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UDR, Inc. (NYSE:UDR)

Q4 2008 Earnings Call

February 10, 2009 1:00 pm ET

Executives

Larry Thede – VP IR

Thomas Toomey – President & CEO

Jerry Davis – SVP Property Operations

Mark Wallis – SEVP

David Messenger - CFO

Warren Troupe – SEVP & General Counsel

Analysts

Jonathan Habermann - Goldman Sachs

Robert Stevenson – Foxx-Pitt Kelton

Michael Bilerman - Citigroup

Michelle Ko – UBS

Richard Anderson - BMO Capital Markets

Mark Biffert – Oppenheimer

Mike Salinsky - RBC Capital Markets

Unidentified Analyst

[Andrew Amculla – Unspecified Company]

Alexander Goldfarb – Unspecified Company

[Kareen Forest – Unspecified Company]

Paula Poskon – Robert W. Baird

Steve Swett – KBW

David Bragg - Merrill Lynch

Operator

Welcome to the UDR fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Larry Thede, Vice President of Investor Relations.

Larry Thede

Thanks all of you for joining us for our fourth quarter financial results conference call. Our fourth quarter press release and 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.

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 are included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

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

Thomas Toomey

Thank you Larry, as we are toward the end of earnings season and I see little benefit in taking up your time playing amateur economist, I have a few quick thoughts and then we’ll turn the call over to the key executives for details.

On the subject of the fourth quarter and 2008 performance in the face of challenging times we were very successful on a number of fronts. We strengthened our portfolio with sales of $1.7 billion, and acquisitions of nearly $1.1 billion in the right markets.

We raised over $1 billion in capital with over $700 million raised in the fourth quarter alone. Our operating team delivered the second best NOI growth for the apartment REITs for the year and twice we reduced our cost structure to reflect changes in our portfolio and operation environment.

We adjusted our development deliveries and redevelopment deliveries to reflect a slowdown in the fundamentals, and I personally want to thank and express my appreciation to all our associates who worked very hard to deliver these results.

Let me now turn to 2009 and 2010, our guidance will be given in more detail by David and Jerry, like you we believe the business climate and volatility will remain challenging. We are extremely concerned over the rapidly eroding employment picture that has seen unemployment rise from 4.7% to 7.6% in just six months.

We are skeptical that the government’s efforts to restart the capital markets will show benefit during 2009. I will say though that our strategies will not change. I will continue to focus my efforts on increasing our financial flexibility and in fact in the first 40 days of 2009 we have increased our lines of credit by $240 million brining total cash and credit capacity to $1.2 billion.

With that let me turn the call over to Jerry.

Jerry Davis

Thanks Thomas, and good afternoon everyone. In the fourth quarter of 2008 we saw increasing job and worsening economic conditions effect our business. Our revenue growth of 1.8% during the quarter was lower then we anticipated as pricing power that we enjoyed in our California and Pacific Northwest markets for the first nine months of the year disappeared.

Fourth quarter expense growth came in right where we expected it at 6.8%. As we had communicated all year our fourth quarter 2007 expenses were extremely low due to several favorable tax deals as well very low insurance. Taxes and insurance make up 38% of our total expenses and they were up 20.6% for the quarter.

The other operating expense categories which make up the remaining 62% of our expenses were actually flat with the prior year. On a sequential basis our revenue fell 0.8%, marking the first drop in sequential revenue in the past 17 quarters. Our expenses were down 5% from our third quarter levels and the result was fourth quarter NOI was 1.2% higher then the third quarter.

For the full year our revenue increased 3.6%, expenses were up 3.1%, and the resulting NOI grew by 3.8%. In comparison to the apartment REITs that have reported full year results, that would place our revenue and our NOI growth at second best in the sector.

Beginning in late October and then continuing through the end of the year, we saw a strong shift in our pricing power throughout our portfolio but most notably in our West Coast markets. While we have been able to keep occupancy at very stable levels, rental rates on new leases in most markets have retreated.

In the fourth quarter we continued to get modest increases on the 3,600 lease renewals we did in the 1% to 2% range. However these were not enough to offset the average decline of 4% that we experienced on the 5,000 new leases that we signed in the fourth quarter.

Given the continuing job loss expectations in 2009 we see revenues decreasing by 1% to 3%. Our expectation is that the DC, Virginia, Northern California, Pacific Northwest, and Texas markets which represent 36% of our total revenue will have positive growth but they will be dragged down by deteriorating conditions in Southern California and Phoenix and a continued struggle in Florida. These markets represent 46% of our total revenue.

We expect our 2009 expense growth will be in the 1.5% to 2.5% range. Real estate taxes and utilities which account for almost half of the total expenses are expected to grow in the 4% to 5% range while the other expense categories are projected to be flat on a cumulative basis.

NOI is projected to be in the negative 3% to negative 5% range in 2009. Occupancy for same store communities for the fourth quarter was 94.6% compared to 94.4% in fourth quarter 2007, that’s a 20 basis point increase. More recently our occupancy in January was 94.5% compared to 94.1% last January. So far in 2009 we’re seeing traffic at a slightly higher level then last year and our applications are flat.

Turnover for the fourth quarter was 53.7% which was up 40 basis points from last year’s fourth quarter. Move outs to home purchases were 14.1% in the quarter that compares to 15.3% in the fourth quarter of last year. For the full year 49.7% of our move ins originated through the internet as we continue to see the benefits of our industry best website.

