UDR Inc (UDR) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to UDR's first quarter 2013 conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions.

(Operator Instructions)

Today's conference is being recorded. At this time I'd like to turn the conference over to Chris Van Ens, VP of Investor Relations. Please go ahead.

Thank you for joining us for UDR's first quarter financial results conference call. Our first quarter press release and supplemental disclosure package were distributed earlier today and posted to our website, www.UDR.com. In the supplement we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure, in accordance with Reg G requirements. I would like to note that statements made during this call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking 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. Moving into 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 first quarter conference call. On the call with me today are Tom Herzog, Chief Financial Officer; and Jerry Davis, Chief Operating Officer, 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.

Multi-family fundamentals remain strong. Job growth continues at a slow and steady pace while new supply remains manageable in the majority of our markets. Third-party research providers estimate that five new jobs are required to generate demand for one apartment home. Used in this relationship, 18 of our 20 markets are expected to have more than sufficient demand to fully absorb the new multi-family supply that is forecast to come online over the next three years. Single-family housing is clearly recovering but move-outs to home purchases remain contained at less than 12%, still well below the long-term average of 15%.

From our investment perspective the amount of capital looking to participate in the multi-family sector remains deep. This has kept cap rates stable which in turn continues to propel above-average profit margins for development and redevelopment investments. Over the coming years we expect that the majority of these macro tail winds to persist especially for UDR, which owns a portfolio primarily concentrated in coastal Gateway markets where multi-family renters want to live and work, where alternative housing options are relatively unaffordable and where long-term new supply pressures are below average. In February we presented a three-year strategic plan for the Company. The plan focuses on driving high quality cash flow per-share growth over the coming years. We believe that cash flow growth is the primary driver of NAV per share growth, dividend growth and ultimately total shareholder return. The team is highly focused on executing our plan.

So what does high quality cash flow per-share growth mean to UDR? First, growth that is driven by capitalizing on what we do best, operating our business to generate strong top-line results while also controlling expenses in an efficient manner. Second, growth that is augmented by accretive investments. Currently development and redevelopment are the most attractive of these pursuits. Our $1.2 billion pipeline of which 43% is expected to be delivered in 2013 is nearly 52% funded, and is comprised of projects in desirable locations that will help drive high quality cash flow growth per share in the coming years. Lastly, growth that is achieved while realizing our long-term leverage objectives.

As we addressed on our last call, we are comfortable with our current balance sheet but expect that organic NOI growth and the delivery of our development and redevelopment pipeline over the coming years will further deleverage the Company. In addition we will continue to look for other ways to improve our balance sheet metrics through non-dilutive activities over time. I'd like to congratulate Jerry and his operating team for strong results they produced in the first quarter, and for great execution during the initial quarter of our three-year strategic plan. 2013 is continuing to look like it will be another strong operating year for us. We are excited to share our success with you as it unfolds. With that I will pass the call over to Tom Herzog.

Thanks, Tom. There are several topics I will cover today. First, our first quarter results. Second, our balance sheet update. Third, an update on insurance recoveries from Hurricane Sandy. Fourth, a change to our income statement presentation. And lastly, our second quarter and full-year 2013 guidance.

Let me begin with our first quarter results. FFO per share was $0.35. After deducting a $0.01 benefit from hurricane Sandy insurance recoveries, FFO as adjusted per share was $0.34. The $0.02 of upside versus the midpoint of our previous FFO as-adjusted guidance was driven by $0.01 from better-than-expected operations, and another $0.01 from timing differences in G&A and other miscellaneous items. We expect these timing differences to reverse during the balance of the year. First quarter AFFO per share was $0.31 and benefited from $0.01 of lower CapEx spend than anticipated during the quarter, which again was due to timing. We continue to target $1,020 in maintenance CapEx per home in 2013.

Turning now to the balance sheet, at quarter end our financial leverage on historic-cost basis was 39%. On a market-value basis, it was approximately 31%. Our net debt to EBITDA was 7.3 times, which remains on target with our plan. As a reminder, we anticipate that net debt to EBITDA will peak at 7.5 times toward the middle of the year, and subsequently decline to 7.0 times by year-end 2013, as non-income-earning assets come online. We ended the quarter with $826 million of available liquidity through a combination of cash and undrawn capacity on our credit facility.

