UDR Inc (UDR) — Q2 2015 Earnings Call Transcript

Thank you operator. Welcome to UDR’s second quarter 2015 financial results conference call. Our second 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. 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 second 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 second quarter of 2015 was a busy and fruitful one for UDR. As we continue to execute on our two year strategic plan. This quarter was highlighted by favorable capital allocation and ongoing impressive operating results. As a result, we have again increased our full year same store growth and earnings guidance ranges. The following four topics highlight the second quarter. First, operations continue to accelerate throughout the second quarter with strong new lease and renewal rate growth leading to over 7% effective rent growth for the quarter. This is an increase of almost 300 basis points year-over-year and over 200 basis points ahead of the first quarter of 2015. Second, our development platform continues to perform very well. Our two communities in lease up, the $218 million development in Boston seaport and $92 million participating loan Steele Creek development in Denver are well ahead of budgeted absorption and rent expectations. Including Steele Creek in the West Coast development joint venture projects, we will complete $310 million of accretive development in 2015 and $377 million in 2016. All of which will continue to drive cash flow and NAV growth. Third, we entered into an agreement to acquire up to $908 million of apartment communities in the Washington DC markets in conjunction with the announced merger between home properties and Lone Star funds. This transaction will allow us to increase our exposure to a recovering DC market at favorable pricing. It is consistent with our strategic plan as it will be immediately accretive to earnings, we will be able to issue OP units at or above NAV and it improves our balance sheet metrics. And finally, we are increasing full year earnings guidance and same store growth ranges for the second time this year to reflect the strength evident in our operations. Since issuing initial guidance in February of 2015, we have increased revenue and NOI growth expectations at the midpoint by 125 and 175 basis points respectively. Additionally, we now expect full year FFO as adjusted growth to be close to 9% as compared to 6% at the start of the year. In short, we feel great about the reminder of 2015 and while it’s early we think 2016 is lining up to be another great year for UDR. 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. We look forward to continued success in 2015. And I'll now turn the call over to Tom.

