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Executives

Andrew Cantor – Investor Relations

Tom Toomey – President and CEO

David Messenger – SVP and CFO

Jerry Davis – SVP, Property Operations

Mark Wallis – Senior EVP

Warren Troupe – Senior EVP, General Counsel and Corporate Secretary

Analysts

David Toti – Citigroup

Swaroop Yalla – Morgan Stanley

Jay Habermann – Goldman Sachs

Mark Biffert – Oppenheimer

Michael Levy – Macquarie

Michelle Ko – Bank of America

Dave Bragg – ISI Group

Anthony Paolone – JP Morgan

Dustin Pizzo – UBS

Ross Nussbaum – UBS

Rob Stevenson – Fox-Pitt Kelton

Karin Ford – KeyBanc

Michael Salinsky – Royal Bank of Canada Capital

Paula Poskon – Robert W. Baird

Steve Sakwa – ISI Group

Mike Liddell [ph] – AIG

Andrew McCulloch – Green Street Advisors

Jordan Sherman [ph] – Parental Real Estate

Jon Litt – Citigroup

Michael Bilerman – Citigroup

UDR, Inc. (UDR) Q3 2009 Earnings Call Transcript October 19, 2009 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. 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 open for questions. (Operator instructions) This conference is being recorded, Monday, October 19th of 2009. I would now turn the conference to our host, Tom Toomey, President and CEO. Please go ahead, sir.

Andrew Cantor

Thank you for joining us for UDR’s third quarter financial results conference call. Our third quarter press release and supplemental disclosure package were distributed earlier today and posted to our website, www.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.

I would like to note that statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in this evening’s press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions and follow-up. Management will be available after the call for your questions that did not get answered on the call.

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

Tom Toomey

Thank you, Andrew. And good evening to everyone. Welcome to UDR’s third quarter conference call. With me today are Jerry Davis, Senior Vice President of Operations; David Messenger, Chief Financial Officer, who will discuss our results; as well as our Senior Executive Vice Presidents, Mark Wallis and Warren Troupe, who will be available to answer questions during Q&A.

After the market closed today, UDR announced that it achieved core FFO per share of $0.31 compared to $0.30 last year. This quarter’s FFO results were impacted by two items. One, a $0.10 charge related to non-cash equity loss on the company’s investment in a development joint venture and a $0.02 charge associated with our bond tender. Including these amounts, our reported FFO per share is $0.19.

During the quarter, we engaged in a number of capital market activities. In September, we completed a bond tender. The tender was at a 10% premium, but was the right decision, as we realized interest savings over the long-term and were able to modify our bond covenants. Furthermore, in mid-September we initiated at-the-market stock issuance program where we sold roughly 2.3 million shares at an average price of $14.89.

In addition to our efforts to lower our interest expense via our bond tender and to raise our equity opportunistically through the ATM program, UDR secured a 10-year $200 million facility with Fannie Mae at a weighted average interest rate of 5.28% and entered into a $450 million acquisition joint venture with Kuwait Finance House. These activities will be discussed in detail during Dave’s remarks.

These activities further illustrate that the market’s willingness to provide strong multi-family operating platforms like UDR with capital necessary to fortify its existing balance sheet and capital to take advantage of anticipated acquisition opportunities.

From an operating perspective, as we have discussed in the prior calls, the economy certainly remains challenging due to the continued job loss and increasingly tough comparables in the field. However, we remain encouraged by how effective we have been executing despite these headwinds.

To that end, in the quarter, we limited our same store NOI decline to 3.7% on a year-over-year basis and 1% through September 30th and continue to maintain occupancies above 95%. We have been communicating throughout this year that rental growth will be allusive in the near-term as we go through a bottoming process. But the scarcity of new product to compete with in most of our markets and the minimal vacancy in our portfolio should allow us to push rental rates when the job market recovers.

While we expect some markets to continue to moderate, such as our Southern California where we are generating 27% of our same store NOI, we are seeing a slowing in rental rate declines on a sequential basis in other markets, specifically Washington DC and Florida where we generate almost 50% of our same store NOI.

And as we look for sequential rental rate increases across several of our markets perhaps as second half of 2010. Jerry and his team have done a great job of managing the trade-off of occupancy, rents, turnover and resident quality in the field, and he will continue to provide more color on these trends in the individual markets during his remarks.

Recently, there have been some high profile deals going to contract that illustrate the disconnect between private market values and those of the public markets. One particular deal in the DC beltway comes to mind. There are over 30 bidders for this asset at a reported cap rate in the low fives. This high level of participation on the anniversary of the financial markets dislocation shows just how far the pendulum has swung from the irrational despair of 2008.

Institutional investors are showing an appetite that has returned particularly for properties located in strong employment markets with high barriers to entry. While this is just one market and one single asset, the story is the same across many markets and many deals and should provide a reference point or baseline on how valuations in the private market for institutional quality assets relate to those in the public markets.

With that, we’ve got a good amount of ground to cover. I’ll pass the call over to Dave to discuss our financial results.

David Messenger

Thanks, Tom. My comments today will focus on the third quarter results, the steps we’ve taken to further improve our capital position, and our outlook for the remainder of fiscal 2009. Earlier this evening, we reported $0.19 of FFO, which consists of $0.31 from our core operations, a $0.02 charge associated with our tender offer, and a $0.10 charge related to a loss on an equity investment. We have excluded the $0.01 effect related to the convertible debt accounting. Our core FFO $0.31 compares to $0.30 last year. Jerry will provide detail on our operating results in a moment.

During the quarter, we recorded a non-cash charge of $16 million or $0.10 per diluted share on an equity investment in two of our unconsolidated Seattle-based joint ventures. One of the ventures is completing development of elements of a 274-unit property located in Bellevue, Washington. The other joint venture was originally established to develop a retail site also located in Bellevue, Washington. However, during the first quarter, the joint venture decided to delay that construction.

UDR does not have any other joint ventures involved in the development of multi-family communities. This charge was a result of recent discussions to change the capital structure of the joint venture such that UDR would become the general partner. Although a definitive agreement has not been reached, nor can be assured of being reached in accordance with generally accepted accounting principles, our investment must be recorded at fair-market value. And if that fair-market value is less than our historical cost basis, then a loss must be recognized.

Regarding capital activity, the third quarter was an active one as we took a number of positive steps with regard to our capital position. We improved the term and cost of our debt, implemented an opportunistic equity offering program, and secured a new line of credit and announced our venture with Kuwait Finance House.

Our Q3 share count increased, as we raised $33.7 million from the sale of 2.3 million shares at a weighted average price of $14.89 under our at-the-market equity offering program. As of September 30, we had in excess of $1 billion of cash and credit capacity, which will more than meet our maturity and development needs through 2001. This capacity allows us to manage our capital plan opportunistically and efficiently. We maintained our fixed charge and interest coverage ratios in excess of 2.0 times after factoring for non-recurring items.

During the quarter, we completed a tender offer for our 8.5% debentures that mature in 2024. We were able to retire 70.3% of the debentures outstanding for $35.7 million and incurred a charge of $3.7 million or $0.02, representing the premium and transaction costs. The retirement of this debt will result in savings of $15 million to $17 million in future interest payments.

