UDR, Inc. Q3 2008 (Qtr End 9/30/08) Earnings Call Transcript

Nov. 4.08 | About: UDR, Inc. (UDR)

UDR, Inc. (NYSE:UDR)

Q3 2008 Earnings Call

November 4, 2008 1:00 pm ET

Executives

Larry D. Thede - Vice President - Investor Relations

Thomas W. Toomey - President, Chief Executive Officer, Director

Jerry Davis - Senior Vice President - Property Operations

W. Mark Wallis - Senior Executive Vice President

David L. Messenger - Chief Financial Officer

Warren L. Troupe - Senior Executive Vice President, General Counsel

Analysts

Analyst for Michael Bilerman - Citigroup

David Bragg - Merrill Lynch

Dustin Pizzo - Banc of America Securities

Jonathan Habermann - Goldman Sachs

[Michelle Coe] - UBS

[Simiti Yupatia - CR Capital Markets]

Jeffrey Donnelly - Wachovia Capital Markets, LLC

Mike Salinsky - RBC Capital Markets

[Mark Ziffert] - Oppenheimer & Co.

Richard Anderson - BMO Capital Markets

Hondo Lee Ute

Operator

Welcome to the UDR third quarter 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 being recorded today Tuesday, November 4, 2008.

I would now like to turn the conference over to Mr. Larry Thede, Vice President of Investor Relations.

Larry D. Thede

Thanks to all of you for joining us for our third quarter financial results conference call. Our third quarter press release and our supplemental disclosure package were distributed yesterday and posted to our website. In the supplement we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.

We’ll begin the call with management comments and then open the call to your questions.

I’d 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 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 Tom, let me mention that we’re hosting a Los Angeles Property Tour on November 18, the day prior to the NAREIT Conference. You can find the sign-up form on the Investor Relations tab of our website and please call me if you have questions.

I’ll now turn the call over to our President and CEO, Tom Toomey.

Thomas W. Toomey

Thank you again for joining us today to discuss our third quarter results and our tactics during these volatile times. Joining me on the call is Mark Wallis, Warren Troupe, David Messenger and Jerry Davis.

Today is a very important day as we finally arrive at the conclusion of the election and begin to answer the question of what policies are going to be implemented over the next four years. For those who are a little less intense and cannot bear the media coverage of the election tonight, the movie Get Smart comes out on DVD.

Overall the third quarter was a good quarter. Our operations performed on plan in spite of deteriorating fundaments. We raised over $300 million in equity and debt and recently renegotiated a 2010 maturing credit facility extending the maturity to 2018 increasing the size at a blended rate of 4.8%. This proves that even in a volatile market capital is available for well-capitalized companies who can move quickly.

We completed the deployment of our exchange fund with the acquisition of five communities for $286 million. We also completed over 1,000 homes or nearly $200 million in development and redevelopment. Lastly, we finalized the special dividend at $132 million to be paid in January 2009.

On the subject of the economy it is very easy to be caught up in the minute-by-minute data but I might suggest a couple key points. Yes, the capital markets are volatile but with unprecedented action taken by the government and the potential for more to come on so many fronts, we have to keep in mind that these actions will take some time to change the course of our economy. But they will change the course.

The recession, they all come and they all pass. No segment of the economy will escape. Over the last 60 years we have endured 10 recessions and they’ve lasted anywhere from eight to 16 months each. When our management team backs up and looks at today’s economic environment, we realize we cannot predict what will happen but we can prepare. While it might be easy to sit back and let the recession and capital markets run their course, we have been adjusting our tactics to ensure we manage the capital markets and recessions to prepare UDR to take advantage of the inevitable opportunities.

Let me turn the call over to Jerry Davis and the rest of the team to discuss specific areas.

Jerry Davis

While our third quarter operating results of 3.4% revenue growth and 6.6% expense growth are not as strong as previous quarters, they are what we expected and what we previously communicated they would be. Revenues will continue to moderate in our market as the economies worsen. Expenses were up quite a bit this quarter due to very low comparisons in the third quarter of 2007. That being said if you look at our year-to-date numbers, our revenue was increased 4.1%, expenses were up 1.7% and NOI has grown by 5.3%.

I would like to point out that we do see further deceleration in revenue growth in the fourth quarter and we once again will be challenged in expense growth due to very low comparisons from the fourth quarter of 2007. These are related to low insurance expense as well as favorable real estate tax adjustments we took in the fourth quarter of 2007.

When we look at our revenue growth in the third quarter of 3.4%, it is important to realize that Florida which makes up 17% of our same-store NOI experienced a 1.5% revenue decline. If you throw out Florida’s results, like I’m sure Al Gore wishes he could have done eight years ago, our revenue growth was 4.7%.

Our strongest markets continue to be in Northern California where job growth has been 1.1% to date and new supply has been limited. While we have felt a softening in Southern California, we continue to feel that our superior locations at the right price points have enabled us to continue to outperform the market in Orange County. Our coastal locations west of the 405 Freeway continued to be where people want to live in Orange County. I’d like to remind everyone that the average Orange County occupancies have historically not fallen below 93%.

Prior to moving to Denver a year ago, I ran this portfolio for UDR. I can tell you from personal experience that besides superior locations at the right price point and a very seasoned operating team running those properties, we have continued to invest in these properties both on their exteriors and interiors. With the average property in Orange County being over 30 years old, and that’s not just us, that’s the entire inventory of the County, and most of the product being privately owned we are confident that our properties are in better condition than our competition and we will continue to outperform the market as we have over the past four years.

Finally, Florida continues to suffer from an oversupply of housing, both apartments as well as single family. While we have begun to see some encouraging signs recently in Tampa, we are concerned about future job losses that could hit all of the Florida markets.

Occupancy for same-store communities for the third quarter was 95.1%. That’s 10 basis points higher than last year. 13 of our 22 markets were the same or higher than last year. Also on our occupancy report that we produce weekly, last week our same-store communities were still at 95.1% physically occupied which is flat with the same week last year.

Now to the expense side. We reported growth this quarter of 6.6%. This increase was primarily caused by an increase in insurance expense of 59%. Because we self-insure up to a cap, we can experience quarterly swings in our insurance experience based on our loss experience. Last year in the third quarter we had very low losses while this quarter we had several fires as well as some claims from Hurricane Fay in Florida. I would like to point out that on the year-to-date basis our insurance expense is actually down 27%. Insurance makes up only 7% of our total expenses.

During the quarter the remaining expense categories were up a combined 3.8%.

