UDR Inc (UDR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to UDR's third-quarter 2012 conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Monday, October 29, 2012. I would now like to turn the conference over to Ms. Chris Van Ens, Vice President of Investor Relations. Please go ahead, sir.

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

I would like to note that statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking 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 third-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 four topics -- first, broad operating trends and quarterly results; second, an update on our external growth activities; third, an update on our CFO search; and finally, the expansion of our UDR/MetLife II joint venture announced this morning. Following my comments, Jerry will provide additional commentary on operating results and emerging operating trends.

During the third quarter, our business continued to operate at an elevated level driven by strong organic rent growth, as well as slightly higher occupancy rates. With the fourth quarter upon us, we have entered the seasonally slow time of year for the apartment demand. Nonetheless, good multifamily fundamentals continue to generate tailwind for the industry and we expect will do so for the foreseeable future. This is especially true for UDR, which owns a portfolio increasingly concentrated in markets that exhibit above-average job growth, low single-family home affordability, a high propensity to rent and in general limited new multifamily supply pressures.

In the third quarter of 2012, core FFO per share of $0.33 increased by 3% year-over-year. Strong same-store revenue and net operating income growth of 5.5% and 6.4% respectively, as well as good execution in our non-same-store portfolio, drove the improvement.

Second, an update on external growth activities. Green-lighting opportunities that increase the Company's net asset value per share remain a top priority, although we are cognizant of balancing this necessity against AFFO per share growth and our intent to operate the Company at a lower leverage profile. The following is what we currently see in the marketplace.

First, acquisitions. We continue to look for opportunities to expand in our core markets, but pricing for most well-located assets is full right now. We will consider buying again when we find the right property, in the right location, at the right price and can fund the acquisition with appropriately priced capital in the context of our lower leverage profile.

Second, development. The weighted average spread between expected stabilized yields and spot cap rates or in-progress pipeline is roughly 150 to 200 basis points. Historically, the spread has been closer to 100 to 150 basis points. As such, development remains as a source of significant value creation. To be clear, we expect our developments to generate stabilized yields that are averaging 6% to 6.5%. These are not representative of the yields we expect upon delivery and lease-up.

With 51% of our $792 million development pipeline already funded, approximately 75% will be delivered by year-end 2013. We are actively evaluating new opportunities, as well as those within our wholly-owned and JV land bank.

And finally, redevelopment. Our pipeline encompasses five projects with a total anticipated spend of $279 million, 34% which is expected to be completed by year-end 2013 and 23% of which has already been funded. Redevelopment continues to offer a superior risk/reward trade-off versus other external growth opportunities. But our opportunity set is limited as viable candidates are inherently tied to the size and scope of our existing portfolio.

We have identified several redevelopment candidates in our core market that we believe can achieve our targeted 7% to 10% return on incremental capital invested. We will update you should these move beyond the drawing board.

We continue to target annual development, redevelopment deliveries that total roughly 5% of the enterprise or $400 million to $600 million, although our ability to make good on this goal can fluctuate from year-to-year depending on the cost and availability of capital.

Next, we are making progress in our search for a new CFO. A short list of candidates has been formed, which we are vetting. As I indicated last quarter, we understand the importance of filling this key position, but UDR possesses the necessary skill set to wait for the right hire.

Finally, this morning, we announced that the Company exchanged its ownership interest in four operating communities and two land parcels in our UDR/MetLife I joint venture in addition to $10 million in cash for an increased ownership interest in The Olivian, an A-plus high-rise building located in downtown Seattle. UDR now owns 50% of The Olivian and the community has been contributed to the UDR/MetLife II joint venture.

Importantly, this swap of ownership interest increased our presence in a core market, Seattle, where long-term multifamily fundamentals appear advantageous. Conversely, it reduced our exposure in non-core markets such as Tampa, Charlotte, Houston and Chicago. Additional details can be found in our third-quarter press release. With that, I will pass the call over to Jerry.

Thanks, Tom. Good morning, everyone. We are pleased to announce another strong quarter of operating results. The third-quarter same-store net operating income grew 6.4% driven by a 5.5% year-over-year increase in revenue. Same-store expenses increased by 3.6% year-over-year primarily driven by higher real estate taxes. Same-store income for occupied home increased by 5.3% year-over-year to $1402, while same-store occupancy increased by 10 basis points to 95.8%.

