UDR, Inc. (UDR) Q1 2008 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and thank you for standing by. Welcome to the UDR Inc. First Quarter 2008 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. [Operator Instructions]. This conference is the recorded Tuesday, May 6, 2008. I would now like turn to conference over to Larry Thede, Vice President of Investor Relations. Please go ahead, sir.

Thank you. And 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 yesterday afternoon. In this supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Our press release and supplement is posted to our website www.udr.com. We will begin the call with brief comments from management and then open the call to your questions. I would like to note that 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 risks and risk factors that could cause actual results to differ from those implied by forward-looking statements is detailed in yesterday's press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Before I turn the call over to management for comments, I want to highlight that we will hold an Investor Day in Washington, DC on Monday, June 2. Senior management will discuss the company's business strategy, performance and future outlook beginning at 2 PM. on June 2 at the Doubletree Hotel, Crystal City. Cocktails and dinner will follow that evening. The next day on June 3, we will host a property tour of three apartment home communities. The tour will conclude prior to the noon allowing guests time to travel to New York for the NAREIT Conference. To register for the event, please go to the Investor Relations section of our website. Let me now turn the call over to our President and CEO, Tom Toomey.

Thank you Larry, and welcome to our call. Joining me on the call today is Mark Wallis, our Senior Executive Vice President responsible for investments and development, Mike Ernst, our CFO, David Messenger, our Senior Vice President and Chief Accounting Officer, Jerry Davis, our Senior Vice President of Operations. We have a new member to the executive team on the call today. Let me introduce Warren Troupe. We announced in February that Warren has joined us as Senior Executive Vice President and General Counsel. But frankly he may have been had one of the longest interviews on record at nearly seven years. You see Warren has been our outside General Counsel since 2001 and has been involved in all our transactions over the years. Topics to cover on the conference call today is operating results, Jerry, will focus on fundamentals in his prepared remarks and will respond to specific market questions. Investment activities including an update on development, redevelopment and acquisitions will be Mark Wallis. And the status of the portfolio sale, use of proceeds and guidance for the year will be Mike. Let me begin with our view of the economy. It certainly seems like we have been in a recession rather you measure it by GDP or business sentiment. Who knows when it started and when it will end but over the last 60 years, we've seen 10 recessions lasting 8 to 16 months each. While they are never the same, they usually are focused around specific sectors or geographies. We believe this is true with this recession specifically the financial and homebuilding sectors leading the downturn. We believe this recession will be below average in duration for a variety of reasons. History will also point out great opportunities are born during recessions and inflation periods. UDR is in a position to take advantage of this environment in three ways. First capital. It is hard to find and it will cost more. This will not be a challenge for UDR. With portfolio sale, we have funded our development, redevelopment, and debt maturities through 2009 and had zero outstanding on our line of credit. We will also be paying a special dividend later this year in the $130 million to $190 million or $1 to $1.50 a share. Second, we have transformed the portfolio focused on 22 markets. As many of you know the right market position and price point are key. Let me highlight three statistics based upon our NOI weighted-average portfolio. Supply, first economists are forecasting a record low multi-family, single-family delivery in 2008 of less than 800,000 homes this year payment. Price points, our average monthly rent of 1,200 compares to an entry-level condo in our markets which would be 2000 a month payment and entry level house of 2,400 a month, meaning even further drops in housing prices should not represent a great threat if anyone can qualify for a loan for those homes. And lastly jobs, 19 of our 22 markets posted positive job growth in the first quarter. While the US is expected to lose 120,000 to 200,000 jobs in 2008, our portfolio is expected to have zero job growth with a weighted average unemployment below 5%. And third, inexperienced team. True none of us have seen all of 10 recessions, although we have an gray hair to prove, we prospered many of them coupled with our strategy, we believe we are in a position to create shareholder value. And again I want to extend a personal invitation that our Investor Day on June 2. You can see the details on our website. We look forward to seeing as many of you there as we can. Let me know me turn the call over to Jerry Davis.