We closed on a construction loan for Vitruvian Park Phase 1 with an interest rate of 5.3% and a maturity of four years inclusive of the one-year extension. Upon closing of this loan, no further financing is required to complete our development pipeline. Also during the third quarter, we closed on a new 10-year $200 million secured facility with Fannie Mae at an all-in rate of 5.28%. The proceeds of the second draw will be used to prepay substantially all of our 2010 secured debt maturities.

In August, we announced that UDR has established a joint venture with Kuwait Finance House. The total amount of the venture is $450 million with an equity contribution from the partners of $180 million. UDR’s maximum equity contribution will be 30% or $54 million. The venture’s target markets are key high-barrier markets and products similar to what UDR owns today.

Finally, with one quarter remaining in fiscal 2009, we are updating our guidance. Our FFO guidance range is now $1.14 to $1.20 per diluted share compared to the prior range of $1.23 to $1.35. This change reflects the $0.10 charge we recorded this quarter and our expectation that our property operations will continue the trend of the first three quarters. The detailed walkover of our guidance is included in our press release.

Now I will turn the call over to Jerry.

Jerry Davis

Thanks, Dave. Good afternoon, everyone. In the third quarter, our NOI decreased by 3.7%, as revenues fell 3% and were offset by a decrease in expenses of 1.6%. Our operating teams continue to execute our strategy of maintaining the occupancy, reducing resident turnover, driving the operating expenses down, and automating the way we do business. It appears that job losses are slowing in our markets though we have not yet begun to see any meaningful hiring. It is unlikely that we will see much of a change in operating results until we see jobs.

Our effectives rates were 4.1% lower in 3Q ’09 compared to 3Q ’08 and down 1.6% to the second quarter. We have continued to see new leases reprice at lower rates, but the rate of decline is slow since the first of the year. This gives us hope that we are approaching a bottom in many of our markets, but we have little visibility on how long that bottom could last.

Rental rates on new leases that were signed in the third quarter of 2009 were 6.8% lower than what the prior resident was paying, while renewing residents averaged decreases of 0.8%. These amounts vary throughout our 21 markets, with California, Phoenix, Orlando and Seattle, experiencing the largest rate declines on new leases. As expected, our DC, Baltimore and Mid-Atlantic markets experienced the lowest rental rate drops on new leases.

Our strategy in 2009 has been to drive occupancy during prime leasing season in anticipation of the winter seasonal downturn. We have met our plan as same community occupancy increased 60 basis points to 95.6% from 95.0% last year.

During the third quarter, all 21 of our markets had occupancy rates over 94%. Because of the continued expansion of our technology platform, superior locations, the quality of our real estate and our focus on customer service, we have been successful in maintaining occupancy levels that have averaged 95.4% over the first nine months of this year.

We are confident that we can sustain this level of occupancy through the remainder of 2009. In fact, just this past weekend, our occupancy rate was 95.5%. To be at this high occupancy level in the seasonally slow fourth quarter will drive higher revenue this year and also allow us to raise rents when the economy turns around.

Our annualized turnover rate for 3Q ’09 was 69%. That was slightly better than the 70% we reported in 3Q ’08. Year-to-date turnover is 60%, which is flat with last year. Move-outs for home purchase continued to be very low in most of our markets.

During the quarter, only 14% of our departing residents left to purchase a home. This compares to 13% last year and also 13% in 2Q ’09. Markets with high home prices, such as Orange County, San Francisco, San Diego, Monterey and LA, all had move-out rates for home purchase of 10%. These markets represent almost 40% of our same-store NOI.

Now turning to expenses for the quarter. Total expenses were down 1.6% for the quarter compared to the same quarter last year. Real estate taxes increased 3.2%. Utilities were down 3.4%, as increases in water expense were offset by lower natural gas prices and lower electricity expense. We continue to renegotiate pricing with the vendors that service our properties. These efforts have helped to drive down repairs and maintenance expense during the quarter by 4%. This includes the reduction in turnover expenses of 21%.

Personnel costs were flat, as we have been able to realize some staffing benefits as a result of automating the way we conduct our business. Direct personnel cost -- personnel costs were down 2%. However, they were offset by slightly higher associate health care costs. Over the last several years, we have working to automate our business.

Our first priority was to increase our Internet marketing to drive more and more perspective renters to our website. This has resulted in over 64% of our third quarter move-ins originating through an Internet source. This is up from 53% last year and from 62% in the second quarter of ’09.

Additionally, for the first nine months of 2009, we have experienced an increase in traffic to our website, udr.com, of 41% year-over-year. Driving more traffic through Internet sources, including mobile devices and multiple language sites, has been beneficial not only in maintaining our occupancy but also in decreasing our administrative and marketing costs, which were down 7% compared to the third quarter of last year.

In the past year, we have been moving toward giving our residents what they want; 24/7 access to us and self-service. At the beginning of this year, we rolled out a resident Internet portal that allows them to electronically communicate with us as well as pay their rent online by ACH. Just nine months into the program, almost 80% of our residents are signed up to use the portal to conduct business with us electronically, and over 53% of our residents paid their rent by ACH in September.

Additionally, during September, 26% of resident service requests were submitted through the portal. This enables our customers to submit a service request 24 hours a day, seven days a week with a detailed information they give us going directly into our system and automatically put into the queue to be completed, enabling us to get to the service request faster and fix the problem more quickly. This eliminates administrative work for our site teams, while giving our customers what they want.

Now turning to our redevelopment and development progress. If you refer to attachment nine in our earnings supplement, you will see that we completed the redevelopment of seven communities, containing just over 2,100 apartment homes. These properties have leased occupancies between 95% and 98% and are performing in line with our pro formas.

We have also completed eight developments containing almost 2,000 homes. Lease-up velocity has been very strong at these properties. In fact, leased occupancy at these properties ranged from 91% to 100%. As our development and redevelopment assets reach stabilization along with our recent acquisitions, our reliance on California and, in particular, Orange County will begin to diminish, and our metro DC market will gain prominence in our portfolio. Consequently, DC will become our second largest market and will account for 12% of our NOI. This also means that while Orange County will still be our largest market, it will represent only 13% of NOI, down from 16% today.

In closing, these have been and will continue to be challenging times in the field. But with our use of technology, our commitment to our customers, and our focus on having our assets located in the best markets, we should continue to drive cash flow and emerge stronger. I’d like to thank all of my fellow UDR associates for executing our game plan and continuing to bring in industry-leading results.

With that, I’ll turn it back to you, Tom.

Tom Toomey

Thank you, Jerry. And operator, I think now we’re prepared for the Q&A part of the call.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from the line of David Toti with Citigroup. Please go ahead.

David Toti – Citigroup

Thanks. Tom, is it possible -- or Dave, can you walk us through some of the components of your guidance change? It looks like it is suggesting a stronger underlying NOI performance than you originally projected. Or is there some component that I’m missing, given the sort of percentage of the reduction?

David Messenger

David, this is Dave Messenger. Regarding the guidance, essentially what we do is you take the midpoint from the original guidance, which is $1.29 and you take up $0.10 for the charge and $0.02 for the additional debt tender that we hadn’t contemplated during the year. That gets you down to $1.17, which is the midpoint of the new range. And then we tightened the low and high end of the ranges, which is a combination of several items. One, we continue to reverse inquiries to purchase our debt. But we find the pricing unattractive, so we think there is little opportunity left in that well. We have also chosen to reset some of our maturities during the last couple quarters at higher interest rates than what they were previously. We are considering the equity that we issued during the quarter as part of the ATM program. And we are expecting our operations trends to continue the way they have in the first nine months of the year.