Sequentially, third-quarter NOI increased 0.9% driven by a 1.8% increase in revenue against expense growth of 3.6%. Generally, our third-quarter results follow the normal seasonal curve we have become accustomed to over the years.

As we have reiterated throughout the year, 2012 continues to unfold in line with our expectations. Our third-quarter effective rental rate increases on new leases at our same-store communities increased by 4.3% on average. Renewal rate growth remains comparable versus previous quarters averaging 6.5%.

Accounting for approximately 25% of our same-store NOI, New York, San Francisco, Dallas and Boston were our best-performing markets during the quarter. These markets delivered weighted average revenue growth of 8.9% year-over-year. Non-core markets such as Sacramento, the Monterey Peninsula, other Mid-Atlantic and Norfolk struggled, but generated less than 8% of our same-store NOI in the third quarter.

Resident turnover moved up slightly to an annualized rate of 66% in the third quarter, 170 basis points higher than last year at this time. Importantly, turnover growth decelerated as the quarter progressed and it appears that this trend has continued into the fourth quarter. Additionally, the pace of which we have been able to refill moveouts with high-quality new tenants has not slowed.

Turning to the performance of our non-same-store wholly-owned communities, 2236 homes, or approximately 42% of our non-mature pool, were stabilized in both the second and third quarters of 2012. These eight communities generated sequential revenue growth of 1.9% during the third quarter, slightly above our same-store sequential growth of 1.8%. The spread narrowed versus what we reported on the second-quarter call as a result of high-growth communities transitioning into our same-store portfolio this quarter. Our non-same-store communities now contribute 17% of NOI, down from approximately 24% last quarter. By year-end, we expect this to decline to roughly 15% of NOI.

During the third quarter, 1913 homes entered our quarterly same-store portfolio, including our initial New York acquisition in Hanover Square, as well as other high-growth communities in San Francisco and Boston. Another 437 non-mature homes will enter our quarterly same-store portfolio in the fourth quarter. By year-end 2012, these additions should increase our same-store income for occupied homes to roughly $1430 all else equal. Additional details can be found on attachment 7B and 7C of our quarterly supplement.

Moving on, I would like to address some of the bigger-picture questions we fielded during the September conference season regarding multifamily fundamentals. First, multifamily supply. Nationally, the multifamily supply still appears to be contained versus historical norms despite the most recent permitting data from the Census Bureau. We gauge the potential impact of new multifamily supply by how much product is expected to come online in our markets and more precisely our submarkets. If we include every submarket in our core and capital warehouse markets where we have at least one community, we find that our portfolio will compete for approximately 40% of the total new multifamily supply that is expected to be delivered into these markets over the next two years. However, because we have different levels of exposure to each submarket, a more meaningful measure of the potential impact of new supply in our portfolio is to weight those submarkets we operate in by our respective unit counts in them.

This analysis indicates that our portfolio will effectively compete with only 22% of the total new multifamily supply that is expected to be delivered into our core and capital warehouse markets over the next two years. This number is far less concerning than headline expectations would suggest.

Second, [the] potential effect that a recovering single-family housing market may have on our business and we believe that a continued recovery in the single-family housing market will translate into a difficult market for apartments. Two thoughts on that. First, increased housing demand will likely be driven by a stronger economy, which suggests better employment growth, both of which are key drivers for continued growth in multifamily demand.

Second, while moveouts for home purchase will likely increase in conjunction with the single-family recovery, return to the excesses of the mid-2000s appears remote. In addition, UDR should be better protected against moveouts to single-family home purchase than historically was the case as, over the past 5 to 10 years, the Company has transitioned its portfolio into urban locations in coastal markets with low home affordability and higher propensity to rent.

Turning to more recent trends, renewal increases sent out through December have averaged 5.7% and we expect to capture most of this increase as is generally the case. With occupancy holding near 96%, we are expecting strong fourth-quarter results.

Finally, I would like to discuss a change we implemented to how we account for bad debt expense that aligns us more closely with our multifamily peers. The majority of our former residents that had an outstanding balance of less than $1000 at moveout paid us within 90 days after vacating. Under our previous policy, cash accounting demanded that we write these balances off immediately upon moveout.

