UDR, Inc. (UDR) Q4 2007 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, thank you for standing by. Welcome to the UDR Investors' Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open up for questions. [Operator Instructions] Conference call is being recorded today, Wednesday January 30, 2008. I would now like to turn the conference over to Larry Thede, VP of Investor Relations. Please go ahead sir.

Good morning, and thank you for joining us for today's conference call. We will cover our fourth quarter financial results and discuss yesterday's announcement that we have entered into a contract to sell 25,684 apartment homes for $1.7 billion. The press releases, the supplemental financial disclosure package, and a set of PowerPoint slides were distributed yesterday afternoon, and are available on our website, at www.udr.com. For the PowerPoint slides, which we will review during this call, click on the Corporate tab on the upper right of the page which will then take you to the page with the links for those slides. The link is labeled 1.7 Billion Portfolio Sale Supplemental Materials. In the fourth quarter supplement we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. We'll begin the call with comments from management and then open the call to your questions. I would like to note that the statements made during the 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 the risk factors that could cause actual results to differ from those implied in forward-looking statements is detailed in yesterday's press releases and are included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Let me now turn the call over to our President and CEO, Tom Toomey.

Thank you, Larry, and again welcome to this call. Joining me on the call today is Mark Wallis, Mike Ernst and Jerry Davis. I have some prepared remarks and then we'll open up the call to questions-and-answers. Again I want to highlight that we have a PowerPoint presentation which I will use in my comments and I encourage you to pull that up it is at udr.com, under the Corporate tab, and I encourage you to get that while I prepare... give you my prepared remarks. As Larry stated, we issued three press releases last night: one, dealing with the $1.7 billion portfolio sale; the second, the fourth quarter and full year financial results; and the third was our share repurchase program which has been expanded. We will cover all three on today's call in detail, but before I get into individual ones, let me talk about the fourth quarter operating results, which, first, were inline with our expectation at $0.43 before one-time charge of $0.03 for restructuring, a lot of that related to just a bulk of portfolio sale and a corporate wide review of the organization. We did not record any gains on sale in our RE3, I think everyone is quite aware that the fourth quarter was a turbulent financial time and liquidity was not available, so a number of transactions did not occur. And what I consider the highlight of the quarter is NOI growth of 8% on a healthy near 5% revenue line, and achieving an operating margin of nearly 70%. So, in summary, I thought it was a very good quarter, Jerry and his team did a number of great things in our marketplaces, and the Company did well. So, let me now turn my comments to the portfolio sale, and before I turn to the PowerPoint, I would like to just give you what I feel is probably hard to pick up from the press releases which is why did we do this, what we are really looking at, and how did we think about the portfolio sale? And I think there are three things that were overriding in our thought process about this transaction. First, was to take advantage of the public versus private valuation arbitrage. I mean, clearly we sold a handpicked portfolio of assets that we would classify below average compared to the remaining portfolio out of 6.5 cap rate, and we can certainly talk about how to calculate cap rate. When the stock was trading at a grater than 7% cap rate, I think, that is capturing that public to private evaluation was critical to us. The second was in a period of time that we have today where liquidity is tough to come by. Financial flexibility was critical in our view and so we wanted to create more financial flexibility for our future, in particular to acquire assets, complete our development and redevelopment efforts, and certainly repurchase shares. And the third, focus the Company. And focus the Company was important in our long-term view in executing our strategies. So with that, why don't I to the PowerPoint, and I hope by now all of you have it. First on the cover, clearly the topics, we have six to cover today. First off, is the portfolio sale, I will go through the detail of that transaction including the benefits. Second is the talk about new UDR and the characteristics of our portfolio. The third: our development activities and pipeline. Fourth is the redevelopment effort. Fifth is the corporate realignment and related charges. And our outlook for 2008. Page number two, certainly where I choose the title Transformation for Growth, because I think in the end when you get done with this presentation you are going to realize we have transformed UDR. And I think we're very excited about that future and look forward to it. But the transaction, first we are selling a little over 25,000 apartment homes for $1.7 billion. The buyer is DRA, and they are partnering with Steven D. Bell to run the assets. They are expected to close on March 3, which is less... pretty close to 30 days, that's a tight close. We are comfortable that they will get there. We'll talk about how much money they have up and the likelihood of closing, but we are very confident they will close. What will they close on? First, the portfolio that has an average rent of $744 a month. We calculate the cap rate at 6.56 that's trailing NOI that $650 a month in CapEx... 650 a door per CapEx... and a 2.75 management fee. Clearly, we believe these assets have historically consumed more than 650 a door and will get into... I am certain on this call, a little bit more about cap rate conversation. The average age was 24 years, this represents a selling price of $67,000 per door. What will we receive in win? On March 3 we expect to receive 1.5 billion in cash and a note receivable with a fixed rate of 7.5% with a maturity of six years locked out for pre-payment for 14 months. Certainly the 7.5 is the higher coupon than could be obtained in the mortgage market, so we expect to be paid off 14 months. What will we do with the capital, first acquisitions, we have got $500 million to $600 million that we are targeting of which $320 million is already under contract in targeted market and expected to close the first week of April. We expect to payoff debt $500 million to $600 million, leaving out cash between $300 million and $500 million and closing at a note receivable $200 million. The benefits of this transaction certainly a stronger portfolio for growth that we will have a little over 44,000 apartment homes in ten states with an average rent in the fourth quarter of $1,163 a month which we expect to grow past $1,200 a month with an average age of 15. We believe that this portfolio has less capital requirement than the prior enterprise, and certainly has better exposure to the right demographics and job growth. Again the other benefits we see, capturing the arbitrage between public and private, generating the ability to buy back our shares on an accretive basis, reducing our debt and creating further financial flexibility, and I would have note that we expect to continue to maintain or grow the current dividend and certainly the ability of our development