribute of the candidate. But it's really an opportunity for us, as a Company, to get somebody that's probably going to be active, engaged with the Street in communication, but can go anywhere in the enterprise and make it more efficient, more profitable, and culturally fit with this executive group and the Company's culture in the field.

So I think those are the attributes that start. There's a lot of qualified people out there who will fit those, and we'll just go through meticulously and get the right person for us.

Thanks, Tom. Appreciate that.

Michael Salinsky, RBC Capital Markets.

Good morning. Jerry, first question. Can you give us the lost lease statistic for the portfolio, and also what your expectations are for DC, just given the amount of supply coming online the second half of the year?

Sure. Lost lease at the end of the quarter, Mike, was 4.9%. That's down from the same time last year when it was, I think, high 5%s, so it's still maintaining at a good level.

And we're -- if you look at that blend, really, between my new leases and my renewals, it blends into that mid-5%s range. So we feel good about that.

DC, for the remainder of the year, we were, I guess, a little pleasantly surprised that we saw a year-over-year growth actually accelerate in second quarter versus first because a couple of our properties in Arlington had lease-ups that completed earlier in the first quarter, so we didn't have that stress on us.

There is a lot of new supply coming, as you know, in DC over the next 12 to 14 months. I think, for the remainder of this year, we'll stay probably in that 4% revenue growth range and I think we're going to be stressed a little bit as we get into 2013 in DC. I don't think it's going to go negative, but my guess is that that new growth will probably be about half of what it was this year.

Okay. Appreciate the color there. I don't know if you look at it this way, but if you look at the non-same-store portfolio, maybe adjusting for periods where you didn't own the assets, but do you have a same-store number? I mean, a year-over-year growth number for the non-same-store portfolio on a comparison basis?

We have tried so hard to figure out the best way to communicate that, and we had difficulty going back to last year because in many cases we either didn't own the asset or -- so we don't have reliable financial data. Or it wasn't mature yet and stabilized.

So the metric we've really tried to use more to show its performance versus our same-store is to look at sequential data because it was typically stabilized in 1Q. When you look at that, our non-same-stores that were stabilized in 1Q were growing revenues at 3.6% and our same-store was going at 2%. So it's almost doubled the rate.

Okay. That's helpful. Then, finally, just on the investment front, I know you guys talked about not expecting a significant amount of acquisitions in the second half of the year. What should we expect in terms of development starts and also additional land investment?

This is Tom. You know, I think in our prepared remarks, we've described on the road a number of times, between 70% and 80% of the development pipeline redevelopment, so almost $1 billion, 70% to 80% of that would be delivered by the end of 2013.

So if that comes out of the pipeline, we've got to add back into 2014 and 2015 deliveries. So we'll be looking at that, and again, trying to stay in that confines of about $500 million of annual delivery numbers. So that's what we'll be targeting, and we think we have a pipeline that probably fits that, meaning dirt inventory that we already control and are just going through the process of defining scope, product, and starts.

So I think we're well on the way of being able to sustain that level without having to go into the market and finding new opportunities.

Okay. But your guidance, though, for the second half of the year does contemplate additional starts, correct?

No, it really doesn't. It's -- probably more of the guidance is is what we're going to spend on the existing assets that are already underway. If we're able to finalize plans on some of the stuff that we're looking at today, then obviously we'll kick it into the start mode.

But we're still in a study mode on those and scope mode, and just not prepared at this time to put forth exactly what will be built because we're still trying to figure it out ourselves.

Fair enough. Appreciate the color. Thanks.

Rob Stevenson, Macquarie.

Good morning, guys. Tom, just to follow up on the last question. What's the level of land that you guys either option or are controlling that's not appearing on the Attachment 9-A on the supplemental? How material is that?

Really the only other land parcels that we have that don't show up on the schedules are the land parcels that we own with MetLife, so there's 10 of those parcels remaining. Some of those we will develop over time. We have very small ownership interest, but in the future that could change.

Okay. So the Wilshire and the 7 Harcourt, plus what you've got left at Vitruvian, is basically the owned, and then you've got Beach Walk, Fremont, and Pier 4 in Boston, which are JV sites, and outside of that, your land that you control is relatively minor? Outside of MetLife?

Well, I think you missed the Fremont site in San Francisco. We control that as well.

