UDR Inc (UDR) — Q3 2015 Earnings Call Transcript

Welcome to UDR's third quarter 2015 financial results conference call. Our third 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 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 the 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 is detailed in yesterday'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 you to be respectful of everyone's time and limit your questions and follow-up. Management will be available after the call for your questions that do not get answered. I will now turn the call over to our President and CEO, Tom Toomey.

Thank you, Shelby and good afternoon, everyone. Welcome to UDR's third 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. Let me start by saying the third quarter was fantastic on all metrics. With 10 months of 2015 complete, four things stand out to me. First, we set out a strategic plan in February and have exceeded it on all fronts. Second, we surpassed our expectations with exceptional operating results which Jerry will outline in his remarks. Third, we were presented with a couple of strategic problem-solving opportunities that we were able to take advantage of. Namely, the $559 million West Coast development joint venture and the $901 million Washington, DC acquisition. These both fell in line with our long-term goals. As they both were accretive to cash flow growth, we were able to issue equity at or above NAV and they lowered our overall leverage metrics. And lastly, we sold or have under contract $800 million in gross assets, our share of which is $480 million. Let's turn to 2016 and the long-term outlook. As you know, the macro numbers around jobs, household formation, supply, etc., look very favorable for the foreseeable future. When we further analyze our specific submarkets and individual community dynamics, we believe that our portfolio of a mix of A and B communities in our urban and suburban locations will continue to perform well throughout the cycles. I know the question on your mind of how 2016 looks. Jerry and the entire operating team have been working hard to position UDR for a strong result in 2016. Without giving forward guidance at this point, we expect 2016 revenue growth to be at least as good as 2015, but after eight years of sub-3% expense growth, we do expect pressure from payroll and taxes to lead to expense increases of just over 3%. All-in, with strong operating fundamentals and over $500 million of development in lease-up, we're in good shape to drive cash flow and NAV growth for 2016 and into the future. As promised, we will publish another two-year strategic plan in February 2016 that will outline what we can expect for our shareholders. With that, I would like to express my sincere appreciation to all my fellow UDR associates for an extraordinary work in producing another strong quarter of results. We look forward to the remainder of 2015 and to a great 2016. I'll now turn the call over to Tom.