Next, an update on our insurance recoveries from Hurricane Sandy. Our original damage estimate of $28 million to $32 million remains intact. To date, we have recovered $16 million or approximately 90% of the $17 million we have paid for hurricane damages and incurred for rental income loss. Moving on, we have updated our income statement presentation in this quarter's and future 10-Qs and 10-Ks. Additionally we conformed Schedule One of our supplement to the income statement presentation in these filings. We adopted these changes to improve the full schedule and increased comparability to how our peers report.

On to 2013 guidance. We increased our full-year FFO per-share guidance to $1.36 to $1.42 from our previous $1.35 to $1.41, to reflect the $0.01 benefit from insurance recoveries in the first quarter. Our full-year FFO as adjusted and AFFO per-share guidance remains unchanged at $1.33 to $1.39 and $1.17 to $1.23, respectively. We did not raise guidance to reflect our first quarter operational upside, as we're only one quarter into the year and are still within our initial guidance ranges. Our same-store expectations for the year also remain unchanged.

We will revisit our guidance on our second quarter call. For the second quarter of 2013 we are providing FFO and AFFO as-adjusted guidance of $0.33 to $0.35 per share, and AFFO guidance of $0.27 to $0.29 per share. As a reminder, primary guidance assumptions can be found on Attachment 15, Page 25 of our supplement. Lastly, during the quarter we raised our annualized dividend per share to $0.94, a 7% increase versus our 2012 dividend. With that, I'll turn the call over to Jerry.

Thanks, Tom. Good afternoon, everyone. In my remarks I will cover the following topics, first quarter operating results; an update on our non-mature communities; development lease-ups and redevelopment projects; and lastly, an update on our New York operations. We are pleased to announce another strong quarter of operating results. In the first quarter, same-store NOI grew 6.3%, driven by a 5.4% year-over-year increase in revenue against a 3.4% increase in expenses.

Our same-store revenue per occupied home increased by 5.4% year over year to $1,448 per month, while same-store occupancy was flat at 95.5%. On a total-portfolio basis, including our pro rata share of joint ventures, our revenue per occupied home was $1,569 per month. Sequentially, first quarter NOI declined by 10 basis points, representing typical seasonality for the first quarter. This was driven by a 0.8% increase in revenue and expense growth of 2.7%.

Turning to new and renewal lease rates, in the first quarter effective rental rate increases on new leases at our same-store communities increased by 2.2% on average, and renewal rate growth remains strong at 5.8%. Annualized turnover in the first quarter decreased by 130 basis points year over year to 45.5%. Moving on to our stabilized non-mature community detailed on page 8 of our supplement, these properties account for 40% of our total non-same-store NOI, excluding joint ventures and they are performing slightly ahead of plan. Our in-progress developments and re-developments are an important driver of our anticipated cash flow growth over the coming years. During the quarter, we spent $111 million on development and re-development projects, including $2 million on our recently completed Capital View on 14th development in Washington, DC.

I'm pleased to report that our development lease-ups are on plan and our re-developments are commanding the rental rate increases we underwrote. Some lease-ups specifics, our 255-home, $126 million Capital development in DC is currently 69% leased and 56% occupied. The project is on schedule, on budget and leasing-up on plan. To date, we have yet to feel any negative impact from impending new supply in the U Street Corridor of D C. A 391-unit, $98 million Fiori, at the Vitruvian Park development in Addison, Texas, is currently 10% leased with the first homes just being delivered a little over a week ago. The project is on schedule, on budget and leasing-up on plan.

Our 467-home $150 million Residences at Bella Terra development in Huntington Beach, California is currently 17% pre-leased and does not deliver its first homes until mid-May. The project is on budget, on schedule and leasing-up ahead of plan. To date, we have not had to offer any concessions on the first 77 leases. Lastly our 256-home $65 million Domain College Park development located across the street from the University of Maryland's Business School, is currently 11% pre-leased and does not deliver its first homes until June. The project is on schedule, on budget and leasing-up on plan.

Turning to our redevelopments. First, our 583-home $36 million Westerly on Lincoln redevelopment in Marina del Rey, California. As of quarter-end we had completed the redevelopment of 424 homes. On these homes we have averaged a 15% rental rate increase, and the property is currently 98% leased and 96.4% physically occupied. Demand remains strong at the Westerly. Second, our 706-home $60 million Rivergate redevelopment in Manhattan. As of quarter end we've completed the redevelopment of 205 homes. On these homes we've averaged a 12% rental rate increase. The property is currently 94% leased and 91% occupied. Lastly our 964-home $75 million redevelopment, now called 27 Seventy Five Mesa Verde, in Costa Mesa, California. As of quarter-end we'd completed the redevelopment of 220 homes. On these homes we have averaged a 21% rental rate increase. Like all of our major redevelopments, 27 Seventy Five is truly a transformation project.