Thanks Tom, and good afternoon everyone. I would like to give you some brief commentary on our first quarter operating results. Revenue was up 5% at 32,342 apartment homes that we classify same community homes. Expenses actually decreased by 0.5%, resulting in NOI being up 7.7%. The revenue growth is the result of effective rent growth of 3.6% and an increase in occupancy of 60 basis points from 94.0% last year to 94.6% this year. 15 of our 22 markets had higher occupancy year-over-year and 19 of the markets had higher revenue. We completed our yield star rollout in the fourth quarter of 2007 and to date we are pleased with the results. In addition to our 4.7% growth in net rental income, we also enjoyed an increase in utility reimbursements of 15.9%. The expense growth was negative 0.5% due entirely to insurance expense in the first quarter '08 being 73% lower than last year. Because we are self insured up to a limit, we benefited in first quarter '08 from very low loss experience compared to first quarter '07. Last year, we had heavy losses caused by several large fires in the first quarter. In addition, we rewrote our insurance policy late in 2007, which resulted in a reduction in our premium of about 6%. Administrative and marketing costs were also down 1.8%. Increased administrative expenses this quarter were offset by a 19% reduction in marketing and leasing cost as we continue to pull out print advertising, and push more of our marketing efforts to the Internet. During the fourth quarter… I mean during the first quarter, 46.7% of our move-ins originated through the Internet compared to 35.2% last year. Utilities were flat in large part due to the relatively mild winter. Repairs and maintenance expenses were up 3.8%, personnel expense was up 4.1%, real estate taxes increased 4.2%. We've seen our resident turnover drop in the first quarter to an annualized rate of 50.2% compared to 51.7% in first quarter '07. Move outs to home purchases were 13.5% in first quarter '08 compared to 16.02% in first quarter '07. This quarter our traffic has increased about 10% to 20% year-over-year due predominantly to our increased efforts in Internet marketing, as well as in mid April we completed our full portfolio rollout of a level one call center. Level one now handles all prospect calls after hours, as well as handling rollover calls when our associates are busy helping our residents and are not able to answer the phone. So, far the second quarter is tracking well with within our plan. Our physical occupancy last Tuesday, April 29 was 95.1%. That compares to 94.4% in the same week last year, an increase of 70 basis points. This gives us confidence that we'll have good pricing powers, as we move into our prime-leasing season. We're very encouraged by our first quarter results, but for the most part, they were in line with our expectations. We feel that there is still quite a bit of uncertainty in the economy for the remainder of the year and we do expect revenue growth to ease. We know that we also can't count on the continuing favorable insurance claim comparisons every quarter. At the beginning of the year, we gave operating guidance of 4% to 4.5% growth in revenue, 3% to 3.5% growth in expenses and 5 % to 5.5% growth in NOI. We're still comfortable with those ranges. In closing, I would like to thank all the UDR associates who worked so hard to stay focused during this first quarter, even while being distracted with the portfolio of sale of approximately one-third of our apartment homes, they were still able to turn an industry-leading results. Now I would like to turn the call over to Mark Wallis.

Thank you, Jerry. I'm going to speak to our core strategy, the first one, and which is to strengthen our portfolio. And I believe we made significant progress in the transformation of UDR's portfolio that began with the $1.7 billion sale that closed at the beginning of March. Now we are involved in the execution of using those proceeds for 1031 exchanges. And I want to briefly review the $580 million acquisitions that we closed this quarter and then I'll briefly touch on our development and redevelopment activities. First community is the community named Edgewater; it is located in the Mission Bay sub-market of downtown San Francisco. Now the Mission Bay redevelopment area is an area that will include the headquarters to the California Institute for Regenerative Medicine, a 2.65 million square foot research campus for the University of California, San Francisco, a 6 million square feet of office, life science and tech space, and ultimately that's going to create over 31,000 new jobs in that sub-market. Now we own 1,800 homes in the metro bay area, that's now our third largest market from an NOI measurement standpoint with 4,097 of those homes located in downtown, San Francisco. This gives us a property down the location that's in walking distance to giant stadium and all the restaurant and retail amenities that make this location one we want to own for the long-term. Another plus about this property, unlike most San Francisco properties, it does not have the required below market rental element in unit count. The second community we acquired is known as Delancey at Shirlington Village in Alexandria, Virginia. This property has great visibility and access is located just south of the Pentagon 395, the major highway that links Northern Virginia and downtown Washington, DC. It's easily accessible from 395 and is in close proximity to employment centers, such as Crystal City, the Pentagon, Roslyn and the Eisenhower Corridor. This is a new product with loft, mid rise and high rise homes, and it is located within walking distance to just under 60,000 square feet of office space that’s currently 97% occupied. This community has an attractive streetscape with retail amenities that a renter of the future will expect. You can go downstairs to a gourmet grocer, you can buy a Starbucks, you can meet friends at restaurant. Once you're home, you don't have to get back in your car. And with this in-fill location we’ve avoided the difficult DC commute of up to two stressful hours. The property was in lease-up when we acquired it and provided opportunity for to us purchase without the typical competition we face from leveraged buyers who now really can't buy this type of lease-up property with GSA money and have to wait until stabilization. The next acquisition was located in the Baltimore market, in the heart of Towson adjacent to Towson Town Center in that central employment area. This property was built in 2003. It includes a structured parking garage and it's adjacent to Towson Town Center, which is a premier shopping destination with quality restaurants. Again, you're at home; you're close to all you need without having to get back in your car. This property has excellent visibility on Dulaney Valley road that carries over 40,000 cars every day. We believe too, there's a percentage of kitchens that can be converted to a more upscale finish that will have extra future rent growth. Circle Towers is a mixed use development contained in three high rise towers located in Fairfax County, Virginia. The property is located in the highly desirable area near the Vienna metro station at the I-66 Corridor and just outside of the 495 Beltway. This is the only residential high rise product in the Vienna metro market, and the mixed use design again provides for renter needs, needs that you can meet without having to get back in your car. There's more than 15 million square feet of office space located within 3-mile radius of the site. This property was constructed in the 1970s. We will redevelop it and it will be done by our team, headed by Richard Geonardy [ph], who have successfully done extensive redevelopments in this region. The incremental rehab expenditures should produce incremental rates of return of 7% to 8%. Legacy apartment homes is located in Legacy Town Center, one of Dallas' newest premier mixed use developments. This consists of three apartment communities that provide urban-style living with 40 restaurants in the area, 450,000 square feet of retail and office within walking distance. The adjoining Legacy Business Park provides a solid job base with a number of Fortune 500 companies. Some of those names are Frito-Lay, PepsiCo, EDS, AT&T Wireless, JC Penney, all of which supports the need for apartment housing in this area. This is a vibrant kind of... it's kind of an uptown Dallas type area but it's located in the West Plano job growth Corridor. The Place at Millenia is our first closing on presale program. Again this product is in walking distance of an upscale mall, where you arrive at your apartment, you can reach the entertainment and restaurants and retail there within walking distance. This property is in lease-up. We leased 30 homes last month, which is a respectful number of what is considered a soft market. We've completed our 1031 exchange identification process, and we expect to purchase an additional 375 million to 425 million of apartment communities that will close by August 30. We have identified properties that are primarily located in Northern and Southern California and in Seattle. And they are in sub-markets that complement our existing portfolio. Now on our development activities, we continue to complete our redevelopment communities and turn them back over our operations. This has been a success and we will have sharper focus in the future on the Northern Virginia market, especially Circle Towers, which I mentioned, and upon assets in California. Our $2.6 million pipeline provides UDR with long-term growth potential. However, we believe that we are managing that pipeline judiciously and with careful restraint. We have only 6% of lease-up and 35% under construction. With 56% of the pipeline producing income, we can be patient in our timings and we look forward to a recovery of the economy in the 2009/2010 timeframe. Our yields remain in the original rage and construction costs are not inflating beyond projections. Also I want to point out that we obtained approval from the city of Addison for a contribution of $39 million for infrastructure and amenity costs of our development in Addison. This development is located strategically near the important intersection of the North Dallas toll road in the LBJ freeway. The location puts residents within 6 miles of some 11 million square feet of office space and the high paying jobs that fill that space. And if you extend that corridor now to the George Bush toll road, an additional 7.7 million square feet of office space that is added to that number. Another important point is 20 minutes from the D/FW Airport only 15 minutes from the Love Field Airport. With the city of Addison approving their funding, we anticipate the Phase I construction commencing this summer. That's my comments regarding our investments and development activity. And now I'll turn the call over to Mike.