This is up from 40% in 2007. Our website, www.udr.com had almost 1.6 million unique visits this year, that’s roughly double what it was in 2007. We continue to develop enhancements to our website to keep it the best in the industry as well as find other ways to connect with our customers through things like mobile websites and social networking.

Not only have these enhancements driven our revenue, they’ve also enabled us to reduce our marketing costs over the last several years. These expenses for 2008 were down 18%. Now looking to the future, we see the same job loss projections as everyone else. Most of our markets will be effected.

That being said I’d like to make four points, first our properties are well located in markets where the price difference between renting and owning remains wide. Over three quarters of our apartment homes have average rents that are still less then 65% of the average mortgage payment on an entry level home.

Second we have a very experienced operating team running our properties. Our expectations for our teams to outperform their peers and their individual markets. In 2008 we had the highest revenue growth in nine of the 19 markets we were have REIT peers and we came in second in another three markets.

Although 2009 will be a challenge for everyone our expectation to market leadership remains the same. 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 udr.com.

Lastly we have and we will continue to invest in our real estate. We have a five year CapEx plan for each one of our properties and our plan in 2009 is to spend $675 per apartment home on recurring CapEx. The private investors only know where 85% of the apartment stock in our country we expect to see many of them starve their properties of capital over the next year.

Even though job loss will effect the entire apartment industry we know that renters value a well maintained community and they will seek out those places to call home. We believe this will enable us to better hold onto our existing residence as well as attract new customers.

In closing I’d like to thank my fellow associates for all of their dedication to making UDR a top performer in the REIT group. Now I’d like to turn the call over to Mark.

Mark Wallis

Thanks Jerry, in 2008 we completed $1.7 billion of dispositions and $976 million of acquisitions making us a net seller of $724 million of assets in 2008. We believe this not only brought needed liquidity into the company but that the portfolio is better positioned for the long-term future of the company.

We do not have any planned acquisitions for 2009 other then one pre-sale asset for $29 million that was put under contract a couple of years ago. We have received offers on one of our recently completed developments in Houston and are evaluating a possible sale of that asset.

On the development front we are wrapping up the completion of two communities in the next two months leaving us six communities that we have under construction. While we are doing pre-sale entitlement and design work on three land sites, we do not have any new construction starts planned for 2009.

In addition we cancelled a pre-sale purchase commitment for 2010 of $59 million and that’s for a to be built development project in Orlando. We increased our development team three years, we decided to run a centralized operation out of our Dallas office and with as lean a staff as possible. And as the market showed signs of weakness last year, we began trimming our development staff since early summer of 2008.

Today our development team consists of one SVP, and one VP and a talented group of six development associates and seven construction associates. We believe that this is a right size group that can properly execute the six jobs underway and the planning for the future. That’s a brief summary of the highlights in the investment area and I would direct you to supplemental schedules nine through 12 including the press release for more details.

Now I’ll turn the call over to Warren.

Warren Troupe

Thank you Mark, I will give a brief update on recent capital market activities, for 2008 we closed five construction loans totaling $179 million at an average spread of 184 basis points over one month LIBOR or approximately 2.3%. In January we closed an additional construction loan with a spread of 250 basis points over one month LIBOR or [4%]. These loans have been through a number of strong regional banks.

In addition we’ve entered into commitments with Freddie Mac for two seven year ARM mortgages on existing properties. We expect the loans to close in the first quarter with net proceeds of approximately $63 million and all at a floating rate of approximately 4% with cap of 7.5%. A summary of our capital activities is set forth in detail in the capital markets update in our press release.

At the end of 2009 we expect to have access to $836 million of undrawn credit facilities and at the end of 2010 we expect to have access to $487 million of undrawn credit facilities. And finally we continue to take advantages of opportunities in the debt market. In the first quarter we purchased $27 million of face amount of our outstanding debt at an average of 20% discount to par for a yield of 13%.

In addition we purchased $18 million of our 6.5% note due in June resulting in interest savings of approximately $495,000 in 2009.

Now I’ll turn the call over to David.

David Messenger

Thanks Warren, my comments will focus on our 2009 guidance, dividend, and disclosure enhancements. As Jerry discussed we are forecasting occupancy of 94% to 95% and a decline in same store revenue of 1% to 3%. On the expense side we made a lot of progress in the fourth quarter renegotiating our contracts and pricing and expect to be able to limit our same store expense growth to 1.5% to 2.5%.

This equates to the same store NOI forecast of negative 3% to negative 5%. Some of this decline will be offset by increased NOI from completed developments and redevelopments as well as assets purchased in their lease out stages in 2008. We expect to reduce our G&A expenses by 8% in 2009 as a result of our 2008 actions.

We will continue to be active in repurchasing our debt and possibly our common and preferred stock. As we mentioned in our press release last night we have repurchased $27 million of our debt for a $0.03 gain to FFO. Weighing all of these factors and utilizing a diluted share count of 160 million common share equivalents, we are forecasting our 2009 range of FFO to be $1.23 to $1.35.

To simply the range, take the fourth quarter of 2008 and consider that a run rate of $0.30 to $0.31, annualized you get $1.20. Add the $0.03 of debt transactions we’ve already done and you’re at the low end of our range. Its an additional $0.12 to get to the top end. Assuming operations come in better then a 5% decline I can pick up half that spread and the balance can be obtained through further debt repurchases.

Turning to our dividend, in 2008 [inaudible] for our special dividend we paid an annual recurring dividend of $1.22 per common share. Given our forecasted operations the collection of our $200 million note receivable and our current capital plan, we expect to generate taxable income of $1.00 to $1.20 per share.