Marketing costs continue to decline as we see more and more traffic and ultimately leasing and move-ins coming from Internet sources. In September we saw 55% of our move-ins originate through the Internet. This is up from 43% last September. Our website www.udr.com is on pace to have 1.6 million unique visitors this year. This is roughly double what it was in 2007. We’ve continued to work hard to make it easier for our customers to find us and do business with us both through www.udr.com as well as our mobile sites, through social networking sites such as MySpace and more recently on our iPhone enhanced website.

Now looking to turnover. Our resident turnover is flat for both the year and the quarter. For the quarter it was 67.2% and year-to-date it stands at 60.2%. Also, move-outs to home purchases have continued to go down. In the third quarter it was 13.1%. That compares to 15.5% in last year’s third quarter. The average rent of a UDR apartment is roughly 59% the mortgage payment on an average entry-level home.

Looking to the future, we know we’re facing a recession. That being said I’d like to point out a few things.

First. Our properties are well located in markets where the price difference between renting and owning remains wide.

Second. We have a very experienced operating team running our properties. Each of our area vice presidents has well over 20 years of experience. They have operated through challenging economic cycles and they know how to adjust their strategies.

Third. We have focused much of our technology efforts on the front end of our business. We have the best website in the industry and we are constantly working to find new ways to drive more traffic to www.udr.com.

Finally. We have and will continue to invest in our real estate. Over the next year we expect to see private owners who control over 75% of the national apartment supply starve their properties of capital. We believe this will enable us to better hold on to our existing residents as well as attract new customers.

In closing, I’d like to thank my fellow associates for all of their dedication to making UDR top performing in the REIT group.

Now I’d like to turn the call over to Mark.

W. Mark Wallis

I’m going to cover our strategy of strengthening the portfolio which involves acquisitions, dispositions, development and redevelopment. If you have the earnings supplement in front of you, attachments 8 through 10 cover the data I’m going to be talking about.

First I’ll discuss the acquisitions that were closed in the third quarter. We successfully completed our acquisitions that we had targeted to deploy the 1031 exchange funds that were generated from the $1.7 billion sale that was closed this past March. We added homes in San Jose, Mercer Island and Austin. These are markets that are still showing decent rent growth and have traditionally shown long-term job growth with their employment based on strong tech companies and state government.

We also closed on two pre-sell assets in Phoenix and Tampa. These were contracted for over two years ago. These development pre-sells were structured in such a way that we were able to utilize them in the 1031 exchange without having to spend new additional funds in that exchange.

In addition you’ll note we were able to purchase a fully entitled development site near downtown Los Angeles. This is a future development. We’re currently making tweaks to the unit designs and will commence construction only upon successfully arranging construction financing.

Second I want to speak to our development pipeline. Please note that we’ve reorganized the attachments 8 through 11 in order to give a better and hopefully clearer picture of development activity.

[Mark Caldwell], who heads our development now, and I have experienced several downturns in the market and those downturns have made a significant impact on development including the severe S&L banking crisis that occurred in the late 80s and early 90s. While there are differences in that downturn compared to this one, that experience taught us to keep your development pipeline as scalable as possible. Now what does that mean?

First. Have centralized control of your development activities. Don’t build up a big overhead in decentralized markets. This makes it very easy to stop building in a particular market and takes away the temptation to keep building in a market to cover overhead in that city and keep the office open. Our strategy at UDR has been to keep our development activities concentrated in our Dallas office. Really with today’s technology and construction management software we can very effectively manage development from our central Dallas location. This gives us more flexibility to right size our development efforts.

Second. Warehouse as much of your land inventory as possible. You’ll note on attachment 10 that we have $139.6 million invested in [inaudible] that can be converted to $1.1 billion of future development when the lending markets are available and the market turns up. In the interim we clipped the coupons on the existing week’s revenue on these.

For example, I’ll point out that Summit at Mission Bay’s a 323 home community; it’s well located in San Diego; has views of the bay; but it’s an old structure that eventually will be torn down and replaced with a new lead certified building that will contain 504 homes. Currently it’s yielding us over 9% on our investment. We will harvest the value from the increased density when the timing is right but we’re under no pressure to start today.

Third, even though the long-term fundamentals look good, right size your portfolio to the construction money that is available in the market. Our active pipeline today amounts to $342 million and will require only $20 million of equity dollars funded by UDR. If we obtain financing for the three deals listed on attachment 10, development subject to financing, that will increase the active pipeline to $610 million with only an additional $8 million of equity funding required from UDR.

We believe that a $400 million to $600 million pipeline that’s financed and delivering primarily into late 2010 and 2011 is properly sized for the market in our enterprise. This pipeline could have been much larger but we have chosen to scale back to this level and will be able to easily scale back up as the markets recover.

Fourth, don’t become myopic and assume a recession will last forever. Development’s a long-term strategy and requires looking beyond the current one to two-year window. The year 2011 is stacking up and looking to be one of the best years in recent history for the multifamily industry, and here are the reasons why I think that.

First, supply is relatively in check today and multifamily construction starts are plummeting. It looks like the annual levels that should go below 200,000 homes annually next year. That’s really a historic low. Second, demographics are in our favor. Our major markets still have population growth and the [inaudible] ranks are swelling in 2010 and 2011.

Third, jobs which are now in decline but with the stimulus that has been put into the worldwide economy most expect a dramatic job growth recovery beginning in 2010 and possibly in full swing by 2011. So with supply not meeting demand, favorable demographics, potential dramatic job growth, 2011 should be a very good year in which we’ll be delivering new competitive multifamily developments.

Let me just wrap up my portion by saying that our portfolio is stronger with the successful $1.7 billion sale and the completion of our 1031 acquisitions that added new product in core market locations. We will continue to add new product through an appropriately sized and financed development and redevelopment program.

I’ll now turn the call over to Dave.

David L. Messenger

During the third quarter we took a number of tactical steps to strengthen our balance sheet. Our primarily objective given current market conditions is to ensure that we have sufficient capital near obligations through 2010 and beyond. In addition we want to maintain sufficient flexibility to take advantage of market opportunities. Let me summarize our recent activities.

In July we repurchased 400,000 shares of our common stock as part of our previously announced stock repurchase program. As we move further into the quarter the market and our stock price experienced unprecedented levels of volatility. We’ve taken advantage of that volatility to capitalize on certain market opportunities.

For example in august and September we repurchased $27 million of our medium term notes for a gain of $2.5 million and we also repurchased 969,000 shares of our Series G preferred stock at a yield of 8.1% and a 16% discount to PAR. In October we issued 8 million shares of common stock at a price of $24.25 per share at almost 27% premium to yesterday’s close and we raised $194 million.

On November 28 we are scheduled to close on an expanded Fannie Mae credit facility. This facility will replace our current $139 million facility that matures in 2010. The new facility will have an expanded commitment up to $300 million and a maturity of 2018. Warren will provide some additional details on this facility momentarily.