Thanks a lot, Mark. Let me start by updating everyone on the uses of the cash from our $1.7 billion portfolio sale that we closed about 60 days ago. On March 3, we received $1.45 billion, which was the sale proceeds net of the mezzanine loan of $200 million, closing costs, and then there were two small deals that were delayed due to lender approvals. We closed one of these deals last week and expect to close the other one in the next 30 days. Of the money we received, we use it in the following ways during the quarter. We acquired $580 million of assets, as Mark has outlined. Our cash balances increased by a little over $350 million. We've reduced debt and other liabilities by about $350 million. In addition, we bought back during the quarter 4.8 million shares at $23.33 a total of $112 million. And then we bought another 500,000 shares back since quarter end. At this point, with the state of the capital markets and our considerably higher share price, we're being cautious about additional repurchases, but we'll keep you updated in the future on those. We also spend about $60 million during the quarter on development and redevelopment capital expenditures. At the quarter end, as Tom mentioned, we had nothing drawn on our $600 million line of credit. We had about $400 million of cash balances. For most of March, we had about $1 billion of cash on our balance sheet, as most of the closings that Mark described actually closed right at the end of the quarter. So, that was extremely dilutive during the course of the month of March. We are very cautious on how we invested the funds, because of all the uncertainty and the “safe investments” that we have seen over the last few months. And unfortunately, we are only earning about 2.5% on the cash during the quarter. One other thing to note, because these properties closed right at the very end of the quarter, in the last three days basically, there was very little income that came off of those during the first quarter. As Tom mentioned, if you look at our cash, sources and uses over the next couple of years, we have identified sources for basically all of our committed capital needs, including our development pipeline through the end of 2009. So, we're feeling very good about our position on that front right now. During the quarter, we closed a $240 million two-year bank term loan facility with a group of nine banks. We swapped $200 million of this loan at a 3.61% rate for two years, and the remaining $40 million is floating at LIBOR plus 85. We used the proceeds to retire $200 million of 4.5% bonds, which matured in early March and for various other corporate purposes. Tom also mentioned the special dividend. We believe the range is $130 million to $190 million. We will nail that down by the end of August, when the 1031 exchange periods expire. We are contemplating whether we will pay part of that in stock, and we'll make that decision later this year, depending on a number of factors, including our share price at that point, attractiveness of other investment opportunities, and the state of the capital markets. With our sale now closed and the benefit of a couple of months to analyze how all the pieces are coming together, we've reevaluated our forecast for the year and are lowering the top end of our guidance to $155 million from $160 million. The significant factors leading us to reduce the top end are the lower returns that we're getting on our cash investments, the increase in our stock price which has made it the economics of the share buybacks somewhat less compelling than we originally modeled and then we're buying some assets that are in lease-up that we think our great investments but create quite a bit more dilution in the short-term than we were originally expecting. As a reminder, our new guidance range of $1.50 per share to $1.55 per share is for core FFO only and does not include any potential gains on sale on RH Re [ph]. By our numbers the current consensus on the Street of $1.54 has about $0.03 of RH Re gains in it, so the comparable numbers are $1.51. And then as Jerry mentioned, we have not changed any of our operating guidance for the year and he's still confident we will be in the range we outlined last quarter. That concludes my comments and I'll turn it back over to Tom for any closing remarks.

