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UDR, Inc. (NYSE:UDR)

Q2 2012 Earnings Conference Call

July 30, 2012 11:00 AM ET

Executives

Thomas W. Toomey – President & Chief Executive Officer

Jerry A. Davis - Senior Vice President of Operations

Christopher G. Van Ens- Vice President of Investor Relations

Warren L. Troupe – Senior Executive Vice President

Harry G. Alcock – Senior Vice President, Asset Management

Analysts

Jana Galan - Bank of America-Merrill Lynch

Karin Ford - KeyBanc Capital Markets

Eric Wolfe – Citigroup

David Bragg - Zelman & Associates

Swaroop Yalla - Morgan Stanley

Paula Poskon - Robert W. Baird

Michael Salinsky - RBC Capital Markets

Robert Stevenson – Macquarie

Alexander Goldfarb - Sandler O'Neill

Richard Anderson - BMO Capital Markets

Jeffrey Donnelly - Wells Fargo Securities

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to UDR's 2Q ‘12 Conference Call. During today's presentation, all parties will be in a listen-only-mode. Following the presentation, the conference will be opened for questions. (Operator instructions). This conference is being recorded today, Monday, July 30, of 2012.

I would now like to turn the conference over to Mr. Chris Van Ens, Vice President of Investor Relations.

Christopher G. Van Ens

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

I would like to note that statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in this morning's press release and included in our filings with the SEC. We do not undertake 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-ups. Management will be available after the call for your questions that did not get answered on the call.

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

Thomas W. Toomey

Thank you, Chris, and good morning to everyone. Welcome to UDR's second quarter conference call. On the call with me today are Jerry Davis, Senior Vice President of Operations, who will discuss our results, as well as senior officers, Warren Troupe and Harry Alcock who will be available to answer questions during the Q&A portion of the call.

My comments today will focus on three topics; first, broad operating trends and our quarterly results; second, our business plan update; and finally, an update on our CFO search. Following my comments, Jerry will provide additional commentary on the operating results and emerging operating trends.

During the quarter our business continued to operate at high level, driven by accelerating new and renewal rental rate growth as well as stable occupancy. Multi-family supply and demand fundamentals continue to provide a strong tailwind for apartment owners and we expect will do so for a number of years to come. And especially for those REIT with portfolios concentrated in markets that exhibit above average job growth, low single-family home affordability, a high propensity to win and limited new multi-family supply pressure.

In the second quarter of 2012, core FFO per share of $0.33 increased by 3% year-over-year. Strong year-over-year same-store revenue and net operating income growth of 5.6% and 6.7% respectively, as well as solid execution in our non-same-store portfolio, drove the improvement. Offset by dilution from our late May secondary equity offering. Second, a business plan update. Creating shareholder value remains our top priority.

As such we will continue to focus on growing NAV per share and on increasing our cash flow per share, which in turn supports dividend growth. Increasing top line growth and expanding operating margins are low risk, insistent generators of NAV growth per share. Our strong operating platform has historically been one of UDRs hallmarks and we expect will continue to be our primary driver of NAV creation moving forward.

Capital allocation is the second variable in NAV growth equation. Over the past few years our portfolio quality and footprint has improved dramatically, primarily the result of purposeful repositioning into coastal gateway markets, while simultaneously selling suburban locations and non-core markets. Some comments with regard to these activities.

First, acquisition activity. We intend to further expand our presence in our core markets over time. Markets that exhibit above average job growth, low home affordability, a high propensity to rent and limited new multifamily supply pressures. The capitalization of any future acquisition will be determined in the context of a lower leveraged operating model, but currently there are limited number of deals that fit our acquisition criteria.

Second, disposition activity. We are on a number of communities located in non-core markets, but not all non-core markets are equivalent in our view. Let me break them down. We have several markets that do not fit our long-term operating plan and we intend to exit them over the next 12 to 18 months. Combined, these markets represent $200 million to $400 million of value, minimal when compared to our total enterprise value.

Beyond these, we operate in a number of geographies that do not fit our long-term plan, but serve as warehouses of capital until sold. These market would comprise the majority of our non-core portfolio are more susceptible to new supply and generate lower rents and margin than our coastal market. Some of these markets include Florida and Nashville, are generating solid results currently. We are in no hurry to sell these assets and these solid performers. Their ultimate disposition will depend on potential use to the proceeds, asset pricing and the cost of alternative capital sources at the time of sale. When the time is right these depositions will be consummated in the usual course of business and will represent normal capital recycling.

Moving on to development and redevelopment. We intend to deliver roughly 5% of the enterprise annually; this implies the development and redevelopment pipeline into $1 billion to $1.5 billion range, versus our current pipeline of $1 billion. When assuming a constant dollar funding approach, and a two to four-year average construction cycle. First, development, new development is an attractive option to drive external growth whereas acquisitions are often event-driven and therefore their timing is difficult to predict.

Development represents relatively predictable capital investment. Our current $742 million pipeline is 45% funded and 80% of it is scheduled to be delivered by the end of 2013. With stabilized yields the 100 basis points to 150 basis points above spot cap rates on average. We are confident in the value creation these project represent and will continue to target core coastal markets for future expansion.

Second, redevelopment. Redevelopment often is minimized in our prepared remarks but should not – given it's important to our business as well as significant value creation potential. Our current $279 million pipeline is 15% funded and 35% of it is scheduled to be delivered by the year end 2013. We continue to evaluate our existing portfolio for redevelopment opportunities and have identified candidates located in key markets including Southern California, Washington D.C. and San Francisco.