Thanks, Tom. The topics I will cover today include third quarter results, balance sheet and capital markets update, recent transactions, casualty loss incurred during the quarter, 421-a and -g impact on New York property taxes, and revised full-year 2015 guidance. Our third quarter earnings results were above the upper end of our previously provided guidance ranges. FFO, FFO as adjusted and AFFO per share were $0.42, $0.42, and $0.37, respectively. This was primarily driven by better-than-expected year-over-year third quarter same-store revenue, expense, and NOI growth which were strong at 5.9%, 2.7%, and 7.3%, respectively. Jerry will provide additional color in his prepared remarks. Next, balance sheet and capital markets activity, in August, we issued $102 million of common equity at a net price of $35 per share. In September, we issued $300 million of 10-year, 4% senior unsecured notes with a yield to maturity of 4.03%. Inclusive of swap breakage fees, our all-in rate was approximately 4.5%. Subsequent to quarter-end, we amended and recast our unsecured revolving credit facility which increased the size from $900 million to $1.1 billion, extended the maturity to January 2021 inclusive of the extensions, and reduced our interest rate spread by 10 basis points to LIBOR plus 90 basis points. We also amended and consolidated our $350 million of term loans under the same facility, repriced the loan to LIBOR plus 95 basis points, a reduction of 20 basis points, and extended the maturity date to January 2021. These transactions completed our debt and equity needs for the year. At quarter-end, our financial leverage on an undepreciated cost basis was 36.7% and on a fair value basis, it was 26%. Our net debt-to-EBITDA was 6 times and inclusive of pro-rata JVs, it was 7 times. All metrics have continued to improve during the year as we had anticipated in our two-year outlook. At the current date, our liquidity as measured by cash and credit facility capacity is $991 million. On to recent transactions, as previously announced in our October 7 press release, subsequent to quarter-end, we closed our Washington, DC acquisition. With this transaction, we purchased six communities valued at $901 million in a recovering Washington, DC market. The transaction was funded through a combination of $565 million of common OP units issued at $35 per unit, the assumption of $89 million of mortgage debt, $221 million of Section 1031 exchanges which are under contract, and $26 million in cash. Additionally, we have another $66 million of communities under contract to sell. We expect to close these transactions in December and upon completion, will have exited the Norfolk market. Next, casualty loss incurred during the quarter. In late September, 717 Olympic, a 151-home community located in Los Angeles, California, which we have a 50% interest through our MetLife II joint venture, experienced extensive water damage due to a sand pipe rupture. As a result, we had to fully evacuate the building. Until clean-up is completed and all safety measures are met, residents will not be allowed to reoccupy the building. We have arranged for them to live in furnished apartments in Downtown LA. The full extent of the damage is still being quantified and will be updated in our fourth quarter earnings release. As a result of the casualty, we expect to incur a $0.01 charge to FFO, of which only $256,000 has been incurred as of September 30. While the joint venture's insurance policy has a $25,000 deductible, the $0.01 charge is attributable to business interruption and temporary housing for our residents which GAAP requires that we recognize as incurred. As this charge is expensed, it will be deducted from FFO, but added back to FFO as adjusted. We expect to recover a significant portion of this charge from the insurance providers and any subsequent recoveries will be included in FFO, but deducted from FFO as adjusted. Since 717 Olympic is owned by MetLife II JV, it has no impact on our same-store results. Next, I will provide an update on the tax impact of the 421-a and -g real estate tax programs which impact three of our New York City assets, 95 Wall, 10 Hanover, and Columbus Square. Individual programs by property burn off in varying amounts over the next 15 years and the impact is based on future assessed values and levy rates which for the out years we cannot fully estimate. However, I will provide the impact for 2015 and projected impact for 2016 and 2017, and we will continue to update you over time as the valuation of levy rates become known and we determine the projected impact. For 2015, 2016, and 2017, 421-a and -g in New York City is expected to negatively impact our same-store expenses by 25 basis points, 45 basis points, and 70 basis points, respectively, and impacts the year-over-year AFFO by $240,000, $670,000, and $1.3 million, respectively. As a reminder, when we acquired these buildings, the 421 property tax impact was included in our underwriting assumptions. Notably, the rent growth for these properties has surpassed even our underwriting, and all-in IRRs to date in these investments are in the low to mid-teens. On to fourth quarter and full-year 2015 updated guidance. We increased our full-year FFO as adjusted and AFFO guidance ranges for the third time this year, primarily due to stronger-than-expected operations. Our FFO as adjusted per share and AFFO per share guidance ranges increased by $0.01 and $0.02 at the mid-points, respectively. Full-year 2015 FFO, FFO as adjusted, and AFFO per share are now forecasted at $1.65 to $1.67, $1.65 to $1.67, and $1.49 to $1.51, respectively. For same-store, we have increased our full-year 2015 revenue growth guidance by 12.5 basis points at the midpoint to 5.25% to 5.5%. Expense growth increased by 12.5 basis points at the midpoint to 2.75% to 3% and our NOI growth forecast increased by 25 basis points at the midpoint to 6.25% to 6.75%. The revenue increase was driven by strong new and renewal rate growth. Fourth quarter 2015 FFO, FFO as adjusted, and AFFO per share guidance is $0.40 to $0.42, $0.41 to $0.43, and $0.36 to $0.38, respectively. Other primary full-year guidance assumptions can be found on attachment 15 or page 28 of our supplement. Finally, in the third quarter we declared a quarterly common dividend of $0.2775 per share or $1.11 per share when annualized, representing a yield of approximately 3.1%. With that, I'll turn the call over to Jerry.

