UDR Inc (UDR) — Q1 2015 Earnings Call Transcript

Welcome to UDR’s first quarter 2015 financial results conference call. Our first quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, www.udr.com. In this supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures 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 yesterday’s press release and included in our filings with the SEC. And we do not undertake the duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you'll 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. I will now turn the call over to our President and CEO, Tom Toomey.

Thank you, Shelby, and good afternoon everyone, and welcome to UDR's first quarter conference call. On the call with me today are Tom Herzog, Chief Financial Officer and Jerry Davis, Chief Operating Officer, who will discuss our results, as well as senior officers Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call. The first quarter of 2015 was another great quarter for UDR, and our business is firing on all cylinders. As a result of great execution from operations, exceptional lease-up velocity, and a new strategic investment, we increased our full-year same-store and earnings guidance ranges. In short, we continue to execute on our previously communicated two-year strategic plan, with transparent strength of fundamentals and our diligent capital allocation; we feel great about the plan and our ability to deliver on it. The following four topics highlight our first quarter. First, our operations outperformed versus our initial expectations and historical norms due to exceptional new lease rate growth, strong renewal rate growth, and a continued focus on containing costs. These trends continued as we move into our prime leasing season in the second quarter. Second, our development lease-up continued to perform very well. We are exceeding our budgeted lease-up absorption and realizing rents in excess of our initial projections at Beach & Ocean in Huntington Beach and our 100 Pier 4 in Boston Seaport area. We expect to complete $326 million of a previous development in 2015, which will continue to drive our cash flow and NAV growth. Third, subsequent to quarter-end, we entered into a joint venture agreement with The Wolff Company in a portfolio of five communities that are currently under construction. The venture will provide UDR with a pipeline of over 1,500 new homes with an accelerated delivery schedule and anticipated completions beginning in 2015 and ending in 2017. All of the communities are located in core coastal markets including Metro Seattle, Los Angeles, and Orange County. Tom will address the economics and the benefit to UDR in his prepared remarks. Fourth, we are increasing our full-year same-store and earnings guidance ranges to reflect the strength evident in our operations and the accretive nature of the venture that I just mentioned. Better operations and the venture contributed a penny each versus previously announced guidance. Lastly, our prospects look fantastic as we enter the second quarter. Our mix of A and B quality communities in northern and suburban locations should continue to generate strong operating results. As I indicated earlier, April trends were well above our initial forecast and May looks like it will continue to accelerate. There remains a long runway for growth at UDR, and we have the right plan and team in place to capitalize on the opportunities. With that, I’d like to express my sincere thanks to all my fellow UDR associates for their extraordinary work in producing another strong quarter of results. I’d also like to welcome Shelby Noble to the UDR team as our new Head of Investor Relations and express my gratitude to Chris Van Ens for all his hard work over the past three years. I know he will be very successful working with Jerry on the operating team. We look forward to continued success in 2015. I’ll now turn the call over to Tom.

