UDR, Inc.
Q3 2012 Earnings Call Transcript

Published: 29 Oct 2012

[Operator:]

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

[Chris Van Ens:]

Thank you for joining us for UDR's third quarter financial results conference call. Our third quarter press release and supplemental disclosure package were distributed earlier today and posted to our website, www.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. I would like to note that statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in this morning's press release and included in our filings with the SEC. We do not undertake the duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions and follow-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to our President and CEO, Tom Toomey.

[Tom Toomey:]

Thank you, Chris, and good morning everyone. Welcome to UDR's third quarter conference call. On the call with me today are Jerry Davis, Senior Vice President of Operations, who will discuss our results, as well as senior officers, Warren Troupe and Harry Alcock who will be available to answer questions during the Q&A portion of the call. My comments today will focus on four topics; first, broad operating trends and quarterly results; second, an update on our external growth activities; third, an update on our CFO search; and finally, the expansion of our UDR MetLife II joint venture announced this morning. Following my comments Jerry will provide additional commentary on operating results and emerging operating trends. During the third quarter our business continued to operate at an elevated level, driven by strong organic rent growth as well as slightly higher occupancy rates. With the fourth quarter upon us we have entered the seasonally slow time of year for the apartment demand. Nonetheless good multi-family fundamentals continued to generate tailwind for the industry and we expect will do so for the foreseeable future. This is especially true for UDR, which owns a portfolio increasingly concentrated in markets that exhibit above average job growth, low single family home affordability, a high propensity to rent and in general limited new multifamily supply pressures. In the third quarter of 2012, core FFO per share of $0.33 increased by 3% year-over-year. Strong same-store revenue and net operating income growth of 5.5% and 6.4% respectively, as well as good execution in our non-same-store portfolio, drove the improvement. Second an update on external growth activities. Green lighting opportunities that increase the company's net asset value per share remain a top priority, although we are cognizant of balancing this necessity against AFFO per share growth and our intent to operate the company at a lower leverage profile. The following is what we currently see in the marketplace. First, acquisitions; we continue to look for opportunities to expand in our core markets, but pricing for the most well located assets is full right now. We will consider buying again when we find the right property in the right location at the right price and can fund the acquisition with appropriately priced capital in the context of our lower leverage profile. Second, development; the weighted average spread between expected stabilized yields and spot cap rates; our in progress pipeline is roughly 150 to 200 basis points. Historically, the spread has been closer to 100 to 150 basis points. As such development remains as a source of significant value creation. To be clear, we expect our developments to generate stabilized yields that are averaging 6% to 6.5%. These are not represented with the yields we expect upon delivery and lease up. With 51% of our $792 million development pipeline already funded, approximately 75% will be delivered by year-end 2013. We are actively evaluating new opportunities as well as those within our wholly owned and JV land bank. We finally redevelopment, our pipeline encompasses five projects with a total anticipated spend of $279 million, 34% of which is expected to be completed by year end 2013 and 23% of which has already been funded. Redevelopment continues to offer superior risk reward paid off versus other external growth opportunity. But our opportunity set is limited as viable candidates are inherently tied to the size and scope of our existing portfolio. We have identified several redevelopment candidates in our core markets that we believe can achieve our targeted 7% to 10% return on incremental capital invested. We will update you should these move beyond the drawing board. We continue to target annual development - redevelopment deliveries that total roughly 5% of the enterprise or $400 million to $600 million. Although our ability to make good on this goal can fluctuate from year-over-year depending on the cost and availability of capital. Next, we are making progress in our search for a new CFO, a shortlist of candidates has been formed, which we are [waiting], as I indicated in last quarter we understand the importance of filling this key position, but UDR possesses the necessary skill set to wait for the right hire. Finally, this morning we announced that the company its ownership interest in four operating communities and two land parcels in our UDR/MetLife I joint venture in addition to $10 million in cash, for an increased ownership interest in The Olivian, an A-plus high-rise building located in downtown Seattle. UDR now owns 50% of The Olivian and the community has been contributed to the UDR/MetLife II joint venture. Importantly, this swap of ownership interest increased our presence in core market Seattle where long-term multi-family fundamentals appear advantageous, conversely it reduced our exposure in non-core markets such Tampa, Charlotte, Houston and Chicago. Additional details can be found in our third quarter press release. With that I will pass the call over to Jerry.