Next, our debt maturity schedule and how we’re addressing it today. With the closing of the Fannie Mae facility our current cash balance and receipt of the proceeds from the $200 million note in mid-2009, we expect to be able to satisfy all of our debt maturities in 2009 without having to draw on our $600 million revolver.

During 2010 we have $550 million coming due. With our new Fannie Mae facility we’ll move $139 million from 2010 to 2018. Now we have $411 million due in 2010. This amount could be further reduced to $360 million if certain extensions are elected. With $360 million due in 2010, I need to put that number in some perspective. During the last 45 days and in the next 30, our team will have raised in excess of $600 million in capital in what many consider to be the toughest capital markets we’ve seen in decades.

That being said we have an 18-month head start on satisfying the 2010 maturities. We’re executing extensions where available and reviewing current market disparities. We continue to monitor the markets for opportunistically issuing new debt and if those opportunities do not arise, we can fully fund the 2010 maturities on our revolver.

We’ve demonstrated an ability to execute transactions despite difficult markets. To date, we’ve closed on the sector’s largest sale transaction and completed the sector’s largest equity offering. As market volatility continues we intend to continue to execute and continue to take advantage of these market disruptions.

Now let me turn to guidance. As a result of these turbulent times, we’ve had to recalibrate our earnings expectations for the balance of the year. As you know we do not publish quarterly guidance as we continue to operate the company with a long-term view knowing that from time to time that will impact short-term results. Since our last guidance update the world has changed significantly.

Today’s annual guidance change is based on three key factors. One. Slower than expected revenue growth at the end of the third quarter and start of the fourth and expense growth at the high end of the range that accounts for approximately $0.02. Second. We had lower-than-expected contributions from our JV partners since four of them planned lease-ups which also accounts for $0.02. Third. Dilution from our recent equity offering and the impact of lower returns on cash holdings due to our very conservative approach accounts for the final $0.02.

Accordingly, we’ve adjusted our full-year FFO guidance to a range of $1.45 to $1.47 per diluted share. We believe these short-term impacts to FFO will position us for success in the turbulent environment and support value creation over the long term.

Now I’ll turn the call over to Warren.

Warren L. Troupe

On October 20 we signed a letter of commitment for a new $300 million facility with Fannie Mae which will mature in 2018. The new facility is being initially collateralized with six multifamily assets that will provide for initial loan advance with the commitment of approximately $224 million. UDR has spread-locked $154.8 million in the commitment at a blended rate of 4.3% and has also rate-locked $70 million in the commitment at a rate of 5.85% for an overall blended rate of 4.8%.

Proceeds from the loan will be used to pay off an existing $139 million Fannie Mae facility that matures in April 2010 and the remaining proceeds will be retained to fund future capital needs of the company. We expect to close the new Fannie Mae facility by November 28, 2008.

Secondly let me address the special dividend. As Tom said, we previously announced that as a result of the capital gains arising from property dispositions in 2008 we expect to declare a special dividend. The amount of the special dividend is expected to be $132 million and the company expects to pay the special dividend in conjunction with the company’s regular dividend for the quarter ended December 31, 2008.

The special dividend will be payable in cash or a combination of shares of common stock and cash. We expect to formally declare the special dividend and set the record date later this month, and it is anticipated that the special dividend and the regular dividend for the quarter ended December 31 will both be paid on January 29.

Thomas W. Toomey

With that operator we’ll open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Analyst for Michael Bilerman - Citigroup.

Analyst for Michael Bilerman - Citigroup

Can you talk a little bit about your revenue management systems and are you seeing dramatic decreases in rent levels as a form of concession relative to most of your markets?

Jerry Davis

We use yield star and we are seeing reductions in rent levels especially on new leases. What we’re really seeing as getting probably 2% to 3% increases on renewals but pretty much probably going backwards 1% on a new lease coming in the door. That varies a little market-to-market. It’s a little stronger in the Pacific Northwest as well as Northern California. In Florida we’re typically having to give away a little bit more than that. We’re pretty fortunate typically in Florida if we renew at flat.

Analyst for Michael Bilerman - Citigroup

What’s your tolerance level before you feel comfortable giving up occupancy? I guess the question is, how negative could you see that going before you’d give up occupancy as that ratio balances?

Jerry Davis

I hadn’t really thought of that. We’ve been able to really manage the portfolio pretty consistently throughout the year on the 94.5% to 95.5% range. Year-to-date we’re at 94.8%. There are a few markets it’s tough for us to get 95% especially in some of the Florida markets but fort the most part we feel like an occupied unit today is better than getting the rent growth.

Thomas W. Toomey

A couple things I might add. In this cycle and all other recessions that we’ve approached in the past, we’ve seen a lot of development occur. In fact the trigger has been an oversupply. There’s very little development going on. What is, is not probably going to be finished that quickly so we don’t have that big threat of oversupply at us so we think with the technology advances on being able to drive more traffic and literally buy traffic if you will, we’ll be able to sustain our occupancy levels at pretty good levels through this recession.

Pricing, what Jerry pointed out, is as customers are becoming very sensitive to it and we have to fight it floor plan by floor plan, market by market.

Analyst for Michael Bilerman - Citigroup

With regard to your development pipeline, can you talk a little bit about whether concessions in your lease-up properties are coming in at pro forma levels, if you’re seeing any margin compression given where rents are in those markets?

W. Mark Wallis

In our Texas developments we’re at or above our pro forma. Anecdotally our projects in Houston made our target last month for leases with 30; we get 36 so obviously we’ve got some power there. I will say that in Florida that’s where we see some softness in concessions on the pre-sell. We have one that’s really not turned units yet but the one that has in Orlando, we’re about 90% leased but the concessions have been over our initial pro forma.

Warren L. Troupe

What are we giving? Six weeks on 12?

W. Mark Wallis

Yes. Six weeks on 12 but we’re at the top of the market as far as our rents, and from an overall performance standpoint it’s doing well. We have a small pre-sell that’s only 200 homes in Phoenix and we’re seeing similar activity there although the traffic’s actually better than we would have expected given the market in the last six months.

Thomas W. Toomey

Mark, why don’t you go down some of the occupancies or percentages leased on attachment 8? These were as of September. Are there any material changes between there and where we stand in November while you’re pulling that up?

W. Mark Wallis

Yes. If you look at the Marina Del Rey for example, it’s one of the lower ones, 37.9%. We’re now at about 50% there this month. The Laurelwoode deal in Houston is the one I mentioned that had the very strong leasing month. That’s now at over 62%. The deal in Phoenix, we’ve gotten to 50% there at the end of the month. So you can see those actually this last month have fairly decent leasing months and they were hitting their target activity. That gives you maybe a flair for how that’s going.