One final point on redevelopment. Our projects go beyond simple kitchen and bath upgrades. When redeveloping a community our objective is twofold; we aim to meaningfully grow rental rate while also achieving cap rate compression through asset quality improvement. All of our redevelopments are significant undertaking.

Moving on to cash flow per share growth. We expect that our improving operation as well as real estate investment we've made over the past three years will drive growth in years ahead.

With regard to the balance sheet, we've reached peer average leverage metrics following our late May equity offering in the subsequent community disposition activity. We have worked diligently over the past three years to deleverage our balance sheet and do not intend to re-risk it, even as we continue to examine growth opportunity, we expect that this strategy will yield dividends moving forward, especially in more volatile economic times.

Finally, our CFO search has progressed. We have retained an executive search firm. We understand the importance of filling this position in a timely manner, but we also have the necessary skill set at UDR to wait for the right hire. To summarize all aspects of our business continue to perform well.

With that, I’ll pass the call over to Jerry.

Jerry A. Davis

Thanks, Tom. Good morning, everyone. We’re pleased to announce another strong quarter of operating results. In the second quarter, same-store and operating income grew 6.7%, driven by 5.6% year-over-year increase in revenue and somewhat offset by expense growth of 3.3% versus last year at this time, same-store income per occupied home increased by 5.6% to $1,330 while same-store occupancy remained flat at 95.8%.

As we indicated on our first quarter conference call, 2012 is unfolding according to plan. In the second quarter, effective rental rate increases on new leases at our same-store communities accelerated 4.5% on average. Renewal rate growth remained comparable versus previous quarters averaging 6.5% higher per year. Accounting for approximately 31% of our same-store NOI, San Francisco, Boston, Austin, Dallas and Orange County were our best-performing same-store markets during the quarter, delivering weighted average revenue growth of 8.5% year-over-year.

Market such as other Mid-Atlantic, Sacramento markets and Monterey Peninsula struggled, contributed a relatively minimal 9% of same-store NOI in the second quarter. Weighted average revenue growth for these markets was 0.4% year-over-year. Resident turnover remains relatively contained at an annualized rate of 58% for the second quarter, 300 basis points higher than last year at this time. Importantly the pace at which we've been able to refill move out has not slowed.

Turning to the performance of our non-same-store wholly-owned communities. 4,600 homes are approximately 65% of our total non-mature pool were stabilized during both the first and second quarters of 2012. These 14 communities generated sequential revenue growth of 3.6% during the second quarter, far outperforming our same-store sequential revenue growth of 2.0%. Our non-mature communities now contribute 26% of NOI down from approximately 32% last quarter. As 2012 progresses we expect this to decline to approximately 15% of NOI by year-end.

As you can see on Attachment 7(NYSE:C) Highlands and Marin, a redevelopment located near San Francisco and (indiscernible), the first phase while the Vitruvian Park project both entered our same-store pool during the second quarter. Another 2,350 non-mature homes around our same-store portfolios by year-end 2012. These are primarily located in higher growth markets including Washington D.C., San Francisco, Boston and New York and have a weighted average income per occupied home of 2,185 in the second quarter. By year-end 2012 these additions should increase our same-store income per occupied home to roughly 1,385 all else being equal. Additional details can be found on attachment 7(NYSE:B) of our quarterly supplement.

A brief update on New York. As many of you head during our Columbus Square property tour, our Manhattan acquisitions are still generating above market rate rent growth, the blended new and renewal leases increasing 8% to 12%. This level of growth has not impacted occupancy which averaged approximately 96% during the quarter. The Rivergate redevelopment is progressing and we have 33 homes through the end of second quarter and achieved rent increases in line with expectation.

Moving on, I want to address the question that I’m frequently asked. What is the next six to nine months or longer looked like from an operations perspective? The dominate thing that we have seen over the past few quarter continue to hold true with our view that apartments still has a good runway for growth over the coming years.

First, we expect the general economic recovery to remain choppy, but many of our markets should continue to exhibit incremental steady growth. Year-to-date the majority of our core markets have generated job growth above the national average. Second, demand for apartments remains robust, especially in urban coastal markets. In addition more cyclical geographies such as Florida and Texas are generating improved results.

Finally, new multifamily supply. Typically new supply has been a predominant driver behind a slowdown in rental rate growth as the recovery progresses. However, new multifamily supply pressures still appear moderate, deliveries is this year and next are expected to be below or at worst near historical averages in many of our markets. The single family rental market has not negatively impacted our business, now you will not see this as a significant risk given our substantially reduced exposure to markets with high single-family affordability. In short, we continue to see a good runway for growth in the multi-family space over the near and in immediate term.

Turning to more recent results. Through the majority of July renewals continue to trend well, up 6.7% or 60 basis points above last July's result. Renewal increases sent out for the remainder of the third quarter have averaged 6.5%, and we expect to capture close to all of this increase as is generally the case. With occupancy holding close to 96%, we expect that third quarter results will be strong.

A couple of words on expenses. You’ll notice that year-to-date same-store expense growth of 1.6% is still below our 2012 guidance of 2% to 3% growth. We continue to believe that our guidance will prove accurate, expense comps toughen in the second half of the year. Turnover is expected to incrementally increase and higher real estate taxes are expected to hit.

As a reminder, we provided updated 2012 guidance at June NAREIT conference. These expectations can be found in our second quarter press release published this morning. Assuming no further equity raises for the balance of the year our 2012 fully diluted share count will be approximately 252.7 million.

Finally, I would like to direct everyone's attention to a couple of new attachments in our quarterly supplement. First, on Attachment 4(B) you’ll see a debt covenant analysis. Second, you’ll see a new development layout on Attachment 9(NYSE:A) which better illustrate redevelopment versus the under construction project.