and redevelopment will have a greater impact on a smaller enterprise. And lastly, we have completed the right-sizing on this organization and it will not be lingering thought or effort on our side. It is done. Let me now turn to page 3. The characteristics of the portfolio contrasting it where it was as of December 31st, where what is sold and certainly what the new UDR looks like. Highlights in my view is an operating margin of nearly 70% and an average monthly rent of |$1,200 a month and you can see how that compares with an old and a new UDR to our peers. And I would highlight in the bottom the recurring capital expenditures as a percentage of the NOI. And you can see, certainly the assets that we sold had a disproportionate amount of capital that was being spent on them. Page 4 highlights the portfolio, on 4, what assets are sold by state, and there is a detailed list now our website of every community that is being sold, the details related to them. And certainly the new UDR, certainly a focus that I think will get into in the Q&A is California, now representing 41% of our 2008 NOI forecast, Florida at 19%, and Virginia, DC, and Maryland combined are nearly 25%. So, when I back up I look at the enterprise and say that nearly 90% of the enterprise is California, the DC corridor or Florida where we see long-term growth, job formation all in positive territory. And certainly we can understand where Florida is today, and we will discuss our view on that later in this call. This is a... if you will... a handpicked portfolio. We look at every asset from a perspective of its rent, its margin, its exposure to its submarkets, its exposure to competition, its future capital requirements and we chose this portfolio. We are very excited about what it does for us both in the short-term and its long-term potential. Moving to page 5, now I want to discuss, I think, we continue to read a lot about development and how people view it, we have always had a cautious stance on development, and we do have a planned $2.6 billion program with our targeted being $400 million to $500 million annually. The targeted returns are 6.5% to 7.0%. I think it's important as we're in what I would call a transitional part of the cycle to understand what your exposure is to development. And we measure exposure in terms of how much is leasing up, where its leasing up, how much is under-construction and certainly how much of its generating NOI and how much is making dirt? And we provided that detail, you can certainly see that, one, we feel very comfortable that our pipeline is being delivered into the right markets, at the right time. With the current 400 million be coming online in 08, 80% of that is being delivered in Southern California, Texas or DC. And looking at 09, 80% coming on in Texas, Southern California and Seattle. So we think we are delivering the right pipeline at the right time and we will be... Mark will give you an update in terms of how the lease ups are going. Moving onto page 6, our redevelopment efforts, and we feel this is one of our strengths, certainly one of our better value creators with targeted returns of 8% to 10%, a lot of our efforts in the Florida, Virginia, Tennessee, and Maryland, Texas markets are coming online in '08 and will help our earnings. And certainly we are now more focused on the West Coast where we believe we have an active pipeline under review, and you'll see us starting delivering results out there in '08 and '09. Going to page 7, in connection with both the portfolio of sale, we really completed a top-down review of the organization as well as the bottom-up it looked as if we were starting over where will we go, and how would we align our resources, what areas did we not have enough resources and literally took the enterprise apart, and concluded that first and foremost we needed to change the corporate office to Denver that in fact it had been here but we just needed to recognize that, and second that we needed to realign a lot of our resources around our key drivers and our business leaders. Dallas is now about 80 individuals and represents the core of our developmental effort. Richmond is our focus for redevelopment and some backroom support functions. It has approximately 80 people as well. And then you have Denver with about 80 dealing with corporate, IT and finance and financial reporting. In connection I read from the fourth quarter, we took a $30.6 million charge which we would believe generates a $2 million annual savings, but becomes, creates a more efficient and effective UDR. The table at the bottom, I think, shows that we are pretty sensitive to our G&A as a percentage of our revenue and very comfortable with it relative to our peers. Page 8, certainly we look back in November 5th and gave guidance in a core of our portfolio as well as our RE3 gains, and as you can see without the restructuring we were right at the target level for our core but no RE3 gains, and certainly post restructuring we're $0.40 for the quarter. What else would I say, I think you look at the operating results by region and you can see that on revenue line the Southeast continues as is primarily Florida to be weak, but the rest of our regions are very strong on revenue growth, and Jerry will probably comment later in the call about how is January '08 outlook are? So, I thought again it was a good fourth quarter, performed where we expected, certainly the market threw, all of us a curveball, as it relates to capital and liquidity. Page 9, let me tell you, we have got a lot of moving parts which make it extremely difficult at this time for us to provide '08 guidance. First, we'd like to get the closing of the sales done. Second, we've got some acquisitions under contract as well as others that we're underwriting. We would like to have firmer grip on that. Share repurchase, certainly we have the authorization and the financial firepower to do so. And then the potential for a special dividend, connection with this transaction we have got $840 million tax gain. We believe we can cover a lot of that in a number of ways, but there is a potential for a special dividend. So, we provided, overall, guidance as it relates to our same-store sales outlook, and other key assumptions on our CapEx per door and G&A, and certainly you can see our market outlooks. There is number of what I would call very solid markets, some extraordinarily hot markets, and again we think Orlando and Tampa probably will have a negative for '08. One other highlight about the outlook for '08. Given this capital environment, we do not believe that giving guidance on RE3 gains is practical, that's not to say that it is not a good effort, but we have always entered into that effort saying that if someone paid us the right price, we would sell an asset. We think it's very difficult in this capital environment for us to see some of those gains. So, if we do lock-in on a few, we'll tell you about them. But we are not providing any guidance in that area. So with that I think what you will see is the transaction fits our strategies, in terms of strength in our portfolio, expanding our RE3 capability, implementing an operations platform which we call 2.0 and sourcing low cost of capital. And the transaction fits all of those strategies and helps us move forward as an enterprise. I think you will find the rest of us are extremely excited about completing this, and that it is an opportunity to create a new UDR and we are excited about that UDR. So with that, I will now open it up to questions and appreciate your time. Let's go. Question And Answer

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Dustin Pizzo with Banc of America. Please go ahead.