Based on those levels we do not see any meaningful savings from reducing the dividend. A final comment about our supplement, we have continued to add to our transparency. We have added additional disclosures and attachment four regarding our available credit facilities, as well as our debt maturities with and without extensions.

This should give you a better picture of what we have coming due and the available facilities we can use to satisfy those maturities. We have also provided a home count reconciliation on attachment seven. This helps complete the picture of what our company will look like as our non-mature assets become mature.

Now I’ll turn the call back over to Thomas.

Thomas Toomey

That concludes our prepared comments, we are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jonathan Habermann - Goldman Sachs

Jonathan Habermann - Goldman Sachs

Could you comment at bit on just the government stimulus plan and obviously implications for what you think might be move outs to single family throughout the year.

Thomas Toomey

I think we’re going to learn a lot about this plan over the next week as everybody gets into dissecting it. Certainly a big part that we noticed was the $15,000 credit towards home ownership and I first I’m for anything that gets this economy started. In the long-term our business will be positively impacted if they get there. The $15,000 credit, if you take a median home price or you take any of the home prices in our markets let’s say, you give people $15,000 down, they’ve still got to come up with anywhere between probably $20 and $35,000 themselves and we think a lot of people, that’s going to be a hard thing to come up with these days to buy a home.

So I think its not going to be that visible to us initially out of the gate in 2009 but as the economy turns its probably going to be another threat to us in 2010. But again I think its going to be market by market, price point by price point, and I think in the future as the clarity is provided, we may put some more in our road show materials about the direct impact in our markets.

Jonathan Habermann - Goldman Sachs

Turning to guidance can you decipher a bit, the expectations for West Coast and specifically NOI growth for California. It sounds like the deterioration was more then expected quarter over quarter.

Jerry Davis

I would tell you Southern California, we would see Orange County as probably going to be negative 1% to negative 3% revenue growth. LA is probably going to be a hair worse then that, San Diego is looking to us, that it could be flat to slightly down. Inland Empire is going to be very bad, probably revenue growth of negative 5% to negative 6%. As you move up the Coast to Northern California we think San Francisco, San Jose, will be positive, slightly in maybe the 2% range.

And we think our Monterey portfolio is well positioned to perform well and could easily do 3% to 5% revenue growth.

Thomas Toomey

I think a couple of things as I look at California, certainly an unemployment rate for the state at 9% or better and probably going higher, when we dissected it down to our individual submarkets, we think that unemployment is more at the 6.5% range. So I think we’re going to do better then the totality of California will.

The second that concerns me a great deal is this budget deficit and I don’t want to use the work bankrupt but when you don’t pay your bills I don’t know what you call it. So I’m worried a little bit about what California is going to do as a state fiscally and is that going to be higher taxes on retail system already, on wages, prop 13 hasn’t been attacked at this point. I think it would hard for them to repel it given it would take a populace vote to carry that.

So think we’ll have to watch how California deals with it. Certainly nothing right on the immediate horizon points to a bright future or to a rebound, it points to more negative. That’s our view on California.

Jonathan Habermann - Goldman Sachs

Can you comment a bit just on the expense savings from the internet, it sounds like half of all move ins, and that’s a positive trend that obviously expectations looking ahead.

Jerry Davis

That savings are roughly historically over the last several years, we’ve cut it by about $50 per unit so that’s a $1 million, $1.5 million when you look back two or three years ago. It was down in 2008 versus 2007 by the 18%. We expect it to go down marginally going forward but for the most part we’ve exited all print ads and we’re predominantly in the internet right now.

So the savings rate will continue to get less as time goes on.

Thomas Toomey

What’s interesting is we’re seeing the number of visits climb dramatically, its up another 25% already this year. People are shopping properties much more where they were looking at three to five before they’re probably now looking 10. So we’ve started moving our tracking of our traffic to really truly applications. And what’s been interesting out of that is the number of aps that we’re taking in, in fact is slightly climbing so that gives us some confidence that we’re going to be able to sustain our occupancy levels at today’s rates but and Jerry has color more on what the pricing for renewals and new leases, he’s provided that earlier, you can see that our rents are rolling down.

But different then a lot of cycles, it appears that we’re going to be able to sustain the occupancy number at this time through.

Operator

Your next question comes from the line of Robert Stevenson – Foxx-Pitt Kelton

Robert Stevenson – Foxx-Pitt Kelton

Can you talk about what your certainly is at this point about the $200 million notes payable being paid off as soon as the lock out period is over, its about 7.5% loan.

Warren Troupe

It is 7.5% interest rate on that and its, we’ve had conversations with DRA and they’ve told us that that money has been reserved and set aside in the fund, $200 million. And we had conversations with the lenders on that note so we have a lot of assurance that its going to be paid and we’re proceeding along that way.

Robert Stevenson – Foxx-Pitt Kelton

So at 14 months or whatever, it gets paid, its not something that they’re going to wait and see and let it run until some time later in 2009.

Warren Troupe

Under the loan agreement, default is not paid by June 1st. That’s the loan agreement between them and Fannie Mae. And even then we have an absolute right to have it prepaid later in that year or so. But we have no indications that number discussed with them, have no indications they’re not going to pay.

Thomas Toomey

You have to understand, they are in the advisory business and the capital accumulation business and the last thing that I would think they would want to have is a mark out there with a public company that they’ve defaulted on a note due them and so I think that would jeopardize their franchise as well as their ability to raise future capital so I wouldn’t think that they would try to string it out or do anything other then pay us off.