Okay. All right. And then, Jerry, you said -- you had a comment early on about skips and evictions, being pleasantly surprised there. Where is that trending and has it been sort of consistent despite -- over the last few quarters, despite what you've been seeing in terms of moveout financial reasons?

Yes, it typically runs for us at about 0.4% of potential rents, and that's a long-term average. Last year, in third quarter, I think it spiked up to 0.5%, maybe 0.6%. But we don't see that growing anymore. It's staying fairly stable. And you know, it's really submarket driven and it hits us much harder in our lower rent markets in those tertiary areas.

(Multiple speakers). I would also add that I think Jerry has done a great job of moving the vast majority -- 85%, 87% of the residents pay us online at the first of the month.

So we're able to identify people that are going to struggle or the slow-pay piece. And in years gone past, and including most of the private sector, you get kind of that drift in by the 10th or the 15th of the month before you realize you have an issue. And we pretty much know it by the third to fourth day of the month, who is going to be a problem. And you're able to jump on it by narrowing the bandwidth in excuses.

So I think you can operate in that range, and that electronic payment has helped us a great deal in that area.

Is that going to be moving more now that you're in more urban areas, like New York City, where the eviction process is long and drawn out and things of that nature? I believe Boston and other parts of California have issues as well. I mean, does that change the dynamic there at all?

I don't think so. You are right. It's harder to get those guys out in places like New York, Boston, and the West Coast, but I think as you go to a higher-end resident profile, they don't live as much paycheck to paycheck. So your better-quality residents offset the more difficulty with the court systems.

Okay. And then, one just oddball question. What's the relative number of corporate units in the portfolio these days?

It's probably -- it's hard to get a totally accurate count. I think it's in the 2% to 3% range.

Okay. Thanks, guys.

Alex Goldfarb, Sandler O'Neill.

Thank you. Good morning. The first question, just going to the guidance for the rest of the year, I don't recall the $0.03 of RE3 gains being in the guidance before. Is there anything upcoming in the back half of the year? Like any other either RE3 or one-timer gains?

This is Toomey. No.

Okay. And was there a reason that that wasn't disclosed in the NAREIT where you provided the full-year guidance update? Was there any reason why that gain wasn't included on that page?

(Multiple speakers). I think -- this is Chris. When we sold the Belmont, there was the $0.03 of gains. There was $0.02, a little bit over $0.02 of gains in our original guidance, so the difference there was not all that meaningful.

Okay. And then, the second question is, looking on the JV page, Attachment 9-B, if I just do the yields out of the various JVs, the MetLife I, the original Hannaford MetLife JV, the yield on that looks to be about 100 basis points lower than the second MetLife JV and the KFH. When do you think we would expect the first MetLife JV -- that yield to be more in line with the others?

You know, my view is that Met JV I is still in a transition period and that we're not done with working with Met on that portfolio and what it will ultimately be for UDR. So I think it's premature to look at it or look at it in light of catching JV II because it's in a state of evolution.

The second aspect, it is will improve as we just continue to operate the assets, which are doing very well, and Met is very happy with as well.

On KFH, I think after looking at it, adjusting for the management fee structure on that, returns will probably get better (multiple speakers) Met JV II. So that one is probably just not a full complexion there. When you look at just the NOIs, you have to really look at the fee structure that's also added to that, and those are probably above a 5%, 5.5% range.

Okay, but Tom, on the MetLife I, what are some of the things that you guys are doing that would improve? Because I think you've had it now for about two years or so, so what are some of the things that would improve the yield as you guys manage that portfolio?

Well, I think, one, the commercial space is always a challenge as it relates to the retail and getting tenants in there. The second is we're continuing to refine and move those rents pretty rapidly, and those improve as well.

And lastly, there's just a continued effort on the expense side. So normal operations stuff that Jerry does day in and day out; we just see a pretty good growth trajectory out of those assets and we continue to have a dialogue with MetLife on a wide range of things about what to do with JV I and we'll continue that dialogue, and feel like it's going very well.

(Multiple speakers) Alex. There's probably two, maybe three assets in that MetLife I that completed lease-up midway to late last year with heavy concessions. So as you continue to have that concession burn off, that should garner some benefit over the next 12 months.

Okay. That's helpful. Thank you.

Rich Anderson, BMO Capital Markets.