Thanks, Tom. The topics I will cover today include our first quarter results, our balance sheet and capital markets update, our development update, recent transactions, and our revised full-year 2015 guidance. Our first quarter earnings were at the upper end of our previously provided guidance ranges. FFO, FFO as adjusted, and AFFO per share were $0.43, $0.40, and $0.37, respectively. This was driven by better than expected first quarter same-store revenue, expense, and NOI growth, which were strong at 5.1%, 2.5%, and 6.2%, respectively. Jerry will provide additional color in his prepared remarks. Next, the balance sheet. At quarter-end, our financial leverage on an undepreciated cost basis was 37.5%, on a fair value basis, it was around 28%. Our net debt-to-EBITDA was 6.4 times, inclusive of pro-rata JVs, it was 7.3 times; all metrics continued to improve as planned. At quarter-end, our liquidity as measured by cash and credit facility capacity was $517 million. In capital markets, as previously disclosed, we issued $109 million of equity net of fees through our ATM program during the quarter, and the shares were issued at a premium to consensus NAV. Turning to development, we commenced construction on our 155-home $99 million Domain Mountain View development in Mountain View, California, in a 50-50 joint venture with Metlife. At quarter-end, the pro-rata share of our underway development pipeline totaled $838 million and was 73% funded with an estimated spread between stabilized yields and market cap rates at the upper end of our targeted 150 to 200 basis point range. As to future development, we continue to underwrite opportunities with a bicoastal focus, and we anticipate the size of our pipeline to be in the targeted range of $900 million to $1.4 billion by mid-year. On to recent transactions. As previously announced, we completed the disposition of our 20% interest in our Texas JV. We realized net proceeds of approximately $43 million on the sale, inclusive of a promote and disposition fee of approximately $9.6 million. These were recognized in the first quarter but excluded from FFO as adjusted and AFFO. This disposition was well-timed as it eliminated our exposure to Houston, reduced our exposure to Dallas, and generated a strong IRR of approximately 14%. As Tom mentioned, subsequent to quarter-end, we entered into a joint venture agreement with The Wolff Company to invest $136 million for a 48% interest in a portfolio of five communities that are currently under construction. Our investment is based on an initial all-in price of $559 million. We are discussing a fixed asset with our partners that we may add before closing, which would represent an approximate 20% increase to both our initial all-in price and investment. This transaction is beneficial in a variety of ways. First, we received a 6.5% preferred return on our $136 million investment; so the transaction would be immediately accretive to FFO and avoid their earnings drag associated with typical development projects. Second, assuming all five of the communities are acquired, we estimate NAV creation of approximately $80 million at current market cap rates. Third, this transaction increases our exposure to high-quality communities located in our core coastal markets, where multifamily supply-demand fundamentals appear favorable for the foreseeable future. Fourth, the JV is less risky than a typical development as construction is already underway on all five of the communities. Our partner has provided certain guarantees that the $136 million to be paid represents our entire reported investment in the venture, and there is no promoted structure to our partner. Fifth, four of the five communities are located within a mile of an existing UDR community, thereby enhancing similarity with anticipated operations and valuations. Finally, with lease-up starting on average in seven months, we’re able to take advantage of current fundamental market strength. Additionally, given our accelerated ability to exercise our purchase options ranging from 22 to 36 months from today, we view this transaction as having elements of a financing arrangement with an option to purchase rather than simply a traditional joint venture. We are excited about the accretive nature of this transaction; additional details are available on our first quarter press release and the West Coast Development joint venture presentation posted on our website. On to the second quarter and full-year 2015 updated guidance. We increased our full-year FFO, FFO as adjusted, and AFFO guidance ranges by $0.02 at the midpoint due to stronger than expected operations and accretion from the development joint venture. Full-year 2015 FFO, FFO as adjusted, and AFFO per share are now forecast at $1.63 to $1.67, $1.61 to $1.65, and $1.44 to $1.48, respectively. For same-store, we have increased our full-year 2015 revenue growth guidance by 50 basis points at the midpoint to 4.25% to 4.75%. Expense growth is unchanged at 2.5% to 3%, and we increased our NOI growth forecast by 75 basis points at the midpoint to 4.75% to 5.75%. The increase was driven by strong new and renewal rate growth, total occupancy, and lower turnover. Second quarter 2015 FFO, FFO as adjusted, and AFFO per share guidance is $0.39 to $0.41, $0.39 to $0.41, and $0.34 to $0.36, respectively. From a sources and uses perspective, we have updated our sales proceeds and debt and equity issuance guidance at the midpoint from $775 million to $825 million. This net $50 million increase is the result of an increase in our acquisition guidance to account for the development joint venture transaction mentioned earlier and the removal of $75 million of assumed land acquisitions. As to funding our capital needs for the year, to date, we received $43 million from our Texas JV disposition. We issued $109 million of equity on our ATM and have $65 million of assets under contract for sale. Assuming a $300 million bond offering late in the second quarter, we have only $250 million to $300 million of remaining capital funding needs for the year. As we outlined in our call last quarter, we will continue to utilize the most advantageous source of capital to fund these needs, typically either through asset sales or through equity issuance at or above NAV. Other primary full-year guidance assumptions can be found on Attachment 15 or Page 25 of our supplement. Finally, we declared a quarterly common dividend of $0.2775 per share in the first quarter or $1.11 per share when annualized, which is a 7% increase above 2014’s level and represents a yield of approximately 3.3%. With that, I’ll turn the call over to Jerry.