David Toti – Citigroup

Okay, great. And then just as a follow-up, are you -- are you comfortable with the sustainability of your expense reduction rate? Or is that something that has a finite life?

Jerry Davis

Hey, this is Jerry. I think it’s sustainable. We won’t be negative forever obviously the way we have been for the first nine months. But we haven’t been deferring work. We think we are going to be able to continue to whittle away at expenses throughout the foreseeable future. We continue to negotiate contracts with vendors, and we continue to automate our -- the way we do business with technology, which I think is going to yield future benefits. So I don’t think we’re going to see a blow-up, but staying negative long-term just isn’t possible.

David Toti – Citigroup

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Swaroop Yalla with Morgan Stanley. Please go ahead.

Swaroop Yalla – Morgan Stanley

Yes, hi. Good afternoon, guys. My question is about the JV you have at KFH. What kind of competition are you expecting for the assets, which you will be targeting? What kind of bids you are expecting? And also if you are anticipating any distressed properties to come through and which you will be able to take advantage of?

Mark Wallis

This is Mark Wallis. I think what we’ve seen so far is, there has been quite a few buyers in the market for high-quality assets and assets in these higher barrier-to-entry markets. We continue to look at a lot of deals, and we’re going to -- we obviously have some criteria that we’re going to stick by. At this point, we think we will be able to make some acquisitions. But I think what we’ve learned so far is that cap rates are lower than probably when we first started talking about this months ago, which I think everyone would agree with that they are seeing the marketplace too. So a lot of it depends on finding the right asset that matches your criteria portfolio. We are seeing a fair amount of deals to look at, and I think we have an advantage on larger deals. So we are just going to keep shopping and keep looking, and go from there. Tom, do you want to add something to that?

Tom Toomey

Yes. This is Toomey. I’d add, the distress, as you specifically stated, requires the fact that you don’t have anybody to show up at a table to buy or that you have a limited number of buyers. And as I noted in my earlier comments, you see one asset come to the market and there is 30-plus people that are showing up to bid for that asset, all in a tight range and most of them not with financial contingency. So we are seeing that similar type of event across many markets. And so I’m not saying that there won’t be distress. Right now, we do not see any in the marketplace.

Swaroop Yalla – Morgan Stanley

Okay. Thank you so much.

Operator

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

Jay Habermann – Goldman Sachs

Hey, guys, good afternoon. Tom, just a comment. I guess in the press release you mentioned for development, most of the deliveries being delivered next year in 2010 expecting improving market conditions. Can you clarify a little bit? Are you still expecting that the gap between new rents versus existing will just be that gap continues to narrow or do you think you’ll actually start to see some pricing power again?

Tom Toomey

Well, I think a couple of things, then I’ll ask Jerry -- add Jerry to -- in some of our markets that the developments are being delivered, say, for example, the DC corridor and Texas corridor of rents seem to have bottomed and be strengthening. And so; we’ll probably see stronger rents next year in those markets as those development activities get delivered. In the case of properties of Phoenix, it’s still sliding down, but not at a greater rate than it was at the beginning of the year. Is that a fair summary, Jerry?

Jerry Davis

Yes, I would agree with that. Just to add on, if you look at our DC rents -- when you look at the new leases we signed in the third quarter compared to what the prior residents was paying, certainly down 3.5%. That’s been sliding down each quarter throughout this year. So we do feel like DC is going to be a market that continues to do well and the same thing is true for our Dallas product.

Jay Habermann – Goldman Sachs

And I guess, given the cap rates you talked about, sub 5% or 5% range for certainly best-in-class assets, are you starting to look at development yields? And I guess, give us a sense of where yields would be today for starts.

Mark Wallis

This is Mark Wallis. I mean, traditionally what you look for on development yields is obviously a premium of what the cap rates are. The cap rates getting in the 5s and sometimes low 5s, obviously when you get to a range of, say, 150 basis points over, 6.5%, in that range in some of these markets, take a DC market with your expected rent growth as the markets recover, start to make sense. Historically, what we’ve seen, the cap rate spread or development versus an acquisition, it’s probably tighter in the DC market, in California. If you get to markets like Texas market, for example, probably that basis point spread is 25 basis points more. But with the cost of debt and the way things are looking as far as ultimately a recovery, I think we see that median of a 150 basis point spread as being where it is today. Given -- qualify that a coastal market may shade a little bit differently from a sunbelt market.

Jay Habermann – Goldman Sachs

I’m sorry, just to clarify, did you mention that the cap rates were -- those were US institutional buyers or you seeing foreign capital given the weak dollar?

Mark Wallis

US institutional buyers.

Jay Habermann – Goldman Sachs

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Mark Biffert with Oppenheimer. Please go ahead.

Mark Biffert – Oppenheimer

Good afternoon. Just adding on to the KFH joint venture, Tom, what IRRs are you guys targeting in that fund, or that JV?

Warren Troupe

This is Warren. We are looking at a 7%.

David Messenger

Our IRRs are looking more like a 12.

Mark Biffert – Oppenheimer

Okay. And then in terms of the markets that you’re looking at, I mean, are they focused mainly on -- you were saying high barrier. I mean, do you consider high barrier in this market to be DC, New York, or is it the West Coast looking like you might get some opportunities given either distress or sellers that may be financially distressed?

Warren Troupe

I think we agree DC, New York and the West Coast, particularly San Francisco would be considered in that area. And we’re also looking at Southern California. And there may be up -- we would go up the West Coast to Seattle at some point, but those would highlight where our focus has been.

Mark Biffert – Oppenheimer

Okay. And then, Tom, you had mentioned in an interview a couple of weeks ago that you might have something close by the end of the year. Is that still your anticipation or has pricing not moved enough for you to make a move in making a deal?

Tom Toomey

I think we are in tight on a number of properties that we are bidding on. And while nothing is certain to get across the goal line, we will see how the chips fall, that we feel pretty confident that we will be able to get this money out over the next couple year period and find activities, rather it’s between now and the end of the year and shortly thereafter. I’m not overly worried about the long-term yields that we’re going to get out of this deal and our promote [ph].

Mark Biffert – Oppenheimer

Okay. And then lastly, I’m just wondering what you think the impact might be if Congress continues the homeownership credit in terms of -- it seemed like homeownership move-outs, homeownership ticked up about 1%. I mean, would you expect that to move up, given some of the recent axiometric [ph] data, which showed that the costs or the spread between renting and owning had compressed through the third quarter?

Tom Toomey

I think Jerry highlighted in his earlier comments that homeownership in our portfolio -- in this reconstituted portfolio, move-outs have been extremely low at 10% in our high barrier markets and 13% in Florida and Texas markets. So I don’t think we are feeling the impact of that 8,000. I don’t think it makes people psychology of running out to buy a home any comfortable now, and you combine the 8,000 credit with even record low mortgage rates that seems like housing doesn’t appear to be much of a threat to this portfolio at this time.

Mark Biffert – Oppenheimer

Okay, thanks.

Operator

Thank you. Our next question comes from the line of Michael Levy with Macquarie. Please go ahead.