To better reflect the economics of our collections, we have switched to an accrual-based method of accounting for bad debts, which resulted in a benefit of $1.9 million in NOI during the quarter. This NOI is not included in our same-store results, but is included in the development communities and other line item on attachment 6 in our supplement.

Moving forward, we anticipate that an improved collections process will generate an additional $250,000 to $500,000 of NOI per year, which will help our same-store results. With that, I would like to thank all of our dedicated associates in the field and at our corporate and regional offices for another good quarter. Operator, we are now ready for Q&A.

(Operator Instructions). Eric Wolfe, Citigroup.

First question is just on The Olivian transaction. Could you just walk us through how you thought about the valuation in terms of cap rate and growth prospects for Olivian Seattle versus the other full assets in the non-core markets? Just trying to get a sense for what you think the appropriate cap rate spread is between those sort of core versus non-core markets.

Hey, Eric, good morning. This is Tom. With respect to the cap rate, we kind of looked at the transaction as more of a swap of interests and the cap rate conversation is not as germane to it as you would normally think of as an acquisition because we are selling interest at the same time. And so I tend to not think of it as a cap rate as much as just a swap of interest and cash flow and market position, which advances kind of our interest in owning more of Seattle, if you will, over the long term and a little less of Charlotte, Tampa and Houston land, etc.

Sure. I guess to put it another way, I guess, you say that you're willing to sort of except a lower return in Seattle because it is a core market and you sort of like that positioning versus those other markets or on a sort of net neutral basis, you are trying to swap out sort of equal return assets in your non-core markets for the same return in your core markets?

Yes, I think more the latter, Eric. Our personal viewpoint over the long term would be that Seattle urban product at the high-rise is probably a better long-term asset than you would a Tampa or a Charlotte suburban product and certainly that is our view over the long term. So more the latter in your argument.

Okay. And then just last question, it sounded like from your remarks that you really haven't seen much rise in cap rates yet, but obviously as rent growth slows, you would expect to see some rise. Why don't you think you have seen it yet or is that more of like a 2013 sort of event?

I will let Harry, who is joining us from Boston today on the call, give you an update on cap rate.

Eric, this is Harry. You are right; cap rates have not moved. Buyers are -- I mean, first of all, our business fundamentally continues to be good. The buyers are still seeing continued NOI growth. Secondly, you still have a little bit of an imbalance between buyers and sellers. There is still a lot of capital chasing these deals and third, interest rates continue to be low and even lower and there is no reason to expect a significant change in the future.

I mean, obviously, as you continue to look forward and you have more of this heavy NOI growth behind us and if there is a change in interest rates, you could at that time see a change in cap rates. Inevitably that is going to happen, but we don't see it happening any time at least in the next few quarters.

Okay, great. Thank you.

Jana Galan, Bank of America.

Thank you. Good morning. Jerry, can you provide the new lease and renewal rate increases for October?

Absolutely. So far in October, new leases are up 2.6% and renewals are up 5.7%.

Thank you. And then I guess given your renewal outlook through December for 5.7% increases, do you have a sense of where you are starting 2013 from given the work that you have done in 2012 in terms of revenue growth?

We are really not prepared at this point to give guidance towards revenue growth in 2013.

Okay. And then maybe just on -- the expenses ticked up a bit in your Western region, particularly in California, which I don't think would be as impacted by real estate taxes. I was wondering if you could give a little bit of color around expenses there.

Absolutely. Yes, what happened in California in great part last year is we benefitted from Prop 8 adjustments down where valuations were allowed to go down from -- where we had originally purchased the properties to where the actual values were. Now what has happened is valuations have continued to go up over the last 12, 15 months. You really don't have a Prop 13 ceiling of the 2% on real estate taxes. So what you're really seeing is benefits that we were able to achieve last year in the third quarter and you can't replicate that.

Thank you very much.

This is Tom Toomey. I have a couple of things to add to Jerry's comment on October. Clearly performing right now in line with our expectations and that is a credit to really Jerry and his team and they have got a very strong occupancy. As of this morning, we are at 96% and I think they will be able to hold a pretty high occupancy coming into the first part of January of 2013, which should aid us on a number of fronts, including pricing power.

Dave Bragg, Zelman & Associates.

Thank you. Good morning. Jerry, can you talk about the performance of Orange County during the course of the quarter?