Operator, we are now ready to take the call for questions. Question and Answer

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Michael Bilerman with Citigroup. Please go ahead.

Hi, it's Craig Melcher here for Michael. Can you talk a bit on the, who were the sellers of assets that you acquired so far in the first quarter?

Mark you want to...

Yes, I mean. I can give you some general information, sort of respecting some of their wishes on disclosure. The asset in San Francisco was the part of [inaudible] sold developer there… in private developer in San Francisco. And… let me go through this list here, the one in Shirlington Village, another local private owner there, Towson Town Center was a group that had acquired this asset… another private group acquired the asset of probably about 10 years ago, and it’s operating that themselves and it has nothing… a smaller management company there. Legacy apartment homes may be familiar with [inaudible] property, which was actually part of the original Columbus REIT, great developer down there, excellent product. Then, the place in [inaudible] was a…

Okay. Do you have a blended cap rate on the acquisitions that you did and also the acquisitions that you're planning on of next few months.

Yes. The blended cap rate is probably going to be in the half works [ph].

That's current or...

That's current.

And where do you...

[inaudible] outside that number obviously as we some REITS have got some lease upside and some management upside.

And so high 4s on the existing ones you bought and on those targeted ones that you're anticipating that other 350 to 400?

Yes.

And Craig, just to clarify that that is net of CapEx so...

Right.

So, the actual FFO impact could be higher than that,

Yes.

What type of CapEx and/or management be your… built into that?

We built in a typical 2.75% management fee unless there is some areas where that needs to be monetized based on additional staff, that pretty well is how we run it. And on, all these product is a new product but we run it at... basically what our standard CapEx is for the whole company even though generally there will be less than that for the first couple of years.

Okay. And just two income statement items probably for Mike. The income tax expense line and the subsidiary interest investment income, if you could just comment on these two items and what we could expect for the balance of the year there?

Well, the income tax expense is actually a... that’s a benefit. It was realized because if there weren’t a lot gains on sale during the first quarter, so you had the ability to recapture prior year’s taxes paid. And I am sorry the other line item you mentioned, Craig?

Just on FFO add back, the subsidiary investment income?

That's pretty small number. It is 374,000. I think it's related to one of the joint ventures.

Okay, thank you.

Our next question comes from Jay Habermann with Goldman Sachs. Please go ahead.

Hi, guys. How are you?

Great.

I had a question for you. Obviously on NOI growth, you're fully running pretty strong revels year-to-date, based on the occupancy level you cited up until the present, I am just curious what sort of assumptions you're building in. Just sort of get to your full-year guidance. I mean what are you assuming if you're maintaining your occupancy level, is it really a function of deterioration in job growth in the back half of the year?

Not a whole lot of that. A lot of it is we just finished up last year so strong, it’s a more difficult comparisons to last year. We're still little concerned about some parts of Florida and the Inland Empire is weakening a little bit for us. But everywhere else right now, we don't see the job growth really hurting us in our markets.

Okay, and obviously the pick up sequentially on expenses, can you just provide some more detail there and I guess in general you've been pretty good at keeping expenses under control and sort of what do you anticipate moving into the balance of the year? Is there still more to go there on expense control?

First, I'll discuss your sequential increase. The biggest part of that was real estate tax and sequentially were up 15.7% and we accrued taxes throughout the year based on our estimates of rate changes and reassessments and then we get the final tax bill typically near the end of the year we true it up or true it down. And luckily in 4Q07 we had to true it down because we were accruing at too high of a rate. So what you are seeing right now is first quarter '08 we're accruing at a rate that is 4% to 5% higher than all of last year because we basically reduced our accrual in the fourth quarter '07, it looks like a huge increase. In addition, we had gas expense in the first quarter for heating. That was 50%…. 57% higher than in 4Q, and I guess the last component is in fourth quarter of '07, we had extraordinarily low healthcare and workers comp expense in our personnel lines, and we had more normalized loss experience in this quarter. Now going forward, we still feel like the 3% to 3.5% expense growth is in line and as I told you in my opening remarks, personnel is up about 4%, R&M is up 3.8%, tax like I said we think are going to up 4% to 4.5%. Utilities we are hopeful are going to be in the 3% to 4% range. So, we really, we don't anticipate great savings but a lot of it does depend on our insurance, our insurance claims since we are self insured up to a limit.

Okay, just one more question. In terms of the Kitchen & Baths and the upgrades, the renovations you're doing to your properties. What are you seeing from the competition generally in your markets versus the same activities?