Michael Levy – Macquarie

Hey, good evening. I know it’s early on, but can you please discuss the delta on effective rent since maybe the end of the summer leasing season, maybe the end of August? Also, are there any markets in which effective rents have been improving since then? I’m trying to get a sense of, now that the demand may have dried up a little bit, where rents have headed.

Jerry Davis

Sure, Mike. This is Jerry Davis. They really haven’t dropped much. Most of our markets have remained firm. When you look at our occupancy at 95.5% as of today, we’ve been able to stay forward out really seeing a decline in our market rents. And when you look at our gain to lease we have on our rents, and compare June to September, it’s actually the gain has gone from about 2.5% in June to a little less than 1% now. So we are actually seeing most markets stabilize. The exception would be some of the Southern California markets. Orange County and San Diego have probably trended down a little. Our Mid-Atlantic markets have strengthened. San Francisco’s remained stable. We’ve done surprisingly well up in Seattle where the rents have gotten -- they have been fairly stable, but when you look at the decline from last year, that shrank a little. And Florida has been pretty stable for the last three to four months.

Michael Levy – Macquarie

Thank you very much. If I can just ask a follow-up question unrelatedly, I know Tom's example of the asset being sold in DC with the low five handle was meant for illustrative purposes, but with assets being sold at levels that seem somewhat aggressive, I guess maybe to me, would the company consider disposing of assets to take advantage of the flood of bidders that seem to have entered the market?

Tom Toomey

This is Toomey. We sold the $1.7 billion portfolio earlier this year. And in that effort, we made a conscious -- to try to clean out this portfolio, if you will, at that time. I don’t see any point now in what we would be selling and redeploying the funds as a very accretive to NAV-type situation. So I think we are on the sideline for selling assets at this point in time. We will evaluate it probably in the next year when we get more clarity on NOIs and what we would do with the proceeds. I’m pretty comfortable where we are at right now on this portfolio. I’d ask Jerry to comment a little bit about the occupancy and the rent.

Jerry Davis

I think you have to realize that we are making a conscious effort to run our occupancy up as high as possible in the 95-plus range to give us, if you will, a little bit of gliding room through the fourth and early part of next year when traffic is very slow. And what we're hopeful is an improving job market and a higher occupancy gives us a chance, if you will, to go to guns and rent increases earlier. And that was a conscious debt on our part. And I think we’re going to -- it's going to pay off.

Michael Levy – Macquarie

Well, I certainly hope so. I guess I would just ask after hearing that, what sort of efforts were being made to -- I mean, it sounded like the turnover was basically the same as it was the previous third quarter on an annualized basis, which I guess given that you seem to be working pretty hard to keep existing tenants. I guess I was a bit surprised that it was not a more material improvement. Is there any -- is there any way that I should be looking at that or is it just a function of the summer trends [ph] and the high natural turnover in the portfolio?

Jerry Davis

There is a little bit of that, but the other thing that’s affected us when you compare this year over last year’s move-outs related to money problems, whether it’s skips evictions or people just moving out or losing their jobs, has gone up 4% to 5% year-over-year. The people that can afford to stay, they really don’t want to move. And I think they are seeing the customer service efforts that we’ve been giving them as well as allowing them to do business more automated with us, has helped keep it flat, especially when you do look at that increase in the money issues that people have. And you’re seeing that more, again, out in the West Coast than you are the other parts of the country.

Michael Levy – Macquarie

Okay, that’s really helpful. Thank you so much.

Operator

Thank you. Our next question comes from the line of Michelle Ko with Bank of America. Please go ahead.

Michelle Ko – Bank of America

Hi. I was wondering if you could talk a little bit more about the wide gap, the spread between the new leases and the renewal rates. It seems like you’ve done a good job in terms of sustaining the wide spread. I was just wondering if you thought that would narrow over the next six to nine months with the renewals rolling down, and in those weaker quarters, in the 4Q and 1Q, the seasonally weaker quarters, if we might see more roll-down then.

Tom Toomey

I think you will see that spread between new leases and renewals compress. This quarter, we were at 6.8% down on new leases and our renewals were down 0.8%. I think what you’re going to see over the next six months is the spread on new leases to the expiring lease continue to go down. Especially as we get more pricing power in the Mid-Atlantic markets, it does feel like some of the West Coast markets have stabilized. They are not growing larger. I think you’re going to see that continue to come down. And I can tell you, right now, we are not -- we are making a conscious effort not to push anybody out because of the rent increase. We are consciously monitoring that. We are not going to get aggressive on the rent increases till we get more comfortable that we can reload that exiting resident with somebody who is going to pay higher. So I think you are going to see that spread, which today is about 6% tight.

Michelle Ko – Bank of America

Okay, great. Also I was wondering if you could give us a little more color on the JV write-downs and how much in percentage terms were actually written down. And do you think there could be more write-downs related to some of the other JVs?

David Messenger

Michelle, this is Dave. In terms of our JVs, we assess these every quarter. These are the only two that we felt were indicative of a write-down to what’s essentially a lower cost or fair-market value of the accounting rules. They are also the only two assets that we have that include non-stabilized or development properties. So we felt that at the end of the quarter, the balance of our JV investments, which are small to the balance sheet as a whole, were accurately stated under GAAP. Did that answer all of your questions?

Michelle Ko – Bank of America

Yes, thank you.

Tom Toomey

I think, Michelle, you need to also remind -- this is Toomey. The value that we wrote them down to were appraisals furnished to us by a bank as they were looking at the loans. And so they may not be indicative of what the ultimate value of the real estate is. It’s just marked to what you have to do in an equity accounting treatment is the fair market value, and our auditors have determined fair market value at this time as the appraisal process. And as a result, I think if you talk to any other real estate person, you’d find that appraisals are probably not a very good indication of long-term value of the real estate. They are indicative of kind of stressed banking situations, stressed NOIs, and what assets would have to be sold for today. But I think the accounting rules take precedence over everything, and as a result, we use the appraisals to evaluate those.

Operator

Thank you. (Operator instructions) Our next question comes from Dave Bragg with ISI Group. Please go ahead.

Dave Bragg – ISI Group

Hi, good afternoon. I think one market we didn’t really cover yet is Texas. I know it’s not a big part of the same store pool, Jerry, but could you talk about operations there and how they have trended over the past few months?

Jerry Davis

Yes. We operate in three markets in Texas, Dave; Dallas, Houston, and Austin. Dallas has -- the job markets held up fairly well. They have lost 61,000 jobs this year, but overall what’s affected Dallas most is the new supply that’s come on line. And in the fourth quarter, another 8,500 units are set to come on line. So we are in for a fight there. A lot of the new product also is coming in from the Plano area, as well as uptown and downtown. So it will be competitive for our properties there because that’s also where we’re located. Our rents fall in about 4% on the new leases in Dallas. And rents in Dallas overall, when you talk to the economists, have fallen 4% year-over-year. Right now, we are not seeing any real job losses in the foreseeable future, but you do have the supply that’s always going to be an issue in Dallas.

Houston -- Houston, at the beginning of the year, was probably our best market when you look at new rents versus expiring rents. I think in the first quarter we actually had increases. By the third quarter, we were down 7.3%. So Houston has really done a U-turn on us. Over the last year, they have lost about 95,000 jobs. There is a not a whole lot of new supply coming on line about 3,200 units. But unfortunately, there is quite a bit -- somewhere in the 15,000-plus units that are still in lease-up, and lease-ups are taking longer in Houston. And as you’re probably aware, what’s affected Houston, there has been a little bit of job loss. I mean, there has been job loss, but there's also been all the people that's moved in from hurricane Ike. Their homes have been repaired and they have moved back. So Houston has gone dramatically worse in the last nine months.