Moving on to New York, on our last conference call, the update I provided was on our lower Manhattan communities, indicated that we expected to have occupancies and lease rates back to normal by the end of second quarter 2013. I'm pleased to report that this is occurring. Currently occupancies at Rivergate, 10 Hanover and 95 Wall are all comparable with pre-hurricane levels and we are no longer offering concessions related to Sandy. I would like to thank our New York team for this impressive achievement. With that, I'll open up the call to Q&A.

Thank you, sir.

(Operator Instructions)

Jana Galan, Bank of America.

Thank you. Jerry, can you let us know what April is looking like for occupancy and new leases and the renewal rate growth? And then what you're sending out for renewals?

Sure. Thanks, Jana. Currently, occupancy as of yesterday for the same-store portfolio was 96%. Probably averaged a little above that 95.5% that we had in the first quarter. And in the month of April, new lease-rate growth is currently coming in at 3.4% growth. And renewals are coming in at about 5.4%. We're sending out renewals right now 60 days out right up around that 5.75%, 5.8% range.

Thank you. And then your DC results were better than I was expecting. I was curious, do you think it's due to maybe having less government-related tenants in your portfolio? Or anything that you can surmise why DC's holding up really well for you?

Yes, I think it's a couple things. First, I would tell you I think we have the best operating team in the industry in Washington, DC that helps us every year perform well above average. Secondly, I think our properties are located in sub-markets that today are not seeing a whole lot of new deliveries affect them. There's one or two that, sub-markets, we will feel the effect of new supply later this year, but we've been fortunate to this point to not really encounter that. And I'd say on the government workers, we do have one or two properties that have felt the effect of some of the sequester, but it hasn't been rampant throughout the portfolio.

Thank you very much.

David Toti, Cantor Fitzgerald.

Hey, guys, thank you. Just a quick question. Some of your occupancy and turnover trends buck what we've been seeing in some other reports. Your occupancy stayed flat and your turn actually went a bit lower. Two questions. Are there any specific regions where there was strength impacting those metrics? And number two, do you believe you left some rent on the table by maybe not being aggressive enough with the rent part of the equation?

Yes, I don't think we left anything on the table. I think our intent this year was to run the turnover roughly flat with last year. And we are still pushing renewals up to what the current market rate is, so I don't think we're really leaving any money on the table. And I would tell you there's a couple of markets where turnover decreased significantly. One was up in our Monterey Peninsula. Another was, which was down about 16%. Portland was down about 14%. And Richmond, Virginia was down about 7%. And then we did see spikes in San Diego. It was up almost 20%. And a large part of that is, we had a tax-exempt bond that matured about a year and a half ago that required 20% of the units to be low-income housing. That requirement went away at the end of last year and we're in the process right now of re-tenanting those units with conventional lease rates.

Okay. That's helpful. And the my second question has to do with technology. You guys are at the forefront of pushing a lot of the online services to your tenants as far down as the phones. Do you think you've maxed out the technology impact at this point? Or are there other things that you're working on that you think you might get some additional financial benefits from?

We definitely don't think we've tapped it out. There's online leasing should be rolling out. We've been beta testing it for the last four to six months. We are ready to do a full roll-out as we go into leasing season. So that will be a beneficial. We probably don't see it having the same penetration rate that we've achieved on our online renewals, which are up around 80%, but we think that will help people make a decision that we're on 24/7 ability to lease a unit and enjoy self-service.

The bigger impact, though, what we're working on this year, and it will probably carry forward for the next two to three years, is introducing technology into the service aspect of our business. Where we use hand-held devices to enable our guys to get service requests mobilely, to punch in and punch out their time on a hand-held device, which will save us quite a bit of time. And we're also using different reports now, that are in our property management system, to better measure the effectiveness of all of our service teams. One thing that we've also started putting in several of our rehabs as well as our new developments, our electronic locks that we find our resident base appreciates that. And our service teams also appreciate it because there's not a need to go back and forth to the office to get keys. Or the need to re-key the lock every time somebody moves in or moves out which is a huge time savings.

Just one last question if I can, Jerry. Have you guys experimented widely with trying to push through higher rental rates via the Internet-based applications versus the traditional walk-ins and call-ins?

I'm not sure I understand the question. You're saying -- Can I get higher rates because we have the electronic platform for leasing?