Thanks, Tom. Good afternoon, everyone. In my remarks, I will cover the following topics. First, our third quarter portfolio metrics, leasing trends, and the rental rate growth we realized this quarter, along with an overview of our current operating strategy. Second, the performance of our core markets 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 third quarter, our same-store revenue per occupied home increased by 6.2% year-over-year to $1,792, while occupancy declined 30 basis points to 96.6%. This led to third quarter revenue growth of 5.9%. Our revenue growth for the first nine months of the year was 5.4% year-over-year. Turning to new and renewal lease rate growth, which is detailed on attachment 8-G of our supplement, our ability to push new lease rate growth continued to outpace historical precedent during the third quarter by a wide margin. We grew new lease rates by 7.6% in the third quarter, a full 310 basis points ahead of the third quarter of 2014. Renewal growth also remained robust, at 7.3% in the third quarter or 220 basis points ahead of last year. This strength in pricing and demand served as the primary driver of our sizable 12.5-basis point increase in same-store revenue guidance at the midpoint or 137.5 basis points from our initial guidance provided in February. As Tom mentioned earlier, we increased our full-year revenue growth guidance range to 5.25% to 5.5%. Although we expect a normal seasonal slowdown to occur starting soon, we continue to see strong fundamentals, and our strategy continues to be to drive rate growth in order to help build in our 2016 revenue. Third quarter expense growth was 2.7% and brings our year-to-date growth to 2.3%. We increased the midpoint of full-year expense guidance by 1/8 of a point to 2.875% due to increased insurance premiums and higher site-level incentive compensation due to the outperformance of property-level budgets. Moving on to quarterly performance in our primary markets, these markets represent 70% of our same-store NOI and 74% 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 6.4% and continues to outperform versus our initial budgeted expectations. Our LA portfolio posted strong third quarter revenue growth of 8.2%, an acceleration over the 3.8% revenue growth reported in first quarter and 6% in the second quarter. The job growth we have spoken to in the west LA coastal communities from Santa Monica to Playa Vista is continuing to arrive, and we continue to see the Marina Del Rey submarket as a primary beneficiary of these new jobs. We expect full-year revenue growth of nearly 7% in 2015, quite an acceleration from what we had forecasted earlier in the year. New York City, which represents 13% of our total NOI, saw revenue growth of 5.8% year-over-year. Continued investment in retail interest at the World Trade Center site supports our long-term view that there is a long runway of growth potential for our New York City portfolio. Metro DC, which represents 13% of our total NOI, posted year-over-year same-store revenue growth of 1.6%. As I stated on the second quarter call, job growth is returning, and in some submarkets, supply is easing. Importantly, we have continued to focus on growing market rent via new lease rate pricing, when possible, as it translates into renewal pricing power as well. We still anticipate full-year revenue growth in DC of just under 2%. San Francisco, which represents over 12% of our total NOI, continues to show no signs of slowing down, as seen by revenue growth of 9.2% in the quarter. Our Santa Clara properties continued to be the strongest with revenue growth of 12%, while our San Jose properties, which are competing with new supply pressure, posted revenue growth of 6.2%. Our downtown San Francisco properties have strengthened to revenue growth of 7.9%. Seattle, which represents almost 7% of our total NOI, posted 8.3% revenue growth in the quarter. Our portfolio continued to benefit from the strong growth inherent in our suburban B assets, primarily those located in Renton and North Seattle, which are submarkets that are less exposed to new supply. We currently see full-year Seattle revenue growth coming in around 7.5% to 8%. Boston, which represents over 6% of our total NOI, posted 5.7% revenue growth in the third quarter, despite new supply pressure downtown. Our best performance is in our suburban product, but our Back Bay property had strong revenue growth also at 5.3%. I'll now turn to our in-lease developments, which you can find on attachments 9-A and -B or pages 21 and 22 of our supplement. Our pro-rata share of these properties represents over $400 million spent. 100 Pier 4, our 369-home, $218 million development project in Boston's Seaport district, was 92% leased and 90% occupied at quarter-end and today, is 95% leased and 93% occupied. With first move-ins in mid-March, we stabilized in seven months, and asking rents today of $4.78 per square foot are ahead of our original underwriting of $4.30 a foot. Steele Creek, our 218-home participating loan investment in the Cherry Creek submarket of Denver, is currently 86% leased and 75% physically occupied. The property is achieving rents in the $3.30 per square foot range versus initial underwriting of $3.10 per square foot. We have two West Coast development JV properties that began leasing during the third quarter. Katella Grand I, our 399-home, $138 million development project located in Orange County, is currently 12% leased, with move-ins scheduled to start in December, and CityLine, our 244-home, $80 million development project in Seattle, is currently 6% leased, and we expect first move-ins there in November as well. We expect October new lease rate growth to come in between 5.25% and 5.5%, and renewals to come in a bit over 7%. Same-store occupancy today is 96.5%. We see continued pricing power and stable occupancies in almost all of our markets. In fact, no market has physical occupancy today less than 95%. These factors leave us confident for the remainder of 2015. Given the impressive strength we have seen year-to-date, we will have approximately 2.75% of 2016 revenue growth baked in by year-end. In addition, we're working on a number of initiatives that are both good for residents and for UDR, including parking solutions and solar solutions. The impact of strong rate increases for the second half of 2015 will be the catalyst for what we believe will be another strong year in 2016. With that, I'll open up the call to Q&A.