We are seeing them do what they call a Kitchen & Bath but typically don't think they do it as well as we do. A lot of times they will just change the doors, paint the cabinets, change the counter tops. We do a Kitchen & Bath, we replace the entire cabinet tree. We also go in and typically put in... we put in all new appliances, do a lighting upgrade and change up the flooring. So a lot of people's K&B is, let's pull the outdoors off, put new doors on and paint the boxes.

Okay. And just for Mike, are you assuming any share repurchases in the guidance for full-year, additional share repurchases?

No, the current guidance does not have any additional share repurchases. However, obviously, we may very will do that which would provide upside.

Thank you.

Our next question comes from David Bragg with Merrill Lynch. Please go ahead.

Hi, good afternoon. Just another income statement question for Mike here. Could you talk about the other income line? What are the components of that in addition to interest income?

David, I believe most of that is interest income off of the $1 billion of cash that we had sitting on the balance sheet for a good... well for most of March. You also have one-month worth of income on the mezzanine note that runs a little over $1 million a month. And I don't think, I think that was really most of it. There may be have been a few minor miscellaneous things but…

Okay, thanks. Then looking at the development page, Mark could you just run us through real quick the expected commencement of deliveries or the commencement of lease ups over the balance of this year?

Yes, I can do that. I'm going to refer to... I’m over on a schedule, that’s where I am looking at.

Yes, for 8B actually?

8B, that's correct. If you look at Tiburon, that one is in lease up and we expect that to be stabilized probably by the third quarter. Lease ups doing going very well there. Currently in part we will just be commencing construction, same thing in Hawking Street. Mission Bay has not commenced construction yet. Signal Hill will commence construction in the second quarter. Laura Wood we've just turned two buildings there and opened a club house. So that lease up has just now begun, anyhow the rate of lease up down in Huston is 10, 20, 30 units a month and we are hitting a good period. There is a lot of jobs out there in that sub- markets. So we expect that to do well. Belmont has just commenced construction in the last quarter; we have work commenced on Waterside Towers. We have started a grading work at the residence of Stadium Village buildings where there is no big lease up, not being leased up this year. [inaudible] Phase II I would expect based on all the plans have been put on next side and we're going vertical on two to three of them. So, we will start lease up there probably in the probably into the third quarter, we’ll have buildings turned and the clubhouse ready to go. And that’s, and Jefferson at Marina del Rey, which is our joint venture with JPI, the clubhouse is now openly started turning units and gotten the permits to do those COs there. So, that has commenced lease up in the last three weeks. And then, the project in Orlando, which really… gets on our development page but was we're in lease up there, they we're probably about 58% leased at this point. I think I have covered all of them, that’s for now.

Now I think that's it. Thank you. And then just lastly, Mike, what's your expected redevelopment spend over the balance of this year?

It depends on a little bit on timing of some of the starts later in the year. But, I think it’s only about $60 million, $60 million or $70 million. Thomas W. Toomey - President & Chief Executive Officer: Yes. I don't think we will top over $60 million just based on timing and permitting some of these Western California markets' permitting across just more prolong, so that would probably keep some $60 million or less range.

Yes. We're really at the point where we're finishing a lot of this stuff that was in the first stage and we were getting ready to identify some new ones. So, they will be actually a little bit of a low during the course of the middle part of this year as a redevelopment.

And then you would shift towards California?

That's right.

Correct. Okay.

Yes. And I mentioned we’ll still do some work in the Northern Virginia markets especially Circle Towers.

Okay, thank you.

Our next question comes from Rich Anderson with BMO Capital Markets. Please go ahead.

Thanks and good afternoon. Good morning.

Yes it is.

Good morning right. So, in terms of stock dividend component, I mean do you have any idea how much that would be stock, have you talked to investors about their interest in getting a stock dividend a little cash, I mean how much of this have you investigated so far?

This is Tom. Rich, I think what we're seeing from large institution is a leaning towards stock instead of cash. But, we're still out collecting input and always want to listen to our shareholders, and be responsive to their desires; I mean we do work for them, so.

Okay. Thomas W. Toomey - President & Chief Executive Officer: That's where we stand on it.

Okay. If the stock were trading where it is today, would you be inclined to have stock element?

Most likely, yes.

Okay. In terms of the, the buying activity obviously you had some redeployment needs and executed on lot of it this quarter, the past quarter. How did you handle that sort of 1031 redeployment pressure with making sure you've got the best deal that you could? In other words, what was your pipeline of deals that you had to choose from whether your new sellers weren't going to pressure you into a better deal for themselves?

Well, I'll comment on that first and Tom may have some comments on that too, this Mark. In the 1031 process you are allowed to identify assets over and above the dollar amounts you ultimately spend and there is some specific rules there but, let’s generally at least 2 to 2.5 times the amount. So we've approached it, we're identifying a lot of quality properties and now we're trying to pick the best of several on our plate. And the ones that we closes, some of these we started work on before actually the sale had closed so that we wouldn't be under that pressure. They were assets we wanted to buy and last quarter we mentioned the closing of Marina del Rey that actually was reverse exchange that came into this $1.7 billion sales. So two things, we've identified properties early in markets that we wanted, and then second thing is we've identified more properties than we ultimately buy and we are competing against each other to get the best deal.