Analyst for Michael Bilerman - Citigroup

Did you talk about your appetite for additional debt repurchasing going forward?

Thomas W. Toomey

I think the appetite is to continue to look at liquidity on some of these bond holders and other forms of securities. We’re getting daily calls and solicitations from them about buying our debts back at substantial discounts from where they’re trading today. We feel like that will continue to grow between now and the end of the year.

We think that as you can see Fannie and Freddie are still open for business and if we can borrow money under 5% from them and we can go back and buy debt that is of greater yield than the 5%, then that’s not a bad use of that credit facility from Fannie. That’s one option we’re looking at but I would expect us to continue to look at that market and find out where it’s inefficient for us to be jumping in there and creating some value.

Last time I checked in life if I could buy back my debt at $0.70 on the dollar, I’m doing pretty good.

Operator

Our next question comes from David Bragg - Merrill Lynch.

David Bragg - Merrill Lynch

I just wanted to ask a few more questions on development and specifically Tom, I wanted to get your thoughts about the relationship between development yields and cap rates and how you see that changing going forward? I remember on last quarter’s call you talked about a spread of 100 to 150 basis points and obviously we’re in a different world today so it’d be great to get your update on how that relationship has changed on both ends and what you can see happening over the next couple years?

W. Mark Wallis

I’ll start and Tom will chime in here. We’ve been at this a long time as far as the development industry and I think that basis point spread that you talked about, 125 to 150, really is still holding in there in our opinion.

How could that be possible given all that’s going on? There’s always probably submarket exceptions somewhere where somebody’s overbuilt the submarket but as Tom talked about this downturn is probably different from the big one we had or referred to in 1990 because that was not only bank driven although the bank situation probably was smaller, it was supply driven. A lot of deals were tax indication deals. That’s how the multifamily industry was financed.

Today supply is more in check and I think that’s holding that spread. The cap rates going in yields may change as the market changes but I don’t see the spread changing dramatically unless you’re in a particular market that’s been dramatically overbuilt or maybe just has a huge overhang of some nature happening there, a big vacancy overhang. But we don’t have anything to point to to speak to a fundamental change there today.

Thomas W. Toomey

I think Mark’s summarized it correctly.

David Bragg - Merrill Lynch

Just to follow up on that, if we think about acquisition cap rates clearly have moved up over the last quarter since we last talked about that and it’s debatable at what degree, but then you think about penciling out rent rate potential declines, are you seeing a decline in replacement costs?

W. Mark Wallis

I’ll speak to a couple of those points. One. What we’ve experienced up until the last six months on construction costs was dramatic increases; hard costs moving 30% up off pro forma’s that were done nine months ago. That’s correcting itself in a dramatic way. I think construction costs are getting back in line but they’re certainly not moving where replacement cost is below quote what you can buy for. I think replacement cost is still a good measure to look at things. That’s how we look at both acquisitions and development.

And then there’s a presumption that pro cap rates have changed. In visiting this week with [Matt Akin] who heads up our acquisition and disposition activities who’s in the market every day I said, “Matt, where are we today in your view if you were asked that question?” He said, “The bid ask is pretty wide.”

My view might be a little more focused on newer assets; we’re not talking about C assets or secondary markets, that’s another subject even though there’s not as many trades going on there, but in those markets Fannie actually still is available to private buyers and Matt said, “We still see some transactions happening there.”

But in the upper end of the market, I’m looking at a schedule. We track deals even though we’re not in the market to buy today, we track deals every month. I’ve got half a dozen; a dozen deals max of decent quality. None of these assets are priced when they’re marketed so you have sellers hoping, still sticky on their sale prices and buyers; they’re not meeting and things aren’t trading.

That may be a deduction that cap rates have changed but until we start seeing trades for high quality products, it’s hard to say. And the other thing is there’s not much product out there. So it’s hard to say how much cap rates have in fact moved although I think the general wisdom out there, everyone says they’ve probably moved maybe 50 basis points. But I can’t point to a trade that backs it up.

That’s sort of a long-winded answer but that’s kind of an overview.

Operator

Our next question comes from Dustin Pizzo - Banc of America Securities.

Dustin Pizzo - Banc of America Securities

Mark, just to follow up on some of David’s questions there. Some of the recent published reports even for your markets and some of the comments your peers have made on the calls have suggested that land prices have fallen anywhere from 20% to 30% from the mid-to-high rise properties and 50% for garden properties. Should we just infer from your comments that you’re not seeing that?

W. Mark Wallis

I’ll say this. I think number one, entitled land sites are for sale. That’s different. You couldn’t touch entitled land sites. Those sites you probably can get a 5% better price on today. You can only speak to your own particular experience so I’ll say we had a site we were looking at in the general area of Southern California; pretty good site; near rapid transit. We attempted to renegotiate that land price in due diligence on the theory that probably we were only one of the few buyer’s in the market. The seller did not hesitate to terminate the due diligence period and go on to the next buyer.

If you’re talking sites that are not entitled that are further out, that aren’t near a metro stop, I’m sure those prices are softer and probably someone could throw up an example of one that’s 20% off but we don’t see that across the board. We do see people who spent money on entitled types probably writing some of their planned costs off and some of their pursuit costs off wanting to sell those sites. So depending on how you interpret that percentage, there are a few of those that are available.

Thomas W. Toomey

It’s tough to always throw a blanket over a statement. The natural thought would be is people that borrowed heavily, that are out in the burbs, are speculating on land going up have obviously gotten burned and they’re trying to cut their prices.

The core on-transportation hubs in urban areas, if dirt’s coming down, Mark had the right idea. It’s 5%. It’s not material. Construction costs; I was talking with a couple other people running California REITs as well as development private companies and they’re saying their construction costs are coming down 10% to 15%. If you take those two combined and you say your rents are coming off on your forecast instead of growth of 5% and now you’re having to say 2% in some of those markets, believe it or not your returns are holding up. There’s just not enough volume of activity to really draw any more than generalities to this.

The point is we’ve outlined our development and the optionality of moving in to it, continuing it should funding be available, and if it’s not we’re happy to just warehouse it and live on the NOI that it generates today. We’re not going to go out and just develop because we feel compelled to. We’re going to develop because we think it’s a responsible use of our capital. It has to compete with other uses including buying back the debt, including acquisitions.

We’re about trying to build the right company for the long term and we’re not going to abandon any one effort over another. We’re going to compete them against each other.