Hey, good morning. Tom, just first on the portfolio transaction, I mean, how much of a spread do you think that there is between the assets that you are selling and the remaining portfolio on a capital basis? And then also, if you could just comment, given the changes in the capital market, I mean, where do you think these assets would have traded six to nine months ago?

Well, the spread between what we sold and what we think we have left for balance and our roll-out, all that market, I think, it's probably a 150 basis points, maybe 170.

I would say 170.

I mean, I think the portfolio post, if you look, at 41%, California; 25%, DC. I can't find anything in that market that would trade north of a 5.

Okay.

I think Florida representing 20% of the enterprise is probably in a market that probably trading 5-7 range, do the math you probably at about 4-8, 4-9 range.

Okay, and then just --

Where were they traded?

With.

Where were they traded six months a year ago?

Yes.

I think the couple of things, six months ago this portfolio doesn't trade, because there was frankly no lending, no capital available, and so zero is your answer, wouldn't have traded at all.

All right, we will call it 9 to 12 months ago, then.

Prior to that my view is probably trades at about where it is. I think what you got, is you got NOI that improves in this portfolio probably 5% over that time horizon, capital cost, Fannie-Freddie lending practices are about a 5% at 75% - 80% loan-to-value on this portfolio. You do this spread it probably trades at about 6.5, these asset moved a lot over that timeframe. I think it went way down and then it's come back up, Mark do you got a viewpoint?

No, I think that's right. And I think there is somewhat of uniqueness in that trading this as a large portfolio that we got a good option. On that we might not have gotten nine months ago, I don't believe we would have, so I think certainly it's the same but not slightly better.

Okay, and then with respect to DRA, it sounds like they are funding it through Fannie and Freddie about 80% leverage, 5% or?

Well, I don't want speak for them, but our understanding of their financial structure is something along the line, 75%, 80%; Fannie financing at 5 or less on a six to seven year piece of paper and they have our beds in their and they have now rate-locked with Fannie and have part money up with them. And by Friday of this week they will have 25 million on part with us. So, we are comfortable that they are going to close. And for a company that uses a lot of leverage, we think they've got a good deal. And they hit the market, I think, at about the right hour almost, in terms of their rate-locks and their finance, so.

Okay and then.

Good deal for them as well. One of those few transactions you back up and look and say, both parties won, they got something out of it they wanted. We are excited about it. We think they are good operators and I know a lot of our people are on the call, and I'll tell you we picked them. I think they are good operator: Mr. Bell and his team.

Fair enough, and then just turning over to the same-store guidance real quick. I mean, not to say you have any better cost side capabilities [ph] than anyone else, but what kind of broader economic assumptions you bake in there for job growth and GDP growth, and maybe you could just elaborate on how you kind of view the world right now?

Well, it's kind of asking me to pour the Mississippi river into a tea cup and try to explain; I'm not much of an economist. And so I've always kind of been a person that says when you throw a blanket over big numbers like job growth of a million next year, what you really have to realize is somewhere in the US 2 million jobs are beings generated and million jobs are being lost. Where I want to be is where the 2 million jobs are being generated. And so we are very encouraged about our particular, for example, Southern California portfolio, because a lot of it's right up within two to three miles of the beach. And so that's where people want to live. We are very encouraged about the DC portfolio, primarily because we are inside the beltway or we are on transportation node. Florida, we understand that it is a weak market today, but over the long-term given it's taxes, it's job growth and diversity of the economy it is going to be a booming state, and we felt that it was important to hold our presence there and we sold what we thought we had extracted all the value out of. So a lot of it, I know it'd be great if I could say, gosh, we think it's a GDP of 1.5, I couldn't tell you how the 1.5 or 1.7 would drive down in the market. What I can tell you from the bottom-up, which is how we run our business, looking at individual assets, our exposure to jobs, our exposure to the long-term aspects of investment. We are very excited about the markets that we are in, and we think we've picked up not just for the short-term but the long-term, and picked... hand-picked the assets. I think that's what was important about this transaction to us. And I think out there, if you back up and say how do I view the world, one, it's an election year. And people need to realize election years you see it all the time, politicians want to make you feel like you need change, and so they talk down everything. And that's to drive you to vote for them because then they are making it all better. The second element is I am encouraged by the Feds and a lot of other people taking action or even the government, stimulus package, cutting rates, trying to get this economy going again. Third, I can't identify a lot of employers or industries that are, frankly, softening that we have exposure to. So, I don't worry much about it. The financial markets we certainly see lenders coming back to the market just slowly and at higher prices. So, I think the lock jam is broke it's just going to take time to start moving capital freely. So, I am more of an optimist than a pessimist about the future, but I don't want to keep getting too much of that I said it's like pouring the Mississippi river into the tea cup, it's too hard to do, why don't we move on.

Sure and then just the last question, I just want to follow-up on Southern California, since you mentioned it. I mean, would you attribute kind of what appears to be somewhat more aggressive guidance than your peers out there who have also given guidance to the better locations as you alluded to or?

I will let Jerry speak, and as you know Jerry ran that operation out there for three years, was number one in its markets for three consecutive years. So, first I'd tell you Tim... Dustin, but I'll let him add to that.

Yeah, I agree with what Tom says about our geography. We have 4,100 units in Orange County. The bulk of it is located in Newport Beach, Huntington Beach and Costa Mesa, a few miles within each other. So, we have good concentration, we have great people, and like Tom said, we are near some jobs but we're really located where people want to live. So, I think we did a great job years ago buying these fields and that's what makes the difference between our portfolio and everybody else.

Okay, thanks, guys.