I appreciate the commentary on 2016 same-store revenue growth being at least as good as 2015. What job growth and supply assumptions are baked into that outlook?

Nick, this is Jerry. We expect job growth to be similar to this year, roughly between 200,000 and 250,000 jobs each month. Nationally, for our core markets, this translates to a slight decline from about 870,000 jobs to 856,000 jobs. Regarding supply, we anticipate deliveries in 2016 to be between 320,000 and 325,000 jobs next year. However, for our core markets, we foresee a decrease of about 20,000 deliveries compared to what we saw in 2015.

And then in terms of operational efficiencies, you guys have talked about a lot in the past. I wanted to get your take on the impact of package deliveries on the business and how you're dealing with it at your garden-style communities?

Sure. We've been looking at package deliveries, honestly, for a couple of years and been trying to find a solution that the carriers will be accepting of, as well as what will be best for our residents. And we think we found a few package locker systems that seem to work for us. To date, we've tested between eight and ten. Just about a month ago, we ordered an additional 20 package locker systems. When we look at it, and there have been studies done on this, a person can handle about 15 packages per hour, so the way we've looked at it, our average resident probably gets between four and six packages a month. You're going to save 300 to, call it, 500 hours on average at a property per year in efficiency. We think our people are going to be able to take that time and either do a better job performing services or they will be able to tend to prospective residents better because the time that current residents were coming in to get their packages, which is after work and weekends, is the same time our leasing office is most busy with prospective residents. The other thing we see is a huge benefit, especially in our garden communities that we don't have a front door, is our residents are going to have 24/7 access.

Then finally, can you give us an update on the potential sixth acquisition as part of the Wolff deal?

This is Warren. The sixth asset was held in a partnership with a third party, and the structure has turned out to be too complicated, so we've decided not to pursue it any further.

It's Austin Wurschmidt here with Jordan. Just had a question on thinking about portfolio allocation going forward. You guys have a sizable chunk of the development pipeline in Southern California. As you start to think about the Wolff JV assets stabilizing late next year and into 2017, how are you thinking about your exposure to that market?

This is Harry. Our portfolio allocation in terms of development, our general plan is to have a diversified portfolio. So we have an asset in Boston that we're just stabilizing. We expect to start our 345 Harrison land site that we acquired last year for $32 million and that will be nearly 600 units and upwards of $300 million-plus. We have an asset in DC that we're just completing, and so we generally would expect to start another project in DC sometime in the relatively near future. In terms of California, we're relatively heavily weighted in California from a development perspective. We're going to have several of these assets running through the completion and lease-up phase in 2016 and into 2017, and so naturally, our development exposure to Southern California will lighten up, and then we'll look to backfill in the ordinary course.

Jordan, Austin, this is Toomey. What I would add to it is my recollection is SoCal was one of the last areas to enter the recession and one of the last to come out. And so if you look at the recent job growth and supply dynamics, we think it's got a long runway to deliver. We’re excited about the Wolff transaction, in particular, because we accelerated a lot of communities and development into lease-up to take advantage of what we think is a very strong market in 2016 and 2017. So we're well-positioned in that marketplace.

And then just turning to DC, DC decelerated a little bit this quarter. I was just curious if there's anything submarket-specific and then what your outlook is for that market going forward?

This is Jerry. You're right. DC experienced a slight deceleration to 1.6% growth. Overall, we believe DC remains stable, and we expect revenue growth to be around 1.5% to 2% this year. Currently, my market rents have increased by 2.7% compared to last October, which is promising for future growth. There are a few other points worth mentioning. A few years ago, we discussed the gap between A and B products. In DC, about two years ago, that gap was 600 to 700 basis points, with B products showing a revenue growth of approximately 3% to 3.5%, while A products were experiencing a decline of 3.5%. Today, that gap has narrowed to about 50 basis points, meaning A products are now just 50 basis points behind B products. Much of our inside-the-Beltway properties are performing comparably to those outside the Beltway. New supply affecting us, especially at our Arlington properties, includes developments in Crystal City, Rosslyn-Ballston, and Potomac Yard. In the 14th Street Corridor, where we have four assets in the Thomas Circle and Logan Circle area, we are seeing revenue growth nearing 3%, indicating strengthening. Overall, DC appears stable. One last point that likely had a minor impact on our deceleration this year is that our DC team dedicated considerable time over the summer to ensure a smooth transition of the six Home properties. That transition has been successful, as we took control of those assets about three weeks ago, and everything is going well. Looking ahead to 2015, our expectation is for revenue growth in the DC portfolio to be just under 2%, and as we project further into 2016, we anticipate a modest increase, aiming for the mid-2% range.