I guess, have you ever experimented with trying different rates through the different channels? Let's say a walk-in really wants the apartment. Do you offer higher rates there? Do you try to push through higher rates through the Internet where customers might be more accustomed, increasingly, to closing deals? Have you experimented with the different tolerance levels in the customer base?

No, David, we've never done that. Whatever the rate is that we get from YieldStar, for the given lease term, we would honor that, regardless of how the person found us.

Okay. That's helpful. Thank you.

Nick Joseph, Citi.

Thanks. How did first quarter same-store revenue growth compare with your original expectations early in the year? I'm trying to get a sense of where you're tracking relative to guidance?

Sure. This is Jerry again. It came in a little bit better, not materially. I would tell you the biggest surprise to us was fee income was higher than expected, predominantly due to lease breaks. And that was caused not so much by people moving out for home purchase, as Tom said. Move-outs to home purchase was still at 11.8% below our historical averages. But we believe it was more related to people needing to move for job transfers. So that was a little better than what we'd expected, $200,000. And we're hopeful that continues throughout the year, but it's hard to tell if it will.

Okay. Then how does traffic trend in the first quarter and what you've seen in April relative to historical averages?

Traffic actually is almost exactly flat. It's up three basis points, if you will. And through the month of April, it's continuing to track pretty even with what it was in 2012.

All right. And then finally, you mentioned earlier, Tom, that development remains very attractive so could you give us some numbers around where the development yields are trending, initial yields, versus where you're seeing transaction cap rates in those markets?

Sure. On an un-trended basis, we won't start a project unless we have a meaningful variance to spot cap rates at. That's going to be at least 100 to 150 basis points. As we look at our trended results of between 6% and 6.5%, where the average spot cap rates in those markets are perhaps 4.5%, we've got a 150 to 200 basis point variance on our expected yield, versus spot cap rates in those markets.

Great. Thanks.

Rob Stevenson, Macquarie.

Thanks. Jerry, can you talk about where first quarter on the expense side came in relative to expectations for snow removal and the other seasonality things like utilities, et cetera?

Sure. Expenses actually came in pretty close to budget. We were a little bit under. I think utilities expense, due to the first part of the season being a little warmer than normal in many of our markets, was down. Snow removal really didn't affect me much on a same-store basis because most of the snow that hit us was up into the Boston area and the impact of that I felt more in my MetLife JV assets. I've got three assets up there that are in my fort, that are in my same-store. One is actually an urban property with no snow removal costs. Snow removal was not a big player in my numbers.

Okay. And then, Tom, just back to the development question. You're sitting here on the development side with $1 billion pipeline. A lot of it's going to be delivered this year. When you look out and see how the market is pricing development or under-pricing development opportunities, is it a situation where you think about it and you steer the pipeline down or just let it burn down from projects coming off? Or you look at it as an opportunity and going to continue to maintain $1 billion development pipeline going out the next year until the economy starts weakening?

Rob, first, we operate in 20 markets. And each market has its own cycle. With respect to the size and annual spend on our development pipeline, first we are always going to look at what our cost of capital is versus what the opportunity is. And as we articulated in our three-year strategic plan that we published in February, we'd like to keep the number somewhere between $300 million and $600 million on an annual spend basis. Projects typically take three years, so you can see that we are probably going average right around $1 billion, $1.2 billion in total pipeline over the next three-year period. We think we have enough in the shadow pipeline in the right markets that are stacking well up on the supply demand equation for us. And we'll continue to execute at that level. We'll wait and see how cost of capital changes that. How cost of building deals changes that. And the individual markets before announcing more starts.

Okay. And then one for Harry, have you started seeing any changes in the environment for dispositions given the rumblings about changes at Fannie and Freddie?

No. There continues to be tremendous demand for product in the marketplace. Cap rates in general, both for A and B product, are flatter in some markets, or even down recently. I think more of the B market product has migrated down even more so than the A, recently. The market fundamentals are still good, interest rates are still good and there's a lot of demand for product in the market right now.

Okay. Thanks, guys.

Alexander Goldfarb, Sandler O'Neill.

Thank you. Good morning out there. First question is on the mid-Atlantic, if you look on page 18 of your new lease rates versus the renewals, and the mid-Atlantic, Baltimore, Richmond, Norfolk, the new rates were negatives, while the renewals were positives, and conceptually, understand that you can push rents more on renewals. But as you think about going out the balance of this year, do you expect this trend to continue or do you think that new rates you'll be able to make positive? Or what's going on in those three markets that's causing it? Is that sequester? Is that just more competition?