Thanks Dustin.

Thank you. Our next question comes from Jonathan Litt with Citi. Please go ahead.

Hi it's Greg Miles [ph] here with John.

Greg, how are you doing?

Pretty good.

Glad to hear it.

I've got a question on the debt you are looking to repay in the deal the $500 million to $600 million, on what type of rate do you expect that to be take on at?

Well you have $200 million of bonds that are coming due in March that are about 4.5%. You have our line of credit which currently is about at 4%. And then we have a couple of other pieces of debt that are at considerably higher rates in the fixes that don't add up to huge numbers but probably $100 million of debt that will be in those fixes.

Okay. And in terms of the cap rates on the deals you are currently looking at, or the ones you are under contract, how are they shaping up?

The ones we have in our current contract today are average of five-five cap, and we are looking in West Coast from Southern California, Seattle, concentrate on Metro DC. Those cap rates were in the 5s, probably low 5s in those markets. Southern California, as Tom mentioned, is going to be sub-5, and we see, we have one opportunity we are looking at in the North Dallas market, it will be EDS corridor, very and that's high-end multiuse project, and that's about a 5A capital network, so that's the range we are looking at.

And Tom you mentioned that the... on the DRA assets, those assets you think would be at the similar price to 9 or 12 months ago, but on these assets you are looking to acquire, have you seen any movement in pricing over the last 9 or 12 months that made you say this is the time to buy rather than either buyback more stock or pay a special dividend?

Well, I mean, I think, we have seen some movement in cap ratio. Now, these are new asset, in-field locations, there is still competition for these, but I think it's 20 to 25 basis point improvement is there today, we will just see how that plays out as we go forward but there is not a rapid increase in cap rate, certainly in California, they still remain low. A slight improvement in the DC market, and the rest of the West Coast is still pretty competitive.

Yes, I think, Greg, I'd also add that a lot of the acquisitions we are looking at... in fact, all of them are 1031s.

Right.

So, anyway the drive behind that is not... and we're holding to our discipline, it's not just to go out and say lock up a bunch of assets, it's really to be focused around whether our investments wants to be in a follow through on that. And so we've known this transaction has been in the works, and frankly for six months have been shopping which has been entertaining, because there is very few people in the market. And feel like we've negotiated pretty strong pricing on assets, but we've found good values. And we think this announcement strengthens that. I think the only asset that we would say, that are probably mis-priced in the market today are probably assets and lease ups, and while they might be short-term and dilutive, the reason they're mis-priced is because Fannie and Freddie won't lend on a lease-up. And so those assets probably represent the best value buys and we'll keep hammering away and looking for that type of opportunity.

What type of financing would Fannie and Freddie give on lower cap rate assets, which is a 5-5 cap rate, would it be lower to some of the cash flow from the assets compared to the ?

You know what's interesting is Fannie generally is not an asset quality driver, what they are is a coverage cash flow driver of their lending practices. And they are kind of a gradient lender in terms of you could borrow 60% or up to 80% and you are going to pay at different points on that curve and different charges. But we think, for example, and we will let DRA speak for themselves, but we think they hit at the right time and that was one of the things for us was the treasury market went weak there for four days. We accelerated the pressure on the bidders and said you guys need to all come up because this is not going to last. And so we think they got it done under 5, at 80% loan to value or 80% loan to purchase price for six year, that's a descent piece of paper. Where would that be today? Probably more at 5.25 or better. So, as long as Fannie is lending at those levels, those rates. And I think all this talk about cap rates is just certainly a bad number. The fact is we demonstrated a transaction and it was financed, and there is a lot more of these to come, not from us but in the marketplace.

No, our question is just on the NOI growth guidance, the 5 to 5.5. If you wouldn't have sold these assets, how would that have looks, can you give the sense of the difference in the NOI growth expectations for that what you're selling versus ?

I would have saved a 100 basis points off of it, that I would have told you we probably be more at the 4 or 4.5 range on the NOI lines, that's probably my view. Jerry, you got

Let me get back here. I think the rent growth is a little lower.

Thank you.

Thanks, Greg.

Thank you. Next question comes from Christine O'Connor with Morgan Stanley. Please go ahead.

Hi, thanks. Good morning. A question on the $200 million note receivables. Will the transaction had been feasible without you guys issuing that note, and how did you arrive at the 7.5% interest rates?

The 7.5% was just the negotiated rate. The transaction certainly would have been feasible without the note, having the note was helpful to us in terms of the tax structuring and being able to manage the very large gain that Tom referred to earlier. One thing about the note is that it has re-coursed to a very substantial entity, as well as security in the partnership interest of all these properties. So, we feel that it is a very secure note. And as Tom mentioned earlier, we fully expect that be repaid in 14 months.

Okay. And on the $2 million of cost savings from the restructuring, should we expect that to appear in the G&A line or in the operating margin line?

That's really G&A right there.

Okay. And last question on the same-store expense guidance for next year, 3% to 3.5%. It seems like the last few years you have been in the 1% to 2% range. So, just wondering what's driving the acceleration there?

Jerry.

I can tell you a big part of it is... the past couple of years our insurance expense has been down just because we've had good experience. We are self insured and we haven't had that many claims and they haven't been that extensive. So, those are up a little. Our utilities, this past year, were virtually flat. Some of that was because of gas rates were down 3.5%, we expect gas is going to go up about 3% going forward. Personnel expense this year was slightly down. Again a lot of that is related to our healthcare and workers' compensation expense which is also self-insured and we had good experience. We are hopeful that it will happen again next year, but we can't count on it. So, where it was flat last year to slightly down, we are budgeting for personnel to be up 3.5% to 4% in 2008. And our admin and marketing in 2007 was down about 7.5%, we think in 2008 the decline is going to be more moderate, we... over the last two to three years have been getting out of print publications and we are virtually out of all of those. So it's hard to keep cutting.