Just two questions, I was wondering if you could just give us a little bit more granularity on the resurgence in Southern California, specifically Los Angeles which beat our forecast by at least 150 basis points, and you were up 260 basis points sequentially. Can you talk about some of the drivers in LA today and how sustainable that growth rate is?

Sure, Ian. This is Jerry again. First thing, I would start off with a reminder that our LA portfolio is almost entirely concentrated in Marina Del Rey. We only have four assets in our same-store pool. One is in La Mirada, but the other three are in Marina Del Rey. What's really driving it is two things. About two years ago, up through about a year ago, you had a surge of new supply that was hitting Playa Vista, and that was putting supply pressure on our Marina product. And that was being built really in anticipation of all the tech jobs that were coming to Silicon Beach, the area between Santa Monica and Playa Vista. Those jobs are now coming in, and it's companies like Facebook, Google, Yahoo, Microsoft, Snapchat, YouTube, Twitter, Uber. So as these jobs come in, it's really driving demand extraordinarily in that Los Angeles submarket of Marina Del Rey, and that's what's really propelling our growth. You look back to the first quarter of this year, our growth was only 3.8%. In the second quarter, it got up to 6%. In this quarter, it was well over 8%. Our expectation is it's going to go a bit higher than even what we did in third quarter in the fourth quarter. LA, honestly, for our same-store portfolio, is one of the markets I'm most excited about for 2016, and it's being driven by that job creation in Playa Vista, Venice, and that submarket. As you get more into Downtown LA, we have the one asset that we owned with MetLife. That area is feeling quite a bit of new supply, and the growth there is not nearly at the level that our portfolio is. So I wouldn't read into LA in general based on what our results are, because ours are focused on that one submarket.

And finally, just thinking about the Equity Residential deal who sold assets in South Florida, Denver, DC, Seattle, and Inland Empire, you guys are the only other apartment REIT to hold assets in each of those markets. The market liked the deal. The stock was up on the news. It wasn't about G&A savings or even higher growth. It was all about the bid for B-quality assets in B markets. How should we think about your plans moving forward, just given what the capital that sits on the sideline and how aggressive it's getting in these markets? And what are your thoughts about accelerating sales in some of these non-core markets?

I would make four or five points on the subject. Just as a reminder, in 2008, we did sell one-third of the company as part of a larger portfolio repositioning because primarily we thought at the time assets were trading well above their replacement cost and as part of that transaction, we declared a special dividend. So we're not afraid of that type of transaction and have executed on it in the past, but today, we don't see that type of repositioning necessary. We've still got very good strong growth from our assets in those marketplaces. Second, I would add that we have a prudent capital allocation process in place. By using asset sales to fund development, we're largely removing any dependency on capital markets for our future growth. And as a reminder, our strategic plan which we continue to outline and update is focusing on consistent cash flow growth. After you look at these transactions and realize the amount of dilution and how much growth you would have to compensate for in the future, they don't seem to be as penciling out at this time. But we'll continue to monitor the market and see what happens with respect to asset pricing, and we're aware of good action on Bs right now. You can see this last year we sold $800 million, our share, $480 million of them. Then we used those proceeds very accretively to fund our development pipeline. So we've got a good plan, we've outlined it, and we’ll do it again and we'll see how the market unfolds.

So Mr. Toomey or maybe Jerry, I would like to get some more color on a comment, I think it was you, Tom, who made it earlier on the call, that your revenue growth for next year can be on par with this year's but from a different angle. I look across the various key regions in your portfolio and expect another solid year, next year for sure, but expect to see some slight deceleration on the revenue side in New York City, Boston. There has been a bit of concern around San Francisco, not only with the recent Wall Street Journal article about the tech ideal slowdown but also a little supply-related concerns in Bellevue, up in Seattle. Are you effectively counting on Southern California, Denver, and perhaps DC to accelerate a bit more from here, make up for those decelerating trends in the other markets here?