With that operator, I’d like to open the call up for questions.

Question-And-Answer Session

Operator

Thank you. Ladies and Gentlemen, at this time we will begin the question and answer session. (Operator instructions). One moment please for our first question. Our first question comes from the line of Jana Galan, with Bank of America. Please go ahead.

Jana Galan - Bank of America-Merrill Lynch

Thank you. Good morning. I wanted to get a little bit more detail on the turnover and if you are seeing any changes based on reasons for a move out or maybe elevated turnover in geographies versus others?

Jerry A. Davis

Sure. This is Jerry. We are seeing reasons for turnout. They are pretty consistent with what they have been. Move outs to home purchase is up about 100 basis points from where it’s been running at about 13%, and the markets you are really seeing that in for the most part are the locations like Austin, Nashville, Richmond, the Inland Empire and one surprising one where we are seeing an increased move out to home purchases in Boston. Most of our West Coast markets, with the exception of San Diego, are still seeing move out to home purchase under 10%. So, West Coast affordability is still difficult for most of our renters. And when you look at move outs to rent increase, it's been growing each of the last probably five quarters and today it stands at about 8%. One area that we have seen a slight reduction year-over-year in move out reasons is money issues, which is skips evictions, lost jobs things like that. And markets where we’re seeing an increase in front over to the first six months, they are predominantly in the West Coast markets where we’ve had quite a bit of pricing power. And -- So, we've been increasing people over the last two to three years and those happen to be the markets where three years ago our peak to trough rents dropped the most, so your B renter was able to move into an A property or your C renter was able to move into a B, and now we’ve escalated rents to a level where they’ve gone back to where that was before.

Jana Galan - Bank of America-Merrill Lynch

Thank you, Jerry. And I believe in your prepared remarks you said you expected to continue to increase in the back half of the year. Do you mean higher than this kind of 58% level or is it just the year-over-year turnover that’s increased?

Jerry A. Davis

No, I think year-over-year turnover for the year is probably going to be three to four basis points over what it was last year, which will put us in that probably 55% to 56% for the year. Third quarter historically is our highest turnover quarter. So it usually gets north of 60 on an annualized basis, but then it comes down significantly as you get into the fourth quarter.

Jana Galan - Bank of America-Merrill Lynch

Okay. Thank you very much.

Operator

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

Karin Ford - KeyBanc Capital Markets

Hi good morning. I wanted to ask Tom about a comment in your press release where you said most of the heavy lifting on de-levering and repositioning are behind us. Can you just talk about where you see UDR when you say most? What type of percentage that means for each one of those activities where we are today?

Thomas W. Toomey

Certainly Karin, and good morning. With respect to the portfolio when we look at it, we start with its $12 billion enterprise today and our portfolio in the Southeast, which is somewhere, around 12%, 15% of the enterprise is a portfolio that’s performing very well. Strong NOI growth this recent quarter and we expect that to continue over time, but it probably doesn't fit the long long-term aspect of where we would like to be, which is basically from DC to Boston and the West Coast. And so as a result, we view it as a warehouse piece of capital that over time if opportunities are found, developments are completed, we’ll look at the pricing that we can achieve in that portfolio and then redeployed the capital into there. So we are looking at it as relatively a static $12 billion enterprise and asking ourselves, when do we and how do we move out of those markets? And we feel no rush, in fact the performance and where it looks like we’ll probably hang on to them for some extended period of time, but it’s a directional aspect and I would not probably see us be an active seller of those anytime soon. Jerry or Harry, would you add anymore to that?

Jerry A. Davis

Well the market started talking about the South Eastern markets, and we are talking about three major cities that are Nashville, Tampa, Orlando, I think they had same-store NOI growth of about 9%, interest rates are low there continue to be investor interest. So to the extent, we do decided to sell those markets in the future. We expect that to be very liquid markets. There are a couple of markets that we would expect to probably sell in the short-term. We are done for the year given for a variety of reasons, but as we look into the relatively near-term, there are a couple of markets that we probably look to exit that might be to $200 million to $400 million in total.

Karin Ford - KeyBanc Capital Markets

Great. And just on the delivering front as well, following the equity deal and the portfolio of sales. Now where do you think you are versus your plan today?

Thomas W. Toomey

I think we are in line with our peer group and our intent is to stay in line with the peer group and any activity undertaken in the future will be to continue to be in line with the peers. So I don't think you’ll see us make dramatic moves one way or another the natural growth of the cash flow of the enterprise will help. In addition as we refinance maturing debt will help, but we are comfortable continuing to be in line with the peer group.

Karin Ford - KeyBanc Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Eric Wolfe, with Citi Group. Please go ahead.

Eric Wolfe – Citi Group

Hi, thanks. Just a question on your operating guidance. It looks like you are expecting around 5.5% revenue growth this year. So I just wanted to sort of break it down in terms of the different components and see what your expectations are. It would sound like from your commentary that you are sort of expecting this mid-6 renewal rate, this kind of growth continuing mid-4s on new leases and sort of flattish growth on occupancy. Is that pretty much what you are expecting for the balance of the year?

Jerry A. Davis

Yeah. I would say that's what I am expecting for third quarter. I think when you get to fourth quarter, if history repeats the way it has the last two to three years you will see the new lease rate growth decelerate down to the 2% range. I think the renewals do tend to stay fairly strong that this year our expectation is to back down a hair on the renewal increases probably starting in October. So, instead of being in that 6, 6.5 range I think we are going to get down more in line into the 5.5 because last year we saw our occupancy in 4Q dropped to 95.1. Our preference is to keep occupancy north of 95.5. But this is pretty normal seasonality, but yeah the midpoint of the guidance is 5.5, that's where we are at right now. I continue to see strength in most of our markets and very little deceleration.