Thanks Tom. The topics I will cover today include our second quarter results, our balance sheet update, our development update, recent transactions and our revised full year 2015 guidance. Our second quarter earnings results were at or above the upper end of our previously provided guidance ranges. FFO, the FFO was adjusted and AFFO per share $0.41, $0.42 and $0.38 respectively. This was primarily driven by better than expected second quarter same-store revenue, expense and NOI growth which was strong at 5.4%, 1.8% and 6.8% respectively. Jerry will provide additional color in his prepared remarks. Next the balance sheet. During the quarter we've received an upgrade from S&P to BBB plus. At quarter end, our financial leverage on a depreciated cost basis was 37.5%. On a fair value basis, it was 28%. Our net debt-to-EBITDA was 6.2 times and inclusive of pro rata JVs it was 7.1 times. All metrics continue to improve as we had anticipated in our strategic plan. At quarter end, our liquidity as measured by cash and credit facility was $446 million. Turning to development, we commenced construction on our 516 home, $342 million specific city development at Huntington Beach, California. At quarter end, the pro rata share of our development pipeline totaled approximately $1.1 billion and our equity commitment was 69% funded. Currently, the estimated spread between stabilized yields and current market cap rates is at the top end of our targeted 150 to 200 basis points range. Additionally, our pro rata share of preferred equity and participating loan investments in West Coast development joint venture and Steele Creek totaled $363 million at quarter end and our equity commitment was 94% funded. As to future development, we continue to underwrite opportunities for the focus and we anticipate the size of our pipeline to remain in our targeted range of $900 million to $1.4 billion. On to recent transactions, as previously announced in May, we closed on the West Coast development joint venture with the Wolff Company. We invested $136 million or 48% interest in a portfolio of five communities that are currently under construction in our core coastal markets. Second, during the quarter, we announced an agreement with Lone Star and Home properties to acquire up to six communities valued at $908 million in recovering Washington DC markets. The terms of the transaction are dependent on the number of home OP unitholders converting to UDR common OP units which we will know next week. If all home OP unitholders convert to UDR common OP units the transaction will be funded through a combination of $753 million of common OP units issued at $35 per unit, the assumption of $90 million of debt and $65 million in cash. This transaction is consistent with our strategic plan and provide several benefits. First, we’re able to select from home's entire portfolio and choose the specific assets to fit our investment. These assets include the four newly constructed originally redeveloped properties and two properties which have redevelopment opportunities. With our best-in-class operating platform, we hope to generate operating efficiencies in the acquired assets and there could be additional upside for the properties which we developed in potential. Second, if all home OP unit holders convert to UDR common OP units, the transactions positively impact our 2016 metrics with the two assets improving by up to 175 basis points and net debt to EBITDA improving by up to 0.2 times. Third, the transaction will be predominantly funded with OP units to issue inline with NAV and will have no associated issuance cost. Lastly, the transaction will be accretive to FFO and FFO was adjusted in AFFO by up to one and half cents per share depending on the number of units issued and the assets acquired. A fewer than 100% of the home OP unit holders are likely to convert will have the option to acquire less than the fixed properties will alternatively acquire some of the properties in 31 exchanges. We will issue a separate press release when we determine the number of OP units we will issue. More details on each transaction can be found under the presentation section of our website www.udr.com. Finally, we sold three communities containing 812 homes in three separate markets Orlando, Tampa and Portland for approximately $110 million. Sales were transacted at a weighted average cash flow cap rate of 5.7% at an average monthly revenue per occupied home of $1,190 and were 30 years old on average on the third quarter and full year 2015 updated guidance. We increased our full year FFO, FFO was adjusted, and AFFO guidance ranges for the second time this year due primarily to stronger than expected operations. Our FFO guidance range increased by a penny at the midpoint and FFO was adjusted and AFFO guidance ranges increased by $0.2 at the midpoints. Full year 2015 FFO was adjusted and AFFO per share is now forecasted at $1.64 and $1.68, $1.63 to $1.67, and $1.46 to $1.50 respectively. The same store would have increased full year 2015 revenue growth guidance by 75 basis points at the midpoint to 5.0 to 5.5%. Expense growth is unchanged at 2.5% to 3% and our NOI growth forecast is increased to 100 basis points at the midpoint to 5.75 to 6.75%. The increases were driven by strong new and renewal rate growth and stable occupancy. The third quarter 2015 FFO, FFO was adjusted, and AFFO per share guidance is $0.39 to $0.41 and $0.34 to $0.36 respectively. Other primary full year guidance assumptions can be found on attachment 15 or page 28 of our supplement. Finally, in the second quarter, we declared a quarterly common dividend of $27.75 per share or $1.11 per share when annualized, 7% above the 2014 level and representing 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 second quarter portfolio metrics, leasing trends and the rental rate growth we realized this quarter, and an overview of our current operating strategy. Second, the performance of our core markets during the quarter and lastly a brief update on our development lease-ups and redevelopment progress. We are pleased to announce another stronger quarter of operating results. In the second quarter, our same-store revenue per occupied home increased by 5.3 percent year-over-year to $1,703. Occupancy was up 10 basis points to 96.9%, which led to second quarter revenue growth of 5.4%. Our total portfolio revenue per occupied home at quarter end was $1,885 across our joint ventures and armature homes. Our revenue growth for the first half of the year was 5.2% year-over-year as a result of a 4.9% increase in revenue per occupied home and an occupancy gain of 30 basis points. As Tom mentioned earlier, we increased our full year revenue guidance range to 5% to 5.5%. Our strategy this year has been to drive rate growth which will benefit both 2015 and importantly 2016. In the first half of 2015, we experienced a slight increase in occupancy compared to 2014. For the second half of the year, we expect the same occupancy pick up. We are focused on continuing to increase rates which will benefit 2016 revenue and NOI growth. That being said we still expect to maintain occupancy levels in the mid 96% range. 