Robert Stevenson – Foxx-Pitt Kelton

Can you talk about what you’re seeing in terms of credit quality over the last few months here, saw that the losses drip down, but where are you expecting that to sort of peak out at over the next 12 to 18 months and where did that peak out during the last recession for you.

Jerry Davis

It was steadily growing in the second half of the year. We ran most of 2008 at about a 0.4% of our gross potential, we were writing off. By the end of the year it was up to about 0.6% in December, it stayed a little, is probably about a 0.7% in January. That’s a historical average for most portfolios. I can tell you when you look back in the last recession I think our worst quarter of credit loss was 1.3% and that was in the fourth quarter of 2001.

I’d remind you that was a portfolio that included much more B&C grade assets that, for the average rents rate $100]. We don’t currently see that debt going north of 1% but are we going to be able to replicate what we did last year when it was 0.5%, I don’t think so. And as far as credit quality of incoming prospects, our decline rate is comparable to what it was last year where probably one out of every four aps either cancels are gets declined.

Robert Stevenson – Foxx-Pitt Kelton

What are you thinking in terms of the portfolio in 2009, is there a situation where you would think about selling a decent amount of assets to raise capital to take advantage of some buying opportunities.

Thomas Toomey

I think we should always be looking at asset prices and as a source of capital. Right now our taxable income is $1.00 to $1.20 a share and so any asset sales would require another special dividend or rolling money over for 1031 activity so we’re probably not going to pull a lot of triggers on the sales side and I don’t think its good business to be doing it frankly at this point in the cycle. I think asset prices are down, I think they’re going to stay down for 2009. They may start rebounding as people play the rebound in 2010.

That’s where I see it.

Operator

Your next question comes from the line of Michael Bilerman - Citigroup

Michael Bilerman - Citigroup

Did you talk about the shopping center acquisition in [RA3]?

Mark Wallis

It is a property that’s on the corner of our [inaudible] development located in Addison, Texas, and we’ve really been working on that since the beginning of that [assumage] of land, it gives us the corner, it’s a high end grocer in Dallas, that anchors that center with a newly remodeled stores. Its somewhat undermanaged so it rounds out our long-term plan and gives us just a better overall master plan for the long-term. In the interim we’ll run it and we think we can improve it a little bit and it just rounds out that situation in Addison like we want.

Michael Bilerman - Citigroup

Moving over to the balance sheet a bit, can you just talk about your comfort with the upcoming extensions and expansions and if there will be any material changes to terms once those are complete.

David Messenger

No we’ve actually visited with Fannie Mae and we have the absolute right, its our right not an option, for the extension and so we’ve talked about the additional $415 million and with respect to terms the pricing on those are as you know are done at the date that you pull down. Once at [DMVS] which is an older product that Fannie has not present quoting, but we do something on that 140 would probably be in the 3.5% to 4% range and on the other one, it’s a 10 year pricing interest only, based on today we’re looking at about a 5.9%, 6%.

Michael Bilerman - Citigroup

Touching on Florida, there’s a lot of theories out there that some of these markets that have hit the bottom stabilize, I wonder if you can give some color on the dynamics that you’re seeing in that market relative to stabilization versus further deterioration off of an already low base.

Jerry Davis

In Tampa and Orlando, it feels like we’re hitting the bottom, we’re not seeing as much rent deterioration, we’re seeing occupancy going up, and I can tell you our leasing activity over the last two to three months in Florida was second to none in our company so we felt a pick up there.

Jacksonville started to drop for us in second half of last year and we anticipate Jacksonville this year is probably going to continue to see a decline in revenue probably in the 3% to 5% range. The rest of Florida we think is while we think is going to be negative there is a chance it could turn. A lot of the inventory issues that they had last year get filled up so unless a lot of unannounced job losses hit Florida, Florida should not go a whole lot worse. It will still have negative revenue growth but its not going to, the two markets I see it will probably and the most gloomy about are probably Phoenix and the [Inland] Empire still.

Thomas Toomey

I think Florida might be a surprise up, given everybody’s expectations are so low and the other might be the military markets and we’ll see whether policy confronts fact, the White House, and the troops start coming back but our sense is is that while we’re not planning for it that could be a nice surprise up and the military markets for us represent San Diego, Seattle, Norfolk, Virginia Beach marketplaces. And the other plus is probably going to be DC. It doesn’t look like this housing Bill or stimulus Bill or the treasury plan, any of them involve shrinking government.

It looks like our corridor from Baltimore down to Richmond is probably going to benefit a great deal from the influx of people moving into those markets. And I think your prior observations on some of our peers Texas isn’t so bad, so I think you’ve got generally a tone everybody is trying to be conservative about their forecast and not trying to find any bright spots but I think there are a few to weigh and the simple answer is in this marketplace and in this timing there’s no reason to show optimism until after the fact, but that’s where I would point to if I were thinking there were going to be some surprises.

Operator

Your next question comes from the line of Michelle Ko – UBS

Michelle Ko – UBS

I just wanted to go back to the fact that you said that there could be positive revenue growth in San Francisco and Monterey, I was wondering if you could tell us what the occupancy and rental rate trends have been month to month from December, January and February, has there been any deterioration in these markets from month to month?

Jerry Davis

Not really, [inaudible] portfolio we’ve had pretty good rent growth. That is a seasonal market, it’s the agriculture business is up in our Monterey portfolio really caters more to the town of Salinas. And this time of the year you will see a decline as there’s no crops to pick but that typically comes back strong in mid-March. Housing up there has not really increased and we don’t see any job cuts in the agricultural business so you really have a captive resident base without a whole lot of supply that we can set the rent.