In Denver, we currently don't have any same-store properties, so we aren't relying on that market. Looking at our entire portfolio, we observe some trends. There are likely two or three markets that we expect will slow down next year. One is Northern California, primarily due to our reluctance regarding new inventory. If I had to predict which market might outperform my projections next year, I would lean towards Northern California, as I believe the fundamentals will remain strong. While I don't expect growth to continue at 10%, our in-place rents were actually 4% higher than budgeted last October, which was unexpected. We're anticipating a slight decrease, yet it will still be our top market next year. The other markets likely to experience some deceleration are Dallas and Austin in Texas, driven mainly by supply issues. We are already sensing this in Austin, especially with our premium product feeling the impact as job growth, while still favorable, is being challenged by supply. For Dallas, we are facing pressures in uptown and the Plano-Frisco area affecting some of our properties. Although our secondary product in Addison is performing excellently with high single-digit growth, we're currently seeing only about 3% growth in Uptown and don't expect much improvement next year due to new supply. In Southern California, I'm very optimistic about LA, especially for our portfolio there. I expect Orange County to perform slightly above average, similar to this year. Regarding Seattle, particularly Bellevue, there is new apartment supply coming into the market. While some jobs have relocated to the west side of Seattle, we are encouraged by recent news of Salesforce leasing office space nearby, which enhances our outlook for Bellevue. Our secondary product in Seattle should perform well, as 30% to 40% of our properties there are in that category, which is promising. As for Boston, it has surprised us positively this year. It's performing better than anticipated, and though we usually see a slowdown, shifting some lease expirations has helped us maintain occupancy at 97%. Our year-over-year market rent growth in our selected Boston properties is 8.4%, compared to a loss-to-lease of 3.1%, which is an improvement from 0.3% last year. Overall, I feel optimistic about Boston. The two Florida markets are also likely to perform well, with Orlando excelling and Tampa close behind. The Mid-Atlantic region, however, will likely remain our weakest performer. Washington, DC may experience a slight improvement to mid-2% growth, but we are less optimistic about Baltimore and Richmond, which will likely stay below average. In summary, I see Texas and Northern California experiencing some decline, while Southern California and Florida are expected to grow, with other markets remaining stable.

Haendel, this is Toomey. I would add this. My quote is revenue for 2016 is at least as good as 2015. And what I would point to, is Jerry and team have been really focused a lot of this year on 2016, by pushing the rents which give us that carry-through. He mentioned in his prepared remarks, 2.75% of revenue is already in the books for next year. We think that trend could continue, but we'll play it out. They have just done an exceptional job of positioning us for 2016, a good number.

And just so I'm clear, Jerry, what, if anything, enters the same-store pool next year?

Actually, in our supplement, on page 11, at the beginning of the year, it will be full-year, Los Alisos, which is Mission Viejo, enters in first quarter; Waterscape; and then also View 34, the old Rivergate property in Manhattan.

And then one more, if I may, a line of questioning I've proceeded in the past. Just curious, your exposure to DC and Seattle, we've seen your portfolio lighten up in suburban locations in both markets. I'm curious about your current portfolios in both markets. Are you looking to lighten up a bit here, especially following the closing of the Home and Wolff deals?

This is Toomey. We expect Washington D.C. to perform slightly better in 2016, but the real recovery there will take place in 2017 and 2018. Our strategy reflects that expectation. Currently, we are somewhat overweight in that market, but we aim to align our rent trajectory as we consider adjusting that specific area. The other market that was...

Seattle? We're happy with Seattle. We've got a good mix of A, B marketplace. We're always looking at shifting some, but it will be so thin on the margin, it probably wouldn't matter in our view. Haendel, we sold two assets in Seattle at the end of last year that were more in the Tacoma market. I agree with Toomey. We like the portfolio. We've got a decent mix of a couple of Bs to go with some urban As that are both in Bellevue, and we're going to increase our exposure with the Wolff transaction down in South Lake Union. But Seattle is a market we're all pretty optimistic about, mid- and long-term.

I'm clear on Seattle, but just want to make sure I'm clear on DC. Sounds like you're happy with your portfolio, would consider selling, but just not a good enough time to sell yet, but something you would monitor over the next year, year to two years for potential culling, is that fair?

That's a fair statement.

You talked about expense growth next year likely going over 3%, and you guys have had lower expense growth than that in the last couple years. Could you just talk a little bit more about what's driving the expense growth higher?