Eric Wolfe – Citi Group

Great. That’s helpful. And then you mentioned that some of your non-core markets were performing very well. I think you said 9% same-store NOI growth. Is it surprising to you that these markets are doing so well, even though they don’t have a lot of the characteristics that you would seem to want in markets that presumably obviously the most obvious is, home ownership is quite much more affordable. So, I’m just curious if that's surprising to you at all and whether that makes you more inclined to kind of keep a decent percentage of those non-core markets in your portfolio over the long-term?

Thomas W. Toomey

Eric, this is Tom and then I’ll ask Jerry to comment as well. My view, over the long period time, you look at those markets and they are bouncing off the bottom. In case of Florida, it was five years of down trending on rent and NOI growth and now it’s coming back up and it probably has a good two to three year run in it. But in that time frame development pipelines will start to rebuild rapidly and will represent a threat to the long-term value of those assets. And so for us, I think, we’re going to ride the cash flow up and then we'll look at it, and ask ourselves when are they are going to get threatened by supply or any other economic downturn that may occur there, and we’ll timeout our exit and repositioning of those dollars accordingly.

Jerry A. Davis

I would agree. There is very little supply coming into those markets. When you look at the long-term average, for example, when Nashville is to add almost 2% of supply a year and over the next year it’s only going to add about 1.4%, and you look at that same metric in Tampa. Tampa usually adds almost 2%, it's looking like they’ll add 1.2%. And then Orlando typically adds just under 3% a year, and it’s only going to add 1.2%. So, very little new supply and I would say, in addition to what Tom said, in those markets we do have no exceptional management teams that probably outperform the market in general.

Eric Wolfe – Citi Group

Okay. That’s very helpful. Thanks guys.

Operator

Thank you. Our next question comes from the line of David Bragg, with Zelman & Associates. Please go ahead.

David Bragg - Zelman & Associates

Hi, good morning. Just a couple extra questions here on the disposition plans that were outlined at the beginning. The $200 million to $400 million of near-term sales. Can you talk a little bit more about what markets those would be in?

Thomas W. Toomey

Yeah. This is Tom. I think they're going to continue to always look at what we can do with the Norfolk portfolio, the Sacramento portfolio. I mean we feel like we have assets there that are generating decent cash flows, but its tough when you have a boat go out and it takes – drops your occupancy from 97% to 90%. And that volatility to sustain cash flow growth and pricing power is awful hard to continue in that market. I think Jerry and his team done a great job of operating them. So we will see what they fetch in price and then if they don't, we are glad to run them and continue to generate the cash flow off of them.

David Bragg - Zelman & Associates

Okay. That’s helpful and I think Jerry alluded to this, but are you currently marketing anything for sale now?

Jerry A. Davis

No.

David Bragg - Zelman & Associates

Okay. And last question is, under what scenario might we see you buy any assets in the next few quarters?

Jerry A. Davis

Well I think that the scenario that would cause us to buy something would be finding the right asset and having the ability to capitalize that appropriately. So I think, look -- we are continually in the market looking at better deals like everyone else. We simply haven't found anything of size that we’re comfortable with pricing or have been able to make a deal with the seller. In fact we brought a couple land parcels. We have got a couple smaller deals now that are really contiguous to existing properties so we can sort of obtain that at operating efficiency. But if you think about it, we haven’t bought anything of size for several quarters, Columbus; we made that deal on the fourth quarter last year, closed in the first quarter this year. So we’re continually out there looking, we just simply haven't found deals between these off-market deals that we like to look at and we just simply haven’t been able to strike a deal with the seller.

Thomas W. Toomey

David, what I would add is, our view of an ideal transaction would probably be something that is first off market adjacent to or very close to our existing communities where we have some operating efficiency that has a redevelopment potential, something we can look at over time horizon and have a very high comfort that both, we can grow NAV through one of our three metrics and drivers, which would be either ground-up development, the operating platform, or the redevelopment platform. And we are not going to find that in trying to win an option for Class A urban asset where a dozen people show up. And so hence we see them, but we were not overly engaged by them and don’t see the upside for us or our shareholders in doing so. So I think we'll stay more focused in the off market and it’s probably a quiet period, we anticipated it being a little bit more quiet. I think we’ll be intrigued at what happens in the pending tax code and rate structure and if that triggers a selling window. But mostly the assets we’re looking for aren’t really going to be in that caliber. So I think you'll see a lot Bs come to the market, probably not stuff we are going to look at unless we really think it’s well located and got to rehab. So I would expect us to be pretty quiet for the balance of the year on the acquisition front and we’ll look at it from their next year and see how the market evolves.

David Bragg - Zelman & Associates

Okay. That’s helpful. And then just one last related question. Tom, you opened last call and you spoke about improving the portfolio both as it relates to the market mix but also urbanizing the portfolio itself within core markets. So we’ve talked a lot on this call about the first part. Can you touch on the second and what markets that are core markets of yours would you like to urbanize the portfolio and how much work does that involve?

Thomas W. Toomey

That's just a long-term directional aspect of it. I tend to think when we look at our portfolio we really break down each market into quartiles of sub-markets and we stay very focused on wanting to be in the two upper quartiles and I think over time we'll continue to examine how those sub-markets evolve and position ourselves accordingly. It gives us what I'd call just a direction. Timing on exiting and urbanizing you know it is just part of normal capital recycling of the enterprise for us. We don't feel like that $12 billion (indiscernible) urgency to try to grow the enterprise significantly. We will naturally over time as the cash flows grow and the development, redevelopment activities come online but we are comfortable with our size and a steady growth trajectory. I think that's how I think about it and the Group thinks about. Anyone wants to add anything?