And moving on to Austin, Austin continues to be a market that is over-supplied. We saw new leases repricing at 7.6% below what the exiting resident was paying. Austin, we still believe in it long-term. It’s going to be one of the premier markets in the country over the next two to three years, but it’s going to have to just make its way through all the supply that’s come on and could continue to come.

Dave Bragg – ISI Group

Okay. So, just assuming you get the same level of job growth throughout the portfolio, it sounds to me as though you’d be more concerned about these markets going forward -- over the next 12 months, assuming no job growth.

Jerry Davis

Well, I think you’re going to have the supply issues, which are much higher than you could see around the rest of the country. I think Dallas, Houston and Austin over the foreseeable future probably will have job growth that’s a little better than the rest of the country. But they are going to continue to have supply issues like they always have.

Dave Bragg – ISI Group

Got it, okay. One other question. Could you just talk about the -- your efforts to generate other income at the property level? Just from visiting properties, I’ve seen a couple of things, including TVs, closet systems. I'm not sure if you're doing valet waste or something similar to that. Can you talk about just the broader efforts and what sort of penetration do we have across the whole portfolio?

Tom Toomey

This is Toomey. We have always evaluated each individual assets in the market on its merits and tried to find opportunities where we could inject a better quality product and get a better return for our investment. What we are finding today is that many of those programs that residents are not receptive to those rent increases, and you’ll find that we’ve curtailed a great number of them where it does have some tractions, probably the DC marketplace, couple of our particular properties in Southern California and Northern California. So the program hasn’t been put forth with the same kind of energy we’ve had in the past because not a prudent use of capital and not a prudent return. The good news, I think, when the economy kicks back up, we’ll be able to go back to guns on those and do well at them.

Operator

Thank you. Our next question comes from Anthony Paolone with JP Morgan. Please go ahead.

Anthony Paolone – JP Morgan

Thank you. I want to tie together your core guidance from the last quarter and just the guidance for the year. So you had negative 3% to negative 5% same store, and it would seem that to kind of even be in that range, the fourth quarter would be down into the double digits almost. And can you comment on that? Are we looking at that right?

David Messenger

I guess the way I've kind of rationalized the guidance going into the fourth quarter, since we are not in the business of giving our quarterly guidance, is that we expect our trends to continue for revenue and expenses through the balance of the year. And while we try to be on the low end of both of those ranges, we didn’t feel prudent to try to update and specify an exact target for both revenue and expense. So revenue, we thought, would still -- we're trending towards the 3% to 5%. Expenses, we’re trending hopefully on the better side.

Anthony Paolone – JP Morgan

Okay. And then just a follow-up on the JV tying together I think a couple of the things you said. So with 5% cap rates, can you get to the return hurdles of the fund?

Mark Wallis

This is Mark Wallis. I mean, we didn’t verify it. So I think that’s the statement that we’re looking for some values better than that. As you know, cap rate is not the only story. We are running these on IRR models, and it depends on what kind of recovery it is, what the occupancy makeup is, what we think we can do the asset to increase revenue. But a general answer is, when it gets that low, it’s going to be harder for us to clear our hurdles. But you've got to ask them sometimes that's mitigated by value-creation opportunities we see in the asset that we could put into the asset.

Anthony Paolone – JP Morgan

Okay, thank you.

Operator

Thank you. Our next question comes from Dustin Pizzo with UBS. Please go ahead.

Dustin Pizzo – UBS

Hi, (inaudible). Just a follow-up on some of the private market questions. How sustainable do you think these lower cap rates are, assuming that they may be driven by either, A, the lower cost of financing we’ve seen, or B, simply a dearth of quality product that’s on the market today as opposed to buyers getting more aggressive with some of their growth assumptions? And then, two, do you think that -- or I guess, what type of spread do you think there would be today between some of these one-off asset sales that we’ve seen as opposed to if you try to trade a larger portfolio, assuming you could even get financing for something like that?

Mark Wallis

This is Mark Wallis. Regarding the sustainability of these cap rates, and again the cap rate is just one factor you look at, but one thing if you look out in the next two to three years, aside from a couple of markets, there is very little new product being delivered to the market and there is very new little products being started. Therefore that factor is going to remain the same. In fact, the two-year old asset in two years is going to be four to five years old. So that’s one thing we think is going to make it more sustainable than maybe we thought originally.

Two, eventually recessions end and eventually jobs come back. And when they do come back, someone may underwrite a depressed low NOI, knowing that it's going to rebound quickly when jobs come back. And they will show greater growth even though the initial going-in cap rate is low. So we will see how long this situation will last. But when jobs come back, that may make it sustainable also. And then again, just the lack of supply and how that’s going to play out, it’s hard to replace these assets at these prices. So, I think it's more sustainable, but as you know, depending on job growth, individual markets, they can -- there is going to be variations off that theme.

Dustin Pizzo – UBS

Okay. And can you tell us what dollar volume of properties you’ve actually bid on this year?

Mark Wallis

I would say around $350 million, give or take.

Tom Toomey

Nearer to $350 million, if you look at my scorecard.

Mark Wallis

Yes. Some of those, obviously, you bail out early in the process. But what I’m trying to indicate there is we are looking at a lot of stuff. And so, that doesn't mean we're -- we may decide to lose early on.

David Messenger

A couple of other things you might want to factor in to the overall equation about cap rates is the amount of capital that has been raised either in terms of the private REIT, the public REIT or just other streams of levered players that are in the marketplace. And when we look down the list of who we’re losing to, these are not amateurs. These are people with a lot of money behind them and a lot of skill behind them. In particular, I thought the DC asset was unique in the sense that the top 10 bidders were only 2% apart on their bids. So that meant there was, in this case, 29 people who did not succeed, who are probably out there a little bit hungrier the next time around, trying to get that money out.

So I think high-caliber assets in good markets, good locations, we are going to start to finally see the spread in cap rates emerge that hasn’t been lacking for the last three years. And so the five that’s kind of being thrown around that deal certainly looks like there is a lot of money out there that’s interested in putting itself to work at that entry level. And I can’t say it’s not a bad idea. If you think about a long-term supply/demand of that market, Mark’s point is right, I mean, lot of people are underwriting kind of an 2012 spike in rents because there has been nothing been delivered for some period of time now. I mean, we are at a 25-year record low building. And every time I’ve seen this industry and I haven’t been at it for full 25 years, but whenever you have these type of supply numbers and there is capital, prices rise.

Tom Toomey

One thing we didn’t I guess ask you one-off question, one-off asset versus portfolio. I think that's always very difficult to answer because portfolio sometimes mean there’s five great assets and one asset you got to try to get the great asset that clouds the cap rate and the delta between the two. I think people tend to underwrite these assets on their own. Sometimes you get a dynamic either way, either a better price or depending on the competition and the strategic value of the portfolio, you can have a higher price. It’s really hard to make the call on that. (inaudible) compared to either way.

Dustin Pizzo – UBS

Okay. And then I believe Ross has a follow-up as well.