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 second quarter by a wide margin; we grew new lease rates by 7.7% in the second quarter, a full 410 basis points ahead of the second quarter of 2014. Renewal growth also remained robust at 7.0% in the second quarter or 150 basis points ahead of last year. In July, these trends continued with new lease and renewal rate growth of 7.8% and 7.3% respectively. The strength in pricing and demand served as the primary driver of our sizable 75 basis point increase in the same-store revenue at the midpoint or 125 basis points from our initial guidance provided in February. Second quarter expense growth of 1.8% came in on plan and brings our year-to-date growth to 2.1%. For the full year, we still expect the expenses to increase 2.75%, which implies second half growth of more than 3%. In the third quarter, we will begin seeing the phase out of the 421G real estate tax payments at our two properties in the financial district in New York City. The expense related to these two properties in the second half of 2015 will be $375,000. Real estate taxes in general tend to be the expense line that fluctuates the most over the make of our plan. Moving on to quarterly performance in our primary markets. These markets represent 66% of our same-store NOI and 72% 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 6% and is outperforming versus our budget expectations thus far in 2015. Our Los Angeles portfolio posted strong second quarter revenue growth of 6.0% and acceleration over the 3.8% revenue recorded in the first quarter, and we expect full year same-store growth to be right around 6% NOI. Although, the portfolio is concentrated in the Marina Del Rey and Playa Vista submarket, which continue to be impacted by new supply, we are seeing new jobs enter the market which is an encouraging sign for 2016. Companies such as Facebook, Google, Yahoo, and Microsoft are all taking up space in the Playa Vista submarket, with hundreds of smaller startups setting up shop along the coast from Santa Monica to Playa Vista. As we indicated a couple of years ago, the jobs are finally coming to this growing tech hub in Southern California. New York City represents 13% of our total NOI. We saw revenue growth of 5.7% year-over-year in New York and expect full year revenue growth to be in the mid 5s. We continue to benefit from our B quality portfolio in the New York City submarket and are encouraged by the 600 basis point reduction in turnover year-over-year. We believe this is primarily due to low home affordability, as the reason to move out for home purchase is less than 5%. We continue to see a long runway of growth potential in our New York City portfolio. Metro DC, which represents 13% of our total NOI, posted year-over-year same store revenue growth of 2.1%. We are forecasting full year revenue growth of just under 2% in 2015. Job growth is returning although some sub markets are under supply. The best performing sub markets for us in the quarter were the on-down-Circle sub market in Capitol Hill. We will continue to benefit from our diverse 50-50 mix of A and B assets located both inside and outside the beltway. We released rates in July, which are coming in at 2% while renewals are up over 4%. San Francisco, which represents nearly 12% of our total NOI, continues to show no signs of slowing down, having seen revenue growth of 9.3% in the quarter. New lease rates growth to-date in July is 15.3% while renewals are at 10.5%. Our results were mixed across our sub markets. Santa Clara properties posted revenue growth of north of 12%, while our properties along the Peninsula saw strong revenue growth of 10%. Our South of Market properties, which are competing against new supply, came in at 6%. We're seeing a wide spread in performance between A and B properties, with B assets outperforming A assets by 270 basis points this quarter. Seattle, which represents 6.7% of our total NOI, posted 6.1% revenue growth in the quarter. Our portfolio continues to benefit from the strong flow inherent in our suburban B assets, those located in Renton and North Seattle, which are submarkets that are less exposed to new supply. Long-term, we continue to like the downtown Seattle submarket as evidenced by recent post-development joint venture transactions, and we believe that the ongoing creation of jobs by companies such as Amazon, Facebook, and Expedia will continue to drive demand in Seattle’s urban core. Boston, which represents over 5% of our total NOI, posted 5.5% revenue growth in the second quarter despite new supply pressure downtown. Our South Shore properties continue to see the least amount of new supply pressure, followed by our North Shore downtown properties. Lastly, Dallas, which represents just over 4.5% of our NOI, posted 4.6% year-over-year same store revenue growth in the second quarter. Our Addison properties carried this market, while Plano and Central Dallas lagged due to new supply, which we expect will continue for the remainder of 2015. For the full year, we expect revenue growth to modestly accelerate from our second quarter results to around 5%. I'll turn now to our in-lease up developments, which you can find on attachments 9A and 9B, or pages 21 and 22 of our supplements. We recently completed redevelopment in 34. Our pro rata shares of these three properties represents over 400 - in particular is 369 home $218 million development in the Boston Seaport district, which is currently 69% leased and 57% occupied at quarter end, and today it's at 81% leased and 65% occupied. The first move-ins happened in mid-March, and we are well ahead of our expectations on both rate and leasing volume. Asking rents today are $477 per square foot, ahead of our original underwriting of $430 per square foot. Currently, we are leasing about 35 homes per month with an expected stabilized occupancy of 90% by October of this year. Steele Creek is a 218 home participating loan investment in the Cherry Creek sub-market of Denver; it is currently 60% leased and 45% physically occupied. The property is achieving rents in the $330 per square foot range versus initial underwriting of about $310 per foot. For the past two months, our leasing velocity is averaging almost 30 applications per month. Lastly, our 739 home, $98 million redevelopment in the Murray Hills neighborhood of New York City is currently over 97% occupied and has been over 90% occupied for the prior four quarters. We have $3 million remaining to spend as we complete the rooftop and potentially the elevator banks. Given stabilized occupancy, we remuted from your redevelopment schedule on the supplement this quarter. As a reminder, it will be added to our same-store pool in the first quarter of 2015. As we sit here today, I can tell you that July results came in well ahead of plan thanks to our physical occupancy today of 96.5%. The new growth in August is projected to be roughly the same levels they were in July at 7.3%, and leasing remains strong. If we continue with pricing power and stable occupancies in almost all of our markets, these factors leave us very confident for the remainder of 2015. More importantly, the impact from our rate increases today will be the catalyst for what we believe to be another strong year in 2016. With that, I will open up the call to Q&A operator.