David Bragg - Zelman & Associates

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

Hi. Tom, you mentioned growing your development pipeline to 1.5 billion. If you can you talk about the markets where you're planning to do that. And also do you worry about the increase in supply effecting your development plan?

Thomas W. Toomey

Well, I think for us when we look at the size and scope of the development pipeline, we look at the triangulation of our skill set, our capital structure, our debt maturities and maintaining financial flexibility and leverage of the enterprise. And so those will probably be the governor of how big of a development pipeline we’ll get. The second, we’ve of targeted initially at this space in the company at about $0.5 billion of annual delivery. We think that’s prudent. On the specific market, we’re certainly going to weigh what the supply threat looks like, but as a long-term value creator, long-term holder, you can’t get swayed by what the next six months pipeline or year pipeline looks at. You have to look over the long period of time and then I think we’ll just weigh through that factual discipline in determining where and when and how much our development shapes.

And I’ll just remind just remind, I think one thing that does go unsaid very often is the redevelopment efforts that we undertake and the value creation in those. And you’ve visited a number of our redevelopment efforts and you can classify them as much more than kitchen and bath. We’re actually changing both the cash flow trajectory of the asset, but also the cap rate aspect of it. And we think there's a lot of value in that and that Southern California is a perfect example of that market where we can rehab and we do not lose all the cash flow or the community. We in fact retain a lot of the existing residents at the new higher rent and that's underway right now at Rivergate in New York and we’re having a very good success there as well.

Swaroop Yalla - Morgan Stanley

Got it, that’s helpful. And then Jerry, what percentage of NOI, the non-same-store pool would enter the same-store pool by 1Q. You guys have a good breakdown in the south now with the number of properties, but if you can just quantify the percentage of NOI which will enter by 1Q. I think that’s when most of your New York assets enter the same store pool.

Jerry A. Davis

As of right now, 26% of our NOI is in non-same-store. By year-end non-same-store will be 15%. I don't have handy exactly what it will be in one quarter, but we can look that up and get back to you.

Thomas W. Toomey

It is fair to say that the entire portfolio is at about $1,500 a month in rent. And so we just kind of gravitate. If we don’t do anything, it kind of rolls itself into and you’ve got to be probably as you said over the next four quarters.

Swaroop Yalla - Morgan Stanley

Great. Thank you.

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

Thanks. Good morning. A housekeeping question for you. What the amount of the one-time vesting charge in G&A?

Warren L. Troupe

Paula this is Warren. It was $3.8 million.

Paula Poskon - Robert W. Baird

Thanks. And did you incur any one-time cost in relation to Dave Messenger’s departure?

Warren L. Troupe

We had a very small associated with some stock that had vested during the quarter, not as a result of the departure but just normal vesting.

Paula Poskon - Robert W. Baird

Okay, thanks. And then what was the transaction that generated the gain in the TRS?

Thomas W. Toomey

It was Belmont.

Paula Poskon - Robert W. Baird

Okay, thank you. And then just a bigger quick picture question for Tom. Could you just give us a little bit more color on the CFO search? Are you already reviewing candidates? Are you seeing the breadth of – in-depth of quality and skill sets that you are hoping to see? Just kind of give us a little bit of color on where you are in the process?

Thomas W. Toomey

Well, certainly, Paula. We’ve engaged a search firm in that and we’ve had a number of people come forth and offer themselves as candidate and we have looked at internal candidates and that process is really just beginning and we feel very comfortable with the executive group participating in that and the depth of the team and Mark Schumacher and his skills in the financial reporting area. So we feel like we can take our time and be very selective and thoughtful about the process and fell that we’ll find the right person for the company.

Paula Poskon - Robert W. Baird

And what are the defining characteristics of the right person given the blend of the skill sets you already have in the team?

Thomas W. Toomey

Well, we would like a guy that could finish the 4 by 100 in the pool and win the gold. I think it’s fair to say that there is a lot of characteristics we are going to look at. We are going to look at the entire attribute of the candidate, but it’s really an opportunity for us as a Company to get somebody that’s probably going to be active, engaged with the street in communication, but can go anywhere in the enterprise and make it more efficient, more profitable and culturally fit with this executive group and the Company’s culture in the field. So I think those of the attributes to start. There are a lot of qualified people out there who will fit those and we’ll just go through meticulously and get the right person for us.

Paula Poskon - Robert W. Baird

Thanks Tom, appreciate that.

Operator

Thank you. Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please go ahead.

Michael Salinsky - RBC Capital Markets

Good morning. Jerry, first question. Can you give us the loss to lease statistic for the portfolio and also what your expectations are for D.C. just given the amount of supply coming online the second half of year?

Jerry A. Davis

Sure. Loss to lease at the end of the quarter, Mike, was 4.9%. That's down from the same time last year when it was I think high fives. So it's still maintaining at a good level and if you look at that blend really between my new leases and my renewals, it blends into that mid-fives range. So we feel good about that. D.C. for the remainder of year, we were, I guess little pleasantly surprised that we saw our year-over-year growth actually accelerate in second quarter versus first because a couple of our properties in Arlington had lease-ups that completed earlier in the first quarter so we didn't have that stress on us. There is a lot of new supply coming as you know in D.C. over the next 12 to 14 months. I think for the remainder of this year we'll stay probably in that 4% revenue growth range and I think we are going to be stressed a little bit as we get into 2013 in D.C. I don't think it's going to go negative, but my guess is that revenue growth will probably be about half of what it was this year.