Okay, thank you.

Thank you.

And your next question comes from Mark Biffert with Goldman Sachs. Please go ahead.

Hey guys.

Hello Mark.

How are you?

Great.

Good. In relations to the joint venture that you guys have, you still have another $300 million on that, and when you look at your acquisitions over say the next six months as you try to reinvest the proceeds. I mean, how do you decide whether it goes into ?

The joint venture has a first look opportunity in any properties that are in Texas. Outside of the state of Texas, we can show them things, I think in the short-term while we were trying to get these 1031s covered, we probably will not show them that many things outside of Texas. But certainly anything in Texas will get first look at. You got another question Mark?

We are going to move on. Our next question comes from Rich Anderson with BMO Capital Markets. Please go ahead.

Hi, thanks, and good morning, congratulation to you.

Thanks Rich.

I guess we sort of screwed this up a little bit in our note, but I mean, when you talk about NAD creation and sort of the cap rate calculation and you know backing back in management fees, CapEx and all that, looking at an apples-to-apples type of cap rate on this transaction. Can you quantify or take a stab at what type of NAD creation you think this transaction in and of itself does day one before you sort of consider the growth potential the remaining portfolio?

Well, Rich, I mean, it's hard to say that the transaction by itself creates NAD, I mean, we sold them at a market price. I think where the NAD creation really comes in is the opportunity to buy the shares back at where we perceive to be a significant discount to NAD.

Okay. So, but I mean when you look at the sort of on an apples-to-apples cap rate, would you say it's in line with your implied... where your stock is trading on an apples-to-apples basis?

No way. I mean, if we do an internal NAD calculation, and we don't discuss our number with people, and we are not going to that here, but if you look at the implied cap rate at last nights closing price based on our NAV model for the stabilized portfolio, it's north of a 7% using the same methodology of taking the $650 door out and taking the 2.75% management fees. So, for the whole Company we are north of a 7% at the stock price today. We sold what is sort of the bottom tier of the assets for 6.56%. I mean I think it is, as us said in your note, the math works.

Okay.

And the market realizing that we're shopping the market hard, in these targeted markets that we now have our Company concentrated in, and Hugh and Harris [ph] mentioned a whole hell a lot about fixed caps or any debit, it's a low, it's between a 4.5 and 5 kind of cap rate for this portfolio on a go forward basis.

Okay. In terms of use of proceeds, it looks like maybe you have like $500 million after the acquisitions and the debt pay down, and most of 500 that you have deal with and maybe you'll buyback stock you'll acquire more or you'll have a special dividend. It's interesting to me that $500 million divided by $22 a share is 22 million shares which is the amount of buyback opportunity you now have. Is that a coincidence and the question is --

Rick, you are good.

The question is how much of that buyback can you actually do and sort of in a comfort level from a leverage standpoint.

Well this transaction provides us the opportunity to do a lot of buybacks that we choose to. Now, will we go out and do $500 million of buybacks. If the stock goes to $18, we might, but I don't know that we would do that level certainly quickly but it does, we would have the capacity to do that.

Okay, so a special dividend to the extent you do it probably something in the $200 million to $250 million range something like that?

I think that would be... I am doing the math of the top of my head here, but that will be the high side.

Okay. You mentioned, Mark, I think, about the auction process, can you just sort of characterize how big of a process it was beyond DRA and their partner, how many other players were involved in this process?

Well I am going to let Tom could probably weigh on this too, but we started with a select group of over a dozen players, probably close to 15, as I recall. And they all look at the portfolio then we narrowed that group down to about half a dozen, and then in the last 30 days, I think, probably would say about four emerged strong players, and then got it down to two. And so the auction was really run from that four down to two. And then as the... I think we anticipate this probably taking little longer, probably another 20-25 days out, but when the debt markets started moving favorably, we accelerated the auction process and add several one to the really step up and see what they can do. Tom, can add to that.

Rich, here is some color that I think would help some people. First, I mean, Mark got it right in terms of number of players, but let's talk about competition. In the final four, we are down to two foreign capital and one pension fund advisor and one levered buyer. We really tried to create a marketplace for this transaction. So, what we did five months ago with Fannie's help is we started underwriting each individual asset with them on what would be their loan and getting in and in fact funding the dollars to have them do the physical survey, the title work, so that we would present to this auction group a pre-packaged, here's your loan, here's your pricing grid, with Fannie. And in essence put them on equal footing, because they had locked up all... they in essence knew where they could get their financing. And in today's market you talk about people buying and selling without the financing, no deals are going to get done. So we took that approach, it came down to four. At the end, I would tell you we had pricing power. We were running up against each other, and then we picked the group that we thought A) highest degree of certainty, good price and we went for that and feel good about the process. Certainly we used Marty Chico and his team and felt that Marty helped us keep it quite as long as we could and effectively was a good conduit of communication. And I am proud of the process. I thought it worked very well for us and I am grateful for Fannie and its patience in helping this transaction.

Okay. And then just a last question on the internal growth prospects for 2008 with this new portfolio 5% plus. I'm just curious is that sort of a number that I mean, is that what you see now, or is that sort of maybe not haircut or sandbag or anything like that, but sort of taking into account some sort of what could happen in terms of a recession, I'm asking because your peer Essex, who is almost entirely California is in that same range. And so I was just wondering if you can reconcile your thought process for internal growth for 2008?