Just two quick operating questions for DC, you mentioned improvement in the results in the job growth. If there’s talk of supply picking up again, what’s the markets you think that supply could most likely come to and if the supply doesn’t categorize do you think DC could accelerate from here?

I’ll start with that and turn it over to Harry about the sub-markets where the new supply is coming. We actually, as you said Nick, we’ve seen acceleration. We think we bottomed in the fourth quarter of last year. As we look out to 2016, our expectation is revenue growth is going to accelerate from the roughly 2% that we’re expecting this year. We look at what we built in on renewal, it’s renewals may come in north of 4% and they’ve continued to do that in the month of July at 4.3%, and new continues to be north of 2% so on a blended ratio probably a little lower at 3%. Today, I would guess it would be higher revenue growth next year. We’re seeing some new supply that’s continuing in our Del Rey sub-markets which I mentioned in my prepared remarks, where having new suppliers reclaim that to finish up the lease up there, while still getting away about a month, a month and a half free. That being said, the other location that we’re located in, we have a heavy presence along that new street, Logan Circle; that part is performing extremely well with revenue growth of 3%, 3.5%. We would expect that one to continue to do well. As for locations with new supply, I know there’s quite a bit new supply coming inside the Del Rey. Harry, you want to take that?

Other sub-markets have several projects in some of these newer neighborhoods around the ballpark in the Southwest Waterfront. We’re also getting to see a significant amount of new supply as Jerry mentioned around Del Rey in Northern Virginia. We continue to see new supply in that sub-market as well.

Thanks. And then just in terms of occupancy, you kept guidance of 96.5% which is 30 basis points lower than what you saw in the first half and also 30 basis points lower than the trailing 12 months. Are you expecting to give up some occupancy in the back half of the year to push rates or do you think that occupancy guidance could end up proving to be conservative?

Yeah, it’s going to be conservative. We didn’t think it was meaningful to change guidance but I do believe in the third quarter, especially my occupancy would be less than it was last year as we drive to continue to push rate. But as I’ve stated again at the end of my remarks, we’re at 96.5 today. I would expect for the next five months to run somewhere in that 96.5 range, which is probably a little bit of a deceleration or decline from last year but we’re not going to drop off to the point well below 96 as we’ve averaged 96.5 for the year.

Hey I guess good morning out there.

Hi Haendel.

So a question here on pro-forma of the acquisition of the home assets in DC. DC will be about 18% of your NOI is that a level you’re comfortable at? Are you inclined to add a bit more to the region in covers or more inclined to call? And then second part of that question, it looks like the yield on the acquisition is in some of the low fives. Just curious how you're underwriting NOI growth over the next couple of years as part of that acquisition.

Haendel, this is Toomey. With respect to the comfort level around DC, we're comfortable with the 18% exposure. I wouldn't see a climb to grow that above that level. Certainly, we think the DC market is obviously recovering and values will continue to grow there. And at some point, we look at calling some of the assets, no particular time frame for that, but we're always looking to try to maximize value, and we think that market will rise in DC probably '17, '18. Harry, you want to take the second question?