Yes, Alex. This is Jerry. First I'd start, they're small markets for us but it's still a relevant question. I don't think it is sequester. I think it was just timing of what was happening with the expiring leases and what was happening with some of the new leases. What happened in the case of Richmond, for example, we had one property that had quite a few corporate leases roll off late in 4Q and early 1Q. And those are typically shorter term leases with premium prices. And we reloaded with 12 month leases on conventional renters.

I can tell you in the month of April, Richmond, for example, new lease rates are up 2.1%, so they're not down any more. In Norfolk, that's a military town and again you'll have cycles with boats going out boats coming in, things like that. I would expect new lease rate growth there to stay low, but again in the month of April, it was flat, right at zero. And then in the case of Baltimore. Baltimore is a pretty weak market right now. There have been some government job cuts that have affected Baltimore. And there's also some new competition in a few of our sub-markets, including Towson, that have made it more difficult to push new rate on incoming people. And unfortunately there, I do have to report that in the month of April I'm still negative at negative 1.6.

Okay. That's helpful. And then for Mr. Herzog, didn't want to say Tom and have confusion. On running the operating assets through the TRS through RE3, is there a time limit of how long you can run those through? Or does accounting or tax say -- hey, if you're operating them, you have to move them back into the regular REIT?

No. There's no time limit on that, Alex.

Okay, so --

From a --. Go ahead.

So indefinitely you'll be booking these tax benefits? Or at a certain point that somehow they reverse out or it burns off?

Well, it gets into a tax strategy conversation that's probably a little deeper than I want to get into on this call. But when we think about the type of assets that might end up in there, it would be development assets for one optionality. There could have been some assets that had certain improvements that might have had the two-year rule attached to them historically or condo-type assets that we've decided since to keep down in the TRS. It is producing this benefit. You will note from the three-year strategy document, that we do show that benefit ticking down over the next couple years in 2014 and 2015. So I do see us seeing that number reduce over time through some tax strategy that we'll be employing over the next couple years.

Okay. Just to finish up there, does it make these assets more advantageous to sell? Or when it comes time to figure out which assets you want to prune, it's no different picking these assets versus other assets?

No, it's really no different. There are strategies that we can employ that allow us to have a similar outcome.

Okay. Thank you.

Karin Ford, KeyBanc.

Hi, good morning. On the 11.8% move-outs to home purchase stat, Jerry, can you give us what the sequential quarterly comparison is on that, versus last quarter?

Yes. Last quarter, Karin, it was 13.4%.

Okay. That's helpful. And, Tom, your thoughts on the competition from the single-family market. It sounded like, from your comments, that you're continuing to think about it. Just wondering if you're feeling, as we keep getting more and more positive data points on the recovery in the single-family market, that you're feeling increasing concern from competition there? It doesn't sound like it's manifesting itself in this stat yet, but is it something you're thinking about in the quarters ahead?

Yes, Karin, a couple points on this. First I'd say we've all lived through a period of time where single-family was almost a predator of the apartment industry, through lax lending, and programs that were probably just not, and turned out to be, not right. I don't see that horizon turning. And that was a big fueling engine towards a lot of our results over the last decade, is fighting back homes. If you look over even a longer period horizon, I think homes will start to get back to the 1 million, 1.2 million start number. That's going to be concentrated a lot in the prior home-building markets. This exposure, this portfolio today doesn't quite carry the same exposure it has historically, at all, to that type of marketplace competition. So it seems to weigh less on our mind as a direct competitor because we're just not in those markets that much anymore. And so going future, I don't believe the housing policy in America that would derail us for the financial crisis, is going to come back into vogue. And I'd see a nice balance with a healthy recovery in the single-family market driving jobs. We'll benefit from some of that. And I like our position on a long-term basis.

Thanks very much.

Paula Poskon, Robert W. Baird.

Thanks. Jerry, just to follow-up on some of the expense commentary, on page 15 in the supplement, wondering what is causing the huge swing or discrepancies between some of the sub-markets within even the same regions? For example, Monterey expenses were up 10.5% but San Diego was down 9.5%, or similarly, Dallas was only up 4% but Austin over 13%. So what's driving those kinds of discrepancies within the regions?