[Jerry Davis:]

Thanks, Tom. Good morning, everyone. We're pleased to announce another strong quarter of operating results. In the third quarter same-store net operating income grew 6.4%, driven by 5.5% year-over-year increase in revenue, same-store expenses increased by 3.6% year-over-year primarily driven by higher real-estate taxes, same-store income per occupied home increased by 5.3% year-over-year to $1402 or same-store occupancy increased by 10 basis points to 95.8%. Sequentially, third quarter NOI increased 0.9%, driven by 1.8% increase in revenue against expense growth of 3.6%. Generally, our third quarter results followed the normal seasonal curve, we have become accustomed to over the years. We have reiterated throughout the year 2012 continues to unfold in line with our expectation. In the third quarter effective rental rate increases on new leases at our same-store communities increased by 4.3% on average. Renewal rate growth remains comparable versus previous quarters averaging 6.5%. Accounting for approximately 25% of same-store NOI, New York, San Francisco, Dallas and Boston were our best performing markets during the quarter. These markets delivered weighted average revenue growth of 8.9% year-over-year. Non-core markets such as Sacramento, the Monterey Peninsula, other mid-Atlantic and Norfolk struggled and generated less than 8% of our same-store NOI in the third quarter. Resident turnover moved up slightly to an annualized rate of 66% in the third quarter, 170 basis points higher than last year at this time. Importantly, turnover growth decelerated as the quarter progressed and it appears that this trend has continued into the fourth quarter. Additionally, the pace at which we have been able to refill move outs with high quality new tenants has now slowed. Turning to the performance of our non-same-store wholly-owned communities 2236 homes or approximately 42% of our non-mature pool were stabilized in both the second and third quarters of 2012. These eight communities generated sequential revenue growth of 1.9% during the third quarter, slightly above our same-store sequential growth of 1.8%. The spread narrowed versus what we reported on the second quarter call as a result of high growth communities transitioning into our same-store portfolio this quarter. Our non-same-store communities now contribute 17% of NOI, down from approximately 24% last quarter. By year-end we expect this to decline to roughly 15% of NOI. Same-store [reported] 1,913 homes entered our quarterly same-store portfolio, including our initial New York acquisition 10 Hanover Square, as well as other high growth communities in San Francisco and Boston. Another 437 non-mature homes will enter our quarterly same-store portfolio in the fourth quarter. By year end 2012 these additions should increase our same-store income per occupied home to roughly $1,430 all else equal. Additional details can be found on our attachment 7B and 7C of our quarterly supplement. Moving on I'd like to address some of the bigger picture questions we fielded during the September conference season regarding multi-family fundamentals. First new multi-family supply, nationally new multi-family supply still appears to be contained versus historical norms despite the most recent permitting data from the census bureau. We gauge the potential impacts of new multi-family supply by how much product was expected to come online in our markets and more precisely our submarkets. If we include every submarket in our core capital warehouse markets where we have at least one community we find that our portfolio will compete with approximately 40% of the total new multifamily supply that is expected to be delivered into these markets over the next two years. However, as we have different levels of exposure to each sub market, a more meaningful measure of the potential impact of new supply in our portfolio is to weight those submarkets we operate in by our respective unit counts in them. This analysis indicates that our portfolio will effectively compete with only 22% of the total new multi-family supply that is expected to be delivered into our core and capital warehouse markets over the next two years. This number is far less concerning than headline expectations would suggest. Second, potential effect that a recovering single-family housing market may have on our business. Many believe that a continued recovery in the single-family housing market will translate into a difficult market for apartment. Two thoughts on them, first, increased housing demand will likely be driven by stronger economy, which suggests better employment growth, both of which are key drivers for continued growth in multi-family demand. Second, while move outs for home purchase will likely increase in conjunction with the single-family recovery, return to the [expresses] of the mid-2000 appears remote. In addition UDR should be better protected against move outs to single-family home purchase and historically was the case as over the past 5 to 10 years the company has transitioned its portfolio into urban locations in coastal markets with low home affordability and a higher propensity to rent. Turning to most - more recent trends, renewal increases spent out through December have averaged 5.7% and we expect to capture most of this increase as is generally the case. With occupancy holding near 96% we're expecting strong fourth quarter results. Finally, I'd like to discuss the change we implemented and how we account from bad debt expense that aligned us more closely with our multi-family peers. Majority of our former residents that had an outstanding balance and less than $1,000 at move outs paid us with a 90 days after vacating. Under our previous policy, cash accounting demanded that we write these balances off immediately upon move out. To better reflect the economics of our collections we have switched to an accrual based method of accounting for bad debt, which resulted in a benefit of $1.9 million and NOI during the quarter. This NOI is not included in our same store results but is included in the development communities and other line item on Attachment 6 in our supplement. Moving forward, we anticipate that an improved collections process will generate an additional $250,000 to $500,000 of NOI per year which will help our same store results. With that I'd like to thank all of our dedicated associates in the field and at our corporate and regional offices for another good quarter. Operator, we're now ready for Q&A.