Absolutely. Orange County actually decelerated as far as year-over-year growth. Through the first six months of the year, we were up about 7%, close to 7% and in the third quarter, I think we decelerated down to growth in revenue of 4.9%. The main thing that happened there, Dave, is we probably got to aggressive -- well, we did get too aggressive on renewal increases that we sent out beginning back in May and it turned out that more of our residents were unwilling to accept that rate. It resulted in turnover spiking up in Orange County; was 11% higher than it was last year and it kept a lid on occupancy growth. So we ran it with a little lower occupancy at 94.8% than I would have liked and that brought it down. We have since gone back, adjusted some of our renewal increases, gotten occupancy back up into the mid-95%s in Orange County and we feel like we are back on pace.

So it seems like you must have had to have lowered your renewal increases in that market in the quarter pretty substantially or was it more so on new move-ins? Just trying to think about the 0.2% sequential rent rate growth in that market for the quarter. I can see the occupancy change, but, on rent gains, there was a pretty big drop-off.

Yes, a lot of it was in new lease rates. We were running throughout the second quarter in the high 4%s to low 5%s. Even in July on new leases, we were getting about 6% and then we have had to drop it down to the mid-3%s since then just to gain the occupancies. And when I look at the renewals that we were sending out or achieving in Orange County, throughout the quarter, the first few months we were getting about 6.5% and then we took it down in September to 4.9%. And in October so far, it is at 5%.

And just last question on Southern California as a whole, Jerry, your peers have sounded a bit more optimistic on this region. The job growth has certainly picked up there and what is your view on your Southern California portfolio going forward relative to the rest of the portfolio?

I think SoCal for us will probably be an above-average performer both in 4Q, as well as when we go into next year. I think the job growth, as well as the recovery of rents that are really lagging the rest of the country are going to help. There is limited new supply that is coming directly at us in any given market in Southern California. Like you said, Orange County this past year, in the last 12 months had about 30,000 jobs added, which is very close to its long-term average. We think that could decelerate slightly next year, but not much.

LA, LA is picking up pretty well. Even though we got a little bit of supply coming at us in Marina del Rey and a little bit downtown, we think demand is more than sufficient.

Now one other thing I will tell you we are working on, we have got rehabs that are going on in Southern California, both at -- in Orange County at Villa Venetia and Pine Brook where we have done a good job of pushing rate there. We are getting about a $520 rehab premium on the 56 units we have turned down there. So there is definitely demand for a higher grade property there. At The Westerly, which is formerly Marina Pointe up in Marina del Rey, we have completed about 315 of the unit interiors, as well as the bulk of the amenities and unit -- or building exteriors. And we have been able to get about a $450 premium on those.

That's helpful. Thank you.

Andrew Rosivach, Goldman Sachs.

Good morning, guys. I am just curious, Tom, when you kind of went through the discussion of the development pipeline and the spread, the spot cap rates, when I look at your NAV or your implied cap rate, the spread isn't as good. And if I fund in my model your development pipeline with equity, it doesn't produce a ton of accretion. And I guess I am wondering on the back of that, have you thought about other ways of funding your development pipeline, especially potentially asset sales?

Yes, Andrew, certainly we have looked at it carefully both in terms of sizing our development activities and redevelopment activities. And our conclusion is this, that during 2013 we'll have approximately $700 million in some phase of lease-up and clearly that won't deliver much of NOI for '13, but will rebound substantially in '14 as those assets are leased up.

So I think what you're going to see is first a little pick-up in our overall leverage in the first couple quarters of 2013 and then I think it comes substantially down as the NOI gets delivered on those assets. So we see it as both good long-term investments in the development activities and clearly, if we are delivering at 6% or better compared to spot cap rates for a lot of these assets, could be low 4%s, mid 4%s, that the NAV creation is there in the long term and that in the short term, it may be dilutive to earnings and then that is part of a trade we are willing to make. But we do believe that long-term NAV accretion is there.

So just to paraphrase, it sounds like you may be comfortable funding with the remainder of your development pipeline with a combination of retained cash and debt and then the EBITDA will grow over time such that the EBITDA becomes more manageable?