Nick, this is Jerry. I'll start, and Herzog may jump in. He mentioned the 421-a real estate program that has started to affect us this year, and it will affect us a little more next year. So a big part of it is real estate taxes. So when you look at what are the two components that we currently forecast would be north of the 3% growth rate, one's going to be real estate taxes which today our expectation, including the 421-as, is going to be north of 7%. When you factor in the impact in the Sunbelt markets, the positive real estate tax refunds that we got this year in the 421 programs at 95 Wall and 10 Hanover, that's about where it gets to. The other one that we anticipate putting some pressure on us is wage growth. In our markets, we've currently penciled in for it to be 4% in personnel growth.

And then what about repairs and maintenance? That's a line item you guys have done a really good job controlling expenses on. How much are you still able to keep that in check?

We think there are still initiatives that we've been working on for the last few years, and that there's still a ways to go. This year, it will probably be very slightly positive. Next year, I still think it will be under an inflationary range, and we're going to continue to find efficiencies with our maintenance teams to bring even more work in-house. So I don't think we're quite done with those initiatives yet.

I was curious about your activity on redevelopment compared to new development. Specifically, regarding the communities acquired from Home, what are your thoughts on where some of those could be redeveloped? How do you view these assets?

This is Jerry again. Harry may jump in after me if I leave anything out. When you look at that portfolio, there are three assets that are newly developed, less than four to five years old, the two in Silver Springs, one in Alexandria that really need next to no work done on them. Home did a good job redeveloping Arbor Park. That one needs very little. The other two, Newport Village and The Courts at Dulles, are probably where we'll focus most of our efforts over the next year or two. They both would benefit from some level of kitchen and bath upgrade. There's a bit of deferred maintenance, and there's some touch-up we can do on the amenities at both of those properties.

And then as it relates to the expectations in terms of the expense side or in actually it also relates to revenue. How are you thinking about turnover as it's been fairly low as of late? What's the expectation in terms of what we're likely to see in 2016 for that?

It's expected to increase by 100 to 200 basis points from this year's level. Last year, it was 51%, and this year it will likely be slightly higher. Next year, I anticipate another rise of 100 to 150 basis points as we begin to encounter more residents facing affordability challenges, leading to moves due to rent hikes. We've noticed a slight upward trend in this area. However, I don't see an increase in move-outs related to home purchases; in fact, move-outs due to financial issues or evictions have decreased. The main trend we observe in some markets is that certain individuals are being priced out of their current communities and are compelled to downgrade their housing. Despite this situation, we've managed to keep occupancy levels around 96.5%, and the time a unit stays vacant has dropped from 26 days three years ago to between 20 and 21 days now. Therefore, turnover is expected to rise by 100 to 200 basis points again.

On the 1031 exchanges, could you share the cap rate on the four Virginia assets, as well as the Huntington Beach sale?

Sure. This is Harry. The cap rates on the four Virginia beach sales are going to be somewhere in the high 6%s, around 7%. That includes a 2.75% management fee and $1,100 per unit in CapEx. The Huntington Beach deal will be just under 5%, and the fixed asset will be in the high 5%s, the Oxnard asset.

That's on forward NOI, correct?

It is.

And then just so I understand the new footnote on the 421 exemptions, the $70,000 higher New York real estate taxes, so this is the first quarter that those abatements started burning off or was the amount de minimis before 3Q?

This was the first year, this first quarter.

Quick question on the abatement as a follow-up, what is the total dollar amount of abatements flowing through the expenses right now for 2015?

We've given the amount of the AFFO impact which is the change. For 2015, it was $240,000 is the AFFO impact. So that's the amount of change year-over-year.

Do you guys have maybe a dollar amount? Since it is a line item that will abate, I just wonder if you had the actual dollar amount, but we could follow up offline if that's fine?

Okay. If you guys want to call on that to get details on that, I'm glad to give them to you.

Yes, we'll do that. Okay. And then looking at the Playa Vista market, it seems quite strong for you. Would you happen to have the loss-to-lease on that market and where renewals are going out right now?

The loss-to-lease on that right now is 5%. The year-over-year market rent growth in that LA portfolio, and it includes one small asset in La Mirada, but this is predominantly the Marina Del Rey, but year-over-year revenue, rent growth is 9.2%. And the most current new and renewal growth in LA is news we've achieved in October 8.8%, and renewals are in October 7.2%.

So we've seen recently some of your peers market New York high-rises as condo conversions because of the superior pricing there. Is that something you guys would consider with any of your New York assets?