We have seen good rent growth there although occupancy when you look over the last three or four months has gone down as seasonal workers have left. But that’s normal. San Francisco, occupancy we did see a decline there in early November and its continued to stay stable since then. It really hasn’t fallen any further and quite a few of our places especially in the San Jose market that initially went south in November have bounced back up and have occupancy levels. Really in San Francisco we’re probably in the 96, 97 range.

Michelle Ko – UBS

Can you talk about renewals, are the new residents being offered better deals then someone renewing at a similar unit.

Jerry Davis

Typically that’s true, what we’ve really seen in the fourth quarter is our average new renewal in the fourth quarter across our portfolio paid an increase of 2.4%. Our new lease when you compare it to what the previous resident was paying was paying 4.3% less. So yes it is true that existing residents are paying more then new leasers. That varies by market. Some places where we’re seeing positive rent growth on new leases are Monterey, the Salinas portfolio, Texas and in San Diego, and we only had really two places where we didn’t see positive growth on renewal rates. Those were Phoenix which was negative and the Inland Empire was flat.

But typically if you said what’s the difference between the rent on a unit where somebody renews and what the new resident is going to pay, its probably in the 5% to 6% range.

Michelle Ko – UBS

I was wondering you commented a bit on your dividend and that you would continue to pay it but I was wondering if, wanted to confirm if that would continue to be in cash or a combination of stock and cash.

Thomas Toomey

I’ve been watching with a great deal of curiosity the market’s reaction to the stock versus cash dilemma and it seems to me that David pointed out that our current at the midpoint shortfall on the dividend is about $13 million which is about 1% of our available debt capital capacity. So it seems like to me if you’ve got the capital capacity in your company and it’s a temporary market condition that you’d continue paying it in cash.

I’ve long ago believed that if the market sees the opportunity for growth on an accretive basis that it will feed us capital and that hording capital is a dangerous sword to play with. So I’m more drawn to the cash, I think its certainly something we plan on discussing with our Board at length throughout the year as the market conditions continue to have more visibility to us but at this present time, I would anticipate us paying it in cash.

Operator

Your next question comes from the line of Richard Anderson - BMO Capital Markets

Richard Anderson - BMO Capital Markets

The exit of the condominium business all together, what happens if that market turns around, is that something that you’ve been burned on, you don’t want to go back to it or would you be willing to go back to doing condo conversions if the market ever allowed it again.

Mark Wallis

The way I answer that is we keep our options open and we have not gotten rid of any condominium maps. And in fact we still are pursuing maps on properties that we have no intention today of putting them in the pipeline because we think that just enhances the value of that asset down the road so the way I would answer is, I think there’s not enough visibility to really answer that question other then we haven’t eliminated or removed any of our options at this point.

Thomas Toomey

Our job is to maximize the value out of our real estate and if that were to lead us to selling to a condo converter or doing one, yes, that’s our job and we should weigh the risk of the downside of it and then you can see from our exercise and discipline over the last couple of years that we took existing product, did quick turns and in the end we had two deals stall out that we’ve reverted back to the rental pool and seem to be doing fine running them that way.

We didn’t go and build, we didn’t go out and speculate on dirt, and I don’t think that’s where our business and our strike zone is.

Richard Anderson - BMO Capital Markets

I don’t see any issue with the selling to a condo converter but you got into the condo conversion business directly a bit late to the game—

Thomas Toomey

It didn’t turn out to be too bad to us did it?

Richard Anderson - BMO Capital Markets

Any issue with the facility in terms of your banks and their commitments to supporting the facility?

Warren Troupe

No, absolutely not. You can see from the press release we’ve done some initial [inaudible] here which tend to pay back down, but all of our banks have participated.

Richard Anderson - BMO Capital Markets

In the aftermath of the big portfolio sale, have you looked at all how that has impacted you pro forma for it not have happened, would you have been in a better position today in terms of the greater level of diversification you would have had or are you in a better position today because it happened.

Mark Wallis

I mentioned in my script that we were net sellers $720 billion, so the way I look at it simplistically is the conventional wisdom is well, assets have declined, pick a number, 15%, 20%, I’ll just use 20%, I made $150 billion of value if all the assets declined exactly the same. I would then argue that the $1.7 billion we’ve sold have declined much more dramatically then the assets we bought. So we look at it as a net gain.

Thomas Toomey

I think we can always look in the rearview mirror and try to say, gosh if I’d done this or that differently you’d come out with a lot of different answers. In the end over the life of this company and its portfolio positioning, I think we made the right choice. Would have liked to have sold it for more but we didn’t. We would have liked to have paid less for the stuff we bought, we didn’t. In the end I can’t rewrite history and neither can you and the simple answer is I thought it was a good strategic move for our shareholders, [Gord] concurred with it and I think in the long run we’ll look up three years from now and realize that that was the true benefit and you sometimes have to measure these things over a longer time horizon.

But in the short-term I thought it was a good choice, in the long-term I think it will be a great choice.

Operator

Your next question comes from the line of Mark Biffert – Oppenheimer

Mark Biffert – Oppenheimer

I was wondering if you could provide some color, I noted that your development yields range you gave was roughly 5.5% to 7% can you just talk about what project, does that include redevelopment and then what would your yield have to be to start a new project in this environment.

Mark Wallis

The upper end, one of the pre-sale I mentioned that we were scheduled to close later in 2009, that was in the 7 to 7.25 underwriting and actually its owned by the developer now but its performing at pro forma but most of the remaining redevelopment deals are going to be at the higher end of the range, the 5.5 is going to be more of the Marina Del Ray type asset that is at the lower end of the range.