Ross Nussbaum – UBS

Hi, guys, good afternoon. A question on your expense line, because you, I think, positively surprised us with the decline. And I’m looking at page 27 of your supplemental, and I compared it to your disclosure a year ago for the first nine months. And what’s interesting to me is, it looks like year-over-year you drove the spending curve unit down -- at least for the first nine months, down to about $519 a unit, which is down $10 from where it was at this point last year. But the CapEx spending shot up pretty dramatically from about $430 to $511. So it looks like the R&M line is going down and the CapEx line is going up. So I guess -- I’m having trouble reconciling those two.

Why don’t we, as we’re looking through it, take the next call and see if we can come back with --

David Messenger

This is Dave. Ross, just real quick. The R&M line, we expected to be coming down as we have newer assets and we completed a lot of the projects over the past several years, be it the kitchen and bath a few years ago, the HVAC program we did two, three years ago, four years ago, with that, we have a newer portfolio, younger portfolio that requires less to do on the repair and maintenance side. And so what we’ve chosen to do is, put more of our dollars into the capital side of the business versus having to spend on a used basis for R&M.

Jerry Davis

I would add one thing to that. We made a conscious effort this year to get a lot of our larger projects, what we call asset quality deals, done early in the year, so we get the benefit in revenue from that, whether it’s paint jobs, parking lots, things like that. So I think part of it is, we’ve done more early in the year than we did in the past. We’re on track this year to spend about $675 a door in recurring CapEx. Last year we spent about $630, $635. So it’s going up a little bit. I think the other thing is we pushed more of it early in the year to get the revenue benefit.

Operator

Thank you. Our next question comes from Rob Stevenson with Fox-Pitt Kelton. Please go ahead.

Rob Stevenson – Fox-Pitt Kelton

Good evening, guys. Most of my questions have been answered, but, Tom, given the comments that you guys have made about cap rates of the DC markets, the demand for properties that’s probably only going to get more significant as we move forward, why wouldn’t you guys start the 14th Street development project in the remainder of 2009 for, let’s say, a 2011 delivery, given that your debt is in a decent position, you guys could issue at the market equity today at 15.5 or so, something like that? And so it seems like that that would be one of the development projects that could get green light sooner rather than later?

Mark Wallis

This is Mark Wallis. A couple things on timing, obviously we entered 2009 being very cautious about our timing. We probably tend to be more cautious than we maybe could have been, but that’s usually good. Couple of things. One is timing of just when you start projects in DC and the weather. So right now, what we -- we're always evaluating when is the right time to go. I can’t commit to that today, but it would be more of a mid-2010 would be a time we look at starting. And the other thing we’re doing is our construction prices have got much better. We have spent the time to get drawings up to 100%. And so we now can really get tighter bids on that, and so we would still have that process to go through, come back, evaluate, see how the market looks, how the capital market looks, and go. But those two factors would put you, when you -- decision point mid-2010 versus -- in mid-2009, we were not at that point.

Rob Stevenson – Fox-Pitt Kelton

Okay. And then a follow-up. Part one, Jerry, what was bad debt this quarter and a year ago? And then, Dave, is there any equity issuance in your fourth quarter guidance?

Jerry Davis

I’ll take that first. Bad debt this quarter was 0.6% of gross potential rents that compares to 0.5% last year in the third quarter, so it was a little bit. If you look at on a full year versus full year, this year we are 0.7%. Last year, we were 0.4%. What that tells me is the worst of the bad debt, hopefully, is over. We started having bad debt look worse in the third quarter of last year, aggressively got worse, probably peak in the middle of the first to the middle of the second quarter, and it seems to be stabilizing back down on that 0.6%.

David Messenger

This is Dave. In terms of guidance, what we provided was an annual range. So what I have in there is the equity issuance that we did in the third quarter, 2.3 million shares.

Operator

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

Karin Ford – KeyBanc

Hi, good evening. I guess on past calls, Tom, you’ve discussed at length your views on the ideal leverage for the company. And given the positive changes in the capital market environment as well as seems like improving visibility in the fundamental environment, can you just talk about any changes to your views on leverage?

Tom Toomey

I guess my views haven’t changed at all. It’s been pretty consistent through this economic downturn, and we’ve got a good balance sheet structure properly. And we will continue to be looking at the market and the pricing of the full range of capital, and figuring out what’s the best opportunities for us.

Karin Ford – KeyBanc

Okay. Just a follow-up. We talked about the write-downs in the JV portfolio. Do you guys foresee any potential write-downs in the old land portfolio?

David Messenger

This is Dave. We continue to evaluate our land and our holdings every quarter. So it’s an ongoing quarterly process.

Karin Ford – KeyBanc

Okay, thanks.

Operator

Thank you. Our next question comes from the line of Michael Salinsky with Royal Bank of Canada Capital. Please go ahead.

Michael Salinsky – Royal Bank of Canada Capital

Good afternoon, actually. Most of my questions have been answered. Just had a question specifically about the 2008 acquisition portfolio. Can you talk about the performance of that? And also, one of the catalysts there had been about the lease-up opportunities, the ramp-up opportunities. Can you talk about, like, where that portfolio is from an occupancy and how much lease-up opportunities, and also when you expect to roll that into the same store portfolio?

Jerry Davis

Sure. I’ll take first shot at that. Every one of those properties we bought last year, I believe, has reached stabilized occupancy and probably of rates between 90% and 98% occupancy today. Obviously some of the rents we underwrote those deals at, the economy changed and we’re not getting the pro forma rents that we had expected. But we have been able to fill them up, to run them effectively. And I guess that’s about it. But, you know, rent levels in some of the markets, DC, probably held up a little better than the one from San Francisco and the West Coast. We did have one in San Jose that has performed probably better than expectations. The ones in Texas are pretty close to expectations. But the ones up in Seattle as well as the one in downtown San Francisco, the rents are not where we had expected.

Michael Salinsky – Royal Bank of Canada Capital

Okay. Relative to your same store portfolio, I’m assuming the performance has been better then?

Jerry Davis

It’s probably comparable. It depends on the market they’re in. They have done as well as the properties in our same store DC, probably a little better because these deals were inside the beltway versus the ones that are outside. So they probably performed a little better, although they have been in competition with other properties in Arlington that were in lease-up. So they have been fairly concessionary over the first 12 months we owned them. The rest of the properties, I would say, have performed pretty much like our same store properties. And your other question, I think, was when did they roll into our same store? They have been. They typically stay out of the same store for five quarters and then we roll them in. So we can always have a comparable quarter in the last year.

Michael Salinsky – Royal Bank of Canada Capital

Okay, that’s helpful. And I think that’s it for me.

Operator

Thank you. Our next question comes from the line of Paula Poskon with Robert W. Baird. Please go ahead.

Paula Poskon – Robert W. Baird

Thank you. Good afternoon. Are you seeing any differences across the markets in terms of turnover trends? And in particular, in what markets, if any, are you seeing job loss as the biggest contributor to move-outs?

Jerry Davis

I’m seeing job loss as probably one of the bigger ones in Orange County, some in San Francisco. Turnover trends, you’ve got some markets that are down dramatically from last year. I know Phoenix, Inland Empire, some of the ones that you’d be surprised because of the market is not performing well. They just had such high turnover last year when the economy first turned that on a comparable basis, they are doing better.