Andrew, I think you have it correct there. Clearly, we are not interested in issuing stock below NAV and we believe that is probably the right route for us is to grow into it. We will continue to look at sales and price it in the market and see what kicks up, but I think a lot of that is dependent on what happens November, fiscal policy, all of those other factors and I am not prepared to give you what the sales environment might be next year. But we feel comfortable, absent sales, being able to grow our enterprise and grow our NAV and we will see how the sales part comes out.

Thanks for that.

Michael Salinsky, RBC Capital Markets.

Good morning, guys. Any changes to the guidance assumptions? I know you guys didn't provide an update there to the supplemental, but just curious as to kind of what you are thinking in terms of same-store results there given the wide range?

Yes, Mike, this is Toomey and I will let Jerry follow up with it, but our overall view is to update guidance at the midpoint of each year and on any material activity and then our view for midyear is that we are still within the strike zone of all the midpoints of our earlier guidance and feel good about those. And so there is not much time -- need for time to update those activities since we are pretty much in the strike zone? Jerry, on the same stores.

Yes, Mike, and we read your note and pretty much agree with your math and the assumptions you came up with. I guess the thing to consider when you're looking at our fourth quarter, especially on the revenue, is that in 4Q '11, we ran occupancy at our same-store portfolio of 95.1% because last year, we had pushed rents hard, letting turnover occur that had difficulty reloading at rates that we liked.

This year, our expectation is to run the fourth quarter in the high 95%s like we have the last several quarters. So you are probably going to be looking at, I would say, a 60 to 80 point increase year-over-year as occupancy that will help get you to that midpoint.

Okay, that's helpful then. Second, could you talk a little bit about LA and San Diego? I know you gave a lot of good color there on Orange County, but we did see a little deceleration there. And then I know you guys give turnover on a trailing 12-month basis, but, in the first half of the year, it was up and it seemed like it dropped in the third quarter. Do you have what it was actually in the third quarter in terms of a decline?

Actually, in third quarter when I compare to the third quarter of last year, and I am not talking trailing 12, it is just an annualized quarter is how we typically give it, it was 170 basis points higher than it was in third quarter of last year at 66.4%. Now if you looked at the nine months annualized, we are currently running about 270 basis points over last year at 57.2%. Because 4Q is typically a very low turnover quarter because we have a low number of lease expirations, I would think we are going to get down into that 54%, 55% range, which will be 200 to 300 basis points higher than it was for the full year of last year.

What we have really seen is, probably from about March through July or August, our turnover is running 300 to 400 basis points higher than it was last year. In the past two months, we have seen it normalize back down to the point it is virtually flat with the -- based on the same properties we owned last year. So we think we have kind of gotten through that layer of residents that had moved in a few years ago when we were at trough rates and as we have increased rents on them 6% to 7% over the last couple years, they have gone back to the asset class they were used to living in and we have reloaded with a higher caliber of residents that we are optimistic will be able to stay with us and we will see flat turnover going forward.

So I can tell you just a couple (inaudible) people typically ask. Our rent to income is still in that 17% range and our average household income today is about $91,000 on our same-store portfolio. That is an indication I think that the quality of the same-store portfolio is much higher than it was in years past when that number was more in the $80 million range.

Fair enough.

Now on LA and San Diego, we are seeing LA improve somewhat. In the last quarter, again, we did push rents there similar to what we did in Orange County and we saw a turnover there actually go up about 10% also. So kind of the same issue that I said in Orange County. We got a little aggressive, pushed too hard and it took us too late in the quarters to re-stabilize that occupancy. Today, LA is running about 95.5% physical and we are optimistic that we have the right teams in place and the right strategy to push that forward.

And finally, did you mention what real estate taxes were during the quarter for the same-store, how much they were up?

I didn't, but I will. They were up 9%. We were hit by the Prop 8 readjustments in California and then when you look in the sunbelt markets, predominantly Texas, as well as Florida, valuations this year are coming in higher than we had expected.

Andrew McCulloch, Green Street Advisors.

Good morning. On your same-store performance for New York, which is just essentially Hanover, how did that 12% same-store revenue growth at 10 Hanover compare to your initial expectations when you bought that asset?

It is probably about in line. It may be doing a hair better, but we expected fully to be able to go in right off the bat and get the increase from what the private owner was charging. We have recouped quite a bit of that as we have gone throughout the year and then there were some concessions that were recurring that have gone away. So it is a little bit ahead, but not markedly.