Mark Biffert – Oppenheimer

What’s kind of a targeted one that you’d have to see looking ahead, based on your current cost of capital.

Mark Wallis

I think that’s a tougher question to answer today, I said we don’t anticipate any starts right now and I think the main reason even though we see markets like DC that are very healthy is where the clouds clear on cost of capital. Today most things are underwriting in the mid 6’s, toward 7. You have to just evaluate whether you think the markets you’re in, like a DC market is going to have long-term growth that justifies a bit lower going cap rate. I think you have to get today, we’re not starting anything and it has to be at least north of the 6.5 but I always hesitate to give that as a blanket answer because there are some markets where it might be a different answer.

Also I might just mention on development one thing that is happening right now, I mentioned we’re engaged in doing some design work, planning on a couple of sites and engaging with general contractors, prices for hard cost are dropping as fast as they’ve dropped in 20 years, maybe longer. Hard cost probably are at least 15% off on a first [lush] meaning what they were 90 days ago. So how that plays out, that’s obviously making the yields get better and then depending on how the credit markets resolve what the cost of capital is you may see yields get better because of that factor.

Thomas Toomey

You also look at buying assets in a particular market and we’re seeing assets come across where expectation prices are in the 6 cap rates inside of DC, California, those types of markets and so if you wanted a spread to the risk over what you could buy assets for, you’re going to have to be talking about 7’s or better and so I just think its something you just keep watching. Its not a discipline that you just abandon or start up and stop, we’ll keep shopping it. If we start something we’d be glad to defend the decision to our investors and to ourselves. But right now we’re not seeing the numbers cross that make sense and you can’t get out of that business, you have to keep plugging at it. And that’s what we’ll keep doing.

Mark Biffert – Oppenheimer

How much dilution do you expect to be in your numbers in 2009 as you lease up the current projects that you have from development.

David Messenger

I’m not trying to think of it as terms of dilution because I just looked at it and said here’s what the NOIs are.

Jerry Davis

We haven’t looked at it like that, we look at more in terms of adding pennies to FFO and to the bottom line as opposed to any kind of dilution from the earnings picture.

Mark Biffert – Oppenheimer

Related to maintenance CapEx for 2009 what’s your projection per unit.

Jerry Davis

Our total recurring CapEx projection for 2009 is $675 a door. If you wanted to break that down to turnover CapEx which is predominantly floor coverings, we expect that portion of the $675 to be $210.

Operator

Your next question comes from the line of Mike Salinsky - RBC Capital Markets

Mike Salinsky - RBC Capital Markets

In the guidance range you provided you indicated annualizing the fourth quarter running that forward what is the range of non-recurring tax benefit type gains and stuff that’s included in that range.

David Messenger

If you’re taking the fourth quarter we’ve got about $0.02 in there from the tax benefit that we incurred I the fourth quarter. Going through my simple math example we’re looking at about a penny a quarter on the tax benefit. We’re going to keep evaluating the capital markets and keep watching operations to determine what else we go after in terms of debt repurchases or other capital activity.

Mike Salinsky - RBC Capital Markets

What is contemplated in guidance currently.

David Messenger

We have the $0.03.

Mike Salinsky - RBC Capital Markets

In the same store assumptions you laid out, what are your unemployment assumptions and what is the sensitivity.

Thomas Toomey

I’ve gotten a kick out of reading several of my peers trying to correlate a national unemployment number to their portfolio and the simple answer is its still a community by community, city by city business and we haven’t gotten so darn good that we can tell you the unemployment in the country is 7.6% and so our business is going to be X. We’ve built it three ways, which is bottom up and top down business plans by our assets, and guarantee the vast majority of our on site community people don’t look at the national unemployment picture.

I don’t think it bears a lot of effort or brain power to do it. That’s my answer.

Mike Salinsky - RBC Capital Markets

Several of your peers have been rolling out ancillary income sources, bulk cable, improved billing and stuff, is there any plans to do that?

Jerry Davis

I can tell you we’ve looked at a few of those and I’m just not confident when you look at things like that, LA Waste for example that we looked at later in last year and that our residents are really to pay that extra amount of money for that right now. Plus it can drive up your expenses and if you’re really not truly getting paid for it you may fool yourself and think you are but your base rent deteriorates further.

On the cable, we believe our residents want the choice to pick what they want so we really haven’t gone to that level yet. We watch what some of our peers are doing but to date we haven’t committed to go that direction.

Thomas Toomey

You also have to look at those contracts, as I recall a lot of them if the occupancy drops you’re still paying the same fixed cost. So its just a philosophical approach towards how we run it. I think it creates a window where you can advertise against that type of campaign where if you move in and you say listen you want the NFL network for Sunday, you can’t get it at XYZ property. At ours you can.

And I hate to say it, there’s a lot of people who are 25 years old who think like that and I’d rather get, I think its an important element of flexibility. I’d rather win on value of the asset and the service then by trying to force you to buy products from me. Last time I checked and I remember the internet and everybody was going to start selling clothes to the residents, that didn’t work out too well either.

Mike Salinsky - RBC Capital Markets

What’s your feeling as to when we start to recover at this point.

Thomas Toomey

I think this is what I have to see, I have to see a marked improvement in the lending and capital flow to get jobs started moving and this lag is going to be when you start to see capital moving its going to take six months after that for a jobs picture to start looking a bit brighter.