Thanks, Tom, and good afternoon. In my remarks, I’ll cover the following topics; first, our first quarter portfolio metrics, leasing trends, and the rental rate growth we realized this quarter and early results for the second quarter. Second, how our primary markets performed during the quarter, and last, a brief update on our development lease-ups. We’re pleased to announce another strong quarter of operating results. In the first quarter, same-store net operating income grew 6.2%, driven by a 5.1% year-over-year increase in revenue, which was above our expectations, and a 2.5% increase in expenses. Our same-store revenue per occupied home increased by 4.6% year-over-year to $1,659 per month. Our same-store occupancy of 96.7% was 60 basis points higher versus the prior year period. Total portfolio revenue per occupied home was $1,836 per month, including pro-rata JVs. Our first quarter revenue growth was well above our original forecast and was driven by widespread strength across our markets. Stable job growth, limited impact from new multifamily supply, a single-family housing market that is still finding its footing, significant demand from new Millennial households, and incremental demand from empty-nesters are all helping. Turning to new and renewal lease rate growth, which is detailed on Attachment 8-E of our supplement. Our ability to push new lease rate growth continued to outpace historical precedent during the first quarter by a wide margin, we grew new lease rates by 4.2% in Q1, a full 320 basis points ahead of the first quarter of 2014. Renewal growth also remained robust at 5.7% in the first quarter or 60 basis points ahead of last year. In April, these trends continued with new lease and renewal rate growth of 6.3% and 6.8%, respectively. Our leasing success in conjunction with stable, sequential occupancy and lower year-over-year turnover gives us plenty of confidence that demand is more than sufficient to continue pushing rates higher throughout the upcoming prime leasing season. These factors also served as the primary drivers of our sizeable 50 basis point increase in same-store revenue guidance at the midpoint. Next, rents as a percentage of our residents’ income decreased slightly to 17.2%. Move-outs to home purchases were flat year-over-year at 14%, in line with our long-term average. Even with renewal increases at a healthy 5.7% in the first quarter, only 6.8% of our move-outs gave rent increases as the reason for leaving. Moving on to quarterly performance in our primary markets. These markets represent 65% of our same-store NOI and 71% of our total NOI. Orange County and Los Angeles combined represent 17% of our total NOI. Orange County posted year-over-year revenue growth of 5.8% and is outperforming our budget expectations thus far in 2015. Our Los Angeles portfolio, concentrated in the Marina Del Rey and Playa Vista submarket, continues to be impacted by new supply in the submarket. As a result, our first quarter year-over-year revenue growth lagged at 3.8% versus the overall LA market. However, we still expect full-year same-store revenue growth of just under 5% for Los Angeles. New York City, which represents 13% of our total NOI, posted combined rent growth of 6.5% in the first quarter while maintaining occupancy at just under 98%. Lower Manhattan remains attractive due to limited new supply, strong job growth in the technology, finance, media, and advertising fields, and low housing affordability, which limits move-outs to home purchases. Metro DC, representing 12.5% of our total NOI, posted year-over-year same-store revenue growth of 1.9%, compared to negative 50 basis points in Q4 of 2014. We are forecasting 1.5% to 2% revenue growth in 2015, as we continue to benefit from our diverse 50-50 mix of A and B assets located both inside and outside the Beltway. San Francisco, which represents nearly 12% of our total NOI, shows no signs of slowing down, as