You know Keith and I haven't gotten together and compare notes by assets, so I can't really speak to his guidance. What I can tell you is that year-in and year-out, I look back at our guidance range on operations and then I look at how Jerry or the operating team has delivered it. And I recall last year people looked at it and said you gave 6 to 8 and we ended up at 7.2. I am very comfortable with this team, it knows how to run its real estate and is comfortable enough not to sand bag me but push and get the results. So I think that's it. Providing the markets, you can certainly see that everyone would say Portland, Seattle, and San Francisco are going to be north at 10. And I think they would all agree. I think the disparity will probably be Southern California where we've discussed in detail where we think we have a better located portfolio. And I think the surprises next year are going to be Dallas. Texas is going to be a strong market next year or this year, excuse me. The negatives, I think we are all anticipating Orlando and Tampa to be negative this next year. So, if we were to take out the bottom 20% which would be the Orlando, Tampa the Florida exposure you'd probably find us another 100 basis points up from this.

Got it.

I don't think that's optimist. I think it's a realist built up from the bottom up and the assumptions utilized. And I think we got one month already in the year, we're doing better than our budget already.

And you have that Florida, Tennessee, and Arizona markets like that because with a longer term perspective, you know that the short-term may be doesn't look so great.

That, as well as we looked at what the redevelopment potentials were for a number of our assets; its specific locations. It was a nice opportunity to just go through and handpick everything and say this is what we really think we can do something with in the future. And I can't stress that enough, it was a top, we looked at every asset in that vein. And we've really have a plan by asset for the next five years about how to bring out some value out of them. Anything you could add, Jerry.

I agree with your comments about those locations, you know in Phoenix, three, four years ago we owned 3,500 units there. We paired that portfolio down for last couple. We have three extremely well located assets right now.

Okay, sounds good. Thanks very much.

Thank you. Our next question comes from Michael Demler with UBS [ph]. Please go ahead.

Hi guys, I just wanted to get a little more clarification on those receivable. You said it was a 14-year expected payoff, is that a hard maturity?

That's 14 months.

Outside 14 months.

There is a hard maturity that is got to terming this would be underlying debt which has a six-year term. But there is incentives, and we have every reason to believe that when it becomes open to prepayment in 14 months it will get paid off.

Okay, and then, you said there was an unsecured note?

It was secured by a partnership interest in all the real estate here plus a guarantee.

So, you have direct title to the real-estate?

Well, we don't have a direct title. We have a security interest and the partnership interest that owns all the real-estate.

And my follow-up is, in terms of sales transaction today versus 12 months ago, what if, if no receivable have been 12 months ago, it would have been bridge equity, it would have been mezzanine debt? I mean how would these deals have been financed?

This note receivable is really not comparable in a lot of ways to what you would typically think of as a mezz note because of the recourse aspect. I mean, you have a fun with a 1.2 billion of equity that is fully liable for the note. And we think we would be comfortable within a totally unsecured, if we had narrowed that way but we have sort of the security interest is grading [ph]. So you know a typical mezzanine note is not non-recourse, so it's very hard to compare.

The only reason I asked is just, it's the first time we have seen a note receivable as part of a transaction proceeds in quite some time.

Yeah, Michael, here is all the time, we used to live on these things. They wanted the tax strategy too, it's a capital. Mike and I and Mark looked down the road and say 200 million bucks coming in 14 months from now. We like our chances to redeploy that, and again it might be short-term earnings dilutive but in the long scheme of things 200 million bucks of firepower 14 months from now has got a lot of optionality for it.

Okay, thank you.

Thank you.

Thank you. Next question comes from David Bragg of Merrill Lynch. Please go ahead.

Hey good morning. Just back to that revenue growth guidance question again. Does that include an impact of the Yield Star, expected?

Not really. We would expect to get those earnings with our without Yield Star.

Okay, and Jerry what's your take on operation so far this year, specifically in Orange County and Central Florida?

I can tell you so far this year, and you know with January kind of in the bag, we are performing at our budgeted plan, revenues in the 5% to 6% range. Central Florida it's struggling as you would expect with roughly flat revenue growth.

Okay and we know that you dropped a redevelopment project I believe in Tampa is that just indicative of how tough that market is?

It was part of the 1.7 sale.

Okay. Thanks, and...

We would have drop it, right [ph].

Sorry.

It was a quick to drop them, we sold it.

Yeah, that's easy. Okay, and then just a last question for Mark, could you just touch on your lease ups right here in this environment and on your future developments in Southern California, what are your target yields?

I think we've had the targeted yield in our supplement on Southern California it's a high-five range. What's going on lease up right now is the product we're delivering in Texas, first of all, and it's been very strong, I mean, we typically budget on lease ups, 20 homes a month in lease up and we are running at 30 down there. And we are meaningful formal rents, those look very strong. We have a presale in Orlando, traffic's good, activity's good, but concessions are higher than we projected two years ago. But we like that long-term asset and the replacement cost due to the impact piece, Orlando and those kind of things are going to be higher in features, so we are very comfortable with that property. But Texas looks very strong, our Southern California project, we turn the clubhouse open in the March-April timeframe, and we expect very good result there, in that submarket.

Okay, thank you.

The next question comes from Jeff Miller with JMG Capital. Please go ahead.

Hi, I just wanted to get a pro forma combined, kind of, outstanding debt and your kind of average mine interest rate going forward, assuming the transaction closes?

Well, if you look at the numbers, I don't have that pro forma interest rate going forward, but if you look the numbers I talked about earlier. I mean we are probably paying down debt that has an average coupon in the high 4s with the $500 million to $600 million that we are going to be paying off as part of this transaction. So, if you factor that into the debt numbers in our supplemental package you can get to that number. And we'll be paying down, as we indicated, $500 million to $600 million right away with the proceeds.

Right, okay. So you can't give me that, also just the, parking out of 40% of your portfolio, you can't give me that update, of that number at this time? Not contemplating the $500 million to $600 million of debt pay down. Just trying to get an idea of what kind of portfolio you have now going forward, what kind of leverage you'll have?