I’m unconvinced by the actions taken to date or those indicated that those are job generators or even capital flow generators. They look like a lot of spending with not a whole hell of a lot of getting capital flowing. It seems to me they’ve missed their chance, they should have shut down about half the damn banks, reopened them, and forced capital out the system that way. And what they’re going to is is some semi privatization/we’ll cover your losses game plan which is going to be confusing and hard for capital to start flowing through that system.

I got very discouraged by what I just saw over the last week in terms of getting capital to flow which is also pushed back my prospects for job growth to start to occur. I hate to say it, I just washed 2009 away in watching what’s just occurred. I think our guidance reflects that, hope I’m wrong but that’s how I tend to think of it.

Operator

Your next question comes from the line of Unidentified Analyst

Unidentified Analyst

On the dividend given your FFO forecast to repeat if you hit the low end and assuming it doesn’t fall out you’re inclined to pay the dividend in cash, if it does fall out would you more inclined to just cut the dividend but keep it in cash or pay of portion of it in stock.

Thomas Toomey

Speaking personally and that’s a topic that is a executive level and Board decision, but the way I look at it today is I think you cut the dividend versus trying to give people paper that they’re just going to turn around and sell. It appears that, we’ll watch as people do more and more of this stock versus cash element. I see the trend going negative on that meaning more people will probably do it and the reaction of the street will be negative.

But I think you cut the darn dividend instead of just handing out paper. I think of our equity very, very cautiously.

Operator

Your next question comes from the line of [Andrew Amculla – Unspecified Company]

[Andrew Amculla – Unspecified Company]

On the financing environment Fannie announced yesterday their intention to move more towards a securitization model as opposed to being a balance sheet lender in the multifamily arena, how do you think that’s going to effect the cost and availability of debt for you going forward.

David Messenger

My view of Fannie and Freddie, has always been that is where their best strike zone is, is an accumulator of paper market and then offload it. The times where they’ve gotten to putting it on their balance sheet they confused their mission so I applaud that move and direction, think it’s a good policy decision and will put our cost of money more in line with what I think other securitized real estate sectors will be.

So will it potentially go up, I think there’s a uniqueness, the guaranty still appears to be evident and is going to be applied and that’s worth 50 to 75 basis points on the spread and so we’ll continue to enjoy that. We’ll see what investors’ appetites are in light of the single family paper getting remarked, multi family getting more volume out there. I don’t know what the, around the globe what the response is going to be but my indications would probably be rates go up versus go down.

[Andrew Amculla – Unspecified Company]

You acquired a fairly healthy amount of assets in 2008 which will roll into the same store pool various quarters throughout this year, how different would you 2009 same store guidance be if all of the 2008 acquisitions were in the same store pool starting January 1.

Jerry Davis

I would say 100 basis points better because when you look at it quite a bit of that was our acquisitions were in the DC market, the Texas markets, and Dallas and Austin, but the big one was in Dallas, Northern California and Seattle so we bought one property in Southern California and we didn’t buy anything in Florida or Phoenix so yes, I would say probably, I don’t know if I’d say that one year’s worth of acquisitions would have pushed it up one point, but it definitely would have pushed it higher.

[Andrew Amculla – Unspecified Company]

When you said 100 basis points is that on revenue or NOI.

Thomas Toomey

NOI.

Operator

Your next question comes from the line of Alexander Goldfarb – Unspecified Company

Alexander Goldfarb – Unspecified Company

Just going to your earlier comments about your taxable income for the year, if you could sell individual assets small assets, if there is market for those, why not continue to sell and if you have to pay a special cash dividend just go ahead and do that.

Thomas Toomey

I’m not convinced the asset pricing today makes a lot of sense. We’ll be out there looking at our RE3 assets which we can sell without triggering a large tax liability. We’ll see what they price but it seems to me that you’re selling assets probably at the bottom of asset valuations and last time I checked that’s never a good thing.

Alexander Goldfarb – Unspecified Company

Even if relative to your stock, if its still a better trade.

Thomas Toomey

I think we’ll keep watching the spread. I notice where the stock is trading today, it’s probably trading at about an 8.5 cap versus selling assets at a 7, you’d probably start looking at that spread and saying that’s probably worth the risk even if you have to pay a bit of tax to move on. At some point the spread does widen to a point that it makes sense to do so, I would hope that people realize that 2008 we did shrink the size of our company and we thought it was a good time to do so. And we’re not afraid to continue that process if it means something that’s beneficial for our shareholders. I just don’t see it at this point, we’ll continue to monitor it, if that spread stays that way I’m certain it will enter into more of our active.

Alexander Goldfarb – Unspecified Company

On the debt side the repayment of the Fannie credit facility with the one-time prepayment penalty what were the thoughts behind that and then as you look to buying back debt, are you more focused on the maturity of the debt or the discount.

Warren Troupe

On the repayment it allowed us to take $139 million that was in 2010 now to 2018 allowed us to reduce the interest rate on that which I think was around 6% to 4.8%. So it made a lot of economic sense both from a expanding the facility we got $400 million in the facility, plus lowered the interest rate.

Thomas Toomey

Through a lot of technicalities normally you would take that facility, the prepayment and roll it over to the new facility and amortize it over the remaining 10 year period. And the simple answer was is Warren and his team did such a great job of negotiating the terms that the accountants deemed it a complete reworking of the facility and not an extension and as a result we just faced the accounting oddity of having to expense it so either way great decision when you lower it a couple of hundred basis points over a 10 year piece of paper and got the expansion feature in play.