Dustin Pizzo - Banc of America Securities

As you think about the redevelopment program and the kitchen and bath specifically, it’s been a pretty big driver of returns. It looks like there’s nothing beyond the first quarter from looking at the supplemental. Are you guys basically just shutting down redevelopment here as it becomes more difficult to push rents at a level necessary to achieve your target IRRs and conserving capital for some of the more opportunistic investments that you outlined?

W. Mark Wallis

A couple things. One, we finished a lot in our portfolio so naturally we knew the number was going to go down. On the redevelopment we’re concentrating on a couple of deals that we want to do out in California, but the permitting, entitlement process out there which you would think would be a routine redevelopment is very lengthy. So that’s delayed. That just means we’re going to keep them leased up longer on the current status.

We’re not abandoning that process. We have a couple of longer term entitlement processes that a lot of times our teams working on the eastern half of the country is going to take them probably 10 month to get those done. So they’re actually all working. We’ll add a couple in California when those permits are available.

On kitchen and baths we’re cutting back. Jerry may want to comment on that because it obviously ties into his work. We’re trying to be prudent about where we should do those kitchens.

Jerry Davis

What I would add to that is several years ago we were doing 500 a month. That was one of your larger portfolios. In 2008 we’ve been averaging about 200 kitchens and baths a month. We’re probably projecting next year it’s going to go down to about 150. Part of that is it’s harder to get the return. The other part is a lot of the product that is coming on notice that we have the opportunity to do the kitchen and bath has already had a kitchen and bath done. So we just kind of run out of product.

Dustin Pizzo - Banc of America Securities

Are there any additional one-time gains as it stands today that we should expect in the fourth quarter from either additional debt repurchases or preferreds?

David L. Messenger

At this time like Tom said, we’re evaluating where we stand within the market place where we’re looking at the different opportunities. As of today we’ve not done anything.

Operator

Our next question comes from Jonathan Habermann - Goldman Sachs.

Jonathan Habermann - Goldman Sachs

I was curious on the expense growth. You mentioned the pickup obviously for the quarter but given the challenges you’ll likely face into 2009 just given the tough comps of the existing year, is it fair to say that the expense growth rate will likely persist?

Jerry Davis

We really haven’t gotten too far into our budget process. I don’t know if we really want to give guidance for 2009.

Jonathan Habermann - Goldman Sachs

In terms of comps year-over-year?

Jerry Davis

Comps year-over-year, I don’t expect to have bad comps with real estate taxes like we’re going to have in the fourth quarter this year. I think on the insurance front it’ll probably even itself out. Utilities, gas prices have come down. We should be in pretty good shape there. I think what you’re going to see is a more normalized rate on a more consistent basis but again any time you self insure on insurance, it can cause fluctuations on a quarterly basis.

Thomas W. Toomey

Insurance is one topic, it’s 7%, but if you think about the primary drivers of our expense growth and you look out to next year, start with real estate taxes. You’ve got 45% of the NOI coming from California. Real estate tax is our largest expense so they’re capped at 2.9%. You’ve got to think, “If I’ve got the other 55%, what do taxes look like?” That’s going to average right around a little bit over 3% or 3.5%. Payroll, our associates know it’s a tough job market. We’ve done a good job on the benefits area so that number probably comes in at a 3% just to peg it.

And utilities; people forget that 87% of our utilities are born by our residents. Of the remaining 13% it’s probably our third largest expense category and you had a spike this last year and probably won’t have a recurrence of that spike going into next year so that’s probably going to be a more manageable number. This year it probably came in at 4%. It’ll probably be better than that in my view.

Probably 80% of your cost structure just in those three or four line items, and you hear a lot of, “Well, around 3%.” That’s probably this business and this portfolio on a long-term basis. I can’t see next year any unusual spikes. I think we’re going to be fortunate to get our insurance renewal done in December before the market runs out of capacity next year and that’ll probably give us a chance.

On the other front, marketing and admin, staffing areas, the technology that we’ve deployed is a long about the front end of our business attracting more customers, and I think as we move further and further into the implementation of that we’ll continue to shrink our marketing costs and find other ways to become more efficient in our staffing model.

I think Jerry and his group have a pretty good plan. They want to go through their detailed efforts but I’m not going to say that next year looks like a heavy expense year at this point. We’re not going to continue. This portfolio’s been doing real well and they’ve been doing great at keeping it at 2% to 2.5%, and I think we’ll probably revert more to the normal 3%.

Jonathan Habermann - Goldman Sachs

In terms of an outlook here, I guess focusing on California, given the recession concerns you highlighted and risks that unemployment move up perhaps as much as 200 basis points from here, can you just give us your thoughts in terms of coastal California? You did mention thus far it’s been holding up well but how do you see that market relative to the national average?

Jerry Davis

I think everything we’re seeing is that job loss is probably going to be a little harder hit in California than the national average. But we do like our markets, our locations; we like our prices. We really haven’t been directly affected by too many job losses to date but there could be an effect coming. I will tell you we’ve experienced a little bit of doubling up; one bedroom guys going into two bedrooms together in Orange County. But it’s interesting when you look at our occupancy across floor plans. They’re all right around 95%. It’s pretty consistent. Right now we haven’t felt any softness really up in Northern California to date.

Seattle depends on which jobs you’re dependent on. A lot of our new product up there is in Belleview and Microsoft is about to move in right next door to our property so we feel like there’s a lot of jobs coming in there. It’s kind of specific to the properties.

To date, have we felt in coastal Orange County a decline? Yes. You can see it in our numbers. Our revenue growth has been shrinking over the last couple of quarters but we still feel like we’re better suited to handle that market than our competition.

The other thing we feel is one thing we do better than most people, especially in California which is older product and it’s very privately owned, is we have continued to invest in the interiors as well as the exteriors. We just think as our competition starves their assets, even if there’s some job loss, people that want a good apartment to live in are going to flock to us.

Jonathan Habermann - Goldman Sachs

Focusing on development for a second, in the event that cap rates do move up higher over the next 12 months, would you anticipate or do you think that there’s some risk that some of the projects you currently have slated for that 2010, 2011 or beyond would get reconsidered or possibly drop off?

W. Mark Wallis

If you look at what we’ve outlined there, we’ve got today $342 million underway; we’ve gotten approved financing on [Signal Hill], we’ll start that; and then the rest of the last we just will look at as the market unfolds.

What I was trying to communicate is this is a very scalable development pipeline. $350 million to $550 million or so of development for an enterprise this size scattered among several markets is what we should be doing for the long term but we’re not going to scale up until some of these clouds go away when the financial markets get a little more clarity to them. To answer your question, we’re going to be careful about it.