Okay, what kind of leverage, okay. There is a million different ways to look at leverage, but when we think about it, we generally think about debt relative to what we believe the private market value of the assets are, pre-transaction you are kind of in the mid-40s, post transaction you are right under 40% debt to private market value of the assets.

I think you got a fixed charge is kind of how we also look at it on a pro forma basis, we are about 2-3 to 2-3-5, moreover 2.5.

Something like that. That's great.

One, clearly, we continue to be committed to maintaining the rating and believe that this transaction on the back side of it strengthens that rating. And you think having access to the London secured market when they come back will be important part of our strategy. So we are not throwing in the towel, we are not brunt by any measure.

Great, thank you.

Thanks. Our next question from Karin Ford with KeyBanc Capital Markets. Please go ahead.

Hi, good morning. Just a couple of quick ones. Are you guys out marketing anything in RE3 today?

This is more interesting question. There are assets that we are not currently marketing today, we do have one asset that's development site in Southern California that we have talked to people about, but it's not formally listed. We will have certain assets in the development pipeline. And we expect once get stabilized, we will be approached about, and so I don't anticipate us widely, having to widely market those. As Tom said, usually we are approached by people offerings us a price, and then we see if we can create a small, quite auction on those assets, but nothing other than that one asset is being in a marketed place today, just to tell us where the market is.

Okay. Next question. Am I correct to assume that it sounds like your strategy on reinvestment of the proceeds is to minimize the special dividend piece, if necessary? And under what scenario will you guys be forced to pay the special dividend, what level of acquisitions?

Well, Karen, as usual you asked a very insightful and thoughtful question, and is one matter that we will take up with our Board. As we said today, clearly in the case of what we identify as 1031s, we have got $500 million to $600 million as a target, that would covert $340 to $400 million of gain, that pulling the dividends forward we would cover another $200 million. And with the note, we defer a 100. So, all that being said is, and it's similar to Rich's number. On the outside, if we were to just to execute that plan you are looking at $200 million of uncovered gain. We would like to be thoughtful about what we buy, and we see that as the outside number, we will keep shopping it. As you know 1031 windows, you've got 45 days to identify and you've got 180 to close. So, we are not going have a definitive number for sometime. Our strategy is not to try to focus on minimizing it, it is try to focus on the strategic advantage and opportunities in the market. And if we are not able to adequately deploy the money in a prudent, thoughtful way then special dividend is irrelevant and important thing to recognize that discipline. We are just not, at this point, comfortable with that range, and we like some time to execute. And we will tell you exactly how we are coming out, to give you updates first when this transaction closes about where we stand. So, we will be back on this call about a month from now and tell you about the transaction closing, and where we stand there. So, I would think that's all I could really tell you right now, but again I think it's a very thoughtful question.

Okay, thanks. Final question, do you care to estimate what the impact this transaction is going to have on your payout ratio?

So first, we started out with one of the lowest payout ratios in the industry, and that gives us comfort being able to make the statement that we see no scenario in which we would cut the current dividend. And exactly where we come out, we are not going to drive it down to 100% or anything like that. We think you should have prudent coverage. Where that ultimately comes out is again a matter that we will take up with our Board, and be able to give more clarity on in the near future.

One other note on that, Karen, is that the portfolio that was sold, to reiterate, had a much higher percentage of capital expenditures. So, when you look at the impact on AFFO it will be much less significant than it will be on any potential impact on FFO.

Just to give you the back of the envelope numbers there, because I think if you look at $650 a door and 65,000 doors, into a 125 million share count, you're about $0.29 charge. We currently look at basically the future and say you got 40,000 doors, 44,000 doors at $650 on a different share count that's $0.20 a share. So you are picking up $0.09 in AFFO coverage. And to also emphasize I think one of the question probably haven't covered is, the CapEx on this portfolio that we are selling last year ran over $1,100 a door. So, it was disproportionate in terms of what we were spending on it to the remaining portfolio. We are comfortable at $650 going forward, primarily because you look at the age of the portfolio it's now down to 15 years. And probably we will continue to get a little bit younger as Mark's development pipeline and our redevelopment pipeline get executed. So I think we are maintaining a good discipline in that area, in fact have completed five-year capital plans for all of the assets and feel comfortable with that level. So, you should be able to pickup $0.09 in the AFFO fall in our opinion which when you run that through your models you are going to see that dividend coverage is probably pretty adequate.

It's very helpful. Thanks.

And your next question is a follow-up from the line of Mark Biffert. Please go ahead.

Hey guys, sorry about that.

No, you are back.

Yes, page 5, in the supplement there... I guess not the supplement but the release that you went through.

To our point, yes.

Yes, you guys talked about your potential increase in NAV and you kind of give a sensitivity analysis there. And then when you look at your target returns as you go up on your sensitivity analysis. I mean it really cramps your spread there, and I am just wondering how do you look at development, when does it become unattractive given the risk premium that you should, most developers put on to development?

Well, I think we talked about this rule of thumb in the past, and of course they have never hard to pass, still deal-by-deal submarket-by-submarket. But you like to see, if you are looking at specific market, 150 basis points going in premium for the risk factor. And I think that's pretty well how everyone looks at that. And one thing about development further we're able to deliver is known products in a mix we want, the design we want, the quality we want, in the long-term durability of the product and that's a factor in there too. There is some risk on the acquisition side when you buy an asset and you do all your due-diligence, everyone knows and there is some risk in setting those budgets too and what you thought that you'll... we pay good results there but there is also that you weigh in all those risk factors. So I think it's generally, it's 150 basis points what's your submarket, what's your long-term growth in some of those markets? Obviously, some markets like Southern California and DC, tighter yields because of the rate growth, and the land itself cannot be replaced, and that land inflates in value and that drives some of those spreads higher.