new and renewal lease rate growth in the first quarter and April point to another strong year for the Bay area. Same-store revenue growth in the first quarter reached 9%. Submarket-wise results were more mixed, with our Downtown properties posting 5% top-line growth due to the impact of new supply, compared against 11% growth at our properties in the Peninsula and Silicon Valley. Seattle, which represents 6.5% of our total NOI, continues to benefit from the strong growth inherent in our suburban B assets, which are less exposed to new supply. Long-term, we continue to like the Downtown Seattle submarket and believe that the ongoing creation of new jobs by companies such as Amazon, Facebook, and Expedia will continue to drive demand in Seattle’s urban core. Boston, which represents 5% of our total NOI, continues to see new supply pressure Downtown. Our suburban assets north of the city and to a lesser degree those on the south shore should fare relatively better in 2015. Lastly, Dallas, which represents just over 4.5% of our NOI, posted 4.4% year-over-year same-store revenue growth in the first quarter. We expect new supply to pressure our Uptown and Plano communities in 2015. For the full year, we expect revenue growth to modestly decelerate from our first quarter results and come in around 4.0%. I’ll turn now to our recently completed and in-lease-up developments, which you can find on Attachment 9 or Page 19 of our supplement. These three properties represent $400 million or roughly 48% of our pipeline. Beach & Ocean, our 173-home $52 million lease-up in Huntington Beach, was 91% leased and 85% occupied at quarter-end. We are ahead of budget and exceeding our lease-up expectations. Asking rents today are just over $3 per square foot or $0.30 ahead of budget. I’d like to remind you this property is located three miles from our Bella Terra project that was stabilized a year ago and it’s just a mile from our oceanfront development site, Pacific City, which we plan to start at the end of the second quarter. DelRay Tower, our 332-home $132 million lease-up in Alexandria, Virginia, remains challenged by the weak DC market. But we’re confident in its long-term prospects. We are currently offering concessions of about two months in this oversupplied submarket to hold rate and maintain leasing velocity to reach our budgeted occupancy. Long-term, we believe in the DelRay submarket, where we built an exceptional property. Lastly, we’re extremely pleased with the first three months of leasing of our 369-home $218 million 100 Pier 4 development in Boston’s Seaport District. We’ve taken over 120 applications in the months of March and April, well above our expectations. At quarter-end, the property was 31% leased; as of today, it is 50% leased and 17% occupied. Asking rents of $4.70 per square foot are ahead of original underwriting. Pier 4’s waterfront location is surrounded by new office building construction and is only a five-minute walk to the Downtown Financial District and Boston’s South Station train hub. Several major employers are relocating to the Seaport District, including Goodwin Procter, which is relocating its Boston headquarters in 2016 and taking 380,000 square feet, State Street Bank, which is relocating from the Back Bay taking 485,000 square feet, and PWC, which is slated to take 334,000 square feet as well. We’ve experienced exceptional leasing demand ahead of these transformational events, and are excited as the area continues to attract new potential residents. April results came in well ahead of plan; as we look ahead to the next few months, we see continued and improving pricing power and stable occupancy. All in all, we had a great first quarter, and we remain very positive on the outlook for multifamily fundamentals and our ability to execute during the peak leasing season and throughout the remainder of 2015. With that, I’ll open up the call to Q&A, operator?