Thomas W. Toomey

I would add, take a hard look at attachment 10. You can see Barc’s pipeline of warehouse opportunities is $1.1 billion but it’s on our books for $140 million. We’ve got $11 million of NOI coming off that $140 million. We’ll just sit on it. We think we’ve got great dirt, great communities situated where we want to ultimately develop, but if the returns aren’t there and the returns are greater at buying other investments, these opportunities will continue to sit in the warehouse.

As Mark highlighted earlier, this economy’s going to turn around. In ’10 or ’11 you’re going to be asking us what we are doing to grow our enterprise. And the simple answer is, and we’re going to be 60 days away from turning these back on and building in the right market with the right product, we think we’ll get good returns.

That’s the way experienced developers handle themselves. Merchant builders go out and lock up lots of land, borrow until their teeth bleed and then keep building because t hat’s the only damn thing they can do. Experienced people buy it; they option it; they warehouse it; and when the right time comes, they have the financial and the technical skills to deliver it.

So spend a little bit of time really looking at 10 and you’ll understand our psychology about development.

Operator

Our next question comes from [Michelle Coe] - UBS.

[Michelle Coe] - UBS

Earlier in the call you mentioned that you had taken down guidance partly because you were seeing slower revenue growth at the end of 3Q and beginning of 4Q. I was wondering if you could expand upon that a little bit more and tell us which markets you think are deteriorating going forward?

Jerry Davis

I wouldn’t say any are really deteriorating. I would just say they’re all getting marginally worse to a degree. You don’t see any that are going to be getting higher from this past quarter’s growth over 3Q when you compare 4Q to 4Q. Florida continues to struggle. We have seen Jacksonville get a little bit worse than the last three to four months. Phoenix has probably gotten more hurt in the last four months than any of our other portfolios. Luckily we only have 1,000 units there.

But the remainder of the portfolio is just coming down a couple percent of growth. Earlier in the year we were at 10% let’s say or more in Northern California and Seattle. It’s getting down into the 7% or 8% but I wouldn’t say it’s a massive deterioration. They’re all coming down a couple percent.

[Michelle Coe] - UBS

Given that we believe fundamentals are worse than next year and cash flows could be less than anticipated, how secure do you feel about your dividends going forward?

Thomas W. Toomey

I’m very confident in the dividend, very confident in the company’s ability to fund it and that’s where we stand.

Operator

Our next question comes from [Simiti Yupatia - CR Capital Markets].

[Simiti Yupatia - CR Capital Markets]

I was looking at the bad debt side and it was up a lot sequentially. Can you provide some color on that? Is that more of a seasonal thing?

Jerry Davis

A little bit of a seasonal thing. When you look at it sequentially, we run a special with our collection agency every year in April to try to get people that have skipped on us in the past that owe us to give us a portion of their tax refund back. We run a sale on what they owe us. Typically you’re going to see second quarter be our lowest of the year. That would really more explain the jump up in 3Q if you’re looking at it sequentially.

[Simiti Yupatia - CR Capital Markets]

Can you provide some color on foreclosure activities in some of the major markets that you’re seeing?

Jerry Davis

They’re continuing to go up, that’s for sure; a couple hundred percent year-over-year. When you look at either the Inland Empire or Phoenix or L.A., the biggest problem markets are in the Inland Empire. Again, luckily we only have two or three assets there. We’ve been able to do pretty well. We’re not seeing a lot of foreclosed homeowners flocking to multifamily. We think they’re heading to the shadow market of single family homes that are being rented out.

Operator

Our next question comes from Jeffrey Donnelly - Wachovia Capital Markets, LLC.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

Building upon Michelle’s earlier question, Tom are there markets that have been persistently strong or weak for that matter in the past few quarters that you see approaching a peak or bottom in the next 12 to 18 months that might lead you to change your thinking about capital allocation in this areas?

Thomas W. Toomey

I think markets that we feel like we’re getting close to a bottom might surprise you, but Florida feels a little bit that way. Looking into next year and thinking about markets that’ll probably surprise you to the up might be D.C. You’re going to have a complete turnover of a lot of jobs and it turns out that all the former politicians become lobbyists and still stay there. That’s probably going to be an up.

Texas more sideways probably. High fuel is driving a lot of its engine; it’s still got a robust economy but it’s not on fire at $65 a barrel as much as it was $140 a barrel.

Moving across Southern California, we’re almost a different kind of market condition there because we’re west of the 405. I’d really encourage you to look at our website for details of where that’s at. It’s a pretty high employment area, stayable, if people lose a job they go find another one very close. We’ve got a good price point there. Technology I think in ’09, people are going to cut back on their technology spending and you’ll see San Francisco go from a high 10% revenue growth to half.

In Seattle I wouldn’t want to bet against Google or Microsoft or Boeing; whoever wins and given their cash reserves and their plans to grow the enterprises. So I feel like Seattle’s still got another good year in it. So that’s kind of a mix in markets and how I feel about them.

Jerry, any different thoughts?

Jerry Davis

I would agree. D.C. is lining up to look very good for next year from what we see.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

On the expense side Tom you were talking earlier about expense growth returning to a more normalized 3% pace. Do you think we achieve that more later in the year, because you potentially face some difficult comps in the first half of ’09 to the first half of ’08?

Thomas W. Toomey

You’ve kind of got this roller coaster and that’s why we’re not overly alarmed at year-over-year at 6.6% when we look at it and say it’s an insurance plan here and the trend on a year-to-date basis is 1.7%. That’s a pretty good trend. I’ve never as long as I’ve been at this focused on a quarter of expenses as much as I’ve looked at a trailing four and asked myself how that feels. I don’t think companies can continue to run well below 3% for long periods of time. Cost structure kicks up, contracts catch up; that’s just this business as long as I’ve been at it. I’ll tell you I’ll take it as long as you’ve got a 70% margin business, 3% revenue growth, expense growth isn’t an issue.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

That might be the answer then to my next question. A good bit of the increase you saw in Q3 expenses on the sequential basis was concentrated in the markets that are exhibiting the weakest fundamentals. What’s driving that and do you think that those weaker markets will come in line with your expense growth expectation next year?

Jerry Davis

When I look at the higher sequential expense growth markets, Jacksonville, some of that was higher turn. We did turn quite a few units in the third quarter versus the second. You always have to look at when do people move in and move out. Typically the summer is heavier and in the softer markets people have more options to move to and also those other options typically are more concessionary and they’re price driven so they’ll jump on you. Other than the insurance amounts, you had some repair and maintenance.

Norfolk you had some higher utility costs. Sometimes that’s just the timing of when we pay the bills if it’s an every other month type deal. We’re pretty much on a cash basis with some of our utilities.

Same thing in Phoenix. Even though turnover for the company is flat for the year and quarter-over-quarter, a couple of markets such as Phoenix and the Inland Empire are up well over 10%. During the summer we saw heavy turnover expense in Phoenix.