Paula Poskon – Robert W. Baird

Thanks. And just a follow-up on the DC asset transaction that we’ve been talking about. Would you have been considering that for your JV or for your own balance sheet?

Mark Wallis

This is Mark Wallis. That was considered for our JV, although I said [ph] we liked the asset. We think that that would be a first look for our JV, but we like the asset -- certainly it’s something we would put on our balance sheet if given the right opportunity.

Paula Poskon – Robert W. Baird

Thanks very much.

Operator

Thank you. Our next question comes from Steve Sakwa with ISI Group. Please go ahead.

Steve Sakwa – ISI Group

Good afternoon. Tom, I’d just want to clarify, the cap rate that you’ve been talking about for this DC asset, as I understand it, that’s kind of after CapEx and the management fee. Is that correct?

Mark Wallis

This is Mark Wallis. That’s correct.

Steve Sakwa – ISI Group

So if you were to just kind of adjust that to kind of plain old NOI, do you have a sense for how much that cap rate might move up?

Mark Wallis

It usually moves up, what, 100 basis points. Typically, rule of thumb -- haven't done the math. It’s going to be close to that.

Steve Sakwa – ISI Group

Okay. And then, just to maybe go back to Ross's question, just on this I guess attachment 12, where you’re talking about CapEx, I guess I’m just trying to understand the -- there are kind of two buckets. You’ve got something called revenue enhancing as well as asset preservation. And I guess the revenue enhancing would seem to me, you almost have to add that with the bucket below in order to kind of really assess how the same store is being impacted. Is that correct? Or what am I missing on the revenue enhancing?

Mark Wallis

That’s correct. Just keep in mind that on a -- the asset preservation is on stabilized (inaudible), so it will be slightly different. But your analysis isn’t far off.

Steve Sakwa – ISI Group

Okay. So would it be fair to use the rough same 43,400 units for that kind of $19 million bucket to try and get a kind of a gross CapEx per unit number or am I going to be terribly off?

Mark Wallis

No, that’s correct.

Steve Sakwa – ISI Group

That’s correct. Okay, thanks.

Operator

Thank you. Our next question comes from the line of Mike Liddell [ph] with AIG. Please go ahead.

Mike Liddell – AIG

Thanks, guys. Just a follow-up to a leverage question earlier. Just curious in terms of the combination between secured versus non-secured. Is this purely a pricing decision in your mindset or is the greater alliance like GSEs or just mortgage debt as a whole come into play there? Where does the price become less of an issue?

Warren Troupe

This is Warren. I think to date, the unsecured market has been not as attractive as the secured. And so obviously we’ve gone out and done a substantial amount under the Fannie Mae facilities. But the secured market -- you know, the unsecured market has come in and it’s become a lot more attractive. And also we’ve tried to maintain some kind of balance between our unsecured and our secured. So I think as we go forward, we will continue to evaluate both options.

Mike Liddell – AIG

Do the rating agencies give you any sort of restrictions in terms of what percent of your debt is coming from secured versus unsecured and where that could put downward ratings pressure?

Warren Troupe

It gives some general guidelines, but they don't give you specific numbers.

Mike Liddell – AIG

Okay. And then just an operational question. In previous quarters, you may have noted this already, but you provided a rent versus buy gap on your portfolio. Could you give us any sort of sense as to what that is this quarter?

Warren Troupe

I’m sorry, rent versus what?

Mike Liddell – AIG

Rent versus buy differential margin?

Warren Troupe

I’m sorry, yes. Today, for the entire portfolio, our average rent is probably about 80% of a -- what a mortgage payment would be. That varies obviously by market when you look at Orange County. I think last quarter I said the difference was, I think, $750 or $800. It’s dropped a little. It’s about $700. And then the spread on San Francisco, for example, is still well over $1,000. Some of the markets, it’s a push, to be honest with you. Some of the Sunbelt markets where prices have been knocked down and average rents may be $900 to $1,000, it will be equal. But portfolio-wide it’s about 80%.

Mike Liddell – AIG

And at what level do you get -- do you start to see a greater propensity to move out to buy? I know you said it -- the whole portfolio, that you’re not really starting to see much of an increase, but at what point do you believe the stress actually pushes them to move out?

David Messenger

I don’t think rent levels today would stress. I mean, I think what’s pushing them right now is own prices coming down. And you are losing some of your better residents that have been -- now they have good credit and they have good jobs, do see opportunities at times to jump out and buy a house. That happens more in the Sunbelt markets than we’re seeing in our coastal markets. What you’re really -- move-outs to homeownership to purchase a home in Orange County, it’s 6% of our move-outs. And in San Francisco, it’s I think 6% to 8%. DC is probably a little around 10%. The markets where you see people moving out are places like Nashville, Houston, Richmond, places where home prices are cheap.

Operator

Thank you. Our next question comes from Andrew McCulloch with Green Street Advisors. Please go ahead.

Andrew McCulloch – Green Street Advisors

Hi, good afternoon. Back to the private market valuation for a second -- the private market value for a second, cap rates can be misleading depending on what CapEx you are using, NOI, what NOI assumptions, management fee, et cetera, can you comment a little bit on the trend you are seeing as far as price per door in your major markets? And are those actually rising or have they just stopped falling?

Mark Wallis

This is Mark Wallis. I think generally it’s a very general question, but the price per door has been going up.

Andrew McCulloch – Green Street Advisors

How do you think that compares to replacement costs and how do you think about replacements costs when you are looking at acquisitions versus starting the development pipeline backup?

Mark Wallis

Well, the academic method is you find a comparable piece of land and you have to price the land, and then we take -- since we are in the development business, we usually have current construction prices at hand, and we price it out that way. The variable always is can I find a comparable piece of land. In some cases, it’s hard to find -- if it's infill, urban -- an exactly comparable piece of land. But what we do is take our -- we can, in markets, usually have relationships with general contractors aside from the deals we're building and see what they see as far as prices and you had to also evaluate, design and that kind of thing. But we do that exercise.

Tom Toomey

This is Toomey. I think the asset that we are particularly focused on in commenting priced probably at about 75% of its original construction. And so today, replacement cost is probably at 90% of replacement cost four-year old asset. So I think we've got some visibility and comfort around your NOIs. Assets are going to price very close to replacement costs very quickly, and people will -- astute buyers will focus on that. And where you still have falling NOIs, people are going to be a little bit more hesitant and resident, if you will, and pull back from that type of number. But ultimately, I think a replacement cost represents a nice flooring for our business with very little supply coming online. And you will see more and more people get drawn to that pricing mechanism.

Andrew McCulloch – Green Street Advisors

Great. Thanks. That was helpful. And then just had one follow-up question on unsecured debt. What do you think you could do a 10-year unsecured deal at today?

David Messenger

Probably about 7.5.

Andrew McCulloch – Green Street Advisors

Great. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Jordan Sherman [ph] with Parental Real Estate. Please go ahead.

Jordan Sherman – Parental Real Estate

Yes, hello. I’m trying to -- two things. One is, midpoint of guidance -- FFO guidance that comes down by $0.02, trying to understand how much of that reflects the changes in the capital market activities, your debt issuance, the debt retirement, equity issuance versus changes in your operating assumptions?