Sure. In terms of underwriting assumptions, we do property-by-property and assume revenue growth during the first year somewhere between 2% and 3% depending on the asset. One of the properties are at the park is completing lease up after their major redevelopment. That property we underwrote in the low-90s in the first year. It’s currently around the mid-80s, and we’ll push that up to 94% in the second year. So we have some second-year upside on that asset in particular.

Okay, appreciate that. Are you exploring or considering starting development projects in DC today? Not to tie too much to the question before, but I’m saying are you comfortable at the level where you're at 18% NOI. But just curious about your level of comfort to potentially pursue development opportunities in DC today.

Haendel, it’s Harry. We don't currently have any land assets that are available for development in the short term. It is, however, a market that we would develop; it's a recovering market as we mentioned. We typically like to have one property in each of our core development markets at construction at any given time. We’re hoping that some time in the next year or two, we will have another land asset that we could pursue for new construction started.

Okay, and just as a follow-up, Tom, what have been your conversations with potential sellers here over the last couple of months given all the vigorousness on people's minds? Any change in the number of opportunities you think come to the market and any change that - interactions with sellers?

Haendel, it's Harry. We haven't seen any significant change in the volume of opportunities available. There continues to be a significant number of transactions. In 2014, as you know, we were well over $100 billion in transaction volume. We expect 2015 to be something similar. In terms of interactions with the sellers, it’s a very active transaction market.

Okay. Thank you for your time.

Thank you.

Thank you very much. I was wondering if you can talk about the idea of turnover. How much of that is being driven by just the upper view of front and just an ability to current resistance to handle that? You talked a lot recently about handling of being happy with low conversion and pushing rents. Wondering overall that capital demand they're seeing in terms of the income qualifications for the residents.

Sure, this is Jerry. I guess to start with we've seen move outs due to rent increases probably go from 6% of the reasons for new loan to a little under 10%. So, we're still with the level that we're comfortable with. And when we look at total turnover in the quarter, it was up 110 basis points compared to the second quarter of last year. The majority of the reason for that is we had a higher number of lease explorations in the second quarter when we had back in 2014 second quarter of about 350 leases. Probably two or three years ago, we started an effort to move more and more explorations from the first and fourth quarter into the middle two quarters primarily because new lease rate growth during those high demand times is typically 200 to 300 basis points higher and that’s what it was this year when second quarter lease rate growth was 7.7% compared to 4.2% in the first quarter of this year. So, we pushed it to that level; we also would expect third quarter, which will have probably 100 to 200 more explorations than we had last year, to have turnover at way higher than it was last year, but then we’ll get into the fourth quarter and we would think turnover would be a little bit less than last year. So when you look at the entire year, turnover should roughly be flat with what it was last year. When you look at rent income, we've really not seen much of the changes toward a little bump in the high teens, pushing 20%. I would tell you that is not as a soft number. Half of my residents have probably lived in their homes on average three to five years and our average tenure is somewhere around 25 months. We only qualify people at the time, so we don’t go back and recertify their income. I tend to look more at my turnover going up when I'm pushing rents, particularly in the California and West Coast markets which have been pushing the hardest over the last year-and-a-half; turnover is actually down in places like San Francisco, Orange County and locations like that on a year-to-date basis. And then the other thing I look at is if you’re pushing too hard, some people will move out when they turn into bad debt as they become unable to pay. My bad debt has actually gone down year-over-year to the point where this year it's at less than 0.2% of our gross potential rate so I look at those two metrics a little bit more because they are harder numbers and easier to measure, and if we see a situation where either my bad debt starts to spike or my turnover increases dramatically, that’s a better indicator to me that I might be pushing too hard.

Great. Thank you.

Hey, good afternoon. It’s Austin in for Jordan. Jerry, you mentioned that you feel like you have a long runway for growth in New York. I was wondering if you could just provide some additional detail in your comments and what really gives you the confidence that with supply increases in 2016 in the burn-off of 421A.