Jeffrey Donnelly - Wachovia Capital Markets, LLC

I think you mentioned at the start of the call about you anticipate further deceleration in Q4 revenues. To be clear, does that mean you believe that year-over-year same-store revenue could in fact turn negative next quarter or it’ll be just slightly positive?

Jerry Davis

It won’t be negative. It’ll still be positive. You’ve seen it go from 5% to 4.4% to 3.4%. We expect it’s probably going to be a hair under 3%. It won’t be negative.

Thomas W. Toomey

Looking over my notes and some of the anticipated questions, I failed to mention a couple of things. this portfolio when we go through and analyze our next year numbers and think about where we stand, we look a lot about the employment base of our residents and what our exposure is.

Just to give you some feel, our largest employer in the portfolio frankly turns out to be government or utilities. I think those are probably safe industries.

Technology is only about 10% of our employment base and manufacturing is about 5%, so when we look around we see industries having to roll through this recession and we ask ourselves what industries are going to have a hit and how does that overlay because you can be in a good market but if the industry goes upside down, it’s still going to hit you. So as we think through next year and through each of our quarters, we overlay our employment base over our belief of what industries are going to do well.

I think one of the surprises next year is going to be the military; a lot of it’s going to come home and a lot of it’s going to have to get rebuilt. They tore up a hell of a lot of equipment and a lot of people are going to get employed by rebuilding that equipment, and we think we’ve got good exposure in the tightwadder Norfolk area and Jacksonville and some of the Florida cities. And that’s probably driving a little bit of our optimism is that belief that you probably don’t hear from other people.

We think about it in a lot of different ways. We’re not just relying upon what the last person in the door told us they want to pay.

Operator

Our next question comes from Mike Salinsky - RBC Capital Markets.

Mike Salinsky - RBC Capital Markets

Tom, first question for you. In your financing assumptions for next year, you’ve got a $200 million mezz note coming due in June it looks like to offset an unsecured offering. How confident are you that that money comes in the door next year, and if it doesn’t what are the ramifications?

Thomas W. Toomey

I think I’ll ask Warren to address the note collectability.

Warren L. Troupe

We’re very confident about it. As you know it’s completely secured by an interest in the properties and also has a guarantee by the parent company, DRA Income and Growth Fund. In addition we’ve had discussions with them and they’ve advised us that it’s their intent to pay the note in June when it becomes due.

Thomas W. Toomey

And their financials, you’ve looked at them and feel comfortable with their ability to do so.

Warren L. Troupe

Very strong.

Mike Salinsky - RBC Capital Markets

If for any reason though it is not, would you take back properties or would you just extend the note out?

Thomas W. Toomey

We’re not going to say that on this call. We’ll wait until that day comes if it comes but we anticipate right now our plan is to collect.

Mike Salinsky - RBC Capital Markets

It looked like in the quarter you deferred another portion of the Vitruvian Park. How much of that can be pushed back to a later date or how much of that rather has to be actually given that you’re working with the City, how much has to be moved forward at certain dates?

W. Mark Wallis

We’ve got a real wide bandwidth there. We’re under no pressure. We’re just about finished with our contract where they’re hiring us to do the infrastructure that puts this mass waterway, bridge, waterfall through there. Our start we had today is we’re in compliance with that which is the south portion of the first intersection we’re building there. As you know we have operating units on the rest of the property so we’re under no pressure there.

We’ve got many, many years which really if we never built it out, we wouldn’t want the rest of their funding anyway. We’d have no place for it to go. So the first big chunk is already coming in of their dollars. We’re about ready to cut all those actually public contracts from the City of [Athama]. We administrate that for them for a fee. That’s about done so we’re in good shape there.

Mike Salinsky - RBC Capital Markets

There are no specifics that you have to have certain things done by certain dates or anything like that?

W. Mark Wallis

There is but it’s four or five years out in the future and it would be in phases across the street that if we didn’t build, they wouldn’t put the infrastructure in anyway if that makes sense. When we need it is when we would go for those dollars. The bulk of those dollars don’t have that timeline on them.

Mike Salinsky - RBC Capital Markets

And the assumption is still to joint venture that somewhere down the road?

W. Mark Wallis

Warren may want to comment on that but yes, that’s our ultimate view because of the size of the development. I think our timing will be good because as we go into the market next year because we’ll have the infrastructure started and the first phase started.

Warren L. Troupe

I agree with that.

Mike Salinsky - RBC Capital Markets

Probably a bigger picture question for Tom. Just having been through a number of cycles and looking at the leverage that’s been in play by some of the private guys over the past several years, how much distress do you expect in this current downturn?

Thomas W. Toomey

I think you have to draw a decision tree and the first part of that is, tell me when the banking industry and Fannie and Freddie’s disposition are determined. My guess is we’ll know more about that in the second half of ’09 and I’m anticipating they’re going to come back in pretty good shape.

What I think is you have to divide it between the following segments: Merchant builders who have significant capital lending requirements, they’re not going to come back in ’09. You’ll start to see them resurface in ’10. The portfolios that were bought in the ’04, ’05, ’06 timeframe that relied upon 4% debt 85% leverage, they’re going to come back to the market in the ’10 and ’11 window with interest rates being 6% to 7% and their need to kick in 20% to 30% more equity. I think you’re going to see those things come to the market. But they’re going to come to the market; they’re going to be beaten up Bs and Cs.

They’re probably not the right type of product and not in the markets we’re going to look at but I think there’s going to be a lot of good buys in that window. I wouldn’t be surprised if it doesn’t resemble the 2003 and ’04 window where Wall Street said, “Great demographics. No new supply. Look, we can fund and go capital markets and in essence participate and take a lot of those guys public again.”

Our sense is that you back up, think about it, you’re in the middle of a quicksand pile, you’ve got to get enough capital to get across this; across looks like us ’10 and ’11, and then the capital markets will feed us a lot of capital by virtue of realizing that we haven’t built anything and/or the demographics are taking over. So we see a very rapid rebound in a robust second half of ’10 and ’11. That’s backing up and thinking about the industry and where we sit.

You’ll hear a lot of merchant builders go out of business in the next six months. As we see it, there are not a lot of opportunities and there’s no reason to buy those guys. The simple answer is you can get the talent for free later.

Operator

Our next question comes from [Mark Ziffert] - Oppenheimer & Co.

[Mark Ziffert] - Oppenheimer & Co.

My first question’s related to how you think about permanent refinancing of some of your construction projects that you’re delivering into ’09 and ’10 given that you have the construction financing coming due as you stabilize?