Okay. That was the point exactly actually. So, and how do you feel let's say you weren’t under any pressure to buy assets today. Do you think you may be gave up 25 basis points of cap rate or do you have any sense of what you could have done in terms of the negotiating process?

I'll answer it this way. I mean I think any time you're making a number of purchases like this each deal has its own character to it. And we are viewing it, the way I think about it is, we are buying a portfolio in the end of $800 million to $900 million and highly lock that portfolio, how does it fit our company. And so, you have one, I expect we have got 50 basis points better than I thought what we get. Another may be we are 25 basis points we paid may be 25 basis points higher but there is some benefits that being adjacent to other properties. So Jerry has got some management benefit there to it. I think it pretty well equals itself out, how it’s been going so far. There is some higher quality properties here that we are buying at a good stage of lease up, there is some upside in but we are not taking them zero occupancy. So overall the balance… some were up, some were down, but overall pretty much where we want to be.

Last question you mentioned the high 4s cap rate with the CapEx etcetera and where do you think that number trends on an apples-to-apples basis once you get that lease up properties to stabilization?

Well, I mean. I think pretty quick all of these assets are being in the 6% yield range in the next 12 months to 18 months, that is how we're forecasting this portfolio to perform. And I think Jerry has been pretty pleased with the assets we have turned over so far. We are hitting our numbers and Jerry's team is very much involved in setting this process. The acquisition group is going to turn the property over to him and hope that they get the number stay. They sign off with us on these numbers and we go out as a team, so…

Rich this is Toomey, I’ll just add a couple of things, and one time we made a decision last July to go after the portfolio sales. At that time, we knew we are going to be a 1031 buyer. And Mark, we turned them loose. Jerry and his team Mat Atkin, and really said listen lock up what makes sense, and extend, extend, extend and keep bleeding the prices to make sense. And so, lot of these were assets that even if you look back at the contracts and negotiations, you would find several addendums and you find that we strung them out to a, insure that the closing happens, but also slating out sellers in terms of credit crisis you're not going to find GSAs lending that much and that was one tactic. The second tactic was to really go after value creation efforts, the 1972 tower, great deals almost 100% occupied, haven’t raised in ages on the darn thing, meaning we got a real opportunity to add some value by rehabbing it, and the others lease ups where the GSAs are not going to finance those deals, there is no money available. The only other buyer of those are going to be 1031 buyers or pension. And we didn't find a whole lot people knocking on those doors. So, we understood the market very well and think that in the end it might not been a great short-term earnings kind of positive event but a long-term value creation for our shareholders. And a lot of stuff sit right in our strike zone in terms of markets, overlaid our new portfolio in terms of 22 markets and in terms of value creation capability. We're not finding the… on great vice [ph] in my opinion.

Okay, great. Thanks very much.

Thank you.

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

Thank you and good morning to you. Just summing up on the 1031 question, just looking at your 1031 balance on the balance sheet of about $350 million, can you just reconcile that to the $360 million or so that you've done so far?

Well, the balance that's on the balance sheet at March 31 is in accounts for future acquisitions. So, as March 31, all the ones we have already done. They have been funded out of the cash from the sale.

Okay, so the remaining balance, the $350 million is also a more 1031 money, it’s not cash that's free and clear?

That's correct.

Okay. Your thought earlier in some of the previous conversations there with an amount of money may be $400 million or so that was free and clear cash above and beyond the 1031 needs.

The $400 million that I've referenced was all cash. So it included, approximately $350 million that's sitting in 1031 accounts and that about $50 million that's just pretty included do with what we want.

Okay. Okay, and then going on to the expense line, just two expense questions, one when you guys do any build backs for utility or anything like that. Is that netted out in the expense line, or is there a revenue line with an offsetting expense line?

It's a revenue line with an offsetting expense line.

Okay, and then on the self insurance, did all of that flow through the operating expenses or does any of that flow through G&A or another non-property related line?

It's all operating expenses.

Okay. So, whether it's a claim or an expense, it also through operating expenses?

Yes.

Okay. Great, thank you very much.

[inaudible] interacting questions, somebody do it differently Alex, I thought we're insuring property. He’s… already, that’s al right, keep going.

Our next question comes [inaudible] with KBW. Please go ahead.

Thanks. Mike, with the increase in development activity, kind of ramping up here. Can you just give me a sense of where capitalized interest was first quarter and where it goes kind of throughout the rest of the year?

Yes, I believe in the first quarter it’s in the supplement. I believe it was $3.3 million, is that correct? $3.5 million $4 million, something like that. Yes $3.3 million in the first quarter. We are expecting over the course of the year, I think what's in our forecast is it’s about $4 million in Q2, $4.5 million and $5 million those are approximations in the third and fourth quarter. So, it ramps up over the course of the year.

Okay. And then, you had mentioned a couple of the dispositions held over into the quarter, if there is $50 million, or so I think it's held for sale on the balance sheet, is that, those properties or are there other things held for sale?

There is a couple of condos that are still classified as held for sale, I think if you look at that $55 million number, I believe $35 million to $40 million of it was the other two properties left over from the big portfolio sale, of which we closed the larger ones. So, there’s only about 10 left of those and then the rest is condos.