Well, the main thing as the 421 is not my same store. Those 421 are at our Columbus square property, which is a joint venture. On the same store side, what really gives me the confidence is when I look at the rent growth that I’ve been getting this year; in New York we got 8.4% in the second quarter on new, 7% on renewals; in the month of July, the new was at 9.3%. We see strength and incoming traffic and incoming residents. The other thing is two more properties in the financial district or the World Trade Center are starting to be occupied, which is becoming much more of an available space. And I guess thirdly, when we look at our portfolio, it’s a deep product; the properties in the financial district are one in Chelsea and then - 34 or the former - will come into the same store in the first quarter, which is finishing redevelopment there. Also, our deep properties, none of them will compete with the new supply that what we come into mid-count of west, and there will be different price points, so we just have not seen the impact of new supply or feeling right now, we’ll continue to not be directly affected. Our property at North Columbus square does feel a little bit of the effect of Herston Yards in Mid-Cont. West but it’s still producing revenue growth in order to 4%.

Well, there have been a lot of reports written that publicize the significant supply on the number of permits pulled in May and June in New York City. The primary reason is developers trying to get under the expiration of the 421A program. The program has since been extended but is certainly not as developer friendly as it requires additional affordable housing units that some of them are going to be required. So we saw more than close to 8,000 units in Manhattan; and more than that in the months of May and June. Even more in Brooklyn, and somewhere in the neighborhood of 35,000 permits have been pulled in all the deferrals over the last couple of months.

Thanks for the detail there. And then just on the capital side, I was wondering, looking at their source of funds outlined in guidance for $750 million to $900 million. Does that contemplate the potential units issued for the HMA transactions?

This is Herzog; no, it does not. But the home transaction there would involve units in addition to those that have been described in the sources we’ve spoken to you earlier.

So then how would you really think about the mix of capital raising throughout the balance of the year to the extent you feel comfortable that the HMA deal is going to go through as currently structured?

Well if the fact was that when we look at our sources who uses for the balance of the year, we've got about $200 million to $250 million left to fund in total. And that's really unchanged from when we spoke to last quarter. It will be some combination of sales, or it could be stock or it could be debt whatever we conclude at the time that provides the best pricing and is the best outcome for our investors. So as far as home, again, the majority of that will come through OP units that depends on how many of the home OP unitholders convert to duty units, as to what will actually look like. And we'll have those numbers sometime in the next couple of weeks.

Thanks for the detail.

Yeah, we've got some optionality obviously on whether we would kick from assets out of if we didn't have full conversion or do - ones or the - we're in good shape on that side.

Hi guys. Hoping you could talk through the unsecured debt market right now and what you're seeing in terms of spreads and what you should think about from modeling purposes in terms of the potential bond offering in the next couple quarters.

Yeah, we day we raised the BBB plus by S&P and AA one by Moody's last year. The current spreads are probably in the range on a 10 year deal 160 to maybe upwards of 170 basis points all-in spread including lesser concessions, but probably closer to about the 160 mark is my guess.

Okay, and just a couple of guidance side. And certainly if you could talk through the increase in G&A expenses while as the large JV FFO guidance.

Yeah, the increase in G&A is going to be just two things. We've had outperformance during the year against what we had set forth as our plan. Therefore, the incentive programs payout at a higher rate. And that's what the increase in the guidance that we set forth on the cash run. 15 years for that. And then as far as the joint ventures, that would then be the Wolff JV and then also the addition of Steele Creek with some offset for the Texas JV, and then there are a few other moving parts within that, but those are probably the numbers.

Okay guys, that's helpful. Thank you.

Thank you.

Thank you. Couple of questions on dispositions, first can you remind us what level of CapEx is reserved for in your cash flow cap rate?

Of the cash flow cap rate, Dave, this is Harry; it includes $11.50 per unit in CapEx.

Is that a consistent assumption anytime we see that from UDR? Is that the right number to apply?

Yes.

Okay, thank you. And what's the disposition pipeline looking like from here?

Well Dave, it depends. We’ve got maybe another I guess I would back up. We put it into that tool we’ve got 250 million left, and that’s going to be some combination of sales, debt, and inside. So again the funding means are not great. I hate to put a number on it because it could change during the year based on conditions.

Okay, and you have been planning on a bond offering earlier in the year. What’s the latest on that front?

We’ve been looking at a ten year deal towards the end of last quarter, and we’ve got about two-thirds hedge rates now from a treasury perspective, so we’re looking on massive hurry on that. We bumped into the Greece and Chinese prices which has made the market choppy and too critical. So, we’re probably better off to look to sometime probably in the early parts of the third quarter, so that’s still part of the plan but we decided to push that again.