Okay. And then on your development pipeline, you guys added stabilization date information and it looks like most are five quarters out. Usually, when we look at your disclosure for your peers, it is two to three quarters out. Is that just conservatism on your part or is that asset-specific by the type of product you are building? What is causing five quarters for stabilization?

This is Tom. Harry, do you want to take that?

Sure. The theory is that once the last unit is delivered, it will take roughly five quarters for the property to become fully occupied and for all or most of the lease-up concessions to fully perk off. So it is more reflective of the real stabilized run rate for the asset.

Okay. So it is not occupancy stabilization then?

No.

Okay. And then last question, Tom, you kind of talked about this in your prepared remarks, but when you look at 2013, how would you rank your external growth opportunities between acquisitions, development and I guess further activity with the MetLife JV?

Well, Andy, I think it is premature to rank them, but I will tell you I think the acquisition environment where our shares are trading today would clearly be very challenging to find anything that would be accretive at today's prices and containing ourself within our leverage metrics. And so you will probably see us continue to look at our redevelopment platform, followed by our development activities and see where sales come out. But I think it is going to be a tough acquisition environment for us where we are trading and in the confines of where we want to keep the leverage of the enterprise.

And with that being said, I think Jerry has got a very good year coming up in '13. We still see good strong fundamentals and so the core of the business being operations looks like it is going to have a good year next year.

Great, that's helpful. Thank you.

Karin Ford, KeyBanc.

Hi, good morning. I appreciate the color on the year-over-year occupancy comparison you are expecting in the fourth quarter. Do you expect to get sequential revenue growth from the third quarter to the fourth quarter? I think you got a little bit last year. Are you expecting that again?

Yes, we would always expect to get sequential growth. I mean we are still raising rent. I think your occupancy level will probably be flattish, so most of your growth is really going to come more through the rent side.

Okay. Next question is I think you said on the last call that you were expecting the same-store pool to contribute 10 to 30 basis points to same-store growth next year. Is that still your expectation or has that increased a little bit given the strong performance in New York?

I don't think that has really changed; although I would tell you we are still in the midst of doing our budget so we don't have a firm number yet. But I don't think any of the assumptions I had back then have changed materially.

Okay. And then last question, am I reading your results correctly that there was a roughly $2.9 million, $3 million tax benefit from RE3 that was included in FFO?

Yes, hi, this is Warren. Yes, it was. It is a recurring benefit, but, as we said, it is dependent on how many communities are held in our TRS at any time.

And was that included in your previous guidance?

Yes, so we expect that the fourth-quarter benefit will be similar to what we realized in the third quarter? Approximately $3 million.

Okay. Thank you.

Karin, this is Toomey. Just to add, I think the business is operating just as we thought it would for the second half of the year and Jerry still has pricing power in a lot of his markets, as evidenced by his ability to honor renewals and the new leases, traffic always drives off this time of year and we wouldn't expect that number to change. So I think we have still got good solid fundamentals.

Michael Bilerman, Citi.

Yes, good morning. Just sticking for a moment on guidance, so the 134 to 139 stands. I think you were talking about everything sort of being at the midpoint. So with the $1.01 done in the first nine months, that sort of leaves you 33 to 38 as the implied fourth-quarter guidance. And I guess if you did 33 in the quarter, which was propped up a little bit by this accounting change, so let's just call it $0.32, how do you get from $0.32 up to a $0.33 to $0.38 range or $0.35, $0.36 at the midpoint?

I will start out with Jerry and finish on it a little bit.

Well, I can tell you I think you typically have good growth in the fourth quarter because expenses go down, so some of it will come from that. I think -- when you said the event in the fourth quarter, are you talking about the change in the bad debt, the $1.9 million?

Yes, well, that affected, sorry, third quarter, so the third quarter you produced $0.33, but in reality that is more closer to $0.32 just given the $1.9 million was in FFO in positive impact that wasn't known before. I assume it wasn't in your guidance because you never talked about it. So you need almost a $7 million increase in FFO, which is a pretty substantial number on a base of $85 million going into the fourth quarter to hit that midpoint. And it just -- I don't know where the pieces are to get $7 million of incremental FFO to get you to the midpoint and I want to make sure that the expectations are correctly adjusted for what you're going to produce in the fourth quarter.