Michael Salinsky - RBC Capital Markets

Okay, appreciate the color there. I don't know if you look at it this way, but if you look at the non-same-store portfolio maybe adjusting for periods where you didn't own the assets, but do you have a same-store number, I mean a year-over-year growth number for the non-same-store portfolio kind of on a comparison basis?

Jerry A. Davis

We have tried so hard to figure out the best way to communicate that and we had difficulty going back to last year because in many cases we either didn't own the asset or so we don't have reliable financial data or it was – it wasn't mature yet and stabilized. So the metric we’ve really try to use more to show is performance versus our same-store is to look at sequential data because it was typically stabilized in 1Q. When you look at that, our non-same-stores that were stabilized in 1Q were growing revenues at 3.6% and our same-store was going at two. So it’s almost double the rate.

Michael Salinsky - RBC Capital Markets

Okay, that’s helpful. Then finally just on the investment front and you guys talked not expecting a significant amount of acquisitions in the second half of the year. What should we expect in terms of development starts and also additional land investment?

Thomas W. Toomey

This is Tom. I think in our prepared remarks we’ve described on a relative number of times between 70% and 80% of the development pipeline, redevelopment, so almost $1 billion. 70% to 80% of that will be delivered in the next – by the end of 2013. So if that comes out of the pipeline we’ve got to add back into ‘14 and ‘15 deliveries. So we’ll be looking at that and again kind of stay in that confines of about 500 million of annual delivery number. So that’s what we’ll be targeting and we think we have a pipeline that probably fits that, meaning the inventory that we already controlled and are just going through the process of defining scope, product and starts. So I think we are well on the way of being able to sustain that level without having to go into the market and finding new opportunities.

Michael Salinsky - RBC Capital Markets

Okay. But your guidance for the second half of the year does contemplate additional starts, correct?

Thomas W. Toomey

No. It really doesn’t – probably more of the guidance is what we’re going to spend on the existing assets that are already underway. If we find, if we’re able to finalize plans on some of the stuff that we're looking at today than obviously we will kick it into the start mode, but we’re still in a steady mode on those and scope mode and just not prepared at this time to put forth exactly what will be built because we are still trying to figure that our self.

Michael Salinsky - RBC Capital Markets

Fair enough. Appreciate the color. Thanks.

Operator

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

Robert Stevenson – Macquarie

Good morning guys. Tom, just to follow-up on the last question. What’s the level of land that you guys either option or controlling that’s not appearing on the attachment 9A on the supplemental? How material is that?

Thomas W. Toomey

Really the only other land parcels that we have that don’t show up on the schedules are the land parcels that we own with MetLife. So there is 10 of those parcels remaining. Some of those we will develop over time. We have very small ownership interest, but in the future that could change.

Robert Stevenson – Macquarie

Okay. So the Wilshire and the 7 Harcourt plus what you've got left at Vitruvian, is basically the owned and then you’ve got Beach Walk, Fremont and Pier 4 in Boston which are JV sites and outside of that your land that you control is relatively minor outside of that land?

Thomas W. Toomey

Rob, I think you missed the Fremont site in San Francisco. We control that as well.

Robert Stevenson – Macquarie

Okay. All right. And then, Jerry, you had a comment early on about skips and evicts being pleasantly surprised there. Where is that that trending and has it been sort of consistent despite the – over the last few quarters despite what you've been seeing in terms of move out the financial reason?

Jerry A. Davis

Yeah. It typically runs for us at about 0.4% of potential rents and that’s a long-term average. Last year in the quarter, I think it spiked up to 0.5%, maybe 0.6%, but we don’t see that growing anymore. It’s staying fairly stable and it’s really sub-market driven and it hits as much harder at our lower rent markets than those tertiary areas.

Thomas W. Toomey

I would also add that, I think Jerry has done a great job of moving the vast majority – 85%, 87% of the residents pay us online at the first of the month, so we are able to identify people that are going to struggle, are the slow pay piece and years gone past and including most of the private sector, you get that drift in by the 10th or the 15th of the month before you realize you have an issue and we pretty much know it by the third to fourth day of the month who is going to be a problem and you are able to jump on it by narrowing the bandwidth and excuses. So I think you can operate in that range and that electronic payment has helped us a great deal in that area.

Robert Stevenson – Macquarie

Is that going to be moving more now that you're in more urban areas like New York City where the eviction process is long and drawn-out and things of that nature? I believe Boston and other parts of California have issues as well. Does that change the dynamics there at all?

Jerry A. Davis

I don’t think so, you are right, it’s harder to get those guys out in places like New York, Boston and the West Coast. But I think as you go to a higher-end resident profile, they don’t live as much paycheck-to-paycheck. So your better quality resident offset the more difficulty with the court systems.

Robert Stevenson – Macquarie

Okay. And then one just odd ball question. What’s the relative number of corporate units in the portfolio these days?

Jerry A. Davis

It’s probably – it’s hard to get a totally accurate count. I think it’s in the 2% to 3% range.

Robert Stevenson – Macquarie

Okay. Thanks guys.

Operator

Thank you. Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Alexander Goldfarb - Sandler O'Neill

Thank you. Good morning. First question; just going to the guidance for the rest of the year, I don't recall the $0.03 of RE3 gains being in the guidance before. Is there anything upcoming in the back half of the year like any other either RE3 or one-timer gains?

Thomas W. Toomey

This is Toomey. No.

Alexander Goldfarb - Sandler O'Neill

Okay. And was there a reason that that wasn't disclosed in the NARIET where you provided the full year guidance update. Was there any reason why that gain wasn't included on that page?