Can you talk about how the development JV was sourced and what the benefit is to your partners for executing the transaction at this time?

Nick, this is Harry. Wolff was in the market looking for capital partners, and given our recent experience with Steele Creek, we started talking to them about a similar type structure, which is how this thing evolved. From our partner's perspective, I assume there are a number of benefits that they could communicate, but I know specifically they've got a couple of benefits: one, they get to return money to an open-ended fund and redeploy it, and secondly, they were specifically over allocated on the development front to certain of these markets.

And then stabilized estimated yield of 5% on current rents or on trended rents?

That’s on trended rents; we have grown rents up 3% on average over the next couple of years through stabilization.

Jerry, I appreciate your going to the core markets. It sounded like DC and Dallas revenue growth are expected to decelerate as we make our way through the year, but every other market looks to be gaining?

Now, that is true. Actually, DC will be close to flat; we expect DC for the full year to come in between 1.5% to 2%. We’re starting to see the Downtown area, as I said in my remarks, get closer to the same types of growth as we saw in the suburbs over the last year or so. They’re roughly even in that 1.5% range today. A big part of that is most of those assets last year were combating against the lease-ups, and therefore, I have an offer I am going to have free of concessions when those have gone away. But the rest of the portfolio, as you noted, we are seeing continuing growth in revenue. When we first gave our guidance back in early February, we felt our numbers were realistic given our economic data at the time, even though at that time we were seeing a lot of the operating trends on the ground that were showing strength; that was a little early in the year. As we got further into the year, we've seen the rate growth continue to accelerate sequentially. Just as an example, I would tell you that in February, our blended rate growth between new and renewals was 4.9%; in March, that grew to 5.6%; in April, it jumped up to 6.6%. So it has been going up 50 to 100 basis points a month, even though we don't expect that pace to continue. We do anticipate that the growth will continue to go higher just not at the same level of increases each month. But I can also say in the month of May, I would expect it to be higher than it was in April with 6.6%. I’d also like to point out that we sent out renewals for the month of June and renewals in June are averaging over 7% portfolio-wide, but there is a fairly wide disparity between the strongest markets, which are the West Coast, where renewals are pushing very high single-digits, and the Sunbelt and Mid-Atlantic, which are at the bottom, those are about 5% renewal increases. Right in the middle, close to the midpoint of what we are sending out is the Northeastern markets of New York as well as Boston, so there is a big disparity. I would remind you that typically we realize very close to what we have sent out, so the 7% should be a pretty good strong number. Today, also just to get this out of the way, our fiscal occupancy is 97%, and what’s really impressive to me and this really speaks to the broad success or strength of the rental markets that we’re in—we don’t have a single market that has fiscal occupancy today less than 95.8%, and when I look at our new lease rate growth in April, our blended rate growth in April compared to the month of March—90% of my markets are higher in April than they were in March. So, going back to what you said, we see continued strength, and it's virtually across the board.

And then just following up, Tom had mentioned that you might be adding one project to the West Coast Development joint venture, and Harry, you said The Wolff Company was over allocated to Southern California. I was just curious if there is an opportunity to add more to the JV?

Yes. Just in—and Jana, you are talking about the land development JV or about Wolff? Yes, we have five assets that are included in the JV currently; there is a sixth asset that is currently being considered by both parties and we may add that prior to closing, so yes, that would be a West Coast asset as well.

And any other opportunity to work more with them?

We do have a pipeline of additional development opportunities that is something that we would discuss with them once we move forward.

Just a couple of quick questions on The Wolff side. Just to be clear, with the five and the potential sixth, was that kind of the entire current existing pipeline or did they have a portfolio of 15, and you went in and in effect picked out these five or six assets?

Steve, this is Warren. They recently had a portfolio of 10 that they presented to us, and when we looked at the 10, the six that we've been talking about are the ones that we thought had the promise for us.

And then I guess for Tom Herzog, if you think about NAV and consensus NAV, I mean we're hearing more companies kind of using consensus NAV as maybe the justification for issuing equity. The companies don't always provide their own views on NAV, but just how do you—it is just, I guess, to the extent that there was a large disparity between your own internal and consensus, how do you sort of rationalize that and is there a threshold at which you probably would not issue equity?

Yes, Steve. Certainly we look at consensus NAV; it is an easy number for us to speak to because it's produced by a sell-side analyst, but we absolutely do our own NAV internally every quarter and then we bump that up against consensus before we consider issuing equity. So that definitely comes into our capital structure considerations. Did I answer your question on that?

Yes. I mean we could sort of chat offline about it. It's just I guess to the extent that your NAV was 35 and consensus was 32 and the stock was at 33, you would be above consensus, below your own number, it may justify that we issued above consensus the duration below your own estimated value. Just trying to sort of get your arms around that or how should we be thinking about that?

So I would put it this way: We do look at our internal NAV and we run it for a purpose to determine whether we believe internally if a transaction would be accretive or dilutive. More certainly, if we had concluded that it would be dilutive to us, we would not do the transaction, so we do look at our own NAV when we consider equity issuance.