Okay. And Tom, I think you referred that basically you've got everything funded through 2009, does that include any incremental sales from here?

No, it does not.

Okay, thanks.

[Operator Instructions]. Our next question is a follow up from Michael Bilerman. Please go ahead.

And it's silly [ph] question of 500,000 shares you bought so far in the second quarter, where were those done?

I don't have the exact number for those 500,000. But, I know when you average those in; you are at $23.50 instead of $23.33. So, they were up a bit higher obviously as the stock prices going up, and they were very much weighted towards the first couple of weeks of the quarter.

All right. And it sounds like given the stock at close to $25 your appetite to buy stock is completely diminished?

I wouldn't say completely diminished, I think what we felt is, it was a time to take a pause, take a look at how some of these 1031s play out. I get a better gauge of how the capital markets play out over the next couple of months and see where we stand, I think we still like the price, I think we do not like it as much as $21 or $22.

But, I guess with your stock trading, it has called 63,64 [ph] implied cap rate and these deals that you went into high 4s and hope to get to a 6. I know there is some tax implications in 1031 positions, but a sort of how we understand why you wouldn't be aggressively continuing to buy the stock as it offers a better return potential than going out and buying assets?

Well, you look at the return potential or development pipeline and the rehab pipeline, and it looks very compelling even compared to the stock. And you haven't seen us got just by acquisitions unless there was a tax motivation reason to do it. So, and we think that tax issues are significant enough where that make sense for us to do the 1031s in most cases?

Plus, we've also very cautious in these capital market environment, that if your company that's got to raise capital in this environment, you might be paying dearly for it and that doesn't look like it's going to ease any time soon, so saving capital is an important part of... and creates an opportunity for the window so…

Right. And I think Tom you had mentioned on one of the assets… of the assets you acquired they hadn’t raised rents, I think you said 20 years or something. But, may be you can just walk through a sort of growth in that return from the high 4s, of course the low 4s may be I’m mixing up my own notes, going to a 6, how much of it’s just leasing up those two under leased assets, how much of it’s rent growth that just sort of splitting it out in terms of going out to 12 to 18 months.

I'll tell to you the general answer there is as far a splitting it out, it's probably there is 30% to 35% just lease up improvement in there and majority is agreeing with that and then I think the balance is just our team getting in there putting our leasing strategy, our Internet strategy on top of it and racing rents and I mentioned to that there is a limited amount of can be opportunity little bit down the road that help us get there but I think 35% or so will be sort of lease up, and the rest is just working on it in our style of management.

Just getting up that monthly revenue number?

Yes.

And the monthly revenues numbers that you show, those are current or those are you targeted?

I believe those are the current ones in a disclosure, yes.

Okay, thank you.

Our next question comes from Ryan Bennett with Lehman Brothers. Please go ahead.

Good afternoon guys. I know you don't give earnings guidance regarding RE3 because one of you guys were actively in the market with any of the assets from RE3 and if so what markets they would be in?

This is Mark. I'll answer that question, there is nothing active obviously at times you do get unsolicited offers, I will say, the assets we have in RE3 they are in the Dallas and Huston markets. Those markets are pretty strong, and we're just getting those to the point where it will be proper to mark, we don't want to mark them too early, but there is some interest once those things are stabilized, and that looks steady later half of year.

Got it. And what sorts of buyers are usually look after this pension funds, life insurance companies?

People want brand new product and those markets there is always a lot of buyers in those markets and yes, obviously people that can tap those sources, you've got management operations around those kind of assets. We will see how that plays out.

And just lastly, in dealings with your capital markets, have you seen any of the spreads lining out of any [inaudible] past quarter or so?

You know, spreads what we have seen with those guys is that the absolute rate has actually stayed pretty constant. So, the spread has tended to widen and narrow sort of according to the… what happens with the underlying treasuries. But, if you're at the five-year end of the curve, you're kind of in the low to mid five, if you're at the 10-year end, you are probably in the high five somewhere, and that's been I think fairly consistent for the last several months.

Okay. Great, thanks.

Our next question comes from Haendel St. Juste with Green Street Advisors. Please go ahead.

Hi, good morning. I guess, good afternoon for you guys, good morning for us. Tom just wanted to get some color from you. We have been hearing talks of portfolio discounting in the marketplace, I wanted to hear your thoughts on this, and if you could also discuss the tax spread the marketplace today, what do think it is when you could see that closing a bit?

I guess, bid ask, I’d chime in and ask Mark for any more color there. It certainly seems like everything today is funneling through what Fannie and Freddie are able to lend at and that people are seeking anywhere from a 100 basis points to 150 basis points spread over that to get into this market. So, if they are landing at 5.25, seems to me that the market is at 6.25 to 6.75 and that's where people are able to transact with an ease of comfort about this economy and it's... whether it's slowing and at what pace. So I don't see that I guess I read the same research you do, [inaudible] looks like volume is up $5 billion a month which is about an average kind of pace in the year if you take out the LBOs. So it seems like transactions are getting done and seems like to us Fannie and Freddie are there, lending that of stabilized number, and proceeds are tightening in terms of what their coverage is are, so people have to put more equity. Seems to me in past experience when more equity is required, pace slows down, bid ask, trades lengthen out. Translated, I think it would be very tough for us to get our portfolio sales to be done today at the cap rate we did just 90 days ago. So, I think we've got a great execution in that calendar. Anything else you would add, Mark?