Christopher G. Van Ens

This is Chris. When we sold the Belmont there was the $0.03 of gain. There was $0.02 – a little over $0.02 of gains in our original guidance. So the difference there was not all that meaningful.

Alexander Goldfarb - Sandler O'Neill

Okay. And then second question is looking on the JV page Attachment 9B, if I just do the yield out of the various JVs, the MetLife I, the original Hannaford MetLife JV, the yield on that looks to be about 100 basis points lower than the second MetLife JV and the KFH. When do you think we would expect the first MetLife JV that yield to be more in line with the others?

Thomas W. Toomey

My view is that Met JV I is still in a transition period and that we are not done working with Met on that portfolio and what it will ultimately be for UDR. So, I think, it is premature to look at it or look at it in light of catching JV too, because it’s in a state of evolution. Second aspect it is will improve as we just continue to operate the assets which are doing very well and that is very happy with as well. On KFH, I think after looking at it, adjusting for the management fee structure on that, returns will probably get better in that JV too. So, that one is probably just not a full complexion there. When you look at just the NOI, you have to really look at the fee structure that’s also added to that and those are probably above 5, 5.5 range.

Alexander Goldfarb - Sandler O'Neill

Okay. But Tom, on the MetLife I, what are some of the things that you guys are doing that would improve, because I think you’ve had it now for about two years or so. So what are the some of the things that would improve the yields as you guys manage that portfolio?

Thomas W. Toomey

I think one, the commercial space there’s always the challenges that relates to the retail and getting tenants in there. The second is, we’re continuing to refine and move those rents pretty rapidly and those improve as well and lastly is just a continued effort on the expense side. So, normal operation stuff that Jerry does day in and day out, we just see a pretty good expose trajectory out of those assets. And we continue to have a dialogue with Met on a wide range of things about what to do with JV I and we’ll continue that dialogue and feel like it’s going very well.

Jerry A. Davis

I would add Alex, there is probably two, maybe three assets in that Met I that completed lease up mid way to late last year with heavy concessions. So as you continue to have that concession burn off, that should garner some benefit over the next 12 months.

Alexander Goldfarb - Sandler O'Neill

Okay. That’s helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Richard Anderson - BMO Capital Markets

Hey, thanks. Tom, a question for you. I think the general population public that follows you trusts the Company. You've made some pretty substantial investments over the recent past in some of these core markets. And I think generally speaking, like I said, people have a trust for your Company and your decisions. But even Mickey Mantle struck out a few times. So I’m curious, what could happen or what are you contemplating in growth going forward for these major investments, mainly acquisition for them to work out for you? Do you have any expectation for growth that you could share and what happens if rent growth decelerates substantially? Will they still make sense to you?

Thomas W. Toomey

Well, Rich, a lot of different embedded questions inside of that and where I would start with is, I guess every one of them was undertaken with the thought that we could grow the value of the asset and add to the overall enterprise. And so in many cases you look at New York, we look at it at a point in time and say we think these assets have embedded operating efficiency which will get us over the initial low cap rate and Jerry has delivered on that. The second phase of that is that we think they are well located for future job growth and they are generally what I call a B type portfolio quality where high propensity to rent, job growth, lack of supply is going to drive outsized cash flow growth and our operating model is basically keeping them full and at higher rents. And lastly is looking at them for redevelopment efforts and that we feel like a lot of them are well located and that we can continue to add to capital to them and incrementally get outsized returns on that incremental capital for rehab and Jerry has done very much that at Rivergate where he has turned 38 doors and he is getting an average rent increase of 25%. And many of the people who are living there are just moving to new units. So that’s the type of long-term value creation that we have looked at when we've bought assets and I think we would continue to do that.

We know it’s a very competitive landscape. We prefer buying from non-marketed, non-auctioned deals because we think we can identify those and we have a track record of successfully executing on those. So I think that’s the first aspect of growing the enterprise. We’re not intent on a site as much as we are intent on an NAV creation model and things getting in that and the big part of NAV creation is, what’s your cost of capital and are you adding to it, are you destroying it? And so in our like view we think we've been adding to it. It takes time sometimes to deliver on that and we appreciate people’s patience and willing to go look at the assets and see and walk them with us and I think you've done it a number of times and you can see what we're doing and you look at it and say, yes, you are executing on what you told us you would do and we’ll continue to do that. We want to be very transparent and very clear to our shareholders that we intend to grow NAV and that we have a team that can do that and we’re going to continue to garner opportunities. We don't know what size and scope they are going to bring, but we’ll be disciplined about it.

Richard Anderson - BMO Capital Markets

If you had known – if you knew that in 2014, 2015 rent growth in some of these markets would decelerate meaningfully, would you still have a view of buying these assets and thinking longer-term or would you maybe…

Thomas W. Toomey

Yeah, I’ll let Harry add to it, but certainly it’s a fair question and we think of what are the potential outcomes of economic downturn and will we slide into a recession which looks like a higher probability every day. And our view is that multi-family has done very well in a recessionary environment. And if you look through the number of recessions I’ve been through, multi-family holds up better than any other asset class and we think that will be true again in this next recession that will come. So you can’t necessarily look and try to time it and say, gosh, we think ‘13 is going to be this way and ‘14. We tend to take a longer term view and realize that in the markets that we’re in there is a higher propensity to rent, there is less likely to be supply and that job we’ve try to concentrate on it, but we’re not always going to it right. The healthcare law is going to spawn a whole new wave of job additions and growth in a number of markets and we are weighing that as well in our future. But we’re a long-term value creator and you’re not going to get it always right on timing, but if you buy right, you run it right, over long period of time we’ll do just fine.