This is Tom. A couple things, Michael, with respect to the third quarter. You're also taking a charge for acquisition expense of about 1.1. So we probably won't be buying anything in the fourth quarter; that would be part of it. The second aspect on your guidance of the range of $0.33 to $0.38, the consensus on the street is about $1.36. We see it pretty much that way ourselves and I think we will really leave it at that.

Okay. And then just in terms of leverage, you -- when you did the big equity offering last quarter, you talked a lot about bringing your leverage down to peers. We have seen a lot of peers in the apartments specifically continue to move leverage down, a pretty aggressive use of the ATMs, as well as equity issuances. I guess what are your thoughts today? Is the rest of the industry now too low or do you need to move your leverage down further because you spent a lot of time talking about getting from the right-hand side of everybody's leverage chart to the middle? And so I am just trying to figure out how you are thinking about it.

We see it a number of different ways. First, it is not really for us to define where leverage should go. I think lower in the long term directional is where we are headed and other companies' use of ATMs seems prudent if they think they are selling stock above NAV. Right now, we would probably not be selling stock and we haven't since May at it because we don't believe we are trading anywhere near our NAV estimate. So I don't see the use of the ATM as a way to lower the leverage.

The way I see it is let the enterprise development/redevelopment activities mature. That will naturally deleverage us, as well as operating cash flow growth. So I am not trying to chase the peers, if you will. I think today we are right about a 6.9 on debt to EBITDA and all the other metrics look like we are at average or below average and I think the Street will be prudent in their judgment of us as they see us consistently bring that number down over time. So leverage, that is kind of how we think about it at this present time.

You have made a comment about the leverage is going to move up in the interim. Where does that 6.9 go in your model as you I guess fund the development and the development is not yet stabilized? I assume that is what you are particularly referring to.

Yes, we are. And I think the first two quarters of next year should drift above 7 and then rapidly start coming down as the NOI from that development/redevelopment activity comes online. And as you know, we are delivering $700 million, which has practically no earnings for us in '13 and then '14 has a substantial uptick. So that is how we see it unfolding.

In the interim, we will continue to monitor the share price in the sales market and see if we can't effect some positive direction on leverage in that way. But we are comfortable with it drifting up slightly for a couple of quarters as people can clearly see the long-term path is towards lower leverage and we think that path is within our control.

Okay. And just (inaudible) on the exchange this morning, what was the gross value of -- I know you paid them $10 million of cash to even it out, but what was the gross value, including any share of debt between the two?

The gross asset value is a little over $400 million. These assets are probably at about 45%, 50% levered.

And then what is left in terms of non-core, either within the MetLife JV, that you would think about selling down either back to your partner or out into the broad market and how much is left non-core on the Company's balance sheet?

In Met JV 1, non-core is probably less than $400 million in our estimation and non-core of the asset -- we kind of divided that into two buckets, assets that we think we have exhausted the value creation and we think there will be an opportunity to sell and that is primarily Sacramento and North Fork. Those assets probably have a gross asset value of probably $200 million, $250 million and then we have a much more larger pool, if you will, of what we call warehouse capital where markets are recovering. We think there is still more value to be gleaned out of the assets through operations or just natural market recovery. And that is probably the Nashville and Florida portfolios and then those assets are probably, oh -- Harry could probably give you a better asset number -- probably $1 billion. And realize it is in the context of multiple years on a $12 billion enterprise. And so I think we will hang onto them for a while. We don't see any particular need to sell them in the short run. In fact, it probably wouldn't be prudent to do so.

Okay, thank you.

There are no further questions at this time. I would now like to turn the call back over to Mr. Toomey for closing remarks.

Well, thank you, all of you, for your time today. I know that we are all watching the weather and certainly our thoughts go out to those who are going to be impacted by this storm. We stuck with having this call this morning in hopes that, one, we would be able to focus our attention on the balance of the week to what damage may occur by the storm and positioning our assets and our people to help our residents and associates get through this event. And we think we are well-prepared, anticipated it and again, thank you for your time and know that we will see many of you in a couple weeks in San Diego. With that, take care.

Ladies and gentlemen, this concludes UDR's third-quarter 2012 conference call. You may now disconnect. Thank you for using AT&T conferencing.