Steve, as I look at my original plan, DC is one of my most positive upside surprises along with Baltimore, so the entire Mid-Atlantic area. Last quarter, we stated that we felt we had bottomed in Q4 of 2014 in DC, and then it was either going to plateau or start to reaccelerate; the acceleration was a little bit sooner than we expected, although we did expect it to go positive. I think it potentially could outperform even more—we’ll have to see if the jobs continue to come. But right now, the new supply inside the Beltway is providing less resistance than it was last year. In fact, I think on this call last year I had given some data points of what my best-performing and worst-performing individual assets were in DC, and I know my worst performing was at about negative 4% growth, and that was my View 14 property down on View Street. If I look at my first quarter results this year, that same property has positive revenue growth of 3.5%. So that U Street Corridor in particular, where we’ve bet pretty heavily with really about four properties within a mile up there, are really performing well.

I guess that’s the only market at this point you’re worried about just downside surprise, or is the jobs picture and the household formations just running so strong that there are very few markets where you kind of worry about downside surprise?

It is universal. One, we will show occasional signs of some weaknesses in Dallas, although the job growth continues to be strong. We have felt the effect of new supply playing out where we have roughly one half of our same-store portfolio. But other than that, the strength is across the board. I think Downtown San Francisco is impacted by supply, as I stated in my prepared remarks; that Downtown area is underperforming the Bay Area at about 5.5% to 6%, if you call that underperforming. But Steve, today we keep looking for when it is going to hit us that is negative, and it’s been hard to find. Earlier in the year, we were a little concerned with Boston, but then what came into reality, similar to last year, is it was a seasonal weather issue, because as soon as March came around, we saw a dramatic pickup in our rent growth; our occupancy, which had stayed strong, got a little bit stronger, and as evidenced by the success of our Seaport lease-up, Pier 4, we’re very enthused by the strength of Boston, even though there is significant development pressure Downtown.

I had a question on the consolidation in the sector recently. Do you expect this trend to continue given the leveraged buyers in the market? And does this change the way you run your business at all? For example, do you want to get large or do you increase your economies of scale?

This is Tom Toomey, and thank you for the question. It’s an open-ended speculative question, and in all frankness, I’d rather focus on what our strategic plan is, the execution of it, and the delivery of the results. And so, while we sat around and observed what’s going on, we think our best plan is the one we’ve outlined and the execution of it.

So do you think that if you could figure the economies of scale would improve for your company?

I think it’s a double-edged sword. I mean I at one time with a few other guys in this room ran a company that was 400 apartment homes. To tell you the truth, after about 200,000 doors, you start having inefficiencies because you become a company that’s run by spreadsheets and not the local knowledge of the particular real estate. And we like our size today and are more focused on what we derive out of the assets than what our G&A is relative to size; we don’t see it as a problem today. We look at the results and the cash flow growth of the enterprise more than we do to the G&A aspect of the enterprise.

I mean we could sort of chat offline about it. It’s just I guess to the extent that your NAV was 35 and consensus was 32 and the stock was at 33, you would be above consensus, below your own number. It may justify that we issued above consensus the duration below your own estimated value and so just trying to sort of get your arms around that or how should we be thinking about that? So I would put at this way: We do look at consensus NAV; it is an easy number for us to speak to because it's produced by a sell-side analyst, but we absolutely do our own NAV internally every quarter, and then we bump that up against consensus before we consider issuing equity. So that definitely comes into our capital. Did I answer your question on that?

No Wolff questions, I promise. Just two quick ones here, Jerry how many projects or dollar value do you think you're going to put into the redevelopment pipeline this year?

We anticipate, and these will all be later in the year, we anticipate—three to seven would be my estimate. There will probably be a handful of those that are in the $15 million to $20 million range, and then some that will be under $10 million. So you’re not going to see any—I believe we had guidance, Tom, for a redevelopment. So what was that number?