Richard Anderson - BMO Capital Markets

Understood and obviously that’s the right answer, long-term focus on making big investments. And then, Jerry, just a question to you. How much does the addition of the non-same-store assets influence your same-store guidance, if at all? Does it add 50 or 100 basis points for the growth?

Jerry A. Davis

For which year?

Richard Anderson - BMO Capital Markets

I mean, obviously it’s not going to get in until deep into the second half, so how would you characterize it for – not to give guidance on, unless you want to give guidance. But for 2013, do you think you could add 50 or 100 basis points to the pool just because of the newness of the asset?

Jerry A. Davis

I doubt it. It’s not quite that much. My guess is it’s probably somewhere 10 to 30 bps.

Richard Anderson - BMO Capital Markets

Okay, great. Thank you.

Operator

Thank you. Our final question comes from the line of Jeffrey Donnelly with Wells Fargo. Please go ahead.

Jeffrey Donnelly - Wells Fargo Securities

Thanks guys. Actually Tom, I’m just curious for your perspective. Some of your peers have suggested that construction activity in the industry, which has been growing is a bit of a bubble, that these are projects that were planned and permitted and not built last cycle and that once we chew through them the pace of growth is going to moderate or at least maybe not climb above current level. How are you thinking about supply I guess nationally and what you do see is more of a passive growth in your markets over the next few years?

Thomas W. Toomey

Well, a very good question and give me a liberty to talk broadly about it. We talk to a number of merchant building models and for us one of the red signals is when we talk to them about are they doing one-off deals, the source of their capital, their expected returns and are they entering into programs and programs are where you have an investor who says, I’m going to do three, four, five deals with you. And what’s been no to us in the past, when people have seen rapid increases in the supply part of the equation, has been when there have been a number of programs offered up or investors having capital that can sustain that and we’re not finding that in the environment today as I'm aware of probably a dozen merchant build very skilled groups. I'm only aware of one who has a program at this time. And so investor capital is very cautious about supplying them and they are very skilled at garnering sites, entitlements and putting up things rapidly. So the second aspect of that and I think is under weighed by the space is the impact of Basel III on the capital structure of bank, and that a lot of supply comes from regionals and local banks, more so than the nationals.

And by getting – having to come into compliance with Basel III, we think it’s going to be a constraint on the construction loan side, which has a higher capital requirement, which in essence banks are going to say they want to be paid more for that and who is going to charge more in the construction financing side or constrain the amount of lending on it. So I think that those two factors are the ones that we look at and draw a little bit of comfort that the supply is not going to get out of hand. That being said, if our rents continue to grow dramatically capital will find a way to garner space and opportunity. So we feel that that is the overall landscape on our individual submarket and market overviews – we see very little threat at this point in time. All we can do is look at the same data you do and look at permit, land trade, look at who's buying it and ask our self the likeliness of how competitive that product is going to be against ours and when it’s going to come online. We can't do anything about constraining that, but we continue to monitor it and do not see it as a viable threat to the business over the next 12 to 18 months. Beyond that you are hour glassing it just like the rest of us.

Jeffrey Donnelly - Wells Fargo Securities

So you don't necessarily see the industry as 250,000 units, let’s just say, pick a number, headed towards 350,000. You think it’s going to sort of running out of gas if you will in terms of just where we can ultimately peak it to have units under construction.

Thomas W. Toomey

Yeah. I think it’s often management teams and certainly analysts try to focus on that aggregate number. We are less concerned about the aggregate because where is the 300,000 or 250,000? To us it’s how is in our submarket, directly competing to us? The fact that they are building in Houston is almost irrelevant to us because we’re practically out of Houston. So we don't pay much attention to the gross number. We aggregate and very think much on our submarket market driven numbers. And our red flag is when it gets above 1% of the submarket then we start really assessing the impact to us. But again we’re long-term, if it’s a strong submarket that we are in, 1% is not going to disrupt us that much.

Jeffrey Donnelly - Wells Fargo Securities

And just a final question or two going the other end into the spectrum, I guess concerning the Pier 4 parcel in Boston, is that residential over retail and I guess how close is your partner there to breaking ground on that project?

Harry Alcock

It is residential over retail. There’ll be about 10,000 square feet of retail, a 20-story tower. We are still finalizing the scope and plans and cost in this thing. The project is entitled. We have BRA approval so that once we get through this exercise, we’ll be in a position where we conceivably could start construction over the next several months.

Jeffrey Donnelly - Wells Fargo Securities

Okay, and just one last question. Jerry, sorry if you gave the figure, but do you guys track move outs to home rental and how is that trending? I might have missed it if you said it.

Jerry A. Davis

We do. It’s right around 4% and it’s stayed fairly consistent. We don’t see many people moving out to rent homes.

Jeffrey Donnelly - Wells Fargo Securities

Okay, great. Thanks guys.

Operator

Thank you. And that concludes our question-and-answer session. I’d now like to turn the conference back over to our host, Mr. Tom Toomey, President and CEO.

Thomas W. Toomey

Well, thank you all for taking the time this morning to exchange thoughts with us and we do appreciate your time. In closing, I’ll just say, in July of this year, marks the 40th year for UDR as a REIT and our 160th consecutively paid quarterly dividend and I think that’s in testament to the associates over the years, the management team and certainty a trend that we are very proud of and look forward to continuing in the future. And that concludes our call today and we wish you the best.

Operator

Thank you. Ladies and gentlemen, that concludes UDR's 2Q '12 conference call. ACT would like to thank you for your participation. You may now disconnect.

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