Thanks. Tom, question for you. I think the general-population public that follows you trusts the Company. You know, you've made some pretty substantial investments over the recent past in some of these core markets. And I think, generally speaking, like I said, people have a trust for your Company and your decisions.

But even Mickey Mantle struck out a few times, and so I'm curious. What could happen -- what are you contemplating in growth going forward for these major investments, mainly acquisitions, for them to work out for you? Do you have any expectation for growth that you could share? And what happens if rent growth decelerates substantially? Will they still make sense to you?

Well, Rich, a lot of different embedded questions inside of that. And where I would start with is, I guess, every one of them was undertaken with a thought that we could grow the value of the asset and add to the overall enterprise.

And so, in many cases, you look at New York, we look at it at a point in time and said we think these assets have embedded operating efficiency which will get us over the initial low capital rate, and Jerry has delivered on that. The second phase of that is that we think they are well located for future job growth and they are generally what I'd call a B type portfolio quality where high propensity to rent, job growth, lack of supply is going to drive outsized cash flow growth and our operating model basically keeping them full and at higher rents.

And lastly is looking at them for redevelopment efforts in that we feel like a lot of them are well located and that we can continue to add to -- capital to them and incrementally get outsized returns on that incremental capital to rehab, and Jerry has done very much that at Rivergate where he's turned 38 doors and he's getting an average rent increase of 25%. And many of the people who are living there are just moving to new units.

So that's the type of long-term value creation that we have looked at when we've bought assets. And I think we would continue to do that. We know it's a very competitive landscape. We'd prefer buying from non-marketed -- or non-auctioned deals because we think we can identify those and we have a track record of successfully executing on those. So I think that's the first aspect of growing the enterprise.

We're not intent on a size as much as we are intent on an NAV creation model, and things steadying in that. And a big part of NAV creation is, what's your cost of capital, and are you adding to it or are you destroying it? And so, in our light -- view, we think we've been adding to it.

It takes time sometimes to deliver on that, and we appreciate people's patience and willing to go look at the assets and see and walk them with us. And I think you've done it a number of times and you can see what we're doing, and you look at it and say, yes, you are executing on what you told us you would do.

And we'll continue to do that. We want to be very transparent and very clear to our shareholders that we intend to grow NAV and that we have a team that can do that, and we're going to continue to garner opportunities. We don't know what size and scope they're going to bring, but we'll be disciplined about it.

If you had known -- if you knew that in 2014, 2015, rent growth in some of these markets would decelerate meaningfully, would you be -- would you still have a view of buying these assets and thinking longer term? Or would you maybe (multiple speakers)

Well, certainly -- you know, I'll let Harry add to it, but certainly it's a fair question. And we think of, what are the potential outcomes of economic downturn and will we slide into a recession, which looks like a higher probability every day?

And our view is is that multifamily has done very well in a recessionary environment. If you look through the number of recessions I've been through, multifamily holds up better than any other asset class. And we think that will be true again in this next recession that will come.

So you can't necessarily look and try to time it and say, gosh, we think 2013 is going to be this way, and 2014. We tend to take a longer-term view and realize that in the markets that we're in, there's a higher propensity to rent, there's less likely to be supply, and that jobs -- we try to concentrate on it, but we're not always going to get it right. You know, the healthcare law is going to spawn a whole new wave of job additions and growth in a number of markets, and we're weighing that as well in our future.

But we're a long-term value creator, and you're not going to get it always right on timing, but if you buy right, you run it right, over a long period of time we'll do just fine.

Understood, and obviously that's the right answer for long-term focus in making big investments. And then, Jerry, a question to you. How much does the addition of the non-same-store assets influence your same-store guidance, if at all? Does it add 50 or 100 basis points to the growth?

For which year?

Choose (multiple speakers) a year. I mean, obviously it's not going to get in until deep into the second half, so how would you characterize it for -- well, not to give guidance on, unless you want to give guidance, but for 2013, do you think it could add 50 or 100 basis points to the pool just because of the newness of the assets?

I doubt it. You know, it's not quite that much. My guess is it's probably somewhere 10 to 30 bips.

Okay. Great. Thank you.

Jeffrey Donnelly, Wells Fargo.