[Operator:]

Thank you, sir. (Operator Instructions) Our first question is from the line of Eric Wolfe with Citigroup. Please go ahead.

[Eric Wolfe:]

Thanks, first question is just on the Olivian transaction, could you just walk us through how you thought about the valuation in terms of cap rate in growth prospects for Olivian, Seattle versus the other four assets in the non-core markets. Just trying to get a sense for what do you think the appropriate cap rate [expected] between those for core and or course non-core market?

[Tom Toomey:]

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

[Eric Wolfe:]

Sure, I guess, just to put another way I guess do you say that you're willing to accept the - a little returning in Seattle because it's a core market and you elect that positioning versus those other markets or on a net neutral basis you're trying to swap out equal return assets in your non-core markets, the same return in your core markets.

[Tom Toomey:]

Yeah, I think more of the latter Eric, our personal viewpoint over the long term would be that Seattle urban product at the high rise is probably a better long term assets than you would a Tampa or Charlotte suburban product and certainly and that's our view over the long term, so a more of the latter in your argument.

[Eric Wolfe:]

Okay, and then just question, it sounded like some of your remarks that you really haven't seen much rise in cap rates yet but in obviously as [rents] flow slows you'd expect that if you summarized and why don't you think you've seen it yet or is that more of like a 2013 event?

[Tom Toomey:]

I'll let Harry, who's joining us from Boston today on the call to give you an update on cap rate.

[Harry Alcock:]

Eric, this is Harry, you're right, cap rates have not moved buyers, it mean first of all our business fundamentally continues to be good. So buyers are still I think continue the NOI growth. Secondly, you still have a little bit of a balance between buyers and sellers and still a lot of capital space in these fields and third interest rates continue to be low and even lower. And there's no reason to expect a significant change in the future and obviously as you continue to look forward and you have more of this heavier NOI growth behind us and if there is a change in interest rate to put that time to see a change in cap rates, inevitably that's going to happen but we don't see it happening anytime in the - at least in the next few quarters.

[Eric Wolfe:]

Okay, great. Thank you.

[Operator:]

Thank you our next question is from the line of Jana Galan with Bank of America. Please go ahead.

[Jana Galan:]

Thank you, good morning. Jerry, can you provide the new lease semiannually increases for October?

[Jerry Davis:]

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

[Jana Galan:]

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

[Jerry Davis:]

You know, we're really not prepared at this point time to give guidance towards revenue growth in 2013.

[Jana Galan:]

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

[Jerry Davis:]

Absolutely, yeah, what happened in California in great part last year's we've benefitted from profit adjustment down, where valuations were allowed to go down to - from where we had originally purchased the properties to where the actual values were. Now what happened as valuations have continued to go up over the last 12 to 15 months, you're not - you really don't have a [proper] 13 ceiling of the 2% on the real estate taxes, so what you're really seeing is benefits that we were able to achieve last year in third quarter and you can't replicate that.

[Jana Galan:]

Thank you very much.

[Tom Toomey:]

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

[Operator:]

Thank you. Our next question is from the line of Dave Bragg with Zelman & Associates. Please go ahead.