Okay. And the last question is there anything qualitative you can share with us regarding the solicitation of home OP units in the quarters?

This is Toomey, to compare the question this time we’ll have an answer in a couple of weeks, so we probably just be able to come out with a press release shortly thereafter with the facts. Speculating between now and then clearly doesn’t reflect our focus.

Understood. Can you just explain to us how the process works?

We’ve been working in conjunction with the Cape of Home, and have been having the conversations, meetings and dialog with the whole OP unit holders both come and explain the trends actually among the home people as well as explain the options. We've received a 700-page offering document, so as you mind that’s clearly complex, so our day-to-day dialogue with them.

Good afternoon guys. Jerry, in terms of the increase in the same store revenue guidance, was there one or two particular markets that were releasing the back half of the year or thus far this year where it’s really surprised versus where you started the quarter with progress?

Yeah, that’s a great question and really the bulk of the increase, well let me put it this way, we only have one market that is not hitting the original business plan and that’s not a material market; it’s in Michigan Virginia. Every one of my other markets is above plan and they vary to some degree. I would state the biggest surprises to original guidance have come from the West Coast, going from mostly Northern California up through the Pacific Northwest, which have helped outperform by quite a bit to our original expectations. Also following that, the two Texas markets, both Dallas and Houston, are holding better in the face of new supply than we originally expected and when we get beyond that there is so caliber rest of the some belt through the Mid Atlantic, they are all doing better than original plan, but the biggest drivers were Northwest.

Okay. And then, Harry would you think today in terms of construction costs, you guys are starting with new developments? I mean, where have the goods costs been sort of six, twelve months ago on these projects versus today and where are you seeing the biggest upward push?

So, over the last couple of years, we’ve consistently seen double-digit cost increases. I can tell you today, as we’re looking to start new projects and looking forward to the next four, six, eight, ten months, the cost increases have moderated; in fact, we’re starting to see decreases in certain materials. Steel has come down 10% plus over the past year, lumber has come down 0.56% over the past year. So as we look forward, as cost increases have moderated, we’re now looking at sort of a mid-single-digit type cost increase; the labor market in certain locations continues to be challenging and is pushing back on some of these material declines. Though we've gone from kind of mid-double-digit type increases to mid-teens down to mid-single digits.

Okay. And then just lastly in your urban core, what do you think these days in terms of both ground-up condo development as well as condo conversions?

Rob, this is Harry. That really was the first market where that materialized, the condo boom. It’s manifested itself in land prices which have gone up significantly, and so far few apartment projects will pencil out now as multi-family use. It's migrated a little bit to say Francisco, where you are seeing, for example, a project right across from our 399 Fremont deal which has been sold to a condo converter. The project has completed a lease-up and now - so we are seeing that a little bit in San Francisco. In other markets, we're not seeing it; primarily in California, a little bit in Boston. But really, a lot in New York. Some in San Francisco, and then just small numbers in other markets.

Okay. Thanks guys.

Thanks Rob.

Just one quick question, Tom. What's the actual Treasury lock rate that you have for the debt deal?

We came in at about let me check back on it. There is about 245 and there was like 20 basis points of forward carry.

So kind of a Treasury and 265 plus the spread of 160 you talked about?

Yeah.

Just two questions and maybe you can give us an update on that potential 6th acquisition from Wolff and what sort of been the issue with finalizing that transaction.

Sure, this is Warren. We are currently negotiating on the sixth asset. We are hopeful that we will be able to consummate that within the near future. The issue is that there is an already partner on both sides, and we've also had to include them in negotiations, which have been over the last couple of weeks.

Alright. Okay, and finally, it has been focused on DC in New York just turn to LA for a second; both you and Avalon reported a pretty nice jump in revenue growth in that market. It’s only been a long time coming. Maybe you can just talk about some of the drivers in LA today and what you think sustainable growth is in that market?