David Messenger

Jordan, this is Dave. The $0.02 that you’re referring to was a result of the debt tender offer that we did in the third quarter. So the midpoint of the original guidance was $1.29. Take out $0.10 for the charge on equity investments, $0.02 on the debt tender, gets you to $1.17.

Jordan Sherman – Parental Real Estate

Okay. So no changes in underlying operating assumptions?

David Messenger

We tightened the ranges. We tightened the high and the low end just based on what we are seeing in debt repurchase activity and possibilities. The fact that we’ve reset some of our maturities ahead of schedule, we factored into account the equity issuance we did in the third quarter of 2.3 million shares under the ATM program.

Jordan Sherman – Parental Real Estate

Okay. Okay. And then I just want to revisit the question that Tony Paolone asked previously, come at it from a different angle. The way I understand your answer to this question is that the negative 3% to negative 5% decline in same store NOI is a run rate in the fourth quarter, not the expectation for full year results.

David Messenger

No, it’s not correct. The expectation for full year would be -- for the full 12 months of 2009, the revenue would be down 3% to 5% -- I’m sorry, 1% to 3%, and NOI would be down 3% to 5%.

Jordan Sherman – Parental Real Estate

Yes. That sort of implies a negative sort of 12% decline in the fourth quarter or something in that range.

David Messenger

That’s, I believe, how the math shakes out. And like I said earlier, revenue we're expecting to be in the midpoint of our original guidance. Expenses, we’ll try to do better than what we’ve got out there. And we’ll let the NOI line shake out to where it is. So we end up eating the 3% to 5% range, or landing in the middle of it. We will be pleased with those results.

Jordan Sherman – Parental Real Estate

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Eric Lee [ph] with L&B Investments [ph]. Please go ahead.

Jon Litt – Citigroup

Hey, Tom. It’s Jon Litt. I'm here with Craig Melcher. Can you hear me all right?

Tom Toomey

Yes, we can, sir.

Jon Litt – Citigroup

My question was following up on Tony’s as well. And I’m just trying to understand, so -- the decision you guys are taking is that you are not giving quarterly guidance and that’s why that 3% to 5% for NOI is still valid. Is that right?

David Messenger

Correct.

Jon Litt – Citigroup

So if you were -- because you did give effectively fourth quarter guidance by narrowing the range, so it seems a little incongruous because we're not going to get a negative double-digit NOI number. So it sounds like it’s just you’re abstaining from commenting on that for the fourth quarter.

David Messenger

Correct.

Jon Litt – Citigroup

Okay, great. Thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Michael Salinsky with Royal Bank of Canada Capital Markets. Please go ahead.

Michael Salinsky – Royal Bank of Canada Capital

Just a follow-up question in light of the impairments there on the two Bellevue assets. Are there any of your joint venture partners that are struggling right now and is there any buyout opportunities on any of those?

Mark Wallis

This is Mark Wallis. We -- that was the only joint ventures, with those Bellevue assets, that we might have that opportunity. We have engaged in that. We are trying to develop -- and this is I think a mutual engagement. So we are trying to work on something that will be a win-win for both of us. I think obviously out there in the marketplace, a lot of private developers are looking for capital, and they might be more willing to look at this than they would otherwise. So, yes, we are looking at that. But we're just working out something that would be a win-win for both of us now that the asset is about completed.

Michael Salinsky – Royal Bank of Canada Capital

Okay, thank you.

Tom Toomey

Mike, you’ve seen the asset, right?

Michael Salinsky – Royal Bank of Canada Capital

Yes.

Tom Toomey

Yes. You know it's a fabulous asset right across the street from Microsoft. Lease-up is going better than planned. I think Jerry has already reported this month 35 leases. And practically, for everything that’s got a COO, we’ve got a lease. So we are encouraged by lease-up of the assets. And we want to be fair to our partner as well.

Operator

Thank you. Our next question is another follow-up question from Mark Biffert with Oppenheimer. Please go ahead.

Mark Biffert – Oppenheimer

Sorry, all my questions have been answered. Thanks.

Operator

Thank you. Our next question is a follow-up question from the line of David Toti with Citigroup. Please go ahead.

Michael Bilerman – Citigroup

Hey, it’s Michael Bilerman. David, just want to come back to the -- just the guidance range for the fourth quarter is $0.24 to $0.30. I’m just trying to understand what may be in there if there is any sort of charges or gains or anything that would cause such a wide variance. We are talking almost 22%, 23% in terms of a spread for fourth quarter expectations.

David Messenger

If you take the third quarter core operations, we’re expecting revenue to come down. Expenses will have tough comparables. I think that gets you into your range of $0.24 to $0.30 for the fourth quarter.

Michael Bilerman – Citigroup

But the core coming out of the quarter was $0.31, I mean, to go down $0.07 to the low end would seem pretty dramatic of a decline.

David Messenger

That’s fair. It's not an exact science. But looking at how leases are repricing today and where we see some of the possibilities on expenses, be it through either insurance, real estate, taxes, and some other unknowns that are out there, we are comfortable that $0.24 to $0.30 is the number you stated.

Michael Bilerman – Citigroup

Right. And then effectively, everything in guidance is updated from capital markets perspective in terms of the equity issuance, the earlier debt issuance and everything else, the losses on the JV expect for within guidance today it’s still this negative 3% to negative 5%. So if we model what you’re running today, negative 1% year-to-date same store NOI growth, if we model that negative 2%, the Street generally is going to move their numbers much higher than your guidance range. Is that a fair assumption?

David Messenger

I’d have to run the math when you're talking about going down to 1% or 2%. But the first half of your question about everything being factored into guidance, that is correct.

Michael Bilerman – Citigroup

And then it’s just the operations --

David Messenger

Correct. Yes, it’s just the operations.

Michael Bilerman – Citigroup

Okay, thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Anthony Paolone with JP Morgan. Please go ahead.

Anthony Paolone – JP Morgan

Thanks. Tom, last quarter you were pretty adamant about not issuing equity unless you had an investment use of the proceeds, and you did a little bit in the third quarter, and your stock is a little higher today. Just wondering if you can update just your thoughts on how you are thinking about your at-the-market program in equity right now.

Tom Toomey

Tony, it’s a fair question. In terms of the use of proceeds, certainly we’re focused on our joint venture in funding our $54 million under that opportunity. And we find assets to buy with the joint venture. It’s nice to show up with our money. And so that’s been in the intent on the equity issuance is to try to get ahead of that. And I think it’s a smart move on our part.

Mark Wallis

I think we’ve just always said that we want to be flexible too and be able to dilate all of our capital market opportunities.

Michael Bilerman – Citigroup

Okay. Thank you.

Operator

Thank you. Our next question is a follow-up question from Michael Levy with Macquarie. Please go ahead.

Michael Levy – Macquarie

I was actually taking myself out of the queue. Tony just asked my question.

Operator

Thank you. And at this time, I’m now showing no further questions. I'll turn the call back to management for any closing remarks.

Tom Toomey

Well, thank you, operator. And thank all of you for your time today. We certainly appreciate your calls and your attention to our company. With that, we look forward to seeing many of you next month at NAREIT. And with that, take care.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the UDR third quarter earnings conference call. If you’d like to listen to a replay of today’s conference, please dial 303-590-3030 or 1-800-406-7325 and enter in the access 4141754. We thank you for your participation. And you may now disconnect.

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Source: UDR, Inc. Q3 2009 Earnings Call Transcript
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