Well, Paula, frequently, most of the outliers tend to come from real estate taxes. Now, there are some situations where it's something else. For example in the Monterey Peninsula, the bulk of that increase came from an increase in personnel because we are running that portfolio in the first quarter of last year with quite a few staff openings, from natural turnover. Plus in the fourth quarter of 2011, as positions turned, we elected to keep them open for a prolonged period of time because it's our slower time of the year. We waited deep into the first quarter to really feel the need to reload that position. But I can tell you as I look at the reasons for all of either large increases or decreases, 80% of the time it's real estate taxes. Either something that happened this year with a valuation increase, or last year we potentially had a refund.

Thank you. That's helpful, Jerry. Thanks. Tom, just a big picture question for you. It's been a tremendous five-year period of activity for UDR. Playing Monday morning quarterback, do you wish you had done anything differently? Or did everything pretty much play out according to plan?

Well, Paula, I'm not one to look in the rear-view mirror and try to drive the ship towards the future, based upon what I would have done differently or not. I think we had a good five-year period. I think we executed. We communicated, probably could've done a better job of communicating our activities in the long-term vision. And that led us to generate the three-year plan and clearly articulate, here's where the portfolio is, here's where the portfolio's headed and we're extremely focused on executing that plan. And so I don't Monday quarterback a lot, other than maybe the Broncos safety and letting the ball get over his head. But running the business, we're very focused on that plan.

Thank you.

Michael Salinsky, RBC Capital Markets.

Tom, first question. We're basically approaching May right now. As we think about disposition timing relative to your guidance, are you guys marketing anything right now? And how do you expect that to play out? As well as additional development starts for the year? I know your guidance previously did not include any additional starts.

Mike, this is Harry. As you know, we have some dispositions in our guidance. We're working on getting those projects in the market now. Again as I mentioned earlier, there's terrific investor demand for the type of product we're going to be selling, so we don't anticipate any issues achieving our guidance. Second part of the question with respect to development starts, I think it's unlikely that we're going to have any this year. Just given where we are in the entitlement and design process. I wouldn't expect any new starts until early next year.

Okay. Following up on that question and as you think about being consistent with your three-year plan of delivering $300 million to $600 million annually. If you don't start projects in '13, it leaves a hole there in terms of 15 deliveries. How should we think about back-splitting the pipeline if that is, or is it more you guys take it as a sit-back approach here and looking at potential acquisition opportunities in '15 and '16?

Yes, Mike. We've looked at that '15 a little bit of drop off and it will probably drop to the $300 million in that year, would be the run rate at this point. That doesn't mean that something might come out of the woodwork, but I doubt it. With respect to acquisitions in that window of time, we're always looking at the acquisition markets but we're going to weigh it against our cost of capital and weigh it against what we think we can do with the asset. And it's hard for me to forecast out what's going to be the environment in '15, given all the variables. But we continue to always examine it under that light.

Fair enough. Thanks, guys.

Rich Anderson, BMO Capital Markets.

Good morning, everybody.

Good morning.

Sorry about the Broncos. You can have Tim Tebow back now, if you like.

(laughter)

Tom, first big picture question, with Avalon EQR buying Archstone, do you see this sector going the way the healthcare REIT sector has gone? A couple very large companies and then a smaller rung? Or do you think that it's getting closer to a time where public-to-public M&A could start to make sense in the space to get bigger companies?

Yes, Rich. It's hard for me to speculate on public M&A in the space. You know what it takes to be successful in that frontier, which is cost of capital advantage, a G&A cut savings, and I just don't know how those line up in other peoples' minds. We are focused on our three-year plan. We'll continue to execute on that. With respect to the debt markets and taking companies private, you're seeing large pools of capital raised. That's probably one of the things that they're looking at, is saying REITs are cheap compared to private market valuations. Leverages of out there and it's abundant and it's an attractive rate. That seems to be probably where I would tilt conversation more than I would towards M&A activity.

Okay. So you don't feel any kind of anxiety about not being very large, relatively speaking? As a company.

No, I think, Rich, very good question, we weighed as part of our three-year strategic plan about the size and scope of our enterprise. And what our research indicated to us is the top 25 REITs have a distinct and a very tight bandwidth of cost of capital and it's not very advantageous once you get out of the top five. So our focus and plan over the three years was to remain in the top 25 REITs in terms of equity and enterprise value. And we think that plan will sustain us in that range. And don't see the ambition towards getting in the top five and trying to create a cost of capital advantage. So I think we thought through that process. We'll continue to monitor the market and how it shifts, but that seems to be the historical trend. And I think it's probably going to be one that we'll project to the future very well, in our view.