So looking at our debt, in terms of are we targeting discount or maturity and there’s not question about it we’re focused primarily first category is on the short-term maturities but we’re shopping the entire spectrum of our debts for discounts. We’re finding sellers. And we’re going to continue to do that and it seems to me it would be a good trade taking 10 year debt from Fannie and Freddie and buying up two year maturities at 20% off or 30% off.

I think we’ll keep doing that. I think the market’s dislocated enough that its still there and probably will persist for some period of time. Ironically I do have to laugh a bit at the most recent government’s pitch which is six months ago they wanted the tax to hedge funds and then make their comp transparent, and now what they want to do is underwrite them and guarantee their returns.

So what can happen in six months is bizarre.

Operator

Your next question comes from the line of [Kareen Forest – Unspecified Company]

[Kareen Forest – Unspecified Company]

Just a clarification on the dividend is the plan for 2009 to reduce the regular quarterly down from $0.33 per share in 2008 in to $0.30.5 in 2009?

David Messenger

We’re not reducing the dividend we considered it more of a restatement of the dividend that when we went through the stock, the special dividend and had the stock issuance, we restated all of our prior year activities in all prior periods so accordingly that $0.33 dividend gets restated to $0.30.5.

[Kareen Forest – Unspecified Company]

But going forward a shareholder should expect that for every share they’re going to get $0.30.5.

David Messenger

Correct and they also have more shares, so the aggregate dividends they receive will be the same or go up.

Operator

Your next question comes from the line of Paula Poskon – Robert W. Baird

Paula Poskon – Robert W. Baird

Could you review the terms and conditions under which you can exercise the extension options of the debt maturities this year and next and further could you tell us whether the later extension opportunities could be contingent upon extending the earlier ones. So for example if you fully utilized all the ones available in 2009 and 2010 does that impact your ability to utilize extensions in 2011 and beyond.

Warren Troupe

On the Fannie Mae facilities we just have an absolute right of extension and there are separate facilities and we can add properties to them, pull down $275 or add properties and pull down $140, they are not contingent on one being [inaudible] before the other. With respect to the one such as the Marina Del Ray loan which is in 2009 that’s just an absolute extension right that we have. Its two one year extensions. And with all of the other construction loans its just an absolute right at our sole discretion.

Paula Poskon – Robert W. Baird

What are you seeing in terms of early lease terminations, and correspondingly an average length of stay.

Jerry Davis

I can tell you the lease terminations are roughly about what they were last year. I haven’t seen a large variance. You’ll see some people that have a job loss and break their lease. And some of those situations you have to write off the balance because they’re not going to pay whereas in previous years you would see people moving because of job relocations and their new employer would pay that lease break but its been fairly stable.

As far as normal length of stay, we don’t track that specifically. But I think most of our residents still tend to sign a nine to 12 month leases.

Operator

Your next question comes from the line of Steve Swett – KBW

Steve Swett – KBW

Last quarter you had an attachment in the supplemental where you had some land positions identified and some operating communities you were looking at redeveloping, and some of those have slid into the active pipeline it looks like but the other ones I don’t see listed anymore in the supplemental, are those still land positions you hold, are you still capitalizing costs related to those.

Mark Wallis

There are still land positions that we do hold and I mentioned that on three of those we are still working entitlements and doing predeveloped planning so appropriately those costs are capitalized. So there’s no real significant change there other then we’re trying to communicate from a volume commitment standpoint of new construction and the cap requirements associated with that that may have been misinterpreted in the past that we are not, we will tell you we’re start to deal with those, they are not going to be started until the as mentioned earlier the financial markets are in line on the deal and it looks like the appropriate yield.

And as I mentioned too there is quite a dynamic market right now where costs could do much better and we’ll see how that plays out.

Steve Swett – KBW

Did you indicate how much the accounting adjustment on the exchangeable notes would be.

David Messenger

We have not, we’re looking at that right now. For 2009 we estimate its going to be between $0.04 and $0.05 for the year. We’ll keep that broken out on the face of the income statement as a separate line item so you can easily see it and we don’t try to mix up the interest expense.

Steve Swett – KBW

Its not in the guidance.

David Messenger

No it is not.

Operator

Your next question comes from the line of David Bragg - Merrill Lynch

David Bragg - Merrill Lynch

On the guidance range the bottom end of the range 123, that does include the 3%, that repurchase gain from the first quarter and it also assumes negative 5% NOI growth.

David Messenger

Correct.

David Bragg - Merrill Lynch

And then to get to the top end of the range, what does that assume, negative 3% NOI growth and does it assume any other one-time items?

David Messenger

Its assuming we’re more active in the debt markets and repurchasing our short longer term debt as well as the operations coming in better then the 5%, 3% being on the high end of that range.

David Bragg - Merrill Lynch

And is there a quantifiable level of the debt repo gains that get you to the $1.35?

David Messenger

No, we were just saying that if you split it, its $0.06 on each side, $0.06 from operations, you pick up another $0.06 from debt repurchases, that gives you the $0.12.

David Bragg - Merrill Lynch

What are you assuming for G&A for the year.

David Messenger

An 8% decrease probably comes in somewhere around $35, $37 million.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Thomas Toomey

Thank all of you. We think we’re moving in the right direction. I think our business is well prepared for the current uncertainty in this environment and that you’ve got a team that’s focused on knocking off its list and moving forward. We’ll see many of you in the upcoming weeks at Investor conferences and look forward to those meetings as well.

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Source: UDR, Inc. Q4 2008 Earnings Call Transcript
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