Just... a general commentary on the bid ask, I think the bid ask is nearing although there is still sellers out there that maybe the bid ask is 6% to 7% spread going in, I would say the last 30 days, the top end on the ask is they are coming off pretty quick, were as Tom mentioned before, earlier in this process, it was a slow process of negotiating the deal down, but... so I think they are narrowing, but there is still some people putting assets out there for sale at pretty high prices but they're happened to come off those, but the sellers seem to be getting a little more realistic now as Tom mentioned, because they are looking the ruby mirror and they are realizing that they can’t sell those assets but they could have done six months ago.

And on your point about portfolio sale, I think you are right on a point there is even when we are transacting our portfolio, we found a lot of buyers with a $100 million to $200 million of equity on a levered basis meaning they could buy $1 billion in the marketplace today. But you don't find a lot of people with $1 billion out in the marketplace, and so large portfolios are going to be hard to get done or they are going have to be club deals to get done. Anything under $1 billion is probably something that you would have interest from a number of buyers and probably get an auction going. Anything above that it appears to us that there is very, very few one-off buyers and so they translate to clubbing and that means clubbing both ways gets a little bit of a beating.

Wasn't sure which clubbing you were talking about there.

Yes. I understand. You're always bright. You will pick it up.

I guess, any color you guys can share at this point on the Addison JV discussions you mentioned that this was going to be one of your near-term focuses. Anything you could share there?

I would say, yes. We have just gotten the money nailed down from the city with a sort of the numbers have been a little bit influx until we had that result. I think that's a significant priority for the rest of the year.

We got to be excited that for those of who are going to be DOI [ph] on the call later this week in Dallas, we are going to have a ground breaking ceremony on Thursday and should have a prominent section of the Wednesday Dallas morning new business page on this development. So, the city is turning out in mass. It's a defining moment for a small city, suburb of Dallas to bring the property of this caliber on line. So, I think that helps us, second, we have already leveled the significant number of the apartment homes and that's gone well and believe it or not even a demolition on an green play. So I think property is going to get a lot of press, we are in control of a, the development timing, the markets in the upswing. We think it's a good time to be knocking on doors, but don't feel compelled that we have to; it is a multi-based, multi-year deal.

Okay. Thank you.

Our next question comes from Richard Ole [ph] with ABG Investments. Please go ahead.

Hi, guys. Just a couple of questions. Hopefully, I didn't miss them, I had to hop off the call for a minute but have you guys looked at repurchasing any of your unsecured notes in the market. A couple of your, I guess competitors or other REITS have kind of nibbled at that. And it seem like there were at some point trading at the good discount. I have a follow-up also?

We bought back in February; space amount of the bonds was about $67 million bought them at a yield to maturity in the high 6s. And bought them about $4.5 million discount phase.

Okay. The next question is did you guys provide an outlook for FFO and core NOI for 2Q?

No, we did not. We are trying to get away from doing quarterly guidance. So we updated the year guidance but don't have anything for 2Q.

Okay. And then the follow-up question, Tom, you kind of gave a shout out earlier about I guess the self-insurance. And I think the question was relating to in part one of your peers excludes what they term casualty and losses from the same store not necessarily from operating expense but from the same store comparison and I guess you can approach it to... and I think in part, I don't want to speak with them but in part their argument was that with this core trend if you have a large sort of unpredictable one-time event and maybe you can just give me your take on that?

I think everybody has their own right to make their own decision. It just struck me that, you wouldn't be excluding that, it seems like a cost of doing the business and maybe one of those things that you disclosed how much self-insurance risk you do take. And how you expect to manage it, and the rationale behind it. I am not critical of anyone; I just haven't heard that before. It caught me by surprise.

Right. And just to follow that up, how much of an influence on the expense rate this quarter was the comparison of somebody not throwing a toaster in the bathtub this year versus last year?

Well, we hopefully we can stop smoking and sleep with the cigarettes these days.

This is Jerry. Given where our other expenses lined up like I said utilities were flat, repairs were up 3.5% to 3.8%, personnel was up 4%, taxes were up 4.2%, ad marketing was down 1.8%. If you had flat insurance, we probably would have been somewhere in that 3.5% to right about 3.5% growth range.

Okay. That's helpful. Thanks.

At this time I’m showing no further questions in the queue. I would like to turn the call back over to management for any concluding remarks that they may have.

Well, thank you operator and thank you all of you for participating on our call today. We hope to see you in June 2 in DC, which I think you will get to me, a significant member of the management team and towards some fabulous assets. So we look forward to seeing you there and with that wish you the best of luck for the rest of the earnings season and take care.

Ladies and gentlemen, this does conclude the UDR Inc. first quarter 2008 earnings conference call. ATT would like to thank you for your participation, and you may now disconnect.