Warren L. Troupe

Most of our construction loans or almost all of them have extension features and most of them are either three years with 1 and 1 extensions. At the end of that I think the market’s going to be a lot different but we’ve already factored that in for our capital needs and we think we’ll be able to get permanent construction at that point in time or any still available.

Thomas W. Toomey

A lot of these deals have somewhere between 25% and 35% equity in them so potentially you look at that type of low leverage coming out on the back side of these. Fannie and Freddie will be there. Some CMBS markets will be back. The unsecured market isn’t going to be shut down forever. So I’ve got to look out two or three years, I feel like we’ll be fine. The key is in making sure you’ve got enough gas to get all the way across ’10 and into ’11, and that’s what our plan is.

[Mark Ziffert] - Oppenheimer & Co.

Jumping to the mezzanine environment, I’m just wondering more if you’re seeing opportunities of distress or areas where people given that the capital markets might be constricted through the end of ’09 and into ’10, where you think those opportunities might arise and would you partake of them?

Thomas W. Toomey

Mark and I’ve been in that business and seen it before time and time again. It just always comes back to the same darn thing. You’re buying the damn real estate and ask yourself if the mortgage is 70%, are you willing to underwrite that the asset won’t go down 20% or 30% in value. If you are and you’re convinced that it’s not going to go down 20% or 30%, then you ought to do that business.

Last time we checked a lot of merchant builders are building in the suburbs. Assets go down 20% in value and all of a sudden you’re writing your loan down or you can say, “Well great, we’ll just take the asset.” We’re not interested in suburban assets like that and that’s where you’d see those opportunities.

Infill, urban, transportation hub driven developments are usually well capitalized by very high caliber people and they don’t need our help as mezz.

[Mark Ziffert] - Oppenheimer & Co.

How do you think of RE3 and the things you plan to do through it over the next year or so? Do you see any gains coming out of that business and is that built in to your expectations looking ahead?

Thomas W. Toomey

We’ve said and adopted a policy that we wouldn’t count on RE3 for gains and put it in the earnings cycle. We’ve got assets in there. We continue to believe that they’re worth more than what we have them on the books for. We’ll continue to run them and increase their value. Today’s not an environment where we would see RE3 as a very big component of our enterprise.

Operator

Our next question comes from Richard Anderson - BMO Capital Markets.

Richard Anderson - BMO Capital Markets

I got on really late so I don’t know if the question was asked, but I was curious and I just have one question about the special dividend and with the current stock price if you changed your strategy about whether it would be stock or cash?

Warren L. Troupe

The way that we set up the special dividend and it can be paid in either cash or a combination of shares and cash, and we retain the flexibility if we get at the end of the valuation period the share price is not at a price that’s acceptable to the Board that we could pay that in all cash.

Richard Anderson - BMO Capital Markets

So at this level would you pay it all in cash?

Thomas W. Toomey

We’re deferring the question. It’s just premature. It’d be like me trying to tell you who’s going to win the election tonight. It’s just premature.

Operator

Our last question comes from Hondo Lee Ute.

Hondo Lee Ute

Tom, not to overuse the phrase but obviously the world has changed significantly the last couple of months and I appreciate your earlier comments on asset values, but given the dramatic asset value distillation currently underway and increasing return requirements, where’s the puck headed? How much more do you think asset values can potentially decline and is it inconceivable to consider a version to a 9% cap rate world?

Thomas W. Toomey

I’ll tell you this. I read your piece. I thought it was very well thought out.

Here’s kind of what I think about this business in multifamily. We typically find a typical B apartment across America prices across five year leverage. So a five-year paper today can be had at 75% loan to value at a 5.7, it’s going to tell you cap rates are anywhere from 6.5% to 7.5% for that asset. If you tell me interest rates are going to 8% or 9%, then yes. 9’s an easy number to see.

I think a lot of it’s going to be driven off of where interest rates move. I think what you have and my personal view is that interest rates come down because of all the stimulus in the short window of the next year but then after that start to climb pretty steadily.

One wild factor in your cap rates that you didn’t calculate in there is what if you’re in a high income tax bracket game and we’re back to tax indications and people are using not just the cash flow but also the after-tax benefits in valuing real estate. That era is potentially there under both potential candidates. I think in the interim to see 9% caps as your article points out is a long shot. To see it if interest rates move to 7.5% on that type of paper, then I’d say yes.

Think more about where interest rates are headed than values and return expectations because in this business I’ve seen cap rates more correlated to that.

Hondo Lee Ute

Mark, I’d like to go back to the [M] acquisition for a moment. I didn’t quite hear, maybe I missed it, but if you compare that purchase price to what that land might have sold for a year ago and assuming you could get construction financing today, what type of return do you think you could develop to?

W. Mark Wallis

Is there a specific piece you’re talking about or just in general?

Hondo Lee Ute

If you could compare that purchase price today versus what you think it might have -

W. Mark Wallis

Oh, a year ago?

Hondo Lee Ute

Yes.

W. Mark Wallis

I think on that particular site probably when you consider the pursuit costs, that it’s entitled, I don’t have a staff out there churning and burning payroll every month, because this site’s 400 feet from metro station and 500 feet is easily walkable, it’s probably all-in 10% better.

We feel like our construction costs as tom talked a little bit about are coming in 10% to 15% better than a year ago, so then we see the yield on that to be pretty strong for a California deal. If you get a mid-6% return or upwards, I don’t want to over-forecast as we price everything out and work on that deal, it could be from a long-term perspective a pretty healthy deal like we hadn’t seen in a while.

But as Tom said, these infill urban sites we do not see them being discounted 20% or 30%. Some suburban sites are starting to build it anyway. By the time you carry them you end up in the same spot. They’re going to be discounted but we’re just not seeing it. And we’ve been bidding on some sites with that expectation and not getting anywhere.

Hondo Lee Ute

A question on construction financing today; any sense of what that would be today versus what you closed your loans for during the quarter?

David L. Messenger

We were doing something earlier at loan to cost of 70% to 75% and it’s more like 60% today. The pricing has moved from LIBOR + 1.75 to about LIBOR + 2.50 today.

Thomas W. Toomey

Operator, I understand we have no more calls. Let me wrap up with closing. Let me mention again that we are hosting a Los Angeles Property Tour, specifically Marina Del Rey, on November 18. This is the day prior to the NAREIT Conference. If you fly into L.A., we’re glad to give you a bus ride down to San Diego to the conference. There are sign-up forms on the Investor Relations tab or you can give Larry or I a call and we’ll be glad to arrange in more detail. Thank you for your time today and take care.

Operator

Ladies and Gentlemen, that does conclude our UDR third quarter earnings conference call. Thank you for your participation. You may now disconnect.

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