Yeah, this is Jerry, and you are right. We are excited to actually participate in some of the higher revenue growth this quarter after having a discipline 3.8% growth in the fourth quarter. We turned it rather 6%. This quarter our expectation full year revenue growth in Los Angeles for us will be more than 6%, and really what’s driven if we UDR, I would remind you, is talk of our same-store portfolio and then we're going to double rates. There has been quite a bit of the new tech jobs coming in Playa Vista. Over the last two years, we've had new equipment supply come to Playa. So it came and proceeded the job growth. But the jobs are finally starting to come. I think in addition to that, what goes from Santa Monica into downtown is helping drive rates in the West side. As another benefit, we’ve more recently seen in the Marina Del Rey portfolio is rental rates in Santa Monica have been driving people just throughout head down the coast 5 or 6 miles to us. New supply is coming in LA right now. It's kind of shifted from that West side and into downtown right now, and we're seeing a little bit of pressure down there. But we’re still optimistic about downtown as this is becoming much more of a livable city with retail and nightlife and some jobs through. But again, as I stated earlier, our same-store pool is heavily concentrated among the area and we’re finally starting to see job growth in some of our apartments.

And has there been a shift in cap rates in that market? Just now that the momentum is building.

Cap rates have been low in that market for some time. We haven't seen any noticeable decline in the cap rates today. They have been and continue to be very, very low for good product in Los Angeles area.

Okay. I appreciate the color. Thank you.

Thanks. Hey guys. Just a quick question back to unsecured; you guys even though given a consideration to shorter terms and then 10 years. Just some peers speak about that and the relative pricing attractiveness and wondering whether you would have ever consider.

This is Toomey; yeah when we look at our debt maturity schedule, we've got a pretty good open slot with very little maturing 10 years out. So we probably pick that window. And that being said, we're looking at the price differential of really our overall governing element is to try to keep that level later maturity schedule.

Thank you. I had a question on your same-store expenses in your MetLife joint venture. They increased significantly during the quarter and much higher than your balance sheet assets. Was there a specific reason for this and is there something that may translate into your own portfolio given the overlap in geography?

No, those are typically just related to real estate taxes either increased this year or refunds last year. I can’t remember specifically what drove it to that level. But I'm pretty sure we did recognize some real estate tax refunds to some of the California assets last year. We may have received and hit with an increase in one of our Texas markets this year. So it’s purely real estate taxes.

Okay. And then on the turnaround that you've had in DC on new leases. Can you elaborate if there is a particular price point among these submarkets that you're finding more success in recently?

Really, it’s interesting that our performance has been better than they did last year. A year ago, the spread between us was probably 500 to 600 basis points and it’s compressed to the point today where it’s closer to what is in our total company, which is somewhere in the 100 to 150 basis points differential. As I stated earlier, we’re finding some of that urban core A product downtown in Logan Circle, Thomas Circle and New Street which are right in the same general area, are very strong. Our property in Arlington village is probably almost struggling today because of the supply. The B assets outside the beltway are continuing to do fairly well; but I would say our strongest sub-market inside that way is the corridor.

Okay. And then finally on dispositions, have you disclosed with your IRRs or economic gains are on the asset sales that you've completed this quarter?

We have not but we can now take it Harry.

It's Harry; the three assets we sold this quarter, the weighted average IRR was around 11%. So we had kind of a 12%, 9%, and then 11% for the three assets that sold. We're probably sold the Texas JV in the first quarter at about 14%, so for the year, we're at about 12% unlevered IRR for the asset base.

All of those numbers you mentioned are unlevered IRRs?

Yes.

Okay, great. Thank you.

Hello everyone. With the labor market tightening, are you seeing any turnover at the property level and also at the construction level?

I'll start with the property; this is Jerry, and then Harry can take construction. Turnout was up year-over-year and it's predominantly in the high apartment supply markets. So when we look at DC, Seattle, places like that, we feel a bit of pressure but nothing significant. I do think as we look into 2016, we're going to see a little bit more wage pressure. Whereas year-to-date, our personnel expenses are up about 3.5%, I'm guessing it's going to be about 100 basis points higher than that in 2016. Harry?

This is Harry. On the construction side, it's a very high labor market for construction management personnel. We've lost one person this year and they're in the process of replacing him; we've added a couple of others as new projects have started. But it's a very competitive labor market.

Okay. Thanks a lot for taking the questions.

Thank you operator and thank all of you for your time and interest in UDR. As we've gotten through two quarters down in the year, it’s a very good year for us. We're looking forward to the second half with this continued strength in our performance. And certainly the team remains focused on the strategic plan, the execution of it, and building to the strength of 2016, and then we think that's going to be a good year as well. So with that, thank you and take care.