This is Harry. Like all of us, we're constantly in the market having general conversations about market pricing. If an opportunity arose where we could predictably capture that spread between a condo user in changing the use at an extraordinarily low cap rate and reinvest those proceeds in a core market on an accretive basis, we would certainly consider that. Right now, we haven't seen any of those opportunities materialize.

Okay. So, really only if you had a reinvestment opportunity?

In all likelihood, yes.

Okay and then only other question for me is do you see any more opportunities for deals similar to your Steele Creek deal?

This is Harry again. Steele Creek and Wolff are two relatively similar transactions that we've completed over the past 12 months. We're in the market looking at those types of opportunities. We don't have anything specific to talk about, but if those same types of opportunities materialized, we certainly would be interested in doing another one.

It looks like household formations were released this quarter, and renter households declined for the first time sequentially in eight quarters. How are you guys thinking about that because it doesn't look like there's any lack of demand in your core markets?

This is Toomey. I take all of these government statistics that come out and wait and see if there's a trend line to develop, if there's not a one-month blip. So you just have to step back and wait and see how that trend and that number gets revised. We took note of it, that we're not feeling it in the marketplace by any measure, and don’t see it as a trend line, but we'll be cognizant of it and keep it in our view going forward.

Okay and then on your 399 Fremont development, can you give any color on just the Rincon Hill area because it looks like there's a lot of high-end product that may come online pretty soon there?

I'll start, and Jerry may add if I miss something, but in Rincon Hill, there's over 4 million square feet of office that's either active or under construction. There are some multi-family projects high-end that are coming online, some of which are in lease-up now and others that will be in line over the course of the next 12 months. It's our expectation that that is an extremely strong submarket within San Francisco for rental product, given the enormous amount of job growth in high-paying jobs, so at this point, we're not concerned about that submarket.

I would agree with Harry. As we've looked at that market and the product we're going to deliver, we think we compete well. Probably the most encouraging thing, you talked about the supply, but the jobs that are coming, that are within a 5 to 10 minute walk over the next several years, are going to provide plenty of residents for all of us to do well.

Okay. And then on the 717 Olympic property, was that water issue just a freak accident or was there some property management that should have occurred to avoid that issue?

It was a freak accident. There was an automobile accident, if you will, in the garage structure that set off the sprinkler system that affected the pressure on the sand pipe. It wasn't maintenance. It was created due to an accident.

Tom Toomey, if you had 20/20 foresight that San Francisco Bay area was about to really fall off the cliff and I know you don't have that, but let's just pretend you do because you have really superpowers otherwise, what would you do? Would you sell immediately right now? Or would you muscle your way through it because you consider it a long-term hold regardless of what might happen over the course of a couple of years?

Rich, it's always a tough question when you look at falling off the cliff in San Francisco, is that the earthquake comes and gets it or just the marketplace.

The marketplace.

The marketplace, I believe it's a center for technology innovation. It's a gateway to Asia. It's a long-term dynamic city that has long-term growth prospects. And I'm prepared to weather the storm that inevitably will happen, that will cause it to take a turn-down and anticipate that through its innovation, its capital formation that it's a long-term vibrant mark and it's sure in heck hard to get real estate there, that's our overall portfolio strategy. We understand that markets will come and go, that situations like oil and gas that are going through right now are not long-term enduring situations. They are short-term blips. And we want to have a portfolio that's diversified to weather those storms, and we've done it both in market diversification and product diversification, and we'll continue that path and think it's the right one for long-term cash flow growth.

Maybe for someone else in the room, what happened leading up to the DC falling off? Did you sell at all? Or did you just defend?

The posture in DC was to defend. We did take some assets that we thought would have a harder time in recovery and pulled those up and moved on. And again, as you outlined earlier in the call, we think we're a little overweight, DC, but we think the inevitable recovery that arrives probably in 2017, 2018 window will represent a good time to pull some capital out of that marketplace, and there will be other opportunities and other markets for us to redeploy those or we'll just pull them up and use them for our development pipeline.

Well, thank you all for your interest in UDR and for your time on the call today. Just let me close by saying it was a fantastic quarter that we're doing a very good job of executing on our strategic plan. We've exceeded all of those metrics. We're certainly positioning ourselves for a strong 2016 and beyond. You'll see more of that plan come February, and we'll be seeing most of you, I believe, at NAREIT in a couple of weeks and look forward to some more Q&A there. With that, take care.