The spend is somewhere—that's going to be as adjusted—about $350 million for the year. That’s development.

But we don’t see any of the redevelopments we’re anticipating right now, Rob, being of the size of some of the ones we've done over the last couple of years.

And your preference today is to exercise this…

If I could just jump in, it's Herzog just to be clear: the 6.5% prep on the investment balance until such time as the asset is considered stabilized, which would be at 80% occupancy and until that date, the Wolff partner will incur all operating losses minus interest or get any operating income during that period of time. Once we have been deemed stabilized on an asset to that definition, then we move into our sharing ratio of 48% to 52% from that point forward. So whatever the asset is yielding at that point will be what falls to the bottom line, and the stabilized numbers that Harry referenced at the 5.4% is what he is speaking to. So that is the mechanics as to how that will play through the P&L over the life.

We like Belvieu very much. Now, there is job growth continuing there, even though Expedia is moving their headquarters over to Seattle from Belvieu. We think it will get refurnished within downtown Belvieu, which is a much smaller submarket and some forecast suggesting that Belvieu might— they’re seeing a 20% expense ratio on supply over the next couple of years. And given that Belvieu is where you and a couple of your peers are effectively concentrated. Curious on—I guess you still have good pricing product today, but your expectations for the market over the course of this year into next, thoughts on perhaps operational strategy. And would you guys perhaps consider culling some of your portfolio there, especially given not only the supply outlook but you guys acquired, it looks like two assets, the Wolff link up. We continue to like the Belvieu area; we think it caters to a lot of the east side job centers, whether it’s Microsoft or downtown Belvieu, or Google employers on the east side. I don’t think we would be looking to downsize Belvieu. Two of our deals are MetLife JVs and then very high end. We have the Element Steels which—they're doing extremely well with the workforce in Belvieu, and we have one property down in the downtown area Belvieu that's only about 80 units. That typically does very well, although this year, as you noted, it’s surrounded by supply, and it’s probably suffering the most with revenue growth that's roughly flat compared to the 6% or 7% to the rest of that submarket.

Jerry, on DC last quarter you provided some good commentary on the split between the deals outside of the Beltway and how they are performing versus the Asian side of the Beltway. Just wondering if you could update that for the first quarter and April?

Deals outside-inside, as I stated earlier on the call, they’re starting to compress to where either it's a B or it's an A or it's inside or outside—they’re all getting more to the point where they’re averaging between 1% and 2%. My A properties actually were at about 1.9% revenue growth during the quarter, and my B properties were about 1.2%. So the A’s actually did pick up. And again, I think that was because they had more supply pressure last year for concessions. We’re keeping the price down. And honestly what’s been interesting for the same reason is my urban product, which is more of the inside of the Beltway, and revenue growth of high twos, and my suburban was just slightly negative. So we kind of have flipped a little bit where the suburban A is starting to pick up steam. Then, when you look at how does April look, in DC, my new lease rate growth was 0.8% in April; that’s probably the first time that number has been positive in the last year and a half. So it did go positive at 0.8%, and my renewal growth in the month of April in DC, and these are effective numbers, is 5.6%. So DC is starting to look a lot more like the rest of the portfolio; it’s getting there.

And Tom, I was hoping to get a couple of questions on the guidance. What is the reason for interest expense now going down versus your prior guidance, and can you just remind us of the capitalized interest you expect this year?

Yes, hi Nick. We took it from 1.25 to 1.30 down to 1.20 to 1.25, and just a couple of items on that; most of it’s due to the delay in the bond issuance. Just based on timing that we previously had in the plan, and we’re comfortable at this point pushing that back towards the latter half of the second quarter. And a little bit of timing on cap interest on one of our development assets. So that's what makes up that difference. And as to cap interest, I could add it up out of the—I want to say it’s around $5 million a quarter. That's just from memory; I think that's right, but I can add it up and you can call me after the call if you like, and I can verify that. But I think it's in that range.