[Dave Bragg:]

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

[Jerry Davis:]

Absolutely, yeah, Orange County actually decelerated as far as year-over-year growth and through the first six months of the year, we were up about a 7% close to 7%. And in the third quarter I think we decelerated down to growth and revenue 4.9, anything can happen there Dave is we probably got too aggressive, when we did get too aggressive on renewal increases that we sent out beginning back in May. And it turned out that more of our residents were unwilling to accept that rate, resulted in turnover spiking up in Orange County was 11% higher than it was last year and it kept a lid on occupancy growth. So we ran it with a little lower occupancy at 94.8% than I would have liked and that brought it down [resets] going back adjusted some of our renewal increases got an occupancy backup into the mid 95 in Orange County, and we feel like we're back on pace.

[Dave Bragg:]

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

[Jerry Davis:]

Yeah, a lot of it was in new lease rates, we were running throughout the second quarter at in the high fours to low fives even in July on new leases we were getting about six and then we've had to drop it down to the mid threes, then spent just to gain the occupancies and when I look at the renewals that we were spending now in our - or achieving in Orange County, throughout the quarter the two months we were getting about 6.5% and then we took it down in September to 4.9% and then October so far to 5%.

[Dave Bragg:]

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

[Jerry Davis:]

I think it's locale for us we'll probably be on above average -- perform about in 4Q as well as when we got into next year. You know I think the job growth as well as the recovery of rents that are really lagging the rest of the country are going to help. There's limited new supply that's come in directly at us in any given market in Southern California. Like you said Orange County this past year in last 12 month had about 30,000 jobs added, which is very close to its long-term average. We think that could decelerate slightly next year but not much. LA, LA is picking up pretty well and even though got a little bit of supply coming at us in Marina del Rey and a little bit downturn we think demand is more than sufficient. Now, one other thing I'll tell you, we're working on we've got rehabs that's going on in Southern California, both at in Orange County at Villa Venetia and Pine Brook where we've done a good job of pushing rates there. We're getting about $520 rehab premium on the 56 units we've turned down there. So there is definitely demand for a higher grade property there. At The Westerly which is formerly Marina Pointe up in Marina del Rey is completed about 315 of the unit interiors as well as the bulk of the amenities and units or building exteriors. We've able to get about $450 premium on those.

[Dave Bragg:]

That's helpful. Thank you.

[Jerry Davis:]

Sure.

[Operator:]

Your next question comes from the line of Andrew Rosivach with Goldman Sachs. Please go ahead.

[Andrew Rosivach:]

Good morning, guys. I'm just curious, Tom, you went through the discussion of development pipeline and the spread the spot cap rates when I look at your NAV or your applied cap rate, the spreads and it's good. And If I fund in my model year development pipeline with equity, it doesn't spruce the accretion and I guess I'm wondering on the back of that and as you thought about other ways of funding your development pipeline especially potentially asset [base].

[Tom Toomey:]

Yeah. Andrew, certainly we've looked at it carefully and both in terms of sizing the development activities and redevelopment activities in and our conclusion is this is that during 2013 we have approximately $700 million in some phase of lease-up and clearly that won't deliver much NOI for '13 but will rebound substantially in '14 as those assets are leased up so. I think what you're going to say as, pose a little tick up in our overall leverage in the first couple quarters of 2013 and then I think it comes substantially down as the NOI gets delivered on those assets. So we see it as both good long-term investments in the development activities and clearly for delivering that fixed or better compared just spot cap rates for lot of these assets be low 4s mid-4s that the NAV creation is there in a long-term and that in a short-term it may be dilutive to earnings and then that's part of a trade we're willing to make, but we do believe the long-term NAV accretion is there.

[Andrew Rosivach:]

And just to paraphrase it sounds like you may be comfortable funding with the remainder of your development pipeline with a combination of retained cash and debt and in the EBITDA would overtime such as that the EBITDA becomes more manageable.

[Tom Toomey:]

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

[Andrew Rosivach:]

Thanks for that.

[Operator:]

Our next question is from line of Michael Salinsky with RBC Capital Markets. Please go ahead.

[Michael Salinsky:]

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

[Tom Toomey:]

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

[Jerry Davis:]

Yeah, Mike. And we read your note and pretty much agree with your math and the assumptions that you came up with, the thing to consider when you're looking at our fourth quarter especially on the revenue. Is it in 4Q11 we ran occupancy at our same store portfolio of 95.1%, because last year we had pushed the rents hard [fetching] turnover occurs and had difficulty reloading rates that we like. This year our expectation to run the fourth quarter in the high 95s like we have the last several quarters as though you're probably going to be looking at I would say 60 to 80 point increase year-over-year in occupancy that will help by get into that midpoint.