Okay. And other big picture, if I may. Have you ever worried, or do you worry about any kind of regulatory pressures entering the system? You guys, as an industry, did very well pushing rents when we were in the midst of a recession. I'm curious, if taking the foot off the accelerator a little bit from a rent perspective, and maybe making your money through lower turn, lower CapEx is a model you think that we could be some day approaching as a means to not have that regulatory conversation start to happen? Is that something that you would consider?

No. We continue to monitor it, and I will say that Washington, no one never sleeps while they're in session. On a state and local level where we do see, from time to time, fights on rent controls, it seems in the end cities are looking at it from a longer-term perspective and realizing rent control environments do not bring new innovative product to their space. And they resist that. And they want that new innovative, because they want to attract a younger, more vibrant workforce. And in our markets we think that will win out over time.

So I'm not overly concerned about rent control in the current environment. Trading off, turnover and rent increases, Jerry weighs that every time he prices a unit. And so we are always looking at it and saying, we want this much traffic we need to get this price point, we're going to always try to maximize the value of our assets. And if we feel like a market has reached a point or an asset has reached a point, we'll look at the alternatives. Our job is to allocate capital, get the most out of it, and when that is exhausted, move on and find another place for that capital.

Okay. Last question then for Tom, I'm sorry, Mr. Herzog, the issue of holding assets in the TRS. Can you remind me if you can quantify what the benefit is to FFO from doing that, if any? I just don't remember. Is there like a flow-through that you get because of that strategy?

Yes. We have in our guidance, a number of $12 million for 2013, that was in at $9,000,000 for 2012. So that is the benefit that does flow through.

That's just a tax benefit. Is that right?

Just a tax benefit. Correct.

Okay, do you take it out when you look at operating FFO, or whatever you call it?

No, we don't. We did take out the removal of valuation allowance last year. That was a carve-out that incurred in the first quarter and that had been reduced from the FFO, the core FFO, and for that matter the FFO itself. The tax benefit itself that does flow-through.

It smells a little bit like Archstone when they were booking gains because they did things in the TRS into FFO. Is that the kind of path you to go down from an FFO definition perspective? Any thought about taking that out? It's a small number, why bother with it anyway?

It's been something that was in our numbers, from a comparability perspective. We'll keep it in there. It is part of our run rate. Again, I do say see that declining over the next couple of years, so we'll continue to present it as we have.

Okay. Sounds good. Thanks.

Dave Bragg, Green Street Advisors.

Thank you, good morning. I Just wanted to follow-up on a couple comments that you made and ask a question on it. Tom, you mentioned that the amount of capital in the multi-family space remains deep. Harry, I think you observed flat cap rates continuing. But we'd all agree that NOI growth outlooks are moderating. So to what extent do you observe that buyers are continuing to lower their return requirements? And are you noticing that from your JV partners specifically?

This is Tom. I'll take a first shot at it and let anybody else clean up on it. What I think of this is first, there's a lot of long-term yield oriented investors out there that are interested and been under-exposed to multi-family and are gaining an appreciation for the asset class and are growing their asset base. I think second, buyers, the levered buyer who's taking advantage of extremely low rates, continues to be deep and hunting a lot of the B type portfolio where they can add extra leverage. The institutional quality coastal A buyer, low-levered buyer, it's a safe haven for money in their view and probably will continue to be buyers in the future. So I don't think they're overly concerned about a degrading NOI curve when they look at the long-term alternatives, and believe that coastal, high-quality urban product has a long-term growth trajectory, which is probably going to be more prevalent as we see costs rise for replacements, as well as NOI. So I think they're in for the long-term haul and I would expect the asset class to do well, not just in the public space but in the private space.

Okay. Thank you. And speaking of rising construction costs, it seems as though yours were pretty well contained with the exception of Mission Bay. There's an uptick there. Is that project-specific? And while we're touching on that can you comment on the supply outlook for that sub-market?

This is Harry Alcock. With respect to Mission Bay, specifically that was project-specific. There's a couple reasons for it. One is we intentionally slowed the rate of unit deliveries given that first units are scheduled for delivery in October, so that added something to our carry cost. Second, as we went through and assessed the project, we found that we could get paid for improving the quality of the product in a manner that will allow us to stand out from our competitors. So we did things like added AC, we upgraded the unit interior finishes, we upgraded our wireless system. We did this whole thing in a lower-cost environment, meaning that we expect that our costs, even with these upgrades, will be lower than competing developments. However, these changes did force a change in our overall reported development cost.

And, Dave, this is Jerry. I think you had asked about supply coming and what we're seeing is somewhere in the 1000 to 1500 units coming through the end of 2014, down in that Mission Bay sub-market.