Okay. That was my only question, everything else was answered. Thanks.

Thanks. Our next question comes from Alex Goldfarb with UBS. Please go ahead.

Good morning. Just a quick question on the portfolio repositioning. Are you guys now complete with repositioning the portfolio? And also is there any further changes in corporate restructuring like relocating the offices or are both of those items complete now?

With respect our restructuring, I believe we are done. We really have taken our time, took six months really looking at it, and said this is the best way to run our enterprise in the future where we want to go. In terms of asset sales in the future, we will certainly not be out marketing assets, but if we get an offer that an out of body experience, I am always glad to hit that, but we probably won't be marketing assets for some time. We think we're very comfortable with this portfolio and its prospects, but that's... you won't always be disciplined in this area, and if there is a chance to cash in on value, we would gladly take it as well.

Okay. And with regards to special dividend, have you given a thought whether it could be a stock special or cash special?

We are considering that. I would not say we made any decisions. As Tom said, we need to talk to the Board. I want to understand better the option of doing the stock dividend and the impact of that. So, it's not out of the question, but it's certainly not given that we would do a stock component to it.

Okay. And then my final question just relates to Fannie and Freddie. Certainly they have gotten a lot of attention as lenders for multi-family these days and given that spreads from other lenders are higher, do you see any chance that Fannie or Freddie may start to take advantage of their position in the market and increase the rates that they are charging for lending?

Well, they have already increased their spread a lot. I think the great rates we are seeing is really because of the treasuries dropping, but their spreads are probably 175-ish. I mean, they are... so they have already widened out quite a bit. I don't know whether they will widen more. I think they take their mandate to provide financing and liquidity for housing pretty seriously. So I doubt they would ever be in a position where they are trying to squeeze the last nickel out of the market.

So, with like other lenders like life companies et cetera charging more like 300 over from what I hear, do you think that those lenders will come down or you think that they will just be that big 100 basis point plus gap between borrowers?

There has always been a huge gap between Fannie and Freddie and the other sources of financing out there. I mean, they are... Fannie and Freddie are very tough to compete with for the right kind of product. I think there are certain things, as Tom alluded to earlier, lease ups and maybe the very high end of the market where they are less competitive, where the portfolio lenders and CMBS guys can play more. But for the sort of mainstream kind of stuff that we do and then most of our peers do, there is nobody that we can really compete with them.

Thank you.

Our next question comes from Paula Poskon with Robert W. Baird. Please go ahead. Paula Poskon - Robert W. Baird & Co.: Thank you. Just one question. Could you characterize the assets that you are seeking to acquire and particularly the ones already under contract in terms of they are being either fully positioned in their markets, redevelopment opportunities, lease up opportunities, et cetera?

Well, the ones we currently have, we have two really newer products, one is three years old, the other is two years old and this would be structured parking, four-storey kind of product. We have one product that's high-rise that could either do... we could either do a moderate renovation on or looking at maybe doing... there is actually three towers. We might do one tower a little bit more extensive renovation in the future. So... and the other product that we are also looking at is generally product that's similar in-fill with a structured parking four-storey kind of product. And we are looking at some of that in the California markets. So the answer to your question is generally newer product, in-fill locations, and what we call the Texas rapid rise. Paula Poskon - Robert W. Baird & Co.: Thanks very much.

Next question comes from Michael Salinsky with RBC Capital Markets. Please go ahead.

Good morning, guys. More quickly, could you provide us with an update on your condo business? I noticed the page there, the supplemental is not there this quarter?

This is Toomey. It has just become an insignificant part of the enterprise and certainly at this point we have got three communities, one in Tampa, one in Arizona, and one in Southern California. And what we are seeing is good interest in Arizona and Southern California, Tampa is a little slow right now. What you have to realize is all three of those were operating apartments that we've leased the apartments and then what we do is we pull off ten a month and if we sell them, then we pull off another 10. But it's really an insignificant part of the enterprise on go forward basis on a go-forward basis, and I think that's prudent capital and time management on our part.

Okay, that's fair. And then real quickly on your outlook for '08, you provided kind of acquisitions and dispositions there. Could you talk about your plans on the development front in terms of spending?

-- spending, well, you've got $400 million coming up out of the ground on an annual basis. That's pretty much the number I would put in there, is $400 million and then on the redevelopment I would putting another $75 million on that front.

Okay.

Yes, I think those are good gross numbers. I think on the development side there is probably 100 or so of that that will end up being funded through venture partners. So the actual dollars out to us will be a little bit less than that.

Okay, thanks guys.

Thanks Michael.

Thank you. And management, there are no further questions. I will turn it back to you for closing comments.

Thank you, operator and all of you for certainly your time today. I know it's a big day in the market, with seeing where the feds go. What I can tell you is that I am very excited. The entire team is excited about where we're headed. I mean, this is a great portfolio. This is a company that has financial flexibility and it has the skills to use that financial flexibility in terms of development, redevelopment, acquisitions. So I think you're getting the best of everything you can get in this marketplace with UDR. An experienced team with the financial fire power, the opportunities identified and stuff that we know how to do. And I think this transaction is a combination of really seven years of effort in putting this portfolio and this company in the right place with the right value creators and the right team. And with that I'd say I am grateful for this teams that were operating the assets that are sold. We are not across the goal line, I'm grateful for their efforts and for everyone else that was dealing with the organizational restructure, as well their sale. It's been a very, very busy period of time, but I think what we feel is very positive about where we're headed and we're relieved to get this done. And with that there is lot more to communicate as we go forward. I think you'll find us, as always, very forthright in what we see, what we're trying to and why. And with that, I always encourage you to just pick up the phone or call us and we can only help you make a better decision. We're excited about it, and again thank you for you time today and all of you, good luck.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation, and at this time you may disconnect.