[Michael Salinsky:]

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

[Jerry Davis:]

Actually, in third quarter when I compare to the fourth quarter last year I'm not talking to trailing 12 which is an annualize quarter is that we typically give it. It was 170 basis point higher than it was in third quarter of last year at 66.4% then if you look at the nine month annualized, we're currently running about 270 basis points over the last year at 57.2 because 4Q is typically a very low turnover quarter because we have low number of lease exploration. I would think we're going to get down into that 54 or 55 range, which will be 200 to 300 basis point higher than it was to the full year of last year. What we've really seen is probably from about March through July or August our turnover is running 300 to 400 basis points higher than it was last year. In the past few month, we've seen a normalize back down to the point it's virtually flat, with the based on the same properties we own last year so. We thank we've kind of gotten through that layer of residence that had moved in a few years ago. And we were at trough rates, and as we increased rents on them them 6% to 7% over the last couple years, they've gone back to the asset class they were used to living in. And we've reloaded with a higher caliber of residence that we're optimistic will be able to stay with us and we'll see flat turnover going forward. Okay. I can tell you I had just couple of stats is typically asking our net income is still going to have 17% range in our average household income today is about $91,000 on our same store portfolio that's an indication I think. If the quality of the same store portfolio is much higher than it was in years past when that number was more in the 80 range. Then on LA and fairly year ago we have seen LA improved somewhat. In the last quarter again we did push rents there similar to what we did in the Orange County and you know we start turnover there actually go up about 10% also. So kind of the same issue that I said it Orange County we got little aggressive push too hard and it took us too late in the quarters to reestablished their occupancy. Today LA is running about 95.5% is a cost and you know we are optimistic that we have the right things in place and the right strategy to push that forward.

[Michael Salinsky:]

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

[Jerry Davis:]

I didn't, but I will. They were up 9%. Now we were hit by the prop 8 readjustment in California and then when you look in the some down market predominantly Texas as well as Florida evaluation this year turned and higher we had expected.

[Operator:]

And your next question is from line of (inaudible). Please go ahead.

[Unidentified Analyst:]

Good morning. On your same store performance in New York which is just essentially Hanover how did that 12% same store revenue growth at 10 Hanover compared to your initial expectation when you bought that asset.

[Tom Toomey:]

It's probably about in line. You know it may be don't want to hear better but you know we expected only to go and right after and give the increase from what private owner was charging we quite a bit of that as we have gone throughout the year and then there was some concessions that were recovering that have gone away. So there is a little bit I had but not markedly.

[Unidentified Analyst:]

Okay. And on your development pipeline you guys added stabilization date, information, and it looks like most of the five quarters out usually when we look at year this quarter out, usually when we look at your disclosure for your peers it's two to three quarters up. It had just conservative them on your part that (inaudible) by the type product rebuilding but what's causing five quarters for stabilization.

[Tom Toomey:]

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

[Harry Alcock:]

Sure. The period that once the last unit is whoever don't take roughly five quarters for the property it become fully occupied and for all her most of the lease-up concession to fully perform, which is more reflective of the real stabilize run rate to the asset.

[Unidentified Analyst:]

Okay. There's still some occupancy stabilization on?

[Harry Alcock:]

No.

[Unidentified Analyst:]

Okay. And then last question Tom, you can't talk about this in your prepared remarks. When you look at 2013 how would rank your external growth opportunity between acquisition and development and I guess further activity with the MetLife JV.

[Tom Toomey:]

You know I think it's premature to rank on, but I will tell you I think the acquisition environment are shares or trading today would clearly be a very challenging to find anything that would be a creative. Yeah today's prices then containing ourselves within our leverage metrics and so you probably see us continue to look at a redevelopment platform followed by a development activities and (inaudible) come out. But I think it's going to be the tough acquisition environment for us and we were trained and confined where we want to keep leverage of the enterprise. With that being said I think Jerry has got a very good year coming up in 13. We still see a good strong fundamentals and so the core of the business in operation looks like it's going to have good year mixture.