Okay. That's helpful. And on this project specifically, where do you see your rents on a first quarter float basis coming out?

Well, we're going to be well above $3 a foot, well above $3.50 a foot when we begin our lease up here in the next three to four months. We will again look at rent expectations. As you probably know, the San Francisco market has been very, very strong. These units have continued to re-price and we'll look at it again, but we'll be above $3.50 a foot.

Okay. Thank you.

Haendel St. Juste, Morgan Stanley.

Hello, guys. Two questions. I want to go back to the comprehensive three-year strategic plan that you laid out on last quarter's call. I'm curious how some of your near-term outlook on sources and uses could change if your stock continues to trade below NAV. In conjunction with attractive unsecured bond market pricing, and relatively attractive pricing for well-located good-quality assets. So just thinking how some of the numbers you laid out could change against a backdrop that I just laid out?

Haendel, This is Tom Herzog. When we look at the assumptions in the three-year strategy, we spoke to a certain amount of equity issuance, some bond offerings, some sales, and those all are ways to generate capital. And I'm going to add to that, proceeds from joint venture transactions where we might bring a partner in. And I think as we look outward, first of all we've got conversations going on a number of fronts in some of these areas. And so what we end up doing is going to be dictated by the outcome of those conversations. As far as the bond markets, they definitely do look good. Rates look favorable from a stock perspective right now, we're trading at a discount. As we indicated in the last call, we're very unlikely to want to issue stock at a discount to our NAV. So all those factors will come into play and we'll see what transpires over the next several months. For now we have not modified those assumptions in our three-year strategy, but certainly over the next quarter or so, I would imagine we'll have a better insight into what that will look like that we'll be able to provide to you.

Okay. Thanks for that. And one more here, specifically on asset sales. We've seen a number of your public peers sell some DC assets recently at pretty good pricing. I'm curious how you view your current DC exposure today, in light of those recent asset sales, but also against the backdrop of moderating growth and the supply wave?

I'm sorry, Haendel, our DC asset sales?

You've seen Equity Avalon, a number of others, sell assets in DC here over the last few weeks, few months. And so I'm curious how you think about your DC portfolio in light of the attractive pricing that's available, against the backdrop of the slowing growth we're seeing in DC, and the mounting supply wave that's coming into DC?

I think we look at our portfolio on a regular basis to decide which assets we're going to sell. We expect to find very strong pricing in many of our markets and typically if you're going to sell an asset you'd prefer to sell an asset that has robust expected short-term revenue and NOI increase, as opposed to assets just from an investor standpoint, that have slightly lower. Your pricing simply is going to be better. Does that answer your question?

To a certain degree, but more curious as to, we see others pare back their exposure there. Just curious as to, not just your portfolio and its prospects, but do you feel that it might be a good time to pare back and capitalize on some of full, the rather full pricing that people appear to be getting for their DC assets?

Haendel, this is Toomey. With respect to the portfolio, I articulated earlier a little bit of our strategy about the size of the enterprise. And how we expected to be over the next three-year period and from that what we drove down was a sub market ranking of our portfolio. And from there, really looked at it and said, how much do we want to have in DC to have a balanced portfolio? Today we're at that target. What we will always look at is the pricing of assets, the use of capital. We'll weigh it as time goes by.

We're not really trying to time markets in our overall philosophy. What we're trying to do is find the best sub-markets for the long-term cash flow appreciation and value. We think we have a great portfolio in DC that fits very well in many of those sub-markets, as you can see in Jerry's recent market performance, relative to peers. It's taken us a decade to assemble this portfolio. We're a long-term holder. We're not going to flip it out when market conditions are just right for a day. We are a long-term holder we're comfortable where we're at. And we think there's other places where we can maximize our capital utilization and recycling than DC in this current cycle right now.

Fair enough. Thank you for the perspective.

Thank you. Ladies and gentlemen that does conclude our question-and-answer session. For closing remarks I'd like to turn the conference back to Tom Toomey, President and CEO.

Well, thank all of you for your participating on today's call. Certainly you can see we feel very good about our business after one quarter. We feel very good about our long-term business plan and the execution on that. And we will see many of you in NAREIT in a few weeks. So with that, take care.

Thank you, sir. Ladies and gentlemen if you'd like to listen to a replay of today's conference please dial 1-800-406-7325 or 303-590-3030, using the access code of 4612133 followed by the pound key. This does conclude the UDR first quarter 2013 conference call. Thank you for your participation. You may now disconnect.