Thanks, guys. Actually, Tom, I'm just curious for your perspective. Some of your peers have suggested that construction activity in the industry, which has been growing, is a bit of a bubble, that these are projects that were planned and permitted and not built last cycle, and that once we chew through them, the pace of growth is going to moderate or at least maybe not climb above current levels. How are you thinking about supply, I guess, nationally? And what do you see as more of a pace of growth in your markets over the next few years?

Well, a very good question, and give me a liberty to talk broadly about it.

We talk to a number of merchant building models, and for us, one of the red signals is when we talk to them about, are they doing one-off deals, the source of their capital, their expected returns, and are they entering into programs? And programs are where you have an investor who says, I'm going to do three, four, five deals with you.

And what's been known to us, in past when people have seen rapid increases in the supply part of the equation, has been when there have been a number of programs offered up or investors having capital that can sustain that. And we're not finding that in the environment today. As I am aware of, probably a dozen merchant built, very skilled groups, I'm only aware of one who has a program at this time.

And so, investor capital is very cautious about supplying them, and they're very skilled at garnering sites, entitlements, and putting up things rapidly.

So the second aspect of that, and I think is underweighed by the space, is the impact of Basel III on the capital structure of banks in that a lot of supply comes from regionals and local banks more so than the nationals. And by getting -- having to come into compliance with Basel III, we think it's going to be a constraint on the construction loan side, which has a higher capital requirement, which, in essence, banks are going to say they want to be paid more for that and he's going to charge more in the construction financing side or constrain the amount of lending on it.

So I think that -- those two factors are the ones that we look at and draw a little bit of comfort that the supply is not going to get out of hand. That being said, if our rents continue to grow dramatically, capital will find a way to garner space and opportunity.

So we feel that that is the overall landscape. On our individual submarket and market overviews, we see very little threat at this point in time. All we can do is look at the same data you do and look at permit, land trade, look at who's buying it, and ask ourselves the likeliness of how competitive that product is going to be against ours and when it's going to come online. We can't do anything about constraining that, but we continue to monitor it and do not see it as a viable threat to the business over the next 12, 18 months. Beyond that, you're hour-glassing it just like the rest of us.

So you don't necessarily see the industry as 250,000 units, let's just say, pick a number, headed towards 350,000. You think it's going to -- instead of running out of gas, if you will, in terms of just where we could ultimately peak it [to have] units under construction.

Yes. You know, I think it's often management teams and certainly analysts try to focus on that aggregate number. We're less concerned about the aggregate because where is the 300,000 or 250,000.

To us, it's how much is in our submarket directly competing to us. The fact that they're building in Houston is almost irrelevant to us because we're practically out of Houston. So we don't pay much attention to the gross number. We aggregate and very think much on our submarket/market-driven numbers.

And our red flag is, is when it gets above 1% of the submarket, then we start really assessing the impact to us. But, again, we're long term. If it's a strong submarket that we're in, 1% is not going to disrupt us of that much.

And just a final question or two, going to the other end of the spectrum, I guess, concerning the Pier 4 parcel in Boston. Is that residential over retail, and how close is your partner there to breaking ground on that project?

It is residential over retail. There will be about 10,000 square feet of retail, a 20-story tower.

We're still finalizing the scope and plans and cost in this thing. The project is entitled -- we have BRA approval, so that once we get through this exercise, we'll be in a position where we conceivably could start construction over the next several months.

Okay. And just one last question, Jerry, I'm sorry if you gave the figure, but do you guys track moveouts to home rental, and how has that trended? I might have missed it if you said it.

We do. It's right around 4% and it stays fairly consistent. We don't see many people moving out to rent homes.

Okay. Great. Thanks, guys.

Thank you, and that concludes our question-and-answer session. I'd now like to turn the conference back over to our host, Mr. Tom Toomey, President and CEO.

Well, thank you all for taking the time this morning to exchange thoughts with us, and we do appreciate your time.

And in closing, I'd just say, in July of this year marks the 40th year for UDR's REIT and our 160th consecutively-paid quarterly dividend, and I think that's in testament to the associates over the years, the management team, and certainly a trend that we are very proud of and look forward to continuing in the future. And that concludes our call today, and we wish you the best.

Thank you. Ladies and gentlemen, that concludes UDR's 2Q 2012 conference call. [AT&T] would like to thank you for your participation. You may now disconnect.