Sure, I understand. Regarding the Wolff joint venture, could you explain why it made sense to accept a lower spread of 50 to 125 basis points in this deal, especially since you've mentioned a typical spread of 150 to 200 basis points? Additionally, is the future MetLife development also anticipated to have a lower spread compared to your balance sheet projects?

This is Harry. We see this as a blend of acquisition and development. On the risk-return spectrum, you start with a fully occupied property with known operating results at a fair cap rate, moving towards pure development where the outcomes are uncertain for three to four years due to design, construction, and lease-up phases, with construction and lease-up risks involved. Wolff fits in the middle, where we're expecting returns in the fives since we'll begin initial occupancy in a year. Our partner bears all construction and cost risks, making it truly a hybrid approach. Additionally, instead of experiencing the drawbacks typical of a pure development project, we benefit from a 6.5% coupon on our invested capital throughout construction and lease-up. Regarding MetLife, for the main Mountain View property we just initiated, while we haven't discussed specific returns, we anticipate it will perform at the high end of our expected 150 to 200 basis points spread, likely exceeding that. We're also considering a couple of properties in the MetLife portfolio that might commence later this year, including two in LA and potentially a new phase at another site, but we're still evaluating the design and economics of those assets and will provide more details when we have them. For the 3033 Wilshire deal we started last year, we similarly expect returns to be at the high end of our 150 to 200 basis points spread based on market cap rates, and we'll share further information as we approach completion.

So, I just want to make sure I understand that with $900 million to $1.4 billion of target range in your development, that’s just what you got now plus Wolff, is that right?

Yes, what we have now plus Pacific City plus Wolff.

Okay. And regarding Wolff, you said the all-in stabilized yield is estimated at five. If you pull the trigger on acquiring assets, does that mean you’re buying at a low four on the actual incremental deal because you’re getting the 6.5% to start with?

No, I think the math is—it’s the 6.5% doesn’t come into play in terms of calculating the stabilized yield. If you take the 5.4% that we’re going to achieve for the first 48%, it would be mid-fours for us for the incremental 52%. So we are assuming we acquired all five properties; we’d be somewhere in that 5% or low 5% range.

So the total price is $597 million, right? And that includes $136 million that you’re getting a 6.5% return on. So I can’t imagine how the number is for the incremental amount above the $136 isn’t something below five to get to an average, an all-in average of five?

Rich, the $136 million, I’ll say the same thing Harry said a little different though. The $136 million, based on that going in price, comes in at a 5.4. I want to be real clear, and I’d probably answer your question, but just one other item to clarify. When we acquire the remaining portion that we don’t own for those assets that we choose to exercise the option, you got to look at that as just we’re acquiring at that point a new stabilized asset for that additional purchase price.

This is Tom Toomey, and thank you for the question. It’s an open-ended speculative question, and in all frankness, I’d rather focus on what our strategic plan is, the execution of it, and the delivery of the results. And so, while we sat around and observed what’s going on, we think our best plan is the one we’ve outlined and the execution of it.

We’re pleased to announce another strong quarter of operating results. In the first quarter, same-store net operating income grew 6.2%, driven by a 5.1% year-over-year increase in revenue. That was above our expectations and a 2.5% increase in expenses. Our same-store revenue per occupied home increased by 4.6% year-over-year to $1,659 per month. Our same-store occupancy of 96.7% was 60 basis points higher versus the prior year period. Total portfolio revenue per occupied home was $1,836 per month including pro-rata JVs. Our first quarter revenue growth was well above our original forecast and was driven by widespread strength across our markets. Stable job growth, limited impact from new multi-family supply, a single-family housing market that is still finding its footing, significant demand from new Millennial households, and incremental demand from empty-nesters are all helping.

Well, first let me say thank you for your time today. It was very productive, and we appreciate your interest in UDR. As we started the call, business is great and bordering on fantastic. You can obviously hear from the call our level of enthusiasm for where operating trends are headed and the opportunities that lie ahead, and we’ll continue to execute on our two-year plan and believe that that is a great path for UDR and for our shareholders. So with that, take care, and we’ll talk to you next quarter.