[Operator:]

Our next question comes from the line of Karin Ford with KeyBanc Capital Markets. Please go ahead.

[Karin Ford:]

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

[Jerry Davis:]

Yeah, we will always expect to get sequential growth. I mean we're still raising rents, I think your occupancy level is probably be flattish for most of your growth, is really going to come more through the rent side.

[Karin Ford:]

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

[Jerry Davis:]

I don't think that's really changed, although I would tell you we're still under midst of doing our budget and so we don't have a firm number yet, but I don't think any of the assumptions I have back then have changed materially.

[Karin Ford:]

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

[Warren Troupe:]

Yeah, hi. This is Warren, yes it was. It's a recurring benefit but, as we said it's dependent on how many buildings are held in our TRS at any time.

[Karin Ford:]

And was that included in your previous guidance?

[Warren Troupe:]

Yeah. So we expected the fourth quarter benefit will be somewhere what we've realized in the third quarter, but (Inaudible).

[Karin Ford:]

Okay, thank you.

[Tom Toomey:]

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

[Operator:]

Thank you. Our next question is from the line of Michael Bilerman of Citi, please go ahead.

[Michael Bilerman:]

Yeah, good morning. Just sticking, just for a moment on guidance, so the 134 to 139 stands, Tom I think you were talking about everything being at the mid-point so with the buckle 1 done in the first 9 months that sort of leaves you 33% to 38% as implied fourth quarter guidance and I guess if you did 33% in the quarter which was up - propped up a little bit by this accounting change, so let's just call it 32%. How do you get from 32% up to a 33% to 38% range or 35% - 36% as the midpoint.

[Tom Toomey:]

I'll start out with Jerry and finish on as little bit.

[Jerry Davis:]

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

[Michael Bilerman:]

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

[Tom Toomey:]

This is Tom. A couple of things, Michael, with respect to the third quarter you're also taking a charge for acquisition expense of about $1.1 million, so we probably won't be buying anything in the fourth quarter, that'll be part of it. And the second aspect on your guidance of the range of 33% to 38%, the consensus on the street is about 136, we see it pretty much that way ourselves and I think we'll really leave it at that.

[Michael Bilerman:]

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

[Tom Toomey:]

We see it in a number of different ways. First, it's not really for us to define where leverage should go. I think lower in the long-term directional is where we're headed and other companies use of ATM seems prudent if they think they are selling stock above NAV. Right now we would probably not be selling stock and we haven't since May added, because we don't believe we're trading anywhere near our NAV estimate. So I don't see the use of the ATM is a way to lower the leverage. The way I see it is unless the enterprise development redevelopment activities mature that will naturally deleverage us as well as operating cash flow growth. So I am not trying to chase the peers if you will. I think today we're right about a [6-9] on debt to EBITDA and all the other metrics look like we're at average or below average, and I think this tree will be prudent and our judgment of this as they see us consistently bring that number down over time. So leverage, that's kind of how we think about it at this present time.

[Michael Bilerman:]

Here you have made a comment about the leverage is going to move up in the interim, where did that [6-9] go in your model as you I guess fund the development the development has not yet stabilized. I think that's what you are particularly referring to?

[Tom Toomey:]

Yes, we are and I think in the first two quarters the next year (inaudible) happen and then rapidly start coming down as the NOI from that development redevelopment activity comes online. As you know we're delivering $700 million, which is practically no earning for us in '13 and then '14 has a substantial uptick. So that's how we see it unfolding. In the interim we'll continue to monitor the share price in the sales market and see if we can affect the positive direction on leveraging that way, but we're comfortable with it drifting up slightly for a couple of quarters as people can clearly see the long-term path is towards lower leverage and we think that path is within our control.

[Michael Bilerman:]

Just [surfing] on the exchange this morning, what was the gross value, I know you paid them $10 million in cash to even it out, but what was the gross value including any share of debt between the two?

[Tom Toomey:]

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

[Michael Bilerman:]

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

[Tom Toomey:]

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

[Michael Bilerman:]

Okay, thank you.

[Operator:]

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

[Tom Toomey:]

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

[Operator:]

Ladies and gentlemen this concludes UDR's third quarter 2012 conference call, you may now disconnect. Thank you for using ACT Conferencing.